Reporting from San Diego – Despite sub-5% mortgage rates and signs that home prices have bottomed out in some places, executives and economists are decidedly downbeat about the future of the country’s mortgage industry as well as the housing market it depends on.

The Mortgage Bankers Assn. said Tuesday that it expected home foreclosures in the U.S. to continue to rise before leveling off late next year. The reason: Job losses have replaced adjustable subprime loans as the main cause of defaults.

Jay Brinkmann, the group’s chief economist, predicted that unemployment would rise through next summer, causing delinquencies to rise. And because of the loss of income, it will be increasingly difficult to keep troubled borrowers in their homes by modifying their loans, he said.

As a result, the foreclosure rate is expected to increase “through the latter part of next year,” Brinkmann said in San Diego at the trade group’s annual convention. “And even when it starts to come down, it’s going to come down very slowly.”

The association’s meeting this year has been marked by mixed emotions.

Loan originators are celebrating a mortgage-refinancing boom created by a decline in interest rates on fixed-rate loans to less than 5%. But that refi surge is expected to ease next year as rates rise. Even with a forecast 12% increase in home-purchase loans, overall mortgage volume is expected to drop from about $2 trillion this year to about $1.5 trillion in 2010, Brinkmann projected.

Mortgage customer-service operations continue to struggle with a rising tide of delinquencies and surging demand for loan modifications.

And nearly everyone at the convention seemed worried about the effect of job losses.

“In the crisis of people who can’t pay their mortgages, we have yet to see the peak,” said David B. Lowman, chief executive of the mortgage unit at JPMorgan Chase & Co., one of the Big Three lenders along with Bank of America Corp. and Wells Fargo & Co.

More than 40% of the mortgages Bank of America makes these days are for home purchases, Barbara Desoer, the company’s mortgage chief, said in an interview. But that doesn’t mean a universal recovery in housing is underway, she said — only that prices have been beaten down so far that in some markets first-time buyers and investors are stepping in to buy perceived bargains.

Those markets include inland areas of California, but not certain other battered areas, Desoer said. For example, in Florida, another big boom-and-bust state, there’s no sign that the bottom has been reached anywhere, she said.

Economists at BofA project that prices nationally still have 5% or so to fall before bottoming out, possibly in the second quarter of next year. Even then, Desoer said, the bank will be on guard for a double-dip recession that could keep the market depressed.

Dean Schultz, CEO of the Federal Home Loan Bank of San Francisco, said he hoped things would look better in a year, but he wasn’t optimistic.

“I think we’re at the midpoint of a difficult period,” he said, “which will stress all organizations.”

The mortgage group projected that:

* Fixed mortgage rates would average 5% in the fourth quarter this year and increase to 5.6% by the end of 2010. One of the biggest uncertainties is how much rates will rise when the Federal Reserve stops buying mortgage bonds from government-backed agencies in March. Brinkmann said it appeared that the purchases had shaved four-tenths of a percentage point off rates.

* Home price declines would abate on a national level by early 2010, but the timing will vary by state and home value, with the biggest demand for entry-level homes. That divergence is already evident in California, where Inland Empire prices appear to have stabilized but prices are still falling in more expensive areas, the mortgage group said.

* Loans to buy homes would total $718 billion this year, down 2% from $731 billion last year, and then rise 12% in 2010 as existing-home sales recover and prices stabilize.

* Refinance mortgages this year would total $1.25 trillion, up about 60% from $777 billion in 2008. As rates rise, refinance activity is likely to decrease to $745 billion in 2010, the mortgage group said.

By Eve Mitchell
Staff Writer
Posted: 06/15/2009 03:53:20 PM PDT
Updated: 06/15/2009 05:23:06 PM PDT

Lenders in California now have to provide a 90-day moratorium on foreclosure proceedings where no effort was made to work with the borrower to modify the terms of a home loan under a new state law rolled out Monday.

But don’t expect automatic or immediate relief under the law, which was authored by state Sen. Ellen Corbett, D-San Leandro.

Lenders and loan servicers that already have a comprehensive and systematic loan modification program in place are exempt from the law. Such programs call for loans to be modified by lowering interest rates for at least five years, deferring or reducing part of the principal, or providing up to 40 years to repay the loan.

“The vast majority of them are already in compliance with some regulation or requirement, either through federal laws or voluntary efforts,” said Chris George, president of San Ramon-based CMG Mortgage Services and a board member of the California Mortgage Bankers Association.

By applying for an exemption, lenders will automatically receive a 30-day stay during which state officials will determine whether the company has a proper loan modification program in place.

“If they do not have a plan in effect, they will be (subject) to that 90-day moratorium,” said George.

The California Foreclosure Prevention Act was included in legislation passed in February that approved the state budget.

Paul Leonard, director of the Oakland-based California office of the Center for Responsible Lending, sees the state law working in conjunction with the Obama administration’s foreclosure plan that includes financial incentives made to lenders, loan servicers and borrowers who participate in loan modification programs.

“It’s a bit of a stick that will create incentives for the lenders and servicers to participate in Obama plan,” he said.

Lynda Gledhill, a spokeswoman for Corbett’s office, said there are no estimates as to how many homeowners facing foreclosure the state law might help.

“It’s hard to say,” she said. “We know there are more resets coming.”

While some people view loan modification programs as a way to curb foreclosures, studies have shown that people who participate in these programs often end up defaulting on their new loans. A report released in April by the Office of the Comptroller of the Currency found that 46 percent of borrowers who had their loans modified during the second quarter of 2008 had fallen behind 60 or more days in their payments after eight months.

The California Foreclosure Prevention Act law applies to first mortgages taken out between 2003 and 2007 for owner-occupied homes. CalHFA loans are not eligible.

The law is on top of separate legislation that requires lenders to wait 30 days before filing a notice of foreclosure after first making initial contact with a borrower who has missed several mortgage payments.

In Alameda County, the number of households that received some type of foreclosure notice in May stood at 3,018, a 19 percent decrease from a year ago, according to a report released last week by RealtyTrac.com.

Contra Costa County households received 3,378 notices, an 18 percent increase while in Solano County 1,480 households received notices, a 21 percent drop.

In San Mateo County, 730 households received a notice, a 40 percent increase from a year ago. San Joaquin County received 3,320 notices, an 11 percent increase.

Founder & Chief Visionary of REThinkRealEstate.com

In real estate, the news of the week (so far) was that foreclosure “activity” was at a record high in April, with one of every 374 American households receiving a foreclosure notice last month. Maybe I’ve just seen so many of these sorts of headlines that it’s tough for me to get super worked up about them. Or maybe I know enough from working with homeowners and their lenders every day that I can see past the headlines and into the other market and mental factors that might be inflating these numbers. Either way, my first thought when I read the RealtyTrac press release announcing the April foreclosure numbers was not horror, like many observers, but rather – hmmmm, let’s dig a little deeper and see what this is all about. In my world, horror is related to fear, panic and paralysis, so dissecting the data to understand it holds the power to calm and empower. I choose dissecting.

First, there’s lots of hyperbole here, so let’s cut through that first. By foreclosure “activity” RealtyTrac means foreclosure filings – primarily, filings of Notices of Default, the first public notice a lender makes when a homeowner is (in most states) 90 days behind on their mortgage. I’ve never seen good studies for how many properties have a NOD filed, but are later rescued from foreclosure, but in my own office and experience I’d say it’s a lot. Well over 80 percent of the homeowners in my clientele are able to either reinstate their loans by catching up on back payments or, more commonly, received a foreclosure-preventing loan modification from their lender(s). Long story short – the fact that an NOD is filed on a home does not equal that the home will be lost to foreclosure.

Beyond the hyperbole, there’s lots of interesting factors at work here that are making these numbers seem abnormally high. First, the fact that these numbers are a record high should be more fully explicated: they are a record high for the four years that RealtyTrac has been keeping records. Enough said.

Second, a good number of lenders and governmental entities had imposed moratoria on foreclosures, many of which expired in April. So, there are untold thousands of homeowners who really should have received a foreclosure notice in January, February or March, but didn’t. The lenders are only now able to file those notices, so what should have been more of a trickle now seems like an avalanche.

Third, and I see this every day – homeowners have gotten much savvier about loan modifications, and have realized that their lenders are more likely to modify their mortgages (e.g., by reducing the interest rate and monthly payment) if they are behind on the payments on their loans. Many of my office’s loan modification clients have learned this in their own experience trying to get a DIY loan mod from their lenders. So they intentionally (with unfortunate effects on their credit, and unsanctioned by my office) go behind on their payments, then call us up to help negotiate the loan modification. And the reality of our experience working with lenders on these mods is that they are more willing to negotiate on the loans that are in default! (Talk about creating a bad feedback loop for your borrowers – in fact, this is exactly the consumer learning that the MakingHomeAffordable.gov program is trying to reverse by literally paying lenders to modify loans of borrowers whose payments are still current.)

Anyhow, many of these homeowners who are intentionally defaulting to get the loan modifications they need to stay in their homes over the long term will not end up in foreclosure.

Even RealtyTrac itself, in the press release, noted that while April’s ‘record’ foreclosure ‘activity’ increase was a 38 percent increase over April 2008, it was less than a one percent increase compared to the immediately preceding month, March 2009. Should we be concerned? Absolutely. But horrified? No – IMHO, a better use of that energy would be to push for the banks to get better about modifying loans before people are late on their payments, so we don’t continue to develop this enormous population of homeowners who are victorious in obtaining a more affordable payment through loan mod, but are burdened with the battle wounds of late mortgage payments and a foreclosure filing on their credit report.

By JAMES R. HAGERTY

Defaults on home mortgages insured by the Federal Housing Administration in February increased from a year earlier.

A spokesman for the FHA said 7.5% of FHA loans were “seriously delinquent” at the end of February, up from 6.2% a year earlier. Seriously delinquent includes loans that are 90 days or more overdue, in the foreclosure process or in bankruptcy.

Since the collapse of the subprime mortgage market in 2007, most home loans for people who can’t afford a sizable down payment are flowing to the FHA. The agency, which is part of the U.S. Department of Housing and Urban Development, insures mortgage lenders against the risk of defaults on home mortgages that meet its standards. FHA-insured loans are available on loans with down payments as small as 3.5% of the home’s value.

The FHA’s share of the U.S. mortgage market soared to nearly a third of loans originated in last year’s fourth quarter from about 2% in 2006 as a whole, according to Inside Mortgage Finance, a trade publication. That is increasing the risk to taxpayers if the FHA’s reserves prove inadequate to cover default losses.

As of January, the cities with the highest FHA default rates in January were Punta Gorda, Fla., at 18%; Detroit, 15.6%; Flint, Mich., 15.1%; Fort Myers-Cape Coral, Fla., 15%, and Elkhart-Goshen, Ind., 12.1%, according to a HUD report.

Foreclosed FHA homes owned by HUD totaled 39,687 in January, up 22% from a year earlier.

Write to James R. Hagerty at bob.hagerty@wsj.com