Some people still wonder if they should walk away from their loans – to simply stop paying and let the Bank foreclose.

Others are prevented from doing so – solely by the image of their Grandfather scolding them to keep their promises to the Banks – and continue to make payments on mortgages on houses that will never (if you count 10 years or more of lost value as “never”) recover their value.

Commentators say that it makes sense to strategically default (to walk away) if the loan to value ratio is 167%. Others say 125%.

I say, if the loan is between $0 and $50,000 more than the home’s value – think about it. If the home is more than $50,000 underwater, I want a really good excuse as to why you would want to stay. If it’s more than $75,000 underwater, I want to know why you waited so long to begin not making payments.

Sure there are tax ramifications (in some – but not all cases). Sure there are credit score hits. BUT, credit scores can be rebuilt – whereas lost money is lost forever.

When confronted with the choice of making mortgage payments on $100,000 of underwater debt, or making those same payments to the kids’ college fund – I know which way Grandpa would tell you to go.

Strictly speaking…

Defining the qualified residential mortgage (QRM) is testing the mettle of the government’s commitment to stability in the real estate market.

QRMs, established under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), are loans meeting low-risk standards which exempt lenders from having to retain any part of these loans in their portfolios.

New proposals by federal agencies and the administration restrict the designation of QRM to loans in which homebuyers put down at least 20% of the purchase price of a home as down payment, colloquialized as “having skin in the game.”

The proposed down payment requirement alone has sparked fierce debate in real estate circles and the media, but it’s far from the only proposed restriction on what qualifies as a QRM. The designation of QRM is restricted to:

. first-lien mortgages to purchase or refinance a one-to-four unit principal residence;
. mortgages amortizing over 30 years or less;
. borrowers who are not currently 30 or more days past due on any debt;
. borrowers who have not been 60 or more days past due on any debt within the last 24 months;
. borrowers who have not, in the past 36 months:
– filed for bankruptcy;
– had property repossessed or foreclosed on;
– engaged in a short sale or deed-in-lieu of foreclosure; or
– been subject to a federal or state judgment for the collection of a debt;
. loans with interest rates adjusting no more than two percent in any 12-month period, and no more than six percent over the life of the loan, if the loan is an adjustable rate mortgage (ARM);
. mortgages which do not contain prepayment penalties;
. loan-to-value ratios of 70% for rate-and-term refinances and 75% for cash-out refinances;
. debt-to-income ratios of 28% for all mortgage debt, called the front-end ratio, and 36% for all debt, called back-end ratio;
. standard documentation loans;
. loans with points and fees of 3% of the loan amount or less; and
. non-assumable loans.

Any loans not meeting all the above requirements would require lenders and securitizers to hold in reserve an amount equal to 5% of the loan balance in their portfolios, as recovery funds in case of default. This means any borrower who does not qualify for a QRM — i.e., the vast majority of borrowers — would be subject to higher interest rates to cover the increased risk a non-QRM would pose to lenders.

Federal Housing Administration (FHA)- and Veterans Administration (VA)-insured loans, as well as loans sold to Fannie Mae or Freddie Mac (while they remain under government control) are not subject to the QRM requirements under the proposal.

If passed, the rules outlined in the proposal will not be implemented until mid-2012.

The zero-sum game lenders will play.

Ah, lenders. The idea of retaining any risk for the loans they originate has them running a bit scared. At this point, we can only speculate on what tricks lenders will devise to get around the rules that borrowers and the rest of the consuming public have to play by — and make no mistake, lenders will do so.

Many of the proposed QRM requirements would set groundwork for a stable housing policy (down payment requirements, strict DTI ratios), separating those who are truly financially able to take on the burden of homeownership from those who are tenants-by-nature. However, it’s important to note the distinction between QRM and a non-QRM are not prohibitive; lenders can still lend to non-QRM-eligible borrowers.

And Americans still have a huge appetite for homeownership in spite of the unmanageable financial risks it poses to most homeowners. A recent study shows Americans are still very willing to glut themselves on housing and mortgage debt, regardless of the financial malaise which follows. Thus, the strict definition of the QRM will only lead to more marginalized types of borrowing — the non-QRM-eligible borrowers will almost certainly be charged higher interest rates, thus perpetuating the cycle of non-QRM-eligible borrowers being more likely to default.

Likewise, the three-year restriction against borrowers who participated in a short sale or deed-in-lieu of foreclosure carries the weight of punitiveness by classification, not ability to pay. Borrowers may have taken it upon themselves to buy (or refinance) when the market value of their properties were worth more than fundamentals dictated, but lenders had no qualms about originating these loans at the time, knowing quite well their conduct was a financial accelerator recklessly driving home prices up. Will restricting short-sale participants from being eligible for a QRM really lead to fewer people overpaying for their homes or defaulting?

Solution or punishment?

The importance of a stable housing policy promoting stable homeownership is paramount, but the strictness of the QRM may be based on reactions to the most recent housing crisis rather than truly crafting a stable housing policy. The strict differentiation between QRMs and non-QRMs merely gives lenders the ability to pawn off their 5% risk-retention onto underqualified homebuyers and homeowners; it’s a zero-sum risk reduction for lenders.

Brokers and agents would do well to be aware of how this proposal fares in the coming months. The proposal is open for comment through June 10, 2011. Comment can be submitted to any of the participating agencies via methods outlined on pages two and three of the proposal, which can be read in its entirety on the Federal Deposit Insurance Corporation (FDIC)’s website.

From: the first tuesday Journal Online — P.O. Box 20069, Riverside, CA 92516.

firsttuesday online reports that “40% of all California resale activity in the first quarter of 2011 can be attributed to real estate owned (REO) inventory — 3% lower than the same period in 2010. REO resales varied significantly from county to county, from rates as low as 12% in San Francisco County to as high as 61% in Stanislaus County.

68,239 Notices of Default (NODs) were recorded in California in the first quarter of 2011, down from 81,054 in the first quarter of 2010. By percentage, the most notable drops in NODs took place in Imperial (-41%), Merced (-28%), San Benito (-28%), and Monterey (-27%) counties.

This is the lowest number of NODs issued in any quarter since the second quarter of 2007. NOD volume peaked in the first quarter of 2009 with 135,431 NODs recorded. 2010’s peak was the third quarter, with 83,261 NODs recorded.

Also in the first quarter of 2011, a total of 43,052 homes were foreclosed upon. This is up from the recent low of 35,431 in the fourth quarter of 2010, and slightly higher than the 42,857 homes forclosed on one year earlier.

Statewide, high-tier regions (zip codes with median home prices higher than $800,000) saw an 8% increase in foreclosures from the fourth quarter of 2010, and a 2% drop over the preceding year. Foreclosures in low-tier areas (zip codes with prices lower than $200,000) rose 23% from the fourth quarter of 2010, dropping 2% from one year earlier. Low-tier neighborhoods continue to see the highest concentration of both NODs and foreclosures.

The most recent data indicates that it takes an average of nine months to complete a trustee’s sale following the recording of the NOD. One year earlier, foreclosure proceedings generally elapsed over an average period of seven and a half months. MDA Dataquick, a real estate information service, sees the extended processing time as a product of legal complications and lender backlogs combined with the pursuit of loan modifications and short sales to circumvent foreclosure.

It is estimated that 24% of homes sold at trustee’s sales were bought by individuals other than the lender or government groups — almost unchanged from 25% last year, indicating that speculators are not yet gone from the real estate market.”

I’d bet that the drop in the overall number of foreclosures is becasuse the “sub-prime” folks are already far into the foreclosure system – thus new” foreclosures aren’t impacted by them. So where are the numbers coming from? STRATEGIC defaulters. That’s my bet. It’s the folks that have homes so far underwater that it makes no sense to continue to pay the mortgages – even if they can afford to do so. And many can. Many could have – but used up all their savings doing so. If only they had let it go to default sooner?

The mess continues.

Much of this article is reprinted from the first tuesday Journal Online — firsttuesdayjournal.com P.O. Box 20069, Riverside, CA 92516

According to Fair Issac Company (My FICO) a company that provides analytic, decision making, and credit scoring services for financial service companies a credit score will go down by 40 to 110 points after being 30 days late. Further, the scoring drop will increase to 70 to 135 points after 90 days late on a mortgage payment.

The average scoring drop in a short sale, foreclosure or deed in lieu is 85 to 160 points. You need to keep in mind that in both short sales and foreclosure it is possible that the credit score drop could be closer to 200-300 points.

Credit scoring factors vary from individual to individual. The scoring change is heavily dependent on where the credit score was before the negative event took place. Both a short sale and foreclosure are considered a loan that was not paid as agreed.

One recent blogger commented:

“All the news you have heard this last month does not bode well for those trying to foreclose on poor home owners. Foreclosure levels have dropped tremendously. And the housing market reacts.

Things are looking a bit sunnier in sunny California these days according to RealtyTrac’s May foreclosure report.

Foreclosure filings in the Sacramento area were down almost 13 percent in May compared with the same month one year ago, although May filings were up slightly (2.25%) from the prior month.

For California as a whole, foreclosure filings were down 22 percent on a year-over-year basis.

RealtyTrac also reported that bank repossessions were up 44 percent in May from the same month one year ago.

According to an AP report in the San Jose Mercury News:

Economic woes, such as unemployment or reduced income, are the main catalysts for foreclosures this year. Initially, lax lending standards were the culprit. Now, homeowners with good credit who took out conventional, fixed-rate loans are the fastest growing group of foreclosures.

To read the RealtyTrac report, go here.

The Sacramento Bee reports that as the number of short sales in the area rise, so do the imaginative ways some people can come up with to exploit them.

The SacBee article warns of these schemes:

• Unlicensed short sale “negotiators” are approaching homeowners, asking for thousands of dollars up front to negotiate with lenders, said Tom Pool, spokesman for the California Department of Real Estate. Only attorneys and licensed brokers can ask for money up front – and only after the DRE approves the agreement with an individual seller. The DRE recently published a consumer alert about this and other scams.

• Real estate agents or these negotiators are lowballing offers to overwhelmed banks, a practice called “flopping.” After the bank approves a short sale at a low price, the agent or negotiator quickly flips the house to a new buyer for much more. Elizabeth Weintraub, a Sacramento short sale agent with Lyon Real Estate, said would-be floppers often want to use their own title companies. That’s a red flag.

• Real estate agents say banks are illegally seeking extra money in hidden side deals before approving short sales.

• Some homeowners, especially savvy, well-off owners who owe far more than their houses are worth, are hiding savings and income to persuade lenders to agree to short sales. Many can afford their mortgages, said Coldwell Banker short-sale specialist Mike Toste of Roseville. But they also know it will take years to recoup their 2006 values.

Real estate experts are calling the current housing market “bipolar”, citing the rise in sales and prices on one hand and the hike in interest rates and repossessions on the other.

The final diagnosis: negative in the short term, but turning positive by the end of the year.

According to a CNNMoney article:

One of market’s biggest hurdles is getting beyond the lapse of the $8,000 homebuyer tax credit. Thanks to the incentive, buyers scrambled to beat the April 30 deadline, pushing new home sales up nearly 30% in March.

But that just borrowed buyers from later months. And now we face the hangover effect.

Industry insiders believe the hangover is worthwhile, however, because the credit helped stabilize housing when it most needed help. Home prices have been steadier in recent months, recently experiencing their first year-over-year rise in more than three years.

Still, there are some strong negatives dragging on the market.

1. Interest rates have been intermittently creeping up. Although nobody expects 6% until at least 2011, the days of 4.5% mortgages are behind us.

2. Bank repossessions are on track to surpass a million homes in 2010. But at least foreclosure filings fell in April, the first time since RealtyTrac began reporting.

3. More than a quarter of borrowers are “underwater,” meaning they owe more than their homes are worth.

4. “Strategic defaults” — where underwater homeowners walkway even when they can still afford to pay — accounted for 31% of all foreclosures in March, according to a recent study.

But there is one factor that has experts really scared: homes that are ready to be sold but haven’t been put on the market. Right now, there could be more than 4.5 million homes in “shadow inventory,” according to a recent report by Barclays Capital.

A report by Morgan Stanley analysts says that 12 percent of all mortgage defaults in February were “strategic defaults” – where homeowners decided to walk away from their mortgages. This is up from 4 percent in 2007.

From the story in the San Francisco Chronicle:

Borrowers are more likely to stop paying their mortgages the higher their credit scores and the larger their loans, the report said.

Defaults by borrowers who owe more than their homes’ values are among the biggest risks for the housing market, according to analysts including Zelman & Associates’ Ivy Zelman and Amherst Securities Group LP’s Laurie Goodman. Last month, the Obama administration said it would adjust its anti-foreclosure program to encourage reductions to borrowers’ principal amounts, instead of just the payments they make, to address the issue.

That change “gives us hope that policy makers are serious about curbing future strategic defaults,” the Morgan Stanley mortgage-bond analysts wrote.

Strategic defaults also increase based on how much more borrowers owe in housing debt than their homes are worth, they said in the report, which made use of consumer credit data from Transunion LLC and Standard & Poor’s home-price indexes.

That finding concurred with reports by Goodman, a New York- based mortgage-bond analyst, who has said that there will be as many as 12 million foreclosures over the next few years unless lenders can effectively modify borrowers’ debt.