RealtyTrac, a leading online marketplace for foreclosure properties released its Q2 2010 U.S. Foreclosure Sales Report, which shows that foreclosure homes accounted for 24% of all residential sales in the second quarter of 2010 and that the average sales price of properties that sold while in some stage of foreclosure was more than 26% below the average sales price of properties not in the foreclosure process—down slightly from a 27% average discount in the first quarter.
A total of 248,534 U.S. properties in some stage of foreclosure—default, scheduled for auction or bank-owned (REO)—sold to third parties in the second quarter, an increase of nearly 5% from the previous quarter, but still down 20% from the second quarter of 2009.

“While foreclosure sales increased in the second quarter, non-foreclosure sales increased even more, spurred on by the home buyer tax credit that expired during the quarter,” said James J. Saccacio, chief executive officer of RealtyTrac. “That had the net effect of lowering foreclosure sales as a percentage of total sales during the quarter, but that may be a temporary dip as the removal of the tax credit could drive more buyers back to discounted short sales and REOs.”

Foreclosure sales by type in second quarter
A total of 151,290 bank-owned (REO) properties sold to third parties in the second quarter, up 3% from the previous quarter but down 28% from the second quarter of 2009. REO sales accounted for nearly 15% of all sales in the second quarter, down from nearly 19% of all sales in the previous quarter and down from nearly 20% of sales in the second quarter of 2009. REOs sold for an average discount of nearly 35%, close to the average discount of 34% in the previous quarter and also to the average discount of just over 35% in the second quarter of 2009.

A total of 97,244 pre-foreclosure properties—in default or scheduled for auction—sold to third parties in the second quarter, up nearly 8% from the previous quarter but down 3% from the second quarter of 2009. Pre-foreclosure sales accounted for 9% of all sales, down from nearly 12% of all sales in the previous quarter but nearly identical to the 9% of all sales in the second quarter of 2009. Pre-foreclosure sales, which are often short sales, sold for an average discount of nearly 13%, down from an average discount of nearly 16% in the previous quarter and down from an average discount of 19% in the second quarter of 2009.

Nevada, Arizona, California post highest percentage of foreclosure sales in second quarter
Foreclosure sales accounted for nearly 56% of all sales in Nevada in the second quarter, the highest percentage of any state despite a decrease in foreclosure sales from the previous quarter and from the second quarter of 2009. Nevada pre-foreclosure sales jumped 29% from the previous quarter and were up 2% from the second quarter of 2009, but Nevada REO sales decreased 14% from the previous quarter and were down 43% from the second quarter of 2009.

Arizona foreclosure sales accounted for 47% of all sales in the second quarter, the second highest percentage of any state. Pre-foreclosure sales in Arizona increased 9% from the previous quarter and 15% from the second quarter of 2009 while REO sales increased 15% from the previous quarter but were down nearly 34% from the second quarter of 2009.

Foreclosure sales accounted for 43% of all sales in California in the second quarter, the third highest percentage among the states. California pre-foreclosure sales increased nearly 8% from the previous quarter but were down 4% from the second quarter of 2009. California REO sales increased 1% from the previous quarter but were down 45% from the second quarter of 2009.

Other states where foreclosure sales accounted for at least one-quarter of all sales were Rhode Island (37%), Massachusetts (35%), Florida (34%), Michigan (33%), Georgia (27%), Idaho (27%), and Oregon (25%).

Ohio, Kentucky, California post highest foreclosure discounts
Ohio foreclosures sold for an average discount of nearly 43% in the second quarter, the biggest discount of any state. Ohio pre-foreclosures sold for an average discount of nearly 24% while the average discount on Ohio REOs was double that at nearly 48%.

With foreclosures selling at an average price that was 41% below the average sales price of non-foreclosure properties, Kentucky posted the nation’s second highest average foreclosure discount in the second quarter. Kentucky pre-foreclosures sold for an average discount of 27%, and Kentucky REOs sold for an average discount of 48%.

California foreclosures sold for an average discount of 39% in the second quarter, the third-highest discount among the states. California pre-foreclosures sold for an average discount of 29% and California REOs sold for an average discount of 46%.

Other states with average foreclosure discounts of more than 35% were Michigan, Tennessee, Pennsylvania, Georgia, Illinois and Iowa, along with the District of Columbia.

Original Article

The Home Affordable Modification Program (HAMP) was expected to help between three to four, million Americans who could no longer afford their mortgage payments. To date, less than 500,000 homeowners have gained modification help.

Homeowners seeking loan modifications are finding it difficult to keep up with payments, while trying to obtain answers from lenders.

Home prices are at an all-time low, as some homeowners wait to sell unaffordable homes. Low mortgage rates, coupled with a semi-optimistic buyers’ market, may mean changes are underway. Yet, home sales remain stagnant as buyers consider alternative housing options. Thousands of homeowners caught in limbo are seeking lender assistance.

According to a Treasury Department press release, lenders are receiving more than 8,000 phone calls related to HAMP daily. This pales in comparison to the number of lender representatives available to answer these calls. As a result, thousands of homeowners seeking a HAMP application or mortgage modification application are being put on hold, in more ways than one.

Another reason why home-modification applications are not being approved is directly linked to Fannie Mae. Homeowners who have Fannie Mae loans can no longer qualify for a modification arrangement, if unemployed. Previously, unemployed homeowners were applying for modifications by including unemployment benefits as a form of income. Fannie Mae has recently put a stop to these applications by disallowing the use of unemployment benefits as a means of steady income.

Fannie Mae representative, Amy Bonitatibus, recently told CNN that the company does not “want to set up borrowers to fail.” Instead, Fannie Mae has employed a tough-love tactic that has left thousands of homeowners in the dark. The Treasury Department issued a similar restriction involving HAMP loans this past July.

There are some other speculations as to why more mortgages are not being modified. Some believe that banks simply aren’t seeing enough government incentives, while others believe that fees charged for missed payments are more enticing to servicers than loan modifications.

Lenders argue that home modifications take time, and that many homeowners aren’t qualifying for a mortgage modification regardless of current hardships. Whatever the reason, HAMP hopefuls will have to keep making mortgage payments or risk foreclosure.

Remember how everyone complained that banks weren’t doing enough to help troubled borrowers?

Well …

Banks have realized that foreclosing on home after home after home may not be in anyone’s best interest — least of all their own. So they’ve ramped up the number of loan modifications they’re handing out to their delinquent clients.

Banks are doing nearly twice as many modifications under their own foreclosure prevention initiatives than under the Obama administration’s signature Home Affordable Modification Program, known as HAMP.

But before homeowners rejoice, they should take a close look at the terms of their bank modification offers, consumer advocates say. Many may not be as good as HAMP, which lowers monthly payments to 31% of pre-tax income.

“We don’t know if they are sustainable based on the monthly payment,” said John Snyder, manager of foreclosure prevention programs at NeighborWorks America, adding banks don’t release a lot of information about their modifications. “We’re not sure what to think.”

Reducing interest and principal
Banks have long come under fire not doing enough to help troubled homeowners, particularly when the mortgage crisis started spinning out of control in 2007. Many loan servicers initially addressed the problem by tacking on the missed payments, which only increased strapped homeowners’ monthly burden.

More recently, however, banks have trumpeted their in-house efforts to stem the foreclosure tidal wave. They are calling more attention to their own programs at a time when the president’s plan is being widely panned for its ineffectiveness.

Servicers completed nearly 644,000 so-called “proprietary permanent modifications” in the first half of this year, compared to 332,000 such adjustments made under the Obama program, according to Hope Now, a consortium of mortgage servicers, investors and housing counselors.

About half of borrowers who don’t land a permanent HAMP modification are given an in-house adjustment, according to federal statistics.

“The vast majority of modifications getting done are happening outside of HAMP,” Mike Heid, co-president of Wells Fargo Home Mortgage, told a House of Representatives panel in June.

At the hearing, bank executives credited the president’s plan with setting an industry standard for loan modifications. But they told lawmakers that their own programs have helped far more people.

About 78% of banks’ in-house modifications involved interest rate and principal reductions, Hope Now found.

Housing advocates are increasingly calling on banks to reduce principal because many homeowners owe so much more on thier mortgages than their home are worth. Banks have been loathe to cut loan balances, and virtually no government-subsidized modifications involve this step, in large part because Fannie Mae and Freddie Mac do not allow it. The two mortgage finance giants guarantee many of the loans eligible under HAMP.

Outside of the Obama plan, however, banks have started to warm to principal reductions.

Wells Fargo, for instance, said last week it has reduced more than $3.1 billion in principal on nearly 60,000 loan modifications in the past 18 months. It uses a combination of principal adjustments, interest rate reductions and term extensions to assist its borrowers, the bank said.

Not the same
Unlike the Obama program, however, bank modifications can vary widely and few details are available about them. Housing counselors say they have heard of some with unfavorable terms.

Ida Ward was none too pleased with the permanent modification offer she received last month.

The Atlanta middle school teacher had called her mortgage servicer in the spring of 2009 after seeing her income drop considerably. She was enrolled in a trial HAMP modification, which reduced her monthly payments to $1,424, down from $2,430.

After more than a year in the trial period, Ward received a final loan modification agreement. But she soon realized she had been shifted from the president’s program to an in-house Chase modification with “horrible” terms. Her loan was being amortized over 40 years at a 5% interest rate with a $197,500 balloon payment due at the end. She must now pay a little more than $2,000 a month.

“These banks should be ashamed of the terms that they are giving to borrowers,” said Ward, who said she had no choice but to accept the offer. “The loan modification process is flawed and deceptive to borrowers.”

A Chase spokeswoman said that Ward did not meet the qualifications for a HAMP modification, but the bank was able to give her an adjustment that it believes will allow her to keep her home.

Original Article

Unemployed homeowners cannot count jobless benefits as income when applying for mortgage modifications if they have loans backed by Fannie Mae. That could greatly limit their ability to get a long-term reduction in their monthly payments.

Because the jobless benefits can’t be considered permanent income, the lender will instead evaluate troubled borrowers for forbearance plans of up to six months. The new guidelines, released Tuesday, will take effect Nov. 1.

“We don’t want to set up borrowers to fail, said Amy Bonitatibus, Fannie Mae spokeswoman.

Fannie Mae’s announcement broadens a ban already put in place from the Treasury Department. In July, the agency quit allowing unemployment insurance to be used as income when applying for the administration’s signature Home Affordable Modification Program, known as HAMP. Previously, borrowers had been allowed to do so.

Now, the unemployed who apply for HAMP are evaluated for forbearance plans, which can reduce or suspend their payments for at least three months.

Fannie Mae (FNM, Fortune 500)’s new stance also prevents banks from using unemployment benefits in their own proprietary modification programs if the loan is backed by the mortgage finance company.

The unemployed account for most of the new delinquencies in the mortgage market, experts say. Many depended on using their jobless benefits to qualify them for modifications.

However, the growing focus on the sustainability of these modifications have raised questions about counting temporary benefits as an income source. Instead, the government and many banks have set up alternate programs for the jobless, such as forbearance.

Non-HAMP bank modifications are growing in importance as the government initiative loses steam. Nearly 449,000 people have received permanent modifications under HAMP through August, up from nearly 422,000 a month earlier, according to federal data released Wednesday.

Another 46,700 people fell out of the HAMP program in August, bringing the total to roughly 664,000. Some 26,600 entered the effort in the trial phase. Some 202,500 borrowers are in the trial period as loan servicers evaluate their ability to keep up with the lowered payments.

Of those who fall out of the program, some 44.5% of them receive other types of modifications from their servicers. But a growing number of them, 13.4%, wind up in foreclosure.

>Original Article

Is it really a good idea to purchase a distressed home? What is a distressed home anyway and why is everyone talking about it? A distressed home is a property under foreclosure or a home sold because the homeowner could no longer afford to continue paying the mortgage. Other lenders would agree to a short sale because they can earn more through this than foreclosing the home. However, most lenders would foreclose the property and have it for sale at a discounted value.

There are a lot of distressed homes sold in the country today. In fact, they take up about half of the properties sold in the market. Although this is the case, not all homebuyers are excited to make the purchase. This is because transactions related to these types of properties are longer. There are also more requirements and more paper works. The processes are even frustrating at times and no buyer would want to deal with it.

The advantages

The process is long and there are different drawbacks you might want to avoid, but there are also advantages especially in this type of market. First, you have lots of options. Not only are the properties inexpensive but there are also a lot to choose from. You do not have to worry about the condition of the homes too because most of them are in good shape. Sellers are aware of the competition, thus they know that they have to take care of their properties if they want to sell it.

Since we are in a buyers’ market, negotiation is much easier. Sellers are friendlier and are more open to different conditions set by buyer. This is because sellers are more motivated. They want to sell the property as soon as possible.

Aside from homeowners, lenders want to sell the foreclosed properties right away too. This is because they will not earn from the property while it is in their possession. They even have to spend for its maintenance. The faster they can sell the homes, the faster they can generate money.

The auction

Lenders sell foreclosed properties through an auction. This means that the property will be given to the best bidder. This can be a challenge because there are a growing number of bidders. However, if you do your homework and research about the value of the home, you can come up with a bidding strategy. This will also prevent you from bidding more than what you should.

Purchasing a distressed home

Purchasing a distressed home is not easy, which is why it is best to work with a professional. An agent can present you with all possible options as he has access to updated MLS. He will also help you with many things like finding the most suitable home, making an offer and negotiating. He will also help you with all the requirements you need. This means that the purchase will be more bearable.

It is also important that you value time when purchasing a distressed home. So make sure that you have your loan approved to avoid problems.

Purchasing a distressed home can be difficult. However, if you are prepared you will do just fine.

Original Article

You want to buy a foreclosure? Remember, there are both great opportunities and great pressures and pitfalls in this market.

First, you have to decide at what stage of foreclosure you want to buy. There are three options: 1. pre-foreclosure; 2. sheriff’s auction; 3. repossession, called REO (for real estate owned by the bank).

“The safest and best way to buy is when it’s a bank-owned property,” said Rick Sharga, a spokesman for RealtyTrac, the online marketer of foreclosure properties.

Pre-foreclosure: These homes are in the foreclosure process, but they have yet to be sent to auction. Owners are typically trying to unload them because they are “underwater,” owing more on the homes than they are worth.

As a result, potential buyers must negotiate a deal with the lender as well as the owner. That makes buying at this stage of foreclosure complicated and slow. But, you have the advantage of being able to inspect the home before purchase — which isn’t the case in other types of foreclosure sales. Sharga warned, however, that prices are usually higher than at other stages of foreclosure.

Sheriff’s auction: These sales yield the lowest prices, but they are fraught with difficulties. Often the house is unavailable for inspection, leaving buyers with a long list of expensive repairs — and much larger bill than they intended. This stage is usually best left to the professionals, the contractors and investors who regularly bid on these places and know what they’re doing.

Repossession: This occurs after the home has gone through a sheriff’s auction but does not sell and the bank gains possession of the property. Homebuyers may not get the best bargains during this stage, but they can nearly always perform a thorough inspection before closing, minimizing costly surprises. Plus, the property comes with a clear title.

In addition, the banks selling these places may extend preferential financing terms to the buyers and may have made some repairs before putting the property on the market.

Even in this safer stage, though, homes are still usually sold in “as is” condition. “That means the bank won’t pay for cosmetic issues,” said Adam Wiener, a spokesman for the Redfin, the online real estate marketer. “Although, they will often pay for some or all of repairs that are health and safety issues. That makes the home inspection even more critical.”

He also pointed out that, since you’re buying from a corporation, not an individual, the buying process can be faster, so be prepared to move quickly. Many times a listing goes on sale on a Friday and is sold over the weekend.

“The buyers and their agents need to be on top of everything from the inspection to the financing,” said Wiener. “Some banks will even charge a per diem fee for late closings.”

Once you’ve decided which type of home to buy, there are several common mistakes foreclosure buyers should take care to avoid. These include:

Getting caught up in a bidding frenzy: The banks often under-price repossessions, hoping to generate excitement, attract multiple bids and sell them quickly. The problem is, as in any auction-type sale, bidders get excited and pay too much.

“Remember,” said Sharga, “there are 800,000 REOs in the banks’ inventories. There’ll be another home to bid on tomorrow.”

Underestimating repair costs: Take full advantage of the home inspection and don’t delude yourself about much the repairs will cost.

“Take along someone who can give you a good estimate of how much repair costs will come to,” said Sharga.

Redfin coaches its agents to warn buyers to factor in a cushion of 10% to 20% of the purchase price to pay for unexpected repairs. “If you end up not using it, go on vacation after 6 months,” Wiener said.

Not knowing what comparable properties cost: This is important in any market but especially in this endeavor. In high foreclosure areas, prices can be eroding very quickly. You want to have the latest homes sale prices on repossessed properties and try to keep your bid comparable or lower.

Buying in a neighborhood flooded with foreclosures: This is most important for people buying for the short-term. Any neighborhood saturated with REOs and foreclosures may be headed for further price falls. If you’re planning to relocate within a few years or buying a bigger house, that could mean selling at a loss. A better bet, if you can find it, is to buy the only foreclosed home in an otherwise stable community. That’s more likely to hold its value.

Not having financing in place: If you don’t have a pre-approved mortgage, you’re really not in the market. “You have to be able to move quickly,” Sharga said.

Banks don’t want to dilly-dally on sales; they’re losing money every day that homes sit on the market. That means they’ll often jump on the highest bid with the best financing already in place.

Having a loan beforehand carries another advantage: It tells you how much credit you have available. You won’t spend time shopping for homes that are too expensive.

Remember that pre-approved financing is different from pre-qualified financing; it means the loan is ready to go. Pre-qualified is more like an opinion of a loan officer and there’s still work to be done before final approval.

Can rates of car ownership predict mortgage performance?

According to some new research from two environmental groups, the answer is yes.

The National Resources Defense Council, an environmental advocacy organization, and the Center for Neighborhood Technology, a Chicago group that promotes urban sustainability, have completed a study of 40,000 mortgages in three cities over a 30-year period. After controlling for income, the groups found that the probability of mortgage foreclosure increased as neighborhood car ownership levels rose.

In other words, “location efficient” communities – where public transit options are available – can contribute to the financial stability of its residents. The reasoning: If the homeowners don’t need to own a car, they can save money on transportation costs (including lease and purchase costs, maintenance, insurance, gas and parking). They are then better positioned to weather negative financial circumstances – say, a spike in the price of gas or a job loss. (Transportation costs account for roughly 17% of the average American household’s expenditures, the second-largest budget item behind housing, according to 2008 figures from the Bureau of Labor Statistics.)

The report recommends that lenders include measures of location efficiency and borrowers’ transportation costs in their underwriting decisions – “providing proportionally better borrowing terms for purchasers of location-efficient homes,” the report says. But Jennifer Henry, the real estate sector manager in the Center for Market Innovation at the NRDC, says that location efficiency isn’t a determining factor in mortgage default or foreclosure – it’s an additional characteristic that, when taken into account, “makes your ability to predict foreclosure more accurate.”

Indeed, the link between transportation expenses and ability to pay the mortgage is somewhat tenuous, says John Taylor, president of the National Community Reinvestment Coalition, a housing advocacy group. Transportation costs represent “a tangential relationship” to mortgage default, he says. For homeowners who are behind on their mortgage – because of a job loss or an increased monthly payment – getting rid of a car might help only so much. Job loss and unsuitable mortgages with unsustainable terms and conditions are more directly tied to foreclosure, adds Taylor.

Talk of how “walkability” boosts home values isn’t new. A study by CEOs for Cities, a network of urban leaders and corporate executives, published last year found a positive correlation between an area’s walkability – proximity to shopping, services, schools and parks – and housing prices in 13 of the 15 housing markets studied.

“Prices of property around transit-oriented developments – especially new developments – have increased or at least kept their value,” says Sarah Catz, a research specialist at the University of California, Irvine’s Institute of Transportation Studies. Catz says she is currently doing research that shows that property increases in value when you bring transit into a region or area.

A mortgage product based in part on a borrower’s access to public transit has existed. The Center for Neighborhood Technology (in partnership with Fannie Mae) developed a location-efficient mortgage program in the 1990s. Just a few cities experimented with these products, including Seattle and Chicago, but only about 300 of the mortgages were made, says Henry, but none went into default.

Under the program, which no longer exists, a statistical model calculated the monthly savings a typical household would realize based on the property’s proximity to local services and public transportation and how walkable the area was. That amount would be added to their income, which would reduce the borrower’s debt-to-income ratio, thus potentially qualifying them for a bigger mortgage on the theory that with lower transportation costs, they could afford it, says Diane Wasson, a vice president at Home Street Bank in Seattle, who was involved in the program. (Debt-to-income ratio is one of several criteria, including loan-to-value ratio and credit history, lenders use to consider an application.)

Getting lenders to incorporate this into their practices might be a stretch. But last year the House passed a bill that would promote energy- and location-efficient mortgages for home buyers through incentives from Fannie Mae and Freddie Mac. And a spokeswoman from the Department of Housing and Urban Development (HUD) says supporting location efficiency in community development practices is absolutely a priority for the agency. “If we can reduce energy and transportation costs through more location efficient housing, it will make homes more affordable generally, and thus reduce the risk of foreclosures,” she says.

Read more: No Car, No Foreclosure? at SmartMoney.com http://www.smartmoney.com/personal-finance/real-estate/no-car-no-foreclosure/#ixzz0gTAtxV8S

The equity the people did have was artificially inflated due to market conditions and the ease with which people could get money to buy homes as well as the rampant use of homes as ATMs with home equity loans and 2nd (and 3rd!!) mortgages. Of course home prices were going to rise dramatically when people could get loans without downpayments or even proper income documentation – two of the biggest obstacles to home ownership. Not that those obstacles are bad things, they were what had kept the housing market strong until the last few years.

Right now we are going to have to swallow the tough medicine and learn from what happened.

More bad news on the housing bust front: Nearly 25% of all mortgage borrowers were underwater, meaning they owe more on their loans than their homes are worth.

First American CoreLogic, the research firm that monitors housing equity, reported Tuesday that 11.3 million homeowners — or 24% of all homes with mortgages — were underwater as of the end of 2009. That’s up from 23% and 10.7 million borrowers three month earlier.

Nevada was the state with the worst record at 70% of all mortgaged properties underwater. That was followed by Arizona (51%), Florida (48%), Michigan (39%) and California (35%).

For many homeowners, being underwater, also know as negative equity, has few consequences. If they’re not planning to sell and can afford their monthly bills, they can wait out the downturn.

For others, however, plunging underwater can spell disaster. If they become unemployed or have a financial emergency, they have no equity to tap. Or, if they need to downsize or sell their home to relocate for a job, they can’t.

“Negative equity is a significant drag on both the housing market and on economic growth,”said Mark Fleming, chief economist with First American CoreLogic. “It is driving foreclosures and decreasing mobility for millions of homeowners.”

Traditionally, being underwater was one of two main factors in determining a borrower’s likelihood of foreclosure. The other is having sufficient income to pay bills. But, there’s an increasingly important exception: strategic default. As equity gets more and more negative, some homeowners are choosing to quit paying and give the keys to the bank.

As long as negative equity remains a big problem, it will be difficult to stem the tide of foreclosures that continue to plague many local real estate markets around the nation.

“Since we expect home prices to slightly increase during 2010, negative equity will remain the dominant issue in the housing and mortgage markets for some time to come,” said Fleming.

Before it was unemployment, health care or carbon emissions that preoccupied politicians, foreclosure prevention was among President Obama’s top priorities when his term began just over one year ago.

In an effort to “stem the tide of foreclosures,” both the previous and current administrations passed a battery of programs: the Hope for Homeowners Act, the Housing Assistance Tax Act, the Helping Families Save Their Homes Act, FHA Secure, the Hope Now Alliance, the Homeowner Affordability and Stability plan, the Recovery and Reinvestment Act, not to mention the takeover of Freddie Mac and Fannie Mae, all costing hundreds of billions of dollars with the expressed goal of keeping people in homes on which they weren’t actually making the payments.

“There will be a cost associated with this plan,” the president admitted last year when selling the stimulus. “But by making these investments in foreclosure prevention today, we will save ourselves the costs of foreclosure tomorrow — costs that are borne not just by families with troubled loans, but by their neighbors and communities and by our economy as a whole.”

By even the most cursory measure, efforts to prevent foreclosure have failed miserably. This month Bloomberg’s Foreclosure Index tapped a new high of 11.74% — up from 7.94% one year ago, despite the unprecedented effort and cash, from Uncle Sam. The S&P Case-Shiller Home Price Index, a composite of 20 cities around the country, is still down 5.3% from year ago-levels.

Now Washington has morphed its message to job creation, not by stimulating the private sector, mind you, but largely via make-work infrastructure programs. There’s plenty of historical precedent to suggest that efforts to create jobs won’t be any more successful than preventing foreclosures.

Depression-era public works projects, to which the modern-day stimulus is routinely compared, increased federal spending from 3.4% of GDP in 1930 to 9.8% in 1940, according to data from Heritage Foundation. During that period, unemployment rose from 5% to over 20%.

Between 1992 and 2000, Japan launched no fewer than 11 separate stimulus programs, most with a massive focus on infrastructure spending, which rose to 6% of GDP. The net result? The country now boasts the highest debt-to-GDP ratio in the developed world. Per capita income, which had been the forth highest in the world, dropped sharply. Unemployment more than doubled.

Ibaraki Airport outside Tokyo provides a telling example of how the “build it and they will come” fantasy of infrastructure spending doesn’t wash. When the $270 million project was approved in 1996, government officials promised the facility would create jobs, boost the economy and handle up to 800,000 passengers annually.

The airport will finally open next month with only one carrier, Asiana Airlines, offering a single fight each day.

The recent spike in the number of delinquent Federal Housing Administration-insured loans has some people worried that taxpayers will eventually have to bail the agency out.

Seriously delinquent FHA loans, those 90 days or more late, jumped 62.1% in the past year to 558,944, or 9.4% of FHA loans, as of the end of January, according to agency statistics released on Friday.

The FHA, however, insists its finances are sound. Its loan portfolio actually performed better than most mortgage products, according to David Stevens, the agency’s commissioner.

“The FHA default rates are increasing at a slower rate than even prime mortgages,” he said.

But the reason for this increase may be more of a statistical glitch than an actual trend. Loans that go into the seriously delinquent bucket stay there far longer, boosting the numbers and making comparisons problematic, said Jay Brinkmann, chief economist for the Mortgage Bankers Association (MBA).

Many lenders and servicers are overwhelmed by sheer volume of loans and are reluctant to take back homes they don’t think they can sell. As result, they keep the loans hanging out in the 90-day late bin rather than moving them into foreclosure.

Lenders are also trying to modify more mortgages, which can take months to accomplish. Meantime, many of the borrowers sit in the seriously delinquent bucket.

In contrast, loans that are 30- or 60-days late actually declined in the past year, according to the FHA.

Home price drops hurt
Until the mortgage bubble burst, FHA loans made up a small portion of the housing market. Now, the agency originates almost a third of all home loans. That means most of the agency’s notes were issued in the past three years — when prices were plummeting.

“There are a lot of young loans in the FHA book,” said Mike Fratantoni, vice president of Single-Family Research and Policy Development at the MBA. “Mortgages typically hit their peak delinquency rates two or three years after origination.”

Those early years are toughest because many borrowers have struggled to afford their homes and their incomes have not risen enough to offset any setbacks.

Additionally, the price drops pushed many FHA borrowers underwater. These homeowners only had to put 3.5% down to start, so they could quickly end up owing more than their homes were worth in places where values plummeted 20%, 30%, 40%.

Once these mortgages clear the system, the FHA portfolio should emerge in sound condition. Recent FHA borrowers have been of high quality; their average credit score has risen 33 points in the 12 months through December to 694 and is up from the low 600s a few years ago.

No policy change
Some FHA mortgages are simply bad loans. After subprime lending froze in 2007, overly aggressive mortgage originators, who could no longer hook up borrowers with subprime loans, turned to FHA loans for their risky clients.

Commission loan officers and rogue mortgage brokers pushed the envelope of who qualified for FHA loans, according to Allen Hardester, a Columbia Md.-based mortgage consultant. They pushed the edge on debt-to-income ratios, credit scores and loan-to-value ratios.

“They took advantage of lax underwriting by FHA to interpret the guidelines broadly,” he said.

The resultant delinquencies have not persuaded FHA to impose risk-based pricing, in which borrowers pay more if they have lower credit scores. But the FHA does now require that borrowers with FICO scores of less than 580 put down at least 10% of the sale price, rather than the 3.5% minimum requirement for more qualified borrowers.

And the agency has also eliminated seller-assisted down payment programs, which HUD has said accounts for a disproportionately large share of FHA delinquencies.

In these transactions, sellers kick back the down payment to homebuyers, usually through a third party. The result is that buyers have no “skin-in-the-game,” which makes the loans more attractive to risky borrowers.

Commissioner Stevens said the FHA is on a sound financial basis. Its primary reserve fund is at $32 billion, its highest level ever. There’s a secondary reserve that has fallen below its mandated level, but the FHA has taken steps to boost it. It recently asked Congress to increase the monthly fees it charges borrowers to insure their loans.

“Given the environment, the FHA has made very responsible changes to its underwriting,” said Fratantoni.