45,000-plus Valley properties remain in foreclosure

By J. Craig Anderson - Jun. 23, 2009
The Arizona Republic

Thomas Kelly explains the foreclosure process to those outside the banking industry by likening it to a tube.

"You get put in the tube when you're 90 days late, and you might come out the other end of the tube six months later," said Kelly, spokesman for JPMorgan Chase & Co.

What Kelly's analogy doesn't explain is how, for the past three years, thousands more Phoenix-area property owners have been entering the tube each month than coming out of it.

At present, the system is backed up with more than 45,000 "pending" foreclosures, up from about 2,300 in June 2006, according to a historical analysis by the Information Market, a Phoenix research firm.

Most experts expect pending foreclosures to increase even more before leveling off sometime within the next 12 months.

There has been much speculation among real-estate professionals about reasons for the apparent backlog of houses and condominiums headed toward foreclosure.

There's a widespread belief that banks are purposely limiting the flow of foreclosure homes onto the market, which helps prevent home prices from sliding even further but could prolong the market's long-term recovery.

Likewise, some say lenders are dragging their heels on repossessing and selling extravagant homes, and to a lesser extent commercial properties, including raw land, because the demand for big-ticket real estate is too low and because selling off large assets at sharply reduced prices could cause some smaller banks to fail.

Lenders have been relatively quiet about their strategies for working through pending foreclosures, which has only fueled various theories.

But Kelly said such theories give the banks too much credit.

"We've got such an enormous portfolio of homes to deal with, we don't have time to say, 'Let's do this with this one, and let's do that with that one,'" he said.

Monthly foreclosure totals have risen and fallen a number of times since the housing market peaked in 2006, although the general trend has been upward.

However, the number of pending foreclosures, properties on notice for a trustee sale but not yet sold, has increased steadily without exception since April 2006. In the past year, it has climbed by anywhere from 500 to 5,000 properties each month.

As of Friday, there were 45,709 total pending foreclosures in Maricopa County, according to the Information Market. Those are in addition to the roughly 73,000 foreclosures completed during the past three years.

Also as of Friday, the county was on track to reach 5,000 foreclosures by the end of this month, which would be the second-highest monthly total on record, having reached a high of 5,240 in February.

Even if 5,000 properties complete the foreclosure process this month, an even greater number will enter it.

As of Friday, lenders had served pre-foreclosure notices on 5,700 additional properties, a net increase of at least 700 in pending transactions for the month.

Actual foreclosures in the past three years total about 73,000, according to the data.

Some Valley foreclosures may be taking longer than the usual 91 days from notice to sale because the borrowers are attempting to work out a loan-modification or "short sale" agreement with the lender.

In Maricopa County, short sales have increased in the past year but still account for less than 5 percent of property sales.


Modifications help

Colleen Gunderson, Tempe-based Century 21 All Stars owner and designated broker, believes banks have intentionally slowed the release of foreclosure properties onto the market at the behest of the federal government, which provided many banks with bailout funds.

"There is a process in place to sort of warehouse these properties until a time when it's more beneficial to place them on the market," she said.

It's the right approach, Gunderson added, because dumping 45,000 foreclosed-on properties onto the market all at once would deliver the knockout punch to a real-estate economy already leaning against the ropes.

New, standardized loan-modification guidelines issued by the Obama administration in March appear to be doing a better job of keeping some borrowers out of foreclosure than modifications made in 2008, according to two federal bank regulators, but it's still too early to know for sure.

More than half of loan modifications negotiated before the Treasury Department launched its $75 million Making Home Affordable program in early March were back in default within six months, according to a study conducted by the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

Those same officials said in May that the rate of re-default fell by about 12 percent among those borrowers whose monthly payments were reduced.

However, the number of loans headed toward foreclosure has risen significantly despite better modifications.

In March, the Investigative Reporting Workshop at American University in Washington, D.C., conducted a study of the nation's roughly 8,000 banks with online-news service msnbc.com and reported finding a 150 percent increase in loans at risk of foreclosure compared with a year earlier.

Kelly said job losses are one likely reason for the continued high volume of foreclosures, in addition to people walking away from mortgages even though the payments are affordable because they owe far more than the home is worth.


Commercial is next

Although most Valley foreclosures thus far have involved residential property, commercial-property owners and lenders are preparing for apartment, office and retail foreclosures to rise sky-high in the coming months.

Selling those properties back to the market could take years in some cases, analysts said, because there is little interest in new office and retail space, even at the low-rent end.

Commercial real-estate broker Craig Henig of Grubb & Ellis in Phoenix said banks aren't in any rush to foreclose on commercial real estate because it forces the lender to adjust the property's book value to today's considerably lower market price.

Significant write-downs on a few multimillion-dollar commercial loans could put a small or financially stressed bank out of business, he said.

"I don't know how they could sustain the amount of markdowns," Henig said.

However, Kelly said the holding costs associated with thousands of foreclosed-on properties outweigh any benefit the bank might realize from waiting to sell them.

He also noted that the value of commercial real estate and high-end homes is still on the decline, which means waiting is likely to cost lenders even more.

"The goal is to get that asset back earning money for you," he said.

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Amid Housing Bust, Phoenix Begins a New Frenzy

Amid Housing Bust, Phoenix Begins a New Frenzy
By DAVID STREITFELD ~ The Wall Street Journal ~ May 24, 2009

PHOENIX — Every weekday morning, Lou Jarvis drives the sun-baked suburban streets looking for investment gold: a family that will lose its house in a foreclosure auction within a few hours.

If the property looks promising, Mr. Jarvis puts in a bid on behalf of any of his dozens of clients eager to become landlords. When he wins, he offers to let the family stay in the house and rent for much less than their mortgage payment.

With this sweltering desert city enduring one of the largest tumbles in housing prices for any urban area since the Depression, there is an unrelenting stream of foreclosures to choose from. On some days, hundreds are offered for sale at the auctions that take place on the plaza in front of the county courthouse.

There is also a large supply of foreclosed families who can no longer qualify for a loan. And that is prompting a flood of investors like Mr. Jarvis, who wants to turn as many of these people as possible into rent-paying tenants in the houses they used to own.

Real estate got just about everyone into trouble in Phoenix, and the thinking seems to be that real estate is going to get everyone out.

The low end of the real estate market here — and in some equally hard-hit places like inland California and coastal Florida — is becoming as wild as anything during the boom.

One real estate agent was showing a foreclosed house to a prospective client when a passer-by saw the open door, came in and snapped up the property. Another agent says she was having the lock changed on a bank-owned home when a man happened by, found out from the locksmith that it was available, and immediately bought it. Bidding wars are routine.

Absentee buyers, who can be either investors or individuals purchasing a vacation property, bought nearly 4 of every 10 homes sold in the Phoenix metropolitan area in April, according to the research firm MDA DataQuick. That is up 50 percent since late 2007, and is nearly the same ratio as at the 2005 peak.

Once again, just about everybody seems to be buying as many houses as they can, positive it will make them rich — or at least allow them to recoup some of their losses.

“I bought too high a few years ago,” said Jason Fischbeck, an entrepreneur who lives across the street from Mr. Jarvis and is one of his clients. “It cost $225,000. Now it’s worth $110,000. So I just paid $80,000 cash for another. ”

Mr. Jarvis, 47, the former co-owner of a wood moulding company that thrived in the boom and faltered in the crunch, also made some mistakes. Last spring, he contracted for three new homes in the distant suburb of Copper Basin, convinced that real estate was bottoming.

He was wrong. He managed to get out of two of the contracts but had to buy one of the houses, which is now substantially under water.

“You need to buy when there’s blood in the streets,” he said with a shrug. “Even if it’s your own blood.”

In January, Mr. Jarvis began working as director of investor relations for Brewer Caldwell, a property management firm that had been approached by the CBI Group, a real estate fund based in Calgary, Alberta. In its first foray into the American market, CBI is buying 175 rental houses in Phoenix.

One of them belonged to Mary Lou and Jorge Aguilar, who purchased it new for $111,000 in 1999. Three years ago, after a series of financial difficulties, they refinanced for $185,000 for reasons they no longer understand. “Our lender talked a pretty picture,” Mrs. Aguilar said bitterly.

When the couple’s mortgage payment adjusted to $1,242 a month, they fell behind and ended up in foreclosure. They now pay $1,014 in rent, which they say is bearable.

Still, their feelings are mixed. “It’s not our house anymore; it’s someone else’s,” said Mrs. Aguilar, who works for the state welfare department.

For CBI, the deal is sweet. At that rent, it would recoup the $52,000 it paid for the house in about five years. “This type of deal is absolutely not available in Canada,” said Jarrett Zielinski, a CBI executive. “No city here has fallen by 50 percent, the way Phoenix has.”

The investment group is opening a new fund this week to buy another 160 Phoenix homes.

As CBI continues to buy, it is planning investing seminars for its tenants. “Our goal is to be able to sell them their house back,” Mr. Zielinski said. “Wouldn’t that complete the circle?”

First up for Mr. Jarvis’s inspection on a recent morning is a three-bedroom on a cul-de-sac in the suburb of Gilbert. A rival investment crew is already there. “You don’t want this one,” one fellow says. “It’s no good.” Mr. Jarvis just laughs.

Once they are inside, the reason he is trying to send Mr. Jarvis away becomes clear. The house, built in 1991, is clean and well proportioned, with an opening bid of $76,000 — $200,000 less than what it sold for three years ago.

Not every property gets his nod. He considers an older condominium but deems it unlikely to appreciate. A three-bedroom seems promising until he sees the power lines looming just feet from the back fence.

In the end, he makes just one bid this day, for the three-bedroom he saw first. He offers $110,000, which is not enough. At the courthouse, it goes for $114,000. Every week, the foreclosure market is more competitive.

As the day’s auctions wind down, Mr. Jarvis goes back to the office to meet with a group that wants to put $5 million into the Phoenix housing market. A few miles away, the owner of that house with the monstrous power lines, Robert Corr, is being told his house was sold and he has five days to vacate.

Mr. Corr smiled when he heard the news, happy to be the latest of the 78,738 foreclosures in Phoenix since January 2005. He had already rented a van to take him and his family back to Alabama, where they would buy a mobile home and live on 10 acres of land.

Brewer Caldwell has bought about 125 houses this year for its clients. Only a quarter had owners who were living there already and willing to stay on as tenants. Filling up the rest, and all the other houses the company intends to buy, will depend on a steady supply of people who cannot afford to buy for themselves.

“If Phoenix loses population,” Mr. Jarvis says, “then buying houses here is a bad bet.”

As Mr. Jarvis scouts for houses, he sometimes finds a familiar one. In February, he saw a home that one of his brothers bought from a builder in 2005, camping out overnight for the opportunity. With its value now shrunk, the brother was letting it go to foreclosure.

Mr. Jarvis’s daughter Jade also bought a house at the market’s peak — in her case to live in. The other day she asked for advice: should she keep paying the mortgage on something that had declined in value by 60 percent? His conclusion: “probably not.”

“Am I teaching my kids right by letting them walk away from something they made a commitment to?” Mr. Jarvis wonders.

Pending Home Sales Jump 3.2%

Buyers defy expectations with an increase in sales contracts signed during March.

By Les Christie, CNNMoney.com staff writer
Last Updated: May 4, 2009
NEW YORK (CNNMoney.com) -- Is the housing meltdown ending?

Pending home sales rose in March for the second consecutive month and are up year over year. The Pending Home Sales Index from the National Association of Realtors showed a 3.2% gain to 84.6 from February, when it was 82. The index stands 1.6% higher than a year ago.

The consensus forecast of industry experts polled by Briefing.com had predicted no increase in the index.

It may still take a while before the market gains enough momentum to firmly state that the downturn has been reversed, according to Lawrence Yun, NAR's chief economist. And, the upturn may have been boosted by the first-time homebuyers tax credit, a temporary measure that will lapse in December.

"We need several months of sustained growth to demonstrate a recovery in housing, which is necessary for the overall economy to turn around," said Yun. "This increase could be the leading edge of first-time buyers responding to very favorable affordability conditions and an $8,000 tax credit, which increases buying power even more in areas where special programs allow buyers to use it as a down payment."

The index is understood to be a forward indicator of home sales trends since it measures contracts signed, not completed sales. The up-tick may indicate that home prices have fallen low enough for buyers to get off the fence.

Feeling for the bottom

Yun is not calling a bottom yet, however, because the index is still at a relatively low level. Instead, he's looking toward the summer selling season to determine what direction the market will take. Plus, he would like the number of homes on the market to drop to a more normal level of six to seven months of supply.

"If inventory goes down - it's at just under 10 months now - to below eight months, that would mean we're on the way to a sustainable recovery," Yun said.

Anecdotal evidence indicates that trend may be happening. Realtors and other industry insiders are seeing rising open house attendance and multiple bids on some particularly desirable properties. Plus, pricing has become sharper, according to Sherry Chris, the CEO of Better Homes and Gardens Real Estate.

"Overpricing seems to be ending," she said. "Properties are coming onto the market and selling quickly."

And buyers are feeling a little more urgency, she added. In many markets, buyers have not felt any pressure to make an offer. "They said to themselves, 'I don't have to act immediately. It will still be on the market two weeks from now,'" she said.

Today, buyers are more likely to bid because they perceive the market as at or near its bottom. An April Gallup Poll reported that 71% of Americans thought it was a good time to buy a house.

They don't, however, believe there will be price increases soon; three of four buyers think prices will stabilize or even decline in their areas over the next 12 months, according to Gallup.

Pat Newport, a real estate analyst for IHS Global Insight, is putting less emphasis on pending home sales than he once did for his housing market analyses. There has been a disconnect lately, he said, between the number of properties going into contract (pending home sales) and the number that actually close (existing home sales).

He speculates that this is because buyers are making offers and signing contracts but, because of financing problems, many deals are falling through.

Regional differences

The South saw the largest gain of any region, with pending home sales jumping 8.5%. Pending sales are 7.7% higher there compared with a year ago.

The Midwest gained 3.9% from February and 1.7% year-over-year. Northeast sales fell 5.7% and are off 24.1% compared with March 2008. The West dropped 1% for the month but are up 8.2% year-over-year.

Low home prices continued to help to drive sales, although NAR's affordability index actually fell 2.3% from February, when it hit a historic high. This index is based on family income, home prices and mortgage rates.

"Compared to a year ago, the typical family can pay much less in mortgage costs for the same home, or buy a better home without necessarily increasing their monthly payment," said NAR President Charles McMillan, in a prepared statement. "For buyers who've been on the sidelines and have good jobs, the market has never looked more favorable.

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Expert: Phoenix, AZ Housing Nearing Bottom

Expert: Housing nearing low
By Marjon Rostami The Arizona Republic 03.29.09

The Valley housing market may be nearing its bottom, analyst RL Brown believes. In what he termed "a doomsday scenario," Brown said it's possible a second tsunami similar to the housing meltdown that started in 2006 could devastate the market in the next few years, bringing even more serious troubles than the current downturn.

But that won't happen if the federal government continues along the path it's undertaken, he said.

The housing economist and analyst, publisher of the "Phoenix Housing Market Letter," spoke Thursday night at Trilogy at Vistancia master-planned community. Residents there said they live in a bubble, far removed from foreclosures that are making housing values plummet.

"Your neighborhoods out here are a piece of cake," Brown said. "It's the neighborhoods in some communities that are devastated."

However disconnected from the damage, Brown reminded residents that foreclosures have a rippling effect and urged attendees to take care of their neighbors to avoid lowering property values across the board.

In February, eight foreclosed houses were sold in Vistancia. Prices ranged from $170,000 to $350,000.

"I guarantee you that those are lower prices than what you paid," Brown said. "Foreclosed prices are setting the prices on your street, and you need to be cognizant of that."

A significant part of the problem is lack of consumer confidence, which Brown said could take years to improve.

He predicted that the housing market is near the bottom, saying consumer confidence has shown signs of improvement over the past three weeks.

Jeff Mitchell, a Trilogy resident, was a home builder in Oregon for 30 years before his company "pretty much self-terminated" last year.

"People miss the impact here. If a property here has been foreclosed, you couldn't tell by driving past it," he said. "Feeling like we've really hit a bottom here is a really good sign that will help stimulate deals. Consumers need to stop sitting on their wallet and being so conservative. This is the time to buy."

Brown told the crowd not to lose sight of the fact that Arizona is in an enviable position.
"It's so easy to believe some of the stuff that is being said by economists who have never been west of the Hudson ," Brown said. "This place will continue to be one of the best housing markets in the world.

"Arizona will flourish once again."

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Reaping repo rewards - BUY FORECLOSURES WITH NO MONEY DOWN. 100% Financing is NOT Gone

Reaping repo rewards

Want to brave the wild world of foreclosures? Follow this advice.
By David Whitford, editor at large - December 24, 2008

NEW YORK (Fortune) - As home prices continue to skid and foreclosure rates soar (up a further 38% since the third quarter of 2007), some investors are on the lookout for outrageous bargains. Think you're ready to jump in?

Consider paying cash
Some transactions require that you close within days. That's not enough time to get a bank loan. A so-called hard-money loan is an option, but you'll pay 15% plus points, and you can't count on refinancing right away.

Perform due diligence
Foreclosures are typically sold as is, where is, but you can inspect the property before you bid. Even after you put down a deposit, you can change your mind and get your money back. Private auctions typically offer a bigger window for deliberation than public auctions on the courthouse steps.

Hire a licensed appraiser
You don't care how much the lender has discounted the note; all that matters is how much the house is really worth. Only an appraiser can tell you that. Could cost you a few hundred dollars to find out. Could save you a few hundred thousand dollars once you know.

Buy short
Instead of foreclosure, buy what's known as a short sale - a negotiated transaction involving you, the bank, and the homeowner prior to formal foreclosure. You'll have more time to arrange financing - and since the lender has fewer costs to recover, you may get a better price. Check public NOD (notice of default) listings for prospects.

And probably the best option yet, buy a foreclosed home through a private lender who offers 100% financing wth great terms. You don't have to go through all the formal bank processes nd the transaction is ten times more simple than going through a conventional bank.











Parts of this article are contributed by Laura Boyajian.

Refi Madness & Buying a House with NO MONEY DOWN in Today's Market

Refi madness - Falling interest rates are leading to a rush to get cheaper mortgages. Should you join in?

By Les Christie, CNNMoney.com staff writer ~ December 26, 2008

NEW YORK (CNNMoney.com) - Falling interest rates are fueling a mortgage refinance frenzy as homeowners rush to reduce their housing payments.

The average rate for a 30-year, fixed mortgage dropped to 5.08% last week, according to the Mortgage Bankers Association, more than a full point lower than just a month ago.

Mortgage applications were up a whopping 48% last week, according to the MBA and more than 80% were from homeowners looking to lower housing costs.

"It's snowing loans," said Steve Habetz, a Connecticut mortgage broker, "and they're all refis."

Among those were Elizabeth Mayer and Michael Keohane, who bought their Manhattan condo just a little over a year ago, financing $220,000 of the purchase price with a 30-year, fixed rate loan of 6.5%. That was affordable, with monthly payments of less than $1,400. But their new 5.25% loan will lower their payment to about $1,215, saving about $175 a month.

"It was a nice holiday gift," said Mayer.

With savings like that, it's no wonder that homeowners are coming out of the woodwork. And mortgage brokers are beating the drums too, advising their clients to let the good times roll.

Mayer said her mortgage broker had kept her informed of interest rate declines ever since she originally purchased her home. "He's been encouraging whenever opportunities arose," she said. "We missed one opportunity last spring when we just weren't able to act on it."

The real estate broker made sure they didn't miss this chance. "He e-mailed me [about it] from South Africa and called when he got back," said Mayer.

Who should refi...
Anyone with high adjustable-rate loans. Folks in this group should try to get into a low fixed rate if they can. Not only will they lower their payments immediately but it would also eliminate the possibility of future increases.

Those who would lower their rate by a percentage point or more. Borrowers who already have a reasonable fixed rate shouldn't jump into a new loan every time rates inch down, according to Orawin Velz, an economist for the Mortgage Bankers Association.

"You should have at least a percentage point difference before you even think about it," Velz said. "If you have a 6.5% loan right now, it would be a great time to refi."

Waiting for a substantial rate decrease makes sense because getting a new mortgage incurs some expenses. There are the costs of a new appraisal and origination and application fees. Plus, a title search and title insurance are usually required.

All those costs, which can add up to $2,000 or $3,000 or more for a typical $200,000 loan, are often rolled back into the mortgage, increasing the principal upon which the interest rates are applied. If that goes up so much that it offsets the interest rate drop, it doesn't make sense to refi.

Those who are planning to stay in their homes for a while. The increased balances usually take a year or two to be wiped out by lower monthly payments, so anyone planning to sell the home during the next few years probably should not refinance, unless the difference in interest rates is very substantial.

The actual rate borrowers get depends, just as with purchase mortgages, on credit scores, income and assets and the value of the home.

"If you have a high credit score and your equity is good, it's like a vanilla cream puff," said Velz. "You're going to get a great rate."

Borrowers with significant equity in their homes. Many homeowners have had much of their home values erased in the post-bubble bust, eliminating much or all of their home equity - the difference between the value of the home and the amount owed on the mortgage.

If a refi borrower's home equity has fallen below 20% of the total appraised home value, the borrower will likely have to purchase private mortgage insurance. The insurance adds a point or two to the monthly mortgage costs, which turns a 5% loan into a 6% or 7% loan, erasing any advantage of refinancing.

"That's the biggest hurdle for refinancing right now," said Velz.

Borrowers who don't think rates will decline much further. Everyone considering refis has to decide whether to wait for interest rates to go even lower, which the Mortgage Bankers Association has been forecasting.

That's only a prediction, though, not a certainty. Rates could turn higher instead.

Borrowers must weigh the advantages of gambling on rates turning around or locking in savings at the present very low rates.

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Home Buyers Turn to USDA for Mortgages

Home Buyers Turn to USDA for Mortgages
Nick Timiraos by Tuesday December 16, 2008, 7:14 pm

Tightened lending standards are leaving builders and real-estate agents scrambling for new ways to move cash-strapped buyers into homes. One increasingly popular option: an obscure home-loan program offered by the U.S. Department of Agriculture.

Created in 1991 as a way to boost homeownership in rural areas, the program is being tapped by home buyers in overbuilt exurbs who are attracted to the no-money-down terms.

When Erick Moore first read about the USDA's Rural Development Guaranteed Loan program, he says he imagined it would be "restricted to some little farmhouse." Instead, the 33-year-old computer programmer moved last month into a four-bedroom, three-bath home in Fuquay-Varina, N.C., 17 miles outside Raleigh. The house sits on nearly one acre and features a brick facade, 10-foot ceilings and hardwood floors.

"I couldn't believe it until we closed," says Mr. Moore, who paid only $1,200 out of pocket to move into the $228,000 home. The seller contributed $5,000 in closing costs, and Mr. Moore rolled the 2% fee charged by the USDA into the loan. Mr. Moore, who owned a home in St. Louis before he relocated to the Raleigh area last year, says a 60% drop in his stock portfolio made it difficult to come up with a down payment. He directed his Realtor to show him only homes that were eligible for the USDA program.

Fueled by buyers like Mr. Moore, volume has nearly doubled for these USDA-backed loans. The department insured $7 billion in loans during the 2008 fiscal year, which ended Sept. 30, up from $3.6 billion the previous year. In October and November, the agency has already insured some $1.7 billion in loans.

That's relatively small when compared with the volume of business handled by the Federal Housing Administration -- which guaranteed $102 billion in new loans during fiscal 2008. But interest in the USDA's development lending program is growing rapidly in response to the nation's credit crunch and as most private lenders have stopped offering loans with no money down.

To be eligible for a USDA-backed loan, a borrower can't have income that exceeds 115% of the median county income, and the loans are restricted to areas with lower population density -- generally towns of no more than 25,000 residents. So while home buyers in big cities aren't eligible for the loans, residents of many of America's fastest-growing towns and exurbs do qualify. The loans that come through the program are made by private lenders, then insured by the government and sold to Ginnie Mae, a federal agency that sells mortgages to investors.

Home builders, many of which have overbuilt properties in these areas, are eagerly promoting the program to sell excess inventory. The USDA program accounted for 40%-50% of sales in October and November for Scottsdale, Ariz.-based home builder , says John Bargnesi, vice president for sales. "It's one of our main tools right now."

Meritage is advertising a "$500 move in" program to clear inventory in new exurban developments, including the Buckeye and Queen Creek subdivisions outside Phoenix that have been hard hit by foreclosures and falling prices. "If a builder is in one of these geographical areas, they certainly are using it," says Mr. Bargnesi. "We're all in tune with it now."

D.R. Horton Inc., the nation's largest home builder by number of houses built, is promoting the program in sales pitches for a number of new developments outside Austin, Texas. One is named Parkside Condos, a development of 144 new two- and three-bedroom condos priced at $130,000 in Pflugerville. Kastera Homes LLC, a home builder based in Boise, Idaho, is offering to pay closing costs for buyers who use a USDA loan. D.R. Horton and Kastera didn't return calls seeking comment.

The success of the USDA program comes at a time when easy home financing is getting much harder to find. Private lenders have stopped offering loans that require no money down, amid worries that borrowers without equity are more likely to let their homes fall into foreclosure. In October, Congress terminated a popular program that allowed sellers to fund down-payment "gifts" for new home loans backed by the FHA. Next year, the FHA will require a minimum 3.5% down payment on all new loans, up from 3%, and private lenders often require a minimum 5% down payment.

Such restrictions do not apply to loans backed by the USDA, which is best known as the guardian of the nation's food supply. In fact, some buyers can finance 102% of the home price, factoring in a 2% USDA insurance fee meant to cover loan losses. The loans also don't require borrowers to pay for monthly mortgage insurance. That means that USDA loans typically carry lower monthly payments than FHA loans, even in cases when the size of the loan is larger.

Sue Botelho of Northstar Mortgage Group in Destin, Fla., is promoting the USDA loans as part of a "move in with a penny down" program. "The down-payment assistance has gone away. Subprime has gone away," she says. "So now mortgage lenders are pretty aggressive in terms of making people aware of this USDA program."

One of Ms. Botelho's clients, 46-year-old insurance adjustor Alan Sammons, paid nothing to move into a new $270,000 home in the Florida Panhandle in June. He had spent more than a year trying to find a reasonable loan before beginning construction on a custom four-bedroom, 3½-bathroom home in his Crestview, Fla., subdivision, which includes a community swimming pool and lighted tennis courts.

"They're still building homes in here," Mr. Sammons says.

Julie Chapman, a Brunswick, Ga., real-estate agent, says she is listing more properties eligible for the USDA loans -- including homes in the Plantation at Golden Isles, a new subdivision adjacent to a golf course. Many of the properties are selling preconstruction. "That's something you don't see anymore in this market," she says.

New housing developments built on open land that were among the first to experience the downturn could now benefit from the USDA program. "They're showing some signs of recovering," says Michael Orr, a housing analyst based in Mesa, Ariz.

Some question the USDA's practice of allowing no-money-down purchases. "If you have to get a 102% loan, you probably shouldn't be buying a house," says U.S. Sen. Christopher Bond (R., Mo.), who adds that he supports the intent of the programs because it has traditionally been "very difficult" for rural borrowers to buy homes.

USDA officials, for their part, say that concerns about the program's 100% financing aren't warranted because the department has a strong track record and because rural areas are less prone to big increases in home prices. "We guarantee in a very controlled environment," says Philip Stetson, a USDA administrator for the lending program. Because its average loan amount is just $120,000, he says that the program is less susceptible to large-scale losses.

USDA- and FHA-backed loans aren't prone to some of the risks that faced subprime loans because the government-insurance programs offer only fixed loans and require income verification. "We have not seen any direct evidence at this point that 100% financing is leading to greater losses," Mr. Stetson says.

The default rate on USDA loans is slightly better than the rate for FHA-backed loans. Some 11.35% of USDA loans were delinquent in 2008, while 1.4% went into foreclosure, according to the department's statistics. Meanwhile, FHA loans had a 13.6% delinquency rate, while 2.3% went into foreclosure. That compares to a 4.3% delinquency rate and 1.6% foreclosure rate on prime loans, and a 20.0% delinquency rate and 12.9% foreclosure rate on subprime loans, according to the Mortgage Bankers Association.

Unlike the FHA, the USDA programs rely on a fixed appropriation from Congress, which totaled $4.1 billion in the 2008 fiscal year, and new loans can't be made once that allocation is exhausted. The program was able to make nearly $7 billion in loans this year because it received additional funding from other department sources.

But heavy demand for the loans has administrators asking for more money. Officials say that the program will run out of money next month, even though it has been funded through March. "Up until only two years ago, we weren't even using the full amount," says Mr. Stetson. "It has been rather incredible at how it has taken off."

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Car, home buyers could benefit from Fed rate cut

Car, home buyers could benefit from Fed rate cut
AP News Wire 12/16/2008


WASHINGTON – Consumers trying to buy a house or finance a car loan could be the big winners as a result of the Federal Reserve's decision to slash its target interest rate to nearly zero and take other steps to battle the financial crisis and worsening recession.

But analysts caution that any upturn in the economy is still months away.

The Fed on Tuesday announced that it was reducing its target for the federal funds rate to between zero and 0.25 percent, down from 1 percent, a level that was already the lowest target rate in a half century.

And the central bank pledged to use "all available tools" to fight the current downturn. It said it was likely that rates would be kept at "exceptionally low levels" for some time to come.

"The Fed has taken some very historic steps and for the first time since this crisis began, they have gotten ahead of expectations instead of trailing behind them," said Mark Zandi, chief economist at Moody's Economy.com.

The Fed's announcement sparked a big rally Tuesday on Wall Street, with the Dow Jones industrial average jumping 360 points, or 4 percent, as investors were pleasantly surprised by the Fed's resolve to aggressively attack the country's economic woes.

In Asia, markets climbed higher Wednesday. Japan's Nikkei 225 stock average rose 44.50 points, or 0.5 percent, to 8,612.52 after initially rising 1.1 percent, and Hong Kong's Hang Seng Index rose 2.2 percent to 15,460.52.

Meanwhile, the Commerce Department on Wednesday reported that the deficit in the broadest measure of American trade fell more than expected in the third quarter as an export boom helped offset an increase in oil imports.

The current account trade deficit, which represents the amount of money the U.S. is borrowing from foreigners, fell by 3.7 percent to $174.1 billion in the July-September quarter. That was a better showing than economists expected, and the deficit is likely to continue falling as the U.S. recession lowers demand for foreign goods.

Economists cautioned that even with the Fed's bold moves it will take months for the economy to stabilize given that it is confronting the worst financial crisis since the Great Depression and a yearlong recession that is already the longest in a quarter-century.

The news on the economy is expected to get worse before it gets better. Businesses, which have already cut nearly 2 million jobs since January, keep laying off workers in the face of slumping demand.

The government reported Tuesday before the Fed rate announcement that home builders slashed production in November by 18.9 percent, the biggest drop in nearly a quarter century, pushing activity down to a record low annual rate of 625,000 units as the woes in housing, where the current economic troubles began, showed no signs of abating.

Economists were optimistic that the central bank's moves Tuesday to cut interest rates and pledge other efforts to unfreeze frozen credit markets will translate into significantly lower interest rates for consumers.

Commercial banks responded immediately to the Fed announcement by cutting their prime lending rate, the benchmark rate for millions of consumer and business loans, by three-fourths of a percentage point to 3.25 percent, pushing it to the lowest point in more than a half century.

Home mortgages, rates on consumer credit cards, auto loans and student loans were also expected to decline in the weeks ahead based on the Fed's commitment to use "all available tools" to make credit more available.

The Fed in the weeks since the credit crisis struck with force in September has rolled out a number of new programs to greatly expand its own lending programs, promising to provide up to $600 billion to purchase debt issued or guaranteed by Fannie Mae, Freddie Mac and other government-backed mortgage companies.

The Fed has also pledged to lend up to $200 billion to support securities backed by credit card loans, car loans and student loans, all in an effort to get those markets functioning more normally.

In its statement, the Fed pledged to keep working to get credit into the economy through these programs and additional programs if needed. It specifically mentioned the purchase of longer-term Treasury securities. The Fed's massive expansions of its loan programs have already pushed its balance sheet of loans from $900 billion in September to $2.2 trillion currently.

The new pledges had an immediate impact on bond markets where the possibility of heavy purchases by the central bank sent yields on Treasury securities falling sharply.

"The Fed has decided to flood the economy with money in the hopes that it will be lent and spent," said Sung Won Sohn, an economist at the Martin Smith School of Business at California State University, Channel Islands.

Sohn predicted that 30-year mortgage rates, which have already fallen a full percentage point since late October to now stand at 5.47 percent, could drop by another percentage point in coming weeks to around 4.5 percent. He predicted that rates on auto loans and credit card debt would also come down.

"The bottom line is that confidence has deteriorated to such an extent that the Fed is willing to take these extraordinary steps," Sohn said.

But Sohn and other analysts still look for the recession to last until next summer. The overall economy as measured by the gross domestic product shrank at an annual rate of 0.5 percent in the third quarter and many analysts believe it will be a much more severe downturn of around 6 percent in the current quarter with continued GDP declines in the first and second quarters of next year.

If the recession ends next June, as some economists are forecasting, it will have lasted 18 months, making it the longest downturn since the Great Depression.

Businesses cut more than a half-million jobs in November alone, pushing the unemployment rate to a 15-year high of 6.7 percent. Many analysts believe that unemployment will surpass 8 percent by late next year before an economic recovery has picked up enough steam to stabilize employment.

The weak economy is helping to keep a lid on prices. The government reported Tuesday that consumer prices fell by a record 1.7 percent in November as gasoline and other energy prices continued to plunge. The Fed noted that "inflation pressures have diminished appreciably," a development that gives the central bank maneuvering room to focus on boosting growth.

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December 10th 2008 ~ Weekly Commentary on Loans & Real Estate

December 10th 2008 ~ Weekly Commentary

Thumbnail Sketch: The non-manufacturing sector ISM (Institute of Supply Management) survey fell from 44.4 to 37.3 last month. This is very much in keeping with declines in retail sales and employment and, indeed, the employment figures for October were very grim, with 533,000 lost payroll jobs (largest one-month drop since December 1974), and a spike in the unemployment rate to 6.7% (highest rate since 1993).

Looking at the plunging non-manufacturing ISM data (which indicates the rapidly declining vibrancy in the service sector), Aaron Smith of Moody’s Economy.com opined: “The survey's plunge reinforces the case that this recession will be the worst since 1981-1982.”

And that, for the most part, is the nature of the news today. Sales, employment and orders are all down dramatically, even after a relatively good post-Thanksgiving shopping day. Factory orders in October were down 5.1%. Consumer credit was down by a precipitous 3.5%. And chain store sales were down 2.7% in November, though Wal-Mart had a very good month.

So one wonders why the number of mortgage loan applications climbed so incredibly high over Thanksgiving week while the rest of the economy was busy exploring the bottom of the proverbial barrel.

The simplest answer is that available mortgage interest rates fell to extremely attractive levels. But that answer doesn’t fully satisfy—for you can reduce the cost of a mortgage to zero and people won’t act on the lower rates unless they want to buy real estate.

Look at the reality of the situation. “The contract rate for 30-year fixed rate mortgages finished at 5.47%, down 51 basis points from a week ago, down 100 basis points from four weeks ago, and down 34 basis points from a year ago” [Economy.com]. If anything, this should bring refinancers out of the woodwork. And indeed it did. Applications were up by 203.3%--which was 37.7% higher than the level of applications a year ago.

But what about applications for purchase money loans? This is where the real estate market’s pedal hits the metal. A strong spike in applications would almost certainly indicate the powerful demand for real estate currently waiting to be fulfilled. Applications were up 38% (but down 22% from their year-ago level). Surely we can conclude, at least tentatively, that the market is ready to revive itself. Just give it half a chance!

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