The Obama Administration summoned 25 of the nation’s biggest mortgage servicers to a meeting yesterday and extracted a promise from them all to work harder on modifying failing mortgages around the country.

The meeting was held at the Treasury Department under the leadership of Treasury Secretary Timothy Geithner and was an effort to kick the Obama foreclosure-prevention plan into high gear.

The plan has been in effect since February, with Administration officials touting that as many as 3 million to 4 million struggling homeowners could benefit from the mortgage modification program. Yet barely 200,000 have participated since then.

During the meeting, lenders discussed their frustrations about the implementation of the plan, specifically how quickly people expected the program to be up and running.

“It was very difficult as an industry as a whole to try to live up to those expectations” said Dan Frahm, a Bank of America spokesman, as quoted by the Associated Press.

They said this is because each modification requires full verification of borrower income as well as the completion of a stack of tedious paperwork. Many lenders have had to hire and train new staff just to handle this program.

Nevertheless, the 25 lenders pledged their support to modify 500,000 more loans before November 1.

Meanwhile, as positive news from the housing market have rolled in this week, mortgage interest rates rose in the latest week, with the average on a 30-year fixed rate loan growing to 5.25 percent, according to Freddie Mac, up from 5.20 percent the week before.

And while no one likes to see rates go up in a down economy, there are signs that the housing sector is starting to recover and rates are still so historically low that this week’s increase is hardly something to worry about.

A Wall Street Journal article today explored the shortcomings of the current Administration’s foreclosure prevention problem. One of the most frustrating issues was the revelation that many federally approved housing counselors are encouraging struggling homeowners not yet behind in their payments to let their mortgage slide for several months before reapplying for government loan modification help.

The Journal quoted one Alisha Gorder of Connecticut who contacted a housing counselor and was told, “Stop paying on the mortgage since you don’t have the resources to cover all your expenses,” and basically check back for help when she was actually delinquent on her mortgage.

“To be told I should do something to put my family in this risky position doesn’t make sense,” Gorder said. “I had a lot of faith in the system. For me, it’s really shocking and jarring to see that the system doesn’t work.”

The problem seems to stem from lender and counselor confusion about the actual rules of the Obama plan announced in February. The requirements allow for not only those behind on their payments to qualify for mortgage modifications but also those who are simply “at-risk” of falling behind. And apparently many lenders do not feel there has been adequate communication from government officials about the plan’s details and how it should be administered.

To date only about 200,000 homeowners have had their home loans modified under the government’s plan, when originally the Obama team promised as many as 3 million borrowers could benefit.

As a result representatives from 25 major mortgage servicing companies have been asked to meet in the Capitol tomorrow to talk with the Administration about the direction of the program and how the aims can move forward at a faster rate.

Perhaps they will also discuss the recent data that shows that many of these modifications are not working anyway, with a large percentage falling back into delinquency within 6 months. Probably not though. That’s a whole other can of worms.

What are we to make of two new reports, one saying existing home sales were up again in June, the other saying foreclosure filings are continuing to pour in?

The National Association of Realtors reported today that sales of existing homes rose 3.6 percent to a seasonally adjusted annual rate of 4.89 million in June, up from 4.72 million in May. Sales were off only 0.2 percent from the June 2008 figures. Housing inventory fell 0.7 percent so that now there is a 9.4-month supply of homes on the market. The national median home price rose from May’s $173,000, to $181,800 in June, but the most recent price is still down 15.4 percent from last year.

And as Jon C. Ogg writes on the 24/7 Wall St blog

When you see the drop in prices, it is hard to get excited in general.  But there is hope as the level of distressed selling is getting to manageable levels.

Now we just have to hope that the shadow supply of houses that will come on the market or that have been foreclosed by banks that are not yet on the market (or being held off the market) is not as high as many fear.  There is also the notion to contend with that the gains are off of levels so low with such low prices that this good news just represents a scolding rather than a lashing.

The Wall Street Journal reported that according to foreclosure data tracker RealtyTrac, foreclosure filings rose again in June to 336,000. During the first half of this year there was one foreclosure filing for every 84 homes in the nation. Some estimates put the total number of foreclosures for this year as high as 3.0 million. Once all these homes get put out on the market, prices are sure to fall more as banks offer deep discounts on these unwanted properties.

Recent comments from top Federal Reserve Officials are making it clear they are not yet worried about inflation and they certainly expect to leave their target interest rate alone for quite awhile.

Atlanta Federal Reserve President Dennis Lockhart, in a speech before the Rotary Club of Nashville, said:

“Certainly we have low interest rates today…I would expect that to continue for some time.”

He was also upbeat about the coming recovery of the markets.

“The economy is stabilizing and recovery will begin in the second half [of this year].” However, the rebound “will be weak compared with historic recoveries from recession…current economic conditions are mixed at best.”

He summed up his position by saying “nothing in the incoming data has altered our view that the economy is nearing a bottom and will soon begin a very slow recovery.”

Fed Chairman Ben Bernanke said in the Wall Street Journal today that:

“Since the onset of the financial crisis nearly two years ago, the Federal Reserve has reduced the interest-rate target for overnight lending between banks (the federal-funds rate) nearly to zero… My colleagues and I believe that accommodative policies will likely be warranted for an extended period.”

So we probably won’t see mortgage rates rising much in the near future due to Federal Reserve actions. That doesn’t mean that they can’t or won’t climb. Any increase will be simply a result of Treasury yields and market consensus on the state of the economy.

Freddie Mac reported today that the average rate on a 30-year fixed rate mortgage loan fell to 5.14 percent, excluding points during this last week, down from 5.20 percent the week before. This is the third consecutive weekly rate drop and is certainly good news for mortgage applicants and lenders alike.

But the flip side is that rates are down because the economy is not moving very quickly. Freddie Mac chief economist and vice president Frank Nothaft said:

“The latest economic reports were influenced by recent energy-cost movements. Although higher gasoline prices fueled a 0.7 percent monthly jump in the consumer price index for June, the index was down 1.4 percent from June 2008 and represented the largest 12-month drop since January 1950.”

What’s more, a new report from the RealtyTrac, a foreclosure data tracking company, says that foreclosures are continuing to jump higher. There were 1.53 million homes in the foreclosure process in the first half of this year, a 9 percent increase from the previous six months and a 15 percent hike from the same time last year.

Said James J. Saccacio, chief executive officer of RealtyTrac:

“Foreclosure activity continues to increase to record levels. Unemployment related foreclosures account for much of this increased activity, and the high number of borrowers who find themselves owing more on their mortgages than their homes are now worth represent a potentially significant future risk.”

So if you have a job and you want a new mortgage loan, now is your time…if you can qualify for funding. But at least rates are down!

Which direction can we expect long-term mortgage interest rates to move this week, the week of July 13? It’s almost impossible to predict, but here are the important reports coming out that will be the major determiners of any shift in rates:

Tuesday

• June Retail Sales – released by the Commerce Department, retail sales are expected to rise by less than one percent this week. Anything stronger than that may mean higher interest rates.
• June Producer Price Index – released by the Labor Department, this figure is predicted to make a very minimal increase, which would hold rates steady this week.
• Quarterly Earnings Report – released by Goldman Sachs, this is the first of several major companies’ reports on their earnings for the second quarter of this year. If the report shows the company to be healthy and thriving, mortgage rates may increase. Otherwise they may stay relatively the same. This goes for the rest of the company reports due this week. Thomson Reuters  is  predicting that S&P 500 companies are likely to see earnings fall by an average of 36 percent, a circumstance that would certainly keep rates from rising.

Wednesday

• June Consumer Price Index – released by the Labor Department, the prices for June likely increased by less than half a percentage point, meaning rates would be probably remain unchanged.
• Federal Open Market Committee Meeting Minutes– released by the Federal Reserve, these are the reasons behind the latest Fed rate decision and help give an idea of how the economy is doing according to the Fed. The Fed often tries to cloak its true outlook on the markets to avoid causing big swings in home loan rates and other financial determinants.

Thursday

• Weekly Jobless Claims – released by the Labor Department, this week’s total jobless claims are expected to rise by 10,000, but that is not large enough to cause a stir in interest rates.
• JPMorgan chase Quarterly Earnings Report

Friday

• Bank of America Quarterly Earnings Report
• Citigroup Quarterly Earnings Report

Very few major improvements in the overall economy are expected this week, but you never know what surprises the markets may have up their sleeves.

The average rate on a 30-year fixed rate loan dipped to a six-week low of 5.20 percent, down from 5.32 percent the previous week.

• Freddie Mac  chief economist Frank Nothaft: “Interest rates for 30-year fixed-rate mortgages fell for the second week in a row to the lowest level in six weeks amid market concerns over a weakening labor market.”

More people are applying for government-insured mortgage loans now than they have for almost the past 20 years. In June, the government loans like FHA and VA loans made up 35.9 percent of all mortgage applications.

• Orawin Velz, Mortgage Bankers Association, associate vice president of economic forecasting: “A primary reason government-insured loans have retained a high share of the purchase market is that these loans typically require lower down payments than conventional loans. In addition, lending standards tend to be tighter for conventional loans, especially for loans that require private mortgage insurance.”

The FBI reported that mortgage fraud activity increased 36 percent in 2008, with the hardest hit states being California, Florida, Georgia, Illinois, and Michigan.

• FBI statement: “Several of these schemes have the potential to spread if the current economic downward trend, as expected, continues into 2009 and beyond” and “While the amount of mortgage fraud cannot be precisely determined, industry experts agree that there is a direct correlation between fraud and distressed real estate markets.”

A new report says foreclosures were down 11 percent in the second quarter of 2009, while pre-foreclosures or delinquencies were down 10 percent.

• Alexis McGee, president of ForeclosureS.com : “These huge drops—double-digit in many parts of the nation—are a sigh of relief for the economy and housing markets as they bump along toward recovery. Despite higher unemployment rates, industry and government stimuli are making a difference. It’s not just depressed properties that are selling anymore.”

A recent article on the Wall Street Journal blog makes a bold claim: predatory lenders and liar loans are not the main cause of the current foreclosure crisis – the prevalence of underwater mortgages is the biggest contributing factor. Stan Liebowitz, the author, asserts that even subprime mortgages, now almost a dirty word, were not the main problem.  He says:

“The focus on subprimes ignores the widely available industry facts (reported by the Mortgage Bankers Association) that 51% of all foreclosed homes had prime loans, not subprime, and that the foreclosure rate for prime loans grew by 488% compared to a growth rate of 200% for subprime foreclosures. (These percentages are based on the period since the steep ascent in foreclosures began — the third quarter of 2006 — during which more than 4.3 million homes went into foreclosure.)”

So, foreclosures are not on the rise because of low credit scores, upwardly adjusting mortgage rates, or all the loans made to people without documentation of their income. Why is simply owing more than your house is worth such a big problem?

“The important factor is whether or not the homeowner currently has or ever had an important financial stake in the house. Yet merely because an individual has a home with negative equity does not imply that he or she cannot make mortgage payments so much as it implies that the borrower is more willing to walk away from the loan.”

I don’ t think Mr. Liebowitz’ explanation is very complete. Borrowers are certainly more willing to walk away from their mortgages, but that doesn’t mean they will in the absence of other factors. So doesn’t it make sense that the other factors are important? If someone whose house is now worth half of the mortgage loan and they lose their job or their payments jump up, aren’t those really the things that caused the foreclosures? Being underwater just makes it easier for these borrowers to toss in the towel.

According to the Wall Street Journal, the Obama administration is redefining who can qualify for government assisted refinance programs. Apparently the original guidelines were not broad enough to help those most struggling with their loans.

After all, the first rules limited homeowners to having a 105 percent loan to value ration on their homes, yet according to Moody’s Economy.com, almost 30 percent of homeowners are underwater in their mortgages and many by much more than 5 percent. The new limit has been raised to 125 percent.

The revised rules come after only 20,000 borrowers received help under the program from March to June. The administration claimed it would be able to save up to 5 million homes from foreclosure at the outset of the initiative, a figure that was never likely to be achieved with the initial restrictions.

Meanwhile, interest rates are dropping and so are applications for mortgage loans. Freddie Mac announced Thursday that the average rate on a 30-year fixed rate loan fell to 5.32 percent, excluding fees, from 5.42 percent the previous week. Freddie had no explanation for the drop in rates this week, but they were likely due to falling yields on Treasury notes as investors worry that excessive government debt may result in inflation.

And mortgage application volume plummeted 18.9 percent in the latest week, according to the Mortgage Bankers Association on Wednesday. Home purchase applications fell by 4.5 percent, but refinance requests plunged down by 30 percent, as mortgage interest rates have risen in recent weeks, much higher than their record lows from the spring.

Not a particularly good week in the mortgage markets, but good things could be just around the corner, right?