New home sales tumble 11.2%

The drop from December renews fears of another decline in housing prices and indicates that a home buyer's tax credit is having little effect.

By Alejandro Lazo

February 25, 2010

An unexpected drop in new home sales for the month of January, plus a plunge in mortgage applications to the lowest level in nearly 13 years, have renewed fears of another decline in housing prices.

Economists said the 11.2% tumble from December in new home sales -- the third consecutive monthly drop announced by the Commerce Department -- indicates that Congress' extension of a home buyer's tax credit late last year appears to be having little or no effect on consumer sentiment.

Economists surveyed by Bloomberg News had expected January new home sales to climb.

New home sales make up a much smaller share of the buying activity than sales of previously occupied homes. But the data are carefully watched by economists because construction can give a boost to an economy heading out of recession.

Analysts said the January numbers indicated that residential builders were probably in for a tough year as they continue to compete with steeply discounted bank-owned properties and consumers face depleted household incomes and heavy debt loads.

"The housing market is still flat on its back and it is only being held together -- as well as it's being held together -- by very aggressive actions by the federal government," said Mark Zandi, chief economist at Moody's Economy.com.

"The new home builders are going to have trouble competing."

The drop put the seasonally adjusted estimate of new home sales for 2010 at 309,000 units. That's the lowest estimate by the Commerce Department, which adjusts the rate monthly, since record-keeping began in 1963.

Comparing the new home sales rate year over year, there was a 6.1% drop from January 2009, when prices nationally were still sinking, financial markets were falling.

"So much for the trend of decent housing news!" Michael D. Larson, an interest rate and housing analyst at Weiss Research, wrote in a note to clients. "January's new home sales figures were awful across the board. Fewer new homes were sold in this country than at any time since the Kennedy administration."

David Crowe, chief economist for the National Assn. of Homebuilders in Washington, said he still expected builders to post stronger sales this year than in 2009.

"I do believe in the spring season we will see a pickup because of the good, affordable mortgage rates and very competitive prices and a significant pent-up demand," Crowe said.

The sales data came as the Mortgage Bankers Assn. in Washington reported separately that applications for mortgages to purchase houses -- new or existing -- fell 7.3% last week.

The group's purchase applications index has been declining for the last few months and is now at its lowest level since May 1997.

"As many East Coast markets were digging out from the blizzard last week, purchase applications fell, another indication that housing demand remains relatively weak," said Michael Fratantoni, a vice president at the mortgage group.

The drops in new home sales and purchase applications follow news Tuesday that home prices in 20 metropolitan areas scored a modest 0.3% gain in December -- the seventh consecutive increase, according to the Standard & Poor's/Case-Shiller index.

Washington policymakers have taken several measures to support the housing market. They have kept interest rates at rock-bottom levels and offered a plentiful supply of mortgages through the Federal Housing Administration.

In November, Congress extended a popular tax credit of as much as $8,000 for first-time buyers through April and expanded it to include a credit of as much as $6,500 for some current homeowners.

"That credit is apparently having no impact whatsoever," said Patrick Newport, U.S. economist with IHS Global Insight.

Jumbo mortgage market is beginning to thaw

The meltdown sent interest rates soaring and availability shrinking, but rates are declining and lenders are more willing to make loans that top the limits for Freddie Mac, Fannie Mae and the FHA.

By E. Scott Reckard

February 24, 2010

Phil Kelly had 18 more months to go before the fixed rate on his $2.5-million mortgage became adjustable.

But when Kelly, a former computer executive living in Rancho Santa Fe, learned he could knock his interest rate down by a full percentage point by refinancing, he went for it.

"It's always tough to pick the exact bottom or top of anything," Kelly said. "But I think this rate is about as low as you're going to get."

Rates on jumbo mortgages -- loans of more than $729,750 in counties with the highest-cost housing -- shot up during the financial crisis as lenders and loan investors shunned anything tainted with even a whiff of higher risk. Rates on big mortgages were especially high relative to those on smaller loans.

But in a boon for borrowers in California's expensive housing markets, the jumbo-loan market is starting to return to normal.

Two weeks ago, the average interest rate on 30-year fixed-rate jumbos dropped to 5.79%, a nearly five-year low, according to rate tracker Informa Research Services of Calabasas. It edged up to 5.88% on Tuesday, still very attractive by historical standards. The average is down from well above 7% in late 2008.

Rates are even lower on so-called hybrid adjustable mortgages, on which the rate is fixed for, say, five years and then adjusts annually. Kelly's new loan is a five-year hybrid adjustable identical to his old one, except that he's paying about 5%, down from 6%.

Banks are also relaxing slightly some of their requirements for jumbo loans. That's an encouraging sign because the market for jumbos, in contrast with the rest of the mortgage business, isn't being propped up by Uncle Sam.

The lower rates and somewhat easier terms reflect newfound confidence among banks in the housing market. That's because, by definition, jumbos are too big to be bought by Freddie Mac and Fannie Mae or to be insured by the Federal Housing Administration. Plus, the private market for mortgage-backed bonds dried up when the meltdown hit. So lenders making jumbo loans these days must be willing to take the risk of keeping them in their portfolios.

The maximum amounts for Freddie Mac and Fannie Mae "conforming" mortgages, and for FHA mortgages, are set by Congress. The cutoff for single-family homes was $417,000 from 2006 until February 2008, when lawmakers increased it temporarily to $729,750 in certain high-cost areas, including Los Angeles, Orange and Ventura counties. Conforming loans top out at $500,000 in Riverside and San Bernardino counties and $697,500 in San Diego County.

The increased upper limits, which have been extended until the end of this year, have created a three-tier system in expensive areas, mortgage professionals say: loans of up to $417,000, which are the easiest to obtain and carry the lowest rates; "conforming jumbos" from $417,000 to $729,750, which are somewhat harder to get and have slightly higher rates; and true jumbos, with the toughest standards and highest rates.

In the boom years of 2005 and 2006, interest rates were typically no more than a quarter of a percentage point higher on jumbo loans than on conforming loans, according to Informa Research. That widened as the mortgage meltdown intensified and home prices dropped in late 2007. The spread ballooned to nearly 1.7 percentage points in early 2009 after the entire credit system froze.

But this year the rate spread has narrowed to less than a percentage point. It could shrink more if conforming-loan rates rise as expected after the Federal Reserve wraps up a $1-trillion-plus program to support the market for conforming loans next month.

In addition to lower rates, down-payment requirements are being relaxed in some cases. For example, to write a jumbo loan in coastal areas of Los Angeles and Orange counties, Wells Fargo Home Mortgage looks for a 20% down payment or that percentage of equity, down from 25% last year, said Brad Blackwell, a national mortgage sales manager at the lender.

The reason: Wells believes high-end home prices are stabilizing in those coastal counties. But the bank still requires higher down payments in the Inland Empire and other battered housing markets such as Florida, Nevada and Arizona, where prices for jumbo-size homes don't appear to be stabilizing, he said.

Jumbo loans remain much harder to get than before the credit crunch and recession. Borrowers typically must have a credit score of at least 700, compared with boom-era minimums in the 600s, though Laguna Niguel mortgage broker Jeff Lazerson said at least one lender was again making sub-700 jumbos available.

What's more, unless their down payments are very large, borrowers must provide evidence of high income, have sizable bank accounts as a cushion against the unforeseen and occupy the houses themselves.

But there are clear signs that the jumbo market has loosened. One is an increasing availability of "stated income" loans -- those that don't require proof of income -- of as much as $2 million to borrowers with at least a 40% down payment, said mortgage broker Gary Bluman, owner of Real Estate Resources in Brentwood.

Also, instead of a true jumbo loan, some "piggyback" second loans are available again to help certain borrowers with 25% down payments pay for high-priced homes, Lazerson said.

Of course, adjustable, stated-income and piggyback loans were big contributors to the mortgage meltdown. But such provisions are less risky if a borrower has 25% to 40% equity.

Despite the confidence in the market that such terms imply, lenders and mortgage investors are still dealing with piles of bad jumbos made during the boom.

Delinquencies of 60 days or more on prime jumbo loans that were packaged into securities jumped to 9.6% in January, up from 3.7% a year earlier, Fitch Ratings reported this month.

The jumbo delinquency rate in California climbed to 11.3% from 4.1% a year earlier.

For now, the jumbo market remains limited to the volume of loans that banks are willing and able to keep on their books. But there is hope for a return to private outside funding.

Although no jumbos have been turned into securities for at least two years, packages of delinquent jumbos have begun to be sold again to "vulture" investors, a sign that the secondary market for the loans may revive, said Michael Fratantoni, vice president of research at the Mortgage Bankers Assn.

"The ice sheet," he said, "is starting to crack here and there."

HOUSING SCENE

Forecast says home values won't regain bubble heights for at least a decade

A New Jersey financial publishing house assumes conservative rates of growth in its formulas but acknowledges that its conclusions take a 'real leap of faith.'

By Lew Sichelman

January 24, 2010

Reporting from Washington

 Many people would like to know when the housing market is going to hit bottom. But those who plan to stay put don't care as much about the bottom as they do about when their home values will return to where they were before the bubble burst.

HSH Associates, a Pompton Plains, N.J.-based financial publishing house, ran some numbers to address that question recently, and the findings aren't terribly encouraging.

"It's going to be a long time coming," HSH Vice President Keith Gumbinger said of the prospects of rebuilding equity. "Even in a reasonable interest-rate environment, even with reasonable appreciation."

According to the Standard & Poor's/Case-Shiller index, which tracks changes in the value of residential real estate in 20 metropolitan regions, prices have fallen 32.6%, peak to trough, between 2006 and the third quarter of 2009.

HSH is predicting a flat real estate market with no increase in value through June 2010. Then, from July 2010 through August 2011, a period of 14 months, prices are projected to increase at a rate of about 2.5% a year. And from then on out, the company is figuring on a yearly gain of 3%.

With these percentages in mind, let's look at what would happen to the value of a $200,000 house purchased at the top of the market in July 2006.

By the time the market hit bottom -- at least the bottom according to Case-Shiller's 32.6% figure -- that property was worth $134,800. Using HSH's assumptions, the value of the imaginary house won't get back to the $200,000 paid for it until July 2022 -- 12 1/2 years from now.

Even Gumbinger concedes this educated guess takes a "real leap of faith" in projecting this far out into the future.

"We could end up running through a whole other recession cycle," he says, noting that the U.S. economy tends to fall into a business-cycle contraction every 10 years or so. "And house value[s] could move up more strongly or more weakly, depending on any number of circumstances."

Following the value line, look at a house that was purchased for $200,000 in January 2000. Based on the Case-Shiller index, this property reached its top value in July 2006, when it was worth $413,040. If the buyer sold at that time, he would have netted a gain of 106% and change.

Using HSH's projections, this $200,000 house purchased at the turn of the century won't be worth $413,000 again until December 2021.

That's not quite as long as it will take the house bought at the top of the market to regain its value, but it's still going to be 11 years and 11 months.

lsichelman@aol.com

Distributed by United Feature Syndicate.

Trade-up buyers settle for less to get more from residential properties

Sellers accept off-peak pricing to upgrade to bigger, better properties

November 01, 2009 12:00AM
 
By Gabby Warshawer

101 Warren Street With third-quarter market reports showing an increase in activity and brokers reporting more deals getting hammered out, the question is: Who has come off the sidelines?

The answer may be "trade-up" buyers, or New York homeowners willing to sell for much less than what they would have gotten at the height of the market -- so long as they can then buy better property at reduced prices.

The thinking behind selling low and upgrading is simple: "It's a logical step because if you take 20 percent off a $1 million home, and 20 percent off a $2 million home, if you can afford the upgrade, you're getting a better value" with the more expensive property, said Leah Blesoff, a sales associate with Halstead Property.

Brokers say they are seeing the increasing trend of selling and buying low among a select group that share a few key characteristics. First, these are buyers who have obviously not been hit hard by the recession, and thus can afford to shell out for a pricier home than they now own. They are also generally a less risk-averse group since, as sellers, they have to be willing to accept less for their property than it was valued at just a short while ago. And finally, brokers say many of those who have already inked deals that fit the sell-low/buy-low formula are unloading properties in New York and buying new ones in the suburbs or other markets across the country, where the real estate bust has been much more pronounced.

Darren Sukenik, a managing director with Prudential Douglas Elliman, points to a listing he is handling in Tribeca at 101 Warren Street as an example of buying and selling low. He said the sellers bought their condo four years ago, "right before the huge run-up," and have listed the unit "at an incredibly competitive price" that's far less than what they likely would have asked a couple of years ago.

They are selling, he said, because they're buying "the estate of their dreams" in Florida for 60 percent off its peak value.

"It's all relative," said Sukenik. "What's exciting is that even though the New York market has come down 30 to 40 percent, other markets have come down much more."

Still, Sukenik argued that "if you bought before '06, you're not really selling low, because you're not necessarily selling at a loss."

For many, there's often a lemons-to-lemonade philosophy underlying sell-low/buy-low transactions.

Luigi Rosabianca, the principal attorney at the real estate firm Rosabianca & Associates, is working with a couple selling their Battery Park City condo at a loss, but upgrading to a larger, more expensive condo on the Upper East Side.

"They're moving to a bigger place in a nicer building and neighborhood," he said. But, he noted, "the underlying notion" that they could have sold their condo for more a year or two ago has been difficult to shake.

Blesoff, meanwhile, cited sellers she's representing in Kips Bay who are considering upgrading to a more expensive home. They had to come to terms with pricing their apartment realistically for today's market in order to get their unit in contract.

They initially tried to sell it themselves in February with an asking price of $850,000. When Blesoff took over the listing in March, she priced it at $799,000. By May, the co-op's price was reduced to $749,000, and it went into contract in July for $675,000.

While some sell-low/buy-low sellers are simply looking to make a smart upgrade in a down market, others are jumping into the market for a host of reasons.

"It's often people who are having a second kid and [are even] feeling good about their jobs," said Gregg Goldsholl, an agent with Houlihan Lawrence. He has worked with a couple of sellers who wanted to upgrade but have had to cut prices on the properties they're selling in order to trade up.

"They realize that even if they're not getting what they wanted for the house they're selling, they're making it up on the buying end," Goldsholl said.

Southern California housing market strengthens in December

In a typically sluggish month, the median sale price rises 4% over the same period a year earlier, and sales jump 12.1%. The pace of sales is the best since 2006, aided by tax credits that end soon.

By Alejandro Lazo

January 20, 2010

Rock-bottom interest rates and stronger sales in higher-priced neighborhoods helped Southern California's housing market post robust gains in the typically sleepy month of December, new data show, and experts say the momentum is continuing -- ushering in an early start to the spring home-buying season.

The median price paid for a Southland home rose 4% to $289,000 last month from December 2008, the first time the closely watched figure has posted a year-over-year gain since the region's real estate market took a nose dive 2 1/2 years ago, according to data released Tuesday by MDA DataQuick, a San Diego real estate research firm.

Rebounding home prices could help the Southern California economy recover from its slump, as a stronger housing market could lead to hiring on construction sites and in real estate sales, title and escrow offices, said Esmael Adibi, director of Chapman University's A. Gary Anderson Center for Economic Research.

"The worst is behind us for sure," he said. "For the economy, the implication is, at least on the residential side, we don't expect more layoffs, and you might actually see some pickup in employment."

But Adibi noted that those gains could be tempered by continued weakness in the commercial real estate market, which includes office buildings, retail centers and hotels.

The increase in December home prices follows a dismal 2008. Even with the rise, the median price was still 42.8% lower than its $505,000 peak during several months in 2007, underscoring the steep decline in the latter part of the last decade. The median is the point at which half the homes sold for more and half for less.

Still, December's sales pace was the best since 2006, capping a year in which strong government support of the housing market helped stabilize prices for most of the last year and brought more buyers back into the market.

"It's time for me to move," said Soosan Saedi, 43, who is looking to sell her three-bedroom, 1,300-square-foot Woodland Hills house and trade up to something bigger. "I need the space, the mortgage rates are low, and fortunately I am not having trouble with loans, so it is time for me to buy."

The housing market's recovery began last year as first-time buyers and investors competed for steeply discounted foreclosed homes. Now foreclosure properties are making up a smaller part of the mix. The gains in December also reflect a more diverse market, experts said, as prices were bolstered by increased sales in many mid- to high-priced communities.

Part of that trend shows the increased affordability of high-end properties as more are taken back by banks or are sold "short," for less than what is owed on their mortgages, real estate professionals said.

"They have come down a lot," said Syd Leibovitch, president of Rodeo Realty in Bel-Air. "I think the sellers dug in for a while, and now they are accepting the reality that prices have dropped, and they are being a lot more flexible."

Beverly Hills, Santa Monica and Newport Beach were among the affluent areas notching healthy sales gains, according to DataQuick. Conversely, areas hard hit by foreclosures -- including Moreno Valley, Lake Elsinore and Palmdale -- saw a drop-off.

Christopher Cortazzo, a Coldwell Banker agent in Malibu, said he sold a home for $12 million in December, roughly $3 million below its listing price, and closed out the month with $26.5 million in sales, one of his best months of the year. Cash-rich buyers looking to capitalize on lower prices have rushed into the market in recent weeks, he said, and the sales pace has continued through January.

"Spring season is going to start early," Cortazzo said. "We are having a lot of cash deals, so there is a lot of money out there, and there is amazing opportunity and great deals to be had."

One thing driving sales is the April 30 expiration of tax credits for home buyers. First-time home buyers can get up to $8,000 in credit on their federal income taxes, and current homeowners can qualify for up to $6,500.

Low mortgage rates are also a factor. Thirty-year fixed-rate loans were below 5% through most of December and haven't risen much.

The role of the federal government in the housing market remains key. Some experts worry that once certain policies and programs wind down -- among them low interest rates, tax incentives for buyers and an increased accessibility of mortgages backed by the Federal Housing Administration -- the housing market could falter.

Christopher Thornberg, principal of Beacon Economics, predicts home prices will drop once those policies and programs expire.

"The bounce in the housing market is due to government policy, not due to fundamentals," he said. "None of these programs fix the underlying problem. They only delay the solution -- they only delay the healing process."

The percentage of Southern California homes that sold for more than $500,000 rose to 20.2% of all sales in December from 16.5% a year earlier, DataQuick said. That is well off the 52% level reached before the credit crunch hit in 2007, which made large mortgages difficult to obtain.

Richard Green, director of the USC Lusk Center for Real Estate, said buyers have sensed more security in Southern California's real estate market in recent months and have begun to get off the fence.

"We are getting a little bit of what we had six or seven years ago, where people are worried if they don't get in now they are going to miss out on an opportunity," Green said. "In a decent neighborhood, in the half-a-million-dollar range, we are back to lots of offers."

A total of 22,328 new and resale homes sold last month in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties, up 16.4% from November and 12.1% from December 2008, DataQuick said.

Still, uncertainty lingers. Unemployment and a potential wave of homes headed for sale because of foreclosure or delinquency loom over the U.S. housing market. Both could slow Southern California's progress toward recovery should the Obama administration fail in its efforts to aid struggling borrowers. California's budget woes could also bode poorly for the state.

"The fiscal picture is still really bleak, and that makes me worry," Green said.

The home-buyer tax credit motivated Jennifer Scholte, 31, to close on a Lakewood home in December. The teacher said she and husband Eric, 34, saved up for a 20% deposit on the $361,000 property.

"We are first-time home buyers, and with that credit, that was a big push," she said.

To take advantage of similarly minded buyers, Leibovitch of Rodeo Realty said he has hired 40 to 50 people in the last three months, including secretarial, marketing and administrative staff, to prepare for what he predicts will be one of the strongest sales years on record. Escrow of the West, a Beverly Hills company, said it would open a Sherman Oaks branch Thursday, creating 25 jobs.

alejandro.lazo@latimes.com

November pending home sales index tumbles

The number of new deals under contract that month fell from October, a sign of vulnerability in the housing recovery.
By Alejandro Lazo

January 6, 2010

 The number of homes placed under sales contracts tumbled in November from the previous month, presenting fresh evidence that the nascent housing recovery could be poised for a dip in the new year.

The National Assn. of Realtors said Tuesday that its pending home sales index -- a forward-looking indicator based on contracts signed in November -- fell 16% to 96 from an upwardly revised 114.3 in October. But the index still was 15.5% higher than for November 2008, when it was 83.1.

The housing market picked up steam last year as the federal government pushed to lower interest rates, increase loans to first-time buyers from the Federal Housing Administration and provide an $8,000 tax credit for first-time buyers.

But experts fear that a slowdown in buying activity coupled with a possible wave of foreclosures this year could cause the values of homes to drop again.

The data on contracts follow a recent government report that new home sales plunged 11.3% in November.

Experts said the November drop in home contracts and in new home sales reflected a falloff after a surge in activity as buyers rushed into the market to take advantage of the tax credit before its initial expiration Nov. 30.

Congress in November extended that credit through April and expanded it to include a $6,500 incentive for some buyers who already own a home.

But many experts, such as Lawrence Yun, chief economist for the Realtors group, predict the effects of the expansion will be muted or, at best, will not lead to a pickup in sales until spring.

"It will be at least early spring before we see notable gains in sales activity as home buyers respond to the recently extended and expanded tax credit," he said. "The fact that pending home sales are comfortably above year-ago levels shows the market has gained sufficient momentum on its own."

Michael Larson, a housing analyst with Weiss Research, was also upbeat.

"Since the period covered in this report, the first-time buyer credit has been expanded and extended," he wrote in a note to clients Tuesday. "We've also seen indicators of unemployment and economic growth stabilize over the past few months. So after we work through this period of housing indigestion, we'll likely see sales rates gradually pick up again and home inventories gradually decline."

alejandro.lazo@latimes.com

Many homeowners with modified mortgages are behind on payments

About 25% of borrowers helped under the administration's massive foreclosure prevention program are delinquent, the Treasury Department says.

By Renae Merle

December 5, 2009

Reporting from Washington

About 25% of borrowers helped under the administration's massive foreclosure prevention plan have already fallen behind on their new mortgage payments, according to government data that raise new questions about the program's effectiveness.

The delinquency figures reflect the latest troubles of the program, known as Making Home Affordable. Treasury Department officials this week announced a campaign to put new pressure on lenders to do more to move struggling homeowners into loans with easier terms.

So far, more than 650,000 borrowers have been enrolled into the initial or trial phase of the program and have seen their payments lowered by an average of $640 a month, or 40%. But a recent survey of large mortgage servicers published by the Treasury Department found that more than 25% of borrowers in the program were not current on their trial payments.

Moving homeowners from the trial phase into a permanent modification has become the program's latest stumbling block. Borrowers must make three payments and submit documents proving that they qualify for the program to move forward, but a bottleneck has emerged, with few homeowners making it through. JPMorgan Chase & Co., which signed up more than 178,000 homeowners, noted last month that 22% of borrowers helped didn't make their first payment.

If borrowers struggle to keep up with their modified mortgage payments, housing experts said, it could diminish the effectiveness of the program, which the administration hopes will help as many as 4 million borrowers.

"I remain disappointed," said Richard H. Neiman, New York's superintendent of banks and a member of the Congressional Oversight Panel, which is monitoring the government's bailout programs. "I am concerned that a quarter of trial mods are not current."

Some borrowers have reported being confused about the trial modification process, including how their new payment was determined and when they need to begin paying, Neiman said. But the delinquency rate also reflects that some borrowers' financial conditions have eroded since they received the initial loan modification, he said.

"If the borrower qualified under that reduced income but then subsequently lost the job entirely, they are more likely to fall behind on the payments," said Andrew Jakabovics, associate director for housing and economics at the Center for American Progress. "Unfortunately, the program doesn't allow for a second bite at the apple."

But some government and industry officials say it is too early to judge the program and unrealistic to expect all borrowers to keep up even after receiving help.

The purpose of the trial phase of the modification process is to give homeowners immediate relief while they submit proof that they qualify for the program and determine whether the reduced monthly payment is sustainable for them, said Meg Reilly, a Treasury spokeswoman.

"Modifications may not be the right option for every homeowner," she said.

In a written response to questions from the Congressional Oversight Panel, Herbert M. Allison Jr., Treasury's assistant secretary for financial stability, noted that "over 73% of borrowers are current," leaving more than 25% of them delinquent.

He also said Treasury has forecast an initial re-default rate of 40% on the foreclosure prevention program. That would be an improvement from the industry track record so far, which has seen more than half of borrowers become delinquent a year after their loans were modified, according to government data.

It may be that some modifications were given to borrowers who had no realistic expectation of keeping their home, said Mark A. Calabria, director of financial regulation studies at the Cato Institute. A few borrowers may be using the program to delay foreclosure and to find another way to save their home or just stay for free, he said.

"There is some positive amount of that," Calabria said. And some borrowers should be going "straight to foreclosure -- they aren't sustainable under any reasonable circumstances."

Many initial modifications were given to borrowers after a phone conversation with lenders but without written confirmation of their income or expenses, said Josh Denney, associate vice president of public policy at the Mortgage Bankers Assn. The borrower "may have had a more optimistic outlook about how their finances were likely to go, how much income they would have available to make their payment on time," he said.

The Treasury Department is expected to release data next week showing that the vast majority of borrowers remain stuck in the initial phase of the program.

More than half of the borrowers eligible for a permanent modification by the end of the year have not submitted all of the required documents, such as pay stubs and tax returns, including some who have provided nothing, government officials have said.

Housing advocates say that in many cases borrowers have submitted the documents but remain in limbo as they await a decision by the lender.

Merle writes for the Washington Post..

HOUSING SCENE

Owners' 'strategic defaults' on mortgages depend largely on how far underwater they are
Research shows that the bigger the difference between what people owe and their home's value, the more likely they are to walk away, even if they can still afford to make mortgage payments.

By Lew Sichelman

Reporting from Washington

 That some underwater owners -- whose houses are worth less than what they owe -- are walking away from their homes even though they can still afford to make their mortgage payments has been well reported, if not well documented.

But just how prevalent are these "strategic defaults"? And what are the social and moral ramifications of jumping ship?

The answer to that first question is difficult to measure, if only because people who do make a conscious decision to ditch their mortgages, although they can still pay them, have every reason to disguise themselves as people who can no longer afford their loans. After all, if they can't make their payments, maybe Uncle Sam will ride to their rescue.

But research by three academics suggests that the willingness of people to default depends largely on just how far underwater they are. Or, as the study's authors put it, "People default because of the size of their negative equity, not just because they cannot afford to pay."

When the difference between what they owe and what their homes are worth is less than 10%, the researchers found that not one of the 1,000 U.S. households sampled said they would walk away.

And when the shortfall is between 10% and 20% of their home's value, Luigi Zingales of the University of Chicago, Paola Sapienza of Northwestern University and Luigi Guiso of the European University Institute found that just 5% of the owners they sampled would quit. Even when the difference reaches 50%, only 17% said they would throw in the towel.

There are some interesting variables. For example, although the biggest determinant is equity shortfall, another major consideration is people's attachment to their homes, with folks who bought more than five years ago far less likely to default.

Another economic driver is the cost to relocate, which increases with the number of years at the current location and the number of children in the family.

But no matter how the researchers sliced it, their findings indicate that there's hardly a stampede of underwater borrowers tossing their keys over to their lenders and moving on.

Indeed, the survey also discovered that moral and social variables tend to play a significant role in predicting strategic default. Zingales, who with Sapienza is coauthor of the quarterly Financial Trust Index, said "the most important barriers" to walking away might be both moral and social.

For example, people surveyed who believe it is immoral to default are 77% less likely to declare their intention to do so. At the same time, people who know others who already have defaulted are more likely to say they themselves would default.

Then there is something the study's authors call a "multiplication effect," meaning that the social pressure not to default is weakened when the borrower lives in an area with a large number of foreclosures. The predisposition to run away increases with the number of foreclosures in the same ZIP Code, the study found.

Factors such as age, education and political affiliation also play a role in the responses. Younger and older people are less likely to say it is morally reprehensible to default than middle-aged folk. People with a higher education are less likely to think defaulting is immoral, while people with higher incomes are more likely to say defaulting is immoral. There is little difference in the moral views among Democrats or Republicans, but independents are less inclined to say defaulting is immoral.

All of this is pure supposition, of course, because the findings are based only on declared intentions, not actual decisions. But the question of morality has generated quite a bit of discussion in the media, at cocktail parties and even in the real estate community.

Realty pros who responded to a question put forth by this column on RealTalk, an online community in which 30,000-plus members seek advice, voice their opinions and sometimes just vent, declared almost universally that walking away is unprincipled -- at least up to a point.

Nellie Arrington of Long & Foster Real Estate in Columbia, Md., says it is "morally wrong, legally wrong and just plain wrong" for an owner to walk away from a mortgage he can afford simply because the balance exceeds the value of the underlying property.

"Life doesn't come with guarantees," Arrington said.

Eileen Landau of Realty Executives in Naperville, Ill., says that while walking away may be smart from a financial perspective, "from an ethical perspective, I think it's dancing with the devil."

Although many agents sided with lenders, several say that banks in some cases are simply on the receiving end of their poor decisions not to work with borrowers.

Deede Wockenfuss of CybrSold Concepts in Chandler, Ariz., has had several clients who tried to no avail to work with lenders to get their loans modified. "The bank is asking the borrower to default," she said.

When push comes to shoving your loved ones out the door, Bob Hunt of Keller Williams O.C. Coastal Realty in San Clemente says the moral duty to protect your family outweighs the moral duty to repay the loan.

"Promise keeping is not the highest moral value," said Hunt, who before his real estate career taught ethics and logic at the University of Redlands. "If I promised to lend you my gun and you are now in a clearly dangerous psychotic stage, breaking my promise would be the right thing to do, not the wrong thing."

Hunt also believes that when it comes to mortgages, moral considerations carry more weight than they should.

"Mortgages are secured notes," Hunt said. "They are not like borrowing from your grandmother. If you willingly default on her, shame on you; she has no recourse. But if you default to the bank, it can take your property. That is the deal they made.

"The property may not be worth what they lent you, but whose fault is that? They are big boys and girls. They made a business decision, and in today's market, they lost. A deal is a deal."

Maybe so, but doesn't that work both ways?

lsichelman@aol.com