The number of people entering into strategic default has decreased slightly. Photo Credit: Gentle/Wikimedia Commons/CC-BY-SA

Over the past few years, the term “strategic default” has entered into the national consciousness. People who owe more on a mortgage than the home is worth simply stop paying and walk away because it isn’t worth the trouble. This practice had begun to increase since the 2008 housing crash, but now the tide is starting to recede, if only slightly.

Credit bureaus and banks getting wise

Banks, loan lenders and credit bureaus have been perturbed by the rise in the number of strategic defaults on mortgages in the past few years. Borrowers that owe more on a mortgage than the house is actually worth will default on their mortgage when the value of the home has dropped so low that it no longer makes any sense to continue. In order to ferret out which consumers were defaulting because the cruelty of circumstances left them unable to make payments from the ones who were just giving up, Fair Isaac and Company, one of the main credit rating agencies in the United States, devised a way to find out which troubled homeowners are likely to engage in strategic default. According to the Chicago Tribune, an estimated 35 percent of all mortgage defaults were strategic in September 2010.

New car and cards a dead giveaway

People who strategically default usually will use available lines of credit just before walking away from the mortgage. New credit cards will be opened up, personal loans taken out to finance the move and new cars will be purchased. Then the underwater homeowner walks. FICO is also working with loan lenders and banks to help them identify potential defaulters before they walk. However, according to SmartMoney, the number of people walking away when it suits them is dropping. It is estimated by the University of Chicago Booth School of Business that strategic defaults dropped to 30 percent in March of this year, down from 37 percent in January. JPMorgan Chase analysts, according to Mortgage Wire, found that the overall rate was decreasing.

Consequences of default

Fannie Mae conducted a survey some time ago that found 27 percent of respondents, according to the Chicago Tribune, found the idea of strategic default acceptable. Consulting agencies began springing up that would advise consumers about how and when to default to their best advantage, such as the website YouWalkAway.com, according to Forbes. Yet people who do strategic default face potentially stiff penalties, according to MarketWatch. Credit scores can lose up to 200 points, leading to a host of other consequences. Landlords and insurers may be less willing to rent to or insure someone who has defaulted, and Fannie Mae has declared that it will not insure a new mortgage for someone who has strategically defaulted. It is estimated that 42 percent of all homes are “underwater,” or worth less than the amount of money owed on the mortgage.

Sources

Chicago Tribune

Chicago Tribune

HousingWire

SmartMoney

Forbes

MarketWatch

Foreclosure rates are on the rise. / Image: The-Lane-Team/Flickr/CC BY-ND

The price of homes continues to fall in the U.S. as foreclosure rates grow. This is good news for home buyers looking for a bargain. However, if you are looking to sell, it may be advantageous to wait a little longer.

FHFA report shows sharp drop

The Federal Housing Finance Agency reports this week that its home-price index fell in the current quarter faster than at any time since 2008. Prices have fallen 2.5 percent in the last quarter, which is a drop of 5.5 percent from last year. The report, however, covers only homes purchased with mortgages provided by Fannie Mae or Freddie Mac. It excludes cash only sales.

Foreclosures remain a key factor

FHFA acting director Edward DeMarco said, “In many local real estate markets, particularly those hit hard by this cycle, foreclosures and other distressed properties are still a key factor in recorded and anticipated future sales and may be delaying price stability or recovery.” The prices of homes in foreclosure are dropping, according to RealtyTrac. The average sales price was $168,321 during the first quarter, which is a 1.89  percent drop from the previous quarter, and 1.46 percent from a year ago. And because foreclosures lower the value of other homes in their neighborhood, they affect the rest of the index as well.

Fewer foreclosures going to third parties

“While foreclosure sales continue to account for an unusually high percentage of all residential home sales, sales volume is well off the peak we saw in the first quarter of 2009, when nearly 350,000 foreclosure properties were sold to third parties,” reported James Saccacio, the CEO of RealtyTrac. During the first quarter, 158,434 homes in various stages of foreclosure were sold to third parties during the first quarter, which is a drop of 16 percent from the previous quarter and 36 percent from a year ago.

Foreclosures rates vary by state

The percentages of houses on the market because of foreclosure varies by state. In Ohio and Illinois it was 41 percent. California and Arizona had foreclosure rates of 45 percent. In Nevada, foreclosures were 53 percent of the market.

Beware of foreclosure scams

This trend has brought out higher numbers of foreclosure rescue scams. These scams involve upfront fees for promises of foreclosure prevention that never happen, leaving the distressed homeowners high and dry. In February the Federal Trade Commission began prohibiting upfront fees to negotiate mortgage reduction plans.

Sources

Wall Street Journal

DS News

Daily Finance

Jumbo loans, or large mortgages for lavish homes, are becoming harder to get as mortgage lending requirements are changing. Image from Wikimedia Commons.

The mortgage industry is going through a volatile period, and the product known as jumbo loans is about to become harder to come by. Jumbo loans are mortgages for large amounts, usually $700,000 or more, and fewer banks may wind up willing to lend them. Smaller mortgages may also get harder to approve.

Mortgage underwriting requirements changing dramatically

Freddie and Fannie play a huge role in the mortgage industry. When a bank wants to lend a mortgage, Fannie Mae and Freddie Mac often agree to purchase the loan from the bank and sell it to investors as a security. This increases the amount of available loan capital so banks can lend more. The mortgage houses are becoming far more discriminating, and the mortgage products called “jumbo loans” are on the way out. The amount that qualifies as a jumbo loan has been revised, according to Reuters, to $625,000 from $729,750. This means in October, Fannie and Freddie will no longer back loans of $625,000 or more. Home buyers who want jumbo loans are scrambling to get the mortgages approved before the loans can’t be underwritten anymore.

Mortgages for low income people to suffer as well

Banks are more willing to lend to people when Fannie and Freddie will purchase the loans. New lending requirements being proposed by the Federal Reserve may make it harder for low income buyers to get a mortgages. As a result of the Dodd Frank Act, the Federal Reserve has proposed that an “ability to repay” metric be established as a requirement to get a loan, according to MSNBC. Low income borrowers would be affected, as an already skittish mortgage market is not conducive to lending bad credit loans for housing. Lending mortgages to people who couldn’t pay them back, a criticism often leveled at credit card companies and payday loans lenders, has often been pointed to as one of the chief causes of the housing market crash. The Fed is only taking comments, according to the Wall Street Journal, and is handing over authority to the Consumer Financial Protection Bureau over mortgage lending practices when the agency begins operations in July.

Credit to tighten for housing

Many indicators point toward credit within the housing industry tightening significantly. Underwriting and purchasing requirements at Fannie and Freddie are already becoming far more strict. For a Freddie or Fannie affiliated lender to lend money for a condominium, 70 percent of the condo units in the building must already be sold, according to CNN. That requirement was 51 percent in 2009. The Federal Reserve and National Association of Realtors estimate that 25 percent of all mortgage application are currently denied, and fewer banks are willing to lend without federal backing from Fannie and Freddie.

Sources

Reuters

MSNBC

Wall Street Journal

CNN

The 30-year fixed-rate mortgage, which only exists because of Fannie and Freddie, is likely to disappear along with them. Image: CC Scurzuzu/Flickr

The 30-year fixed-rate mortgage could be history if Fannie Mae and Freddie Mac go away. Ridding taxpayers of the burden to prop up Fannie and Freddie is a goal supported by both Democrats and Republicans. But the demise of Fannie and Freddie will likely make getting a mortgage a luxury for a majority of Americans.

Goodbye 30-year fixed-rate mortgage

The 30-year fixed-rate mortgage is threatened with extinction because the only reason it exists is through government support. Fannie Mae and Freddie Mac offer borrowers low mortgage rates because of money from investors who get a guarantee from the government they will make money even if borrowers default. That government guarantee cost taxpayers billions when the housing market collapse and now the housing market is too weak to stand on its own. Fannie, Freddie and other federal programs back about 90 percent of new mortgage loans because lenders can’t find investors in mortgages without a government guarantee.

Hello 10-year floating rate mortgage

Whether Congress abruptly pulls the plug on Fannie and Freddie or tries to gradually wean the housing market from government support, the 30-year fixed-rate mortgage isn’t expected to survive. Without the Fannie or Freddie guarantee, mortgage lenders will have no incentive to offer 30-year fixed-rate loans because they must assume the risk of rising interest rates over a very long time. Lenders will likely switch to a 10-year floating-rate loan to attract investors. The 10-year floating-rate loan would shift risk away from lenders and their investors to the borrowers. Borrowers will face higher loan fees, higher interest rate risk and a more acute “equity gap” risk in the event of a shorter term loan and falling home prices.

Profound changes in U.S. homeownership

Both Republican and Democratic voices on the housing issue want the government to replace Fannie and Freddie with a system that somehow offers borrowers similar benefits without the government guarantee. Others argue that a private market without government support would inspire investor confidence and offer middle class homeowners better loan products — products that would not include the 30-year fixed-rate mortgage.  Without the 30-year fixed rate mortgage, a housing market staple since the 1950s, fewer Americans are likely to buy homes. The majority who will are likely to gravitate toward less expensive homes.

Sources

New York Times

Huffington Post

NPR

Mortgage applications rose recently, as low interest rates have spurred interest in mortgage modifications. Image from Wikimedia Commons.

Mortgage applications have risen over the past month, largely thanks to more people applying for mortgage modification. Low interest rates make modifications more attractive than purchases. However, prospective buyers are still apprehensive because home values continue to fall.

Low interest rates fuel spike in mortgage activity

Months of low interest rates have caused a spike in mortgage activity, according to Bloomberg. Mortgage applications rose by 15.5 percent during the week that ended March 4, which is the largest increase in mortgage activity since June 11 of 2010. Mortgage applications declined 6.5 percent during the same week in 2010. However, applications for mortgage modifications fueled the bulk of activity, 65.5 percent of total mortgage application volume, up from 64.9 percent the week before. The Mortgage Bankers Association reports that the purchase index rose by 12.5 percent from the week before, but the MBA does not differentiate applications for purchasing existing homes or new homes. The sale of existing homes makes up about 90 percent of all home sales.

Home values continue to plunge

Home prices have declined 31 percent since prices peaked in July 2006, and there is rampant speculation that a double dip in real estate is possible. One of the leading proponents of the idea that a double dip is pending is Robert Shiller, co-founder of the Case-Shiller Index, according to CNN. Shiller believes home prices will continue to fall, and the fact that home sales dropped during January 2011 certainly means it is possible. Unfortunately for most middle class prospective home buyers, taking advantage of lower prices is going to become more difficult over the next few years as financing standards are about to change.

Fannie and Freddie may take 30 year mortgage with them

The government has expressed interest in getting rid of Fannie Mae and Freddie Mac. Fannie and Freddie create capital for lenders by purchasing mortgages and selling them to investors, keeping the mortgage industry flush with cash for new loans. Should the mortgage houses be done away with, the 30-year fixed mortgage may go with them, according to the New York Times. A 30-year loan with fixed interest is a risky venture, as the lender cannot see the future. Few people pay off the loan or stay in the same house for 30 years. It is likely that within the next decade, adjustable rate mortgages will become the norm, as investors will want to be able to adjust interest rates to the market. Larger down payments will likely be required, and interest rates will be higher.

Sources

Bloomberg

Mortgage Bankers Association

CNN

New York Times

Fannie Mae and Freddie Mac are starting to limp back to health, but Treasury Secretary Timothy Geithner is still serious about reducing their role in the market. Image from Wikimedia Commons.

Troubled mortgage insurers Fannie Mae and Freddie Mac are starting to creep back toward solvency. The federal government has lent both houses more than $130 billion since Fannie and Freddie were placed under conservatorship in 2008. However, a new round of foreclosures is on the horizon, and that may undo any progress that has been made.

Losses slow as Freddie and Fannie get houses in order

Freddie Mac and Fannie Mae were one of the largest recipients of emergency loans during the federal bailouts of the past several years. Both mortgage houses received a combined sum of more than $130 billion to keep the real estate market afloat. However, the two toxic companies are starting to hemorrhage less money, according to ABC. During the last quarter of 2010, the period from October to December, Fannie Mae posted a loss of only $2.1 billion and Freddie Mac posted a loss of only $1.7 billion. In the same period of 2009, Fannie posted a $16.3 billion loss and Freddie posted a $7.8 billion loss. However, Fannie and Freddie have both requested additional loans, with Fannie asking for a further $2.6 billion and Freddie seeking another $500 million.

Plans to wind down the mortgage giants

For decades, Fannie Mae and Freddie Mac have played a crucial role in the real estate industry. The two companies purchase mortgages and resell them as investments in order to free up capital for loan lenders to lend more mortgages. However, the government is serious about drastically reducing Fannie and Freddie’s involvement in the mortgage market, including possibly phasing them out altogether. Treasury Secretary Timothy Geithner has admonished Congress to have a serious plan ready before trying to vote on anything, according to USA Today. Geithner cautioned House Republicans eager to cut the programs that doing so could have an adverse effect on the real estate market, including possibly destabilizing the housing finance industry entirely. Geithner has recommended a gradual program as the best course.

Darkest before dawn

Fannie and Freddie are both expected to endure further damage in coming months. Though Fannie and Freddie own roughly 50 percent of all mortgages in the United States, and 90 percent of all mortgages originated in the past few years, there is a growing backlog of foreclosures that cannot be completed until foreclosure reforms related to the “robo-signing” scandal are resolved. Whatever reforms take place regarding Fannie and Freddie, Treasury Secretary Geithner expects housing prices to rise a little bit over the next few years, according to Reuters. He also recommended that given housing conditions over the past few years, home buyers put larger amounts of cash down to ensure greater stability.

Sources

ABC

USA Today

Reuters

Fewer Americans believe homeownership and real estate are worthy investments. Photo Credit: Infrogmation/Wikimedia Commons/CC-BY

Americans are becoming less convinced that getting mortgage loans to buy real estate is a good idea. A recent survey found that the number of people who believe owning a home is a worthy investment has dwindled to the lowest level in years. Home sales have been sluggish to recover from the housing crash.

Fewer see homeownership as good investment

American real estate has been shaken to its core during the past few years. One of the side effects has been that fewer people believe homeownership is something to aspire to and that owning a home is not as good an investment as once thought, according to Reuters. Mortgage investment house Fannie Mae performs a quarterly survey on attitudes about home ownership, called the National Housing Quarterly Survey, which found that 64 percent of respondents believed that the tradition of going to a bank or loan company to get a loan and buy a house was a good investment. That marked a declined from early 2010, when 70 percent of respondents thought so. In 2003, the figure was 83 percent.

More people turning to rentals

As fewer are buying houses, more are going with paying landlords instant cash through renting. The percentage of vacant rental units declined over the fourth quarter of 2010 to 9.4 percent from 10.3 percent in the summer of 2010. That is the lowest percentage of available rental units since 2007. The same survey from Fannie Mae found that nearly 75 percent of respondents said they thought it would be harder to get a mortgage from a loan lender than to  rent.

Home sales fall

New home sales plunged over the month of January 2011, according to CNN. Some areas where prices are dropping are able to sell more inventory, but areas like Arizona and other places with highly inflated prices have difficulty liquidating housing inventory. However, after stops and starts over the fall, new home sales fell 11.2 percent over January 2011, marking an 18.2 percent reduction between January 2010 and January 2011. The housing market is down more than 80 percent overall from a peak point in 2005.

Sources

Reuters

CNN

Treasury Secretary Timothy Geithner is due to unveil some proposals concerning Freddie Mac and Fannie Mae soon. Image from Wikimedia Commons.

Mortgage backing companies Freddie Mac and Fannie Mae could become a thing of the past. An upcoming Treasury report will make proposals about what should be done with the two government sponsored enterprises. One proposal is to let them both go under.

Proposed cut of Freddie and Fannie would take years

The Department of the Treasury has several proposals about what to do with government sponsored mortgage insurance companies Fannie Mae and Freddie Mac, according to CNN. The mortgage backing companies were placed in conservatorship when the real estate market crashed. Since then, more than $150 billion in emergency loans was lent to Freddie and Fannie to keep the housing market afloat. The government has been trying to figure out what should be done with Freddie and Fannie. One proposal is to withdraw the government from the mortgage market altogether. However, that would mean that low cost loans for homes would likely become a thing of the past.

Other possibilities

Freddie and Fannie own or insure half of all mortgages in the United States, from Birmingham, Alabama, to Anchorage, Alaska. Phasing the mortgage houses out, according to Bloomberg, or other proposals will take time to implement. It is also rumored that the size of loans that the companies can insure will be reduced. Currently, only loans less than $729,500 can be backed by either company. It is also thought that Freddie and Fannie could be reduced to being mortgage backers of last resort.

Vital role in keeping mortgage costs low

Freddie Mac and Fannie Mae play a role in keeping risks and costs in the mortgage market low. The companies repackage mortgages as securities that are sold to investors and guarantee lenders and investors compensation if borrowers default. The goal is to make sure loan lenders are willing to lend by creating more lending capital and decreasing risks that lenders will lose money if borrowers default. If Freddie and Fannie are axed, the cost of mortgages could increase and make it difficult for anyone other than the wealthy to get a loan for purchasing a home.

Sources

CNN

Bloomberg

Fannie and Freddie have raised risk fees for mortgage loan lenders, making it that much harder to buy a home. Image from Wikimedia Commons.

Fannie Mae and Freddie Mac have announced a raise in the risk fees they will charge mortgage loan lenders. The mortgage insurance houses are charging lenders more to buy the loans and sell them to investors. Higher costs for obtaining loans may be passed on to borrowers.

Fees charged to mortgage loan lenders to rise

Fannie Mae and Freddie Mac, the mortgage insurers that received billions from bailouts, are raising risk fees charged to mortgage loan lenders, according to USA Today. The fees aren’t being raised astronomically, but risk fees are now being assessed on mortgages lent to some of the least risky borrowers. The way Freddie and Fannie work is that when a  bank or other loan company lends a mortgage to someone trying to get a loan, Freddie or Fannie buys the loan and guarantees lenders that they will receive payment and not lose money on the loan, should the borrower default. Then Freddie or Fannie can sell the loan to investors as an investment. The loan lender is charged a fee by the mortgage insurers for taking on the risk.

Fees to include least risky borrowers

Freddie and Fannie are now including fees on all mortgages, not just the risky ones. Previously, risk fees were not assessed on loans to borrowers who had credit scores of 711 or better and paid at least 20 percent down. From now on, anyone who borrows a mortgage loan without a credit score of 740 and 25 percent down is likely to warrant a risk fee assessed to the lender by Freddie and Fannie. These fees are likely to be passed on to consumers. The amounts will vary, depending on the credit score and amount of down payment of the borrower.

Least likely to affect wealthy borrowers

Those least likely to face risk fees are those who have perfect credit or who are well off enough to not worry about it. People trying to get a piece of the American dream of home ownership, whether it’s in Jackson, Mississippi, or in Scottsdale, Arizona, now have one more thing to contend with. Risk fees are expected to be incorporated into new mortgages nearly immediately.

Source

USA Today

Bank of America has just set aside some cash to compensate Freddie and Fannie for bad guaranteed loans the bank is responsible for. Image: MoneyBlogNewz/Flickr/CC-BY

Bank of America has reached an agreement to compensate Freddie and Fannie for selling them toxic guaranteed loans. The largest bank in the nation will pay more than $3 billion to the troubled mortgage houses. B of A is expected to take a loss on the deal.

Bank of America to make amends for bad guaranteed loans

Bank of America has finalized an agreement to compensate Freddie Mac and Fannie Mae for toxic mortgage assets sold to the two mortgage houses, according to MSN. Not all of the bad guaranteed loans were sold to Freddie or Fannie by Bank of America, however. The settlement is largely over loans that were originated by Countrywide, which was purchased by and merged into Bank of America in 2008. Prior to that, Countrywide had been one of the largest loan lenders in the nation for mortgages. Of all people who bought a home from New York to San Diego and all points in between before the 2008 mortgage crisis, about one in five got their home loans from Countrywide. Bank of America took over responsibility for all Countrywide assets, including settling with Fannie and Freddie.

Expected loss for largest national bank

It is expected that Bank of America, the largest bank in the nation, will file a $2 billion loss for the fourth quarter of 2010. The bank has set aside more than $3 billion for Freddie and Fannie for Countrywide mortgages and others sold to the mortgage houses. B of A has already bought more than $11 billion in bad bank loans from the two houses, with around $2.7 billion left. Still, Bank of America probably won’t need a cash advance to see the agreement to the end.

Mortgage houses still owed

Numerous large banks still owe Freddie Mac and Fannie Mae some considerable sums, as toxic mortgage assets sold to the two have to be either bought back or compensated for. The government still runs the two companies.

Source

MSN

The regulator for Fannie and Freddie won't let the agencies participate in principal reduction to prevent underwater mortgages. Image: CC Asurroca/Flickr

A battle over principal reduction as a way to keep underwater mortgages and foreclosures from increasing is being waged in Washington. The Obama administration is trying to convince Fannie Mae and Freddie Mac to join a program that reduces the balance of underwater mortgage loans. Experts say the program won’t work unless Fannie and Freddie are on board, but the regulator of those agencies opposes their involvement.

Stemming a rising tide of foreclosures

Principal reduction — reducing the amount owed on a mortgage loan — is viewed as a benefit to both borrowers and lenders. It is expected to serve as an incentive for underwater borrowers to stay in their homes and benefit lenders  more financially than they would through a foreclosure. Nearly 25 percent of U.S. mortgages are underwater. As U.S. home values continue to fall, that number is expected to increase. Government officials have estimated that up to 1.5 million underwater mortgages could be saved from default by principal reduction, which was recently added to the underperforming Home Affordable Modification Program.

Principal reduction program needs Fannie and Freddie

To jump start a sputtering HAMP program, in October the administration started offering banks additional subsidies in return for principal reduction on underwater mortgages. To qualify, borrowers have to be current on mortgage payments and owe at least 15 percent more on their mortgages than their homes are worth. The administration and bankers agree that without Fannie Mae and Freddie Mac going along, the program is unlikely to work. Fannie and Freddie own about half of all U.S. mortgages. So far banks have been reluctant to support principal reduction. The consensus is that if Fannie and Freddie join in, the biggest banks in the U.S. will be pressured to do the same.

Why Fannie and Freddie won’t play

Fannie Mae and Freddie Mac have stayed on the sidelines because the regulator of the agencies, the Federal Housing Finance Agency, opposes their participation. When the government had to take over the mortgage giants in 2008, FHFA was charged with curbing losses at Fannie and Freddie. In the past two years the agencies have cost U.S. taxpayers about $134 billion, and those losses are expected to increase. The Obama administration is pressuring the FHFA to let Fannie and Freddie in. They say short term principal reduction will mitigate more severe long-term losses. But the FHFA says as long as underwater borrowers keep making their payments as is, Fannie and Freddie will keep taking their money.

Sources

Pro Publica

Wall Street Journal

Mortgage11.com

Loan lenders are going to freeze foreclosure activity for the holidays, as is customary. Image: Brendel/WikiMedia Commons/CC-BY

Every year, most home loan lenders halt foreclosures through the holidays. This year, most mortgage lenders are halting foreclosure activity for Christmas, as it is customary to do so. It isn’t unusual, but a foreclosure freeze was already in effect for some lenders anyway.

Loan lenders customarily halt foreclosures

Typically, mortgage loan lenders halt all foreclosure activity from late December until after New Year’s Day, according to CNN. This year will be no exception. Freddie Mac and Fannie Mae have a freeze on foreclosing on any outstanding installment loans that either company lent or backed. Freddie and Fannie are still a long way from emerging from conservatorship, as both companies are still under the direct control of the Treasury, but auctioning a few homes would not help the troubled mortgage houses. Both are still suffering from the weight of toxic mortgages, regardless of how many emergency loans either company has received from the government.

Large lenders freezing foreclosures as well

The nation’s largest loan companies are freezing foreclosures for the holiday as well, as is the custom. JPMorgan Chase, Bank of America and Wells Fargo are all halting evictions from foreclosed properties where the people who were borrowing money lapsed on payments. However, Bank of America and JPMorgan Chase are both embroiled in the “robo-signing” controversy and cannot necessarily evict anyone to begin with. Both companies are accused of automatically signing off on foreclosures without having done the due diligence as to whether the action was legal.

Much needed reprieve

Currently, about 100,000 people lose their homes to foreclosure per month. Foreclosures have been a scourge of the real estate industry, but the bright side, if there is one, is that the rate hasn’t been accelerating lately. However, the key to fixing the real estate market is for unemployment to further decrease.

Sources

CNN

Selling bank loans as securities is not like selling used cars; if securities are defective, the seller must buy them back. Image from Wikimedia commons.

Part of what caused the collapse of the housing market was toxic mortgages. A loan lender or bank would lend a mortgage to a customer and sell the debt as an asset. Sometimes the mortgage went bad because of circumstances, and some were lent to people who shouldn’t have been lent bank loans in the first place. Many of these loans were sold to Fannie Mae and Freddie Mac, and when the assets went bad, Fannie and Freddie went into freefall. Few of these bad loans are being bought back by the banks that sold them.

Bad loans can be repurchased

It seems fair that if bad mortgages were sold on the market and seriously damaging the companies that bought the bad finance loans, those loans should be bought back. In fact, laws were passed that guaranteed loans had to be bought back by the seller if the loans in question went bad. Freddie Mac and Fannie Mae bought a lot of these mortgages. Because both of those companies are seriously in trouble, and the law is on their side, those toxic assets should be getting repurchased.

No redress of defective assets

However, the toxic assets are not being repurchased. In fact, according to USA Today, more than $11 billion in defective loans were returned by Fannie and Freddie to the institutions that sold them, only for the bank or loan company to refuse to purchase them. Of those defective loans, a third have been waiting to be addressed for at least 90 days. The backing for mortgage loans also was provided for by the Federal Housing Administration and the Veterans Administration.

Banks hurting themselves

A bank or loan company that refuses to buy back these loans is only hurting itself. Fannie and Freddie are being propped up with taxpayer dollars, and businesses as well as individuals pay taxes. That means that the longer the mess drags on, the more everyone has to pay, including bank executives and shareholders.

Sources

USA Today

Foreclosed Palm Springs, Calif., home with a graffiti message on the garage door that reads "Mortgage fraud by Mission Hills Mortgage." (Photo Credit: CC BY-SA/Florian Boyd/Flickr)

America’s housing crisis was caused by a number of factors. One that has remained largely hidden from the general public until now is MERS. According to the Nolan Chart LLC mortgage industry blog, MERS (Mortgage Electronic Registration System) is an institution that enables the Mortgage Backed Security (MBS) industry to pass over rules regarding recording and transferring title when a property changes hands. Created by Fannie Mae in the mid-1990s, MERS acts as a quasi-agent (they call it “nominee”) for any party that becomes involved in the mortgage, with the exception of the homebuyer. MERS transacts in an online (rather than brick-and-mortar) world. Thus, as mortgages are bundled, bought and sold at the speed of the MERS electronic network, there is definitely convenience. But since Fannie Mae – which handles well over 50 percent of all U.S. home mortgages – is now owned by the U.S. Treasury, various sources have raised the question of whether MERS has the legal right to be listed on mortgages in the first place, considering that the company never pays for any property.

Suspicion over MERS and the lack of a paper trail

The most significant question raised by the operation of MERS, particularly as it relates to potential mortgage fraud, is whether the company should be able to listen itself on electronic mortgage documents, as MERS has neither paid for any property nor represented the mortgage holder in any tangible legal way. MERS’ streamlined method of recordkeeping has not set well with mortgage industry critics, as the old methods of mortgage processing documentation constituted legal transaction in the past. MERS claim to represent up to 60 million mortgage cases, reports Nolan Chart, is legally questionable in the minds of critics. That’s over $10 trillion worth of mortgages, and it seems likely that a company like MERS – with little or no free market competition – will be hearing from the Supreme Court before long. The question of whether MERS should have the right to foreclose homes must be answered to the satisfaction of the law.

State intervention creates profit machine

MERS sits in a position of great privilege and benefits from public funding. Thus, argues Nolan Chart, the public has a right to be skeptical when little to no free market competition exists to regulate prices. The contract law loopholes that have allowed MERS to operate thus far have expedited the MBS. That industry is largely responsible for creating the U.S. housing crisis in the first place. MERS may need to be reined in by the highest court in the land for the long-term benefit of homebuyers nationwide.

Sources:

Nolan Chart LLC

Wikipedia

Freddie Mac commercial on mortgage fraud

Treasury Secretary Geithner in a meeting with President Obama. Image from Wikimedia Commons.

At a recent press conference, Treasury Secretary Timothy Geithner called for changes to be made to the way the mortgage market does business. He did not issue a hard and fast deadline. However, it is expected that he will tell Fannie Mae and Freddie Mac to get their houses in order within the next year. Geithner also made it clear that the U.S. cannot afford to have to bail them out again and that they were too aggressive in taking on risk.

Geithner unclear on how to proceed

As of now, there is no real plan in place for what to do about Freddie Mac and Fannie Mae. However, Geithner did make a few things perfectly clear. First, Fannie and Freddie will not be resuming business in the manner they were conducting it before the market meltdown. He also pinpointed irresponsible practices, including the two mortgage houses trying to take the bulk of the market from the private sector. He was adamant that the current mortgage industry, as it stands, is untenable, according to Reuters.

Little consensus on how to go about it

There is not much in the way of a consensus among industry insiders or economists on how to best reform the housing industry. Geithner did support retaining some of the government backing of mortgages, as the richest industrial nations all have something akin to Freddie and Fannie for insuring mortgages against loss. Some, such as Bill Gross, the co-founder of the Pacific Investment Management Co., argue full nationalization is necessary. According to Businessweek, the investment guru contended that the private market cannot make a comeback at this point.

Something has to be done regardless of strategy

Despite the wide range of opinions that exist about what to do about Fannie Mae and Freddie Mac, all agree something has to change. According to NPR, the government is already on the hook for $150 billion for the mortgage houses. For the first half of this year, 89 percent of all mortgages granted in America were backed by Freddie Mac, Fannie Mae and Ginnie Mae. Ginnie Mae, unlike Freddie and Fannie, is wholly part of the U.S. government, sells mortgage backed securities only if they meet specific standards and doesn’t lend mortgages.

Further Reading

Reuters

Business Week

NPR

Second-home mortgages used to be used for vacation homes, but now they are used for Buy and Bail. Image: Flickr/ rejohnson71

It’s called “Buy and Bail” — getting a second mortgage-guaranteed loan to buy a house before strategically defaulting on the first. Fannie Mae and Freddie Mac, two of the nation’s largest lenders, have taken actions to quash the practice, but it is still very common. Buy and Bail itself is not illegal, though some borrowers could be charged with fraud.

The basics of Buy and Bail

Buy and Bail what mortgage brokers are calling certain types of emergency loans. Homeowners apply for second mortgages and buy a second home. Once they have moved into the second house, they default on their first. Usually, the first house becomes the victim of strategic default. This practice allows homeowners to get a house and mortgage payments that are much less than their original mortgage before their credit is ruined.

The implications of Buy and Bail

Buy and Bail is an option that, more often than not, borrowers with large financial resources decide to take.

In order to qualify for the second loan, the family has to prove that they have the income and assets to pay both mortgages for the foreseeable future. Additionally, Fannie Mae and Freddie Mac have instituted a policy where the borrower has to have enough money in reserve to pay both mortgages for six months. Eventually, though, the first homes of Buy and Bail borrowers are ending up in default. This increases the stock of available homes on the market and deepens the housing crash. Typically, Buy and Bail homes are worth more than $417,000, meaning they are not likely to sell quickly.

The legality of Buy and Bail

Buy and Bail seems like a practice that should be illegal — an overnight cash advance for the well-off. The only way Buy and Bail can be prosecuted, though, is if the borrower lied on the loan application. If the borrowers were entirely truthful through the whole process, they cannot technically be prosecuted for Buy and Bail. The only thing that happens to a borrower who was entirely truthful throughout Buy and Bail is that their credit rating drops for seven years.

A guaranteed loan is good to keep you from bouncing checks. Image from Wikimedia Commons.

The functions of personal finance and high corporate finance are different, but believe it or not, the two are not completely dissimilar. The companies which need some guaranteed loans at some time, or at least a line of credit in case they need a short term loan are some of the biggest names out there. The Ford Motor Co. needed guaranteed loans from the government. Ford is getting out of debt in double quick time. Meanwhile, Freddie Mac and Fannie Mae need more guaranteed loans to stay afloat.

Guaranteed loans for Ford

During the worst of the recession, the Ford Motor Co. borrowed $23.5 billion to stay afloat and keep Ford from having to file bankruptcy and ask for bailout money. During the car bailout, Ford didn’t need any auto loans, but merely asked for lines of credit as a contingency. It turned out not that asking for emergency loans from the government at that moment panned out. While Chrysler and General Motors were figuring things out, Ford’s sales went up 22 percent, according to the Wall Street Journal. Sometimes just knowing you can borrow can give a boost of confidence; some people like knowing they can get a loan until payday if they really need it.

More guarantees needed for mortgage giants

Meanwhile, Fannie Mae and Freddie Mac need more guaranteed loans from the government in order to stay solvent. According to ABC, Freddie has lost about $6 billion for the second quarter of this year alone. The money hemorrhaging firm is asking for another $1.8 billion from taxpayers.The twin mortgage giants are struggling, and both have less than two years to get their affairs in order. That’s when Treasury Secretary Tim Geithner isn’t going to cut any more checks.

Fortune 500 companies have credit scores too

One of the motivations for Ford is that the credit rating for the agency improves as they pay off debt. Just like paying off a credit card improves your credit score, it works for big companies too.

Further Reading

Wall Street Journal

ABC

Flickr/moneyblognewz/CC-BY

A Wall Street Reform bill was signed into law by President Obama Wednesday. The financial reform bill is described as the most sweeping financial industry reform legislation since the Great Depression. At the signing ceremony for the financial reform bill after months of debate, Obama called Wall Street reform “the strongest consumer financial protections in history.” Republicans called the bill a permanent Wall Street bailout that would hurt small community banks and send jobs overseas.

Financial reform bill finally becomes law

Two years after runaway Wall Street greed nearly collapsed the U.S. economy, the president signed the bill after months of debate. Politico reports that Democrats hoped to produce a strong bipartisan financial reform bill, but in the end it barely passed in the Senate with a handful of Republican votes. Most Republicans argued the bill failed to address the root cause of the 2008 financial crisis: the lending policies at mortgage giants Fannie Mae and Freddie Mac. Republicans also said the bill would force financial firms to move jobs overseas to avoid stricter oversight.

Signing ceremony guest list

At the signing ceremony for the financial reform bill, Obama was flanked by the senators who authored the bill: Congressman Barney Frank of Massachusetts and Senator Chris Dodd of Connecticut, as well as others from Congress who contributed to the reform efforts. But the Washington Post reports that the people who werent’ there speak volumes about the bill. Among those who did not receive a signing ceremony invitation were Wall Street titans James Gorman of Morgan Stanley, Lloyd Blankfein of Goldman Sachs, John Stumpf of Wells Fargo and Jamie Dimon of J.P. Morgan Chase.

Wall Street reform – with a catch

During the ceremony, Obama challenged criticism from Republicans and Wall Street. He described Wall Street reform as a triumph for consumers and a necessity for business, saying the financial system “only works – our markets are only free – when there are clear rules and basic safeguards that prevent abuse, that check excess, that ensure that it is more profitable to play by the rules than to game the system.” The president also said that the meat of the financial reform bill will be left to regulators and that Wall Street greed will still have wiggle room to maneuver. Plus, several parts of the legislation won’t take effect for a year or more as regulators implement new rules.

Republicans call financial reform a Wall Street bailout

The financial reform bill overcame strenuous opposition from Republicans, who charged that by targeting Wall Street greed, it did not address the root problems that caused the meltdown. CBS News reports that in a statement following the signing, House Republican leader John Boehner (who did not receive a signing ceremony invitation) said the bill “provides permanent bailouts for his Wall Street allies at the expense of community banks and small businesses around the country, while doing nothing to reform Fannie Mae and Freddie Mac, the government mortgage companies that triggered the financial meltdown by giving too many high-risk loans to people who couldn’t afford them.”

Fannie Mae and Freddie Mac made some investments that regulators are now questioning. Image from Flickr.

This morning, the Federal Housing Finance Agency announced that it will be investigating the investments of mortgage companies Freddie and Fannie. The subpoenas issued cover files on the secured loans and bank loan information used in securities purchased by the companies. The FHFA believes that some of the liability for these securities may be with the sellers.

Fannie and Freddie’s investments

The investments made by mortgage lenders Fannie and Freddie during the housing boom included many mortgage securities. These “packaged” securities saw huge drops in value when the market crashed. Many of these packaged securities included mortgage installment loans for people with bad credit. There is a belief that Fannie and Freddie fanned the flames of the bubble by being so willing to purchase these securities.

Subpoenas for loan information

The Federal Housing Finance Agency, which recently took over control of Fannie and Freddie, has issued 64 subpoenas to sellers of these poor credit loans. The agency has been attempting to get information on these loans for a while, but has encountered resistance. There is some concern that the sellers of these packaged securities obscured the reality of the risk behind the loans.

Possible result of the loan subpoenas

The subpoenas issued to sellers of these debt loans seek to determine whether some information was not shared. If the loan documents do reveal that information was hidden, the Wall Street firms that sold the securities could be on the hook. Thus far, Fannie and Freddie have lost more than $145 billion of taxpayer money. If there was obscured information or lies in the loan documents, the lenders might be asked to reimburse the taxpayers for money lost because of these loans. The most difficult thing will be actually recovering money, since many of the lenders offering these quick cash loan products are now out of business.

Fannie Mae, which owns or guarantees more than half the mortgages in the U.S., wants to crack down on surging trend of strategic default. Flickr photo.

Fannie Mae upped the ante on strategic default of home mortgages Wednesday, saying that borrowers who default despite having ability to pay or do not seek alternatives in good faith won’t be eligible for a new Fannie Mae-backed mortgage for seven years from the date of foreclosure. Strategic defaults are increasing along with home foreclosures. Numerous offers are proliferating online to assist in strategic defaults. Last week the House passed the FHA Reform Act with a provision for penalizing strategic defaulters in the bill.

Strategic default consequences

Fannie Mae, which owns or guarantees more than 50 percent of mortgages in the U.S., wants more severe strategic default consequences. It is now refusing to back new loans for walk-away borrowers for seven years after they abandon their homes. In a press release, Terence Edwards, executive vice president for credit portfolio management at Fannie Mae, said “Walking away from a mortgage is bad for borrowers and bad for communities, and our approach is meant to deter the disturbing trend toward strategic defaulting. On the flip side, borrowers facing hardship who make a good faith effort to resolve their situation with their servicer will preserve the option to be considered for a future Fannie Mae loan in a shorter period of time.”

Fannie Mae to sue strategic defaulters

In the press release, Fannie Mae,  said it will also sue to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments. In an announcement next month, the company will be instructing its servicers to monitor delinquent loans facing foreclosure and make recommendations for strategic default cases that warrant the pursuit of deficiency judgments.

Defining strategic default

The strategic default issue is a thorny one because of the challenge to define what makes a default strategic. The Washington Independent reports that strategic defaulters aren’t really breaching their contracts. Every mortgage contract defines exactly what happens if the borrowers don’t pay: the bank evicts them and takes the home. It’s doubtful that the government could stipulate that homeowners have to hand over the last of their savings to the bank before they can walk away, or that they have to be hand over a certain percentage of their annual income before they walk away. The money people have left could be used to move to an apartment, pay medical bills or to buy shoes for their kids.