The Federal Open Market Committee, led by beleaguered Chairman Ben Bernanke, lowered the short-term federal funds rate Wednesday down 50 basis points (half a percent) to 3 percent. That’s two hefty cuts — a combined 1.25 percent — in little more than a week! Way to go Ben!!!

But is it enough to save the faltering real estate market in this time of crisis? There were more than 1 million more foreclosure filings in 2007 than there were in 2006, and 2008 promises to be equally surprising in terms of foreclosure levels.

For its part, the Fed has wavered in its view of the crisis begrudgingly, early on calling it a “correction” in FOMC statements last year. In its latest statement the FOMC is now calling it a deepening “housing contraction!”

You can use all the “C” words you want Ben, but housing usually leads the country in and out of economic “recession” (that “R” word you refuse to give into) and bluntly some areas of the country are probably feeling like they are already there.

Frankly, not everybody believes these latest cuts are going to help. Either they are too little too late, or it’s going to take too long to figure out if they helped at all, and by then we may already be in a recession.

Talk to the folks in Detroit and Cleveland right now who are experiencing high levels of foreclosure activity and unemployment. Try to sell the notion that our present economy is sustainable and won’t take a further dip with out-of-control inflation to the vanishing middle class of America. Good luck Ben. You’ll need it!

Yes, the credit market has tightened its stranglehold on funds, and yes, the financial markets are hurting and under tremendous stress, but people need a place to live and more and more of them are losing their homes and seeking rental arrangements in this time of soaring rents, energy costs and food costs. Not a conducive environment for homeownership to say the least.

In any case, these latest interest rate adjustments are good news for people who can rightfully qualify for home mortgages these days — particularly investors looking to pick up some good bargains in local real estate markets around the country where less fortunate folk have already lost their homes to foreclosure.

Arguably the most influential television news magazine, 60 Minutes, last night spent more than 15 minutes — an eternity in television — focusing on the so-called Subprime Meltdown. The town they chose to use as a backdrop not surprisingly was Stockton, Calif., which ranked No. 1 in terms of nationwide metro foreclosure rates in both the third quarter and November, according to RealtyTrac.

Much of the 60 Minutes piece stuck with the standard storyline: greedy lenders offered piles of money to anyone who could fog a mirror without really caring if the loan could or would be repaid. That's because the lenders could easily turn around and sell the loans to greedy Wall Street firms who wrapped up the loans in pretty packages and sold them to investors.

However, to their credit, the producers of the piece also included one contributing factor to the unfolding debacle that is not emphasized much in the media: the greed of the homeowners and investors who took advantage of these loans, and the ability of many of those people to walk away from the properties without feeling much immediate pain in their pocketbooks. That's because many of these buyers took out 100 percent financing, so the only money they've shelled out for the property is the monthly mortgage payments — which of course they have stopped paying if they are now in foreclosure. View video.

RealtyTrac will be releasing its December, fourth-quarter and year-end numbers tomorrow morning, and we'll have the full details posted on this blog immediately when they are released (5 a.m. EST, 2 a.m. PST). But for now, here's a little taste of what to expect from Stockton. Below is a map showing fourth-quarter foreclosure filings in the area, broken down by type of filing. We'd like to hear from folks in and around Stockton about whether this represents what they're seeing in the area. And if you'd like a similar map of your area, submit your request via comment and we'll try to provide it for you.

Will the Federal Reserve’s rate cut revive the housing market and stem foreclosures?

Don’t count on it.

The Fed’s interest rate cut is largely symbolic. It makes more funds available to depository institutions — old-fashioned banks — but old-fashioned banks aren’t where the crisis is centered. The Fed’s move will do little for what ails the U.S. economy: Falling home prices, tighter lending standards, rising foreclosures and the ever-growing number of unsold houses on the market.

Nor will President George W. Bush’s $150 billion economic stimulus plan prevent Americans from losing their dream of homeownership to foreclosure. The Fed’s move will spark an avalanche of refinancing for homeowners with good credit. But that won’t necessarily translate into lower mortgage costs for some 2 million Americans with risky subprime home loans with rates that are scheduled to adjust sharply higher over the next year. Many subprime borrowers have mortgages larger than what the properties are worth, ruling out the possibility of refinancing from an adjustable rate loan into a fixed mortgage rate.

For the economy to rebound, home values have to return to historic norms. Slowly, home prices are beginning to fall back to more reasonable levels. Over the last year, home prices in the U.S. have fallen by about 6 percent on average, according to the Standard & Poor’s/Case-Shiller index of housing prices, which measures the value of homes in 20 cities.

So, expect a rising tide of foreclosures to continue to add inventory to an already over-saturated housing market. A growing inventory of unsold houses, in turn, will pull down home values, dragging more homeowners into foreclosures as prices drop. Spooked buyers, waiting for the housing market to bottom out, will nervously wait on the sidelines — further depressing prices.

For foreclosure investors and homebuyers this year could be a great opportunity to buy at bargain prices.

In what may end up being a precedent-setting test case, the Star Tribune is reporting that a northern Minneapolis neighborhood is suing CitiMortgage over a foreclosed property that has remained vacant, alleging that the deteriorating state of the property is bringing down their property values.

The lawsuit, filed by the non-profit Foreclosure Relief Law Project, alleges “negligent and improvident lending practices” were used to finance the purchase of the property on 31st Avenue N. Located in what the Star Tribune calls the “epicenter of the Twin Cities foreclosure crisis,” the empty two-story house has garnered numerous 911 calls to police and fire departments, and has been tagged for un-mowed grass, weeds and rubbish.

The neighborhood has attempted to contact the lender but to no avail. Prentiss Cox, a law professor at the University of Minnesota, told the Star Tribune that one of the biggest initial hurdles the lawsuit faces is establishing that the neighborhood “has standing to sue as an entity harmed by the mortgage deal.”

The cities of Baltimore and Cleveland have recently sued national lenders to recover millions of dollars lost due to increased foreclosure activity from the deceptive lending practices of the recent past.

RealtyTrac will continue to follow this story as it progresses through the legal system. Stay tuned!

The National Association of Realtors today reported a 1.4 percent drop in U.S. median home prices for 2007, from $221,900 in 2006 to $218,900 in 2007. It was the first drop in national home prices in the 40 years that NAR has been surveying median home prices, according to MarketWatch.

“Although no hard data are available, most economists believe median home prices hadn't fallen since the Great Depression of the 1930s,” according to the MarketWatch story.

In its press release announcing the December numbers and 2007 numbers, NAR said home prices slowing the most in higher cost markets created a “downward distortion to the national median.”

And despite a 22 percent year-over-year drop in existing home sales in December, in the lead sentence of its press release, NAR touted “total sales in 2007 at the fifth highest on record.”

Home prices are closely tied to foreclosure activity (see graph), so this news from the industry bastion of optimism would indicate that foreclosures will continue at a high level into 2008. As home prices drop, homeowners in financial distress lose equity leverage to sell or refinance their homes to avoid foreclosure.

And at the risk of sounding like I’ve put NAR’s rose-colored glasses on, all this bad news for the market could be good news for contrarians — homebuyers who want to buy low and are willing to see their equity diminish in the short-term but come out way ahead in the long term, or investors who are able to buy properties low enough to either still flip for a profit (despite the sluggish market) or at least cash flow as rentals.  

As more families around the nation come face to face with the daily realities of economic distress, and the possibility of being foreclosed and evicted from their home lingers overhead, family pets are increasingly becoming victims without a voice.

An article in the Chicago Tribune addresses how while some Chicago homeowners losing their homes to foreclosure are turning their pets into local animal shelters, in the most inhumane and disgusting cases people are vacating their homes and leaving their pets to starve, either too embarrassed to admit they are in foreclosure, or figuring the animals will be found and taken care of. In either case the scenario has turned tragic for dogs, cats, birds, horses and other animals.

“Abandoning pets for any reason, is not only irresponsible — it is illegal,” said Stephanie Shain, director of outreach for companion animals at The Humane Society of the United States, in a statement released by the organization early this month.

The HSUS press release offers good, responsible alternatives including foster care for animals.

Being forced to move into a rental property that does not accept pets, or not being able to afford to live in one that does, is no excuse for leaving pets — which many people consider to be another member of the family.

There is help available. All it takes is a phone call or a search on the Internet for solutions. If you’re looking at a situation like this, use those tools and get help. Foreclosure effects EVERYONE in the family — human and otherwise.

Check the latest newscast and it looks like the rest of the world’s financial markets are at least spooked by the prospect that it may happen. Yet, Ben Bernanke and his colleagues at the Federal Open Market Committee won’t say it (not in their official statements at least). Maybe they save it for so much office water cooler gossip, or behind closed door discussion with “W” at the White House.

Still, the Fed refuses to give into the concept that we are very likely headed for a dive into a RECESSION!!!

In a move that has not been seen in decades, the FOMC on Monday decided to make a rate cut ahead of its regularly scheduled meeting, taking the federal funds rate down 75 basis points to 3.5 percent. And the committee may follow it up with another rate cut next week during its regular meeting as well.

The FFR is the short term interest rate banks charge each other overnight to borrow money. These cuts could end up impacting consumers in the wallet in the form of lower mortgage rates (the upside), as well as higher credit cards rates, and lower interest rates on savings accounts (some of the downsides).

The question is: is this latest cut, which wasn’t expected by most people until the FOMC’s next meeting, more of a way to stem the severe bear market trends on Wall Street? Or was it more of a reaction to the fact that many financial experts don’t believe Mr. Bush’s $145 billion economic stimulus package announced a few days ago will do anything to pull us up by our bootstraps — allowing the Fed to save face while not admitting that a recession is almost here (if not here already by some accounts)?

In its statement the Fed admits that the housing “contraction” is deepening and labor markets are softening. If last month’s employment numbers are any indication, along with companies like Yahoo! announcing its plans to lay off hundreds of employees in the near future, we are getting dangerously close to compiling all of the factors that led to the recession of the early 1990s. High foreclosures, job losses, an upward trend in bankruptcy filings. The only factor from that time we haven’t seen is high interest rates — at least not yet anyway.

We’ll have to wait until next week to see if any of the economic stimulus proposals are really going to help homeowners either in foreclosure or on the cusp of going into foreclosure. In the meantime, hold onto your hats. We’re in for a bumpy ride!

With foreclosures helping to push the economy to the brink of recession, President George W. Bush unveiled a $145 billion economic stimulus plan today that includes tax relief for individuals and tax incentives for businesses. President Bush, acknowledging the risk of recession, embraced a sweeping tax relief plan to give the economy a “shot in the arm.”

President Bush didn’t reveal specific components of the plan, but The Wall Street Journal claims that it includes tax relief for individuals — probably to come in the form of one-time $800 rebate for individuals and $1,600 for households. Moreover, the plan could include tax breaks for businesses, including small companies, to make new and major investments this year.

“We’re in the midst of a challenging period, and I know Americans are concerned about our economic future,” said Bush in a prepared statement.

But as the shadow of recession spreads across the country, views are mixed on whether an economic stimulus plan will avoid a recession.

Do you think a recession is coming (or already here)? Will foreclosures drive the economy into a recession?

There's been a lot of buzz about government-sponsored initiatives to help save homeowners from the prospect of looming foreclosure. Unfortunately, the initiatives have proven to offer more hype than hope; at last count, according to CNBC's Diana Olick, the FHA Secure program had managed to write between 299 and 600 loans. In a quarter when RealtyTrac reported that over 600,000 foreclosure filings were issued, that doesn't even qualify as a very small drop in a very large bucket.

Meanwhile, the question is constantly asked: Are the lenders doing anything to help solve the problem? And Countrywide, largely believed to be the single biggest issuer of the dreaded sub-prime ARM loans, has been the press's favorite target. Which makes today's press release from the once high-flying company very interesting.

According to the release, Countrywide has re-worked nearly 81,000 loans in 2007, with over 61% of these loans being modified (banker-speak for "we changed the terms of the loan so that the homeowner could afford the payments"). Now I know that press releases need to be viewed for what they are, and I'm not suggesting that we erect statues of Angelo Mozilo in town squares across the country. But for people yearning for substantive results instead of politically-pleasing platitudes, 81,000 seems to be a lot more attractive a number than 600.

What might be a really interesting undertaking would be for the lenders and loan servicers who are having some success in home retention activities to compare notes and share some of the tactics that are working best. The problem we're facing was created in large part -although not exclusively - by the mortgage industry itself; the most likely solutions - working solutions - will probably come from this group as well.

If anyone knows of other lenders having success in helping homeowners stay in their homes, I'd love to hear about it.

You may not know who John Paulson is, but you soon will.

Last year, Paulson made $3 billion betting on foreclosures. That puts the Wall Street hedge-fund manager among the top 150 richest Americans. In one year, Paulson made more money than The Donald made in a lifetime, according to the Wall Street Journal.

To put Paulson’s payday into perspective, it would take the income of 62,500 Americans earning $48,000 annually to equal the loot he raked in last year.

Paulson made his money the old fashion way — he earned it. During the last housing slump, Paulson was a foreclosure investor, buying two distressed properties; a New York apartment and a large home in the Hampton on Long Island. Later, he joined Bear Stearns as a mergers-and-acquisitions investment banker. By 1994, he started his own hedge fund with $2 million and built it into a $500 million nest egg by 2002.

During the housing boom, Wall Street began repackaging mortgage securities into instruments called collateralized debt obligations, or CDOs, and selling slices of these securities to investors at varying levels of risk. Paulson believed that investors were underestimating the risk of the mortgage market, betting that the CDO market would crash.

In 2006, Paulson started another hedge fund solely to bet against risky mortgages. Meanwhile, Wall Street had started a new trading index to bet for or against subprime mortgages, called the ABX, which reflect the value of a pool of subprime mortgages made over a six month period.

He raised $150 million and bet against the ABX. In July 2006, the ABX index began with a value of 100, but it soon fell to 60 and Paulson’s profits began to pile up. As the more and more subprime mortgage giants tumbled throughout 2007, Paulson’s funds racked up even more gains.

“Mortgage experts were too caught up” in the housing boom,” Paulson told the Wall Street Journal. “I’ve never been involved in a trade that had such unlimited upside with a very limited downside.”

And things are looking even better in 2008 for the doomsday trading titan as real estate prices tumble and foreclosures spread like wildfires. Paulson is a bear when it comes to the housing market, claiming it will take years to recover.

Just goes to show you, for every crisis there are winners and losers.

Do you think Paulson earned his money or do you think it’s just plain luck?

The following video provides an interesting discussion about what parts of the country are hotbeds of foreclosure activity and whether it's a good time to invest in those areas.

Amid fears the economy could be slipping into a recession, President George W. Bush abandoned his usually sunny rhetoric last week and painted a darker picture of the economy’s condition.

“We can’t take growth for granted,” Bush said last week in Chicago, acknowledging that “recent economic indicators have become increasingly mixed.”

With foreclosures rising and home values plunging, Bush is considering a series of economic measures, but it isn’t clear what kind of package would pass Congress in an election year. Speculation is mounting that Bush could unveil a stimulus package for the economy in his annual State of the Union address which he is due to deliver on January 28.

Meanwhile, Federal Reserve Chairman Ben Bernanke said this week that the central bank is not predicting a recession, but sees “slow growth ahead.”

“The Federal Reserve is not currently forecasting a recession,” explained Bernanke, responding to a question asked after his speech. “We are forecasting slow growth.”

Bernanke hinted that more U.S. interest rate cuts may be needed to shore up economy in the face of a prolonged housing slump.

But according to the Wall Street Journal: “the Federal Reserve can’t flip its easy-money switch and immediately end the credit crunch, forestall home foreclosures, and leap tall buildings at a single bound.”

What do you think? Are we headed for a recession? Are we already there? RealtyTrac wants to know.

It didn’t take long from a historical perspective. Just late last year Bank of America infused $2 billion into the coffers of Countrywide Financial to support the floundering lender’s attempt to survive the subprime mortgage mess — which reportedly almost forced the firm into filing for bankruptcy protection earlier this week.

Now with Countrywide’s stock weak and its value depressed, it is being widely reported that Bank of America is paying $4 billion in stock to buy out the company — in which it already had a 16 percent stake in convertible preferred stock after the bailout.

Things were bad enough in 2007 when Countrywide Financial, along with many other mortgage lenders, was pummeled by rising defaults and foreclosures — forcing a slew of lenders to either close down their subprime divisions and lay off employees, or close their doors altogether.

Generally recognized as the nation’s largest lender, as it turns out Countrywide ended 2007 in even worse condition than was imagined. According to various news reports, earlier this week the firm reported that the number of foreclosures and late payments on mortgages it held in December 2007 soared to their highest level in five years.

Wall Street reacted to the news, and the company’s stock continued to plunge, closing Wednesday at $5.12 a share with 164 million shares traded, down dramatically from even just Oct. 5, 2007, when the stock was selling at $20.25 per share with 9.8 million shares traded, according to Yahoo! Finance.

In the meantime, the boards of both Bank of America and Countrywide have approved the buyout, and the deal is now subject to approval by regulators and Countrywide’s shareholders.

Angelo Mozillo, founder and CEO of Calabasas, Calif.-based Countrywide may be set to reap more than $115 million from the deal with Bank of America. What happens to the millions of home loans being serviced in Countrywide’s portfolio is up in the air, however. Are those homeowners going to profit or be hurt by this deal? There’s enough pain to go around already.

So the question remains, as more and more economists and industry analysts start pontificating about whether the U.S. economy is already in a recession (oops I used the “r” word; sorry about that Mr. Bernanke!), how long is it going to take before the Federal Reserve finally admits that the housing/mortgage crisis IS having a major impact on the overall economy. Even now Bernanke and his colleagues at the Federal Open Market Committee are still denying it.

Ask the thousands of people losing their homes to foreclosure every month how they feel about their economic outlook for the near future. Somewhere down the line it has to translate into less consumer spending and a major slowdown in economic activity nationwide.

While some may disagree whether foreclosures beget slowing home price appreciation or vice versa (it's probably both), there's no doubt that the two are closely related. Take a look at this chart based on RealtyTrac's foreclosure statistics and the Office of Federal Housing Enterprise Oversight's House Price Index.

It seems like Treasury Secretary Henry Paulson has been spending the new year defending his boss’ “Hope Now” plan to ease the pain of foreclosure and to give the U.S. economy the boost it needs to sustain itself.

So far this week Paulson made a speech in New York on Monday defending the president’s Hope Now alliance which has been together a mere three months. In the process the secretary justified the need for the industry coalition, while calling on Congress to expedite legislation to reform the Federal Housing Administration loan program.

Then, appearing on CNBC Tuesday, the secretary revealed that the Bush Administration is exploring the possibility of expanding the scope of the Hope Now program beyond freezing adjustable rate mortgages for five years for only subprime borrowers to include borrowers with loans at prime rates, according to a report by the Associated Press.

“The housing downturn is the biggest risk to the economy,” Paulson said during an interview on the CNBC show Squawk Box. “We have some programs I think will be relatively effective. There’s no silver bullet. Nothing we can do to let us avoid the problem that is implicit in this. We had a number of years of unsustainable growth in housing prices.”

According to CNN Money, during his speech on Monday Paulson explained the administration’s goals in reforming the FHA program to include lowering down-payment requirements and increasing the cap on loans qualifying to be FHA insured.

The Administration is also calling on Congress to pass legislation to take greater oversight over Fannie Mae and Freddie Mac, the two corporations that purchase mortgages on the secondary market. The legislation seeks to increase the conforming loan maximum for Fannie and Freddie to make it easier and less costly for borrowers in higher-priced parts of the country to get new mortgages or refinance their existing mortgages.

The current federal maximum on “conforming loans” for Fannie and Freddie is $417,000.

The American Dialect Society has chosen subprime as the word of the year for 2007, reflecting a “preoccupation of the press and public for the past year with the deepening mortgage crisis.” The society defines subprime as “an adjective used to describe a risky or less than ideal loan, mortgage or investment.”

The preoccupation with the subprime loan fallout also prompted the society to create a new category for its 18^th annual words-of-the-year vote: real estate words. Other real estate words nominated for voting were “exploding ARM,” “liar’s loan” and “NINJA” (No Income, No Job or Assets).

Words from other categories that received votes for word of the year included “green,” “Facebook,” “waterboarding,” and “Googlegänger,” a person with your name who shows up when you Google yourself.

We’re predicting that the 2008 word of the year will begin with an “r.” If the dip in foreclosure activity in November is indicative of the trend in 2008, then it could be “recovery.” But if another wave of defaults and bank repossessions hits, as many are expecting, the word could be “REO” or something even more ominous.

A state law that took effect Jan. 1 gives Colorado homeowners who enter foreclosure more time to “cure” the loan in foreclosure before the public foreclosure sale.

In the past, Colorado homeowners had 45 to 60 days from the commencement of foreclosure proceedings — initiated by what is called a notice of election and demand — to cure the loan by making all past-due payments along with late charges and other costs. Under the new law, created by H.B. 1387, most homeowners now have 110 to 125 days to cure the loan (owners of agricultural property have 215 to 230 days).

The law also eliminates the 75-day redemption period previously available to homeowners. This redemption period allowed homeowners who had been foreclosed on to buy back their homes after the public foreclosure sale by paying the winning bidder the amount of the winning bid.

“For that reason, about the only way to pull off a redemption is to sell the property, accomplish a miracle refinancing, bag a timely inheritance or win the lottery,” writes attorney Jim Flynn in the Colorado Springs Gazette. “The new law, in recognition of the fact that owner redemptions have been few and far between, has done away this right. As a trade-off, however, the period of time in which a cure can be accomplished has been extended.”

The Colorado Division of Housing told DSNews that it did not think the new law would affect the number of initial foreclosure filings, but would at least give homeowners more time to avoid losing their property at the foreclosure sale. Colorado’s foreclosure rate of one foreclosure filing for every 320 households in November ranked fourth highest among the states, according to RealtyTrac.

The longer upfront time to cure also gives real estate investors more of a chance to work out deals with homeowners in foreclosure who want to sell. And with the federal government removing the tax on forgiven mortgage debt last month, more short sale opportunities may also be available during the pre-foreclosure grace period.

For real estate investors looking for pre-foreclosure bargains, a new federal law could unleash a torrent of short sales as struggling borrowers facing foreclosure unload their over-mortgaged homes to avoid huge tax bills on capital gains.

HR 3648, or the Mortgage Forgiveness Debt Relief Act, signed by President George W. Bush on Dec. 20, helps people whose homes are in foreclosure by canceling taxes on any mortgage debt that has been forgiven by their lender. The government previously viewed the difference between the debt and the value of the home as taxable “income.” Now it does not.

The tax change, says investor and author Thomas J. Lucier, means more struggling borrowers will consider selling their homes to investors through short sales. A short sale is a pre-foreclosure sale in which the mortgage lender agrees to accept less than what they are owed on the property.

“It’s going to change everything,” said Lucier, a Tampa, Fla., investor and author of the Pre-Foreclosure Property Investor’s Kit. “Since most people in foreclosure today have zero equity in their homes, more homeowners will be willing to strike a deal with investors.”

Lucier said that with no “phantom income” tax looming in their future, struggling homeowners may be more willing to pursue a short sale for their home rather than await foreclosure. Investors could potentially use this information to their advantage when negotiating with sellers in order to pursue a short sale with the bank and ultimately purchase the property for a lower price.

The primary intent of HR 3648 is to assist homeowners who are facing foreclosure. When a homeowner opts for a short sale, they are often “forgiven” the difference between the sale price of the property and the balance on their mortgage, known as the deficiency. In the past, the lender reported the forgiven deficiency as 1099 income that was taxed, adding a greater financial burden onto an already struggling taxpayer. HR 3648 excludes this phantom income from the sellers’ gross income, exempting them from taxation of their forgiven debts on principal residences.

If a person, for example, owes $200,000 on a mortgage, and the borrower and the bank agree to sell the house for $150,000, the $50,000 debt forgiven by the lender will not be taxed. For the next three years, the IRS won’t count as income debt forgiven by lenders when troubled borrowers negotiate short sales or work-outs on their primary residence that involve forgiveness of part of their debt.

“We are entering uncharted waters,” claims Lucier, a 25-year veteran real estate investor and pre-foreclosure expert. “I’ve never seen the real estate market so bad.”