Homeowners take ‘cash for keys’ to escape debt

Borrower loses house, but gets fresh start without black mark on credit

NEW YORK - Jon Daurio, chief executive officer of mortgage investor Kondaur Capital Corp., recently offered a $4,000 check to Barry Culver for the deed to his Bryan, Ohio, house.

With the exchange, and a pay-off to a second-lien holder, Culver was freed of $120,000 in crushing mortgage debt on the house, said Daurio, who had bought the right to cut the deal when he purchased the mortgage months earlier. The house, after repairs, is now on the market for $47,500.

"It got me out of a bind," said Culver, a former Kmart employee who has since relocated near his in-laws in Tennessee where job prospects are better. "I got a little cash out of it and was able to pay off other stuff I owed."

Such "cash-for-keys" offers are common for Orange, California-based Kondaur, one of the largest players in the business of buying and resolving distressed loans for profit.

The business is growing more popular, with volumes of loans for sale at their highest since the founding of Kondaur in July 2007, said Daurio, a veteran of the subprime lending industry.

At DebtX, a Boston-based loan exchange, the number of bidders on pools of loans is up 25 percent since last quarter.

Deals are increasing
Owners of bad loans are increasingly making deals with borrowers to avoid a foreclosure, which tends to reduce returns for investors and place a black mark on the homeowner's credit. Lawmakers and regulators are becoming more accepting of these solutions even though they mean the borrower loses the home.

The trend comes after more than two years of loan modification programs and foreclosure moratoriums that have produced mixed results, with many homeowners ineligible or defaulting again.

Where a modification isn't feasible, the U.S. Treasury in April will begin paying borrowers who agree to a deed-in-lieu of foreclosure or short sale, where a home is sold for less than outstanding debt. Unlike most modifications, those actions erase excess debt and reset home values, solving the problem of underwater loans that are a top cause of defaults.


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U.S. modification efforts to date have been "tragic" in delaying housing and economic recovery, Daurio said.

"All you are doing is delaying depreciation of the houses," Daurio said. "You are not preventing it by keeping people in a house that they can't afford."

More than 11 million properties with mortgages are "underwater," according to First American CoreLogic. Efforts to expand use of principal forgiveness haven't caught on.

Delaying the inevitable
Foreclosures have been stalled on more than 1 million bad loans since the U.S. Home Affordable Modification Program was announced a year ago, resulting in higher costs and losses to investors, according Moody's Investors Service.

This is delaying an inevitable clearing of the housing market that is needed for a lasting rebound, analysts said. A pent-up "shadow inventory" from failed modification efforts could destabilize the market in 2010, they worry.

"You are preventing the orderly transfer of a home from those that can't afford it to those that can afford it," said Rod Dubitsky, a global structured finance specialist at Pacific Investment Management Co. in Newport Beach, California.

The ability to customize loan workouts and earn potentially huge profits are enticing investors to the market, where loans are commonly sold at 40 cents to 60 cents per dollar of principal. Discounts give investors more room to work with borrowers than banks working to mitigate their loss, said Kingsley Greenland, chief executive officer at DebtX.

Investors generally look for a quick workout since it costs them to carry the loan or the property, said Jeff Freud, founder of LoanMarket.net, in Irvine, California.

Distressed whole loans are just a slice of the total mortgage market, however. Many loans are tied up in securities, and banks now with adequate reserves are arranging deed-in-lieu and short sale agreements themselves.

Mountains of cash chasing a limited field of loans has buoyed prices, but that is reducing opportunity for funds, said Louis Lucido, a principal at Los Angeles-based DoubleLine. But that could change if the Federal Deposit Insurance Co. more rapidly unwinds the assets of its failed banks, he said.

New entrants to the market tend to be small investors, who hold less than 100 loans at any one time, analysts said.

Among a pool of loans acquired by Dean Engle, a real estate investor in San Francisco who teaches others how to get a start in the business, was a foreclosed home in Greenwood, Missouri. It was still occupied by the former owner, who had no money to find a new place to live.

Engle told Ellen Brewood, a local agent to offer the former owner $5,000 to move out, and avoid a lengthy eviction. The house was vacated within five days. After 15 days on the market, it had offers above the $139,000 asking price.

"He wouldn't believe it, that investors wanted to pay him," Brewood said of the former owner.

Sales of new homes hit a record low in January

Decline will heighten fears about the fledgling recovery in housing
















WASHINGTON - Sales of new homes plunged to a record low in January, underscoring the formidable challenges facing the housing industry as it tries to recover from the worst slump in decades.

The Commerce Department reported Wednesday that new home sales dropped 11.2 percent last month to a seasonally adjusted annual sales pace of 309,000 units, the lowest level on records going back nearly a half century. The big drop was a surprise to economists who had expected sales would rise about 5 percent over December's pace.

While winter storms were partly to blame, home sales have fallen for three straight months despite sweeping government support. Economists were already worried that an improvement in sales in the second half of last year could falter as various government support programs are withdrawn.

"There is no doubt that January and February are going to be messy months for housing, given the severe weather conditions, but that doesn't take away from the fact that the housing sector has taken another big step back, even with the government aid," Jennifer Lee, a senior economist at BMO Capital Markets, said in a research note.

January's weakness was evident in all regions except the Midwest, where sales posted a 2.1 percent increase. Sales were down 35 percent in the Northeast, 12 percent in the West and almost 10 percent in the South.

The drop in sales pushed the median sales price down to $203.500. That was down 5.6 percent from December's median sales price of $215,600, and off 2.4 percent from year-ago prices.

New home sales for all of 2009 had fallen by almost 23 percent to 374,000, the worst year on record. The National Association of Home Builders is forecasting that sales will rise to more than 500,000 sales this year, an improvement from 2009 but still far below the boom years of 2003 through 2006 when builders clocked more than 1 million new home sales per year.

January's data will increase concerns that the housing rebound could falter in coming months as the government withdraws the support it has used to try to bolster the housing market, which stood at the epicenter of the country's overall recession, the worst downturn since the 1930s.

A $1.25 trillion program from the Federal Reserve which has held down mortgage rates is set to end March 31 and tax credits to bolster home buying are scheduled to expire at the end of April.

Fannie Mae seeks $15.3 billion more in aid

Troubled mortgage finance company posts $16.3 billion quarterly loss

WASHINGTON - Fannie Mae needs another $15 billion in federal assistance, bringing its total to more than $75 billion. And worse, the mortgage finance company warned its losses will continue this year.

The rescue of Fannie Mae and sister company Freddie Mac is turning out to be one of the most expensive aftereffects of the financial meltdown. The new request means the total bill for the duo will top $126 billion.

And the pain isn't over. Fannie warned Friday that it will need even more money from the Treasury, as unemployment remains high and millions of Americans lose their homes through foreclosure.

Fannie Mae reported Friday that it lost $74.4 billion, or $13.11 a share, last year, including $2.5 billion in dividends paid to the government. That compares with a loss of $59.8 billion, or $24 a share, a year earlier.

Fannie Mae, which was seized by federal regulators in September 2008, has racked up losses totaling $136.8 billion over the past three year.

Late last year, the Obama administration pledged to cover unlimited losses through 2012 for Freddie and Fannie, lifting an earlier cap of $400 billion.

Earlier in the week, Freddie reported a loss of almost $26 billion for last year. The company didn't request any more money, but expect to do so later this year.

Fannie and Freddie play a vital role in the mortgage market by purchasing mortgages from lenders and selling them to investors. Together the pair own or guarantee almost 31 million home loans worth about $5.5 trillion. That's about half of all mortgages.

"Through this prolonged stress in the housing market, we are helping homeowners across the country, supporting affordable housing, and providing financing to keep the residential markets functioning," the company's chief executive, Mike Williams, said in a statement.

The two companies, however, loosened their lending standards for borrowers during the real estate boom and are reeling from the consequences. At the end of last year, nearly 5.4 percent of Fannie Mae's borrowers had missed at least one payment — dramatically higher than historic levels.

During the most recent quarter, Washington-based Fannie suffered $11.9 billion in credit losses and a $5 billion write-down for low income tax credit investments.

That led to a fourth-quarter loss of $16.3 billion, or $2.87 a share, including $1.2 billion in dividends paid to the Treasury Department. It compares with a loss of $25.2 billion, or $4.47 a share, in the year-ago period.

In hard-hit markets, some see signs of bottom

Home sales activity improves in Western cities, with big government boost...










Syd Leibovitch, owner of Rodeo Realty in Los Angeles is doing what many real estate agents can only dream of: expanding. In the past three months, Leibovitch has hired more than 40 agents and is opening a new office on Hollywood’s Sunset Strip.

“My sales last year were 30 percent higher than 2006, which was our best year,” said Leibovitch, who specializes in luxury homes in the Los Angeles area. “A lot of my competition closed or went out of business entirely, and I picked up a lot of their agents.”

He attributes some of business improvement to buyers feeling more optimistic and sellers being more realistic with pricing. But declining inventory is also helping.

“We have very little inventory of low-priced homes,” he said, referring to homes under $400,000. “Banks have held back foreclosures because they are under political pressure to work with borrowers to make a deal.”

Southern California’s coastal region might be one of the few bright spots in a state that has nine of the top 20 metro foreclosure rates nationwide and a 12.4 percent unemployment rate. Still, despite the gloomy numbers and mixed reports in recent weeks, some economists see evidence that Western states like California, Arizona and Nevada—the ones hit hardest in the housing crisis—are showing signs of healing. Home prices in Los Angeles, Phoenix, San Diego and San Francisco have risen for at least six months.

“The epicenter of the boom and bust will be the leaders of the recovery,” said Lawrence Yun, chief economist for the National Association of Realtors. “Those three regions went through a big boom and a big bust and I think they overcorrected and are making solid gains compared to the rest of the country.” He sites multiple bids on lower priced properties, prices beginning to stabilize and inventory levels coming down as evidence that the bottom is in sight.


Others aren’t as optimistic. Celia Chen, senior director at Moody’s Economy.com, predicts that housing prices will fall again this year, especially in states where foreclosures have been rampant like California, Nevada and Arizona. Nearly 1 million loans have been temporarily modified over the past year under a federal program to keep people in their homes, and Chen believes many of these will fail in coming months, especially given the nation’s 10 percent jobless rate. “New foreclosures will come onto the market and bring prices down again,” she said.

Housing numbers released over the past week have painted a mixed picture, muddied by a federal tax credit that was set to expire and then was expanded. After a strong growth from September through November, existing home sales plummeted 16.7 percent in December from November, according to the Realtors. Yun and others attribute the swing to first-time homebuyers hurrying to close on properties before the Nov. 30 deadline for an $8,000 tax credit. Congress has since extended the program April 30.

A closer look at the West reveals a few positive signs in three of the hardest-hit states:

Southern California
Andrew LePage, analyst for MDA DataQuick who focuses on the San Diego region, confirms what Leibovitch of Rodeo Realty observed: Higher-priced homes in southern California’s coastal regions are starting to sell.

“The high-end market was comatose in 2008 and 2009, and the spring and summer of 2009 was the only time we saw anything close to normal activity,” said LePage. “Foreclosure resales are down, and there aren’t as many coming through the pipeline.”

Leibovitch is seeing multiple offers for houses in the $400,000 to $700,000 range; his $300,000 inventory is sold out.

The California market improved in part because of the state’s $10,000 tax credit for new homes, which was in addition to the original federal $8,000 first-time buyer’s credit and the more recent $6,500 credit for repeat home buyers.

“That was enough to encourage a lot of people to make a purchase,” said Brad Hunter, chief economist for Metrostudy, a national housing market research group. Moreover, Los Angeles and San Diego were already built up, so they didn’t experience the same kind of rampant overbuilding that affected inland cities like Bakersfield and Riverside, said Robert Denk, economist at the National Association of Home Builders.

The lower end of the market has been showing consistent growth so has most likely hit a price bottom, but there is an important caveat. “If a large number of foreclosures happen this year, especially over a short period, like six months, the price stability we’ve seen will be jeopardized,” said LePage. A lot depends on the unemployment rate.

Phoenix
Arizona has two things going for it: Unemployment has stayed below the national average at 9.1% and the state has a consistent population growth. From 2007 to 2008 Phoenix added 116,000 people, according to the Census Bureau.

Still, the market is heavily dominated by foreclosure activity, with about 4 percent of homes foreclosed on in Maricopa County, which includes Phoenix, in 2009. But foreclosures have remained flat on a quarterly basis. The upside is that banks are able to foreclose properties quickly in Arizona because there is no lengthy court process as in Florida, and it doesn’t have the 30-day notice requirement for a trustee sale that California has.

“Foreclosures hit hard and fast, but it means you get through the pain a little faster than in most places,” said Michael Orr, head of The Cromford Report, a real estate analysis company. “The new normal is back to 2000 pricing.”

Orr said sellers are starting to undervalue homes, so they’re getting more bids. The average sales price per square foot has been slowly trending upward in recent months, according to The Cromford Report.

“We have not hit bottom, but we are seeing a stabilization in the starter home market of $250,000 and below,” said E. Patrick LaVoie, president of Equity Capital Group, a private equity firm. Added Brad Hunter of Metrostudy: “I don’t know if this is definitely the bottom, but the freefall is over.”

Las Vegas
The poster child for rampant speculative home buying, Las Vegas had the highest metro foreclosure rate in the country for 2009, according to RealtyTrac. More than 12 percent of households in the metro area received a foreclosure notice in 2009, a whopping five times the national average.

Still, foreclosure activity was down in the fourth quarter of 2009 from the third, as it was in all 10 areas with the highest foreclosure rates. Las Vegas has experienced a roller-coaster ride the past four years, with home prices falling 56 percent from its peak to its low point.

Despite these obvious challenges, there is a silver lining. Home sales soared in 2009, as prices fell so low buyers couldn’t pass them up. Local Realtors reported 46,879 housing sales in 2009, up 64 percent from 28,618 in 2008. In fact 2009 was the second-best year on record for sales of existing homes in southern Nevada.

“We see a tightening supply due to lack of new home construction, and there are multiple offers on foreclosures and short sales,” said Paul Bell, president-elect for the Greater Las Vegas Association of Realtors. He said properties in good locations priced right could see anywhere from three to 25 offers.

Home loan demand hits highest since late May

Robust demand for mortgage refinancing and applications for home loans

U.S. mortgage applications jumped last week to their highest since late May as interest rates tumbled below 5 percent, data from an industry group showed on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended Sept 18 increased 12.8 percent to 668.5, the highest level since the week ended May 22.

While consumers clamored for home refinancing loans, their appetite for applications to buy a home, a tentative early indicator of sales, was also robust. The overall trend bodes well for the hard-hit U.S. housing market, which has been showing signs of stabilization.

Eric Belsky, executive director at Harvard University's Joint Center for Housing Studies, said several months of improvement in new and existing home sales is a positive sign.

"Low interest rates on mortgages are important to the fledging housing recovery," he said.

This has made a significant impact on the affordability front and where they may be headed could be key to a sustained recovery, he said.

"While an uptick may bring buyers anxious that rates will keep rising into the market temporarily, a material increase in rates could threaten the rebound.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.97 percent, down 0.11 percentage point from the previous week. It was the first time since the week ended May 22 that the rate on this most widely used home loan was below 5 percent.

However, the rate remained above the all-time low of 4.61 percent set in the week ended March 27. The survey has been conducted weekly since 1990. Nevertheless, interest rates were well below year-ago levels of 6.08 percent.

Low mortgage rates, high affordability, and the government's $8,000 tax credit for first-time home buyers — part of the stimulus bill — have helped stabilize the market.

But with the tax credit set to end November 30 and distressed properties making up a high proportion of sales, the flurry of activity masks uncertainty about the long-term outlook.

The MBA's seasonally adjusted purchase index rose 5.6 percent to 288.3, driven by applications for government-insured loans. Indeed, the government purchase index was at the highest level ever recorded in the survey and the share of purchase applications that were government-insured was 45.7 percent, the highest share since November 1990, the MBA said.

The four-week moving average of mortgage applications, which smoothes the volatile weekly figures, was up 4.3 percent.

The Mortgage Bankers seasonally adjusted index of refinancing applications increased 17.4 percent to 2,881.5, with the index at its highest since the week ended May 29.

The refinance share of applications increased to 63.8 percent from 61.0 percent the previous week, but remained significantly lower than the peak of 85.3 percent in the week to January 9. The adjustable-rate mortgage share of activity increased to 6.7 percent, up from 6.0 percent the prior week.

The U.S. housing market has suffered the worst downturn since the Great Depression of the 1930s and its impact has rippled through the recession-hit economy, as well as the rest of the world.

Housing construction hits highest in 9 months!

Most of the gains come from apartments; single-family homes still lag












WASHINGTON - Housing construction rose in August and the number of newly laid-off workers seeking unemployment aid fell unexpectedly last week, adding to signs the recession has ended.

Still, the reports suggested a slow and fragile economic recovery. In part, that's because the increased housing starts were due solely to a surge in construction of apartment buildings — while the much larger single-family homes sector fell for the first time in six months. And jobless claims remain far above the levels associated with a healthy economy.

Even as the housing industry begins to recover from its worst downturn in decades, a glut of unsold homes and record levels of home foreclosures are weighing on the industry.

Construction of multifamily homes and apartments rose 1.5 percent to an annual rate of 598,000 units, the highest level since November, the Commerce Department said Thursday. That was slightly lower than the 600,000-unit pace economists had expected. And it remains more than 70 percent below the peak rate hit in 2006.

The tentative improvements in housing are most likely a rebound "from unsustainably weak results ... reinforced by a temporary boost to demand" from the $8,000 first-time homebuyer tax credit that ends Dec. 1, Joshua Shapiro, chief economist at MFR Inc., wrote in a note to clients.

"Gains from here on will probably be much more difficult to achieve," due to high unemployment, tight credit and a large number of new and existing homes already on the market, he said.

Applications for building permits, a gauge of future activity, rose a 2.7 percent in August to an annual rate of 579,000 units, slightly below the 580,000 level that had been forecast. Permits for single-family homes dipped 0.2 percent but rose for multifamily units by 15.8 percent.

The 1.5 percent rise in housing starts followed a small 0.2 percent dip in July. The August strength reflected a 25.3 percent surge in construction of multifamily units, a volatile sector that had fallen 15.2 percent in July.

The single-family sector dipped 3 percent last month to an annual rate of 479,000 units, the first setback following five straight monthly gains.



Paul Dales, U.S. economist at Capital Economics, noted that housing starts remain 74 percent below their 2006 peak and predicted the housing recovery would be a very "long-winded process."




Meanwhile, initial claims for unemployment benefits dropped last week to a seasonally adjusted 545,000 from an upwardly revised 557,000 the previous week, the Labor Department said Thursday. Wall Street economists expected claims to rise by 5,000, according to Thomson Reuters.

The decline was the third in the past four weeks. The four-week average, which smooths out fluctuations, dropped 8,750 to 563,000. Despite the improvement, that's far above the 325,000 per week that is typical in a healthy economy.

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Rates for 30-year home loans ticked down for the second-straight week, remaining close to record lows reached over the spring.

The average rate for a 30-year fixed mortgage was 5.07 percent this week, down from 5.08 percent a week earlier, mortgage company Freddie Mac said Thursday. Rates, while above the record low of 4.78 percent hit in the spring, are still at attractive levels for people looking to buy a home or refinance.

Rates should stay low for another month or two as government efforts to keep them low remain effective, predicts Michael Larson, an interest rate and real estate analyst with Weiss Research.

But it won’t last forever. Rates will eventually trend upward, Larson said, as the economy starts to turn around and concerns return about how long overseas investors can stomach massive levels of U.S. debt.

“Over the longer-term, there’s going to be general upward pressure on interest rates across the spectrum,” he said. “Mortgage rates will be caught up in that.”

To prop up the housing market and help the economy revive from the worst recession since the 1930s, the Federal Reserve is spending $1.25 trillion on mortgage-backed securities, which has driven down rates on home loans.

That money is set to run out by winter, though some analysts expect the central bank to add more money to the program or allow it to last longer by gradually reducing its purchases.

“What the Fed does not want is to see a sharp pickup in mortgage rates,” said Greg McBride, senior financial analyst with Bankrate.com. “That would throw cold water on a recovering housing market.”

With rates low, borrowers are seizing on the opportunity. Mortgage applications for refinancing surged 22.5 percent for the week ending Sept. 4 in the biggest one-week jump since mid-March. According to the Mortgage Bankers Association, applications for home purchases were up 9.5 percent.

Despite government efforts to prop up the mortgage market, qualifying for a loan is still tough. Lenders have tightened their standards dramatically, so the best rates are available to those with solid credit and a 20 percent down payment.

Freddie Mac collects mortgage rates on Monday through Wednesday of each week from lenders around the country. Rates often fluctuate significantly, even within a given day.

The average rate on a 15-year fixed-rate mortgage fell to 4.5 percent, from 4.54 percent last week, according to Freddie Mac.

Rates on five-year, adjustable-rate mortgages averaged 4.51 percent, down from 4.59 percent a week earlier. Rates on one-year, adjustable-rate mortgages rose to 4.64 percent from 4.62 percent.

The rates do not include add-on fees known as points. The nationwide fee for loans in Freddie Mac’s survey averaged 0.7 point for 30-year and 15-year loans, 0.5 point for five-year loans and 0.6 point for one-year loans.