Pending home sales is continuing to muddy the waters about the real picture of home sales and several roadblocks can be identified as the culprits. The rise in the past three months as pointed out by the National Association of Realtors reflect the broad impact of the home buyer tax credit and favorable housing affordability conditions.

The Pending Home Sales Index, a forward-looking indicator, rose 6.0 percent to 110.9 based on contracts signed in April, from an upwardly revised 104.6 in March, and is 22.4 percent higher than April 2009 when it was 90.6. That follows gains of 7.1 percent in March and 8.3 percent in February.

Pending home sales are at the highest level since last October when the index reached 112.4 and first-time buyers were rushing to beat the initial deadline for the tax credit. The data reflects contracts and not closings, which usually occur with a lag time of one or two months.

The current impasse can be attributed to the mortgage institutions that are in a constant battle over “value on the books” versus “real current value” under the disguise of deference. It is really a horrendous situation that only serves the banking interest rather than the buyer/seller interest. The following example should give an insight on how it works:

Let’s say a property was appraised in 2007 at $1,000,000 and thus the Bank has this property on the books for $1,000,000 with a mortgage of 7% over the principal of $950,000. Now in 2010, with the meltdown of the real estate market, the property is appraised at $400,000. Knowing that the bank has “borrowed or set-out funds” against the appraised value of $1,000,000, yet the current value of that property is $400,000, the Bank is in marginal danger of being short $600,000 in guarantees. The Bank very well knows that the $600,000 is not claimable from the current owners, even under the best circumstances, and it would have to write off the amount creating a solvency problem for the bank (Think Large Scale).

The additional trending circumstances are that most mortgages are based on amortization, meaning that the bank takes in the beginning the lion’s scale of the monthly payments as interest payment and only a very small portion is principal pay. A compounding problem is that currently 30 year interest rates with a 7 year renewal are on or about 4.7%, making the gap between 2007 mortgage and interest rate a rather very unattractive deal for Banks in general.

But the real bad boy is the Federal Government / Federal Reserve who, in protecting the looming insolvency of the financial institutions due to the overabundance of “toxic” mortgages on the books by the banks, have granted the banks a moratorium to keep the 2007 appraised value of this property on the books and thus showing a rather “healthy” balance sheet. This however changes the moment this “healthy” property on the books goes either up for auction, into shortsale or forced sale. The moment the bank “sanctions” the sale the “inflated” value of the property of $600,000 is coming off the books and thus showing a “hole” of the same amount when the property changes hands for $400,000.

Now all of a sudden the “healthty” balance sheet of the bank is not so rosy anymore. Hence the banks do everything in their power to keep the “toxic” inflated appraisal value of $1,000,000 as long as possible on the books. This situation turns even more miserable when the potential buyer’s bank, who approved the mortgage at $400,000, is a rival bank since they stand to gain in an rather bottomed out market “assets” that will strengthen their balance sheet since the credentials of the buyers have passed the test.

Let the tug of war begin and this will stretch the “Pending” sales that typically would take 2 months well into 4-5 months negotiations. Hence the amount of pending sales increases dramatically with all consequences of missed tax breaks and what not else.

This is an over simplified example without taking into account the Amortization since in the beginning of the mortgage period your monthly “principal” payments are “negligible” since in a 30 year amortized situation your principal will only see significant drops in the last 6-7 years.