According to the latest S&P Case-Shiller index released Tuesday, national U.S. home prices fell by historic margins again in October, an indication of a weak economy and a continued foreclosure crisis.

“The bear market continues; home prices are back to their March 2004 levels,” says David Blitzer, Chairman of the Index Committee at Standard & Poor’s. He added, “As of October 2008, the 20-City Composite is down 23.4%. In October, we also saw three new markets enter the ‘double-digit’ club.”

Those markets included Atlanta, Seattle, and Portland, each with a yearly price decline rate of about 10 percent.

“While not yet experiencing as severe a contraction as in the Sunbelt, it seems the Pacific Northwest and Mid-Atlantic South is not immune to the overall demise in the housing market,” Blitzer added.

Cities that had already been experiencing price declines saw deeper plunges with prices dropping more than 30 percent during the past year in the Las Vegas, Phoenix, and San Francisco markets. Other severely impacted markets were Miami with a 29 percent yearly price decrease, Los Angeles with 28 percent, and San Diego with  27 percent.

“October was really the first month to feel the full brunt of the credit crunch,” he said. “Up until the Lehman Brothers [bankruptcy filing on September 15], everyone felt relatively optimistic.”

Massive amounts of foreclosures and short sales were also contributing factors in the most recent numbers, as almost 85,000 homes were repossessed in foreclosure proceedings during October.

Demand for homes is also continuing to drop as the National Association of Realtors reported an 8.6 percent decrease in existing home sales in November.

One potential bright spot on the horizon is historically low mortgage interest rates. During the week of December 31, 2008, the average rate on a 30-year fixed rate loan fell to an unprecedented 5.10 percent, excluding fees. Lower rates could make it much easier for many Americans buy new homes or get into the housing market for the first time, creating a larger appetite for housing and causing prices to stabilize again in many areas.

The National Association of Home Builders reported that its index of home builder sentiment, a measure of confidence in the housing market, remained at a record low reading of 9 in December. That number reflects the lowest point on record since the group began its survey in 1985.

Any reading below 50 is an indication that more builders view housing market conditions as poor rather than favorable.

“The crisis continues,” said NAHB Chairman Sandy Dunn  in a statement. “While builders are doing everything we can in the way of price and non-price incentives to move new homes off the books, buyers are afraid to move forward, and in any case there is almost no way to compete with the cut-rate product that is continually flooding the market from mounting foreclosures.”

The NAHB hopes the government will give buyers more incentive to move forward by extending more tax credits and interest rate modifications in coming months.

“Expanding the first-time buyer tax credit and providing government action to reduce mortgage rates would go a long way toward arresting this downward spiral, just as a combination of similar moves worked in the 1970s to boost the housing market and economy,” NAHB Chief Economist David Crowe said.

Currently, U.S. home builders are at a stand still, constructing very few new homes, waiting for current inventories to get worked off. The NAHB sees no immediate hope for market improvement.

“We have seen no improvement over the past month in terms of sales conditions for new homes,” Crow lamented. “In fact, certain factors have gotten progressively worse, not the least of which is the job market, where massive layoffs are having a devastating effect on consumer confidence.”

Without government intervention, the NAHB does not predict a quick end to landslide of foreclosures and feeble new home sales.

Mortgage giant Freddie Mac has released its monthly forecast, showing less confidence in the U.S. mortgage market now than it did last month. The forecast from the company’s Office of the Chief Economist lowered expectations on almost all aspects of the housing sector following a month of more economic turmoil.

Freddie Mac now believes that mortgage demand will not rebound until 2010. The forecast predicted that mortgage originations were likely to fall by 8 percent to $1.65 million in 2009 before expanding to $1.82 trillion the following year. In October, Freddie believed that mortgage originations would increase to $1.92 trillion in 2009 and grow to $2.04 trillion in 2010.

The forecast also showed lowered estimates of home sales in 2009. Freddie Mac had previously projected home sales hitting 4.86 million in 2008 and rising to 5.13 million next year, but new data suggest that while there may be more home sales this year, no more than 5 million sales are likely for 2009.

Similarly, home prices are now expected to suffer more next year as well. As of last month, Freddie Mac expected the Standard & Poor’s Case-Shiller national home price index to fall by 13 percent in 2008, by 5.1 percent in 2009, and by 2 percent in 2010. The new predictions are that the indexed prices will drop by 13.9 percent this year, by 7.8 percent next year, and still fall 2 percent in 2010.

Exacerbating the housing downturn will be rising interest rates. Freddie Mac forecasts that rates on 30-year fixed rate home loans will average 6.1 percent this year and grow to 6.3 percent over the next two years. Last month, the company predicted that interest rates would drop to 5.9 percent in 2009 before rising to 6.2 percent in 2010.

All of these predictions were fueled by weaker employment and economic data. Freddie Mac predicts that unemployment will swell to 7.5 percent in 2009 while the gross domestic product (GDP) will only grow by 1.3 percent during the same year.

The number of foreclosure filings increased again in the latest month, growing by 25 percent from October 2007, according Irvine, Ca.-based RealtyTrac.  Unfortunately this trend has been in place for some time and there seems to be no end in sight.

“October marks the 34th consecutive month where U.S. foreclosure activity has increased compared to the prior year,” said James J. Saccacio, chief executive officer of RealtyTrac.

There were 279,500 U.S. homes in some stage of the foreclosure process last month, up 5 percent from September figures. That accounts for one out of every 452 households across the country encountering a default notice, auction sales notice or a bank repossession.

“The really sobering reality for us is that despite these various state programs that are artificially keeping the numbers down, we are still up 25% from a year ago,” said Rick Sharga, senior vice president of RealtyTrac in reference to a new California law enacted in September.

The Golden State law calls for mortgage lenders to personally contact and negotiate with borrowers before beginning the foreclosure process. This law has delayed, but not permanently reduced, the number of foreclosures on the books.

The states with the highest rates of foreclosure were Nevada, Arizona, and Florida, according to RealtyTrac data.  Nevada had one foreclosure filling for every 74 homes in October, six times the national rate. Last month marks the 22nd month that the state has had the highest foreclosure rate in the country.

Arizona saw its foreclosure filings rise to 17,507, an 35 percent increase from September and a 176 percent jump during the past year. The foreclosure rate there is now one out of every 149 households.

Foreclosures in Florida grew to 54,324 in October, up 13 percent from the previous month and 80 percent from the same time a year ago. One out of every 157 properties is now in some stage of foreclosure in Florida.

As to when things will start to turn around, Sharga said, ““It took us the first half of the decade to get into this problem, so it is probably going to take a couple of years to get out.”

The number of U.S. homeowners that are “upside down” in their mortgages has quadrupled in the past two years, according to a recent report from Moody’s Economy.com.

Of the 75.5 million homeowners across the nation, about 12 million of them now owe more on their mortgages than their homes are worth, a situation that is also known as negative amortization. That means that roughly 12 percent, or one in six, of all homeowners have a mortgage balance greater than the value of their property.

By comparison, only 4 percent of borrowers were upside down in their mortgages in 2006 and 6 percent had negative equity by 2007.

And among those who bought a home in the past five years, the distinction is even more pronounced; approximately 29 percent in that category are “under water” on their home loans, according to the real estate website Zillow.com. This statistic is likely due to the fact that home prices reached their highest point during the past five years and mortgage lending standards were also at their loosest.

Home prices have made a steady decline since their peak in mid-2006, falling 13 percent to the current national median price of $203,000. That represents a more affordable price-to-income ratio, at 1.9 times the average pre-tax income, compared with prices that were 1.87 times the average income during the period of 1985 to 2000.

And while the number of people in mortgages with negative amortization is growing, the majority of homeowners, about 64 million, still have some equity in their home, with more than 24 million owning their homes completely, with no remaining mortgage balance.

Still, defaults and foreclosures are on the rise, and it can  be very difficult for those who have no equity and are way behind on their payments to hold on to their homes. The foreclosure crisis may continue to deepen as struggling homeowners face falling home values and fewer available mortgage lending resources.

Amid the flurry of banking bailout talks and stock market worries, the National Association of Realtors released a report Wednesday showing a decrease in existing home sales nationally last month.

The Associated found that sales of previously owned homes, including single-family, townhomes, condominiums and co-ops, dropped a seasonally adjusted 2.2 percent to an annual rate of 4.91 million units from a rate of 5.02 million in July. August figures are also down 10.7 percent from the same time last year.

The national median price for existing homes also fell last month to $203,100, a 9.5 percent slide from August 2007 when the median price was $224,400.

“The median home price reflects more transactions related to subprime loans,” said NAR chief economist Lawrence Yun. “Fewer than 10 percent of homeowners have subprime loans, but these mortgages are accounting for a disproportionately high share of sales in the current market. On the other hand, areas that have had sharp price cuts are seeing a turnaround in sales, which are rising very fast now in parts of California, Florida and Nevada.”

Yet home sales were still down in the West, falling 5.3 percent in August from July.“The highest concentration of foreclosures is in the West, which is weighing down the median price because many buyers are taking advantage of deeply discounted prices,” Yun said.

The Northeast saw a 6.6 percent decline in sales during the past month, while the Midwest and South experienced gains of 0.9 percent and 0.5 percent, respectively.

The main reason for sagging sales, according to NAR President Richard F. Gaylord, was the lack of mortgage financing. “The difficulty in obtaining a mortgage increased over past couple months, making it more challenging for creditworthy borrowers to find financing,” he said. “Our hope is that overly tight lending criteria can be loosened with reasonable standards and credit so that sales activity can catch up with demand. Interest rates have already declined, but there is a serious question as to whether a cash infusion by the U.S. Treasury into Wall Street would help consumers by improving mortgage funding.

“We urge Congress to restore access to sound mortgage credit so people have the ability to make and keep a long-term investment in the American dream of homeownership. Congress needs to take care of Main Street and not just bail out Wall Street.”

One bright spot in the NAR report was that inventory dropped by 7.0 percent during the same time to 4.26 million existing homes, representing some hope that the market is slowly balancing out.

The Federal government announced yesterday its bailout plan for troubled mortgage finance companies Freddie Mac and Fannie Mae, but neither the Treasury Secretary or market analysts know exactly how much this government buyout is going to cost taxpayers in the end.

“I have long said that the housing correction poses the biggest risk to our economy,” said Treasury Secretary Henry Paulson in prepared remarks Sunday. “It is a drag on our economic growth, and at the heart of the turmoil and stress for our financial markets and financial institutions. Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing.”

Paulson said that the new goal for the government, by running Fannie and Freddie, will be primarily to increase the availability of mortgage financing to the public. 

The two government-sponsored entities back a large percentage of U.S. home loans, and faced with combined losses of $14 billion over the last four quarters, they were likely to fail soon without government intervention. The result would have left millions of home buyers without mortgage financing, further depressing the ailing housing market.

The government predicted that the move would lower interest rates for borrowers with good credit and bolster the stock market with assurances of Freddie and Fannie stability.

Yet the long-term cost to the nation could be in the range of tens of billions of dollars, according to many analysts.

“No one likes to put taxpayers into situations like this,” Paulson said in a Monday interview with Bloomberg Television. “Government intervention is not something I came down here wanting to espouse, but it sure is better than the alternative.”

Asked about the total costs of the bailout by CNBC reporters, Paulson replied “We ultimately don’t know.” He said it will depend on “how long it will take for housing prices to stabilize and the housing market to come back.”

Still by taking over Freddie and Fannie, Paulson reassured Americans in his speech Sunday that the Treasury has “acted on the responsibilities we have to protect the stability of the financial markets, including the mortgage market, and to protect the taxpayer to the maximum extent possible.”

The U.S. may experience another shock wave of foreclosures as early as next year, sooner than expected, according to data released Tuesday from Fitch Ratings.

The company reported that almost $29 billion worth of option adjustable rate mortgages (ARMs) are poised to reset next year based on its analysis of a large group of loans originated in the last phases of the recent housing boom. 

Pay option ARMs differ from other ARMs in that borrowers are allowed to choose from four different payment options each month during the initial term. The option most exercised by borrowers is the lowest payment amount, which does not even cover the full amount of monthly interest due on the home loan.  After making only this minimum payment for several years, and with the aid of decreasing home values, many homeowners find themselves in upside-down mortgages, meaning they  owe more on the mortgage than their home is worth.

Lenders only allow borrowers to build up a certain amount of negative amortization on their home loans before they reset the interest rate and require higher payments.  And as most option ARM borrowers have only been making the minimum payment since their loans began,  their  mortgage interest rates will reset sooner than they otherwise would have.

Fitch Ratings has estimated that most of those with these option ARMs will see an increase of $1,053 in monthly mortgage bills, a figure that is likely to be too high for many to keep up with, resulting in mass foreclosures across the U.S. once again.

“The combined impact of payment shock, negative amortization, declining home prices and restricted availability of mortgage credit may leave many option ARMs’ borrowers unwilling to continue paying their mortgage,” said Group Managing Director and U.S. RMBS group head Huxley Somerville in a statement.

According to the credit rating firm, the foreclosure wave is likely to last well into the beginning of the next decade, as there are an additional $67 billion in pay option ARMs  due to reset  in 2010.

Sales of both new and existing U.S. homes rose in July, giving market leaders hope that the “bottom” of the housing slump may have finally passed.

New single-family home sales increased by 2.4 percent in July, according to the Commerce Department, to a seasonally adjusted annual rate of 515,000, while inventory of new homes on the market shrank to 416,000 units.
 
“We are cautiously optimistic that home sales are approaching a bottom,” said NAHB Chief Economist David Seiders, “and that the newly enacted first-time home buyer tax credit (which went into effect as part of the housing stimulus bill on July 30) will help stimulate sales and provide crucial support for a market turnaround.”

New home sales increased by 39 percent in the Northeast and by 9.9 percent in the West, but decreased by 8.2 percent in the Midwest and 2.5 percent in the South.

Meanwhile, existing homes, which include single-family, townhomes, condominiums and co-ops, jumped up by 3.1 percent to a seasonally adjusted annual rate of 5.00 million units, the highest level in five months, according to the National Association of Realtors.

Regionally, existing home sales rose in the West by 9.7 percent, 5.9 percent in the Northeast, 0.9 percent in the Midwest, and fell in the South by 0.5 percent.

And recent federal legislation should also help existing home sales continue upward, said NAR President Richard F. Gaylord. “We hope the new tools in the hands of home buyers from the recently enacted housing stimulus package will spark a sustained sales uptrend in the months ahead,” he said.

The stimulus package enabled the Federal Housing Administration (FHA) to back larger loans, up $428,750, a 37 percent increase from its former cap, enabling mortgage borrowers to obtain lower risk home loans in pricier real estate areas like Florida and California. FHA loans are safer investments for lenders because mortgage borrowers receive home loan insurance through the federal government.

With greater accessibility of FHA money, Gaylord advised, “Buyers who’ve been on the sidelines should take a closer look at what’s available to them now in terms of financing and incentives.”

A foreclosure occurs when a bank (or other lending institution) needs to seize a home, business, or other property because the owner has stopped making mortgage payments. Next, the property is sold to someone else (if possible), to recover some or all of the money the bank lent to its previous owner.

When a borrower does not repay a loan (such as a mortgage), the lender can seize any relevant collateral, which real estate property qualifies as - similar to how a pawn shop can keep and sell collateral items if the borrower doesn’t pay back the loan and interest. Banks often remain reluctant to initiate foreclosure, particularly when home sales are down. They would rather avoid using the money and time it takes to resell a home, and prefer to keep making money on interest the borrower is paying.

The bank will also attempt to obtain payment from any co-signer on the mortgage after failing to receive it from the primary borrower. After the home has been seized, it will usually be sold at an auction. Authorities often force the previous owners to leave if they do not vacate the property voluntarily. What more, the previous owner’s credit record and score are severely damaged, making it difficult to borrow money for several years. However, there are a few options to prevent this or at least limit its detrimental effect.

In some cases, lenders are willing to renegotiate a mortgage, depending upon what capability the borrower has to continue making payments. Filing for bankruptcy often delays a foreclosure, and sometimes enables the owner to obtain a different payment schedule. Another possible option is to hand over the home’s deed to the lender instead of allowing foreclosure to occur. What this does is to reduce harm to the borrower’s credit record, although it doesn’t change the rest of the process a great deal.

If the property fails to sell at auction, it may be sold through other methods such as a real estate agency. The exact process varies from one state to the next. The new owner typically obtains the property at a rather low price, although it may be in disrepair after being neglected for months or years following the foreclosure. Some previous owners and others have removed fixtures from vacant foreclosure homes, along with anything else of value.