The state of the housing market; the good, the bad, and the downright ugly

                                   Home sweet Home?

We have heard a lot of news recently that home sales are up, and in many areas, housing prices are rising.  And while statistics bear out these claims, we are hearing an awful lot of negative news as well.  Here’s a recap of all the negative news that we probably should be paying attention to:

• Currently 1 out of every 357 households in the country is in some state of default, if not in foreclosure according to a report from Realty Trac. (This number does not take into account those homes that have already been auctioned off and are now bank owned.)

• As of this month, the first of the Neg Am (aka Option ARM) loans have begun to re-set. These are the loans that offered the 1% teaser rates where the borrower knew up front that with every payment, he/she would go into the hole on principal, and that eventually that loan would re-set, sometimes increasing the payment 10-20 times the teaser level. A very large number of these loans were made on expensive properties, which have taken an enormous hit on values. It is anticipated that as these re-sets hit, we could see an avalanche of foreclosures hit us before year end.

• Meredith Whitney, a well know financial analyst, has forecast that given the current state of the economy, the high rates of unemployment, and of course, the ARM resets yet to hit, we could see property values drop another 25% next year. I recently commented that I had to see influential people, such as Meredith Whitney, make such forecasts, because I do believe that emotions do play a part in how people react. For example, if people who are struggling now, but still getting by, believe that their home will lose another 25% in value, will they be more or less likely to continue to struggle to keep their homes? Or will they just walk away and become one more statistic, thereby making the prophecy a reality? This is just food for thought. I don’t have a crystal ball.

• In the meantime, the government has a few programs that were designed to help homeowners save their homes that are not working. First we had the HARP (Home Affordable Refinance Program). As this program was initially rolled out, it was an awesome way for those with Fannie or Freddie owned loans to refinance their loans to lower rates and save on the housing payments. But, as with most government programs, the banks were given so much autonomy to layer on their own rules that this program has not been nearly as successful as it should have been.

• Loan modifications is yet another area where lenders are not cooperating. The HAMP program is perhaps the most controversial of all. Lenders are finding every excuse under the sun to NOT modify loans. And to make it worse, the loss mitigation departments seem to work completely separately from the rest of the bank. Here are just a few of the horror stories I have heard:

• o One man told me that after struggling with his bank for almost 9 months, he was finally told his modification was approved and to watch for paperwork with the terms of the modification in the mail. The next day he awoke to an auction taking place on his doorstep. His home was sold out from under him, literally, before the modification paperwork was ever signed.
• o One woman fought with her lender for months, being tossed around from one “negotiator” to the next, only to learn that her home was also scheduled for auction. She managed to save her home just a few hours before the auction, by draining her retirement account. Her modification has finally been approved, but not even close to HAMP guidelines (payments not to exceed 31% of gross income). In the end, with the “modification,” she is likely to lose her house anyway.
• o An 81 year old woman was told her modification was denied because………….. no explanation given, just because. (Excuse me? Is this acceptable?)
• o I have heard of others whose “modifications” actually increased the monthly payments! This is not even logical. Why would anyone opt for a payment increase ever?

Barney Frank, Chair of the House Financial Services Committee, is getting tough on lenders finally.  He has threatened that if the banks do not start modifying loans, he will "revive legislation to allow bankruptcy judges to rewrite the terms of troubled mortgage loans."  On Wednesday, he warned mortgage services that he would encourage support for the measure, which is fiercely opposed by the banking industry, if they don't do more to help strapped borrowers.  This measure narrowly passed the House earlier this year, but has been rejected by the Senate twice in the past two years. 

"The best lobbyists we have for getting bankruptcy legislation passed are the servicers who are not doing a very good job of getting mortgages modified," Mr Frank said at a House hearing on the Obama Administration's foreclosure prevention effort."  Under this measure, bankruptcy judges would be allowed to reduce mortgage debts by slashing interest rates, extending the loan term or reducing the principal balance, known as "cramdown."

While it is unlikely this bill will pass the House or the Senate, it was gratifying to hear someone in power come down on the banks that seemingly have been "thumbing their noses" at Congress since this crisis began.

So what is the state of housing now?  I'm sorry, but you will have to draw your own conclusions.

Barney Frank photo credit: AP Photo/Bizuayehu Tesfaye