Typically the summer months are the busiest time of year for home sales. But when the Home Buyer Tax Rebate expired it motivated buyers and sellers to move in the spring. That is all good, except now we are looking at a gaping hole in the market.

The market now is moribund. Pending home sales are at all time lows and now the demand for mortgages are scraping 13 year lows.

We have sucked all the life and energy out of the housing market to get some of our tax money back.

While real estate has always had ebbs and falls, there was a consistency to it. Now we have broken even that with millions of agents, brokers, vendors, and mortgage companies looking at activity drying up during what is typically the busiest time of the year.

That is not the sign of a healthy market.

Demand for loans to purchase U.S. homes sank to a 13-year low last week, and refinancing demand also slid despite near record-low mortgage rates, the Mortgage Bankers Association said on Wednesday.
Requests for loans to buy homes dropped 3.1 percent in the week ended July 9, after adjusting for the Independence Day holiday, to the lowest level since December 1996, the industry group said.
Refinancing applications fell 2.9 percent, and the mortgage market index that reflects total loan demand also fell 2.9 percent. via MSNBC

This is turning into a trend:

The average rate on a 30-year fixed mortgage dropped to 4.57 percent this week, mortgage company Freddie Mac reported Thursday. That’s down from the previous record low of 4.58 percent set last week.

It’s the lowest since Freddie Mac began tracking rates in 1971. The last time rates were lower was in the 1950s, when most long-term home loans lasted just 20 or 25 years.

Rates have fallen over the past two months. Investors, concerned with the European debt crisis, have poured money into the safety of Treasury bonds. Treasury yields have fallen and so have mortgage rates, which tend to track yields on long-term Treasurys. via AJC

What is truly a shame is that the lending environment is so tough that even with these low rates deals are still not getting done. You would think that mortgage brokers across the country should be working non stop, but most are scrambling for any work.

The housing tax credit took the wind out of the sails of the real estate industry and has created a moribund atmosphere. Those in a position to refinance already have while those who need to can’t due to the tightening restrictions.

The mortgage industry is in a true Catch 22.

Over the counter or penny stocks is not the place where people put their retirement funds. But years of mismanagement and social engineering have landed Fannie Mae and Freddie Mac in the world of OTC stocks.

Trading under a dollar for too long has gotten these stocks out of the New York Stock Exchange and into the nether worlds of the penny stock trading floor.

There is an irony that what is perceived as the underbelly of the investment world is where Fannie Mae and Freddie Mac are forced to live. The full faith and credit of the Federal Government, who own 80 percent of the two companies now, can not prop the valuation of the remaining 20 percent of shares to over a dollar.

And what makes matters worse, these two companies are providing the liquidity to an already distressed housing market.

But to listen to the politicians in Washington all is fine with the housing market and home buyers have nothing to fear.

I am not so sure of that anymore.

• When the guarantor of the housing market is essentially a subsidized federal program, I get nervous.
• When the private market does not see any value in lending to home buyers, I get nervous.
• When investors see no value in holding mortgages, once seen as the safest investment that many built their retirements around, I get nervous.

We have to remember that the housing market needs to be self sustaining once this crisis is over. The valuation of our homes have to be based upon what the free market thinks they are worth without government subsidies. Tax credits, artificially low interest rates, and other government props do not make a healthy market, especially when the government is running huge deficits.

The politicians, the media, and the National Association of Realtors all can not talk about the problems we have in the mortgage world but the real barometer is how the investment world sees the problem.

By delisting Freddie Mac and Fannie Mae, the financial markets have spoken that the companies that are the underpinning of the housing market have no value to investors.

If you are a Bank of America, or a former Countrywide, mortgage holder and have been trying to get someone on the phone, things may be getting better. The company has recently hired 2,000 more employees for the default management department.

What is truly amazing to me is how many calls they get a day. The reported number of calls the Bank of America mortgage department takes is 100,000 every single day. That is indicative of either a real mess or incompetence. My guess is both.

And with 60 percent of the people answering calls in the default management department being new hires in the last 18 months, odds are it is not the most competent group. There is lots of learning happening on the other side of the phone right now.

But it sounds like they are addressing the problem. Next one to tackle for Bank of America is their short sale department.

The lender now has more than 18,000 workers in “default management,” a 60 percent increase since January 2009, Barbara Desoer, president of Bank of America’s home-loan and insurance unit, said in testimony prepared for a congressional hearing on U.S. housing policy tomorrow. Those workers handle 100,000 calls a day, she said. Wells Fargo & Co., the largest U.S. home lender, Bank of America and other companies have hired thousands of employees or shifted staff from other departments to work with borrowers who have lost jobs or experienced declining incomes. Banks repossessed a record 257,944 homes in the first quarter, 35 percent more than a year earlier, according to Irvine, California-based RealtyTrac Inc. More than a fifth of U.S. mortgage holders owed more than their homes were worth, Seattle- based real estate data provider Zillow.com reported last month.

As the Federal Government scrambles to prop up Freddie Mac and Fannie Mae, investors have called it quits on the two companies. With their stock prices hovering around one dollar, The Hill is reporting that they are planning on delisting from the New York Stock Exchange.

If these were true public companies, the phrase “Putting a fork in them” would apply, but as they government has committed to bailing them out Fannie and Freddie will continue to stumble around like drunken sailors.

It is a sad day for many investors though.

Fannie Mae and Freddie Mac, the bailed-out mortgage giants, are expected to remove their shares from the New York Stock Exchange (NYSE), a government regulator said Wednesday.

The two companies would need to take steps to shore up their share prices to meet stock exchange rules. The Federal Housing Finance Agency (FHFA) directed the companies to delist their shares.

“The determination to direct delisting is related to stock exchange requirements for maintaining price levels and curing deficiencies,” said FHFA acting Director Edward DeMarco. via The Hill

According to the latest data from the Federal Bureau of Investigations these 10 cities were the leaders in mortgage fraud in the country.

Typically the mortgage fraud were misstatements on mortgage applications that lead to loans being improperly made.

Mortgage fraud is one of the contributing factors to the housing bubble and the recession we are now in.

Top 10 Cities For Mortgage Fraud

1. Los Angeles
2. Miami
3. San Francisco
4. Chicago
5. Sacramento
6. New York
7. Tampa
8. Detroit
9. Minneapolis
10. Atlanta

via the Financial Times (subscription required)

According to the FBI, mortgage fraud is still on the increase. The Federal Bureau of Investigations has had 23 regional mortgage fraud offices open since 2008 and have found that mortgage fraud is not just a problem from the housing bubble.

Could it be that the tighter requirements for loans combined with Federal tax incentives is driving the increase in fraudulent activity, or is it that we are now looking for it so the feds are finding more fraud.

Either way, the news is not great for the industry. And to top it off, reports are that there will be a major roundup of people involved in mortgage fraud this week. Last year when the report was released they arrested 400 people in “Operation Malicious Mortgage”.

As of June 2009, suspicious mortgage-related activity for the year was on track to exceed 70,000 cases, a 10 per cent increase over 2008 levels, according to preliminary FBI estimates. Mortgage fraud-related losses totalled $1.4bn in 2008, an 83.4 per cent rise over the previous year.

In the first six months of 2009, losses exceeded levels for the same period in 2008 by $208m. California and Florida, two states that played a key role in the subprime meltdown, had the most mortgage fraud in 2008, according to the latest data. Los Angeles, Miami, San Francisco, Chicago, Sacramento, New York, Tampa, Detroit, Minneapolis and Atlanta were the top cities in descending order for mortgage fraud. via the Financial Times (subscription required)

A combination of weather and low demand has led to a 13 year low in demand for mortgage applications according to The Mortgage Bankers Association. Demand for mortgages has not been this low since 1997.

Hopefully the market slowdown is a statistical blip due to the harsh winter that so much of the country has been dealing with. Unfortunately the uncertainty of the market and economy has all of us scoreboard watching. The demand for new mortgages is the canary in the coal mine for the real estate industry.

If mortgage applications drop typically closing are not on the horizon.

A continued drop in demand for purchase loans, a tentative early indicator of home sales, would not bode well for the hard-hit U.S. housing market, which remains highly vulnerable to setbacks and heavily reliant on government intervention.

The Mortgage Bankers Association reported an 8.5 percent decline in its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended February 19.

The four-week moving average of mortgage applications, which smoothes the volatile weekly figures, was up 1.6 percent.

The MBA’s seasonally adjusted purchase index fell 7.3 percent, the lowest level since May 1997.

Barney Frank, the Democratic Representative from Massachusetts and Chairman of the House Financial Services Committee, has called for the abolishment of Freddie Mac and Fannie Mae.

Frank, you should remember, is the Congressman who said that the companies were in great shape just before they imploded and are now on the hook for over 400 billion in public assistance. Oh, and Frank is also the one who drove the companies into that situation as he used them as tools of a social experiment forcing lending downstream to borrowers who could never repay their loans.

But ignore all that, it does not matter anymore. Now Congressman Barney Frank has a real plan. Just get rid the evidence of Congressional excess and experimentation and let’s start again.

Sorry Congressman, we have long memories here.

“The remedy here is…as I believe this committee will be recommending, abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance,” said Rep. Barney Frank (D., Mass.), the chairman of the House Financial Services Committee.

His comments initially rippled through bond markets on concerns that the government might pull away from the mortgage market. Many believe that’s unlikely and that any revamp would include continued government involvement. The government took over the companies in September 2008 as loan losses mounted.

Some Republicans have argued that the companies should ultimately be reduced in size and privatized, while at other end of the spectrum, some analysts have recommended turning the companies into government agencies. But several industry groups and academics have suggested that the government is likely to continue playing at least some role in the future of the companies. via WSJ

What is that sucking sound coming from the mortgage and housing industries this morning? It may be the sound of fear as the Federal Reserve may be contemplating ending it’s buyback program of mortgage debt with taxpayers money.

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, said the central bank should end its purchases of mortgage debt as planned in March because the private market for the securities is “healing.”
Hoenig said last week’s report showing the economy lost 85,000 jobs in December doesn’t change his outlook for growth of 3 percent to 3.5 percent this year. The central bank should consider raising its target rate for overnight interbank lending from a record low even with unemployment at 10 percent, he said.

The ugly reality of the market is that the real estate industry has been being subsidized for the past year with lower interest rates and tax incentives to keep from imploding. Now we are looking at these subsidies going away because they are too expensive for the government to continue.

I see a muddle in the real estate markets for the next couple of years as we migrate away from a subsidized environment, see inflationary pressures, and higher mortgage rates.

Not the cocktail for a full on recovery that so many agencies and brokerages are counting on.