Do you own a second home or investment property in a vacation spot?  Don't expect to be able to sell it any time soon.  Vacation markets all around the country are seeing prices drop as the real estate bubble deflates.

David Olsen of Wholesale Access (whose clients look like a who's who of mortgage lenders), reports that 40% of all homes being bought are being purchased by either investors or as vacation homes.  That's who is artificially driving up the prices we are seeing in the market. 

Olsen reports that in 2005, 28% of homes were purchased by investors and 12% were bought as vacation homes.  Vacation home prices shot up in the past five years and are now deflating.  One example Olsen gives is near Sarasota, Florida, where homes bought for $140K five years ago, sold for between $700K and $800K last year.  This year buyers are accepting $500K just to get out before the bubble burst.

Scenarios like this one are happening all over the country in vacation spots.  Mark Zandi of economy.com predicts that the first to be hard hit will be California, Florida and the DC market. 

If you're thinking of buying a vacation home now, don't.  If you have one and can get out with a decent profit, it's probably a good time to do it.

ACC Capital Holdings sent shock waves through the mortgage industry when it announced yesterday it was closing 229 of its Ameriquest retail branches and laying off 3,800 of its 11,000 workforce.  Ameriquest is one of the largest sub prime lenders focusing on poor people and people with bad credit ratings.  ACC wants to cut costs and stay competitive in a mortgage industry that's slowing down as interest rates rise and home sales slow.

Ameriquest settled an investigation in January started by investigators in 49 states.  The heavy-handed sales tactics of some of its agents was questioned.  Ameriquest agreed to pay $325 million and change its business practices to settle with the states.

Obviously the investigation hurt more than ACC cares to admit.  In addition to all the negative press, the impact of the declining number of new applications in the mortgage market led ACC to this retrenchment decision.

Ameriquest is not the first to cut back.  Washington Mutual, Aames Investment Corp. and ECC Capital Corp cut their staff during the past few months.

Freddie Mac bought $10.09 billion worth of mortgages last month, which increased its portfolio to $715.4 billion for an annualized growth rate of 17.2%, the Associated Press reports.  The last time Freddie Mac got this hungry for mortgages was in November of last year.

Freddie Mac spokesman Michael Cosgrove told the AP that the federally chartered company wanted to take advantage of a "modest widening of mortgage debt spreads." Freddie Mac's main purpose in life is to keep the mortgage market liquid by buying mortgages from banks to free up more money for home loans.  Freddie Mac keeps some of the loans it buys and repackages others into mortgage securities to be sold.

Freeing up some money for new home loans is a good thing right now, since according to reports earlier this week from the Commerce Department and the National Association of Realtors home sales are climbing.  New mortgage applications should shoot up soon too.

New homes sales surprised everyone in March.  According to Bloomberg, new homes sales took the biggest jump in almost 12 years.  New purchases jumped 13.8% - the most since April 1993.  The annual rate is now tracking at 1.213 million up from 1.066 million in February, according to the Commerce Department.  Sales of resales jumped by a much smaller percentage - 0.3% in March to annual rate of 6.93 according to the National Association of Realtors yesterday.

That should be good news to mortgage lenders as well.  No doubt most of these home buyers will need mortgages. 

The median price of new home sales did drop slightly by 2.2 percent to $224,200 over the past 12 months, which was the first time that happened since December 2003.  The drop reflects the fact that more homes were bought in the price range of $150,000 to $299,999.  There were fewer sales of higher-priced homes compared to March 2005.

Democratic Gubernatorial Candidate Eliot Spitzer promised to direct the State of New York Mortgage Authority to provide "reverse mortgages" for New York seniors.  The mortgage authority serves primarily moderate- and low-income home buyers.  Spitzer wants seniors to be able to tap into their home equity to pay for home repairs and health costs.

According to wire reports, Spitzer said while announcing his proposal before the New York StateWide Senior Action Council, "Most seniors want to live in their homes and communities as long as they possibly can.  Yet too many seniors have little choice but to opt for institutional care they do not want, and do not need ... our government has for too long avoided being creative and innovative in developing programs for our seniors."

Reverse mortgages can be an excellent alternative that allows seniors to stay in their homes.  But, do seek legal advice before signing any reverse mortgage contract and be certain you understand the implications both for yourself and your heirs.

You've probably not heard the term upside-down home loan yet, but I predict that you will be hearing about it soon.  The growth of nontraditional interest-only mortgages and payment-option ARMs will ultimately drive consumers down the road to the upside-down home loan.

Nontraditional interest-only mortgages more than doubled in popularity in just two years. San Francisco data firm Loan Performance says interest-only loans accounted for 26.4% of U.S. mortgages last year, up from 10.3% in 2003.

Another very risky mortgage type - the payment-option adjustable rate mortgage (ARM) - allows borrowers to pay less than the accrued interest with the unpaid interest added to the loan principal.  With these mortgages a homeowner could end up owing more than the house is worth very quickly.  Loan Performance reports the popularity of these types of loans jumped from 0.4% in 2003 to 10.4% last year.

Based on Loan Performance statistics, these exotic loans were used by 36.8% of the consumers who either bought a home or refinanced one last year.  Yikes!  I didn't realize the numbers had jumped that much in just two years.

Since these loans are relatively new to the market and consumers have at least five years before being socked with huge payment hikes, the real danger won't be seen by consumers for a few years.  I predict that by 2010 many of the consumers who used these nontraditional mortgages will be facing foreclosure with the amount due on the mortgage higher than their homes are worth.  You've heard of the upside-down car loan.  We'll soon be hearing about the upside-down home loan.

As housing sales slow, fewer people look for new mortgages.  Bank profits took their first hit in this slowing market last quarter.  Citigroup, J.P. Morgan Chase, Wells Fargo and Wachovia all reported falling mortgage sales.

Citigroup said sales declined in its U.S. consumer lending business because of reduced mortgage servicing revenues and the reduction in gains on the sale of real estate loans.  CFO Sallie Krawcheck told analysts that the bank is selling off its fixed-rate mortgages and holding onto variable rate mortgages.

J.P. Morgan Chase reported its net income from mortgage banking dropped from $139 million to $39 million.

Wells Fargo reported its home-mortgage revenue dropped to $853 million from $1.5 billion.

Wachovia reported 14% revenue growth in its General Bank unit, but said there was slowing growth in its home equity lines.

The Mortgage Bankers Association (MBA) predicts a 7% to 8% drop in home sales this year.  It also believes new mortgages and refinancings could drop 14%.  MBA reported a decrease in mortgage applications of 1.7% for the week ended April 14 compared to the prior week.

Comptroller of the Currency John C. Dugan wants mortgage lenders to warn consumers about the risks they take when using mortgages with payments that start off artificially low and jump dramatically 5 to 10 years down the road. 

In a speech before an economic conference hosted by the Greenberg Institute (a fair-lending advocacy group), Dugan said regulators don't plan to stop the marketing of these exotic mortgages, but want to strengthen disclosure rules and approval requirements to be sure borrowers understand and will be able to meet their lending obligations. 

Dugan warned that with some nontraditional mortgages payments can double after five years.  If the borrower can't make the higher payments, he or she could risk losing his or her home.  Lenders also face risks - they could suffer huge losses if they must foreclose on many of these loans.

The popularity of interest-only mortgages continues to increase as interest rates rise, but don't jump too quickly into this new mortgage scheme.  Financial services firm UBS AG analyzed loans being packaged into mortgage-backed securities and found that the volume of interest-only loans jumped from only $7.9 billion in 2004 to $38 billion last year. They now account for 8% of all new residential mortgages.

While the interest-only mortgage does look attractive because of the initial lower payments, your payments will jump dramatically when the interest-only period ends in 10 to 15 years. For example, a standard $300,000 30-year fixed rate loan at an interest of 6.62% (this week's average) would have a principal and interest payment of $1,920.  The interest-only loan rate is a bit higher at 6.75%, but the payment is much lower at $1,687.  That's because you won't be paying anything toward the principal of the loan initially.

Those lower payments may sound great if you're trying to buy a larger home, but don't get caught up in the hype of the interest-only loan.  Usually the interest-only period lasts for just 10 years.  If you don't sell or refinance before that time, your payments could jump by 35% to $2,281, when the interest-only period ends.  You will still have to pay the principal off in 30 years, but only have 20 years in which to do it.

If you do need to sell the home in the first ten years,  you'd better hope your home has appreciated enough to cover the costs of the sale, since you haven't paid down any of the principal of the loan.  If not, you may have to come up with cash to close the loan in order to pay closing and sales (real estate commissions) costs.

As interest rates rise, new mortgage applications continue to fall.  That's no big surprise.  Consumers quickly become uneasy about higher interest rates. 

The Mortgage Bankers Association reported that mortgage applications to buy a home fell for a second week in a row by 2.5%.  Refinance applications fell 0.4% to the second lowest level in a year.

The average rate for a 30-year fixed-rate mortgage hit its highest level in almost 4 years, since the week ended June 7, 2002.  The rate climbed to 6.56%, up from 6.5% a week earlier.

The good news for the economy is that as housing cools it will ease economic growth in the second quarter, which should slow inflation.  That ultimately will make it easier for the Fed to halt its drive to raise interest rates. 

Freddie Mac, the king of home mortgages, faced record breaking news yesterday - but it's not the type of record any company wants to break.  Freddie Mac agreed to pay $3.8 million in civil penalties to the Federal Election Commission (FEC) - the largest fine in history. 

The FEC accused Freddie Mac of breaking campaign finance rules by improperly encouraging its corporate executives to donate money to candidates, as well as to sponsor fund raisers for Congressman that served on key Congressional committees. 

Freddie Mac is a federally charted corporation whose primary mission is to promote home ownership.  Since it is federally chartered, laws and regulations are in place to prohibit Freddie Mac from this type of campaign fund-raising activity.  Most corporations can and do assist Congressmen and Congresswomen with their fund raising.

Freddie Mac did not concede any wrongdoing, but it also did not contest the FEC ruling.

Many homeowners who took advantage of low adjustable rate mortgages in the last couple of years should get ready for a major shock to their pocketbooks.  The Mortgage Bankers Association estimates that people holding about $330 billion worth of ARMs face interest rate adjustment in 2006 and $1 trillion worth of ARM holders will be impacted by the end of 2007.

What does that mean for you?  If you hold an ARM that you got when interest rates were 4%, the ARM is likely to increase by 2% to 6%.  Your monthly mortgage principal and interest payment would increase by $245 from $955 to $1,200.  Ouch.  That would hurt anyone’s budget.  If your property taxes increase as well, you’ll be hit by an even greater increase on your mortgage payment.

Unfortunately, if you’re in this boat, there’s not much you can do to get out.  Fixed rate mortgages averaged 6.49% at the end of last week.  If you do hold an ARM, get ready for the rocky road now and start cutting your other monthly expenses before you get hit with the payment change.