The Future of our Housing Market

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The Mortgage Electronic Registration Systems (MERS) is an American privately held company that operates an electronic registry designed to track servicing rights and ownership of mortgage loans in the United States.  Never heard of MERS?  Read The New York Times’ Business Day, Mers?  It May Have Swallowed Your Loan.”

MERS was the subject of a study by Harbinger Analytics Group Real Estate Fraud Experts, authored by David Woolley which outlined how MERS destroyed the chain of title, and has ultimately damaged the housing industry as a whole. Woolley writes, “thanks to the Mortgage Electronic Registry System’s (“MERS”) failure to accurately complete and/or publically [sic] record property conveyances in the frenzy of banks securitizing home loans and in subsequent foreclosure actions, neighbors to a foreclosed property (with a sequential conveyance) as well as the foreclosed property itself will have unclear boundaries and clouded/unmarketable titles making it difficult, if not impossible, for these homeowners to sell their properties and for subsequent purchasers to obtain title insurance on that property.”

Tara Steele, News Director at AgentGenius and author of “Study Says “MERS Has Destroyed the Chain of Title, Hurt Housing,” said that anyone involved in real estate from brokers and agents to loan officers and title agents should be up to date on MERS’ role in the industry as many have proclaimed it to be the biggest force working against the housing sector in history.  You can read the 85-page white paper — MERS: The Unreported Effects of Lost Chain Title on Real Estate Owners — and her full article here.

The City of San Francisco recently released a report revealing the widespread nature of foreclosure abuse, with 84 percent of the 400 local foreclosure cases studied showing illegal activity.  The drastic rate puts the housing industry on alert, but not surprised, in light of the MERS report.

Other cities are chiming in, claiming similar levels of foreclosures that are illegal due primarily to paperwork flaws due to robosigning.  Robosigning is done by banks most frequently to push foreclosures forward without human review, resulting in mistakes in paperwork and illegal foreclosures. The debacle was the primary reason for the recent $25 billion civil settlement among the nation’s five largest lenders.

Experts point to the robo-signing scandal and the role of MERS in housing to have caused chaos in the housing industry.  Lenders foreclosed on wrong addresses; paperwork on loans were never completed or reviewed prior to repossessing properties. When mortgages were packaged and repackaged to investors and lenders acquired each other or shut down, the chain of title in many cases gets lost and it is unclear who actually holds a loan.

In the study performed by the City of San Francisco, 45 percent of loans studied were sold to entities claiming to be the loan holder but actually were not and lenders foreclosed on homes they do not even own.

Some point out that in non-judicial foreclosure states, as in California, foreclosure fraud rates are higher due to the lack of judicial oversight over the foreclosure process.

It will take years and years to sort out this tangled mess we are in.

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Obama Proposes Extending Mortgage Debt Forgiveness Relief

Tax

Obama’s FY2013 budget proposal includes an extension of the Mortgage Forgiveness Debt Relief Act of 2007.

The Act ensures that homeowners who received principal reductions or other forms of debt forgiveness on their primary residences do not have to pay taxes on the amount forgiven.

Without the Mortgage Forgiveness Debt Relief Act, debt reduced through mortgage modifications or short sales qualifies as income to the borrower and is taxable. Under the act, up to $2 million in debt elimination can be tax-free.

The administration is proposing an extension that would apply to any amounts forgiven before January 1, 2015.

At that point, the government would reassess the market and determine whether another extension is appropriate.

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Is the Housing Picture Getting Brighter?

I am certain everyone affected by the economic and housing crisis is feeling a little vindicated that irresponsible lenders are starting to be held accountable for their actions.

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The $25 billion settlement recently reached is not the end, but the start, of more investigations.

On February 10, Baron and Budd attorneys, led by a team in Los Angeles, filed a lawsuit alleging that Wells Fargo and JPMorgan Chase charged excessive default service fees through “cryptic wording.”  One of the fees charged to borrowers who pay late is the broker’s price opinion (BPO), which is used to help the lender price the property for foreclosure.

According to the suit, Wells Fargo and Chase combined service about 25 percent of all U.S. mortgage, and while federal law allows mortgage servicers to charge borrowers BPO fees, Wells Fargo and Chase marked up the charges or performed unnecessary services to make a profit, which is not permissible.  The suit also claims that the fees are disguised on statements as other charges, miscellaneous fees, or corporate advances.

Full article here.

Meanwhile, Bank of America, one of the five biggest mortgage lenders in the $25 billion settlement over the industry’s handling of foreclosures, will pay $1 billion to settle on the largest False Claims Act relating to mortgage fraud.  Of the $1 billion, $500 million will provide recovery to the FHA, which was said to have incurred hundreds of millions of dollars in damages due to loan origination practices from Countrywide.  The remaining $500 million will fund a modification program for affected Countrywide borrowers with underwater mortgages.

BofA was also accused of originating loans based on inflated appraisals and failing to identify homeowners who could participate in the government’s Home Affordable Modification Program.   BofA is now required to solicit potential borrowers who are eligible for the program.

Original article here.

And, according to foreclosure listing firm RealtyTrac Inc., foreclosures rose 8 percent nationally last month from December, but were down 15 percent from a year earlier.    That trend is expected to strengthen this year in light of last week’s $25 billion settlement.  Piecing it all together, I would say, slowly, but surely, we are inching our way out of this gargantuan mess.  Nevertheless, I would continue to keep my fingers crossed.

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Number of ‘Improving’ Housing Markets Expands to Nearly 100

In the Improving Markets Index published monthly, First American and the National Association of Home Builders (NAHB), added 29 metros to the number of housing markets showing measurable improvement in February for a total of 98 markets represented in thirty-six states.

The index tracks those housing markets that are showing signs of improvement for at least six consecutive months in overall economic health, based on growth in employment, home price appreciation, and increases in single-family housing permits.  Kurt Pfotenhauer, vice chairman of First American Title Insurance Company, said this shows that the momentum is building for a housing recovery and that more buyers and sellers are starting to feel confident enough to return to the market.

Napa, California is among the 29 metros added to the index in February.  A complete list of all 98 metropolitan areas currently on the Improving Markets Index is available at: NAHB.org/imi.

Seven markets dropped from the Improving Markets Index in February as they experienced softening house prices. San Jose, California is one of them.

Full article here.

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Housing Crisis to End in 2012

Music to everyone’s ears, isn’t it?

Well, Capital Economics, an analytics firm, expects the housing crisis to end this year, according to a report released last Tuesday.  One of the reasons: loosening credit.  The average credit score required to obtain a mortgage loan remains at 700.  Although this is higher than scores required before the housing crisis, it remains constant with requirements one year ago.

Other market indicators point not just to a stabilization of mortgage lending standards, but also a loosening of credit availability.  Banks are now lending amounts up to 3.5 times borrower earnings, up from a low 3.2 times during the crisis.

Banks are also loosening loan-to-value ratios (LTV), which Capital Economics denotes “the clearest sign yet of an improvement in mortgage credit conditions.”  Banks are now lending at 82% LTV in contrast to 74% in mid-2010.

However, Capital Economics points out that while credit conditions may have loosened slightly, some potential homebuyers are still struggling with credit requirements.  Potential buyers not qualifying for loans resulted in 8 percent of contract cancellations in November.

Capital Economics also warned that the improvement in credit conditions is not significant enough to generate any actual house price gains, and potential ramifications from the euro-zone could affect credit availability in the future.

Read original article here.

Never thought the headline was real.  It just felt good to put it up there.

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Time To Stop Throwing Good Money After Bad

It was just last summer that Charlotte Perkins made the hardest decision of her life as she and her husband Jim were caught in the vise of the housing bust.

Wanting to downsize their lives as they headed toward retirement, they bought a new house in Mesa, Arizona, before they sold the old one, also in Mesa. Their previous home had been appraised at nearly $400,000 at the height of the market, but as the housing crisis ravaged Arizona, they were told they’d be lucky to get $200,000 for it.

They were carrying a loan of $260,000 on their original home alone, meaning they were well ‘underwater,’ owing much more than it was worth. Combined with the mortgage on the new house, their housing payments had become an “anchor around our necks,” she says, threatening to gobble up all their retirement savings and leave them with nothing.

The couple made a difficult call: They would do a ‘strategic default,’ and simply stop paying the old mortgage. “We really had to wrestle with it,” said Perkins, 60. “We had worked all of our lives to build good strong credit, and we’re proud people. But it came down to, ‘Can we keep doing this?’ We had to say ‘No.'”

Full story here.

The article explored the issue of whether it makes sense to keep paying a massive mortgage knowing that it might be decades before a home regains its prior value.

People naturally feel embarrassed about breaking a contract and not paying their bills; no one wants to be branded a deadbeat. But the article argues that it is not a personal, but a business decision.  Companies default on their obligations through the bankruptcy process when it makes financial sense for them to do so.  Ironically, even the Mortgage Bankers Association itself arranged for a short sale of its Washington headquarters.

The consequence is that your credit record gets blown up in the near-term.  Credit-scoring firm FICO estimates that someone with a 680 score would see that number drop between 85-100 points to 580-595, and someone with 780 could tumble 140-160 points to 620-640.  You will likely not qualify for a mortgage or a car loan for a few years.  When lenders are ready to take a chance on you again, you’ll have to pay a higher  interest rates due to your default history.

Of course strategic default is not a decision to be taken lightly.  It should be a last resort, not a first option.  Since 30-year mortgage rates are at near record lows, you should look into refinancing, loan modification or short sale.

Each state has its own rules and regulations regarding foreclosures, which affect both the length of the process and what you could be liable for in the end.  In ‘non-recourse’ states like Arizona, California and Texas, a lender cannot come after you for any deficiency (the difference between what you owe and how much your property sells for).  The more reason a California homeowner should look into all the above-mentioned options.  In other states they can pursue the difference, in theory – which is why some homeowners opt to file for bankruptcy, to free themselves from those potential obligations as well.  (The hit on your credit score for filing bankruptcy is 130-240 points.)

You should also know the tax implications. Historically, if you have a debt that’s forgiven, the canceled amount is considered taxable by the IRS.  In the wake of the housing crisis, the Mortgage Forgiveness Debt Relief Act was drafted to spare you those taxes. That legislation expires at the end of 2012, and if not extended, you could potentially face a tax bill for the difference.

So talk to a professional. A bankruptcy or real-estate attorney can help you through this very tricky process. The National Association of Consumer Bankruptcy Attorneys, for instance, has a searchable database of lawyers at http://www.nacba.org.

I am an Accredited Distress Property Specialist, licensed in California, and can help you with your short sale.

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Short Sale Lottery?

At first, the San Leandro woman, who had fallen behind on her condo payments, thought the letter was a scam. “You could sell your home, owe nothing more on your mortgage and get $20,000,” it proclaimed in large type.

“I almost ripped it up,” she said.

But the letter was sent by JPMorgan Chase, the bank behind her mortgage. And after she sold her condo two weeks ago for $98,000 – a third of what she owed on it – Chase indeed gave her $20,000 as an incentive payment, according to the woman and her real estate agent, Jasmin Rhodes of Prudential California Realty.

“I’m not sure why I was so blessed to be given that opportunity,” said the woman, who asked that her name be withheld for personal reasons.

Read more here.

There is no limitation on how homeowners use the bonus payouts.  They can use them for moving expenses, as a security deposit on a new place, as a nest egg or simply to pay off other debts.

Some speculate that the offers occur when banks misplace essential paperwork and can’t defend a legal challenge to a foreclosure.  Banks say that isn’t so, that when a loan modification isn’t possible, a short sale is often a faster and better solution for everyone concerned than a foreclosure.  However, throughout the foreclosure crisis, banks have dragged out short sales over many months and failed to approve reasonable offers, until recently.

So if banks are now turning into Santa Claus, should struggling underwater homeowners stop paying their mortgage in hopes of winning the short sale lottery?  We do not really know how banks determine who gets what amount.  Since it is random and the outcome is uncertain, homeowners should look at their own case and follow the guidelines out there for their situation.  Work with your housing counselor, lender(s),  attorney, CPA, and real estate professional.

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Feds and Banks Reached $25B Foreclosure Abuse Deal

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The $25 billion settlement with the five biggest banks related to foreclosure abuses including “robo-signing” of documents is the largest multi-state settlement since the Tobacco Settlement in 1998, said the Department of Justice.

California will receive a big chunk of the settlement, up to $18 billion.  A separate agreement calls for banks to enact a minimum of $12 billion in principal reductions for the state’s homeowners.

California’s attorney general Kamala Harris said that $12 billion has been guaranteed for about 250,000 homeowners who are underwater on their loans and behind or almost behind in their payments, for an average of $48,000 each.  Harris estimates $849 million will be dedicated to refinancing loans of 28,000 homeowners who are current on their payments but underwater on their loans, for an average of $30,321 each. Another $279 million will be designated to offer restitution to about 140,000 California homeowners who were foreclosed upon between 2008 and Dec. 31, 2011, for an average of about $1,993 each.  Another $3.5 billion is set aside to relieve 32,000 California homeowners of unpaid balances remaining when their homes are foreclosed, for an average of $109,375 each.

Among the money allocated will be $1.5 billion distributed nationwide to about 750,000 borrowers who lost their homes to foreclosure.

Gordon Whitman, policy director for PICO National Network of faith-based community organizations, said the deal is “‘too small” compared to the $700 billion in negative equity in the U.S. and our total outstanding mortgage debt of $8.8 trillion.  I am still elated by today’s news.   I feel a little hope.

Attorney General Eric Holder said the deal by 49 state attorneys general does not preclude states from pursuing their own suits against the banks.  (The state attorney general of Oklahoma did not sign the settlement.)  Holder announced further terms of the deal would be on the website, NationalMortgageSettlement.com, and residents of the states involved should visit the sites of their respective attorneys general.

N.Y. Attorney General Eric Schneiderman, in his interview today with CNBC TV, said that the most important issues from his point of view have always been that whatever relief the investigations provided are that (1) the people who engaged in misconduct will be held accountable; (2) that homeowners will receive some relief; and (3) that facts are aired out so that this never happens again.

Schneiderman had objected to the earlier forms of  settlement because the level of relief provided was really not commensurate with the kind of releases the banks sought.  The banks wanted immunity from lots of misconduct that have not even been investigated yet.  Schneiderman said he is satisfied that after some tough negotiations in the last few months the banks have been released from conduct like robo signing and flaws in their notarization process, in the foreclosure process.  But the conduct that actually led to the meltdown of the economy is still all fair game for investigation.

President Obama has unveiled a joint working group of which Schneiderman is a co-chair, that will be digging in on issues related to possible tax fraud and other misconduct pre-crash.  All criminal prosecutions have been preserved; Schneiderman’s claims about the shadow mortgage system, which was computerized rather than going through county clerk offices have been preserved.  As big as this settlement is, Schneiderman said it is just a down payment on the way to broader relief.  This settlement resolves a few issues like robo signing, but there are more issues to resolve and investigations are ongoing.

When asked where he stand on the moral hazard issue — those homeowners who are underwater but have been making their payments, perhaps through a second job to keep up with their mortgage, who are not likely to get relief as a result of the settlement — Schneiderman says the settlement actually does provide relief for people who are underwater, whether or not they are in default or foreclosure because a foreclosure hurts the entire community.  People who are struggling to keep up with underwater mortgages are not out spending money, buying dinner, moving the economy forward.   It is in everyone’s interest going forward.   And the ongoing investigations will “deal with the issue, that up until 2003, the market was working the way the markets were supposed to work, but negative amortization, documentation loans that took place in the years after that, there was an artificial inflation of the housing bubble.  There was market abuse.  Some of it might have been legal, in which case we should change the … laws, some of it was illegal and people should be held to account for that.”

The current settlement does not involve Fannie and Freddie.  Schneiderman says there are three pools of mortgages out there that need to be addressed if we are going to get comprehensive relief.  The first are the mortgages held in the banks’ portfolios, which is essentially what’s at issue in the settlement today.  Then there are mortgages held by investors and the investors have their right to get payment, too.  The largest pool are the mortgages held by the government entities, Freddie and Fannie, they have to be a part of any final resolutions in this crisis.

The joint investigation going forward, Schneiderman says, is really focused now much more on the conduct that contributed to the artificial inflation of the housing bubble, and the crash.

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President Obama’s Plan to Help Responsible Homeowners

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In his State of the Union address, President Obama laid out a plan to help responsible borrowers and support a housing market recovery.

Key aspects of the president’s plan include:

  • Broad-based refinancing: The president’s plan will provide borrowers who are current on their payments with an opportunity to refinance and take advantage of historically low interest rates.
  • Homeowner Bill of Rights: The president is putting forward a single set of standards to make sure borrowers and lenders play by the same rules, including: Access to a simple mortgage disclosure form, so borrowers understand the loans they are taking out; full disclosure of fees and penalties; guidelines to prevent conflicts of interest that end up hurting homeowners; support to keep responsible families in their homes and out of foreclosure; and protection for families against inappropriate foreclosure, including right of appeal.
  • First pilot sale to transition foreclosed property into rental housing: The FHFA, in conjunction with Treasury and HUD, is announcing a pilot sale of foreclosed properties to be transitioned into rental housing.
  • Providing a full year of forbearance for borrowers looking for work: Following the administration’s lead, major banks and the GSEs are now providing up to 12 months of forbearance to unemployed borrowers.
  • Pursuing a joint investigation into mortgage origination and servicing abuses: This effort marshals new resources to investigate misconduct that contributed to the financial crisis under the leadership of federal and state co-chairs.
  • Rehabilitating neighborhoods and reducing foreclosures: In addition to the steps outlined above, the administration is expanding eligibility for HAMP to reduce additional foreclosures, increasing incentives for modifications that help borrowers rebuild equity, and is proposing to put people back to work rehabilitating neighborhoods through Project Rebuild. The above information is taken from the California Association of Realtors’ (C.A.R.) weekly e-newsletter covering vital industry information including economic reports, legislative developments, and new real estate products and services.

Details here.

Sounds like a good and promising plan to me.  But the mortgage market and housing analysts were doubtful that the plan will become a reality this year.

“The goal of the program is good,” said Kevin Stein of the California Reinvestment Coalition.  “Whether they can reach the goal is another question.”

Dustin Hobbs of the California Mortgage Bankers Association called the plan “a positive sign,” but unsure what the result would be.

Ed Mills, a financial policy analyst with FBR Capital Markets in Washington, D.C., noted that the proposal to pay for the program with a tax on large banks will likely be dead on arrival at a fiercely partisan Congress in an election year.

Rep. Scott Garrett, R-N.J., head of the House finance subcommittee that overseas Fannie Mae and Freddie Mac, blasted the plan, calling it the “latest salvo of the federal government’s unprecedented expansion into our nation’s housing market.”

Last fall, President Obama made a controversial move by bypassing Congress and moving forward with an executive order to fix housing by issuing the second phase of the Home Affordable Refinance Program (HARP) which eliminates fees and appraisal process, along with other adjustments.

Last month, the Obama administration announced that they are taking a similar approach seeking to improve the Home Affordable Mortgage Program (HAMP) by expanding eligibility to mortgage holders with higher debt loads and the new phase of HAMP triples the incentives it pays banks that reduce principal on loans, a move the administration has been strongly advocating.

The Federal Housing Finance Agency (FHFA), the conservator of Fannie Mae and Freddie Mac told lawmakers in a letter that forcing the two to write down the principal on underwater home loans would require more than $100 billion in new taxpayer funds.

Despite that, the administration also announced this week that it would offer incentives to Fannie and Freddie to reduce principal on loans which previously was only offered to private entities and banks.

The new changes would not require new funds, as HAMP has been funded by billions of taxpayer dollars, more than half of which has not been spent.  The housing plan gives mortgage servicers incentives to modify mortgage loans by cutting interest rates, deferring a portion of the loan or extending other terms.  The administration launched the program with the promise that four million homeowners would be helped and be able to stay in their home.  But nowhere near that number of homeowners were helped.  Perhaps in hopes that the four million mark is still attainable, the program has been extended an extra year to end in 2013.

In the meantime, the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) applauds President Obama’s proposal to help millions of underwater homeowners who are current on their mortgage to refinance, but opposes the implementation of FHFA pilot program to transition Real Estate Owned (REO) properties into rental housing.  Given the low REO inventory in California and the high demand even in the state’s hardest hit areas, this plan may not be as beneficial here.

I am sure a lot of tweaking is still in order.

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Some Fast Facts from the California Association of Realtors

Calif. median home price: December 2011: $285,920 (Source: C.A.R.)
Calif. highest median home price by region/county December  2011: Marin: $693,880 (Source: C.A.R.)
Calif. lowest median home price by region/county December 2011: Madera: $106,000 (Source: C.A.R.)

Calif. Pending Home Sales Index: December 2011: 91.6, an increase from the revised 82.5 recorded in December 2010

Calif. Traditional Housing Affordability Index: Third quarter 2011: 52 percent (Source: C.A.R.)

Mortgage rates: Week ending 1/26/2012 30-yr. fixed: 3.98% fees/points: 0.7% 15-yr. fixed: 3.24 fees/points: 0.8% 1-yr. adjustable: 2.74% Fees/points: 0.6% (Source: Freddie Mac)

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