To prevent the rising number of “walkaways”, people who just give up their homes, Fannie Mae is offering a series of new loans to help those close to foreclosure. While seen as counterintuitive by some in the mortgage industry, the bridging loans are intended to help homeowners weather rocky periods and ultimately keep their houses.

Additionally, Fannie Mae announced that they will more aggressively pursue financial compensation from homeowners who “walkaway” yet still have assets. This move reflects a growing trend in the credit markets that started with bankruptcy reform. Lenders aggressively pursuing consumers for payment of interest and debt in cases where borrowers still have the ability to pay.

The new policies sent a positive message to Wall Street which is still reeling from huge credit losses attributed to overly generous lending for the last 7 years. Some blame the current lending crisis on community activist pressure to loan money to minorities. The CRA:

“The Community Reinvestment Act (CRA) was established by Congress in 1977. The Act requires that deposit-taking financial institutions offer equal access to lending, investment and services to all those in an institution’s geographic assessment area-at least three to five miles from each branch. In the case of large banks with many branches, the geographic area may encompass an entire county or even a state.”

However, on inspection this doesn’t hold up. Blaming CRA for the mortgage meltdown when only one in four sub-prime loans were made by the institutions fully governed by CRA.

Janet Yellen, president of the San Francisco Federal Reserve disagrees with the blame the CRA. She says:

“Independent mortgage companies, which are not covered by CRA, made high-priced loans at more than twice the rate of the banks and thrifts.”

Home Sales Rose, Prices Fell in February

After declining for 2 quarters, sales of existing homes increased in February which signals sellers willingness to adjust to market forces and lower prices. 
The National Association of Realtors said that sales of existing homes rose by 2.9 percent in February to a seasonally adjusted annual rate of 5.03 million units.

The trade group reported that the median existing sales price in February fell to $195,900. The drop to $195,900 was the largest year-over-year drop on record, however the records only go back to 1999.

Regionally, sales rose by 11.3 percent in the Northeast–which reflects the completely local nature of the widely over reported real estate slump and the health of the economy in the Northeast. 

Midwest  home sales rose a modest 2.5 percent indicating steady economic performance. There was a mild 2.1 percent increase in sales in the South.

 Not surprisingly, the price inflated West saw a decline in the sales, where they dropped by 1.1 percent. But even that 1.1% dropped has surprised many in the real estate industry and economists, who were predicting a catastrophic drop.

 Overall, February’s numbers indicate an adjusting real estate market, in which prices are rationalizing and people are selling and buying based on present market conditions rather than past prices or future expectations, which is what a healthy market does.

The existing home sales numbers do not change the fact that developers of new housing are cutting back dramatically and that sales of new units haven’t kept pace with existing home sales.

Amid the doom and gloom hype by the media right now, all across the country there is a quiet real estate phenomenon going unnoticed. Neighborhoods close to dynamic city centers are maintaining their home values. There are a couple of reasons that having a home in an area close to the city center preserves your equity.

First, rising gasoline prices have made commuting more expensive. Second, the cookie cutter look of many outer suburban or exurb developments doesn’t call out to the soul. Third, commuting is a huge time expense for most people, so anything that can save us time, we value. Fourth, arts, theater, music, food, restaurants and the like attract people to close in suburbs.

 The bottom line is– location, location,location– which has and will always be the case when it comes to real estate.

I had a client who wanted to look at homes, she was not pre qualified.  I suggested that she get pre qualified before she starts looking. She insisted that she knew what she would qualify for. We find a property she likes and she wants to make an offer, I told her that she has to get pre qualified now because we cannot submit an offer with out a pre-approval letter from a lender. She contacts a bank and finds out that she can not qualify for the amount of the purchase. She qualified $75,000.00 less then she anticipated. She lost her interest in buying a home.

Kellie Clifford

Right now everyone has an opinion about the real estate market. Many people are forecasting that real estate will take 5 years to recover fully and they point to the subprime lending crisis as a reason. But recent revelations by Morgan Stanley, Citigroup and other banks that have been carrying a lot of subprime loans on their balance sheets  lead to a more measured conclusion.

Morgan Stanley wrote off about $3.7 billion in subprime loans and Citigroup about $5 billion, leaving many analysts feeling that the worst of the crisis is over. The future of subprime paper consists of finding a fair market value for the loans that are recoverable and separating out the unrecoverable junk. Once the paper has been classified and bundled, the market forces artificially driving real estate down will diminish.

With the falling dollar, US real estate is a golden investment for international capital and money is already flowing into hard assets in the commercial market. With the continuing dollar weakness, oil price inflation and US economic growth leading the Western World, US real estate markets will recover quickly.

While the stock market maintains record levels hoping for a Fed cut in late October, consumers aren’t benefitting from the trend. Because over 2/3 of the US economy depends on consumer spending, this could be a sign of trouble. Granted, stock market gains do increase consumer income through appreciation and dividends, but the stock market rally probably doesn’t reflect the overall state of the economy. This has been a 5 year bull market, which if historical trends inform us at all will likely end soon.  One possible drain on consumer disposable income could be a U.S. Energy Information Administration (EIA) forecast for 10% higher home heating costs this winter. Paper products are likely to rise as manufacturers respond to the Kimberly-Clark announcement that they will raise prices 4-7% for a portion of their consumer paper portfolio of products because of raw material and energy cost increases. Additionally, consumers are still bearing the burden of historically high gasoline prices which have reduced disposable income. 

Retailers are anticipating a tough Christmas season as indicated by Wal-Mart accelerating by 2 weeks its 10 to 50 percent off its “Top 12 Toys of Christmas”  sale compared to last year. Employment remains a strong spot in the economy, yet while the Labor Department now says that 118,000 more jobs were created in June, July and August than it originally reported, it also overstated employment growth by nearly 300,000 in the 12 months ending March 2007.

So how is real estate doing in the uncertain economy?  

Prices are holding firm in

California, one of the nations biggest markets, even as  listing numbers are up and days on market are up. Forecasts indicate that

California median home prices could drop 4% to $553,000 in 2008 compared to this years already high median price of $576,000. California Association of Realtors (C.A.R.) anticipates that sales for 2008 could drop 8-9% to 334,500 units in 2008 against the  367,500 units for 2007.

Some are predicting that mortgage lenders tightening the standards will lead to a further drop in home sales in 2008, while contrarians see a positive side to reducing the predatory practices of the past. Housing bulls say that increasing credit availablity to debt-healthy consumers at even better rates will prevent a catastrophic downturn in the economy. 

Home prices rose an average of more than 50 percent nationwide in the past five years, which left many people scrambling to play catch up or try and get in on the windfall profits they read about in the papers and saw on the news at night. Unfortunately, as any kid who ever blew a bubble knows, every bubble must burst and what goes up must come down.

But, the good news is that if you are looking to buy a home now, you are presented with huge cost saving opportunities that in effect allow you to turn back the clock on the bubble. Because bubbles come and go, the most recent one is gone, but another will come along and people who purchased during the current downturn will have realized significant asset appreciation in that time.

August was a worse month for mortgage brokers and borrowers, according to a just-released Campbell Communications survey sponsored by Mortgage Finance. About 33 percent of home purchase closings of loans originated by mortgage brokers were canceled during August. Worse, approximately, 57 percent of the brokers’ customers found they could not refinance their adjustable rate mortgages that had resetting interest rates.

Washington-based Campbell Communication’s survey of 1,744 mortgage brokers was conducted August 23-31, and is one of the earliest “quantitative measures of the major disruptions in the mortgage originations market which started in early August,” says the survey.

Not surprisingly, the survey found that home purchase closings were most often canceled for homebuyers with subprime credit. Fifty-six percent of subprime homebuyers in August had canceled closings compared to 21 percent of homebuyers seeking prime conforming mortgages who had canceled closings, a startling high number. In 2004, in another survey of real estate agents taken by Campbell Communications back in 2004, respondents indicated that only 4 percent of home purchase closings failed to close for mortgage-related reasons.

What a difference interest rates and investors’ appetite for risk can make.

Thomas Popik, a designer of the survey, noted that the reasons for canceled closings were different depending on credit class and product category. Prime conforming homebuyers were more likely to withdraw from the transaction while subprime homebuyers were more likely to have problems getting mortgage approval, he said.

“The survey found that both prime and subprime homeowners are having trouble refinancing adjustable rate mortgages,” Popik said. “Sixty-four percent of subprime homeowners could not refinance while 50 percent of homeowners seeking prime conforming mortgages could not refinance. Subprime homeowners most commonly had issues with subprime loan programs no longer being offered and FICO scores. Those seeking prime conforming mortgages most commonly found appraised property values and loan-to-value (LTV) ratios as impediments.”

Other product categories covered in the survey were Alt A loans and prime jumbo loans. Alt A loans have lower documentation requirements for borrowers’ income and assets.

Jumbo loans have a loan amount greater than the Fannie Mae and Freddie Mac conforming limit of $417,000.

The bottom line is that loan-to-value ratios have returned to more traditional limits. For prime jumbo loans, the maximum acceptable LTV has tightened to 90 percent, the lowest of any of the four product categories surveyed. For prime jumbo loans, the minimum acceptable FICO score now averages 679, the highest of the four product categories surveyed.

Subsequently, the survey found substantially reduced mortgage broker production in the month of August 2007 as compared to August 2006. Production of prime conforming loans was down approximately 20 percent while production of Alt A loans was down nearly 50 percent.

One of the major reasons is that lenders are failing to meet their commitments to fund loans that they had previously fully approved. Twenty percent of commitments to fund subprime loans through mortgage brokers were not met during the month of August. Survey respondents indicated that one-third of their most frequently used subprime lenders in August are no longer accepting applications or funding loans. For prime jumbo lenders, approximately 15 percent are no longer accepting applications or funding loans.

The subprime problem has changed the way mortgage brokers operate. They typically submit identical applications for the same borrower to multiple lenders for the following reasons: rate shopping, uncertainty regarding mortgage approval, uncertainty regarding prevailing underwriting guidelines, and concern that lenders will not honor funding commitments. While mortgage brokers more often submit multiple applications for subprime and Alt A borrowers, this practice has become more prevalent for prime credit applicants as well. On average, mortgage brokers are currently submitting 1.7 applications for prime conforming loans; another Campbell Communications survey of mortgage brokers in 2006 found only 1.2 applications submitted on average for prime conforming loans.

“There is very little hard data available about what is currently going on in the mortgage originations and home sales markets,” Popik noted. “The Mortgage Bankers Association weekly application index is likely being skewed by mortgage brokers submitting multiple applications. The National Association of Realtors Pending Home Sales Index does not account for sales that will fall through because of mortgage issues. Our survey shows that the number of home purchase transactions falling through due to the mortgage market disruption was substantial for the month of August. Mortgage originations statistics for the month of August from government registries of deed and industry surveys will not become available for another 60-90 days. To the best of my knowledge, we have the most current and actionable data available on the wholesale mortgage market and on homebuyers served by mortgage brokers.”

Editor’s note: For information about obtaining the new survey report, contact John Campbell at (202) 363-2069, email john@campbellsurveys.com. The full survey instrument is available for viewing online at www.campbellsurveys.com/chgmkt07.

Prepared at the Federal Reserve Bank of Chicago and based on information collected before July 16, 2007. This document summarizes comments received from business and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials.
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Reports from the twelve Federal Reserve Banks indicated that economic activity continued to expand in June and early July. New York, Richmond, St. Louis, Minneapolis, and San Francisco described the pace of growth as “moderate” while Cleveland and Chicago saw it as “modest.” Philadelphia noted that economic conditions improved. Kansas City said the regional economy continued to grow but at a moderating pace, and Dallas characterized its economy as strong but said it decelerated. Boston and Atlanta described business contacts’ reports as “varied” or “mixed.”

On balance, consumer spending rose at a modest pace, although a number of Districts indicated that sales were mixed or below expectations. Several reports indicated that capital spending increased, and expenditures for most business services continued to rise. Employment increased further in most regions and in many sectors of the economy. Most Districts said that residential construction and real estate activity continued to decline. Commercial construction and real estate markets were generally more active than during the previous reporting period. District reports indicated that manufacturing activity continued to expand during June and early July. Household lending declined in most regions, while commercial and industrial lending expanded at a modest pace. Contacts generally reported ongoing input cost pressures, particularly for petroleum-related inputs, while prices at the retail level continued to increase at a moderate rate. Energy and natural resource activity remained at high levels, or in some instances, rose further. Many Districts described overall wage gains as moderate and/or similar to the previous reporting period. Agricultural conditions varied widely, as the impacts of drought were felt east of the Mississippi River and heavy rains affected the Dallas and Kansas City Districts.
Construction and Real Estate
Most Districts said that residential construction and real estate activity continued to decline on balance. Many Districts, however, noted increased activity in some individual market locales or segments. Atlanta, Chicago, St. Louis, and Minneapolis said construction decreased. Boston and Kansas City said housing markets remained “soft” and “weak,” respectively, while San Francisco indicated that residential markets were weak and had slowed further in some areas. New York said markets were mixed but stable. Two notable exceptions were the Cleveland and Richmond regions, which experienced slight increases in sales. Atlanta said home inventories remained high, as did Dallas (even after a slight decline in the recent period). Inventories increased in Kansas City, but they declined in New York, and contacts in Boston and Cleveland described the number of homes for sale as “normal” and “acceptable,” respectively. District reports on home price appreciation were mixed: Boston noted a return to price appreciation and Kansas City indicated slower rates of decline. But Richmond and Chicago reported slower rates of increase or the beginning of declines, and in the Dallas District, some contacts projected a correction in entry-level home prices. Looking ahead, contacts in the Cleveland District were uncertain about how long it would be until the market turned, and analysts in Dallas had revised their housing outlook down. Contacts in Atlanta expected further declines overall, though they anticipated the market in Florida would be flat.

Commercial construction and real estate markets were generally more active than during the previous reporting period. New York said markets strengthened and San Francisco reported continued firming. Cleveland, Atlanta, Minneapolis, and Kansas City indicated small gains in development. Richmond and Dallas described local markets as still “solid” and “robust,” respectively. Chicago said the pace of development was steady, and St. Louis said markets were mixed. Richmond and Chicago observed that overall commercial vacancy rates were stable. Office vacancy rates fell in four regions. Demand for industrial space increased in four Districts, while net absorption in the Minneapolis District was negative. Richmond, Kansas City, and San Francisco reported increases in rental rates for commercial space, and New York said that the asking rents for space “continued to soar.”

NEW YORK (Reuters) - Countrywide Financial Corp. (CFC.N) shares sank 13 percent, their biggest one-day decline since the 1987 stock market crash, on fears the largest

U.S. mortgage lender could face bankruptcy as liquidity worsens.

“If enough financial pressure is placed on Countrywide or if the market loses confidence in its ability to function properly, then the model can break, leading to an effective insolvency,” Merrill Lynch & Co. analyst Kenneth Bruce wrote. “If liquidations occur in a weak market, then it is possible for Countrywide to go bankrupt.”Countrywide debt prices fell and the perceived risk of owning its bonds rose, suggesting less confidence that the Calabasas, California-based company can pay its bills and fund operations.This helped drag down U.S. stocks, as investors bought safe U.S. government debt to escape clouds enveloping the

U.S. mortgage industry.Bruce downgraded Countrywide to “sell” from “buy” on Wednesday. “The company can survive a period of secondary market instability; however, the steps that it would take to preserve shareholder value would be expensive, likely leading to further share price declines,” he said.Shares of Countrywide closed down $3.17 at $21.29 on the New York Stock Exchange. They have fallen 50 percent this year, and the company’s market capitalization has dropped to about $12.3 billion. Countrywide did not immediately return requests for comment on Wednesday’s share price decline.Bruce’s downgrade suggests deepening problems at Countrywide, which has in the last month tried to assure investors it would thrive once the credit crunch afflicting

U.S. mortgage lenders passed.The downgrade came a day after Countrywide said foreclosures and mortgage delinquencies rose in July to their highest levels since at least early 2002. DEBT YIELDS RISEShares of several other companies exposed to mortgages also suffered double-digit percentage declines on Wednesday, including Deerfield Triarc Capital Corp (DFR.N), KKR Financial Holdings LLC (KFN.N) and Scottish Re Group Ltd (SCT.N). The KBW Mortgage Finance Index (.MFX) fell 2.7 percent.The mortgage industry is struggling as defaults rise, investors refuse to buy many home loans, and bankers curtail lending to mortgage providers. Dozens of lenders have quit the industry this year, and several have gone bankrupt.Countrywide spokesman Rick Simon declined to discuss Bruce’s report, but said: “Management is completely focused on running the business in a changing environment.”Reuters obtained a copy of Bruce’s report.Countrywide’s 5.8 percent notes maturing in 2012 fell 1.9 cents on the dollar to 90 cents, yielding 8.37 percent, according to Trace, the Financial Industry Regulatory Authority’s bond pricing service.The perceived risk of owning Countrywide bonds rose. Credit default swaps rose about 100 basis points (1 percentage point) to 500 basis points, or $500,000 per year for five years to insure $10 million of debt, traders said.Countrywide’s unsecured 30-day commercial paper yielded 6 percent to 6.25 percent, according to Deborah Cunningham, chief investment officer for money markets at Federated Investors. DISRUPTIONSBruce said market disruptions have made it difficult for many companies to obtain even short-term financing. He pointed to

Canada’s Coventree Inc. a structured finance firm that on Monday found itself unable to sell its own short-term debt. It said it later found buyers for C$600 million (US$556 million) of the debt. The Countrywide downgrade is “a big deal,” said Blake Howells, director of research at Becker Capital Management in

Portland, Oregon. The disruptions are “an issue for Countrywide and for anyone accessing pretty reliable short-term funding.” Earlier this month, Countrywide said it had access to $186.5 billion of cash as of June 30, including $46.2 billion of “highly reliable” short-term financing. Chief Executive Angelo Mozilo on July 24 said Countrywide expected to add market share, and eventually be among perhaps five lenders to dominate the mortgage market. Countrywide added nearly 7,000 jobs from January to July. Bruce said “we like” Countrywide’s franchise, but industrywide liquidity problems could erode its value.

By Jonathan Stempel  

(Additional reporting by Karen Brettell, Doris Frankel, Chris Sanders, Neil Shah and Dan Wilchins)