Some experts say the housing answer is not just lowering interest rates but also actually reducing principal. In other words, these experts are encouraging banks to write down the principal and interest rates to current market value, which according to some experts would save homeowners $71 billion each year. CoreLogic reported that at the end of the second quarter 2011, underwater homeowners owed $709 billion on mortgages (much more than their homes were worth).

Real estate expert, Tanya Marchiol, who has appeared on TV, in print, and on Sirius Satellite Radio, writes in a recently released report, “In 2010 the nation’s top banks paid out twice that amount in bonuses and compensation ($146 billion).”

Marchiol claims the savings to homeowners whose mortgages are upside down would create an economic boost to the economy–creating jobs, reducing mortgage payments, helping investors–rather than the negative financial effects which ripple through the economy when a foreclosure occurs.

Marchiol writes that, “investors would typically be better off if servicers would agree to loan modifications with principal reductions rather than letting the home fall into foreclosure.”

However, the thought of principal reduction and loan modifications are often scoffed at by big banks. Marchiol claims that’s because servicers can actually make more from a property that is foreclosed on by the foreclosure-related fees. She points to the National Consumer Law Center and writes, “A servicer deciding between a foreclosure and a loan modification faces the prospect of near certain loss if the loan is modified and no penalty, but potential profit, if the home is foreclosed.” This Marchiol claims is often not in the best interest of the mortgage investor. She explains that when a servicer forecloses on a home, it’s the investor who is “saddled with all foreclosure-related costs: legal fees, maintenance costs on the property, sales costs, etc.”.

That can be quite costly. The argument Marchiol makes is that it can be cheaper to simply write down principal to the current market value and avoid foreclosure. A win for everyone she explains, and the solution to “solve the housing crisis and jumpstart the economy”.

However, quite obviously big banks have not viewed it this way and have resisted principal reduction or loan modifications.

Opponents of principal reduction argue that the main reason it doesn’t work is because of what is referred to by economists as asymmetric information, according to information by the Federal Reserve Bank of Atlanta. This basically means that only the borrowers truly know if they will really default on a loan and let it fall into foreclosure. So, this theory speculates that without this information investors who back mortgages are essentially guessing which ones may or may not default and which ones truly need help as opposed to defaulting and trying for help simply because a principal reduction might be available.

The authors, economists, Chris Foote, Kris Gerardi and Paul Willen write on the website, “The argument for principal reduction depends on superhuman levels of foresight among lenders as well as honest behavior by the borrowers who are not in need of assistance. Thus far, the minimal success of broad-based modification programs like HAMP should make us think twice about the validity of these assumptions”

So far, programs like the Principal Reduction Alternative (PRA) have only really helped what would be considered a mere handful (53,000) of fortunate homeowners. Many millions more remain in need. PRA offers incentives to investors to reduce principal on certain mortgages. It’s part of the Home Affordable Modification Program (HAMP) but PRA’s reach has been limited partly because the program requires that the mortgage not be owned by Fannie Mae or Freddie Mac, which significantly reduces the number of homeowners who can qualify.

PRA launched in October of 2010 and requires that mortgage servicers evaluate homeowners for a possible principal reduction when they apply for a HAMP loan modification, (provided they do not have a Fannie Mae or Freddie Mac mortgage) and have a loan-to-value ratio greater than 115 percent. The investor who holds the mortgage must approve the principal reduction. Homeowners who are approved will earn one-third of the total reduction over a period of three years, provided they stay current on their mortgage.

Marchiol sums it up, “The American economy is chained to the crushing housing debt load. Chronic unemployment, foreclosures, and small business closings can all ultimately be traced back to the housing crisis.”

She claims principal reduction is the answer to the housing crisis. “Now it is the banks’ turn. Principal reduction will restore the American Dream, create jobs, and give the American family the ability to breathe again.”

by Phoebe Chongchua

Published: December 23, 2011, RealtyTimes – Real Estate News and Advice

On December 21, 2011 NAR released two documents that address some significant problems with its home sale statistics. One is a PowerPoint presentation titled, “Re-benchmarking of Existing Home Sales”. Despite the somewhat imposing title, it provides a brief and understandable overview of the issue. The other, “Description of Methodology to Benchmark Existing Home Sales, 2011″, is a considerably more detailed description of NAR’s data gathering and estimating procedures. It is not for the faint of heart. Both are available on the NAR web site.

The apparent extent of NAR’s reporting errors is significant. Existing home sale numbers were revised for the past four years. The yearly discrepancies ranged from 11% – 16%. The four-year average of 5,157,000 existing homes sold was revised downward to 4,420,000 – a 14% change.

“How,” one might wonder, “can this be? It’s just counting isn’t it?”

Well, no, it isn’t just counting. It’s considerably more complicated than that. And who knew?

The NAR methodology report points out this: “The actual level of monthly home sales for the entire country is unknown. NAR provides existing home sales estimates based on benchmarks and sample data… there is currently no comprehensive, current listing of monthly sales for the entire country based on actual records.” The report goes on to state that “Most economic data are based on benchmarks and samples.” Here is how benchmarks worked for NAR:

“A representative sample of approximately 200 MLS’s from around the country provide NAR with sales and price data on a monthly basis.

• The Monthly EHS [existing home sales] was last benchmarked for 1999 based on the 2000 Census.
• Each month, beginning in January 2000, NAR tracked the percentage change in sales in the MLS data from the same period one year ago.
• The percent change from the MLS data was applied to the benchmarked data to estimate monthly sales.”

Let me try to represent this method with a greatly over-simplified example. I know that MLS data doesn’t represent the entire number of homes that have been sold in any given period. So, I decide to use as my benchmark the sales data taken from the long form questionnaire in the 2000 census. I figure that is the best way to capture the actual number of sales. (Note, as we will observe later, that county records are not uniformly reliable.)

Suppose, then, that the census data indicates that my market area sold 1,000 homes in July; whereas the MLS data showed 900 sales. Then I will figure that MLS data represents 90% of actual sales. Now, next year – when there is no census data available – I will use MLS data, and extrapolate accordingly, to estimate actual sales. If MLS sales increased to 990, I would estimate actual sales at 1,100.

In recent years, it has been observed that there were growing discrepancies between NAR’s estimates and those of other information providers, most notably CoreLogic, whereas they had been pretty close in the past. Investigation into the causes of these differences led NAR to acknowledge that they had overlooked some important changes in the market. These changes meant that the MLS data should be treated differently than it was in the year 2000. Some of the more notable changes were these:

1. In recent years there has been a lower percentage of for-sale-by-owner (FSBO) sales than there were during the benchmark year. So, when NAR statisticians were extrapolating from MLS data to the number of actual sales, they have recently been adding more FSBO sales than actually occurred.
2. NAR reports were for sales of existing homes, not newly constructed ones. During recent years, however, more new-home builders have been putting their inventory into MLS. Thus new homes sales have been influencing the supposed count of existing home sales.
3. Finally, in a slow market it is an increasingly common practice to list homes in more than one MLS. When the home is sold, then, it shows as a “sold” in each MLS in which it was listed. Hence, when accumulated MLS data is used, the same sale is counted more than once, inflating the result.

It is to NAR’s credit that they have engaged in a thorough re-examination of their statistical procedures. The lengthy report that has been issued explains the new methods that will be used to estimate existing home sales. Like visiting a sausage factory, though, you might like the product better if you don’t become too well acquainted with how it is made. But, it may be the best we can do.

And why not just count sales as recorded by the county? That, unfortunately, is easier said than done. As the report makes clear, “States and counties across the country record home sales transactions in a non-standardized manner… Further, in non-disclosure states, some critical sales information is not publicly available.” The bottom line: “…courthouse records do not provide adequate information in the form needed at this time.”

National home sales data is extremely important to those who shape and influence housing policy. Both political and business decisions may rely on such reports. To most of us in the business, though, we are reminded of old 1960s theme: you don’t need a weatherman to tell you which way the wind is blowing.

by Bob Hunt

Published: December 27, 2011, RealtyTimes – Real Estate News and Advice