There’s little doubt that 2009 was a brutal year for many in real estate while for others it was a buying opportunity. Foreclosure filings reported by RealtyTrac topped 300,000 per month for much of the year while the National Association of Realtors says that a typical existing home sold for $173,100 in October, down 7.1 percent from a year earlier.

There’s also been good news. Interest rates fell below 5 percent and NAR reports that home prices actually rose in 30 metro areas during the third quarter. Home prices also fell in 123 areas, but a recovery — if there’s to be a recovery — has to start somewhere.

What about 2010? Where are we headed? Here are the views of one observer — someone who admittedly is not a trained economist, Nobel laureate, high-ranking government official, soothsayer or seer.

Foreclosures & Modifications

Since it first began tracking foreclosure activity, RealtyTrac says no month was worse than July 2009 when foreclosure filings topped 360,000. Happily, the monthly numbers then retreated for the rest of the year.

Fewer foreclosure filings sure seems like good news, but lender actions against borrowers have stalled, not ended. Foreclosure activity is being delayed, deferred and put on hold with foreclosure moratoriums, legal challenges and loan modification efforts.

The biggest loan modification project is the federal government’s Making Home Affordable program. If a borrower passes a three-month test period then the trial loan terms are converted into permanent financing. At the end of November just 31,382 mortgages nationwide had been transformed into permanent status under the program — that’s out of 3,299,780 loans which were at least 60 days late.

“Borrowers in the government’s Making Home Affordable program are in a kind of financial neutral zone,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com, the leading online marketplace for foreclosure properties and data. “Owners will not be foreclosed, and lender books will not show additional lost properties while properties are in the program. The result is that foreclosure stats after July started to contract at precisely the moment when three-month trial periods began to get underway in serious numbers.”

Option ARMs

With an option ARM, borrowers elect how much they want to pay each month during the loan’s “start” period. Typically they can pay at the 30-year fully amortizing rate, a 15-year self-amortizing rate, on an interest-only basis or at a base rate which does not even cover monthly interest costs. The interest not paid is added to the outstanding principal amount, a process called negative amortization. After the start period ends, the loan is then “re-cast” so that the remaining loan payments are large enough to pay off the loan during the remaining mortgage term.

According to Fitch Ratings, 2010 is likely to be the year of the option ARM — and not in a good way. The picture looks like this according to Fitch:

• Option ARMs worth $189 billion remain outstanding.
• The overwhelming majority of option ARMs — 88 percent — have yet to experience a re-cast event.
• Of the loans that have not yet re-cast, 94 percent of all borrowers have only been making minimum monthly payments. This means borrower mortgage debt has been increasing.
• Option ARMs worth $134 billion will re-cast during the next two years.

Let’s play with some numbers: Imagine that the typical option ARM mortgage started with a $200,000 balance. Loans worth at least $126.96 billion have negative amortization ($134 billion x 94 percent) and are soon to re-cast. There are a total of 634,800 option ARMs with negative amortization ($126.96 billion divided by $200,000) that will re-cast in 2010 and 2011 — that’s 26,450 per month on average, or 317,400 for a year.

Fitch says the typical new payment will increase 63 percent above the minimum monthly cost for principal and interest that most (94 percent) option ARM borrowers have been paying. Some payments will double.

As a result of falling home values, most option ARMs cannot be refinanced unless borrowers put more cash into a property. As well, many option ARM borrowers will not qualify for federal help because the value of their loan exceeds the value of their property by more than 25 percent. The bottom line: Huge numbers of option ARMs scheduled to re-cast in 2010 will add to foreclosure totals.

Read the rest at FrontDoor.com.

Posted in: Housing Market
Tags: foreclosure properties, foreclosures, loan modification, national association of realtors