The U.S. economy is expanding again. The recession is technically over. Things are looking up. So why do foreclosure rates continue to climb and when will they stop?

In the most recent survey from the Mortgage Bankers Association, mortgage foreclosure/delinquency rates have hit a new high, with 7.4 million Americans, or 14 percent of homeowners facing some sort of foreclosure issue during the third quarter. The MBA reports that 9.6 percent of borrowers were delinquent on their home loans, and an additional 4.5 percent had already entered the foreclosure process. That means about 1 out of every 7 homeowners in delinquent or in foreclosure!

“Job losses continue to increase and drive up delinquencies and foreclosures because mortgages are paid with paychecks, not percentage point increases in GDP,“ said MBA chief economist Jay Brinkmann.  He also added “the outlook is that delinquency rates and foreclosure rates will continue to worsen before they improve.”

Florida, California, Arizona, and Nevada were the hardest hit states, altogether making up 43 percent of all foreclosures last quarter. Also of note is that the number of foreclosures on FHA-insured loans rose, mortgages that have typically been considered “safe.” Prime borrowers are defaulting in larger numbers, with prime, fixed-rate loans making up 33 percent of all foreclosures.

So when will things turn around? When unemployment rates start to drop, apparently. Brinkmann said:

“It is unlikely the employment picture will get better until sometime next year and even then jobs will increase at a very slow pace. Perhaps more importantly, there is no reason to expect that when the economy begins to add more jobs, those jobs will be in areas with the biggest excess housing inventory and the highest delinquency rates.”

The waiting game continues…

Speaking at the Economic Club of New York today, Federal Reserve Chairman Ben Bernanke seemed to imply that the mortgage markets may need the Fed’s help longer than he previously expected.

Bernanke made it clear that the state of the U.S. economy is still frail. “The flow of credit remains constrained, economic activity weak, and unemployment much too high. Future setbacks are possible.”

He also said, “Unfortunately, reduced bank lending may well slow the recovery.” According to the numbers, that has been true in recent past. The Fed’s senior loan officer survey from October reported that 25 percent of lenders had tightened their mortgage standards of single-family prime loans since the last survey in July. Not a good sign for the mortgage markets when things are looking so tenuous.

“We continue to encourage banks to raise additional capital to support their lending. And we continue to facilitate securitizing through our Term Asset-Backed Securities Loan Facility (TALF) and to support home lending through our purchases of mortgage-backed securities,” Bernanke said.

So, the Fed will almost definitely be leaving its target interest rate alone, meaning mortgage interest rates have a shot at staying low and close to the five percent mark. Record low rates have been one of the only consistently positive indicators in the market for the past year.

On the overall future of the economy Bernanke summarized, “My own view is that the recent pickup reflects more than purely temporary factors and that continued growth next year is likely. However, some important headwinds-in particular, constrained bank lending and a weak job market-likely will prevent the expansion from being as robust as we would hope.”

Zillow.com reported today that the number of underwater mortgages in the country is shrinking. According to its quarterly survey, 21 percent of all single-family homeowners during the third quarter of 2009 were underwater, or owed more than their homes were worth, a decrease from 23 percent during the second quarter.

Good news, right? Yes, because it means fewer foreclosures as a result of underwater loans.

“The decline in the percentage of homeowners with negative equity is a positive sign and is directly attributable to the stabilization of home values from the second quarter to the third,” said Zillow chief economist Stan Humphries, as quoted in a CNN article.

Yet the less obvious side of the story is that the number of underwater loans is decreasing simply because so many homeowners are losing their homes to foreclosure, removing themselves from the mortgage scene altogether.

The number of underwater loans may be due to rise again in the near future as well, as a combination of factors is converging to create another wave of foreclosures.  There are tens of thousands of risky option ARMs and interest-only loans perched to reset during the next year and experts are predicting many of those borrowers will not be able to keep up with their new, dramatically higher payments.

Plus the national unemployment rate just topped 10 percent, which could add to the foreclosure frenzy as borrowers who have recently lost jobs have no income to pay their mortgages.

All this makes it seem like we may still be several months or more away from true housing market stabilization. That’s good news for first-time buyers, but not so pleasant tidings for current homeowners, especially those looking to sell.

The U.S. House of Representatives voted Thursday to extend the first-time homebuyer tax credit through 2010 as well as offer a credit to more seasoned homebuyers. The vote was 403-to-12 and was widely expected to pass.

The current tax credit has been in effect since January as a piece of President Obama’s economic stimulus plan and has allowed first-time homebuyers an $8,000 tax credit. It has been credited with jump starting the fallen national housing market, resulting in increases in existing homes over the past several months. Many feared that if it were allowed to expire as it was set to on December 1, that the real estate market would see a dramatic drop again.

Here’s how the extension works:

Buyers must be entered into a mortgage contract for a home purchase by midnight on April 30, 2010 and must close on their sale by midnight of June 30, 2010. First-time homebuyers will still receive $8,000 in tax credits, while previous homeowners (specifically those who have owned their current homes for at least five years) will be allowed $6,500 in credits.

The purchased homes must be principal residences and may not exceed $800,000 in price. Those with an income of $145,000 or more ($245,000 if married filing jointly) are not eligible for the credit and those with incomes between $125,000 and $145,00 would receive a reduced credit.

Many hope that this extension will get things moving in not only the lower-priced end of housing but in the middle-priced range as well. Lawrence Yun, chief economist for the National Association of Realtors believes that it might stem potential buyers’ fears about falling home prices.

“Once the consumer fear factor disappears, then housing can move into a sustainable recovery,’’ Yun said. “I think we will be there by the middle of next year.’’

I like how Patti Ketcham put it, a Tallahassee real estate firm owner, as quoted in the Boston Globe. “It’s huge. I think it’s going to have a big impact. I hope I’m right. Golly, I hope I’m right.”

The tables have really turned in the past couple years in terms of why American homeowners are refinancing. During the height of the housing boom, homeowners were borrowing against their equity like crazy, as their home values appeared to be headed quickly upward indefinitely.

Now, however, Americans are house poor and many are and have been at the mercy of high adjustable interest rates. In the most recent study from mortgage finance giant Freddie Mac, it looks like homeowners are overwhelmingly using refinance loans to lower those rates and cut their monthly payments.

Freddie Mac reported that in the third quarter of 2009, refinanced loans netted up to a total $3 billion in payment savings for the first year of the new mortgages for participating homeowners. One half of all those who refinanced conventional mortgages lowered their annual mortgage interest rate by 17 percent or more!

“Homeowners are benefiting from an extended period of very low interest rates. In the first nine months of 2009, interest rates on 30-year fixed-rate mortgages have averaged 5.1, the lowest such average in the 38-year history of Freddie Mac’s Primary Mortgage Market Survey,” noted Frank Nothaft, Freddie Mac vice president and chief economist. “At the beginning of the year, only borrowers who still had a solid equity cushion could take advantage of the low mortgage rates, but through the Homeownership Affordability Refinance Program that got underway in April, borrowers who have a loan owned by Freddie Mac or Fannie Mae can refinance that loan even if they have no home equity. As of August 31st, over 93,000 borrowers had taken advantage of this opportunity according to the Federal Housing Finance Agency, with the bulk of those occurring in July and August.”

And 64 percent of prime (good credit) borrowers who refinanced conventional loans in the third quarter retained the same principal balance or actually reduced it. That is the highest recorded percentage in six years. Only 36 percent of borrowers refinanced with “cash-out” loans. In total they pulled out $20 billion of home equity, the lowest amount in almost a decade.

Bottom line: If you can qualify, refinance now for payment savings. Interest rates are likely to rise starting sometime in 2010 and may not reach today’s lows for a long time to come.

Mortgage interest rates moved a little higher during the past week, but overall this has been a great year for rates according to mortgage finance giant Freddie Mac on Thursday.

The average rate on a 30-year fixed rate mortgage inched up to 5.03 percent, excluding points, from 5.00 percent the week before. One year ago, however, the average rate was more than a point and a half higher at 6.46 percent.

The average rate on a 15-year FRM grew to 4.46 percent, up from 4.43 percent last week and one-year adjustable rate mortgages carried an average rate of 4.57 percent, up slightly from 4.54 percent.

“Interest rates for 30-year fixed mortgages have averaged just below 5 percent this year, which is the lowest 10-month average since the survey began in 1971,” said Frank Nothaft, Freddie Mac vice president and chief economist. “As a result, refinance activity has accounted for almost seven out of ten mortgage applications on average this year.”

So why didn’t rates move much this week? According to a survey from BankRate.com, the incoming economic data sent mixed signals to the mortgage markets, as investors quickly bought up securities at a government debt auction early in the week, then consumer confidence and new home sales were down.  But then again, existing home sales showed strong gains, jumping up 9.4 percent in September from the previous month.

And although it is anyone’s guess what will happen to interest rates in the coming week and month, by historical standards there is no doubt that rates are fabulously low. If you are a potential homebuyer sitting on the fence, pre-boom home prices coupled with today’s rates make now a really good time to buy.

The Federal Housing Administration is set to implement a new set of rules November 2,  pertaining to mortgages made for condo-buyers. The new guidelines are aimed at protecting the FHA from mortgage fraud as well as minimize its risk of loss on condo foreclosures, but they will probably have the undesirable effect of preventing many buyers from entering the housing market.

Here’s what the FHA plans to change:

“Spot Approvals”  -  it used to be that the FHA would approve individual condo units for mortgages, without having to approve the entire condominium building/project. Now the whole thing will have to check out before someone can get an FHA-approved loan. The FHA said in a statement that the “processes have been streamlined, eliminating the need to approve units on a ’spot loan’ basis,” but lenders say that this could seriously reduce the available condo choices for buyers.

Maximums on FHA-Loan Holders in a Condo Project - In the past there was no limit, but now the FHA plans to only allow a maximum of 30 percent of condo owners to have the government-backed loans. This means that some buyers, especially those with lower credit scores and smaller down payments, may be kept out of certain condo projects because there are already too many of such homeowners in the building. Again, this will limit available condo options.

Requirements for Sold Units - Although there have been no limitations, the FHA will now require that half of the units in a condo project be sold before it will insure any loans for that building. While this protects the FHA against loss, it creates a catch-22. FHA buyers cannot buy until 50 percent of the project is sold, but it will be hard in many cases for condo builders to sell 50 percent of the units without FHA loan-backing for that first half. This requirement is still more lenient than that of Freddie Mac and Fannie Mae, which require that 70 percent of the project must be sold before they will make loans to new buyers.

Owner-Occupancy Rules - Now only 50 percent of a condo projects’ units must be owner-occupied, instead of the former 51 percent rule. This change doesn’t promise to make a huge difference in the condo market.

Overall, if these new rules go into effect on schedule, they will probably slow the housing market recovery by many months.

Today, the Obama administration announced two new programs to help a small segment of the U.S. housing industry get back on its feet, all with the promise that the taxpayer will not have to foot the bill.

HFAs Getting Help:
State and local housing finance agencies, also known as HFAs. They originate home loans for first-time homebuyers and lower-income buyers. They also provide refinance loans for rental properties. According to National Council of State Housing Agencies President Susan Dewey, the HFAs create between 100,000 and 200,000 new mortgages every year (this represents about 1 percent of the total mortgage market). They are also known for making very safe long-term loans with very low default rates. “Performance of HFA loans has materially outperformed most other loan types, especially when controlling for borrower profile,” according to a Treasury Department fact sheet. They create tax-exempt bonds based on their mortgage securities to pay for their operations.

Why HFAs Need Help:
Dewey says the HFAs have only issued $4 billion in bonds this year. In 2008 they issued $10 billion and in 2007 the total was $16 billion.

“With the market upheaval, we’ve been unable to sell new mortgage bonds for a year,” Bob Kucab, the executive director of the North Carolina Housing Finance Agency, said in a statement accompanying the release. “Despite all the ingenuity we can muster, we’re now helping only about a quarter as many first-time buyers as normal.”

The Obama/Treasury Plan:
1. The Treasury Department will buy HFA-backed securities issued by government controlled finance giants Freddie Mac and Fannie Mae.
2. Freddie and Fannie will provide the HFAs with a credit program to refinance the debt from their existing bonds at better rates and terms.

The hope is that these measures will provide the HFAs will the money needed to fund more new mortgages.

The Cost:
The HFAs will pay fees to participate in the new programs, which will supposedly cover the costs, but some reports have said that the initiative could cost taxpayers as much as $35 billion.

Treasury Assistant Secretary for Financial Institutions Michael Barr said there are some risks involved, but he didn’t expect taxpayers to take any losses for these programs.

“The expected cost to the government is zero,” Barr said of both programs. It seems unlikely, but perhaps…

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 sounds like an oxymoron: “US recession over, unemployment seen at 10 pct” was the title of a Reuters article today. I know that a recession is technically defined by two consecutive quarters of real GDP decline, but it just doesn’t seem like a recession should be “over” until most Americans feel like it is over. The article reported the findings of a recent survey from the National Association for Business Economics (NABE) that polled 44 professional forecasters, with 80 percent of them saying they believed that the economy had grown in the third quarter, effectively “ending” the recession.

“The great recession is over,” NABE President-Elect Lynn Reaser said. “The vast majority of business economists believe that the recession has ended, but that the economic recovery is likely to be more moderate than those typically experienced following steep declines.”

Yet most of those same analysts believe that “ordinary Americans will probably not see much difference as unemployment will remain high well into 2010.”

Here’s what they think will happen with the housing market: the downturn is almost over and two-thirds of the survey respondents believe that home prices will bottom out this year. They expect the Fed to leave its target interest rate alone until late spring 2010, with the rate only rising to 1 percent by the end of next year.

Well, at least that should help keep mortgage rates low. Or at least give them the potential to remain low.

I don’t know how effective these professional forecasters are at foretelling the future (I guess they are good enough to make a living at it), but good news and increased confidence tend to have a positive impact on the markets regardless of whether or not they are based on reality. So here’s to faking it until we make it!