Government Bails Out Banks But Not Consumers

When it comes to bankruptcy reform, the only type that the politicians and bankers like is changes which make it more difficult, more time consuming, and less efficient for borrowers and homeowners. The point is to push foreclosure victims into a difficult bankruptcy, while the banks themselves get bailed out by these same taxpayers to avoid the same fate.

Over the past year of the housing crisis, with foreclosure rates remaining at historic highs, one of the proposals to fix the problem was allowing bankruptcy judges to reduce the amount that homeowners owed on a first mortgage. This would have made it easier for the borrowers to pay back part of the loan in the event the property value had fallen.

Of course, the fact that this solution makes some sense and is perfectly acceptable in the case of second homes and other types of debt and other types of bankruptcies (Chapter 11, for instance) did not change the banking industry’s opposition to it. Although giant corporate-government bank Citigroup supported the bill, the Senate defeated legislation that would have allowed it.

Homeowners facing foreclosure, according to the politicians, should not be able to enter into a government bankruptcy court and have their mortgage balance reduced. Instead, they should be forced to enter into a government foreclosure relief program to have their mortgage balance reduced. The key difference is how much control the banks have over the reduction.

In most of the government programs to help homeowners qualify for mortgage modifications, the lenders participation in the plan is voluntary. And in practice, the lenders’ participation has been lukewarm at best or nonexistent at worst. Take, for example, the FHA Hope for Homeowners program, which has been given $320,000,000,000 in taxpayer money and has helped one single homeowner.

Thus, the government modification programs have been a disaster because they allow banks to work as hard as they want to help borrowers. The banks, in turn, give homeowners bad deals or fail to negotiate in good faith with borrowers. Instead, they rely on their bailouts and other free money programs to prevent them from having any motivation to assist borrowers in stopping foreclosure.

The banks know that, if homeowners could file bankruptcy and get their mortgages modified, there would be fewer reasons to go to the government for free handouts. Borrowers would be able to file a Chapter 13, have the mortgage balance reduced to the market value of the home, and be able to make payments to the lenders again. This would be a tragedy for the lobbyists and mortgage companies!

One of the objections to the legislation was that it would make mortgages more expensive. But during the real estate boom, mortgages were as expensive as they ever have been. Although this was not in terms of interest rates, once the bubble inflated to astronomical levels, the amount of a loan a borrower needed to take out just to qualify for a mortgage was extraordinarily high.

The Federal Reserve had lowered interest rates to historic lows. Banks reduced lending standards knowing they could get bailed out by the government if anything went wrong. Loans were given to people who could never afford to pay them back, inflating the demand and rising prices even further. Some of these loans reset at high interest rates after a few years on extremely overvalued properties. None of this was a good deal.

And now, the main objection to allowing bankruptcy judges to reduce mortgage balances is that it would make it more expensive to take out a mortgage? How could it be any more expensive than taking out a loan for 250% of its actual value at a teaser rate that would reset to 12% interest in a couple of years? The banks could not make the mortgage market any more expensive if they tried.

Regardless, the banks worked hard to lobby politicians to defeat the legislation, and now the mortgage banking industry is celebrating its victory. But what have they won? Nothing more than ability to force homeowners to keep paying for properties that are overvalued, while the banks themselves line up to receive more and more taxpayer money in order to avoid the same fate of a difficult bankruptcy.

Foreclosures Fall

NEW YORK (CNNMoney.com) — Lenders filed fewer foreclosure notices in May, but the total number of filings was still the third-highest monthly total on record.

One of every 398 households in the United States received some kind of filing, including notices of default, scheduled auctions or bank repossession, during May. That was a decline of 6% from April but an increase of 18% compared with May 2008.

And the ultimate type of foreclosure filing – bank repossessions – increased during the month, according to RealtyTrac CEO James Saccacio.

“While defaults and scheduled foreclosure auctions were both down from the previous month, bank repossessions, or REOs, were up 2%” he said, in a prepared statement. “We expect REO activity to spike in the coming months as foreclosure delays and moratoria implemented by various state laws come to an end.”

But overall, the May statistics underscore what may be a slight improvement. The number of filings trailed off toward the end of the month, according to RealtyTrac spokesman, Rick Sharga.

“We’re still coming through a three-month period like nothing we’ve ever seen before,” he said, “with nearly a million filings in all.”

The month saw big increases of repossessed homes in several states, including Michigan, Arizona, Washington, Nevada, Oregon and New York. In Michigan alone bank repossessions went to 6,246 from 3,560 in April, a 75% increase.

And it could have been worse. Sharga said he’s been hearing anecdotal reports of banks taking homes all the way through the foreclosure process and then suspending further action.

“We hear the servicers are pulling back from the brink,” he said. “They want someone in the house.”

Vacant homes are subject to vandalism and looting and often quickly lose whatever value they have. Thieves crash through plaster walls to get at copper wiring and plumbing or strip aluminum siding from exteriors, in many cases eliminating any chance of salvaging the property.

States of foreclosure

The foreclosure problem is widespread but reaches plague proportions in 10 states; those hardest-hit areas account for 77% of all foreclosure filings. California had more than any other state with with 92,249 – nearly 29% of all U.S. filings.

Florida posted the nation’s second highest number at 58,931, up 50% from May 2008. Other top 10 states were Nevada (17,157), Arizona (16,865), Michigan (13,891), Ohio (11,360), Illinois (10,942), Georgia (10,516), Texas (9,813) and Virginia (5,385).

Nevada had the highest foreclosure rate with one filing for every 64 households. California, with one for every 144, and Florida, with one for every 148, were second and third respectively.

Working through the problem

The foreclosure boom has depressed home prices and that has brought homebuyers back into some markets. In fact, sales volume is much stronger in many states compared with 2008, and affordability has improved to levels not seen in many years.

“In some of the ‘ground-zero’ places, like Stockton, parts of Phoenix, San Diego and some others, buyers are bidding bank-owned homes up, way, way over the the asking prices” said Sharga.

What could slow down this market revival, however, is the recent bump in mortgage interest rates.

Rates for a 30-year, fixed-rate loan have jumped to about 5.5% from about 4.8% five weeks ago. That adds about 12% to monthly mortgage payments, almost as if the house increased that much in price.

If the higher rates cause demand for foreclosures to slacken, the nation could see further addition to its supply of repossessed homes. That could send more home prices plummeting, pushing more mortgage borrowers underwater (owing more than their properties are worth) and closer to foreclosure.

The Outrage Of BPO’s In Real Estate

A new income opportunity has appeared on the horizon recently for down-and-out real estate agents who are in desperate need of income and this has led to one of the biggest scams in the real estate industry today. A broker price opinion (BPO) is ordered by the bank or mortgage lender who is looking at doing a short sale on a property where the borrower is upside-down on their mortgage and they cannot qualify for (or the bank is not prepared to do) a loan modification. The BPO is done by the Realtor for $40 – $60 (almost doesn’t cover their gas and car expenses) and is used as the basis (for the bank) to negotiate with potential new buyers.

These Realtors are obviously not making money selling real estate and are often some of the most inexperienced individuals in their profession trying to make a buck or two. They sometimes are hoping to create a connection with the bank so that the can get their REO listings for themselves, which are really the only deals being closed right now. So from the getgo they are trying to please the bank which results more often than not in the BPO coming in at a much higher price than the real market value of the property.

The Realtor marketing the property for the owner then gets offers based on the real market price , which in almost all cases is much lower than the infamous BPO. They try and negotiate with the bank, get nowhere, there is no short sale, the bank then forecloses on the property, thinking they can get more than the offer. These important financial decisions being based on a $40 BPO done by someone that is inexperienced.

The property value declines even further as the banks don’t maintain the properties at all after the foreclosure or the original owner, angered by the bank’s posture regarding the short sale, strips the property of all it appliances, the pool pump, the ceiling fans, the water heater and even sometimes the air conditioning unit and wall cabinets, so the house is no longer marketable as no lender will finance properties in this condition.

Can you blame the homeowner? Maybe, but they are going to have to fight for the next 10 years with a foreclosure on their record even though the bank got offers at the real market price. A price calculated by a very experienced professional – the buyer’s Realtor – and often backed up by a real appraisal performed again by a professional appraiser at a cost of around $350. But the bank blindly looks at the $40 BPO!

Here is an example of how such a transaction looks financially:

BPO Value $200,000
Buyer’s Realtor Estimate $165,000 – $175,000
Highest offer submitted $172,000
REO Price 6 months later $125,000
REO sale $115,000

So the bank gets $57,000 less than the original offer six months later. They have the costs of foreclosure (at least $15,000) and then the upkeep of the home they now own (HOA fees, taxes, general maintenance etc.). So all in all they lose approximately $75,000 compared to the original offer all based upon their faith in the unprofessional BPO. Everyone I know in the industry, Realtors, loan officers and appraisers,  are all shaking their heads in disbelief. They are also losing money as the deals they are working with fall through and  don’t pay them a dime but they still have invested their costs.

And yet the government is pumping billions of dollars into these financial institutions, which is coming from the taxpayers who are in turn being screwed and put out on the street by the same banks. HELLO, ANYONE HOME? To make things worse the REO homes that are now in terrible shape are being bought for cash from wealthy investors and not the poor homeowners who now have a foreclosure on their record and cannot get a loan (from the same bank that just screwed them!).

Some of my more savvy clients are looking at some form of recourse against the bank that hardballed them on the sale of their property based upon a $40 BPO. In my view, the government should impose a substantial fine on the banks, which can be based on the difference between the highest original offer the bank chose to decline and the REO price the bank finally receives. At least, the bank should be forced to remove the foreclosure filing with the credit agencies and give some sort of restitution to the original homeowner.

Or the owners of the banks should fire the management that manage this mess and put in people that at least have some semblance of a brain in their head. Oh, yes, but the bank owners are now the government. So should we fire the government?

Author – Colin Buckingham
Global Internet Entrepreneur

Wells Fargo Delivers Surprise $3 Billion Profit

NEW YORK (CNNMoney.com) — Wells Fargo delivered a much-needed bit of good news for the banking sector Thursday, saying it expected to book a better-than-expected profit of approximately $3 billion in the most recent quarter.

The announcement not only sent Wells Fargo stock 25% higher in midday trading, but boosted shares of many other big banks as investors bet that Wells’ peers may also post results that exceed Wall Street’s estimates. Bank of America , which will report its results on April 20, gained 30%.

Originally slated to deliver its results later this month, the San Francisco-based Wells Fargo issued guidance for the first quarter, saying it expected to report a record profit of about $3 billion, or 55 cents per common share. Expectations are for the company to book a profit of 28 cents a share, according to Thomson Reuters.

“Our business momentum is strong, and we expect our operating margins to remain at the top of our peer group,” Wells Fargo CEO John Stumpf said in a statement.

Wells Fargo attributed the strong results to healthy lending margins driven by lower interest rates, fewer additional costs related to its purchase of Wachovia and a boom in mortgage activity.

Mortgage applications surged during the quarter, with the company reporting $83 billion in applications during the month of March alone.

Wells Fargo also said Thursday its recent purchase of Wachovia was exceeding expectations. The company announced plans to acquire Wachovia, which was on the verge of collapse during the height of the credit crisis, last October.

Since the deal completion’s late last year, customers that had been concerned about Wachovia’s health have been returning, Wells Fargo said, which helped drive loan and deposit growth in the current quarter .Wells Fargo said that Wachovia accounted for 40% of combined revenue in the quarter.

Until now, there have been persistent fears that further deterioration across Wachovia’s shaky loan portfolio would mean more writedowns for Wells Fargo.

But top executives at the firm reiterated their confidence in the purchase, which has drastically expanded Wells’ footprint in both the Southeast and the Mid-Atlantic.

“Wachovia’s outstanding franchise has proven to be everything we thought it would be when we announced this acquisition,” said Stumpf.

Just a quarter ago, Wells Fargo swung to a $2.6 billion loss, hurt by a charge related to the Wachovia purchase and rising credit costs.

A repeat performance?

With Wells Fargo giving such an upbeat forecast, the market’s attention now turns to the nation’s remaining big banks.

Next week, a trio of the nation’s largest banks will report their numbers starting with Goldman Sachs. Following closely behind are JPMorgan Chase and Citigroup, which are expected to deliver their results next Thursday and Friday respectively.

Analysts expect most of the big banks to report a profit in the quarter, with the notable exception of Citigroup.

A modest uptick in capital markets activity as well as a surge in mortgage refinancings over the last three months has helped turn the tide, analysts said.

The increased mortgage activity helped Wells Fargo this quarter, and many industry observers believe that other big mortgage lenders and servicers will also benefit from the latest refi boom.

“That should roll through to the BofA’s, JPMorgan Chase’s and Citi’s of the world,” said Robert Maneri, managing director at Victory Capital Management, whose firm owns shares of all three banks.

Top executives at all three firms made headlines last month after indicating that they were profitable during the first two months of the year.

A numbers game

But some analysts are still skeptical. Earlier this week, bank stocks swooned after Calyon Securities analyst Mike Mayo warned that many of the nation’s leading banks have written down the loans on their books by only a fractional amount, and added that loan-loss ratios would exceed peak levels from the Great Depression.

There are also fears that last week’s move by the Financial Accounting Standards Board to relax the rules that banks rely on to value some of their assets could allow lenders to take greater liberties with their results.

Others worry that banks may try and postpone building their loan loss provisions this quarter in an attempt to make their results appear that much more rosy for regulators who are currently “stress testing” the books of the nation’s largest banks in an effort to determine if they may need to raise additional capital.

“Banks are seeking to avoid having to raise additional common equity and reporting strong first quarter earnings could help them in that effort,” said Ed Najarian, head of bank stock research for ISI Group.

At Wells Fargo, the company set aside just $1.3 billion for future loan losses during the quarter, a level that some say doesn’t square with the current economic environment and an unemployment rate of 8.5%.

“The low level of net credit losses and low level of loan loss provisions will prove unsustainable,” Najarian said.

Nevertheless, shares across the banking sector were sharply higher in Thursday afternoon trading. JPMorgan Chase climbed 12% while Citigroup was up 10%

Foreclosures Spike

NEW YORK (CNNMoney.com) — Lenders have helped an increasing number of mortgage borrowers to get current on payments and stay in their homes, but the tide of foreclosures is still rising.

In February, nearly 250,000 homeowners received either mortgage modifications or repayment plans from their lenders, according to Hope Now, the coalition of lenders, investors and community advocacy groups put together to combat the foreclosure plague.

About 134,000 of the workouts completed were mortgage modifications, which typically lower the interest rate on loans, lengthen mortgage terms or reduce principal owed to make loans more affordable. Modifications are considered more comprehensive and effective than repayment plans, which simply tack the late payments on to the end of the loan but don’t reduce payments.

“The mortgage lending industry is responding to the needs of its customers and offering solutions that are appropriate to the current market and economic conditions,” said Hope Now’s director Faith Schwartz.

But in spite of these efforts, the number of foreclosures started in February rose to 243,000 form 217,000 in January. About 87,000 homes were repossessed by banks during February, a 28% jump from the 68,000 foreclosures completed in January. Since the mortgage meltdown hit in July 2007, 1,395,044 homes have been lost.

February was the second straight month of sharply higher foreclosures; prior to January, the problem appeared to be easing. Foreclosures declined to 69,000 in November from 77,000 in October and then dropped again to 56,000 in December.

But the report could have been much worse, considering the nation’s deteriorating economic picture, Schwartz said. “We’re shedding 650,000 jobs a week,” she said. “But there’s more flexibility [by the lenders]. They’re offering more forbearance in response to job losses.”

The Obama administration’s foreclosure prevention initiative could send mortgage modification numbers higher in the coming months, but it will take time. “We won’t see a spike right away,” said Schwartz. “[Under the program] It takes 90 days to complete a modification. Over the next three months we’ll start to see some pull-through.”

April will be “the month to get all the implementation details done on the new plan so that everything is crystal clear when they start using it,” she added.

Is This A Housing Recovery?

NEW YORK (CNNMoney.com) — Has the housing market finally hit bottom? It’s probably too soon to say — but Wall Street sure seems to think so. The Commerce Department reported Wednesday that new-home sales rose almost 5% last month after hitting their lowest point ever in January. Economists were expecting a decline of about 3% This comes on the heels of two reports showing a better-than-expected gain in existing-home sales and the first increase in construction of new homes since June.

Investors have taken notice. The SPDR S&P Homebuilders (XHB) exchange-traded fund spiked about 8% higher Wednesday morning. The ETF includes several leading homebuilders, as well as companies with strong ties to the housing market like Home Depot (HD, Fortune 500) and Lowe’s (LOW, Fortune 500) and paint maker Sherwin Williams (SHW, Fortune 500).

Over the past two and a half weeks, a period when the entire market has surged, the homebuilders ETF has been one of the big leaders — it is up more than 40% compared to about 20% for the S&P 500. In fact, even though the broader stock market is still down sharply this year, several homebuilding stocks are actually in the black, including D.R. Horton (DHI, Fortune 500), Lennar (LEN, Fortune 500) and Pulte Homes (PHM, Fortune 500).

Now what does all this mean? Are savvy investors declaring that the worst is over for housing and that it’s time to start plowing back into homebuilders? Perhaps. Still, it’s hard to get overly excited about the recent housing data. Investors have to be cautious.

Even though some of the February numbers suggest that the that the credit markets may be finally thawing after the Lehman Brothers collapse-induced freeze, many experts warn that isn’t the same thing as a healthy housing market — especially since home prices continue to fall. In addition, the unemployment rate has risen sharply in the past few months and many economists expect that trend to continue.

So even though mortgage rates have been falling and banks may be more willing to lend now that the Treasury Department has a plan to help them unload some of their most troubled assets, that may not be enough to counter the growing ranks of unemployed who can’t buy under any circumstances. Nonetheless, one fund manager who owns several homebuilder stocks said that even though it’s premature to predict a housing recovery, the group has been beaten down so far that it won’t take a significant real estate upturn for more share-price gains.

“One month does not a trend make. We’re hopefully bouncing along the bottom but happy days are not here again,” said John Buckingham, manager of the Al Frank fund. “Still, many of the stocks have been priced for the Great Depression 2. Lots of homebuilders have been generating cash during the downturn and their balance sheets, believe it or not, are in good shape.”

Buckingham said he’s a little concerned by the sharp recent run-up in the stocks. But he said he still likes shares of several of the larger builders, including MDC Holdings (MDC), Ryland (RYL), D.R. Horton and KB Home (KBH, Fortune 500), for the long-term. At the end of the day, stabilization in the market is what is needed before a recovery. It’s the classic case of learning to crawl before you can walk, let alone run.

Buckingham said that as long as the housing numbers are “getting less worse” that should be treated as encouraging news by investors. He added that even though some may dismiss February’s surprising sales strength as a byproduct of more demand for foreclosed homes, any boost to sales is a good sign.

“Clearly there is interest in homes. Whether it’s in foreclosure or not, there’s still a buyer. That helps put in a floor on prices and could boost confidence,” he said.

Another investor in several housing-related stocks agreed that the housing picture looks less bleak. But he added that investors will need to be patient. Just as the housing market didn’t collapse overnight, a rebound won’t take place quickly either.

“It’s exciting that the numbers are perking up and the government’s efforts to bring mortgage rates down are helping,” said Doug Ober, chairman and CEO of Adams Express (ADX), a closed-end fund that invests mainly in U.S. stocks and owns Ryland, Lowe’s and cabinet and plumbing fixtures maker Masco (MAS, Fortune 500). “But I think that probably the market is a little early on this. This is going to be a recovery that will take several years.”

New Home Sales Rise Unexpectedly

NEW YORK (CNNMoney.com) — Sales of newly constructed homes rose unexpectedly in February, rebounding nearly 5% after sinking to the lowest level on record in January, according to a government report released Wednesday. The U.S. Census Bureau reported that new home sales rose 4.7% to a seasonally adjusted annual rate of 337,000 in February from a revised 322,000 in January. It was the first increase since July, and comes after sales tumbled to an all-time low in the previous month. Economists were expecting a sales rate of 300,000, according to consensus estimates compiled by Briefing.com.

While February purchases were up from January’s record low, the sales rate is still down more than 41% from February 2008, when sales were an estimated 572,000. The report is “generally a good sign,” said Andreas Carbacho-Burgos, an economist at Moody’s Economy.com. “But it’s definitely not enough to say that the housing market is starting to recover,” he said. Carbacho-Burgos noted that new home sales have recorded monthly increases several times over the past few years even as the overall trend in sales declined.

“This is only a single month’s worth of data,” he said. “You need at least three months of increases before you can say the market is recovering.”

The report also showed that the median sales price of new houses sold in February was $200,900, down 18% from $245,300 a year ago. That was the biggest year-over-year decline in history, according to real estate analysts at Weiss Research. The estimated number of new homes for sale at the end of February was a seasonally adjusted 330,000. At the current sales pace, it would take more than a year to sell through that inventory, according to the report. Wednesday’s report was the latest in a series of better-than-expected readings on the housing market. But many analysts remain wary of the prospects for a long-term recovery.

“The worst of the drop in sales is over but a sustained recovery…is a way off still,” wrote Ian Shepherdson, chief U.S. economist at High Frequency Economics, in a research note.

On Monday, the National Association of Realtors said that existing home sales rose 5.1% in February to a seasonally adjusted annual rate of 4.72 million units from a rate of 4.49 million in January. Last week, the Commerce Department reported that initial construction of new homes surged 22% in February to a seasonally adjusted annual rate of 583,000, up from a revised 477,000 in January. It was the first time housing starts increased since June. Meanwhile, a report from the Mortgage Bankers Association showed Wednesday that the number of Americans applying for home loans jumped 30% last week, driven mostly by applications to refinance existing loans

Existing Home Prices Rise 5%

NEW YORK (CNNMoney.com) — Sales of existing homes unexpectedly rose in February, recovering from a sharp drop in the previous month, according to an industry report released Monday. The National Association of Realtors said that existing home sales rose last month to a seasonally adjusted annual rate of 4.72 million million units, up 5.1% from a rate of 4.49 million in January. February sales were down nearly 5% from year ago levels. Economists surveyed by Briefing.com were expecting existing home sales to decline to 4.45 million.

The report said first-time buyers made up half of all purchases in February, and that sales of distressed properties accounted for about 45% of all transactions. Sales were unexpectedly strong in the West, with activity increasing more than 30% over last year.

“February wasn’t too shabby for the existing-home market,” said Mike Larson, real estate analyst at Weiss Research. “The catch? The increase in sales activity is coming at the expense of pricing.”

The national median existing-home price was $165,400 in February, down 15.5% from last year, when the median price was $195,800. Prices were depressed by the large number of foreclosed properties on the market, said NAR chief economist Lawrence Yun in a statement.

“Our analysis shows that distressed homes typically are selling for 20% less than the normal market price, and this naturally is drawing down the overall median price.”

Meanwhile, the total number of existing homes on the market at the end of February rose 5.2% to 3.80 million units. At the current sales pace, it would take an estimated 9.7 months to sell down that inventory of properties. The report also said the total number of homes for sale has steadily declined over the past six months from a record level last July. Ian Shepherdson, chief U.S. economist at High Frequency Economics, said there’s a “good chance” the collapse in home sales that has been going on since September is “now over.” “Though a sustained recovery is still a long way off,” he added.

Mortgage Fraud At All Time High

NEW YORK (CNNMoney.com) — The number of reported incidents of mortgage fraud has reached an all-time high even as the number of home loans being issued has shrunk, according to a report released Monday.

Cases of reported fraud surged 26% from 2007 to 2008, according to the Mortgage Asset Research Institute (MARI), a LexisNexis Service, which compiled the report for the Mortgage Banker’s Association.

“With fewer loan originations today, the data suggests that the economic downturn may have created more desperation, causing more people than ever before to try to commit mortgage fraud,” said Denise James, LexisNexis Risk and Information Analytics Group director of Residential Mortgage Solutions, in a written statement.

Rhode Island had more cases of mortgage fraud than any other state, according to the report. Through the first quarter of 2009, Rhode Island recorded three times the rate of fraud that would be expected based on the number of mortgages originated in the state. This is the first time Rhode Island has made the top 10 list.

Florida recorded the second highest percentage of mortgage fraud compared with expectation, after leading the pack for 2007 and 2006. Illinois came in third, followed by Georgia, Maryland, New York, Michigan, California, Missouri and Colorado.

Types of fraud: “MARI data shows that mortgage fraud is more prevalent today than it was at the height of the boom in mortgage loan originations,” said John Courson, president and chief executive officer of the MBA, in a written statement.

The most prevalent form of mortgage dishonesty in 2008 was application fraud. According to the report, 61% of all reported frauds in 2008 were a result of misrepresentation on the application for a mortgage. This is the fifth time application fraud has topped the list.

Pending Home Sales Plummet

A brief glimmer of hope for the US housing market was dashed on Tuesday as the closely watched index of pending home sales plunged more than twice as much as expected to a fresh record low in January from the previous month, after a surprising bounce in December.

The data, released by the National Association of Realtors, which reflect deals that have been signed but not completed, showed that pending home sales fell by 7.7 per cent during the month and were off 6.4 per cent on the year. Economists expected that pending sales would fall by 3.5 per cent, after hopes were lifted the month before with a revised 4.8 per cent increase.

“Even with many serious potential home buyers on the sidelines waiting for passage of the stimulus bill, job losses and weak consumer confidence were a natural drag on home sales,” said Lawrence Yun, NAR chief economist.

Sales fell in the northeast, south and midwest in January, dropping 12.7 per cent, 11.9 per cent and 9.2 per cent, respectively. Pending sales ticked up by 2.4 per cent in the west, fuelled by foreclosures and distressed sales.

Economists said that homeowners have been reluctant to sell their homes amid falling prices, while buyers await the impact of the government stimulus package and new incentives such as the buyer tax credit.

Falling sales and prices have brought home affordability to new highs. According to the NAR housing affordability index, buying conditions are more favourable than they have been since tracking began in 1970. A year ago a median-income family could afford a $263,300, with a 20 per cent down payment but now that same family could purchase a home costing $283,400.

Tuesday’s results follow last week’s disappointing NAR figures revealing that the pace of sales of existing homes in the US tumbled to a 12-year low in January as prices plunged and buyers delayed purchases ahead of a government economic stimulus package.

Home resales fell by 5.3 per cent to an annual rate of 4.49m in January and were off 8.6 per cent year-on-year. The median price of an existing home fell 14.8 per cent on the year to $170,300.

Last month government data showed that new residential building in the US plunged to a record low in January as falling house prices and rising rates of foreclosure deterred builders from breaking ground. Meanwhile the latest closely watched Case-Shiller index showed that home prices in big US cities dropped at a record rate last year, falling 18.5 per cent. Home prices have fallen 27 per cent since their 2006 peak.