Countrywide. Citigroup. Washington Mutual and Merrill Lynch. All well known names in the world of finance, and all are now feeling the pinch due to an unstable real estate mortgage market and the lasting impacts the subprime mortgage crisis is having on their bottom lines.

For Countrywide, the second quarter of the year was a real let down with the company drawing from an $11.5 billion credit facility to help keep it afloat, followed by announced workforce cutbacks shortly thereafter.

Now with the first week of October behind us, Citigroup, Washington Mutual (WaMu as it likes to be known) and Merrill Lynch announced their organizations would be taking major hits in the pocketbook for the third quarter of 2007.

Citigroup came out with a press statement last week projecting that the company will suffer a 60 percent decline in third quarter income between 2006 and 2007. The statement also explains the company’s need to write down more than $3 billion in various financial instruments including subprime mortgage-back securities, highly leveraged financial commitments and fixed income credit trading.

As for Merrill Lynch, a release distributed Friday by the company said it also expects to report a loss for the third quarter. Earnings were adversely impacted by collateralized debt obligations (CDOs as they are called), and subprime mortgages, resulting in more than $5 billion in write-downs, with the company projecting a net loss of up to 50 cents a diluted share.

In its release, WaMu announced an expected 75 percent decline in quarterly net income compared to third quarter 2006. Ongoing weakness in the housing market, along with held-for-sale mortgages, net losses in the company’s trading securities portfolio and losses on investment grade mortgage-back securities were cited as key contributors to the projected loss for the quarter.

Given that these financial institutions all had vested interests of some sort in the subprime fiasco, these losses should come as no surprise. Still, the federal government and the mortgage industry are now left with the mess and are in the midst of cleaning it up, which will take years.

However, in the end, these losses will balance out against profits generated by the institutions’ other lines of business and the companies will all survive just fine. Tightened lending guidelines are already in place at the national and state level, so future borrowers should be more well qualified and capable to maintain the standard of living they want to enjoy by buying a house they can actually afford.

As for distressed homeowners facing foreclosure into the foreseeable future, these types of problems on the lender’s side of the transaction are probably going to make it more difficult for them to refinance or restructure their financial situation in order to save their homes.
The situation might adversely impact investors as well, making it more difficult to obtain the financing they need in order to help out those distressed homeowners looking for a way out of foreclosure without ruining their credit.

RealtyTrac will continue to follow the financial mess the subprime mortgage crisis has left behind, and to explain its potential impact on distressed homeowners, investors, real estate professionals and would-be home buyers looking to find bargain real estate in this current market.

For many real estate investors, the foreclosure market is smoking. Foreclosures nationwide are heating up, especially in once-supercharged real estate bubbles like Florida, California, Nevada and Arizona.

But in Michigan, where foreclosures are widespread and a hot market for real estate investors, people are burning down the homes to avoid foreclosure . . . literally!

Last month, a Michigan homeowner in foreclosure was arrested for allegedly setting her three-year old Grand Rapids home on fire to collect the insurance money, according to the Grand Rapids Press.

Sheryl Christman, a 38 year old housewife, torched her home just four days shy of losing  it to foreclosure. Christman was arraigned Sept. 1 on a felony arson count that is punishable by up to 20 years in prison. She was released from Kent County jail on Oct. 1 on a $20,000 cash bond.

The fire completely destroyed the home, which is valued at $150,000. Fire investigators were suspicious because the blaze roared out of control quickly.

The married mother of three allegedly planned to use the insurance settlement money to be with her boyfriend. Investigators convinced the boyfriend to wear a wire, recording a conversation between  him and Christman. Court papers claim that she admitted to setting the blaze.

Foreclosure fraud — and now arson and insurance fraud — are becoming issues in Michigan and across the country. As foreclosures continue to rise, tragic stories like the case against the Gaines Township woman may grow as well.

At RealtyTrac, we’ll keep you informed of these and other developments.

It wasn’t very long ago that President George W. Bush came out with a public policy statement negating any possibility of either a homeowner, or a lender bailout, given the impact the current mortgage crisis is having on the nation’s housing economy.

So it comes as a surprise of sorts that the White House issued a statement earlier this week supporting the recent passage of HR 3648 by the House of Representatives, while at the same time asking that a key provision of the bill be watered down to the point of making its implementation temporary at best.

Titled the “Mortgage Forgiveness Debt Relief Act of 2007,” HR 3648 is sponsored by Rep. Charles Rangel (D-NY), Chairman of the House Ways and Means Committee, and a number of other sponsors. The provision that is the focus of the White House proposal goes to the crux of the bill – to amend the Internal Revenue Code of 1986 to exclude discharges of indebtedness on principal residences from gross income.

At present, under the Tax Code a homeowner who loses a home to foreclosure has to pay income taxes on any portion of the mortgage debt the lender may decide to forgive. The IRS currently considers such forgiven debt to be additional gross (and taxable) income for the year.

This can directly affect the homeowners’ ability, or desire for that matter, to proceed with such things as short sales and other types of workout situations that may offer them foreclosure relief, for instance.

“…the Administration strongly believes this relief should be temporary to assist homeowners during the current mortgage market transition period and to avoid distorting consumer and lender decisions on new mortgage loans,” the statement said.

The White House also goes on to justify its position, stating that the Tax Code, as it currently exists, already provides relief to the most financially-distressed mortgage borrowers from having to pay tax when a debt has been discharged in bankruptcy.

Given such reasoning, amending the legislation’s core concept may indeed be justified because in the free market system under which this country operates homeowners, like any other consumers, should not be rewarded for making bad financial decisions in purchasing more home than they could really afford in the first place.

Still, the Administration’s view that this assistance be temporary, and should last only so long as it takes for the mortgage markets to emerge from the current “transition period,” may be flawed from the get go. Most people facing foreclosure at any time, no matter the cause, probably don’t have either the income or the equity to pay the higher taxes on the forgiven debt to begin with. And the timing and true length of a market turnaround in the current circumstance, when it occurs, is uncertain at best.

Will this effect the number of foreclosures coming down the pike as non-traditional ARM’s continue to reset at higher interest rates for the next few years? Probably not in the near term at least, since most major lenders are still holding out from agreeing to workout deals and short sales.

However, many industry experts believe that lenders will eventually have to come around to accepting the idea, even if begrudgingly, as their REO inventories continue to expand at a more rapid pace as those subprime loans reset their rates.

Stay tuned to ForeclosurePulse and RealtyTrac as this story continues to develop.

In an interesting post on his excellent, informative FHA Mortgage Guide blog, author Peter Miller notes that, over a 5-year period, FHA and VA loans have basically lost half of their market share. While this may speak more to the nature of a loan market that approved virtually anyone, anywhere for any loan, anytime, it also suggests that those in the government responsible for managing programs intended to increase home ownership may not have been as proactive as they should have been over the past few years. Despite the fact that they're not as sexy as "no doc, no talk, just walk" loans - all of which seem to be going into default now - VA and FHA loans tend to be much safer, and an all-around better alternative to the risky, toxic products that have been at the heart of the current foreclosure mess.  

With President Bush proposing the FHA Secure program, hopes abound that some of these governmental programs will continue to help deserving families move into homes, and prevent some disenfranchised homeowners from losing theirs.

Television reporters — their crystal balls in tow — were talking about it like it was a done deal before it was even announced. Analysts were beyond whether it was going to happen. They were guessing just how much it was going to be cut. And in the end they were all, to a certain extent, correct.

The Federal Open Market Committee did finally cave in to pressure from peers, industry analysts, and even the public at large and slashed the federal funds rate 50 basis points Tuesday to 4.75 percent in hopes of curtailing the housing crisis befalling this country, while still keeping a careful eye on inflationary concerns.

In a simultaneous move Tuesday, the Fed’s Board of Governors also reduced its discount rate (the rate charged by banks to each other to borrow funds overnight) by 50 basis points to 5.25 percent. This is the second reduction in the rate in as many months.

The impact, and reaction, to the cut in the Fed’s short term rate that dictates the interest consumers pay on myriad types of personal and business loans, was immediate and strong — whether for or against it. Wall Street was ecstatic, ending the trading day both Tuesday and Wednesday up markedly. So were lending institutions like Bank of America, which immediately lowered its prime rate.

Some analysts weren’t so sure it was the right thing to do at the moment. One Yale University economist even testified before a congressional committee Wednesday that a drop in consumer confidence could result in a recession within the next year’s time.

In a statement released Tuesday, the FOMC justified making the move (the first rate decrease in years after 17 consecutive upward rate “adjustments” under Alan Greenspan’s leadership, followed by more than a year of a wait and see stance with Fed Chairman Ben Bernanke at the helm).

“Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally,” said the FOMC statement. “Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook.”

Translation: the Fed’s not sure, but they have to do something. Lowering interest rates always has the potential of increasing inflation rather than controlling it, as we saw with home prices over the past six years. It will take years for the fallout from this latest move to be felt and measured. In the meantime, the Fed says it remains ready to act as needed to promote price stability and sustain the nation’s overall economic growth.

In a published report released Wednesday, RealtyTrac VP of Marketing Rick Sharga stated that the reduction of the federal funds rate may help moderate future foreclosure activity somewhat in two important ways: 1) some people who may have gone over the edge into foreclosure may be spared if the reduction means the rate on their adjustable rate mortgage isn’t reset as high as originally anticipated; and 2) money that has been held out of the credit pool by investors may find its way to Wall Street after all.

Overall, it is way too soon to tell whether this latest move by the Fed will help or hinder the nation’s economy and pull the housing market out of its slump. In the meantime, investors, prospective homebuyers and real estate professionals working the foreclosure market will still have an ample supply of inventory to work with.

Two natural disasters that severely impacted Kansas homes this year have brought housing issues to the forefront in that state. One of those natural disasters, a tornado four months ago in Greensburg, virtually wiped out an entire town. Now the governor wants to rebuild the town as an environmentally friendly “green” community, according to state Rep. Tom Borroughs.

“They can do it bigger and they can do it better,” he said at a housing conference in the state last week.

But it’s not only natural disasters that are impacting the state’s housing situation. The manmade problem of foreclosures is also taking a toll on the state’s housing market. Although the state’s foreclosure rate is relatively low compared to the national average, foreclosure activity has been steadily trending upward over the past couple years, according to RealtyTrac. Kelly Edmiston, Senior Economist in the Community Affairs Department of the Federal Reserve Bank of Kansas City, said in a luncheon address at the conference that the state’s housing market never fully recovered from previous foreclosure surges, making it more susceptible to high foreclosure levels now.

“Kansas foreclosures are not at an all-time high, but they’re close,” he said, pointing to a trend chart showing foreclosure activity in the state over the past few decades.

Edmiston attributed the rising foreclosures to three factors: a greater share of nonprime mortgages, which inherently come with higher default rates; payment shock that comes when non-traditional mortgage products reset to higher monthly payments; and the low amount of equity in many homes. Edmiston provided an eye-opening example of how a monthly mortgage payment on a $200,000 so-called nontraditional loan taken out in August 2004 could increase from about $600 to more than $1500 when it resets three years later.

Edmiston said most of the foreclosure problems in Kansas are in the urban areas — Kansas City, Wichita and Topeka. Using data from RealtyTrac he created heat maps showing foreclosure hot spots in those cities. He noted that the foreclosure hot spots tended to appear in low-income neighborhoods. His foreclosure forecast — which he carefully noted was his own personal opinion and not that of the Federal Reserve — was that foreclosure activity will continue to rise in the near future with a decline possible in 2009. But, he added, that could change depending on “what happens to home prices.”

Few if any of the nine Republican candidates believe that the government should start cutting checks to help struggling subprime borrowers, speculators and lenders.

Instead, President George Bush and his Republican allies have followed a laissez-faire approach to the markets for the past six years. Bush and other GOP leaders have rejected Democratic calls for a federal bailout in response to the housing crisis.

“It’s not the government’s job to bail out speculators, or those who made the decision to buy a home they knew they could never afford,” said Bush last week, announcing a new package of measures aimed at alleviating the impact of the subprime crisis on homeowners. “The government’s got a role to play. But it is limited. A federal bailout of lenders would only encourage a recurrence of the problem. It’s not the government’s job to bail out speculators, or those who made the decision to buy a home they knew they could never afford.”

Among the steps Bush announced:
• Urging Congress to pass legislation that would allow more borrowers to get mortgages insured by Federal Housing Administration, either to refinance existing mortgages or for first-time homeowners.
• Changing the tax code so borrowers who win partial forgiveness of their debt don’t have to pay tax on the amount forgiven.
• Enforcing predatory lending laws and strengthening lending practices.

Several GOP presidential candidates agree with Bush’s new plan.

 Former New York mayor Rudolph W. Giuliani believes in a hands-off policy to correcting the crisis. Like Bush, Giuliani is opposed to broad government intervention. “I think at most, more transparency, more information” should be added to the system. As president, Giuliani added, he would “not succumb to the temptation of trying to manipulate it too much and come in with a bailout.”

Mitt Romney, the former Massachusetts governor, has also positioned himself as small-government conservative. Romney believes the government should simplify the mortgage process, ensure that regulators better monitor the industry and punish “bad actors.”

Arizona Sen. John McCain wants to avoid a broad and potentially expensive bailout. McCain prefers to target assistance to borrowers who have been taken advantage of by lenders. He also would like to see more consumer education.

As the 2008 Republican and Democratic presidential caucuses approach, more candidates from both sides of the aisle are tapping into the economic anxieties of working Americans by introducing proposals to remedy the growing foreclosure crisis. With homes prices tumbling, foreclosures rising and a glut of unsold homes flooding the nation’s real estate markets, the relentless housing slide will continue to dominate the economic and political news in the months ahead.

With mortgage foreclosures at historic highs, Democrats and Republicans are fighting over a political issue that could have major implications in the 2008 presidential campaign. 

Sensing an opportunity to win votes, the major presidential candidates have come out swinging; proposing a variety of prescriptions to ease the worsening housing slump. Both the White House and Democrat leaders in Congress agree that something must be done to stop the foreclosures. 

Yearning to retake the GOP-controlled White House next year, Democrats  are clamoring for the federal government to do something, anything, to contain the crisis. Republicans, on the other hand, are opposed to a government bailout for lenders, homeowners and speculators.

Meanwhile, the rising flood of foreclosures promises to become a major presidential campaign issue in the weeks and months ahead because an alarming 2 million American homeowners could lose their homes by November 2008.

Here’s what the major presidential candidates have to say about the growing foreclosure epidemic:

The three main Democratic presidential candidates — Clinton, Obama and Edwards —have made various proposals for modest reform, including setting up a federal fund to help homeowners fend off foreclosure and providing borrowers with counseling, along with laws to ban predatory lending policies.

Democratic presidential front-runner Sen Hillary Rodham Clinton  wants an end to prepayment penalties for home mortgages and a $2 billion federal fund to help homeowners avoid foreclosure. Clinton also wants the government to impose new disclosure requirements on mortgage brokers and curb their ability to dictate lending terms.

“We need to act now with smart, practical solutions to strengthen our housing and mortgage markets,” Clinton told The Associated Press. “We need to put an end to fly-by-night mortgage brokers peddling loans to unqualified applicants based on inflated appraisals.'”

By contrast, Illinois Sen. Barack Obama favors fining unscrupulous lenders. Like Clinton, Obama also believes in creating a home rescue fund. Writing in the Financial Times, Obama warned that the foreclosure crisis is “more than a temporary blip in our economic progress, it is a cancer that threatens to spread with devastating impact to housing and to our economy as a whole.”

Furthermore, Obama called for tighter mortgage regulation and blamed lobbyists working on behalf of lenders for obstructing tougher regulation of the subprime industry, adding: “The rules currently governing mortgages were written in the 20^th  century to make borrowing easier to understand for borrowers. We need to update these rules for the 21^st century and enact the regulatory and disclosure laws that the mortgage industry has been lobbying against.”

Former North Carolina Sen.John Edwards — criticized for investing in a hedge fund linked to lenders that have foreclosed on Hurricane Katrina victims — advocates a “Home Rescue Fund” (financed by taxpayers) to help millions of Americans homeowners who are at risk of defaulting on their loans and losing their homes. Edwards also wants to ban certain fees, establish uniform broker licensing standards and start a national database for disciplinary infractions.

Connecticut Sen. Christopher J. Dodd,  chairman of the Senate banking committee, has held several hearings about predatory lending. Dodd wants to end penalties for early payment of subprime mortgages and to raise limits on the portfolios of mortgages held by Fannie Mae and Freddie Mac. “The power exists today with regulators to lift those caps,” said Dodd. “That does not require statutory language or new laws.”

Dodd also pointed out that many brokers give clients the false impression they’re working on their behalf. “Brokers should have to act either as agents of the borrower, thereby owing them a fiduciary duty, or as agents of the lenders, who would be responsible for the brokers' sales practices.”

Delaware Sen. Joseph Biden urged for more transparency in the operation of Wall Street hedge funds and private equity firms. “They are the ones that are causing this to go under, and there’s no transparency, no accountability,” Biden told The Washington Post.

New Mexico Gov. Bill Richardson — taking aim at President Bush and the GOP — called the current financial crisis the “the Katrina of the mortgage-lending industry,” referring to the 2005 hurricane that devastated New Orleans. Richardson added: “The president has let these people regulate themselves, and as a result, the necessary checks and balances have been overlooked. This must change.”

No butter for me. Personally, I like my hot baked potato covered with sour cream and chives. Nowadays, I may have to add a side of presidential politics too!

Bob Pisani, Wall Street correspondent for CNBC, recently called foreclosures the “hot potato of the political season.” According to RealtyTrac’s latest numbers the top five states with the highest number of foreclosure filings in July accounted for 55 percent of all foreclosure filings in the country. (see related blog post below). They also happen to be five of the states with the most electoral votes up for grabs. The five: California, Florida (the hanging chad capital of the western world), Michigan, Ohio and Georgia.

For the upcoming 2008 presidential election, California will have 55 electoral votes, Florida 27, Michigan 17, Ohio 20 and Georgia 15. That’s 134 electoral votes out of a total 538 with 270 votes needed to elect a president. In other words, the five states with the most foreclosures in the country represent 25 percent of the available electoral votes, or roughly 50 percent of the votes it will take to elect our next president!

For their part, the Democrats are starting early, with Clinton, Obama, Edwards and Dodd proposing varying solutions while laying blame for the current mess up of the national economy on the front doorstep of the nation’s mortgage brokers. Even Bush put in his two cents worth, taking a more or less hands-off approach to the whole mess.

Edwards had to deflect some controversy as it was revealed that the former North Carolina senator reportedly has invested $16 million in a hedge fund involving subprime lenders that are presently foreclosing on homeowners in New Orleans after the devastation of Hurricane Katrina. However, the CNNMoney.com report does go on to say that Edwards has been an outspoken critic of subprime lenders and vows to help those victims.

Investors, real estate professionals and potential home buyers looking to pick up a property at bargain prices should stay keenly focused on this election. It looks like foreclosures are going to be a real HOT button of the political season and RealtyTrac will be following it closely no matter how you like your potatoes prepared.

California, Florida, Michigan, Ohio and Georgia together accounted for 55 percent of all U.S. foreclosure filings in July, according to the RealtyTrac U.S. Foreclosure Market Report released today. The foreclosure filings tracked in the report are default notices, auction notices and bank repossessions.

California reported the most foreclosure filings of any state, with 39,013. The state's foreclosure activity was actually down a half a percent from the previous month but still up 289 percent from July 2006. California's foreclosure rate of one foreclosure filing for every 333 households slipped from third highest in June to fourth highest in July, behind foreclosure rates in Nevada, Georgia and Michigan.

Florida foreclosure activity in July decreased almost 9 percent from the previous month, but the state still reported the second most foreclosure filings and a foreclosure rate of one foreclosure filing for every 431 households — the nation's seventh highest state foreclosure rate.

Michigan, Ohio and Georgia all reported more than twice the number of foreclosure filings as they did in July 2006. A 75 percent month-over-month spike in Georgia pushed that state's foreclosure rate to second highest among the states, and Michigan's foreclosure rate came in third place thanks to a 39 percent monthly jump in foreclosure activity. Foreclosure activity in Ohio was up 12 percent from the previous month, and the state's foreclosure rate ranked sixth highest among the states.

View full report.

 More than 925,000 foreclosure filings were reported on more than 573,000 properties in the first half of 2007, according to the RealtyTrac Midyear 2007 U.S. Foreclosure Market Report, released yesterday. The report marks the first time that RealtyTrac has included a count of unique property addresses in some stage of foreclosure. But whether you count by total foreclosure filings or number of properties affected by foreclosure, foreclosure activity is up more than 55 percent from the first half of 2006.

“The addition of this (property count) metric to our foreclosure report was spurred by a data request for unique property addresses from the Federal Reserve Bank, which is using our data for market and risk analysis, and we believe it will serve as a valuable complement to the total foreclosure filing count that we have been including all along,” said Rick Sharga, RealtyTrac’s vice president of marketing. “It’s interesting to note that the total foreclosure filings and unique property counts reveal almost identical trends on the national level: foreclosure filings are up 39 percent from the previous six months and 56 percent from the first half of 2006; unique property counts are up 32 percent from the previous six months and up 58 percent from the first half of 2006.”

The similarity between the trends revealed by the two different counts did not end at the state level. Both counts showed the same six states — Nevada, Colorado, California, Michigan, Florida and Ohio — with the highest per household foreclosure activity. And the same five states — California, Florida, Texas, Ohio and Michigan — documented both the highest number of foreclosure filings and the highest number of unique properties in some stage of foreclosure.

View full report.

Storm clouds are gathering over the nation’s battered housing market. Depending on whom you ask, the forecast calls for either thunderstorms or gale force hurricane winds. Fueling the latest concerns is a deluge of discouraging data in the housing sector, all of which point to opportunities for investors and buyers looking for bargains — particularly on foreclosure properties. For many Americans, they may have thought that they would be able to flip or refinance their houses quickly and avoid the rise in their mortgage payments. But now — in a declining real estate market — many of them are finding themselves stuck... VIEW FULL STORY

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