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.

Two Florida candidates for the Senate, appearing on the same show, immediately voiced their support for a new credit.

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.

 ”I think this will create a Civil War,” said Realtor Dan Spera of York, Penn.  “They would almost have to make this retroactive to those that missed it over the past few months or it is going to be nasty out there.”

 ”I’ll go out on a limb and say there are many agents salivating at the thought of a revived tax credit, and I’d be shocked if the National Association of Realtors didn’t lobby, hard, for it,” said Jay Thonpson, author of the influential Phoenix Real Estate Guy blog. “Personally, I have yet to be convinced the home buyer tax credit did much to truly help a housing recovery. And I am completely convinced that buying a home just to score an $8,000 tax credit is a bad idea. A really bad idea.”

Ilyce Glink, author of the nationally syndicated Think Glink column, echoed the despair many real estate professionals feel as sales enter free fall.

“What does the U.S. housing market look like without all the life support provided by the federal government?” she wrote in a recent CBS Moneywatch column, A New Home Buyer Tax Credit? HUD Not Ruling It Out .  “A little too much like a corpse.”

Talk of another credit is causing sales to contract even more.

“In meetings and discussions op sales professionals and brokerage leadership over the past two weeks I have heard more than once that there is a sense that some of the decline in sales is due to buyers waiting to see whether there will be additional tax credits or stimulus coming from the Federal government.  And, as of this writing, while there is no evidence that such financial stimulus measures are in the offing, it is also likely that at least some buyers may be waiting for just that,” wrote Steve Murray in his influential Real Trends newsletter.
 

“It may be time for policy makers to declare whether any new tax credits or other targeted housing stimulus is in the offing and if not declare that as well.  Further while no one wants rates to increase in the near term it could well be that the threat of increasing rates in the future may stimulate some housing sales,” Murray said.

 Meanwhile HUD tried to limit the boss’s damage. “No news here,” a HUD spokesperson told CNBC yesterday.  “There are no discussions underway to revive the credit.”

But if August pending sales, which are due out Thursday, look anything like July’s disastrous existing home sales, the grass roots pressure for a political solution will surely escalate.  With just two months to go before a midterm congressional election, the future of the homebuyer tax credit may be decided in campaign speeches and voting booths, not the concrete-walled hallways of HUD.

Sales of existing homes in July dropped 27.2 percent in July to the lowest rate in 15 years.  U.S. new homes dropped in July to the lowest level on record, signaling that even with cheaper prices and reduced borrowing costs the housing market is retreating. Purchases fell 12 percent from June to an annual pace of 276,000, the weakest since the data began in 1963. 

Donovan said on CNN’s State of the Union show yesterday that it is “too soon to say” whether the administration’s $8,000 first-time homebuyer credit tax credit, which expired April 30, will be revived.

“All I can tell you is that we are watching very carefully,” Donovan said. “We’re going to be focused like a laser on where the housing market is moving going forward, and we are going to go everywhere we can to make sure this market stabilizes and recovers.”

After Donovan’s remarks, two out of the three Florida candidates for the Senate announced their support for reviving the tax credit.  On the same CNN show that Donovan appeared on, Republican-turned-independent Florida Gov. Charlie Crist said reviving the tax credit “would be a great lift” that “would stimulate the economy, it would increase home sales in Florida.”

“I think any time you can reduce taxation in order to spur the economy forward, that’s a good thing to do and that would be great to do. I would absolutely encourage the president to support that because it would certainly help my fellow Floridians,” Crist added.

One of Crist’s opponents, Democratic Rep. Kendrick Meek, agreed and said he “absolutely” wants to see the credit extended.

Many housing economists attribute the fact that consumers moved up their home purchases so that they could take advantage of the credit, leaving a dearth of buyers which contributed to unexpectedly low sales in subsequent months.

  ”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.”

First-time homebuyers accounted for only 39.1 percent of the home purchase market last month, down from a peak of 48.2 percent as recently as March, according to the Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions.

In 2009, first-time buyers comprised an unprecedented 47 percent of the market, most likely due to the federal tax credit and historic affordability, according to the National Association of Realtors®’ 2009 Profile of Home Buyers and Sellers. In 2008, first-timers account for 41 percent of transactions. The previous high was 44 percent in 1991.

“The end of the tax credit has clearly had an effect,” stated Thomas Popik, research director for Campbell Surveys. “First-time homebuyer participation is continuing to drop. We expect a further decline in first-time homebuyer activity, perhaps reaching as low as 30-35 percent of the market by the fall months.”

With homeowners continuing to fall behind on their mortgages, and more distressed properties coming on the market, first-time homebuyers serve the function of soaking up this excess inventory. In contrast, purchases by current homeowners have little positive effect of the housing inventory, because they usually sell a house at the same time they are buying another.

Fewer first-time homebuyers in the housing market will likely put downward pressure on home prices in the late summer and fall. However, in the near-term, real estate agents reported stable prices overall for the month of July and rising prices for non-distressed properties.

“Once the ‘free’ money (from the federal tax credit) was over, the market began to die. The sales that would have normally taken place over the summer took place in March and April to get the money.  The residential market is dying-prices are gradually falling,” reported a real estate agent in Iowa.

“Non-distressed property pricing is rising too quickly. Anticipated REOs (foreclosed properties) coming on the market will impact this pricing by the end of September,” predicted another agent in Florida.

 Short sales remain one of the few bright spots in the residential housing market. Time on market for short sales continued to decline, from an average of 20.5 weeks in February to 15.8 weeks in July. Significantly, first-time homebuyers made up a healthy 46.4 percentof short sale purchasers last month.

The Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions surveys more than 3,000 real estate agents nationwide each month and provides up-to-date intelligence on home sales and mortgage usage patterns.

However, renters usually paid a higher percentage of their household income on these costs than did owners (31 percent compared to 20 percent).lThe 2009 American Housing Survey also found that 32 percent of owner-occupied units were owned free and clear, 66 percent had a regular and/or home equity mortgage and 2 percent had only a line-of-credit.

The most important considerations for people moving to a new home were financial (28 percent), followed by room layout/design (15 percent) and size of home (10 percent).   In choosing a neighborhood, movers look for convenience to job (20 percent), convenience to friends or relatives (14 percent), look/design of neighborhood (10 percent) and the house itself (10 percent).

Issued jointly every two years by the U.S. Census Bureau and the Department of Housing and Urban Development, this survey provides detailed information on the characteristics of the nation’s housing stock.

 A wide range of specific topics is covered, such as the presence of air conditioning, crowding, housing costs, special living services offered to older residents, safety equipment present, type of heating fuel used, satisfaction with the neighborhood, cost of utilities and size of the home. The survey also covers the demographic characteristics of the housing units’ occupants.

 ”So many of these measures are really unique to this survey,” noted Tamara Cole, chief of the Census Bureau’s American Housing Survey Branch. “Together they provide a comprehensive view of the quality of the nation’s housing stock. This survey is also a longitudinal one, meaning it follows the same unit over time. For example, you can track the remodeling done to a specific unit from one survey to the next.”

The 2009 survey indicates that respondents are generally quite content with where they live: about 70 percent rate their homes an 8, 9, or 10 on a scale of 1 to 10 with 28 percent giving them the “best” rating of 10.

Residents of new construction tend to rate their homes even more highly: 84 percent gave them between an 8 and 10, and 45 percent gave a perfect 10 rating. Likewise, more than two-thirds of residents (68 percent) rated their neighborhood highly with 25 percent giving it a “best” rating. People living in newly built homes rate their neighborhoods especially highly: 75 percent (rated highly) and 35 percent (rated best), respectively.

Fears of prices decreasing further are up from 20 percent in the first quarter. Thirty percent believe home values in their local market will increase, down from 42 percent in the first quarter, according to the Zillow second quarter Homeowner Confidence Survey.

In fact, home prices, including distressed sales, increased nationally by 1.4 percent in June 2010 compared to June 2009 and increased by 3.7 percent in May 2010 compared to May 2009, according to CoreLogic’s Home Price Index.  The Zillow survey was conducted in late July.

Should prices continue to rise, the Zillow survey found that 5 percent of homeowners say they are very likely to put their homes on the market in the next six months. This pending supply translates into about 3.8 million additional properties in inventory. Some 5.2 million existing homes were sold in of 2009.

“As homeowners have been so inundated recently with news of declining home sales post-tax credit, it’s no surprise that they would become more pessimistic about the future of home values,” said Dr. Stan Humphries, chief economist at Zillow.com®. “Homeowners have become much more responsive to current market conditions than they were just two years ago, when a more typical reaction was denial.

“Given this sentiment, we’re surprised so many homeowners believe their market has already bottomed. Although our Q2 reports indicated signs of stabilization in 30 percent of markets we cover, we’re concerned that this was at least partly due to the homebuyer tax credits. We’re already seeing payback for the credits in the form of declining home sales, and this trend will push up inventory levels and exert downward pressure on home values. Add in the inventory from the millions of sidelined sellers and we’ll take more steps back. Our forecast remains largely unchanged: We’re in for an L-shaped recovery that will likely keep annualized home value appreciation very low for the next three to five years,” Humphries said.

TransUnion’s latest quarterly analysis found that delinquencies over 60 days decreased again in the second quarter to a level of 6.67 percent - only marginally lower than in the first quarter of this year.

This statistic reflects a decrease of 1.48 percent from the previous quarter’s 6.77 percent national average. Year over year, mortgage borrower delinquency is still up approximately 14.8 percent (from 5.81 percent in the second quarter 2009).

Mortgage borrower delinquency rates in the second quarter of 2010 continued to be highest in Nevada (15.86 percent) and Florida (15.02 percent), while the lowest mortgage delinquency rates continued to be found in North Dakota (1.61 percent), South Dakota (2.23 percent) and Nebraska (2.61 percent). Twelve states showed increases in delinquency from the previous quarter with Rhode Island (+4.63 percent), New Mexico (+4.45 percent) and Washington (+3.39 percent) leading the pack.

Measures of later-stage mortgage delinquency, such as the ratio of borrowers 90 or 120 or more days past due, provide additional positive news. For the first time since before the recession began in 2007, these later-state delinquencies rates have now both declined nationally from where they were last quarter.

The average national mortgage debt per borrower again decreased (0.77 percent) to $191,284 from the previous quarter’s $192,774. On a year-over-year basis, the second quarter 2010 average represents a 1.3 percent decrease over the second quarter 2009 average mortgage debt per borrower level of $193,811. The area with the highest average mortgage debt per borrower continued to be the District of Columbia at $366,627, followed by California at $345,502 and Hawaii at $311,130. The lowest average mortgage debt per borrower remained in West Virginia at $99,206. Quarter over quarter, Vermont showed the greatest percentage increase in mortgage debt (+2.1 percent), followed by New Mexico (+1.96 percent) and North Dakota (+0.65 percent). Areas showing the largest percentage drop in average mortgage debt were Nevada (-3.12 percent), Arizona (-3.0 percent) and Florida (-1.80 percent).

On a year-over-year basis at a national level, mortgage originations dropped almost 50 percent. The drop was across all states, with the smallest decline in year-over-year originations seen in North Dakota (-26.8 percent) and Arkansas (-31.4 percent). Idaho and Wisconsin experienced the steepest year-over-year declines (-58.7 percent and -58.6 percent, respectively).

“The second quarter decline in mortgage delinquency gives further credence to the notion that the credit market is stabilizing. Although this is good news for the consumer, the economy is still burdened by high unemployment, upcoming ARM resets and a glut of foreclosures,” said FJ Guarrera, vice president in TransUnion’s financial services business unit.

“The dynamics inside the mortgage market are changing. It is ironic that, with record-setting low interest rates, a large inventory of homes and low home prices, this is one of the most affordable times to buy a house within the last 50 years — yet most consumers are not considering a home purchase the investment opportunity it was considered in the past. Add to that irony and concurrent with these near perfect consumer buying conditions, tighter lending standards and increased documentation scrutiny have made it difficult for many consumers to qualify for a mortgage.”

Just as mortgage delinquency trends differ between the national and state economies, metropolitan areas also showed different movements in the second quarter of this year. Sixty-two percent of the metropolitan statistical areas (MSAs) showed a decrease in their 60-day mortgage delinquency rates since last quarter, as compared to a 59 percent between the fourth quarter of last year and first quarter of 2010.

Changes are even more significant in later stage delinquency measures. Sixty-four percent of all MSAs showed a decrease in their 90-day mortgage delinquency measure as compared to only 45 percent from the previous period. Furthermore, the percentage of MSAs showing a decline in their 120-day delinquency ratio almost doubled from the previous quarter-over-quarter levels.

“TransUnion believes that the 60-day mortgage delinquency rate will likely continue to drift downward in 2010, possibly nearing 6.4 percent nationally by the end of the year. Note that this forecast is based on various economic assumptions, including the assumption that both real estate values and the unemployment picture will improve gradually. This forecast would certainly change if there are unanticipated shocks to the economy affecting the recovery in the housing market,” said Guarrera.

With regard to regional forecasts, Florida is again anticipated to experience the highest mortgage delinquency rate by the end of 2010, reaching as high as 16.2 percent. North Dakota is still expected to continue to exhibit the lowest mortgage delinquency by year-end with a rate of 1.5 percent.

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.