Lender Processing Services, a technology firm that reports on loan delinquencies, says that its data – based on 40 million first loans and 5 million home equity loans and lines of credit — points to an escalation in prime loan delinquencies across the U.S.

According to LPS analyst Steve Berg, there is a huge inventory of delinquent loans and more deteriorating every day. Using 2005 as a base year, LPS says that prime loans have deteriorated 305 percent, which outpaces subprime loans at 230 percent and FHA loan delinquencies, which have been flat.

From a post at Inman.com:

Berg uses Los Angeles County, home to a significant number of very high-priced residences, as an example. Looking at the data at the end of last year, the number of “dirty sales,” either short sale or REO, as a percentage of all total sales in the $250,000-and-below bracket, reached as high as 78 percent. However, the number of homes in that bracket that were in default or foreclosure was relatively modest, meaning the pipeline was shrinking.

In the lower-price home bracket where short sales and REOs had been concentrated, prices are not going to drop much more because it is already totally saturated with REOs and short sales — and the damage has been done.

As a comparison, in the highest price band, $750,000 and greater, only 16 percent of transactions were dirty sales. But, the number of properties in default and foreclosure are now higher than in the low-priced bracket and that, says Berg, “is going to whipsaw the home-sale market.”

The five states with highest volume of prime jumbo loans outstanding were California, New York, Florida, Virginia and New Jersey. Together those five states represent about two-thirds of total delinquencies.

In his recent posting on HousingWire.com, publisher Paul Jackson scrutinizes current data from Lender Processing Services – which showed that a record 7.5 million loans are non-current – and posits that the real key to resolving the housing market problems yet-to-come is REO property sales.

And here’s why:

For all loans at 90+ days delinquent, the average days delinquent is 272. For loans in foreclosure, the average days delinquent is 410. Which means that severely delinquent borrowers have gone almost 10 months without making a loan payment – and foreclosure hasn’t started yet for them. Those in the foreclosure process have not made a payment for over a year.

Clearly, short sales will not cover all this distressed property. Jackson says the key indicator that the housing market is on the road to recovery will be an increase in REO volume; here’s a forecast from JPMorgan Chase:

To read the full story (good stuff), go here.

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A report last month from the Natural Resources Defense Council (NRDC) says those homeowners who spend a lot of time driving everywhere are at a greater risk of foreclosure.

Using data from three large urban areas – San Francisco, Chicago and Jacksonville – the study found that “factors such as neighborhood compactness, access to public transit, and rates of vehicle ownership are key to predicting mortgage performance and should be taken more seriously by mortgage underwriters, policymakers, and real estate developers.”

It stands to reason that getting to the job, the grocery store and carting the kids to soccer practice may take precedence over paying the mortgage on time. Transportation costs account for approximately 17 percent of average American household income – and more when the price of gas goes up. Homeowners have no control over energy pricing; they do have control over paying the mortgage.

Based on the results of the study, the NRDC made the following recommendations:

1. Public policy relating to land use, infrastructure and transportation should enable and encourage development of location-efficient communities to help improve mortgage performance and reduce foreclosures.

2.Mortgage underwriting practices should be changed to provide access to proportionally better borrowing terms for purchasers of location-efficient homes

3. Further analysis should be conducted by lenders and researchers to develop and refine tools for assessing the impact of location-efficiency variables within their models.

In Shakespeare’s Julius Caesar, Caesar is warned to “beware the Ides of March.”

The same can be said this year for the mortgage market, as the Fed prepares to wean it off government life support (the purchase of mortgage-backed securities) by March 31.

According to a piece this past week in the San Francisco Chronicle:

The Fed started buying securities backed by Fannie Mae, Freddie Mac and Ginnie Mae in January 2009 and originally planned to conclude the program by year’s end. It extended it for three months to ease the impact on mortgage markets, although it didn’t allocate more money. The program’s ultimate cost won’t be known until the Fed sells off the securities, something that officials said it will do gradually starting this year. It’s conceivable that the program could end up generating a modest profit, breaking even or losing money, depending on what prices the securities go for.

While experts agree that the Fed’s exit will cause mortgage rates to rise, the big unknown is how severe the effect will be.

Other federally funded housing market shore-up programs are also undergoing changes that may rock the recovery boat:

• The home buyers’ tax credit expires on April 30;
• FHA loans with new, more stringent lending criteria were announced last month;
• HAMP acts to stem foreclosures, but if homeowners default on those modified loans, a delayed wave of foreclosures could further erode home prices.

CitiMortgage has launched a pilot program that will allow distressed mortgage holders to stay in their home an additional six months in return for turning the keys over to the mortgage lending giant at the end of that period.

In a press release issued last week, CitiMortgage announced that the program will initially be offered in six states: Texas, Florida, Illinois, Michigan, New Jersey and Ohio:

In exchange for the deed on their property, CitiMortgage will allow borrowers to stay in their homes for a period of up to six months. At the end of the six months, the borrower will turn over the property deed to CitiMortgage, and CitiMortgage will provide a minimum of $1,000 in relocation assistance to the borrowers. Citi will also provide relocation counseling by trained professionals and will cover certain monthly property expenses if Citi determines that the borrower can no longer afford them. Payment of utilities costs will be the responsibility of the borrower. Other costs incurred by the borrower, such as homeowner’s association and escrow fees, will be determined on a case-by-case basis considering the borrower’s specific financial circumstances. As part of the agreement, borrowers must maintain the property in its current condition and agree to bi-monthly meetings during which trained relocation professionals will help the borrower prepare for the next chapter of their lives.

Before a borrower enters the Foreclosure Alternatives Program, they must first be evaluated for a permanent mortgage modification. For those who do not qualify for a modification or another solution, CitiMortgage will explore the possibility of a short sale in which the company might accept a buyer’s offer for less than the outstanding amount of the mortgage. If a short sale is not feasible, then the borrower may be considered for the deed-in-lieu program. In addition, in order to be eligible, homeowners must hold first mortgages with a clear title owned by CitiMortgage, occupy the property, and be at least 90 days delinquent on their mortgage payments.

As it evaluates the progress of the pilot program, CitiMortgage will assess whether or not to expand the program to other parts of the United States. The initial pilot is expected to help as many as 1,000 families.

…or how to get rid of the underwater second mortgage, from a recent Ezine article by David Reinholtz, founder of LoanOfficerSchool.com, a speaker and an approved education provider for NMLS:

One day Suzie homeowner reviews her personal finances and comes to a stomach-churning realization: the house that she has lived in and made payments on and invested with her dreams is worth less than her total mortgage debt. She is deeply “underwater.” Her financial situation is serious enough so that she contemplates Chapter 13 bankruptcy. But in reviewing her options, her attorney tells her about something called “second lien strip.” Resisting the urge to slap him across the face at this seemingly risqué suggestion, she listens. He outlines a scenario.

Ten years ago Suzie bought her home for $295,000. Today it is worth $215,000. She owes $250,000 on her first mortgage. To make matters worse, a few years ago during the real estate boom her home was appraised for $350,000. Feeling confident, Suzie took out a second mortgage for $25,000 from ABC Finance. At the time it seemed like a safe enough bet. She spent the money on some unsecured debts, home improvements, and a new powerboat that she keeps on the lake. Today she owes $20,000 on the second mortgage.

Her house is worth $215,000. She owes $250,000 on her first mortgage and $20,000 on the second. Clearly there will not be enough money from the sale of the home to pay off the first mortgage, let alone ABC Finance.

Suzie files Chapter 13 bankruptcy. Her attorney explains that under Chapter 13, she can keep her home but will be required to use her income to repay some or all of her debts. A court-sanctioned Chapter 13 bankruptcy plan pays off most secured loans first and delays payment of unsecured debts. The representative from ABC Finance insists that because her second mortgage is secured debt, ABC needs to be at the front of the line for repayment.

The courts have disagreed. To understand why, it’s helpful to refer to the U.S. Bankruptcy Code. Here is the relevant excerpt from 11 USC 506 – Sec. 506 – Determination of secured status:

“(a) An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim.”

Courts have ruled that because a second lien like Suzie’s ABC Finance mortgage is debt that is not supported by equity, the debt is by definition unsecured. If Suzie’s second lien is stripped, the court will classify it as an unsecured debt in the payoff plan. Suzie will be able to pay a fraction over five years, just like her credit card debt. The actual percentage that she must pay will depend on factors including her income and the value of unencumbered assets.

For this strategy to work, you must consult a qualified attorney. Your home must be underwater on your first mortgage (or if you have multiple liens, underwater on at least the last one). If this applies to you, you can take comfort in the fact that you have lots of company; recent studies suggest that nearly one-quarter of Americans are underwater on their home mortgages.

A recent New York Times article reported succinctly on the growing trend of homeowners who are “underwater” on their mortgages simply packing it in and walking away. Called “a situation without precedent in the modern era,” abandoned homes are becoming more prevalent as “people’s emotional attachment to their property is melting into thin air.”

An Arizona mortgage broker admitted that he has advised many of his clients to walk away. He even defaulted on a rental property he owns.

By June, the number of homeowners who owe more than their home is worth is projected to be over 5 million – which is approximately 10 percent of all American mortgage holders.

And with some big commercial property owners walking away from their financial obligations –like Tishman Speyer BlackRock, one of the country’s largest commercial property owners, that sent their $5.3 billion investment in 11,000 apartments in New York back to their bankers – homeowners are often left thinking, “why not?”

Pile on the bank bailout outrage and headlines about the reinstatement of big bonuses for bankers, and the “why not?” can quickly turn into a “hell yes”.

So are “strategic defaults” a good thing for a borrower? In many cases – you’re darn right they are. So why so few of them? Read more here.

Many banks suspended their foreclosure activities in December for the holidays (can’t have Tiny Tim in the street at Christmas….let’s wait until January!). So it wasn’t unexpected to see the December foreclosure rate decline.

However, according to ForeclosureRadar.com:

Foreclosure activity dropped dramatically in December, especially when looked at on a daily average basis. For example while Notices of Default dropped 17.5 percent in aggregate, they actually dropped 32.5 percent on a daily average basis due to the fact that December had 22 days on which documents were recorded, versus 18 in November.

“The dramatic drop in foreclosure activity may have been a Christmas gift to homeowners,” says Sean O’Toole, Founder and CEO of ForeclosureRadar.com, “however, given rising mortgage delinquencies it is becoming increasingly clear that foreclosure activity no longer fully represents market realities”.

Unlike November where we saw nearly flat foreclosure filings on a daily average basis, with declines being due to the holiday shortened month, the decline in December foreclosure filings is actually understated due to the increased number of recording days. On a daily average basis, Notice of Default filings dropped a dramatic 32.5 percent from November and Notice of Trustee Sale filings dropped 23.0 percent. We have not seen a similar December drop in recent years, so this is not simply a regular seasonal decline.

Another tiny pinpoint of light in the foreclosure debacle? We won’t know until we get more number from the first few months of 2010.

But maybe…just maybe…we won’t get Scrooged quite as hard this year as last.

The Purchase Agreement

You may think that that CAR form Residential Purchase Agreement you know so well will be the form of purchase agreement used in the transaction. Right up until the time you get a 12-page Counter Offer from the bank. That Counter Offer overrules many of the protections in the CAR RPA form. You read it, and re-read it. Then you go talk to your client, the buyer. You start explaining the differences in the terms. You start walking them through each new term and condition and explain the meaning and consequences of each new provision. You have now begun practicing law without a license. And, if you thought the penalty of doing general contractor work was bad, just wait till the lawyers get hold of you.

The consequences of the contract form provided by the bank is just not something you, as a broker/agent, are allowed by law to discuss with your client. Tell them to seek advice from a
lawyer. Give that advice to them in writing. Tell them to think of it as a “legal inspection” just like a termite inspection, or a roof inspection. After all, they are getting a ‘bargain’ when buying the REO property in the first place. This legal review is just an additional cost of doing business. One that can save them tens of thousands of dollars later.

Banks are selling off tens (hundreds?) of millions of dollars of real estate. They have paid their lawyers tens (hundreds?) of thousands of dollars to draft purchase agreement forms that the bank will use in each transaction. The banks are NOT your friend. The bank’s lawyers certainly aren’t your friends.

What are some of these “bank terms?”

Disadvantageous terms (for the buyer) include, but are not limited to: mandating substantial down payments, liquidated damages clauses, forcing the buyer to prequalify with the selling bank, refusing to pay any closing costs, refusing to provide any disclosures, requiring hold-harmless agreements, requiring the buyer to waive certain rights while maintaining all of their own, charging per-diem fines for any delay in closing, not allowing any buyer inspections or contingency periods. And this isn’t a complete list.

Let’s not forget the infamous “as is” clause. A bank will try to get the buyer to waive any right to make claims for intentional withholding of known material facts, and then compel the buyer to agree to buy “as is.”

MLS Listings on Net Sale Price
The bank wants to maximize its money on the sale of an REO property. It also wants your best efforts to sell the property. So, it will try to get you to agree to a commission on a NET sales price. Or, at the last minute, once you’ve presented an offer, then banks says “OK, but we have to cut the commission.”

It’s happened so often that MLS rules have been instituted with respect to how you split commissions when a bank demands a reduction. Most MLS rules require either a percentage of the GROSS selling price, or a fixed dollar amount be shown as compensation to the selling (buyer’s) office.

What to Disclose
We all know that banks are exempt from having to give a TDS to a buyer. Banks are also exempt from NHDs, Mello-Roos, Supplemental Property Tax, Military Ordinance, Airports, Industrial Zoning and Private Transfer Fee disclosures as well.

Banks still have to provide disclosures of Natural Hazard Zones (not the NHD form mind you, but the zones), and the Megan’s Law, Lead Based Paint, Smoke Detector, Water Heater and Meth Labs, FIRPTA and HOA disclosures as well. Banks also must disclose anything that materially affects the value or desirability of the property.

What about things like the Seller Property Questionnaire, or the Statewide Buyer and Seller Advisory or the HOA documents? What about them? The bank has no duty to provide them. And often doesn’t.

Brokers, by the way, still have to give an Agency Disclosure form to both the bank and any buyer, as well as a TDS. You read it right. An agent still has to complete that reasonably competent, diligent, visual inspection of the accessible areas, and disclose what was observed that might materially affect the property’s value or desirability. Selling agents [representing the buyer] have an even higher level of inspection and disclosure duty.

What does the poor broker/agent do when the bank refuses to comply with these regulations? Document the file. Fill it with a paper trail that shows how much and how often you tried to get the bank to do so. Then make sure the buyer knows that the bank hasn’t given over the required and recommended disclosures. Get an acknowledgment from the buyer that he/she has been so notified, and elects to proceed with the transaction anyway. The best of all worlds is to get a waiver from the buyer of any claims the buyer might make against the broker/agent as a result of the bank’s refusal to comply — in advance of the sure-to-follow claim.