Here’s a riveting story from The New York Times that should fascinate people feeling threatened that they might lose their home in the current housing market meltdown.

In a nutshell, the Times story by Gretchen Morgenson suggests that a home dweller being threatened by a bank with foreclosure on a first or second mortgage should demand proof that the bank still holds the loan paper.

Crazy as that sounds, Ms. Morgenson reports at least two homeowners have been able to continue living in their houses despite foreclosure threats because the banks couldn’t produce the paperwork which would show a mortgage had been issued.

If a bank has “lost” the paperwork associated with a loan, it can’t foreclose on that loan, Ms. Morgenson’s story suggests, and she reports on two cases in which that argument has held up in court.

How can banks “lose” paperwork associated with a loan?

The New York Times reporter suggests - none too delicately - that it could have to do with the speed with which banks “shoveled” secondary and subprime loan paperwork into securitization trusts which were peddled on the assurance that enough of the paper was good to warrant the price of the whole wad.

If you think banks couldn’t operate in such a haphazard manner you probably haven’t been reading the newspapers for the last year or so.

Now, according to The New York Times, judges are telling bankers to “go fish.” In other words, if you can’t find the paper that says you made a loan because that paper was dumped haphazardly into a bucket and sold God knows where, you have no claim on the property which was used as collateral and you can darn well quit hassling the people who live there.

As Ms. Morgenson put it, “Bookkeeping is such a bore, especially when there are billions to be made shoveling loans into trusts like coal into the Titanic’s boilers. You can imagine the thought process: Assigning notes takes time and costs money, why bother? Who’s going to ask for proof of ownership of these notes anyhow?

“But…bankruptcy judges across the country are increasingly asking these pesky questions.”

According to Diane E. Thompson of the National Consumer Law Center, homeowners, lenders and investors usually lose money when a home forecloses but mortgage servicers (those that manage mortgages and collect mortgage payments) do not. She says:

“Servicers may even make money on a foreclosure. And, usually, a loan modification will cost the servicer something. A servicer deciding between a foreclosure and a loan modification faces the prospect of near certain loss if the loan is modified and no penalty, but potential profit, if the home is foreclosed.”

The National Consumer Law Center argues that mortgage companies have more incentives and reason to foreclose on homes when homeowners have difficulty making payments than they have reason to modify the loan. Thompson indicates that this comes from the ability of private rule makers to decide how the servicer can account for potential losses and profits. According to data from the Inside Mortgage Finance publication, more than 2/3 of mortgages issued since 2005 have been securitized; and private rule makers have great influence over securitized mortgages owned by investors. In this situation, a servicer can manage the mortgage from the collection of the monthly payment to the foreclosure proceedings and have the ability to decide whether a foreclosure or loan modification is “in the best interest of the investors” of the mortgage.

According to the Huffingtonpost :

When a homeowner is delinquent on a mortgage that’s been securitized, the servicer must front the late payment to the investors. When a home is foreclosed, the servicer is typically first in line to recoup losses. But if a mortgage is modified, the servicer typically loses money that isn’t necessarily recoverable. That’s part of the reason why the Obama administration created a $75 billion program to limit foreclosures. The money is to be distributed to servicers who successfully modify home loans, with the hope that the incentives to modify outweigh the incentives to foreclose.

International credit ratings agency Fitch Ratings improved its outlook on the U.S. housing market in its recent “Chalk Line” report, but that’s not saying much considering it still expects housing starts and new home sales to continue to plunge downward through the end of the year.

“During the first 12-15 months off the bottom, the housing recovery may appear jaw-toothed as substantial foreclosures now in the pipeline surface as distressed sales, while meaningful new foreclosures arise from Alt-A and option adjustable-rate mortgage resets,” wrote managing director and lead U.S. homebuilding analyst Bob Curran.

The new forecast includes a 36.7 percent decrease in total housing starts in 2009, up from a previous prediction of 43.3 percent. The new projection calls for a 21 percent decline in new home sales, up from the earlier forecast of 30 percent. And existing home sales are now expected to move up 1.1 percent this year to almost 5 million, a change from Fitch’s last prediction of flat sales.

Why the more “upbeat” outlook? Fitch says it took into consideration increased affordability, a slowing of builder cancellation rates, shrunken builder inventories, an uptick in consumer confidence and an increased demand for new homes from those who have been sitting on the sidelines.

Why are the numbers still trending downward though? According to Fitch there is still a great risk of a new wave of foreclosures on the way, home prices continue to decline, and the first-time homebuyers tax credit that has artificially inflated sales for the past two quarters is due to expire in December.

“There is also a negative psychology that remains relatively pervasive. For many, the expectation or fear is that home prices are vulnerable to further declines and buying now might be a mistake,” Curran wrote. “This psychology applies to all types of buyers but especially applies to trade-up and second-home buyers.”

So, we may be in for many more ups and downs across the market for at least the foreseeable future!

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.

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.

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!

A recent study from the Boston College Center for Retirement Research shows that today more Americans than ever are carrying a mortgage into their retirement years. The research found that among those in the age 60 to 69 age group, 41 percent were still making mortgage payments. Interestingly, one out of two of those retired mortgage borrowers has enough in investments and savings to pay off the mortgage in full right now.

So why would they hold on to those monthly payments? The study suggests that many believe it is better to keep the home loan and the associated tax benefits in order to keep their wealth more liquid. While there are many people who obviously feel this is the smarter path, the research study concluded that investing in retirement years without having paid off the mortgage is essentially investing with borrowed money. I think that makes sense; if there was a financial emergency, the liquid funds and investments would be used up and there would be no money left to pay the mortgage. The home could be foreclosed on and the retirees could find themselves homeless.

For me it would truly be about peace of mind. I know that financially savvy individuals can use tax credits to their advantage as they deftly maneuver the stocks and bonds scene, but there is plenty of emotional relief that comes from having something as big as a house paid off in full. I am sure you can still make your money work really well for you even if you first pay off your mortgage and then go crazy with investing.

The study doesn’t really address the 20 percent of retired 60 to 69-year-olds that do not currently have the money to pay off their home loans. That is obviously a much more precarious situation. Social security is not usually enough to cover a mortgage payment in addition to living expenses. Will the next big foreclosure wave come in the next decade as seventy-somethings run out of money?

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.