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After a flurry of foreclosures over the last 18 months the fallout from toxic subprime loans has started to wain. Foreclosure investments all the rage have impacted REO portfolios held by banks to just under 900k. This fact does not note the second wave of foreclosures to hit the market between 2009 to 2011 expected to be around 4 million.

The reason for the second waive of REO and Foreclosures is the adjustable rate prime mortgages structures on 3, 5, 7 and 10 year fixed periods after which may reset into substantially larger payments based on 1 - 2 percent rate increases or balloon forcing an accelerated payment. While mortgage backed securities typically utilized a 3% default rate for valuations some lenders are finding 12% of their portfolios in some stage of delinquency or foreclosure.

The office of the Thrift Supervision and the Controller of Currency released a 3rd quarter report putting a scare into the already fragile housing market illustrating new findings. The report, which covers the third quarter of the year, was the second such indication of the effectiveness — or lack thereof — of new efforts at foreclosure mitigation. It examined the portfolios of nine national banks and five thrifts, including JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C), Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), and First Horizon (NYSE: FHN), representing more than 60% of all U.S. mortgages outstanding.

As detailed in the report, the first since the initial tabulation was put out in June, new foreclosure initiatives actually fell by 2.6% to 281,298 in the September quarter (largely due to mortgage relief programs). But a perhaps more important metric, foreclosures completed, increased by 8%, while the total number of foreclosures in process rose by 11% to 617,642.

There was also a disturbing new trend in the report released by Comptroller of the Currency John C. Dugan: More than half of the mortgages modified in the first quarter to benefit struggling borrowers had fallen back into delinquency, once again more than 30 days past due by the end of September.

Real estate investments in the foreclosure and reo space are heating up. For more information on Foreclosure investments contact Stone Equity Group

Financially troubled homeowners will get an insight into the mortgage foreclosure process and advice on avoiding it at a workshop scheduled Saturday at Gilbert Civic Center.

The workshop, part of a Valley-wide effort by the Leadership Centre and the Arizona Foreclosure Prevention Task Force to stem the rising tide of foreclosures, is aimed at teaching families about crisis budgeting and strategies for keeping their homes.

Residents who live in neighborhoods plagued by foreclosed properties will also get information on how to maintain their own property values amid the blight that often comes with abandoned houses.

Several speakers are lined up for the event, including representatives from the Don’t Borrow Trouble Campaign and Arizona Saves. The goal is to help people before it’s too late, said Cheri Horbacz with the task force, which also plans a workshop Jan. 10 in Mesa.

Similar workshops elsewhere in the Valley have brought in crowds of 500 people; one in Glendale drew 1,800.

Participants will learn how to talk to their lenders about loan modifications because about half of homeowners facing foreclosures fail to talk with their lender during the process, said Patricia Garcia-Duarte, task force chairwoman.

“We want to make sure people feel comfortable. The bank is calling, but they may have an option,” Garcia-Duarte said.

Beleaguered owners will also learn how to save money, and maybe their homes, even when facing a foreclosure. A class will teach 90-day crisis budgeting, said Jennifer Quillin with Arizona Saves.

Quillin said many lenders require money up front if a loan modification is agreed on. Even if terms can’t be reached, homeowners should still trim their budgets to save money, she said.

“If they are not able to save their home, they’ll need that money to move out,” Quillin said. “It’s not a ‘no bill holiday’ when you can’t make a mortgage payment.”

Speakers will also touch on the tax ramifications of foreclosures and what to expect during legal proceedings.

Mark Lines, an attorney with Shaw and Lines, will speak on trustee sales and personal liabilities that could be retained after a foreclosure.

Organizers hope people will leave the workshop energized to survive the down market.

“They’ll walk out feeling like they are the CEO in charge of their company and no one cares more about their money than they do,” Quillin said.

LA TIMES - Foreclosure filings — that includes default notices, auction sale notices and bank repossessions — were reported for 60,491 California residences in November, according to Irvine-based RealtyTrac, the most of any state. That was up 6% from the previous month (after two months of decreases) and a 51% increase from November 2007.

Just what are we talking about here? That translates into 1 in every 218 houses or more than two times the national average.

Some of the California metro areas making the U.S. Top 10 list for foreclosure filings and where they ranked:
Upland 3. Merced, 1 in 76
4. Modesto, 1 in 93
5. Stockton, 1 in 94
6. Riverside-San Bernardino, 1 in 107
9. Bakersfield, 1 in 129
10. Vallejo-Fairfield, 1 in 133

Nationwide, RealtyTrac showed a 7% decrease in November foreclosure filings (1 in 488) from October, but a 28% increase since November 2007.

As to why there was a November decrease nationally, RealtyTrac CEO James J. Saccacio cited state laws that have extended the foreclosure process, loan modification programs and holiday foreclosure moratoriums. “There are several indications, however, that this lower activity is simply a temporary lull before another foreclosure storm hits in the coming months.”

I think he’s got that right. The November slowdown was merely a delay of much more to come.

For the record: As commenter TMSELF correctly points out, California is not the leader in percent of homes in foreclosure filing: “Nevada maintained the nation’s No. 1 foreclosure rate, with one in every 76 housing units receiving a foreclosure filing during the month — more than six times the national average,” according to RealtyTrac. Also ahead of California, Florida with 1 in 173 homes and Arizona with 1 in 198 homes.

– Lauren Beale

By Dan Levy

Dec. 11 (Bloomberg) — U.S. foreclosure filings climbed 28 percent in November from a year earlier and a brewing “storm” of new defaults and job losses may force 1 million homeowners from their properties next year, RealtyTrac Inc. said.

A total of 259,085 properties got a default notice, were warned of a pending auction or were foreclosed on last month, the seller of default data said in a report today. That’s the fewest since June. Filings fell 7 percent from October as state laws and lender programs designed to delay the foreclosure process allowed delinquent borrowers to stay in their homes.

“We’re going to see a pretty significant storm next year,” Rick Sharga, executive vice president of marketing for Irvine, California-based RealtyTrac, said in an interview. “There are two or three clouds that suggest a pretty heavy downpour.”

Rising unemployment, expiring foreclosure moratoriums and state efforts that “run out of steam” will push monthly filings toward the record of more than 303,000 set in August, Sharga said. The number of homes that revert to lenders, the last stage of foreclosure and known as “real estate owned” or REO properties, will increase to 1 million from as many as 880,000 this year, he said.

Job Losses

“The forces leading to foreclosure are hard to offset in most cases and impossible in many,” Robert Hall, a Stanford University professor and chairman of the National Bureau of Economic Research committee that calls the beginnings and ends of recessions, wrote in an e-mail. “Job loss is a major source of defaults at all times, and job losses are running at extreme levels now.”

Initial jobless claims increased to 573,000 in the week ended Dec. 6, the highest level since November 1982, while the number of workers staying on benefit rolls reached 4.429 million, also the most since 1982, the Labor Department said today. U.S. companies slashed payrolls by 533,000 last month, the fastest pace in 34 years, for a total of 1.9 million job cuts so far this year.

“The labor market is facing its worst crisis since 1982, and it is certainly not over yet,” said Harm Bandholz, a U.S. economist at UniCredit Markets and Investment Banking in New York.

Home prices have fallen by about a fifth from the mid-2006 peak, according to the S&P/Case-Shiller home price index.

‘Devastating Consequences’

“The decline in prices and its devastating consequences” will continue next year with no indication of when they will stabilize, Hall said. Programs that modify the terms of loans, including efforts by Fannie Mae, Freddie Mac, JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. can’t help thousands of borrowers, he said.

“Something like 70 percent of subprime foreclosures are beyond the reach of modification programs because the owners are investors, because the owner is in default for the second time on the property, or because the owner has disappeared,” Hall said.

The share of mortgages delinquent by 30 days or more in the third quarter rose to a seasonally adjusted 6.99 percent while loans already in foreclosure rose to 2.97 percent, both all-time highs, the Mortgage Bankers Association said in a Dec. 5 report. The gain in delinquencies was driven by an increase in loans with payments 90 days or more overdue.

No Improvement

“Until we see a turnaround in the job situation, we’re not going to see these numbers improve,” said Jay Brinkmann, chief economist of the Washington-based bankers group.

In November, one in every 488 U.S. households received a foreclosure filing, RealtyTrac said. Nevada had the highest rate for the 23rd straight month with one in 76 households in some stage of foreclosure, more than six times the national average. Filings more than doubled from a year earlier to 13,962.

Florida had the second-highest rate, one in 173 households, and the second-most filings at 49,190, an increase of 68 percent. Arizona had the third-highest rate, one in 198 households, and ranked fifth in total filings with 13,136, up 128 percent.

California, Michigan, Georgia, Ohio, Colorado, Utah and Idaho also ranked among the top 10 highest rates, said RealtyTrac, which collects property data from more than 2,200 U.S. counties that represent more than 90 percent of the population.

California

California had the most filings with 60,491, up 51 percent from a year earlier, and a rate of one filing for every 218 households, more than twice the national average.

Michigan ranked third in filings with 14,594, up 27 percent, and had a rate of one for every 309 households, according to RealtyTrac. Nevada, Arizona, Ohio, Georgia, Illinois, Texas, and Virginia were among the top 10 states with the most filings.

New Jersey had the 15th highest rate, one in 622 households, and had 5,582 filings, up 32 percent from a year earlier. New York had the 39th highest rate, one in 3,040 households, and had 2,601 filings, a decrease of 55 percent, RealtyTrac said.

Florida had three metropolitan areas among the top 10 highest rates, including Cape Coral-Fort Myers in first place with one in 59 households in a stage of foreclosure. Fort Lauderdale was seventh at one in 117 households, and Port Lucie- Fort Pierce was eighth at one in 118 households.

Las Vegas ranked second at one in every 61 households in a stage of foreclosure.

California had six metro areas in the top 10, led by Merced in third place with a rate of one in 76 households in a stage of foreclosure. Modesto, Stockton and Riverside-San Bernardino ranked fourth through sixth, Bakersfield was ninth and Vallejo- Fairfield was 10th, according to RealtyTrac.

To contact the reporter on this story: Dan Levy in San Francisco at dlevy13@bloomberg.net
Last Updated: December 11, 2008 12:33 EST

Reo Foreclosures and foreclosure investing are the basis for real estate investing in today’s market.

By DAVE MICHAELS / The Dallas Morning News

WASHINGTON – Even as banks streamline programs to renegotiate troubled mortgages, efforts to help Texas homeowners are being hindered by the state’s fast-track foreclosure process, according to housing counselors and government officials.

In other states, foreclosure can take as long as four months, giving the borrower more time to negotiate a better loan or catch up with missed payments. But in Texas, the process starts sooner and may take as little as 41 days to complete – the quickest in the country, according to a 2006 study by the Texas Department of Housing and Community Affairs.
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“The biggest obstacle we have in Texas is we are a very fast foreclosure process state,” said Linda Davis-Demas, assistant housing director for the Consumer Credit Counseling Service of Greater Dallas, which works with borrowers. “We are always up against the gun in regards to that.”

Texas’ foreclosure laws are so adverse to struggling homeowners that state Attorney General Greg Abbott plans to push the Legislature next month to lengthen the time homeowners have to “cure” a default, from 20 to 45 days.

Under state law, a homeowner who doesn’t catch up on payments after receiving the 20-day notice can lose his or her home.

Mr. Abbott, who obtained a predatory-lending settlement against Countrywide Financial Corp. that could lead to more affordable loans for 30,000 Texans, said the 20-day window is far too short in the current economic environment.

“Twenty days, when you count the fact that people have things going on, that is just real short notice to get anything done,” Mr. Abbott said in a phone interview. “Forty-five days more than doubles the length of time.”

Texas’ residential foreclosure laws haven’t changed since 1984, after state lawmakers decided borrowers should be given 20 days before foreclosure could start, said Judon Fambrough, a lawyer and senior lecturer at Texas A&M University’s Real Estate Center.

Texas mortgage bankers don’t think the law needs to be changed now, said Larry Temple, general counsel for the Texas Mortgage Bankers Association. Mr. Temple said mortgage servicers are “anxious” to help struggling homeowners.

“We believe the time frames now are pretty fair and reasonable,” Mr. Temple said. “It’s after the borrower is in default and has failed to make a payment or two that they are given notice and are in default. If they don’t [cure it], then comes the foreclosure.

“You put all of that together, and in most cases the borrowers are 90 or 100 days delinquent,” he said.

Housing crisis

The housing crisis has been most acute in states such as California and Nevada, where many borrowers took on exotic loans to finance homes that always seemed to appreciate in value.

The foreclosure process takes longer there than in Texas, indicating that more time doesn’t necessarily mean borrowers will find a way to save their homes.

Last week, the Mortgage Bankers Association reported that 11.5 percent of subprime loans in Texas had either started the foreclosure process or were more than 90 days behind in payments. The figure was 9 percent at the same point in 2007, according to the MBA, which says state foreclosure laws can complicate the loan-modification process.

Dallas-Fort Worth had more subprime loans than Houston and San Antonio combined, according to a study by the Federal Reserve Bank of Dallas. Many of the area’s subprime borrowers got adjustable-rate mortgages, whose interest rates reset to much higher levels after two or three years.

Forrest Brannon of Dallas was one such borrower.

Mr. Brannon, a 78-year-old veteran, is running out of time to save his home after he got behind on his monthly payments, which almost doubled in recent months, from $379 to $700.

Mr. Brannon said his finances were imperiled when he and his wife had to spend more money on health care, including a $3,000 bill for dental work. He got behind on his mortgage, then received a notice his home would be sold about a month ago.

First Franklin Loan Services, his servicer, has agreed to work with him, Mr. Brannon said. But he has less than a month to find a solution, he said.

“I can’t hardly write, and now I’ve got to send bank statements and fax forms,” said Mr. Brannon, a former postal worker who lives off disability from an injury he sustained on the job. “I feel I should have more time to get these mortgage payments together. The thing about it is, I could pay a little extra and get caught up.”

Bill Halldin, a spokesman for First Franklin, said he couldn’t discuss Mr. Brannon’s case specifically. But he said the company reaches out to borrowers “dozens of times” before initiating foreclosure. The information includes referrals to mortgage counseling services, he said.

“Unfortunately, often borrowers do not respond to our requests and in some instances [we] are unable to work out a solution,” Mr. Halldin said.

Vexing problem

Mr. Brannon’s experience illustrates a problem that is vexing lawmakers and housing experts. Despite widely publicized efforts to rescue troubled homeowners, foreclosures are rising, and experts are divided over whether loan workouts are working.

A report this week by federal regulators showed that more than half of borrowers whose loans were modified in the first half of 2008 have since fallen behind on payments.

“This raises questions … about what modifications work and what ones don’t work, and what else needs to be done,” said Bryan Hubbard, a spokesman for the Office of the Comptroller of the Currency, which regulates national banks.

Federal Deposit Insurance Corp. chairman Sheila Bair, a leading advocate of loan modifications, said many servicers still aren’t changing loans enough to make them affordable.

Sherry Randall, office director of housing for Acorn Housing in Dallas, agreed: “A lot of them are being stuck on repayment plans or given loan modifications, where there are changes but the payments are still high.”

Some are tempting foreclosure even as they wait for new loans. That’s because most servicers are modifying loans for only the most delinquent borrowers – those who are more than 90 days behind. By that time, the foreclosure process could have already started for some Texans.

JoAnn DePenning, statewide coordinator for the Texas Foreclosure Prevention Task Force, said Texas should push to include information about foreclosure-prevention resources with notices that are sent to delinquent borrowers. Mr. Abbott’s recommendation “is the first very strong push to change our process,” Ms. DePenning said. But “if you are just saying we are giving you longer and aren’t changing any other part of the process, you are delaying the inevitable.”

Staff writer Jessica Meyers in Dallas contributed to this report.

By KELLY CURRAN
December 9, 2008
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The nation’s foreclosure hemorrhage has finally slowed — slightly, mind you — from 84,534 REO properties in October to 84,291 in November, according to the 2009 outlook from ForeclosureS.com, released Tuesday. While the decline is largely likely an artifact of a growing push to halt pending foreclosures while lenders and government officials search for solutions to the nation’s housing crisis, Alexis McGee, president at the online foreclosure investing resource says that she sees a significant decline in foreclosures as buyers return in 2009, pushing home prices up and fueling a real estate recovery.

“Recovery is underway. Affordable is back in the housing market,” says McGee. “In 2009, housing will not only recover, but we’ll see buyers leap into this market in droves, depleting our housing oversupply, and actually put higher price pressures on the market.”

That’s a pretty optimistic take, and one that stands in stark contrast to most assessments, given that well-known and respected economists including Mark Zandi at Moody’s Economy.com have suggested that the nation’s housing markets won’t be likely to see a bottom until late next year.

McGee has been preaching a brighter future for the housing market for well over a year, suggesting that investors start buying foreclosures; a cynic might suggest, of course, that she has strong self-interest in doing so.

In June of 2007, she said “the overall economy is sound, and markets will turn around,” in arguing that investors start to buy foreclosed properties. In February of this year, she suggested that investors shouldn’t “be scared off by the gloom and doom talk swirling around housing markets,” and should buy properties that were, in her eyes, on sale.

Obviously, most investors that bought in February have likely seen their investments lose money, given most regional and national home price trends this year. And as recently as November, McGee was suggesting that a drop in pre-foreclosure notices signaled a real estate bottom, rather than the more likely seasonal effect the trend has since been proven to be.

But regardless of a market that seems stubbornly unwilling to follow her predictions, McGee maintains that now is a great time for investors to buy. Low interest rates and the ability to rent out properties for positive cash flow, she says, are strong reasons to invest; of course, she also touts that investors will be able to sell their investments in late 2009 at a large profit.

Which is exactly, in our opinion, what the housing market doesn’t need right now: a swarm of investors with short-term horizons, looking to put properties on the market in late 2009, when most economists are suggesting a more organic bottom for the housing markets.

What the numbers show
ForeclosureS.com found that the number of properties repossessed by lenders following foreclosure in November is off nearly 21 percent from September’s 106,415 REO filings. “Certainly some of the drop reflects growing results of government and private efforts to keep homeowners in their homes,” said McGee, acknowledging the likely strong effect of moratorium and modification efforts.

Still, year to date, however, 12.6 of every 1,000 households nationwide have been lost to foreclosure.

The national pre-foreclosure average isn’t necessarily promising, either. Pre-foreclosures, which include notice of mortgage default and/or foreclosure auction, were up 5.57 percent in November from October’s totals, with 27.1 of every 1,000 households across the country facing some kind of foreclosure action.

McGee said pre-foreclosure numbers are likely to climb in early 2009, albeit at a much slower rate than in 2008. “Too many homeowners already are just too overextended and likely won’t seek help to work out their delinquent mortgages until after a pre-foreclosure filing against their property. That filing, it seems, is the wake-up call for many to get the help they need and sell,” she said.

“What I can tell…is that hardest hit housing markets have already hit bottom and others will follow in 2009,” she argues. “The bottom line to keep in mind: What goes down absolutely positively will go back up again.”

The only question seems to be: when? Timing, after all, is everything.

– Paul Jackson contributed to this report.

Reo Foreclsoures, foreclosures investing is timely for real estate investing.

WASHINGTON (AP) — With job losses mounting and lawmakers preparing to funnel money to Detroit automakers, a top House Democrat said Monday that a new government effort to help borrowers avoid foreclosure will have to wait until after President-elect Barack Obama takes office.

Wall Street rallied for the second straight day with the major market indexes jumping more than 3 percent. The Dow Jones industrials’ nearly 300-point advance gave the blue chips their highest close in a month.

Speaking to reporters during a housing industry forum in Washington, Rep. Barney Frank, D-Mass., said any use of $700 billion in financial industry rescue money to aid homeowners will come after President George W. Bush leaves office next month.

While the Federal Deposit Insurance Corp. has proposed to use $24 billion from the financial bailout to help borrowers, Frank declined to specify how much should be spent but said it won’t require new legislation.

Frank also threatened to tie up the remaining half of the $700 billion financial industry rescue money unless the Bush administration provides some of it for borrowers facing foreclosure.

“They’re not going to get the (money) unless they get very serious about the foreclosure modifications and showing us how we’re going to get some lending out of the banks,” said the House Financial Services Committee chairman. “At this point I don’t see that happening.”

The Treasury Department says $335 billion has been allocated from the first half of the program, which was enacted more than two months ago. Treasury Secretary Henry Paulson, who is overseeing the program, is weighing tapping the second $350 billion. The main goal of the program is to get financial institutions to lend money more freely again.

The Bush administration has focused mainly on voluntary industry efforts to modify loans, and those have not stopped the surge in foreclosures.

“Imagine how many foreclosures we would have if the financial system had been allowed to collapse,” Neel Kashkari, director of the Treasury Department office overseeing the $700 billion program, said at the same conference.

But critics say many in the public — and lawmakers on Capitol Hill — were led to believe that some of the money would go to avoiding foreclosures and are frustrated that it has yet to do so.

In a report to be released Tuesday, a special bipartisan commission chaired by former HUD Secretaries Henry Cisneros and Jack Kemp takes aim at the Bush administration for the current foreclosure crisis, citing its lax enforcement of fair housing laws and lackluster response for problems that have disproportionately hit large poor and minority populations.

Calling the system “broken,” the seven-member panel calls for the creation of an independent agency separate from the Department of Housing and Urban Development to more vigorously enforce fair housing laws.

“The federal government needs to be in the business of getting things done,” said Kemp, who served under President George H.W. Bush. “And right now, fair housing enforcement is not getting done. That’s why we need a new, independent agency that won’t get mired in politics.”

Discussion at Monday’s forum, sponsored by the federal Office of Thrift Supervision, focused on how broad the government’s intervention should be, rather than whether the government should play a role. The U.S. is on track for 2.25 million foreclosures this year, more than double traditional levels.

Mark Zandi, chief economist at Moody’s Economy.com, said the public is likely to be more sympathetic to efforts to assist borrowers, because the link between the foreclosure crisis and the sinking economy is increasingly clear in the minds of most Americans.

“It’s now in every corner of the country,” Zandi said.

However, data released Monday show that more than half of all homeowners who had their loans modified to make the payments more affordable in the first half of the year already are in default again.

The data raise questions about whether government money may be better spent on creating jobs, rather than averting foreclosures, said John Reich, director of the federal Office of Thrift Supervision.

But the reports aren’t detailed enough to show how well the programs are working or which borrowers have been most helped, said FDIC Chairman Sheila Bair.

The report “raises more questions than answers because it fails to define, in any meaningful way, the modifications that have redefaulted,” she said in a statement e-mailed after the forum. “It’s impossible to make any judgment about the redefault rates of sustainable modifications versus cosmetic modifications that by their nature are more likely to redefault.”

New Jersey Gov. Jon Corzine called for a three- to six-month halt to foreclosures while the government works out a more aggressive plan. “We need a bottom-up approach … by modifying people’s mortgages and helping them stay in their homes,” he said.

The U.S. economic picture has darkened over the past month. One in 10 Americans with a mortgage is either behind or in foreclosure, and more than 500,000 jobs were lost in November.

Unemployment stands at 6.7 percent, and the worldwide credit markets have only improved modestly from the freeze that led Congress to approve a $700 billion bailout before the election.

Investors seeking safety during the ongoing economic and financial peril are pouring money into Treasury securities, driving down rates on short-term bills to record lows. The Treasury Department auctioned $27 billion worth of three-month Treasury bills Monday, fetching a discount rate of 0.005 percent, and another $27 billion in six-month bills was auctioned at a discount rate of 0.300 percent, both all-time lows.

Also Monday, House Speaker Nancy Pelosi said negotiations are continuing with the White House on a $15 billion auto bailout that could go to a vote this week, and three more large U.S. employers announced layoffs.

Dow Chemical Co., based in Midland, Mich., said it will slash 5,000 jobs and shutter 20 plants to rein in costs, Maplewood, Minn.-based 3M Co. is cutting 1,800 jobs in the fourth quarter, while Anheuser-Busch InBev said it would cut about 1,400 U.S. jobs to help save the world’s largest brewer at least $1.5 billion a year. Three-quarters of the job cuts will be at Anheuser’s North American headquarters in St. Louis.

Elsewhere, privately held newspaper publisher Tribune Co. filed for bankruptcy. Tribune, which is controlled by real estate magnate Sam Zell, owns the Los Angeles Times, Chicago Tribune and the Baltimore Sun, plus the Chicago Cubs and Wrigley Field.

AP Writers Jeannine Aversa, Christopher S. Rugaber, Hope Yen and Daniel Wagner contributed to this report.

On Monday we published a letter from the FDIC complaining about our recent editorial on the agency’s mortgage modification plan. Hours later, the Comptroller of the Currency released new data suggesting that the FDIC proposal may be as bad as we feared.

Background Reading

The FDIC wants to pay loan servicers to restructure delinquent loans and then have taxpayers share the losses if the loans fail again after six months. The FDIC did not appreciate that we reported private data showing that more than 50% of modified loans go delinquent again. The agency suggested that 15% might be a better estimate.

That estimate just got a lot harder to defend. Comptroller John Dugan released the default numbers on loans modified in the first two quarters of 2008, based on data from institutions servicing more than 60% of all first mortgages. “What makes these quarterly reports unique is that they are not merely surveys, but instead consist of validated, loan level data,” said Mr. Dugan. “We believe the reports include the most accurate and reliable data on mortgage performance that is available today.”
In today’s Opinion Journal

According to Mr. Dugan, “The results, I confess, were somewhat surprising, and not in a good way.” Of mortgages modified in the early part of this year, more than 35% had gone at least 60 days delinquent again after just six months, and a full 53% were 30 days delinquent or more. By eight months, this default rate had climbed to 58%. Second quarter modifications are on track to be nearly as ugly, with more than 50% of borrowers at least 30 days delinquent at the six-month mark. Come to think of it, these stinkers are going south so quickly that perhaps the FDIC’s plan actually will protect taxpayers — there won’t be much left to insure after these toxic loans blow up in the first six months after modification.

Of course, that would mean that fewer foreclosures would be avoided, which is supposed to be the point of this exercise. For her part, FDIC Chairman Sheila Bair says that “The OCC’s data on redefaults raises more questions than answers because it fails to define, in any meaningful way, the modifications that have redefaulted.” In politics, when you don’t like the data, merely wish it away.

She believes that her formula, which reduces interest rates initially but often creates larger obligations down the road, will yield fewer re-defaults than the industry average. Washington’s housing bubble resulted in many loans going to borrowers who cannot or will not make their mortgage payments. Let’s stop contriving ways for taxpayers to subsidize them.

From WSJ.com

Job losses, declines in work hours, and other financial strains due to the deteriorating economy — more than risky loans — are now driving up mortgage default rates, economists say, and threatening to trigger another giant wave of foreclosures.

An estimated 1 in 14 homeowners in Rhode Island with a mortgage were at least three months behind on their payments at the end of September, according to a report released Friday by the Mortgage Bankers Association in Washington.

These “seriously delinquent” mortgage holders — on top of the more than 2,100 mortgage holders who entered foreclosure in Rhode Island during the third quarter — are largely the product of the deteriorating job market, economists say, and therefore even harder to rescue than their predecessors.

“You can do all the [loan] modifying you want, but if you lost your job, you can’t pay back any of your loan,” said Nicolas P. Retsinas, director of Harvard University’s Joint Center for Housing Studies. “In some ways, the worst is yet to come.”

Nationally, the first wave of foreclosures was driven primarily by investor speculation, followed by homeowners who faced “rate shocks” when interest rates on their mortgages reset, said the Mortgage Bankers Association’s associate vice president of economic forecasting, Orawin Velz. “Now, the problem becomes fundamental, which is that people are losing jobs.”

The U.S. economy has shed 1.9 million jobs this year, and slack labor demand has left more people working part time because they can’t land full-time jobs. The Economic Policy Institute in Washington estimates the number of unemployed or underemployed workers in the county at 19.6 million, or about one in eight workers.

“Until we see a turnaround in the job situation, we’re not going to see these numbers improve,” said Jay Brinkman, Mortgage Bankers’ chief economist. The increase in mortgages that are 90 days delinquent is “the highest it’s ever been,” he said.

Rhode Island has lost nearly 15,000 payroll jobs since January and the state unemployment rate as of October is 9.3 percent, tied with Michigan’s as the highest in the country.

Rhode Island also is just behind Michigan in its rate of foreclosures initiated during the third-quarter, making it sixth-highest in the country and ahead of every other state in New England. The Mortgage Bankers’ report is based on a survey of about 85 percent of all mortgage companies, commercial banks, thrifts, credit unions and other lenders

Meanwhile, the ranks of homeowners have fallen behind on their mortgages has grown. The state’s third-quarter delinquency rate (mortgages 30 days or more past due) rose to 7.3 percent, compared with 5.8 percent during the same period last year, according to he Mortgage Bankers’ report. (The delinquency rate excludes loans in foreclosure.)

“People are losing their jobs, they’ve depleted savings and 401(k)s,” said Raymond Neirinckx, of the Rhode Island Housing Resources Commission. “They’re saying, ‘What else can I do now to save my home?’ ”

Efforts by Washington lawmakers to encourage lenders to voluntarily modify mortgages “are not working,” Neirinckx said. “Tweaking interest rates or extending the terms from 30 to 40 years isn’t having a significant impact.”

Lenders are taking months to come up with modification plans, Neirinckx said, in part because the entire system is overwhelmed by the volume of work. And when they do come up with a proposal, he said, the modification is often not enough to make the mortgage affordable for the homeowner.

Federal Reserve Chairman Ben S. Bernanke last week outlined several options to help stem foreclosures, including buying delinquent mortgages and providing bigger incentives for lenders to refinance loans. He called for addressing the “apparent market failure” of lenders to modify mortgages even in cases where it was in their own economic interest to do so.

Bernanke’s proposal would go beyond the efforts announced last month by the Department of Housing and Urban Development to change the amount of the loan a lender must forgive, and allow banks to extend the mortgage’s payback period.

“The harsh reality is that many of these loans that are now in default … are outside the reach of traditional channels,” said Harvard’s Retsinas. “You’ve got to break through the thicket,” he said, by reforming bankruptcy laws and changing tax rules to create incentives for investors of mortgage-backed securities to modify loans.

—With reports from Bloomberg NewsForeclosure starts

Rhode Island ranks sixth nationwide in percentage of foreclosure actions that were initiated in the third quarter.

1. Nevada 2.47 %

2. Florida 2.31

3. Arizona 1.88

4. California 1.53

5. Michigan 1.23

6. Rhode Island 1.22

Source: Mortgage Bankers Assoc.