Preliminary reports indicate that more existing homeowners than expected took advantage of the homebuyer tax credit to help buy a new home this year.  About one third of all the 2010 homebuyer tax credits processed to date are going to existing homebuyers, not first-time homebuyers, according to a new report last week from the General Accounting Office. 

Some 200,000 existing homeowners have claimed $1.2 billion of the $4.1billion in tax credits claimed to date for purchases between November 7, 2009 and August 30, 2010, according initial claims received by the IRS.  About 400,000 first-time buyers claimed the balance, according to the preliminary IRS data through July 3.  The GAO noted that these numbers are likely to increase because the IRS is still processing returns and credit can be claimed on tax returns filed during the 2011 filing season.

The existing homeowner credit became available last November.  Previous versions of the homebuyer tax credit dating back to 2008 only applied to first-time buyers.  The IRS has processed about $20 billion in claims from first-time buyers under previous legislation.  However, some $7.2 billion went to buyers who claimed a credit under the first version of the legislation, the Housing and Economic Recovery Act of 2008, which was in effect through June 2009.  They are required to repay the credit?which was really an interest-free loan?within two years in equal payments over 15 years.

How many first-time and existing owners were motivated to buy by the new credit and how many were planning a purchase anyway is not known. This spring the National Association of Realtors estimated that 4.4 million Americans will ultimately receive tax credits. That includes 900,000 buyers that NAR projected would not have purchased homes otherwise.

To qualify for the $6500 credit, homeowners selling their homes and buying new ones had to have used the homes being sold or vacated as principal residences for five consecutive years within the last eight.

During the winter and spring, reports circulated that the existing owner credit or “move-up buyer” credit, was too small to motivate owners.  The $6,500 credit was thought to mean little to a buyer with enough equity to sell a property and afford another home. Sellers who retain a real estate agent to sell their existing home might typically pay 6 percent of the sales price. For example, a home sold at the national average price of $164,700 at the time, the agent’s commission is $9,882?more than the tax credit.

A survey released last November by Campbell Communications/Inside Mortgage Finance found that the credit gives existing homeowners only half as much incentive to buy a home as first-time buyers.  Because of the lesser value of the credit and the higher median price of move-up homes, the credit only accounted for two percent of the cost of an average move-up home as opposed to four percent of a first-time buyer’s starter home, according to the study.

California and Florida are leading the nation in the dollar value of claims from existing homeowners, accounting for more than $779 million, or 64 percent, of the $1.2 billion claimed.

 For a copy of the GAO report, clink on the link at the top of the story.

 That’s because some creative bookkeeping at HUD has spread the scheduled increase in FHA’s mandatory mortgage insurance premiums over the life of the loan, and will actually reduce the up-front payment at closing from the current 1.75 percent of the loan to 1.00 percent.

Mortgage insurance payments, however, will increase from 55 to 90 basis points.  On a $275,000 mortgage, the change in payment would be about $70 higher a month.  On a $125,000 mortgage, the increase would amount to about $27 more a month.

Even though recent legislation passed by Congress authorized HUF to raise upfront mortgage insurance premiums as high as 2.25 percent of the loan, an increase that was originally scheduled to take effect today, HUD has decided to raise the annual premium and correspondingly lower the upfront premium, except for Home Equity Conversion Mortgages (HECM), so that FHA is in a better position “to address the increased demands of the marketplace and return the Mutual Mortgage Insurance (MMI) fund to congressionally mandated levels without disruption to the housing market,” according to a message circulated to FHA lenders September 1.

The change is causing some confusion in the marketplace, as some lenders are trying to use the increase in premiums to encourage buyers to close before the deadline. Others, including a loan officer whose scary email to buyers was forwarded to a real estate agent and published on the Agent Genius web site today, are getting their facts wrong.  “This loan officer will not be let loose near my clients,” noted the agent.

Experts believe the indices that prompted optimism in the first half are about to reverse themselves as government props to stabilize prices either, like the $30 billion homebuyer tax credit, faded away, or bombed altogether.

After 18 months of tax credits, July housing sales sank 26 percent from July 2009 and inventories soared to their highest level in recorded history.  Now that the average American home takes more than a year to sell, sellers are cutting prices in despair.

ZipRealty reported Friday that the number of price-reduced homes on the market increased 3.26 percent in August compared to July, ZipRealty’s monthly review of MLS-listed properties in 26 major markets found that 47 percent of “for sale” homes had at least one price reduction and the average seller actually slashed their list price twice to attract buyers.

The growing number of price-reduced homes outpaced newly listed homes in August, which increased less than one percent, with sellers nationally reducing their asking price by an average of $19,092.

“It appears that homebuyers are taking their time as they don’t feel a sense of urgency to make an offer, unless the price is right, and sellers are having to aggressively cut their prices to stay competitive in this market,” said Leslie Tyler, vice president of marketing for ZipRealty. “We typically find if a buyer hasn’t walked through the door in 30 to 45 days, a seller needs to lower their asking price. If a home hasn’t had an offer in six months, it’s time to rethink the sale.”

The number of canceled modifications in the Home Affordable Modification Program (HAMP) has jumped significantly, while the rate of new modifications has declined to a fraction of the previous pace. Most of these loans have not yet entered foreclosure, and it appears that many will enter non-federal modifications. That said, the effect of this program is nevertheless starting to reverse, from one that absorbed would-be distressed supply from the market, to one that will at some point add it back.

There are still over 11 million homeowners literally underwater on their mortgages. A subset of these, some 4.8 million, are over 60 days past due in their monthly payment obligations. This figure is up over 30 percent from where it was a year ago.

Massive purchases of mortgage-backed securities by Fannie, Freddie and the Federal Reserve have kept mortgage rates low, but record low rates alone don’t seem to be enough to encourage demand.  While the conforming spread has risen by roughly 30 basis points from its low point at the end of the Fed’s MBS purchases in March, it is still significantly below normal levels. GSE reform discussions that get underway later this year could present a new risk to this last source of temporary policy support.

Even a new Federal Housing Administration  refinancing initiative designed to help three to four million homeowners get out from under their underwater mortgages that kicks off tomorrow faces two major problems.  First, lenders must agree to eat 10 percent or more of the principal and the program won’t help borrowers who are deeply underwater.

While an Administration facing a tough off-year election struggles to find answers, economists and experts are now speaking of a price free fall that may take two years to complete.

“We probably, almost assuredly, will experience more house price declines. By those two criteria, I think that would qualify as a double dip.,” said Moody’s economist Mark Zandi in July

“Housing needs to go back to reasonable levels,” said Anthony B. Sanders, a professor of real estate finance at George Mason University told the Washington Post. “If we keep trying to stimulate the market, that’s the definition of insanity.”

In July, Scott Sambucci, vice president of data analytics for Altos Research, said house prices will continue to drop through the rest of the year and will begin 2011 lower than they were in 2009.

 ”The recovery period is dependent on inventory,” Sambucci said. “But different markets move differently. It’s important to get local.”

Goldman Sachs is just one of many investment houses that have lowered their outlook for home prices.   Last year, it estimated that federal housing policies-the homebuyer tax credit, mortgage modification programs, and the Fed’s MBS purchases-boosted house prices by about 5 percent, with the implication that the fading of these policies would lead to renewed price declines in 2010. In August Goldman updated its house price forecast; expecting a 3 percent decline in the Case-Shiller 20-city index this year and another 1 percent in 2011.

The consensus among the experts that home prices will fall farther before they hit bottom may become a self-fulfilling prophecy as the very buyers so desperately needed to buy up the excess inventory and stop the price slide will wait until they are absolutely sure that prices have reached their lowest point.

FHA estimates some three to four million homeowners could take advantage of the program, called FHA Short Refinance, which would dramatically stabilize housing markets, reduce delinquencies and foreclosures, and make it possible for many “move up” owners to sell and buy a new home that better fits their needs.

As one enthusiast put it, “Now the Short Refinance makes it possible to exchange an upside down mortgage into a right side up one!”

However, lenders must voluntarily agree to write off ten percent of the unpaid principal in order to bring a borrower’s combined loan-to-value ratio to no greater than 115 percent.  Real estate and mortgage professionals around the country fear that the principal reduction, which is also required in modifications under the Treasury’s Housing Affordable Modification Program (HAMP), to be a potential roadblock.

In some markets, where prices are still far below the peak in 2006, homeowners who bought at that time today are far below the 97.5 percent loan to value ratio the new program requires. 

 In addition to getting the lender to eat 10 percent or more of the principal, the program, also requires:

• The homeowner must qualify for the new loan under standard FHA underwriting requirements and have a credit score equal to or greater than 500.
• The homeowner must owe more on his/her mortgage than their home is worth.
• The homeowner must be current on his/her existing mortgage. The property must be the homeowner’s primary residence.

 ”Only time will tell how successful this program will actually be.  Getting the current lender to write off 10 percent of the current balance will eliminate many homeowners,” commend mortgage professional Rodney Mason of Atlanta, GA in a recent Active Rain thread.

One lender’s web site advises potential borrowers that they will need to plead hardship.  “We will need to negotiate with your existing lender to get them to agree to a short payoff. Not just anyone will qualify for this, of course, as we will need to demonstrate a need based upon some level of hardship. It’s important that this short payoff include both the first and the second mortgages and have a loan to value of approximately 95 percent of current appraised value,” it said.

 Contracts on homes signed in August rose 5.2 percent over July instead of falling 1 percent, as forecast by 37 economists in a Bloomberg News survey. 

Pending sales are still 19.1 percent below July 2009 when the index was 98.1. The national index had fallen 29.9 percent in May and another 2.8 percent in June.  The data reflects contracts and not closings, which normally occur with a lag time of one or two months.

“Home sales will remain soft in the months ahead, but improved affordability conditions should help with a recovery,” said NAR’s Lawrence Yun. “But the recovery looks to be a long process. Home buyers over the past year got a great deal, and buyers for the balance of this year have an edge over sellers. For those who bought at or near the peak several years ago, particularly in markets experiencing big bubbles, it may take over a decade to fully recover lost equity.”

HUD Secretary Shaun Donovan created turmoil in the real estate industry when he said on CNN Sunday that a restoration of the homebuyer tax credit is “not off the table” and that it is “too soon to say” whether the administration’s credit tax credit, which expired April 30, will be revived.

Donovan’s remarks set off a fierce debate within the real estate industry. Despite the record-setting 27 percent fall in July home sales, the idea of bringing back the credit is surprisingly controversial among real estate professionals.  Opinion clearly has changed from the near-unanimous support the credit enjoyed when it was renewed and expanded in February.

REOs are currently unloading onto the market at a faster rate in a number of the 35 plus markets that Metrostudy tracks, bringing more downward pressure on prices, especially at the higher end and faster in some markets than others. 

Cure rates are worsening, which is contributing to an increase in mortgage delinquencies, which now exceed 9 percent overall.  There are 2.5 mortgages that have returned to delinquency for every one that has actually improved.   Nationally, there are 4 million distressed mortgages (REO, in foreclosure or seriously delinquent).  There are also an additional 4.1 million households with mortgages who have more than 50 percent negative equity!

Metrostudy said that the number of households is shrinking as people double up, and increasing excess supply even more.  Excess housing is around 2 million, and the loss of excess households is about 1.5 million.  As more excess supply is created by the decline in households and new foreclosures, it will be difficult for existing demand to absorb both.  “This is further evidence that we have not yet hit the bottom,” the report said.

Metrostudy’s  latest statistics show that sales per subdivision were dismal in May, and only slightly better in June and in July.  “California extended their tax credit, but it will not help much.  The former fence-sitters already bought, and that has left behind a vacuum of demand,” the report concuded. 

New home sales contracts per project were down again in June, and ALSO for July versus year-ago, in Phoenix, Las Vegas, and San Diego.  Month over month, data show poor sales in June, with a little uptick in July in those markets.  In San Diego, June was even worse than May.

  ”For the third consecutive month, the consensus from the experts indicates weakened overall confidence in the U.S. housing recovery, with only 21percent of our panelists now predicting positive growth in prices nation-wide for 2010, and average expected cumulative price appreciation through 2014 falling almost one-third since our inaugural survey just three months ago,” said Robert Shiller, MacroMarkets co-founder and chief economist.

 A wide range of views among some of the survey panelists, and the August survey data itself, confirmed that a path to housing recovery remains intact. Terry Loebs, MacroMarkets managing director reported, “The slope of the expected recovery path, although flattening, remains positive and implies a $1.4 trillion gain in aggregate U.S. homeowner equity from current levels by the end of 2014, assuming that other relevant factors such as mortgage debt levels do not change.”

 This month, MacroMarkets provided additional context for the survey expectations curve by comparing it to a “bubble-adjusted” price trend line derived from available historical data through 1999. For the third consecutive month, the majority of survey panelists expect annual U.S. home price appreciation will not exceed 3.58 percent, the average annual rate that prevailed during the 1987-1999 ‘pre-bubble’ period, until 2014.

Loebs remarked, “Nationally, home prices over-shot the pre-bubble trend more than a year ago, and as of the end of Q1 this year, were still languishing about 8 percent below that benchmark. The average data from our August survey suggests that this negative gap will widen in the coming years. Nine out of every ten panelists are now projecting that U.S. home prices will be stuck below the extrapolated pre-bubble trend line at the end of 2014.”

 Inventories of existing homes for sale as measured by months supply broke an all-time record in July.  Months supply reports the number of months it would take for all the current homes for sale on the market to sell, given the current monthly sales volume. Four to five months of supply is average:

Months of supply increased to 12.5 months in July from 8.9 months in June.   This level of supply will put additional downward pressure on house prices, which slowly increased nationwide during the first half of the year. Total housing inventory at the end of July increased 2.5 percent to 3.98 million existing homes available for sale. 

 The previous all time record high for months supply was 11.2 months of supply in 2008 and the all-time record high number of homes for sale in America was 4.58 million in July 2008.  In the third quarter of 2008, the Case-Shiller National Price Index fell a record 16.6 percent.

“Even with sales pausing for a few months, annual sales are expected to reach 5 million in 2010 because of healthy activity in the first half of the year. To place in perspective, annual sales averaged 4.9 million in the past 20 years, and 4.4 million over the past 30 years,” said NAR’s Lawrence Yun yesterday. “There is not likely to be any measurable change in home prices going forward,” he told the New York Times.

However, others weren’t as sanguine.

“”You end up in a home-price-depreciation death spiral,” Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP in New York told the Wall Street Journal.  “It’s not clear there’s enough demand to handle this overhang without another round of price declines.”

He also announced the Administration will not support returning Fannie and Freddie to the role they played before they entered conservatorship in 2008, “where they fought to take market share from private competitors while enjoying the privilege of government support.”

Geithner said Fannie and Freddie lowered their underwriting standards, providing guarantees for increasingly risky types of mortgages without charging nearly enough to cover the risk. They also were allowed to build up substantial portfolios of mortgage-backed securities, which rose to a level of more than $1.6 trillion at their peak, without the financial resources to cover potential losses.

“These two strategies were pursued to maximize short-term returns to shareholders and senior management. They were possible only because of the toxic combination of a perceived guarantee by the government and an absence of effective oversight. They were not the sole causes of the crisis, but they made the financial crisis worse. And they resulted in huge losses for the taxpayer,” he said.

While opposing a return to their former roles, Geithner had no specific recommendations for the future of Fannie and Freddie, outside of supporting fundamental change.  “I believe there is a strong case to be a “carefully designed guarantee in a reformed system, with the objective of providing a measure of stability in access to mortgages, even in future economic downturns,” he said.

Geithner charged the conference with reaching a consensus on four key questions:  what role should the government play to provide stability to the housing finance system; what role should the government play in providing financial support to improve access to affordable housing; what should we do about the securitization market more generally; and how do we best manage the transition to a new housing finance system?

“We need to begin the process of weaning the markets away from government programs and make room for the private sector to get back into the business of providing mortgages,” signaling a retreat from the Administration’s past policy of using the GSE to keep mortgage rates low by purchasing large amounts of mortgage backed securities.

 The one-day conference includes participants include leading economists and policy makers in the housing sector.

 Nasdaq 100 futures fell 6 points to 1,831.70, and S&P 500 futures dropped 2.50 points to 1,082.50. Futures on the Dow Jones Industrial Average slipped 18 points to 10,319, according to Marketwatch.

An Associated Press story focused on actual repossessions, not total foreclosure activity as measured by filings, and reported that “the number of U.S. homes lost to foreclosure surged in July, another sign that lenders are moving quicker to take back properties from homeowners behind in payments.”    Reuters also led with repossessions rather than filings, “More Americans fell into foreclosure in July as a sour job market kept them from making payments, and banks took over homes at a near record pace.”

 However, RealtyTrac;s news wasn’t all bad.  In fact, it confirmed a trend of declining default, suggesting foreclosures in the months to come.

 RealtyTrac reported July total foreclosure filings are up only 4 percent over June and are actually down 9.7 percent from the same month last year, the second straight month of year-over-year declines.

 After a 1 percent yearly increase in May, filings declined 6.9 percent on an annual basis in June and the nearly 10 percent drop in July. There were 325,229 properties that received a foreclosure filing in July, a 4% increase from May. It also marks the 17th consecutive month that foreclosure activity exceeded 300,000, said James Saccacio, CEO of RealtyTrac.  Saccacio added that default notices were down from the previous year for the sixth straight month in July.

 RealtyTrac also reported that though banks are stepping up repossessions of properties in default, new defaults are declining, in line with similar reports from Freddie Mac, Fitch Ratings and ForeclosureListingsNationwide.com. See Foreclosures Show Signs of Decline.

 ”July marked the 17^th consecutive month with a foreclosure activity total exceeding 300,000,” said James J. Saccacio, chief executive officer of RealtyTrac. “Declines in new default notices, which were down on a year-over-year basis for the sixth straight month in July, have been offset by near-record levels of bank repossessions, which increased on a year-over-year basis for the eighth straight month.”

California alone accounted for 21 percent of the national total in July, with 66,910 properties receiving a foreclosure filing during the month - down 3 percent from the previous month and down 38 percent from July 2009, according to the RealtyTrac report.  Concern in California is growing that another wave of foreclosures is coming, Sean O’Toole, founder of ForeclosureRadar, reported yesterday.

“We see no evidence of a foreclosure wave anytime soon, and would like to remind everyone that even it were to occur we would see evidence of it months before those homes actually hit the market. While there is clearly a huge “shadow” inventory of homes that are delinquent in their mortgage payments, those homes still have to go through the entire foreclosure process before hitting the market as REO listings. A process which takes a minimum of 120 days, and at the moment an average of 226 days. Even if those properties already in foreclosure, and currently scheduled for sale, were to begin actually going to foreclosure sale (rather than postponing or canceling), it still takes lenders on average 269 days to resell those homes after the foreclosure sale occurs,” wrote O’Toole in his July 2010 California Foreclosure Report.

 ”Bottom line - we aren’t ruling out a double dip for housing, but at least in California it certainly won’t be caused by an excess supply of foreclosures anytime soon,” O’Toole said.