The Treasury Department’s loan modification program, which has been criticized as ineffective almost since its inception, came in for another battering in a Congressional report released Tuesday.
The panel’s report calls the program a failure, although Senator Ted Kaufman, a Democrat from Delaware and chairman of the panel, declined to go that far in a conference call with reporters.
“The program has turned out to be a lot smaller and had a lot less impact on the housing market than we thought,” Mr. Kaufman said.
One reason: the loan servicers, who act as middlemen between the distressed homeowners and the investors who own the mortgage, often find it more profitable to foreclose than modify. The modification program provides incentives for servicers to participate in the program but no penalties for their failure to do so.
The oversight report estimated that the modification program would spend only about $4 billion of the $30 billion approved for it. With the deadline for reallocating the money having passed, “an untold number of borrowers may go without help,” the panel said.
Tim Massad, acting assistant secretary for financial stability, said at his own press briefing that the criticism was “somewhat unfair.”
Aside from the borrowers directly helped by the modification program, Mr. Massad said, many others have been helped indirectly, as servicers used the government standards in proprietary modifications.
The program “is having a real impact on the ground, even though I certainly acknowledge there are a lot of challenges and a lot of difficulties,” he said.
One of the challenges is a persistently weak housing market. Many households that have won permanent modifications are still heavily in debt, which leaves them vulnerable to redefaulting.
If the redefault level rises significantly, Mr. Kaufman said, “that’s a lot of taxpayer money down the drain with no effect.”
Since the development of the Hardest Hit Fund in February, the state of Oregon has received more than $200 million to help homeowners struggling with their mortgages and to developforeclosure prevention measures.
This Friday the state will open its first foreclosure prevention program.
The application for the Mortgage Payment Assistance (MPA) program will be available on the recently launched OHSI Web site from December 10 to January 14, 2011.
Program participants will be randomly selected from a pool of eligible applicants by a software program and notified after the application is closed.
Each applicant will fill out the online application and then meet face-to-face with an advisor to answer questions and make sure all required documents have been submitted.
“While we recognize there are not enough resources to serve the great need faced by homeowners in Oregon, we are pleased to have created a solid program that will help smooth the difficult path many families have been traveling,” said Victor Merced, director of Oregon Housing and Community Services (OHCS).
Around 5,000 applicants will be selected to receive mortgage payment help for up to one year or up to a maximum payout of $20,000, whichever comes first.
The MPA has been funded with $100 million of the Hardest Hit money. Three smaller programs developed by the OHSI will use portions of the remaining money for foreclosure prevention initiatives.
WASHINGTON — A national consumer coalition plans to file a series of landmark federal fair housing complaints beginning Monday challenging a widespread practice by banks and mortgage lenders: Requiring borrowers who apply for FHA loans to have FICO credit scores well above the 580 minimum score set by the FHA itself for qualified applicants with 3.5 percent down payments.
The complaints allege that the higher FICO requirements disproportionately discriminate against African-American and Latino borrowers, many of whom have credit scores above the 580 threshold set by FHA but below the 620 to 660 minimums frequently imposed by private lenders. FICO scores run from 300 to 850, with higher scores correlated with lower future risk of default.
Since FHA insures lenders against losses from serious delinquency or foreclosure, there is “no legitimate business justification” for rejecting applicants solely on the basis of FICO scores that are acceptable to FHA, the complaints contend.
The identities of the 20-plus mortgage lenders who are expected to be the subjects of fair lending filings were not available in advance. But John Taylor, CEO of the National Community Reinvestment Coalition, which plans to file the complaints, said they include “large, medium and small banks,” all of whom maintain minimum FICO scores higher than what FHA requires. The coalition represents 600 local and regional consumer, economic development, and civil rights groups, and has long been an advocate of equal opportunity in mortgage lending.
According to a draft complaint that I obtained in advance, the coalition conducted what it calls “extensive” blind tests among lenders active in the FHA program. Testers presented themselves to loan officers as financially qualified applicants for FHA-insured mortgages, with FICO scores between 601 and 605. Loan officers routinely informed them that they cannot accept applicants with FICOs less than 620.
When applicants responded that they knew FHA is willing to insure loans for borrowers with credit scores as low as 580, often they were told the same: We require higher FICO scores on FHA loans than FHA does itself.
Lenders with higher FICO policies “knew or should have known that African-Americans and Latinos disproportionately have credit scores between 620 and 580, both within the FHA portfolio” and within the lender’s own market areas. As a result, the complaint argues, these lenders’ policies have “the effect of discriminating against African-Americans (and) Latinos.”
In an interview, Taylor said “the insidious part of these policies” is “not simply that they discourage” minorities from purchasing homes, but they also are “cutting off refinancings” that might be available via FHA for current homeowners who need loan modifications to avoid foreclosures.
FHA, which was created by the federal government during the Great Depression, traditionally has been a crucial source of mortgage financing for moderate-income, minority and first-time home purchasers.
Asked what he thinks about lenders’ independent credit score cutoff limits, David H. Stevens, the FHA commissioner, said the current FICO 580 minimum standard is “based on pretty in-depth analysis of performance data” by borrowers, and represents an acceptable level of risk for the agency consistent with its mission.
In an interview that did not touch on the upcoming fair-lending complaints, Stevens said he has “concerns” about the negative impacts lenders trigger when they impose stricter credit-score standards on applicants than the minimum required by FHA. This is especially the case when borrowers’ scores are low not because they are “habitual late payers,” but because they’ve experienced unforeseen economic reverses such as recession-related job losses or uninsured medical bills.
One of the country’s top advisers to FHA lenders, Brian Chappelle, a principal with Washington, D.C.-based Potomac Partners, said banks set higher credit-score limits for sound economic reasons: They are concerned about costly indemnification demands from FHA and “reputational risk” in the investment community if low-FICO loans go sour. Also, Chappelle said, they don’t want to lose valuable revenue they receive for servicing FHA-insured mortgages that are paying on time.
Terry H. Francisco, a spokesman for Bank of America, one of the highest-volume FHA lenders, confirmed that rationale and said the bank sets its own “credit standards based on our best analysis of an applicant’s capacity and willingness to repay the loan.”
Brian D. Montgomery, the immediate past FHA commissioner, agreed that the recent “stricter credit” limits have “some (people) asking if FHA is still serving (its) traditional type of borrower.” But, he emphasized, the potentially heavy “incremental expenses of managing delinquent borrowers” are the key drivers of rising credit score standards.
Ken Harney’s e-mail address is kenharney(at)earthlink.net.
Court documents show that DiCugno — who left a career as a high school teacher and coach in 2005 to, in his words, “run after wealth” — found himself at the heart of two federal investigations.
Charged alongside Ashmore in a mortgage fraud scheme, DiCugno, 38, is also assisting authorities investigating activities at Pierce Commercial Bank, according to statements to the court from his own attorney.
Riley went on to claim that the government may indict others involved in Pierce Commercial Bank as early as the end of this year.
Portmann was a college friend of DiCugno’s, Riley told the court, and brought him into Pierce Commercial Bank even though DiCugno had no experience in finances.
In a letter to the court, DiCugno said the promise of easy money prompted him to give up a fulfilling career.
“I regret ever leaving my teaching and coaching job to run after wealth,” DiCugno said. “I was a good teacher and coach and I was impactful in the lives of the students I taught.
“I should have been content with this career. I am faced with the stark reality that I will never be a public school teacher again.”
While with the bank, DiCugno worked with Ashmore to secure loans “straw buyers” who sold their names to Ashmore for money. DiCugno was charged alongside Ashmore and two others following an investigation into a wide-ranging mortgage fraud scheme that saw 40 properties sold to straw buyers.
Federal prosecutors contended Ashmore and others recruited “straw buyers” — individuals willing to lend their identities to obtain mortgage loans — with promises of payment up to $10,000. The buyers then obtained overly large loans to purchase homes, prosecutors contended, passing the leftover money to those running the scam.
The properties were often “flipped” to another straw buyer, at an even higher price, with the excess amount going to Ashmore.
One Bellevue home bought by a straw buyer at Ashmore’s behest for $655,000 was sold to a co-defendant for $830,000 then resold to a straw buyer for $1.1 million, netting the conspirators $445,000, prosecutors contended. Two other homes noted in the complaint were resold for profits in excess of $100,000.
In the end, the straw buyers would fail to make payments on the loans and properties would go into foreclosure, causing the financial institutions and mortgage lenders to suffer substantial losses. While his attorney disagrees, prosecutors contend DiCugno’s actions during five real estate transactions cost banks about $1.1 million.
Asking that his client be sentenced to home detention and community service, Riley told the court DiCugno’s superiors — Portmann and two other men — “set the tone” for loan officers at the bank. DiCugno, the attorney said, was “naïve.”
DiCugno resigned after the bank was served with a grand jury subpoena related to the investigation into Ashmore’s activities.
Pierce Commercial Bank — which had loaned a significant amount of money to those involved in the Ashmore scheme — ultimately shutdown its home loan business and came under increased scrutiny from state and federal regulators because of the badly damaged loan portfolio. State regulators closed the bank Nov. 5.
“Like many institutions, Pierce Commercial Bank has experienced large losses associated with construction and land development loans,” Brad Williamson, Banks Division director for the Department of Financial Institutions, said at the time. “Unfortunately, the bank also suffered from poor mortgage lending practices that further impacted the bank’s earnings and capital.”
Prosecutors have asked that DiCugno be sentenced to 18 months in federal prison.
Such a sentence, which would fall 15 months short of the standard minimum, is warranted in large part because of DiCugno’s cooperation with authorities investigating Ashmore and Pierce Commercial Bank, Assistant U.S. Attorney Nicholas Brown told the court.
Brown noted, though, that DiCugno, as a bank employee, had a heightened responsibility to not to engage in fraud.
“While there appears to have been numerous others at Pierce bank involved in similar fraud, (DiCugno) was a large part of the overall problem,” Brown said in a statement to the court.
“As the defense notes, he was clearly intelligent enough to have known better. … Instead, to pursue his own greed, he joined the conspiracy perpetrated by Mr. Ashmore and others with hopes to gain financially.”
Having pleaded guilty to a single count of wire fraud, DiCugno is scheduled to be sentenced Thursday morning by U.S. District Court Judge Richard Jones.
Jones is also scheduled to sentence one of DiCugno’s co-defendants, Hiep Nguyen, on similar charges. A third co-defendant, Luke Reimer, was sentenced to 15 months in prison Tuesday.
Convicted of wire fraud following a jury trial in which DiCugno testified for the prosecution, Ashmore, 42, is scheduled to be sentenced Dec. 17.
Recently, the Federal Housing Administration (FHA) made a change to its premium pricing structure: lowering the upfront premium amount from 2.25% to 1% and raising its monthly premium from .50% to .85% for 30-year loans with 5% or more down and from .55% to .90% for 30-year loans with less than 5% down. This change has made some people anxious and others just don’t care. What does this change mean to today’s homebuyers? Is this a good change or not?
Well, that depends. For borrowers with lower credit scores, an FHA loan may continue to be the best option. For borrowers with higher credit scores, private mortgage insurers offer cheaper alternatives.
Even FHA commissioner David Stevens said, in an article that appeared in the National Mortgage News on September 27, 2010, “We have actually made GSE loans with private mortgage insurance a better option for some homebuyers.”
Private mortgage insurance (MI) has become a better option because private mortgage insurance companies have made changes, too. In response to the housing and economic downturn many private companies, including mortgage insurers tightened, however, as the economy began to recover most have spent the majority of 2010, opening up markets and normalizing guidelines and some have altered their pricing . The result is private MI options that are competitive with FHA, especially for borrowers of credit scores of 720 or higher.
Here are 6 things you need to know about the Monthly MI premium plan offered by private MI insurers:
No upfront premium: While all MI companies offer premium plans that allow for an upfront premium, the most popular premium structure by far in the industry is the Monthly MI plan where no upfront payment is needed. Borrowers choosing an FHA loan must either pay an additional 1% at closing or finance the amount into their loan.
Lower loan amount: Most FHA borrowers choose to finance that upfront premium into the loan and spread it over the life of the loan, increasing their debt. With a private MI Monthly premium, there is no upfront premium and no need to increase the loan amount.
Greater equity: Because there was no upfront premium to finance into the loan with a private MI Monthly premium, the borrower is put in a better equity position right from the start.
Lower or comparable monthly payment: Here is where homebuyers and real estate professionals should rely on a professional loan originator, because several variables will come into play, especially the borrowers’ credit scores.
For instance, at MGIC, the leading private mortgage insurance company, a borrower with a 720 credit score and 5% downpayment will pay a monthly premium rate of .67%, compared to FHA’s premium rate of .85% for a borrower with the same score and downpayment. But remember that FHA also charges a 1% upfront premium! So it’s important to “do the math” to see which option is actually better for the borrower. In many cases, going the private MI route results in a lower monthly payment, compared to FHA.
Lower total MI cost: Because there is no upfront premium and often a lower monthly premium, the amount paid for mortgage insurance can be dramatically less with private MI compared to FHA. For example, on a $150,000 loan where the borrower put 5% down and had a credit score above 720, the borrower will pay more than $2,500 more in MI costs over 3 years with FHA compared to MGIC’s Monthly MI.
Cancellation:Fannie Mae and Freddie Mac have more flexible rules for cancellation than FHA, meaning a homebuyer using private MI may be able to cancel the monthly MI payment sooner than with FHA, saving even more money over the life of the loan.
It’s obvious that checking out all the options can really pay off for savvy lenders and homebuyers. To find out which is the better option, all the MI companies provide calculators that allow originators to compare FHA and private MI premium plans. (MGIC’s calculator is located at: www.mgic.com/calculator)
MGIC (www.mgic.com), the principal subsidiary of MGIC Investment Corporation, is the founder and leader of the private mortgage insurance industry, serving more than 3,300 lenders with locations across the country and Puerto Rico.
U.S. home prices are unlikely to fall much further in the next year even after a “discouraging” report on values in September, said Karl E. Case, the co-creator of the S&P/Case-Shiller Index.
“If I were betting even odds, I’d bet that we don’t have much further decline, but that we bounce along the bottom,” Case, a retired professor of economics at Wellesley College, said today in a Bloomberg Television interview on “Surveillance Midday” with Tom Keene. “If you gave me 2-to-1 odds, I’d bet they go down.”
Home prices in September dropped 0.8 percent from August, the biggest monthly decline since April 2009, the S&P/Case- Shiller index of prices in 20 U.S. cities showed today. Values rose 0.6 percent from September 2009, the smallest year-over- year gain in eight months.
Fifteen of the 20 cities in the index showed year-over-year declines, led by a 5.6 percent slump in Chicago. Falling home values threaten to undermine consumer confidence and slow an economic recovery after the worst recession since the 1930s.
The S&P Case-Shiller index measures resale values over the most recent three months. The September slump wasn’t a surprise because the index moved past June, when sales were inflated by homebuyer tax credits worth as much as $8,000, Case said.
“You’d expect it to be down,” he said. “Nonetheless, it was discouraging in the face of the fact that a lot of these cities had done well in the previous 18 months. Whether that was because of the credit or not, housing prices were up as much as 20 percent in some markets.”
29% Below Peak
National prices fell 1.5 percent in the third quarter from the same period last year, and decreased 2 percent from the previous three months. Prices are 29 percent below their peak of July 2006.
Home prices may drop another 10 percent, Christopher Low, chief economist at FTN Financial in New York, and Luigi Zingales, professor of finance at the University of Chicago’s Booth School of Business, said on “Surveillance Midday” today.
“It’s hard to imagine that prices can rise with this huge overhang of foreclosures and vacancies,” Zingales said.
Prices will probably find a bottom quicker without government support of the housing market, Low said.
“It’s probably better to get this done sooner rather than later,” he said.
‘Cultural Change’
Robert Shiller, the index’s other creator, said on the program that a “catastrophic drop in confidence” makes it unlikely demand for homes will recover soon. He declined to predict price changes.
“There’s been a cultural change,” said Shiller, a Yale University professor, citing a five-year decline in a confidence index by the National Association of Home Builders. “It goes beyond any short-run forecasts.”
Sales of existing homes, which make up more than 90 percent of the market, declined more than forecast in October amid foreclosure moratoriums and the absence of the tax credit, the National Association of Realtors reported last week. Sales fell in July to the slowest pace in a decade’s worth of record- keeping by the Chicago-based group.
To contact the reporter on this story: John Gittelsohn in New York at johngitt@bloomberg.net.
To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net.
CNBC’s Diana Olick reports that the investigation into the biggest financial fraud in recent history is about to be shelved: the reason, state AGs are nearing a settlement with banks, which will slap a few wrists, will see banks put some lunch money in a settlement fund, will result in some principal reductions, and everything will be well again, as banker bonuses surpass 2009 levels (as noted previously). Retroactively in perpetuity. In other news, state sponsored fraud in America is alive and well.
Update: don’t spend that bonus money on the January edition Perfect 10s just yet. In what seems to be a day of relentless newsflow, we have just learned via Charlie Gasparino and Fox Biz, that Phil Angelides is launching his own probe into the mortgage market. Then again, all this means is that BofA will need to spend a few million extra dollars to bribe the key people in this latest development, and then everything shall be well again.
Add Phil Angelides to the growing list of regulators investigating whether banks committed fraud in the $6.4 trillion mortgage-bond market, the FOX Business Network has learned.
The Financial Crisis Inquiry Commission, which Angelides chairs, has begun investigating whether mortgages packaged into bonds and now held by investors including government agencies like Fannie Mae and Freddie Mac were done so improperly, thus calling into question the legality of trillions of dollars of debt, according to people with direct knowledge of the matter.
The inner workings of the mortgage-backed securities market have come under intense scrutiny in recent months following revelations that big banks may have committed fraud by hiring so-called robo-signers to approve foreclosure applications on tens of thousands of mortgages. At issue: Whether the robo-signers properly approved foreclosures and whether people forced from their homes received due process.
The latest twist in the robo-signer controversy involves whether improper foreclosures and banks failing to follow proper legal procedures will call into question the mortgage bonds themselves. Many of the foreclosed mortgages aren’t held by banks, but have been placed in bonds held by investors. The money thus is returned to an investor holding the bond.
But if the foreclosure has been done by a robo-signer, or if the banks creating the bond did so improperly, as a recent congressional study suggested, then the bonds themselves could be declared illegal. That could pose big problems for the banks that created the mortgages and sold the bonds, like Bank of America (BAC: 11.94 ,-0.16 ,-1.32%) and JPMorgan (JPM: 39.58 ,-0.47 ,-1.17%) because it would allow investors to “put”, or force the banks to buy back, the underlying mortgages.
While sources say there is no universal solution to shoddy foreclosure practices at some of the nation’s largest mortgage banks/servicers, the three largest, BofA, JPM and Wells Fargo, may be agreeing to the same solution.
First, banks would pay into a fund used to compensate borrowers who have claims after their home has been sold in foreclosure. The borrowers would have to prove they were wronged in the process, and the attorney’s general would allocate the funds. In other words, the AGs would be the administrators. The amount of said fund is still undetermined, and likely still in negotiation. Each bank could settle on its own amount, or there could be a joint agreement.
Secondly, the banks would do away with the dual track of modifications and foreclosures. That means that only after all options of modification are exhausted can a bank begin foreclosure proceedings. Many borrowers currently complain that they are in the midst of the modification process when they get a notice of foreclosure sale. The drawback to eliminating the dual track is even greater extended timelines to foreclosure for borrowers. As it is, borrowers on average can be in their homes for a year and a half without making mortgage payments before eviction.
Finally, there would be some kind of agreement to third party mediation for review of all the cases in the first part of the agreement where borrowers are seeking compensation from the AG fund.
There has also been talk of principal write down as part of settlements, perhaps with some banks and not others. “It’s been on the table,” says one source.
WASHINGTON/CHARLOTTE, North Carolina (Reuters) – Banks under fire over their foreclosure practices face twin hearings in Congress this week, at which they will come under renewed pressure to find ways to keep borrowers in their homes.
The hearings on Tuesday and Thursday will include the first appearances by executives from major lenders like Bank of America and JPMorgan Chase since the furor over sloppy foreclosure paperwork erupted in September.
Banks are accused of having used “robo-signers” to sign hundreds of foreclosure documents a day, a fiasco that has reignited public anger with banks that received billions of dollars in taxpayer aid during the financial crisis.
Lenders will be pressed on whether the paperwork problems are further evidence that modifying loans is a better alternative to eviction.
Here’s a couple of barriers that Congress needs to consider:
1. Many foreclosures are investor owned. These homes do not qualify for loan mods. Many of them were purchased at the peak, or close to it. In many cases the owners are unable to find renters, or cannot find renters willing to pay enough to cover the mortgage. A recent study showed that 33% of foreclosures are on investor owned properties, so that takes a lot of foreclosures out of the loan mod pool.
2. Many homeowners in foreclosure pick up and leave. Unemployment is now the leading cause of foreclosures. Even with assistance to pay the mortgage, people often find themselves unable to pay their other expenses. We know that household formation is down, but I’m unaware of any studies showing how many former homeowners are now living with friends or relatives because they can’t afford to keep the utilities paid. L has told me that the vast majority of the foreclosures he sees are empty by the time the banks get them, and I’m certain that his experience is not unique. We don’t know if these folks have downsized, moved in with relatives or are renting a comparable place for less, but for whatever reason, many folks are just picking up and leaving. They aren’t interested in mods, or feel they don’t qualify.
The loan mod programs have been a disaster, and could certainly be better managed. However, Congress can legislate all it wants, but it’s unlikely that any loan mod program will make a significant dent in the foreclosure problem. Too many of these homeowners can’t be saved with a loan mod. So here’s the question for Congress: How do you keep homeowners in their homes when they are already gone?
Who owns all of those homes that have been foreclosed on from 2008 to the fall of 2010? As a taxpayer- You do.
Taxpayers fund mortgage lenders Fannie Mae and Freddie Mac. Last year at this time the two lenders possessed around 120,000 homes mortgaged through various lending banks. These banks sold the mortgages to Fannie Mae and Freddie Mac who in turn bundled them as securities and sold them to investors. These federal lenders guarantee the payment of the mortgages they sell. When the homeowners stop making monthly payments, Freddie and Fannie are on the hook for the remainder of the unpaid mortgage.
The 120,000 homes grew to 240,000 in default by September 30, 2010. The value in these homes are now at $24 billion. 1 in 4 mortgaged homes are now in the hands of Freddie and Fannie based on a RealtyTrac report. 1 in 2 mortgages in the US are owned or guaranteed by one of the two federal lenders.
Fannie Mae and Freddie Mac are backed by The U.S. Treasury through the purchase of shares of preferred stock. To date $148 billion has been invested in them. As a dividend the Treasury has received $17 billion in two years. When liquidity becomes a problem they return to the Treasury for more money. Fannie Mae and Freddie Mac have both requested more funding from the Treasury during October. It is projected that eventually the foreclosure total could rise from 142 billion to $259 billion by December 2013, according to the Federal Housing Finance Agency.
HORSHAM, Penn. (CAP) – Internal memos and other documents covertly obtained by CAP News show that mortgage company GMAC‘s questionable foreclosure practices included not only the so-called “robo-signing” of tens of thousands of foreclosures on single family dwellings, but also children’s treehouses, public outhouses and in one case, an 8-year-old German Shepherd‘s dog house.
“We’ve only audited less than one percent of GMAC’s September filings and already we’ve found so much fraudulent activity it would make Bernie Madoff roll over in his grave,” said Penn. State Attorney GeneralTom Corbett. “You know, if he were dead.”
Corbett said his office uncovered one situation where a Philadelphia girl was told by her mother to go clean up her Barbies before dinner but upon arriving in the living room found the front door to her Barbie Pink World 3-Story Dream Townhouse locked and all the furniture strewn across the living room floor. “And to make matters worse, her Ken had run off with her best friend’s Barbie,” added Corbett.
Other scenarios played out similarly. A Scranton man who asked not to be identified said his son came running into the house crying one Saturday because he tried to climb into his treehouse only to find that another boy he didn’t know was playing Matchbox cars there. Numerous attempts to bribe the boy with candy failed to get him to emerge from the treehouse.
“And now my kid’s inside just sitting on the couch watching TV,” said the father. “If he becomes lazy and obese because of this, I’m gonna sue.”
GMAC isn’t alone. Both Citigroup and Bank Of America have also come under fire for signing documents without fully reviewing them, which somehow extended beyond foreclosures to include other loan approvals, faked autographs on sports memorabilia, and a permission slip for one office worker’s child’s school field trip to Fred’s Museum Of Science.
“Totally fraudulent – that science museum has been closed for months,” said Mass. Attorney General Martha Coakley. “And I’m pursuing a case against Super Duper Foreclosures, Inc. too. Something’s just not right about that.”
Other state attorneys general are joining the fight with Corbett and vowing to put an end to the unscrupulous foreclosures, “if it’s the last thing we do” – which for many of the Democratic incumbents seeking re-election this fall, it may be.
“What we need is a hard-target foreclosure check of every gas station, residence, warehouse, farmhouse, henhouse, outhouse and doghouse in the area,” said Iowa Attorney General Tom Miller. “Every duplicitous foreclosure means one less vote for me. Go get ’em!”
Pundits note that President Obama has been noticeably absent from any of the foreclosure brouhaha, but administration sources say he’s still dealing with the long-term fallout from when the White House was foreclosed on President Bush in 2007. He also has reportedly stationed secret service agents inside the fort on Sasha and Malia’s play structure to ensure the first family “doesn’t fall victim to a middle-class problem.”
“Who knew when we bailed out those people who couldn’t afford their mortgages a year and a half ago that they’d all end up in foreclosure now,” said Obama. “Not me, that’s for sure. Funny how it worked out like that.”
For the second time since he became chairman in 2006, Ben S. Bernanke is leading the Federal Reserve into uncharted monetary territory.
Bernanke next week is likely to preside over a decision to launch another round of large-scale asset purchases after deploying $1.7 trillion to pull the economy out of the financial crisis, comments from policy makers over the past week indicate. This time, with interest rates already near zero, the Fed will be aiming to increase the rate of inflation and reduce the cost of borrowing in real terms. The goal is to unlock consumer spending and jump-start an economy that’s growing too slowly to push unemployment lower.
Estimates for the ultimate size of the asset-purchase program range from $1 trillion at Bank of America-Merrill Lynch Global Research to $2 trillion at Goldman Sachs Group Inc., with economists at both firms agreeing the Fed will likely start by announcing $500 billion after the Nov. 2-3 meeting. The danger is that once the Fed kindles price increases, inflation will be difficult to control.
“By reducing real interest rates and trying to break the psychology of ‘Why spend today when I can buy goods cheaper tomorrow,’ they are hoping to drive growth that would be more commensurate with a pickup in employment,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York. “The risk is a late 1970s type of scenario where the inflation genie gets out of the bottle.”
The U.S. Treasury Department yesterday sold $10 billion of five-year Treasury Inflation Protected Securities at a negative yield for the first time at a U.S. debt auction as investors bet the Fed will be successful in sparking inflation. The securities drew a yield of negative 0.55 percent.
‘Unacceptable’ Inflation
William Dudley, president of the New York Fed and vice chairman of the Federal Open Market Committee, yesterday repeated that current levels of inflation and a 9.6 percent unemployment rate are “unacceptable” and said the Fed needs to take action, even though expanding the balance sheet isn’t a “perfect tool.”
“To the extent that we can do things to improve the economic environment, we certainly owe it to the millions of people who are unemployed to do so,” Dudley said in response to audience questions after a speech in Ithaca, New York. Policy makers haven’t yet decided whether to buy additional assets, he said.
A second jolt of monetary stimulus would expand the Fed’s $2.3 trillion balance sheet to a record and likely work through the exchange rate as well as interest rates, said former Fed governor Lyle Gramley. A weaker dollar would boost U.S. exports and push prices higher as the cost of imported goods rises.
Competitive Exports
“It is a channel that works not only from the standpoint of encouraging more growth and making exports more competitive, but if you’re worried about inflation getting too low, this tends to put a little upward pressure” on it, said Gramley, a senior adviser at Potomac Research Group in Washington.
An index of the dollar versus six major currencies is down 5.2 percent since Sept. 20, the day before Fed officials concluded their last meeting by saying inflation measures were “somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.” The Standard and Poor’s 500 Index is up 3.8 percent since then.
A 10 percent decline in the dollar in the first six months of next year would push the economy above estimates of trend growth, moving indicators on inflation and employment more rapidly toward the Fed’s policy goals, according to a simulation run by Macroeconomic Advisers LLC on their model of the U.S. economy.
Effect on GDP
Gross domestic product would rise 1.1 percentage points more than the St. Louis-based firm’s baseline forecast for next year, to 4.8 percent. In 2012, growth of 5.7 percent would exceed the baseline forecast by 1.3 percentage points.
Unemployment would fall to 7 percent by the end of 2012, 1.4 points lower than the firm’s baseline forecast. The consumer price index, minus food and energy, would rise 0.4 percent and 0.7 percent more each year.
A continuing rally in stocks could also provide an added lift to growth, the firm’s simulation showed.
The firm, co-founded by former Fed governor Laurence Meyer, predicts the Wilshire 5000 stock index will jump 14 percent next year and 16 percent in 2012. The index tracks the impact of rising asset prices on household net worth. An additional 10 percent gain in the stock index in the first half of 2011 boosts growth by 0.1 percentage point and 0.3 percentage point more than the firm’s baseline forecast.
‘Transmission Mechanism’
“The transmission mechanisms are risk assets and a lower dollar,” said Steven Einhorn, who helps manage $5 billion at hedge fund Omega Advisors Inc. in New York. “Exports will respond over the next six to 12 months, and a further lift in risk assets will have benefits in more consumer spending as it lifts households’ net worth.”
A weaker dollar won’t be welcomed by U.S. trading partners concerned about the danger of competitive devaluations as nations seek to boost exports and growth.
Bernanke received “criticism” at a meeting of Group of 20 central bankers and finance ministers in South Korea last weekend, said German Economy Minister Rainer Bruederle.
“It’s the wrong way to try to prevent or solve problems by adding more liquidity,” Bruederle told reporters. “Excessive, permanent money creation in my opinion is an indirect manipulation of an exchange rate.”
$500 Billion
Economists Jan Hatzius at Goldman Sachs and Ethan Harris at Bank of America predict the Fed will spread an initial $500 billion in asset purchases over six months. That is the figure mentioned in the Oct. 1 speech by Dudley, who said $500 billion in purchases could have the same effect as cutting the benchmark federal funds rate by as much as a 0.75 percentage point.
The FOMC’s meeting next week could be contentious, with regional bank presidents such as Charles Plosser of Philadelphia and Richard Fisher of Dallas expressing concern in public remarks about a second round of asset purchases. Neither is a voting member of the FOMC this year.
Plosser told reporters Oct. 20 that high unemployment may not be “amenable to monetary-policy solutions” and added that he was “less inclined to want to follow a policy that is highly concentrated on raising inflation and raising inflation expectations.”
Fisher said central bank officials must be mindful of the effect their actions are having on the dollar.
Dollar Impact
“We need to be aware of the impact whatever we do has on other variables, and one of the variables is the dollar, the value of the dollar against other currencies,” Fisher said in an Oct. 22 interview in New York.
The prospect of an easier policy for a long period could prompt foreign investors to use Fed purchases as an opportunity to unload longer-term Treasuries, said Vincent Reinhart, former director of the Fed Board’s Division of Monetary Affairs.
“This might put more pressure on the exchange value of the dollar than the Fed is willing to tolerate,” said Reinhart, a resident scholar at the American Enterprise Institute in Washington.
Some commodity prices have already started to move up in anticipation of further Fed stimulus. Gold futures traded on the Comex in New York have risen 22 percent this year to $1,338.90 an ounce, while silver is up 40 percent.
“The Fed would like to talk up as many asset classes as it can,” said Scott Minerd, the Santa Monica-based chief investment officer at Guggenheim Partners LLC, who helps oversee $76 billion.
Asset Bubbles
“The history of the Fed, over the last 20 years, is one of bubble to bubble: one bubble deflates to create another bubble,” Minerd said. “We are certainly heading into the mother of all bubbles with commodities and gold.”
Another danger for the Fed is that its policy fails to have the intended effect, damaging the central bank’s credibility, Reinhart said.
“What happens if they bulk up the portfolio by another $500 billion in the next six months and there is no material change in markets or the outlook,” he said. “Presumably, the Fed will double-down and buy some more, but at some point, people will ask, ‘Is that all there is?’”
U.S. central bankers cut the benchmark lending rate to zero in December 2008. Seeking more stimulus, they launched a $1.7 trillion program to buy mortgage-backed securities, housing agency debt and U.S. Treasuries. The purchases ended in March.
Jackson Hole
Bernanke told central bankers in Jackson Hole, Wyoming, in August that those purchases “pushed investors into holding other assets with similar characteristics,” lowering interest rates on a broad range of debt.
While a second round of Treasury purchases would also lower nominal rates, the FOMC has been explicit about the need to lower real interest rates through higher inflation, minutes of its Sept. 21 meeting show.
The personal consumption expenditures price index, minus food and energy, rose at a 1.4 percent annual rate in August. That’s below the Fed’s long-run preference range of 1.7 percent to 2 percent. The year-over-year increase in consumer prices jumped as high as 14.8 percent in 1980 during the administration of Jimmy Carter.
Even moderate rates of inflation can shift wealth through the economy. Companies can make more money because their prices rise faster than wages. Households can also benefit as incomes eventually rise while costs on fixed-rate debt stay the same.
Chipotle Mexican Grill Inc. chief financial officer John Hartung told Bloomberg Television Oct. 22 that he expects inflation to be in the low-single to mid-single digits next year. “We would welcome modest inflation along with the continued pickup in consumer demand,” Hartung said.
To contact the reporters on this story: Craig Torres in Washingtont ; or Scott Lanman in Washington at slanman@bloomberg.net.
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
Going against state bankers, New YorkGov. David A. Paterson has signed into law a measure that will allow prevailing homeowners in many foreclosure actions to claim attorney fees from lenders.
The Access to Justice in Lending Act, A1239/S2614, will put defendants in foreclosure proceedings on the same footing as lenders, who often include in mortgage documents the right to recoup reasonable attorney fees if they bring a successful action.
Supporters of the new requirement say that it will encourage attorneys to volunteer their services to homeowners facing foreclosure, many of them who cannot afford to hire their own lawyers. At the same time, they say the measure will give the homeowners leverage to negotiate concessions from lenders seeking to avoid the potential costs of litigation.
“At a time when not-for-profits and counselors are flooded with these cases, this is an important step in bringing parity for homeowners,” the governor’s office said in an e-mailed statement.
The new law, Real Property Law §282, provides that all mortgage agreements giving prevailing lenders the right to attorney fees, must be read to grant that right to borrowers as well. Although it goes into effect 60 days after its signing, it applies to all mortgages in effect on or after Oct. 20 and all proceedings begun on or after that date.
Assemblyman Rory Lancman, D-Queens — who sponsored the bill with Senator Jeffrey Klein, D-Bronx — said in an interview that it will help “restore integrity and fairness” to a foreclosure process shadowed by revelations that many banks and their attorneys have resorted to procedural shortcuts that deny homeowners their right to due process. The measure was signed on the same day Chief Judge Jonathan Lippman ordered lender attorneys to submit affirmations in all foreclosures attesting that they have made reasonable efforts to verify the facts in the documents they submit.
The law was opposed by the state Bankers Association in a memorandum to the governor drafted by Wilson, Elser, Moskowitz, Edelman & Dicker (NYLJ, July 9). The memo argued the bill was unconstitutional in its application to existing mortgages. It contended that the two most common laws used by homeowners to fight foreclosure, the federal Truth in Lending Act, 15 USC §1640, and the federal Fair Debt Collection Practices Act, 15 USC §1692k, already allowed the recovery of attorney’s fees. And it complained that the bill’s “broadly drafted” language could open up the possibility of homeowners being awarded attorney’s fees to which they had no right.
Roberta Kotkin, general counsel and chief operating officer of the association, said in an interview after the governor signed the law that the organization stood by its criticisms. Moreover, she said the new requirement could increase the cost of mortgages to account for lenders’ added risk.
“Now it’s signed into law. Obviously we’re going to honor it and work with it,” she said.
But organizations representing homeowners have been enthusiastic about the bill.
“I do think the biggest benefit is the leverage [the new law] gives the homeowner in getting out of foreclosure with an affordable modification,” said Meghan Faux, director of the foreclosure prevention project for South Brooklyn Legal Services, which is a part of Legal Services NYC.
There were 77,815 foreclosures pending in New York courts as of Oct. 12, a 50 percent increase from the beginning of the year. Legal Services NYC, in a memo to the governor supporting the law, said the demand for its services had mounted, and “because of our limited resources, we are able to represent only a fraction of low-income homeowners, even though many of them have meritorious claims and defenses to foreclosure.”
The group argued that the proposal would allow a greater number of borrowers to obtain legal representation and create an incentive for lenders to resolve more cases early in the process.
And attorneys are becoming increasingly creative in challenging foreclosures as the process comes under more scrutiny. For example, they are questioning the ownership of mortgage notes that were shuffled from entity to entity during the securitization boom.
“With so many issues of standing being questioned, it seems both the availability and the range of potential defenses is much larger today than even a couple of weeks ago,” said Michael Hickey, executive director of the Center for New York City Neighborhoods.
Lancman, an attorney, said the fees to homeowners’ lawyers would likely be low in most cases — ranging from a few thousand dollars to “low five figures” — because skilled attorneys could determine problems with the lender’s case early on. He said attorneys would not make a fortune from foreclosure cases, but the profits would be enough to justify picking up the most meritorious cases.
The new program is modeled after Real Property Law §234, a 1966 law that gave prevailing tenants the right to recoup attorney’s fees whenever landlords include a fee provision in the lease. A 1995 Court of Appeals decision upheld the application of the law to leases signed before it became effective. Duell v. Condon, 84 NY 2d 773.
That ruling describes the purpose of the earlier fees provision as “to level the playing field between landlords and residential tenants, creating a mutual obligation that provides an incentive to resolve disputes quickly and without undue expense.”
Moreover, it said that the law tended to discourage landlords from engaging in frivolous litigation aimed at harassing tenants.
My company frequently works with customers to “clean up” their credit so that they can qualify for a home loan. This process typically takes about 6 months, maybe longer depending on the severity of the problem and the resources available to pay off delinquent accounts. We don’t charge anything for this because: a) it’s illegal, and b) it’s part of serving our clients and ensuring they get a loan they can live with.
We have been working with one couple on this process for about 8 months, and we were able to get them approved to buy a home. We all know that corrections/updates to credit tradelines can take somewhere between 30-90 days to be reflected on your credit report. However, this isn’t always the case. Sometimes the delinquent items continue to reported inaccurately for years. In my experience, in no instance is this more true than with government judgments and tax liens.
We’ve all heard horror stories about government inefficiencies from every department in every level of government. Whether it’s the DMV or the USPS, it’s a big undertaking and people are, after all, only human. There will be mistakes. However, the lack of accountability is an area in which I think the public sector excels.
When we re-pulled the credit to get the loan going, the client’s FICO score was just fine. However, a $257 judgment from Multnomah County, OR was still reporting as delinquent. A couple of years ago, the county instituted a temporary income tax called the ITAX, and many people wound up owing hundreds, sometimes thousands of dollars when the tax expired. Our clients were some of those people.
The client had paid a settlement with the county a couple years ago, and believed that this amount was included. Even if it wasn’t, $257 isn’t a huge deal for anyone to worry about. Until you start adding penalties and 9% interest, that is.
We decided that we would submit the loan file anyway, and given underwriting turntimes, we would be able to collect proof before every other piece of documentation had been signed off by our underwriter. What follows is the story of how that happened.
I called the county circuit court, where the judgment had been filed and processed. I was given another number to call. The person at that number couldn’t help me, because it was a “small claims” matter. She gave me the number for small claims. The nice man at small claims told me that he could accept a payment for the judgment, but has no way of knowing what the payoff amount would be. I played along hoping he could give me the number of someone who would know more about the issue. He directed me to yet another phone number, which was the “helpline” for the ITAX. I called this number. It was out of service, as it expired THE SAME YEAR THE ITAX EXPIRED, which was a few years ago. A pre-recorded message directed me to yet another number. The person I talked to at that number told me that the account had been sent to collections, and gave me the number of the collection agency they contract with.
OK, now I’m getting somewhere. I skeptically call the collection agency, and a very helpful lady answered the phone and told me what I already suspected:
They would never sue someone over $257 because it costs $100 to file the suit.
This is where her very nice qualities shined through. She took down my information, and said she would call the county courthouse to find out what was going on and get back to me. I thought to myself, “why the heck would she take the time to do all that for something she has no prayer of receiving payment on?”. However, I thanked her and moved on.
I called the county back, explaining yet another person what I had just been through, and she directed me to the one man who still deals with ITAX payment issues. She also asked to remain on the line to verify that this would be the correct way to deal with any other future ITAX related issues so that people like me would not have to waste what had become a 45 minute telephonic wild goose chase. I thanked her profusely.
The “ITAX man” picked up the phone and was very courteous and professional. However, he told me something after looking up the client in his system that absolutely floored me. He said that the client’s judgment amount was for $833! I told him they had another tax lien from a previous year that had already been paid off, as indicated on my credit report. He said he didn’t have any record of that, but that he would take my word for it because that’s what the credit report said. He said that the client would need to send his department a check for the $257, and he would send the check and the paperwork to the attorney’s office. The attorney would clear the item, then send the check in to be processed. Once the check had cleared, I would get an email with the proof of payment on county letterhead. I hesitantly asked him how long he thought this process would take. He said 5 or 6 business days.
I knew the client would pay the $257 just to get it over and done with, and feeling like I had accomplished a small victory, we called him. He told us that he had just made 5 phone calls to various county departments and that they told him that their records indicated that he didn’t owe anything, which is what we suspected all along. However, he would need to get a letter from the law firm he settled with indicating as such so that we could prove to the lender that everything was all clear. That is where we are in the process.
Now, everyone I talked to during this entire process was courteous and helpful. But here’s what I want to know:
How can a society function when it takes roughly 23 phone calls to clear up a $257 judgment that NOBODY can even determine is still active?
It would be a shame if something like this caused this client to miss out on the opportunity to buy the house of their dreams at a record low interest rate. Surely, we can do better.
Multnomahforeclosures.com was updated with the largest list of Notice Defaults to date. With Notice of Default records dating back nearly 2 years. Multnomahforeclosures.com idocuments the fall of the great real estate bust of the 21st century.
All listings are in PDF and Excel Spread Sheet format.
Fannie Mae and Freddie Mac are broke. The two government-sponsored enterprises (GSEs) that togetherfinance more than $5 trillion in mortgages are insolvent, if you don’t count the $150 billion already injected into them by the federal government. The common shares of these state-corporate hybrids have lost more than 99 percent of their value, both have been delisted from the New York Stock Exchange, and since September 2008 they have been official wards of the state. The largest owner of their obligations is now the United States Federal Reserve.
Housing finance inflation was at the center of the financial crisis, and the GSEs were at the center of housing finance inflation. Any meaningful reform of the mortgage system, and therefore the financial problems underlying the recession, must deal directly with Fannie and Freddie. But last summer our elected representatives instead passed a 2,300-page financial “reform” act that purposefully avoided addressing this central issue.
Discussions of how to reform Fannie and Freddie have now belatedly begun on Capitol Hill and in the Obama administration. The process will be complicated and controversial. But if we are to avoid future distortions and government-inflated bubbles in the housing market, Fannie and Freddie can and should be dismantled.
Divided and Conquered
The core problem with GSEs isn’t hard to understand. You can be a private company disciplined by the market, or you can be a government entity disciplined by the government. If you try to be both, you can avoid both disciplines.
To fix that, the first step is to put the GSEs into receivership (as opposed to the current conservatorship), so that the small remaining value of the common shares and all their governance rights are wiped out. Then the restructuring can proceed, Julius Caesar style: divide them into three parts.
The first of those parts, unfortunately, must be a “bad bank,” a liquidating trust that will bear Fannie and Freddie’s deadweight losses–the $150 billion spent by the Treasury so far, plus the additional losses that are embedded in the GSEs’ portfolios and will be realized over time. According to various estimates by the CBO and private analysts, it will cost in the range of $200 billion to $400 billion to make whole the foreign and domestic creditors of Fannie and Freddie. That cost will unjustly, but at this point unavoidably, be borne by taxpayers.
All the current debt and mortgage-based securities obligations that bear the Treasury’s implicit but very real guarantee should be placed in these trusts to run off over time, with all the current mortgage assets of the GSEs dedicated to servicing them. These trusts will be responsible for liquidating the old GSEs. They can be modeled on the structure used in the 1996 act that privatized another GSE: Sallie Mae, the federal student loan company.
The second of the three parts should be formed by privatizing Fannie and Freddie’s prime mortgage loan securitization and investing businesses. All their intellectual property, systems, human capital, and business relationships should be put into truly private companies, sold to private investors, and sent out into the world to compete, flourish, or fail like anybody else. As fully private enterprises, they will be free to do anything they think will create a successful business–except trade on the taxpayers’ credit card.
When there is a robust private secondary market for the largest segment of Fannie and Freddie’s business–high-quality prime mortgage loans to the middle and upper middle classes–private investors can then put private capital at risk, taking their own losses and reaping their own gains. In this mortgage sector, the risks are manageable, and no taxpayer subsidies or taxpayer risk exposures are necessary.
Decades ago, there may have been an argument for GSEs to guarantee the credit risk of prime mortgage loans in order to overcome the geographic barriers to mortgage funding, barriers that were themselves largely created by government regulation. More recently, there may have been a case for using GSEs to get through the financial crisis that they themselves had done so much to exacerbate. But as we move into the future mortgage finance system, the prime mortgage market can and should stand on its own, just like the corporate bond market.
A private secondary market for prime mortgages should have developed naturally a long time ago. It didn’t because no private entity could compete with the GSEs’ government-granted advantages. Bond salesmen, pushing trillions of dollars of GSE debt and mortgage-backed securities to investors all over the world, basically told them this: “You can’t go wrong buying this bond, because it is really a U.S. government credit, but it pays you a higher yield. So you get more profit with no credit risk.” Although there was, and still is, no formal government guarantee of Fannie and Freddie’s obligations, what the bond salesmen told the investors was nonetheless true, as events have fully confirmed. The Treasury has made it clear that its financial support of Fannie and Freddie is unlimited.
There can be no private prime middle class mortgage loan market as long as Fannie and Freddie use their government advantages both to make private competition impossible and to extract duopoly profits from private parties. The duopoly element of the old housing finance system should not be allowed to survive.
The third part to be carved from Fannie and Freddie should consist of intrinsically governmental activities, such as housing subsidies and nonmarket financing of risky loans. These should move explicitly to the government, where they will be fully subject to the discipline of congressional approval and appropriation of funds. This would be in sharp contrast to past practice, in which the GSEs received huge subsidies and used some of the money to win political favor, all concealed off budget. Instead, the funding for these activities would have to be appropriated by Congress in a transparent way, subject to the disciplines of democracy. These functions of Fannie and Freddie should be merged into the structure of the Department of Housing and Urban Development, along with the government mortgage programs of the Federal Housing Administration and Ginnie Mae.
Ending Freddie and Fannie, SlowlybIt is unrealistic to expect to achieve all this at once, but by clarifying where we should arrive, we can start the journey. That process has become somewhat easier because Fannie and Freddie are basically government housing banks
now, overwhelmingly owned and entirely controlled by the government.
Fair and transparent accounting demands that the GSEs not receive the political benefits of off-balance-sheet accounting. The Accurate Accounting of Fannie Mae and Freddie Mac Act (H.R. 4653), proposed by Rep. Scott Garrett (R-N.J.), would require Fannie and Freddie to be part of the federal budget, a change recommended by the Congressional Budget Office. Honest, on-budget accounting would give Congress a strong incentive to junk the GSE model and restructure Fannie and Freddie on the principle of “one or the other, but not both.”
Congress should also take up a proposal from Rep. Jeb Hensarling (R-Texas), the GSE Bailout Elimination and Taxpayer Protection Act (H.R. 4889), which lays out a transition to a world with no GSEs. Hensarling’s bill would increase Fannie and Freddie’s capital requirements, reduce their role in the mortgage market, and establish a sunset on the GSE charters.
The ongoing, unlimited bailout of the GSEs will hit the taxpayers for much more than the $150 billion cost of the notorious savings and loan collapse of the 1980s. It is obviously difficult for Fannie and Freddie’s longtime political supporters to admit that the GSEs were a massive blunder. But that is now undeniable. The failure of Fannie and Freddie creates a perfect opportunity to restructure these hybrids, leaving no government-sponsored enterprise behind.
I get on an airplane, and there are more dramatic developments by the time I land.
Even though the headline item is the fact that the attorneys general in all 50 states are joining the mortgage fraud investigation, the real indicator that the banks are stressed is that they have started abandoning MERS, the electronic database that passes itself off as a registry for mortgages. JP Morgan has quit using it as an agent on foreclosures; it clearly can’t withdraw from it fully, given that it has become a central information service.
Despite this being treated as a pretty routine event in the JP Morgan earnings call, trust me, it isn’t. The withdrawal of JP Morgan from the use of MERS as the face in foreclosures is a tacit admission that the past practice of using MERS as the stand -in for the trust is problematic. I’ve heard lawyers discuss the possibility of class action litigation to invalidate all MERS-initiated foreclosures in states with strong anti-MERS rulings; this idea no doubt will get more traction given JP Morgan’s move. (An attorney who is in the thick of this situation told me another major bank has made the same move as JPM, but I see no confirmation in the news as of this writing).
The triggers for the sudden escalation appear to have been the release of a research note by Citigroup which included a grim assessment (which we did not consider to be dire enough) by Professor Levitin to Citi clients on likely path of the mortgage crisis. This was no doubt compounded among the cogoscenti by the research note published by Josh Rosner, that most if not all notes (which are the borrower IOU in a mortgage) were endorsed in blank, which creates near insurmountable problems in foreclosure, worse even for the RMBS ownership of them as de facto mere unsecured paper.
But the stunner is the withdrawal of JP Morgan from the purported mortgage registry system, MERS. 60% the mortgages in the US are registered through MERS, and not at the local courthouse as was the long established, well settled custom in the US. Countries that have moved to central databases (such as Australia) have them operated by the government, and they are transparent and run with sound standards of data integrity. As noted, banks like JP Morgan can’t fully withdraw; MERS has become too integral, but its announcement is an admission that all is not well.
The fact that major MERS members are suddenly resigning from MERS is a sign that tectonic plates are moving. MERS has become central in mortgage securitization; Freddie and Fannie have required its use since early in this decade.
JPMorgan Chase’s CEO says the bank has stopped using the electronic mortgage tracking system used by major financial institutions.
Lawyers have argued in court proceedings that the system is unable to accurately prove ownership of mortgages.
JPMorgan Chase & Co. and other banks have suspended some foreclosures following allegations of paperwork problems in thousands of cases.
The trigger may have been the publication of a simply devastating analysis at the end of September, “Two Faces: Demystifying the Mortgage Electronic Registration System’s Land Title Theory” by Christopher L. Peterson. Even though I have read the critical MERS unfavorable opinions, this is the first time I am aware of that someone has looked at the operation of MERS from a broader legal perspective. It finds fundamental flaws in virtually every aspect of its operation. To give a partial list: the language used by MERS in its registry at local courthouses is contradictory (it claims to be both the owner of the mortgage and as well as a nominee; legally, a single party can’t play two roles simultaneously), rendering it unenforcable; MERS has employees of servicers and law firms become “MERS vice presidents” or secretaries when fit none of the criteria that fit those roles, and also have clear conflicts of interest given that they are also full time employees of other organizations; MERS record keeping has the hallmarks of being poorly controlled (there have been cases of mortgages basically being stolen from other MERS members; some contacts have suggested that a single MERS member can assign a mortgage, meaning checks are weak; MERS members are not required to update records). And most important, every state supreme court that has looked at the role of MERS has ruled against it.
As much as I have heard the case against MERS in bits and pieces, and regarding it as very problematic, seeing it assembled in one place (with solid references to judicial decisions) makes for a overwhelming case. The best resolution the author can come up with is that lenders with MERS registered mortgages would be granted an equitable mortgage as a substitute for the flawed MERS registered mortgages:
While awarding equitable mortgages is surely a better approach for financiers and their investors than simply invalidating liens, it would not solve all their problems. Replacing legal mortgages with equitable mortgages would give borrowers significant leverage. Historically, state law has not uniformly treated equitable mortgagees vis-à-vis other competing creditors. Generally, the holder of an equitable mortgage had priority against judgment creditors. But, it is likely that an equitable mortgage could be avoided in bankruptcy. Moreover, it is likely that financiers would have less luck seeking deficiency judgments when foreclosing on equitable mortgages.
In Florida, the so-called rocket docket has apparently slowed to a crawl, between some banks suspending foreclosures and at least some judges starting to take borrower allegations of fraud seriously. From Bloomberg:
Home to more foreclosures than 47 U.S. states, Florida sought to clear out its backlog with a system of special court hearings that dispensed with cases quickly, sometimes in less than a minute.
Homeowners like Nicole West now threaten to slow that system, Florida’s so-called rocket docket, to a crawl. West, who has been fighting to save her Jensen Beach house from foreclosure, has leveled a new allegation in her three-year battle: the entire process is based on fraud.
West said her case is rife with the kind of flawed mortgage documents that have caused lenders including Bank of America Corp. and JPMorgan Chase & Co. to stop the process of foreclosures and evictions across the country. The banks said they are investigating homeowner charges like West’s that signatures were forged and documents were backdated…..
The bank moratoriums are already thwarting the initiative by Florida officials to clear jammed court dockets. Now, efforts by homeowners such as West to bring claims of fraud to the attention of judges are further prolonging evictions, and in turn slowing purchases of foreclosed properties.
The focus so far has been on what the foreclosure mess means for borrowers. Not enough media attention has been given to the implications for the major banks, particularly their trust businesses, and RMBS investors. Neither the facts nor the law are on the financiers’ side, but they are either in denial or doing a full bore job of obfuscation.
New listings have been added to OregonLandsalesContract.com: Homes are located in the following areas:
Canby
Lake Oswego
Oregon City
Portland
Each home listed on the site the seller will consider cash out and contract terms offers.
Visit OregonLandSalesContract.com and see if any of the homes listed can fit your needs.
Just because you cannot qualify for a conventional or FHA loan, does not mean you cannot buy a home. Many sellers are willing to sell their home on private contract to qualified buyers.
Multnomahforeclosures.com was updated with the largest list of Notice Defaults to date. With Notice of Default records dating back nearly 2 years. Multnomahforeclosures.com idocuments the fall of the great real estate bust of the 21st century.
All listings are in PDF and Excel Spread Sheet format.
OREGON REAL ESTATE ROUND TABLE 