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When an Adjustable Rate Mortgage Makes Sense

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When an Adjustable-Rate Mortgage Makes Sense

Locking in a historically low fixed rate might feel safer. But borrowers can save big on ARMs right now.

By Janice Revell, contributor, Fortune, September 3, 2012

FORTUNE — During the housing meltdown, adjustable-rate mortgages were vilified as a hallmark of irresponsible borrowing. Recently, though, they’ve been making a comeback, especially among affluent borrowers. This summer, for instance, Facebook (FB) CEO Mark Zuckerberg reportedly financed his home using an ARM with a rate of just 1.05%. Most borrowers can’t snag a rate remotely close to that. But many would still do well to consider an ARM right now — even if conventional wisdom says otherwise.

An adjustable-rate mortgage offers an introductory period in which you pay a lower interest rate than with a fixed loan; after that, the rate can fluctuate up or down. With rates near historic lows, the safety of locking in a fixed rate appeals to many borrowers. But they’re paying a premium for that security: The spread between rates on 30-year fixed-rate mortgages and the most popular ARMs now stands at about one percentage point, more than double the difference just five years ago.

That means that homeowners who are planning to either move or pay off their mortgage over the next few years can save big with an ARM. Take, for example, a homebuyer who plans to pay down an $800,000 mortgage. Currently the rate on the fixed portion of a 5/1 ARM — which is guaranteed for the first five years and adjustable once a year thereafter — is around 3%. In a typical 5/1 ARM, the maximum increase during the sixth year is five percentage points above the initial rate. Alternatively, our hypothetical borrower could opt for a 30-year mortgage that locks in an annual rate of about 4%.
MORE: Mortgage applications up, mortgages not so much

Fortune asked Greg McBride, an analyst with mortgage tracker Bankrate.com, to run the numbers on both options. To be conservative, McBride assumed the worst-case scenario with the ARM — one in which the rate shoots up to the 8% maximum in year six. Here’s what would happen: For the first five years, our homebuyer’s monthly payments on the ARM would be $3,373 — or $446 less than what he’d pay under the 30-year fixed mortgage. Over that period he’d save a total of $39,000 in interest and would amass $12,000 more in equity. After the initial five years the monthly payments under the ARM would balloon to $5,490. But it’s not until the seventh year of the loan that the savings garnered by the lower ARM payments during the first five years would be wiped out entirely. (This doesn’t factor in the mortgage-interest tax deduction, which would be greater on the fixed-rate loan for the first few years but higher on the ARM thereafter.)

If after five years, however, the rate on the ARM increased at a more moderate pace of one percentage point a year, the initial savings wouldn’t be eclipsed by the fixed rate until the 10th year of the loan. The bottom line: Unless you definitely plan to stay in your mortgage over the long term, it might pay to adjust your thinking.

–A former compensation consultant, Janice Revell has been writing about personal finance since 2000.

Downsizing the Jumbo Loan

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Downsizing the Jumbo Loan

By Vickie Elmer in the New York Times

WITH interest rates still low, many homeowners have been saying goodbye to their “jumbo” mortgages and refinancing into conventional loans. They may need to write sizable checks at the closing, but in the end they are likely to reduce their monthly payments while improving their cash flow.

“It’s an opportunity not to be missed,” said Melissa Cohn, the chief executive of the Manhattan Mortgage Company, adding that her customers like the idea of locking in a lower rate.

Jumbo mortgages, also called nonconforming loans, exceed $625,500 in high-cost areas like New York. Unlike conforming mortgages, they do not meet specific guidelines of Fannie Mae and Freddie Mac, which repurchase loans and resell them to investors. Because lenders assume more risk, interest rates for nonconforming loans are higher than for conforming.

These days the spread between conventional and non-conventional is 0.5 percentage points, on average, according to data from HSH.com, though if the jumbo loan was taken out during the financial crisis of 2008, it could have been up to 1.8 percentage points more.

To refinance out of a jumbo loan, most borrowers will have to put in extra money — sometimes $100,000 or more — to decrease the balance to below $625,500, or $417,000 in other parts of the country. Some, though, may see this as a sound investment.

“A lot of homeowners are sitting on cash, concerned about the stock market,” said Bob Moulton, the president of the Americana Mortgage Group in Manhasset, N.Y. “They get 3.5 percent-plus by putting it into their home,” he added, referring to the prevailing rate nationwide on a 30-year fixed-rate loan.

“If you don’t have a need for the cash — if your cash position is O.K. — then that’s the right decision,” he added.

Mr. Moulton says he has had several customers eager to buy down their mortgage balances. “When people are to the cusp,” he said, referring to borrowers’ balances near the cutoff for conventional loans, “I always bring that to their attention.”

Cash-in refinancing has remained popular as homeowners work to cut their debt levels. Some 23 percent of homeowners refinancing in the second quarter decreased their mortgage balances, according to Freddie Mac; in the fourth quarter of last year it was 47 percent. The agency provides a guide for consumers on its Web site.

Sheila Walker Hartwell, the owner of Hartwell Planning, a financial planner based in Manhattan, says homeowners with a good financial foundation could greatly benefit by moving to a conventional mortgage from a jumbo. She provided one scenario in which a couple pays in $75,000 when they refinance a $700,000 mortgage, and save at least $5,900 a year on interest based on a 0.33 percentage point reduction in their interest rate. They would need to earn almost 7.5 percent a year on that money to net the same amount from savings or investments, she said.

But Ms. Hartwell cautioned that when homeowners pay into their mortgages to build up equity, “the money’s not liquid,” or readily available. She said that she would prefer that her clients develop a savings and spending plan and make sure that they have a “contingency fund” with at least six months’ and sometimes up to 12 months of living expenses. (The 12-month fund is worthwhile when the economy is uncertain or if your job or industry seems less than solid, she said.) It’s not a good idea to deplete those funds to pay down your mortgage, even if the funds are earning next to nothing, Ms. Hartwell said.

Especially, Mr. Moulton added, “if they anticipate big expenses — college expenses, home improvement — or have other debts at a higher interest rate. Then they don’t want to do this.”

Another drawback, Ms. Hartwell said: Unless the length of a loan is reduced, each time you refinance, the mortgage starts again at the beginning and initial payments are almost all interest.

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Home Prices Signal Recovery May be Here

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Home Prices Signal Recovery May be Here

NEW YORK (CNNMoney) — A sharp boost in home prices during the spring could signal a recovery in the long-suffering U.S. housing market, according to an industry report issued Tuesday.

The S&P/Case-Shiller national home price index, which covers more than 80% of the housing market in the United States, climbed 6.9% in the three months ended June 30 compared to the first three months of 2012.

“We seem to be witnessing exactly what we needed for a sustained recovery; monthly increases coupled with improving annual rates of change,” said David Blitzer, a spokesman for S&P, in a statement. “The market may have finally turned around.”

Two other key indexes covered in the S&P/Case-Shiller report also showed gains. The 20-city index was up 6% for the quarter and the 10-city index rose 5.8%.

National prices were up 1.2% compared with a year earlier, and the 20-city and 10-city indexes also gained year over year. It was the first time all three measures showed positive annual growth rates since the summer of 2010, when generous tax credits for homebuyers were in place.

There have been several positive industry reports over the past several weeks. In July, new home sales were 25% better than a year earlier; existing home sales gained 10% year over year; and developers applied for 30% more residential building permits.

The steep increase in home prices “feels really good after six years of straight down,” said Mark Zandi, chief economist of Moody’s Analytics.

He cautioned that the results may overstate the case for the housing recovery a bit. The mix of homes being sold has changed lately, with fewer repossessed homes on the market. Those sell at big discounts to conventionally sold homes and had been propelling prices downward.

The home price improvement is expected to have a positive impact on foreclosure rates, according to Michael Fratantoni, vice president for research and economics for the Mortgage Bankers Association.

Foreclosures have already been falling and could drop some more if the upswing in home prices continues.

As home values increase, home equity rises, and fewer mortgage borrowers will be underwater, owing more than their homes are worth. That will give them an asset to tap should they run into a tight financial patch.

An improving housing market will also give homeowners more confidence in the investments they’ve made in their homes.

“There has also been a lot of concern about strategic defaults,” said Fratantoni. “That should ease now. When home prices go up, people have a financial incentive to hold onto their homes and they’re less likely to walk away.”

Rising prices are likely to push potential homebuyers off the fence, where many have been waiting out the price decline, according to Doug Duncan, chief economist for Fannie Mae.

“Their perception that we hit the bottom takes out the risk of buying into a falling market,” he said. “That should increase demand, particularly if they also believe that mortgage rates have reached a bottom as well.”

Each of the 20 cities covered in the report recorded a gain in June, compared with a month earlier. Detroit prices jumped 6% for the month, the most of any city. Minneapolis prices climbed 4.8% and Chicago prices rose 4.6%.

In Phoenix. home prices were 13.9% higher in June than 12 months earlier, the highest gain of any of the 20 cities covered.

Several cities were still in negative territory year over year, including Atlanta, where they were off 12.1%. New York prices were down 2.1% on an annual basis, and Las Vegas prices were 1.8% lower.

For Zandi, all the positive news on housing carries over to the rest of the economy.

“Housing is beginning to act as a tailwind for the recovery,” he said.

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Mortgage Closing Costs fell 7 Percent for Homebuyers

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Mortgage closing costs fell 7% for homebuyers

NEW YORK (CNNMoney) — Federal regulations are helping to significantly reduce the amount new homebuyers are paying come closing time.

The average cost of closing on a mortgage has fallen by 7.4% over the past year, according to a recent survey by Bankrate.com. At the end of June, a homebuyer looking to close on a $200,000 mortgage with 20% down paid an average of $3,754, $300 less than 12 months earlier.

Included in those costs are origination expenses, such as application fees and the cost of doing credit checks, and third-party fees, such as those paid for title searches and insurance.

The decline can be attributed to new regulations that require lenders to be more accurate when estimating closing costs for borrowers, said Greg McBride,

Bankrate’s senior financial analyst.

The regulation, which was put in place two years ago as part of the Real Estate Settlement Practices Act requires lenders to provide a “good faith estimate” of third-party fees that is within 10% of the actual amount the buyer will pay.

“The big drop in third-party fees indicates the lenders are doing a better job at estimating what the costs will be,” said McBride.
with scissors and the bogeyman probably aren’t keeping you awake at night, either.

The fact that everyone is scared to dabble in—much less commit to—housing makes it a close-to-perfect investment based on Mr. Buffett’s principle. But buying real estate is a good long-term investment for many more reasons, some of which have only become apparent in recent weeks.

The most striking: Housing prices rose sharply from April to May. The S&P/Case-Shiller Index rose 2.2% in 20 of the nation’s big cities. Prices shot up more than 3% in Chicago, Atlanta, San Francisco and Minneapolis. Even Detroit’s housing market scored a gain, inching up by 0.4%.

Nationally, the increase was the first in seven months. More importantly, the increase matched other data and empirical evidence this spring that foreclosures slowed and inventories were shrinking. Simple economics suggests that as the supply of distressed property slows, buyers will be forced into higher-price properties.

In addition, interest rates on 30-year fixed mortgages have tumbled below 3.5%. For those who can get credit, these aren’t just historically low rates; they are one-sided deals tilted toward borrowers.

Other good signs: Housing starts rose 6.9% in June. Home-building stocks are on the rise, with the Philadelphia Housing Sector Index up 27% so far this year. And for those who can invest in property, rents continue their ascent. Prices are at a 10-year high, with the median unit renting for $710 a month.

Real-estate website Trulia found that it is cheaper to buy than rent in each of the nation’s 100 biggest metropolitan areas.

In other words, if you can buy a home today, you can save the difference it would cost you to rent even if you stay in the home just five years. If you can buy a property and rent it, it is almost certain that the rent will cover the cost of the financing—and the property will appreciate.

Here’s where the fear comes in. From 30% to 50% of existing mortgages in the U.S. market are underwater, depending on the estimate. That means many borrowers are trapped in their homes and loans. They either can keep paying and hope prices will improve or walk away, putting downward pressure on home prices.

Foreclosure rates have leveled off, but market analysts believe an increase is likely.

Here’s why. Since the financial crisis, 3.7 million homes have been foreclosed on, but an additional 1.4 million remain in the national foreclosure inventory, according to CoreLogic, a real-estate research firm.

Finally, a housing recovery won’t happen, or could be snuffed out, by a rotten economy. There’s never been significant growth in housing with high unemployment. And as Dow Jones’s Kathleen Madigan noted, “Potential buyers must feel secure with their job prospects before they commit to long-term mortgages. Higher loan standards mean banks want to see an applicant’s solid income history before lending.”

There is plenty to be afraid of when it comes to home buying. But in the current investing climate, housing presents an attractive long-term investment that should hold steady or even have upside surprise in the short term.

Fixed-income yields have fallen to historic lows, and the stock market has traded in a range, rising and falling skittishly on jobs, growth data and the news from Europe.

Recently, I was forced to choose between renting and buying. I decided to buy because it offered immediate monthly savings compared to renting, not to mention a mortgage-interest deduction.

So this is at least one case where I’m putting my money where my keyboard is.

Mr. Buffett would remind us that investments of any kind are not without risk. Each should be considered with the investor’s time horizon and appetites. But he also has acknowledged that real estate is especially attractive when financing is cheap, there is pent-up demand and prices have been driven down by a spooked market. Put another way, it’s time to be greedy.

Write to David Weidner at [email protected]

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Will Short Sales Hit Homes Sales?

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Will Short Sales Hit Homes Sales?

By AnnaMaria Andriotis

Could a new government program to help distressed homeowners wipe out recent gains in home prices?

On Tuesday, the Federal Housing Finance Agency announced new guidelines that are supposed to make it easier for homeowners to sell their home in a short sale. In a short sale, a home sells for less than the borrower owes on the mortgage. In addition, the new guidelines, which kick in on Nov. 1, allow homeowners with a Fannie Mae or Freddie Mac mortgage to pursue a short sale even if they haven’t fallen behind on their mortgage payments but have a hardship, such as a job loss or divorce.

Consumer advocates say change will help some of the borrowers who’ve been unable to sell the estimated 11 million American homes worth less than the value of their mortgage, according to CoreLogic. However, not all homes would qualify in this new program.

And while the changes provide new hope to distressed homeowners, experts say they could negatively impact home prices in neighborhoods that get an influx of new short sales. A rise in short sales will result in “downward pressure on home prices until we clear out the majority of these distressed properties,” says Jack McCabe, an independent housing analyst in Deerfield Beach, Fla.

Home prices had been rising in recent months, a trend experts say is due to the limited inventory and the smaller number of distressed properties on the market. In July, median home prices were up 9.4% from a year prior, according to the National Association of Realtors. That marked the fifth back-to-back month of year-over-year increases in home prices — the longest streak since 2006. Inventory was down 24% from a year prior. And distressed sales—including short sales and foreclosures—accounted for 24% of July sales, down from 29% a year prior.

For its part, the NAR says it’s called for an expedited short sales process to help boost inventory. The FHFA says it expects short sales to settle at market prices and that they’ll help avoid foreclosures and long vacancy periods that result in declines in home values.

Still, data suggests that the impact on homeowners who aren’t in distress could be lower home values in the near term. Even if short sales fly off the market, they’ll likely go at a discounted price. According to the NAR, short sales sell at prices that are 15% lower than regular home listings on average.

Instead, the benefits for homeowners could be bigger in the long term. “It’s a better idea to clear out the backlog of distressed homes rather than delay the process in the name of supporting [home] values,” says Brad Hunter, chief economist at Metrostudy, a housing market research and consulting firm.

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Life After Bankruptcy

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Life After Bankruptcy

EVERY month tens of thousands of people file for federal bankruptcy protection, mostly to wipe out debts and start anew.

Many of these filers mistakenly think that it will be many years before they can obtain a mortgage or refinance an existing home loan, if they ever can — perhaps because notice of a bankruptcy filing typically stays on a credit report for 7 to 10 years. In reality, they could become eligible in as little as one year, as long as they work diligently to improve their financial picture.

Mortgages guaranteed by the Federal Housing Administration are permitted one year after a consumer exits a Chapter 13 bankruptcy reorganization, which requires a repayment plan that is often a fraction of what is owed, and two years after the more common Chapter 7 liquidation, which discharges most or all debts. Conventional mortgage guidelines from Fannie Mae and Freddie Mac, meanwhile, call for a wait of two to four years.

“There’s a lot of other things that go into your ability to get approved” for a mortgage after a bankruptcy, said John Walsh, the president of Total Mortgage, a direct lender based in Milford, Conn.

The most important point, he and other industry experts say, is that consumers re-establish their credit and show that they can manage it responsibly. They can do this by paying rent and utility bills on time, or perhaps by obtaining a secured credit card, according to Mr. Walsh.

If a bankruptcy filing was the result of a one-time occurrence, like the death of a spouse, divorce or illness, the waiting period to apply for a mortgage may be reduced. Lenders will often want borrowers to write a hardship letter explaining their situation, backed by documentation like hospital bills or a court-approved divorce settlement. If the person has paid back 85 to 95 percent of his debts during the bankruptcy process, he will need to mention that in the letter as well, said Bruce Feinstein, a bankruptcy lawyer in Richmond Hill, Queens.

But examples of shortening the waiting period through hardship letters are “few and far between, and tough to get,” Mr. Walsh said.

Mr. Feinstein says he has seen a few clients qualify for a mortgage only two years after filing for Chapter 7, though generally borrowers can obtain a loan quicker after a Chapter 13 reorganization, because of the partial repayment of debts, he said.

As Mr. Walsh noted, “Chapter 13 is a little more responsible” way to go from the lenders’ perspective, so lender guidelines are a bit more lenient.

Almost 70 percent of personal bankruptcies are filed under Chapter 7, according to the American Bankruptcy Institute, a research organization. The institute data noted that last year there were 1.362 million personal bankruptcy filings nationwide, down from 1.53 million in 2010, and closer to the norm over the last 15 years. At the end of the first quarter of this year there were 311,975 filings, which is 5 percent less than the first quarter of 2011.

Rebuilding credit after a personal bankruptcy will take some work. Mr. Feinstein suggests that individuals maintain or take out one or two credit cards and routinely use them. “If the payment’s due on the first, make sure it’s paid by the 25th” of the previous month, he said.

A personal bankruptcy filing will have a larger impact on a credit score than any other credit issue, according to a July report by VantageScore, which provides credit scores to lenders. Filing for bankruptcy protection will reduce a credit score by 200 to 350 or more points, it said, compared with a decline of 80 to 170 points for a foreclosure. VantageScore’s scores range from 501 to 990.

For the larger rival FICO, bankruptcy could cut a credit score by 130 to 240 points.

By VICKIE ELMER (09/13/12)

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Sacramento High on Affordability Index

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Sacramento High on Affordability Index

By Mark Glover; [email protected]; Published: Saturday, Aug. 11, 2012

Higher home prices offset record-low interest rates to reduce housing affordability throughout California in the second quarter, the California Association of Realtors said Friday.

Sacramento, however, remained one of the state’s more affordable places to buy a house.

CAR said homebuyers who could afford to purchase an existing median-priced single-family home in California fell to 51 percent, down from 56 percent in this year’s first quarter and matching the percentage in the second quarter of 2011.

San Bernardino County was the most affordable county in the state with an index rating of 78 percent. San Mateo County edged out San Francisco County (24 percent) to be the least affordable, with only 23 percent of households able to purchase the county’s median-priced home ($790,000).

Sacramento County’s affordability index in the second quarter was 74 percent, based on a median price of $170,210. Placer County, with a median base of $279,820, came in at 65 percent.

There were no break-out listings for El Dorado and Yolo counties.

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Consumer Protection Bureau to Propose New Federal Mortgage Rules

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Consumer Protection Bureau to Propose New Federal Mortgage Rules

New federal mortgage rules to be proposed by the Consumer Financial Protection Bureau are designed to prevent a repeat of the foreclosure crisis.

By Jim Puzzanghera, Los Angeles Times, August 9, 2012, 9:00 p.m.

WASHINGTON — New federal rules would require banks to provide homeowners with better information about their mortgages to avoid costly surprises, such as sharp interest rate increases, and provide better service to help them avoid foreclosure.

The rules, to be proposed Friday by the Consumer Financial Protection Bureau, are designed to prevent a repeat of the foreclosure crisis. They track an outline released in April by the agency, which was created in 2010 in part to help protect borrowers.

The public will have two months to comment on rules, and the consumer bureau aims to make them final in January.

“From processing payments to evaluating struggling homeowners and helping them avoid foreclosures, the bottom line is to treat consumers fairly by preventing surprises and runarounds,” said Richard Cordray, the bureau’s director.

Some of the rules mirror requirements agreed to by large mortgage servicers, including Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co., as part of a $25-billion settlement with federal and state officials over foreclosure abuses.
The bureau’s proposed rules would apply to all mortgage servicers, with some exceptions for small companies, and focus on two areas: providing clear and timely information for homeowners about their loans and helping them avoid bureaucratic hassles.

Servicers would have to send homeowners a clear monthly statement with a breakdown of payment information and due dates; provide a warning 210 to 240 days before the first interest rate change on an adjustable-rate mortgage, along with an estimate of the new rate; give advance notice of plans to charge homeowners for property insurance if their policies lapse; and make a good-faith effort to contact borrowers who fall behind on their payments to tell them of ways to avoid foreclosure.

Foreclosure prevention is the focus of another set of proposed rules. They include acknowledging a request to fix errors or other complaints within five days, then conducting an investigation and providing those results in 30 to 45 days.

The rules also would require a prompt review of applications for loan modifications and direct access to mortgage servicers’ employees to better help borrowers.

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Home Sales Climb 2.3 in July

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Home Sales Climb 2.3% in July

NEW YORK (CNNMoney) — Americans seem to be stepping up their homebuying while they can still find bargains.

July home sales rose 2.3% from June, and 10.4% from a year earlier, to an annual rate of 4.47 million, according to a report from the National Association of Realtors.

The market has been bolstered by low home prices and mortgage rates, according to Lawrence Yun, NAR’s chief economist, but the inability of some potential buyers to obtain financing has cut into sales.

“The market is constrained by tight lending standards and shrinking inventory supplies, so housing could easily be much stronger without these frictions,” he said.

Given the country’s population growth and demographics, Yun said home sales are still below what he would consider normal, which would be between 5 million and 5.5 million.

Elizabeth Ptacek, a senior real estate analyst for KeyBank, said economic factors still limit home sales.

“Mortgages are available if people have good credit and enough cash for a down payment,” she said. “But with the [slow] job growth and consumer confidence still low, even if you can get a mortgage, you have to think twice about buying.”

July sales came in slightly below forecasts from a panel of industry experts surveyed by Briefing.com, which had predicted an annual sales rate of 4.57 million.

Related: Best Places to Live where homes are affordable.

Stuart Hoffman, chief economist for PNC Financial, said the psychology of the market has turned. With mortgage rates coming off of historic lows and home prices on the rise, homebuyers are more likely to think that prices will rise, making them more inclined to buy.

NAR reported a rise in the median home price of 9.6% in July, compared with a year earlier, to $187,300. Listing inventory has fallen to a 6.5 month supply, down 24% from a year earlier.

NAR President Moe Veissi stressed that pricing homes at the right level is key.

“Correctly priced homes are selling quickly these days,” he said. “Fully one-third of homes purchased in July were on the market for less than a month, and only 21% were on the market for six months or longer.”

Mortgage Delinquencies Rose in Second Quarter, Trade Group Says

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Mortgage Delinquencies Rose in Second Quarter, Trade Group Says

The Mortgage Bankers Assn. says home loans with at least one missed payment but not yet in foreclosure rose to 7.58% in the second quarter from 7.4% in the first quarter.

The nation’s slowly improving housing market hit another bump last quarter, with more borrowers missing payments amid continued high unemployment, a report from a trade group shows.

The Mortgage Bankers Assn., in a quarterly delinquency survey issued Thursday, said home loans with at least one missed payment but not yet in foreclosure increased in the second quarter to 7.58% of all mortgages. That’s up slightly from 7.4% in the first quarter.

A separate survey from foreclosure listing firm RealtyTrac Inc. said the number of homes going into foreclosure rose 6% in July compared with a year earlier, the third straight month of year-over-year increases.

That trend reflected the fact that last year many foreclosures were on hold as banks focused on cleaning up flawed processes for seizing homes after the “robo-signing” scandals.

The Mortgage Bankers Assn. survey said the quarter-to-quarter increase in delinquencies appeared to result instead from a fundamental change: The slowing of the economy’s recovery during the first half of the year.

Although in no way reversing the longer-term trend of declining delinquencies — the missed-payment rate was 8.44% a year earlier — the increase raised eyebrows at the lender group.

“It’s not the direction you would want to see,” Mortgage Bankers Assn. economist Michael Fratantoni said in an interview. The key determinant, he said, will be the job market, which has shown signs of improvement lately.

In a brighter sign, the percentage of loans in all stages of the foreclosure process, or at least 90 days past due, dropped to 7.31% in the second quarter from 7.44% in the first quarter and 7.85% a year earlier.

The slow decline in this “seriously delinquent” category shows that lenders are gradually working through the huge backlog of soured loans made during the housing boom, Fratantoni said.

Federal Housing Administration loans entering foreclosure were a notable exception. The percentage of loans in foreclosure soared to 4.23% in the second quarter to a record high. Foreclosure starts for FHA loans also increased to 1.53%, also a record high.

The increase was due to major lenders, particularly Bank of America Corp., starting up foreclosures on loans that had been delinquent but held up because of to the federal government’s investigations into faulty foreclosure practices, said Shaun Donovan, secretary of Housing and Urban Development, which oversees the FHA.

The report confirmed signs that California, once the poster child for collapsing housing markets, is generally in recovery mode.

Across the nation, 4.27% of all home loans were in the foreclosure process at the end of the second quarter, the home lenders group said. In California, 3.1% of residential mortgages were in foreclosure.

That compared with 13.7% in Florida, 7.7% in New Jersey and 6.5% in New York, all states in which foreclosures are processed through the courts, resulting in huge legal entanglements. Most foreclosures in California are processed more quickly without judicial reviews.

More struggling homeowners are finding it possible to sell their homes rather than see them taken away in foreclosures as the prices slowly increase.

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