This post was on the Daily Business Journal:

"Maryland has approved emergency legislation that will try to ward off future increases in housing foreclosures.

Mortgage service companies must now provide the state with lists of homeowners who have adjustable mortgage rates that are on the cusp of resetting at higher interest rates, under the regulation approved Tuesday by Gov. Martin O’Malley. The breadth of subprime and adjustable-rate mortgages that were given to people with poor credit during the housing boom has been blamed for the recent spike in foreclosures.

The state Department of Labor, Licensing and Regulation (DLLR) will keep the homeowners’ names and provide them with information on resources to fend off foreclosure. One form of assistance the state provides is the "Bridge to Hope Loan Program," which provides zero percent-interest gap loans to homeowners who are a few months behind on their mortgages." ……..

This is a glimpse of what California is currently preparing for.  The mortgages due to reset are in the billions each month for the next 12 months.  We are about to get hit by a wave of foreclosure that have never been seen before. 

I found this article and thought it was interesting.  Wanted to share with my readers.

The CEO of Fair Isaac, the company behind the FICO credit score, stands by his company’s credit scores but sees more pain ahead for consumers.

NEW YORK (CNNMoney.com) — If you’ve applied for a mortgage, auto loan or credit card recently, then you’re probably intimately aware of what your FICO score is.

Banks rely heavily on these credit scores to determine whether or not to give consumers a loan. And as Wall Street and Main Street sort through the mortgage mess, people are looking for scapegoats.

Some have argued that the company behind the FICO score, Fair Isaac (FIC), as well as other companies that provide credit scores, such as Equifax (EFX), Experian and TransUnion, are partly to blame since their credit scores could not accurately predict subprime default risk.

I talked to Dr. Mark Greene, the chief executive officer of Fair Isaac to get his thoughts about this criticism as well as his perspective on the mortgage market and economy at large.

Greene told me it’s not, uh, fair to blame Fair Isaac for the credit crunch.

"People are looking for fingers to point and the FICO score comes in for critique," he said. "But we are quite confident that it has performed as well and is not an appropriate source of blame."

That said, Greene does think there is room for improvement. Fair Isaac is in the process of rolling out a new credit score product, FICO 08, in May. Greene said the new scores will focus on strengthening the predictive accuracy of credit risk of subprime borrowers as well as so-called "thin file" borrowers – people with little credit history.

Still, Greene maintains that credit scores are only one way to judge a borrower’s creditworthiness.

He said the banks with the most problems with mortgages are those who relied solely on credit scores and failed to look at the other two of what he dubbed the "three Cs": collateral and capacity to repay.

Along those lines, Fair Isaac is also rolling out in May something that it calls a Credit Capacity Index. That will help banks determine how much additional debt a prospective borrower can handle.

These products may help lenders do a better job of gauging the creditworthiness of prospective borrowers. But unfortunately for Fair Isaac shareholders, it’s unlikely to lead to a turnaround in the company’s fortunes anytime soon. The mortgage crisis is taking its toll on Fair Isaac’s sales and profits.

Before the company reported its fiscal first-quarter results last month, Fair Isaac lowered its sales and profit targets. The company also warned that results for the second quarter and the full fiscal year, which ends in September, would not meet analysts’ forecasts.

Analysts now expect sales to increase just 1% this year and that profits will only be up 4%. The stock has plunged 23% this year.

Greene wouldn’t address his company’s outlook specifically but he did have some not so encouraging things to say about the economy at large.

Greene, who joined Fair Isaac last year following 12 years on the financial services team at IBM (IBM, Fortune 500), also has worked for Citicorp (now Citigroup (C, Fortune 500)) and started his career in 1982 as an economist for the Federal Reserve.

"This slowdown is the first in thirty to thirty-five years that is clearly consumer-led," Greene said. He added that we "probably are entering a recession now."

Greene said it’s usually easier to predict when a corporate-led recession will end. The big problem with the current downturn is that it’s more about confidence — how consumers feel about job security and their household income.

If consumers are able to borrow more to buy homes, cars or other big-ticket items, that could help get the economy back on track. But with lenders so concerned about risk, credit standards have tightened. And until they loosen, it’s hard to forecast when this economic pain will be over.

"How quickly the ability for consumers to get credit is an important element in how quickly we recover," he said.

Another problem, Greene said, is that he’s hearing from his customers that more and more consumers are reversing their typical payment habits and leaving their home payments for last, confirming a trend we reported about earlier this week.

Before the housing downturn, people tended to pay off their mortgage first, followed by their car loans and finally, their credit cards. But with Americans now facing a cash crunch and a precipitous drop in housing prices, some have decided the mortgage is no longer their top priority.

"People are paying their credit cards first. They don’t feel the same incentive to pay off their home because of negative equity," he said.

That’s obviously not a good sign for lenders that are already wary of extending more credit, which could mean that this downturn could lag on for a bit.

I tried to get Greene to predict how much worse the economy can get and when things might turn around. But his training at the central bank has apparently served him well.

"I learned a trick while at the Fed. Never give a date or a number," he said.

A short sale is a legally binding agreement to allow a home to be sold for less than the amount that is owed. For debt ridden homeowners or those who owe more than the house is currently worth, a short sale could save them some of the enormous pain, embarrassment, and major credit challenges associated with bankruptcy and/or foreclosure. For lenders, it helps avoid some of the hassle and expense of seizing and auctioning off delinquent real estate. For potential homebuyers and real estate investors, a short sale offers a great opportunity to purchase property at a significant discount. It’s important to note that short sales occur at the sole discretion of the existing lender or servicing company. This is not like negotiating the price of a home under normal circumstances. A written declaration and supporting documentation demonstrating financial hardship and an inability to make payments will definitely be required by the lender in order to even consider a short sale. This may include pay stubs, tax returns, and liquid asset statements, including those for retirement accounts, among other documentation. In addition, the borrower must be at least 60-91days delinquent before a lender will even discuss a short sale. This is where an experienced real estate professional becomes invaluable to your cause. Knowledgeable real estate agents have likely negotiated short sales in the past and are well versed in the substantial risk and reward involved in this extremely complex and often drawn out process.

Be aware that there are serious consideration to the consequences of a short sale. If you are considering this, please send me an email.

Housing Meltdown

by Peter Coy
Friday, February 1, 2008

Why home prices could drop 25% more on average before the market finally hits bottom

As Washington policymakers struggle to keep the U.S. out of recession, the swirling confusion over the housing market is making their job a lot tougher. Will American consumers keep shopping or be forced to pull back? Will banks lend freely or be hamstrung by mortgage defaults? What are the best policy options right now? Those and other important questions simply can’t be answered without a good idea of whether home prices will rise, flatten out, or keep dropping.Some experts have begun to suggest that a bottom is in sight. Pali Research analyst Stephen East wrote in a research note to his firm’s clients on Jan. 25 that “the sun is not shining very brightly, but at least the worst of the storm has likely passed.” With optimism budding, Standard & Poor’s beaten-down index of homebuilder stocks soared 49% from Jan. 15 through Jan. 29.

But it’s considerably more likely that the storm is still gathering force. On Jan. 30 the government said annual economic growth slowed to just 0.6% in the fourth quarter as home construction plunged at a 24% annual rate. The Standard & Poor’s/Case-Shiller 20-city home price index fell 7.7% in November from the year before, the biggest decline since the index was created in 2000.

And that could be just the start. Brace yourself: Home prices could sink an additional 25% over the next two or three years, returning values to their 2000 levels in inflation-adjusted terms. That’s even with the Federal Reserve’s half-percentage-point rate cut on Jan. 30.

While a 25% decline is unprecedented in modern times, some economists are beginning to talk about it. “We now see potential for another 25% to 30% downside over the next two years,” says David A. Rosenberg, North American economist for Merrill Lynch (MER), who until recently had expected a much smaller slide.

Shocking though it might seem, a decline of 25% from here would merely reverse the market’s spectacular appreciation during the boom. It would put the national price level right back on its long-term growth trend line, a surprisingly modest 0.4% a year after inflation. There’s a recent model for this kind of return to normalcy after the bursting of a financial bubble. The stock market decline that began in 2000 erased most of the gains of the boom of the second half of the 1990s, leaving investors with ordinary-sized returns.

Why might housing prices plunge violently from here? Remember the two powerful forces that pushed them up: lax lending standards and the conviction that housing is a fail-safe investment. Now both are working in reverse, depressing demand for housing faster than homebuilders can rein in supply. By reinstituting safeguards such as down payments and proof of income, lenders have disqualified thousands of potential buyers. And many people who do qualify have lost the desire to buy. “A down market is getting baked into expectations,” says Chris Flanagan, head of research in JPMorgan Chase’s (JPM) asset-backed securities group. “People say: I’m not buying until prices are lower.’” He predicts prices will fall about 25%, bottoming in 2010.

Nobody can be sure how far prices will decline. Still, if prices drop that much, it could mean big trouble for the U.S. economy, which is already on the brink of recession. It would blow a hole in the balance sheets of banks and households, slicing more than $5 trillion off household wealth. That’s roughly the size of the drop in stock market wealth from the peak in early 2000, a big reason for the recession of 2001. Yale economist Robert J. Shiller, a longtime housing bear, points out that a housing decline that started in 1925 and ran until 1932 weakened banks and contributed to the Great Depression, which started in the U.S. in 1929.

MACARONI AND CHEESE

It has become a cliché, but an accurate one, that Americans used their homes as ATMs during the boom years. They lined up for cash-out refis or home-equity loans to turn housing wealth into spending money.

So far, the amount of equity being withdrawn has remained surprisingly strong—$700 billion at an annual rate in the third quarter. But it’s bound to dwindle if prices keep falling, giving the economy a further downward push. According to an analysis conducted for BusinessWeek by Zillow.com, the real estate Web site, a further 20% decline in prices nationwide would mean that two-thirds of people who bought in the past year would owe more than their homes would be worth, meaning they couldn’t take out cash if they wanted to.

Home Sweet Deals 

When it comes to real estate, foreclosures aren’t the only big story in the news. Builders and sellers are reportedly offering huge savings and massive incentives in order to pull in buyers and compete in today’s marketplace.

Business Week recently revealed that some big builders have been auctioning homes discounted by as much as 50% in selected markets, while other large builders have been providing up to $100,000 in savings and incentives. Many individual sellers are getting in on it, too, by offering incentives like special financing, plasma TVs, vacations, and even motorcycles, cars, and boats.

But, be wary. While there are many sweet deals to be found in today’s market, there are also scams, lemons, and unreliable builders, sellers, and industry professionals. Make sure that any deals or incentives you’re receiving or providing make sense for your own financial goals and needs. For home buyers and home sellers, this means working with knowledgeable, experienced real estate agents and mortgage professionals you can trust.