In Merced, 53.4% of sales were home foreclosures and 4.8% were California short sales. In nearby Stockton, 51.1% were foreclosures and 5.4% were short sales.  “As more markets turn down and markets that were already down go deeper, the pace at which value is being erased from the U.S. housing stock is rapidly increasing,” said Stan Humphries, Zillow’s vice president in charge of data and analytics.   To give you ideas of just how fast home values are depreciating, a recent Zillow home value report indicated that “more home value was wiped out in the 4^th quarter of 2008 than was eliminated in all of 2007,” Humphries said.

About $3.3 trillion in home equity was erased in 2008, with $1.4 trillion of that wipeout coming in the fourth quarter alone, according to Humphries. More than $6 trillion in home equity has disappeared since home values hit their peak in 2005.  These home equity losses have buried many homeowners underwater, where they increase significantly for home loan default. Unfortunately these struggling homeowners do not have the option of cash out refinancing or taking out a home equity loan or second mortgage to raise capital needed to pay medical bills, credit cards and mortgage payments.  Bankruptcy, debt settlement and consumer credit counseling figures continue to soar.

A according to Zillow, 17.6% of all homes are now underwater in the United States.  Of those under-water homes, 41.2% of these mortgage loans came from homes purchased in the past 5 years.  The worst value stricken cities are located in the where the sun shines bright. In Las Vegas, 61.4% of all residential properties are underwater.  Because so many houses are worth less than their home loan balances, an increasing number have to be sold short. But short sale transactions still take a long time to close, because most lenders are unable to keep up with the rising demand of loan modification requests.   Mortgage lenders may not approve short sales for months. The deals cannot go forward without their approval, because the banks must agree to forgive the difference between what they are owed and what the sale brings in.   As the time it takes to arrange short sales lengthens, they become harder to complete. 

Les Christie wrote about one example of how home sales declines can also kill a short sale occurred recently in Phoenix. Curtis Johnson, a real estate broker there, worked with a health care worker whose hours were being cut and who could no longer afford her mortgage loan. She fell behind on her mortgage payments and decided to sell the home.  Johnson was able to find a home buyer willing to pay $183,000 and got a FHA loan approved by a lender. The owner confidently moved out, got a new place and started a new life. But the lender folded and the mortgage went to a new servicer, who took six weeks to approve the deal.  “Unfortunately, the buyers who were approved were no longer interested because the real estate market declined so rapidly,” Johnson said. “They wrote a new home sale offer, which was significantly lower than the original offer but it was time to punt and start over.”  See original article >

Sheila Bair, chairman of the Federal Deposit Insurance Corp. (FDIC), said the plan “falls short of what is needed to achieve wide-scale modifications of distressed mortgages.”

With the government spending billions to aid distressed banks, “we must also devote some of that money to fixing the front-end problem: too many unaffordable home mortgage loans,” Bair said in a statement.

Democrats on Capitol Hill aren’t satisfied, either. “When the home loan is chopped up into a million pieces and any investor can block a modification from happening, a program like this will only scratch the surface of the mortgage crisis,” said Sen. Charles Schumer, D-N.Y.

Deutsche Bank estimates more than 80 percent of the $1.8 trillion in outstanding troubled loans have been packaged and sold in slices to investors worldwide. Most of those loans won’t likely be helped by the new plan.

The rest are “whole loans,” which are easier to modify because they have only one owner.

The new mortgage assistance plan was announced by the Federal Housing Finance Agency, which seized control of Fannie and Freddie in September and other government and industry officials. It takes effect on December 15, 2008. FHA officials say they hope the new approach will become a model for loan servicing companies that collect mortgage payments and distribute them to investors. These loan companies have been roundly criticized for being slow to respond to a surge in defaults.

A Step in the Right Direction

After more than a year of slow and weak initiatives, there now seems to be a serious effort among major retail banks to get at the heart of the credit crisis: falling U.S. home prices and record foreclosures.

Citigroup said Monday it is halting foreclosures for borrowers who live in their own homes, have decent incomes and stand a good chance of making lowered mortgage payments.

JPMorgan Chase & Co. last month expanded its mortgage loan modification program to an estimated $70 billion in loans, which could aid as many as 400,000 customers. The bank already has modified about $40 billion in home loans, helping 250,000 customers since early 2007.  Bank of America Corp. plans to modify an estimated 400,000 loans held by newly acquired Countrywide Financial Corp. as part of an $8.4 billion legal settlement reached with 11 states in early October.