NEW YORK (CNNMoney.com) — Fewer mortgage borrowers are delinquent on their loan payments, according to the latest data from the Mortgage Bankers Association.

The nation’s overall delinquency rate dropped to 9.85% in the second quarter, down from 10.06% of all loans outstanding three months earlier.

Even better, the percentage of seriously delinquent loans — ones 90+ days late or already repossessed by lenders — dropped to 9.11% from 9.54% in the first quarter.

The drop in loans 90 days or more late was the biggest the MBA has ever recorded, according to the MBA’s chief economist, Jay Brinkmann. “That shows we’re making headway,” he said.

He cited three reasons for the improvement:

• Fewer loans are coming into the default process;
• The homebuyers tax credit, which increased demand for homes, generated many pre-foreclosure sales, removing the attached delinquent loans from the statistics;
• The government- and lender-led mortgage modifications “cured” some payment problems.

However, even with those bright spots, there was one troubling finding: First-time delinquencies increased after four quarters of decline. It inched up to 3.51% in the second quarter from 3.45% in the first quarter. According to Brinkmann, the reversal reflects the weakness in both the housing market and the overall economy.

“It’s a question of jobs,” he said. “It takes a paycheck to make a mortgage payment.”

Underscoring the trend is the foreclosure trend among borrowers with conventional loans, like 30-year, fixed rate mortgages. They accounted for nearly 36% of foreclosure starts during the quarter. And these safe loans rarely get into trouble unless they lose employment or income.

The four worst hit states — California, Florida, Arizona and Nevada — still account for nearly 60% of national delinquencies, but California’s numbers dropped dramatically this year. At the end of 2009, California foreclosure starts made up nearly 20% of the nation’s total. That dropped to 14.7% during the second quarter.

Another positive trend is the gradual downturn in the number of borrowers who are underwater on their mortgages, owing more than their homes are worth. 

CoreLogic reported today that the rate of borrowers underwater dropped to 23% in the second quarter from 24% in the first.

When borrowers fall underwater, it increases the chance that they’ll lose the homes. Brinkmann calls it one of the two “triggers” that lead to foreclosure.

If homeowners have positive equity, they can use it as a source of cash to pay bills, including mortgages. But if their cash reserves are gone and they can’t afford to make payments because their income has dropped, foreclosure is almost inevitable.

CoreLogic found that negative equity is worst in five states: Nevada (68%), Arizona (50%), Florida (46%), Michigan (38%) and California (33%).

By Les Christie, staff writer, CNNMoney.com

Bank of America is launching a new cooperative short sale program that will target 2,000 pre-screened homeowners, said Matt Vernon, the REO and short sale executive at B of A. 

In an exclusive interview with REO Insider, Vernon said the bank pre-screened these borrowers who have been considered for a modification under the Home Affordable Modification Program (HAMP) and a short sale under the Home Affordable Foreclosure Alternatives (HAFA) program. They have either fallen out of both programs or failed to qualify. 

“The big question we’re looking to answer is customer responsiveness,” Vernon said. “These are not customers who are seeking short sales but rather distressed customers who are on the road to foreclosure, and we want to provide them an alternative. Our goal is to provide a tailored program with incentives that are attractive to homeowners experiencing a true hardship.” 

Under this “test umbrella” for future programs, no new documents are needed from the seller since they already submitted their financial information to the bank. B of A is waiving deficiencies, or the difference between what the home sells for and how much is left on the mortgage. Vernon said his department will assign a short sale specialist to work with the real estate agent and the homeowner to market the property for 120 days. 

Letters have already gone out to the homeowners, and they have 120 days to list the property. Vernon said they are looking at a six month program. The bank will be working with the homeowners’ real estate agents, meaning the bank will not be selecting agents to work with the homeowners. 

Once sold, the former homeowner receives a $3,000 relocation fee, and the real estate agent gets a 6% commission. If it doesn’t sell, B of A will accept a deed-in-lieu of foreclosure in order to satisfy the mortgage. 

Vernon said the homeowners targeted are heavily concentrated in the sand states, California, Florida, Nevada and Arizona. 

“It’s a small test of customers who have been pre-screened,” Vernon said. “We’ve also worked with an investor to get their approval in the program before hand. This allows us to test and learn. Our hope and desire of this is that this pilot and others will help us design expansion of these programs in the future.” 

That investor held a stake in the original mortgage that is now in default. Lenders need approval from these investors for a short a sale to go through. It has been one of the major hurdles in the short sale process. 

The industry is beginning to recognize short sales as a serious alternative to foreclosure. According to the real estate data and service provider Core Logic, short sales in the US have tripled since 2008. Freddie Mac recently reported that its short sale figures were up 600% from two years ago and said in its Q210 financial statement that it completed 22,117 short sales in the first half of 2010, up nearly 180% from 7,914 in the first half of 2009. 

In Q210, B of A completed more than 25,000 short sales, almost three times the amount done in the same quarter last year. Roughly 90% of the short sales are performed on the Equator platform, and Vernon said by the end of the year, the entire short sale business will be. 

“Bank of America is committed to constantly improving the short sale process for our customers and our real estate business partners,” Vernon said. “We continue to test new ways of completing short sales to provide customers with a dignified exit and help avoid foreclosure.”

If you are approached by Bank of America for this program, please know that I have a long-term, successful relationship with them, in both distressed and non-distressed properties.  I am thoroughly qualified to be your chosen local Realtor, for this program.

Foreclosure filings rose 4 percent nationwide last month versus June, according to foreclosure-tracking firm RealtyTrac.com. For the 17th straight month, total filings topped 300,000.

A foreclosure filing is defined as default notice, scheduled auction, or bank repossession.

As with most months, just a handful of states dominated foreclosure activity nationwide.

• California : 14.9 percent of all activity
• Florida : 11.6 percent of all activity
• Arizona : 6.4 percent of all activity
• Michigan : 6.2 percent of all activity
• Georgia : 6.1 percent of all activity
• Texas : 4.9 percent of all activity

Together, these 6 states represent just 30 percent of the overall U.S. population.

The other 44 states (and Washington D.C.) were home to the remaining 49.0%.

Despite this imbalance, though, in all markets, foreclosures and REO are making a profound impact on pricing and product. “Distressed” homes now represent 32 percent of the overall resale market nationwide, according to the National Association of Realtors®.

Buying a foreclosed home can make for a terrific “deal”, but buying in the REO market is decidedly different from buying a non-foreclosed property.

As 3 examples:

1. Buying bank-owned homes can take 120 days to close.
2. Foreclosures aren’t always listed for sale publicly. Some inventory is privately-held.
3. Bank-owned homes are often sold “as is”. There may be defects that render the homes mortgage-ineligible.

If you have an interest in buying REO, consider talking with a distressed properties experienced real estate agent first. Even the negotiation process is different as compared to a non-distressed sale. It helps to have an experienced professional representing your interests.  As a local Realtor with over 33 year’s experience, I would be a qualified choice.

Here’s one facet of this issue that has never been explored, as far as I’ve seen. 

If lenders really had all this stockpile of “shadow inventory”, waiting for prices to rebound higher, why didn’t ANY of them take advantage of the market that existed in Orange County between January of 09, and April 30th of 2010, when, largely due to tax credits and low inventory, there were multiple offers – sometimes as many as 20 to 50 – on practically every listing in the lower price ranges? ( Under $350k, for condos, and under $500k for detached houses.) 

That was a well known, more than a year’s worth of time, when it would have been an IDEAL time to unload excess inventory, getting prices bid up to higher than market value, in many cases, while the median price in Orange County rose more than 10%. 

If all those lenders were holding all that alleged inventory, their agents would have been imploring them to take advantage of such conditions. 

The reason that DIDN’T happen is because that stockpile really only exists in the minds of conspiracy theorists, who can only offer their opinions or theories on the idea of shadow inventory, with charts, graphs, and stories concocted from still more theories. 

Here’s MY theory.  There is no shadow inventory - at least not as promoted by doom & gloom bloggers - where lenders have huge stockpiles of properties that they’ve already foreclosed on, and are “holding”, waiting for prices to come back. 

What there is, is a lot of properties wending their way through each lender’s labyrinth of systems with loan mods, short sales, and even cancellations, all preferable to eventual foreclosure.  That pile of properties is probably going to take 2 or 3 more years to work their way through these systems, and will likely do so in an extremely manageable fashion, a little bit at a time. 

As such, there’s very little likelihood of anything much more than a trickle of such properties hitting the market at any given time – pretty much as it has been for the past year and a half.  Those on the lookout for a Tsunami of distressed properties to arrive, over this next few years are in for quite a disappointment.   

Of course, this is just my opinion.

Short Sale Tactics May Bring on Legal Liabilities For Agents.

Written by my long time friend, Bob Hunt, for Realty Times.

Real estate agents know that short sales are likely to be time-consuming and frustrating. What many don’t know is that short sales carry high risks of legal liability for agents. This message was delivered on a variety of occasions at the recent meetings of the directors of the California Association of Realtors® (CAR), held in Sacramento, California. It was discussed by CAR attorneys at a member legal forum; it was discussed in a meeting of attorneys who represent brokerages and Realtor® associations, and it was discussed in presentations by the Real Estate Commissioner.

One area of short sales that is fraught with liability is in the use of negotiators. In California, short sale negotiators must possess a real estate license and are subject to a variety of regulations. Moreover, a negotiator’s agency relation to the principals is frequently unclear and undisclosed. Undisclosed dual agency is a particular problem.

At the CAR meetings special emphasis was directed to the unfortunately common practice of short-sale listing agents deliberately setting an artificially low listing price and/or submitting low offers for bank approval while discouraging or ignoring higher ones. Sometimes this practice occurs simply in the context of the agent trying to get a sale as quickly as possible. At other times the practice is part of a strategy to enable the buyer to “flip” the property.

How can one justify the agent not trying to achieve a higher price? An agent, a flipper, or a short-sale seminar instructor may say something like this: “Look, the seller’s not going to get any money out of the transaction anyway. So he or she really doesn’t care what the price is. They just want to be done with it, and the sooner the better. The lower price is really in the seller’s interest, because it resolves their problem sooner.”

Well, that rationale would have its point if it were true, but too often it isn’t. That is because, in many cases, the purchase price does make a difference to the short-sale seller. To explain this, we begin by noting that, while there are some situations where the forgiven debt in a short sale may not be taxable, in many cases — likely most — it is. Typically, then, the short-sale seller will be faced with one of two unpleasant possibilities: (a) the unpaid debt will be forgiven by the lender and the amount will then be treated as taxable income, or (b) the lender will allow the sale to go through, but will reserve the right to pursue the seller for the unpaid debt amount.

In short, generally, the purchase price does make a difference to the short-sale seller, because the higher the price the lower the amount of either taxable income or unforgiven debt. The agent who ignores or conceals this fact is inviting a future legal action that will allow him to participate in the seller’s financial problems. In California, he may have an opportunity to explain his behavior to the Department of Real Estate as well.

Additionally, if the above scenario also includes a deliberate attempt by the agent to influence the BPO (Broker Price Opinion) to come in significantly lower than fair market value, then a federal charge of bank fraud could be added to the list of liabilities.

Many agents have learned legally dubious short sale strategies at seminars and through books and tapes. It is an unfortunate, albeit understandable, fact that on occasion classes giving such advice take place at Realtor® association facilities. It is common for the sponsors of these classes to assure everyone that their programs have all been approved by the Department of Real Estate, legions of attorneys, H.U.D., and maybe even the White House. Of course they lie; and how is the person responsible for scheduling classes supposed to know? That is why a very strong piece of advice coming out of the CAR meetings was that Realtor® associations should be sure that classes dealing with short sale issues should first be vetted by the association’s legal counsel.

An article just landed in my email box, describing an interesting idea that makes sense to me.

The Slippery Slope of Short Sales by PAUL JACKSON     June 28th, 2010,     ( From HousingWire.com )

This past week, I received an email from one of my dearest friends that has really stuck with me. It illuminates perhaps one of the single largest shifts in borrower psychology likely to come from a push to short sales:

My neighbors are being foreclosed on. He is an civil engineer, and she is a retired banker. They are the most wonderful people I have ever met, and have been such sweet giving neighbors. She basically designed and built the house from scratch.

The house and land (1.3 acres) was valued at $1.8m a few years ago. Now, they are behind on payments and the bank wants to force a short sale for only $700k. She told me that she tried to modify the mortgage twice already, and has been turned down. She is willing and able to make payments on the $700k amount, but the bank is refusing and would rather sell to someone else.

The message paints an interesting picture of a potentially hidden angle to the recent short sale push by the Administration, banks, and Realtors: a renewed call for broad principal forgiveness.

It’s not too hard to see this sort of thinking quickly becoming the norm among many distressed homeowners, as a push for short sales grows ever stronger and many ask themselves why someone else is getting the better deal. More than 11 million borrowers currently owe more on their mortgage than it is worth, according to CoreLogic (CLGX: 18.09 +0.17%)—and this group of borrowers would love nothing more than to replace their current underwater mortgage with whatever the accepted “short sale price” is deemed to be.

I don’t know that such a response on the part of borrowers could be deemed irrational, either. Many will ask themselves why they have a mortgage at a higher amount, especially if the bank is willing to sell the house to another buyer for less money. Why does someone else get the lower purchase price? Isn’t easier for the bank to just give me that loan instead? I already live here.

It’s clearly a slippery slope, and not even a steep one, from a short sale push towards an outright push for the write down of mortgage principal to “short sale levels.” I suspect, in fact, that this is part of the reason some large commercial banks—Bank of America (BAC: 15.24 -1.17%) among them as of late—are working feverishly to get in front of this end game, announcing principal reduction programs that are great press exposure, and yet also protect their financial interests as much as possible.

Because the truth is that the bank and/or investor may not always have the luxury of defining their terms on principal write downs, especially not with elections looming this coming November. It’s only late June, after all.

Of course, reality is much more complicated. Generally speaking, the mortgage world can best be divided up into three sub-worlds: the GSEs, private-label securities, and whole loans. Depending on what class of mortgage asset you tend to hold, your viewpoints can differ dramatically; and if you hold all three, as most commercial banks tend to do, you’re facing more than a mild case of financial schizophrenia.

While the truth is many investors are in favor of principal write-downs, at least to a point—and many investors buying distressed whole loans are already forgiving significant amounts of principal, because they can—many commercial banks are hamstrung by such a maneuver. What’s more, plenty of consumers (rightfully) roil at the notion that financial rewards would ever accrue to the worst performers.

For most major commercial banks, for example, their whole loan portfolios present a distinct set of challenges apart from any securitized servicing they do—especially in the case of second liens (which I’ve written about before). Wide-scale principal reduction for these banks means recognizing massive losses on their second lien portfolios, losses that would blow a hole in their balance sheets so large that even the coziest of regulators wouldn’t be able to ignore it.

I’m pretty sure that right now, there isn’t the political will to fund another banking sector bailout. But the will to reduce principal is already embedded in our government’s short sale push—from there, it’s only a hop, skip and a jump into the broader use of principal reductions.

Editor’s note: The author held no relevant investment positions at the time this story was published.

Paul Jackson is the publisher of HousingWire.com and HousingWire Magazine. Follow him on Twitter: @pjackson

Here is an interesting article I came across today.

Modifications rise sharply on some mortgage loans

60-day-delinquent loans fall for first time in two years, Fannie and Freddie say

By Amy Hoak, MarketWatch

CHICAGO (MarketWatch) — Loan modifications through the government’s Home Affordable Modification Program tripled in the first quarter compared to the fourth quarter, according to data that covers loans held by Fannie Mae and Freddie Mac, the Federal Housing Finance Agency said Tuesday.

Also, loans 60 or more days past due fell for the first time in two years, dropping by nearly 23,800 to about 1.7 million in the first quarter, according to the FHFA’s latest quarterly Foreclosure Prevention & Refinance report.

Overall, the FHFA said various efforts to keep homeowners out of foreclosure, including loan modifications, short sales and deeds-in-lieu, rose 75% in the first quarter compared with the previous quarter, to a total of 239,000 completed “foreclosure prevention activity” efforts.

Permanent mortgage modifications through the government’s Home Affordable Modification Program rose to 136,000 at the end of the first quarter, up from 43,000 in the fourth quarter. Homeowners must successfully complete a trial modification period in order to make their modification permanent.

About 66% of modifications completed in the fourth quarter reduced borrowers’ monthly payments by more than 20%.

Meanwhile, cumulative refinance volume through the Home Affordable Refinance Program rose 53% to nearly 291,600 at the end of the first quarter, up from 190,180 in the fourth quarter. The program allows existing Freddie and Fannie borrowers who are current on their mortgage payments to refinance and reduce their monthly mortgage payments at loan-to-value ratios up to 125%.

The Federal Housing Finance Agency regulates Fannie Mae, Freddie Mac and the 12 federal home loan banks; the numbers in the report don’t reflect the Federal Housing Administration’s efforts to prevent foreclosures.

A broader view

Overall, the total number of homeowners receiving restructured mortgages since April 2009 increased to 2.8 million; also, half of homeowners unable to enter a permanent HAMP modification get an alternate modification with their servicer, according to a separate report Monday from the Department of Housing and Urban Development and the Treasury Department.

The 2.8 million figure “includes more than 1.2 million homeowners who have started HAMP trial modifications and nearly 400,000 who have benefitted from FHA loss- mitigation activities,” the report said. “Of those in the HAMP program, 346,000 have entered a permanent modification, saving a median of more than $500 per month,” See HUD and Treasury’s monthly housing scorecard.

“The good news is the industry is doing more than the government modifications,” said Faith Schwartz, senior adviser for HOPE NOW, a private-sector alliance of mortgage servicers, investors, mortgage insurers and non-profit counselors. “They start with the government mods to see if they fit.”

Treasury Secretary Tim Geithner said in a news release Monday: “The Administration’s housing policies, combined with actions of the Fed, have lowered mortgage interest rates, helped stabilize home prices and reduced the rate of foreclosures, repairing some of the damage caused by the financial crisis to the financial security of millions and millions of American families.”

Separately, the percentage of loans in foreclosure or with at least one payment past due was a non-seasonally-adjusted 14% in the first quarter, down from 15% in the fourth quarter of 2009, according to a Mortgage Bankers Association report in May. That works out to about 6.2 million loans somewhere in the delinquency or foreclosure process. See story on 14% of mortgages delinquent or in foreclosure.

Amy Hoak is a MarketWatch reporter based in Chicago.

Thanks for the good news Amy!