Predatory mortgage lending involves a wide array of abusive and unethical business practices. Here, the “Center for Responsible Lending” (“CRL”) boils it down to eight (8) of the most common signs of a bad home loan.
Your best defense? Shopping. Before accepting a mortgage, it is always a good idea to talk to several lenders to make sure you understand the most competitive options available to you, and be on the lookout for predatory signs. If you encounter any one of the “red flags” described below, say no and look for a better deal.
• Excessive fees
• Prepayment penalties
• Inflated interest rates from brokers (yield-spread premiums)
• Steering and targeting
• Adjustable interest rates that “explode”
• Promises to fix problems with “future refinancings”
• Not counting taxes and insurance in a monthly payment
• Repeated refinancings that drain your resources
EXCESSIVE FEES
When buying a home or refinancing, you should shop based on interest rate, of course, and you should also make sure you understand all the other costs of the mortgage. “Points” or “discount points” are the lender’s fee for making the loan. On a competitive loan, you will be charged one point, or one percent of the loan amount. You also can expect additional fees, which may include payment to a broker and charges for such necessities as an appraisal and title insurance. High points and fees are the hallmark of a predatory loan. It’s worth your time to get your credit score in advance and research typical fees in your area.
PREPAYMENT PENALTIES
A prepayment penalty—most common on subprime mortgages—means that you will have to pay a steep fee before refinancing. A prepayment penalty can become a trap that locks you into an expensive mortgage even when you could qualify for a more affordable loan. The penalty is typically effective for two or three years and costs more than six months’ interest. Before agreeing to a mortgage, make sure it does not come with a prepayment penalty. If it does, refuse the loan and find a better deal.
INFLATED INTEREST RATES FROM BROKERS (YIELD SPREAD PREMIUMS)
Mortgage brokers receive frequent updates on what kinds of loans lenders are offering and at what price. Watch out for brokers who try to sell you a loan with an inflated interest rate—i.e., higher than the rate acceptable to the lender. Be aware that brokers have plenty of incentive to increase interest rates unnecessarily, since lenders often reward them by paying a “yield spread premium.” This compensation is essentially a kickback for making the loan more costly than necessary. To make sure your transaction doesn’t include a yield spread premium, ask for a good faith estimate in advance, and make sure you understand all items that represent compensation to the broker.
STEERING & TARGETING
Predatory lenders may try to steer you into a more expensive loan, such as a subprime mortgage, even when you could qualify for a mainstream loan. If you are a senior citizen or a minority, be on the lookout for predatory lenders who target vulnerable groups. Fannie Mae has estimated that up to half of borrowers with subprime mortgages could have qualified for loans with better terms. Remember that you don’t need to give in to aggressive sales tactics. Don’t respond to ads that say bad credit doesn’t matter, and be especially wary of lenders or brokers who contact you or those who try to rush you into decisions. An ethical lender will answer your questions and encourage you to make an informed decision based on your own best interests.
ADJUSTABLE INTEREST RATES THAT “EXPLODE”
During the height of the reckless boom in subprime lending, the most common type of subprime mortgage was an “exploding ARM”—a home loan with an adjustable interest rate that can increase sharply after a short time, usually two or three years. If you are a person of modest income, this type of loan is not appropriate for you. Beware of adjustable-rate loans that can rise significantly, especially if the interest rate can never go down. Make sure you understand the worst-case scenario before agreeing to this type of loan. And don’t count on a future refinance to get out of trouble in the future (see next item
PROMISES TO FIX PROBLEMS WITH FUTURE REFINANCING
Predatory lenders are notorious for selling bad deals by promising that they will refinance the loan within a short time, or if it becomes unmanageable for you. It is important to remember that the lender is not bound by that promise, and it is best to refuse a loan if it stretches you too much financially, now or in the foreseeable future. Also, avoid any mortgage that comes with a “balloon” payment, meaning that you will be obligated to pay the loan in full after a relatively short period of time.
NOT COUNTING TAXES AND INSURANCE IN A MONTHLY PAYMENT
Home buyers should find out up front whether their monthly mortgage payment will include the costs of property taxes and insurance (i.e., whether the lender has established an escrow account for these costs). If not, the homeowner will be responsible for paying these costs separately, usually in a lump sum each year. Unscrupulous lenders make monthly payments seem artificially low by excluding taxes and insurance, and many families have been pushed into foreclosure because they couldn’t afford to pay these costs.
REPEATED REFINANCINGS THAT DRAIN THE BORROWER’S RESOURCES (LOAN FLIPPING)
Beware of lenders who aggressively approach you to refinance your home loan. They may try to entice you with cash, but these loans typically increase the amount you owe on your home and can also increase your monthly payment. It is important to consider all that you are likely to lose valuable equity that you have already acquired on your home—equity that could help send a child to college or fund retirement. Flipping can quickly drain borrower equity and increase monthly payments—sometimes on homes that had previously been owned free of debt. In too many cases, predatory lenders have refinanced families repeatedly until there is nothing left and the family is forced into foreclosure.
Sunday, December 20, 2009
Beware Bank's FINE PRINT-Homes Sold w/out Notice!
Beware the FINE PRINT in a Mortgage Company's "Loan Modification Agreement" – Some Homeowners are Learning that their Homes are Being Sold without Notice!
WASHINGTON — Ten months after the Obama administration began pressing lenders to do more to prevent foreclosures, many struggling homeowners are holding up their end of the bargain but still find themselves rejected, and some are even having their homes sold out from under them without notice.
These borrowers, rich and poor, completed trial modifications of their distressed mortgage, and made all the payments, only to learn, often indirectly, that they won’t get help after all.
How many is hard to tell. Lenders participating in the administration’s Home Affordable Modification Program, or HAMP, still don’t provide the government with information about who’s rejected and why.
To date, more than 759,000 trial loan modifications have been started, but just 31,382 have been converted to permanent new loans. That’s averages out to 4 percent, far below the 75 percent conversion rate President Barack Obama has said he seeks.
In the fine print of the form homeowners fill out to apply for Obama’s program, which lowers monthly payments for three months while the lender decides whether to provide permanent relief, borrowers must waive important notification rights. This clause allows banks to reject borrowers without any written notification and move straight to auctioning off their homes without any warning.
That’s what happened to Evangelina Flores, the owner of a modest 902 square-foot home in Fontana, Calif. She completed a three-month trial modification, and made the last of the agreed upon monthly payments of $1,134.60 on Nov. 1. Her lawyer said that in late November, Central Mortgage Company told her that it would void her adjustable-rate mortgage, which had risen to a monthly sum above $2,000, and replace it with a fixed-rate mortgage.
“The information they had given us is that she had qualified and that she would be getting her notice of modification in the first week of December,” said George Bosch, the legal administrator for the Law Firm of Edward Lopez and Rick Gaxiola, which is handling Flores’ case for free.
Flores, 58, a self-employed child care worker, wired her December payment to Central Mortgage Company on Nov. 30, thinking that her prayers had been answered. A day later, there was a loud, aggressive knock on her door. Thinking a relative was playing a prank, she opened her front door to find two strangers handing her an eviction notice.
“They arrived real demanding, saying that they were the owners,” recalled Flores. “I have high blood pressure, and I felt awful.”
Court documents show that her house had been sold that very morning to a recently created company, Shark Investments. The men told Flores she had to be out within three days. The eviction notice had a scribbled signature, and under the signature was the name of attorney John Bouzane.
A representative in his office denied that Bouzane’s law firm was involved in Flores’ eviction, and said the eviction notice was obtained from Bouzane’s Web site,www.fastevictionservice.com.
Why would a lawyer provide for free a document that gives the impression that his law firm is behind an eviction. “We hope to get the eviction business,” said the woman, who didn’t identify herself. Flores bought her home in 2006 for $352,000. Records show that it has a current fair-market value of $99,000. The new owner bought it for $78,000 at an auction Flores didn’t even know about.
“I had my dream, but now I feel awful,” said Flores, who remains in the house while her lawyers fight her eviction. “I still can’t believe it.”
How could Flores go so quickly from getting government help to having her home owned by Shark Investment? The answer is in the fine print of standard HAMP documents.
The Aug. 25 cover letter from Central Mortgage Company, the servicer that collects Flores’ mortgage payments, offered Flores a trial modification with this comforting language: “If you do not qualify for a loan modification, we will work with you to explore other options available to help you keep your home or ease your transition into a new home.” CMC is owned by Arkansas regional Arvest Bank, itself controlled by Jim Walton, the youngest son of Wal-Mart founder Sam Walton.
A glance past CMC’s hopeful promise finds a different story in the fine print of HAMP document, which contains standardized language drafted by the Obama Treasury Department and is used uniformly by lenders. The document warns that foreclosure “may be immediately resumed from the point at which it was suspended if this plan terminates, and no new notice of default, notice of intent to accelerate, notice of acceleration, or similar notice will be necessary to continue the foreclosure action, all rights to such notices being hereby waived to the extent permitted by applicable law.”
This means that even when a borrower makes all the trial payments, a lender can put the house up for auction if it decides that the homeowner doesn’t qualify — assuming that foreclosure proceedings had been started before the trial period — without telling the homeowner.
Until now, lenders haven’t even had to notify borrowers in writing that they’d been rejected for permanent modifications. In January, 11 months after Obama’s plan was announced, homeowners will begin receiving written rejection notices, and the Treasury Department finally will begin receiving data on rejection rates and reasons for rejections.
The controversial clause notwithstanding, the handling of Flores’ loan raises questions.
“Foreclosure actions may not be initiated or restarted until the borrower has failed the trial period and the borrower has been considered and found ineligible for other available foreclosure prevention options,” said Meg Reilly, a Treasury spokeswoman. “Servicers who continue with foreclosure sales are considered non-compliant.”
CMC officials declined to comment and hung up when they learned that a reporter was listening in with permission from Flores’ legal team. Arvest officials also declined comment. McClatchy did hear from Freddie Mac, the mortgage finance agency seized by the Bush administration in September 2008. Freddie owns Flores’ loan, and spokesman Brad German insisted that Flores was reviewed three times for loan modification.
“In each instance, there was a lack of documentation verifying that she had the income required for a permanent modification,” German said.
That response is ironic, said Michael Calhoun, the president of the Center for Responsible Lending, a nonpartisan group in Durham, N.C., that works on behalf of borrowers. “These lenders gave loans with no documentation and charged them a penalty interest rate for doing so. And now when the people ask for help, they are using extravagant demands for documentation to give them the back of their hand and continue to foreclosure,” Calhoun said.
German said that Flores was sent a letter on Nov. 24, which would have arrived several days later, given the Thanksgiving holiday, informing her that she’d been rejected for a permanent modification. Flores and her attorney said she never got a letter, and neither Freddie Mac nor CMC provided proof of that letter.
Exactly one week after the letter supposedly was sent, Flores’ home was sold to Shark Investments. That company was formed on Aug. 19, according to records on the California Secretary of State’s Web site. Shark Investments, apparently an unsuspecting beneficiary of Flores’ woes, has no phone listing. The Riverside, Calif., address on the company’s filing as a limited liability company traces to a five-bedroom, four-bath house with a swimming pool.
German didn’t comment on whether Flores received sufficient notice under Freddie Mac rules, or how the home could move to sale so quickly. Flores’ legal team, which specializes in foreclosure prevention, thinks that lenders and servicers are gaming Obama’s housing effort.
“It seems servicers are giving people false hopes by sending them a plan, and they are using the program as a collection method, getting people to pay them with no intention of modifying the loan,” said Bosch. “I believe they are using this as a tool to suck people dry.”
Dashed hopes aren’t exclusive to the working poor such as Flores. David Smith owns a beautiful home in San Clemente, Calif., the location of the Richard Nixon Presidential Library. Smith purchased his five bedroom home four years ago for $1.3 million. Today, the real estate Web site Zillow.com estimates the value of Smith’s home at $981,000, slightly below the $1 million he still owes on it.
Smith said he went from “making a lot of money to making hardly any” as the national and California economies plunged into deep recession. He’s a salesman serving the hard-hit residential and commercial construction sector. On top of his hardship, Smith’s mortgage exceeds the limits for the HAMP plan.
In late August, Smith signed and returned paperwork in a prepaid FedEx envelope to Bank of America that said it had received the contract needed to modify the adjustable-rate mortgage he originally took out with the disgraced lender Countrywide Financial, which Bank of America bought last year.
The modification agreement shows that Bank of America agreed to give Smith a 3.375 percent mortgage rate through September 2014, and everything Smith paid between now and through 2019 would count as paying off interest. He’d begin paying principal and interest in October 2019, with the loan maturing in 2037.
The deal favors the lender, but Smith, 55, jumped on it because it kept him in the home.
Armed with what he thought was “a permanent modification,” Smith returned a notarized copy of the agreement and made subsequent payments on time. In return, he got a surprising notice from Bank of America saying that his house would be auctioned off on Dec. 18.
“It looks like they’re trying to sell this out from underneath me,” Smith said. “My wife cries all the time.”
After a Dec. 16 call from McClatchy asking why Bank of America wasn’t honoring its own modification, the lender backed off. “The case has been returned to a workout status and a Home Retention Division associate will be contacting Mr. Smith for further discussions,” said Rick Simon, a Bank of America spokesman. “The scheduled foreclosure sale will be postponed for at least 30 days to allow for review of the account in hope of completing a home retention solution for Mr. Smith.”
The Center for Responsible Lending says such problems are common. “Everyone acknowledges that the system is not working well,” Calhoun said.
WASHINGTON — Ten months after the Obama administration began pressing lenders to do more to prevent foreclosures, many struggling homeowners are holding up their end of the bargain but still find themselves rejected, and some are even having their homes sold out from under them without notice.
These borrowers, rich and poor, completed trial modifications of their distressed mortgage, and made all the payments, only to learn, often indirectly, that they won’t get help after all.
How many is hard to tell. Lenders participating in the administration’s Home Affordable Modification Program, or HAMP, still don’t provide the government with information about who’s rejected and why.
To date, more than 759,000 trial loan modifications have been started, but just 31,382 have been converted to permanent new loans. That’s averages out to 4 percent, far below the 75 percent conversion rate President Barack Obama has said he seeks.
In the fine print of the form homeowners fill out to apply for Obama’s program, which lowers monthly payments for three months while the lender decides whether to provide permanent relief, borrowers must waive important notification rights. This clause allows banks to reject borrowers without any written notification and move straight to auctioning off their homes without any warning.
That’s what happened to Evangelina Flores, the owner of a modest 902 square-foot home in Fontana, Calif. She completed a three-month trial modification, and made the last of the agreed upon monthly payments of $1,134.60 on Nov. 1. Her lawyer said that in late November, Central Mortgage Company told her that it would void her adjustable-rate mortgage, which had risen to a monthly sum above $2,000, and replace it with a fixed-rate mortgage.
“The information they had given us is that she had qualified and that she would be getting her notice of modification in the first week of December,” said George Bosch, the legal administrator for the Law Firm of Edward Lopez and Rick Gaxiola, which is handling Flores’ case for free.
Flores, 58, a self-employed child care worker, wired her December payment to Central Mortgage Company on Nov. 30, thinking that her prayers had been answered. A day later, there was a loud, aggressive knock on her door. Thinking a relative was playing a prank, she opened her front door to find two strangers handing her an eviction notice.
“They arrived real demanding, saying that they were the owners,” recalled Flores. “I have high blood pressure, and I felt awful.”
Court documents show that her house had been sold that very morning to a recently created company, Shark Investments. The men told Flores she had to be out within three days. The eviction notice had a scribbled signature, and under the signature was the name of attorney John Bouzane.
A representative in his office denied that Bouzane’s law firm was involved in Flores’ eviction, and said the eviction notice was obtained from Bouzane’s Web site,www.fastevictionservice.com.
Why would a lawyer provide for free a document that gives the impression that his law firm is behind an eviction. “We hope to get the eviction business,” said the woman, who didn’t identify herself. Flores bought her home in 2006 for $352,000. Records show that it has a current fair-market value of $99,000. The new owner bought it for $78,000 at an auction Flores didn’t even know about.
“I had my dream, but now I feel awful,” said Flores, who remains in the house while her lawyers fight her eviction. “I still can’t believe it.”
How could Flores go so quickly from getting government help to having her home owned by Shark Investment? The answer is in the fine print of standard HAMP documents.
The Aug. 25 cover letter from Central Mortgage Company, the servicer that collects Flores’ mortgage payments, offered Flores a trial modification with this comforting language: “If you do not qualify for a loan modification, we will work with you to explore other options available to help you keep your home or ease your transition into a new home.” CMC is owned by Arkansas regional Arvest Bank, itself controlled by Jim Walton, the youngest son of Wal-Mart founder Sam Walton.
A glance past CMC’s hopeful promise finds a different story in the fine print of HAMP document, which contains standardized language drafted by the Obama Treasury Department and is used uniformly by lenders. The document warns that foreclosure “may be immediately resumed from the point at which it was suspended if this plan terminates, and no new notice of default, notice of intent to accelerate, notice of acceleration, or similar notice will be necessary to continue the foreclosure action, all rights to such notices being hereby waived to the extent permitted by applicable law.”
This means that even when a borrower makes all the trial payments, a lender can put the house up for auction if it decides that the homeowner doesn’t qualify — assuming that foreclosure proceedings had been started before the trial period — without telling the homeowner.
Until now, lenders haven’t even had to notify borrowers in writing that they’d been rejected for permanent modifications. In January, 11 months after Obama’s plan was announced, homeowners will begin receiving written rejection notices, and the Treasury Department finally will begin receiving data on rejection rates and reasons for rejections.
The controversial clause notwithstanding, the handling of Flores’ loan raises questions.
“Foreclosure actions may not be initiated or restarted until the borrower has failed the trial period and the borrower has been considered and found ineligible for other available foreclosure prevention options,” said Meg Reilly, a Treasury spokeswoman. “Servicers who continue with foreclosure sales are considered non-compliant.”
CMC officials declined to comment and hung up when they learned that a reporter was listening in with permission from Flores’ legal team. Arvest officials also declined comment. McClatchy did hear from Freddie Mac, the mortgage finance agency seized by the Bush administration in September 2008. Freddie owns Flores’ loan, and spokesman Brad German insisted that Flores was reviewed three times for loan modification.
“In each instance, there was a lack of documentation verifying that she had the income required for a permanent modification,” German said.
That response is ironic, said Michael Calhoun, the president of the Center for Responsible Lending, a nonpartisan group in Durham, N.C., that works on behalf of borrowers. “These lenders gave loans with no documentation and charged them a penalty interest rate for doing so. And now when the people ask for help, they are using extravagant demands for documentation to give them the back of their hand and continue to foreclosure,” Calhoun said.
German said that Flores was sent a letter on Nov. 24, which would have arrived several days later, given the Thanksgiving holiday, informing her that she’d been rejected for a permanent modification. Flores and her attorney said she never got a letter, and neither Freddie Mac nor CMC provided proof of that letter.
Exactly one week after the letter supposedly was sent, Flores’ home was sold to Shark Investments. That company was formed on Aug. 19, according to records on the California Secretary of State’s Web site. Shark Investments, apparently an unsuspecting beneficiary of Flores’ woes, has no phone listing. The Riverside, Calif., address on the company’s filing as a limited liability company traces to a five-bedroom, four-bath house with a swimming pool.
German didn’t comment on whether Flores received sufficient notice under Freddie Mac rules, or how the home could move to sale so quickly. Flores’ legal team, which specializes in foreclosure prevention, thinks that lenders and servicers are gaming Obama’s housing effort.
“It seems servicers are giving people false hopes by sending them a plan, and they are using the program as a collection method, getting people to pay them with no intention of modifying the loan,” said Bosch. “I believe they are using this as a tool to suck people dry.”
Dashed hopes aren’t exclusive to the working poor such as Flores. David Smith owns a beautiful home in San Clemente, Calif., the location of the Richard Nixon Presidential Library. Smith purchased his five bedroom home four years ago for $1.3 million. Today, the real estate Web site Zillow.com estimates the value of Smith’s home at $981,000, slightly below the $1 million he still owes on it.
Smith said he went from “making a lot of money to making hardly any” as the national and California economies plunged into deep recession. He’s a salesman serving the hard-hit residential and commercial construction sector. On top of his hardship, Smith’s mortgage exceeds the limits for the HAMP plan.
In late August, Smith signed and returned paperwork in a prepaid FedEx envelope to Bank of America that said it had received the contract needed to modify the adjustable-rate mortgage he originally took out with the disgraced lender Countrywide Financial, which Bank of America bought last year.
The modification agreement shows that Bank of America agreed to give Smith a 3.375 percent mortgage rate through September 2014, and everything Smith paid between now and through 2019 would count as paying off interest. He’d begin paying principal and interest in October 2019, with the loan maturing in 2037.
The deal favors the lender, but Smith, 55, jumped on it because it kept him in the home.
Armed with what he thought was “a permanent modification,” Smith returned a notarized copy of the agreement and made subsequent payments on time. In return, he got a surprising notice from Bank of America saying that his house would be auctioned off on Dec. 18.
“It looks like they’re trying to sell this out from underneath me,” Smith said. “My wife cries all the time.”
After a Dec. 16 call from McClatchy asking why Bank of America wasn’t honoring its own modification, the lender backed off. “The case has been returned to a workout status and a Home Retention Division associate will be contacting Mr. Smith for further discussions,” said Rick Simon, a Bank of America spokesman. “The scheduled foreclosure sale will be postponed for at least 30 days to allow for review of the account in hope of completing a home retention solution for Mr. Smith.”
The Center for Responsible Lending says such problems are common. “Everyone acknowledges that the system is not working well,” Calhoun said.
Friday, December 18, 2009
NY TIMES - LOAN MODS NEED DEBT REDUCTION
EDITOR’S NOTE: The NY Times is urging the Government to create a new, fully-overhauled “Loan Modification Program” that emphasizes PRINCIPAL REDUCTION along with interest rate reduction. In reviewing the progress of loan modifications over the past 12 months, the NY Times found:
(1) Current loan modification programs almost always focus on rate reduction rather than on any principal writedown;
(2) The average monthly rate reduction for completed loan modifications nationwide has been just over 30%;
(3) Almost 75% of loan modification that only involve “rate reduction” fail within 12 months;
(4) The qualifying process for government loan mod programs (and also with private loan mod programs) focuses almost exclusively on a borrower’s income - and fails to properly account for a borrower’s legitimate, bona fide monthly expenses;
(5) Negative equity in a property – rather than a borrower’s unemployment – is the biggest factor causing mortgage defaults;
(6) Any “new” government loan mod program needs to emphasize and create incentives for lenders to give principal reductions;
(7) Currently, banks and other mortgage companies are rarely, if ever, agreeing to “principal reductions” when they are acting merely as a “servicer” for a third-party investor. But banks HAVE been willing to grant principal reductions in 30.5% of the cases in which they are both the true “investor” as well as the “servicer” of a mortgage.
Here's the full article from the Times:
Why Treasury Needs a Plan B for Mortgages (By GRETCHEN MORGENSON, NY TIMES, 12/6/09)
AFTER months of playing pretend, the Treasury Department conceded last week that the Home Affordable Modification Program, its plan to aid troubled homeowners by changing the terms of their mortgages, was a dud. The 10-month-old program is going nowhere, the Treasury said, because big institutions charged with implementing it are dragging their feet.
“The banks are not doing a good enough job,” said Michael S. Barr, assistant Treasury secretary for financial institutions, in an article published last Sunday in The New York Times.
After the government spent hundreds of billions of dollars bailing out banks, the Obama administration rolled out the $75 billion loan modification plan to show its support for beleaguered homeowners. But if the proof of the pudding is in the eating, homeowners are going hungry.
A stalled loan modification plan might not be worrisome if the foreclosure crisis were abating. Yet at the end of September, a record 14.4 percent of borrowers were either in foreclosure or delinquent on their mortgages, the Mortgage Bankers Association reported.
It’s time for the government to acknowledge the flaws in its program and create one that might actually succeed. Only then will the supply of homes for sale, and the pressure on prices associated with that overhang, be reduced.
The Treasury program has decided to tackle the delinquent mortgage problem by reducing the interest rate on eligible borrowers’ loans to a level that makes monthly payments affordable. But how it calculates affordability is one of the program’s major flaws — at least that’s the view of Laurie Goodman, senior managing director at Amherst Securities Group and head of mortgage strategy at the firm.
Her research shows, for instance, that 70 percent of modifications involving only interest rate cuts, rather than reductions in the principal borrowers owe, have failed after 12 months. The Treasury program is likely to have similar outcomes.
According to government investigators, the average monthly mortgage payment for a borrower under early plan modifications fell by 34 percent. Assessing for possible success under these terms, Ms. Goodman analyzed past re-default rates on modifications that cut payments by 34 percent. She found that 65 percent of borrowers fell back into delinquency.
The terms of loan modifications also make them especially failure-prone because the government calculates “affordability” (how much mortgage debt a borrower can actually manage) in a highly unusual way — raising serious questions for the housing market over all and for the program’s effectiveness for borrowers.
Moreover, investors in first liens, like pension funds and mutual funds, also get beaten up in this process.
For example, in devising what it considers an affordable mortgage payment, the program doesn’t account for all of a borrower’s debts — the first mortgage, second lien, credit card debt and automobile payments. Instead, it calculates affordability using only the borrower’s first mortgage payment, insurance and property taxes.
As a result, what may look like an affordable mortgage payment under the Treasury plan quickly becomes onerous when other debt is added. While the government may ignore a borrower’s second lien and revolving credit obligations, you can be sure the creditors that extended those loans will not. Re-defaults seem a likely result.
Another flaw in the program, Ms. Goodman said, is its failure to consider how much equity, or negative equity for that matter, the borrower has on a property. She said that while many analysts contend that unemployment is the major predictor of mortgage defaults, her research shows that negative equity, when a borrower owes more on the home than it is worth, is actually the driving force.
Ms. Goodman recently compared the experiences of prime mortgage borrowers living in areas with an 8 percent unemployment rate. Those with at least 20 percent equity in their properties were falling two payments behind for the first time at a rate of only 0.22 percent a month. But the same 60-day delinquency rate for those who owed at least 120 percent of the value of their homes was 1.46 percent a month.
“We have kicked the problem down the road through modifications that don’t work,” Ms. Goodman said in an interview last week. “You have to address the second liens and ultimately have some type of principal write-down program so borrowers can re-equify.”
Unfortunately, there is a $442 billion reason that wiping out second liens is not high on the government’s agenda: that is the amount of second mortgages and home equity lines of credit on the balance sheets of Bank of America, Wells Fargo, JPMorgan Chase and Citigroup. These banks — the very same companies the Treasury is urging to modify loans that they service — have zero interest in writing down second liens they hold because it would mean further damage to their balance sheets.
Say a troubled borrower has a first mortgage owned by a pension fund in a securitization trust and a second lien held by the bank that services the loans. The servicer is happy to modify the first mortgage under the Treasury program because the pension fund holding that loan takes the biggest hit while the second lien is untouched. This hurts the investor who holds the first mortgage and the borrower, who must pay off the second lien, which typically has a significantly higher interest rate.
The result? Yet another conflict of interest enriching financial companies while impoverishing investors and consumers.
AN interesting data point: when banks DO own all the mortgages on a property they seem to see the merit in principal reduction modifications. Studying second-quarter government data, the most recent available, Ms. Goodman found that when banks owned the loans, 30.5 percent of modifications reduced principal balances. When they service someone else’s loan or hold a second lien on the property, they rarely allow principal reductions.
Of course, cries of moral hazard will erupt if borrowers get large cuts in their principal balances. Rightly so. Why should those who took on too much debt to buy too much house get rescued when those who were prudent go unrewarded?
But doing nothing also has hazards, the most obvious being continuing foreclosures, which nobody wants, and further declines in real estate prices that will hurt homeowners as well as investors.
(1) Current loan modification programs almost always focus on rate reduction rather than on any principal writedown;
(2) The average monthly rate reduction for completed loan modifications nationwide has been just over 30%;
(3) Almost 75% of loan modification that only involve “rate reduction” fail within 12 months;
(4) The qualifying process for government loan mod programs (and also with private loan mod programs) focuses almost exclusively on a borrower’s income - and fails to properly account for a borrower’s legitimate, bona fide monthly expenses;
(5) Negative equity in a property – rather than a borrower’s unemployment – is the biggest factor causing mortgage defaults;
(6) Any “new” government loan mod program needs to emphasize and create incentives for lenders to give principal reductions;
(7) Currently, banks and other mortgage companies are rarely, if ever, agreeing to “principal reductions” when they are acting merely as a “servicer” for a third-party investor. But banks HAVE been willing to grant principal reductions in 30.5% of the cases in which they are both the true “investor” as well as the “servicer” of a mortgage.
Here's the full article from the Times:
Why Treasury Needs a Plan B for Mortgages (By GRETCHEN MORGENSON, NY TIMES, 12/6/09)
AFTER months of playing pretend, the Treasury Department conceded last week that the Home Affordable Modification Program, its plan to aid troubled homeowners by changing the terms of their mortgages, was a dud. The 10-month-old program is going nowhere, the Treasury said, because big institutions charged with implementing it are dragging their feet.
“The banks are not doing a good enough job,” said Michael S. Barr, assistant Treasury secretary for financial institutions, in an article published last Sunday in The New York Times.
After the government spent hundreds of billions of dollars bailing out banks, the Obama administration rolled out the $75 billion loan modification plan to show its support for beleaguered homeowners. But if the proof of the pudding is in the eating, homeowners are going hungry.
A stalled loan modification plan might not be worrisome if the foreclosure crisis were abating. Yet at the end of September, a record 14.4 percent of borrowers were either in foreclosure or delinquent on their mortgages, the Mortgage Bankers Association reported.
It’s time for the government to acknowledge the flaws in its program and create one that might actually succeed. Only then will the supply of homes for sale, and the pressure on prices associated with that overhang, be reduced.
The Treasury program has decided to tackle the delinquent mortgage problem by reducing the interest rate on eligible borrowers’ loans to a level that makes monthly payments affordable. But how it calculates affordability is one of the program’s major flaws — at least that’s the view of Laurie Goodman, senior managing director at Amherst Securities Group and head of mortgage strategy at the firm.
Her research shows, for instance, that 70 percent of modifications involving only interest rate cuts, rather than reductions in the principal borrowers owe, have failed after 12 months. The Treasury program is likely to have similar outcomes.
According to government investigators, the average monthly mortgage payment for a borrower under early plan modifications fell by 34 percent. Assessing for possible success under these terms, Ms. Goodman analyzed past re-default rates on modifications that cut payments by 34 percent. She found that 65 percent of borrowers fell back into delinquency.
The terms of loan modifications also make them especially failure-prone because the government calculates “affordability” (how much mortgage debt a borrower can actually manage) in a highly unusual way — raising serious questions for the housing market over all and for the program’s effectiveness for borrowers.
Moreover, investors in first liens, like pension funds and mutual funds, also get beaten up in this process.
For example, in devising what it considers an affordable mortgage payment, the program doesn’t account for all of a borrower’s debts — the first mortgage, second lien, credit card debt and automobile payments. Instead, it calculates affordability using only the borrower’s first mortgage payment, insurance and property taxes.
As a result, what may look like an affordable mortgage payment under the Treasury plan quickly becomes onerous when other debt is added. While the government may ignore a borrower’s second lien and revolving credit obligations, you can be sure the creditors that extended those loans will not. Re-defaults seem a likely result.
Another flaw in the program, Ms. Goodman said, is its failure to consider how much equity, or negative equity for that matter, the borrower has on a property. She said that while many analysts contend that unemployment is the major predictor of mortgage defaults, her research shows that negative equity, when a borrower owes more on the home than it is worth, is actually the driving force.
Ms. Goodman recently compared the experiences of prime mortgage borrowers living in areas with an 8 percent unemployment rate. Those with at least 20 percent equity in their properties were falling two payments behind for the first time at a rate of only 0.22 percent a month. But the same 60-day delinquency rate for those who owed at least 120 percent of the value of their homes was 1.46 percent a month.
“We have kicked the problem down the road through modifications that don’t work,” Ms. Goodman said in an interview last week. “You have to address the second liens and ultimately have some type of principal write-down program so borrowers can re-equify.”
Unfortunately, there is a $442 billion reason that wiping out second liens is not high on the government’s agenda: that is the amount of second mortgages and home equity lines of credit on the balance sheets of Bank of America, Wells Fargo, JPMorgan Chase and Citigroup. These banks — the very same companies the Treasury is urging to modify loans that they service — have zero interest in writing down second liens they hold because it would mean further damage to their balance sheets.
Say a troubled borrower has a first mortgage owned by a pension fund in a securitization trust and a second lien held by the bank that services the loans. The servicer is happy to modify the first mortgage under the Treasury program because the pension fund holding that loan takes the biggest hit while the second lien is untouched. This hurts the investor who holds the first mortgage and the borrower, who must pay off the second lien, which typically has a significantly higher interest rate.
The result? Yet another conflict of interest enriching financial companies while impoverishing investors and consumers.
AN interesting data point: when banks DO own all the mortgages on a property they seem to see the merit in principal reduction modifications. Studying second-quarter government data, the most recent available, Ms. Goodman found that when banks owned the loans, 30.5 percent of modifications reduced principal balances. When they service someone else’s loan or hold a second lien on the property, they rarely allow principal reductions.
Of course, cries of moral hazard will erupt if borrowers get large cuts in their principal balances. Rightly so. Why should those who took on too much debt to buy too much house get rescued when those who were prudent go unrewarded?
But doing nothing also has hazards, the most obvious being continuing foreclosures, which nobody wants, and further declines in real estate prices that will hurt homeowners as well as investors.
Thursday, December 17, 2009
Ohio Sues Lender for Bad Service to Homeowners
From www.bloomberg.net – December 16, 2009
Ohio Attorney General Richard Cordray filed suit against major international mortgage lender “Barclays Capital Real Estate Inc.” for issuing what he called unfair loan modification agreements and for providing “inadequate, incompetent customer service” to people at risk of losing their homes to foreclosure.
Cordray’s complaint against the Barclays’ subsidiary known as “HomEq Servicing”, was filed today (12/16/09) in state court in Dayton, Ohio. The attorney general asked for a court order barring the loan-servicing firm from violating state consumer protection laws, and has demanded fines of $25,000 for each violation.
HomEq services more than 10,000 subprime loans in Ohio (and many thousands more nationwide), Cordray said in a statement. Borrowers were forced to enter into one-sided agreements releasing the company from liability in exchange for the opportunity to keep their homes, and this particular lender’s actions (as well as those of other servicing agencies) have aggravated the foreclosure crisis, Cordray stated.
“In Ohio, we have zero tolerance for any more excuses,” Cordray said. The actual name of the case is State of Ohio v. Barclays Capital Real Estate Inc., 09-10136, Montgomery County, Ohio, Court of Common Pleas (Dayton).
Ohio Attorney General Richard Cordray filed suit against major international mortgage lender “Barclays Capital Real Estate Inc.” for issuing what he called unfair loan modification agreements and for providing “inadequate, incompetent customer service” to people at risk of losing their homes to foreclosure.
Cordray’s complaint against the Barclays’ subsidiary known as “HomEq Servicing”, was filed today (12/16/09) in state court in Dayton, Ohio. The attorney general asked for a court order barring the loan-servicing firm from violating state consumer protection laws, and has demanded fines of $25,000 for each violation.
HomEq services more than 10,000 subprime loans in Ohio (and many thousands more nationwide), Cordray said in a statement. Borrowers were forced to enter into one-sided agreements releasing the company from liability in exchange for the opportunity to keep their homes, and this particular lender’s actions (as well as those of other servicing agencies) have aggravated the foreclosure crisis, Cordray stated.
“In Ohio, we have zero tolerance for any more excuses,” Cordray said. The actual name of the case is State of Ohio v. Barclays Capital Real Estate Inc., 09-10136, Montgomery County, Ohio, Court of Common Pleas (Dayton).
The Ten (10) Most Dangerous Toys for 2009
Just in time for the holiday season, the organization “The World Against Toys Causing Harm, Inc.” (“WATCH”) released its list of “Ten Worst Toys”.
WATCH is a Massachusetts, non-profit corporation working to educate the public about life-threatening toys and other children’s products, including children’s furniture, clothing and playground equipment. Beginning in 1973, WATCH has published its annual “Ten Worst Toys.”
Here’s the 2009 list:
1) Disney-Pixar Wall-E Foam Rocket Launcher
2) Moon Board Pogo Board
3) Curious Baby George Counting-My First Book of Numbers
4) The Dark Knight Batman Figure
5) X-Men Origins Slashin’Action Wolverine
6) Lots To Love Babies Mini Nursery
7) Just Kidz Junior Musical Instruments
8) CAT Rugged Mini
9) Pucci Pups Maltese
10) Spy Gear Viper-Blaster
If you want to know what WATCH finds troubling about these toys please visit the organization's website:
http://www.toysafety.org/worstToyList_index.shtml
WATCH is a Massachusetts, non-profit corporation working to educate the public about life-threatening toys and other children’s products, including children’s furniture, clothing and playground equipment. Beginning in 1973, WATCH has published its annual “Ten Worst Toys.”
Here’s the 2009 list:
1) Disney-Pixar Wall-E Foam Rocket Launcher
2) Moon Board Pogo Board
3) Curious Baby George Counting-My First Book of Numbers
4) The Dark Knight Batman Figure
5) X-Men Origins Slashin’Action Wolverine
6) Lots To Love Babies Mini Nursery
7) Just Kidz Junior Musical Instruments
8) CAT Rugged Mini
9) Pucci Pups Maltese
10) Spy Gear Viper-Blaster
If you want to know what WATCH finds troubling about these toys please visit the organization's website:
http://www.toysafety.org/worstToyList_index.shtml
Wednesday, December 16, 2009
Fannie Mae, Freddie Mac Seeking MORE Bailout Funds
(From www.bloomberg.com)
Fannie Mae and Freddie Mac’s federal regulator is renegotiating the companies’ financing plan with the U.S. Treasury Department and may seek an increase to their $400 billion federal lifeline before the end of the year, according to people familiar with the talks.
Treasury and Federal Housing Finance Agency officials are also debating whether to lower the mortgage-finance companies’ dividend payments on their Treasury borrowings, according to these people, who requested not to be identified describing the internal deliberations.
Fannie Mae and Freddie Mac, the largest sources of mortgage money in the U.S., have used $111.6 billion of their $400 billion in backup financing in less than a year. The companies say their 10 percent annual dividend payment, which comes to about $5 billion each, costs more than either have earned in most years and adds to their draws on Treasury.
“A larger line, safest to be executed before year end, would buy Washington the time necessary to address more pressing housing matters,” Jim Vogel, a debt analyst with FTN Financial in Memphis, Tennessee, said in a note to clients today. “The possible risk in the discussions is any investor disappointment that might follow no change in the existing agreements.”
FHFA spokeswoman Stefanie Mullin, Treasury spokeswoman Meg Reilly, Freddie Mac spokesman Doug Duvall and Fannie Mae spokesman Brian Faith declined to comment. Fannie Mae rose 5 cents, or 4.4 percent, to $1.18 at 4:15 p.m. in New York Stock Exchange composite trading. Freddie Mac rose 4 cents, or 2.8 percent, to $1.48.
$400 BILLION LIFELINE
The financing plan instituted for Fannie Mae and Freddie Mac requires them to reduce their $1.57 trillion combined mortgage portfolios by 10 percent annually starting next year and caps their debt issuance at 120 percent of their assets.
The Treasury and Federal Housing Finance Agency seized control of the mortgage-finance companies almost 16 months ago amid fears the two were at risk of failing. Officials set up a $200 billion lifeline with the Treasury, which was doubled in May, to keep the companies solvent. If they exhaust that backstop, regulators will be required to place them into receivership.
Treasury officials aren’t likely to take the chance of allowing the companies to fall into receivership, which is a bankruptcy-like process that would increase the companies’ debt costs and disrupt the mortgage markets, said Paul Miller, a former examiner for the Federal Reserve who now analyzes the banking and mortgage industry for FBR Capital Markets in Arlington, Virginia.
‘PAIN THRESHOLD’
“The Treasury has shown that their pain threshold is almost” non-existent, and the housing “market is still very fragile,” Miller said in an interview.
The companies have said $200 billion apiece may not be enough support. The Treasury Department is facing a Dec. 31 deadline to increase that amount without congressional approval.
While Treasury officials are free to renegotiate other terms of the deal, such as the dividend payment and restrictions on debt issuance, at any time, Congress set a deadline of the end of this year on the department’s ability to invest in the companies.
“Treasury should be giving confidence to the markets that they will take care of it,” said Rajiv Setia, a fixed income analyst for Barclays Capital in New York. “You increase the backstop and it removes the element of doubt.”
RULES KEEP SHIFTING
Washington-based Fannie Mae, which has lost $120.5 billion over the last nine quarters, has requested $60.9 billion from the Treasury this year. McLean, Virginia-based Freddie Mac has tapped $50.7 billion in government capital since November 2008 and recorded $67.9 billion in cumulative losses over the last nine quarters amid a three-year housing slump.
The companies are an integral part of President Barack Obama’s housing-relief plan and have been pushed by the government to help more homeowners modify or refinance their loans to more affordable terms to curb foreclosures. The government-sponsored enterprises, or GSEs, own or guarantee about $5.5 trillion of the $11 trillion in U.S. residential mortgage debt.
“With the GSEs being used as public policy tools, it is impossible to quantify with certainty what losses might be in a stress scenario, as the rules of the game might keep shifting,” Setia said.
Fannie Mae and Freddie Mac’s federal regulator is renegotiating the companies’ financing plan with the U.S. Treasury Department and may seek an increase to their $400 billion federal lifeline before the end of the year, according to people familiar with the talks.
Treasury and Federal Housing Finance Agency officials are also debating whether to lower the mortgage-finance companies’ dividend payments on their Treasury borrowings, according to these people, who requested not to be identified describing the internal deliberations.
Fannie Mae and Freddie Mac, the largest sources of mortgage money in the U.S., have used $111.6 billion of their $400 billion in backup financing in less than a year. The companies say their 10 percent annual dividend payment, which comes to about $5 billion each, costs more than either have earned in most years and adds to their draws on Treasury.
“A larger line, safest to be executed before year end, would buy Washington the time necessary to address more pressing housing matters,” Jim Vogel, a debt analyst with FTN Financial in Memphis, Tennessee, said in a note to clients today. “The possible risk in the discussions is any investor disappointment that might follow no change in the existing agreements.”
FHFA spokeswoman Stefanie Mullin, Treasury spokeswoman Meg Reilly, Freddie Mac spokesman Doug Duvall and Fannie Mae spokesman Brian Faith declined to comment. Fannie Mae rose 5 cents, or 4.4 percent, to $1.18 at 4:15 p.m. in New York Stock Exchange composite trading. Freddie Mac rose 4 cents, or 2.8 percent, to $1.48.
$400 BILLION LIFELINE
The financing plan instituted for Fannie Mae and Freddie Mac requires them to reduce their $1.57 trillion combined mortgage portfolios by 10 percent annually starting next year and caps their debt issuance at 120 percent of their assets.
The Treasury and Federal Housing Finance Agency seized control of the mortgage-finance companies almost 16 months ago amid fears the two were at risk of failing. Officials set up a $200 billion lifeline with the Treasury, which was doubled in May, to keep the companies solvent. If they exhaust that backstop, regulators will be required to place them into receivership.
Treasury officials aren’t likely to take the chance of allowing the companies to fall into receivership, which is a bankruptcy-like process that would increase the companies’ debt costs and disrupt the mortgage markets, said Paul Miller, a former examiner for the Federal Reserve who now analyzes the banking and mortgage industry for FBR Capital Markets in Arlington, Virginia.
‘PAIN THRESHOLD’
“The Treasury has shown that their pain threshold is almost” non-existent, and the housing “market is still very fragile,” Miller said in an interview.
The companies have said $200 billion apiece may not be enough support. The Treasury Department is facing a Dec. 31 deadline to increase that amount without congressional approval.
While Treasury officials are free to renegotiate other terms of the deal, such as the dividend payment and restrictions on debt issuance, at any time, Congress set a deadline of the end of this year on the department’s ability to invest in the companies.
“Treasury should be giving confidence to the markets that they will take care of it,” said Rajiv Setia, a fixed income analyst for Barclays Capital in New York. “You increase the backstop and it removes the element of doubt.”
RULES KEEP SHIFTING
Washington-based Fannie Mae, which has lost $120.5 billion over the last nine quarters, has requested $60.9 billion from the Treasury this year. McLean, Virginia-based Freddie Mac has tapped $50.7 billion in government capital since November 2008 and recorded $67.9 billion in cumulative losses over the last nine quarters amid a three-year housing slump.
The companies are an integral part of President Barack Obama’s housing-relief plan and have been pushed by the government to help more homeowners modify or refinance their loans to more affordable terms to curb foreclosures. The government-sponsored enterprises, or GSEs, own or guarantee about $5.5 trillion of the $11 trillion in U.S. residential mortgage debt.
“With the GSEs being used as public policy tools, it is impossible to quantify with certainty what losses might be in a stress scenario, as the rules of the game might keep shifting,” Setia said.
"Forgiven" Mortgage Debt May NOT be Taxable Income
Homeowners whose mortgage debt was partly or entirely forgiven in calendar years 2007, 2008 and 2009 may be able to claim special tax relief by filling out newly-revised Form 982 and attaching it to their federal income tax return, according to the Internal Revenue Service.
Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007 (as modified in 2008) taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was $2 million or less. The limit is $1 million for a married person filing a separate return. Details are on Form 982 and its instructions, available now on this the IRS website.
“The new law contains important provisions for struggling homeowners,” said Acting IRS Commissioner Linda Stiff. “We urge people with mortgage problems to take full advantage of the valuable tax relief available.”
The new law applies to debt forgiven from 2007 to 2009 – and will continue in full force and effect for debt forgiven through the end of calendar year 2012. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief.
The debt must have been used to buy, build or substantially improve the taxpayer's principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.
Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for relief under the “Mortgage Forgiveness Debt Relief Act”. HOWEVER, other kinds of tax relief are still available for debts of this nature, particularly if the taxpayer can claim “insolvency” during the year in which the particular debt was forgiven. (See Form 982 for details).
Borrowers whose debt is reduced or eliminated normally receive a year-end statement (Form 1099-C) from their lender. For debt cancelled in 2007, the lender was required to provide this form to the borrower by Jan. 31, 2008. By law, this form must show the amount of debt forgiven and the fair market value of any property given up through foreclosure.
The IRS urges borrowers to check the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. Borrowers should pay particular attention to the amount of debt forgiven (Box 2) and the value listed for their home (Box 7).
Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007 (as modified in 2008) taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was $2 million or less. The limit is $1 million for a married person filing a separate return. Details are on Form 982 and its instructions, available now on this the IRS website.
“The new law contains important provisions for struggling homeowners,” said Acting IRS Commissioner Linda Stiff. “We urge people with mortgage problems to take full advantage of the valuable tax relief available.”
The new law applies to debt forgiven from 2007 to 2009 – and will continue in full force and effect for debt forgiven through the end of calendar year 2012. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief.
The debt must have been used to buy, build or substantially improve the taxpayer's principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.
Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for relief under the “Mortgage Forgiveness Debt Relief Act”. HOWEVER, other kinds of tax relief are still available for debts of this nature, particularly if the taxpayer can claim “insolvency” during the year in which the particular debt was forgiven. (See Form 982 for details).
Borrowers whose debt is reduced or eliminated normally receive a year-end statement (Form 1099-C) from their lender. For debt cancelled in 2007, the lender was required to provide this form to the borrower by Jan. 31, 2008. By law, this form must show the amount of debt forgiven and the fair market value of any property given up through foreclosure.
The IRS urges borrowers to check the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. Borrowers should pay particular attention to the amount of debt forgiven (Box 2) and the value listed for their home (Box 7).
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