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- Short Sales and Foreclosures - a Brief Overview

In April of 2008 the NATIONAL ASSOCIATION OF REALTORS® conducted an on-line survey of members on issues related to the credit crunch, foreclosures, and short sales. We obtained approximately 5,800 responses. Below is a summary of the results of that survey.

Short Sales
What is a short sale? A short sale is usually defined as a case in which a bank or other mortgage lender "discounts" the balance of the loan, usually due to a borrower's financial or other economic hardship. The property owner/borrower then sells the property at that lower price and the proceeds from the sale are turned over to the lender. Typically, short sales are done in order to prevent foreclosure.

In the NAR survey, REALTORS® indicated that overall 40 percent of their clients have been involved in a short sale. Of those REALTORS® participating in short sales, 55 percent reported that they had assisted buyers, and 45 percent had assisted sellers.

The top states in terms of the percentage of REALTORS® involved in short sales were

Nevada (65%)
Rhode Island (52%)
California (52%)
Florida (50%)
Arizona (47%)
The states with the lowest percentage of REALTORS® involved in short sales were:

Vermont (less than 1 percent)
Wyoming (11%) 
Mississippi (17%) 
Alaska (17%)
Delaware (18%).
Since short sales involve some write-down by the lender of the amount owed, the survey asked REALTORS® about the extent of write-downs. More than a quarter of respondents who participated in short sales - 26.7 percent - reported that short sales involved more than 20 percent debt forgiveness. A small percentage - 4.4 percent - reported short sales with less than five percent debt forgiveness.

Foreclosures
REALTORS® were also asked about the share of active listings in their market (or in their multiple listing service) were foreclosed properties. The median percentage of "foreclosure" listings was

six percent. But more than a third of respondents didn't know. In addition, some MLSs do not list foreclosed homes. Nearly 15 percent of REALTORS® indicated that one to five percent of their market listings were foreclosed properties.

Credit
In addition to asking survey participants about short sales and foreclosures, REALTORS® were also asked about recent availability of credit and what percent of their clientele were having challenges

in obtaining approval for mortgage loans. Well over a third of respondents indicated that all - or nearly all - of their their clients encountered no problems in getting a loan.

But there were differences in some states. Fully two thirds of participating REALTORS® from Alaska reported that their clients had no problems obtaining approval for a loan. Similar trends were reported in New Jersey (59%), Montana (48%), Wisconsin (47%), and the District of Columbia (46%).

Postponing the Homebuying Decision
Some potential homebuyers have been "on the fence" -- perhaps waiting for prices to dip further, for interest rates to decline, or for their personal financial/economic situations to improve. In a difficult housing market, it is sometimes challenging to determine the factors that are influencing a buyer's decision whether or not to purchase a home.

The survey asked REALTORS® if their recent clients had postponed the home buying decision. More than half indicated that their clients did actually purchase a property. But more than a fifth reported that buyers wanted to wait for home prices to decline even more before purchasing. Almost 8 percent said that buyers were unable to purchase a home because they needed to sell their current residence. A very small percentage of survey participants - 3.9 percent - reported that buyers postponed a home purchase for personal reasons.

Some Positive Signs for the Future
There is some good news on the home buying horizon. Recently released data from the Mortgage Bankers Association shows that mortgage purchase applications are up. The purchase portion of the MBA's Mortgage Applications Index* increased 6.4%, from 349.0 to 371.5 for the week ending September 5, 2008. That is a fourth consecutive weekly increase. Consecutive rises in mortgage applications signal that buyers are returning to the market, possibly at a moderate pace but still in numbers that can be measured. While it may take some time for consumers to absorb recent positive housing news, affordable home prices, the still historic low mortgage rates - and a large selection of existing inventory - are already attracting the fence sitters.

- Second Quarter Mortgage Delinquency and Foreclosures Rates

A Mix of Good and Bad News
By George Ratiu, Research Economist

There was good news and bad news on the home mortgage delinquency and foreclosure front earlier this month. Data for the second quarter of 2008 from the National Delinquency Survey by the Mortgage Bankers Association shows an increase in delinquency and foreclosure rates. On the positive side, however, the figures also point to some marked improvements. Delinquency rates for subprime, FHA and VA loans dropped from last quarter. Foreclosure inventory rates for FHA loans also declined on a quarterly basis. Furthermore, the data also recorded decreases in foreclosure rates for several states.

Delinquencies
The overall delinquency rate increased from 6.35 to 6.41 percent. However, the increase was driven by a jump in prime loan delinquencies - an increase of 22 basis points, up from 3.71 percent to 3.93 percent.

However, seasonally adjusted delinquency rates provided some positive highlights. The delinquency rates for all other loans dropped. Rates for subprime loans decreased 12 basis points (from 18.79 to 18.67 percent). The decline follows a 148 basis point increase reported in the first quarter. Declines were also noted for loans guaranteed through the two major government mortgage programs. Delinquency rates fell 40 basis points for VA loans (from 7.22 percent to 6.82 percent), while the rates for FHA loans declined from 12.72 to 12.63 percent.

Still, on a year-over-year basis, delinquency rates increased across the board. Seasonally adjusted delinquency rates moved up 120 basis points for prime loans, 385 basis points for subprime loans, five basis points for FHA loans, and 67 basis points for VA loans from the second quarter of 2007.

Foreclosures
Nationally, the rate of foreclosures started was up 20 basis points compared with that reported in the first quarter of 2008. In the second quarter of this year, the foreclosure starts rate increased from 0.54 percent to 0.67 percent for prime loans from a year ago. Foreclosures on subprime loans rose from 4.06 percent to 4.70 percent and from 0.50 percent to 0.65 percent for VA loans. FHA loans also posted an increase of 16 basis points in foreclosure starts -- from 0.87 percent to 1.03 percent. That increase follows a decline posted in the first quarter rate.

The foreclosure inventory rate also increased nationally for all loans, from 2.47 percent in the first quarter of 2008 to 2.75 percent in the second quarter of 2008. On a year-over-year basis, the foreclosure inventory rate increased 135 basis points (from 1.40 percent in the first quarter of 2008). The foreclosure inventory rate rose for all loans except FHA loans. The foreclosure inventory rate rose 20 basis points for prime loans, 107 basis points for subprime loans, and nine basis points for VA loans. Foreclosure inventory rates for FHA loans actually experienced a 16 basis point drop.

Mixed Regional Results
There were differences in delinquency and foreclosure rates by state. While delinquency rates rose across the country from the first quarter to the second quarter of 2008, not all states experienced the same pattern.

The top five states with the highest quarter-over-quarter increase in delinquency rates were Delaware (104 basis points), Mississippi (103 basis points), Massachusetts (100 basis points), Maryland (96 basis points), and Indiana (92 basis points). On the flip side, the states with the smallest change in delinquency rates were South Dakota (20 basis points), North Dakota (27 basis points), Wyoming (32 basis points), Colorado (33 basis points), and Oregon (34 basis points).

In terms of foreclosure rates, the national numbers masked surprising quarter-over-quarter regional changes. The rate of foreclosure starts dropped in 12 states from the first to the second quarter of 2008. Massachusetts recorded the largest decline-33 basis points - followed by Maryland (a 9 basis point decline) and Mississippi (7 basis point decline). The other states with declines in foreclosure starts were Nebraska, Arkansas, Texas, South Dakota, Missouri, Colorado, Montana, Michigan, and Louisiana.

Meanwhile, foreclosure inventory rates also dropped in 17 states over the first two quarters of 2008. Wyoming posted the greatest drop-24 basis points - followed by Massachusetts (declining 21 basis points), and Mississippi (a decline of 20 basis points). Foreclosure inventory rates also declined in Alabama, Arkansas, Indiana, Iowa, Kansas, Louisiana, Michigan, Missouri, Nebraska, North Dakota, Ohio, Oklahoma, South Dakota, and Texas.

These positive changes were nonetheless offset by foreclosure rate increases in states like Florida, Nevada, Arizona, California and New Jersey. These states experienced significant increases from the first to the second quarter of 2008, both in terms of foreclosure starts and foreclosure inventory rates. Florida posted the highest figures, with a 139 basis point jump in foreclosure inventory and a 35 basis point increase in foreclosure starts. The changes were similar in the other four states-Nevada (80 basis point change in inventory, 31 basis point change in starts), Arizona (68 basis point change in inventory, 29 basis point change in starts), California (73 basis point change in inventory, 23 basis point change in starts) and New Jersey (39 basis point change in inventory, 14 basis point change in starts).

Impact of Fannie/Freddie Takeover
Events in the capital markets during September have clearly overshadowed the mortgage delinquency and foreclosure report, which came out prior to the news about the federal government takeover of Fannie Mae and Freddie Mac. The obvious question arising from these events centers on the impact that this move will have upon the mortgage industry and the performance of existing and future loans.

While there are still a large number of details left to be resolved, much depends on the government's degree of involvement in Fannie and Freddie. Assuming that the Treasury and the Federal Housing Financed Agency (FHFA) increase liquidity in the two enterprises, we can expect mortgage rates to decline in the short run. FHFA can accomplish this through its authority to purchase a larger amount of mortgages, including the newly conforming jumbo loans (up to $625,000). In the long run, the performance of the mortgage market will likely be conditioned by the restructuring of Fannie and Freddie and the recovery of the housing market.

- The Forecast

A "Shot in the Arm" for the Housing Market
By Lawrence Yun, NAR Chief Economist

Home sales continue to edge up and down. Overly stringent lending criteria imposed by Fannie Mae and Freddie Mac in the past month no doubt held back contract signings. Pending home sales declined in July, after rising in June. But the recent action by the federal government in "taking over" the two GSEs could be the shot in the arm that the housing market needs.

Even with the latest pullback in contract signings, pending home sales have been fairly stable on a national basis for nearly a year, with dramatic local market differences continuing. Contract signings have been steaming ahead, nearly doubling in activity from a year before in several California and Florida markets. The outer Washington, D.C., exurbs also are coming around very strongly. That bodes well for future home sales nationally.

Another factor is the attractiveness of FHA-mortgages. FHA is taking a more active role in serving a broad cross-section of home buyers, but it will take some time to fully get up to speed. There's been a surge in FHA mortgage applications. Interestingly, many people in high-cost areas aren't familiar with FHA programs. REALTORS® should be aware that they are one of the major sources of information about mortgage programs for their clients. They should familiarize themselves with this increasingly valuable program.

Still, there are many ambiguities in the marketplace. The economy is producing more, yet job cuts continue. GDP growth in the second quarter of this year was 3.3 percent. In fact, the last time GDP growth was negative was in the fourth quarter of last year - and that was before the unprecedented surge in oil prices. In spite of relatively healthy GDP growth, 84,000 non-farm payroll jobs were shed in August - more than most analysts (including me) expected. And those most recent job cuts have been across the board in all sectors.

Those job cuts help explain anemic consumer confidence. While consumer confidence rose in August, the Conference Board reports that its consumer confidence index stood at 56.9 for that month.. The reading suggests that for most Americans, the economy is basically in "neutral." A first-time home buyer tax credit - one of the provisions of the economic stimulus legislation passed and signed into law earlier in the summer - and lower interest rates on newly conforming jumbo loans favors consumers. But buyer confidence remains low. Even with the Treasury Department's direct intervention in the secondary mortgage market, it is unclear if we will go back to sound normal underwriting criteria, or if it will remain overly stringent. The housing market outlook is very cloudy.

We often cite the real estate professional's mantra: all real estate is local. But economic conditions are also local. The speed and timing of a housing and economic recovery depends on local market conditions. Based on local market fundamentals, I expect robust home price growth in places like Denver over the next two years. Up until the weekend of September 12, I would have included Houston in that list as well, but given the recent damage wrought by Hurricane Ike we'll have to watch the Houston market closely to see how fast its economy recovers from the storm. In addition, the frequent reporting of multiple bids in California and Florida may be signaling a bottom in home prices in those areas. Nationally, home sales are stable now but are expected to increase in coming quarters.

A Look Down the Road
Looking at middle-ground assumptions, existing-home sales are projected to total 5.01 million this year before rising 6.9 percent in 2009 to 5.35 million. After declining an average of 4 to 7 percent

this year, home prices are forecast to rise by 2 to 4 percent next year. New-home sales will total about 508,000 in 2008 and 463,000 next year, down significantly from 775,000 in 2007. With builders motivated to clear inventory, housing starts, including multifamily units, will probably fall 17.1 percent in 2009 to 801,000 units from 966,000 this year. NAR's housing affordability index is likely to remain favorable throughout 2008, averaging 13 percentage points higher than last year.

Growth in the U.S. gross domestic product (GDP) is forecast to remain positive with a growth rate of 2.0 percent for all of 2008, and 2.0 percent also next year. The unemployment rate is estimated to average 5.8 percent over the coming year. Inflation, as measured by the Consumer Price Index, is anticipated at 3.8 percent this year and 1.6 percent in 2009. Inflation-adjusted disposable personal income is projected to grow 1.8 percent in 2008 and 2.1 percent next year.

Other Factors and Conclusions
The recent takeover by the federal government of Fannie Mae and Freddie Mac could significantly affect many of the components of housing activity. For one, interest rates are likely to dip initially. That is good news for homebuyers who have been waiting for rates to decline. In addition, the recently enacted economic stimulus package that provides for a first-time homebuyer tax credit could spur those consumers currently waiting for that one piece of encouragement to become homeowners. Recent drops in the price of a barrel of oil could also impact consumer confidence - but a lot depends on the supply of oil (OPEC was meeting this month to decide whether or not to curtail production), the strength of the U.S. dollar, and if any of that translates into major declines in the price of a gallon of gasoline at the pump for American consumers. The impact on fuel prices post-Hurricane Ike is also wildcard.

And there's always politics. At the time of this writing, the national election is less than two months away. Housing will be major issue in the campaign - and for the next administration.