Treasury Releases Guidance on Short Sales

Today, the US Treasury announced new guidelines to simplify the procedure for completing short sales, an increasingly common term used when lenders agree to allow the borrower to sell the house for less than is owed on the property.

These guidelines are intended to address the issues that have prevented short sales, such as financial incentives or deed in lieu transactions, and setting time limits within which the bank must respond to a short sale offer. These incentives include a $1,000 payment to servicers, and a maximum of $1,000 to go to investors who sign off on payments to subordinate lien holders.

Borrowers would receive $1,500 in relocation expenses. Mortgage servicers have ten days to approve or deny a request for a short sale. When the sale is completed, the lender must fully release the borrower from the debt.

It also prohibits mortgage servicing companies from reducing real estate commissions on the sale, a practice that has dissuaded many agents from taking short sale listings.

In one of the most contentious issues that were seen as holding up negotiations between lenders, the Treasury’s guidance caps the total proceeds to subordinate lien holders (second and third mortgages or other liens after the first loan) at $3,000.

At this point, I think these are guidelines and not requirements. Stay tuned!

Global Gold Demand Up U.S. Dollar Down

China the world’s largest gold producer is set to break records for both production and consumption of gold. China over took South Africa, in 2007, to become the World’s largest producer of gold.

“Gold demand may be more than 450 metric tons compared with 395.6 tons in 2008, and output may climb to 310 tons, compared with 282 tons a year earlier, Zhang Yongtao, deputy secretary- general of the association, said at a conference in Kunming yesterday.”
Source: Bloomberg News

Gold is now flirting with a $1,200 an ounce (11-26-09). The continued weak U.S. Dollar could push a $1,500 an ounce sooner than later.

“The inflation concern this year has boosted the Chinese consumer demand for things like property, autos and gold…” This demand for hard goods vs. U.S. Dollar will most likely push China past India as the number one consumer of gold.

Read the full Story here:
Also, 60 Minutes did a story on Gold production from Congo and its tie in with the bloody conflict in that region. Story and video here:

“Trial Period” Loan Modifications are Just Another Scam

I’ve been hearing rumblings lately about how many people are easily getting into “trial period” loan modifications and the occasional articles about it. My contact at a California law firm tells me that it’s easy to get qualified for a trial loan modification under the HAMP program. This is a good thing initially, but what happens when your trial period is up?

Apparently nothing.

I’ve never thought loan modifications were a good idea. They are a band aid on a much bigger problem: the massive scam that has been perpetrated on Americans through securitization and all the lies the banking industry had to tell in order to make the entire scheme work in their favor.

For awhile, loan modifications were the only option a lot of homeowners had because there was not a lot of information available to them about how to fight foreclosure, or lawyers who could intelligently represent them. Our elected officials still lag behind the rest of us in understanding what’s going on, but that’s not surprising. And I know that a lot of you just wanted a modification with a house payment you can afford, and I understand that too.

The problem is that loan modifications aren’t working. As I’ve mentioned before, HAMP doesn’t have any legal teeth, and since the government didn’t attach strings to the bailout money they received, the banks don’t have a legal duty to modify anything unless it’s a federally backed mortgage.

And now, people are in trial period modifications, making payments as required, yet the lenders aren’t permanently modifying their loans.

Trial period loan modifications are just another scam on us by our government and the lending industry to get as much money out of us now that they can’t make any more loans. They have to figure out a way to keep those massive profits coming.

Don’t be fooled, America: this is just another invention by the banks to scam you.

That’s why it’s so easy to qualify! They don’t do any underwriting before allowing you to get into the program. Isn’t bad underwriting part of the reason we got into this mess in the first place?

They know you’ll keep paying to save your home, and so far, it’s working. They’ll keep you in the trial period as long as they can to keep taking your money. When you get tired of paying into a trial loan mod and stop paying on your house, they’ll foreclose on you and you’ll kick yourself for not keeping your money in your pocket for something they were just going to foreclose on anyway.

I just can’t see how this mess isn’t going to turn into one massive pile of litigation. If our lawmakers are going to tie the hands of homeowners to keep them from getting legal representation for loan modifications or create laws that don’t force the banks to modify loans or respond to a short sale offer, what else can they do besides file a lawsuit?

Should More Homeowners Walk Away?

I read a very interesting article today by Josh Brodesky of the Arizona Daily Star. He cites a study by a University of Arizona law professor named Brent White, who recently wrote a paper that concluded that it was in most people’s best interest to walk away from their homes.

As the article points out, it wasn’t that a professor was telling people to just walk away from their homes. He had a bigger point to make: why are the banks being bailed out for making bad loans, yet homeowners are still expected to hold up their end of the deals?  He argues that the government, real estate agents and mortgage brokers, among other players in the lending game, were encouraging people to buy a home because it was a good investment. Yet now that the market has collapsed, the homeowners are left holding the bag.

A friend of mine who has filed a predatory lending lawsuit in federal court says that the part of this lending mess that makes him the most angry is how the bank, MERS, and the rest of the defendants all want to collect the money due to them under the loan, yet none of them want to accept responsibility in their part of the mess of his loan and the overall mortgage problem in this country. They all want the money; yet nobody wants to take responsibility for the crap loan he was sold without his knowledge. As he put it, if he had known that he was participating in an illegal scheme, he would have just said no.

Similar to the conclusion in Dr. White’s paper, the housing mess has fallen squarely on the backs of the middle class, and the government and the banking industry are standing around, passing the buck, and doing nothing meaningful to help homeowners.

This attitude is further reflected in the way the loan modification process unfolds. If you’ve tried to negotiate a loan modification, it’s a long, drawn out process that leaves the homeowner really angry. The government’s HAMP program has no teeth either – homeowners are suing the Treasury and the lenders for not following the guidelines, yet judges have repeatedly found that a bank has no duty to modify a loan under HAMP.

And how about getting a short sale approved? I know a handful of people who waited months to get a short sale approved. I know there are some of you out there who have had luck with short sales and modifications, but you are in the minority. I know because I hear from people daily asking me for help.

I’m personally conflicted on whether the government should intervene in a meaningful way. I’m politically and socially liberal but am so angry at how our government is handling this mess that I can’t call myself a Democrat anymore. I think they are going to get their rear ends handed to them in the mid-term elections in 2010 and in the next presidential election.

I don’t think the government should hand every homeowner a wad of cash, but would it be too much to ask that our elected officials pass some laws, since that’s what they are paid to do, that make it easier for a homeowner to get a loan modification or to make the bank to respond to a short sale offer within a reasonable period of time? How about relaxing the deficiency statutes in states that have them so that people don’t have to file bankruptcy to recover from a financial disaster when they lose their home?

If we’re not going to put Geithner in jail for his role in bringing on this economic crisis, surely he can figure out a way to make it easier for a homeowner to get a loan modification under Treasury guidelines!

Over the summer I sent a letter to President Obama expressing my anger at how his administration has responded to the housing mess. Guess what I got back? A form letter from him recommending the administration’s HAMP program!

Now, to be clear, I was not expecting a personal response. However, I certainly didn’t expect a letter that makes it clear that he’s still drinking the HAMP kool-aid.

I will probably get a lot of people who unfollow me after reading this post, but let’s be clear: what he’s doing on this issue isn’t working and it doesn’t matter which party he belongs to. I voted for Obama, and he hasn’t done ANYTHING meaningful to help homeowners. It really doesn’t matter which party he belongs to — this housing crisis isn’t a one party problem. We should all be holding the president responsible for their failure to act regardless of which party he or she belonged to.

With fewer options, maybe more people need to walk away and let the market start to crash again – and maybe the banks and our elected officials will take notice.

Wall Street is paying out record bonuses this year while Main Street struggles to keep a roof over their heads and pay for necessities. I’m personally tired of watching these greedy bankers get paid out millions in bonuses when the average person is struggling.

I wish I could tell you who to complain to in our government, but who’s listening to anything the people have to say? No one, as far as I can tell.

There is a serious leadership crisis in America. It’s becoming clear to me that it’s up to us, American citizens, to find a way out of this mess ourselves, because our government is clueless.

What can you do to help your fellow Americans?

Video: ABA Files Suit on Repeal of AZ SB 1271

Common Mistakes by Appraisers

I’ve heard from quite a few of you during the audit process who have mentioned that the appraiser who performed the appraisal on your property did something screwy, such as miscalculating the square footage of the property. I’ve spoken to Kent Berk of Berk & Moskowitz, who says the most common error made by appraisers is that they went outside of an acceptable range to “force” a property to warrant the asking price of the home.

I’ve even found myself wondering how an appraiser manages to make the home appraise at EXACTLY the sales price. They weren’t fooling anyone. It seems, looking back, that the appraisal process is a useless waste of time and money.

This is problematic on many levels. First, if this happened to you as a borrower, you were probably borrowing more money than you needed to. If the comparable sales don’t merit the asking price on a home, then the loan should not have been made at that price. End of story. Yet, that’s not what happened. 

Presumably because everyone was making money, everyone played along – mortgage brokers, loan originators and appraisers, contributing to the run up in real estate prices. In some cases, lenders had their appraisers appraise the house at approximately 25% over its actual fair market value and did not conform to the requirements of appraisal guidelines as set forth by Congress. In other cases, appraisers never even set foot on the subject properties, using a computerized valuation service instead of a real appraisal.

From 2001-2008, lenders (actually the mortgage brokers) retained the same appraisers over and over to make sure that even the riskiest, high cost loans would be approved, based on a puffed up appraisal. As such, many borrowers paid a 25% premium on the houses they bought during this time period (roughly 2001-2007).

If, during the discovery phase of litigation this is uncovered, it could be considered an additional “settlement charge” that was undisclosed in the APR or percentage rate, and thus constitutes a TILA violation, a RESPA violation, a HOEPA violation, and could even amount to a usurious interest rate under state and federal usury law.

Below is a list of common mistakes made by real estate appraisers. I got this list from a book written by Howard Jackson Jr. on real estate appraising. Not all of these would arise to the level of fraud or negligence — some of these are just unprofessional. However, if they exist in an appraisal report alongside negligence, they would certainly bolster a case for negligence on the part of an appraiser.

Poor overall format
Failure to understand client’s requirements or procedures (usually the lender is the client)
Contract specifications not followed
Typographical errors
Math errors
Poor copies (hard to read) of supportive data and reports
Poor exhibits (quality and relevance)
“Chamber of Commerce” type data that doesn’t relate factually
Inadequate history of property
Failure to consider zoning or future zoning
Failure to consider easements
Inadequate discussion of highest and best use
Inadequate comps: too far away and not similar size
Failure to fully adjust all comp data
No discussion of sales and rural data
Bad photos
Unsupervised staff
Failure to define the interests being represented in appraisal (Meaning: who is the report prepared for? The lender or the borrower?)
No discussion of positive or negative features
Failure to explain an approach to value amount
Inconsistency in measurement between comp sales and subject property
Inconsistent adjustment patterns
Reliance upon math formulas without relating them to subject property
Failure to follow other analysis in factual presentation
Conclusion doesn’t support highest and best use
Lack of clarity regarding appraiser’s reasoning procedures

If you suspect the appraiser on your home was negligent, pull out your appraisal report, compare it to this list of common errors and see what you find. I’m curious to see what you find in your own appraisal too, so send me an e-mail through the site and let me know what you discover.

What is Securitization and What Does It Have to Do with My Mortgage?

I’ve received so many e-mails and phone calls from readers asking about my recent post on Aurora Loan Services and securitization of the loans it services that I thought it made sense to explain more about securitization and how it works.

The majority of this information was taken from the Chicago Fed Letter, here.

Admittedly, this is a complex subject, so don’t be surprised if you don’t understand it the first time around. It took me awhile to understand how it all works and untangling the securitization mess will be increasingly important for those of you fighting foreclosure.

Years ago, if you got a mortgage for a home from your local bank, it was likely that the bank would keep the loan on its balance sheet until it was repaid. This is no longer the case. Today, the institution you deal with to obtain the loan (the originator) is most likely planning to sell your loan to a third party. That third party might be a government sponsored entity (“GSE”) such as Fannie Mae, Ginnie Mae or Freddie Mac, or a private sector financial institution.

The third party who purchases your loan packages it with other loans and sells the payment rights to investors. This might not be the final destination for your mortgage. Some of the investors may use the mortgage payments they receive to back other securities they issue. In essence, the eventual buyers of the mortgage, meaning the parties that provide the funding, can be many steps removed from the originator of your mortgage.

The process by which most mortgage loans are sold to investors is referred to as securitization. In the mortgage market, securitization converts mortgages into mortgage-backed securities (“MBS”).

An MBS is a bond whose payments are based on the payments of a collection of individual mortgages. The initial sales of the bonds are put together either by the two GSE’s or by private financial institutions, such as Countrywide or Lehman Brothers. The MBS origination process typically begins when the issuer purchases a collection of mortgages from the originators. As payments are made, they are passed through the trust to bondholders.

Look at this chart:

Source: Chicago Fed Letter, November 2007, by Richard J. Rosen

Here’s an example of how an MBS issuance works:

Let’s assume that an issuer has assembled 1,000 mortgages, each worth $100,000 with a thirty year maturity and a fixed interest rate of 6.5%. This $100 million pool of mortgages can be used to back 10,000 bonds, each worth $10,000 with a 30 year term and a fixed coupon rate of 6.0%. Each bond shares the same coupon rate and other features, and importantly, each has a similar claim on payments. The MBS’ are structured so that interest payments on the mortgages are at least enough to cover the payments due on the bonds and the fees of the intermediaries.

In addition to private firms, the participants in the securitization process include the GSE’s. Ginnie Mae facilitates the securitization of home mortgages that are backed by federally insured or guaranteed loans issued by FHA or VHA. Ginnie Mae guarantees the timely payment of mortgages’ principal and interest, thereby reducing the risks for MBS investors. Ginnie Mae accounted for only 4% of the MBS’ issued in 2006.

Fannie Mae and Freddie Mac accounted for a total of 40% of the MBS’ issued in 2006. They purchase loans that are called non-conforming mortgages from originators. Conforming mortgages are those that meet certain borrower quality characteristics and loan-to-value ratios and are smaller than the conforming loan size limit of $417,000.

These GSE’s use these conforming loans to back the MBS’ they issue, adding guarantees that principal and interest on the mortgages will be paid.

The rest of the MBS issuances in 2006 were made by private sector financial institutions. Most of the MBS’ included securities backed by high-quality (prime) loans, subprime loans or “Alt-A” loans.

The problems in recent months have been largely confined to subprime and Alt-A loans, and it is the MBS’ backed by these loans that have had the most problems.

The difference between subprime and prime mortgage loans hinges on borrower quality. A prime loan indicates that the borrower has a good credit rating, while a subprime borrower has a lower credit score.

Many of the prime loans that back private sector MBSs are jumbo loans issued to high-quality borrowers, but they are too large to meet the conforming loan size limit of the GSE’s.

Alt-A loans are issued to borrowers that appear to have good credit, but these loans also do not meet the definition of prime or conforming. Often, Alt-A loans are issued to borrowers with limited or no income and asset verification. In recent years, the Alt-A sectors have included loans for which the loan to value ratio was too high.

The main benefit of securitization was that it allowed lenders to get mortgages off their books. By selling them, they were able to make more loans to more people. This also explains why the lending standards were so low – the originator didn’t worry about a borrower’s ability to pay because they were going to sell the loan to someone else, effectively making it someone else’s problem if the borrower defaulted.