The FDIC, six weeks after taking over mortgage lender IndyMac Bank, said Wednesday that it will start automatically modifying some of the bank’s most troubled loans to keep borrowers in their homes.

The Federal Deposit Insurance Corp. said it has started to send out the first of what will be an estimated 25,000 letters to borrowers most seriously delinquent on their loans.

The goal of the modifications: to provide borrowers with affordable payments so they can stay in their homes while minimizing the risk of foreclosure and loss to investors in securities backed by the loans.

“Foreclosure is often a lengthy, costly and destructive process. Avoiding foreclosure not only strengthens local neighborhoods where foreclosures are already driving down property values, it makes good business sense,” FDIC Chairman Sheila Bair said in a statement. “This is a ‘win-win’ program all around.”

Equally important, by turning what are currently non-perfoming loans into performing loans, the FDIC hopes to maximize the value of IndyMac assets to potential buyers, which would be good news for IndyMac customers who had uninsured deposits at the bank when it was taken over. A higher purchase price would also mean fewer costs for the FDIC and its insurance fund.

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Prime mortgages are starting to default at disturbingly high rates - a development that threatens to slow any potential housing recovery.

The delinquency rate for prime mortgages worth less than $417,000 was 2.44% in May, compared with 1.38% a year earlier, according to LoanPerformance, a unit of First American CoreLogic that compiles and analyzes residential mortgage statistics.

Delinquencies jumped even more for prime loans of more than $417,000, so-called jumbo loans. They rose to 4.03% of outstanding loans in May, compared with 1.11% a year earlier.

And prime loans issued in 2007 are performing the worst of all, failing at a rate nearly triple that of prime loans issued in 2006, according to LoanPerformance.

“The extent of how bad these loans are doing is very troubling,” said Pat Newport, real estate economist with Global Insight, a forecasting firm.

Washington Mutual CEO Kerry Killinger said last month that the bank’s prime loan delinquencies are on the rise. As of June 30, 2.19% of the prime loans issued by WaMu in 2007 were already delinquent, compared with 1.40% of prime loans issued in 2005.

Also last month, JP Morgan Chase CEO Jaime Dimon called prime mortgage performance “terrible” and suggested that losses connected to prime may triple. For the second quarter, the bank reported net charges of $104 million for prime rate delinquencies, more than double the $50 million recorded three months earlier.
The latest shoe

Prime loans are just the latest class of mortgages to suffer a spike in failure rates. The first lot to go bad was, of course, subprime mortgages, whose problems set the housing meltdown in motion. Next were the Alt-A loans, a class between prime and subprime loans that doesn’t require strict documentation of a borrower’s assets or income.

Now, as prime loans are added to the mix, the resulting foreclosures could haunt the housing market for a long time, according to Global Insight’s Patrick Newport.

“Home prices will drop for quite a while - maybe several years,” he said.

Prices are already off nearly 20% from their 2006 highs, according to the S&P/Case-Shiller Home Price index.

And there’s a strong inverse correlation between home prices and defaults, according to Lawrence Yun, chief economist for the National Association of Realtors.

“It’s a feedback loop,” he said. “Price declines lead to more defaults, which leads to more price declines.”

More foreclosures will add to an already massive oversupply of homes on the market. Inventories are up to about 11 month’s worth of sales at the current rate.

Indeed, about 2.8% of all homes for sale were vacant as of June 30, according to Census Bureau statistics. That’s up about 50% from three years ago, and near historic highs.

More foreclosures, fewer loans

The failure of prime mortgages will also make it more difficult for new borrowers to find affordable loans - and that will slow sales even more. Lending standards have been tightening for months, but if prime loans start to look risky, lenders will be even more conservative about who gets a mortgage.

About 60% of the loan officers surveyed reported that they tightened lending standards for prime mortgages during the first three months of 2008, according to the April 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices from the Federal Reserve, which is released quarterly.

That number will likely be even higher for the second quarter, according to Mike Larson, a real estate analyst for Weiss Research. “It’s already harder and more expensive to get loans,” he said. “Lenders pull in their horns when things go south.”

While easy credit fueled the housing boom, restricted credit is certainly contributing to the bust.

“Eventually,” said Newport, “time will break the cycle. Pricing will drop enough to attract more buyers, and inventories will decline.”

But there will probably more hard times ahead before markets come back into balance and recovery begins.

Credits: CNNMoney.com

The number of homes listed for sale continues to edge lower in many metropolitan areas, though supplies remain ample.

The supply of homes available for sale in 29 major metropolitan areas in July was down 0.5% from a month earlier, according to figures compiled by ZipRealty Inc., a real-estate brokerage firm based in Emeryville, Calif. The supply has begun to erode partly because some would-be sellers have given up and withdrawn their homes from the market for now.

The ZipRealty data cover all listings of single-family homes, condominiums and town houses on local multiple-listing services in areas where the firm operates.

Over the past two decades, the number of listed homes typically has declined slightly in July as the peak spring/summer selling season winds down.

Nationwide, about 4.5 million previously occupied homes were listed for sale at the end of June, according to the National Association of Realtors. At the current sales rate, that total is enough to last about 11 months, the trade group says. The market is considered roughly in balance between supply and demand when the inventory is enough to last around six months.

The largest declines in July from a month earlier were in the metro areas of Boston (-4.2%) and Tucson, Ariz. (-3.5%). The biggest increases were in the metro areas of Sacramento, Calif. (6.9%), and Phoenix (6.1%).

Patrick Lashinsky, ZipRealty’s chief executive, says home sales have been relatively strong recently in the Boston, Las Vegas, Riverside-San Bernardino, Calif., and Sacramento areas. Prices have fallen far enough in those areas to attract some bargain hunters.

The July inventory was down 3.8% from a year earlier in 18 metro markets for which comparable year-earlier data are available.

The Zip data don’t include New York. But Miller Samuel Inc., an appraisal firm based there, says there were 6,441 cooperative apartments and condominiums available in Manhattan at the end of July, down 6.2% from June. The Manhattan market has been cooling recently as Wall Street firms shrink their staffs.

The inventory figures from Zip and the Realtors probably understate the supply of homes because not all foreclosed properties that lenders are trying to sell are listed on multiple-listing services.

In a report issued last week, Julia Coronado, an economist at Barclays Capital in New York, said the housing market may start to bottom out by year end. Home sales in 2009 are likely to flatten out near current low levels, she said. “We expect some further downward pressure on prices through 2009 as inventories continue to be worked off,” Ms. Coronado wrote.

Housing construction “appears to have fallen below the pace consistent with population growth,” she said, and price declines have made housing more affordable in many areas.

Credits: WSJ.com

With the market slowdown wearing on, real estate, home-building and lending professionals in Tucson are pinning hopes for a turnaround on a recently passed federal housing-stimulus package.

The wide-ranging bill, signed into law July 30, encompasses a slew of incentives and reforms aimed at helping the housing industry out of its slump. Among them are a potential $7,500 tax credit for first-time buyers, money for the rehabilitation of foreclosed properties and a variety of changes to Federal Housing Administration-insured loans.

Southern Arizona Home Builders Association President Ed Taczanowsky said the stimulus measures not only will help the local market, they also serve as a sign that it’s approaching a turning point.

“When the federal government steps in and puts a huge amount of money into the housing market, that signals to me that we are near the bottom,” Taczanowsky said.

In June, the number of sales was down about 25 percent compared with a year earlier, said a report from the Tucson Association of Realtors Multiple Listing Service. Both the median and average sale prices showed drops of more than 10 percent compared with June 2007. The median sat at $200,000 in Tucson in June, the Realtors’ report said.

Meanwhile, monthly new-home-start numbers have plunged this year to levels not seen since the early 1990s, according to local research firm Bright Future Business Consultants.

The tax credit alone might do wonders for helping to get would-be buyers off the sidelines, said Colin Zimmerman, spokesman for the Tucson Association of Realtors.

“Basically, it will lower the effective cost of your home by $7,500,” he said. “I don’t see why everyone isn’t taking advantage of it.”

As with all government initiatives, however, there are a few kinks — namely that the tax credit is actually an interest-free loan, intended to be repaid by the buyer over 15 years. The bill does not specify how the loan payments will be collected, said Megan Booth, senior policy representative for the National Association of Realtors. That will likely be determined by future regulations, she said.

Rita Thomson-Zurita, president of the Southern Chapter of the Arizona Association of Mortgage Brokers, said in an e-mail that she wishes the tax credit were available to other buyers.

Also “some first-time home buyers have other issues which a tax credit will not help,” she said, such as credit scores.

Thomson-Zurita said she is also concerned about a provision eliminating down-payment assistance from sellers for FHA loans.

The law may not be a total fix for the market, but it’s a good start, said Tom Heath, vice president of advocacy for the Southern Arizona Mortgage Lenders Association.

“Anything that’s going to keep homes out of inventory and out of foreclosure is going to benefit us,” he said. “To what extent, I’m not sure.”

Credits: Arizona Daily Star

The good news: Mortgage giant Fannie Mae is taking steps to shore up its finances. The bad news: You’re going to pay for it when you take out a mortgage.

Fannie plays a central role in the market for home mortgages by purchasing loans, securitizing them and selling them to investors. In announcing announcing a $2.3 billion loss on Friday, it also said it would make major changes that could have a significant effect on mortgage liquidity and pricing.

The company said it will increase its fees, stop buying certain high-risk loans and charge a higher risk premium for buying loans in the declining market.

“[These actions] have raised the costs of mortgage credit and reduced its availability,” said Mark Zandi, chief economist for Moody’s Economy.com. “Policy makers had been hoping they would move forward to provide more credit and now they’re just hoping they don’t pull back.”

The increases were inevitable, according to Keith Gumbinger of HSH Associates, a publisher of mortgage loan information.

“The cost of mortgage credit is getting pushed higher by the issues in the marketplace,” he said. “They can’t reduce their market exposure and that means more expensive mortgages.”

Fannie increased fees for some loans by a quarter of a percentage point, based on borrowers’ credit scores and the amount of their down payments. It will charge, for example, 1% (up from 0.75%) for a buyer with a credit score of 680 paying 20% down.

And Fannie doubled its “adverse market delivery charge” to 0.5%. That is an across-the-board fee assessed against every loan Fannie buys, according to a Fannie spokeswoman. Fannie first instituted the charge this spring.

“It’s very negative,” said Lawrence Yun, chief economist for the National Association of Realtors. “Any time there’s an additional imposition of fees in obtaining a mortgage, it knocks some potential buyers out of the market.”

Fannie’s smaller cousin, Freddie Mac, which also announced a big loss this week, has been taking similar steps to shore up in finances and reduce its exposure to risky loans.

The additional fees imposed by Fannie will hit newcomers particularly hard, according to Yun. First-time buyers are usually most on the margins and struggling to afford a home purchase. The added fees will be passed on to borrowers and could mean quarter-point increases in interest rates.

Reducing the number of first-time buyers can have a domino effect on the market. Existing homeowners looking to trade up to bigger, more expensive homes may postpone doing so because they can’t sell their present home.

Fannie will also eliminate buying Alt-A loans by the end of 2008. Alt-A loans, a category between prime and subprime, accounted for about 11% of the company’s loans during the last years of the boom. They have been used mostly by people who couldn’t or wouldn’t document their incomes, their assets or both. These buyers will find it harder to obtain financing once Fannie stops buying the loans.

According to Yun, however, the cutback in Alt-A will hurt people buying second homes to rent out or resell, rather than first time homeowners.

“These are people who often rely on their good credit to buy investment properties putting little or no money down,” he said.

But removing some of them from the market will decrease demand in a market already struggling with high inventory.

Fannie and Freddie, as private companies created and sponsored by the government, have to foster home ownership while satisfying their shareholders. They have to maintain profitability or risk triggering a government rescue.

“They were created to provide liquidity in times of crisis,” said Yun. “If they don’t do that, what’s the point of having Fannie and Freddie in the first place?”

Credit: CNNMoney.com