Home Loan Focus

Archive for the ‘Mortgage Legislation’ Category

The sub prime mortgage scandal was definitely created in large part by mortgage brokers offering up shady deals, but they could not have acted in a vacuum. Someone had to underwrite those mortgages and securitize the portfolio, reselling it to investors via hedge funds. Well, FBI Director Robert Mueller and the FBI is still in the process of following the money working to trace the fraud back to the money that created that demand and enabled it to happen by not operating in a truly free market fashion.

“We are targeting accounting fraud, insider trading and deceptive sales practices. These investigations may well lead to other instances of fraud, from investment banks and private equity firms to hedge funds.” Subprime probe may lead to hedge funds, others: FBI

Mortgage fraud was possible in part because the people that should have been reviewing the mortgage brokers actions and the banks above them both turned a blind eye to what was really going on. In the drug world, this is part of the reason why the FDA is in place to test drugs, such as was done with lipovox reviews, and now many politicians including the Fed are lining up to set up controls that would do the same in the mortgage market.

Over the last seven years the Republican administration of George Bush and the Republican led Congress (up until 2006) were so bad at managing the nations finances that it was hard to conceive that anyone, anything or any other party could be worse.  Democrats seem to be working to prove that they are just as bad at helping Americans and the US economy as their Republicans cohorts on Capital Hill.

This week, the two sides are arguing over a Sub Prime bail out that seems designed to bail out no one, yet it will spend $300 billion dollars.

What it might do

1.  Give funds to local communities to go fix up empty foreclosed homes. 

Why?  Who knows, maybe it will give the mice and the looters something fresh to compete over.

2.  It will replace a borrowers existing mortgage with an FHA backed mortgage and will give the Federal Government partial ownership of your home. 

Why? Who knows, maybe the Federal Government hopes to get a foot in the door on legal grounds in case they want to perform a search or seizure of your property without a warrant with a warrantless wire tap.  The last thing the fed wants to do is go into the real estate business again having to comply with local ordinances and bylaws on maintenance and upkeep.  Wasn’t the United States set up in part so that people could get away from governments that owned all the land?

3.  It would require banks to write down the principal amount of a mortgage balance to recognize new home loan values in various areas. 

Why?  If you currently owe more on your home than it can be sold for in the market, financially you will have the incentive to walk away and leave the bank with the bad deal.  That increases defaults, drops property values further and creates more instability for all of your neighbors who might soon fall into the same problem.

What it will not do

1.  Allow Bankruptcy Judges to do what they used to do and negotiate better interest rates and principal amounts to avoid a total default and loss by the home owner and the banks.

2.  It will not help people facing foreclosure avoid foreclosure.  (But they will fix up your house real nice after you are kicked out by the local sheriff)

3.  It will not bail out speculators that gambled on the value of your home as collateral.  But it will back their remaining investments with an FHA guarantee so that they can take their money and run to another investment arbitrage opportunity, maybe something in grape seed extract commodity contracts.

Related Stories on this Topic

Senate deal breathes life into housing rescue bill
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The two largest backers of home loans in the United States have agreed to new over site.  New standards will be effected to increase the quality of home appraisals.

A long-term investigation by New York State Attorney General Andrew Cuomo’s office has led the two largest purchasers of home loans in the U.S. — Fannie Mae and Freddie Mac — to enter into cooperation agreements.

The pacts require the companies to only buy loans from banks that meet new standards designed to ensure independent and reliable appraisals. Cuomo’s office had been investigating fraud in the home appraisal process.

Deal reached with home loan companies – Business First of Buffalo

Home appraisals and fraud related to those appraisals were and are a significant part of the problem that has created the sub prime mortgage scandal.  Many banks performed appraisals or hired appraisals that never took place.  Many appraisers only viewed comparables and never set foot in the neighborhood of the home let alone the house. In extreme cases, some houses were not even confirmed to exist at all.

The loans that were made on these properties were very risky.  Banks essentially sold mortgage backed securities that were more risky than taking a bet in a Las Vegas hotel.  This is likely to be just one of many reforms that will continue to come and be developed.

In many areas of investments and accounting when a company has an assets on the books and the market value of the asset drops below the original cost of that asset, the company must write down the value of the asset on their books.  Writing down that asset requires taking an expense which can result in a loss for the company involved.  Good accounting principles require this move as it does most companies and especially investors no good to keep a fictitious value on their books.  Plus, the recognition of the loss can enable the company to save a little on taxes, a small condolence for losing asset value.

Fed Chairman Bernanke is essentially calling for something similar to help solve the mortgage crisis.  He’s calling on Treasury Secretary Paulson of the Bush Administration to take action to push lenders to write down the value of the mortgages that you might hold.

Bernanke said “more can, and should, be done” to limit foreclosures. He added that principal reductions “may be a relatively more effective means of avoiding delinquency and foreclosure” than renegotiating interest rates. … “the current housing difficulties differ from those in the past, largely because of the pervasiveness of negative equity positions.”  Bloomberg.com: U.S.

For example, if you have a mortgage in San Francisco for $800,000 and the real value of your property is now $650,000.  People are not companies and do not keep a lower of cost or market basis in their homes.  Banks however, take those mortgages and sell them to investors in a process known as securitization.  Banks would have to decrease the value of the mortgages they hold before the sale to investors and possibly after as well.  Think of it like Wal-Mart providing you a credit on a receipt if the price of a TV goes on sale within 30 days of buying it at their store.  Banks would essentially, have to give investors a credit on their investment, take a loss and let mortgage holders off the hook for the loss in home value and readjust the monthly mortgage payment downward.

That is definitely a tough pill to swallow for banks, but they may have no option. If they do not make such an adjustments, a homeowner that holds a property worth $650,000 with a mortgage of $800,000 might quite logically make the investment decision themselves to walk away from the house and allow a foreclosure to happen.  Every day they stay in that over mortgaged house, they are essentially making the decision to over pay for their own house by $150k.  That’s a bad financial move for a home owner thinking like an investor.

This same process could unfreeze credit from investors too.  If they get a refund on their investment, they could conceivably invest in new mortgages at more appropriate values.  Investors need to see that foreclosures are stopping, that people are buying houses, that the real estate market correction is over and most importantly that banks can be trusted again!

The Fed, the Treasury Secretary, banks, investors and home owners are all essentially trying to find a way to put some baby clothes back on the baby after throwing the baby out with the bath water.  The downside to this proposal is that it essentially puts the blame and the cost on bankers.  Except in the cases where banks created or contributed to fraud, homeowners are the ones that made the initial bad investment decision of buying a house that subsequently later devalued.  The fraud of the banking industry does appear substantial, but buying into a bubble can not be ignored either.  This will definitely be a difficult concept to pass through Washington DC during an election year.

This week we can expect yet another ‘Super Tuesday’.  The only people these Super Tuesdays are helping is the 24 hour news channels.  For Americans and the economy however, they are stretching out the political cycle and increasing the amount of angst and risk for investors.  That is not all of the problem, but definitely a component in keeping prices at the pump high and keeping investors on their toes as they try and determine whether or not Barack Obama would really bomb Pakistan or whether or not both Obama and Clinton were paying lip service to the notion of canning NAFTA with Canada, our closest supplier of oil, or Mexico, our cheapest supplier of labor.

I would not suggest that there is a lot of room for improvement in politics today, but purely looking at this from the investors perspective, a long drawn out political battle with risk is a bad thing for them and they pass that down hill to borrowers in the form of higher interest rates, tighter credit, lower savings rates and more.  The economy has a long way to go to heal itself, but if the parties do not get a move on in selecting their candidates we are all going to be looking at a factory job packaging dog supplies for minimum wage with a worthless dollar as a step in the right direction.

So last week the President and Congress did a fine job of congratulating each other on passing a stimulus package.  That package include provisions to enable the FHA to start securing home loans with greater limits.  It also makes it possible for people that have not missed a house payment yet to refinance their home before things get too bad.

But if you meet that requirement, will you actually get a better financing deal from a bank?

The unfortunate answer is no.

The legislation in many regards is like an unfunded mandate.  It enables companies to act, but does not force them to act.

They can offer you the same mortgage that has you in bad shape already.  They can offer you something worse.  If your credit is good, you might be able to get something better.

In this regard, recent interest rate reductions will help you the most, but its going to take the FHA at least 30 days to figure out what they are doing and it could take the industry even longer after that.  So in the end, Congress and the President seem to have helped very few people with this.  It does add an option for people that are running out of options.  It just may not be a better option. 

Kind of like giving discounts on travel health insurance to people that do not travel.  That is your government at work.  If they worked any harder, we would really be in trouble!

Voting Your Pocket Book on Super Tuesday was never More Difficult

It’s kind of amazing, but none of the major presidential candidates going into Super Tuesday are doing anything, or offering anything to solve the Mortgage and real estate crisis that is driving the country into a recession with about $150 billion is bad debt by the mortgage companies, and at least $150 billion in lost home owner asset value and foreclosures across the country ($15-$20 billion in California alone).  None of the candidates do much more than pay lip service to people facing mortgage problems.

Heck, now that the Florida primary is over with no one is even talking about home insurance problems for the people on the coast either.

No one is demanding a clean up of the mortgage industry.  No one is demanding an investigation into banks or mortgage brokers that engaged in illegal or deceptive practices.  No one is offering a bail out to cover either the big banks or the home owners.  The candidates are all leaving the country and its citizens to hang in the wind and dry up or dry out on their own.  So if you are hoping to vote your pocket book today in the Super Tuesday primary, you might be better off casting a primary vote for none of the above and sending a donation to a third party candidate. 

Hillary’s Position

1. Wants a 90 day foreclosure moratorium
2. Freeze Interest Rates for 5 years (allowing people to work out of adjustable rate mortgages)

 

Obama’s Position

1. $10 billion for foreclosure prevention aid program
2. Mortgage Tax Credits
3. Homeowner Counseling

 

Republicans Position

1. No Government Bailout

 

John McCain

1. Does want to leave the option open for limited Government Assistance if the President’s current plan fails.

 

Mitt Romney

1. Reduce the FHA requirements to get more people covered or protected by the FHA
2. He then also wants to fix the economy in general so to help the mortgage market by extension

People were already making the move to refinance before the Fed came in on Tuesday and cranked down interest rates.  They were acting before the White House and Congress came up with a plan to open up credit by increasing loan limits for FHA loans and enabling Freddie Mac and Fannie Mae to secure some of those same large mortgages.

Refinance applications drove the increase: Applications to line up new financing on an existing loan rose 16.9% during the week ended Jan. 18, compared with the previous week, according to the MBA’s weekly survey.

“Refinance applications are up 92% since the beginning of November and purchase applications are up 7%,” said Jay Brinkmann, the MBA’s vice president of research and economics.

Refinancing applications continue to rebound, MBA data show – MarketWatch

Now don’t start packing your Samsonite bags in preparation for a vacation to Real Estate Boom 2.0.  The amusement park rides there are still shut down for repairs for the most part as credit is still tight.  The planets are starting to align themselves however, and there is potential that we might just pull out of this thing sooner rather than much later and that at least is good news!

Maryland Governor Martin O’Malley said yesterday that he wants the states mortgage servicers to start filing monthly reports on how they deal with bar a worse in the United States that are facing foreclosure. But Mollie once detailed reports on how these people are dealt with as there are thousands of Marylanders on the verge of foreclosure.

But Mollie is considering offering emergency no interest loans to struggling borrowers but needs detailed information collected from mortgage lender service providers so they can determine how much money to appropriate and how to run the programs themselves in a way that will work with the mortgage service providers and not burn borrowers like a contractor wielding a festool wood burning tool.

Under the governor’s initiative Maryland would become the second state, after California, to give mortgage servicers such scrutiny.

Maryland seeks U.S. mortgage servicer scrutiny | Reuters

Seven states have started the initial phase of tracking mortgage brokers.  The Sub Prime mortgage crisis revealed that there were many mortgage brokers out there that engaged in mortgage fraud or induced unwitting mortgage applicants to commit mortgage fraud.  All states will eventually get on this band wagon, but the first phase is essentially just a database that will track brokers registrations with the state.

Idaho, Iowa, Kentucky, Massachusetts, Nebraska, New York and Rhode Island are the initial states participating. In total, 42 state agencies – including those in Washington, D.C., and Puerto Rico – have committed to joining by the end of 2009, 7 States Launch Mortgage-Broker Tracker

Future, phases could include a number of aspects of licensing from testing, continuing education, oversight and penalties, but today the tracker is just that a tool to monitor mortgage brokers.  Its got about as much teeth as licensing laws for construction contractors.  Eventually, however technology may enable the states to share their database knowledge and monitor the activities of bad brokers that move from one state to the next to set up shop.  Then eventually regulators might be able to gather up the evidence they need to go after bad brokers that move or even convince the legislatures to put some laws on the books with teeth until then the brokers still have a lot of freedom to do what they will with no need to seek travel insurance from the feds.