The latest news on the Foreclosure & Subprime Markets

NAR foresees short-term impact from subprime reforms
Market problems and reforms in the underwriting and pricing of subprime loans, including the tightening of underwriting standards by regulators, will have a short-term impact on housing markets, says NAR. That impact will be lessened if Congress enacts legislation to expand the roles of Fannie Mae, Freddie Mac and the Federal Housing Administration to provide more housing opportunities to lowerincome homeowners and those living in high cost metropolitan areas.

NAR Chief Economist David Lereah predicts that tighter underwriting practices may cause total home sales to fall by about 100,000 to 250,000 nationally, or no more than 3 percent a year over the next two years. Many of these households will probably, over time, purchase a home when they have attained the financial capacity to do so by saving for a down payment or growing their income.

Key Points

REALTORS® are part of the Solution
You are the first point of contact for homebuyers in the real estate transaction. Consumers turn to REALTORS® for expert advice on financing. We encourage home buyers to shop for the mortgage that is best for time and we warn them against predatory loans that can poison the home buying process and trap unsuspecting borrowers into years of financial hardship. Consumer education by Realtors is a critical part of the solution to the problem of subprime defaults. Realtors not only want to sell homes to families, we want to make sure they can keep their homes.

Market impact is overstated in many media stories
Whatever impact tighter underwriting standards will have will be temporary. Mortgage rates are very low and the economy is growing and healthy. Jobs and liquidity are plentiful in the marketplace. The subprime problems may be a manageable problem within our $10 trillion-plus economy.

Congress can act now to help lower income borrowers
Many borrowers have turned to subprime loans in the past to buy their homes because Federal programs designed to serve their market failed to do so. NAR is urging Congress to enacts legislation to expand the roles of Fannie Mae, Freddie Mac, the Federal Housing Administration and the Veterans Administration to provide more housing opportunities to lowerincome homeowners and those living in high cost metropolitan areas. A few simple changes can make a big difference. NAR supports increasing FHA loan limits, allowing risk-based pricing of mortgage insurance premiums and reducing down payment requirements to reflect today's mortgage market.

Overreacting could make the situation worse
Regulation or legislation that goes too far can make it impossible for deserving and responsible families to obtain financing that will help them buy a home. We vigorously oppose fraud, predatory lending and abusive practices and where they exist we believe that they should be prosecuted to the fullest.

NAR seeking stories to support proposed Mortgage Cancellation Relief Act of 2007
With pressure on lenders to allow short sales to assist burdened homeowners, the forgiven debt can create a tax problem for the seller.

For example: Assume a family purchased their home for $200,000, with a mortgage of $195,000. Later, they need to sell the home, and find that the value of homes in their area has declined, and they can sell for only $185,000. At the time of the sale, the outstanding balance on the mortgage might be, for example, $190,000. Thus, there will not be enough cash at settlement to repay the lender the full balance of the mortgage. In some circumstances, a lender might forgive the amount of any shortfall ($5,000 in this example).

In this example, the seller will be required to recognize $5000 of income (the forgiven amount of the debt) and pay tax on it at ordinary rates. Thus, the seller, who has experienced a true economic loss, is required to pay tax on any phantom income, even though no cash has changed hands and even though he has experienced a loss. Similar results would apply in a foreclosure where some debt amount  remains outstanding at the conclusion of the proceeding.

Any lender who forgives debt is required to provide a Form 1099 information report to the borrower and to the IRS stating the amount of the forgiven debt. The Form 1099 will be required in any circumstance when a debt is forgiven, whether it is a short sale, foreclosure, deed in lieu of foreclosure or any similar arrangement that relieves the borrower of the obligation to pay some portion of a debt.

NAR adopted policy seeking a correction of this problem in the mid-1990s. In 1999 and 2000, two different bills passed the House and Senate including a provision that made any debt forgiveness on a sale of a principal residence non-taxable. Unfortunately, the bills that included this relief were never enacted. During the 2001-2005 housing boom, the issue faded from the congressional tax-writing committees' agendas.

But the Mortgage Cancellation Relief Act of 2007 was introduced in the House on April 17, 2007, and currently has one cosponsor. It was referred to the House Committee on Ways and Means.

Now, NAR is seeking "stories" about the experiences in our marketplace that illustrate the terrible problems individuals will face when they find themselves in foreclosure or in short sales circumstances. If you have a situation to share, contact John DiBiase at (202) 383-1037 or jdibiase@realtors.org.

Rise in Foreclosures reported by many

Foreclosure filings in March jumped 47 percent compared to the same month last year, to a rate of one foreclosure filing for every 775 U.S. households, according to RealtyTrac. The company reported 149,150 foreclosure filings ? including default notices, auction sale notices and bank repossessions ? in March, which represents a 7 percent rise from the adjusted February total.

California, Florida, Texas, Michigan and Ohio ? the five states with the most foreclosure filings in March ? accounted for half of the nation's foreclosure filings. All five of these states had foreclosure rates above the national average in March.

A March report by First American CoreLogic Inc. predicts 1.1 million foreclosures nationwide in the next six to seven years among adjustable-rate mortgage loans that originated from 2004-06.

The Mortgage Bankers Association (MBA) reported in March that the seasonally adjusted delinquency rate for residential properties with one to four units rose 28 basis points from third-quarter 2006 to fourth-quarter 2006, and was up 25 basis points compared to fourth-quarter 2005.

Foreclosures.com reported in April that about 2.4 in every 1,000 U.S. homeowners faced foreclosure during the first quarter of the year, with a total of 253,803 preforeclosures and notices of pending foreclosure auctions filed. That represents a 22.5 percent increase compared to fourth-quarter 2006, based on the company's coverage of 1,349 U.S. counties.

Lending institutions filed 46,760 notices of default from January to March, DataQuick reported, up 23.1 percent from the previous quarter and up 148 percent compared to first-quarter 2006. Most of the defaults were for loans originated between April 2005 and May 2006.

It's important to note that U.S. foreclosure activity overall is not far above historical norms. Last year we saw a surge in foreclosures in the first quarter followed by a leveling off through the second and third quarters; however, if that pattern does not repeat itself, and foreclosure activity continues to accelerate, we may see more widespread consequences.

Facts about Subprime Loans

• Subprime loans comprise about 10% of the overall mortgage market.
• Recent rise in delinquency rates are mostly associated with the subprimes. Defaults on prime loans have been steady with very little movement.
• Of the subprimes, the delinquency rate has climbed to 15%.
• At most, problematic subprime loans make up 1.5% of all loans outstanding.
• Majority of delinquencies never lead to a foreclosure as many catch up and make mortgage payments.
• Many of the delinquencies could be refinanced into FHAs or conventional loans. Mortgage rates are still near 45-year lows. But there will be more scrutiny on refinancing now due to "stringent" standards and lower home price appreciation in many markets.