Esko Kiuru

The housing industry is relying heavily on government-backed mortgage organizations like Fannie Mae, Freddie Mac and FHA for supplying financing to home buyers, filling a gaping void left by the private home loan sector still applying remedial salve to its festering wounds. Without them the real estate arena would be uniquely anemic. And the government is slowly gaining even more control over housing in a different but quite influential capacity, whether it likes it or not.

As mortgage foreclosures keep steadily spilling onto the ravaged real estate market, GSEs - Fannie Mae's and Freddie Mac's official designation - and its federal cousins like FHA and VA pick up repossessed homes by the thousands. Radar Logic - a real estate research boutique - reports that the government now holds about 46% of all U.S. REO inventory, a large share that has been continually growing over the past several years.

What's alarming is that it's going to increase from there for the foreseeable future. 2.3 million homeowners are currently 30-90 days behind on their mortgages, as Zillow and Lender Processing Services have figured out. Radar Logic calculates that 69% of these home loans are guaranteed or owned by the various government agencies. The situation is worse than that, though. About 5 million mortgage borrowers are either 90 days past due or are already in the foreclosure pipeline. The Treasury reports that 56% of these are in some shape or form under the government's umbrella. Radar Logic estimates that roughly 35% of mortgages in these two categories will avoid foreclosure via modification efforts or short sales.

Nevertheless, when everything is tallied up nearly 3 million homes will soon be in the government's REO inventory, Radar Logic says, pushing up its percentage share quite a bit.

If Washington puts the entire inventory as it becomes available for sale, real estate prices that have lately shown some stability will certainly weaken again. That will predictably swing the nascent housing turnaround in reverse. Also, selling in this soft real estate market will bring more losses that will ultimately turn into the taxpayer's responsibility. These choices are so unappealing. What other options are there? Renting them out until the housing market recovers and then later on sell them to at least break even, might be one answer. That is exactly what many investors are doing today, especially in worst-hit areas like Las Vegas and Phoenix. The operative word for them is hold. Be patient.

The government is not in the house leasing business but in this dire and unusual situation it might be wise to seek solutions outside the box.

As the housing sector kept sucking for more oxygen, Washington announced back in February the Hardest Hit Fund worth $1.5 billion that was designed to help states in serious housing peril and asked them at the time, as a condition to get a slice of the money, to submit creative programs that would lend a hand to homeowners struggling with mortgage payments. The plans from Arizona, California, Florida, Michigan and Nevada have now been okayed by the Treasury and the assigned funds are ready to begin flowing to the states' Housing Finance Agencies, or HFA, tasked to administer their use.

California drew the largest share at $699.6 million, Florida got $418 million, Michigan $154.5 million, Arizona $125.1 million and Nevada $102.8 million. Apparently the split was based largely on population size, which certainly is one way to do it.

A fairer method might have been to look at the current mortgage foreclosure rate in each state, in which case Nevada - with Las Vegas as its much-pummeled real estate meltdown epicenter - would have picked up a bigger portion of the proceeds. Negative equity measure, or being underwater, would be another metric that could have been used here. Again, Nevada would have ranked right up there for more funds than what it now received.

Each state presented its own innovative program for mortgage borrower relief, but a few predictable items appear on everyone's list. The most prevalent one is principal reduction, something that all address in a variety of ways. It clearly is the key in any plan, government or private, to stabilize housing markets from Florida to Nevada and beyond. The Obama Administration is putting increasing emphasis on it, but its actions need more support from mortgage lenders who so far have been reluctant to do much about it.

Unemployed homeowners get help to meet their mortgage obligations while looking for work is another popular feature. As is the assistance to handle the complexities of a second mortgage that may be hindering loan modification or any other real estate transaction, like a short sale.

Hardest Hit Fund will have a second phase later this year, covering the next tier of states lured into the now infamous mortgage and real estate backwater. It will bring some relief to a still festering housing situation, but for a real impact to be achieved the private sector needs to step up to the plate with a hot bat.

Subprime home loans became a noteworthy ingredient in the recent real estate frenzy. Large pools of them were sold on the secondary mortgage market as RMBS, or residential mortgage-backed securities, to supply additional liquidity for more loans. When the air suddenly escaped from the tremendous housing bubble the first mortgage product to absorb its swift and devastating effects was the subprime kind, leaving scores of investors wondering what had whacked them.

Moody's Investors Service details that subprime RMBS issued from 2005 to 2008 reached a delinquency level of 54.4% in January of 2010, an all-time high. From there on, though, the rate has been steadily falling, settling at 51.5% in April, a moderate improvement. But it had been climbing continuously for years since the real estate market's collapse, so a change downward, even if slow, is desirable news. In short, subprime mortgage borrowers are bringing their loans current at an increasing rate. Everybody likes to see that.

According to Moody's research HAMP, or Home Affordable Modification Program, has been a major contributor to this. HAMP has received sometimes loud criticism for its lack of bite, but Moody's numbers appear to show otherwise. In January 117,302 trial modifications were converted into active permanent ones and then in April the same happened to 299,092 of them. That's real progress.

Re-defaults are still a problem, however. Moody's estimates that 50-70% of permanent mortgage loan modifications will do so, thanks to the underwater, or negative equity, dynamic affecting so many states. Worst-mauled areas like Las Vegas and Phoenix are extremely ripe here. The emphasis now from the government is to get home loan lenders and servicers to lower principal for borrowers, a task that has been tough in the past and probably will stay so.

It seems that HAMP needed quite a bit of time to get in gear and now it's cruising along under full power and is showing some encouraging results.

Washington has already come up with some unusual and at times confusing legislation during this enduring housing collapse to correct perceived deficiencies. HVCC – the Home Valuation Code of Conduct – addressing the alleged appraisal problems of the recent past is one. The new RESPA – Real Estate Settlement and Procedures Act – is another that has led to many complaints and questions from the mortgage and real estate industries and puzzles the consumer as well. More of the same could be forthcoming.

House Republicans presented a surprise rider at the end of an FHA-related debate the other day that would prohibit mortgage borrowers who engineer a strategic default while still able to make payments from getting any future government-sponsored loans. Basically meaning FHA, VA, Fannie Mae and Freddie Mac. This proposal passed on a voice vote without any dissent probably because everybody was in a hurry to exit town for the weekend.

What is bothersome about this idea is that it would single out mortgage recipients for supposedly being morally wrong and for that they shouldn’t be allowed to enjoy any government benefits. Businesses, including mortgage lenders, constantly pull off strategic defaults when it’s in their best economic interest and no one waves a red flag saying it’s misguided. Some of the biggest mortgage banks just got bailed out, for starters. They also find tax breaks and other government support very useful. To be fair about this, companies then should face the same restrictions upon strategic default as homeowners do.

Wall Street’s greasy fingerprints appear to be all over this strategic mortgage default provision. They are seemingly becoming more common as the real estate meltdown lingers on and the home loan banking interests want to send a warning signal to homeowners who are toying with the idea. Really bad things will happen should they do it.

But the whole thing reeks of a double standard. What’s good for a company should go for an underwater homeowner as well. Fortunately the idea is just taking its first baby steps and once people read the details and find out what it really means it may not go very far. Enforcement alone would be a chore. Besides, it also needs to pass the Senate.

Southern Nevada real estate statistics continue on an unsteady path, as they’ve been for the past several months. One sector could show a bit of sunshine peeking through while anther struggles with a curve heading in the wrong direction. But anyhow, let’s go right to the cold, hard numbers.

The median price for a single-family house came in at $142,000 for May which equals the figure for the previous month, so reported GLVAR, or Greater Las Vegas Association of Realtors. When placed side by side with May of 2009 it’s up 1.4%, a tentative improvement but nothing much to trade hugs and kisses over. Nevertheless, the real estate values are holding on at least for now while talk about the ominous housing double-dip on a national scale is gathering momentum.

In addition, GLVAR bravely informs that 2,884 single-family houses were closed in May, signaling a 2.3% drop from April and a second consecutive monthly deficit this year. It certainly is a concern. And more so when the decline of 11.4% from May of 2009 is reluctantly hustled into focus. Those who have been quietly praying for an impending real estate turnaround in Vegas should scale back their anticipation. It isn’t over until the fat lady sings.

Single-family house inventory has been on a slow but steady climb for six months. In May it reached 21,143 units, 263 higher than in April. A marginal amount really, however when month after month small increases are added up they’ll materialize into real numbers that’ll make a difference. For comparison’s sake with last year this time, the listings inched unimpressively lower by 0.2%.

Las Vegas valley – featuring subdivisions and towns like Summerlin, Mountains Edge, Silverstone Ranch, Anthem, Henderson and Green Valley Ranch – existing real estate market is at best muddling along. Mortgage brokers and lenders are offering inexpensive financing to borrowers, which is one of the great positives in this otherwise tight underwriting era. But it alone obviously isn’t enough to spur more sales than this. Like someone said a while back, “It’s the economy, stupid!” With that in mind, everybody be patient.