As government and industry scrambled to stem the housing crisis, another 84,868 homes were lost to foreclosure in October, according to a report released Thursday.

Last month 279,561 struggling borrowers received foreclosure filings, including default notices, notices of auction sales and bank repossessions, according to RealtyTrac, an online marketplace for foreclosures. That’s a 5% increase from September, and up 25% from October 2007.

“October marks the 34th consecutive month where U.S. foreclosure activity has increased compared to the prior year,” said James J. Saccacio, chief executive officer of RealtyTrac in a statement.

A total of 936,439 homes have been lost to foreclosure since the housing crisis hit in August, 2007.

Foreclosures hit a record high in August when 304,000 homes were in default and 91,000 families lost their houses. Since then, a number of states have adopted legislation to freeze foreclosures and give homeowners a chance to modify their mortgages. These laws have helped slowed the rate of foreclosures.

“The really sobering reality for us is that despite these various state programs that are artificially keeping the numbers down, we are still up 25% from a year ago,” said Rick Sharga, Senior Vice President of Realty Trac.

Making matters worse is the rapidly deteriorating economy, says Global Insight economist Pat Newport.

“It seems almost every day you hear about another company planning further layoffs,” he said. When people lose their jobs, they can’t make mortgage payments.

And while some homeowners are defaulting because they’ve fallen on hard times, Newport says that others have simply stopped paying their mortgages. “Falling home prices are providing an incentive for them to walk away from their homes simply because it just isn’t worth it,” he said.

Home prices have been on a steep decline, with 20 major markets plunging a record 16.6% year-over-year in August according to the most recent data fromCase-Shiller. That index has recorded declines for 25 consecutive months.

State legislation: A a new law in California, one of the hardest-hit states in the housing crisis, requires banks to contact struggling homeowners 30 days before delivering a notice of default, to give them time to restructure their plans.

Thanks to that legislation, foreclosures in the state fell 18% from September. But California still had the highest number of foreclosures in the country for October, logging 56,954 filings. That total was down from a peak of more than 100,000 filings in August, but up 13% from October 2007.

Clearly the housing crisis is not relenting. “While the intention behind this legislation – to prevent more foreclosures – is admirable,” said Saccacio, “without a more integrated approach that includes significant loan modifications, the net effect may be merely delaying inevitable foreclosures.”

The delays may also be masking the problem, he said. “The apparent slowing of foreclosure activity understates the severity of the foreclosure problem in these states,” Saccacio said.

Nevada had the highest rate of foreclosures of any state for the twenty-second consecutive month in October, with one in every 74 housing homes receiving a foreclosure filing. Arizona had the second highest rate in October, with one in every 149 housing units in default. Florida was third, with one in every 157 homes there in default.

Banks, government step up: Both government agencies and a handful of major lenders have recently introduced new foreclosure prevention programs, but it will take a while before they have an impact.

“It took us the first half of the decade to get into this problem,” said Sharga, “so it is probably going to take a couple of years to get out.”

On Tuesday the Federal Housing Finance Agency, which oversees mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), unveiled a new program to help eligible borrowers stay in their homes by lowering their monthly payments to 38% of gross household income.

And on Monday Citgroup (C, Fortune 500) announced the Citi Homeownership Assistance Program, which it says will modify $20 billion worth of loans for 130,000 borrowers. Similar housing rescue initiatives were unveiled recently by FDIC-controlled IndyMac Bank, which says it will help as many as 40,000 homeowners, as well as Bank of America (BAC, Fortune 500), which estimates it can rescue 630,000 homes and JPMorgan Chase (JPM, Fortune 500), which expects to help another 400,000 families.

The moves are promising. “This is finally a step in the right direction,” said Sharga. “Those are the kind of programs we need to see executed to see the number of foreclosures slow down.”

Hurdles remain, including home loans that will be much harder to modify because they’ve been packaged and securitized into investments.

And Sharga notes that fixing existing loans is only part of the equation; banks must resume lending to new borrowers. “Just freeing up some funds for qualified home buyers would make a huge difference in getting the housing market back on its feet,” he said.

Mike Larson, a real estate analyst with Weiss Research, added that falling home prices and the slowing economy will also create strong headwinds for any government relief program.

“You can certainly fix some of these mortgages, you can certainly try to slow the foreclosures,” said Larson, “but until home prices stabilize and the economy gets back on its feet, it is going to be a tough slog.”

Credits: CNNMoney.com

Rep. Barney Frank, chairman of the House Committee on Financial Services, highlighted the need for a bailout program for troubled homeowners on Wednesday. But he stressed that not all borrowers should necessarily be rescued.

“Diminishing foreclosures is an important part of getting out of this [financial crisis],” said Frank, D-Mass., in an opening statement at a Congressional hearing on bank rescue plans for homeowners facing foreclosure.

But Frank added that taxpayer money should not be used to give anyone a “free ride,” and warned that aid should not go to homeowners who never could have afforded their mortgage to begin with.

“There is, in my judgment, zero likelihood that taxpayer dollars will go to those who should never have had loans in the first place,” Frank said.

Several major banks have recently launched programs to assist homeowners in danger of foreclosure.

On Tuesday, Citigroup (C, Fortune 500) said it would expand its Citi Homeownership Assistance Program in an effort to keep 130,000 troubled borrowers with mortgages worth $20 billion in their homes. The plan is similar to programs outlined by IndyMac Bank, which was taken over by the Federal Deposit Insurance Corp. this summer, as well as Bank of America (BAC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500).

IndyMac launched a program in August to help 40,000 borrowers. JPMorgan has sad that it hopes to assist 400,000 homeowners by modifying loan terms or payments. Today, Bank of America said that it expects its housing rescue plan will help 630,000 troubled customers, a figure that is revised upward from its original estimate of 400,000.

The hearing featured testimony from Michael Gross, managing director of loan administration loss mitigation for Bank of America, and Molly Sheehan, senior housing policy advisor in the home lending division for JPMorgan Chase. Both executives detailed changes they are making to their workout plans.

Sheehan said JPMorgan Chase will “systematically review its entire mortgage portfolio” and proactively offer interest-rate reductions and other financing options to homeowners. The bank will also establish 24 new regional counseling centers in areas with high mortgage-delinquency rates.

JPMorgan Chase also intends to add 300 more loan counselors, bringing its total to 2,500. Sheehan said JPMorgan will “create a separate and independent review process with Chase to examine each mortgage before it is sent into the foreclosure process.” Finally, she said, no additional loans will start the foreclosure process for 90 days, during which time the outlined changes will be implemented.

Gross said Bank of America is implementing a “proactive loan modification process” to provide relief to homeowners who are “seriously delinquent,” representing roughly $100 billion worth of mortgages. This includes refinancing under the Hope for Homeowners program and interest rate reductions. The bank is also considering principal reductions on pay-option and adjustable rate mortgages in order to restore lost equity, Gross said.

Gross said that, through October of this year, loan modifications accounted for 75% of Bank of America’s mortgage workouts, while repayment plans accounted for 12%. Loan modifications, which make the terms of a loan more affordable, are generally considered to be a much more effective means of keeping people in their homes than repayment plans, which simply give borrowers more time to make their original payments.

Tom Deutsch, deputy executive director of the American Securitization Forum, told the committee that while corporate foreclosure prevention efforts are critical to turning the market around, they “are not a panacea” for fixing the problem. He said he sees more work for the government ahead.

“In addition to expanded industry efforts, federal government initiatives such as Hope for Homeowners and the Troubled Asset Relief Program will have to be even more aggressive in their efforts to stabilize homeownership, neighborhoods and communities around the country,” said Deutsch.

He added that expected housing prices to continue to decline throughout 2009 in “some of the more troubled markets,” including California and Florida.

Borrowing a line from former Federal Reserve chairman Alan Greenspan, Deutsch blamed “irrational exuberance” for the imploded housing market, in addition to the economic downturn.

But even with these plans in place, Mark Zandi, chief economist for Moody’s Economy.com, estimates that 1.6 million Americans will lose their homes this year through foreclosure or distressed sale. Zandi, who was not at the hearing, said that another 1.9 million families will lose their homes in 2009.

The federal government’s plan to streamline modifications of troubled loans held by Fannie Mae and Freddie Mac won’t help the majority of people threatened with foreclosure, experts said.

Under a plan unveiled Tuesday, homeowners whose loans are owned or backed by the mortgage finance companies and who are at least 90 days behind can enter a streamlined modification program. Their payments would be adjusted through lower interest rates or longer repayment terms that would total no more than 38% of their monthly household income. In some cases, payment on part of the loans’ principal may be deferred, though not reduced.

The interest rate could be lowered to as little as 3% for five years. After that, it would increase by 1 percentage point a year until it hits either the market rate or the original interest rate, whichever is lower, officials said.

Unlike previous federal efforts, participation by servicers is not voluntary. They will now work with eligible borrowers to reach more affordable mortgage payments, using the guidelines laid out Tuesday.

Also, officials hope the new program, which could help more than 400,000 homeowners, will convince servicers who handle loans held by private investors to follow suit.

Program doesn’t cover most subprime loans

While experts and some government officials called the plan a positive step forward, they said much more needs to be done to address the mortgage crisis. The program does not address the heart of the problem — troubled loans held by private investors.

Though Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) own or guarantee 58% of all mortgages on single-family homes, these loans represent only 20% of serious delinquencies. The majority of the problem mortgages were bundled into securities, which were sold in pieces to investors.

“This is a step in the right direction but falls short of what is needed to achieve widescale modifications of distressed mortgages, particularly those held in private securitization trusts,” said Federal Deposit Insurance Corp. chairman Sheila Bair, who has proposed an alternate plan addressing securitized loans. “As we lend and invest hundreds of billions of dollars to help institutions suffering leveraged losses from defaulting mortgages, we must also devote some of that money to fixing the front-end problem: too many unaffordable home loans.”

Problems in the mortgage market remain concentrated in the subprime sector, which are mainly held by investors who have resisted modifying the loan terms.

“Most foreclosures are happening on subprime loans that Fannie and Freddie don’t control,” said Eric Stein, senior vice president at the Center for Responsible Lending, which has long pressed the federal government to help delinquent borrowers. “More is still needed to address foreclosures on these mortgages. To date, voluntary modifications haven’t been sufficient. That’s why we still have a foreclosure crisis.”

To broaden existing foreclosure fixes, Bair supports using up to $50 billion of the $700 billion financial sector rescue plan to guarantee modified loans. This would give servicers an incentive to adjust the loan terms and could help up to 3 million homeowners, though the number is not firm.

Meanwhile, the FDIC has already adopted a streamlined process to modify troubled loans owned or serviced by the failed IndyMac Bank, which the agency took over in mid-July. Some 3,500 borrowers have accepted the workouts, which also aim to keep payments at no more than 38% of gross income.

Several major servicers — including Bank of America, JPMorgan Chase and Citigroup — have recently announced expansions of their foreclosure prevention efforts, which could aid nearly a million more borrowers.

The programs will also seek to make payments more affordable by cutting interest rates or stretching out loan terms, but some homeowners can also get their mortgage principal reduced depending on their servicer and financial situation.

Deferring payment on principal

Reducing principal is key to keeping some borrowers — especially those whose house values have fallen below their mortgage balances — in their homes, experts said. It makes both the loan more affordable and gives homeowners more incentive not to walk away.

In announcing the plan, officials made a point of saying that borrowers must repay their current mortgage in full, just with more affordable monthly payments.

“Loan modifications are not a gift … the principal cut on the front end will be paid at the end of the loan, either in extended payments or a balloon payment,” said Brian Montgomery, commissioner of the Federal Housing Administration. “This is not loan forgiveness.”

However, to make payments affordable, servicers may choose to defer part of the payment — with no interest — until the end of the loan, officials said. For borrowers whose homes are worth less than their mortgages, servicers might defer the difference.

Here’s how it would work: Let’s say a homeowner has a $200,000 mortgage on a house now worth $150,000. The servicer may defer payment on $50,000 of principal. If the home recovers its value and the borrower sells it, he or she would have to pay back the deferred amount at that time. If it doesn’t recover, the borrower would have to work out a deal with the servicer, likely a short sale, in which the bank forgives the difference between the sale price and the mortgage balance.

If the borrower stays in the home, he or she would have to pay the deferred amount within 30 days of the last payment, likely 30 or 40 years from now. Homeowners could take out a new mortgage to cover that balloon payment.

Setting industry standards

Officials hope that Fannie and Freddie’s influence in the mortgage market will prompt servicers working with private investors to use this streamlined procedure in their own modifications. Often, investors defer to the mortgage finance agencies to set the methodology.

“I ask the private label mortgage-backed securities servicers and investors to rapidly adopt this program as the industry standard,” said James Lockhart, head of the Federal Housing Finance Agency, which oversees Fannie and Freddie. “Not only will this streamlined program assist borrowers, but broad acceptance and effective implementation could stabilize communities and property values.”

Credits: CNNMoney.com

The government may let more borrowers qualify for a $300 billion program designed to let troubled homeowners swap risky loans for more affordable ones, a top Bush administration official said Wednesday.

The program, included in a housing bill passed by lawmakers over the summer, was launched Oct. 1. But there are concerns that lenders won’t participate because they have to voluntarily reduce the value of a loan and take a loss.

“We’re concerned that the program — as constructed today — is limiting people’s availability,” Department of Housing and Urban Development Secretary Steve Preston said in an interview with Associated Press writers and editors.

In its current design, lenders have to take a big loss. They must absorb the difference between the current mortgage’s value and a new loan for 90 percent of the house’s current appraised value. One potential change is to make the new loan around 97 percent of the current home value, thus requiring lenders to take a smaller loss, Preston said.

Making that change and others “would open up participation in the program,” he said.

Designed by lawmakers eager to respond to the mortgage crisis, the Congressional Budget Office had projected over the summer that the program would let 400,000 troubled homeowners swap risky loans for conventional 30-year fixed rate loans with lower rates.

But the early results are discouraging: the government received only 42 applications in the program’s first two weeks, according to the Federal Housing Administration. And only 20,000 applications are expected by next fall, according to early projections.

To participate, homeowners can try to persuade their existing lender to join the program, but the decision is ultimately up to the lender. The banking industry appears likely to favor options that don’t require an immediate reduction in principal, such as deferring payments, allowing partial payments and lowering the interest rate.

In addition, the program may be unattractive to some borrowers because those who sell their properties must agree to share some of their profits with the government.

Meanwhile, HUD also is revising the often-confusing disclosure forms that home buyers receive when they refinance a loan or buy a new house. HUD announced Wednesday that it completed an overhaul 1974 law requiring lenders to give a so-called “good faith estimate” of mortgage costs, including lenders’ payments to mortgage brokers.

“It’s a big step forward in restoring trust and transparency between the industry and homeowners,” Preston said.

The government, which originally proposed revising these forms more than six years ago and released its latest proposal in March, says the new forms — to be required starting in 2010 — should save consumers around $700 in closing costs.

Preston acknowledged that industry opposition stalled similar government changes. Had they been made earlier, “it would have reduced the impact of the crisis that we’re seeing today,” he said.

Nevertheless, changes to the stack of paperwork that consumers must sign before buying a house will have a big impact on thousands of real estate agents, mortgage brokers, banks and title companies.

The real estate industry had flooded HUD with complaints that the changes would be complicated and costly, and don’t necessarily make the process easier for consumers to understand.

In theory, if borrowers had a better understanding of loan terms, they might have avoided some of the riskier loan products that became popular in recent years — such as subprime loans, or so-called option ARMs that allow borrowers to pay only the interest on the loan or even less, so the principal increases.

Minorities have been most abused, research shows. A study of 7,500 mortgages released in May by the Urban Institute and HUD found that black borrowers paid $415 more in loan fees on average than white borrowers. For Hispanics, the difference was $315.

Credits: MSNBC.com

Low home prices and excess supply helped drive a rise in first-time U.S. home buyers and reduce excess inventory, according to a study released Saturday by The National Association of Realtors.

According to the survey, which was released at the 2008 Realtors Conference & Expo, the number of first-time buyers rose to 41 percent from 39 percent of all transactions in 2007.

“First-time buyers are much more flexible in entering the market because they aren’t concerned about selling an existing home,” National Association of Realtors Chief Economist Lawrence Yun said in a statement.

Yun attributed the increase to low home prices, “plentiful” supply and affordable interest rates. Looking ahead, Yun expects further increases in first-time home buyers because of a temporary first-time buyer tax credit and improvements to the FHA loan program.

“It’s been an optimal time for entry-level buyers with a long-term view,” Yun said.

According to the study, the median age of first-time buyers was 30, down from 31 in 2007.

The median income for a first-time buyer was $60,600 and typical first-time buyers bought homes costing $165,000.

Of first-time buyers who made a down payment, 69 percent used savings and 26 percent used money from a friend or relative. Another 7 percent received a loan from a relative or friend, while 16 percent used funds from their investments. A fixed-rate mortgage was chosen by 92 percent of those surveyed.

Looking at home sellers, the median age was 47 with income of $91,000. Three-quarters of respondents were married, lived in their home for six years and had their home on the market for eight weeks.

Results from the survey come from a questionnaire that NAR mailed to 133,000 home buyers and sellers nationwide who bought their homes between July 2007 and June.

Credits: MSNBC.com

Falling prices and rampant foreclosures are not the stuff of healthy housing markets. But to some real estate investors, the dismal market can signal that it is time to invest.

So what if cities like Phoenix and Las Vegas have regularly appeared on RealtyTrac’s list of top 10 foreclosure markets quarter after quarter? Or if the National Association of Realtors is reporting that more than one-third of all existing homes for sale in America are “distressed,” meaning they’re in foreclosure or approaching it?

To some investors, the persistent price declines and prolonged sales downturn signal something positive: The possibility of future profits.

Just ask Christopher Yates, president of CM Yates Real Estate Investment. Yates, who is based in Colorado, has invested in residential real estate since 2003. He bought a Las Vegas home for $226,000 in 2003 and sold it about a year later for $370,000, making a tidy profit. He’s avoided Las Vegas since 2005, but is now planning a return — by way of Phoenix, another hard-hit market.

“It’s time,” he says. “The Las Vegas area is really landlocked, and prices have to go back up eventually.”

A house in Las Vegas similar to the one he sold for $370,000 three years ago now fetches just $200,000, he says, happily. Because the rental market in Las Vegas is relatively healthy, it’s possible for him to buy a house like that now with a sizable cash down payment and operate it profitably as a rental. Had prices not fallen, this wouldn’t be possible.

Investing in these markets requires a strong stomach, and a lot of patience.

The risk of future home price declines rose in 94 percent of 381 metropolitan areas last quarter, according to  PMI Mortgage Insurance, based in Walnut Creek, Calif. Prices are likely to be down more than 20 percent this year alone in Las Vegas, Phoenix and many California and Florida markets, with no clear sign yet of a bottom.

Investors wading back into these troubled markets say they are buying for cash flow rather than for the quick appreciation that was possible in frothier times. Investors who can get a fixed-rate loan and find tenants to pay rent steadily can afford to hang on for a long time until housing prices rebound.

“You don’t wait for the bottom of the market,” Yates says of sale prices in the markets he’s investigating. “You wait till it makes sense.”

Nationally, existing-home prices in September 2008 were 9 percent lower than a year earlier, according to the National Association of Realtors. Several recent reports have shown home sales activity rising as buyers are lured in by falling prices. Even if prices continue to fall, many investors say they can wait for the market to rebound as long as they can get cash flow from renters.

“I was one of the people criticizing the enormous amount of investor activity over the past three or four years,” says Andrew Jolley, a partner at Capsource in Henderson, Nev. “I think in some ways we’re now helping the market by purchasing inventory, but real recovery will have more to do with the credit market improving.”

At Capsource, Jolley and three partners have a portfolio of about 30 single-family homes in Las Vegas. They’re looking for more, and while there is competition, the seller is often a bank or lender, meaning foreclosure is already complete and investors can negotiate with an institutional owner rather than an individual seller.

“It’s difficult to call the bottom,” Jolley says. “But it certainly feels close. Inventory has declined, sales have risen. But pricing is still on the decline. When pricing stabilizes then we’ll know a turnaround is under way.”

Leonard Baron, a professor at San Diego State University, has made 60 offers in the suburbs of San Diego during the past six months. Some sellers refuse to negotiate, he says. But he expects to succeed in closing two purchases in the near future: A single-family home for $200,000 (down from $435,000 in 2005) and a condo for $95,000 (down from $175,000 in 2005).

“Those are huge price drops,” Baron says. “But keep in mind 56 of my offers were rejected. And the new prices reflect the current market.”

Baron mostly made offers on foreclosed properties, which he characterizes as a “big appeal” for investors who want low prices and have time to work through the red tape or bat around negotiations with an institutional seller.

He says he plans to “buy and hold” the properties he is buying, rather than try to renovate them and sell them quickly. Because prices have fallen so far, he can get rents that allow him to make money managing the property over time, rather than just hold and hope for appreciation as investors did during frothier times.

“The old rule was that you tried to get 1 percent of the purchase price per month in rent,” Baron says. “Those numbers haven’t been seen for a long time in San Diego. But they’re out there.”

In fact, Baron says he can make money off properties if he can fetch rents just 0.7 to 0.8 percent of the purchase price per month, of about $1,500 a month for a $200,000 home.

“It’s tough to get loans now,” he says. “But in San Diego, as long as a property has some redeeming qualities there will be multiple offers on it.”

Credits: MSNBC.com

Homebuyers pulled back some more in September amid turmoil in the financial markets.

The Pending Home Sales Index for the month fell 4.6% to 89.2 after climbing 7.4% in August, according to the National Association of Realtors (NAR). Still, the index was up 1.6% from a year ago.

NAR said the dip in sales was tempered by a sharp decline in prices, which fell 9% year-over-year in September. Also propping up sales to some extent were affordable mortgage interest rates, which dipped below 6% for a 30-year fixed-rate loan during the month, according to Freddie Mac (FRE, Fortune 500).

It doesn’t look like things will improve soon.

“Right now, we’re in a recession, and unemployment will increase through 2009,” said NAR chief economist Lawrence Yun. “Consumer spending has halted and businesses are very cautious of expanding. It is unclear by how much the global economic slowdown will dampen U.S. exports, which had been rising strongly.”

In contrast to Yun, The National Bureau of Economic Research – which is the organization whose definition of a recession is most widely accepted – has yet to call the current downturn a recession.

Yun expects that the economy will continue to deteriorate, with the gross national product contracting through the end of 2008 and first quarter of 2009.

“The depth of the recession depends entirely on housing,” he said. “With sufficient housing stimulus, the recession will be shallow. If government actions stay focused on housing, the cost to the Treasury would be much less that the potential losses in the nation’s output and income in a severe recession.”

One bright spot: NAR reports that the drop in home prices, combined with low interest rates, have brought home buying affordability to 2003 levels. But the improved affordability may not be enough to quickly bring housing all the way back into recovery.

“To me [the pending home sales drop] is another indication that we haven’t hit bottom yet in the housing market,” said Nariman Behravesh, chief economist for Global Insight.

The financial market turmoil and the freezing of lending have slowed home sales. “A lot of people simply can’t get a mortgage these days and that’s a key element,” he said.

Yun, however, noted that pending home sales did increase in the regions that have already seen massive price declines.

September sales volume climbed 3.7% in the West, and was 39.5% above a year ago. In the Midwest the index inched down 0.7% to come in 3.1% below September 2007. Pending sales in the South dropped 7.9% for the month and were down 11.3% compared with a year ago. In the Northeast, the index dropped 16.8% for the month and 9.4% year-over-year.

With the economy slowing, Yun revised his forecast for existing home sales downward to 5.02 million for all of 2008. Last month, he forecast sales of 5.04 million existing homes.

The total should rise to 5.32 million in 2009, according to Yun. He said new home sales are likely to amount to 487,000 for 2008 and 413,000 in 2009.

Credits: CNNMoney.com

The Bush administration on Tuesday unveiled a new program to modify mortgages and stabilize the battered real estate market, but the plan stops short of providing direct government financial help to at-risk homeowners.

The plan centers on Fannie Mae and Freddie Mac, which between them own or back about 31 million mortgages worth a combined $5 trillion. The federal government took over the firms in September due to mounting losses on their portfolios of mortgages.

Eligibility is determined by several factors: Homeowners must be 90 days or more late in their mortgage payments, owe at least 90% of their home’s current value, live in the home on which the mortgage was taken and have not filed for bankruptcy.

Their mortgage payments would be adjusted through lower interest rates or longer repayment schedules with the goal of bringing payments below 38% of monthly household income. Interest rates could be lowered for five years and then raised to a predetermined level. Loan terms could be lengthened to 40 years.

Officials said the standards for loan modifications should fast-track changes in payments. The standards will be applied to loans owned and guaranteed by Fannie and Freddie, but officials said they hope they will also be adopted industrywide.

“We expect that it could significantly increase the number of modifications completed,” said James Lockhart, director of the Federal Housing Finance Agency, the regulator that oversees Fannie and Freddie.

There was no estimate available of how many loans owned by Fannie or Freddie are eligible for help under this program. Fannie reported this week that 1.7% of its mortgages by value are delinquent by 90 or more days. Fannie’s filings suggest that it has about 18 million mortgages on its books, which would work out to about 300,000 mortgages that could potentially be eligible.

Freddie has yet to release third-quarter results, but at the end of the second quarter it had 115,000 delinquent loans on its books, or about 1% of its total. That number is likely to be significantly higher when it reports third quarter results later this week.

‘An important step forward’

Faith Schwartz, executive director of Hope Now, a coalition of lenders, loan servicers and not-for-profit housing groups, said setting standards for loan modifications is an important advance that she believes other banks and mortgage investors are likely to follow.

“It may not be across the whole industry, but it’s an important step forward,” she said. “We think over time this is going to affect a couple hundred thousand homeowners.”

But even in cases where declining home prices have taken the value of a home to less than is owed on the mortgage, the balance of the loan will not be lowered under this program.

“This is not loan forgiveness; the loans will be paid but at terms affordable for borrowers,” said Brian Montgomery, commissioner of the Federal Housing Administration.

The fact that mortgage balances will not be reduced for the so-called underwater mortgages — those in which a homeowner owes more than the home is worth — will limit the use and impact of the program, according to some experts.

“When they realize they owe $300,000 on a home worth $200,000, many will decide it’s just not worth it,” said Dean Baker, co-director of the Center for Economic and Policy Research.

Sen. Charles Schumer, D-N.Y., was quick to criticize the program for not going far enough. He said too many of the loans won’t be modified because the investors who own the loan will be able to block a new payment schedule.

“These voluntary plans sound nice, but they don’t do the job,” Schumer said.

Sen. Christopher Dodd, D-Conn., called the plan “a constructive step forward.” But he called on the Bush administration to push ahead with a separate mortgage guarantee program under the $700 billion financial system bailout enacted last month. “We are still awaiting agreement from the Treasury Department to move this program forward,” he said.

Private-sector efforts underway

While a number of major banks, including Citigroup (C, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Bank of America (BAC, Fortune 500), have announced loan modifications programs in recent weeks, they hold only a fraction of those owned or guaranteed by Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500).

Most of the mortgage modification programs announced by banks so far cap the payments of homeowners at risk of losing their homes at a level they can afford — typically about 34% to 40% of their income — through lower interest rates, longer repayment schedules or reductions in loan balances. But many of those loan modification programs include the option of reducing the balance of the loan, an option not included in this latest program.

Banks and mortgage finance firms have a strong interest in trying to halt foreclosures. The market is already flooded with more homes for sale than there are buyers, and foreclosures will only further drive down home prices and lead to more foreclosures.

Moody’s Economy.com forecasts that even with loan modification programs, 1.6 million Americans will lose their homes this year either in a foreclosure or a distressed sale, and another 1.9 million are projected to lose their homes in 2009.

On Monday, Fannie reported a $29 billion loss in the third quarter. The company also reported sharp increases in loan default rates and the amount it is setting aside for future loan losses.

Credits: CNNMoney.com

Mortgage rates fell this week amid a pullback in consumer spending and a weaker job market.

Mortgage finance firm Freddie Mac reported Thursday that 30-year fixed-rate mortgages averaged 6.20% this week. That’s down from 6.46% last week and below 6.24%, the rate at this time last year.

Even though interest rates were slightly lower this week, rates are fairly firm and likely to remain that way, according to Keith Gumbinger of HSH Associates.

“From the mortgage-lender standpoint, the risks are rising,” he said. “And because the risk of real estate lending remains so acute, the price of that money reflects the risks.”

Lenders are tightening their credit standards in the face of a contracting economy and record home foreclosures, according to Frank Nothaft, Freddie Mac (FRE, Fortune 500) vice president and chief economist. A survey of senior loan officers from the Federal Reserve found that about 70% of banks raised their lending standards for prime mortgages, and about 90% of banks that offer nontraditional mortgages did so as well.

Rates on 15-year fixed-rate mortgages fell to 5.88% from 6.19% last week. A year ago, the rate was 5.90%.

The five-year adjustable-rate mortgage fell to 6.19%, from 6.36% last week. A year ago, the rate was 5.89%.

The rate on a one-year adjustable-rate mortgage fell to 5.25% from 5.38% last week. At this time last year, the rate was 5.50%.

Rates for 30-year fixed-rate mortgages have been at 6% or higher for four straight weeks. Between the week of Oct. 9 and Oct. 16, the 30-year fixed-rate mortgage posted its biggest weekly jump since April 1987, rising from 5.94% to 6.46%.

In September, the government took control of the mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac with a rescue plan that could inject them with $200 billion.

For mortgage help, contact Matt Meister by clicking on Tucson Real Estate Resources.

Credits: CNNMoney.com

For years, bad loans and their aftershocks have been sending homeowners into foreclosure. Now it’s lost jobs that are putting troubled borrowers over the edge.

As the economy tanks, unemployment is the major factor driving a much larger proportion of foreclosures now than in the earlier stages of the mortgage meltdown.

In June, 45.5% of all delinquencies reported by Freddie Mac (FRE, Fortune 500) were due to unemployment or the loss of income, according to the company. That’s an increase from 36.3% in 2006.

“The two economic factors that most contribute to foreclosures are falling home prices and rising unemployment,” said Richard DeKaser, chief economist for National City Corp (NCC, Fortune 500). “It’s hard to pay your mortgage when you don’t have a job.”

And that’s a situation that more and more people are finding themselves in. Nearly one million Americans have lost their jobs in 2008. The Bureau of Labor Statistics reported in early October that 159,000 private sector jobs were lost in September, and on Friday, economists expect the BLS to report that 200,000 jobs were lost in October.

“The rise in job losses will increase and extend the delinquency trend,” said Doug Duncan, the chief economist for mortgage giant Fannie Mae (FNM, Fortune 500). Foreclosures spiked 71% in September alone according to RealtyTrac.

A double whammy

Chris Berio of Long Island, N.Y., worked in two industries that have been hit particularly hard by layoffs. During the boom he worked in construction as a steam fitter, while also moonlighting as a mortgage broker. Berio, 28, was very confident when he bought a $350,000 fixer-upper in Deer Park in 2006 and took an 11% mortgage to finance it.

In 2007, he lost both of his jobs in quick succession. “I went from making good money to nothing,” said the married father of two. Berio was one of the lucky ones: His mortgage was modified in September and its interest rate reduced to 5%.

“The number of people we’re helping has tripled,” said Sal Pane, founder of the for-profit Amerimod Modification Agency, which helped Berio. “And much of the increase in our business is due to job loss.”

Berio has found a new job in what should be a growth industry for years: He’s become a foreclosure prevention counselor.

Of course the housing crisis is driving unemployment, which in turn has exacerbated the housing crisis – particularly in bubble states like Florida, Nevada and Arizona.

The unemployment rate in Florida was just 3.3% in May 2006, when the subprime crisis began to emerge – far below the national average of 4.7% at the time. Today Florida’s rate stands at 6.6%, well above the current national average of 6.1%

Jacksonville, Fla., resident Paula Seabrooks lost her mortgage brokerage company this year in the wake of the Florida economy’s deterioration. She has worked in the industry since 2001, first as a contract underwriter for companies such as Wells Fargo (WFC, Fortune 500). She then opened her own business. Her income dropped from nearly six figures in 2006 to less than $20,000 last year.

Seabrooks bought a $165,000 home in March 2006 and financed it with a hybrid adjustable-rate mortgage, which recently reset to 8.375% interest.

“I thought I’d be doing well,” she said, “I took the low rate, intending to refinance within two years.”

Seabrooks has a new job, but it pays only $38,000 a year. That is not nearly enough to afford her $1,400 monthly mortgage bill, much less make up the five months of missed payments and fees that now total about $11,000. She’s seeking a loan modification with the help of counselors from the National Community Reinvestment Coalition.

Ironically, her new job involves handling applications from people seeking to refinance their own unaffordable mortgages into FHA-insured loans.

“Every other loan application I get, it seems, either the wife or the husband is unemployed,” Seabrooks said.

Dark days in the Golden State

Like Florida, California has seen its economy devastated by the housing meltdown. Foreclosure prevention counselors now have far more clients seeking help because their jobs disappeared, rather than because their adjustable-rate mortgages are resetting.

Wes Lobo, a foreclosure counselor for the Community Housing and Credit Center in Chico, Calif., said that his last three clients on Wednesday were victims of job or income loss.

Lobo says that his clients are mostly middle-class Americans who have lost their jobs and exhausted their savings and investments and can’t pay their bills.

One of his clients was employed for years by a used car dealer and had worked his way up to a management position. With auto sales way down, he got laid off and now can’t pay his $240,000 mortgage or his $60,000 home equity loan.

With the auto industry on the ropes, his chances of finding work in his original line of work are diminishing. The unemployment rate in the Chico metro area has climbed to 8.1%, up two percentage points over the past 12 months.

If that keeps up, more Chico homeowners will be visiting both the unemployment office and their local foreclosure prevention counselors.

Credits: CNNMoney.com