Heartbreaking foreclosure stories are all over the news today. Lot of people cannot afford rising mortgage payments on their refinance or home loans. Selling is not an option for many because the value of their loans is now greater than the value of their homes. The result is that tens of thousand of people default on their mortgage commitments each month and get kicked out of their homes by the lenders. The numbers are certainly discouraging.  Almost 92,000 Americans lost their homes to foreclosure in July, a 14 percent increase from the previous month, and more than twice the 42,000 foreclosures nationwide in July of last year.

Yet for many borrowers there may be a solution. An initiative created by President Bush in October 2007, HOPE NOW is a coalition of mortgage lenders and bankers, mortgage servicers and financial counselors aimed at helping as many qualified homeowners as possible hold on to their mortgage loans.

“The industry’s overwhelming commitment to helping homeowners avoid foreclosure and stay in their homes is undeniable and steadfast,” said HOPE NOW’s Executive Director Faith Schwartz. “Because of HOPE NOW’s vast and multifaceted efforts, more than 2 million families and the communities in which they live are much better off today than they otherwise would have been.”

In July 2008 alone, the coalition helped 192,000 homeowners either refinance into safer, more affordable home loans, or get modified mortgage payments that were within in their ability to pay.  That number is up from the 181,000 Americans that received aid in June.

Schwartz is hopeful that the amount of people the group can help will accelerate in coming months as HOPE NOW steps up its efforts to spread the word about its services. One of the biggest reasons homeowners end up in foreclosure is because they do not know that there are resources available to them or that most lenders are willing to make compromises.

“Outreach is crucial,” Schwartz said. “Borrowers have to talk to their lenders. That’s the most important message we communicate.”

It is true, however, that not all borrowers will qualify for HOPE NOW assistance. In order to be eligible, homeowners must have obtained their mortgages between January 1, 2005 and July 31, 2007 and have interest rates that will reset between January 1, 2008 and July 31, 2010. Only those with home mortgage loans, not home equity loans, can qualify and borrowers must be current on their mortgage payments before their interest rates increase, but show an inability to make payments after the rate hikes.

Even if you do not think you could qualify, it is worth your while to talk with a HOPE NOW counselor. She may be able to point you in the direction of other resources. Assistance is available by calling the Homeownership Preservation Foundation’s toll-free HOPE Hotline (1-888-995-HOPE). Counselors take calls 24 hours a day, seven days a week, and even on holidays. 

In these days of national security, where it seems like everybody knows your business and activities, you have to wonder how come there was so many unethical things going on in the mortgage market the past few years yet no one allegedly saw it coming. You could pretty much figure that with skyrocketing home values and low interest rates, not to mention the “teaser” rates and “liar loans” that someone, somewhere would have had a clue. With all these pie in the sky developments, it was bound to attract shady and unethical people looking for a fast buck. It is obvious that they did. Was anyone keeping an eye on these developments?

Here’s a quote - Chris Swecker had this to say: “It has the potential to be an epidemic. We think we can prevent a problem that could have as much impact as the S&L crisis.” Who is Swecker? He is the FBI official in charge of criminal investigations, and he made this comment to reporters in 2004.

Banks and brokerages have written down more than $300 billion of mortgage-backed securities and other risky investments in the last year or so. People are walking away from their homes, and defaults are still on the rise. Weakness in the mortgage market is heard about almost daily on the news. I have to ask myself - if the FBI was aware that this was happening, why was no formal investigation launched, and the whole mess nipped in the bud before it came to this?

According to the FBI, there was some action on their part. However, there were only 100 investigators nationwide who were doing anything, and more focus was placed on identity theft and child pornography than the mortgage market crisis. It was also reported that the FBI was under the gun at the time of Swecker’s reporting by Congress and the White House to focus on anti-terrorism. The mortgage debacle took the back seat in light of these efforts.

According to the LA Times, it appears that the FBI is focusing on simple, easy to solve cases. With little manpower in the field to work on white collar crime, it is easy to see that they will fail to get to the heart of the matter. To their credit, they do have 21 open cases on the books, delving into possible large-scale fraud related to the subprime meltdown. Possible targets include investment firms that sold billions in securities backed by shaky subprime mortgages. They are also looking at credit rating agencies that gave high marks to the now-worthless securities and failed to protect investors in the process. A federal grand jury in Los Angeles has subpoenaed records from three large California lenders Countrywide Financial Corp., New Century Financial Corp. and IndyMac Federal Bank.

You can’t really fault the FBI for a lot of this current crisis, even though they were aware of it happening. I have long said that banks and lending institutions need tighter regulation to prevent this in the first place. Many, I am sure, will disagree with that, but I have a feeling that a lot of investors who lost a great deal of money over the past year would be more than willing to give this concept some serious thought.

I do not have the knee-jerk mentality of many who scream no bailout for failing banks and lending institutions.  Nor do I see it as a necessary evil.  Even though I am a bit opinionated, I have to be realistic when it comes to the current crisis we are in.  It cannot be a sense of letting the chips fall where they may.  We are in too much financial trouble as it is, and to get out of this mess, it will take some very hard headed thinking and planning on the part of those capable of making necessary changes.

Today, shares of Freddie and Fannie took another dive, finishing the week at $7.75 a share for Freddie, and Fannie Mae at $10.25.  I am reading tonight about the deathwatch of these two mortgage giants.  On Monday when Freddie Mac is due to sell $3 billion of short-term debt, we will see more clearly how this will pan out.   If the plan is a failure, investor confidence will fall, and a new plan will have to be made.  Some feel the Fed should step in before market open on Monday and do their thing.

One thing is right - they really are too big to fail.  Richard Syron, Freddie’s chairman and chief executive, said earlier this year “Do a little examination and ask yourself, ‘What do you think the housing market in the U.S. would look like without the GSEs now?”‘  Although both of the dynamic duo have had bad press, we need to remember that they still hold a very high profile portfolio, and all we are hearing is the doom and gloom about their Alt-A and subprime holdings.   These “affordable” were pushed on the pair by the Congress so hurried to deal with them now.  Secretary Henry Paulson had asked for total takeover of the pair in July.  He is totally against what he sees as a “bailout of investors.”  It is a “moral hazard” to his line of thinking - he feels it will desensitize investors to the ordinary risk of investing, because they would  feel any investment they might make in the future as something that will be bailed out by the Fed.  I seriously think that people like Warren Buffet has that kind of mentality.   For one thing, the trouble with F&F has shaken out all the investors that stand to lose.  Preferred stock must be taken care of, and the holders of bonds held internationally, worth $1.4 billion, are safe.

We have not seen the end of this.  Whatever happens, it must be done at a level to protect the economy - right or wrong from whatever position you take.  The failure of F&F is just not in the cards.  A shakeout?  Of course.  But failure is just not going to happen.  And that is how I see it…

No one is sure what the exact number of people there are with upside down mortgages, but a study by First American Core Logic, a real estate data analysis firm, estimates that 11% of homes purchased between 2004 and 2006 are there.  There has been dropping valuation, mortgages resetting and people simply walking away because of this situation.  The downside for lenders is that they are stuck with a piece of property subject to vandalism and neighborhood blight, and they are faced with the prospect of having someone maintain and market them to potential buyers as well.  It is a no win situation for everyone involved.

Clearly, the best answer to this is for banks to deal with homeowners who are struggling.  I don’t know anyone that wants to own and pay for something that is worth less than it is worth, yet I think that people are overall responsible and honest in dealing with their mortgages woes.   The website Smart Money reports that lenders are now becoming more willing to help struggling homeowners.  The caveat here is that you must be behind on your mortgage payments, not just struggling to make the monthly mortgage payment.  Todd Mark, a vice president of education at Consumer Credit Counseling Service of Greater Dallas, a HUD-approved housing counseling organization, says that “You’ll see more and more lenders helping people stay in their homes over the long run”, and Brian Tracz, a New York-based real estate attorney who specializes in foreclosures adds “Lenders want to know the hardship is there.  They view this almost as a partnership in misery.”    This is a bit of a turnaround for lenders, who have typically dragged their feet in offering help.  It is obvious that there is too much money being lost because of this stance.  Clear indication of this is in the Moody’s report, which stated lenders modified less than 1% of the loans that reset during the months of January, April and July 2007.

There are parameters that will need to be followed.  You must be willing and able to continue to live in the home in question if you seek a lender’s help.  You will be asked for specific financial information and questioned on ability to pay.  Lenders may request a letter explaining your financial hardship.  They will want to see a budget, and your action plan to stay in the home that you can stick to.  To my way of thinking, it only makes good business sense to have done this in the first place, not after the fact.  It amazes me how quickly things turn around when business begins to feel the crunch.  I am not so sure that the government has a whole lot of influence over lenders and the banking industry in general.  Whatever the case, it is time to do something, and it appears lenders are now a bit more willing to take that plunge.

It is amazing to watch the continuing fallout from the mortgage market.  Banks are going down. Freddie and Fannie are in the soup, and we see the government making attempts to set things right.  It seems like everything is tied to this crisis, and there is undoubtedly a lot we do not know.  I spent some time on the Mortgage Fraud Blog tonight looking for content, and was amazed at the number of people that are being prosecuted for wrongdoing - mostly wire fraud and mortgage fraud.   It sometimes seems to me that there are some things I just do not wish to know.

Which brings me to tonight’s subject - the number of people selling real estate at a loss.  The market is correcting, yet we are a very long way from bottom.  California and Florida are especially hard hit, where real estate has climb in value way disproportional to other areas of the country.  I have seen homes listed in California that are in price ranges that are unbelievable for the amount of space available.  2 bedroom/1 bath homes with less than 1,000 square feet go for 600-700 thousand dollars.

While on vacation, I took a look at real estate in Anderson Indiana, and found that large homes with a nice lot will go for 65-75,000 dollars.  No, they don’t have an ocean view, but they are in nice neighborhoods and are well taken care of.

According to Zillow.com, a real estate site, nearly 25% of all homes sold nationwide fetched less than sellers originally paid in the past 12 month ending in June.  Stan Humphries, Zillow’s vice president of data and analytics, had this to say: “It’s stunning what’s happening out there.  The numbers are the worst we’ve seen and it’s not just the magnitude of the problem but the scope - so many markets are affected.”  California takes the hardest hit, with 63% of homes sold during the past 12 months in Merced taking a loss.   Prices currently have fallen 40% over the past twelve months, and are down an astounding 56% since 2006 - 2 short years ago.  Other figures include 63% of sellers in Stockton, Calif., who lost money during the same period, 60% in Modesto, Calif., 55% in Las Vegas and 38% in Phoenix.

These numbers don’t lie.  They show that the market is far from seeing bottom yet.  Billions of dollars are being lost, and the only solution seems to be a short sale.  Right now, a third of homeowners nationwide owe more on their homes than they are worth.  Until this sees correction, the market is going to be doom and gloom.

Since I read a lot of web content, blogs and news, I see a lot of things in the course of my work that most people don’t.  I subscribe to several RSS feeds that cover the mortgage market, and I am especially fond of Dr. Housing Bubble, who gives me a big head’s up on certain areas of the country, but especially California.  Housing prices there are ridiculous, and the median value of homes in 6 of the counties flirts with $1 million.  If you could see some of these homes, you would put yourself in the hospital, laughing so hard your sides would split.  Seriously, folks, these homes are little cracker boxes that often run less than 1,000 square feet, yet command very high prices.  A home featured, in Toluca Lake, Los Angeles County, has a going price of $6,650,000. The home has been on the market for 450 days and has seen a reduction in price by $2.1 million in one year.  Before you decide that his is a bargain, realize that the home sold in 1991 for $1,200,000.  A $5 million gain in those few years since is more than superb, it is absolutely ridiculous. This, however, is just typical of California real estate.  Dream on.

In Florida, things are not a lot better.  One of the troubles facing Bank of America is their book in that state. As of June 30th, $463 million was listed with BOA as noncurrent.  Of the $15.17 billion in residential mortgages, this ratio of 3.05 percent is bound to put BOA in a world of hurt.  Yet Florida, like California, remains a state where the price of property has skyrocketed to a very lofty height. And you can’t blame it on the snow birds.

I think that until these markets become more reasonable, there will be troubles in the mortgage market.  Ask Ed McMahon.  The Donald has bailed him out to the tune of beau coup bucks.  And that was after Ed dropped the price from $7.7 million to $4.6 million.  No one knows yet what the final price will be, but rest assured, it will be huge.  And that, I think, pretty much sums up a lot of what is currently wrong.  Home prices are way higher than they have been in these areas, and people have refi’ed to the point where the mortgage is upside down.  Some say the general consensus is to just walk away…

Because I subscribe to numerous services, I often get content from overseas. I have not yet reported on any overseas viewpoints, but thought that the article in the Economic Times - Gurgaon, Haryana, India, was noteworthy. Mortgages and securities are, after all, world wide. So for a change I thought I would share their viewpoint.

Quoting the article, they say: “Despite the fact that Freddie and Fannie are government sponsored enterprises, they are privately owned and enjoy special privileges like not having to register their securities with the government, not being liable to pay state and local income taxes, being conferred special treatment for investment purposes by bank regulators, etc.” It is funny what we learn by studying others – I was not aware that they did not pay state and local taxes. I was aware of their seemingly special status, being coddled by the government while they go about their daily business, opaque to those that should have the need to know.

India questions the practice of a private enterprise that is backed by a governmental entity. They see no equity in firms that are a privately owned entity subject to the discipline of the market place yet exude the aura of a government backed business, not subject to the laws of the marketplace. Indeed, if they truly were a private enterprise, a lot of this would not have happened. Wall Street watchdogs and analysts would have foreseen what was happening in a transparent business. One noteworthy thing here is that several foreign governments invested their foreign exchange reserves, and when the bottom fell out, the US government had to step in and lend a hand.

We can’t see a time when Freddie and Fannie will be up front and transparent, at least not under its current status. What we can do is watch as they over leverage their reserves and bring about a government bailout. And the thing that bothers me most is the foreign view of how we handle our money. They see private investors making money hand over fist from their dealings with the dynamic duo, and doing so because of the special privileges they enjoy because of our government backing. And in the final analysis, Mr. Average Joe down there on Main Street is going to have to pick up the tab. Show me the equity in that.

We all know that it is not a very good time to buy a home right now, especially if our credit is less than stellar. To be honest, there are some really good deals to be had right now, and taking advantage of that is a good thing if conditions are right for you. Banks are obviously a bit anxious today due to the way things have been going this past year, but if you are on the up and up, pay your bills on time, then chances for securing a mortgage are in your favor.

The banks want to see this:

1. A good FICO score. This is one number you should always be concerned about, and work towards improving. If you are like so many other people who have had to use a credit card, be aware that the CC companies can make things extremely tough on you. Don’t let these lag to stay on top of the mortgage payment if you possibly can. Right now, the FICO score is a big number.

2. Have a good down payment. Many people have made the mistake of not only borrowing for the mortgage, but have also borrowed for both down payment and closing costs. Not a good idea. If you can’t save up a down payment of at least 10%, you can’t afford the home anyway.

3. Take a VERY good look at your budget. Be honest with yourself. Your mortgage payment should never be more than 26% of your income. If you make $4,000 a month, then your mortgage payment should never be more than $1,000. Often, people don’t take into consideration the “incidentals” of daily living. That $3.50 latte on the way to work each day and the need for the latest Stephen King novel are often never figured into the monthly budget. If you spend it, budget for it. Figure your “play money” into your budget, and stick to it.

We hear a lot of scare tactics in the media about buying a home these days. Although banks are a bit antsy, they also recognize a good deal when they see it. If you try to gloss over anything about your finances and are vague about income, don’t waste the banker’s time. They will very quickly show you the door. The Fed is looking at the banking industry right now with a very eagle eye, and for good reason. Buying a home today is no different than it was in our parent’s day. The rules are the same. Follow them for success.

Even though Freddie and Fannie were aware of the market crisis, the pair kept revving the security engine full bore, even though Wall Street knew better, and backed away from it.  To someone like me, that is criminal intent.  Yet we are still hearing all the gushing news from Washington how good old Freddie and Fannie are gonna be okay, and Uncle will keep them afloat.  (Read that taxpayers.)

We are talking trillions of dollars here.  The pair hold nearly half of the mortgages - around 5.3 trillion the last time I looked, and to see them fall would mean sure diaster in the mortgage market and the economy.  Now, they have been given carte blanc with no statutory limits on their gigantic $5.3 trillion book of business.  Lehman Brothers the two have another $3.3 trillion in hedge funds, along with other items, off the balance sheet, so it is evident that we have no real idea of where they are at.

Things at the pair grow worse and worse by the day, as we seen failure after failure, and we hear the same old song and dance about business as usual.  Freddie and Fannie have reported more than $11 billion in pre-tax losses over the last three quarters.  I don’t look for that to improve until well into 2009.  Now the government has passed legislation that will provide bailout for the pair.  A lot of people, including myself, take issue with that.

I have no problem with trying to improve the economy, nor do I resent the government trying to keep things afloat.  What I do resent, however, is publicly traded companies that are in the basement on Wall Street, are guilty of mishandling accounts and accounting practices, and that have continually forged ahead even though the market was bleak.  I am curious to see how this will all play out…

No one state has been hit harder in the mortgage market crisis than California.  Research today shows why there is so much trouble there.  In certain areas, ridiculously small homes are going for enormous prices, depending on area.  These little cracker boxes in any other part of the country would go for 50-65K, yet they are selling in CA for upwards of a half million.  And I am talking 2 bedrooms, 1 bath, maybe 925 square feet.  No McMansions, but priced like one.  Sad.

In California, homes reached a peak median price of $597,640in April 2007.  By June of 2008, the median price in California is hovering at $368,250, a drop of 38.38%.  I do not think that this has reached bottom yet, either.   There is a budget crisis on in CA now, with the Governator cutting state jobs back to the minimum wage and erasing part timers from the state payrolls.  This alone will drive more people into foreclosure.

California is also seeing $300 billion in pay option ARM’s to reset in the later part of the year.  The Pay Option ARM is one of the most poorly put together mortgage products ever to face this planet.  It has several options, but the most widely used option is to pay the minimum payment on the property.  Your payment is set for 12 months at an introductory rate. Then payment changes are made annually and a payment cap limits how much it can increase or decrease each year.  Explaining the pay option ARM is another whole post, but the sad news here is that up to 80% of the people who have these loans make the minimum.  When things go sour down the road, they find themselves with a loan that is not paying down, but paying up.  All for a piece of the American dream, which lending institutions have been more than happy to push.

When the market levels out, we will see a lot more difficulties in CA than anywhere else in the nation.  Analysts do not feel that it will correct until May of 2011, and homes will then be valued at prices from May of 2003.  When all is said and done, we will see CA in a lot more hurt than the rest of the country, where mostly home values are more realistic.  Until then, hold on to your hats.  It is going to be a tough ride.