Foreclosure Deal Deadline Arrives as States Must Choose Whether to Sign On

States that balked at bank liability releases in a proposed $25 billion nationwide settlement over foreclosure practices must decide by today whether its mortgage relief and reforms are worth the legal claims they’ll give up.

While some states have already announced their intention to sign the deal, others including California Attorney General Kamala Harris have yet to publicly commit in part due to terms that protect the banks from future litigation. Without Harris, the deal’s value will drop by several billion dollars, according to a person familiar with the matter.

The agreement is “beyond fixing,” said George Goehl, executive director of National People’s Action, a network of community organizations which advocates for fair lending and affordable housing.

“People are very disappointed in what this is going to be both in terms of dollars and release of claims,” Goehl said in a telephone interview. “We’re giving away the store.”

Most states don’t have the resources to go it alone and fight the banks in court, said James Tierney, director of Columbia Law School’s National State Attorneys General Program. States such as California that may reject the agreement must decide whether the time and money needed to fight for a better deal is worth it, given that the settlement provides immediate relief for homeowners, he said.

“How long does it take and how much better?” Tierney said of a state pursuing its own deal. “Is it so much better that it warrants the cost and delay?”
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Today’s deadline, extended by the parties from Feb. 3, comes almost 16 months after all 50 states announced they were investigating bank foreclosure practices following disclosures that faulty documents were being used to seize homes.

Economists See Ways to Aid Housing Market

he underpinnings of a housing recovery are hiding in plain sight: sharp price declines, low mortgage rates and rising rents have made owning more affordable than renting in a growing number of markets.

Yet housing largely remains in a funk. The prospect of continued price declines—led by the oversupply of foreclosed homes—has deterred some potential buyers, while others can’t qualify for loans.

Many economists, including some at the Federal Reserve, are urging President Barack Obama to do more, and the president will be “aggressive on housing” in his State of the Union address on Tuesday, his housing secretary said last week. The administration is already rebooting a refinancing initiative and putting finishing touches on programs to convert some foreclosed properties into rentals.

What more can be done? Economists cite three broad ideas that could advance a housing recovery.

First, local investors could play a greater role in spurring a recovery in their own communities. Some mom-and-pop investors have begun to buy up excess housing stock and rent it out.
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Second, policy makers could restore clarity to lending by finalizing a clutch of pending regulations. The government’s extraordinary steps to rescue Fannie and Freddie helped prevent a cataclysmic shock but it has made no real movement to overhaul the companies and the nation’s broader housing-finance machinery.
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Third, a growing number of economists are warning that the overhang of debt in some of the most distressed housing markets will linger for years, particularly if more borrowers default. They say mortgage investors and banks should consider reducing debt for more troubled homeowners.
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Mustering the political will to take any of these three steps wouldn’t be easy. Given the state of the market, “there isn’t a solution which will make everyone love you and cost no money,” Mr. Ranieri says.

Indeed, no single idea will fix all of housing’s problems. Many involve taking on more risk or rewarding bad behavior.

Bernanke calls for nationwide REO rental program

The government should consider helping the nation’s vacant, unsold stock of foreclosed properties by supporting initiatives to occupy.

Federal Reserve Chairman Ben Bernanke believes that one aspect should be a government support program that allows renters to move into those houses.

In a letter Wednesday to ranking members on the House Committee of Financial Services, Reps. Spencer Bachus, R-Ala., and Barney Frank, D-Mass., Bernanke said that inefficiencies in the foreclosure and mortgage origination processes are dragging on the economic recovery.

However, solutions are available, he added.

“Preliminary estimates suggest that about two-fifths of Fannie Mae’s REO inventory would have a cap rate above 8% — sufficiently high to indicate renting the property might deliver a better loss recovery than selling the property,” Bernanke’s staff writes in a supporting white paper.

“Estimated cap rates on the Federal Housing Administration’s REO inventory are a bit higher — about half of the current inventory has a cap rate above 8% — because FHA properties tend to have somewhat lower values relative to area rents,” they said.
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In a scenario of declining house prices such as this, homeownership should be promoted, according to the white paper. Indeed, they argue that in many cases REO-to-rentals may be inappropriate. Yet unless mortgage origination requirements, with tighter underwriting standards, are loosened in the immediate future, borrowers may have little choice but to rent.

Furthermore, support for such a program will cost mortgage servicers, bond investors and even taxpayers. But it may be a sacrifice for the greater good.

Modification blunders bedevil U.S. housing recovery

Shirley Burnell, a community activist from Oakland, California, has been trying to get her subprime loan restructured since 2007.

She never missed a payment, but the adjustable rate mortgage she got in 2004 shot up to a monthly payment she could no longer afford.

First she provided documents without getting any response, then she was denied in April by her servicer, Bank of America (BAC.N), for not providing documents it never actually asked for.

As one part of the bank appealed that decision and approved her for a trial modification, another part denied her again – twice – providing two new reasons in part based on inaccurate calculations, according to documents reviewed by Reuters.

When asked about Burnell’s case, a bank spokesman said she was unable to qualify under “imminent default provisions,” a third reason that Burnell said she had never been given.

At one point, Burnell even received notice the bank would accelerate foreclosure proceedings, despite her perfect payment record and the letter itself saying the bank owed her $281.01.

“They gave you a funky loan in the first place, and now they’re refusing to work with people to get it worked out,” Burnell said. “It just keeps you upset all the time.”
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Three years after the foreclosure crisis began, the process to apply for a loan modification remains a bureaucratic nightmare that is complicating the housing recovery and could dull the impact of any Obama administration initiatives in the works.

The administration’s biggest foreclosure-prevention effort, the Home Affordable Modification Program (HAMP), targeted to help 3 million to 4 million homeowners, has reached only about a quarter of that since its 2009 inception.

The program pushed mortgage servicers to cut interest, extend terms, or defer parts of a loan in an effort to reduce monthly payments and keep borrowers in their homes.

But servicers have dragged their feet on providing wide-scale modifications. They continue to lose documents, use inaccurate numbers to issue denials, or both approve and deny applications at the same time, according to housing advocates.

“It delays resolution of the problem of defaulting loans and it is adding uncertainty to the market,” said Susan Wachter, a housing expert at the Wharton School of the University of Pennsylvania.

Around one in every 12 mortgages in the country is delinquent, and only a fraction of them have received modifications.

“Somehow the borrower is unreachable, or the servicer hasn’t found the right way to reach the borrower, but the fact is, we see (modifications) piercing maybe 10 to 25 percent of the potential population,” said Diane Westerback, a managing director of global surveillance analytics at Standard & Poor’s.
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“These are institutions that have taken a huge amount of bailout money. There should be a level of responsibility to communities,” said Josh Zinner, an advocate with the Neighborhood Economic Development Advocacy Project in New York. “HAMP is far from perfect, but the biggest problem is servicers not doing their job.”

What Housing Risk?

Before the 2007 housing bust, financial analysts who raised questions about Fannie Mae and Freddie Mac’s shaky finances were dismissed as cranks. So it’s worrying to see a thoughtful critique of another taxpayer-backed monolith—the Federal Housing Administration—receive a similar brush-off.

The flap centers around an American Enterprise Institute paper “Is FHA the Next Housing Bubble?” by Wharton real-estate finance professor Joseph Gyourko earlier this month. Mr. Gyourko notes that while the FHA’s loan exposure has grown to more than $1 trillion this fiscal year from $305 billion at the end of 2007, the agency hasn’t “increased its capital reserves commensurately.” Sure enough, the Department of Housing and Urban Development recently reported that the FHA’s capital reserves are 0.24%, a far cry from the 2% statutory minimum.

If the FHA were a private entity, these revelations would alarm investors exposed to the risk and force management to adjust. But the FHA is a bureaucracy, so its instinct is the opposite. In a blog post titled “The Continued Strength of the FHA,” Assistant Secretary for Research and Policy Development Raphael Bostic dismisses Mr. Gyouko’s “outrageous claims” and says the FHA’s books are “sound.” His arguments are worth mulling for what they reveal about what passes for FHA thinking.

Mr. Bostic focuses on the FHA’s expansion and recent reforms. Although the agency expects “record” payouts next year as borrowers default, it forecasts $9 billion of new business over the same period. FHA credit scores have improved markedly: At the end of 2007, 47% of borrowers had a credit score of less than 620, but today that figure is 3.5% and the average credit score tops 700. The Obama Administration has increased FHA premiums three times, made “reforms to credit policy, risk management, lender enforcement, and consumer protections,” and “total liquid assets are at their highest point ever,” Mr. Bostic notes.

In other words, the FHA wants to grow its way out of its problems by shedding subprime borrowers and expanding into prime loans, an area historically served by private insurers. Mr. Bostic makes this argument explicit, arguing that the FHA’s market dominance—the agency now backs nearly one-third of all new single-family mortgages—is “essential” to a housing-market recovery, adding: “Providing access to credit for homebuyers of all income ranges and in all communities, and stabilizing our housing market, has been FHA’s mission for nearly eight decades.”

And here we thought its mission was to make housing affordable for lower-income earners. But if the FHA now wants to dominate America’s housing market with taxpayer monies, that’s even more reason to examine the risks, not ignore them.

Mortgage firm is Mafia Inc: feds

It was a hostile corporate takeover — Mafia-style.

The son of jailed former Lucchese boss Nicodemo “Little Nicky’’ Scarfo used the trusted mob technique of extortion to gain control of a cash-rich mortgage company — and then loot it for millions, according to federal prosecutors in New Jersey.

“The [mob’s] criminal activities have evolved from the back alleys to the boardrooms,” said Michael Ward, FBI agent-in-charge in Newark, said of the stunning scheme.

Nicodemo “Junior’’ Scarfo, 46, and 12 others, including an accountant and five lawyers — one, David Adler, from tony Chappaqua, NY — were nailed in the scheme involving Irving, Texas-based FirstPlus Financial Group, authorities said.
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Instead of targeting a more typical Mafia staple such as a restaurant or illegal-gambling racket, the mobster offspring and his cronies zeroed in on FPFG, which had been raking in millions from its subprime-mortgage business at the height of the real-estate boom, the feds said.
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“They saw the potential, they saw this small company that was cash-rich, looking to do a restructuring,” one law-enforcement source told The Post. “They saw an opportunity to exploit. It was wrong place, wrong time” for the firm.

The group began threatening the board of directors — and their families — to get them to vote their way, or else.
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In another instance, when Pelullo was trying to get enough directors to vote his way, he allegedly screamed at an associate: “I don’t care if [any voting members] are in a funeral parlor, I don’t care if they’re in a f–kin’ hospital respirator, we’ll send somebody there.

“I want their vote, I want their signature, and I want it done by the close of the day today.”

The scheme netted $ 12 million by bleeding FPFG dry. The money was laundered by manipulating mergers of sham shell companies they owned and engaging in phony consulting contracts, prosecutors alleged.

U.S. Gambles With Mortgage Retreat

hree years after virtually nationalizing the U.S. mortgage market, the government has embarked on a pullback to see whether private industry picks up the slack.

Some people in the housing industry worry that Washington’s move will cause fresh pain in many regions where demand has yet to recover amid the sluggish economy.

At issue are the loan limits that Congress expanded in 2008, allowing Fannie Mae and Freddie Mac to buy mortgages that exceeded the national cap of $417,000.

When the mortgage market melted down four years ago and sent private mortgage investors fleeing, interest rates rose sharply on “jumbo” mortgages—those too large for backing by Fannie, Freddie or agencies such as the Federal Housing Administration. That accelerated home-price declines in high-end markets throughout California and the Northeast, where many pricey homes couldn’t be bought with a government-backed loan.

To stem the fallout in prices, Congress raised the loan caps to as high as $729,750 in markets such as Los Angeles and New York. It then passed a series of one-year extensions to keep the higher limits in place. But this year, Congress and the Obama administration opted against an extension.

As a result, the limits in hundreds of counties fell by 10% or more on Oct. 1. For loans backed by Fannie and Freddie, the limits declined to between $417,000 and $625,500 in about 200 counties.

More worrisome to real-estate agents are declines in the FHA limits, which fell to between $271,050 and $625,500 in 600 counties. Those changes are causing heartburn because the FHA allows buyers to make down payments of just 3.5%, and it has financed as many as half of all home purchases in recent quarters.

Policy makers allowed the limits to fall because they want private companies to hold more mortgage risk, and dialing down loan limits is one way to carve out space for those investors. Fannie, Freddie, and the FHA currently back nine in 10 new mortgages. Taxpayers already are on the hook for $141 billion in losses at Fannie and Freddie, and the FHA’s reserves have plunged to razor-thin levels.

Bernanke calls for more housing help from Washington

Federal Reserve Chairman Ben Bernanke delivered a speech Tuesday afternoon on emerging market economies, but it was his remarks about the state of the still-ailing U.S. economy in a Q&A after the speech that garnered the most attention.
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The Fed Chairman also called on Congress to do more to help boost a U.S. housing market that remains, at best, in the doldrums. Bernanke said “strong housing policies to help the housing market recover” were needed to advance a tepid U.S. economy, along with a focus on jobs and solving budget imbalances.

More than 6.3 million U.S. homes are 30 days or more behind on mortgage payments or in foreclosure, according to mortgage services firm Lender Processing Services (LPS: 14.59 0.00%). And while housing prices are improving month-over-month, prices remain well below year-ago levels — the most recent Standard & Poor’s/Case-Shiller housing price index found home prices down 4.1% in July across 20 of the nation’s largest metropolitan areas.

Mortgage rates have touched historic lows in recent weeks, after the Fed introduced plans on Sept. 21 to buy $400 billion of Treasury bonds in an effort to lower long-term borrowing costs. The Fed also said it would invest reinvest principal payments from agency debt into additional agency mortgage-backed securities investments. But with jobs a looming concern, questions remain as to just how many borrowers will be able to take advantage of lower rates.

Eric Rosengren, president of the Federal Reserve Bank of Boston, hinted Wednesday in his own remarks at what sort of policy options might best for housing — arguing that new policies were needed to allow underwater homeowners to refinance their loans.

“Clearly getting more money into the hands of homeowners who spend it could help to fuel GDP growth,” he said. “This would reduce one of the impediments to a more significant effect from the monetary policy actions taken to date.”

$1T in sour notes

It’s the flip side of foreclosure fraud: Not only is the city fireman in danger of losing his home, he also might wind up with smaller retirement checks because his pension invested in home-mortgage-backed bonds that were bundled and sold off by banks during the real-estate bubble.

Pension funds, insurance companies, university endowments, charities, community banks and other investors are believed to be out hundreds of billions of dollars because of the mess big banks made of the housing market.

Although lawsuits against banks are mounting, the disputes over the almost $1 trillion in mortgage securities may take years to resolve — and most investors are likely to wind up with only cents on the dollar.

“It comes out of our pockets,” says Peter Henning, a Wayne State University law professor and securities-law expert. “No one reached into your wallet and took out cash, but it impacts all of us. If you’re a mutual-fund holder with a bond fund, you’ve probably taken a hit. Insurance companies have losses, and that cost has to get passed on.”

Investors are getting aggressive about getting money back, but they recognize that only a small amount might get recovered, says Steve Toll, a partner at law firm Cohen Milstein, lead counsel in eight class-action lawsuits over mortgage-backed securities.

“We’re trying to get as much as we can for investors, but there’s never enough money to go around,” he says.

Bad loans continue to rise for NJ banks

Toxic loans held by New Jersey-based banks continued to climb in the second quarter even as bad loans at U.S. banks declined, according to new government data.

The Federal Deposit Insurance Corp. said Tuesday in its quarterly industry profile that loans more than 90 days past due or no longer accruing interest at New Jersey’s 117 banks and thrifts rose to 3.61 percent of total loans as of June 30, up from 2.91 percent a year earlier. Those banks’ combined seriously delinquent debt climbed in each of the past four quarters.

Meanwhile, the combined bad loans at the nation’s 7,513 banks fell to about 4.4 percent of the total, down from 5.2 percent a year earlier, the fifth straight quarter of declines.

Paramus-based Hudson City Savings Bank, the largest thrift based in New Jersey and a high-end residential mortgage lender, had 123 foreclosed properties on its books at the end of June, up from 52 a year earlier.

A weak economy, persistent high unemployment and a slow foreclosure process have all contributed to the recent rise in bad loans throughout the state, said Bill Brewer, partner at the Livingston office of Crowe Horwath LLP, a community bank auditor. “Banks have had a hard time moving this stuff off the books,” he said. “The banks have the capital to withstand this, but it is a continuing problem.”

Increased delinquencies have been across the board with weakness in residential mortgages, commercial real estate loans and other types of business and consumer loans, Brewer said.

Kevin Cummings, chief executive officer of Short Hills-based Investors Savings Bank, said New Jersey is “feeling the pains of an old-fashioned recession.”

U.S. housing faces extra drag – low appraisals

When Sean McGowan signed a contract to buy a New Jersey home in November, he didn’t expect he’d still be living with his parents nearly a year later.

The deal fell through after two appraisals came in tens of thousands of dollars below the contract price, part of a wider trend of differences over property valuations that is compounding the U.S. housing crisis.

“It was very frustrating. We really wanted to move in,” said McGowan, a 31-year-old real estate lawyer.

Many housing experts say low appraisals are yet another headwind for a housing market already suffering from a plunge in prices, high unemployment and tight credit.

Lenders are forced to cap their mortgage loans at the value set by appraisers and buyers and sellers often can’t agree on how to make up the difference with an original deal price.

“It’s hard to talk about any recovery of the housing market and home prices until the appraisal issue is squared away, and that is a broad issue,” said Guy Cecala, publisher of Inside Mortgage Finance, a Maryland-based trade publication.

Sixteen percent of Realtors reported contract cancellations in July, matching June’s level, which was the highest since March 2010, when the National Association of Realtors began collecting data.

Nine percent reported contract delays due to low appraisals, and 13 percent reported a contract was renegotiated to a lower price because an appraisal came in below the original price in the last three months, the NAR said.

PMI Group units forced to stop writing new insurance

The PMI Group’s market share “is going to be eaten up by competitors” in the aftermath of Arizona regulators placing the mortgage insurer under state supervision and curtailing the writing of new business, according to Rob Haines, insurance analyst with CreditSights.

The Arizona Department of Insurance, the primary regulator for PMI, instructed The PMI Group to cease issuing new mortgage insurance commitments in any state. The move was largely expected with the insurer warning investors earlier this month in filings with the Securities and Exchange Commission.

Based on the state’s supervisory order, PMI can issue new mortgage insurance through pending commitments until Sept. 16, but must stop making interest payments on $285 million of surplus notes the company issued.

The company also cannot enter any new contracts, mergers, and acquisitions nor withdraw from any bank accounts. Arizona regulators said executives must submit a plan for rebuilding The PMI Group’s financial condition within 60 days.

The next step, Haines said, is a potential regulatory seizure of the insurer.

“The regulatory seizure might not happen, but that depends on the company’s success trying to execute some type of recapitalization,” Haines said.

The company warned if Arizona appoints a receiver and begins liquidating the insurer, roughly $735 million of outstanding debt would become due. PMI said it doesn’t have enough capital to meet those obligations. The company hired Willis Capital Markets & Advisory and Evercore Partners as advisers to help find options.

The PMI Group is still facing a difficult situation with other mortgage insurers not facing the same restrictions on new business — a key tool in any type of recapitalization plan.

“They are all facing the same headwinds, but they went into this storm in different conditions,” Haines said when discussing all private mortgage insurers. He said the problem for The PMI Group is the firm does not “have the same capital resources that these other companies had” heading into the volatile period.

Predictions for closing prices on the Dow, S&P, Gold and Oil are due in by noon.

Tighter Lending Crimps Housing

The percentage of mortgage applications rejected by the nation’s largest lenders increased last year, spotlighting how banks’ cautious lending practices are hampering the nascent housing market recovery.

In all, the nation’s 10 largest mortgage lenders denied 26.8% of loan applications in 2010, an increase from 23.5% in 2009, according to an analysis by The Wall Street Journal of mortgage data filed with banking regulators.

Although lenders were expected to pull back from the freewheeling conditions that helped inflate the housing bubble, some economists argue they are now too conservative, and say that with the U.S. economy still wobbly, mortgages need to be easier to obtain for qualified borrowers, not harder.

“As the noose on credit availability tightens, credit is being choked off at a time when the housing market is extremely fragile,” says Laurie Goodman, senior managing director at Amherst Securities Group LP.

Christopher Thornberg, a housing economist at Beacon Economics in Los Angeles, counters that “banks are doing what they need to do” to change lending standards in the wake of a “crazy bubble. ”

He adds, “You had decades where credit standards were tougher than they are even now.”

Among the would-be borrowers having a harder time are those who have seen their incomes fall or interrupted by a period of unemployment, scenarios that have become increasingly common in recent years. Some self-employed applicants are also hitting barriers to loans—hurdles they didn’t face in the past.

Lending standards are still tight in part because government entities Fannie Mae, Freddie Mac, and the Federal Housing Administration, which collectively account for more than nine in 10 loans being made today, are under heavy pressure to avoid any losses.

Those firms don’t make loans directly but instead purchase or guarantee mortgages that meet their standards, and so have significant influence over which loans banks are willing to approve.
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The mortgage data analyzed by The Wall Street Journal included loan applications filed by consumers who wanted to refinance existing mortgages as well as those planning to buy a home. Among home-purchase applications, lenders denied 19.9% of applications, up from 18.2% in the previous year, while 27.2% of refinance applications were denied, up from 24.4%.

Recent surveys by regulators show no sign of credit easing so far this year. Nearly four in 10 banks reported tighter mortgage lending conditions for the 12-months ended in February, according to a survey published this week by the government’s Office of the Comptroller of the Currency. Just 8% said that standards had loosened.
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The Journal analysis found that insufficient collateral was the most common denial code flagged by lenders when they rejected loan applications.

Other top denial reasons included inadequate debt-to-income ratios and poor credit histories.

Lower loan limits deadline may not boost housing prices

The Federal Housing Finance Agency is expected to reduce conforming loan limits on mortgages guaranteed by Fannie Mae and Freddie Mac this October. The hopeful anticipation is that demand driven by buyers looking to beat the deadline this summer will also drive up prices, thereby reducing recent dips in home values.

But the rush may have less of an effect than thought, according to some analysts, and likely won’t last.

The limits were originally raised in February 2008 as part of the economic stimulus, allowing the government-sponsored enterprises to guarantee more loans and more of the market at a time when private capital had all but vanished.
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Anthony Sanders, a professor of real estate finance at George Mason University said the scramble to get ahead of the conforming loan limit cuts – which would drive up costs for loans higher than the new limits – could push prices back up.

“But that will be a short-lived blip, much like the Administration’s tax credit,” Sanders said in a blog post this week.

Alex Villacorta, the senior statistician at data analytics firm Clear Capital, which called the double-dip two months before S&P/Case-Shiller, took a look a closer look at the data and found that lowering the conforming loan limits may not have such a drastic boost on prices.

Villacorta pointed to Marin, Calif. specifically. There, the conforming loan limit will like be cut to $625,500 from $729,750, which equates to a 14% drop. Since February 2008, when the new loan limits were set, Marin home prices for this upper-tier pricing segment have already dropped 25% as of the end of the first quarter.

“I think prices will rise for homes between the old and new limits,” Villacorta said. “In that range it certainly could happen. But, really, to get a better gauge is to see how many buyers are really in this segment. In that range, it’s a very small percentage.”
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For these higher-end markets such as Marin, San Francisco and New York, prices might actually fall off come October as the buyer pool in these areas drop off without the government guarantee on higher-valued loans. Still, Villacorta said like the current volatility, there will be many variables to blame.

“You would be hard pressed to base another drop in prices on any decrease in the buyer pool or the conforming loan limits alone,” Villacorta said. “There’s already a significant amount of factors causing the drop.”