Fed Reserve Paper Endorses Loan Modification over Foreclosure

Posted on January 19, 2012 by Michela Terrazino

Recently, Federal Reserve Chairperson, Ben Bernanke, took a public position on the issue of foreclosures and loan modifications. A White Paper was sent to the House of Representatives’ Committee on Financial Services addressing the severity of the nation’s housing problem and offering possible solutions, with a stress on avoiding foreclosures.

The White Paper offers a thorough economic understanding of the housing problem with lengthy analysis and numerous statistics which you might expect from the economists at the Federal Reserve.

The first paragraph on housing conditions sets the tone of the discussion:

“House prices for the nation as a whole (figure 1) declined sharply from 2007 to 2009 and remain about 33 percent below their early 2006 peak, according to data from CoreLogic. For the United States as a whole, declines on this scale are unprecedented since the Great Depression. In the aggregate, more than $7 trillion in home equity (the difference between aggregate home values and mortgage debt owed by homeowners)—more than half of the aggregate home equity that existed in early 2006—has been lost. Further, the ratio of home equity to disposable personal income has declined to 55 percent (figure 2), far below levels seen since this data series began in 1950.”

The paper is directed towards helping homeowners stay in their house by finding alternative solutions. And if a homeowner cannot keep a home, then alternatives to foreclosure are considered.

The paper looks at specific situations of homeowners—those who may be able to refinance, though who can qualify for a loan modification, those who are temporarily unemployed, those who can avoid foreclosure by conducting a short sale or offering a deed-in-lieu, those who might like to stay in the home they have lost and rent it.

Renting out foreclosures is also a second major thread of the piece, a parallel issue to loan concerns. The paper’s position is that it would be better to rent out foreclosed homes. This would include renting by banks until they can sell them and also purchases of blocks of homes by big investors. The idea is that renting would stop the deterioration of the properties, take the houses off the market and reduce the continuing price plunge of foreclosed properties, and this would buoy up the home values of the entire neighborhood.

The Federal Reserve points out that many houses were sold to people who could not afford them, so the rental market should actually be bigger today, and should have been bigger in the past, if proper loan policies were followed.

There are good ideas in the white paper. Potential solutions are provided. The many paradoxes and contradictions in a problem are highlighted. And many discussions while not offering a solution seem to lead up to a solution, if one is bold enough.

Also, there are some weaknesses in the statement. The white paper does not see principal reduction in a loan modification as a solution. So it focuses only on other tactics. It shies away from a hard line against the banks—fines, Justice Department actions, putbacks from investors to banks etc.

Another fault lies in the discussion of the strict lending policies by banks without a means to alter their behavior. The paper points out that banks are using more stringent guidelines than are necessary—higher than the GSEs (Fannie Mae, Freddie Mac), and this is not obligatory, and this is hampering demand and sales, and lowering overall house prices. One obvious solution is to require banks to use GSE criteria if they want to use GSE money.

There is no significant section in the paper on promoting housing demand through tax incentives to buyers which would certainly be an important element of a housing solution.

The conversation about REO to renting seems to minimize the impact of low auction prices on community house values, though it is interesting and strives to be comprehensive.

Despite the weaknesses, overall, the white paper is a breath of fresh air. It breaks the stunning silence on the major issue dragging down the economy: Housing. It targets a main problem as loan modifications. It takes a broad view on the many complex issues. And it offers some thoughtful solutions.

And it certainly will set the stage for solutions: inferred by the discussion, selected by process of elimination or just simply new and surprising.

Below are excerpts on the white paper.

Basic points of the white paper:

1. Convert foreclosures to rentals

“Reducing some of the barriers to converting foreclosed properties to rental units will help redeploy the existing stock of houses in a more efficient way. Such conversions might also increase lenders’ eventual recoveries on foreclosed and surrendered properties.”

2. Increase housing demand and purchases

“Obstacles limiting access to mortgage credit even among creditworthy borrowers contribute to weakness in housing demand, and barriers to refinancing blunt the transmission of monetary policy to the household sector. Further attention to easing some of these obstacles could contribute to the gradual recovery in housing markets and thus help speed the overall economic recovery.”

“Finally, foreclosures inflict economic damage beyond the personal suffering and dislocation that accompany them. In particular, foreclosures can be a costly and inefficient way to resolve the inability of households to meet their mortgage payment obligations because they can result in ‘deadweight losses,’ or costs that do not benefit anyone, including the neglect and deterioration of properties that often sit vacant for months (or even years) and the associated negative effects on neighborhoods. These deadweight losses compound the losses that households and creditors already bear and can result in further downward pressure on house prices.”

3. Expand loan modifications

“Some of these foreclosures can be avoided if lenders pursue appropriate loan modifications aggressively and if servicers are provided greater incentives to pursue alternatives to foreclosure.”

4. Greater use of short sales and deed-in-lieu

“And in cases where modifications cannot create a credible and sustainable resolution to a delinquent mortgage, more-expedient exits from homeownership, such as deeds-in-lieu of foreclosure or short sales, can help reduce transaction costs and minimize negative effects on communities.”

5. Change Fannie Mae and Freddie Mac policies

“Intertwined in these issues is the unresolved role of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, in both the near term and long term. The GSEs hold or guarantee significant shares of delinquent mortgages and foreclosed properties. Because of their outsized market presence, the GSEs’ actions affect not only their own portfolios, but also the housing market overall. However, since September 2008, the GSEs have operated in conservatorship under the direction of the Federal Housing Finance Agency (FHFA), with specific mandates to minimize losses for taxpayers and to support a stable and liquid mortgage market.

In many of the policy areas discussed in this paper—such as loan modifications, mortgage refinancing, and the disposition of foreclosed properties—there is bound to be some tension between minimizing the GSEs’ near-term losses and risk exposure and taking actions that might promote a faster recovery in the housing market. Nonetheless, some actions that cause greater losses to be sustained by the GSEs in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery.”

Excerpts on specific topics

On loan policies of banks

“As a result of these developments, mortgage credit conditions have tightened dramatically from their pre-recession levels. Mortgage lending standards were lax, at best, in the years before the house price peak, and some tightening relative to pre-crisis practices was necessary and appropriate. Nonetheless, the extraordinarily tight standards that currently prevail reflect, in part, obstacles that limit or prevent lending to creditworthy borrowers. Tight standards can take many forms, including stricter underwriting, higher fees and interest rates, more-stringent documentation requirements, larger required down payments, stricter appraisal standards, and fewer available mortgage products.”

“Other data show, for instance, that less than half of lenders are currently offering mortgages to borrowers with a FICO score of 620 and a down payment of 10 percent (figure 5)—even though these loans are within the GSE purchase parameters. This hesitancy on the part of lenders is due in part to concerns about the high cost of servicing in the event of loan delinquency and fear that the GSEs could force the lender to repurchase the loan if the borrower defaults in the future.”

“Reduced mortgage lending is also notable among potential first-time homebuyers, who are typically an important source of incremental housing demand. These households often have relatively new credit profiles and lower-than-average credit scores, as they tend to be younger and have fewer economic resources to make a large down payment. Consumer credit record data show that the share of 29- to 34-year-olds getting a first-time mortgage was significantly lower in the past 2 years than it was 10 years earlier.”

On rentals

“A government-facilitated REO-to-rental program could take many forms. The REO holder could rent the properties directly, sell the properties to a third-party investor who would rent the properties, or enter into a joint venture with such an investor. In making this decision, policymakers should consider what program design will provide for the best loss recoveries and the best outcomes for communities.”

“An REO-to-rental program that relies on sales to third-party investors will be more viable if this cost-pricing differential can be narrowed. REO holders will likely get better pricing on these sales if the program is designed to be attractive to a wide variety of investors. Selling to third-party investors via competitive auction processes may also improve the loss recoveries. Providing investors with debt financing will likely also affect the prices they offer on bulk pools of REO properties. As noted, such financing is largely unavailable now, thus limiting the number of potential investors. In the current tight mortgage lending environment, private lenders may not have the capacity to fund a large-scale rental program, and it may be appropriate for REO holders to fill the gap. However, whether such funding should be subsidized is an important question. Subsidized financing provided by the REO holder may increase the sales price of properties, but at the cost of reducing the REO holder’s future income stream. If so, the costs of such financing need to be accounted for in the rental program.”

“In addition, a program that minimizes the amount of time that a vacant property lingers in REO inventory before being rented would reduce disposition costs to the REO holder. These costs might be reduced by including properties that are already rented, such as properties rented under the provisions of the Protecting Tenants at Foreclosure Act. Another possibility is to auction to investors the rights to acquire, in a given neighborhood, a future stream of properties that meet certain standards instead of auctioning the rights to current REO holdings. A third possibility is to encourage deed-for-lease programs, which circumvent the REO process entirely by combining a deed-in-lieu of foreclosure—whereby the borrower returns the property to the lender—with a rent-back arrangement in which the borrower remains in the home and pays market rent to the lender.”

“In light of the current unusually difficult circumstances in many housing markets across the nation, the Federal Reserve is contemplating issuing guidance to banking organizations and examiners to clarify supervisory expectations regarding rental of residential REO properties by such organizations while such circumstances continue (and within relevant federal and statutory and regulatory limits). If finalized and adopted, such guidance would explain how rental of a residential REO property within applicable holding-period time limits could meet the supervisory expectation for ongoing good faith efforts to sell that property. Relatedly, if a successful model is developed for the GSEs to transition REO properties to the rental market, banks may wish to participate in such a program or adopt some of its features.”

Refinancing and HARP

“GSE fees known as loan-level pricing adjustments (LLPAs) are another possible reason for low rates of refinancing. Under normal circumstances, LLPAs are used to provide higher compensation to the GSEs for the risk that they undertake when new loans are extended to borrowers with high loan-to-value (LTV) ratios or low credit scores. In a HARP refinancing, however, the GSEs already carry the credit risk on the original mortgage, and refinancing to a lower rate could even lower the credit risk of some such loans; thus, it is difficult to justify imposing a higher LLPA when refinancing in this circumstance.”

“To reduce these and other obstacles to refinancing, the FHFA announced changes to HARP in October 2011.31 LLPAs for HARP loans were eliminated for borrowers shortening the term of their loans to 20 years or less and reduced for longer-term loans, certain representation and warranty requirements were waived, loans with LTVs greater than 125 percent were made eligible for the program, the appraisal process was largely automated, servicers were given greater flexibility to notify borrowers of their eligibility for refinancing through HARP, and private mortgage insurers agreed to facilitate the transfer of mortgage insurance. Some estimates suggest that another million or so homeowners could refinance their mortgages with these changes in effect.”

“An important group of borrowers who are not able to take advantage of the HARP program is homeowners with high LTVs but whose mortgages are not guaranteed by the GSEs. For the most part, these borrowers are not able to refinance through any public or private program. One possible policy option might be to expand HARP—or introduce a new program—to allow the GSEs to refinance non-GSE, non-FHA loans that would be otherwise HARP eligible. Unlike HARP refinances, however, these refinances would introduce new credit risk to the GSEs because the GSEs do not currently guarantee the loans, even if the loans were offered only to borrowers who are current on their payments and would meet underwriting standards (for example, debt-to-income ratio and credit score), if not for their high loan-to-value ratios. Perhaps 1 million to 2-1/2 million borrowers meet the standards to refinance through HARP except for the fact that their mortgages are not GSE-guaranteed.”

“The structure of the HARP program highlights the tension between minimizing the GSEs’ exposure to potential losses and stabilizing the housing market. Although the GSEs would take on added credit risk from expanding HARP to non-GSE loans, the broader benefits from an expanded program might offset some of these costs. In particular, some homeowners who are unable to refinance because of negative equity, slightly blemished credit, or tighter underwriting standards could reduce their monthly payments significantly, potentially reducing pressures on the housing market.”

Loan modifications and HAMP

“About 880,000 permanent modifications have been made through the voluntary Home Affordable Modification Program (HAMP), which is part of the Making Home Affordable (MHA) program. HAMP pays incentives to lenders, servicers, and borrowers to facilitate modifications. Among its key program terms, HAMP reduces monthly payments for qualifying borrowers to 31 percent of income. For borrowers who have received HAMP modifications, the help is often substantial. For example, the median monthly payment after a permanent HAMP modification is about $831, compared with about $1,423 before the modification. Millions of additional mortgages have been modified by lenders, guarantors, and the FHA.”

“On the other hand, the 31 percent payment-to-income target has also precluded the participation of borrowers who might benefit from a modification even though their first-lien payment is already less than 31 percent of income. One potential method of expanding the reach of HAMP that may be worth exploring would involve allowing payments to be reduced below 31 percent of income in certain cases.”

“Instead of a longer-term modification, a payment deferral may be more helpful to temporarily unemployed borrowers whose income, it is hoped, will rise in the near future. MHA has introduced an unemployment forbearance program under which servicers grant 12 months’ forbearance. Resources from the Hardest Hit Fund, which was created by the Department of the Treasury (Treasury) under the Troubled Asset Relief Program, have been used to provide assistance to unemployed homeowners through a variety of programs run by state housing finance agencies.”

About principal reduction

“An alternative to large-scale principal reduction for addressing the barriers that negative equity poses for mortgage refinancing and home sales could involve aggressively facilitating refinancing for underwater borrowers who are current on their loans, expanding loan modifications for borrowers who are struggling with their payments, and providing a streamlined exit from homeownership for borrowers who want to sell their homes, such as an expanded deed-in-lieu-of-foreclosure program (described later). This approach focuses on reducing payments rather than reducing principal per se, and could be more effective at keeping committed borrowers in their homes if affordability is the prime consideration driving default.”

About short sales and deed-in lieu

“Despite the potential for loan modifications and targeted forbearance programs to prevent unnecessary foreclosures, many borrowers will not be able to keep their homes. In these cases, the most efficient solution may be to find an alternative to foreclosure such as a short sale or a deed-in-lieu-of-foreclosure (DIL). In a short sale, the home is sold to a third-party buyer offering less than the amount owed by the homeowner. In a DIL, there is no sale, but the property is transferred directly to the lender or guarantor, rather than going through the formal foreclosure process. Both options are within the bounds of mortgage contracts and avoid some of the economic damage potentially caused by the foreclosure process. Short sales can be attractive because the property is transferred to a (presumably sustainable) new owner, keeping the property out of REO and reducing potential negative effects on communities from vacant properties. DILs can also be helpful because they can sometimes be easier to execute than a short sale and because they can fit into an REO-to-rental program to prevent a discounted sale that would otherwise occur. Both options may be particularly attractive to borrowers if lenders partially or fully waive borrower liability for deficiency balances. The MHA’s Home Affordable Foreclosure Alternatives program provides incentive payments to facilitate both short sales and DILs.”

About mortgage servicers

“Also, the fee structure of the servicing industry helped create perverse incentives for servicers to, for example, reduce the costs associated with working out repayments and moving quickly to foreclosure, even when a loan modification might have been in the best interest of the homeowner and investor.”

From the conclusion

“The challenges faced by the U.S. housing market today reflect, in part, major changes taking place in housing finance; a persistent excess supply of homes on the market; and losses arising from an often costly and inefficient foreclosure process (and from problems in the current servicing model more generally). The significant tightening in household access to mortgage credit likely reflects not only a correction of the unsound underwriting practices that emerged over the past decade, but also a more substantial shift in lenders’ and the GSEs’ willingness to bear risk. Indeed, if the currently prevailing standards had been in place during the past few decades, a larger portion of the nation’s housing stock probably would have been designed and built for rental, rather than owner occupancy. Thus, the challenge for policymakers is to find ways to help reconcile the existing size and mix of the housing stock and the current environment for housing finance. Fundamentally, such measures involve adapting the existing housing stock to the prevailing tight mortgage lending conditions—for example, devising policies that could help facilitate the conversion of foreclosed properties to rental properties—or supporting a housing finance regime that is less restrictive than today’s, while steering clear of the lax standards that emerged during the last decade. Absent any policies to help bridge this gap, the adjustment process will take longer and incur more deadweight losses, pushing house prices lower and thereby prolonging the downward pressure on the wealth of current homeowners and the resultant drag on the economy at large.

In addition, reducing the deadweight losses from foreclosures, which compound the losses that households and creditors already bear and result in further downward pressure on house prices, would provide further support to the housing market as well as provide assistance to struggling homeowners. Policymakers might consider minimizing unnecessary foreclosures through the use of a broad menu of types of loan modifications, thereby allowing a better tailoring of modifications to the needs of individual borrowers; and servicers should have appropriate incentives to pursue alternatives to foreclosure. Policymakers also may want to consider supporting policies that facilitate deeds-in-lieu of foreclosure or short sales in order to reduce the costs associated with foreclosures and minimize the negative effects on communities. Restoring the health of the housing market is a necessary part of a broader strategy for economic recovery. As this paper suggests, however, there is unfortunately no single solution for the problems the housing market faces. Instead, progress will come only through persistent and careful efforts to address a range of difficult and interdependent issues.”

Here is the link to the Federal Reserve site to obtain the entire white paper:

http://federalreserve.gov/publications/other-reports/files/housing-white-paper-20120104.pdf

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8 More Years of Recession If We Don’t Have Mass Loan Modifications

Posted on December 6, 2011 by Michela Terrazino

The foreclosure problem is not getting better, it is getting worse. But what seems to be getting better is our ability to ignore the issue.

The number of homes piling up on bank owned property lists is staggering. There can be no doubt that this problem is going to derail our economic recovery.

Mass loan modifications, forcing Put-backs of homes and offering housing buying tax incentives are the only viable solutions. Yet leaders are avoiding the issue.

To get a grasp of our economic reality, let’s look at some data:

  • Statistics from RealtyTrac show total foreclosure and preforeclosure (short sale) homes sold for the third quarter of this year amounts to 264,000.
  • The second quarter has a very similar total number of 265,000. The first quarter is also close these figures.
  • If we assume these figures are stable, this amounts to 88,000 distressed home sold per month.
  • LPS Analytics estimates there is a backlog of about 2.1 million homes.

When you divide 88,000 into 2.1 million homes you arrive at 239 months, approximately 20 years! At this rate, it would take 20 years to sell off the banks’ inventory of distressed homes!

However, LPS Analytics estimates that it will take 8 years to sell the inventory. We assume they are predicting more foreclosed homes for sale will appear per month — as the inventory is increased, prices will decline and this will release new demand. Perhaps they are also thinking a mild economic recovery is coming that will boost sales. And perhaps they are thinking that if half the inventory is sold then we can begin to see some life again. Also, statistics show that the number of homeowners falling late in payments is dropping sharply, so that the rate of accumulation of the backlog is indeed declining.

Taking LPS Analytics figure, which seems conservative, we have a recession lasting 11 years from 2008 to late 2019, if we assume that real estate and construction are the primary factors restraining economic growth.

This projection for a foreclosure recession, assumes also that the US will NOT have other economic problems such as:

  • Inflation. Currently inflation is running at 3.53%, moving up generally from last year.
  • Treasury bond rates that spike. Currently investors are buying US bonds given the instability of the Euro, so the perceived weakness of the dollar has not at this time causing bond buyers to demand higher interest rates. Presently rates are at a comfortable 3.125%.
  • European recession. The EU may well be on the verge of a recession caused by debt defaults in various countries — Italy, Greece, Ireland, Spain, Portugal.
  • Developing world recession in China, India, Brazil, Turkey, and Russia. US firms are heavily invested in the developing world now making up to half of their profits outside the US. A recession globally would hurt US firms and this would have an impact on the domestic economy.

Even if none of these events come to pass, which is unlikely, the nation might have 8 years more of recession, and this can only aggravate the country’s problems. Tax revenues will continue to decline; US corporations will lose some of their competitive edge; budget cuts will have a multiplying effect that reduces income, economic activity and jobs; huge deficits will continue.

If we believe real estate is key problem in our economy, then there must be an imperative to fix it.

A weakened housing market leads to:

  • A reduction in mortgages and financial activity
  •  A general and continuing reduction in home values putting people underwater, and this process continues as more foreclosed homes are coming to market
  • A reduction in the amount and number of home equity loans which pump money into the economy
  • A decline in construction of new homes, single and multi-family, a continuing depression in the construction industry
  • And a malaise in businesses connected to housing and construction such as hardware, home furnishings etc.

In the face of this enormous difficulty, what are our options?

There are at least four:

  • Do nothing
  • Speed up home sales
  •  Force loan modifications
  •  Force “Put-Backs”

DO NOTHING

The recession evolved from an original event, an event that did not have to happen — lack of oversight and standards for home loans, and the dangerous cycle of converting house notes into mortgage backed securities which resulted in cash for even more loans with low or no criteria.
Most recessions happen for unavoidable reasons that reflect a complex process that has its ups and downs, ebbs and flows. These events are very difficult to predict and anticipate. But the current recession is entirely a “man-made” affair, which could have been easily averted because its process was entirely under the control of humans. This was a simple trouble that could have been easily remedied, rather than some great macro problem of economics — which expressed a global evolution into brand new financial and industrial territory that very few could comprehend or argue convincingly.

Transparency in reporting, public data on what the banks and investment banks were doing would have popped the housing bubble before it ever became more than a tiny bit of foam or fizz. Because investors, economists, concerned citizens and government officials would have seen immediately looming potential in these threatening figures and insane policies.

Today, leaders have been focusing on the subsequent and consequent events and not the initial and opening event — the real estate debacle. The housing problem is the original source and the continuing force of our anguish. Leaders however have moved onto other successive issues in the long domino chain of collapses.

Now we have a “sovereign recession”, that is, a recession of the government itself, a recession that has progressed all the way from finance and industry up to the level of the state. And politicians have their hands busy putting out the fires of deficit growth and budget quandaries. And it may be that leaders feel more comfortable dealing with governmental issues rather than economic ones in the private sphere.

In any case, they are still not dealing with the fundamental cause; instead they are managing the scary effects of the cause. Yes, mismanaging the deficit and budget appropriations and tax policy will make the current recession worse, but these will not end the recession, they will only continue the status quo.

As any CEO will tell you, if you read current corporate financial reports, it is real estate and construction that is holding back economic resurgence. Many other industries are showing signs of life but the ramp up into optimism and liveliness will hit a bog of diminished demand and limited lending. So a double dip may be coming — or perhaps, more like a flat line stagnation of no growth or very restricted growth, as we see now.

Since nothing is being done about the primary cause of our economic problems, we must conclude that apparently the solution offered by our leaders is one of Attrition. That is, let us ignore the problem and let it work itself out in its own painful and ugly way, while we work on other problems, more convenient problems.

Attrition is the long term strategy of short term thinkers.

And unfortunately it is the favorite policy of those who are not directly affected by the attrition itself. Unfortunately, attrition will take its toll on everyone and all the institutions of our culture. If we ignore, deny and disregard the real estate issue, it will certainly not ignore, deny or disregard us.

SPEED UP HOME SALES

Foreclosure sales are running at a very low rate. Why? Considering the incredible deals out there, the sales seem inexplicable. One obvious reason for the restricted market is that most people are expecting house prices to further decline, and to buy now means that they will lose money in a matter of months, and perhaps a substantial amount over a few years. This logic also applies to investors looking for quick turnarounds or planning to rent out units.

How are we to deal with this?

One way is to offer tax incentives to home buyers to increase sales. Budget problems argue against this but, on the other hand, long term needs counter-argue for national deliverance from an inevitable economic despondence. Tax incentives would be a major means of reducing the backlog, restarting the housing market and spurring a general price increase of homes as demand jumps. The experience last year of tax breaks for first time home buyers provides empirical proof that this method does work.

Another way to increase home sales is lower prices. Can this be done? If banks and investors sell their homes in massive blocks to super-investors, to Wall Street magnitude investors, would it be worth it to them to lower the average home price, to be free of the hassles and costs of being America’s largest landlord? Maybe not. They may lose too much money.

The problem here is even if the banks and mortgage backed security investors deem it good to sell off their inventory in a massive fire sale, then the overall median price of a US home would plunge. Already homes have declined over 30% in value since the 2008 crash and are still declining according to current statistics, so a massive wholesale fire sale would strike down the prices of real estate. And this would put many millions further underwater, currently we have 28% of all homeowners owing more than what their house is worth on the market. A bundled auction of homes might put 40-50% of Americans upside down and underwater.

And this would surely create a national political crisis. And this prediction should be more than enough to prompt leaders into action to stop this solution. You would think…

What are we to do? A massive inventory sale would reduce the length of the recession from 11 years to who knows how many years. On the other hand it may create even worse problems.

The Obama administration is planning the auctioning of millions of FHA, Fannie Mae homes to investors who would convert the homes to rentals. This process will begin in a few weeks.

One wonders if this is a good idea. Why? To sell these homes in large blocks, the discount on the properties would have to be significant, so that Wall Street investors could make an “acceptable” profit. It won’t be surprising if homes are sold at deep discounts of 80% to 85%, so that the going rental price for a property will provide big investors a comfortable rate of return.

And if the homes are removed from the market and must remain as rentals only, won’t that affect the price of non-rental abodes next door? If a homeowner lives next to a very similar home, that was in foreclosure and has now been sold to investors to rent only, do you really think that will not affect the price of her or his home?

Already a foreclosed property sells for 32% below the price of a non-foreclosed abode. With an 85% discount taken by the Wall Street, this means the gap between a normal house sale price and a distressed rental home is 42%. We live in a buyer’s market not a seller’s market, and this economic fact will find its way into a buyer’s calculation when she or he makes an offer. Quarantining a rental from the market would certainly be a good idea, but quarantining the fact of the actual sale price of a Fannie Mae home inside a buyer’s brain will not be so easy…and this is a buyer’s market.

FORCE LOAN MODIFICATIONS

Considering the various options and problems created by them, the best alternative is to force loan modifications, so that houses are taken out of foreclosure, and given an income stream.

How can this be done? Banks have resisted loan modification from the beginning. True, they are giving more loan modifications than last year, but the number required is many times what they are offering at the present.

Loan modifications will have to be forced through fines on the banks and through other measures, including existing powers and through new legislation.

Further, the government needs to wage a campaign amongst investors to convince that mass loan modifications are a better alternative than do nothing or embarking on a wholesale selloff of all houses in a trust’s mortgage pool.

Houses can be taken off the market, this will speed up recovery because the timeline now to a resurgence will be shortened. Oddly enough, banks will do better in the long run receiving monthly mortgage payments for the notes that they own.

Also, let us review some facts to break through the amnesia and distraction of ordinary life fostered by media:

  • Banks caused the economic problem in the first place
  • Banks sold off most of their mortgage backed securities to investors, leaving them holding the bag.
  • Banks were saved by the government with trillions of dollars of taxpayers’ money, free with no strings attached, and in addition with multi-trillion dollar guarantees on the money market and many other markets and assets.
  •  Today, Banks are making record profits even without mortgage loans and construction loans and equity loans!

Given all of this, the reasonable and just solution is to make the banks pay for loan modifications.

FORCE PUT-BACKS

Related to the loan modification solution is that of “Put-Backs”.

A put-back is a note that is transferred from an investor or investor group back to the bank which originated the note. In the last year, many investors have won court cases against banks to put back billions of dollars of mortgage notes because of deceit about credit quality. The banks retrieve their initial properties, they now own them, and they must pay for them and maintenance them, and decide what to do with them, whether to do loan modifications or not, etc.

Normally, after selling a mortgage to a trust, that converts a pool of mortgages into mortgage backed securities, the bank is completely free of responsibility — and remains only as the servicer of the loan who collects payments. During a foreclosure, a bank takes on the responsibility of maintaining a property, hiring a lawyer, and making fundamental decisions about the home, BUT the bank actually makes money charging for its services!

What the government can about all of this is this: The Justice Department can begin taking banks to court about false statements concerning the mortgages they sold to investors. The general goal being settlements must be reached that include both put-backs and loan modifications.

Surveying the issues above, we can see that we have a few tools to fix our problem. Loan modifications, house buying incentives and forcing put-backs can go a long ways toward clearing out the inventory of distressed homes and raising general home prices.

RECESSION OR STAGNATION?

We generally think of a recession as a cyclical process, a few years or so, and then we are out of it, back into the sunshine, joy and animation of deals and growth and loans as usual.

But the facts point to a recession that is now 3 years old extending for more than a decade to a recession that is 11 years in length or more. The Japanese real estate recession began in 1991 and saw the stock market hit bottom in 2003, taking 12 years before upward movement was even possible.

We are actually not an ordinary recession. We are now in a sort of stable recession, a steady state malaise that may not cycle so much as creep forward in a flat line of stagnation. We need a new language here because we are facing a new phenomenon.

In any case, we know what the cause of this economic stagnation or economic despondence is. It is real estate, and we know what the simple primary solution is, loan modifications.

We know that leaders are off dealing with the effects and not the cause. And we know that the banks are doing well, and it seems are actually in charge of the nation’s economic recovery – which explains why they are doing so well and the rest of us are not.

While we are swamped by news, tweets, email and numerous diversions, we should remember the mass foreclosures and all of the suffering households who are being removed from their homes or who have already been ejected. Foreclosure is the quintessential issue and the most human of issues today.

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Housing foreclosure crisis over in 2017? Economic recovery in 2018?

Posted on June 21, 2011 by Michela Terrazino

Is economic recovery that far off? Well, if you do the math on current housing and foreclosure statistics you will arrive at some interesting conclusions.

Banks now own 827,000 properties which they have obtained through court action in the country.

They have another million in the foreclosure process for which they will eventually obtain the ownership.

The current foreclosure sales rate is 158,000 deals in the first quarter for the nation. Two years ago, 350,000 sold in the first quarter, demand is clearly dropping off, even though a mound of supply is building up.

It is predicted that in the next two years, another 2 million houses will go into foreclosure due primarily to ARM resets of interest and principal.

These numbers lead to some clear conclusions. If we continue at the current sales rate of 158,000 per quarter, then the math yields this time period:

  • 15.6 months to sell all homes that now have title transferred to the banks
  • 18.9 months to sell all homes in the foreclosure process
  • 37.8 months to sell homes predicted to go into foreclosure in the next few years.
  • 72.3 months total time to sell all foreclosed homes. This is about 6 years!

We are talking about 2017 when the supply of REO homes is sold. Are these figures for real? Yes. Experts have been saying that the foreclosure problem would end in three years, but when we look at the forecasted number of homes in foreclosure and the rate of buying these homes per quarter, one can arrives at double the prediction.

And this 72.3 months does not include delays caused by banks not having enough staff to manage all of these foreclosures and documentation problems in court. Also, banks will have to stage the roll out of new REO properties to avoid a glut that would sink values like a stone.

Taking these issues into account the foreclosure timeline would likely increase to 7 or 8 years to 2018 or 2018.

Further, this prediction is based on the current level of demand at 158,000 houses a quarter. But what if this demand drops as it has been doing over the last few years? It is now at 45% of 2 years ago. The timeline to sell the foreclosed inventory might actually elongate to 7 or more years.

Supply and demand is the critical issue. Demand might go up if the public sees an end to the present crisis coming, then picking up a house at a low price right before an economic upturn would be ideal.

Investors are buying about 15% of REOs, they are either speculating or renting them out or both. If this fraction increases then the foreclosure backlog will reduce at an accelerated pace.

It is highly unlikely that banks will take their houses off the market and go into the landlord business, and it is not probable that investors in mortgage backed securities would accept a deal from the banks that included national property rental companies.

Statistics say that it takes 400 days for the foreclosure process to finish, and then 170 days to sell the property. This is a total of 570 days but this information can misleading, because supply and demand is the supreme law operating here, and supply is increasing, while at the same time demand is slacking off.

However, if we ignore certain issues above and take the optimistic prediction of 6 years to clear the housing inventory based on today’s demand rate, then we can infer these things:

A continuing erosion of house prices

The Federal Housing Finance Agency reported recently that home prices were down 2.5% in the first quarter of 2011 compared to the fourth quarter of 2010, and down 5.5% compared to the first quarter a year ago.

With a forecasted build up of foreclosed properties, prices will continue to decline. Soon we will have the largest number of foreclosures ever on the market and this is sure to depress prices because demand is waning.

Currently, the average REO property sells for 35% less than a comparable property on a national basis. In some areas of the country like New York, Illinois, Wisconsin or Ohio, the discount is 50% or more.

And this is a dynamic process where foreclosed houses sell for less than comparable properties, and then this lowers prices of the neighborhood overall, and then the REO must sell for even less to attract buyers.

An increase in Strategic Default

Secondly, an extended period of foreclosure activity will cause some homeowners to consider “strategic default”. They will walk away from their homes and let the banks take them. These would be people who are able to make their mortgage monthly but are unwilling to do so. Why? Because they will see no overall financial wisdom in doing so. Their loans will cost more than the market value of their houses so they will do a strategic default and create an artificial foreclosure or self induced foreclosure.

They will save up a down payment for a future home and wait for their credit to repair, and in only a few years they will be able to purchase another home at a far lower price than their present one.

These people do not believe prosperity is around the corner and are betting that the price problem will last much longer. They are coldly objective living in their prefrontal cortex where detached judgments are made, they take a radical action because it makes absolute sense.

And these self induced foreclosures will further erode market prices benefitting future strategic defaulters but hurting homeowners overall.

National economic recovery in 2018 or 2019?

If it takes 6 years to clear out the cache of foreclosures (based up today’s demand rate and neglecting issues such as documentation and staging the roll out of the housing inventory), we can make a prediction about economic recovery and the end of the recession.

We can conclude that the national economy may come out of the recession in 1 to 2 years from the resolution of the mortgage problem. This means we are looking at 2018 as the soonest to be out of this recession, but more likely 2018 crossing into 2019.

It is possible that this recession may last approximately a decade — which is very interesting because this timeline is very similar to the Japanese recession caused by its real estate bubble where the government made the error also of propping up banks and big corporations.

The major assumption in this analysis here is that the housing-mortgage problem is the key factor holding back economic resurgence. While other industries are returning to profitability and greater margins, the real estate industry is languishing still. And real estate plays a very important role in the economy, it does these things:

  • Creates jobs in the construction sector
  • Creates demand for building materials, appliances, hardware, furniture etc. This creates more jobs
  • House appreciation allows for home equity loans used to purchase goods and make investments, more jobs created
  • Mortgage loans make more profit for banks and mortgage companies, increasing loans available and lowering interest rates
  • A healthy real estate sector creates a long term condition of appreciating house values and commercial building values

As any CEO will tell you, it is the foreclosure problem that is holding back a US economic rebound. One only has to look at economic statistics for other nations, particularly developing nations and you will see much of the world is doing well. Why aren’t we? Other nations did not allow the lending practices of US banks and did not allow an unregulated mortgage backed securities market to proliferate.

Can we wait until 2018 or 2019?

We were ground zero for the mortgage disaster and we still have not dealt with it properly. The strategy of ignoring the problem and letting attrition do its work may work in the absence of other problems. The timeline of 2018 to 2019 to get out of the recession is an optimistic deduction. If however other issues are exacerbated then the recession might continue. Government deficits are mounting as tax revenues are declining. Six to 7 more years of skimpy tax collection will lead to increased personal taxes to pay for basic government functions and services. The Treasury will not be able to sell bonds to pay for bonds forever. Increased taxes will curtail a recession recovery.

Also, there is the problem of the nation’s credit rating. If Moody’s, for example, downgrades this precious advantage, then Treasury bonds will have to be sold at higher interest rates to satisfy investors who will then look at US securities as high risk junk bonds. And once again this will mean even higher taxes to individuals and businesses.

The Foreclosure problem is doing long term damage. It might be that the recession will end in 7 years, but such an outlook is highly optimistic and relies on blind luck, pure serendipity, inaction and helplessness.

The best solution would be to arrange universal loan modifications to take the huge volume of foreclosures off the market. This way house prices can stop falling and eventually the housing market, construction and loans can get a restart. And this solution would have a relatively quick effect and save us from a 6, 7 or 8 year grind which might do irretrievable damage to the national economy.

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7 different solutions to the foreclosure problem

Posted on June 6, 2011 by Michela Terrazino

Here is list of various solutions to the present foreclosure crisis — some are minor, some are major, some are unethical, some are not, some help, some make things worse:

The government doing nothing

This is the current strategy. Several errors underlie this attitude.

One is that the market will naturally fix itself. But this is not likely because the government created a distorted and artificial situation when it gave money to the banks and did not require they correspondingly offer loan modifications to homeowners in trouble. Now the banks are doing well, but no TARP monies were used to head off foreclosures. The result is more foreclosures coming and more empty homes, and a continuing decline of average house prices. And this is the major factor holding up economic recovery — which may trigger the next big problems: deficits that cannot be paid, a demotion of the US’s credit rating, and then higher Treasury bond rates to pay for the deficit that the taxpayers will have to pay.

A second mistake was made when the Obama administration very early on affirmed to the banks that that their mortgage debts were all valid, that banks had a right to collect on all them. This let them off the hook, and they were free to pursue foreclosures. The banks were relieved of culpability. They then developed the myth that the borrowers were the real cause of the crisis because they lied, did not read their paperwork and were financially incompetent. Which is interesting because the banks were not even asking for tax returns, proof of income, proof of pulse or a MRI brain scan showing the slightest activity. Further, the banks sold some people ARMs that had future payments that were impossible for anyone to make except lottery winners. But miraculously the banks were unaware of this because this was buried on page 20 of the loan documentation which apparently even the bank executives never read.

Attrition strategy of the banks

Banks are following an attrition plan of a long term and slow removal of residents from their foreclosed homes, one household at a time.

The essence of this plan is that homeowners will act and react as individuals and not in organized groups and in many cases without lawyers in representation. Essentially, being alone and without support, they will surrender to the process. Alienation and disconnection which are given conditions of our culture make things easier for financial institutions.

Homeowners will be removed from their houses one at a time, a million per year, predicted for 2011.

The attrition strategy is a divide-and-conquer strategy that occurs at the atomic level of the lonely individual, by herself or himself. It is a low effort process that nicely stages work for the banks in an orderly and manageable fashion. And keeps the power relation in the correct and most comfortable proportion: the big bank versus one or two little individuals.

Offer them cash to move

News coverage of robo-signing at the end of last year has some banks worried that the patient attrition strategy may not be enough. Homeowners are increasingly demanding to see their mortgage note in court, and this is increasing lawyer’s fees. Even if a genuine note is eventually produced, the amount of time lost in the process causes losses to the banks as general property values decline, leading to large losses once the REO is sold. Further the longer a property is left idle, the more maintenance is required to keep it up, there are continuing insurance and tax payments, and this costs quite a bit.

So the second strategy of financial institutions is to offer CASH to the homeowner to move. Some banks are offering up to $10,000 cash to pry an owner out of house, so the bank can get on with sale. In addition, the federal government is offering another $3000 in aid when the householder vacates the home. So we have up to a $13,000 buy off, to help the banks and mortgage trusts avoid more lawyer’s fees, maintenance costs, and more house price declines. Also, in many cases the original promissory note for a mortgage does not exist, so a challenge might stand in court for years, until the Judge finally concludes that no note exists at all. And then the house might revert to the homeowner.

Paying the homeowner money to leave on the condition that they sign a paper is a good idea. The homeowner will accept that the bank owns the house regardless of whether the note went to the big shredder or fell behind the cabinets — then the distressed homeowner can pay for moving costs and throw a big party and get drunk.

Banks can lose anywhere from $30,000 to $50,000 on a foreclosed house, so a $10,000 payment on their part is absolutely a matter of fiduciary responsibility to their shareholders.

Add government cash to the pot

Third, along the same lines of a bank’s cash offer, the government can help pitch in even more cash to make the offer sweeter to the foreclosed homeowner. This solution is getting some play. Some industry experts are suggesting this idea because they seem to think there is unlimited cash in the US Treasury.

The reasoning is that with a bigger pot of gold, the foreclosure problem can be resolved much quickly, and then the economy can really take off. If there are let’s say 2 million more households to lose their homes in the next few years, then at $10,000 a shot, this amounts to $20 billion dollars.

The government could also require homeowners to sign a form giving up their legal rights to the house and all possibilities of recourse. In this way the “system”, government and banks, would be completely free of all legal headaches, impedances, convoluted legal arguments, false public statements and unending scrutiny.

We could have a clean sweep of all legal issues: proper documentation, the lawful validity of REMIC trusts, the validity of a mortgage backed security, the proper transfer of Special Purpose Entities from a bankrupt bank to another and so on.

Current law has the potential to stall foreclosure actions and call into question many issues of legal “detail”. If people are paid off, then the system could paper over a rather large hole in the wall of jurisprudence. Also, in a quiet and private setting, banks, lawyers and politicians could modify current laws and regulations when the public is not watching them so closely anymore and when no one is under pressure to pay for their misbehavior.

And a nice benefit of this would be NOT putting the Supreme Court on the spot – forcing them to rule for banks in this economic malaise to save the republic, when maybe out of concern for fundamental legal procedure they might not want to endorse what is going on, and they might see a big mockery has been made of jurisprudence, and they might feel that “Your Honor’s” honor is at actually stake.

Penalize the banks

The Federal Reserve has the power to penalize member banks, and state attorneys general throughout the country can fine local banks.

Many have been advocating monetary penalties to banks and other financial institutions for their misbehavior which caused the 2008 economic crash.

Monies taken in fines could be used to write down principal on loans, thus, modifying them for homeowners, making them affordable.

This is clearly not a win-win strategy, it is a win-lose strategy driven by moral justice, where the winners are the victims, and the losers are the perpetrators, the banks and company. Win-win strategies work only when both parties are above board with good intentions. Win-lose strategies are necessary when you are seeking redress and justice, when one of the parties is a devious dissembler.

Another advantage of the penalty idea is that penalties would be a singular and universal action covering all banks and mortgages and homeowners, resolving the issue once and for all.

Compromise between banks and investors

The banks sold investors low quality, high risk mortgages. Most mortgages created in the bubble period were packaged into mortgage backed securities and sold to unsuspecting investors. In a literal case of passing the buck, the banks ejected themselves out of the pyramid scheme before it came crashing down on other people and institutions.

These notes were sold without proper documentation and with misleading and false statements.

An entire team of mendicants and prevaricators found common material interest in hawking these mortgages — banks, trusts, underwriters, security salespeople, and credit rating agencies.

But they are not getting away with it. Investors have been winning actions against banks making complaints in local court or with a local Federal Reserve. When a bank has to take mortgages back this is called a “putback”, some large banks are now putting back up to $4 billion a year in notes.

This problem between the investors and the mortgage initiators is very large. At some point banks will have to resolve this issue on a larger scale, and come to some compromise with investors overall.

Banks do have the money to pay off investors. Because they have not been able to make mortgage loans or consumer loans in this economy, they have been making profit in other areas such as investment banking, the stock market, international operations, wealth management and so on. Further they are parking their money in nice secure places like the money market or the Fed. So the money is there to make a deal with the investors.

This resolution would certainly help the harried investor. And it would only help the homeowner if the number of putbacks or cash payments made to investors becomes so great that banks are forced to give some loan modifications to households — because the sheer volume of problem loans would drown the banks in property taxes, lawyer fees, maintenance fees, real estate commissions and insurance payments.

And as we see more of these putbacks return to the banks, then perhaps the banks will get wise and realize that an accumulation of REO foreclosed properties will send house values even lower, meaning even less money for the bank when the property is finally sold.

Homeowner’s solution

Most of the above solutions do not directly deal with homeowner concerns.

What does it mean to be fair to the homeowner? We know what banks want, and we know what investors want, but what do homeowners want?

Concerns for the distressed homeowner would include at least these:

  • An affordable payment throughout the life of the loan, and not a plan with manageable payments in the first few years of a loan and then a multiplication of the monthly bill as in an adjustable rate loan, or an absurd balloon payment etc. This would also include extending the loan beyond 30 years if necessary.
  • Deleting attorney’s fees, penalties, extra interest and other costs from the arrears calculation
  • Putting missed payments at end of the loan at the same interest rate
  • Sanitized credit – removal of mortgage delinquency and foreclosure reports, and bad credit marks in general if they are tied to unpayable mortgage bills.
  • Reducing loan value to actual market value of a property. If this is not done, then homeowners will have no choice but to do a “strategic default”, which is walking away from the loan because the market value of the home is too far below the actual loan value. If this is not taken into consideration then a foreclosed home will return to the foreclosure market again.
  • And related to the above, a special strategic default clause in a loan modification contract that states if market prices continue to drop below a certain amount, then the homeowner has the right to renegotiate the agreement or walk out of the loan agreement with no penalty either monetarily or in credit reporting.

Those who have lost their homes

What do you do for people who have already lost their homes?

First, everyone should have the right to take their case back to foreclosure court. Unfortunately, those who have lost their homes in most cases could not possibly get their homes back, so compensation in the form of money and other things could be provided.

Certainly, the issues for these people would include:

  • Compensation for the unfair behavior of the banks and trusts which has caused loss and damage
  • A clean credit record, removing bankruptcies and foreclosures from their record, also deficiencies etc
  • Elimination of all deficiency amounts passed on to the homeowner from the bank
  • Special Tax breaks to ease the financial burden
  • Priority consideration for future home loans backed by the federal government with special terms for those who have lost their homes
  • And the continuing right to sue banks and investors, to challenge note ownership, and the giving of other legal privileges to the removed homeowner
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Boston FHLBank sues about bogus mortgage securities

Posted on May 17, 2011 by Michela Terrazino

They might be able to use the
“show me the note” tactic.

The Federal Home Loan Bank of Boston, a government sponsored bank that lends to other banks, has found that mortgage backed securities that it purchased for investment purposes were risky and bogus.

On April 21, the Boston FHLBank tendered a complaint in Superior Court naming a list of characters: securities dealers, credit rating agencies, underwriters and more connected to 115 trusts that sold $5.8 billion in mortgage backed securities.

In the action, it is claimed that the documents provided were full of misrepresentations and omissions. In addition, credit rating agencies are being accused of fraud.

The Boston FHLBank is demanding the bonds be taken back and its payments returned to it. In addition, it wants damages, lost interest, attorney’s fees etc.

Banks bite hand that feeds them

The interesting theme of this story is that a FHLBank loans money to banks for them to make loans such as mortgages. Here we have an example of banks biting the hand that feeds them.

A Federal Home Loan Bank is a government sponsored entity that operates like a private enterprise, its purpose is to aid member banks in making loans, and it provides easy capital to them. It is a sort of credit union for banks.

These were set up in the 30s to support mortgages, small business, and rural development. There are 12 Federal Home Loan banks around the nation; they have 8100 financial institutions as members. They are the largest source of community credit in the US. They have combined assets of $1.3 trillion. Ten percent of earnings go to affordable housing programs.

FHLBanks make loans and also make investments to fund their operations, mortgage backed securities is one form of investment made. Though they get no federal money, they do get special tax breaks.

What we have happening in Boston is a prime example of banking ethics. After receiving funds from a FHLBank, banks made bad mortgages and then turned them into mortgage backed securities. Securities dealers then sold them to unsuspecting investors, including the FHLBank which helped fund these mortgages in the first place!

Here is a clear example regarding who is to blame for the financial crisis, for even the FHLBank did not know what was going on, its own members deceived it.

The banks knew, of course, that’s why they sold off most of their mortgages during the bubble. Boston FHLBank had no clue, that’s why it bought them.

Boston FHLBank can demand “Show me the Note!”

The Boston FHLBank retaliated by filing a complaint against securities dealers, the intent being some pressure to make the dealers take back the securities and return the cash to the FHLBank.

If the mortgages pooled to make these bonds came from member banks then the Boston FHLBANK has another tactic. It can demand, just like a homeowner in foreclosure, “show me the note”.

A FHLBank makes loans to member banks so they can in turn make loans such as mortgages. The member bank has to provide collateral just as everyone else does. When a member bank provides mortgages as collateral, but only a list of loan numbers which is a common practice, and does not provide the actual documentation, then the FHLBank is in a precarious position.

Documentation for loans as you know is a very big legal issue today in foreclosure cases. Foreclosure lawyers are saying that in almost every case, they find missing documentation, incomplete documentation, improper documentation and wrong monetary amounts and interest rates. Copies of promissory notes, affidavits, Mers information, loan numbers, statements by robo-executives witnessed by robo-notaries, and so on are not legally acceptable – only the actual promissory note is allowable.

A mortgage that does not have proper documentation or is just lost would not serve as legitimate collateral in a loan transaction. If the FHLBank ends up taking the mortgage to retrieve payment for its loan from a member bank, then it has the same problem a forecloser has with a homeowner – submitting proper documentation.

For FHLBank Boston, a demand to the member bank(s) to provide documentation would probably result in the very same activity we are seeing in foreclosure courts: Nothing.

Though maybe embarrassing to the Boston FHLBank pursuing this tactic would might yield positive results. Because after the failure of probative response, the FHLBank could then threaten to put loans to the member bank into rescission, that is, terminate the loan because it was not made with a proper and legal contractual agreement. If the collateral is improperly documented, then the loan was not a loan, no loan really every occurred. Money was given for a false promise based upon a false premise.

The loan money could be demanded back returning both parties to their original position before the lie was told. (Except now one party knows from experience the other is definitely a “liar”)

Further, the FHLBank could put the bank’s membership in the FHLBank in jeopardy cutting off its easy supply of capital.

Such a tactic might force the member bank to rethink its interests and relent. It would have to make a deal with the securities dealer and take back the offending mortgage backed securities.

This would be a “put back” which is the act of putting back mortgages into the bank’s cache of assets, and dissolving the trust, draining the asset pool, and disappearing the bonds.

Money would be returned to the investor, the FHLBank, and this action would make the Boston FHLBank whole again. Then other FHLBanks could do the same thing

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What Happened to Mortgage Interest Rates?

Posted on May 4, 2011 by Michela Terrazino

Federal Reserve head, Ben Bernanke, announced in November an effort to reduce interest rates in the US. This involved a massive buy-back program of Treasury bonds which was intended to increase cash in financial institutions and thus cause them to lend more, and then lead to lower interest rates. $600 billion of money was created to engineer this process.

But what happened?

The average 30 year interest rate on April 22 was 4.80%. The average 30 year rate for the month of November was 4.38%.

The Federal Reserves’ program did not seem to decrease interest rates. On Dec. 3, they were at 4.46%, an increase over November of 4.17%. On Feb. 11, the average rate was 5.05%; Mar. 4, 4.87%. There has been small decrease from February to the present, but overall the rates have gone up since the Fed’s buy bank program was initiated.

The cumulative movement from mid-November to April 22 is about .63%.

Supposedly, a $600 billion dollar buy-back program should have begun working by now.

What is the Fed doing, what is the logic of it?

Bernanke stated that $600 billion would be used to buy government bonds from financial institutions from November 2010 to June 2011. This fiscal strategy is called “Quantitative Easing”.

The purpose of this is to lower interest rates which will increase lending and stimulate the economy; the other reason is to notch up the inflation rate from 2% to a higher rate of 4% or 5% which is considered to be a healthy rate for economic growth. (FYI: Higher inflation actually reduces the value of national debt. Treasure bond debt declines in value as the government collects higher tax revenue due to inflated prices and incomes. An inflation rate of 4% reduced US WW2debt by almost half. So inflation is a strategy to reduce deficits!)

Quantitative Easing is not a traditional tool used by the US central bank though it is more commonly used in Europe. In the past, the focus has been on manipulating interest rates via the Federal Funds rate – this is the rate for banks who lend to each other within the Federal Reserve system. The Fed Funds rate generally determines the interest rate in the marketplace for business, consumers and mortgages.

If the Fed moves up its target for the Federal Funds rate, this pushes up interest rates which will put a brake on the economy. If Federal Funds rate is dropped, this brings down interest rates and helps stimulate borrowing. The problem today is that rate is virtually zero! This rheostat tool has been turned as far as it can go and still the economy is not responding, it still lingers in recession.

Previous bond purchases have been relatively successful, so the Fed hoped this time it could continue to reduce interest rates. In January 2009 average mortgage interest rates were at 5.05%, in October 2010 they slid to 4.23%

Increasing money supply and lowering interest rates

Bernanke announced in November, a new strategy.

The Fed will create electronic money that it will put in its bank account. The central bank will then buy Treasury bonds from the private market at a relatively high price. This money will go directly into the economy, into the accounts of banks and financial institutions. Hopefully they will then make investments and loan it out.

An increased supply of funds should lower the interest rate for loans and thus make the money more accessible to individuals and companies. And this should give a boost to the economy.

This is the strategy of Open Market Operations. The Fed can also do the reverse — if its policy has created too much inflation, it can simply sell its securities to the private sector, which will decrease the money supply with a resulting increase of interest rates.

Currently, banks are in a retentive mode holding onto their cash and avoiding consumer, business and mortgage loans. They are stressing international business, stocks, commodities. Investment banking, wealth management and other things. Bernanke is trying to break the banks out of their wary behavior into a mode of domestic lending again. An influx of funds for them may do the trick, it was thought.

Banks won’t budge

But as of early April the banks are still refusing to loan out money for mortgages or equity loans. Formerly, these loans were a large size of their portfolio but now it has shrunk and they have focused elsewhere.

Mortgages amount to nearly $14 trillion in the US, equal to the entire annual GDP.

One wonders if there has been a kind of mental sea change, a psychological shift in the behavior of banks, that they have gone over to another mode that stresses other activities – investment banking, stocks, overseas operations. Have they all but given up on mortgages, equity loans and consumer financing?

Is this behavior temporary or permanent? Experts are saying that house prices may stop dropping next year. Perhaps they are waiting. But on the other hand a cessation of price decline is not the same thing as market value increases, and it is an environment of appreciation that banks like best.

For this means better economic health, secure jobs and more jobs. And when a bank makes a loan on a house, it is more likely the payments can be made. Further, if they have to foreclose, then they will get an acceptable price for the dwelling. More, the rate of foreclosure will be at tiny levels as in normal times and foreclosure actions will not drop overall house values as is happening right now.

Banks have exhibited no voluntary behavior in the past few years to do their own “stimulation” of the economy.

TARP stimulated the banks but they were not required to stimulate anyone else. The banks received $700 billion in Tarp monies they did not use the funds for loans or loan modifications.

Also banks have not utilized the funds created by the Obama administration for loan modifications or refinancing.

Now they have been given a good price on their bond holdings and still they are holding onto their cash.

In the world of personal ethics, one good stimulation deserves another, but in the world of finance this maxim is apparently not so.

A key problem in the economy right now is mortgage rates, this is because the housing problem is holding back economic resurgence. Lower mortgage rates would increase the numbers of people eligible and willing to buy. Banks would make money on these new loans. The prices of houses would cease their fall, leading eventually to a mild long-term appreciation rate as before the bubble period. If real estate can get a reset, then equity loans would begin again. And construction could begin again and this would increase employment.

The situation in real estate is holding back the economy. It is estimated that real estate is 8-10% of the economy. Without it returning to health, the national economy will not resuscitate. And consider that banks are heavily involved in real estate with mortgages, and that banks are central to the whole economy – unhealthy finance hurts all sectors.

Persistence of this condition will lead to greater problems in the future. One of these is the continuing decline of house prices. Right now 27% of homeowners across the country are upside down, that is, their loans are valued higher than the market price of their houses. This means in a rational and financial sense, it may not be logical in the long run to keep a house and pay the mortgage, it would be cheaper to walk away from the abode in a “strategic default”. This shift in thinking would be a “game changer” and would certainly cause more national economic problems. Certainly, this year there will be more than 30% of homeowners in this upside down situation as more than a million more foreclosure notices will be issued.

Bernanke’s quantitative easing and bond buy-back is an attempt to avoid these more serious problems in the future. But these tactics do not seem to be working. Just what will it take to get banks to do the right thing?

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American Dream in Strategic Default

Posted on April 25, 2011 by Michela Terrazino

New Wave of ForeclosuresAccording to Zillow.com, in February of this year, the national percentage of households that are “underwater” (owing more debt than the market value of their house) is 27%. This is a 4% increase from 3 months ago.

Connected to this, median house prices are dropping significantly, nationally the price hit a high of $183,000 in mid 2010, now is at less than $160,000.

Bank possession of homes ran over a million in 2010, and is expected to be high in 2011. While foreclosure filings declined in the second half of 2010 due to the press and protest about “robosigning”, the number of evictions of households continued at a high rate.

ARMs (adjustable rate mortgages) will be resetting for those unfortunate enough to have signed higher risk “subprime” loans. At this time 40% of all subprime loans are at least 60 days delinquent. The subprime market is about 7% of all home mortgages.

ARMs will reset in two ways:

  1. Interest rates will be going up
  2. Principal payments will be going up, as some homeowners have been paying no principal or partial principle initially. This is called “recasting”.

This is bound to increase delinquency and foreclosure in 2011 into 2012 and 2013.

This trend is not only harrowing for those in or near foreclosure but for any homeowner in general. The essential issue being the general plunge in average median house prices. Today 27% of all homeowners in the US owe more than their houses are worth in the marketplace. This means for many if they sell their home, they will still owe tens of thousands to the bank. And the banks will come after them for the deficiency getting judgments, liens, wage garnishments and bad credit marks

Assuming this trend continues for the long run, we will certainly have by 2013 more than 30%, and perhaps more than 40%, of all households in a upside down situation of mortgage debt to real value.

If you plan to move or must move, this financial reversal will be costly.

The problem is not something to panic about if you expect the economy to make a turnaround in the next few years. If however the national economy continues to lumber along in 2014 then homeowners may have to change their financial paradigm.

If for example the real estate economy does not make an upturn, then the national economy will sputter along because real estate is the great ball and chain holding back growth. Another grim possibility is that the US government will get a lower financial rating eventually because of our deficits, this will lead to higher Treasury bond rates because global investors will want less risk, this in turn will lead to higher taxes here. Any of these possibilities and others may cause house prices to remain depressed or to drop even further.

In such a financial environment, individuals will have to discard an old paradigm and adopt a new paradigm. “Strategic defaults” might become a popular option.

A strategic default is the act of walking away from a mortgage when the owner decides that the debt to equity ratio, that is, the loan cost vs. the actual market house price is financially unfavorable and irrational.

In a dismal future, there would be no rational reason to keep a house if your debt is greater than your house’s market value. The rational judgment would be to walk away and suffer the bankruptcy and poor credit marks. Why should you pay more for a home that what it is actually worth?

In the next financial paradigm, the house is no longer an appreciating asset that has a payoff which can fund a comfortable retirement, children’s tuition, a larger house, starting a business and so on.

The house will not be an appreciating asset, it will become like an automobile, a depreciating asset. And who knows maybe they will develop a Kelley Bluebook for Homes.

This condition will benefit no one, not homeowners, not banks, nor corporations, nor local property tax agencies and county governments– but it may be reality nonetheless.

In the next financial paradigm there might be a modified version of the

American Dream: It will not include your house. It will include someone else’s house: Your Landlord’s.

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REMICs and Lost Documentation of Mortgages

Posted on April 15, 2011 by Michela Terrazino

housing market tumblesObjections raised by homeowners and lawyers about ownership of mortgage notes are beginning to reveal the problems in the methods of a mortgage backed security system.

There about $1.4 trillion in mortgage backed securities in the US.

In general, here are some ways that specific ownership of a promissory note for your mortgage may get become a problem:

Sloppy documentation

In the heyday of the bubble, the documentation simply was lost. Banks and mortgage companies pushed sales and did not either have trained personnel to handle paperwork issues or simply did not focus on that.

Mortgage firms go bankrupt

As result of the 2008 crash, many financial firms went out of business. Many mortgage companies went bankrupt and disappeared. That means that all of the paperwork is gone. What loans or bonds did they buy, who did they sell them too?

In court, an investor may have a mortgage backed security but cannot prove a full chain of transfers because of the gaps which cannot be filled in. This certainly lead to delays and pleading with a judge, but perhaps eventually the current owner of a mortgage will get possession of a property for sale.

Investment companies collapse

Many investment companies that bought mortgages and bonds also went bankrupt, once again no chain of ownership. Bonds were sold down the line to one entity after another.

Here again we have gaps to fill, which a judge might do by a feat of wary logical deduction.

Mortgages pooled without documentation

In another case, the mortgage itself has not been attached in a transfer to the institution that converts the pool of mortgages into securities. In this situation, an “assignment in blank” takes place. Literally, the mortgage details are left blank!

This means there is no paper trail on mortgage ownership at all. A collection of mortgages provides the foundation for mortgage backed securities, but no specific notes are documented. In this case, the mortgage pooler has no idea whose notes are involved. And that means that it is unlikely the bank or mortgage company that originated the mortgage knows either.

How did this happen? The mortgages were totaled up into huge blocks, perhaps organized according to degree of risk, and then they were sent to a trust. No one cared about the specific mortgages and individuals involved.

Today the bank may have no records because it sold the notes and purged its records. Further, the pooler does not care; it is only interested in the total dollar figure, and chopping this huge number into convenient size bonds to sell to investors, individuals, pension funds, governments etc.

However, once the payments stop from homeowners and houses go to auction, then a problem results. Which mortgages are in default? Which trust gets the reduced payment? But how can you do that if you don’t know who got what? Then what do you do? Just take an average and pay all trusts the same?

In court this issue of “assignment in blank” can cause some grave difficulties. Most states require an actual loan to be attached, so a blank does not suffice. Some states actually accepted only electronic filings, as in Florida, paper documentation was consciously destroyed

A REMIC

All of this documentation mystery leads to other problems.

First, we need to know what a REMIC is.

A REMIC stands for a Real Estate Mortgage Investment Conduit. This is a financial vehicle used to collect mortgage loans together and to then issue mortgage backed securities (MBS). The mortgages are held in trust, and bonds are created from the collective pool in various denominations. These are sold to investors, individuals, other banks, governments, pension funds and so on.

These securities trade on the secondary mortgage market. The primary mortgage market is the world where mortgages are originated by banks and mortgage companies.

REMICs are sometimes called trusts. They can issue MBSs in the forms of ‘single class’ and multiple class” and other varieties.

REMICS have the advantage of not being taxed so they are very desirable. Investors who buy the bonds are taxed but not the institution itself, this makes the MBS more profitable.

A bank may set up its own REMIC. Or a bank can sell its mortgages to Fannie Mae which also sets up REMICs. In fact, it is the largest generator of REMICs and MBSs.

Fannie Mae

Fannie Mae offers a sort of guarantee on its bonds, so they have generally been attractive. The government has been pumping money into Fannie Mae in the last two years to shore up its solvency, to convince the nation that the guarantee is real.

Fannie Mae is designed to encourage banks to make mortgage loans. When a bank originates a loan, it can then sell it Fannie Mae. It then can take the cash and make more loans. Then these loans can be sold to Fannie Mae again, and so we have a feedback loop that drives the mortgage industry and home ownership.

Why do we have mortgage backed securities in the first place? They provide fresh capital for originators to make more loans, more profit, more home ownership. They create an ascending arc of financial business and homeowner “happiness”.

But as we are finding out, this particular system is filled with dangers. The cycle of loan origination and then MBS formation, and then more capital to a bank can lead to bubble – particularly, if standards for loans are not enforced, as we have seen. Bubbles are the natural danger in these kind of feedback cycles.

Improper financial vehicles

There are other issues too: When a REMIC is formed there is an important requirement that is often violated. Within 90 days of establishing a REMIC, all mortgages pooled must be proven valid and permissible. Otherwise the REMIC cannot form itself as legal financial vehicle. So technically many REMICS are not legal institutions and should not be in business at all. Why? Because they have been founded upon collateral that is not documented properly.

Undoubtedly, many REMICs are in this category. We have REMICs selling bonds to investors and they do not meet the legal qualification for a proper REMIC. In this case what do you do? If you are an investor, do you even have a case to foreclose on a household? If your bond is not legal, then is your argument only with the firm that set up the REMIC? And then would not fraud be an issue as in a typical investment scam?

For the homeowner, the quandary is not only can you not prove or disprove your mortgage is part of a REMIC because it was filed as a “blank”, now the REMIC might be unsanctioned and technically illegal. Then who owns your mortgage? Who gets your payments? Who gets the funds from the sale of your foreclosed house?

The legal problems that mortgage backed securities have created are astounding:

  • Note transfers take place with no specific documentation required, filings done in “blank”
  • Companies buy and sell the bonds and go out of business
  • Bonds are sold from firm to firm in an endless sequence
  • Electronic documentation tries to substitute for paper documentation that now has now all but disappeared
  • But the electronic documentation system is poor, gapped, dysfunctional
  • Finally, the investment pools are not legal entities at all 

Sloppiness or false documentation?

At this point one has to wonder if the focus on “robo-signing” and sloppy documentation is a distraction from the more essential issues. The whole system of documentation in the world of the MBS is a disaster. And the trust which eventually sells the MBS may well be non-legal, unsanctioned, uncertified and unlicensed.

The culpability is more than poor methods of documentation, it is the whole system. And the banks of course know this. And they are hoping this will all pass from the public’s short term memory, and the few million who are losing their homes will be isolated and ignored, and vilified as irresponsible.

Mortgages “assigned in blank” cannot be fixed. Paperwork gaps are everywhere. The banks say this can be resolved in a few weeks or a month, but this cannot be done. The problem is not fixable and we need another approach. But we do know in certainty that the banks cannot fix the problem, and that a general legal fix may not be possible because of all of the complexities involved. There would be far too many contradictions in the law for a solution to make sense.

Investors are taking action

Investors now find that the bonds they purchased might not be supported by collateral or perhaps by only a portion. More, banks fibbed to investors about the quality of the loans they bought into. Now monthly payments from servicers of the mortgages are declining.

In October, large investors in a letter to Bank of America, which purchased Countrywide, insisted that the bank pay the investors billions for the mortgages, because there was not transparency about nature of the loans and the mortgage records were inadequate.

REMIC tax on foreclosures

One more point: We should also add that REMICS get taxed for handling foreclosure properties! This tax undoubtedly passes onto the investors, another headache. REMICs are taxed at a high rate for foreclosure incomes, and must file 1066 forms. Here is another conflict of interest between banks and the investors who do not gain from foreclosures.

The courts

Do the courts have the legal means to solve all of these problems? In the issue of chain of ownership, perhaps a judge can reasonably fill in the holes in a chain. But when the holes become numerous this act of deduction becomes unsupportable. At some point the homeowner’s right to know who owns the note will predominate.

Further, the court does not bear the responsibility of finding the true current owner of the note, this lies with the bank or the current owner. While homeowners have been trying to look up who has their mortgage, now it is time for the investor to start looking up exactly what mortgages do underlie his bond. Let’s see how they fare. The burden of responsibility should be on them.

So the homeowner’s objections should be sustained. And until someone can come up with a genuine document of transfer and ownership, then there cannot be a foreclosure or auction or collection of late payments either.

And if an investor cannot find out whose mortgage is the foundation for the MBS offerings, then the investor should go after those who formed the REMIC in the first place.

In the case of a REMIC which has ‘blanks’ and no specific documentation what do you do? These should be declared insufficient vehicles, and the investors have a case against the REMIC creators. Because if the bond is not a proper bond, then the investor has no case against the homeowner, for the bond is not valid and is not based on anything, neither mortgages nor anything else.

Another solution to the whole problem is a general ceasefire where the investors work out deals with homeowners for loan modifications, these are not ideal, but far better than waiting for years for money and selling foreclosed houses on the market for a fraction of their value.

Then for their losses the investors can sue the banks and REMIC managers to recoup. And in no case should the banks get a bailout for this.

Banks currently are insulated from all of this having sold off the mortgages for the most part. All of the issues of documentation, transfer, ownership, improper REMIC formation are not material to them. As long as we avoid taking on the banks, the national economy will get worse as foreclosures escalate and drop all house prices.

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8 Problems of Mortgage Documentation

Posted on April 11, 2011 by Michela Terrazino

houses upside down

U.S. Comptroller of the Currency, John Walsh, testified during a February Senate Banking Committee hearing that the number of fraudulent foreclosures was very small, trying to assure lawmakers that the mortgage documentation problem was tiny and nothing to worry about.

On the other hand, reports from foreclosure lawyers and news organizations are saying the complete opposite. When Reuters investigated Walsh’s numbers it found his report was misleading. Reuters took him to task and pointed out that his conclusion was based upon a sample of only 2800 mortgages and his methods were flawed.

A 60 Minutes investigation on April 3 went into detail about robo-signing, talking to people actually involved in it, who testified to its widespread use and complete cynicism. Major Banks hired companies like DocX who systematically and efficiently composed false documents by creating fake executives who signed thousands of documents a day in the presence of fake notaries who stamped anything put before them.

Experienced foreclosure lawyers claim that documentation and fraud problems come up in an overwhelming majority of cases. An Illinois foreclosure attorney, O. Max Gardner III, told Reuters that in every one of his foreclosure cases, "I’ve never seen a complete chain of transfers and of the note". And "We see a problem with the dollars and cents in almost every single bankruptcy case that I file.”

If you are in or near foreclosure, you should find a foreclosure lawyer to help you and represent in you, and to help you deal with the mortgage documentation problems below:

  1. No Documentation
    There is no documentation provided which proves mortgage note ownership. This is critical because without proof of ownership of a loan, no entity can foreclose on you, servicer, bank or trust. The prevalence of robo-signing indicates that banks actually do not have a clue as to where a homeowner’s mortgage papers went, otherwise why do robo-signing on such a large scale? The banks have tried to insulate themselves by blaming contractors for the document fraud, but this does not alter the fundamental legal premise that the party who is making a claim must provide proof of ownership of the debt.

  2. “The Trust owns it”
    Documentation is not provided but the claim is made that the mortgage is owned by a certain trust.

    A trust creates the mortgage backed securities from a pool of thousands of mortgages. These bonds are stripped of individual identity; they are collectively mingled into one vast fund of billions. One should contact the trust in this situation to verify the claim, if it does not have the documents then there is a good chance that the note is lost. Neither the trust nor a servicer can proceed with a foreclosure without the proper documentation, without proving ownership of the mortgage note.

  3. False documentation
    False documents are provided as in the case of robo-signing. This clearly invalidates a claim made by a bank or servicer or trust. And this can lead to penalties, civil and criminal.

  4. Wrong Numbers
    Many mortgage documents actually show incorrect principal and interest rates.

  5. Broken chain of transfers
    A chain of transfers from one bank to another bank is broken. When notes are sold, they are in a process called “assignment”, this thread of transfers must be clear and unbroken. If a mortgage is supposedly sold from one bank to another but there is no document of assignment, then the transfer is not consummated or legal.

  6. “The Servicer owns it”
    Often the Servicer can be given as the owner of the mortgage note, but a servicer does not own the loan, it is merely a servicer that collects payments and sends them on or manages the foreclosure processes, filing papers, hiring lawyers, hiring real estate agents etc. Servicers get a fee for their work. Banks for the most part sold off their mortgages to trusts, they are now servicers to the new owners, and they have a reduced material interest in any loan problems because of this.

  7. “MERS owns it”
    Also MERS is given as an owner of mortgage note but this is an electronic tracking organization. MERS (Mortgage Electronic Registration Systems, Inc.) is a recording organization set up by banks to manage the electronic filing of mortgage creation and transfers. MERS bypasses local filings. MERS has saved the financial industry billions of dollars in local filing fees. But MERS does not own the mortgages it tracks, it merely follows them, it collects data on their details and history — although, as we are finding out, the accuracy of MERS is very dubious.

  8. Improper formation of a REMIC
    A REMIC is a Real Estate Mortgage Investment Vehicle; this is the proper, legal name for a trust that collects up mortgages to create bonds. A REMIC when founded must have all mortgages accounted for, it cannot have missing mortgages or false documents or incorrect monetary amounts. If a REMIC is founded on invalid material, it is does not rise to the level of a legal entity, it is an aborted institution whose bonds are not authorized. Questioning the validity of a REMIC is more a difficult challenge but technically it can be done and this will probably begin to appear in the news soon. Confronting a REMIC will lead to a battle between banks and investors.

    Already investors are making claims against banks for receiving risky, underperforming mortgages. Banks are now being forced to pay back investors for low quality loans which the banks attested to be low risk notes. Bank of America paid $4 billion itself in these “put-backs” in 2010. Other banks have similar claims and are paying billions too.  Pimco and BlackRock, investment companies, have focused on Bank of America. The Federal Reserve Bank of New York is demanding that B of A retrieve $47 billion of mortgages, most of which were created by Countrywide Financial, which B of A purchased.

The documentation problem in the mortgage industry is very big. The whole thing can unravel in the courts if most people challenge their foreclosures in court. Foreclosure lawyers are saying that almost all of their cases have some form of documentation problem as well as false numbers.
One million Americans were foreclosed upon last year, and a similar amount is predicted for 2011. Evictions despite the news of robo-signing are higher than ever.

Bank strategy

The strategy of the banks and trusts is that most homeowners will NOT challenge their foreclosures. After finding they cannot get a loan modification, they may try a short sale or simply give up and vacate. If this turns out to be true then they will only have to compromise with a small percentage of homeowners, while evicting the vast majority.

More disastrous to the banks would be a challenge to the very legality of a trust or REMIC. This would take the foreclosure battle to a whole new level and directly challenge the legality of a mortgage backed security. If a REMIC is found by a court to be formed upon an improper basis with missing or false documents, then investors will have a very, very big problem. What will happen? If a REMIC is ruled illegal then its mortgage backed securities are not legal either — this means that the banks will have to give the money back to the investors! Then we will see a very interesting three-way fight between homeowners, banks and investors. If servicers and trusts are hurt enough, they will turn to some sort of a compromise out of necessity, to avoid a full scale collapse.

However, at this time, banks are offering incentives to move residents out of their homes. One major bank is offering $10,000 to a homeowner to move. Add this amount is added to the $3000 that the HAMP program offers to a homeowner to move – a total $13,000 cash gift to pry someone out of their house. Obviously, the strategy is to avoid having the foreclosure clock run out to the end because this can cost a bank anywhere from $30,000 to $50,000 in costs (lawyers, lost income, real estate agents, house maintenance, property taxes and insurance).

The second reason is to divert the attention of the homeowner from fighting to retreating because a bank cannot afford to have too many documentation challenges. Even if they are only the servicer, having long since sold the mortgage to investors, the bank has to worry that in this unstable environment that the investors might go after them for causing all these problems in the first place. And they have a material interest to do so as their note payments get smaller month by month.

If however more homeowners become angry and active and fight their foreclosures, the court system will jam up and the foreclosure process nationwide will stall. And this will lead to a motion for resolving the mortgage problem in one overall national plan. However, banks maintain a planned strategy of attrition. They count on homeowners fear and shame of foreclosure.

If however more homeowners become angry and active and fight their foreclosures, the court system will jam up and the foreclosure process nationwide will stall. And this will lead to a motion for resolving the mortgage problem in one overall national plan. However, banks maintain a planned strategy of attrition. They count on homeowners fear and shame of foreclosure.

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House prices continue to fall

Posted on March 26, 2011 by Michela Terrazino

While the economy shows some signs of improving the housing market continues to slide downhill.

According to the National Association of Realtors (NAR), February existing home sales dropped 9.6% compared to February 2010. (Existing home sales are closed transactions for single-family, townhomes, condominiums and co-ops.)

Sales of New Homes collapsed to the worst month ever to a seasonally adjusted annual rate of 250,000; the previous record low was 274,000 for last August. 2010 is so far the worst year for new home sales.

According to the Commerce Department, home construction took its largest monthly drop in 27 years in February – 57.1% in the northeast, 27.5% in the Midwest, 14.7% in the west, 6.3% in the south. And applications for new building permits hit a new low. Builders simply cannot compete in an environment of discounted prices.

2011 house prices same as 2002

The most interesting information provided by the NAR concerns house prices. The median house price for February 2011 was $156,100. This is for all types of housing. This price is 5.2% below February 2010.

This price compares with figures for houses in 2002 ($156,000). Homes now are valued at the same level as those nine years ago, several years before the housing bubble began to inflate.

From 2003 to 2004 there was a gradual expansion of the housing bubble. By 2005 the bubble was growing and was showing signs of oscillation, though prices generally pushed upward. In 2006 values began to falter, up and down. In 2007 general prices began to take a final plunge, prices have been falling ever since to the present, 2011. (In 2005 median home prices were $219,000; in 2006 they were $222,000; in 2007 they were 217,800; in 2008 they were 197,000; in 2009 they were 172,000; in 2010, 173,200.)

Median house values are now at 2002 levels, nine years ago and they are still diminishing. We have passed out the negative side of the bubble phase and house prices are still declining.

The housing bubble was fed by banks that turned their mortgages into instant cash by transforming them into mortgage backed securities. To get even more cash they turned their new revenue into more mortgages and loans with lower and lower loan criteria, eventually reaching the stage of no criteria at all. Now that we have returned to “normal” we encounter another problem currently, values are diminishing due to a unique set of factors as we shall see.

Causes and Conditions for Today’s Continuing Price Slide

2002 prices are arguably 1.5 to 2 years before the appearance of the beginning of the housing bubble. February 2011 prices are 9.6% less than February 2010 prices, and there is no doubt that prices will continue to plunge. Why? Here are some forces involved:

  • ARMs are resetting in 2011. The resets involve interest and principal payments. For many these increases will be beyond their means.
  • The percentage of “distressed” homes now on the market according to the NAR is 39%, these are homes in foreclosure or in short sale. Last year’s figure was 37%
  • Total housing inventory is increasing. The number of existing houses available for sale in February is 3.49 million, this translates into an 8.6 month supply of homes. In January the supply translated into a 7.5 month supply
  • The number of foreclosures is rising, even though we had a partial moratorium last year because of “robo-signing”. Bank takeover of homes was over a million in 2010, and is expected to be higher in 2011.
  • Further, as prices continue to drop, wiser buyers are delaying a home purchase waiting for some semblance of a “bottom” to appear.
  • In addition, many deals are being scuttled according to the NAR because appraisers are finding that the original offer on a property is too high, significantly above market value as prices become highly mobile in the downward direction
  • Finally and very importantly, Banks are loan-shy these days though mortgage rates are affordable loan criteria is strict. With little demand for homes, prices of homes will not stop falling.

All of these factors are conspiring to increase foreclosures, increase inventory and generally lower home prices.

How long will this problem last? Some experts are suggesting this will go on for at least 2 or 3 more years until all present and upcoming delinquent mortgages are cleaned out of the system, and then market prices will rise again. A survey of 111 economists by MacroMarkets yielded an answer, in 2012, by next year.

But the real question is will home prices actually turn upward? In a more normal market this would likely occur, but when the government gave money to the banks and did not correspondingly demand the banks do their bit to help the real estate economy then an artificial and negative process was set in motion.

The banks took the money to aid themselves, to make profit in other spheres such as the stock market, investment banking, international operations etc. This hurt the real estate market, homeowners and the whole country.

Experts are saying that a major cause of the inability to resuscitate the housing market is the lack of credit — mortgage rates are good but credit terms are difficult. Today banks are avoiding loans for home purchasing though they have the money as their financial statements show. More, they have cash received from Bernanke’s bond buyback program, intended to increase money supply, available cash for loans and thereby lower interest rates through “quantitative easing”. But as of yet the decrease in interest rates has not been significant — in February the average mortgage rate was 4.95% actually going up from 4.30% in November when the latest round of cash infusion in the economy began.

Banks are holding onto their capital. The TARP bailout made no demands on banks to make loan modifications to forestall foreclosures or make new loans to homeowners, consumer or businesses to get the economy going. Without penalties or proscriptions, the financial institutions used the national funds to improve their health and profits without consideration for anyone else.

At the same time, we have no tax credits or rebates for those who purchase homes to stimulate real estate and lending.

So it is not clear if this reverse bubble will be short lived or long term. Moreover, if prices stabilize how long they will remain in a dormant state, and what economic impetus will pull, beckon or inspire us out of our stagnation?

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