The Fed is buying $1.25 trillion in mortgage-backed securities in its effort to prop up the economy but will end purchases by March 31.  To ease the impact on mortgage markets, the central bank has been phasing its MB purchases since the first of the year,

Federal Reserve Bank of New York President William C. Dudley said in interviews with the Nightly Business Report and the Associated Press that the time is right to end the program because the economy is growing and because expanding the purchases would make it harder for the Fed to unwind its support down the road.

Since first of the year, rates fell every until this week until they rose slightly. Freddie Mac’s survey has rates on 30-year fixed-rate mortgage (FRM) averaging 5.01 percent with an average 0.7 point for the week ending February 4, 2010, up from last week when it averaged 4.98 percent. Last year at this time, the 30-year FRM averaged 5.25 percent.

Fed officials have estimated that rates could rise as much as .75 to 1.00 percent with the end of the MBS buyout program.  Since the inception of the program in January 2009, the Fed has spent $1.17 trillion in the MBS market, or 93.83 percent of the allocated $1.25 trillion, which is scheduled to run out in March 2010. This leaves $77.08 billion left to purchase mortgage backed securities.

“Homeowners facing foreclosure or struggling to make mortgage payments shouldn’t have to contend with fraudulent ‘companies’ that don’t provide what they promise,” FTC Chairman Jon Leibowitz said. “The proposed rule would outlaw up-front fees so companies can’t take the money and run.”

The FTC said the mortgage crisis has launched an industry of companies purporting, for a fee, to obtain mortgage loan modifications or other relief for consumers facing foreclosure. The FTC has brought 28 cases in this area, and state and federal law enforcement partners have brought hundreds more. Generally these cases charged that companies do not provide the services they promise and that they misrepresent their affiliation with the government and government housing assistance programs.

The commission accused two California-based companies of collecting at least $3.3 million from Spanish-speaking homeowners without following through on promises to help them negotiate loan modifications with lenders to avoid foreclosure.

In September, it sued the Nation’s Housing Modification Center and its principals who allegedly violated the FTC Act and the FTC’s Telemarketing Sales Rule by misrepresenting themselves as a federal government agency or affiliate and falsely claiming that, in return for a $3,000 fee — half due up-front and half due two weeks later — they would obtain mortgage modifications that would make consumers’ loan payments substantially more affordable in virtually every instance.

The FTC also brought charges last year against Infinity Group Services and its president, charging them with violating the FTC Act by falsely representing that they would obtain a loan modification in all, or virtually all, instances; that they would give full refunds if they failed to do so; and that they would obtain loan refinancing for an up-front fee of $995.

The proposed rule would require mortgage relief companies to make good on their promised results before charging or accepting payment from consumers. Under the proposed rule, companies could not be paid until they had a documented offer from a mortgage lender or servicer that lives up to the promises they have made.

‘Far too many homeowners have paid up-front fees to bad actors who promised loan modifications but never delivered,” Treasury Secretary Timothy Geithner said. “I commend the FTC for proposing a strong set of safeguards to protect consumers from these predatory practices.”

The cap on itemized deductions, designed to raise nearly $179 billion next year by increasing taxes on wealthier Americans, mirrors a similar effort last year. It sparked an aggressive lobbying campaign from the housing lobby and financial services interests, and was eventually stricken from the 2010 budget in Congress.

The new budget includes a triple whammy on upper income taxpayers.  In addition to the limits on itemized deductions, the tax cuts imposed during the Bush Administration will expire for families earning over $250,000, raising $338 billion.  An increase in the capital gains tax will raise another $118 billion.

The new budget appears to have caught housing groups by surprise.  To date, only the Mortgage Bankers Association has attacked the new budget proposal.  MBA said it would have a negative impact on the housing market, particularly in high-cost states such as California and New York, as it would increase the cost of mortgages for many potential homeowners, especially in high-cost states. 

“What you’re doing is disadvantaging the mortgage relative to other usages of money, so they may decide to reduce mortgages or pay off the house rather than make other investments conducive to the economy, such as the stock market,” said Jay Brinkmann, MBA’s chief economist.

More than 100 years old, the mortgage interest deduction allows homeowners to deduction from their taxable income the value of interest paid on their mortgage.  In addition to the US, the Netherlands, Sweden, Switzerland allow mortgage interest to be deducted.

Critics of the deduction argue that only about half claim the deduction. For the 37 million individuals and couples who do, the rewards go to the wealthy who need it least.  On average, homeowners receive just under $2,000 per return. On a million-dollar mortgage, however, the tax benefit is worth approximately $21,000 a year.  The deduction costs the Treasury more than $80 billion a year.

Homes sold as “short sales,” sales where the proceeds from the sale fall short of the balance owed on the loan secured by the property being sold and the lender agrees to take a lesser amount than is currently owed, are an increasingly popular alternative to foreclosure.  However, they are complicated transactions and requiring the approval of a number of parties.  Many take as long as 120 days to complete. 

The popularity of short sales mushroomed last year.  The number of short sale requests has doubled on a national level in 2009, according to Bank of America. In Las Vegas, short sales averaged about 7 percent to 8 percent of total existing-home closings in early 2009, but averaged 22 percent of the market by the end of the year and in early January.

They are less damaging to homeowners’ credit and are less costly both for borrowers and lenders — one study found that loan losses average 19 percent with short sales, compared with 40 percent with foreclosures. In certain cases, a seller no longer is liable for paying taxes on the difference between the amount owed on the loan and the short sale price.  Lenders have become more accepting of short sales and last spring the Treasury Department enacted regulations to encourage short sales by owners who owe more on their property that it is worth.

Despite their growing popularity among sellers, many short sale deals never close, even after months of effort. In fact, only 23 percent of short-sale offers that homeowners receive from potential buyers actually close, according to a February 2009 study of 1,300 real estate agents by Campbell Communications. More than 90 percent of agents cited a slow response from the lender as the reason short sales were lost.  The National Association of Realtors reports only three percent of sellers reported that their home sale was a short sale, compared with 5 percent in 2008.

Short sales take a lot of time to negotiate and the close. During October, the average market time needed to sell a foreclosed home in Chicago, for example, was 117 days, while Chicago homes offered as short sales spent 245 days on the market before going under contract.

Moreover, there is no way for the buyer to know in advance how long a sale might take. Bankers have been slow to sign off on short sales because homeowner associations, mortgage insurers and second- lien holders may not agree to the terms of the deal.  Second lien holders often hold up the transaction to exert the largest possible payment, in exchange for releasing their lien, even though in foreclosure they will get nothing.

Even should buyers make the April 30 contract deadline, they could easily fail to close in two months.  In general, lenders are becoming more adept at short sales, but they are complicated transactions.  Having the right lender is critical.  Some banks require 30 to 60 days just to review the transaction.  Others lack the staff or the experience to do it in less time.  The fact is that not all banks are equal in developing short sale procedures. This is why short sales do not have a timely procedure in place or sometimes produces a result we are not looking to gain. All banks claim to be working diligently on a procedure to make the process smoother but buyers and their agents have no control over the process.

For buyers planning to take advantage of the tax credit, pursuing a short sale may not be wise, even though they are writing off a significant portion of attractive inventory.  However, avoiding short sales may be difficult. Short sales compete with foreclosures and populate many of the price points attractive to first-time buyers.  MLS online listings open to the public do not screen out short sales.  Buyers may spend precious time pursuing a short sale and not even know it unless they are working with professional agents.

The Census Bureau reported today that the homeownership rate at 67.2 (+ 0.5) percent for the last quarter of 2009 was “not statistically different” from the fourth quarter 2008 rate (67.5 percent), but it was lower than the third quarter’s rate

(67.6 percent).  When seasonally adjusted, though, the decline from third to fourth quarter was only .1 percent, also with the margin of error. Standard errors for quarterly homeownership rates for the United States generally are 0.3 percent. At the end of the year, there were 75,038,000 owners and 36,673,000 renters.

 Census also reported a small rise in vacant homes, but the current rate (2.7 percent) was not statistically different from the fourth quarter 2008 rate (2.9 percent) or from the rate last quarter (2.6 percent).

A flood of first-time buyers motivated by low prices, low interest rates and the Federal tax credit, may have offset the exodus of foreclosure victims who left homeownership behind.

Homeownership rates are higher in a number of countries, including Ireland (77 percent), Norway (77 percent), Spain (85 percent), Israel (71 percent) and Belgium (71 percent), than in the U.S.

The all-time high U.S. homeownership rate was 69.1 percent in the first quarter of 2005.

These numbers represent a harsh reality for many households in America. Almost 3 million households lost their home last year. One in forty-five households was in default last year. The states with the highest foreclosure rates were Nevada, Florida, California and Arizona. The states showing the greatest improvements in the foreclosure situation (i.e., the lowest rates of foreclosure) were Indiana, Ohio and Rhode Island.

Let’s not forget that behind every foreclosure is a lost home and a family in crisis. The emotional stress on a household, particularly with children, is well documented. And the financial stress associated with a foreclosure is a primary reason for separation and divorce.

What is particularly disconcerting about the record number of foreclosures last year is that fact that the Obama Administration exerted great efforts to stem the rising tide of foreclosures. The government created the Home Affordable Modification Program, HAMP, which was designed to reduce the number of foreclosures by providing banks with incentives to modify deteriorating homeowner loans and/or to refinance poor quality loans as well. As of this writing, progress associated with this program has been trivial.

Looking forward, our nation’s foreclosure problems are likely to get worse, not better. There are a meaningful number of delinquent home loans mounting on lender desks. According to the Mortgage Bankers Association’s quarterly delinquency survey, during the third quarter there were a record number of homeowners that missed their monthly mortgage payments for at least three consecutive months. This 90 days and greater past due category portends unfavorably for future foreclosure filings. And word is that this delinquency category continued to deteriorate in the fourth quarter as well. It is likely that a high percentage of these delinquent homeowners will default on their mortgage loans, prompting lenders to file for foreclosure. So the pipeline of potential foreclosure filings is currently swelling among the major financial institutions across the nation.

Some also say that banks held back on foreclosure filings during this past year because of operational issues and an avoidance of booking losses. This suggests that the current pipeline of foreclosure filings is even larger than previously anticipated.

Mounting foreclosure filings are expected to exert downward pressure on home values, suggesting that there will not be stabilization or a revival of home values anytime soon. To make matters worse, the government has begun lifting its housing subsidies which will further weaken the housing sector. The Federal Reserve is phasing out its mortgage security purchase program which brought mortgage rates below 5 percent this past year; mortgage rates are now expected to rise in the coming quarters. In addition, the homebuyer tax credit is expiring in the first half of this year, removing a financial incentive to purchase homes.

On balance, I expect some hesitation in the housing recovery during the next several quarters. There are too many potential foreclosure filings in the pipeline to have any reasonable chance of realizing price stabilization in the near future. And the impending removal of government housing subsidies suggests a marked slowing in future housing demand. These two likely developments depict a fragile housing sector; not yet ready to experience a complete recovery. Unfortunately, 2010 (at least in the first half) may not be the year of a housing turnaround. We will have to wait and see.

Illegal immigrants are not eligible for the credit, but the value of all non-citizens claims for the credit total $20.8 million, a U.S. Treasury Department inspector general said. Texas’ total was almost double that of similar suspicious filings from California, a state estimated to have nearly twice as many illegal residents.

Russell George, Treasury inspector general said in an interview with The Dallas Morning News that the involvement of third-party preparers in some questionable homebuyer claims filed nationwide suggested there may have been “conspiracies and attempts to cheat the government by more than one person.”

George warned of the potential for fraud in the homebuyer credit program soon after it was enacted by Congress in July 2008. The credit was increased and extended in February 2009 as part of the $787 billion stimulus legislation.

In October, an investigation headed by George found that more than 580 children, some as young as four years old, had received $627,000 in first-time homebuyer credits.  The IRS has identified 167 suspected criminal schemes and opened nearly 107,000 examinations of potential civil violations of the first-time homebuyer tax credit

The investigation identified more than 19,300 electronically filed 2008 tax returns on which taxpayers claimed the credit for a home which had not yet been purchased, but allegedly would be in the future. The amount of the credits inappropriately claimed via e-filing totaled more than $139 million. To date, however, the Justice Department has filed only one criminal case and one civil injunction against tax preparers for submitting false claims for the homebuyer credit. One preparer was from Jacksonville, Fla. The second was from Mission, Texas.

An individual taxpayer identification number (ITIN) is used by people who are not eligible for a Social Security number. The ITIN program was created to collect taxes from foreign investors, but the IRS has acknowledged that more than half of ITINs are filed by illegal immigrants. Holders have filed more than 1 million tax returns each year, a requirement to obtain a refund.

George said he could not disclose for privacy reasons where in Texas the suspicious homebuyer claims by noncitizens originated. But he said his office has not completed its investigation. He said another interim report is expected to be released by late February and will contain more revelations.

“The numbers get a lot worse,” he said.

Credit is the life force that makes home construction possible.  It pays for the acquisition of land, the wages of skilled workers, the materials and the subcontractors that create a new home.  A handful of America’s biggest builders are publicly held and investor-owned, but the vast majority is small, privately owned businesses operating in a single market or region that traditionally have relied upon portfolio lenders - commercial banks and thrifts - to finance 90 percent of the industry’s residential acquisition, development and construction (AD&C) financing.  Lenders use the land and homes being built as collateral against the possibility the builder defaulted.

Three relatively simultaneous events have dried up credit for residential construction.  First, the credit crunch made borrowing more difficult for all small businesses, especially those in real estate.  Second, the real estate market went south, forcing builders to default and leaving banks with unfinished homes to sell.  Finally, some of the hundreds of lending institutions that have closed their doors since 2006 and were taken over by the FDIC froze lenders’ (AD&C) loans for weeks, making it impossible to draw on their loans to pay workers and subcontractors.  Entire projects stopped dead in their tracks. 

By last April, the lending crisis had choked off credit for so many home builders that the National Association of Home Builders feared the situation threatened to prolong the housing and economic downturn.  A survey of builders by NAHB showed that 85 percent believe that access to financing has been getting progressively worse over the last 18 months. Home construction loans were down 51 percent in the third quarter of 2009 compared to the peak in 2006.

The hottest ticket at the International Builders Show in Las Vegas was a matchmaking session organized by NAHB for builders to meet new prospective lenders and investors, including private equity funds that have never considered investing in residential construction projects.  More than a dozen investment funds and a handful of lenders met with builders held over four days during the show.

Among the investment funds that participated were Hearthstone, KeyBank Real Estate Capital, Encore Housing Opportunity Fund, Greenfield Partners and Yun Capital. Bank of America and Royal Bank of Canada also were on hand. Some 255 builders registered to meet with fund managers. Builders delivered their pitches and investors were introduced to potentially favorable deals.

No deals were signed on site, but none were anticipated.  Rather, it was the first step in a courtship that may transform the way homes are built and projects are financed.  Learning each others languages, understanding each others’ businesses, finding the right opportunities and establishing the trust that glues deals together will take time for people from Main Street and Wall Street.  The first deals, we hear, are in the works.

Sometimes crisis is a necessary catalyst to bring about new ways of doing business.

With homes sales plummeting again, three million foreclosed homes clogging inventories across the nation and the Administration’s program to fend off foreclosures falling short of expectations, it’s no secret that twelve months after taking office housing has proved to be more difficult than anticipated.

In his speech, the President mentioned the first-time buyer credit and vowed to “step up refinancing so that homeowners can move into more affordable mortgages,” though there were no details.  Nor were their bold new ideas to address foreclosures, improve home values, restore faith in the mortgage-backed securities markets, shore up FHA, resolve the fates of Freddie Mac and Fannie Mae, or rekindle demand with the tax credits expire in three months.

Yet he attacked the unemployment aggressively, devoting two-thirds of his speech to the economy and declaring jobs to be “our No. 1 focus in 2010.”

To add a touch of irony to the situation, today HUD is expected to dust off a program launched by the Bush Administration?Hope for Homeowners?to help homeowners who owe more than their properties are worth. The changes would be at least the third lease on life for the program, which began in October 2008 and has so far helped just 96 of the 400,000 homeowners originally targeted.

Two hours after he finished, RealtyTrac released its statistics on leading foreclosure markets in 2009.  The data underscored the link between foreclosures and jobs. 

“While it was expected that cities from states with the highest levels of foreclosure activity would top the charts, there is evidence that we’re entering a new wave of foreclosures, driven more by unemployment and economic hardship than what we’ve seen over the past few years,” said James J. Saccacio, chief executive officer of RealtyTrac.

“Areas like Provo, Utah, Fayetteville, Ark., Portland, Ore., and Rockford, Ill., all posted foreclosure rates above the U.S. average in 2009. And markets like Honolulu, Minneapolis and Seattle saw foreclosure activity increase at more than twice the national pace over the past 12 months - although all three of those markets still had 2009 foreclosure rates that were at or below the U.S. average.”

The lack of attention to housing did not go unnoticed in some communities where foreclosures are bleeding local housing markets dry. In Fresno, Representative Jim Costa (D-Fresno) stated, “The president made no mention of the two most serious issues affecting our Valley’s economy: water and housing.”

“I’m pissed off,” Rep. Dennis Cardoza, D-Merced, said Wednesday. “The Obama administration did not cause these problems, but they’re not working hard enough to fix them.” Citing the department’s “complete incompetence,” Cardoza declared he had “lost confidence” in Donovan and all but demanded the Cabinet secretary’s resignation.

The congressman blames the housing secretary for failing to adequately assist valley cities such as Merced, where the foreclosure crisis ranks among the nation’s worst. He blames Obama for not visiting the San Joaquin Valley, wracked by chronic unemployment and extended drought.

Cardoza’s not alone in his frustration.  According to a Harris Survey conducted for the Trulia web site and released yesterday, only 36 percent of Americans give the president a passing grade or better for restoring the American dream of home ownership.  A year ago, he received passing grades from 54 percent.

Falling home prices during the past several years nearly crippled the housing sector. Just the expectation of falling home prices unnerved potential homebuyers. Many trade-up buyers postponed purchasing because they did not want to purchase a home that was losing value. Other trade-up buyers were unable to purchase a larger home because the equity in their current home had lost too much value to adequately fund the down payment required to acquire a larger home.

Resort buyers postponed purchasing vacation properties for similar reasons: they would not purchase a resort property that was losing value; and they no longer could afford to purchase a resort property due to the substantial loss incurred on the equity in their primary residence. Many investors shied away from investing in property because falling prices introduced greater risk to their return on investment. At some point, however, falling prices create opportunities for investors because lower priced properties generally have better cash flows than higher priced properties, everything else the same.

On the other hand, falling home values had a favorable influence over first-time buyers. Immediately after the real estate boom, many first-time households preferred renting over owning due to the relatively high home prices, courtesy of the boom. But as home prices continued to fall, more and more first-time households began to choose homeownership over renting as homes became more affordable.

On balance, plummeting home values during the past several years wreaked havoc in the housing markets. According to the Case-Shiller 20-city Home Price index, home values plunged 29 percent to a 146.6 index in October 2009 (our most recent data), from a peak index of 206.5 posted July 2006. It is no coincidence that housing demand literally dried up during this period, as evidenced by an over 30 percent drop in both existing and new home sales.

However, most of the damage has already been done. In the past six months home prices have shown signs of stabilizing.   The Case-Shiller 20-city index has risen 5.3 percent since April of this year. The worst may be over but it is likely that prices may drop further due to a mounting foreclosure problem. According to a recent Realty Trac report, there were almost 3 million foreclosure filings last year, an all-time record. Foreclosures are one of the primary reasons for falling home prices since a foreclosed homes sell at a discount to non-foreclosed homes, bringing down the mean and median price for all homes sold in a marketplace.

Unfortunately, there has been an unusually large build up of mortgage loans that have been seriously delinquent over the past several quarters. According to the Mortgage Bankers Association’s mortgage delinquency survey, the 90 days or greater past due category is at an all-time record and many of those loans are likely to result in a foreclosure filing. The pipeline of foreclosure filings is filling up quickly which does not portend favorably for future home values.

Although home values may resume declining due to a precarious foreclosure situation, the bulk of the price correction has already occurred. The inventory of homes available for sale has been reduced markedly during the past two quarters, including the number of vacant homes. Further, in many locations (e.g., metros) today’s lower home prices are better aligned with local market rents, providing some support for homeownership vis a vis renting. To this end, further drops in home values should be limited during the first half of this year.