Homebuyers get a bonus in the stimulus bill

NEW YORK (CNNMoney.com) -- If you're thinking of buying a home, there could be a big bonus for you in the economic stimulus bill that's now before Congress.

Among its many provisions is a $7,500 tax credit for first time home buyers. The House passed the $819 billion stimulus plan, including this tax credit, in a vote late Wednesday. The Senate may vote on its version of the bill some time next week.

Technically, the stimulus bill is actually changing the terms of the $7,500 tax credit that was issued as a part of the Housing Recovery Act, which Congress passed last summer. That legislation required that the tax credit be repaid over 15 years, making it more of a no-interest loan. Not surprisingly, the measure had little impact on the market. The stimulus bill now under consideration would make that tax credit a true credit that doesn't need to be repaid.

Many in the housing industry believe this credit could do a lot to jump start the moribund housing market.

"Our economists have studied the effect [of the credit] and they say there could be a 10% increase in home sales if it's implemented," said Mary Trupo, a spokeswoman for the National Association of Realtors. "It gives people who are sitting on the fence or who have inadequate funds for closing costs an incentive to act now."

A 10% increase would yield an extra half million sales this year.
Who qualifies

To be eligible, buyers cannot have owned a home for the past three years, and the new home has to be used as a primary residence. The credit phases out as income rises above $75,000 for singles and $150,000 for couples, and disappears entirely at $95,000 and $170,000, respectively.

Applying for it is easy, or at least as easy as doing your income taxes. Just claim it on your return. That's it. No other forms or papers have to be filed.

Both the Senate and the House versions of the new act remove the requirement that buyers repay the credit. The Senate bill applies retroactively to any purchase completed between January 1, 2009 and the end of August. The House version is also retroactive to the start of the year, and expires at the end of June. As long as buyers don't sell for at least 36 months, they keep the money.

And the credit is refundable, meaning that it can be claimed even if the amount of the credit earned exceeds the buyer's tax liability. So even if your total tax bill comes to just $5,000, you can still qualify for a full $7,500 refund.

The housing industry has been pushing this idea for many months, arguing that first-time homebuyers are the key to boosting home sales. First time buyers who purchase from existing homeowners free those sellers to trade up to bigger, better houses.
Buyers beware

But the credit has its drawbacks, according to Bob Williams, a spokesman for the Tax Policy Center, which gave it a mediocre C+ grade in its Tax Stimulus Report Card.

Williams argues that the credit is poorly targeted because it goes to every first-time buyer, not just the ones who wouldn't buy without it. So, it merely provides a windfall for many people who would have purchased anyway. (See correction, below).

And in the end, a $7,500 tax credit, regardless of the details, does nothing to address the issue that's holding most buyers back - the suspicion that prices are going to keep falling.

"As long as people are uncertain about what markets are going to do, this won't help much," said Williams. "It's not enough to change that."

The industry would like to make the tax credit stronger by making it available to all homebuyers, not just first-timers. And it's pushing to have the credit last through the end of the year, at least.

"By the time it's implemented," said Trupo, "there could be very few months left to act."

Banks working to prevent foreclosures

NEW YORK (CNNMoney.com) -- In a sign that banks are stepping up their efforts to combat foreclosures, lenders intervened to help prevent 239,000 foreclosures last month, according to a report released Thursday.

Hope Now, a coalition of lenders, investors in mortgage-backed securities and community advocacy groups, said that December marked the fourth consecutive month that its members had arranged more than 200,000 mortgage workouts.

For all of 2008, the number of interventions approached 2.3 million, Hope Now said.

More importantly the number of homes lost to foreclosure has been on the decline. In December, lenders repossessed 55,608 homes, down from 69,000 homes that were repossessed in November, and 77,000 in October. In 2008, a total of 917,964 homes were lost to foreclosure.

"The December results demonstrate that Hope Now members are moving aggressively to do what's needed to avoid preventable foreclosures," said Faith Schwartz, Hope Now's director.

She adds that says that fewer homes were lost to foreclosure in December thanks also to seasonal factors, since lenders tend to ease up on repossessions during the holidays, and to foreclosure moratoriums implemented recently by some lenders, including mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500).

She also credited very low mortgage interest rates, with helping people refinance and stay in their homes. "That's very helpful for homeowners who have good credit and are not underwater," she said. "They can refinance into more affordable loans."
The crisis continues

Still, other housing experts still see plenty of trouble ahead.

"There's an overwhelming preponderance of data that confirms that these voluntary loan modifications simply don't work," said Jim Carr, COO for the National Community Reinvestment Coalition, an advocacy group whose members do foreclosure-prevention counseling.

A recent report issued by the U.S. Comptroller of the Currency found that 53% of borrowers who had their mortgages modified in the first half of 2008 were already at least two months delinquent again.

"The redefault rate is growing, home prices are tumbling, repossessions may be down but the projections for future foreclosures are going through the roof," he said.

Carr pointed out that a Credit Suisse report forecasts that as many as 8 million homeowners could face foreclosure over the next five years.

"We're way beyond voluntary modifications now," he said. "This is an unemployment-induced foreclosure problem and it will swamp Hope Now's efforts. Their staff is working so hard, but it's not anything they can control."

When homeowners are unemployed it matters little whether their lenders modify their loans. Without any income they simply can't afford any mortgage.

The December statistics also revealed the changing face of troubled borrowers. Previously, most mortgage workouts reported by Hope Now involved subprime borrowers. In the second quarter of 2008, for example, 62% of the group's workouts involved subprime loans.

In December, that percentage had fallen to 54%, a proportion that is likely to drop further this year. More prime borrowers are running into mortgage payment problems as the economy declines. Unemployment is now the main driver behind mortgage delinquencies.

Meanwhile, the number of problems caused by unaffordable mortgages -- such as hybrid adjustable rate mortgages, the so-called "toxic" ARMs -- have declined, since many of these loans have already failed and lenders no longer issue them.

Snag a great deal on a short sale

(Money Magazine) -- When Brian Gavitt, a physician, and his wife Gayleen, a stay-at-home mom, started to eye homes in Sacramento last winter, they knew they were looking in the hardest-hit areas of the housing bust. So the couple, who were relocating from Lansing, figured they could land a fantastic bargain in no time at all.

The part about the bargain turned out to be true. The Gavitts bought a five-bedroom house in the upscale Natomas Park neighborhood ("Even now, you don't see FOR SALE signs up anywhere," says Gayleen.) And it was a steal at $300,000, a full $200,000 less than they would have paid just two years ago.

The amount of time it took to land the deal was another story. It was more than six months from when the Gavitts first saw their dream home to the moment they held the keys in their hands. The reason: The home they bought was a short sale.

Not along ago, few people had even heard of a short sale, which occurs when the bank agrees to discount the loan balance for a seller who owes more on his mortgage than the home is currently worth.

If you're in the market for a home today, you're almost guaranteed to be looking at some short sales. Nationwide, 14% of homeowners are currently underwater on their mortgages, calculates real estate website Zillow.com. And in many areas, it's far more: In the Gavitts' zip code, for example, over half of homeowners would owe more than their home is worth if they sold today, calculates Dee Schwindt, the Gavitts' realtor.

The good news is that short sellers are likely to still be living in the home and some may even be current on their payments. That means these aren't the run-down, distressed properties that you often find among foreclosures; in fact, there's a good chance that some of the most deluxe homes for sale in your market are underwater.

Before you get too excited about buying a short sale, know that they generally aren't, well, short. For the sale to go through, the seller's lender must approve the price and agree to take the shortfall as a loss. That extra step can cause the process to drag on three times as long as a normal home sale.

But as the Gavitts discovered, the hassles can be well worth it. Some buyers and realtors don't want to deal with short sales, leaving many choice homes with very few bidders. So if you're willing to brave the intricacies of the process, you'll be far more likely to land the home you always wanted. The key to snagging a good deal is knowing how to avoid the land mines.

Know what you're getting into. In a short sale, you are dealing with several parties: the sellers, their agent and the sellers' lender. That's why a short sale can take anywhere between two and six months to execute, compared with about 30 days for a typical sale. Though many banks are willing to take a loss on a mortgage in a short sale if it means avoiding an even bigger loss in a foreclosure, with so many owners trying to unload properties, the lender's negotiators are flooded with short-sale offers. So if you're moving or selling another property, keep in mind that you'll likely need to budget for a few months' worth of rental payments so you have somewhere to live in the interim.

Find the right pro. Lenders often make realtors who work on short sales take a hit on their commission, so some brokers may be loath to show you the listings. But don't even think about going solo. These deals take a lot of work and persistence, says Loni Parmelly, author of Success in Short Sales. Before you sign up with an agent, ask him how many short sales he's closed. If he hasn't done at least two, find someone more experienced.

Weed out candidates. In most cities, home listings will indicate in the description whether the property is a short sale. Ideally, you want to knock off ones that come with extra complexities. If possible, pass on any home that has more than one lien against it; having to negotiate loans with two lenders can greatly increase the amount of time it takes to complete the deal. Also avoid homes where the seller has other offers. That's because if another offer is pending, the seller's agent isn't likely to even submit yours for approval until the first one is rejected, meaning you'll have to wait for another negotiation to play out before you even get a chance.

Set the right price. The first step is to have your agent submit your offer to the seller. Don't just rely on the current list price to come up with your initial bid, says Bill Richardson, a district sales manager for the Keyes Co. Realtors in Boca Raton, Fla. The seller's agent may have far underpriced it in hopes of attracting buyers, but the bank likely won't accept a lowball offer. Ask your agent to determine the home's fair market value by searching comparable sales in the area, with an emphasis on other short sales and foreclosures (or get a rough estimate yourself at zillow.com). If the fair market value is lower than the list price, set your offer 10% lower than that.

At this point, you'll also want to get pre-approval for a mortgage; many banks won't even consider your offer if you don't have one, says Schwindt.

Protect yourself. Next, the seller's agent will submit your offer to the seller's lender. At this point, you'll be asked to sign a sales contract. See if the lender will agree to pick up all closing costs as part of the contract, says author Parmelly. Also ask your realtor to specify that you won't do an appraisal or inspection of the property until the offer is approved. That way you won't have to shell out hundreds of dollars until you know you realistically have a good chance of getting the home.

Finally, though most lenders will require you to make some kind of deposit along with the contract, don't put down more than $3,000 before your bid is accepted. That will give you room to put offers on other homes or even to pull out of the sale if it drags on for too long.

Be a pain in the neck. After your offer is submitted to the lender, you're likely to hear nothing for weeks, if not months. This is no time to relax. Call your agent at least once a week, and make sure the seller's agent is contacting the bank's negotiator nearly every day.

"These negotiators may have 400 files on their desk. They'll want to get rid of the squeaky wheels," says Parmelly, who worked as a loan negotiator for lenders for 16 years. To help the seller's realtor in her negotiations with the lender, it's a good idea to have your agent show her which comparable homes you used to arrive at your number.

If the clock keeps ticking and you're reaching the end of your rope, try playing hardball. After months, the lender the Gavitts negotiated with was still dragging its feet and their pre-approved loan rate was about to expire. "We said, 'We need an answer by Friday or we walk,' " Gayleen says. The bank responded by week's end.

Keep your eye on the market. When the bank finally sends its counter-offer, use it as a guideline rather than an ultimatum. Most of the time, the lender's number is based on its own research, that of a local realtor it hires and the outstanding loan balance. Usually its goal is to sell for at least 90% of the home's value, says Amy Bohutinsky, a spokes-person for Zillow.com.

The lender's offer may not be what you'd hoped for, but don't despair: You have a chance to counter. If the market has been flat since your initial bid, try for 5% to 10% less than the bank's number. If the market has been sinking rapidly, however, you may be able to prove that the home's value has shrunk further and offer even less. Once you have the lender's ear, the new offer should take less time to process.

Despite all the legwork and wait, the Gavitts are thrilled with their new home. "I'm glad people are turned off by short sales," says Brian. "It just means more choices for the rest of us."

Existing home sales in surprise jump

NEW YORK (CNNMoney.com) -- The number of existing homes sold in December rose 6.5% from the previous month, according to a report released Monday, as bargain hunters took advantage of plummeting prices.

The National Association of Realtors said that home sales increased to a seasonally-adjusted, annualized rate of 4.74 million units. That's up from a revised pace of 4.45 million units sold in November and more than the rate of 4.4 million units projected by a consensus of industry analysts as reported by Briefing.com.

"We have some months to go before we are out of the woods on the housing front," said Robert Dye, senior economist at PNC financial services group. Especially considering "weak consumer confidence and ongoing rapid deterioration in labor markets."

Still, December's existing home sales are down 3.5% compared with December of 2007, when the seasonally-adjusted, annual sales rate was 4.91 million. Existing homes include single family homes, townhomes, condominiums and co-ops.

For all of 2008, there were 4,912,000 homes sold, which was the lowest volume since 1997, when there were 4,371,000 homes sold. Sales volume in 2008 was down 13.1% from the 5,652,000 existing homes sold in 2007.

Bargain hunters: Bargain prices are bringing buyers back into the market. The median existing home price was down 15.3% to $175,400 from December 2007, when the median price was $207,000. The median price measures where half of the homes sold for more and half sold for less.

"Americans love a bargain, and the housing market is no exception," said Mike Larson, real estate and interest rate analyst for Weiss Research in a written statement.

Thanks to the sales increase, the number of homes available on the market decreased 11.7% in December from the previous month, to 3.68 million. That represents a 9.3-month inventory supply at the current pace of sales, down from a 11.2-month supply in November.

"That's exactly what we need to see if the housing market is ever going to get back to a state of equilibrium," said Larson.

Home prices were pushed lower by the high volume of distressed sales, which accounted for 45% of December transactions according to the report.

"The higher monthly sales gain and falling inventory are steps in the right direction, but the market is still far from normal, balanced conditions," said NAR chief economist Lawrence Yun in a written statement. He warned that the housing market is far from healthy. "Buyers will continue to have an edge over sellers for the foreseeable future."

Surge in the West: The number of homes sold nationwide was buoyed by a surge in the West, where the housing market has been hardest hit by a record number of foreclosures.

Existing home sales in the West surged 13.6% to an annual rate of 1.25 million in December, up 31.6% from a year ago. But the median price in the West was $213,100, down 31.5% from December 2007.

In the South, existing home sales increased 7.4% to an annual pace of 1.74 million in December, but that was still 11.2% lower than December a year ago. And sales in the Midwest increased 4% in December to an annual rate of 1.04 million, but were down 10.3% from the same period last year.

The Northeast saw sales edge 1.4% lower, to an annual pace of 720,000 in December, down 14.3% from December 2007.

In the months to come: Analysts said that the weakening job market would slow any recovery in housing.

On Monday morning, a slew of companies announced a massive wave of job cuts. Home Depot (HD, Fortune 500), the No. 1 home improvement retailer, announced it would eliminate 7,000 jobs, or 2% of its total workforce, while Caterpillar (CAT, Fortune 500) said it will cut 20,000 jobs.

"Unfortunately, we are seeing fast and furious [layoffs] now," said PNC's Robert Dye. "And that does add to the level of uncertainty and it does put workers and consumers on edge."

Mike Larson from Weiss Research echoed that sentiment. "It's hard to imagine a lasting turn in the housing market with thousands of layoffs being announced every few days," he said.

The Obama administration is now at work on an economic recovery plan, and Yun said that this will be critical to the revitalization of the housing industry.

"The Obama administration and Congress need to move fast to stimulate a spring sales upturn which will help to stabilize home prices and set the foundation for a sustainable economic recovery," Yun said in a statement.

What is a short sale?

With the increase in foreclosures lately you may have heard the term “short sale” and wondered what it was. A short sale is when the lender will accept less than the full amount due on a mortgage when a property is sold. Usually, the lender will accept the short sale to avoid the time and expense of a foreclosure.

When a borrower is in default on a mortgage they not only owe the back payments but also may owe late fees, property inspection fees, attorney fees, etc. This can add up quickly to eat up all the equity the borrower had in the property. If the borrower is unable to bring the account current the lender will then foreclose on the property. With a foreclosure, the lender can lose up to 40% of the mortgage amount because of the extra costs involved with foreclosing on a property: attorney fees, court costs, lost interest, eviction costs, property maintenance costs, and selling costs. Foreclosing on a property can also take up to two years in some states. Therefore, it is sometimes in the best interest of the lender to accept the short sale.

It also can be in the best interest of the borrower. They will not have to endure the time and stress of a foreclosure and their credit may not be as adversely affected as it would with a foreclosure. It is quicker and easier and does not subject the borrower to the embarrassment of a foreclosure.

How does it work?

The first thing the borrower should do when they can no longer afford a property is to contact the lender immediately. The last thing a lender wants to do is foreclose on the property. Lenders typically have departments that work with people who are behind on their payments to resolve the situation. If you cannot resolve the default with the lender, and you want to see if they will accept a short sale, they will direct you to the department that handles short sales.

The lender will usually require the borrower to submit a lot of information to the lender in order to consider the short sale. The information required may include:
• Income documentation such as W-2s and pay check stubs to verify the borrowers’ income.
• Bank statements to verify the borrowers’ assets
• Hardship letter – this letter will describe for the lender the reasons the borrowers are in the financial position they are in and will ask the lender to accept the short sale. Borrowers should make this letter sound as sad as possible and back up the story with any documentation you may have such as medical bills, etc.
• Fair market value for the property – depending on the lender they may require an appraisal or may accept an opinion from a local Realtor know as a Comparative Market Analysis (CMA).
• Preliminary proceeds sheet from the sale of the property. This will show the proceeds of the sale of the property after the mortgage is paid off and all other closing costs and fees are paid. This will be negative in the case of the short sale and this negative amount is the amount of the shortage.
• Listing agreement and purchase agreement when they are available.

When the lender reviews all of this they may or may not approve the short sale. If they do not approve the short sale they will proceed with the foreclosure. If they do agree to the short sale you will close on the sale of your property and the lender will take the loss.

So, is the borrower off the hook?

Not necessarily. The lender still has options to try to collect this shortage. As a condition of the short sale the lender may require the borrower to sign a note to repay the shortage. They may also file a collection or a judgment for the amount of the shortage. This is something that an attorney with expertise in this area of real estate needs to be consulted.

Also, the IRS may come after the borrowers for income taxes on the amount of the shortage. If the shortage was forgiven, the lender will report the shortage as income to the IRS and the IRS will collect taxes on this amount. Again, for the specifics on this please consult a tax professional.

30-year fixed rated climbs back above 5%

NEW YORK (CNNMoney.com) -- Interest rates on 30-year fixed rate mortgages rose after an 11 week streak of declines.

Government sponsored mortgage lender Freddie Mac said Thursday that fixed rates on 30-year mortgages averaged 5.12% for the week ending Jan. 22nd. That's up from last week when is averaged 4.96% but still below 5.48%, which is where the rate stood at this time last year.

"Fixed-rate mortgages followed bond yields and edged up this holiday week," said Frank Nothaft, Freddie Mac (FRE, Fortune 500) vice president and chief economist in a release on Thursday.

"However, over the first three weeks of 2009, the 30-year fixed-rate mortgage was an average 0.25 percentage points below its monthly average for December 2008. As a result, the number of mortgage applications for refinancing was roughly about 86 percent of all conventional loans over the same time period."

The 15-year fixed rate mortgage was also up this week, averaging 4.8%, compared with an average of 4.65% last week. But that's still still down from a year ago at this time, when the 15-year FRM averaged 4.95%.

One-year Treasury-indexed adjustable-rate mortgages (ARM) rose as well and averaged 4.92% this week, up from 4.89% last week. At this time last year, the 1-year ARM averaged 4.99%.

However, five-year Treasury-indexed ARMs continued to fall this week. The 5-year ARM averaged 5.24%, down from last week when it averaged 5.25%.

The lowdown on getting a low down payment loan

NEW YORK (CNNMoney.com) -- The credit crunch has made it hard for anyone to get a loan these days - and borrowers who can only make a small down payment are facing even tougher odds.

But it's not impossible to land a low-down payment loan. The Federal Housing Administration (FHA) is actually still offering 3.5%-down mortgages to qualified buyers, even as the subprime loans that these types of borrowers had traditionally relied upon have dried up.

The FHA has been flooded with applications; in 2008 it helped 630,000 borrowers buy homes, most of them using low-down payment loans.

"People can get an FHA loan with very little out of pocket," said George Hanzimanolis, a mortgage broker in Pennsylvania and past president of the National Association of Mortgage Brokers.

He recently arranged an FHA mortgage for a client last month for $242,500 on a $250,000 home. The interest rate came in at 4.75% for a 30-year fixed rate loan, yielding a monthly payment of only about $1,265 - just $15 more than the rent the buyer had been paying on a smaller home. The tax savings will more than offset that, as well as his property taxes and insurance.

No wonder the program is flourishing.
How to get an FHA-insured mortgage

Applying for an FHA loan isn't difficult, and the parameters for those who qualify are fairly straightforward. Start by calling a mortgage broker or an FHA-approved lender. You can search for an FHA lender on the Web site of the U.S. Department of Housing and Urban Development.

For lenders, income is the main factor in determining who qualifies for an FHA loan. The agency's guidelines dictate that that buyers spend no more than 31% of their gross income on mortgage payments.

Lenders do look at buyers' credit histories, but the interest rates that FHA borrowers pay aren't actually based on their credit scores, as they are for most home buyers, according to Keith Gumbinger of HSH Associates, a publisher of mortgage loan information. Instead, FHA borrowers get the same interest rate that any conforming borrower with a good credit score would receive.

One catch: Borrowers with scores of 500 or less are generally required to pony up a down payment of 10% rather than the 3.5% minimum.

The FHA also charges insurance premiums, which pay to cover any defaults. Borrowers pay an up-front fee of 1.5% to 2.5% of the dollar-value of loan, as well as an annual fee of 0.5%.

So a buyer of a $200,000 home would be expected to come up with a $7,000 down payment as well as $5,000 for the initial insurance premium. The borrower's monthly mortgage payment would come to about $1,096, including the 0.5% ongoing fee, at an interest rate of 5%.

And there is a limit to just how much can be borrowed. In most parts of the country, FHA borrowers may not finance more than $271,500. In high-cost areas like New York and California, the cap is $625,000 for single family homes. In Hawaii, the cap is as much as $721,050.

And there is even more help available to lower-income home buyers from the government-funded American Dream Down Payment Initiative program. That fund makes $200 million a year available to help low-income home buyers pay for down payments, or to make home repairs. To be eligible, a borrower's income must be no more than 80% their area's median income. And the grants may not exceed $10,000, or six percent of the home price, whichever is greater.
Good track record

After the FHA issues a loan, it has a strong track record of keeping its borrowers in their homes.

The agency's loans do have significantly higher delinquency rates than prime loans - almost 12% compared with 4.3% for prime, according to the Mortgage Bankers Association. But thanks to the FHA's well developed loss mitigation procedures, its delinquent loans rarely end up in foreclosure.

Fewer than 1% of FHA loans were foreclosed on during the third quarter of 2008 compared with 0.6% for prime loans. At the same time, more than 4.5% of subprime loans went into foreclosure.

The FHA keeps foreclosure rates low by working hard with delinquent borrowers, according to John Courson, president of the Mortgage Bankers Association.

"It does a lot of forbearance [postponing payments] and pays a lot of partial claims [one time payments from the insurance fund borrowers pay into] to keep foreclosure rates down," he said.

With access to credit so restricted these days, the fact that people can still obtain safe, affordable mortgages while putting very little money down provides a real boost to housing markets.

FHA loans are especially critical for first-time home buyers, who are considered by experts to be critical to getting housing moving again. When they buy homes from existing home owners, that allows those homeowners to trade up to more expensive homes. That's the kind of cycle that could help get the market going.

Says Hanzimanolis: "These loans are really helping to move real estate these days."

Obama: Challenges real, but 'they will be met'

Barack Obama delivered a sobering assessment of where America stands and a hopeful vision of what it can become during his inaugural address as the nation's 44th president.

"Today I say to you that the challenges we face are real. They are serious and they are many. They will not be met easily or in a short span of time," Obama told those gathered on the National Mall -- a crowd estimated at about 2 million -- and millions more watching on television and the Internet.

"But know this, America -- they will be met," he said.

Obama acknowledged the "nagging fear" of an imminent decline of the U.S. He firmly asserted that Americans were up to reversing the trends spawning that fear, whether they be social, economic or political.

"Greatness is never a given. It must be earned," he said, further proclaiming that people who question the scale of U.S. ambitions "have forgotten what this country has already done."

He also vowed to end the divisiveness and partisanship he said was rampant through Washington.

"We come to proclaim an end to the petty grievances and false promises, the recriminations and worn-out dogmas that for far too long have strangled our politics," he said.

Inauguration: 'This is America happening'

WASHINGTON (CNN) -- Hundreds of thousands of people are on the National Mall -- dancing, singing and chanting -- in anticipation of Tuesday's swearing-in of Barack Obama as the nation's 44th president.

"This is America happening," said Evadey Minott of Brooklyn, New York. "It was prophesized by [the Rev. Martin Luther King Jr.] that we would have a day when everyone would come together. This is that day. I am excited. I am joyful. It brings tears to my eyes."

Minott was at Lafayette Square near the White House, where Obama and his wife, Michelle, had coffee with the President Bush and first lady Laura Bush before heading to Capitol Hill.

Obama arrived at the Capitol, and cheers erupted as his image appeared on large television screens lined up on the Mall.

The Obamas attended a prayer service earlier at St. John's Episcopal Church to kick off the day of events surrounding Obama's inauguration.

As many as 2 million people are expected to crowd into the area between the Capitol, the White House and the Lincoln Memorial as Obama takes the oath of office at noon ET.

Gerrard Coles of Norwalk, Connecticut, had staked out a position in front of St. John's.

"Everyone's down here -- hopefully to catch a glimpse of Barack, just for a split second," he said. "I think this was a beautiful thing. It's something I always wanted to do. It's not every day that you get to be a part of history. Rather than just watch it on TV, you actually get to partake in it and you have a story to tell your kids."

Nine-year-old Laura Bruggerman also hoped to catch a glimpse of the soon-to-be president. She waited with her mother, Wendy, and father, Jeff, of Bethesda, Maryland, amid an affable crowd that tried to let shorter onlookers and children to the front for better views.

"I want to see Obama. I think that would be really cool. I could tell all of my friends that I got to see him," the youngster said.

Some spectators will be more than a mile from the swearing-in ceremony, watching on giant TV screens erected along the National Mall.

The historic event has drawn myriad celebrities and politicians, including actors Dustin Hoffman and Denzel Washington, director Steven Spielberg and former vice presidents Dan Quayle, Al Gore and Walter Mondale.

Former Presidents Clinton, Carter and George H.W. Bush also were in attendance. Clinton and Bush shared an embrace.

Oprah Winfrey and actor Samuel L. Jackson sat on the same row. Winfrey hugged Senate hopeful Caroline Kennedy and later said of the inauguration, "It's behind the dream. We're just here feeling it with the throngs of people. It's amazing grace personified."

Thousands arrived before daylight Tuesday in standing-room-only trains. They carried blankets and wore Obama scarves to ward off the wind chills of minus 15 degrees Fahrenheit.

Suburban Washington train stations were jammed. A four-story parking deck at the Springfield, Virginia, station was filled at 5 a.m. Trains rolling into the stop about 15 miles south of the Capitol had no room for the hundreds on the platform.

The Metro rail system's Red Line was shut down about 9 a.m. after a pedestrian was hit by a train, further snarling the already overloaded train service, fire officials said.

On Monday night, visitors wandered around the Mall, snapping pictures and shooting video of the Capitol and monuments.

The scene around Lafayette Square was almost chaotic, with cars turning around in the street as they were confronted with barriers to closed-off areas and clots of pedestrians crossing streets against the light.

The visitors' excitement rubbed off on some of the jaded locals, one of whom said D.C. residents were "cynical of government."

"The energy on the streets is something I've never seen before," said Nancy Wigal, a 45-year-old technical writer who lives in the Mount Vernon Square area. "People are walking lighter, standing taller and are reaching out to one another. It feels like hope. It feels like shared happiness."

The morning began at 4 a.m. for many as those without tickets made a land grab on the Mall, rushing to stake out positions for the ceremony.

After Obama and Vice President-elect Joe Biden take their oaths of office on the western front of the Capitol, Obama will deliver his inaugural address, which Obama aides say will emphasize that America is entering a new era of responsibility.

In the approximately 20-minute speech, Obama will say America has been hurt by a "me-first" mentality that contributed to the current economic crisis, aides say, and he will call on individuals -- as well as corporations and businesses -- to take responsibility for their actions.

After a formal farewell to President George W. Bush and lunch with congressional leaders, Obama will head up Pennsylvania Avenue to the White House, where he and his family will watch the inauguration parade from a reviewing stand. The parade begins at 3:45 p.m. ET.

Citi backs foreclosure prevention plan

NEW YORK (CNNMoney.com) -- Citigroup reached an agreement with Democratic lawmakers Thursday on legislation that would allow judges to reduce mortgage debt for individuals who have filed for bankruptcy.

Sen. Dick Durbin of Illinois, the bill's architect, said he hoped the participation of Citigroup would entice other mortgage lenders to sign onto the program.

"I hope other institutions will follow suit," he said. Durbin appeared at a press conference along with fellow sponsors of the bill, Sen. Christopher Dodd of Connecticut and Sen. Charles Schumer of New York.

Until recently, members of the banking industry, including Citigroup (C (C, Fortune 500), Fortune 500), as well as other housing-related groups like the National Association of Realtors, have criticized the notion of allowing the courts to have a say over their mortgage portfolios.

The Mortgage Bankers Association is extremely resistant to this idea. The trade group insists that so-called "mortgage cram downs," which allow bankruptcy courts to reduce the size of a home loan, will add considerably to future borrowing costs.

"We remain opposed to bankruptcy cram-down legislation because of the destabilizing affect it will have on an already turbulent mortgage market," said John Courson, president and CEO of the Mortgage Bankers Association.

Under the proposed mortgage bankruptcy bill, judges could treat the portion of the mortgage balance that exceeds a home's newly appraised value as unsecured debt - loans not backed by collateral. If a homeowners owes $400,000 on a house worth $300,000, $100,000 would be unsecured debt and eligible to be dismissed.

In addition, judges would have the discretion of lowering mortgage interest rates. They would also be allowed to extend the term of the loan to as long as 40 years, which would reduce monthly payments as well.
Change of heart

Opposition to the bill has been eroding. Long time opponent the National Association of Home Builders recently did an about-face.

"This crisis is so severe that every possible solution must be on the table," said Jerry Howard, president of the National Association of Home Builders, in a prepared statement released on December 31. "To be clear, we don't support any specific legislation that would implement cram downs, but we are willing to discuss this tactic and any other solutions with Congress, the administration and other stakeholders."

Lawrence Yun, chief economist for the National Association of Realtors, indicated that his organization may also be backing away from its opposition.

"In general, tinkering with mortgages by judges will tend to lead to higher interest rates," he said. "But by handing judges this authority now, perhaps some of the foreclosures, which can lead to even larger financial hits, can be mitigated."
Who qualifies

Under the proposed plan, only homeowners with existing mortgages would be eligible to have their loans reduced. Additionally, homeowners would have to certify that they attempted to contact their lender about modifying their loan before filing for bankruptcy.

An earlier version of the bill proposed in 2008 only made this option available to borrowers who held either a subprime or non-traditional mortgage, such as an adjustable rate loan.

The Center for Responsible Lending backs the bill, and expects that it could help more than 600,000 households across the country avoid foreclosure.

Credit Suisse estimates that more than 8 million homeowners could face possible foreclosure over the next five years. More than a million homes have been lost to foreclosure since the housing crisis took off in August 2007.

"We don't think this will remedy the whole [housing] situation, but we think this is an essential and necessary tool," said Kathleen Day, a spokeswoman for the non-profit group.
Objections

The bill's opponents charge it would add to risk for investors in mortgage backed securities. Allowing borrowers to have some of their mortgage debt written off reduces the value of those securities, according to cram-down critics. Investors would demand an extra risk premium to offset that risk, raising the costs of mortgage borrowing for everyone. That could add as much as a percentage point and a half to rates, according to the Mortgage Bankers Association.

Bill supporters deny that the risk premium would be anywhere near that. For one thing, relatively few homeowners would take advantage of the bankruptcy protections. There were only about a million bankruptcies filed last year in the United States, and not all of them involve mortgage debt.

Of those that do involve mortgage debt, not all of the homeowners are upside down, owing more on their mortgages than their homes are worth, so the cram down would not apply to them. And, only existing mortgages, not newly issued ones, would qualify for cram downs under the bill, so no risk premium should come into play.

In the past, according to Adam Levitin, a Georgetown University law professor who examined historic interest rates during periods when judges were authorized to reduce mortgage debt, the impact of cram downs on mortgage rates was probably not more than a negligible 0.15 percentage point.

Supporters also claim that the mere threat of bankruptcy may be enough to encourage lenders to voluntarily offer at-risk borrowers more sustainable mortgage workouts. Critics have consistently charged that lenders are dragging their heels on mortgage modifications, which has led to continued high rates of bank repossessions. Faced with the threat of having judges step in and alter the terms of their loans, banks may be more willing to make the adjustments themselves.

As a leading mortgage lender, Citigroup's approval of this bill may appear puzzling. But participation in the program could go a long way to helping the ailing institution, which has been one of the hardest-hit banks during the housing crisis. It is expected to report a fourth-quarter loss later this month, due in part to its exposure to the U.S. housing market.

It remains to be seen whether other lenders will back the cram-down measure, but Durbin is hopeful.

"There is clearly a need to try something new," he said.

Taming inflated home appraisals

NEW YORK (CNNMoney.com) -- Washington policy makers have taken aim at one of the main contributing causes to the housing crisis: inflated appraisals.

When home prices were soaring, one of the driving factors was that appraisers, pressured by loan officers and mortgage brokers, kept hyping home values. Not only did homebuyers wind up paying more, but the exotic mortgage products they needed to finance their purchases later exploded, setting off the financial and economic turmoil the nation is facing today.

Now, the Federal Housing Finance Agency (FHFA), the government agency created to oversee Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), has announced a plan to curb the influence that loan originators exert on appraisers to overvalue homes. A new Home Valuation Code of Conduct, which will take effect this May, is an attempt to improve the reliability of appraisals for mortgages sold to the two companies. The guidelines prohibit lenders from coercing, extorting, colluding with, intimidating or bribing appraisers into making inaccurate appraisals.

"It's a step in the right direction," said Tom Inserra, president of Pinnacle Peak Appraisers in Arizona, who has testified before Congress on appraisal issues. "Separating the lending function from the selling function had to be done."

Fannie and Freddie have a strong interest in ensuring the soundness of appraisal reports because they're the basis for the mortgage loans that they buy from lenders, according to James Lockhart, FHFA's director.

Most mortgages in the United States are now bought by Fannie and Freddie, who then securtitize them and resell them to investors.
High hopes

Appraisals get inflated because the incomes of mortgage brokers and loan officers depend on how many mortgage loans are approved. A high appraisal ensures that the house - the collateral backing the loan - is worth more than the amount of the loan, which reduce the bank's risk.

Inserra knows how intense the pressure to inflate values can get. Three years ago, he found himself battling one of his largest clients. The bank's senior vice president in charge of mortgage lending tried to get Inserra to "hit a number," industry parlance for inflating the appraisal. He wouldn't do it.

"The discussion got so heated," recalled Inserra, "that he threatened to do harm to my family if I didn't co-operate. I really thought he might do it. I got a restraining order from a judge."

In the end, the banker didn't hurt his family, but he did punish Inserra by depriving him of the $200,000 in annual business he had been getting from the bank.

That may be an extreme case, but it was not isolated. A 2007 survey by October Research found that 90% of appraisers said that they felt pressured to fudge figures.
Enforcement is key

Not everyone is convinced that the new guidelines will help.

"I'm very skeptical," said Elizabeth Kern, a past president of the National Association of Independent Fee Appraisers (NAIFA). "I think the only thing that will change is that we'll see the better appraisers, the more experienced ones, not getting the work."

Inserra wonders about enforcement of the rules.

"The concern is that, unless there's an enforcement mechanism that works better than what we have today, it won't do much good," he said.

Under the new rules, complaints from appraisers, consumers, or anyone else will be fielded by the "Independent Valuation Protection Institute," which FHFA will set up.

If a lender logs too many complaints, it may be prohibited from selling its loans to Fannie and Freddie. That should be enough to make lenders police their appraisals more carefully, since the government entities are virtually the only buyers left standing.

The National Association of Mortgage Brokers is not happy with the plan. According to its president Mark Savitt, mortgage brokers often work closely with appraisers to make sure applications are error free and accurate. That kind of co-operation may be construed as crossing over the line into trying to influence appraisals, even when it's not.

Savitt said increased enforcement of existing regulations is all that's needed to make the appraisal inflation problem disappear. "Beef up the penalties for the laws that we already have and enforce those laws."

Right now, few loan originators are held to account for pressuring appraisers. Bill Garber, director of government and external relations at the Appraisal Institute, reports that only about 15 states have any laws targeting loan officers and mortgage brokers, and these are not often enforced.

Appraisers themselves are more likely to get hit; more than 250 lost their licenses last year for hyping values, he said.

But if the new regulations help prevent some of the abuses, it could have a healthy impact on the housing market.

Lenders will have much more confidence that the home values are justified and that could make them more willing to lend.

How Google Is Making Us Smarter Part 2

Clark argues that Ballard’s subjects made the pattern of blocks part of their extended mind. It became a store of knowledge they could dip into, an external repository of information. It was as if Inga did not actually recall the address of MOMA but only the page in her notebook where she had written it down. Our memory holds a great deal of information. But the extended mind moves swiftly between outside and inside sources, showing little regard for where its information comes from.

Our minds do more than take in information, of course. They also make decisions and send out commands—and those commands certainly don’t stay inside the mind. In the block-building game, for example, some commands go to neurons in the hand in order to move the computer mouse. But our brains don’t make a perfect mental replica of our hands and the mouse and the table in order to calculate where the mouse needs to go. Our hands and eyes constantly send signals to the brain, and that feedback alters the signals coming back out. Hand, eye, and brain are part of the same system.

What’s even more remarkable about our brains is that they actually search for new things to make part of this feedback system. Imagine you are poking a stick into an animal’s burrow. As you poke away, you are aware of what the far end of the stick is touching, not the end you’re holding in your hand. This kind of extended sensation appears to be the result of a reorganization of the brain. Scientists have found that when test monkeys spent five minutes learning how to use a rake, some of the neurons in their hands began behaving in a new way. They began to fire in response to stimuli at the end of the rake, not on the monkey’s hand. Other neurons, in the brain, respond to things that appear to lie within arm’s reach. Training the monkeys to use the rakes caused these neurons to change—reacting to objects lying within rake’s reach rather than arm’s reach.

The eagerness with which the brain merges with tools has made it possible to create some stunning mind-machine interfaces. For instance, Miguel Nicolelis of Duke University and his colleagues put electrodes in the brains of monkeys to link them to a robot arm. The monkeys quickly learned how to move the arm around with pure thought; their neurons reorganized, establishing a new feedback loop between brain and robot arm.

Humans are proving just as good at this merger of mind and machine. The U.S. Navy has developed a flight suit for helicopter pilots that delivers little puffs of air on the side of the pilot’s body as his helicopter tilts in that direction. The pilot responds to the puffs by tilting away from them, and the suit passes those signals on to the helicopter’s steering controls. Pilots who train with this system can learn to fly blindfolded or to carry out complex maneuvers, such as holding the helicopter in a stationary hover. The helicopter becomes, in effect, part of the pilot’s body, linked back to his or her mind.

Results like these, Clark argues, reveal a mind that is constantly seeking to extend itself, to grab on to new tools it has never experienced before and merge with them. Some people may be horrified by how passionately people are taking to their laptops and GPS trackers. But to Clark it would be surprising if we didn’t. We are, in Clark’s words, “natural-born cyborgs.”

The extended mind theory doesn’t just change the way we think about the mind. It also changes how we judge what’s good and bad about today’s mind-altering technologies. There’s nothing unnatural about relying on the Internet—Google and all—for information. After all, we are constantly consulting the world around us like a kind of visual Wikipedia. Nor is there anything bad about our brains’ being altered by these new technologies, any more than there is something bad about a monkey’s brain changing as it learns how to play with a rake.

Neuroscientists will soon be able to offer fresh ways to enhance our brains, whether with drugs or with implants. To say that these are immoral because they defile our true selves—our isolated, distinct minds—is to ignore biology. Our minds already extend out into the environment, and the changes we make to the environment already alter our minds.

That doesn’t mean we must approve of every possible extension of the mind, and even good extensions will have some drawbacks. Socrates worried that writing would make people forgetful and unwise. Sure enough, writing did rob us of some gifts, such as the ability to recite epic poems like The Iliad from memory. But it also created a much larger pool of knowledge from which people could draw, a pool that has continued to expand (or, dare we say, continued to extend?).

There’s no point in trying to hack apart the connections between the inside and the outside of the mind. Instead we ought to focus on managing and improving those connections. For instance, we need more powerful ways to filter the information we get online, so that we don’t get a mass case of distractibility. Some people may fear that trying to fine-tune the brain-Internet connection is an impossible task. But if we’ve learned anything since Clark and Chalmers published “The Extended Mind,” it’s not to underestimate the mind’s ability to adapt to the changing world.

How Google Is Making Us Smarter Part 1

Our minds are under attack. At least that’s what I keep hearing these days. Thumbing away at our text messages, we are becoming illiterate. (Or is that illiter8?) Blogs make us coarse, YouTube makes us shallow. Last summer the cover of The Atlantic posed a question: “Is Google Making Us Stoopid?” Inside the magazine, author Nicholas Carr argued that the Internet is damaging our brains, robbing us of our memories and deep thoughts. “As we come to rely on computers to mediate our understanding of the world,” he wrote, “it is our own intelligence that flattens into artificial intelligence.”

I have a hard time taking these Cassandras of the Computer Age seriously. For one thing, they are much more interested in our fears than in the facts. In his new book, Txtng: The Gr8 Db8, the English linguist David Crystal demonstrates that many of the dire warnings about texting are little more than urban legends. Texting doesn’t lead to bad spelling, he finds. In fact, Crystal writes, “texting actually improves your literacy, as it gives you more practice in reading and writing.”

More significantly, the ominous warnings feed on a popular misconception of how the mind works. We tend to think of the mind as separated from the world; we imagine information trickling into our senses and reaching our isolated minds, which then turn that information into a detailed picture of reality. The Internet and iPhones seem to be crashing the gate of the mind, taking over its natural work and leaving it to wither away to a mental stump. As plausible as this picture may seem, it does a bad job of explaining a lot of recent scientific research. In fact, the mind appears to be adapted for reaching out from our heads and making the world, including our machines, an extension of itself.

This concept of the extended mind was first raised in 1998, right around the time Google was born, by two philosophers, Andy Clark, now at the University of Edinburgh, and David Chalmers, now at the Australian National University. In the journal Analysis, they published a short essay called “The Extended Mind” in which they asked a simple question: “Where does the mind stop and the rest of the world begin?” Most people might answer, “At the skull.” But Clark and Chalmers set out to convince their readers that the mind is not simply the product of the neurons in our brains, locked away behind a wall of bone. Rather, they argued that the mind is something more: a system made up of the brain plus parts of its environment.

Clark and Chalmers asked their readers to imagine a woman named Inga. Inga hears from a friend that there’s an exhibit at the Museum of Modern Art. She decides to go see it. She thinks for a moment, recalls that the museum is on 53rd Street, and starts walking that way. She accesses her belief that MOMA is on 53rd Street from its storage place in her brain’s memory network. Now imagine a man named Otto, who has Alzheimer’s. His memory is faulty, and so he keeps with him a notebook in which he writes down important details. Like Inga, Otto hears about the museum exhibit. Since he can’t access the address in his brain, he looks it up in his notebook and then heads off in the same direction as Inga.

In the view of Clark and Chalmers, Inga’s brain-based memory and Otto’s notebook are fundamentally the same. Inga’s mind just happens to access information stored away in her brain, while Otto’s mind draws on information stored in his notebook. The notebook, in other words, is part of his extended mind. It doesn’t make any difference that Otto keeps his notebook tucked away much of the time. After all, Inga tucks the memory of MOMA’s address out of her conscious awareness most of the time too. Clark and Chalmers concluded that real people are actually more like Otto than like Inga: We all have minds that extend out into our environments.

Eleven years later, this argument continues to trigger fierce debate among philosophers, psychologists, and neuroscientists. There is no doubt that the extended mind is a weird concept. One reason it seems so strange is that our minds feel as if they are really totally self-contained. We innately believe, for example, that as we walk down a street, we are continuously filming a detailed movie of our surroundings and using that mental movie to decide what to do next. But like many beliefs we have about ourselves, this movie is an illusion. Our awareness is, in fact, remarkably narrow.

One of the most spectacular demonstrations of how oblivious we can be was carried out by psychologists Daniel Simons of the University of Illinois and Christopher Chabris at Harvard University. They asked people to watch a video of students weaving around each other and passing a basketball. Half the students wore white shirts, the other half black. The subjects had to keep track of how many times the ball was passed by members of one of the teams. In the middle of the game, a gorilla (rather, a student in a gorilla costume) sauntered through the scene. Many subjects later reported that they never saw the gorilla; their brains discarded it as extraneous.

Inside our heads, instead of making a perfect replica of the world, we focus our attention on tiny snippets, darting our eyes from point to point. We extract only the information we need for whatever task is at hand, whether we’re sorting the laundry or climbing a mountain.

We use strikingly little information in the process. Dana Ballard, a computer scientist at the University of Texas, developed a computer game to measure just how little. He showed his subjects a pattern of colored blocks in the upper left-hand corner of the computer monitor. He then had them build a similar pattern of blocks in the lower left-hand corner. To do so, the players used a mouse to grab blocks, one by one, from a collection on the right-hand side of the screen. As the players looked from the original model to the collection of blocks to their own growing pattern, Ballard tracked their eye movements. He found that players looked at the model at the upper left before they picked up a block, and then again afterward. His experiments suggest that in each glance, the players were storing only a single piece of information. The first time they noted a block’s color. The second time they noted its position in the model. Instead of keeping a detailed picture of the blocks in mind, people extracted just tiny scraps of information on a need-to-know basis.

Stayed tuned...Part 2 tomorrow...

Foreclosures up a record 81% in 2008

NEW YORK (CNNMoney.com) -- U.S. foreclosure filings spiked by more than 81% in 2008, a record, according to a report released Thursday, and they're up 225% compared with 2006.

A total of 861,664 families lost their homes to foreclosure last year, according to RealtyTrac, which released its year-end report Thursday. There were more than 3.1 million foreclosure filings issued during 2008, which means that one of every 54 households received a notice last year.

"Clearly the foreclosure prevention programs implemented to date have not had any real success in slowing down this foreclosure tsunami," said James Saccacio, CEO of RealtyTrac in a statement.

And despite those efforts on the part of both the government and the banking industry to quell the housing crisis, defaults continued to climb as 2008 came to an end. Foreclosure filings were up 17% in December over November, and rose 41% compared with December of 2007.

"The big jump in December foreclosure activity was somewhat surprising given the moratoria enacted by both Freddie Mac (FRE, Fortune 500) and Fannie Mae (FNM, Fortune 500), along with programs from some of the major lenders and loan servicers aimed at delaying foreclosure actions against distressed homeowners," said Saccacio.

Both of the government-sponsored mortgage giants suspended foreclosures starting November 26, 2008 through January 31, 2009.

The devastating numbers are unlikely to improve soon.

"I don't see how we can avoid three million foreclosures again in 2009," said Rick Sharga, a RealtyTrac spokesman. His company now has nearly a million sales listings for bank-owned homes.
Huge foreclosure inventory

And what's worse, Sharga thinks that as many as 70% of the bank-owned homes listed on RealtyTrac's site have not yet been posted on multiple listings services (MLS), the industry databases of homes for sale. Those homes are less likely to be sold because most real estate agents won't know they're available.

"Either banks are overwhelmed and can't get the houses on the MLS quickly, or they're deliberately slowing down so they don't have to take markdowns to actual home values on their books," Sharga said. Either way, it has the effect of underestimating the foreclosure inventory problem.

Banks also seem to be slowing the foreclosure process, according to Sharga. They are not sending out foreclosure filings as quickly when homeowners fall behind on payments.

Part of that is because some new state regulations require banks to notify delinquent borrowers of their intent to file notices of default, and to offer help to borrowers who want to get their finances back on track. Banks simply lack the manpower to track down so many delinquent homeowners with the required notifications. This creates a delay between the time that borrowers first miss payments and when they go into foreclosure.

After one such rule took effect in California this past summer, notices of default fell by half, to 21,665 from 44,278. But they jumped back to more than 44,000 again in December, probably because banks caught up on many of the postponed notices.

"The recent California law, much like its predecessors in Massachusetts and Maryland, appears to have done little more than delay the inevitable foreclosure proceedings for thousands of homeowners," said Saccacio.
Falling home prices

Foreclosures are closely tied to home prices - they tend to rise as prices fall. And nationally, home prices have fallen more than 21% from their peak, according to the S&P/Case-Shiller Home Price index. In many areas, the decline has been much worse.

In Los Angeles, San Francisco and Miami prices are down 30% or more. They've fallen more than 40% in Phoenix and nearly that much in Las Vegas.

Declining prices put many homeowners "underwater" on their mortgages, owing more than their homes are worth, which makes them more likely to default.

And adding a flood of bank-owned homes to already slow markets further outstrips demand and dampens prices, creating a spiral of lower prices and higher foreclosures.

As a result, more homeowners who fall behind on their mortgage payments end up losing their homes, according to Jay Brinkman, the chief economist for the Mortgage Bankers Association

In California and Florida 80% of the homeowners who miss a payment end up in foreclosure, according to the MBA. That's a much, higher percentage than in the past.

"The number of mortgages 30 days past due are still below what they were during the 2001 recession," said Brinkman. But the proportion of those loans that went into foreclosure was much lower, he added - about 10%.

"Delinquency itself has become a much clearer predictor of foreclosure," said Sharga.

If home prices keep plunging, the foreclosure scourge will likely continue.

And S&P's chief economist, David Wyss, expects home prices to continue to decline, bottoming in early 2010 roughly 33% below their 2006 peak.
Worst hit areas

The three states hit hardest by foreclosure in 2008 were Nevada, Florida and Arizona. In Nevada, 7% of homes received a foreclosure filing - such as a notice of default, auction sale notice or foreclosure sale - during the year, up 126% from 2007.

Florida filings soared 133%, hitting more than 4.5% of all households, while Arizona filings jumped 203%, also to about 4.5%. California had the highest total number of filings for any state, 523,624, more than double 2007 levels.

Stockton, Calif. had the highest rate of foreclosures of any metropolitan area, at 9.5%. Las Vegas was second with 8.9% and Riverside/San Bernardino Calif. was third with 8%.

Of the top 20 cities for foreclosures, most are in the Sun Belt, with the exception of Detroit at number 10, Memphis, which ranked 18th and Denver which was 19th.

Mortgage applications surge

NEW YORK (Reuters) -- U.S. mortgage applications jumped in the first full week of 2009 as record low interest rates spurred the greatest demand for home refinancing loans in more than 5-1/2 years, data from an industry group showed on Wednesday.

Low mortgage rates, however, have yet to fuel demand for loans to purchase homes.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended Jan. 9 increased 15.8% to 1,324.8. That's the highest reading since the week ended July 11, 2003, when it reached 1,358.2.

Thirty-year mortgage rates have dropped dramatically since the Federal Reserve unveiled a plan in late November to buy as much as $500 billion of mortgage securities backed by Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500) and Ginnie Mae. The program also entails buying up to $100 billion of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

The refinance share of applications increased to 85.3% from 79.8% the previous week, the highest level since the MBA started conducting its survey in 1990.

Spencer Rascoff, chief operating officer at Zillow.com, an online real estate service company based in Seattle, said loan requests to his company are up more than 200% from just two months ago, with loan requests on pace to hit about 25,000 in January and loan quotes on pace to hit 200,000.

"Many experts agree that rates will stay relatively low for at least the next few months since the federal government is now committed to buying mortgage-backed securities to keep borrowing costs low," Rascoff said on Tuesday.

"But the future of rates isn't certain, so locking in these low rates now is a smart move," he said.
Record low rates

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.89%, down 0.18 percentage point from the previous week, the lowest level recorded in the MBA's survey's history.

Interest rates were well below year-ago levels of 5.77%.

"Our business has definitely increased dramatically in the past few weeks with rates dropping," Melissa Cohn, chairman and CEO of Manhattan Mortgage Company in New York, said on Tuesday.

Cohn said the telephones at her company have been ringing off the hook and while the company has not hired additional staff, it has retained as many people as possible.

"We are just working twice as hard to handle the increased volume," she said.

Meanwhile, though, the MBA's seasonally adjusted purchase index fell 14.1% to 295.8. The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was up 10.8%.
Refinancing surges

The prospect of affordable home financing has provided a glimmer of hope for the U.S. economy with the housing market in the worst downturn since the Great Depression.

The Mortgage Bankers' seasonally adjusted index of refinancing applications jumped 25.6% to 7,414.1, the highest reading since the week ended June 27, 2003, when it reached 8,599.1.

The adjustable-rate mortgage share of activity increased to 1.1%, up from 0.9% the previous week.

Fixed 15-year mortgage rates averaged 4.63%, down from 4.67% the previous week. Rates on one-year ARMs decreased to 5.89% from 5.90%.

Mortgage help gains momentum

NEW YORK (CNNMoney.com) -- There are many ways to spend $800 billion to revive the economy. In recent days, President-elect Barack Obama has ticked off many of them: invest in infrastructure projects, help states pay for Medicaid, cut taxes on the middle class, expand use of renewable energy.

But what about helping those at risk of foreclosure, and by extension the housing market as a whole?

Lawmakers in Washington are demanding that more be done, and they are aiming their sights both at the $700 billion financial rescue package known as TARP and the massive economic stimulus bill Obama is pushing as vehicles for new housing measures.

Already, Treasury Secretary nominee Timothy Geithner is working on plans to revamp the way TARP is used to make foreclosure prevention a bigger priority, two transition aides told CNN. Congress has made it known that it likely won't release any more TARP funds until some of the money is earmarked for housing.

For his part, Obama has been shy on details but has said that within a month or two he would unveil "a sweeping effort to address the foreclosure crisis so that we can keep responsible families in their homes."

Meanwhile, Senate Budget Chairman Kent Conrad, D-N.D., on Wednesday said it would be a mistake to pass a stimulus bill without also tackling the housing crisis.

"The housing market is 16% of the economy," Conrad said. "To think that we are going to have a package of economic recovery that does not address housing adequately I think would miss the boat."
What's on the table

Use TARP for homeowners: House Financial Services Chairman Barney Frank, D-Mass., is writing a bill that would impose conditions on the use of any more TARP money and in a memo to colleagues this week called for "substantial efforts" to be made to reduce foreclosures, a spokesman for Frank's office said in an e-mail.

Frank said Friday that his bill will call for $40 billion or $50 billion from TARP funds to be used for foreclosure mitigation. And he's calling on the Treasury to implement a plan by April 1.

That plan essentially must be a version of a plan proposed by FDIC Chairwoman Sheila Bair. Bair's plan would systematically modify loans and provide a government guarantee to protect investors in the event a homeowner re-defaults after the loan has been modified.

The plan also must reduce the costs and writedown requirements for lenders and borrowers of the Hope for Homeowners program, which began in October but has helped virtually no one.

That program offers full government backing for lenders that agree to write down a mortgage to below a home's appraised value. But the loss to lenders can be greater than that reduction because many troubled homeowners are also "under water" due to falling home prices - meaning they owe more on their home than its current market value. So as the law was initially passed, to participate in Hope for Homeowners, lenders in many cases would have to lock in a sizeable loss.

"We wrote it too restrictively. ... [Now] we'll make it more user-friendly," Frank told reporters on Friday.

Reform bankruptcy law: On Thursday, Senate Banking Chairman Christopher Dodd, D-Conn., and Sen. Richard Durbin, D-Ill., said that Citigroup (C, Fortune 500) has agreed to support a proposal that the lending industry has strongly opposed that would allow bankruptcy judges to write down the primary mortgages of homeowners filing for bankruptcy.

The bank's support of the proposal is based on the condition that the change only apply to existing mortgages and that homeowners filing for bankruptcy notify their lenders 10 days before to give them a chance to modify the mortgage.

Other lenders and housing industry interests -- including the powerful National Association of Home Builders -- have also started to lower their resistance to so-called bankruptcy cramdowns.

The long-held argument against cramdowns is that they would cause rates to rise because mortgage securities investors would demand a higher interest rate to compensate for the risk that a judge could rewrite mortgage contracts on terms disadvantageous to the investor.

Offer bigger tax break to home buyers: NAHB has been pushing for all home buyers to get a temporary tax credit for buying a primary residence worth up to 10% of the purchase price. A tax credit is a dollar-for-dollar reduction of one's tax liability.

Currently, only first-time buyers may get a temporary tax credit worth up to $7,500 for a limited period of time. But that credit functions more as an interest-free loan from Uncle Sam because the home buyer has to repay it over time.

Neither Dodd nor Senate Finance member Charles Schumer, D-N.Y., speaking to the press on Thursday, endorsed the idea of an actual tax credit. Dodd said a tax credit would not help prevent foreclosures but could spur economic growth.

And Schumer said there was "broad support" among members of the Senate Finance Committee to make tax policy changes to support housing, particularly existing homes as opposed to newly constructed ones.

Push interest rates down: The National Association of Realtors, among others, has pushed for the Treasury Department to take a more active role in driving mortgage rates down by buying securities backed by 30-year fixed-rate mortgages from Fannie Mae and Freddie Mac.

Frank has suggested that in order to use TARP funds, Treasury must commit to using some money to "stimulate demand for home purchases ... including through ensuring the availability of affordable mortgage rates for qualified home buyers."

A plan already in place at the Federal Reserve has already had the effect of lowering rates on the 30-year fixed to record lows. The Fed is buying up to $500 billion in mortgage-backed securities backed by Fannie and Freddie, a move that bolstered confidence in the mortgage giants' ability to continue to buy and back loans in the secondary market.

Another idea that has been floated recently is to have Uncle Sam use money to buy down points on home buyers' mortgages to lower interest rates.

Mortgage rates dip to new all-time low

NEW YORK (CNNMoney.com) -- Mortgage rates fell to another all-time low, declining for the tenth consecutive week.

Government sponsored mortgage lender Freddie Mac said Thursday that fixed rates on 30-year mortgages averaged 5.01% for the week ending Jan. 8th. That's down from 5.10% last week and well below 5.87%, which is where the rate stood at this time last year.

The 30-year fixed rate mortgage has not been lower since Freddie Mac started conducting the survey in 1971.

Mortgage rates continue to respond to the Federal Reserve's decision to purchase mortgage backed securities from Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500) and Ginnie Mae, according to Frank Nothaft, Freddie Mac vice president and chief economist.

"On November 25, 2008, the Federal Reserve announced that it planned to purchase up to $500 billion of these securities by the end of June this year. For the sake of comparison, there were roughly $4.7 trillion of such securities backed by home mortgages available as of September 30, 2008," Nothaft said in a release Thursday.

The 15-year fixed rate mortgage this week averaged 4.62%, which is down from 4.83% last week. A year ago at this time, that rate averaged 5.43%.

The 15-year rate has not been this low since June 13, 2003, when it averaged 4.6%.

Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 5.49% this week, down from last week when they averaged 5.57%. At this time a year ago, the 5-year ARM averaged 5.63%.

And the one-year Treasury-indexed ARM averaged 4.95% this week, up from 4.85% last week. Last year, the 1-year ARM averaged 5.37%.

"Since the end of October 2008, these rates have declined by almost 1 1/2 percentage points," said Nothaft. "[That's a] payment savings of about $184 a month for a $200,000 loan - an additional $11 from last week."