OREGON REAL ESTATE ROUND TABLE

Category: Portland

  • The Home Affordable Refinance Program (HARP): What You Need to Know, by Hayley Tsukayama, Washington Post


    On Monday, the federal government announced that it would revise the Home Affordable Refinance Program (HARP), implementing changes that The Washington Post’s Zachary A. Goldfarb reported would “allow many more struggling borrowers to refinance their mortgages at today’s ultra-low rates, reducing monthly payments for some homeowners and potentially providing a modest boost to the economy.”

    The HARP program, which was rolled out in 2009, is designed to help. Those who are “underwater” on their homes and owe more than the homes are worth. So far, The Post reported, it has reached less than one-tenth of the 5 million borrowers it was designed to help. Here’s a quick breakdown of what you need to know about the changes.

    What was announced? The enhancements will allow some homeowners who are not currently eligible to refinance to do so under HARP. The changes cut fees for borrowers who want to refinance into short-term mortgages and some other borrowers. They also eliminate a cap that prevented “underwater” borrowers who owe more than 125 percent of what their property is worth from accessing the program.

    Am I eligible? To be eligible, you must have a mortgage owned or guaranteed by Fannie Mae or Freddie Mac, sold to those agencies on or before May 31, 2009. The current loan-to-value ratio on the mortgage must be greater than 80 percent. Having a mortgage that was previously refinanced under the program disqualifies you from the program. Borrowers cannot not have missed any mortgage payments in the past six months and cannot have had more than one missed payment in the past 12 months.

    How do I take advantage of HARP?According to the Federal Housing Finance Agency, the first step borrowers should take is to see whether their mortgages are owned by Fannie Mae or Freddie Mac. If so, borrowers should contact lenders that offer HARP refinances.

    When do the changes go into effect?The FHFA is expected to publish final changes in November. According to a fact sheet on the program, the timing will vary by lender.

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  • Real Estate News On The National Scene, by Phil Querin, Q-Law.com


    The credit and real estate meltdowns, coupled with the subsequent foreclosure crisis, caused many politicians, all with differing motives, to shift into high legislative gear.  Without commenting on motivation, which is an admittedly fertile area for discussion, let’s take a look at the national legislative scene to see what has occurred[1], and whether things are better today than in 2008.

    MERS. I am addressing this issue at the beginning, primarily to get it out of the way.  I for one am suffering from “MERS Fatigue,” which is a malady afflicting many of us who watch and wait for something new to occur on this front.

    It’s important to understand that MERS, which is the catchy acronym for the “Mortgage Electronic Registration System”, was never a creature of statute.  It was born and bred by the lending and title industries in the late 1990s, for reasons that most people already know.  But because of its national scope – affecting approximately 60% of all home mortgages – MERS bears mentioning here.

    Despite all the national attention, the MERS controversy is really one that can only be resolved on the local level, since real estate recording and foreclosure statutes occur on a state – not national – level.  In Oregon, although there have been several federal court rulings, MERS’ legality is still up in the air.  This is because the local federal judges, who are supposed to follow Oregon law, have no binding Oregon appellate court precedent to follow when it comes to MERS.  The result is that there have been divergent federal court rulings.  And, the topic is so contentious at the Oregon legislature that there is little political appetite to tackle the problem, since few can agree on a solution.

    So, the news is that there is no news.  It will take months for the one state court case currently on appeal to find its way to the Oregon Court of Appeals or Supreme Court.  And, although there is a slight chance of a breakthrough in the upcoming session, 2012 does not appear to be a year in which we will see a legislative answer.

    Fannie and Freddie. Since the fall of Lehman Brothers in 2008, these two Government Sponsored Enterprises or “GSEs” have come under government ownership and control.  For a summary of the issues from the Congressional Budget Office, go to  the link here.  Since the private secondary mortgage market effectively disappeared between 2007-2008, this means that today, there is no viable buyer of residential loans except the federal government. To some observers, depending on their political bent, this is a good thing; but to others, it’s bad.

    One thing is certain; as long as the federal government, through Fannie and Freddie, dictate borrower qualifications, LTVs, and conforming loan limits[2], the conventional mortgage market will continue to be tight.  This does not bode well for higher end homes, especially.  Unfortunately, we don’t have to go back very far in time to remember what happened in the “private label” secondary mortgage market (i.e. non-GSE market) where home loans were handed out like party favors, and those who should never have qualified did.

    While there is much talk about doing away with Fannie and Freddie, it is unlikely any time soon.  However, what is occurring, albeit slowly and somewhat quietly, is a move to shift some of the GSEs’ loans to the private sector, where the risk would not be backed by the federal government.  If this works, perhaps more will follow.  While there may be some investors for such loans, it is likely that without a governmental safety net, the nascent private secondary market will demand a higher rate of return to offset the higher risk.

     

    In the meantime, the loans of choice appear to be through the FHA.  While the paperwork may be daunting, the LTVs are good and the bar to borrower qualification is much lower and more flexible than conventional loans.

    The Consumer Finance Protection Bureau. In recognition of Wall Street’s role in the credit and mortgage meltdowns, Congress established the Consumer Financial Protection Bureau (CFPB) through the Dodd-Frank Wall Street Reform and Consumer Protection Act. On July 21 of this year, it was opened for business. This is no ordinary federal agency.  It is a super agency, responsible for regulating many, many areas of consumer finance and mortgage loans.[3]

    Elizabeth Warren, a Harvard law professor and Presidential Advisor, was the driving force behind the Agency’s creation.  She was a zealous advocate for the consumer.  Unfortunately, the political reality was that she may have been too zealous.  Instead of being appointed director, Richard Cordray, former Ohio Attorney General, was appointed to head the agency.  However, his nomination is currently tied up in Congress, and he may not be confirmed.  Many Republicans oppose the idea of so much power being wielded by a single person rather than a board of Senate-confirmed appointees.  So as it stands, the CFPB – this mega agency that was created to oversee so many aspects of consumer law – has a website, is hard at work making manuals and processing paperwork, yet has no director to oversee enforcement of anything.

    Risk Retention, Skin in the Game, and the QRM. Mindful of the risks created when banks used their own safety net capital to trade in high risk loans, known as “proprietary trading,” the 2010 Dodd-Frank Act enacted Section 619, which placed severe restrictions on the ability of banks to use their funds to place risky bets (known as the “Volker Rule”).  Billions of dollars of these bets failed in 2008, leading up to the massive government bailouts that taxpayers funded.  What is the status of the Volker Rule today?  It’s still out for public comment, with banks arguing that the Rule will reduce their revenues and thereby force them to increase the cost of loans to borrowers. Given that big banks are still suffering the reputational fallout from the bailouts, the Volker Rule -with most of its teeth – may actually become law. When? Who knows.[4]

    Also mindful of the risks created through sloppy underwriting of securitized loans, Dodd-Frank sought to require that banks retain a 5 percent interest in the risk of loss on those loans. This risk retention rule has been referred to as “skin in the game,” and was intended to require banks to share a portion of the risks they securitized to others.  Instead of investors taking on the entire risk of a slice of securitized loans, banks would have to hold back 5% on their own balance sheet.

    However, the law made a major exception; it provided that through rule making, a standard be set for certain loan types with statistically lower default rates for which risk retention would be unnecessary.  This exception became known as the “Qualified Residential Mortgage” or “QRM.”  The QRM rules were intended to impose high standards for documentation of income, borrower performance, low debt-to-income ratios and other quality underwriting requirements.  Although they were to be the exception, not the rule, today, most lenders want these standards to be flexible rather than inflexible, so that there is more wiggle room for their loans to qualify as QRMs and thereby remain exempt from risk retention.  The argument in favor of looser loan standards is the fear that an inflexible QRM exemption will impair access to home loans by low and moderate income borrowers. This debate continues today, and there is some reason to believe that these rules will be substantially diluted before becoming law.

     

    PCQ Editorial Comment: It was not so long ago that certain banks criticized borrowers of 100% home financing as creating “moral hazard” – i.e. they took risks because they had no financial risk of default since they had no down payment to lose.  Today, the concept of “moral hazard” seems to have been forgotten by those same banks opposing risk retention rules.  They now expect their borrowers to have “skin in the game” – hence the higher down payment rules – but deny the need to do so themselves.  “Pot meet Kettle.”

    Conclusion. So, notwithstanding the fact that this country teetered on the brink of disaster in 2008, the politicians’ rush to legislate has continued to move at a snail’s pace.  Query:  Is the American consumer really better off today than in 2008?

    [1] This article will not cover Mortgage Assistance Relief Services (“MARS”), since the much ballyhooed national law was never intended to apply to Realtors®, even though that realization did not come soon enough to avoid all sorts of unnecessary industry handwringing and forms creation. All of the Oregon-specific legislation has been discussed in my prior articles.

    [2] On September 30, 2011, Fannie’s high loan limits for certain high housing cost parts of the country expired.  In portions of California, this may result in otherwise qualified buyers having to wait a year or two to save for the additional down payments.

    [3] Here is a listing of its responsibilities: Board of Governors of the Federal Reserve: Regulation B (Equal Credit Opportunity Act); Regulation C (Home Mortgage Disclosure); Electronic Fund Transfers (Regulation E); Regulation H, Subpart I (Registration of Residential Mortgage Loan Originators); Regulation M (Consumer Leasing); Regulation P (Privacy); Regulation V (Fair Credit Reporting); Regulation Z (Truth in Lending); Regulation DD (Truth in Savings); FDIC: Privacy of Consumer Financial Information; Fair Credit Reporting Registration of Residential Mortgage Loan Originators; Office of the Comptroller of the Currency: Adjustable Rate Mortgages Registration of Residential Mortgage Loan Originators; Privacy of Consumer Financial Information; Fair Credit Reporting;  Office of Thrift Supervision: Adjustments to home loans; Alternative Mortgage  transactions; Registration of Mortgage Loan Originators; Fair Credit Reporting; Privacy of Consumer Financial Information; National Credit Union Administration: Loans to members and lines of credit to members; Truth in Savings; Privacy of Consumer Financial Information; Fair Credit Reporting Requirements for Insurance; Registration of Mortgage Loan Originators; Federal Trade Commission: Telemarketing Sales Rule; Privacy of Consumer Financial Information; Disclosure Requirements for Depository Institutions Lacking Federal Depository Insurance; Mortgage Assistance Relief Services; Use of Pre-notification Negative Option Plans; Rule Concerning Cooling-Off Period for Sales Made at Homes or at Certain Other Locations; Preservation of Consumers’ Claims and Defenses; Credit Practices; Mail or Telephone Order Merchandise Disclosure Requirements and Prohibitions Concerning Franchising Disclosure Requirements and Prohibitions Concerning Business Opportunities Fair Credit Reporting Act Procedures for State Application for Exemption from the Provisions of the Fair Debt Collection Practices Act; Department of Housing and Urban Development: Hearing Procedures Pursuant to the Administrative Procedure Act; Civil Monetary Penalties; Land Registration Purchasers’ Revocation Rights; Sales Practices, and Standards Formal Procedures and; Rules of Practice Real Estate Settlement Procedures Act; Investigations in Consumer Regulatory Programs. For source, link here.

    [4] It is rumored that Morgan Stanley and Goldman Sachs, both of whom changed their charters from securities firms to become “banks”, in order to be eligible for taxpayer funded bailout money, are now considering exiting that status, precisely so they will not have to comply with the Volker Rule – if it passes.

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  • What the heck does “loan-to-value” mean?


    There are lots of terms we use in the mortgage industry that aren’t part of everyday parlance. Today, I’ll talk a little bit about “loan-to-value”, or LTV for short.

    In fact, I have a video that’s less than 90 seconds long if you’re in a hurry:

    Loan-to-value

    So, just to recap what I said in the video, your loan-to-value is the percentage of your home’s value that you finance with your home loan.

    Whether you a purchasing a home, or refinancing your existing mortgage, LTV is an extremely important factor in making an educated decision about your home loan.

    I’ll give you an example:

    FHA – When purchasing a home using an FHA home loan, you can finance up to 96.5% of the appraised value of the property. If you are refinancing, you have two options: “rate & term” or “cash-out”. Rate & term means you are refinancing to lower your rate or change the length of your loan. A rate & term refinance is capped at a 97.75% LTV for FHA. Cash-out FHA refinances are limited to 85 per cent of the value of your home. If your current mortgage is an FHA loan, you can refinance with an FHA streamline, which does not have an LTV limitation.

    So your needs define your loan-to-value, which helps define what home loan program you are going to apply for.

    If you would like to learn more about loan-to-value, other mortgage terminology, or home loans in Oregon and Washington, I invite you to visit my site or contact me. I am long on answers and short on sales pitches 🙂

    Thanks for taking a minute to read this post!

    Picture: Jason HillardJason Hillard – homeloanninjas.com

    Mortgage Advisor in Oregon and Washington MLO#119032

    Pinnacle Mortgage Bankers

    a div of Pinnacle Capital Mortgage Corp

    503.799.4112

    jason@mypmb.us

    1706 D St Vancouver, WA 98663

    NMLS 81395 WA CL-81395

    Equal Housing Lender

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  • Is The National Association Of Realtors Hurting The Real Estate Market? by Brett Reichel, Brettreichel.com


    Yesterday, a fairly sophisticated home buyer called me about a pre-approval.  He and his wife own a home, and a vacation home.  This is a successful business couple who are doing well in the residential construction market despite the current economy.  He indicated that they wanted to buy a new primary residence.  His question to me was “We can get together about 10% down.  Can we even buy a new home with less than 20% down?”

    It’s no wonder they are confused.  Every other article where leadership of the National Association of Realtors is quoted, every press release they issue usually has the quote that “tight lender guidelines are hurting the real estate market”  or “buyers need to have 20% down and be perfect to accomplish a purchase” or some words like that. 

    Unfortunately, these types of statements are blatantly untrue in most markets, and are very damaging to the real estate market at large and to home buyers and sellers everywhere. 

    It’s true that lenders are giving loan applications MUCH greater scrutiny than they have in any time since 1998.  Rampant mortgage fraud on the part of borrowers, Realtors, lenders, and mortgage originators have required lenders to check and recheck everything represented in a loan application.  Unfortunatley, until we get everyone to realize that the “silly bank rules” they are breaking consititutes a federal crime we are stuck with the extra scrutiny.  Fortunately, the new national loan originator licensing and registration systems should make loan officers everywhere realize the seriousness of this issue and root out fraud before it get’s to the point of a loan being funded.  The safety of our banking and financial systems is too important to allow the kinds of games that have been played over the last few years. 

    The National Association of Realtors is right about appraisals.  Appraisals remain a very serious issue.  Pressure from Fannie Mae and Freddie Mac on lenders results in pressures by lending institutions on appraisers to bring in appraisals very conservatively.  It’s common for appraisers to use inappropriate appraisal practice due to the Fannie Mae/Freddie Mac form1004mc, which results in innacurate appraisal (see previous posts).

    It’s also true that underwriting guidelines are stricter than they were during the golden age of loose underwriting (1998 thru 2008).  What people don’t realize that underwriting guidelines are easier now than they’ve been in any previous time frame.  In fact, it’s a great time to buy for many folks who have been priced out of markets previously.

    How can I make that type of claim?  Because I remember the “bad old days”…..Prior to 1997-1998, debt-to-income ratio’s were much stricter than they are now.   A debt-to-income ratio compares your total debt to your total income.  In the old days, if you put 5% down on a conventional loan, you couldn’t have more than 36% of your total income go towards your debt.  Now?  If you’ve been reasonably careful with your credit, have decent job stability, and a little savings left over for emergency it’s pretty easy to get to a ratio of 41%!  With only 5% down!  On FHA loans, it’s really easy to go to 45% DTI with only 3.5% down!   In fact, there are times that we go even higher.

    Is that obvious in the mass media?  No.  They paint a dire picture based, in part, on the statements of NAR. 

    So, if you are a Realtor, press NAR to paint a more positve picture of financing.  Nothing that is “puffed up”, just reality.  If you are a buyer, don’t be fooled by what you read in the mainstream press.  Talk to a good, local, independent mortgage banker.  They’ll give you a clear path to home ownership and join the ranks of homeowners!

     

     

  • Refinancing your Underwater Fannie Mae home loan


    The Fannie Mae DU Refi Plus home loan program is extended through this year and into 2012. This program may be able to help you refinance if you owe more than your home is worth. Check out this quick video:

    The Fannie Mae DU Refi Plus – Basics

    First of all, you need to make sure that your current loan is owned by Fannie Mae. You can check that at Fannie Mae’s website. All you need is your full address.

    You also need to be on time with your mortgage payments. If you are behind in your mortgage, you will need to discuss loan modification or other options with your lender.

    The biggest impediment when discussing the DU Refi Plus program is the issue of mortgage insurance. The best case scenario is if you do not have mortgage insurance on your current home loan.

    If you need to figure out your options when it comes to refinancing your home in Oregon or Washington, shoot me an email. You may not always like the answer, but knowing is better than the alternative.

    Thanks for taking a minute to check this post out!

     

    Picture: Jason HillardJason Hillard – homeloanninjas.com

    Mortgage Advisor in Oregon and Washington MLO#119032

    Pinnacle Mortgage Bankers

    a div of Pinnacle Capital Mortgage Corp

    503.799.4112

    jason@mypmb.us

    1706 D St Vancouver, WA 98663

    NMLS 81395 WA CL-81395

    Equal Housing Lender

  • Bank of America Offers $20,000 Short-Sale Incentive to Homeowners, by Kimberly Miller, The Palm Beach Post


    Bank of America, the nation’s largest mortgage servicer, is offering Florida homeowners up to $20,000 to short sale their homes rather than letting them linger in foreclosure.

    The limited-time offer has received little promotion from the Charlotte, N.C.-based bank, which sent emails to select Florida Realtors earlier this week outlining basic details of the plan.

    Only homeowners whose short sales are submitted for approval to Bank of America before Nov. 30 will qualify. The homes must have no offers on them already and the closing must occur before Aug. 31, 2012.

    A short sale is when a bank agrees to accept a lower sales price on a home than what the borrower owes on the loan.

    Realtors said the Bank of America plan, which has a minimum payout amount of $5,000, is a genuine incentive to struggling homeowners who may otherwise fall into Florida’s foreclosure abyss.

    The current timeline to foreclosure in Florida is an average of 676 days — nearly two years — according to real estate analysis company RealtyTrac. The national average foreclosure timeline is 318 days.

    “I think this is a positive sign that the bank is being creative to try and help homeowners and get things moving,” said Paul Baltrun, who works with real estate and mortgages at the Law Office of Paul A. Krasker in West Palm Beach. “With real estate attorneys handling these cases, you’re talking two, three, four years before there’s going to be a resolution in a foreclosure.”

    Guy Cecala, chief executive officer and publisher of Inside Mortgage Finance, called the short sale payout a “bribe.”

    “You can call it a relocation fee, but it’s basically a bribe to make sure the borrower leaves the house in good condition and in an orderly fashion,” Cecala said. “It makes good business sense considering you may have to put $20,000 into a foreclosed home to fix it up.”

    Homeowners, especially ones who feel cheated by the bank, have been known to steal appliances and other fixtures, or damage the home.

    “This might be the banks finally waking up that they can have someone in there with an incentive not to damage the property,” said Realtor Shannon Brink, with Re/Max Prestige Realty in West Palm Beach. “Isn’t it better to have someone taking care of the pool and keeping the air conditioner on?”

    A spokesman for Bank of America said the program is being tested in Florida, and if successful, could be expanded to other states.

    Wells Fargo and J.P. Morgan Chase have similar short-sale programs, sometimes called “cash for keys.”

    Wells Fargo spokesman Jason Menke said his company offers up to $20,000 on eligible short sales that are left in “broom swept” condition. Although the program is not advertised, deals are mostly made on homes in states with lengthy foreclosure timelines, he said.

    And caveats exist. The Wells Fargo short-sale incentive is only good on first-lien loans that it owns, which is about 20 percent of its total portfolio.

    Bank of America’s plan excludes Ginnie Mae, Federal Housing Administration and VA loans.

    Similar to the federal Home Affordable Foreclosure Alternatives program, or HAFA, which offers $3,000 in relocation assistance, the Bank of America program may also waive a homeowner’s deficiency judgment at closing.

    A deficiency judgment in a short sale is basically the difference between what the house sells for and what is still owed on the loan.

    HAFA, which began in April 2010, has seen limited success with just 15,531 short sales completed nationwide through August.

    But Realtors said cash for keys programs can work.

    Joe Kendall, a broker associate at Sandals Realty in Fort Myers, said he recently closed on a short sale where the seller got $25,000 from Chase.

    “They realize people are struggling and this is another way to get the homes off the books,” he said.

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  • The Home Loan Application, by Jason Hillard , Homeloanninjas.com


    Applying for a home loan is quite a process. A good place to get familiar with the process is the home loan application. I made a video awhile back showing the different sections of the loan application:

    Some things to know when you apply for a home loan:

    • Detailed residence history for the last 2 years
    • Detailed employment history for the last 2 years
    • Knowledge of your various bank accounts, retirement accounts, and other liquid assets
    • Social Security number
    • A good idea of your credit history – dates of bankruptcy discharge, etc

    Obviously, there’s more to it than that. But those items might be things you wouldn’t usually think about. It helps to have the following put together when you fill out the loan application:

    • Most recent 30 days of paystubs for all borrowers
    • Most recent bank statements; all pages, all accounts
    • Most recent retirement or 401k statements
    • Last 2 years Federal tax returns; all pages, with w2s
    • Business tax returns if applicable
    • Divorce decree/child support paperwork if applicable
    • Award letters for Social Security/VA/Disability if applicable
    • Pension letters/Annuity statements if applicable
    • Bankruptcy Discharge paperwork if applicable

    That sounds like a lot of stuff to put together, but the truth is it will help your Mortgage Professional put your application together, and the underwriter will need to document and verify all of those items anyway.

    You might as well begin prepared.

    For more information about the home loan application, and a copy you can download and get familiar with, check out my website. I try to provide valuable information about home loans in Oregon and Washington, rather than empty sales pitches. Thanks!

    Picture: Jason Hillard

    Jason Hillard – homeloanninjas.com

    Mortgage Advisor in Oregon and Washington MLO#119032

    Pinnacle Mortgage Bankers

    a div of Pinnacle Capital Mortgage Corp

    503.799.4112

    jason@mypmb.us

    1706 D St Vancouver, WA 98663

    NMLS 81395 WA CL-81395

    Equal Housing Lender

    Related articles

  • Portland Real Estate Developer Betting With the House as He Develops Family-Owned Treasure, by (EON: Enhanced Online News


    No one would call Reed Dow, of Reed Dow & Associates, a gambler- but he is betting nearly $1 million that the renaissance of Division Street that has been moving along for the last several years will help breathe new life into a 10,000 square foot former commercial warehouse that his family has owned since 1965.

    The building located at 3525 Southeast Division Street is getting more than just a facelift. While the original character of the Art Deco façade will be preserved to blend seamlessly into the urban Division-Clinton neighborhood, the interior of the building was gutted down to the poured-in-place concrete walls and wood frame roof. Now that permitting is complete, plans call for a new roof with exterior insulation, rooftop HVAC units, electrical system, storefront glass and common area restrooms.

    The newly branded ‘Dow Building’ is hoping to attract a restaurant or café for the prime corner space on SE Division and 35th Place and several other boutique retailers for the remaining store front spaces along Division.

    “The building was constructed in 1925 at the peak of the Deco period, and over the years it has been home to a drug store, my family’s disaster recovery business, a tavern and many other establishments,” said Dow. “With the city targeting low impact, high density living for this area, we’re hoping that the restored charm of our building will attract a handful of new, locally-owned business that will complement the neighborhood.”

    Josh Bean of Doug Bean & Associates, Inc. is the building’s leasing agent. According to Bean, the project may have up to six different tenants.

    “We can accommodate five different retail tenants along Division Street and one creative/production tenant in the remaining space facing SE 35th Place. Over the past few years, even during the peak of the recession, Division Street has enjoyed a steady revitalization. Several developers have built new mixed-use projects or converted tired old buildings into vibrant new properties,” said Bean. “Division Street has become home to some of the city’s top chefs and restaurants including Andy Ricker of Pok Pok and David Machado of Lauro Mediterranean Kitchen. By the time our renovation and restoration are complete in November, we fully expect that we’ll be adding new interest to the block.”

    “It brings me special pleasure to be a part of the restoration of a building that has been in my family for generations,” Dow added. “My family has a life-long commitment to the success of this friendly neighborhood that few in the area can equal. Our roots are in this neighborhood and with this project we’ll be sinking them just a little deeper.”

    For leasing information please visit the website of Doug Bean & Associates, Inc., http://www.dougbean.com

    Contacts

    Reed Dow & Associates

    Chris Daly, media

    703-435-6293

    chris@dalygray.com

  • Oregon’s Shadow Inventory – The “New Normal”?, by Phil Querin, Q-Law.com


    The sad reality is that negative equity, short sales, and foreclosures, will likely be around for quite a while.  “Negative equity”, which is the excess by which total debt encumbering the home exceeds its present fair market value, is almost becoming a fact of life. We know from theRMLS™ Market Action report that average and median prices this summer have continued to fall over the same time last year.  The main reason is due to the volume of  “shadow inventory”. This term refers to the amorphous number of homes – some of which we can count, such as listings and pendings–and much of which we can only estimate, such as families on the cusp of default, but current for the moment.  Add to this “shadow” number, homes already 60 – 90 days delinquent, those already in some stage of foreclosure, and those post-foreclosure properties held as bank REOs, but not yet on the market, and it starts to look like a pretty big number.  By some estimates, it may take nearly four years to burn through all of the shadow inventory. Digging deeper into the unknowable, we cannot forget the mobility factor, i.e. people needing or wanting to sell due to potential job relocation, changes in lifestyle, family size or retirement – many of these people, with and without equity, are still on the sidelines and difficult to estimate.

    As long as we have shadow inventory, prices will remain depressed.[1] Why? Because many of the homes coming onto the market will be ones that have either been short sold due to negative equity, or those that have been recently foreclosed.  In both cases, when these homes close they become a new “comp”, i.e. the reference point for pricing the next home that goes up for sale.  [A good example of this was the first batch of South Waterfront condos that went to auction in 2009.  The day after the auction, those sale prices became the new comps, not only for the unsold units in the building holding the auction, but also for many of the neighboring buildings. – PCQ]

    All of these factors combine to destroy market equilibrium.  That is, short sellers’ motivation is distorted.  Homeowners with negative equity have little or no bargaining power.  Pricing is driven by the “need” to sell, coupled with the lender’s decision to “bite the bullet” and let it sell.  Similarly, for REO property, pricing is motivated by the banks’ need to deplete inventory to make room for more foreclosures.  A primary factor limiting sales of bank REO property is the desire not to flood the market and further depress pricing. Only when market equilibrium is restored, i.e. a balance is achieved where both sellers and buyers have roughly comparable bargaining power, will we see prices start to rise. Today, that is not the case – even for sellers with equity in their homes.  While equity sales are faster than short sales, pricing is dictated by buyers’ perception of value, and value is based upon the most recent short sale or REO sale.

    So, the vicious circle persists.  In today’s world of residential real estate, it is a fact of life.  The silver lining, however, is that most Realtors® are becoming much more adept – and less intimidated – by the process.  They understand these new market dynamics and are learning to deal with the nuances of short sales and REOs.  This is a very good thing, since it does, indeed, appear as if this will be the “new normal” for quite a while.

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  • House is Gone but Debt Lives On; Expect Huge Surge in Deficiency Lawsuits, by Mike “Mish” Shedlock


    Forty-one states allow lenders to sue for mortgage debt if a home fetches less than the mortgage in a foreclosure sale. It always will. Such lawsuits are one of the reasons I have consistently advised people to consult an attorney before walking away.

    For a nice write-up on deficiency judgments please consider the Wall Street Journal article House Is Gone but Debt Lives On.

    Joseph Reilly lost his vacation home here last year when he was out of work and stopped paying his mortgage. The bank took the house and sold it. Mr. Reilly thought that was the end of it.

    In June, he learned otherwise. A phone call informed him of a court judgment against him for $192,576.71. It turned out that at a foreclosure sale, his former house fetched less than a quarter of what Mr. Reilly owed on it. His bank sued him for the rest.

    The result was a foreclosure hangover that homeowners rarely anticipate but increasingly face: a “deficiency judgment.”

    Until recently, “there was a false sense of calm” among borrowers who went through foreclosure, Mr. Englett says. “That’s changing,” he adds, as borrowers learn they may be financially on the hook even after the house is gone.

    Some close observers of the housing scene are convinced this is just the beginning of a surge in deficiency judgments. Sharon Bock, clerk and comptroller of Palm Beach County, Fla., expects “a massive wave of these cases as banks start selling the judgments to debt collectors.”

    Because most targets have scant savings, the judgments sell for only about two cents on the dollar, versus seven cents for credit-card debt, according to debt-industry brokers.

    Silverleaf Advisors LLC, a Miami private-equity firm, is one investor in battered mortgage debt. Instead of buying ready-made deficiency judgments, it buys banks’ soured mortgages and goes to court itself to get judgments for debt that remains after foreclosure sales.

    Silverleaf says its collection efforts are limited. “We are waiting for the economy to somewhat heal so that it’s a better time to go after people,” says Douglas Hannah, managing director of Silverleaf.

    Investors know that most states allow up to 20 years to try to collect the debts, ample time for the borrowers to get back on their feet. Meanwhile, the debts grow at about an 8% interest rate, depending on the state.

    Laws vary from state to state and things may depend on whether or not the loan is a recourse loan or not. Once again, before walking away, and before considering a short-sale or bankruptcy, please consult an attorney who knows real estate laws for your state.

    Mike “Mish” Shedlock
    http://globaleconomicanalysis.blogspot.com

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  • Battle Brews Over Responsibility For Defaulted West Coast Bank Home Loans in Oregon, By Jeff Manning, The Oregonian The Oregonian


    Did former Bend banker Jeff Sprague go rogue during the housing boom and make a series of dishonest loans egregious enough to get him charged with bank fraud?

     
    Or was he a low-level flunky just following orders from his bank-executive bosses who knew and approved of what he was doing?
     
    Those are the questions at the heart of a legal battle between Sprague and his former employer, West Coast Bank. Sprague, facing criminal fraud charges stemming from a series of 2007 loans he handled to employees of Desert Sun Development, has subpoenaed the Lake Oswego bank attempting to force it to hand over internal documents, including the findings of its own investigation into loans that Sprague handled.
     
    Federal prosecutors have asked for many of the same documents.
     
    The bank has handed over some of the requested material. But it has refused to give up about 100 documents claiming they are protected by attorney-client privilege.
     
    The material could shine a new light on the behavior and lending standards of the Lake Oswego bank during the crazy days of the real estate boom. Banks all over the country dispensed with their characteristic caution during much of the last decade and made billions of dollars worth of residential loans with little if any due diligence.
     
    The industry came to regret its recklessness after borrowers defaulted in enormous number. The industry’s slipshod lending helped send the American economy into a tailspin from which it has yet to recover.
     
    Robert Sznewajs, West Coast Bank CEO, declined comment, as did the bank’s Portland attorney David Angeli.
     
    Sprague’s fight over the documents may be a long-shot. Attorney-client privilege is a well-accepted legal doctrine that ensures the confidentiality of communications between a client and attorney.
     
    But the bank’s refusal also begs the question: What is it hiding?
     
    CRIMES AND INVESTIGATIONS

    The stakes are high for Sprague. He and his former assistant, Barbara Hotchkiss, were among 13 indicted on fraud or related charges in November 2009 in the Desert Sun case. Prosecutors allege that the Central Oregon real estate developer convinced West Coast and several other banks to loan the company or its employees $41 million through falsified and forged loan applications.
     
     
    The West Coast loans handled by Sprague went to Desert Sun employees, who were participating in the company’s home ownership program. Designed to capitalize on Central Oregon’s red-hot housing market, the company offered to build homes for employees and associates and then split the sales proceeds. But Desert Sun allegedly pocketed the loan proceeds, sometimes completing little if any work on the home for which the employee now owed hundreds of thousands of dollars.
     
     
    Several of the defendants have agreed to plead guilty, including Shannon Egeland and Jeremy Kendall, two former senior executives of the company. Desert Sun CEO Tyler Fitzsimons maintains his innocence.
     
     
    Scott Bradford, the Eugene-based prosecutor leading the case for the government, declined to comment.
     
     
    Desert Sun remains the biggest criminal case in Oregon to emerge from the housing boom and bust. It is also one of the few cases nationally in which bankers were charged with crimes. Senior executives from the financial industry have gone virtually untouched in the subsequent wave of investigations and prosecutions.
     
     
    No West Coast executives have been accused of wrongdoing, either in criminal or civil jurisdictions.
     
     
    Federal prosecutors allege that Sprague and Hotchkiss knowingly helped originate and process phony loans. The loan applications contained forged signatures and inflated claims of the borrowers’ financial wherewithal.
     
     
    Attorneys for Sprague and Hotchkiss say their clients were simply following the West Coast Bank playbook.
     
     
    Sprague helped originate so-called stated-income loans, a widely use during the boom in which the lender made no effort to verify an applicant’s earnings. Sprague routinely offered general guidelines to loan applicants as to the income or assets they would have to list in order to qualify.
     
     
    “I think the bank is hiding that they knew that this loan process was in place and that they approved of it,” said Marc Friedman, a Eugene attorney representing Sprague.
     
     
    John Kolego, attorney for Hotchkiss, agreed. “I think these lending practices originated pretty high up in the organization,” he said. “There’s a pretty good chance there’s a smoking gun here, if we could just get the documents.”
     
     
    Hotchkiss was Sprague’s assistant who did the routine work of processing loans. “She worked for the bank for less than two years,” Kolego said. “She was making $28,000 a year.”
     
     
    Sprague did decidedly better, earning both a salary and commissions on loans he originated. Reports that Sprague was bringing home a six-figure salary during the boom is an exaggeration, Friedman said, adding that he didn’t know exactly how much his client made.
     
     
    In any case, the material withheld by the bank is necessary to support Sprague’s defense and “may, in fact, show that he initiated the investigation after discovering hints of fraudulent activity,” according to his court filings.
     
     
    Court filings make clear the bank did hand over to the government material it did not feel was privileged. Following the typical rules of discovery, the U.S. attorney’s office then shared those documents with Friedman and other attorneys for the defendants.
     
     
    Court filings also include a list of about 100 other documents the bank refused to hand over. It filed a motion to quash Sprague’s subpoena arguing that the materials are shielded from discovery under attorney-client privilege.
     
     
    Federal Magistrate Thomas Coffin is expected to rule shortly on the bank’s motion.
     
     

    FAILURE DOESN’T EQUAL FRAUD

     
     
    The scrap over the documents is another reminder of West Coast Bank’s ill-fated “two-step” loan program.
     
     
    Though not historically a big home mortgage lender, the bank pushed aggressively into some of the hotter housing markets around the Northwest with its “two-step” program, a short-term construction loan. By most accounts, the program was the brainchild of David Simons, a bank senior vice president and manager of residential lending.
     
     
    West Coast linked up with U.S. Funding, a Vancouver mortgage brokerage, for more client referrals. Two-step was geared for flippers, investors who had every intention of immediately selling the new home rather than living in it. Bank officials agreed to 100 percent financing even for borrowers they never met.
     
     
    By the end of 2007, West Coast had grown its two-step portfolio from next to nothing to $341 million, more than 16 percent of its total loans.
     
     
    Then, the boom ended.
     
     
    The bank’s loan portfolio suffered on all fronts, but its two-step loans went bad in enormous numbers. In Lebanon, where West Coast loaned home flippers nearly $16 million for about 45 homes in a new, relatively high-end subdivision, it eventually repossessed more than 40 of them. In all, the bank repossessed 422 properties from failed two-step loans, according to SEC filings.
     
     
    West Coast reported in its 2009 10-k annual report that its non-performing two-step loans peaked at $127.7 million in the third quarter of 2008, nearly a third of the total.
     
     
    Sprague and Simons left the bank after its Desert Sun investigation.
     
     
    Criminal investigators from the FBI and other federal agencies continue to probe West Coast’s two-step lending in Lebanon, Happy Valley and elsewhere.
     
     
    Ken Roberts, a Portland attorney noted for his work with local banks, said its unfair to equate the failure of West Coast’s two-step program with fraud or other wrongdoing. Thousands of banks jumped on the housing bandwagon last decade and few of them anticipated the boom ending, let alone a painful crash leading, millions of foreclosures and 30 percent declines in home values, Roberts said.
     
     
    Federal and state bank regulators did single out West Coast in October 2009, issuing a cease and desist order requiring the bank to raise new capital and clean up its act. The FDIC and the Oregon Department of Finance and Corporate Securities did so after they had determined the bank “had engaged in unsafe and unsound practices.” The agencies ordered the bank to, among other things, cut all ties with employees, borrowers or anyone else suspected of fraudulent activity.
     
     
    That same month, West Coast raised $155 million by essentially selling an 80 percent equity stake in the bank to outside investors. The transaction and the new capital probably saved the bank. It also vastly diluted the value of the stock held by existing investors.
     
     
    The West Coast board of directors in 2010 awarded CEO Sznewajs $870,89, a hefty raise from the $407,545 he got paid the year before.
     
     
    Sprague, meanwhile has left banking and is working as a carpenter. His marriage ended. “He’s taken some really big hits,” Friedman said.
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  • HUD Cuts To Devastate Mortgage Counseling Agencies Across Nation, By Ben Hallman, IWATCHNEWS.ORG


    Housing counselors at Western Tennessee Legal Services were plenty busy, even before one of the region’s largest employers, a Goodyear tire factory in tiny Union City, shut its doors in July.

    The plant closing, which put nearly 2,000 employees out of work in a rural part of the state, meant more work for counselors like Emma Covington. Covington said she already takes 18 to 20 calls a day and meets in person with people who need counseling on foreclosures and other housing issues.

    Now, like many of its clients, the legal nonprofit will have to make do with less.

    Earlier this year, Congress defunded the $88 million grant program administered by the U.S. Department of Housing and Urban Development that helped support more than 7,500 housing counselors across the country, including those at Western Tennessee. Funds run out Sept. 30.

    The cuts come at a terrible time, say counseling advocates.

    In the second quarter of 2011, more than 3.4 million home mortgages nationwide were 90 or more days delinquent or in the foreclosure process. More than one in five mortgage borrowers owe more on their mortgages than their homes are worth, according to government data.

    The counseling money may not be coming back. The House Appropriations Committee recently approved a budget for 2012 that also doesn’t include any HUD housing counseling dollars. A group of senators is trying to restore funding, but even if successful, it is unlikely that funds will reach counselors before next spring, at the earliest.

    The looming gap in funding and continued uncertainty about the program’s future means layoffs and reduced hours for counselors at nonprofits across the country at a time when demand for their services is greater than ever.

    “These are rough times for our clients and our staff,” said Steven Xanthopoulos, the executive director at Western Tennessee Legal Services. “We are faced with some hard decisions.”

    Western Tennessee may lay off as many as four employees when its $1.2 million HUD grant runs out at the end of this month, Xanthopoulos said. Many more counselors could lose their jobs at the 25 rural legal aid groups throughout Appalachia and the Mississippi River delta that the nonprofit supports with its share of the grant money, he said.

    The National Council of La Raza supports 50 housing counseling agencies that helped 65,000 families last year with about $1.2 million from HUD. Thirty of those agencies will close their doors if Congress does not restore the HUD housing counseling funding, said Graciela Aponte, a legislative analyst.

    “We are in the middle of foreclosure crisis,” Aponte said. “This is devastating for our families.”

    HUD grants also support one of the nation’s biggest housing counseling training programs. NeighborWorks America used a $3 million HUD grant to fund 1,200 housing counseling training scholarships to its mobile nonprofit training university last year. When the HUD money goes away, so will those scholarships, a spokesman said.

    The program – whose cost is modest, by Washington standards – is being suspended at least in part because HUD is a full year behind distributing the grant money to housing groups.

    “HUD has been slow to distribute the money and Congress zeroed in on that,” said Candace Mason, senior director of housing and national grants at the National Foundation for Credit Counseling.

    In recent testimony , a HUD official said that the agency has a plan to reduce the distribution timeframe to 180 days.

    Some have questioned the effectiveness of the programs but the Government Accountability Office cited several studies that show counseling helps struggling homeowners avoid foreclosure and prevent them from lapsing back into default – especially if the counseling occurs early in the foreclosure process.

    One study cited by the GAO found that clients who received counseling were 1.7 times as likely to be removed from the foreclosure process by their mortgage servicer as borrowers who did not. Clients who got loan modifications paid an average of $267 a month less than they would have otherwise, according to the study.

    Counseling advocates say there appears to be general antipathy toward HUD, an oft-criticized federal agency, from some members of Congress related to the agencies past failings.

    Congress also hasn’t yet provided $45 million mandated by the Dodd-Frank financial regulation law for HUD to set up a new Office of Housing Counseling, which will set counseling standards and dole out grants to agencies.

    Here, too, HUD has been slow to act. According to the GAO, a working group at HUD is “in the process of developing a plan” for how to organize that new office, but is unable to say when it will submit it.

    HUD already has an office that seems to have a similar function: the Office of Single-Family Housing. HUD officials say the primary change needed to create the new office is the reassignment of staffers who work on housing counseling activities, but also have other responsibilities.

    Staffers at the House committees responsible for the funding did not comment for this story.

    Foreclosure prevention made up the single-biggest slice of any housing counselor’s workload in 2009 and 2010, according to HUD, with nearly half of all queries coming from homeowners in trouble. What makes the HUD grants so valuable, housing counselors say, is that the money can be spent to help people resolve a variety of housing woes, in addition to foreclosure.

    For example, the Federal Housing Administration requires seniors who want a Home Equity Conversion, or reverse mortgage to first receive counseling. Since 2005, more than 486,000 seniors received one of those loans, about 3.6 percent of all counseling activity, according to HUD. 

    Many of these seniors, especially in rural areas, have nowhere else to turn, said Covington, the Tennessee housing counselor. “People can’t afford to travel to our office much less to Memphis and Nashville,” she said.

    Homes on the Hill, a Columbus, Ohio, counseling service, is already operating on a razor-thin margin in terms of both budget and staffing, said executive director Stephen Torsell. Counselors have

    had their hours cut and clients have faced long waits for an appointment – several weeks in many cases.

    The nonprofit receives HUD money through La Raza. The annual grant is quite small—about $75,000 per year—but like other housing nonprofits, Homes on the Hill uses the HUD money to solicit matching funds from private donors.

    There is still a chance that Congress will at least partially fund the housing counseling program for 2012. A Senate subcommittee recently signed off on $60 million in funding for 2012, but whether the funding makes it into law is uncertain

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  • No End in Sight: Mortgage Loans Harder in High-Foreclosure Areas by Brian O’Connell, Mainstreet.com


    NEW YORK (MainStreet) — Here’s another bitter pill for homeowners to swallow: If you live in an area with a high foreclosure rate, the chances of someone getting a loan to buy your house significantly decreases.

    The news comes from the Federal Reserve’s latestreport, in which it concluded that mortgage lending was dramatically lower in communities and neighborhoods where foreclosures were surging, using data from the Neighborhood Stabilization Program (NSP) and from the Home Mortgage Disclosure Act (HMDA).

    “Home-purchase lending in highly distressed census tracts identified by the Neighborhood Stabilization Program was 75% lower in 2010 than it had been in these same tracts in 2005,” the report said. “This decline was notably larger than that experienced in other tracts, and appears to primarily reflect a much sharper decrease in lending to higher-income borrowers in the highly distressed neighborhoods.”

    The Fed uses the term “highly distressed” in place of the word “foreclosure”, but the message is clear: Banks and mortgage lenders are taking a big step back from lending to buyers who want a home in a high-foreclosure neighborhood.

    It’s the same deal for borrowers who want to actually live in a home and buyers who want to purchase the property as aninvestment, as neither party seems to be having much luck in getting a home loan in a highly distressed neighborhood, according to the Fed. The lack of credit extended to investors could really hurt neighborhoods crippled by foreclosures.

    “In the current period of high foreclosures and elevated levels of short sales, investor activity helps reduce the overhang of unsold and foreclosed properties,” the Federal Reserve says.

    Overall, the Fed reports that 76% fewer mortgage loans were granted to “non-owner occupant” buyers in 2010, compared to 2005.

    The Fed’s report reveals some other trends in the mortgage market:

    • Mortgage originations declined from just under 9 million loans to fewer than 8 million loans between 2009 and 2010. Most significant was the decline in the number of refinance loans despite historically low baseline mortgage interest rates throughout the year.  Home-purchase loans also declined, but less so than the decline in refinance lending.
    • While loans originated under the Federal Housing Administration (FHA) mortgage insurance program and the Department of Veterans Affairs‘ (VA) loan guarantee program continue to account for a historically large proportion of loans, such lending fell more than did other types of lending.
    • In the absence of home equity problems and underwriting changes, roughly 2.3 million first-lien owner-occupant refinance loans would have been made during 2010 on top of the 4.5 million such loans that were actually originated.
    • A sharp drop in home-purchase lending activity occurred in the middle of 2010, right alongside the June closing deadline (although the deadline was retroactively extended to September). The ending of this program during 2010 may help explain the decline in the incidence of home-purchase lending to lower-income borrowers between the first and second halves of the year.

    All in all, the report offers a pretty bleak – but even-handed and thorough – review of today’s home-purchase market.

    Read more about the continuing effects of the housing crisis at MainStreet’s Foreclosure topic page.

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  • U.S. To Have Tough Time in Suits Against 17 Banks Over Mortgage Bonds, by Jim Puzzanghera, Los Angeles Times


    Federal regulators allege the banks misled Fannie Mae and Freddie Mac over the safety of the bonds. But analysts say the two mortgage giants should have known that the loans behind the bonds were toxic.

    Reporting from Washington—

    The government’s latest attempt to hold large banks accountable for helping trigger the Great Recession could fall as flat as earlier efforts to punish Wall Street villains and compensate taxpayers for bailing out the financial industry.

    Federal regulators, in landmark lawsuits this month, alleged that 17 large banks misled Fannie Mae and Freddie Mac on the safety and soundness of $200 billion worth of mortgage-backed securities sold to the two housing finance giants, sending them to the brink of bankruptcy and forcing the government to seize them.

    Targets of other federal lawsuits and investigations have deflected such claims by arguing, for example, that the collapse of the housing market and job losses from the recession caused the loss in the value of mortgage-backed securities.

    The big banks, though, might have a more powerful defense: Fannie Mae and Freddie Mac were no novices at investment decisions.

    The two companies were major players in the subprime housing boom through the mortgage-backed securities market they helped create, and they should have known better than anyone that many of the loans behind those securities were toxic, some analysts and legal experts said.

    “I can’t think of two more sophisticated clients who were in a better position to do the due diligence on these investments,” said Andrew Stoltmann, a Chicago investors’ lawyer specializing in securities lawsuits. “For them to claim they were misled in some form or fashion, I think, is an extremely difficult legal argument to make.”

    But the Federal Housing Finance Agency, which has been running Fannie Mae and Freddie Mac since the government seized them in 2008, argued that banks can’t misrepresent the quality of their products no matter how savvy the investor.

    “Under the securities laws at issue here, it does not matter how ‘big’ or ‘sophisticated’ a security purchaser is. The seller has a legal responsibility to accurately represent the characteristics of the loans backing the securities being sold,” the FHFA said.

    The sophistication of Fannie and Freddie is expected to be the centerpiece of the banks’ aggressive defense. Analysts still expect the suits to be settled to avoid lengthy court battles, but they said the weakness of the case meant that financial firms would have to pay far less money than Fannie and Freddie lost on the securities.

    Stoltmann predicted that a settlement would bring in only several hundred million dollars on total losses estimated so far at about $30 billion.

    In the 17 suits, the FHFA alleged that it was given misleading data.

    For example, in the suit against General Electric Co. over two securities sold in 2005 by its former mortgage banking subsidiary, the FHFA said Freddie Mac was told that at least 90% of the loans in those securities were for owner-occupied homes.

    The real figure was slightly less than 80%, which significantly increased the likelihood of losses on the combined $549 million in securities, the suit said.

    GE said it “plans to vigorously contest these claims.” The company said it had made all its scheduled payments to date and had paid down the principal to about $66 million.

    The federal agency also has taken on some of the titans of the financial industry, including Goldman Sachs & Co., Bank of America Corp. and JPMorgan Chase & Co., to try to recoup some of the losses on the securities. That would help offset the $145 billion that taxpayers now are owed in the Fannie and Freddie bailouts.

    The suits represent one of the most forceful government legal actions against the banking industry nearly four years after the start of a severe recession and financial crisis brought on in part by the crash of the housing market.

    The FHFA had been negotiating separately with the banks to recover losses from mortgage-backed securities purchased by Fannie and Freddie, but decided to get more aggressive.

    “Over the last couple of years, they’ve been doing sort of hand-to-hand combat with each of the banks,” said Michael Bar, a University of Michigan law professor who was assistant Treasury secretary for financial institutions in 2009-10. “The suits are an attempt to consolidate those fights over individual loans.”

    Bar thinks the government has a legitimate case.

    “The banks will say, ‘You got what you paid for,’” he said. “And the investors will say, ‘No we didn’t. We thought we were getting bad loans and we got horrible loans.’”

    Edward Mills, a financial policy analyst with FBR Capital Markets, said the FHFA has a fiduciary responsibility to try to limit the losses by Fannie and Freddie. But the independent regulatory agency also probably felt political pressure to ensure that banks be held accountable for their actions leading up to the financial crisis, he said.

    “There’s still a feeling out there that most of these entities got away without a real penalty, so there’s still a desire from the American people to show that someone had to pay,” Mills said.

    Although the suits cover $200 billion in mortgage-backed securities, the actual losses that Fannie and Freddie incurred are much less. For example, the FHFA sued UBS Americas Inc. separately in July seeking to recover at least $900 million in losses on $4.5 billion in securities.

    The faulty mortgage-backed securities contributed to combined losses of about $30 billion by Fannie and Freddie, but a final figure is likely to change as the real estate market struggles to work its way through a growing number of foreclosures.

    Some experts worry that the uncertainty created by the lawsuits makes it more difficult for the housing market to recover, which adds to the pressure on the FHFA and the banks to settle.

    The government case also could be weakened by an ongoing Securities and Exchange Commission investigation into whether Fannie and Freddie did to their own investors what they’re accusing the banks of doing — not properly disclosing the risks of their investments.

    Banks are expected to make that point as well. But both sides have strong motives to settle the cases and move on, said Peter Wallison, a housing finance expert at the American Enterprise Institute for Public Policy Research.

    “Within any institution there are people who send emails and say crazy things, and the more these things are litigated, the more they get exposed,” Wallison said.

    Because of flaws in its case and political pressures, the FHFA also will be motivated to settle, Wallison said.

    “There will be a settlement because the settlement addresses the political issue … that the government is going to get its pound of flesh from the banks,” he said.

    jim.puzzanghera@latimes.com

  • What’s Behind the U.S. Suing Big Banks Over Mortgage-Backed Securities?, By Robert Blonk, ESQ., LLM., William H. Byrnes, ESQ.


    More bank stock declines and less lending could be in store as financial institutions face another massive round of lawsuits. The Federal Housing Finance Agency sued 17 banks on Sept. 2, alleging that the financial institutions committed securities violations in the lead-up to the recent financial crisis.

    The lawsuit concerns sales by the institutions to Fannie Mae and Freddie Mac of almost $200 million in residential private-label mortgage-backed securities that later collapsed. The lawsuit also names some of the banks’ officers and unaffiliated lead underwriters. 

    In addition to the securities violations, the lawsuits allege that the banks made negligent misrepresentations and failed to do adequate due-diligence and follow standard underwriting procedures when offering the mortgage-backed securities.

    The complaints were filed in both federal and state courts (New York and Connecticut) against 17 banks, including major financial institutions like Bank of America, Barclays, Citigroup, Countrywide, Credit Suisse, Deutsche Bank, General Electric, Goldman Sachs, HSBC, JPMorgan Chase, Merrill Lynch, Morgan Stanley and others. The lawsuit is substantially similar to the suit filed against UBS Americas earlier this year.

    Fannie Mae and Freddie Mac were placed into conservatorship in 2008, right after the subprime mortgage crisis made public waves. Under the conservatorship, the FHFA has control over the government-sponsored enterprises and has the power to bring lawsuits on their behalf, as it did in this case.

    The feds waited to file the lawsuit until the stock market was closing for the Labor Day weekend Sept. 2. But the timing didn’t prevent a run on bank stocks as rumors about the suit led to significant declines in bank stock prior to the release. This latest litigation comes on the heels of the 50-state robosigner foreclosure investigation which by itself could cost banks almost $200 billion.

    Some in Washington say not bringing the suit would have been akin to giving the banks another bailout. U.S. Rep. Brad Miller, D-NC, praised the FHFA for bringing the suit, saying that “[n]ot pursuing those claims would be an indirect subsidy for an industry that has gotten too many subsidies already. The American people should expect their government not to give the biggest banks a backdoor bailout.”

    But other commentators say the government’s timing of the lawsuit couldn’t be worse. It will hit the banks’ bottom lines when they can least afford it. And with interest rates likely to stay at record lows for the next two years and the Federal Reserve running out of options for stimulating bank lending, the cost may further stagnate the slow economic recovery. It’s hard to imagine how the lawsuit could be anything other than a weight on the already fragile economy.

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  • Owners Escape Tax Debt By Rebuying Foreclosed Homes, by Christine MacDonald/ The Detroit News


    Detroit —Landlord Jeffrey Cusimano didn’t pay property taxes on seven of his east-side rentals for three years, owing the city of Detroit more than $131,800.

    Typically, that would mean losing the properties. But Cusimano not only got to keep them — his debt, including interest, fees and unpaid water bills, was virtually wiped free.

    Cusimano and a growing number of Detroit property owners are using a little-known loophole to erase tax debt by letting their properties go into foreclosure and then buying them back a month later at the Wayne County Treasurer‘s auction for pennies on the dollar.

    It’s legal. But that doesn’t mean it’s fair, said homeowner Marilynn Alexander, who lives on Fairmount next door to one of Cusimano’s rentals. The landlord owed $26,200 in taxes and other fees on the bungalow, but bought it back in October for $1,051.

    “He shouldn’t be able to get away with that,” said Alexander, a 57-year-old laundry worker who said she scrapes together every year her $1,500 in property taxes at the house where she’s lived for 20 years. “That’s not a fair break to anybody else out here.”

    Critics described it as a growing problem as the foreclosure crisis deepens. A record number of properties — nearly 14,300 — are expected to be auctioned this fall, and officials predict more owners will try to buy back their properties.

    The News identified about 200 of nearly 3,700 Detroit properties sold at auction last year that appeared to be bought back by owners, some under the names of relatives or different companies and many for $500. The total in taxes and other debts wiped away was about $1.8 million.

    “I don’t think it’s OK; it’s just how things are,” said Cusimano, who argues Detroit taxes are so unfairly high he was forced to buy back the foreclosed properties.

    At the September auction, the properties’ prices are the debt that’s owed. But in October, the county treasurer sells off whatever is left at a $500 opening bid. That’s where most of the sales happen, including owners buying back their properties.

    There’s an effort in Lansing to ban the practice, but others defend it.

    Many of those defenders are struggling homeowners, said Ted Phillips, who runs a legal advocacy nonprofit agency. He helped about 140 families buy their houses back last year and expects to “easily” double that in October.

    “It’s absolutely better to have folks in their homes,” said Phillips, executive director of the United Community Housing Coalition.

    “The system is just so broken. This is a little bit of a way to correct the broken system. Not a great way, but a way.”

    But he agreed that others who can afford to pay the taxes are exploiting the loophole and should be stopped.

    Besides Cusimano, well-known land speculator Michael Kelly bought back three properties last fall through a company he is affiliated with to erase a $37,595 debt. The News profiled the Grosse Pointe Woods investor who, through the tax sale, gained control of more Detroit properties than any other private landowner as of earlier this year.

    Cusimano, who owns about 80 rentals, makes no apologies and blamed Detroit for failing to reduce his assessments on homes whose values have crashed. He said he’s got small bungalows with $4,000-a-year tax bills, which he argues sometimes is more than the house is worth.

    “The taxes are ridiculous,” Cusimano said. “I don’t even pay that for my house in Clinton Township.”

    Huge debts wiped clean

    The savings can be striking.

    One owner bought back her storefront on West Seven Mile last year for $15,000, eliminating nearly $37,000 in debt. Another owed $23,100 on two buildings and a parking lot on Conant, but bought each back for the minimum $500.

    And Cusimano got his seven rentals back for $4,051, erasing nearly $128,000 in property taxes and other government liens.

    Cusimano, a landlord in the city for two decades, said the method wasn’t his first choice. He said he tried to appeal his high taxes without success. He admits he’s taking advantage of the loophole, but said he must to survive the tough economic times.

    “You just have to go with how the system goes,” said Cusimano. “I have been learning that in the last few years.”

    Owners often buy back their properties using the same name under which they lost them. And there’s generally a low risk of getting outbid because of the glut of vacant land. Last fall, at least 6,847 parcels in Detroit went into the city’s inventory after they didn’t sell at auction.

    Landlord Allen Shifman justified his buys, saying “every house is going to the highest bidder.” He owed $35,300 on three properties owned by one business in which he has an interest, but bought them back under another affiliated business for $3,500.

    Shifman described them as “garbage properties” even though the city puts the three houses’ market value between $20,000 and $60,000. He said many of the city’s landlords are struggling.

    “It didn’t work out that well for me,” Shifman said of repurchasing the properties. “I didn’t get anything for my money.

    “The taxes are more than it’s worth. The houses don’t have any value at all. If the properties were worth the value of the houses, people would pay the taxes.”

    Detroit’s tax rates — 65 mills for homeowners and 83 mills on other property owners — are the highest in the state, according to a recent Citizens Research Council of Michigan report. The average statewide rate is 31 mills for homeowners and 48 mills for other property owners.

    Dan Lijana, a spokesman for Mayor Dave Bing, said the city has been reducing residential assessments “in the double-digit range” over the last four years, but that “distressed sales,” such as the sales from the county auction, can’t be a factor.

    Cusimano’s neighbors on Fairmount, a street in northeast Detroit with mostly maintained aluminum-sided bungalows, argued they are paying taxes and were angered when told of the loophole.

    “OK, he gets to buy his back and my mother has to struggle?” said Tekena Crutcher, who lives with her mom. “The city is the way it is because of people like him not paying his taxes.”

    Alexander said she’s suffering from throat cancer, but pays her taxes.

    “It’s disappointing to know that the system is set up like that and things like this are allowed to happen,” she said.

    Lijana said City Hall is looking at the city’s tax structure and the auction loophole.

    “We are working to make the City of Detroit run more like a business,” Lijana said in an email. “This is an example of a challenge that we are looking to address both from a fiscal perspective and as a land use policy.”

    Legislation aimed to stop it

    Wayne County Chief Deputy Treasurer David Szymanski, whose office runs the auction, said it’s frustrating to see people ditch tax obligations, but the law allows for it.

    “There is no restriction in the law about who can or cannot bid at auction,” Szymanski said. “It’s such a tough issue.”

    “It’s clearly in the best interest to keep people in their homes. But it’s a very bitter pill for the people next door.”

    Mah-Lon Grant, 62, and Gloria Grant, 57, said they would be homeless and their house likely gutted if Phillips’ nonprofit group hadn’t helped them buy it back.

    Their debt only was about $5,500, but it was overwhelming.

    The couple got behind on their taxes after losing their landscaping business when Mah-Lon Grant went to prison in 2005 for five years on felony firearm and assault charges, according to state records. He said the situation got out of control while he was defending himself as he collected a debt from an associate.

    “If we had to do it ourselves, I don’t think we would have been able to do it,” Mah-Lon Grant said. “There’s no way we could catch up.”

    “We are barely surviving.”

    The couple was able to buy the house, where they’ve lived for 34 years, back at auction for $500. They live there with their 22-year-old son and 15-month-old great-granddaughter.

    He said his family is different from other property owners using the loophole.

    “They are doing it for profit,” Grant said. “We are doing it for survival.”

    State Sen. Tupac Hunter, D-Detroit, has introduced legislation to ban buyers who owe back taxes.

    He said he’s looking to retool it to make sure nonprofits can buy properties on behalf of families, such as the Grants.

    But Hunter said he wants to stop “land speculation and the scavenging currently going on in Wayne County’s tax foreclosure auctions.”

    “My intent is to make it more difficult for land speculators to game the system,” Hunter wrote in an email.

    Szymanski said his office opposes Hunter’s bill because it’s too restrictive, but is brainstorming ways to prevent owners who can pay their taxes from buying back properties.

    “We want to help people in need, not make people rich,” Szymanski said.

    But Shifman and others who oppose limits on who can buy at auction said it will only hurt taxpayers further.

    All the revenue raised at the auction goes back to the city, schools and library.

    “I don’t know what the county is going to do without all those proceeds,” Shifman said. “You will eliminate a lot of buyers.”

    cmacdonald@detnews.com

    (313) 222-2396

    From The Detroit News: http://detnews.com/article/20110907/METRO01/109070383/Owners-escape-tax-debt-by-rebuying-foreclosed-homes#ixzz1XJMP2BOJ

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  • Tying Health Problems to Rise in Home Foreclosures , by S. MITRA KALITA , Wall street Journal


    The threat of losing your home is stressful enough to make you ill, it stands to reason. Now two economists have measured just how unhealthy the foreclosure crisis has been in some of the hardest-hit areas of the U.S.

    New research by Janet Currie of Princeton University and Erdal Tekin of Georgia State University shows a direct correlation between foreclosure rates and the health of residents in Arizona, California, Florida and New Jersey. The economists concluded in a paper published this month by the National Bureau of Economic Research that an increase of 100 foreclosures corresponded to a 7.2% rise in emergency room visits and hospitalizations for hypertension, and an 8.1% increase for diabetes, among people aged 20 to 49.

    Each rise of 100 foreclosures was also associated with 12% more visits related to anxiety in the same age category. And the same rise in foreclosures was associated with 39% more visits for suicide attempts among the same group, though this still represents a small number of patients, the researchers say.

    Teasing out cause and effect can be delicate, and correlation doesn’t necessarily mean foreclosures directly cause health problems. Financial duress, among other issues, could lead to health problems—and cause foreclosures, too.

    The economists didn’t find similar patterns with diseases such as cancer or elective surgeries such as hip replacement, leading them to conclude that areas with high foreclosures are seeing mostly an increase of stress-related ailments.

     

    Tuesday brought news of further weakness in the housing market as the closely watched S&P/Case-Shiller home-price index came in 5.9% lower for the second quarter from a year earlier. Continued job losses and economic uncertainty could weigh on home prices and make for another wave of foreclosures, economists say.

    It may not just be foreclosure victims arriving at hospitals—but neighbors also grappling with depleting equity in their biggest investment.

    “You see foreclosures having a general effect on the neighborhood,” Ms. Currie says. “Everybody’s stressed out. There is a connection between people’s economic well being and their physical well being.”

    The situation got so bad for Patricia Graci, a 51-year-old Staten Island, N.Y., resident, that she canceled a recent court appearance related to the foreclosure on her house because she couldn’t get out of bed. After her husband lost his job as a painter in 2008, the Gracis relied on savings to pay their mortgage for two years.

    “Everything was going downhill. My savings were going down to nothing,” says Ms. Graci. “When I realized the money wasn’t there anymore, I started getting very anxious and depressed.”

    She says her lender advised her to default on her mortgage to qualify for a loan modification. Ms. Graci, who was an assistant bank manager and already had rheumatoid arthritis, says she began seeing a therapist and landed in the hospital with difficulty breathing in December 2009. A few weeks later came the foreclosure notice from the bank.

    “They told me it was more anxiety and stress that made me wind up in the hospital than the arthritis,” Ms. Graci says. After repeatedly missing work due to illness, Ms. Graci went on long-term disability.

    The areas that have the highest foreclosure rates also tend to have a large portion of their population unemployed, underemployed or uninsured. Ms. Currie says the research accounted for this by instituting controls for persistent differences among areas, such as poverty rates, as well as for county-level trends. Much of the 2005-2009 period examined came before unemployment peaked, too, she says. The researchers examined hospital-visit numbers and foreclosure rates in all ZIP Codes that had those data available.

    The areas that have the highest foreclosure rates also tend to have a large portion of their population unemployed, underemployed or uninsured. Ms. Currie says the research accounted for this by instituting controls for persistent differences among areas, such as poverty rates, as well as for county-level trends. The time period examined, 2005 to 2007, was before unemployment peaked, she says. The researchers examined hospital-visit numbers and foreclosure rates in all ZIP Codes that had those data available.

    They found that areas in the top fifth of foreclosure activity have more than double the number of visits for preventable conditions that generally don’t require hospitalization than the bottom fifth.

    At the local hospital in Homestead, Fla., a city of mostly single-family, middle-class homes about 30 miles from Miami, the emergency room has been bustling. Emergency visits to the hospital in 2010 more than doubled from 10 years earlier to about 67,000, and emergency department medical director Otto Vega says they will surpass 70,000 this year. Homestead has the highest rate of mortgage delinquencies in the U.S.—in June, 41% of mortgage holders in the hardest-hit ZIP Code of Homestead were 90 days or more past due on payments, according to real-estate data firm CoreLogic Inc.

    While the most common ailments are respiratory problems and pneumonia, Dr. Vega notes an increase in psychosomatic disorders, such as patients with chest pain and shortness of breath, and others who feel suicidal. “A lot of young people, less than 50 years old, have chest pain. You know it’s anxiety,” he says.

    Nationwide, overall emergency-room visits have also been rising, growing 5% from 2007 to 127.3 million in 2009, according to the American Hospital Association. But inpatient stays have largely kept pace with population growth over the last decade, says Beth Feldpush, a vice president for policy and advocacy at the National Association of Public Hospitals.

    The number of people covered by employer-sponsored insurance has been falling, she says. “When people don’t have insurance, they put off seeking care for too long and end up in the emergency room.”

    And some of those seeking treatment had medical conditions before foreclosure—but the stress of losing their homes has exacerbated their ailments.

    In 2008, Norman Adelman of Freehold, N.J., called his lender to ask for a forbearance of three or four months, saying he was about to undergo knee-replacement surgery. The lender complied and Mr. Adelman, who runs a home-energy business, says he began scaling back his work. He underwent needed tests and doctor visits.

    After two months of not paying his mortgage, he successfully applied for a loan modification, taking his monthly payment from $2,700 to $1,900. But then the loan was sold—and a new servicer didn’t recognize the terms of the arrangement, he says.

    Mr. Adelman is fighting the new lender but says he has been in and out of the hospital for the last two years. He never had his knees replaced and is now on antidepressants and antianxiety medication.

    “He’s deteriorated. He’s had sleepless nights,” says his wife, Shulamis. “You always have this fear of being thrown out. He’s just gotten worse and worse from not sleeping.”

    Earlier this month, after working with the nonprofit Staten Island Legal Services, Ms. Graci received a trial loan modification. “I’m happy but I am still scared,” she says. “I want a permanent solution. I don’t know if I am in the clear.”

    Write to S. Mitra Kalita at mitra.kalita@wsj.com

    Corrections & Amplifications
    The researchers examined the years 2005 through 2009. An earlier version of this article incorrectly implied the research only covered 2005 through 2007

     

     

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  • Promoting Housing Recovery Parts 1 and 2, by Patrick Pulatie


    Previously, I have posted articles regarding housing and foreclosure issues. The purpose was to begin a dialogue on the steps to be taken to alleviate the foreclosure crisis, and to promote housing recovery.   Now, we need to explore how to restart lending in the private sector.  This will be a three part article, with parts I and II herein, and III in the next post.

    To begin, we must understand how we got to the point of where we are today, and whereby housing became so critical a factor in the economy. (This is only an overview. I leave it to the historians to fill in all the details.)

    Part One – Agreeing On The Problems

    Historical Backdrop

    At the beginning of the 20th century, the U.S. population stood about 76,000,000 people. By the end of 2000, the population was over 310 million. The unprecedented growth in population resulted in the housing industry and related services becoming one of several major engines of wealth creation during the 20th century.

    During the Depression, large numbers of farm and home foreclosures were occurring. The government began to get involved in housing to stop foreclosures and stimulate housing growth. This resulted in the creation of an FHA/Fannie Mae– like program, to support housing.

    WWII led to major structural changes in the U.S., both economically and culturally. Manufacturing and technological changes spurred economic growth. Women entered the work force in huge numbers. Returning veterans came back from the war desiring to leave the rural areas, begin families, and enter the civilian workforce. The result was the baby boom generation and its coming influence.

    From the 1950s through the 1970s, the US dominated the world economically. Real income growth was occurring for all households. Homeownership was obtainable for ever increasing numbers of people. Consumerism was rampant.

    To support homeownership, the government created Fannie Mae and Freddie Mac so that more people could partake in the American Dream. These entities would eventually become the primary source of mortgages in the U.S. F&F changed the way mortgages were funded, and changed the terms of mortgages, so that 30 year mortgages became the common type of loan, instead of 5 to 15 year mortgages.

    Storm clouds were beginning to appear on the horizon at the same time. Japan, Korea, Germany, and other countries had now come out of their post war depressions. Manufacturing and industrial bases had been rebuilt. These countries now posed an economic threat to the U.S. by offering improved products, cheaper labor costs, and innovation. By the end of the 1970s, for many reasons, US manufacturing was decreasing, and service related industries were gaining importance.

    In the 1980s and 1990s, manufacturing began to decline in the U.S. Service Industries were now becoming a major force in the economy. With the end of the Cold War in 1989, defense spending began to decline dramatically, further depressing the economy.

    In the early 1990s, F&F engaged in efforts to increase their share of the mortgage market. They freely admitted wanting to control the housing market, and took steps to do so, undermining lenders and competition, and any attempts to regulate them.

    In 1994, homeownership rates were at 64% in the US. President Clinton, along with Congress and in conjunction with Fannie and Freddie, came out with a new program with the intent to promote a 70% homeownership rate. This program was promoted even though economists generally considered 64% to be the maximum amount of homeownership that an economy could readily support. Above 64%, people would be 

    “buying” homes, but without having the financial capabilities to repay a loan. The program focused upon low income persons and minorities. The result was greater demand for housing and homeownership, and housing values began to increase.

    Lenders and Wall Street were being pushed out of the housing market by F&F, and had to find new markets to serve. F&F did not want to service the new markets being created by the government homeownership programs. The result was that Wall Street would naturally gravitate to that market, which was generally subprime, and also to the jumbo market, which F&F could not serve due to loan amount restrictions. This was the true beginning of securitized loan products.

    The events of 9/11 would ultimately stoke the fires of home ownership even further. 9/11 occurred as the US was coming out of a significant recession, and to keep the country from sliding back into recession, the Fed lowered interest rates and kept them artificially low until 2003. Wall Street, recognizing the promise of good financial returns from securitized loans, freed up more and more capital for banks and mortgage bankers to lend. This led to even greater demand for homes and mortgages.

    To meet the increased demand, home construction exploded. Ancillary services did well also, from infrastructure, schools, hospitals, roads, building materials, and home decor. The economy was booming, even though this was “mal-investment” of resources. (Currently, as a result of this activity, there are estimated to be from 2m to 3.5m in excess housing units, with approximately 400k being added yearly to housing stock.)

    It did not stop there. Buyers, in their increasing zeal, were bidding for homes, increasing the price of homes in many states by 50 to 100,000 dollars more than what was reasonable. The perception was that if they did not buy now, then they could never buy. Additionally, investors began to purchase multiple properties, hoping to create a home rental empire. This led to unsustainable home values.

    Concurrently, the Fed was still engaged in a loose money policy. This pumped hundreds of billions of dollars into the housing economy, with predictable results. With increasing home values, homeowners could refinance their homes, often multiple times over, pulling cash out and keeping the economy pumped up artificially. A homeowner could pull out 50,000 to 100,000 dollars or more, often every year or two, and use that money to indulge themselves, pretending they had a higher standard of living than what existed. The government knew that this was not a reasonable practice, but indulged in it anyway, so as to keep up an appearance of a healthy economy. Of course, this only compounded the problem.

    The end result of the past 40 years of government intervention (and popular support for that intervention) has been a housing market that is currently overbuilt and still overvalued. In the meantime, real wages have not increased since the mid 1990s and for large numbers of the population, negative income growth has been experienced. Today, all segments of the population, homeowners especially so, are saddled with significant mortgage debt, consumer debt, and revolving credit debt. This has led to an inability on the part of the population to buy homes or other products. Until wage and debt issues are resolved, employment increases, and housing prices have returned to more reasonable values, there can be no housing recovery.

    Current Status

    As all know, the current status of housing in the US is like a ship dead in the water, with no ability to steer except to roll with the waves. A recap:

    Private securitization once accounted for over 25% of all mortgage loans. These efforts are currently nonexistent except for one entity, Redwood Trust, which has issued one securitized offerings in 2010 and one in 2011. Other than this, Wall Street is afraid to invest in Mortgage Products (to say nothing of downstream investors).

    Banks are unable to lend their own money, which represented up to 15% of all lending. Most banks are capital impaired and have liquidity issues, as well as unknown liabilities from bad loans dating to the bubble.

    Additionally, banks are suffering from a lack of qualified borrowers. Either there is no equity in the home to lend on, or the borrowers don’t have the financial ability to afford the loan. Therefore, the only lending that a bank can engage in is to execute loans and sell them to Fannie Mae, Freddie Mac, or VA and FHA. There are simply no other options available.

    F&F are buying loans from the banks, but their lending standards have increased, so the loan purchases are down. F&F still distort the market because of government guarantees on their loans (now explicit instead of implicit), and they are still able to purchase loans above $700k, which was implemented in response to the housing crisis.

    F&F are still having financial issues, with the government having bailed them out to the tune of $140b, with much more to come.

    VA is buying loans and doing reasonably well, but they serve a tiny portion of the market.

    FHA has turned into the new subprime, accepting credit challenged borrowers, and with loan to values of 95% or greater. Default rates on FHA loans are rising significantly, and will pose issues for the government when losses absorb all FHA loss reserves, which may have already happened (depending on how you look at the accounting).

    The Mortgage Insurance companies are financially depressed, with PMI being forced to stop writing new policies due to loan loss reserves being depleted. Likely, they will cease business or be absorbed by another company. Other companies are believed to be similarly in trouble, though none have failed yet.

    The US population is still overburdened with debt. It is believed that the household consumer debt burden is over 11%, for disposable income. This is far too high for effective purchasing of any products, especially high end. (There has been a lessening of this debt from its high of 14% in 2008, but this has primarily been the result of defaults, so most of those persons are not in a position to buy.)

    Patrick Pulatie is the CEO of LFI Analytics. He can be reached at 925-522-0371, or 925-238-1221 for further information. http://www.LFI-Analytics.com, patrick@lfi-analytics.com.

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  • The New Homestead Act: Update, by Dr. Ed’s Blog


    President Barack Obama recently promised that he has a plan to create jobs, which will be disclosed in September, after he takes 10 days off in Martha’s Vineyard. I certainly hope he comes up with a good plan. If he needs one, how about the one that Carl Goldsmith and I proposed at the beginning of August? [1] I met with my congressman, Gary Ackerman, last Tuesday to pitch the plan. He liked it well enough to issue a press release on Wednesday of this week endorsing it and promising to introduce the “Homestead: Act 2” when Congress returns from its August recess.[2]

    The Act aims to reduce the huge overhang of unsold homes by offering a matching down payment subsidy of up to $20,000 for homebuyers, who do not currently own a home, and exempting newly acquired rental properties from taxation for 10 years. The cost of these incentives would be offset by the tax revenues collected by lowering the corporate tax rate on repatriated earnings to 10%. 

    Congressman Gary Ackerman is presently serving his fifteenth term in the US House of Representatives. He represents the Fifth Congressional District of New York, which encompasses parts of the New York City Borough of Queens and the North Shore of Long Island, including west and northeast Queens and northern Nassau County. Ackerman serves on the powerful Financial Services Committee, where he sits on two Subcommittees: Financial Institutions and Consumer Credit as well as Capital Markets and Government-Sponsored Enterprises (of which he is the former Vice Chairman). The stock market rose sharply after March 12, 2009, when Mr. Ackerman, during a congressional hearing, leaned on Robert Herz, the head of FASB, to suspend the mark-to-market rule. FASB did so on April 2. I had brought this issue to the congressman’s attention in a meeting we had during November 2008.

     

    Dr. Ed’s Blog
    http://blog.yardeni.com/

     

     

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  • The Meat of the Matter – In Re: Veal Analyzed, by Phil Querin, Q-Law.com


     

    “When a note is split from a deed of trust ‘the note becomes, as a practical matter, unsecured.’ *** Additionally, if the deed of trust was assigned without the note, then the assignee, ‘having no interest in the underlying debt or obligation, has a worthless piece of paper.’” [In re Veal – United States Bankruptcy Appellate Panel of the Ninth Circuit (June 10, 2011)]

    Introduction. This case is significant for two reasons: First, it was heard and decided by a three-judge Bankruptcy Appellate Panel for the Ninth Circuit, which includes Oregon.  Second, it represents the next battleground in the continuing foreclosure wars between Big Banks and Bantam Borrowers: The effect of the Uniform Commercial Code (UCC”)on the transferability of the Promissory Note (or “Note”).

    Remember, the Trust Deed follows the Note.  If a lender is the owner of a Trust Deed, but cannot produce the actual Note which it secures, the Trust Deed is useless, since the lender is unable to prove it is owed the debt.  Conversely, if the lender owns the Note, but not the Trust Deed, it cannot foreclose the secured property. [For a poetic perspective on the peripatetic lives of a Note and Trust Deed, connect here. – PCQ]

    By now, most observers are aware that Oregon’s mandatory recording statute, ORS 86.735(1), has been a major impediment to lenders and servicers seeking trying to foreclose borrowers.  Two major Oregon cases, the first in federal bankruptcy court, In re McCoy, and the other, in federal district trial court, Hooker v. Bank of America, et. al, based their decisions to halt the banks’ foreclosures, squarely on the lenders’ failure to record all Trust Deed Assignments.  To date, however, scant mention has been made in these cases about ownership of the Promissory Note. [Presumably, this is because a clear violation of the Oregon’s recording statute is much easier to pitch to a judge, than having to explain the nuances – and there are many – of Articles 3 and 9 of the UCC.  – PCQ]

    Now we have In re: Veal, which was an appeal from the bankruptcy trial judge’s order granting Wells Fargo relief from the automatic stay provisions under federal bankruptcy law.   Such a ruling meant that Wells Fargo would be permitted to foreclose the Veals’ property.  But since this case arose in Arizona – not Oregon – our statutory law requiring the recording of all Assignments as a prerequisite to foreclosure, did not apply.  Instead, the Veals’ lawyer relied upon the banks’ failure to establish that it had any right under the UCC to enforce the Promissory Note.

    Legal Background. For reasons that do not need to be explained here, the Veals filed two contemporaneous appeals. One was against Wells Fargo Bank, which was acting as the Trustee for a REMIC, Option One Mortgage Loan Trust 2006–3, Asset–Backed Certificates Series 2006–3.  In the second appeal, the Veals challenged the bankruptcy court’s order overruling their objection to a proof of claim filed by Wells Fargo’s servicing agent, American Home Mortgage Servicing, Inc. (“AHMSI”).

    Factual Background. In August 2006, the Veals executed a Promissory Note and Mortgage in favor of GSF Mortgage Corporation (“GSF”). On June 29, 2009, they filed a Chapter 13 bankruptcy.  On July 18, 2009, AHMSI filed a proof of claim, on behalf of Wells Fargo as its servicing agent.  AHMSI included with its proof of claim the following documents:

    • A copy of the Note, showing an indorsement[1] from GSF to “Option One”[2];
    • A copy of the GSF’s Mortgage with the Veals;
    • A copy of a recorded “Assignment of Mortgage” assigning the Mortgage from GSF to Option One; and,
    • A letter dated May 15, 2008, signed by Jordan D. Dorchuck as Executive Vice President and Chief Legal Officer of AHMSI, addressed to “To Whom it May Concern”, stating that AHMSI acquired Option One’s mortgage servicing business.[3]

    The Veals argued that AHMSI [Wells’ servicing agent] lacked standing since neither AHMSI or Wells Fargo established that they were qualified holders of the Note under Arizona’s version of the UCC.

    In a belated and last ditch effort to establish its standing, Wells Fargo filed a copy of another Assignment of Mortgage, dated after it had already filed for relief from bankruptcy stay.  This Assignment purported to transfer to Wells Fargo the Mortgage held by “Sand Canyon Corporation formerly known as Option One Mortgage Corporation”.

    The 3-judge panel noted that neither of the assignments (the one from GSF to Option One and the other from Sand Canyon, Option One’s successor, to Wells) were authenticated – meaning that there were no supporting affidavits or other admissible evidence vouching for the authenticity of the documents.  In short, it again appears that none of the banks’ attorneys would swear that the copies were true and accurate reproductions of the original – or that they’d even seen the originals to compare them with.  With continuing reports of bogus and forged assignments, and robo-signed documents of questionable legal authority, it is not surprising that the bankruptcy panel viewed this so-called “evidence” with suspicion, and did not regard it as persuasive evidence.

    • As to the Assignment of Mortgage from GSF (the originating bank) to Option One, the panel noted that it purported to assign not only the Mortgage, but the Promissory Note as well.[4]
    • As to the Assignment of Mortgage from Sand Canyon [FKA Option One] to Wells Fargo[created after Wells Fargo’s motion for relied from stay], the panel said that the document did not contain language purporting to assign the Veals’ Promissory Note.  As a consequence[even had it been considered as evidence], it would not have provided any proof of the transfer of the Promissory Note to Wells Fargo. At most, it would only have been proof that the Mortgage had been assigned.

    After considerable discussion about the principles of standing versus real party in interest, the 3-judge panel focused on the latter, generally defining it as a rule protecting a defendant from being sued multiple times for the same obligation by different parties.

    Applicability of UCC Articles 3 and 9. The Veal opinion is well worth reading for a good discussion of the Uniform Commercial Code and its applicability to the transfer and enforcement of Promissory Notes.  The panel wrote that there are three ways to transfer Notes.  The most common method is for one to be the “holder” of the Note.  A person may be a “holder” if they:

    • Have possession of the Note and it has been made payable to them; or,
    • The Note is payable to the bearer [e.g. the note is left blank or payable to the “holder”.]
    • The third way to enforce the Note is by attaining the status of a “nonholder in possession of the [note] who has the rights of a holder.” To do so, “…the possessor of the note must demonstrate both the fact of the delivery and the purpose of the delivery of the note to the transferee in order to qualify as the “person entitled to enforce.”

    The panel concluded that none of Wells Fargo’s exhibits showed that it, or its agent, had actual possession of the Note.  Thus, it could not establish that it was a holder of the Note, or a “person entitled to enforce” it. The judges noted that:

    “In addition, even if admissible, the final purported assignment of the Mortgage was insufficient under Article 9 to support a conclusion that Wells Fargo holds any interest, ownership or otherwise, in the Note.  Put another way, without any evidence tending to show it was a “person entitled to enforce” the Note, or that it has an interest in the Note, Wells Fargo has shown no right to enforce the Mortgage securing the Note. Without these rights, Wells Fargo cannot make the threshold showing of a colorable claim to the Property that would give it prudential standing to seek stay relief or to qualify as a real party in interest.”

    As for Wells’ servicer, AHMSI, the panel reviewed the record and found nothing to establish that AHMSI was its lawful servicing agent.  AHMSI had presented no evidence as to who possessed the original Note.  It also presented no evidence showing indorsement of the Note either in its favor or in favor of Wells Fargo.  Without establishing these elements, AHMSI could not establish that it was a “person entitled to enforce” the Note.

    Quoting from the opinion:

    “When debtors such as the Veals challenge an alleged servicer’s standing to file a proof of claim regarding a note governed by Article 3 of the UCC, that servicer must show it has an agency relationship with a “person entitled to enforce” the note that is the basis of the claim. If it does not, then the servicer has not shown that it has standing to file the proof of claim. ***”

    Conclusion. Why is the Veal case important?  Let’s start with recent history: First, we know that during the securitization heydays of 2005 – 2007, record keeping and document retention were exceedingly lax.  Many in the lending and servicing industry seemed to think that somehow, MERS would reduce the paper chase.  However, MERS was not mandatory, and in any event, it captured at best, perhaps 60% of the lending industry.  Secondly, MERS tracked only Mortgages and Trust Deeds – not Promissory Notes.  So even if a lender can establish its ownership of the Trust Deed, that alone is not enough, without the Note, to permit the foreclosure.

    As recent litigation has revealed, some large lenders, such as Countrywide, made a habit of holding on to their Promissory Notes, rather than transferring them into the REMIC trusts that were supposed to be holding them.  This cavalier attitude toward document delivery is now coming home to roost.  While it may not have been a huge issue when loans were being paid off, it did become a huge issue when loans fell into default.

    So should the Big Banks make good on their threat to start filing judicial foreclosures in Oregon, defense attorneys will likely shift their sights away from the unrecorded Trust Deed Assignments[5], and focus instead on whether the lenders and servicers actually have the legal right to enforce the underlying Promissory Notes.

    [1] The word “indorsement” is UCC-speak for “endorsement” – as in “endorsing a check” in order to cash it.

    [2] Although not perhaps as apparent in the opinion as it could have been, there were not successive indorsements of the Veals’ Promissory Note, i.e. from the originating bank to the foreclosing bank. There was only one, i.e. from GSF to Option One.  There was no evidence that the Note, or the right to enforce it, had been transferred to Wells Fargo or AHMSI.  Ultimately, there was no legal entitlement under the UCC giving either Wells or its servicer, AHMSI, the ability to enforce that Note.  The principle here is that owning a borrower’s Trust Deed or Mortgage is insufficient without also owning, or have a right to enforce, the Promissory Note that it secures.

    [3] Mr. Dorchuck did not appear to testify.  His letter, on its face, is clearly hearsay and inadmissible.  The failure to properly lay any foundation for the letter, or authenticate it “under penalty of perjury” is inexplicable – one that the bankruptcy panel criticized. This was not the only example of poor evidentiary protocol followed by the banks in this case.  However, this may not be the fault of the banks’ lawyers. It is entirely possible these were the documents they had to work with, and they declined to certify under “penalty of perjury” the authenticity of them. If that is the case, one wonders how long good attorneys will continue to work for bad banks?

    [4] This is a drafting sleight of hand.  Mortgages and Trust Deeds are transferred by “assignment” from one entity to another. But Promissory Notes must be transferred under an entirely different set of rules – the UCC. Thus, to transfer both the Note and Mortgage by a simple “Assignment” document, is facially insufficient, by itself, to transfer ownership of – or a right to enforce – the Promissory Note.

    [5] The successive recording requirement of ORS 86.735(1) only applies when the lender is seeking to foreclose non-judicially.  Judicial foreclosures do not contain that statutory requirement.  However, to judicially foreclose, lenders will still have to establish that they meet the standing and real party interest requirements of the law.  In short, they will have to deal head-on with the requirements of Articles 3 and 9 of the Uniform Commercial Code.  The Veal case is a good primer on these issues.

    Phil Querin
    Attorney at Law
    http://www.q-law.com/
    121 SW Salmon Street, Suite 1100 Portland, OR 97204 
    Tel: (503) 471- 1334

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