In my visit back to Pennsylvania last week the subject of reverse mortgages came up on several occasions as more and more seniors have little recourse other than to tap their home equity in order to pay, primarily, medical bills. Long-term care costing upwards of $10,000 a month (i.e., after the three months that Medicare pays) will quickly wipe out whatever savings most elderly have, leaving them with few alternatives other than a reverse mortgage that, surprisingly, are now taken out as a lump sum by a margin of two-to-one.

Until reading this Wall Street Journal story, I didn’t even realize it’s possible to default on these loans, but, clearly it is, and those default rates are on the rise, but help is on the way.

Defaults occur when a borrower fails to pay property charges, including property taxes and homeowners insurance. Of the almost 600,000 reverse mortgages outstanding, 9.8% are currently delinquent, up from 8% in 2011, the first year for which statistics are available, according to the federal Department of Housing and Urban Development, whose Federal Housing Administration insures virtually all reverse mortgages.

Delinquencies have increased in recent years as up to 70% of borrowers have opted for lump-sum payouts.

“For many homeowners, taking all eligible cash upfront results in insufficient cash flow in later years for property upkeep, taxes and insurance,” HUD warned in a November report to Congress.

The good news: Help is available. Under guidelines HUD released in 2011, lenders—before initiating foreclosure proceedings—are required to notify borrowers who fall behind of free financial counseling. Such sessions can help them get back on track by, among other things, tapping benefit programs for some older individuals.

I haven’t seen any data on this recently, but reverse mortgages have got to be a booming business for banks with, as I recall, some very big up-front fees.

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Cheap Money and the Housing Rebound

Apparently, a strong housing market doesn’t really depend on people having good jobs in order to come up with a down payment and service a mortgage. Whether that strong housing market is healthy or not is another matter as detailed in this special report at Reuters.

The once-beleaguered Las Vegas housing market has been on fire since investment firms led by Blackstone Group LP, Colony Capital and American Homes 4 Rent began buying homes here some eight months ago, backed by $8 billion in investor cash to spend nationally.

These big investors and a handful of others have bought at least 55,000 single-family homes across the U.S. in the past year. In the Vegas area alone, they have accounted for at least 10 percent of the homes sold since January 2012, according to a Reuters analysis of housing transactions.

That added firepower helps explain why home prices in this metropolitan area of 2 million people are up 30 percent over a year ago, far more than the national average of 10 percent.

There’s lots more in this story, most of it disturbing such as 60 percent of Las Vegas home sales being all cash and a reminder that hot money from Wall Street doesn’t tend to stick around once the artificial appreciation stops – when that will be is anyone’s guess.

I missed the S&P Case-Shiller housing report earlier in the week where is looks like Las Vegas is about to overtake Phoenix as the nation’s hottest housing market.

The Expected Alarming Failure Rate of HAMP

I’ve written about the government’s loan modification program known as HAMP (Home Affordable Modification Program) on many occasions over the years, primarily to note what was obvious to me – the unusually high debt levels this program allowed sets up borrowers for failure since the debt can’t be serviced over long periods of time.

• Mar 2010 – The New Road to Serfdom – Part 63
• Apr 2010 – The Government’s Loan Mod Bizarro World
• May 2010 – HAMP Back-End DTIs Are Getting Ridiculous
• Jul 2010 – Another Way to Look at HAMP
• Feb 2011 – Loan Modification Data in Need of a Pie Chart

Now, a few years on , the evidence is in and, as expected, default rates on these loan mods have skyrocketed as detailed in this story at CNBC

The U.S. Treasury’s mortgage bailout is failing at an “alarming rate,” according to a government watchdog, but architects of the four-year-old plan say that it is no worse than they expected.

Mortgage Loan ModificationThe Home Affordable Modification Program (HAMP) was launched in early 2009 with the goal of helping 3 to 4 million borrowers avoid foreclosure. So far fewer than one million borrowers are in permanent modifications, and default rates on these modifications are high.

A new report from Special Inspector General for the Troubled Asset Relief Program points to disturbing numbers, but offers no reason for the high rates.

Treasury’s data shows that the longer a homeowner remains in HAMP, the more likely he or she is to redefault out of the program. As of March 31, 2013, the oldest HAMP permanent modifications, from the third and fourth quarter of 2009, are redefaulting at a rate of 46.1 percent and 39.1 percent.

Is that a good thing? Someone at Treasury expected a failure rate of almost half.

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More Concern over Canada Home Prices

It looks like they’re really starting to get concerned north of the border as a seemingly indefatigable housing bubble is now showing many of the same signs seen elsewhere in the world over the last half decade that it’s about to meet its pin. The latest warnings come from this story in the Globe & Mail, from which the chart below was culled.

The report begins:

Canadians are obsessed with whether or not our housing market is going to suffer a “U.S.-style” correction. It’s by now widely accepted that corrections are happening in key Canadian cities. Sure, there are still pockets of strength – Calgary and the detached market in Toronto, for example – but most markets are seeing rising inventory and falling sales, which typically foretell price weakness.

Well, at least there’s no mention of a “permanently high plateau”.

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Existing Home Sales Slip, Prices Rise

The National Association of Realtors reported that sales of existing homes fell 0.6 percent last month, from a downwardly revised, seasonally adjusted annual rate of 4.95 million units in February to 4.92 million units in March.

Home prices continued to rise due to low inventory, record low mortgage rates, record government guarantees of new mortgages, record purchases of mortgage debt by the Federal Reserve, strong demand from Wall Street investors, and what are clearly signs of speculative fervor in parts of the country.

Existing Home Sales

The number of unsold homes increased 1.6 percent in March to 1.93 million, representing a 4.7 months supply, up from 4.6 months in February and part of a normal seasonal rise as the inventory figures are not adjusted for seasonal variations. But, only 30,000 units were added to inventory last month, far lower than the average March increase of 100,000 units.

The median home price rose from $173,600 to $184,300, a gain of 11.8 percent from a year ago and the biggest annual increase since a 12.8 percent gain during the housing bubble heyday in late-2005. Distressed homes accounted for 21 percent of all sales in March, up from 25 percent in February, and all-cash sales were unchanged at 30 percent while investors were responsible for 19 percent of sales, down from 22 percent the month prior.

A trio of new surveys from Gallup point to a rapidly changing outlook by Americans on such topics as the economy, housing, and investment classes in general, real estate and precious metals in particular. First, after holding steady in recent weeks as other measures of consumer confidence faded, this Gallup survey is now showing weakness too.

While they may not feel as good about the economy in general, rising home prices have Americans feeling confident about this trend continuing according to this poll.

Given the above, it should come as no surprise that Americans’ preferred asset class is no longer gold, but housing, as detailed in this survey. Since this poll was conducted prior to the early-April sell-off in precious metals, look for recent trends to accelerate next time.

We’re pretty good at noticing trends and projecting those trends into the future…

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