Homebuyers scramble as mortgage rates jump

The era of record-low mortgage rates is over.

The average rate on a 30-year loan has jumped from about 5 percent to more than 5.3 percent in just the past week. As mortgages get more expensive, more would-be homeowners are priced out of the market — a threat to the fragile recovery in the housing market.

And if you wanted to refinance at a super-low rate, you may have missed your chance. Mortgages under 4 percent are still available, but only for loans that reset in five or seven years, probably to higher rates.

Rates are going up because of the improving economy and the end of a government push to make mortgages cheaper.

For people putting their homes on the market this spring, rising rates may actually be a good thing. Buyers are racing to complete their purchases and lock in something decent before rates go even higher.

“We are seeing some panic among potential buyers who have not found houses yet,” said Craig Strent, co-founder of Apex Home Loans in Bethesda, Md. “They’re saying: Man, I should have found a house three weeks ago or last month when rates are lower.”

It’s all about affordability. For every 1 percentage point rise in rates, 300,000 to 400,000 would-be buyers are priced out of the market in a given year, according to the National Association of Realtors.

The rule of thumb is that every 1 percentage point increase in mortgage rates reduces a buyer’s purchasing power by about 10 percent.

For example, taking out a 30-year mortgage for $300,000 at a rate of 5 percent will cost you about $1,600 a month, not including taxes and insurance. But the same monthly payment at a rate of 6 percent will only get you a loan of $270,000.

Good economic news is the first reason rates are rising: U.S. government debt, a safe haven during the recession, is losing its appeal as investors turn to stocks and riskier corporate bonds.

Lower demand for debt means the government has to offer a better interest rate to sell its bonds. The yield on the 10-year Treasury note, which is closely tracked by mortgage rates, hovered above 4 percent this week, the highest since June, before falling back slightly.

The second reason is the Federal Reserve. Last week, the Fed ended its program to push mortgage rates down by buying up mortgage-backed securities. When demand from the central bank was high, rates plummeted to about 4.7 percent for much of last year. And business boomed for mortgage lenders as homeowners raced to refinance out of adjustable-rate mortgages and into fixed loans.

As of Wednesday, the Mortgage Bankers Association put the national average for a 30-year fixed-rate mortgage at 5.31 percent. One week ago, it was 5.04 percent.

Many analysts forecast rates will rise as high as 6 percent by early next year. If they go much higher, the already shaky housing recovery could stall. And that could slow the broader economic rebound.

In a normal market, with home prices steadily rising, a jump in rates doesn’t cause a big dip in demand. That’s because people know their homes will eventually rise in value and they’re willing to accept a higher mortgage payment.

But now home prices are flat nationally and still falling in some places. Potential buyers are nervous about jumping in.

“In this environment, any rise in mortgage rates does significant damage because people don’t think they’re going to get their money back” if prices fall, said Mark Zandi, chief economist at Moody’s Analytics.

For people who bought their first home in the 1980s, when rates stayed over 10 percent for several years, paying 6 percent for a home loan may seem like a steal. But it’s coming as a shock to many first-time homebuyers this spring.

In Overland Park, Kan., Sirena Barlow checks mortgage rates online once a day. She’s been shopping for something around $130,000 and wants to sign a contract this month, to take advantage of a tax credit for first-time homebuyers.

Barlow, a legal assistant, already has told her landlord she’s moving, so her stress level is high. Her real-estate agent, Michael Maher, has been doing his best to calm Barlow and other clients, but rising rates are making them anxious.

“It’s like giving hyperactive kids ice cream,” he said. “It has really taken the ones who are focused on buying and amped them up a little bit

Source: The Associated Press, by By ALAN ZIBEL and ADRIAN SAINZ (04/07/2010)

Pending Home Sales Show Healthy Gain

Pending home sales rose in February, potentially signaling a second surge of home sales in response to the home buyer tax credit, according to the National Association of REALTORS®.

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in February, rose 8.2 percent to 97.6 from a downwardly revised 90.2 in January, and remains 17.3 percent above February 2009 when it was 83.2. The data reflects contracts and not closings, which usually occur with a lag time of one or two months.

Lawrence Yun, NAR chief economist, says the improvement is another hopeful sign. “The rise in buyer contact activity may signal the early stages of a second surge of home sales this spring. The healthy gain hints home prices are continuing to flatten,” he says. “We need a second surge to meaningfully draw down inventory and definitively stabilize home values.”

Source: NAR

King County house prices post year-over-year rise for first time in 2 years

Median house prices in King County rose year-over-year in March for the first time in more than two years, according to statistics released Monday by the Northwest Multiple Listing Service.

The median price of a single-family home that sold last month was $367,250, the broker-owned service said, up 0.9 percent from March 2009.

The last time prices rose year-over-year was in January 2008.

The March bar was low, however. March 2009’s median, $363,850, was the lowest in years. And last month’s number, while higher, still was the lowest since then.

Median house prices in King County have fluctuated between $370,000 and $395,000 over the past year.

The broker-owned service also reported a surge in sales, which agents said was spurred by low interest rates, greater affordability and the upcoming expiration of federal tax credits for many homebuyers.

Buyers closed on 1,596 houses in King County in March, up 65 percent from the same month last year. Condo closings were up 47 percent.

Pending single-family home sales — offers that have been accepted by sellers, but haven’t closed — were up 63 percent in King County. The last time more pending sales were recorded was in May 2007, before the market turned.

But pending sales have become a less-reliable measure of sales activity in recent months as many deals — especially “short sales” for less than the owner owes on the house — fail to close.

In Snohomish County, closed house sales were up 74 percent year-over-year in March. The median sale price, $279,950, was down 11 percent.

Source: Seattle Times, by Eric Pryne (4/05/2010)

Don’t foreclose! Do a short sale

Short sales are the hottest thing going in the distressed-property market, and the trend is expected to get even hotter in coming weeks, when the government starts handing out cash to encourage lenders to close these deals.

“Banks have ramped up short sale approvals,” said Duane Legate of House Buyer Network, which connects short sellers with buyers. “They’re hiring a lot of the people who once worked in the mortgage-lending industry and moved them over to short sales.”

These transactions, where lenders allow homeowners to sell their houses for less than they owe, accounted for 17% of all residential real estate sales in February, up from nearly 13% in November, according to a monthly real estate market survey by Campbell/Inside Mortgage Finance.

And Bank of America (BAC, Fortune 500), the country’s largest mortgage servicer, has more than doubled the number of short sales it processed in recent months.

Elizabeth Weintraub, a Sacramento, Calif.-area real estate agent who handles many short sales, was amazed at how quickly a recent deal went through. “Bank of America approved it in 24 days,” she said. “That flipped me out.”

This is a huge change from even just six months ago when the short-sale market was stalled and most people would describe the process has real estate hell. Because lenders stand to lose so much on these transactions, they have been reluctant to make short sales happen, often waiting months before getting back to potential buyers.

Beware: You lost your house but still have to pay

“In the past, many short sales would never come to fruition and the ones that did averaged over half a year to complete,” said Chris Saitta, CEO of Equator, which produces short sale software.

“Things would just fall into a black hole and not come out again,” added Weintraub.

And even when banks did agree to the sale, the process could be further complicated if the original owner had a second mortgage.

In most cases, the first lender is repaid in full before any money flows to a second-lein holder. And because most distressed borrowers are severely underwater, there’s usually nothing left to send on. As a result, second-lein holders are left holding the bag and have been killing many deals.

But that has been changing. For one thing, banks realize that they make out far better financially with a short sale than a foreclosure. “The lenders lose 50% on a foreclosure and only 30% on a short sale,” said Glenn Kelman, founder of the real estate Web site Redfin. “And short sales offer a way to get distressed properties off their books quickly.”

And on April 5, lenders and mortgage investors will have even more incentives to offer troubled borrowers short sales instead of foreclosing.

Under the new Home Affordable Foreclosure Alternatives program, borrowers will earn a $3,000 “relocation incentive” and servicers will get $1,500 for handling a short sale.

The investors who actually own the mortgage notes will get $2,000 in exchange for sharing proceeds of the short sales with any second-lien holders. And, finally, those second lien holders will receive up to $6,000 for releasing their claims.

Lenders participating in the program must also determine the market values of properties early on and inform the owners of just what price they’re willing to accept. Then, if owners come back to the lenders with bonafide offers, they have to be accepted within 10 days.

Equator’s Saiita anticipates a short sale explosion in response to the new program. “The challenge will be handling all the volume,” he said.

The company has already tweaked its software, which 58 servicers use, to handle the new HAFA rules. And that should help reduce the time it takes to execute a sale, which currently averages 88 days.

The boom in short sales may accelerate the end to the foreclosure crisis by cleaning out the overhang of borrowers in distress and replacing them with more stable homeowners.

Plus, these sales are better for distressed borrowers because their credit scores suffer less. Going through a foreclosure can knock 200 points off a FICO score, twice as much as the penalty for a short sale.

Source: CNNMoney.com, By Les Christie (03/29/2010)

California Extends Home Buyer Tax Credit

Is this a sign of things to come for other states? I understand that California has a large inventory of homes on the market, the job market is getting hammered and their budget is in the red but is this fair to the other states that are going through similar circumstances. I always look for the silver lining in every dark cloud and hopefully this is an indicator of what is to come for the rest of the country because it would be benificial to all.

California has re-established and extended a $10,000 home buyer tax credit, allocating $200 million to the credit for homes purchased between May 1 and Dec. 31, and between Dec. 31 and Aug. 1, 2011.

Steve Goddard, president of the California Association of REALTORS®, said the tax credit will help create incentive for first-time home buyers to purchase abandoned and foreclosed homes. “It is these homes that will require substantial rehabilitation by the new owners, which will in turn generate a tremendous increase in jobs and accessory purchases connected to home improvement activities,” Goddard said.

The credit will be split between first-time buyers and buyers who have lived in their home for at least two years.

“The tax credit will help push prospective buyers off the fence, clear out inventory, and jump-start the homebuilding industry, which will help create jobs and reinvigorate the state’s economy,” said Liz Snow, CEO and president of the California Building Industry Association, in a statement.

Source: Inman News (03/25/2010)

Bank of America to cut some mortgage balances

Housing experts argue that borrowers are more likely to walk away if their mortgages are underwater, meaning they owe more than the home is worth. Nearly 25% of borrowers are underwater, according to First American CoreLogic.

Bank of America is launching the program to entice more borrowers to participate in its foreclosure prevention efforts and to reduce the chance of redefault, said Barbara Desoer, president of Bank of America Home Loans.

When modifying mortgages, Bank of America will initially consider reducing the balances of borrowers with qualifying subprime, Pay-Option ARMs and prime 2-year hybrid ARM loans to bring down the monthly payments to 31% of pre-tax income. Currently, banks first look to reduce interest rates or lengthen the term.

TARP watchdog slams Obama foreclosure program

Homeowners who are at least 60 days late and whose mortgages total more than 120% of their home’s value can have their balances reduced over five years by a maximum of 30%. Borrowers must also meet the criteria for the president’s loan modification program.

“Bank of America has found that many homeowners who owe considerably more on their mortgages than their homes are worth are reluctant to accept a solution that addresses only the amount of the payment without an accompanying reduction in the balance due on the loan,” said Desoer.

Borrowers also must qualify for the servicer’s National Homeownership Retention Program to be considered. The initiative was developed as part of Bank of America’s 2008 settlement with state attorneys general to assist Countrywide Financial Corp. borrowers with subprime and Pay-Option ARMs.

The settlement called for Bank of America, which acquired Countrywide in July 2008, to modify troubled mortgages with up to $8.4 billion in interest rate and principal reductions for nearly 400,000 Countrywide customers.

The bank expects that 45,000 borrowers will qualify to have their loan balances reduced by a total of $3 billion under the program announced Wednesday. It is set to begin in May.

Pay-Option ARMs allow borrowers to make tiny monthly payments, but the unpaid interest is tacked onto the mortgage balance, a practice called negative amortization. Two-year hybrid ARMs have a fixed interest rate for the first two years, but adjust after that.

How it will work

Under the “earned principal forgiveness program,” borrowers will receive an interest-free forbearance of principal that can be turned into forgiveness if the homeowner makes timely payments over five years.

The ultimate amount forgiven depends on an updated appraisal of the property. Bank of America will not reduce balances below 100% of the home’s value.

These conditions will also make the program more attractive to investors because it should reduce the probability of redefault and adjust the amount forgiven if home values rise, Desoer said.

The servicer is also making changes to its National Home Retention Program. It will reduce the negative amortization on Pay-Option ARMs through principal forgiveness and will convert the loans to ones that don’t build up the balance.

It will also expand the program to cover Countrywide loans originated on or before Jan. 1, 2009, and will extend the program by six months to the end of 2012.

Many housing experts, lawmakers and even some mortgage investors have been pushing servicers to reduce loan principal. But Treasury officials and bank executives have said they are concerned about the “moral hazard” of helping those who don’t truly deserve or need it.

Still, experts say that principal reduction is a must, especially in areas hit hard by falling home values.

Bank of America announced Wednesday that it will first look at reducing the loan balances of certain distressed homeowners with subprime or adjustable rate mortgages to make their payments more affordable.

The move makes Bank of America (BAC, Fortune 500) one of the first major loan servicers to systematically incorporate the controversial loan modification technique into its home retention program. Financial institutions, as well as the Obama administration, have come under increasing pressure in recent months to add principal reduction to their foreclosure prevention efforts.

“Principal reduction is an important tool in making loans sustainable for many borrowers,” said John Taylor, head of the National Community Reinvestment Coalition, who praised BofA’s effort. “The rest of the industry should follow suit. And federal policy should reflect the growing consensus that principal reductions are required to stem the foreclosure crisis…”

Source: CNNMoney.com By Tami Luhby, senior writer (03/24/2010)

New Foreclosure Prevention Plan Announced

President Obama is announcing an expansion of foreclosure-prevent tactics, including a plan to reduce principal balances and special aid for unemployed borrowers.

The bulk of the responsibility for carrying out the new program will be assigned to the Federal Housing Administration, which will insure lenders against part of the losses.

The plan asks banks to write down loan balances to less than the value of the home. If there is both a first and second mortgage, the combined total would have to be no more than 115 percent of the home’s value.

The Treasury would pay part of unemployed homeowners’ loans for three months while they job hunt.

Source: The Wall Street Journal, Nick Timiraos and James R. Hagerty (03/25/2010)

Head of FDIC Supports Loan Write-Downs

The possibility of solving the underwater mortgage problem by writing down principal has been deemed politically impossible by the Obama administration, but some government officials see write-downs as the best long-term solution.

One of the most outspoken supporters of write-downs is Federal Deposit Insurance Chair Sheila Bair. This week, she called underwater mortgages a continuing problem and said the FDIC is “actively looking” at ways to encourage principal write-downs in the deals it does to facilitate acquisitions of failed banks.

Overall, Bair was positive about housing finance. “After three long and difficult years for housing and mortgage finance, I think we’re seeing some progress in stabilizing our housing markets,” she said.

Source: Reuters News, Karey Wutkowski (03/04/2010)

Foreclosure Bargains Getting Harder to Find

Home buyers hoping to snag a really good deal on a foreclosed home are finding it increasingly difficult because supply is shrinking.

The number of foreclosures that are available for sale nationwide fell to 617,000 in December, down from 845,000 in November 2008, reports Barclays Capital.

Not only have attractive homes in popular neighborhoods already been snapped up, but also government help for distressed buyers is delaying more foreclosures.

Demand is driving up prices. Investors say typical prices have climbed from 75 percent of appraised value to 85 percent or higher when there are bidding wars.

Source: The Wall Street Journal, James R. Hagerty (02/23/2010)

National Association of Realtors Resource to Reduce Short Sale Stress

According to the most recent REALTORS® Confidence Index, buyers continue to be discouraged with the extended short sale process, which frequently results in foreclosures that could have been prevented.

New resources from the National Association of REALTORS® aim to help REALTORS® and consumers successfully navigate the short sale process to help more home owners avoid foreclosure.

“Our members report that short sales are often riddled with delays and red tape,” said NAR President Vicki Cox Golder. “NAR has worked tirelessly to provide REALTORS® with the resources they need to navigate short sale transactions, as well as provide guidance on helpful government programs designed for home owners facing the process.”

On April 5, 2010, the U.S. government will implement the Home Affordable Foreclosure Alternatives Program (HAFA). Part of the Home Affordable Modification Program, HAFA helps home owners who are unable to retain their home under HAMP by simplifying and streamlining the use of short sales and deeds-in-lieu of foreclosures. Home owners must meet certain requirements to participate, and incentive payments are provided to home owners and servicers.

Source: NAR (02/19/2010)