BY GRETA GUEST
FREE PRESS BUSINESS WRITER

The Obama administration said Friday that it would widen the reach of its home loan modification program, which could help thousands of unemployed and underwater Michigan homeowners.

The Home Affordable Modification Program, criticized for its slow pace and low number of modifications, would put $14 billion toward the program by helping those who owe more on their homes than they’re worth get new loans backed by the Federal Housing Administration. Unemployed people would get a temporary break, with lowered mortgage payments for three to six months.

The FHA refinancing program would be available to those with credit scores as low as 500, said Vince Parlove, president of First Preferred Mortgage in Bingham Farms. The programs are expected to be available in the fall.

Drew Sygit, a certified mortgage planning specialist who leads the Lending Edge Team at First Michigan Bank in Troy, said the plan sounds great on paper. But he expects it would take months to roll out and could be difficult for banks to execute.

Mark Zandi, chief economist at Moody’s Economy.com, said the changes could spare 1 million to 1.5 million homeowners from losing their homes. And it could end the housing crisis earlier than expected.

Struggling homeowners eager for aid

Heidi Lucken, who has been working to save her Oak Park home for the better part of five years, was hopeful Friday that the expanded federal government loan modification program could help her stay.

Lucken, who lives in the three-bedroom, 1.5-bathroom house with her two sons, said the home that she bought in 2002 for $107,500 is now worth $55,000. She has been laid off, rehired and is now on a medical leave from her human resources job. She was granted a temporary loan modification last year, but has been waiting for something permanent.

“I’m hopeful about it for everyone,” Lucken said.

Despite the Obama administration’s attempts to short-circuit the housing crisis, just 170,000 loan modifications have been made since the program was unveiled last year. About 6 million homeowners have missed at least two months of mortgage payments. Meanwhile, Michigan ranks fourth nationwide for the number of mortgages that are underwater, meaning the owner owes more on the house than it is worth.

The expanded program, announced Friday, would encourage lenders to reduce the amount some troubled borrowers owe on their home loans and give jobless homeowners a temporary break. It also would help underwater homeowners refinance into loans backed by the Federal Housing Administration. The FHA will get $14 billion in incentive money from the federal bailout fund. Lenders would get incentive payments to reduce principal on home loans, but it was not clear Friday what those were.

“This is very encouraging for people who are having problems out there,” said Vince Parlove, president of Bingham Farms-based First Preferred Mortgage. “It is stimulating the lenders to go out and do these kinds of loans.”

Parlove said that according to information provided to lenders, FHA will allow people with credit scores around 500 to qualify for these loans. It would be available only to those who are current on their mortgages, and lenders must agree to a principal write-down.

“This is a pretty wide stroke of the brush in my mind,” Parlove said. “We’re starting to get our arms around this and helping people who have been hurt by the economic situation in the United States and Michigan.”

Since the housing crisis started, Michigan’s average home sale price has dropped by 35%. And the state remains in the top 10 for monthly foreclosure filings.

Administration officials cautioned that the plan won’t stop all foreclosures or help all troubled homeowners. Instead, they said the goal is to meet the original target of helping 3 million to 4 million borrowers avoid foreclosure.

Sygit said he was encouraged that principal write-downs are part of the plan.

“All the academics have said it isn’t going to work until you write down the principal balances,” Sygit said. “And here we are three years and billions of dollars later.”

It also gives temporary help for unemployed people who are looking for work. People receiving unemployment benefits would see their mortgage payments drop to no more than 31% of their monthly income for three to six months.

In Michigan, 39%, or 532,774 properties, were considered underwater, according to First American CoreLogic data through December. More than 11 million mortgages nationwide are underwater.

The administration’s existing program to prevent foreclosures has failed to make a major dent in the problem. A lack of planning created a huge backlog in the program, the special inspector general for the federal financial bailout fund told lawmakers this week. Only 170,000 homeowners have completed loan modifications out of 1.1 million who began the program over the past year.

The administration also stressed that the plan won’t aid investors, speculators or “Americans living in million-dollar homes or defaulters on vacation homes.”

But preventing even a fraction of potential foreclosures could help stop home prices from falling more. That would encourage those who are underwater to keep paying their mortgages as prices stabilize.

While many are critical of the government’s efforts to repair the housing market, Parlove said that even if the administration has made mistakes, it keeps trying new things and could eventually arrive at the solution. The FHA loan will be a standard loan program, which means local brokers can handle them for people instead of everyone needing to apply online, he said.

“There isn’t one solution for everyone. We have to keep layering these on,” he said. “Hopefully we will get a big bang out of this. I think it will stimulate the local mortgage firms.”

Banks will be given extra incentives to reduce payments or eliminate second mortgages, such as home equity loans. Second mortgages have derailed many modifications.

The four big holders of second mortgages — Citigroup Inc., Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. — have now joined the government’s program to modify second mortgages, after pressure from the Treasury Department. That program was delayed for months, but now the major industry players are on board.

Contact GRETA GUEST: gguest@freepress.com. The Associated Press contributed to this report.

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And even the faint promise of better days ahead might not come true, given all the headwinds the housing industry is facing at the moment.

“This is going to be another difficult spring,” said Mark Zandi, chief economist at Moody’s Economy.com. “I think we are at the beginning of the end of the housing downturn, but it is going to be a long and painful end.”

The devastation is certainly a far cry from the boom years from 2001 to 2005 when sales of new and existing homes were setting records for five straight years. During that time, home prices were soaring, luring thousands of investors into the market, hoping to buy homes and flip them for quick profit.

But since 2006, the country has been mired in a housing bust which, in many ways, is the worst since World War II. Construction is expected to drop to the slowest pace since the 1940s and prices are expected to decline by the largest amount since the Great Depression.

Hardest hit are the states where sales boomed the most: California, Florida, Nevada, Arizona and parts of the Northeast. In the Midwest, the problem is shrinking jobs in the auto industry, making homes hard to sell.

But virtually all of the country has felt the aftershocks of the housing slump, either through weaker home sales or the massive drag housing has imposed on the overall economy.

Housing has shaved more than a full percentage point off economic growth, trimming the gross domestic product for the past two quarters to a barely discernible 0.6 percent rate and raising the threat that the country could topple into a full-blown recession.

The National Association of Realtors reported that 46 states saw sales decline in the first three months of this year compared with the same period in 2007.

Two-thirds of 149 metropolitan areas saw prices decline during the same period, the largest percentage of cities reporting price drops in the history of the NAR survey, which goes back to 1979.

The state with the biggest sales decline was Maryland, with sales down 38.6 percent in the first three months of this year compared with the same period in 2007. The drop nationwide was 22.2 percent.

The price decline nationally was 7.7 percent in the first quarter, with the biggest plunge a 29.2 percent decline in the Sacramento, Calif., area. As the spring sales season got under way, the slump was continuing.

The Realtors reported Friday that existing home sales fell 1 percent in April, the eighth drop in the past nine months, with the median home price falling 8 percent compared with a year ago, the second-biggest drop on record.

So just how much worse will things get? Lawrence Yun, chief economist for the Realtors, sees some hopeful signs.

Some parts of the country that have been hammered with sharp declines in sales and prices, such as San Diego, Calif., and Fort Myers, Fla., are now reporting sales increases, as buyers are being lured back into the market, looking for bargains.

“Lower prices and low interest rates are starting to generate results,” Yun said, noting that 30-year fixed-rate mortgages averaged 5.92 percent in April, down from 6.18 percent in April 2007.

That reflected an aggressive rate-cutting effort by the Federal Reserve to try to keep the country out of a recession.

Sales should also be helped in coming months, Yun predicted, by the reappearance of more mortgage products as lenders reopen the tap for certain loans. That supply had been closed following the credit crisis that hit last August, triggered by rising defaults in subprime mortgages.

Other economists are not so optimistic, noting that the Realtors’ latest report showed the number of unsold single-family homes jumping to a 23-year high, reflecting, in part, a rising tide of mortgage foreclosures, which are dumping more homes on an already glutted market.

Adding to the foreclosure problem is the weak economy, which has resulted in four straight months of job layoffs, an indication to some analysts that the country has already fallen into a recession.

Rising job layoffs and higher gasoline and food prices have sent consumer confidence plunging — not a great environment to mount a rebound in housing.

And then there is the problem of the huge overhang of unsold homes generating further declines in prices, which seem to be keeping more prospective buyers on the fence.

“Right now a lot of people are staying away because they don’t want to buy an asset that might lose value right away,” said Patrick Newport, an economist at Global Insight.

Newport predicted that prices, which by some measures have fallen by about 15 percent nationwide from their peak two years ago, will decline another 10 percent before bottoming out in the spring of 2009.

A 25 percent fall in prices would be the biggest since home prices plunged by about one-third during the Great Depression of the 1930s.

David Seiders, chief economist for the National Association of Home Builders, said he believed sales will bottom out by the middle of this year and then start to move higher by the end of this year.

He said builders, trying to control inventories, will continue slashing production, with housing starts expected to drop by 39 percent this year following a 30 percent decline in 2007. That will push activity to the slowest annual pace since the end of World War II.

Seiders predicted a gradual rebound in construction starting next year. “This is stacking up as the most dramatic housing contraction in the post-World War II period,” he said.

And while sales, construction and prices should all start to recover by next year, the rebound is not expected to be a rapid one. Some analysts are forecasting it will take a couple of years for housing to regain its footing.

“It is going to take some time first to restore confidence that housing is a reasonably OK investment, then to work off this inventory and then for the financial system to revive,” Zandi predicted.

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Home Prices Continue Sharp Descent

NEW YORK (CNNMoney.com) — Single-family home prices dropped 7.7% in the first quarter in the largest year-over-year decline since the National Association of Realtors began reporting prices in 1982.

The median sales price fell to $196,300, down 4.8% compared with the last three months of 2007.

Lawrence Yun, the chief economist of NAR, attributed much of the record decline to liquidity problems dragging down high-priced markets.

“These are highly unusual results because there were very few jumbo loan originations in the latest quarter,” he said. “So sales are much slower in high-cost areas.”

Jumbo mortgages skew results

That sales slowdown changed the mix of houses sold.

In California, according to Yun, homes bought with jumbo mortgages – more than $417,000 – accounted for 40% of all sales before liquidity for these loans dried up during the summer of 2007. Since then only 10% of sales in California involved jumbo loans.

In February, Freddie Mac and Fannie Mae, the government sponsored enterprises that guarantee a market for conforming loans, have raised the $417,000 cap to include mortgages of up to $729,750, but lenders were still charging much higher rates for these “conforming jumbos,” between 1% and 1.5% more than ordinary conforming loans. The higher rates are discouraging sales in higher price ranges and so skewed NAR’s median price results.

Many of these same markets were also among the hardest hit by the subprime implosion, which forced many lower priced homes back on the markets, again dragging down NAR’s results.

That helped put many California and other Sun Belt cities, with their toxic combinations of both high prices and heavy proportions of subprime mortgages, among the biggest losers.

In California, Sacramento prices plummeted 29.2% to $258,500 compared with last year and Riverside prices fell 27.7% to $287,100. Prices in Las Vegas fell 20.2% to $247,600 and those in Phoenix dropped 15.4% to $222,200.

Some Midwestern cities, hard hit by factory closings, also suffered huge losses with Lansing, Mich., prices falling 26.9%. Saginaw, Mich., had the lowest median prices of any of the 150 markets studied; a median house in Saginaw sold for just $65,400.

“You have two themes: the weak industrial economies under increasing pressure by struggles of the Big Three automakers and the deflating of what were once the most prominent bubble markets,” said Michael Youngblood, an analyst with FBR Investment Management.

About of a third of the markets did show gains. The best performer in the nation was Binghamton, N.Y., where prices rose 11.8% to $109,700. Then came Peoria, Ill., up 10.4% to $119,000 and Spartanburg, S.C., where prices rose 10.2% to $130,300.

Regionally, in the Northeast, single-family home prices rose slightly, 3.2% to $280,000. But prices in the South dropped 7.5% to $164,200, in the Midwest they fell 7.9% to $142,700 and in the West they plunged 12.3% to $296,300.

Foreclosures put more homes in play

Hurting home prices were big rises in foreclosure rates over the past 12 months, which threaten to get even worse. Delinquencies more than doubled over that time and more than 155,000 lost their homes in bank repossessions during the first three months of the year. With many adjustable rate mortgages (ARMs) poised to reset this year to higher interest rates, defaults could go even higher.

“Yes, but I hasten to say it’s not merely the ARMs,” said Youngblood. “Fixed rate loans are performing poorly as well.”

All that foreclosure activity added to the glut of homes on the market. The total inventory has risen to an average of 10 months worth of unsold homes. In addition, a record number – 2.9 million – of vacant homes are up for sale, according to the Census Bureau.

The big inventory has led to aggressive price slashing and increased incentives by builders looking to sell homes. They’ve also cut way back on housing starts, which are at a 17-year low.

The pace of existing home sales, at about 492,000 a month, is about a third less than its peak during the summer of 2005.

Condo prices fared a bit better than single-family homes. The median price fell just 3% since early 2007. The worst hit market was the Sarasota area, where condos dropped 35% over the past 12 months to $268,500. Sacramento condo price cratered 33.4% to $147,200. In Miami, prices fell 26.4% to $176,100.

The best performing condo market was about as far from the madding crowds of South Beach as one can get: Bismarck, N.D., condo prices soared 36.4% compared with 12 months ago, to $124,900.

The price declines in falling markets may not have run their course. Some analysts point to low home prices in many Midwestern cities and assert there’s not much room for prices to fall but Youngblood disagrees.

“If we’d had this discussion a year ago, we would have said the same thing – how much further can they fall?” he said. “But jobs are declining and people are moving out and you’re getting sharper home price declines than you ordinarily would.”

Also, according to Youngblood, the sheer volume of foreclosures takes a toll. “Recent studies report that foreclosed properties sell for an average of 20% less than comparable properties that have not been foreclosed on,” he said.

As for the bubble markets that have already lost 30% of their values, Youngblood thinks their declines are not over. He expects some to drop another 20% or so through February 2009.