It seems there can be no complete recovery of the housing market until the job market stabilizes. New data from Equifax, reported by Reuters news today, showed that the rate of mortgage delinquencies is climbing, and climbing fast.

According to the source, 7.58 percent of all U.S. mortgages were delinquent by 30 days or more in August, an increase from July’s 7.32 percent. This is the fourth straight month of rising delinquencies, and the current rate is up dramatically from a year earlier when it was 4.89 percent. Two years ago, in August 2007, the rate was only 3.44 percent.

Here’s a graph from the Mortgages Unzipped blog that shows the delinquency trend over the past few years. It is definitely on the quick rise.

Apparently there is a very high correlation between these recent figures and the rate of consumer bankruptcy filings. Bankruptcy filings rose by 32 percent in the past year according to Reuters.

Rising unemployment numbers are certainly to blame for both of these issues. And we haven’t seen the end of job losses so far. While unemployment rates have not been increasing as fast in the latest months, more jobs are still being cut than are being created. And as people continue to lose jobs, they will continue to be unable to meet their financial obligations.

What does this mean for the rest of the mortgage market? Home prices are likely to stay down across many regional markets until the delinquency rates (and consequently the foreclosure rates) calm down. But the good news is that mortgage interest rates remain near historic lows, so buying and refinancing are still very attractive for those who can qualify.

According to top state officials another wave of foreclosures is about to break across the country, this time in the form of resetting option ARM loans.

“Payment option ARMs are about to explode,” said Iowa Attorney General Tom Miller after the meeting. “That’s the next round of potential foreclosures in our country,” he said.

State Attorney Generals in a meeting Thursday with President Obama’s administration warned that a new round of foreclosures could destabilize the timidly recovering housing market.

Arizona Attorney General Terry Goddard offered raw figures on the plight of his state, saying that there are 128,000 option ARMS poised to reset through 2010, with many of them already starting to reset this month. “It’s the other shoe,” he told Reuters. “I can’t say it’s waiting to drop. It’s dropping now.” He also said that they “threaten a much greater hit to the consumer than the subprimes,” the original shock wave of foreclosures.

What are option ARMs? They are mortgage loans that provide borrowers with extremely low initial teaser rates and give borrowers the option to pay even less than the monthly interest on their loans for a certain period of time. This actually causes the loan balance to increase, creating negative equity or “underwater” loans. Once the interest rates reset, the new payments can be as much as 10 times higher than the initial payment, leaving many people unprepared for the huge jump and often resulting in default and foreclosure.

Here’s a graph from the consumerist.com, courtesy of Credit Suisse, that shows when and how big the option ARM hit will be. It looks like tens of billions of dollars worth of these loans will be resetting over the next two years. And odds are, many of these borrowers will not be able to afford the new, higher payments. Surfs up everybody!

Mortgage companies are rolling out modification programs to help strapped borrowers who are behind on house payments. However, it appears that not all of the “help” is going to have its intended effects.

A recent article on forbes.com states, “the mortgage industry claims it has provided relief over the last two years to 4 million homeowners who were having trouble paying their mortgages. But all help is not created equal.”

Here are four things that you should watch out for when it comes to loan modification programs:

1. Credit Score ‘hits’ – Some programs that are called “forbearance” plans will allow you to make lower payments for a period of time (usually six months). These lower payments are 50% of a normal payment and still include the escrow amount (if you have a loan with this option). But, you will most likely take a hit on your credit score as the mortgage company will report your payments as “late.”

2. Adding loans onto loans – Some mortgage companies are offering loans to help home owners to be able to get caught up on their payments. But, what really happens is that this money is in turn added on to the end of the loan and must be re-paid along with the principle and interest that is accruing on their original mortgage. This practice eats up equity and represents a financial set-back for the homeowner.

3. ARM to ARM modifications – One serious tactic is for a mortgage company to offer a loan modification program that is just another Adjustable Rate Mortgage. The payments are attractive and look like they will help the mortgagee be able to keep their home, but later they discover that the payments begin to rise again to unaffordable levels. The way to avoid this is to agree only to modifications that are based on a fixed rate of interest. A loan modification program needs to provide long term relief, not just short term. Check our ARM Loan Payment Calculator to see what your payments might be.

4. Temporary Interest Rate reductions – Some companies are reducing interest rates for just a short time period to help homeowners be able to make their payments. Real and lasting help has to include permanent modifications to a mortgage.

Be alert for any hidden fees or costs that are incurred as a result of a modification. Also, always ask to see any modification in writing before you enter into an agreement. Full disclosure must be a part of these programs.

Because loan modification programs are created outside of normal laws and practices, there is a tendency on the part of some mortgage companies to use them to their advantage. Real help provides support for borrowers regardless of the benefits to the mortgage company.

During the first two weeks of September 2009, mortgage interest rates have trended downward and are considerably lower than August’s averages. According to mortgage company Freddie Mac, the average rate on a 30-year fixed rate loan last week, excluding points, was 5.07 percent, down from the average for all of August which was 5.19 percent.

Is the lower trend likely to stick around for the rest of the month? It’s always hard to say, especially because there are two big factors this month that might try to pull rates in opposite directions. First, the Federal Reserve recently announced that the amount of consumer credit across the nation dropped by $21.6 billion in July, and credit availability dropped even more than reported in June. The Fed said that after six straight months of decreasing consumer credit figures, this is the largest decline since the Fed started its survey in 1943. What this means for interest rates is that when consumer credit shrinks fewer people are borrowing money, and there are fewer mortgage backed securities (MBS) for investors to buy. As the price for those increases because of a shriveled supply, it could push mortgage rates down as lenders try to attract more borrowers back to the mortgage table.

The second factor, however, is that the Fed has also announced its plans to stop purchasing U.S. Treasury bonds. It has been buying these up throughout the year to pump more liquidity into the markets, but as the economy has started to show signs of life again, the Fed has decided to back off in hopes that the market is beginning to correct itself. Some predict that this move will cause bond yields to rise and bring mortgage rates with them.

So far, rates have moved lower this month, so maybe the consumer credit issue is the more influential factor right now. Rates are near historic lows right now - so in the long run, they really only have one direction to go and that is up. For those who can qualify for funding, now is a great time for a mortgage loan.

A recent Washington Post article brings up how deeply involved the Federal government has become in the current housing market. In order to keep the mortgage markets from freezing up during the dire days of the housing crash, the government stepped in and took over Fannie Mae and Freddie Mac, two of the nation’s largest mortgage financiers.

“While this made it possible for many borrowers to keep getting loans and helped protect the housing market from further damage, the government’s newly dominant role - nearly 90 percent of all new home loans are funded or guaranteed by taxpayers - has far-reaching consequences for prospective home buyers and taxpayers,” the article says.

And together with guarantees made by the Federal Housing Administration, “The [government] outlay has already reached about $1 trillion over the past year and is rising. During that time, the government has pumped more money into the mortgage market than has been spent on Medicare or Social Security or the defense budget, more even than Washington has paid to bail out banks and other struggling companies.”

And with Treasury and Federal Reserve programs, “all told, the government now stands behind 86 percent of all new home loans, up from about 30 percent just four years ago, according to Inside Mortgage Finance.”

Among the biggest concerns about the government takeover of all these loan guarantees is that many of the loans are looking ripe for default and foreclosure. Fannie and Freddie have lost more than $150 billion since the beginning of 2008 and FHA loan delinquencies are also rising. So, instead of truly curtailing housing market problems, have we simply shifted the responsibility from individual homeowners, lenders, and companies to the American public (taxpayers) at large? So we all go down together instead of just one industry? Or will the Fed just print up some more money to continue bailing out the housing market if things really go south?

Since the housing market went belly-up and took Wall Street down with it, the Federal Reserve has been doing all it can to bail out the industry and provide liquidity in the system. The buying up of U.S. Treasuries and government-backed mortgage backed securities (MBS) has been the Fed’s focus.

But as the housing market has started to show signs of life again, the Fed has announced plans to slow down its purchases of Treasuries. It seems to be considering a similar plan with mortgage debt.

“I think something similar might be possible for MBS, but no decision has been made,” said St. Louis Federal Reserve Bank President James Bullard in Little Rock, Arkansas on Thursday. “I think we agreed that on the Treasuries we’d do the tapering thing and see how it works. We can decide some time during the fall how we want to do the MBS.”

And Richmond Fed President Jeffrey Lacker said Thursday in Danville, Virginia:

“I will be evaluating carefully whether we need or want the additional stimulus that purchasing the full amount authorized under our agency mortgage-backed securities purchase program would provide.”

Originally the Fed was prepared to buy up to $1.25 trillion of MBS, but has spent just over $792 billion so far of securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae.

Some people are excited about the possibility of an early exit strategy for the Fed, saying it will open the door for private investors to take over again. Others are not sure the markets are ready for the pullout.
For example Larry Doyle, on the Wall Street Pit blog says:

While Fed governor Lacker would maintain that the Fed may slow its purchasing of MBS because the economy has improved and continues to improve, I would beg to differ. Home sales are rebounding, but delinquencies and foreclosures are running at record pace. Those statistics, in my opinion, continue to cast dark clouds on our housing landscape.

He also predicts that mortgage rates will move higher as a result, probably in the range of 0.50 percent to 0.75 percent, a move that could put a serious damper on the recent flow of home purchase activity.

A majority of the nations’ states saw an increase in their existing home sales during the second quarter of this year. Those sales jumps came at the cost of median home price decreases in 129 out of the 155 metropolitan areas monitored by the National Association of Realtors.

Still, this news is very encouraging for the overall housing market, according to Lawrence Yun, NAR chief economist.

“With low interest rates, lower home prices and a first-time buyer tax credit, we’ve been seeing healthy increases in home sales, which are a hopeful sign for the economy,” he said.  “There have been sustained sales gains in Arizona, Nevada and Florida, as well as diverse areas such as Maryland, the District of Columbia and Nebraska.  More recently, we’ve seen strong double-digit gains in Idaho, Utah, New Mexico, Washington, Hawaii, New York, New Jersey, Maine, Vermont, Wisconsin, Indiana, South Dakota and Montana.”

This can only mean good things for the economy as well, Yun said.  “Given the need for related goods and services, each home sale pumps an additional $63,000 into the economy – that’s how the housing engine traditionally pulls us out of recession.  In addition, sales are drawing down inventory and that will help stabilize home values, which in turn will lessen foreclosure pressure and boost credit availability for other sectors of the economy.”

Existing home sales on average were up 3.8 percent during the second quarter to 4.76 million units from 4.58 million homes during the first three months of the year. The national median home price fell to $174,100, a 15.6 percent drop from the second quarter of 2008.

So home prices continue to fall but inventory is down and there is much more movement in the market. A report is due out within the next few weeks about home sales from July and an increase would mean four straight months of sales growth. It’s hard not to feel hopeful after such improvement.

Somehow foreclosures do not seem to be having the same terrible impact on the housing market as they have previously in this recession. Freddie Mac announced today that long term mortgage interest rates rose in the past week. The average rate on a 30-year fixed rate loan grew to 5.29 percent excluding points, up from 5.22 percent the previous week. Both 15-year FRM loan rates and one-year ARM rates also moved upward. Freddie Mac VP and chief economist Frank Nothaft said the increase was due to better than expected employment reports as well as rising home prices in 17 percent of the nation’s major metro areas.

Yet even as the housing and economic picture is starting to look rosier in many respects, in one particular aspect things are only getting worse. Foreclosure filings in July set a new record high with filings jumping up 7 percent from June and up 32 percent from the previous year, according to RealtyTrac Thursday.  That means one in every 355 American home-owning households received some sort of foreclosure notice last month.

“July marks the third time in the last five months where we’ve seen a new record set for foreclosure activity,” James J. Saccacio, RealtyTrac’s chief executive, said in a statement.

“Despite continued efforts by the federal government and state governments to patch together a safety net for distressed homeowners, we’re seeing significant growth in both the initial notices of default and in the bank repossessions.”

The current unemployment rate is 9.4 percent and could reach 10 percent in the coming year.
So where is the disconnect? Why are these growing foreclosures not affecting the markets the same way as they did in the previous months. Interest rate movement would suggest that everything is getting better in the housing market. Are these continued foreclosures not going to affect home prices anymore? How can the housing market recover when foreclosures continue to rise? Perhaps next week’s rate will reflect this latest report.

The Federal Reserve’s Federal Open Market Committee meets again this Tuesday and Wednesday to decide the fate of its target interest rate, currently set at the range of zero to 0.25 percent. There is very little concern that the Fed will raise its rates this week, as the economy continues to teeter. Here’s what committee members have been saying recently according to Reuters:

• NEW YORK FED PRESIDENT WILLIAM DUDLEY, JULY 29:

 ”Credit availability will be constrained for some time to come, and this will serve to limit the pace of the recovery. “

• SAN FRANCISCO FED PRESIDENT JANET YELLEN, JULY 28:

 ”We glimpse the first solid signs that economic growth may be poised to resume. Indeed, I expect that to happen some time this year … I can assure you that we will act decisively and appropriately to tighten the stance of monetary policy and maintain price stability.”

•  FED CHAIRMAN BEN BERNANKE, JULY 21:

“Accommodative policies will likely be warranted for an extended period. At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road.”

• ATLANTA FED PRESIDENT DENNIS LOCKHART, JULY 20:

“The recovery will be weak because the economy must make structural adjustments before the healthiest possible rate of growth can be achieved. While this adjustment process is going on in the medium term, I believe inflation and deflation are roughly equal risks and require careful monitoring.”

So will a decision to do nothing affect mortgage interest rates this week? It just might, based on the Fed’s meeting comments.  If the group says it is worried about inflation, rates could rise. If it seems pessimistic about the economy’s next six weeks, rates might drop.

Just when we thought the housing market was on the way to recovery, Deutsche Bank comes out with a research survey saying that the number of underwater mortgages is going double over the next year and a half until 48 percent of all homeowners owe more than their home is worth.

Here’s what they found:

• 41 percent of prime conforming loans will be underwater by the first quarter of 2011. Only 16 percent were underwater by the end of the 2009 first quarter. They make up two-thirds of all U.S. mortgages.
• 46 percent of prime jumbo loans will be underwater, up from 29 percent in the first three months of 2009. Jumbo loans make up 13 percent of the total market share of loans and “the impact of this is significant given that these [jumbo] markets have the largest share of the total mortgage market outstanding,” the analysts said.
• 69 percent of subprime loans with be greater than the property value, up from 50 percent this past March.
• 89 percent of risky option adjustable-rate mortgages will be underwater in 2011, up from 77 percent.
• Home prices are expected to drop on average 14 percent from now to first quarter of 2011 in the 100 largest U.S. metro areas, for total average drop of 41.7 percent since the beginning of the housing crash.
• The top 5 hardest hit states are likely to be California, Florida, Arizona, Nevada, and Ohio.
  The major danger of this forecast coming true is that is will likely lead to millions more foreclosures, which could hold back a true housing market recovery.

And all this just when we were getting excited about home sales rising for several months, prices stabilizing, and housing inventory shrinking!