Friday, October 29, 2010

Do You Want to See Something Really Scary?

Do you remember Twilight Zone--The Movie?  I did not see it--my mother was extremely strict and never allowed us to watch horror movies or even light comedy containing anything that smacked of the occult.  But I remember my father coming back from a trip and telling us that he had been driving with his nephew on a dark, wood-lined road when his nephew told about the scene from Twilight Zone where a set of characters are in a car at night trying to scare each other.  Finally, one of them says to the driver of the car, "Do you want to see something really scary?"  When his friend agrees, he turns his face away and when he turns back he has become a monster who kills the young man who is driving.

If Hollywood were making that movie today, rather than having the actor turn into a monster, he could just hold up the foreclosure statistics released by RealtyTrac and thereby cause his friend to die of massive heart failure.  The report that Realty Trac released yesterday shows that cities in California, Florida, Nevada, and Arizona account for 13 of the hardest hit areas in the United States.  Las Vegas is leading the pack with a wide lead--Realty Trac reports that one out of every 25 homes in Las Vegas has had some kind of foreclosure filing.  Cape Coral, Florida comes in at number 2 with one in 35 homes in default, followed by Modesto, California with one in 36.  While Las Vegas led percentage wise, in terms of numbers, Miami led the way with 59,000 properties with filings.

The glut of foreclosures has created some great opportunities.  One group of buyers I know is busy purchasing Las Vegas foreclosures for cash.  They tell me that homes previously valued at $250,000 can be purchased for $40,000 cash right now and then used as rental properties.  But since the scandal broke over robo-signing and the investigation into whether the banks own the properties they are foreclosing on, there has been a dramatic dip in foreclosures and in foreclosure purchases.  According to CNN money, bank owned properties are still the safest ones to buy, as long as title insurance is available for the properties; but skittish buyers may shy away from foreclosures because of  fears that the original owners may be able to redeem the properties if the foreclosures are found to be improper.

But one group of investors is apparently not scared at all--the Australians.  A CNN money report out today says that an Australian based firm with offices in Orlando, Florida, is introducing Australian investors to the U.S. foreclosure market.  Since the unemployment in Australia is about 5.1% and the Australian dollar is strong, our friends from down under have money to spend and they are spending it here in the U.S. buying up our foreclosed on properties and turning them into rental real estate.   Australians are even reportedly cashing in the equity in their own homes to get the money to buy houses in the U.S.   According to the author of the CNN money report, the Australians conduct tours--mini reconnaissance missions--to scout out the areas in which they are purchasing, talk to the locals and get a feel for the local economy.  One real estate broker in the Phoenix area says that she has helped Australians buy 16 properties in six weeks.  Says, Andrew Allen, founder of MyUSAProperty which arranges the tours, "The beauty is, the U.S. economy will recover one day... You guys have hit a rough patch, but we know you'll be back with flying colors."

I wonder if Allen understands that a huge dynamic in our own crash was speculative investing by those who borrowed money with the hopes of getting rich in real estate.  If his predictions are wrong and our market stays bad, our real estate woes could jump the ocean to another continent to take down a population who cashed out of their own homes to buy our distressed properties.  Pretty scary if you ask me.



Thursday, October 28, 2010

More Changes to Disclosures

Those of us actively working in the real estate industry remember last July when the Mortgage Disclosure Improvement Act of 2008 went into effect.  At that time, each Truth in Lending form was revised to contain the verbiage, "You are not required to complete this agreement merely because you have received these disclosures or signed a loan application."  In addition to mandating the sentence, the new law mandated that if the APR increased more than 1/8 of a 1%, a new truth in lending had to be disclosed to the borrower and the borrower had to wait three days to close.

Now, over a year since this revision, the Federal Reserve is changing the form again.  They published their interim rule on August 16, 2010 regarding the new truth in lending form.  The new form is optional for lenders from October 25 through January 30 of 2011, when it will become mandatory for all mortgage lenders.

Amazingly, the Federal Reserve has announced that even though use of the form is optional beginning this past Monday, they are still accepting comments about the new form and may issue further revisions to it before January 30, 2011. 

The most basic change is that the new truth in lending must disclose a payment summary for all mortgage loans, whether fixed or adjustable.  The payment summary must include the initial interest rate of the loan, and if it is an adjustable rate mortgage, the maximum interest rate and payment that can occur for five years and the maximum interest rate and payment possible over the life of the loan.  The truth in lending must also contain a statement that there is no guarantee that the consumer will be able to secure a lower rate by refinancing the loan.  Even though the Mortgage Disclosure Improvement Act of 2008 calls for this statement only on adjustable rate loans, the new Federal Reserve rule requires that the statement be on all Truth in Lending forms for all loans.

The new form will require several new tables.  For instance, on adjustable rate loans, at each scheduled rate adjustment, the form must display the payment corresponding to the increase and the earliest date at which the increase could occur.    Loans that are escrowed for taxes and insurance must display the full payment with the taxes and insurance on the truth in lending.  (Presently the truth in lending form displays only the principal and interest and the mortgage insurance if applicable.)  The irony is that the full payment with the taxes and insurance used to appear on the good faith estimate form, but when HUD introduced the new revised form this year, they took the escrowed payment off the form which has created a lot of confusion.  If the loan has mortgage insurance on it, the truth in lending form must display the mortgage insurance  and the date of automatic termination.

Introductory and "teaser" interest rates must be clearly defined as such with a clause that says "You have a discounted introductory rate of _____% that ends after (period).  In the (period), even if market rates do not change, this rate will increase to________%)."

I do not disagree with all of this.  A lot of consumers simply do not understand the difference between an introductory rate and a permanent rate, just as there were consumers walking around a few years ago who believed that they had a "fixed" rate when in fact the rate was fixed for only a set period of time, say five or seven years, and after that they were going to experience a rate increase.  So disclosure, especially where adjustable rate mortgages are concerned, is very important.

I do not even disagree with the statement to the consumer that there is no assurance that they can refinance their loan in the future.  Those are just the facts.  Many people across the U.S. would have loved to have refinanced their homes over the last two years but were unable to for a variety of reasons.

What I do disagree with is taking the time to make our industry revise all of these forms yet again when the new Consumer Financial Protection Bureau is actively working on getting rid of both the truth in lending and the good faith estimate and combining both forms into one new disclosure.  In fact, the Dodd Frank Bill actually mandates that a new form be created.  Every time that we have to change or revise disclosures or change the processes, it costs the entire industry money, from the very smallest shop like mine who has to invest in new software, to the mortgage giants who have to invest in new software.  If the changes make sense and they can be expected to be permanent--or as permanent as anything in our world is--then the cost is worth it.  But if what we are spending money on will be obsolete as soon as we have invested in it, then it is a wasted expense which is going to be passed on to the consumer in the form of higher fees.

Why don't we just all wait until Elizabeth Warren and company get one new form ready and then we can all spend of all our money switching over to that system?

Wednesday, October 27, 2010

Could Your Mortgage Interest Deduction Become a Thing of the Past?

Over the past year, there have been frequent rumors about ending the mortgage interest deduction. But with new pressure on the White House to balance the budget by 2015, the prospect of eliminating the mortgage interest deduction is looking like more of a real possibility.

An October 25 story in the Wall Street Journal states that the National Commission on Fiscal Responsibility and Reform, which is a bipartisan council, is currently seeking ways to trim $240 billion annually in order to balance the budget by 2015.  And cutting off income tax deductions, including the mortgage interest credit, is an attractive way to do that.  According to Yahoo News, the mortgage income tax deduction will total about $131 billion in 2012.  Yahoo News is quick to point out that this is seven times the 2011 budget for NASA and greater than the budget for the VA, or the Department of Labor or the Department of Education.

According to the Tax Foundation, 28% of U.S. filers claim the mortgage interest deduction on their income taxes and the average amount deducted was $12,221.  In California about 30% of filers took the deduction and the average amount was about $18,876. 

A spokeswoman for the Obama administration had reportedly commented that removing the mortgage interest deduction would have little effect on most families because "most Americans don't itemize."  And there certainly appears to be an false idea floating around that getting rid of the mortgage interest deduction merely raises taxes on the rich.  But nothing could be further from the truth.  Many homeowners who are in higher income brackets do not get to deduct the mortgage interest on their homes because they have to pay the Alternative Minimum Tax--in other words they are responsible for paying a certain amount of income tax to the government regardless of any deductions they may have.  In fact, eliminating the mortgage interest deduction for primary residences is one tax increase that is really going to hit the middle class squarely in the jaw since middle class families who own their own homes and are not subject to alternative minimum tax are the main beneficiaries of the deduction. 

A key factor in how we look at this issue is going to revolve around two basic questions, "Whose money is it anyway?"  and "What behaviors do we want to encourage as a society?"

The "Whose money is it anyway?" question is really critical as we look at this, because that is central to whether we see the deduction as a cost to the government or a savings to the tax payer.  If we take the approach that the money is rightfully the government's, then we have to look at the deduction as a form of  legally "stealing" what should rightfully go to the Treasury.  But if we take the approach that we earned our money through our own efforts and it is rightfully ours, then the logical conclusion is that we have a right to take permissible deductions.  Using the first argument we are costing the Treasury $131 billion annually; using the second we the people are saving $131 billion which we can put back into the economy, or into savings or into charitable contributions.

Second, what behaviors do we want to encourage as a society?  The mortgage interest deduction was introduced in 1913 to encourage home ownership.  For nearly 100 years, it has been a mainstay of our society, just as home ownership has been a vital part of the American dream.  But if we want to transition to a society of renters, there is no need to promote incentives to home ownership--in fact, it is counter productive to the goal of having a renter society.

An interesting statistic by the Census Bureau states that in 2009, half of all homes which are free and clear are owned by the elderly.  Most Americans buy their first home around age 35, and by age 65, over 80% of Americans are homeowners.   The ability to purchase and pay off a home is an important part of planning for a secure retirement.  And the ability to deduct the mortgage interest provides a financial incentive to Americans to purchase their homes and pay the mortgage for thirty years so that they can have a home that is paid for in their golden years.  It will be interesting to see how those statistics will change in the future if the commission determines that the $131 billion is really the government's money after all.

Tuesday, October 26, 2010

Looking for An Honest Man

The Greek philosopher Diogenes is said to have walked the streets of ancient Greece with a lighted lantern in broad daylight looking for an honest man.  Clearly, thousands of years of human civilization have not produced any progress in the honesty arena--if Diogenes were alive today, he could well spend his days walking up and down the major streets of any large city, or small little hamlet for that matter, searching high and low for an honest person without success.

To illustrate my point, I have pulled some recent headlines of convictions and guilty pleas for financial crimes so outrageous that it is hard to believe that these are real life stories and not something out of the mind of Oliver Stone.

I will begin with a story from the Associated Press, which ran yesterday, October 25, about a Bend, Oregon, police captain and wife, a real estate agent of 20 years, who have been recently indicted on 21 counts of fraud including conspiracy to commit wire fraud, wire fraud, bank fraud and money laundering.  Kevin and Tami Sawyer are charged with swindling about $4.4 million dollars from investors which they used to pay for cars, credit cards and a vacation home in Cabo San Lucas, Mexico which they built and decorated.  The Sawyers approached friends and acquaintances, including their daughter's dance instructor, and persuaded them to invest in their real estate schemes, which included development of 22 acres in Greensburg, Indiana near the proposed construction site of a Honda Plant.  From 2004 to 2009, the Sawyers are said to have owned or been involved with at least 10 companies, bought and sold dozens of properties and taken out millions of dollars in mortgages.  County records indicate that the Sawyers and their companies still own 18 properties in the Bend, Oregon area.  Although Kevin Sawyer and his attorneys were unavailable for comment after news of the indictment was handed down, Tami did give the following statement to the local television station, "How funny.  It's news to me.  I had no earthly idea."  Since the Sawyers have been under federal investigation for two years, I think perhaps they should consider hiring a new attorney who will keep them better informed of the status of the investigation.

Moving across the country now, we come to the case of Florida money manager Arthur Nadel.  An October 22, Bloomberg News story reports that the 77 year old Nadel was sentenced to fourteen years in prison last Thursday for defrauding 390 investors out of $168 million dollars.  Nadel was charged with, and convicted of, wire fraud, mail fraud and securities fraud.  The prosecutors had asked for 19 and a half years, but in light of Nadel's advanced age, the judge gave him a sentence that provides him with some hope of release before he dies.  Nadel pled guilty to operating a 10 year Ponzi scheme in which he invented net asset values for hedge funds and then transferred money from them.  He reportedly told investors that the funds were valued at more than $360 million and that his funds yielded 11 % to 55% per year, but in reality there often were no yields, and he pocketed $63.9 million in trading fees and profits, including $45 million from 2005 to 2007 which paid for a luxurious lifestyle for himself, a flower shop for his wife, and a real estate project in North Carolina.  At his sentencing hearing on Thursday, Bloomberg reports that Nadel stated that he has had time during his incarceration since January 2009 to think about the victims of his crimes and to read the letters they sent to the court.  He reportedly told the judge, "Recently, I read their letters over and over again until their anger and outrage became my own against myself."  With a 15 year prison sentences in front of him, plus three years of supervised release, Nadel will have plenty more time to reflect on his crimes and their victims.

Next we have the case of Frank Castaldi,  who on Sepember 16 was given a 23 year prison sentence--the maximum possible under the law--for running a 20 year Ponzi scheme which stole millions from the  mostly working class Italian American community in Chicago where he lived. The 57 year old accountant earned the trust of the members of the community by preparing their tax returns.  He was personal friends with the victims in his community and attended birthday parties and weddings while stealing their life savings. A 72 year old Italian American immigrant testified that Castaldi took his life savings in the Ponzi scheme; a widow read a statement that shortly after her husband died Castaldi convinced her to invest $300,000 with him.  He promised the investors 11 to 15% returns on their money and stole from a total of about $77 million from 473 investors.  When the economy began to falter, some investors began to demand their money back.  Apparently, Castaldi decided he would be safer in prison, so in January 2008 he turned himself in to federal authorities and pled guilty.  The prosecutors asked for a 12 and a half year sentence in light of his cooperation, but the judge rejected their request because of the lives that Frank Castaldi has ruined.

But in my opinion the most colorful criminal is Indiana money manager Marcus Shrenker who was just sentenced to 10 years in prison for his fraud schemes which stole millions from 9 clients including a friend of ten years and Shrenker's own aunt.  According to the October 25 Associated Press story, the 39 year old Shrenker pleaded guilty to securities fraud charges and agreed to pay $600,000 in restitution.  Unfortunately, after liquidating his bank accounts and auctioning off his assets, the court-appointed receiver came up with only $556,000 in cash against the $3.9 million dollars that Shrenker owes his investors and the additional $9 million that he owes creditors.  Apparently, Shrenker's assets were heavily leveraged, and he had used his ill gotten gains to secure loans to purchase a 10,000 square foot home, planes, and luxury cars.  The victims were told that they were investing in a foreign currency fund which turned out to be non existent.  When the scheme began to unravel, Shrenker set his small private plane on auto pilot and jumped out with a parachute in January of 2009.  The plane crashed into the Florida panhandle--Shrenker said he was aiming for the Gulf of Mexico, but the plan ran out of fuel before it got there.  Shrenker was arrested two days later at a Florida campground where he had cut his own wrists. (On top of the 10 year fraud sentence, Shrenker will also serve four years for faking his own death.)

Although investors will receive about 7 cents on the dollar from the court appointed receiver, Shrenker had written to his estranged wife that he had over $1 million dollars in an offshore bank account.  He also told her that he had book and movie deals pending.  And in the strangest footnote of all, Shrenker claimed that he jumped out of the plan with a 90 pound bag of gold worth about $1.9 million dollars which is now at the bottom of an Alabama river.  When asked if he had made any effort to recover the gold, Shrenker answered that he had not, but he was sure that treasure seekers would be looking for it.  He claimed that the decision to fake his death was necessary in order for his wife and children to receive millions of dollars in life insurance and to spare them the financial consequences of his going to prison.  Unfortunately for the Shrenker family, their father now has no money to pay child support.

What do all of these people have in common, other than a long-term residence at a facility run by the federal government?  Each of them knew that their actions were both morally wrong and criminal.  They stole money from friends, neighbors and even relatives, and took the life savings of people in their own communities. They violated not only legal precepts, but the most basic and agreed upon moral principles.  And they did it all for money.

This weekend, the White House urged voters to consider their choices carefully next week because if Republicans are elected, the Wall Street Financial Reform Act will be repealed.  Ignoring the fact that the Republicans will not have a large enough majority to override a promised presidential veto, the President stated that, "Our economy depends on a financial system in which everyone competes on a level playing field, and everyone is held to the same rules...And, as we saw, without sound oversight and common-sense protections for consumers, the whole economy is put in jeopardy."  But as we have seen, laws do not stop criminals--they merely provide authorities with tools to prosecute after the criminal actions have taken place.  The Wall Street Reform Act contains thousands of pages of rules and calls for hundreds of new studies, but nothing in it is going to stop the lying, cheating and stealing which costs families their life savings. In fact, by cutting off legitimate options for loans and investing, laws such as the Wall Street Reform Act actually make vulnerable consumers more susceptible to lies and overblown promises from crooks who are out scouting for victims. After all, there is no law anywhere that can change the heart of a con artist.

Wednesday, October 20, 2010

New Appraisal Rules Begin November 1

Yesterday I spoke to a long-time friend of mine who owns an appraisal company.  It seemed strange to think that up until a little over a year ago, I used to call his company frequently to order appraisals, and check the status of pending orders.  Since the Home Valuation Code of Conduct was implemented in May of 2009 as a result of a settlement between Andrew Cuomo and Fannie Mae and Freddie Mac, none of us loan originators have been able to order appraisals for loans that were going to be sold to Fannie Mae and Freddie Mac.  So for almost a year and a half, I have been getting my appraisals through whatever company the lender chooses and seeing them after the underwriter does.

When the Home Valuation Code of Conduct was first introduced, the mortgage broker industry cried foul since it took the mortgage loan originator (and specifically the small, independent mortgage broker) completely out of the appraisal ordering process.  After 11 years in business, rather than calling an appraiser I knew and could rely on, I placed an order through the lender's website and they randomly selected an appraiser from their list.  Some of those appraisals were so far off the mark that I was shocked--I still remember the Las Cruces appraiser who appraised a home selling for $360,000 for only $270,000.  He compared the property to a foreclosure next door.   Other appraisals were surprisingly good.  I discovered that appraisers who worked hard and took pride in their work continued to do so even though they were being hired by AMCs while appraisers who had always produced substandard work continued to do so as well.

Supposedly, the Home Valuation Code of Conduct was necessary to keep corrupt mortgage brokers and loan originators from attempting to influence the value of a property by improperly influencing the appraisers.  And from the stories that I have heard, there were apparently enough incidences of originators pressuring appraisers to make this a real issue.

However, HVCC decimated the small business owners and made them all subject to being hired by an appraisal management company who dictated what they could be paid.  So the rule which was supposed to protect the independence of the appraiser actually harmed the independent small business owner.

As part of the Dodd Frank bill, HVCC has supposedly been eliminated and new appraiser independence rules have been put into place. But the new rules sound an awful lot like the Home Valuation Code of Conduct they replace.  For example,  no employee or or agent or independent contractor (mortgage broker) shall attempt to influence any appraiser through coercion, bribery or threats to bring in a certain value on a property.  In addition, the new rules ban "requesting an appraiser to provide an estimated, predetermined, or desired valuation in an appraisal report prior to the completion of the appraisal report, or requesting that an appraiser provide estimated values or comparable sales at any time prior to the appraiser's completion of an appraisal report."  Further, "the Seller will not accept any appraisal report completed by an appraiser selected, retained or compensated in any manner by any other third party (including Mortgage Brokers and real estate agents)."  So for those who have been waiting for HVCC to end so that they can go back to the old relationships between originators and appraisers, there is going to be a long wait.

What I find truly interesting about both HVCC and the new appraiser independence rules is while both claim to protect the independence of the appraiser, neither one makes it illegal for a bank holding company to own an appraisal management company or to use an in house appraiser.  As long as the loan officer involved in the transaction does not have direct personal contact with the appraiser, this is not considered a conflict of interest.  But in reality, if the bank holding company pays the appraiser's salary--either directly or through an appraisal management company--and the bank sends the appraiser a purchase contract for a property, the appraiser is going to probably feel some obligation to appraise that property for the sales price.  And appraisers who do not feel any such obligation may find themselves unemployed.

I have noticed what appears to me to be a real shift in the appraisals that I have received over the last nearly 18 months since HVCC was implemented.  At first, very few properties appraised for the expected value.  That it turn led to a lot of deals falling through.  I talked to a title officer last year who said that she had a stack of files in her office that had fallen through because the appraisals were too low that "looked like the leaning Tower of Pisa."  When we challenged the valuations of appraisals through the AMCs, we got back notes like the one that I received when I challenged the Las Cruces appraiser.  That appraiser emailed back a nasty comment saying that he did not have to please loan originators any more since we could not hire him. 

However, lost deals cost money.  Lost deals with interest rate loan locks cost the banks a lot of money.  So it was probably inevitable that the trend of properties not appraising for value would be reversed. Nowadays, most of the appraisals do come in for value.  That may be due to the market stabilizing some, but it seems to me to also be due to a general understanding that appraisals on purchases "must" come in.  Earlier this month I completed a purchase transaction through a major wholesaler.  I really feared that the property would not appraise since it was a large home on the eastside of El Paso where it can be hard to find comparables for more expensive properties.  I placed the appraisal order through the lender who placed it through their appraisal management company.  When I got the appraisal back, I was shocked to see that the appraisal had actually come in $17,000 higher than the sales price. When I looked to see who had completed the report, I saw that it was an individual I would never have hired to appraise any property--much less a difficult, complex property such as this one.  To me it appeared that she had pushed to match the contract price--actually to exceed the price--rather than to really accurately assess the value of the property.  Since I am not allowed to have any direct contact with the appraiser, I was very interested to see how the underwriter would feel about the report.  To my surprise, all she asked for was a letter explaining why some of the comparables used were so far away from the subject.  The appraiser put notes of explanation in the file, sent the report back, and the underwriter accepted it.

Don't misunderstand--my loan closed and I was happy.  But I firmly believe that if I had hired an appraiser who had produced a report of that quality and sent it to the underwriter, at the very minimum she would have required a review and she might have conditioned for a new second appraisal.  It appears to me that now that the originator is no longer a factor in the appraisal process, the overall quality of the work does not seem to matter at all.  The only thing that matters is that the originator did not have a conversation with the appraiser.

One problem that is supposed to be addressed through the new rules is the matter of appraiser compensation.  The new rules are supposed to require that appraisers be licensed in the states in which they work and that they be paid a fair wage for their work.  Fair market wages would tend to improve the quality of the workmanship.  But there should be some other system besides a rotation to insure that qualified, capable people are rewarded over those who really do not know what they are doing.

The great irony of the entire appraisal mess is that just before the real estate market imploded, Fannie Mae loan approvals were coming back with conditions for limited appraisals, exterior only appraisals, and sometimes no appraisals at all.  If the automated system agreed with the stated value of the property, then the borrower could get away without getting the house appraised.  Now, three years into the market meltdown, this phenomenon has returned in a big way.  A majority of the loans that I do now do not require an appraisal with a value--they allow for exterior photos only (what is called a form 2075).  And in some cases, the findings do not require any appraisal or inspection of the property. So the irony of the new real estate market is that neither the appraiser nor the originator is really determining the value of real estate properties--that information is being pre-determined by pre-programmed information in the computers at Fannie Mae.

Monday, October 18, 2010

The Tax Man Cometh (And He's Dressed as a Banker)

As citizens. when we pay our property tax bills we have an expectation that those funds will go to the city, county, or state.  But Huffington Post has an interesting story today detailing how that is not always the case.

It seems that Bank of America, and J.P. Morgan Chase along with the hedge fund Fortress, which is headed by former Fannie Mae CEO Daniel Mudd, are purchasing property tax liens from counties and municipalities.  The companies purchase the liens under affiliated company names and then collect from the property owners using the threat of foreclosure.

Some states allow tax lien collection companies to charge as much as 18% in fees and surcharges to the delinquent homeowner.  These additional fees can make it hard for the homeowner to catch up the taxes when they attempt to pay up.

Since Huffington Post encourages us to re post and share the video, I have attached it here so that you can watch it.


The irony of Bank of America and JP Morgan Chase purchasing tax liens and then pursuing the delinquent homeowner is that both institutions were the beneficiaries of TARP money. After receiving tax dollars to bail themselves out, they are now pursuing individual homeowners for property taxes as well as smaller infractions such as bills for sidewalk cleaning and property maintenance.

Obviously the cities and counties benefit from selling these delinquent tax liens to banks and hedge funds because getting the cash up front helps the local governments to alleviate their cash flow problems.  But homeowners immediately receive threatening letters and bills for legal fees which they may not be able to pay.  And since, according to the video link, the banks and hedge funds are not necessarily set up to receive the delinquent tax funds in payments, if the homeowner is unable to pay the entire amount due,  this may be an opportunity for holding companies to pick up real estate for the amount of the taxes owed plus legal fees.

I believe firmly and strongly in free enterprise and privatization wherever possible.  But privatizing tax collection just does not seem right.  Our tax dollars and any fees and penalties should be going directly to the municipalities we live and work in--not to corporate giants who after receiving tax dollars in the form of bailouts are profiting off of the hard times of the individual citizens.


Friday, October 15, 2010

Is Buying a Home a Good Decision?

We finish the week with a new survey released just yesterday by the National Association of Realtors which shows that the number of Americans who believe buying a home is a smart financial move has dropped every year since 2007 and that overall support for homeownership has dropped a total of 6% from 83% to 77%.   The survey shows that during this same period, the number of Americans who strongly believe that home ownership is a good financial decision has fallen from 80% to just 68%.

Conversely, 16% of Americans believe that homeownership is not a good financial decision, which is up from 10% ten years ago.  According to the NAR survey, in the second quarter of 2010 66.9% of Americans owned their homes.

I have seen this negative attitude toward homeownership spread through the media this summer and I have heard it repeated by politicians, but this week it hit closer to home as I talked with my brother who is here visiting from Miami.  My brother owned a home a number of years ago when he was living in Kansas City.  When he moved to Chicago with his job, he rented an apartment in a 34 story high rise.  Now, I understand that he has a condo close to the beach in Miami.  I asked him whether he owned it or was just renting it.  "I rent," he answered firmly. When I suggested that with mortgage interest rates so low, he might consider purchasing, he brushed off the suggestion. "You'd have to be nuts to buy a condo in Miami.  Everybody in Miami is in a condo.  My neighbors have had theirs for sale for 2 years with no luck. If you buy a condo there, you will never be able to get rid of it--you will have it forever."

In my brother's case, that might make sense.  After all, he is a single man living in Miami for his work.  He knows that he does not plan to stay in Miami--he wants to retire someplace totally different.  As a photographer for CNN, he travels constantly.  When I asked how Miami was he answered that he did not really know because he is never there.  His rental condo provides little more than a place to sleep when he is between assignments and a permanent address for receiving his mail.  So perhaps for him, and for people in situations like his, home ownership is not a good investment.

On the other hand, my sister is living in Dallas with her husband, two kids, and three dogs while she waits to sell her home down here.  Nobody has to convince her and her husband that home ownership is the way to go.  They have bought and sold three houses since they have been married, and they are looking forward to the next one.  They know that they want to make Dallas their permanent home.  They understand the costs and responsibilities of home ownership; my brother-in-law does home maintenance projects on their homes as a hobby.  And they have an overall lifestyle that is consistent with providing a home for their family--not just a place to sleep at night.

The comparison between my brother's situation and my sister's makes me wonder how much lifestyle was a factor in the NAR survey.  The survey is a telephone survey of 1209 adults in 25 of the most populous metropolitan areas.  I wonder whether it takes into consideration whether the respondent is single or married and with or without children.  How many of the respondents are wondering whether their jobs will last?  How many of them would change jobs and perhaps change the cities they live in if the job market were better and they perceived they had better employment opportunities.  All of these factors influence the way that individuals perceive home ownership. 

When we see headlines saying "Support for Homeownership Falls Six Percent" we tend to see just another negative headline in a barrage of negative headlines about the housing market.  But we need to remember that each individual in that survey has his or her own story.  Homeownership is not a good investment for every person, but for a lot of people, owning a home remains very appealing.  And for all of those people, we in the real estate community need to keep the lights on.


Thursday, October 14, 2010

Whose Fault is the Foreclosure Mess Anyway? Part II

In 1953 my grandmother went through a divorce at a time when very few people living in middle America got divorces.  Abandoned by her husband at about thirty years of age, she and her three young children (all under the age of 10) moved back to the tiny town of Parsons, Kansas, where her parents and siblings lived.  My grandmother moved in with her mother and father and got a job in town which barely covered the expenses for herself and and her children.  After a short time, she realized that she needed a loan from the local bank in order to make ends meet.

My grandmother did not have credit or any collateral, but she hoped that her family's long-time presence in the community would help her in securing the small loan she needed.  When she talked to the banker, she told him that her father would be willing to co-sign for her for the loan.  The banker's only question was, "Who is your father?"

"Harlan Stringer," replied my grandmother.

"In that case, I don't need a co-signer," replied the banker.  "I know your father.  If you don't pay this money back, he will, whether he co-signed for it or not."  She left the bank with the money, which she did pay back in full from her meager wages.

My great-grandparents were fairly typical of Depression-era families.  They never had any extra money, but they raised a garden and a cow which allowed them to feed their own six children plus six extra children from town every night.  (Each of their children had instructions to bring home one classmate from school each night for dinner, but to rotate the children so that all of the classmates could come out to the farm and eat.  Children who lived in town often went hungry, so it was important that the invitations be extended to everyone since the Stringers raised their own food so they always had plenty to eat.)  My great-grandfather eventually went to work for the railroad, and after he retired he stayed home and kept the garden, raised and sold chickens and fished.  At that point, my great-grandmother got a job in town where she worked until well into her seventies.

They had no expectation of wealth--no concept of winning the lottery or some contest that would bring a windfall into their lives.  They expected to work for whatever they received and to pay for whatever they owned.  They did not borrow money carelessly, because their sense of honor required that debts had to be paid--even if the debt were for an adult child who had borrowed the money because of a personal crisis but could not afford to repay the loan. 

We hear a lot of comparisons today between our present day crisis, "The Great Recession," and the "The Great Depression" but I really don't think that it is fair to compare our society with the generation from 70 years ago who weathered that storm.  The Depression-era generation was not as sophisticated as we are today and not nearly as well educated or well traveled, but they had a sense of values that our generation cannot begin to understand.

Yesterday, I said that I thought there were two seldom mentioned culprits in the foreclosure mess, and that Culprit A had helped to create Culprit B.  Culprit A, in my opinion, is the Making Home Affordable Program and all of the companion programs that play on homeowners' desires and needs and encourage them to apply for modifications they will not get.  But Culprit B is the borrowers themselves and the  "I am entitled to something for nothing" mindset that touches every facet of our society today.  No discussion of the foreclosure problem is complete without acknowledging that a big part of the problem is individuals who refuse to take responsibility for their actions.

As we listen to the media coverage of the furor over foreclosures, we hear a lot about how banks may not have fully reviewed the documents, or how the MERS system allows lenders to transfer deeds without re-recording them, but we hear very little about the fact that the average foreclosure is taking over 460 days to consummate.  We hear a lot about declining values as a reason for borrowers to practice strategic default and allow a house to be sold on a short sale, but we do not hear much about the fact that the same borrower was making the payment on the house and living in it before the home devalued.  If we discount arm resets (which can be a serious problem for homeowners who can no longer make the new higher payment), what can possibly be a good justification for stopping making a house payment just because the home devalued?  If the payment has not adjusted and there is no loss of employment or drop in income, then the borrower is making the same payment that he always was on the same house he had been living in prior to the market crash.  The equity will return at some point. 

The reason that loan modifications have been able to take advantage of so many people and put so many Americans in a position to lose their homes is that as a society, we want to be taken advantage of.  We want to believe that we should have our payment modified, we should have the principal balance we owed on the house reduced, and we really are entitled to the lowest possible interest rate whether we actually qualify for it or not.  If "life is not blowing us kisses" then we need to find someone to blame and hold responsible.  We can always hire an attorney to tell a judge that we did not understand what we were signing, or that we were tricked or misled.  And if all of that fails, we have the option of living in our home for over a year without making a house payment until the bank can finally sell it.  And we feel righteous in doing so, because after all, it is not our fault that we signed a note for something we could not afford in the first place.

Today, we do not have a point of reference for a man who valued his word so much that he would pay a bill he clearly did not owe for his daughter, particularly when paying that debt he had not signed for would have worked a genuine financial hardship on him. But his attitudes about money and personal integrity obviously influenced his own family.  My grandmother, who today is 89 years old, understood that no magician was going to come along and fix all of her problems.  In a couple of years, she met and married my mother's step father, who was in the army. She saved money carefully, and when he got out of the military they paid cash for their first home in the Kansas countryside.  After they got too old to live there, they bought a house in town which they also paid cash for. She and her new husband never made much money, but through an extremely thrifty lifestyle, she saved enough money to be comfortably self-sufficient in her old age. Her funeral arrangements are fully paid for so that even in death she will not leave behind any unpaid bills.

As a society, we will get out of "The Great Recession".  This round of foreclosures will finish and the homes will be resold.  New laws will tighten credit standards for quite a while, although experience teaches that credit standards are often cyclical and over time will tend to loosen up again.  But for our country to avoid another problem like the one we are in today, we need more than new regulations or financial reform bills, or reviews of foreclosures.  We need a return to personal integrity as individuals that demands that we repay  what we borrow, and that we borrow only what we are able to repay.


Wednesday, October 13, 2010

Whose Fault is the Foreclosure Mess Anyway?

After a week of spreading moratoriums on foreclosures throughout the country, and calls by Nancy Pelosi and Barney Frank to have a federal moratorium on foreclosures, we see common sense and reality beginning to weigh in on this issue.  According to the Washington Post,  federal regulators today urged lenders to get to work reviewing paperwork on foreclosures, to file new documents if the documents that are part of their current files are found to be in error, and to continue with foreclosures as quickly as possible if no problems are found.  This is an unusually practical approach for the federal government to be taking, and it is  absolutely necessary to prevent a complete crash of the real estate financing system.

I promised in last week's post that we would take a look at who is really responsible for the foreclosure mess.  Obviously, a complete list would take a long time to compile.  Poorly underwritten lending products are one culprit.  Joblessness is another--without employment, Americans cannot make their mortgage payments.  And as long as unemployment hovers just under 10% we are going to see continuing problems with foreclosures. 

However, I believe that there are two other contributors to the foreclosure problem we have today who receive much less publicity.  In fact, I believe that contributor A helped create contributor B.  And that is what I want to talk about today.

What is contributor A?  The Making Home Affordable Program and the entire system of loan modifications as proposed by the Obama administration has exacerbated the foreclosure problem by 1. encouraging Americans to believe that they may be entitled to a lower payment, 2. by misrepresenting what modification means in real terms, 3. by putting homeowners in jeopardy of losing their homes if they do not complete the process, which many fail to do.

Consider this: a Huffington Post article entitled Extend and Pretend: The Obama Administration's Failed Foreclosure Program, posted 08/4/2010, took an in-depth look at HAMP.  The stated goal of HAMP according to a speech made by the President in February of 2009 and quoted in the Huffington Post article, was to "enable as many as three to four million homeowners to modify the terms of their mortgages to avoid foreclosure."   As of August 4, 2010,  approximately 1.2  million homeowners had applied for loan modifications under the Making Home Affordable Program, but  only about 400,000 people received a permanent modification.  About 529,000 people were denied and the rest were still waiting for an answer.

So what does a program that is designed to reduce monthly payments and help homeowners stay in their homes have to do with the current foreclosure crisis?  Plenty.  For one thing, homeowners who applied for the Making Home Affordable Program were put on a trial modification which temporarily reduced their payments while the loan servicer determined whether they qualified to receive a permanent modification.  The purpose of the modification was to reduce the mortgage payment to 31% of the home owner's income to make it easier for the homeowner to stay in the house.  The problem was ( and is) that home owner's have to be able to document income and assets and to qualify for the relief offered under the program.  And even though the qualification process is supposed to take three months, for many borrowers it drags on and on. The Huffington Post article tells the story of Bea and Terry Garwood who applied to Chase for relief under the HAMP program in April of 2009 and had their mortgage payment reduced during the HAMP trial.  However, after almost a year of waiting, they were told this past March that they did not qualify for modification after all and they were being kicked out of the program.  At that point, they owed Chase $12,000--the difference in the payment they had been making and the actual payment on the house.  Borrowers kicked out of the HAMP program also owe the servicer late fees in addition to the principal and interest that has been deferred during the trial modification.

A borrower who is struggling making his or her payments might continue to struggle to do so while looking for a job or trying to cut expenses.  But a homeowner who has been lured into HAMP and then rejected from the program generally cannot come up with thousands of dollars additional in order to bring the note current after paying a reduced payment every month in the form of a trial modification.  So a program that is supposed to save homeowners from foreclosure by reducing their payments actually endangers their homes if they do not qualify for a permanent modification.

But HAMP also puts borrowers in a position where they ultimately owe more than they did when  they started.  Since HAMP does not reduce principal--it just lowers the payment,for five years--the borrower still owes the full amount of the mortgage, but he will owe that mortgage over a longer period of time, and with home prices continuing to decline, even borrowers who successfully complete HAMP trial modifications may conclude that continuing to make the house payment on a property that is depreciating just is not worth it.  Some statistics show that as many as 70% of borrowers who receive a HAMP modification will end up in foreclosure anyway because they cannot afford the mortgage payment.

As far as I know there are no studies directly linking HAMP modifications to foreclosures.  However, the Huffington Post did have some interesting statistics:  Since the implementation of HAMP,  1.2 million homeowners have applied for the program, 389,000 have been approved, and banks have foreclosed on nearly 1.1 million borrowers (almost three times the number of those receiving permanent modifications.)

The point of the Huffington Post article is that HAMP, while unsuccessful, was necessary to delay foreclosures so that housing prices could rise.   But it is my belief that many of those who are losing their homes today might not be doing so at all if HAMP had not been introduced.  If HAMP were a private initiative rather than a government-based one, it would now be decried as the worst form of predatory lending--a program which offered false hope to struggling homeowners while burdening them with debt they could not pay and then resulting in the loss of their homes.

As the U.S. now faces the foreclosure crisis head on, we need to begin to take a long hard look at the long- term consequences of our actions.  Today's encouragement from regulators to proceed with processing foreclosures is one major step in the right direction.  We need to stop delaying the inevitable and start dealing with reality.  And we need to stop promising homeowners help that we know is not coming.  For many of these homeowners, the only way they can actually Make Home Affordable is to move out and get into a new place that they can actually afford.

Tuesday, October 5, 2010

Why Halting Foreclosures is a Bad Idea-- Part I

Just when we thought that the housing market could not get into a bigger mess, the major banks started announcing that they are putting a hold on pending foreclosures.  To many commentators this appears to be a good idea--over the weekend commentators on Fox News remarked that this would give troubled homeowners more opportunity to straighten out their problems and keep their homes.  But does it really?

Apparently the foreclosure process has created about as many villains as the origination process.  Many people outside of the industry are blaming the MERS system which allows lenders to sell home notes without re-recording the deed of trust.  I read the comments' section today of a website called which urges distressed homeowners who are about to be foreclosed on to find an attorney to argue that they do not have a legal obligation to pay anyone but their original lender.  If the note has been sold to a new lender, and the original lender has been paid off, they do not have any obligation to make payments under the note. 

This argument is nothing short of insanity.  I wonder if the people who advocate using technical loopholes like MERS and the presence of a new lender to avoid foreclosure realize that the secondary market (which allows lenders to buy and sell home loans and therefore creates more capital for originating new mortgages) is the very reason that they were able to buy a home in the first place.  If you dismantle the secondary market by claiming that the current note holder does not have a legal right to foreclose on the property, you effectively destroy the very system that has allowed the U.S. to become a nation of homeowners.

Then there are complaints about "foreclosure mills."  A letter signed by Barney Frank, Alan Grayson and Corrine Brown dated September 24,  2010, addressed to Michael Williams, CEO of Fannie Mae, complains that Fannie Mae servicers in Florida are employing law firms that specialize in speeding up the foreclosure process, "without regard to process, substance, or legal propriety.  According to the New York Times, four of these mills are both among the busiest of the firms and are under investigation by the Attorney General of Florida for fraud...Several of the busiest of these mills show up as members of Fannie Mae's Retained Attorney Network."  The letter complains that pressure to foreclose upon properties is leading Fannie Mae and its servicers to rely on attorneys who "specialize in kicking people out of their homes" noting that this same network of attorneys is retained to do pre-filing mediation between troubled homeowners and banks.

I do not know whether Williams responded to the letter or in what fashion he did so, but I do know this week, one wholesale lender suspended its operations in Florida.  If foreclosures are going to be under the scrutiny of Congress, why lend there at all?

In the meantime, Bank of America, Ally and Chase are putting a hold on foreclosures in 23 states requiring court ordered foreclosures.  According to an October 1, article in the Washington Post, Bank of America executive Renee Hertzler admitted in a deposition that she signed up to 8,000 foreclosure documents a month without reviewing them.  The attorney general of California has ordered that Ally Financial stop foreclosures in the state--California does not have judicial foreclosure--and Connecticut attorney general Richard Blumenthal has announced a 60 day moratorium on all foreclosures by all lenders in the state.

So where is all of this headed?  The elephant in the room in this situation is, that legal maneuvering aside, the homeowners being foreclosed on cannot afford the houses.  The reason that the HAMP program--Making Home Affordable--has been such an ongoing failure is that even if the loans are modified into more affordable terms, the homeowners still cannot afford them.  We currently have homeowners living in their homes over 400 days after foreclosure while they wait for the bank to sell the house.  Is a person who has been living in his or her home without making a payment for 400 days going to want to start making payments on that home again if the loan can be modified?  I don't think so.  After not making a house payment for over a year, those homeowners are not going to be happy with anything less than have the lien invalidated so that they can own the house free and clear--a move which would cause a financial crash that would make the one two years ago look like a minor hiccup.

And then there is the issue of the title companies who insured title on the sale of foreclosed properties.  If the foreclosures themselves are ruled illegal, they will face claims on the title they insured.  In the worst case scenario, the new buyers could potentially forfeit the property as it is returned to its original owners.  If the title company is responsible, will they have to reimburse all of the costs to the individual who purchased one of these homes in good faith and is now going to be homeless himself?  Apparently, the title companies are getting nervous, as Old Republic Title has stopped issuing title insurance on foreclosed properties owned by Ally.

Frustrated homeowners who feel embattled by the banks may be cheering these moratoriums on, but they do not understand the full consequences of what is happening right now.  And while the individual homeowners may not understand this reality, I believe that the major players in the housing industry such as Barney Frank certainly do understand it.

Is this all just political appeasement ahead of an important midterm election?  Maybe partially, but I think this issue of stalling foreclosures on technicalities is a much more important issue than merely scoring brownie points with angry voters.  A court ruling that a note holder who purchased a home note on the secondary market does not have a legal claim to foreclose on that property could fundamentally and radically change housing finance in the United States.  If a judge were actually to rule that the lien holder does not have legitimate claim to the property the secondary market would effectively end, which would mean that banks and lenders would be able to make significantly fewer home loans at significantly shorter terms knowing that they were not going to be able to sell the notes.  This new halting of foreclosures is much more than just a political move for voters, or a stall tactic for unhappy homeowners--it is a power play to restructure homeownership in this country as the government moves us from a society of homeowners to a society of renters.

Some of you may remember a few years ago, before the market crash and the murderous drug war in Mexico--when there was a lot of interest in providing housing finance in Mexico.  Stewart Title even opened a title office in Mexico City.  At that time, the idea was that so many Americans wanted to retire to Mexico that if the proper mechanisms were in place, they could buy houses with mortgage loans and title insurance similar to what they enjoyed in the U.S.

Efforts to duplicate the mortgage system were unsuccessful though.   Living here on the U.S.-Mexico border, I used to get phone calls from people wanting to buy both commercial and residential properties in Mexico and wanting to get them financed.  Financing was almost impossible to obtain, and after a few years I asked one lender why that was true.  They answered that Mexican law made it almost impossible to foreclose on a property owner, and for that reason, lending was very scarce.

As we work through the process of foreclosures, we need to remember as a society that what makes mortgage debt an attractive financial instrument is that unlike credit card debt or auto loans, mortgage debt is secured against an immovable piece of collateral which under normal circumstances usually appreciates in value.  A homeowner in trouble cannot run away with his house.  So the debt is a good risk because the collateral is the lender's security.  But when we make foreclosures impossible, we take away the collateral, and without the collateral, the entire system crashes.

Tomorrow:  Whose fault is the foreclosure mess anyway?