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Popular Economics Weekly

Fannie Mae’s rate of serious delinquencies - at least 90 days behind - for conventional loans in its single-family guarantee business increased to 5.29 percent in November, up from 4.98 percent in October - and up from 2.13 percent in November 2008. To put it in historical perspective, the delinquency rate for all conventional loans is now above 6 percent, up from 4 percent long term.

This is why there are efforts to ramp up the government’s Home Affordable Modification Program (HAMP) to include equity-line second Trust Deeds. The U.S. Treasury has outlined new guidelines aimed at streamlining requirements for mortgage relief under the administration’s Home Affordable Modification Program launched a year ago.

The guidelines specify that borrowers must provide three items to loan servicers, the companies that collect mortgage payments: a form requesting a loan modification, authorization for the servicer to seek tax information from the Internal Revenue Service and evidence of income, such as two recent pay stubs. Previously, some servicers have asked borrowers to fax in copies of their tax returns. Borrowers sometimes couldn’t find the needed tax forms or complained that servicers repeatedly lost material faxed to them.

Bank of America is the first large lender to sign on to the second lien program in an effort to speed up modifications. There are 3-4 million mortgage holders supposedly eligible for modifications. A 3 to 6 month trial period when payments must be kept up is to be followed by a more permanent 5-year fixed rate ARM. With market rates for both conforming and jumbo-conforming (with $729,750 maximum amount) 5-year fixed rates below 4 percent, this is an ideal time to push the modification effort.

Borrowers are eligible if their overall monthly mortgage payment including taxes, insurance and Condo Homeowner Association fee, exceeds 38 percent of their gross income on a loan taken out before January 1, 2009. Their lender has to first agree to bring their payment down to 38 percent, and the HAMP program will split the cost with the lender-servicer to bring it down to 31 percent of gross monthly income. To date more than 1 million have applied, but few have been converted to permanent status. This is in part because the rules have changed, and now income-verification is required.

The Fed’s $1.3 billion purchase of mortgage-backed-securities has kept down interest rates, but regulators are still pushing lenders to tighten their credit standards. The latest change is a maximum debt-to-income ratio limit of 45 percent of gross income. To date, this hasn’t helped to lower foreclosure rates, so defaults are still at record highs.

For those who are worried about mortgage rates after the Fed stops purchasing Mortgage Backed Securities in March, here is a Wall Street Journal opinion. The odds are highly in favor of the Fed keeping overnight rates where they are through June. In fact, an article in the Wall Street Journal yesterday points out that there is a growing belief among investors that when the Fed’s mortgage security purchase program ends at the end of March, mortgage rates won’t soar. "They argue that investors, searching for higher-yielding securities, will find government-backed mortgage-backed securities a bargain relative to other investments, like corporate debt, that have rallied for much of the past year."

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The number of California homes entering the foreclosure process declined again during fourth quarter 2009 amid signs that the worst may be over in hard-hit entry-level markets, while slowly spreading to more expensive neighborhoods. There are mixed signals for 2010: It’s unclear how much of the drop in mortgage defaults is due to shifting market conditions, and how much is the result of changing foreclosure policies among lenders and loan servicers, a real estate information service reported.

Calculated Risk reported that Mid 2006 was clearly the worst of the ‘loans gone wild’ period and it’s taking a long time to work through them. We’re also watching foreclosure activity start to move into more established mid-level and high-end neighborhoods. Homeowners there were able to make their payments longer than homeowners in entry-level neighborhoods, but because of the recession and job losses, that’s changing. Foreclosure activity is a lagging indicator of distress," Walsh said.

Very good news was that fourth quarter advance estimate of gross domestic product rose more than expected at an annualized rate of 5.7 percent. This was the quickest growth rate in more than six years, up from Q3 growth of 2.2 percent.

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And it was with very little inflation, what with wage costs having barely risen. The GDP’s so-called price deflator, the best indicator of inflation since it covers all sectors of the economy, is rising just 0.6 percent year-over-year.

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Wage costs, which make up two-thirds of product costs, are directly tied to the employment rate. And since it could be another 3-5 years before employment returns to normal levels, there should be little inflationary pressure for years to come.

So the combination of low inflation and weak employment should keep interest rates low through 2010. This is already encouraging homebuyers to return to the housing market.

Harlan Green © 2010