David Streitfeld | Livinglies's Weblog

LABOR DAY ABYSS

Posted on September 6, 2010 by Neil Garfield

EDITOR’s comment: Everyone seems to agree that nobody really knows the identity of the creditor in the millions of mortgage transactions that were created from 2001 to 2008. Yet the general consensus from the administration and the media is that these transactions should be enforced anyway. The idea of enforcing a transaction in which only one of the parties is known is enough to make the authors of any of the major legal treatises turn over in their graves. It is so obviously ridiculous that one need not consult the United States Constitution on due process, nor any statute or case in common law. Nevertheless this elephant continues to sit in our living rooms claiming ownership of our home. Thus a fictional character is prevailing over the rights of real people owning real homes who were tricked into fraudulent loan products based inflated appraisals that created the reasonable assumption on the part of the borrower that the “experts” had verified the fair market value and validated the viability of the loan product.

Most people understand that these homeowners were victims of fraud more than they were borrowers of money for a legitimate transaction. These title twisting transactions continue to become increasingly convoluted as the “ownership” of the “loans” becomes increasingly blurred by a continuing process of transfers, “sales,” auctions without creditors or bona fide bidders, and the continuation of the strategy of moving the goal post every time anyone wants to examine it.

In the article below the Obama administration is described as having exhausted all possible remedies and is now faced with the untenable choice of future homeowners versus current homeowners. This is delusional thinking based on business dogma. The “experts” are now all raising their voices in a growing chorus of “let the market collapse.” It is only natural for these so-called experts to suggest such a dark scenario.

Under the business dogma currently driving the limp choices being made by the administration and by Congress, a crash in home housing prices from current levels would produce the foundation for a bull market in housing prices that would be reduced to oversold levels. This so-called bull market could only be fueled by speculators who are sitting on piles of money. It certainly won’t be fueled by the average consumer whose median income is dropping, whose wealth has been drained through Wall Street speculation, whose savings do not exist, and whose credit has been exhausted. In short, this brilliant strategy of giving up on the housing market can only result in a further widening between those who have money and wealth and those who do not and now have no prospects.

I know that most people do not have the time to be students of history. But a little time spent on Google or Wikipedia will show you that no society in human history has ever been sustained on a status quo that excluded an expanding and vibrant middle class, with abundant opportunities for improvement in the financial condition of anyone in any class of that society. There is an answer to this problem but it is being ignored for political reasons. We cannot instantly raise median income for tens of millions of people. We can and we should lay the foundation for abundant opportunities for improvement in their economic and social condition, but this will not solve the current situation.

The current situation is that we are sitting on the abyss. And it seems that the general consensus is to see no evil, hear no evil and therefore ignore the only realities that must be addressed. We cannot escape the fact that in our current situation our economy is driven by consumer spending. We cannot escape the fact that consumer spending cannot rise in the short term by an increase in median income. We cannot escape the fact that consumer spending can only rise by presenting the consumer with a proposition that is acceptable––one in which both real and apparent consumer wealth is increased. Unless the deal is real, the current lack of confidence in the economy, our society and our government will prevent any increase in consumer spending and therefore prevent any improvement in our current economic decline.

Consumers have made it clear that they do not trust the housing market, they will not accept a continuation of credit driven spending, and that they are alone in fending for themselves and future generations. Therefore the savings rates on what little money consumers are receiving as income are increasing at unprecedented rates. This money is not going to come out of savings and into the marketplace and a general rush towards spending that will revive the old consumer driven economy unless the basic and real concerns of consumers are directly addressed with reality and conviction. The perception (delusion) is that consumers are a bottomless well from which infinite sums of money can be withdrawn by way of taxes, insurance, subsidies to big business, and a government that is primarily concerned with the appearance of stability on Wall Street rather than the reality of amends that need to be offered.

I am not a pundit. I am only seeking to apply common sense to a situation that seems to be wallowing in dogma, and political maneuvering. In my view they are arranging the deck chairs on the Titanic. In my view the worst is yet to come. In my view under the worst-case scenarios our way of life, our society, our economy and our government will be destabilized unless we open our eyes. It’s true that we don’t have a lot of tools left in the box. But then again we never did have a lot of tools in the box.

A great fraud has been committed on American and foreign taxpayers and investors as well as American and foreign buyers of real estate, commercial and residential. The perpetrators of this great fraud were intermediaries between the people who had money and the people who didn’t. If an honest attempt was made to do the right thing, we would do more to improve the confidence of our own consumers as well as foreign investors than any of these of exotic and creative plans to shore up an economy based on illusion and delusion.

If we already know that the identity of the creditor is in doubt, then we already have a perfectly legitimate legal reason to stop foreclosures. If we already know that the prices that were used in many fraudulent loan transactions were not equal to any sustainable measure of fair market value and that neither the borrower nor the actual lender (investor) was aware of this misrepresentation, then we already have a perfectly legitimate and legal reason to restructure all the affected loans, especially since most of them are controlled through guarantees of federal agencies if not outright ownership by those federal agencies. If we already know that somebody probably exists who has actually lost money on these transactions, or some of them, then it shouldn’t be hard for them to come forward, provide the necessary accounting and proof of ownership, and be included in the restructuring of these mortgage loans.

What is stopping the use of common sense is that we are relying on the very intermediaries who caused the problem in the first place and who have everything to gain by a continuation of the foreclosures, by a continuation of the free fall in housing prices, by a continuation of the charade of modifications, and by the speculative bull market that is currently being constructed right under the nose of this administration. That bull market may have a temporary effect on the economy (or at least the indexes that measure economic results) and of course the stock market, but in reality it is easy to see that such a bull market will only be another bubble which will cause more devastation and further undermine confidence in the American economy and the American government.

HERE IS WHAT A FAIR RESOLUTION WOULD LOOK LIKE:

ALL HOMES ELIGIBLE (INCLUDING REO). Forget the blame game

ALL MORTGAGE BONDS ELIGIBLE. Forget the blame game

REGULATE SERVICING COMPANIES LIKE UTILITIES OR REPLACE THEM WITH COMPANIES THAT WILL DO THE JOB

SUSPEND ALL FORECLOSURES, SALES, JUDICIAL AND NON-JUDICIAL. SUSPEND MORTGAGE PAYMENTS, ALL MORTGAGES 90 DAYS.

OFFER INTEREST RATE ONLY RE-STRUCTURE TO HOMEOWNERS THAT REDUCES FIXED INTEREST RATE TO 2%

OFFER PRINCIPAL REDUCTION TO 110% OF FAIR MARKET VALUE WITH 5% FIXED INTEREST RATE, TOGETHER WITH AN EQUITY APPRECIATION CLAUSE OF 20% FROM REDUCED PRINCIPAL.

OFFER CERTIFICATION OF OWNERSHIP FROM FEDERAL AGENCY TO THE HOMEOWNER.

CREATE FAST TRACK QUIET TITLE ACTIONS TO RESOLVE ALL TWISTED TITLE ISSUES RESULTING FROM SECURITIZED LOANS

OFFER TO SERVICE THE NEW LOANS FOR INVESTORS WHO PROVE OWNERSHIP.

CREATE CUT-OFF DATE: HOMEOWNERS WHO DON’T TAKE THE DEAL EITHER STAY WITH EXISTING TITLE AND MORTGAGE SITUATION OR GO THROUGH FORECLOSURE. INVESTORS WHO DON’T TAKE THE DEAL EITHER STAY WITH EXISTING TITLE AND RECEIVABLE SITUATION OR SUE THEIR INVESTMENT BANKERS.

I KNOW. WHO HAS THE POWER TO DO THIS? OBAMA, THAT’S WHO. NO NEW REGULATIONS ARE REQUIRED. STATE AND FEDERAL LEGISLATION TO PUT A “CAP”ON THIS IS UNNECESSARY, BUT IF THEY WANT TO DO IT THEY COULD DO IT AFTERWARD. The immediate result is that the downward pressure on housing would vanish. The upward mobility of consumers would instantly appear. The confidence by consumers that the government cares more about them than the oligopoly of banks who appear to be running the country would soar, as would their spending. World-wide confidence in the American financial system would soar because they would see the end of illusion and delusion.

And let’s not forget that the American moral high-ground would be restored, which is the only real basis for the consent of the governed here and around the world.
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Housing Woes Bring New Cry: Let Market Fall

By DAVID STREITFELD

The unexpectedly deep plunge in home sales this summer is likely to force the Obama administration to choose between future homeowners and current ones, a predicament officials had been eager to avoid.

Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market, using tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance intended to keep values up and delinquent borrowers out of foreclosure. The goal was to stabilize the market until a resurgent economy created new households that demanded places to live.

As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.

When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve.

“Housing needs to go back to reasonable levels,” said Anthony B. Sanders, a professor of real estate finance at George Mason University. “If we keep trying to stimulate the market, that’s the definition of insanity.”

The further the market descends, however, the more miserable one group — important both politically and economically — will be: the tens of millions of homeowners who have already seen their home values drop an average of 30 percent.

The poorer these owners feel, the less likely they will indulge in the sort of consumer spending the economy needs to recover. If they see an identical house down the street going for half what they owe, the temptation to default might be irresistible. That could make the market’s current malaise seem minor.

Caught in the middle is an administration that gambled on a recovery that is not happening.

“The administration made a bet that a rising economy would solve the housing problem and now they are out of chips,” said Howard Glaser, a former Clinton administration housing official with close ties to policy makers in the administration. “They are deeply worried and don’t really know what to do.”

That was clear last week, when the secretary of housing and urban development, Shaun Donovan, appeared to side with current homeowners, telling CNN the administration would “go everywhere we can” to make sure the slumping market recovers.

Mr. Donovan even opened the door to another housing tax credit like the one that expired last spring, which paid first-time buyers as much as $8,000 and buyers who were moving up $6,500. The cost to taxpayers was in the neighborhood of $30 billion, much of which went to people who would have bought anyway.

Administration press officers quickly backpedaled from Mr. Donovan’s comment, saying a revived credit was either highly unlikely or flat-out impossible. Mr. Donovan declined to be interviewed for this article. In a statement, a White House spokeswoman responded to questions about possible new stimulus measures by pointing to those already in the works.

“In the weeks ahead, we will focus on successfully getting off the ground programs we have recently announced,” the spokeswoman, Amy Brundage, said.

Among those initiatives are $3 billion to keep the unemployed from losing their homes and a refinancing program that will try to cut the mortgage balances of owners who owe more than their property is worth. A previous program with similar goals had limited success.

If last year’s tax credit was supposed to be a bridge over a rough patch, it ended with a glimpse of the abyss. The average home now takes more than a year to sell. Add in the homes that are foreclosed but not yet for sale and the total is greater still.

Builders are in even worse shape. Sales of new homes are lower than in the depths of the recession of the early 1980s, when mortgage rates were double what they are now, unemployment was pervasive and the gloom was at least as thick.

The deteriorating circumstances have given a new voice to the “do nothing” chorus, whose members think the era of trying to buy stability while hoping the market will catch fire — called “extend and pretend” or “delay and pray” — has run its course.

“We have had enough artificial support and need to let the free market do its thing,” said the housing analyst Ivy Zelman.

Michael L. Moskowitz, president of Equity Now, a direct mortgage lender that operates in New York and seven other states, also advocates letting the market fall. “Prices are still artificially high,” he said. “The government is discriminating against the renters who are able to buy at $200,000 but can’t at $250,000.”

A small decline in home prices might not make too much of a difference to a slack economy. But an unchecked drop of 10 percent or more might prove entirely discouraging to the millions of owners just hanging on, especially those who bought in the last few years under the impression that a turnaround had already begun.

The government is on the hook for many of these mortgages, another reason policy makers have been aggressively seeking stability. What helped support the market last year could now cause it to crumble.

Since 2006, the Federal Housing Administration has insured millions of low down payment loans. During the first two years, officials concede, the credit quality of the borrowers was too low.

With little at stake and a queasy economy, buyers bailed: nearly 12 percent were delinquent after a year. Last fall, F.H.A. cash reserves fell below the Congressionally mandated minimum, and the agency had to shore up its finances.

Government-backed loans in 2009 went to buyers with higher credit scores. Yet the percentage of first-year defaults was still 5 percent, according to data from the research firm CoreLogic.

“These are at-risk buyers,” said Sam Khater, a CoreLogic economist. “They have very little equity, and that’s the largest predictor of default.”

This is the risk policy makers face. “If home prices begin to fall again with any serious velocity, borrowers may stay away in such numbers that the market never recovers,” said Mr. Glaser, a consultant whose clients include the National Association of Realtors.

Those sorts of worries have a few people from the world of finance suggesting that the administration should do much more, not less.

William H. Gross, managing director at Pimco, a giant manager of bond funds, has proposed the government refinance at lower rates millions of mortgages it owns or insures. Such a bold action, Mr. Gross said in a recent speech, would “provide a crucial stimulus of $50 to $60 billion in consumption,” as well as increase housing prices.

The idea has gained little traction. Instead, there is a sense that, even with much more modest notions, government intervention is not the answer. The National Association of Realtors, the driving force behind the credit last year, is not calling for a new round of stimulus.

Some members of the National Association of Home Builders say a new credit of $25,000 would raise demand but their chances of getting this through Congress are nonexistent.

“Our members are saying that if we can’t get a very large tax credit — one that really brings people off the bench — why use our political capital at all?” said David Crowe, the chief economist for the home builders.

That might give the Obama administration permission to take the risk of doing nothing.

Filed under: bubble, CDO, CORRUPTION, Eviction, evidence, expert witness, foreclosure mill, GTC | Honor, HERS, investment banking, MODIFICATION, Mortgage, Motions, Pleading, securities fraud, Servicer, STATUTES, trustee | Tagged: borrower, bull market, congress, creditor, David Streitfeld, fraud, fraudulent appraisals, fraudulent loan transactions, housing market, identity of the creditor, Investor, Ny Times, Obama, speculators, Wall Street | 45 Comments »

FED BANS YIELD SPREAD PREMIUMS

Posted on August 17, 2010 by Neil Garfield

A YIELD SPREAD PREMIUM IS A FEE PAID TO A BROKER FOR CREATING A FRAUDULENT PROFIT BY LYING TO THE CUSTOMER WHO BUYS A FINANCIAL PRODUCT. This particular lie would be about the rate on the loan.

One would think this was already illegal and one would be right. Not only is it specified in the Truth in Lending Act and other state and federal laws governing deceptive lending practices, it is also covered by RICO and common law actions for fraud. YSP fees and other forms of undisclosed compensation, of which there were many, are all illegal. These fees are illegal and are all due back to the borrower, along with attorney fees, interest, and potential treble damages. And states and federal government agencies that collect revenue should be interested in all this undeclared income “earned” tax-free.

Up until the era of securitization, YSP fees were limited to those situations addressed by this “new” FED ban — where a mortgage broker convinced a borrower to take a higher interest rate in exchange for some perceived advantage that was in fact disadvantageous to the customer — like coming to the table with less money in exchange for a virtual guarantee of foreclosure down the road. But what this ban does not address directly is the the “tier 2” YSP, in which the second broker was the investment bank. Nor does it take a shot at the trillions in YSP fees ripped out of our economy up until now, which the taxpayers have guaranteed thanks to the TARP, US Treasury and Federal Reserve programs in the fall of 2008. In a hot election year, government and Wall Street guessed correctly that nobody would realize what hit them until long after the deed was done.

While the first YSP was abhorrent, paying brokers thousands of dollars for each bad loan, the second one, also undisclosed, paid investment bankers a profit that sometimes exceeded the loan itself. In the first instance the lie was that this loan is better for you because your initial payment is less, your down payment is less or whatever. In the first instance the lie was first to the prospective borrower, and second to the investor who was advancing money under the supposition that the money would be used to fund loans that had the usual risk of non-payment — which is to say that the odds were in their favor that on balance they would get the return they were looking for, get their principal back and minimize the small balance of defaults with proceeds of foreclosures.

The first lie was predicated on an even bigger lie to both the borrower and the lender (investor): that the property was worth more than the loan, so it was covered by a security interest that would minimize or eliminate the risk of an actual loss. This lie was compounded by the lie that housing prices never go down and they had the appraisals and ratings form official rating agencies to prove that these were transactions whose value was the highest grade available in the marketplace.

The compounded lie was used to convince borrowers that the fact that they knew they could not afford the loan payments when the loan reset to its real terms was “offset” by the “fact” that the broker “guaranteed” the house would later be refinanced at a higher value in which the payment would again be reduced and the borrower would actually receive extra cash. This passive return on an investment meets the definition of the sale of a security, qualifies as a fraudulent unregistered securities transaction, and should land some people in jail. So far, though, the bulk of public opinion continues to blame the victim. The fact that in a transparent transaction where the real facts were disclosed most borrowers would never have signed and no investor would have advanced money is still mysteriously being ignored by policy makers and the courts. Yet it is as plain as day.

This brings us to the second BIG LIE which was that the loan met underwriting standards for the industry, was verified in all the appropriate ways, and the money advanced by the investors was being used to fund loans, not illicit profits. All the lies overlap. The worse the loan the higher the “yield spread premium” to the broker and the higher the yield premium to the investment banker. If the lender (investor) and the borrower knew that the actual amount funded by the lender was $450,000 but the loan was only $300,000, how many people do you think would have allowed or completed that transaction. If they knew that a $150,000 yield spread premium was kept by the investment banker on a $300,000 loan, how many readers think that NOBODY would have asked “hey! Where is the other $150,000?” How many readers think that ANYONE would say that 50% of the loan amount is a reasonable fee for the investment banker to keep?

Although they make it sound complicated the method was conventional and simple: keep the borrower and lender far away from each other so that neither one actual knew the true facts of the transaction. In other words, your standard con game.

This is why the securitization searches are SO important in confronting your adversary in a mortgage dispute. The title search is important, but the securitization search is what really traces the money. And NOBODY in the financial industry wants you to be able to trace the money because if you do, then investors and borrowers who are suing in greater and greater numbers are going to know where the money went, who got it, and they are going to want it back because it was procured by outright lies.

NOTE: The tier 2 YSP runs counter-intuitive to most people so they keep putting it aside. But it lies at the heart of the mortgage crisis. So I’ll explain it AGAIN here. I’ll use a brand new example taken from the above. It is oversimplified to make the point, but it makes the double point that every financial transaction should be allocated to every loan where it is appropriate to do so, which is why your action for ACCOUNTING and DISCOVERY is so important.

Teachers Pension Fund of Arizona is limited to AAA rated investments, which means the equivalent of U.S. Treasury obligations. They seek the highest possible return without going outside the lines of the primary restriction: NO RISK. They understand that in a market where AAA returns are running at 4% they are not going to get 8% without substantially increasing their risk, which is not allowed. The fund managers basically have the job of making sure that investments stay within guidelines, and that liquidity is maintained to pay the benefits to retired Arizona teachers. The fund managers generally rely upon the rating agencies (Moody’s, Standard and Poor’s, Fitch etc.) but they also “peek under the hood” now and then to make sure everything is OK. Generally they rely upon 2 or 3 investment brokerage houses that have world wide reputations to “protect” and whose objective is to keep the pension fund as a long-term client. It’s been like this for decades, so the hum drum of daily activity lulls everyone into a semi-comatose state.

So when Merrill Lynch tells them they have this “innovative financial product” that “everyone” is buying and that has the AAA rating but provides a higher return of say 5% AND is further insured by AIG and/or AMBAC, the fund managers, wanting to look pretty to management of the fund, buy some of these exotic creatures. In our case we will say for example that the fund invested $450,000 in exchange for a promised return on investment of 5%.

Thus our pension fund managers have partied with $450,000 and they are expecting 5% interest (RISK-FREE) which is, in dollars, $22,500 per year. And they expect the investment bank to pick up a few basis points as their fee on this no-brainer risk free investment transaction.

The investment bank goes to its mortgage aggregator, let’s say Countrywide (now Bank of America/BAC), and says give me a $300,000 loan on which the borrower has agreed to pay $22,500 in interest. CW does a quick calculation and arrives at the obvious result: Merrill Lynch is asking them for a $300,000 mortgage loan whose stated rate of interest is 7.5%. Just to check their math they multiply $300,000 times the 7.5% rate and sure enough, it is $22,500 annual interest.

CW goes to its loan originator, and asks for a $300,000 loan with a nominal rate of 9%, with a teaser payment of only 1%, because they want to make sure there is plenty of money to pay the yield spread premium to the mortgage broker, and to collect service fees, transaction fees etc.

The loan originator goes to the prospective borrower who qualifies for a 5 1/2% loan fixed rate for 30 years and can easily pay that. But that is not what Merrill Lynch, CW, or the loan originator want in order to earn their ridiculous fees.

The loan originator assigns a “loan specialist” who has received been certified as a mortgage analyst after a total of 7 seconds of training on his way up the elevator to the 13th floor where his cubicle is filled with prospective deals. His conviction for mail fraud, wire fraud, and prison sentence is behind him now because this new company doesn’t care about his past.

The loan specialist is given a script to convince the borrower against paying 20% down payment, and to take a loan that allows them to pay only 1% interest only for two years. At $250 per month payment, the savings per month is enormous and the loan specialist further entices them with the fact that this is a bona fide transaction backed up by Quicken Loans or some other originator who has done the math and they have figured out that this works best for the customer. Not only that, home prices are forecasted to continue rising by 20% per month, so in a year they will able to refinance and take out an extra $100,000 with even Lower payments.

If the borrower takes the bait, everyone gets what they want except the borrower who is in for some nasty surprises down the road when the payments rise substantially above anything the borrower can pay. This loan is identified as being in the junior tranches of a securitized pool, but subject to a credit default swap which was sold by the senior tranche thus contains toxic waste loans without anyone being the wiser. [This “sale” initially shows MORE INCOME in the senior tranche but creates an enormous liability — the equivalent of having purchased the worst of the toxic waste loans. Thus the senior tranche “safe” asset was converted into a horrendous liability that was as guaranteed to fail as the lowest tranches. The trick on the secondary transaction was that the investment banking firm had the proceeds of the credit default swaps payable to themselves instead of the investors, by labeling the transaction as a proprietary trade instead of a fiduciary transaction].

If the borrower doesn’t take the bait, then the loan is done at 5 1/2% and is identified as being in the senior tranches of a securitized pool by virtue of a spreadsheet without any assignment, indorsement or delivery of or recording of actual documents.

So to summarize, on a $300,000 loan, the investment bank made $150,000 which was used to fund the outsized and illegal yield spread premiums to the mortgage brokers, who were incentivized to make the worst loans possible because the investment bank’s spread increases exponentially every time they get a bad loan. The Arizona Pension Fund is not wise to the fact that only $300,000 of their money was actually invested in a mortgage. Nor do they know the quality of the mortgage is virtually ‘guaranteed to fail” much less AAA.

Once the loan fails, the Pension Fund does not in theory ask any questions about what happened to all the money — except now, many investors ARE asking that that question and I encourage readers to keep track of those cases, since the discovery responses and pleadings will be very revealing regarding your own actions as borrowers to recover damages, interest, attorney fees etc for TILA, RICO and other violations.

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August 16, 2010

Fed Adopts Rules Meant to Protect Home Buyer

By DAVID STREITFELD

The Federal Reserve on Monday moved to end a controversial lending practice that had helped propel the housing boom to unsustainable heights and then accelerated its collapse.

The Fed announced that it was adopting new rules banning yield spread premiums, which allowed mortgage brokers and lenders to gain additional profit from loans by charging borrowers higher-than-market interest rates.

Reaction to the change was muted. For one thing, the recent package of financial reforms passed by Congress this summer already addressed the issue. And some thought a ban should have been imposed long ago, at a time when it could have directly affected loan quality.

Michael D. Calhoun, president of the Center for Responsible Lending, described the action as “a real milestone,” but he said that he had been trying to convince regulators for at least 15 years that yield spread premiums were no more than illegal kickbacks.

Many borrowers had little idea of what a yield spread premium was, even when it was costing them money.

Traditionally, mortgage brokers were paid directly by the home buyer. The rise of the premium allowed the brokers to be compensated by the lender as well. Lenders in effect started paying bonuses to brokers who brought them high-interest loans that were naturally coveted by mortgage investors.

From there, critics said, it was a short step for some brokers to put unsuspecting buyers into these loans and tell them it was the best deal they could get. Subprime lenders in particular often used yield spread premiums.

“People didn’t just happen to end up in risky loans,” Mr. Calhoun said. “Mortgage brokers and other people on the frontlines were getting two to three times as much money to push buyers into those loans than they were into 30-year fixed-rate loans. So what do you think happened?”

Brokers argued that it was frequently in the interest of the borrower, especially a low-income buyer, to pay a higher rate in exchange for bringing less cash to closing.

Attempts at reform achieved little, and during the housing boom the yield spread premiums became ever more prevalent. In many cases, groups like the Center for Responsible Lending found, borrowers never realized they were paying both higher fees and a higher rate.

While the new rules prohibit payments to a lender or broker based on the loan’s interest rate, they do allow for compensation based on a fixed percentage of the loan amount.

To avoid steering the buyer into a loan that is offering less favorable terms, the rules now say that the borrower must be provided with competing options, including the lowest qualifying interest rate, the lowest points and origination fees, and the lowest qualifying rate without risky features like prepayment penalties.

The National Association of Mortgage Brokers, which had long argued that efforts to reform the premium unfairly singled out its members, pronounced itself satisfied with the new rules.

The Fed rules “put everybody on the same footing,” including brokers and banks, said Roy DeLoach, executive vice president for the brokers’ association.

The rules take effect in April. Similar, and in some ways broader, rules in the financial reform bill will take effect later.

Filed under: bubble, CDO, CORRUPTION, Eviction, evidence, expert witness, Fannie MAe, foreclosure, foreclosure mill, GTC | Honor, HERS, investment banking, Investor, MODIFICATION, Mortgage, Motions, Pleading, securities fraud, Servicer, STATUTES, trustee | Tagged: David Streitfeld, fraud, RICO, TILA, yield spread premium, YSP | 33 Comments »

HELOC LOANS WORTHLESS

Posted on August 12, 2010 by Neil Garfield

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EDITOR’S NOTE: It is ironic how reality eventually catches up with illusion. While we have been pounding on the issue of principal reduction as the only realistic way out of the recession, and while the financial industry has been busy convincing people that principal reduction is somehow immoral, the contraction of home prices back to reality is having its own consequences.

In the article below the art and necessity of strategic default is revealed as mainstream in the current housing market. In the case of home equity loans or home equity lines of credit the bloating of appraisals at the time of the transactions has blown up in the face of the financial industry. Many of those home equity loans were in reality part of the initial transaction without which the buyer would have been unable to purchase the home. The transaction would have been valid if the appraisal had been valid. It wasn’t.

A simple analysis of basic fundamental figures published monthly over the last 120 years easily demonstrates that the appraised values that were unverified by the alleged “lender” as part of a nonexistent “underwriting process” could not sustain the test of time or circumstance.

In point of fact most new homeowners quickly found out within weeks or months of the initial transaction that their property was worth far less than the representations made to them at the time of closing. The true value was so far below the so-called appraised value that it didn’t cover the home equity part of the transaction even at the time that the transaction was closed.

The reaction of homeowners to the disappearance of the illusion of wealth has been entirely predictable. For the present the number of home equity loans which are going unpaid is soaring both in numbers and percentages, regardless of the borrower’s ability to pay. Any party that wishes to assert itself as the “owner” of the loan is stuck in the position of holding a predatory loan subject to numerous defenses that is completely unsecured by any equity in the home. According to this article there is at least one debt collector that won’t pay more than $500 per loan regardless of the principal amount due.

The rising number of strategic defaults on primary loans is also rising, also predictable and also inevitable. This is the obvious reaction of a marketplace seeking equilibrium and dependable valuations. Until policy makers accept the reality that the wealth of our economy is largely buried under the illusion of debt that is neither secure nor perfected arising from transactions that were illegal, predatory and fraudulent, there is no way out.

Restoring consumers to the position they were in before they were defrauded is the only way to restore confidence in our society that has permitted the privatization of the issuance of money. Financial reform without providing an easy path to restoration of wealth in the middle-class is meaningless.

August 11, 2010

Debts Rise, and Go Unpaid, as Bust Erodes Home Equity

By DAVID STREITFELD

PHOENIX — During the great housing boom, homeowners nationwide borrowed a trillion dollars from banks, using the soaring value of their houses as security. Now the money has been spent and struggling borrowers are unable or unwilling to pay it back.

The delinquency rate on home equity loans is higher than all other types of consumer loans, including auto loans, boat loans, personal loans and even bank cards like Visa and MasterCard, according to the American Bankers Association.

Lenders say they are trying to recover some of that money but their success has been limited, in part because so many borrowers threaten bankruptcy and because the value of the homes, the collateral backing the loans, has often disappeared.

The result is one of the paradoxes of the recession: the more money you borrowed, the less likely you will have to pay up.

“When houses were doubling in value, mom and pop making $80,000 a year were taking out $300,000 home equity loans for new cars and boats,” said Christopher A. Combs, a real estate lawyer here, where the problem is especially pronounced. “Their chances are pretty good of walking away and not having the bank collect.”

Lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows. So far this year, the trend is the same, with combined write-offs of $7.88 billion in the first quarter.

Even when a lender forces a borrower to settle through legal action, it can rarely extract more than 10 cents on the dollar. “People got 90 cents for free,” Mr. Combs said. “It rewards immorality, to some extent.”

Utah Loan Servicing is a debt collector that buys home equity loans from lenders. Clark Terry, the chief executive, says he does not pay more than $500 for a loan, regardless of how big it is.

“Anything over $15,000 to $20,000 is not collectible,” Mr. Terry said. “Americans seem to believe that anything they can get away with is O.K.”

But the borrowers argue that they are simply rebuilding their ravaged lives. Many also say that the banks were predatory, or at least indiscriminate, in making loans, and nevertheless were bailed out by the federal government. Finally, they point to their trump card: they say will declare bankruptcy if a settlement is not on favorable terms.

“I am not going to be a slave to the bank,” said Shawn Schlegel, a real estate agent who is in default on a $94,873 home equity loan. His lender obtained a court order garnishing his wages, but that was 18 months ago. Mr. Schlegel, 38, has not heard from the lender since. “The case is sitting stagnant,” he said. “Maybe it will just go away.”

Mr. Schlegel’s tale is similar to many others who got caught up in the boom: He came to Arizona in 2003 and quickly accumulated three houses and some land. Each deal financed the next. “I was taught in real estate that you use your leverage to grow. I never dreamed the properties would go from $265,000 to $65,000.”

Apparently neither did one of his lenders, the Desert Schools Federal Credit Union, which gave him a home equity loan secured by, the contract states, the “security interest in your dwelling or other real property.”

Desert Schools, the largest credit union in Arizona, increased its allowance for loan losses of all types by 926 percent in the last two years. It declined to comment.

The amount of bad home equity loan business during the boom is incalculable and in retrospect inexplicable, housing experts say. Most of the debt is still on the books of the lenders, which include Bank of America, Citigroup and JPMorgan Chase.

“No one had ever seen a national real estate bubble,” said Keith Leggett, a senior economist with the American Bankers Association. “We would love to change history so more conservative underwriting practices were put in place.”

The delinquency rate on home equity loans was 4.12 percent in the first quarter, down slightly from the fourth quarter of 2009, when it was the highest in 26 years of such record keeping. Borrowers who default can expect damage to their creditworthiness and in some cases tax consequences.

Nevertheless, Mr. Leggett said, “more than a sliver” of the debt will never be repaid.

Eric Hairston plans to be among this group. During the boom, he bought as an investment a three-apartment property in Hoboken, N.J. At the peak, when the building was worth as much as $1.5 million, he took out a $190,000 home equity loan.

Mr. Hairston, who worked in the technology department of the investment bank Lehman Brothers, invested in a Northern California pizza catering company. When real estate cratered, Mr. Hairston went into default.

The building was sold this spring for $750,000. Only a small slice went to the home equity lender, which reserved the right to come after Mr. Hairston for the rest of what it was owed.

Mr. Hairston, who now works for the pizza company, has not heard again from his lender.

Since the lender made a bad loan, Mr. Hairston argues, a 10 percent settlement would be reasonable. “It’s not the homeowner’s fault that the value of the collateral drops,” he said.

Marc McCain, a Phoenix lawyer, has been retained by about 300 new clients in the last year, many of whom were planning to walk away from properties they could afford but wanted to be rid of — strategic defaulters. On top of their unpaid mortgage obligations, they had home equity loans of $50,000 to $150,000.

Fewer than 5 percent of these clients said they would continue paying their home equity loan no matter what. Ten percent intend to negotiate a short sale on their house, where the holders of the primary mortgage and the home equity loan agree to accept less than what they are owed. In such deals primary mortgage holders get paid first.

The other 85 percent said they would default and worry about the debt only if and when they were forced to, Mr. McCain said.

“People want to have some green pastures in front of them,” said Mr. McCain, who recently negotiated a couple’s $75,000 home equity debt into a $3,500 settlement. “It’s come to the point where morality is no longer an issue.”

Darin Bolton, a software engineer, defaulted on the loans for his house in a Chicago suburb last year because “we felt we were just tossing our money into a hole.” This spring, he moved into a rental a few blocks away.

“I’m kind of banking on there being too many of us for the lenders to pursue,” he said. “There is strength in numbers.”

John Collins Rudolf contributed reporting.

Filed under: bubble, CDO, CORRUPTION, Eviction, evidence, expert witness, foreclosure, foreclosure mill, GTC | Honor, HERS, investment banking, Investor, Mortgage, Motions, Pleading, securities fraud, trustee | Tagged: appraisals, David Streitfeld, fraud, home equity, Mortgage, predatory | 34 Comments »

Obama: A Bold U.S. Plan to Help Struggling Homeowners

Posted on April 1, 2010 by Neil Garfield

YOU DON’T NEED TO BE DELINQUENT TO SETTLE OR MODIFY. It might just be a good time to pick up the phone right now and call the servicer, trustee, or whoever is saying they have your loan (even though they don’t) and make a deal. Think about it first. Don’t be too generous to them and don’t be to greedy for yourself. It’s true they don’t serve the home or the new mortgage, but if you can get the terms you need, and you get a court order confirming it, it won’t matter that the investors got ripped off in the deal. That’s not your problem.

Editor’s Note: Now that the plan is more fully described, hold the presses. It would seem that Obama got our message. This plan addresses all homeowners with securitized mortgages that were over appraised, and aims to keep them in their homes to avoid the obviously needless and lawless displacement that has been the rule up till now.

But don’t get lulled into complacency. The Banks are no more able or willing to give you that modification than they were before, with the possible exception of BofA. You still need legal weapons and ammunition, you most likely still need a lawyer, and you still need to get title quieted through a court order. It’s all possible if the settlement or “modification” agreement provides the right terms.

March 26, 2010

A Bold U.S. Plan to Help Struggling Homeowners

Once again, the federal government is adding to its arsenal of programs for troubled homeowners, seeking to help those who urgently need it while neither angering nor creating perverse incentives for those who do not.

The new measures, announced by financial policy makers at the White House on Friday, are among the boldest to date. They are aimed not only at the seven million households that are behind on their mortgages but, in a significant expansion of aid that proved immediately controversial, the 11 million that simply owe more on their homes than they are worth.

Some of these people, if the government plan works, will emerge with a house whose payments they can afford and whose new mortgage reflects its market value. Unlike many previous modification recipients, they would presumably be less likely to re-default, helping to stabilize a housing market that remains queasy.

“We’re walking that delicate balance to make sure these solutions are sustainable and not temporary,” said David H. Stevens, commissioner of the Federal Housing Administration.

It is a balancing act in numerous ways. If the plan falls short — and some experts were skeptical on Friday — the Obama administration could find itself having to start over yet again in six months or a year.

“The housing market is the Vietnam War of the American financial system,” said Howard Glaser, a housing consultant. “The federal government is in so deep, they have to keep ramping up to find a way out.”

The latest programs, together with foreclosure assistance efforts already in place, are aimed at helping as many as four million embattled owners keep their houses. But the measures, which will take as long as six months to put into practice, might easily fall victim to some of the conflicting interests that have bedeviled efforts to date. None of these programs have the force of law, and lenders have often seen no good reason to participate.

To lubricate its efforts, the government plans to spread taxpayers’ money around liberally. For instance, it had previously planned to give homeowners that sell their homes rather than let them go into foreclosure a “relocation assistance” payment of $1,500. The plan announced on Friday increases that amount to $3,000.

All told, the new measures are expected to cost about $50 billion. The White House was careful to stress that the money will come from funds already set aside for housing programs in the Troubled Asset Relief Program. There will be “no additional commitment of taxpayer dollars,” Michael S. Barr, an assistant secretary of the Treasury, said at the White House briefing.

Here is what the $50 billion is supposed to buy:

The simplest component of the plan involves assistance to unemployed homeowners. Mortgage companies will now be encouraged to reduce payments for at least three months and possibly six months while the homeowner pursues a new job.

To be eligible, borrowers must submit proof they are receiving unemployment insurance. The new payments will be 31 percent or less of their monthly income. The missing money will be tacked onto the loan’s principal.

A second and more complicated program is a requirement that mortgage servicers consider writing off a portion of a borrower’s loan to get it down to a more manageable level.

Borrowers in the government modification plan who owe more than 115 percent of the value of their home and are paying more than 31 percent of their monthly income toward the mortgage are eligible. The write-downs are to take three years, with the borrowers in essence being rewarded for making their payments on time.

The third major new program strays the farthest from the government’s previous approach. Borrowers who owe more on their homes than they are worth will get a chance to cut their debt — providing the investor or bank who owns the loan agrees.

Mr. Stevens of the F.H.A. said the program was “for responsible homeowners who through no fault of their own find themselves in a situation of negative equity.”

There is no official requirement that these homeowners be in distress, but it would probably make the investor more receptive to a deal. Whether homeowners will scheme to get into the program is one of the big uncertainties.

The investors will write down the loans to 97.75 percent of the appraised value of the property, at which point the F.H.A. will refinance them through new lenders. The F.H.A., which currently insures about six million homes, will insure the new loans as well.

If the homeowner has a second mortgage, as many do, the total value of the new mortgage can be as much as 115 percent of the value of the property. The F.H.A. will spend up to $14 billion to provide incentives to the banks that service the primary loan as well as the owners of the secondary loans. Some of the money will also provide additional insurance on the new loans.

Numerous parties will have to work together to make these deals fly. The primary loan might have been bundled into a pool and sold to investors during the housing boom. The investor must agree to cut the principal balance for a deal to work, and any bank holding a second mortgage on the property would have to go along, too.

The only incentive for the first lien holder is a quick exit from a loan that might ultimately default. Payments for second lien holders will be made on a sliding scale.

Early reaction to the refinance program among lending groups was less than enthusiastic.

“The magnitude of this program will likely be measured in the tens of thousands rather than the hundreds of thousands of borrowers,” said Tom Deutsch, executive director of the American Securitization Forum. Both banks and investors belong to the forum.

The Mortgage Bankers Association, which represents the banks that service the primary loans and own outright many of the secondary loans, warned that “each servicer will need to determine whether this is the best approach to help the individual borrower.”

The new proposals irked many people, who flooded online forums Friday. Some said those in trouble deserved their fate. Others asked why the government was propping up housing prices when many renters still could not afford to buy a house. And some wondered about the message these rescue plans were sending to those who resisted the housing bubble.

Dave Juliette, a software worker in Pittsburgh, is in the last group. He paid off his loan eight years ahead of schedule and now owns his house free and clear. “I’m a homeowner in a more genuine sense of the word than many of these people with mortgages,” Mr. Juliette said. “But I won’t be seeing a dime.”

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: "modification" agreement, BofA, Complaint to Quiet Title, David Streitfeld, delinquent, friendly quiet title action, LAWYER, modification, Mortgage, Obama, quiet title, servicer, trustee | 8 Comments »

Principal Reduction: A Step Forward by BofA, Wells Fargo

Posted on March 29, 2010 by Neil Garfield

Editor’s Note: Better late than never. It is a step in the right direction, but 30% reduction is not likely to do the job, and waiting for mortgages to become delinquent is simply kicking the can down the road.

The political argument of a “gift” to these homeowners is bogus. They are legally entitled to the reduction because they were defrauded by false appraisals and predatory loan practices — fueled by the simple fact that the worse the loan the more money Wall Street made. For every $1,000,000 Wall Street took from investors/creditors they only funded around $650,000 in mortgages. If the borrowers performed — i.e., made their payments, Wall Street would have had to explain why they only had 2/3 of the investment to give back to the creditor in principal. If it failed, they made no explanation and made extra money on credit default swap bets against the mortgage.

For every loan that is subject to principal reduction, there is an investor who is absorbing the loss. Yet the new mortgage is in favor of the the same parties owning and operating investment banks that created the original fraud on investors and homeowners. THIS IS NO GIFT. IT IS JUSTICE.

—-EXCERPTS FROM ARTICLE (FULL ARTICLE BELOW)—–

New York Times

Policy makers have been hoping the housing market would improve before any significant principal reduction program was needed. But with the market faltering again, those wishes seem to have been in vain.

Substantial pressure came from Massachusetts, which won a significant suit last year against Fremont Investment and Loan, a subprime lender. The Supreme Judicial Court ruled that some of Fremont’s loans were “presumptively unfair.” That gave the state a legal precedent to pursue Countrywide.

The threat of a stick may be helping banks to realize that principal write-downs are in their ultimate self-interest. The Bank of America program was announced simultaneously with the news that the lender had reached a settlement with the state of Massachusetts over claims of predatory lending.

The percentage of modifications that included some type of principal reduction more than quadrupled in the first nine months of last year, to 13.2 percent from 3.1 percent, according to regulators.

Wells Fargo, for instance, said it had cut $2.6 billion off the amount owed on 50,000 severely troubled loans it acquired when it bought Wachovia.

March 24, 2010

Bank of America to Reduce Mortgage Balances

By DAVID STREITFELD and LOUISE STORY

Bank of America said on Wednesday that it would begin forgiving some mortgage debt in an effort to keep distressed borrowers from losing their homes.

The program, while limited in scope and available by invitation only, signals a significant shift in efforts to deal with the millions of homeowners who are facing foreclosure. It comes as banks are being urged by the White House, members of Congress and community groups to do more to stem the tide.

The Obama administration is also studying whether to provide more help to people who owe more on their mortgages than their homes are worth.

Bank of America’s program may increase the pressure on other big banks to offer more help for delinquent borrowers, while potentially angering homeowners who have kept up their payments and are not getting such aid.

As the housing market shows signs of possibly entering another downturn, worries about foreclosure are growing. With the volume of sales falling, prices are sliding again. When the gap increases between the size of a mortgage and the value that the home could fetch in a sale, owners tend to give up.

Cutting the size of the debt over a period of years, however, might encourage people to stick around. That could save homes from foreclosure and stabilize neighborhoods.

“Banks are willing to take some losses now to avoid much greater losses later if the housing market continues to spiral, and that’s a sea change from where they were a year ago,” said Howard Glaser, a housing consultant in Washington and former government regulator.

The threat of a stick may be helping banks to realize that principal write-downs are in their ultimate self-interest. The Bank of America program was announced simultaneously with the news that the lender had reached a settlement with the state of Massachusetts over claims of predatory lending.

The program is aimed at borrowers who received subprime or other high-risk loans from Countrywide Financial, the biggest and one of the most aggressive lenders during the housing boom. Bank of America bought Countrywide in 2008.

Bank of America officials said the maximum reduction would be 30 percent of the value of the loan. They said the program would work this way: A borrower might owe, say, $250,000 on a house whose value has fallen to $200,000. Fifty thousand dollars of that balance would be moved into a special interest-free account.

As long as the owner continued to make payments on the $200,000, $10,000 in the special account would be forgiven each year until either the balance was zero or the housing market had recovered and the borrower once again had positive equity.

“Modifications are better than foreclosure,” Jack Schakett, a Bank of America executive, said in a media briefing. “The time has come to test this kind of program.”

That was the original notion behind the government’s own modification program, which was intended to help millions of borrowers. It has actually resulted in permanently modified loans for fewer than 200,000 homeowners.

The government program, which emphasizes reductions in interest rates but not in principal owed, was strongly criticized on Wednesday by the inspector general of the Troubled Asset Relief Program for overpromising and underdelivering.

“The program will not be a long-term success if large amounts of borrowers simply redefault and end up facing foreclosure anyway,” the inspector general, Neil M. Barofsky, wrote in his report. One possible reason is that even if they get mortgage help, many borrowers are still loaded down by other kinds of debt like credit cards.

Bank of America said its new program would initially help about 45,000 Countrywide borrowers — a fraction of the 1.2 million Bank of America homeowners who are in default. The total amount of principal reduced, it estimated, would be $3 billion.

The bank said it would reach out to delinquent borrowers whose mortgage balance was at least 20 percent greater than the value of the house. These people would then have to demonstrate a hardship like a loss of income.

These requirements will, the bank hopes, restrain any notion that it is offering easy bailouts to those who might otherwise be able to pay. “The customers who will get this offer really can’t afford their mortgage,” Mr. Schakett said.

Early reaction to the program was mixed.

“It is certainly a step in the right direction,” said Alan M. White, an assistant professor at Valparaiso University School of Law who has studied the government’s modification program.

But Steve Walsh, a mortgage broker in Scottsdale, Ariz., who said he had just abandoned his house and several rental properties, called the program “another Band-Aid. It probably would not have prevented me from walking away.”

Even before Bank of America’s announcement, reducing loan balances was growing in favor as a strategy to deal with the housing mess. The percentage of modifications that included some type of principal reduction more than quadrupled in the first nine months of last year, to 13.2 percent from 3.1 percent, according to regulators.

Few of these mortgages were owned by the government or private investors, however. Banks tended to cut principal only on mortgages they owned directly. Wells Fargo, for instance, said it had cut $2.6 billion off the amount owed on 50,000 severely troubled loans it acquired when it bought Wachovia.

Bank of America said it would be offering principal reduction for several types of exotic loans. Some of the eligible loans are held in the bank’s portfolio, but the program will also apply to some loans owned by investors for which Bank of America is merely the manager.

The bank developed the program partly because of “pressure from everyone,” Mr. Schakett said. Even the investors who owned the loans were saying “maybe we should be doing more,” he said.

Substantial pressure came from Massachusetts, which won a significant suit last year against Fremont Investment and Loan, a subprime lender. The Supreme Judicial Court ruled that some of Fremont’s loans were “presumptively unfair.” That gave the state a legal precedent to pursue Countrywide.

“We were prepared to bring suit against Bank of America if we had not been able to reach this remedy today, which we have been looking for for a long time,” said the Massachusetts attorney general, Martha Coakley.

Bank of America agreed to a settlement on Wednesday with Ms. Coakley that included a $4.1 million payment to the state.

Reducing principal is widely endorsed, in theory, as a cure for foreclosures. The trouble is, no one wants to absorb the costs.

When the administration announced a housing assistance program in the five hardest-hit states last month, officials explicitly opened the door to principal forgiveness. Despite reservations expressed by the Treasury, the White House and Housing and Urban Development officials have continued to study debt forgiveness in areas with lots of so-called underwater homes, according to two people with knowledge of the matter.

On a national scale, such a program risks a political firestorm if the banks are unable to finance all the losses themselves. Regulators like the comptroller of the currency and the Federal Reserve have been focused on maintaining the banks’ capital levels, which could be hurt by large-scale debt forgiveness.

“You have to be very careful not to design a program that would change people’s fundamental behavior across the country in a destabilizing way or would be widely perceived as unfair to people who are continuing to pay,” Michael S. Barr, an assistant secretary of the Treasury, said early this year.

Policy makers have been hoping the housing market would improve before any significant principal reduction program was needed. But with the market faltering again, those wishes seem to have been in vain.

Bank of America’s announcement came within hours of a fresh report that underscored the renewed weakness. Sales and prices are dropping, leaving even more homeowners underwater.

Sales of new homes fell in February to their lowest point since the figures were first collected in 1963, the Commerce Department said. Sales are about a quarter of what they were in 2003, before the housing boom began in earnest.

“It’s shocking,” said Brad Hunter, an analyst with the market researcher Metrostudy. “No one would ever have imagined it would go this low.”

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, expert witness, foreclosure, Forensic Analysis Workshop, GTC | Honor, Investor, MODIFICATION, Mortgage, Motion Practice and Discovery, securities fraud, Securitization Survey, Servicer, STATUTES, workshop | Tagged: Alan M White, ARIZONA, assistant secretary of the Treasury, Bank of America, BOA, BofA, Brad Hunter, Commerce Department, countrywide, credit cards, David Streitfeld, debt forgiveness, forgiveness of debt, Fremont Investment and Loan, Housing and Urban Development, inspector general, Jack Schakett, Louise Story, Martha Coakley, Massachusetts, Metrostudy, Michael S. Barr, Neil M. Barofsky, New York Times, predatory lending, preumptively unfair, principal reduction, redefault, Scottsdale, Steve Walsh, Supreme Judicial Court, TARP, Troubled Asset Relief Program, Valparaiso University School of Law, Wachovia, Wells Fargo, White House | 14 Comments »

U.S. Plans Big Expansion in Effort to Aid Homeowners

Posted on March 28, 2010 by Neil Garfield

March 25, 2010

U.S. Plans Big Expansion in Effort to Aid Homeowners

By DAVID STREITFELD

The Obama administration on Friday will announce broad new initiatives to help troubled homeowners, potentially refinancing several million of them into fresh government-backed mortgages with lower payments.

Another element of the new program is meant to temporarily reduce the payments of borrowers who are unemployed and seeking a job. Additionally, the government will encourage lenders to write down the value of loans held by borrowers in modification programs.

The escalation in aid comes as the administration is under rising pressure from Congress to resolve the foreclosure crisis, which is straining the economy and putting millions of Americans at risk of losing their homes. But the new initiatives could well spur protests among those who have kept up their payments and are not in trouble.

The administration’s earlier efforts to stem foreclosures have largely been directed at borrowers who were experiencing financial hardship. But the biggest new initiative, which is also likely to be the most controversial, will involve the government, through the Federal Housing Administration, refinancing loans for borrowers who simply owe more than their houses are worth.

About 11 million households, or a fifth of those with mortgages, are in this position, known as being underwater. Some of these borrowers refinanced their houses during the boom and took cash out, leaving them vulnerable when prices declined. Others simply had the misfortune to buy at the peak.

Many of these loans have been bundled together and sold to investors. Under the new program, the investors would have to swallow losses, but would probably be assured of getting more in the long run than if the borrowers went into foreclosure. The F.H.A. would insure the new loans against the risk of default. The borrower would once again have a reason to make payments instead of walking away from a property.

Many details of the administration’s plan remained unclear Thursday night, including the precise scope of the new program and the number of homeowners who might be likely to qualify.

One administration official cautioned that the investors might not be willing to volunteer any loans from borrowers that seemed solvent. That could set up a battle between borrowers and investors.

This much was clear, however: the plan, if successful, could put taxpayers at increased risk. If many additional borrowers move into F.H.A. loans, a renewed downturn in the housing market could send that government agency into the red.

The F.H.A. has already expanded its mortgage-guarantee program substantially in the last three years as the housing crisis deepened. It now insures more than six million borrowers, many of whom made minimal down payments and are now underwater.

Sources said the agency would use $14 billion in funds from the Troubled Asset Relief Program, some of which it could dangle in front of financial institutions as incentives to participate.

Another major element of the program, according to several people who described it, will be to encourage lenders to write down the value of loans for borrowers in modification programs. Until now, the government’s modification efforts have focused on lowering interest rates.

Lenders began offering principal forgiveness last year on loans they held in their own portfolios. In the fourth quarter, however, this process abruptly reversed itself, for reasons that are unclear. The number of modifications that included principal reduction fell by half.

Bank of America, the country’s biggest bank, announced this week that it would forgive principal balances over a period of years on an initial 45,000 troubled loans.

Another element of the White House’s housing program will require lenders to offer unemployed borrowers a reduction in their payments for a minimum of three months.

An administration official declined to speak on the record about the new programs but said they would “better assist responsible homeowners who have been affected by the economic crisis through no fault of their own.”

The new initiatives would expand the government’s current mortgage modification plan, announced a year ago with great fanfare. It has resulted in fewer than 200,000 people getting permanent new loans. As many as seven million borrowers are seriously delinquent on their loans and at risk of foreclosure.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: David Streitfeld, LOAN MODIFICATION, Mortgage, New York Times, Obama administration, principal reduction, TARP | 13 Comments »

Obama Considering Expansion of Cash for Keys With Taxpayer Money

Posted on March 13, 2010 by Neil Garfield

Editor’s Note: It seems to me that this concedes the battle to Wall Street. It encourages homeowners to take the loss that at the very least should be shared with ALL the players in the securitization scheme and creates more problems in housing and social services.

Excerpt from NYT – do not buy into this –

Program Will Pay Homeowners to Sell at a Loss
By DAVID STREITFELD
Published: March 7, 2010

“In an effort to end the foreclosure crisis, the Obama administration has been trying to keep defaulting owners in their homes. Now it will take a new approach: paying some of them to leave.

This latest program, which will allow owners to sell for less than they owe and will give them a little cash to speed them on their way, is one of the administration’s most aggressive attempts to grapple with a problem that has defied solutions.

More than five million households are behind on their mortgages and risk foreclosure. The government’s $75 billion mortgage modification plan has helped only a small slice of them. Consumer advocates, economists and even some banking industry representatives say much more needs to be done.

For the administration, there is also the concern that millions of foreclosures could delay or even reverse the economy’s tentative recovery — the last thing it wants in an election year.

Taking effect on April 5, the program could encourage hundreds of thousands of delinquent borrowers who have not been rescued by the loan modification program to shed their houses through a process known as a short sale, in which property is sold for less than the balance of the mortgage. Lenders will be compelled to accept that arrangement, forgiving the difference between the market price of the property and what they are owed.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: borrowers, cash for keys, David Streitfeld, lenders, New York Times, Obama | 11 Comments »

Monster From Below, Not from Above — Appraisal Fraud

Posted on February 15, 2010 by Neil Garfield

Editor’s Comment: Again, myth prevails.

The monster that gobbled our home equity and the value of our pension funds came from the waters beneath the market not from some economic disaster or sudden migration of population to Australia. The “loss of value” was nothing of the sort. Prices were going up during a decade when median income was going down. Prices at best should have been level. This disaster is from a lack of support on the fundamentals of economics — the houses were never worth what the money that appeared on appraisals.

Most pundits, reporters and “experts” talk about the decline in housing prices as the result of some mysterious downward market pressure — like a lack of demand. Demand for housing is no lower or higher than it ever was.

The truth is that there never was any increased demand for housing to support the huge price jumps over the last decade. THAT was caused by an increase of what economists call liquidity and the rest of us now know as phoney money pumped in by Wall Street who paid appraisers to render a report that conformed to contracts instead of market conditions.

Those contracts went through not because of public demand or population increases or even migration. They came from the fact that Wall Street paid or created “lenders” to pretend they were “underwriting” loans and assessing risk the way banks normally perform their duties as lenders. But since they had no money at risk, these “lenders” as straw men in a complex securitization chain, dropped their underwriting function altogether and merely pretended to “qualify” borrowers and approve contracts to purchase or refinance.

February 15, 2010

U.S. Housing Aid Winds Down, and Cities Worry

By DAVID STREITFELD

ELKHART, Ind. — Over the next six months, the federal government plans to wind down many of its emergency programs for housing. Then it will become clear if the market can function on its own.

People here are pretty sure the answer will be no.

President Obama has traveled twice to this beleaguered manufacturing city to spotlight the government’s economic stimulus program. The employment picture here has indeed begun to improve over the last nine months.

But Elkhart also symbolizes the failure of federal efforts to turn around the housing slump at the heart of the economic crisis. Housing in this community has become almost entirely dependent on a string of federal support programs, which are nonetheless failing to prevent a fall in prices and a rise in mortgage delinquencies.

More than one in 10 mortgage holders in Elkhart is seriously behind on payments. The median sales price has plunged to the level of a decade ago. Many homeowners owe more than their home is worth, freezing them in place for years. Foreclosures recently hit a record.

To the extent that the real estate market is functioning at all, people here say, it is doing so only because of the emergency programs, which have pushed down interest rates on mortgages and offered buyers a substantial tax credit.

Equally important is an expanded mortgage insurance program run by the Federal Housing Administration, which encourages private lenders to accept borrowers with small down payments. The government takes the risk of default.

A few years ago, only one in 10 buyers in Elkhart used the housing agency program. Now about half do. Across the country, the agency has greatly expanded its reach so that it now insures six million mortgages.

“There has been all kinds of help for housing. I’m not unappreciative,” said Barb Swartley, president of the Elkhart County Board of Realtors. “But you can’t turn real estate into a government-sponsored operation forever.”

Many in Washington agree. With worries about the deficit intensifying, the government is eager to start withdrawing some of its support programs.

The first step could happen as early as next month, when the Federal Reserve has said it will end its trillion-dollar program to buy up mortgage securities. That program has driven mortgage interest rates to lows not seen since the 1950s.

Yet it is uncertain whether the government can really pull back without sending housing markets into another tailspin. “A rise in rates would kill us all by itself,” Ms. Swartley said.

The Obama administration has offered few ideas about reforming the housing market. Proposals for the future of Fannie Mae and Freddie Mac, the mortgage holding companies taken over by the government at the height of the crisis, were supposed to be introduced with the president’s budget this month. They were not.

The government programs, however crucial, are distorting the market. The tax credit produced sales last fall, but some lenders here say it has troubling implications.

“People are buying to get that tax credit, to get some reserve money. They’re saying, ‘If something happens, I will have a little bit of money to fall back on,’ ” said Denny Davis of Horizon Bank in Elkhart. “That’s not healthy.”

The programs favor first-time buyers, who have the fewest resources to bring to a deal. Heather Stevens, a 23-year-old nurse here, is closing on a three-bedroom house this week. Since her loan was insured by the Federal Housing Administration, she had to put down only 3.5 percent of the $74,900 purchase price.

“It was a breeze to get approved,” she said.

The sellers are covering her closing costs, which agents say is often the case here. That meant Ms. Stevens had to come up with only the $2,600 down payment, which still took all her savings.

But the best part is the $7,500 tax credit. She will use that to remodel the kitchen. “If it wasn’t for the credit, we would have waited to buy,” said Ms. Stevens, who is getting married this year.

Buying houses with no money down was a feature of the latter stages of the housing bubble. It gave prices a final push into the stratosphere. But buyers with no equity were the first to abandon their properties as the market turned south.

With housing prices stagnant, bolstering the market by again letting people buy with hardly any money down is viewed in some quarters as a bad bet.

Neil Barofsky, the special inspector general for the government’s Troubled Asset Relief Program, wrote in his most recent report to Congress that “the federal government’s concerted efforts to support” housing prices “risk reinflating” the bubble.

He noted one difference from the last bubble: taxpayers, rather than banks, are now directly at risk in these new mortgages.

In Elkhart, the worries are less about the risks of doing too much and more about the perils of doing too little. If the Federal Reserve really ends its $1.25 trillion program of buying mortgage-backed securities, economists say, mortgage rates could rise as much as one percentage point. In recent weeks, rates on 30-year fixed mortgages have drifted below 5 percent.

The tax credit requires home buyers to make a deal by April 30, the middle of the prime spring selling season.

For now, the F.H.A. is modestly tightening the requirements on some of its programs, trying to strike a balance between stabilizing the market with qualified buyers and overwhelming it with unqualified borrowers.

John Katalinich, chief lending officer at the Inova Federal Credit Union in Elkhart, says there is danger in letting buyers get into properties with so little at stake, but those risks are minimal compared to the alternative.

“If the government were not to continue the same level of support, it would be very detrimental, like cutting the legs off a wobbling child and expecting it to run a marathon,” he said. “It’s very possible we’ll still be at this level of need five years from now.”

Elkhart, in the northeast corner of Indiana, became a symbol of distressed Middle America after Mr. Obama chose it as the place to introduce his stimulus plan last February. The region is a hub of recreational vehicle manufacturing, one of the first industries to falter in the recession. In less than a year, the unemployment rate tripled, peaking at 18.9 percent last March.

Mr. Obama returned in August to promote the effectiveness of the stimulus program and of government grants for the manufacture of battery-powered electric vehicles. Several companies have announced they are hiring. Unemployment in December was down to 14.8 percent.

No such improvement is visible with housing. In the last 18 months, the F.H.A increased its loans in Elkhart by 40 percent even as its defaults rose 174 percent.

As these troubled loans become foreclosures, the government takes over the property and tries to sell it. On Saturday, Gina Martin, an administrative assistant, examined a three-bedroom government house for sale southeast of Elkhart.

In late 2003, the house sold for $115,000, but in these depressed times the government was willing to let it go for $75,000.

Ms. Martin’s agent, Dean Slabach, thought the government would eventually have to take a much lower bid, substantially increasing its loss. Most of the F.H.A. properties on the market in Elkhart carry notations like “significant price reduction” and “all reasonable offers considered.”

“They’ll end up selling this for $60,000 or less,” Mr. Slabach said.

But Ms. Martin, a 47-year-old renter who has approval for an F.H.A. loan, said she was not tempted at any price.

“We’ll see what else is out there,” she said.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: Appraisal, David Streitfeld, demand, FHA, lenders, modification, Neil barofsky, New York Times, underwriting, Wall Street | 3 Comments »

No Help in Sight, More Homeowners Walk Away

Posted on February 3, 2010 by Neil Garfield

New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying.

See the whole article in New York Times. Extensive discussion of the issue. It’s beginning to look like a parade. There is no question that without principal reduction, the bottom has yet to be reached in home values. Strategic Defaults are on the rise and may well dominate the housing market for years to come.

No Help in Sight, More Homeowners Walk Away

By DAVID STREITFELD
NY Times

In 2006, Benjamin Koellmann bought a condominium in Miami Beach. By his calculation, it will be about the year 2025 before he can sell his modest home for what he paid. Or maybe 2040.
“People like me are beginning to feel like suckers,” Mr. Koellmann said. “Why not let it go in default and rent a better place for less?”

After three years of plunging real estate values, after the bailouts of the bankers and the revival of their million-dollar bonuses, after the Obama administration’s loan modification plan raised the expectations of many but satisfied only a few, a large group of distressed homeowners is wondering the same thing.

New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying.

In a situation without precedent in the modern era, millions of Americans are in this bleak position. Whether, or how, to help them is one of the biggest questions the Obama administration confronts as it seeks a housing policy that would contribute to the economic recovery.

“We haven’t yet found a way of dealing with this that would, we think, be practical on a large scale,” the assistant Treasury secretary for financial stability, Herbert M. Allison Jr., said in a recent briefing.

The number of Americans who owed more than their homes were worth was virtually nil when the real estate collapse began in mid-2006, but by the third quarter of 2009, an estimated 4.5 million homeowners had reached the critical threshold, with their home’s value dropping below 75 percent of the mortgage balance.

They are stretched, aggrieved and restless. With figures released last week showing that the real estate market was stalling again, their numbers are now projected to climb to a peak of 5.1 million by June — about 10 percent of all Americans with mortgages.

“We’re now at the point of maximum vulnerability,” said Sam Khater, a senior economist with First American CoreLogic, the firm that conducted the recent research. “People’s emotional attachment to their property is melting into the air.”

Suggestions that people would be wise to renege on their home loans are at least a couple of years old, but they are turning into a full-throated barrage. Bloggers were quick to note recently that landlords of an 11,000-unit residential complex in Manhattan showed no hesitation, or shame, in walking away from their deeply underwater investment.

“Since the beginning of December, I’ve advised 60 people to walk away,” said Steve Walsh, a mortgage broker in Scottsdale, Ariz. “Everyone has lost hope. They don’t qualify for modifications, and being on the hamster wheel of paying for a property that is not worth it gets so old.”

x_http://www.nytimes.com/2010/02/03/business/03walk.html?th=&emc=th&pagewanted=all

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: David Streitfeld, house arrest, jingle mail, New York Times, principal reduction, strategic defaults, walking away | 6 Comments »

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Housing Woes Bring New Cry: Let Market Fall

By DAVID STREITFELD

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A YIELD SPREAD PREMIUM IS A FEE PAID TO A BROKER FOR CREATING A FRAUDULENT PROFIT BY LYING TO THE CUSTOMER WHO BUYS A FINANCIAL PRODUCT. This particular lie would be about the rate on the loan.

Fed Adopts Rules Meant to Protect Home Buyer

By DAVID STREITFELD

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Debts Rise, and Go Unpaid, as Bust Erodes Home Equity

By DAVID STREITFELD

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A Bold U.S. Plan to Help Struggling Homeowners

By DAVID STREITFELD

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Editor’s Note: Better late than never. It is a step in the right direction, but 30% reduction is not likely to do the job, and waiting for mortgages to become delinquent is simply kicking the can down the road.

Policy makers have been hoping the housing market would improve before any significant principal reduction program was needed. But with the market faltering again, those wishes seem to have been in vain.

Bank of America to Reduce Mortgage Balances

By DAVID STREITFELD and LOUISE STORY

Policy makers have been hoping the housing market would improve before any significant principal reduction program was needed. But with the market faltering again, those wishes seem to have been in vain.

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U.S. Plans Big Expansion in Effort to Aid Homeowners

By DAVID STREITFELD

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U.S. Housing Aid Winds Down, and Cities Worry

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