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

The people who strategically default may be doing so because of their financial savvy. Photo Credit: Kelseyman749/Flickr.com/CC-BY

People who engage in “strategic default,” purposely defaulting on a mortgage when it’s no longer worth the effort, may be more financially astute than other homeowners in default. A recent study indicates that strategic defaulters have higher credit scores than people who stick out a bad mortgage. However, there are not many people who engage in the practice.

Higher credit scores among those who default on purpose

A recent study by Fair Isaac And Company (FICO) found that homeowners who engage in a practice called “strategic default” usually have higher credit scores than normal defaulters, according to USA Today. FICO found that people who strategically defaulted on their mortgages usually had most other aspects of their personal finances in order and took steps to protect themselves. For instance, only 10 percent of strategic defaulters had maxed out their credit cards and usually would open card accounts with new companies before defaulting. That way, they didn’t have to worry about having to get bad credit loans when a default showed up on their credit report.

Many disapprove of the practice

Not everyone approves of the practice of strategic default. A survey by legal website FindLaw, according to NASDAQ, found that six of 10 people surveyed did not approve of strategic default. However, 34 percent of respondents said that default was acceptable if the mortgage was underwater. People 65 and older were more accepting than those aged 35 to 44, who were the least accepting of strategic default. Strategic default makes sense from a business perspective. Homes are assets, and it doesn’t make sense to pay more for an asset than it is worth on the market. However, people often feel a moral obligation to meet commitments such as making payments on a mortgage, car or personal loans of any sort.

Foreclosures slowing

The rate of foreclosure slowed during the first few months of 2011, according to CNN. RealtyTrac announced that in the first quarter of this year, it observed 681,000 filings, which includes foreclosure filings, evictions and realty auction notices. RealtyTrac also observed 215,046 homes that had to be vacated by the residents. A filing doesn’t mean a family has been kicked out, only that a notice has been filed. Both figures were reduced from last year. Overall filings fell 27 percent from 2010, and evictions fell by 17 percent. Strategic default has increased during the recession, but is only estimated to have made up 35 percent of all foreclosures overall.

Sources

USA Today

NASDAQ

CNN

14 financial institutions have been ordered to pay back any homeowners that were wrongfully foreclosed upon in the robosigning scandal. Photo Credit: respres/Flickr/CC-BY

Federal authorities have ordered more than a dozen large financial institutions to compensate homeowners who were victims of fraudulent foreclosures. The number of homes that were foreclosed because of robosigning have not been totaled up, and the owners of those improperly foreclosed homes will be paid for their anguish.

Largest banks in the nation to pay the price of incompetence

Federal regulators recently reached a settlement with the financial institutions involved in the robosigning scandal, in which foreclosure proceedings were improperly started against homeowners because bank officers could not be bothered to do their due diligence on the paperwork regarding the state of the homeowners’ personal loans. Part of the settlement agreement, according to Reuters, is that any homeowners who were wrongly foreclosed on have to be repaid by the bank that did it. There were 14 companies in all, according to USA Today, including lending companies Ally Financial, Aurora Bank, EverBank, HSBC, Sovereign Bank, SunTrust Banks, MetLife Bank, OneWest Bank, PNC, U.S. Bank, Wells Fargo, Bank of America, JPMorgan Chase, Citigroup and subsidiary Citibank. Loan servicing companies MERSCORP and Lender Processing Services have also been ordered to pay back improper foreclosures. Affected homeowners will likely be contacted by these institutions in the near future to make arrangements.

Total fallout to be determined

It isn’t known yet how many people will be recompensed or how much in fines lenders will have to pay. Some government officials have been recommending up to $20 billion in fines be levied against the financial institutions involved. To further add to the headaches of these institutions, this is only from the settlement with the Federal Reserve, the Office of Thrift Supervision and the Office of the Comptroller of the Currency. Other settlements with other federal agencies are still pending as well as every state attorney general in the nation.

Costs of mortgages to increase

Banking and real estate insiders are insisting that the new legislation and increased regulatory scrutiny will increase the costs of lending a mortgage to a prospective homeowner. New Federal Reserve rules on mortgage officer compensation, according to MarketWatch, may cut into commissions for loan officers. Mortgage brokers and loan officers at lending institutions cannot receive a commission based on the interest rate at which a mortgage is lent at any longer, which analysts predict will eat into profits. The Center for Responsible Lending, a consumer advocacy group that has endorsed reform of financial products from mortgages to payday loans, insists that costs to consumers will not go up, but decreasing revenues are usually passed to consumers in the form of increased costs.

Sources

Reuters

USA Today

MarketWatch

Maryland lawmakers are hoping a short term loan of foreclosure fees will keep property values up. Image: Flickr / TheTruthAbout / CC-BY-SA

In some areas of the country, the number of foreclosures continues to rise. One Maryland county is hoping to address the problem with a fee on foreclosed homes. The bill would also make it a criminal offense to let a home fall into disrepair.

Maryland’s high foreclosure rate

Maryland has been facing high foreclosure rates since the housing collapse in 2008. Prince George County in Maryland has had one foreclosure for every 457 households thus far in 2011. Many of the homes in Prince George County are not being maintained, which is reducing property values at the same time inventory is going up. Not only does this lead to urban blight, Prince George County tax revenues are falling.

Charging a foreclosure fee

Prince George County has been appealing to the state lawmakers for the right to do something about homes that are not maintained. The county wants to charge owners of foreclosed homes $75 per year. This money would go into a county fund that would pay for contractors to clean up abandoned homes. Essentially, it would be one more fee on the short term loans of foreclosures. The county would also be given the right to send inspectors to check on foreclosed homes.

Problems with foreclosure fees

Getting a short-term loan in the form of foreclosure fees is intended to help the city care for foreclosed homes and improve property values. The fee, however, could be the equivalent of trying to squeeze blood out of a turnip. The county says it will not be trying to collect the $75 fee from homeowners in debt. However, that means that the county may be trying to collect a per-house fee from banks that own the properties and are not maintaining them. In order to help ensure this happens, the county may also be creating a criminal or civil misdemeanor offense for not “keeping a property up to neighborhood standards.”

Source

Washington Examiner

Many active-duty servicemembers are facing even tougher financial realities if they bank with JPMorgan Chase. Image: Flickr / troismarteaux / CC-BY

JPMorgan Chase is facing tough questions about its treatment of servicemember finances. JPMorgan Chase has foreclosed on many active servicemembers’ homes under questionable circumstances. Now, Chase is re-thinking how they handle active duty servicemembers’ student loans.

JPMorgan Chase and active service members

JPMorgan Chase is a mega-finance bank that provides financial services such as student loans, mortgages, checking, savings and lines of credit. Congressional committees and federal prosecutors are both investigating how JPMorgan Chase has handled the finances of active-duty military service members, including military loans. The accusation is that Chase is overcharging active duty servicemembers.

Student loans for service members

Active-duty servicemembers who have their student loans through JPMorgan Chase received surprising news over the last few weeks. Their student loans, which had previously been deferred, were coming due. The policy of JPMorgan Chase had been to defer all student loans while military members were on active duty. This short term loan policy was reversed in late January 2011. Some servicemembers were informed that they would owe over $400 per month extra, starting in just weeks. After multiple complaints from servicemembers saying they would need to take out a payday loan to cover these costs, and the threat of additional congressional inquiries, Chase re-reversed the policy.

Congressional inquiry into Chase mortgages

JPMorgan Chase was the subject of an ABC News investigation that kicked off congressional inquiries just a few weeks ago. Chase has admitted that they overcharged and wrongly foreclosed on several service member’s homes, including homes in Reno, Nevada and Irving, Texas. These actions, and possibly the student loan policy, may violate the Servicemembers Civil Relief Act. The act limits the legal and financial actions for which servicemembers can be held responsible while they are on active duty.

Sources

MSNBC

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

Bank of America could conceivably be paying for the mortgage loan modification mess for decades. (Photo Credit: CC BY-SA/Michael Gray/Flickr)

Waiting for mortgage loan modifications that banks fraudulently promised has thrown thousands of American families into foreclosure. Bank of America, perhaps the nation’s worst offender, has been a target of the Federal Reserve because of mortgage bonds for a while, and now the State of Arizona is stepping in on behalf of its homeowners. The Associated Press reports that state Attorney General Terry Goddard has filed a civil lawsuit against Bank of America for what he claims is multiple violations of consumer fraud law by “misleading consumers” who are seeking mortgage loan modification.

B of A lied to mortgage loan modification customers

Reports indicate that despite a string of assurances that the mortgage loan modification would go off without a hitch – a string of assurances that would last many months – Bank of America still foreclosed on hundreds of Arizona homes. Throughout the waiting period, many homeowners whose mortgages were underwater continued to make payments, only to find later that B of A had lied and would not grant a mortgage loan modification. Foreclosure was the next nasty step.

“Those people could have used that money for something else,” Arizona Attorney General Terry Goddard told the AP. “They were deceived into continuing to make mortgage payments when they had no hope of saving their homes.”

Consumer complaints spurred Goddard to action

After receiving a massive number of complaints from Arizona residents regarding Bank of America’s mortgage loan modification practices, Attorney General Goddard took action more than a year ago. There had been talk of a settlement dating back to April, but those talks dissolved yesterday. Today, the State of Arizona has filed suit against Bank of America in Maricopa County Superior Court. According to Goddard, the State of Nevada is expected to file a similar lawsuit.

Sources

Associated Press

A tale of B of A mortgage loan modification woe

U.S. home ownership rates have fallen to the lowest level in a decade, and millions of Americans are expected to lose their homes in 2011. Image: CC TheTruthAbout/Flickr

U.S. home ownership levels have declined to the lowest level in more than a decade. The trend has accelerated in recent years because of high unemployment, a foreclosure crisis and falling home values. Millions of Americans have lost their homes in the last five years and millions more are expected to in the near future.

Home ownership declining steadily

Home ownership in the U.S. has declined steadily over the last five years according to a report from the U.S. Census Bureau. U.S. home ownership has dropped by 3 million households since 2005. In the third quarter this year the rate of home ownership was 66.9 percent — the lowest rate since 1999. The home ownership rate peaked in the first quarter of 2005 at 69.1 percent. The economic uncertainty of the past several years hit younger homeowners the most. In the third quarter 39.2 percent of people younger than 35 owned homes, a decline of 9 percent since 2005.

Housing market repercussions

As homeownership falls, the housing market follows. U.S. existing home sales in September dropped 19 percent from the year before. The current annual rate of 307,000 existing home sales is a historic low. The lack of sales continues to drive down home prices. The Census Bureau reports that 18.8 million homes are vacant. Housing starts in 2010 are at about a 600,000 a year annual rate, far below what is considered normal. A real estate analyst told CNN that fewer people are forming new households or renting. Families are doubling up and younger people are living with more roommates.

Home ownership and the foreclosure crisis

Nearly a million homes are expected to be foreclosed on in 2010. If the unemployment rate doesn’t go down, analysts have said foreclosure numbers will be even higher in 2011. A Morgan Stanley report said that about 3.1 million mortgage holders are seriously delinquent, and many are expected to lose their homes. An additional 4 million homeowners are falling behind, and half of those are expected to go into foreclosure. The total number of homes in danger of foreclosure is about 11 million.

Sources

CNN

Daily Finance

Consumer Affairs

Renting with bad credit is a challenge more people are facing. It requires a clear strategy to succeed. Image: Thinkstock

Renting with bad credit is a challenge a great number of people are facing these days, thanks to the housing crisis, mortgage lending meltdowns, unemployment, foreclosures, etc. Circumstances beyond their control have put many people in the bad credit doghouse. But a decent place to live, or simply a roof over one’s head, is a fundamental need that must be met. The bottom line is simply that the rent must be paid. For people with bad credit who can pay the rent, securing a place to live requires a strategy.

Know the facts about your credit score

It’s tough for renters with bad credit to lease an apartment or house, whether the economy is good or bad. AOL Real Estate says that credit scores, income and employment history, are the major factors landlords use to evaluate renters. The first priority a renter must address is to know where they stand with their credit. Anyone can get a free credit report at annualcreditreport.com. This is the official government site for the free credit report everyone is entitled to by law once a year. Credit scores are available for purchase from any of the nationwide credit reporting agencies providing the credit report via this site.

Stay away from a credit check

The best way to successfully rent with bad credit is to avoid getting a credit check. According to CNN, houses or apartments rented by an independent owner may be more easygoing than properties managed by a professional management company. Start by checking Craigslist, free newspapers and bulletin boards. Landlords advertising in these venues are trying not to invest any money in advertising rental units, and the odds are better they won’t do credit checks. When you ask about the place, ask them about the criteria they use to evaluate renters. If a credit check isn’t on their list, you’re a step closer to success.

Other bad credit rental options

The reality for renters with bad credit is that most landlords require a credit check and a completed application before they will lease an apartment. According to About.com, options are still available. Getting someone to vouch for your financial responsibility can help offset bad credit. A family member or good friend with good credit can also act as a co-signer on the lease. Getting a roommate with good credit could help. But keep in mind that if your name isn’t on the lease, you’re not building your credit with a rental history.

The auction gavel is due to fall on more homes, as repossessions are skyrocketing. Image from Wikimedia Commons.

The dismal saga of the real estate industry in America continues, and despite the occasional bright spot, there is still plenty of bad news to go around. Sales were boosted for some time by the home buyer tax credit. Foreclosures were barely helped by the loan modification program from the government. Not only did few homeowners actually have their bank loans and homes saved by the program, but repossessions have actually increased. In fact, repossessions increased by 25 percent since last year.

Repossessions skyrocket

The number of repossessions has shot through the roof since 2009. According to a recent report by RealtyTrac, repossessions are higher than have been recorded since the recession began. The number of repossessions in August 2010 was up to 95,364, according to Bloomberg. RealtyTrac has never recorded that large a number of repossessed homes in its existence. The number of repossessed homes, where a homeowner has to vacate the premises and the loan company tries to resell it, have only increased. Since August of 2009, repossessions increased 25 percent.

Foreclosures decrease

However, there is some good news. Overall foreclosure and default notices decreased by 5 percent since July of this year. That being said, there is a difference between foreclosures and repossessions. A foreclosure is when mortgage holders have fallen into default, and the bank begins a legal process to get them out of the homes. There also are ramifications, such as the mortgage holder being responsible for any lost revenue when the home sells. Repossessions are just when the bank or finance company kicks a delinquent homeowner out but doesn’t start any legal proceedings, and just resell the home.

Foreclosure inventory increasing

There is an incredible stockpile of available homes, some at discount prices. It isn’t as if you can buy a home with a small cash advance, but if you can get the financing, a good home can be acquired at a great price. As it stands today, one in every 381 homes in America has received a foreclosure notice.

Sources

Bloomberg

Existing home sales are down, thanks to the tax credit expiration and high unemployment numbers, to name just two factors. (Photo Credit: CC BY-ND/David/Flickr)

While new home sales showed an increase in June (but a marked decrease in July), the Association of Realtors has revealed the dirty underbelly of those statistics, reports Bloomberg. Contracts to buy previously owned homes were down that month, something that experts did not predict. The indication here is that as the home buyer tax credit expired, demand spiraled downward.

Economists predicted 4 percent growth in existing home sales

The median forecast by the National Association of Realtors had a much rosier outlook on June 2010. Existing home sales weren’t predicted to fall as far as they did immediately following the April 30 deadline for the government tax credit, when a massive 30 percent drop occurred. Bloomberg reports that 30 percent drop in May 2010 was the largest decrease in existing home sales since the association began the median forecast in 2001.

No more $8,000 credit means people need to earn more

Of course America remains in a recession, which means that unemployment is still high and wage gains remain stagnant. As Treasury Secretary Tim Geithner predicts that unemployment will increase in August, existing home sales probably aren’t going to be trending upward for a while. Stocks are down in anticipation of the bad news, as the Standard & Poor’s 500 recently went down 0.6 percent.

Existing home sales are the bulk of the housing market

In fact, 90 percent of the U.S. housing market consists of existing home sales, so the recent downturn doesn’t bode well for a housing market recovery. Lawrence Yun, chief economist of the National Association of Realtors, told Bloomberg that “There could be a couple of additional months of slow home sales activity before picking up later in the year, provided the job market improves.”

The specter of home seizure

Then there are those pesky foreclosures. Even though 30-year fixed mortgages are down to 4.54 percent at July’s end, foreclosure was up 38 percent from the year previous, according to RealtyTrac, Inc. Donald Horton of home builder D.R. Horton Inc. remarked that market conditions have become quite challenging, and there’s no immediate end in sight.

Sources:

Bloomberg

Homeowners who are staying put

Mortgage holders and banks are playing a very intricate game. Image from Flickr.

Strategic defaults — when a mortgage borrower decides to pick up and just walk away from their mortgage, even though they can pay it — are increasing. About 31 percent of mortgage foreclosures were estimated to be “strategic” in March of 2010. Strategic defaults can, more than ever, be an option for borrowers whose mortgages just don’t make financial sense anymore.

Defining strategic default

When borrowers owe more on a property than the property is worth, their mortgage is said to be “under water.” Many borrowers with mortgages that are under water are choosing to simply not pay their loans. When a borrower cannot afford the mortgage, this is called a default. When the borrower can pay the mortgage, but has chosen not to, it is called a strategic default.

Fallout of strategic defaults

When a borrower chooses to strategically default, there are consequences. There are two major types of mortgage loans: recourse and non-recourse. If you have a recourse mortgage loan, you owe the full amount of the mortgage, whether you give the house back to the bank or not. A borrower with a recourse mortgage can walk away, but the bank has every legal right to come after them for the payments, fees and additional charges. A non-recourse mortgage, however, is written in such a way that if the borrowers hand the keys over to the bank, they can walk away and not owe anything else on the loan. Either way, borrowers will take a hit on their credit reports. Mortgage borrowers who strategically default will also be waiving their eligibility for certain federal aid programs for five years or more.

Options other than strategic defaults

There are options other than just walking away and taking the credit score hit and finding a new place to live. The Making Home Affordable loan modification program has been put in place to help borrowers modify their loans so they can afford them – though it doesn’t always work. Short sales are one other option – finding a buyer that will negotiate with the lender to buy the house just for what is owed on it.

Strategic defaults are an option for some borrowers who are under water with their loans. There are other options, but for more than 30 percent of people that end up in foreclosure, it’s a strategic financial decision.

An underwater home mortgage doesn't offer have options, but new federal programs can offer some flexibility. Flickr photo.

Nationwide, CNN reports that about one in four home mortgages are underwater. An incredible 25 percent of borrowers owe more than their houses are worth. The Federal government has been trying to stop the bleeding with many new financing programs. There’s always mortgage loan restructuring, but what if you just want to get out of the house instead of sinking money into it?

Caught in a mortgage bubble

Many families who financed a mortgage a few years ago, before the real estate bubble burst, had double incomes from good jobs. A high monthly payment on an adjustable rate mortgage seemed affordable at the time, especially if refinancing later would result in an appraisal worth more than the selling price of the home. But the real estate bubble did burst, and prices have fallen an average of 26 percent nationwide. About 10 million people lost their jobs.

New federal refinancing program

With a home mortgage underwater and lower income, mortgage loan restructuring may be better than selling for a loss, even if you could close a deal. Moody’s economy.com reports that prices in 61 percent of American cities won’t return to pre-recession levels until 2015. But a new federal program that refinances existing loans into smaller FHA loans could lower monthly payments. People who haven’t fallen behind on payments can qualify — if their lenders say it’s OK.

Shortsale or foreclosure?

Free advice about underwater home mortgages is available at makinghomesaffordable.com. If a property does undergo a short sale, this website may be able to learn whether or not the lender can come after you for the difference down the road. An expert can also show you how to make sure that a short sale doesn’t damage your credit like a foreclosure would. Foreclosure should always be a last resort because it stays on your credit report for seven years.

Another option for an underwater home mortgage is to make a case to your lender that you are so broke you could just walk away. A cleaner option may be to ask your lender for a short sale, in which it would accept less than the loan amount. A breed of real estate agent called a distressed property specialist makes a living twisting the arms of reluctant bankers.

Applying for a Convenient Loan

Loan companies have assisted the consumers by simplifying their application process, making it easier to apply and qualify for the loan. Consumers who are over the age of 18, have a job and a current active bank account can apply and qualify for the fast loans. The lender will examine the application, make an approval decision and determine how much money the applicant is eligible to borrow. Funds can be made available within 48 hours of the loan approval. It is being estimated that the US citizens will not see an improvement in their economy for at least a year, and the straining economy has caused a need for government bailout which has limited the normal lenders in the US.

Struggling US Banks

In 2008, the US banks began showing signs of struggle within the country’s economy. Although in 2009 the US banks have begun to show profits gaining, analysts advise that the banks increasing profits do not prove that the US economy is completely out of its recession. The banks have improved since the bailout, however; that does not mean that they are not still suffering from smaller losses, which have been experienced throughout the months. Despite their improvements, the US banks are still not operating at the levels they were in previous years.

Analysts warn that although the banks are improving with revenue increasing more than expenses, the US banks still have issues from the past that must be dealt with. The lending practices of many banks are one reason the banks fell into hard times. Lenders were approving loans for almost anyone who applied without checking the applicants properly. Unwise lending was becoming more and more popular and is believed to be a large contributor to the recession experienced in the US. Banks hope that the bailout they received, in addition to interest rates, will allow them to completely turnaround their struggling situation, giving them the opportunity to start fresh.

How Fast Loan Lenders Benefit?

The US banks have shortened lists of qualified borrowers, which have led to an increase in business for cash advance loan companies. Due to the structure of their loans, this type of lender still remains able to extend money. Individuals needing loans that were turned down by conventional banks are finding approval from these loan companies. A simple application process, willingness to lend, and the structure of their loans is what allow this type of lender to extend monies to those individuals who find themselves in need of a loan.

Foreclosure Still on the Rise

Decreased business activity and an increase in unemployment continue to push borrowers into default. Many banks have put a stop on foreclosures, pending the results of the government bailout and how it would affect the market. Once banks begin sorting out the questionable loan customers, a decrease in their profits may once again begin to rise. It is difficult to estimate the number of defaulted homes that may occur in the future. With employment being difficult to find in many regions of the US, foreclosure will still occur as consumers make difficult choices pertaining to their financial state. Conventional lenders are being careful about who they choose to lend to. Many Americans have turned to and will continue to turn to the quick loan lenders, rather than the banks, to apply for loans. These loan companies are in a better position to extend funds, which helps the consumers.

Cash advance loan companies are becoming more popular as the US banks and economy continue to struggle. Fast and simple, this kind of loan looks good to consumers. The application process for these quick loans is simple and convenient, unlike the process taken by traditional financial institutions. The structure of these loans makes it easier for these lenders to extend money to those in need. US banks are making it more difficult for Americans to borrow money, and Americans find themselves turning to this type of Loan Company to supplement their income when times are tough.

Start your quick cash advance loan application HERE!

With housing markets across the county in shambles, millions of homeowners are sitting on real estate that’s worth less than they owe on it. Many of those people are also having trouble making their monthly mortgage payments, and some of them are losing their homes as a result.

Whether your mortgage lender forecloses on your property, whether you voluntarily surrender it, or whether your lender agrees to a short sale — losing your home is never pleasant. Even so, most people who have to surrender their real estate heave a sigh of relief at finally being freed of an impossible financial burden. Sadly, what many of them don’t realize is that they may still be liable for the unpaid portion of the mortgage debt.

Many homeowners are underwater

We used to think of foreclosure as something that only happened to other people. Then, as the sub-prime mortgage crisis gathered steam, thousands of homeowners who had borrowed more than they could afford to pay — thanks to lenient lenders or exaggerated incomes — had to surrender the property one way or another.

With real estate prices having fallen so drastically in many areas, a huge number of homeowners who bought houses they could afford at the time, and who always made their payments on time, are in trouble as well. Some have lost their jobs, had to relocate for work, or filed for divorce, and now they can’t sell the house for enough to pay off the mortgage. When you owe more on your mortgage than your home is worth, it’s known as being “underwater” on the mortgage.

Each state has different laws

In more than 30 states, lenders can sue to recover the deficiency on a mortgage debt once the property has been sold. New York, Texas, and Florida are among the states that allow lenders to pursue deficiency judgments after a foreclosure or short sale. California is one of the states that don’t allow deficiency judgments; but even there deficiency judgments can sometimes be obtained on refinance or second mortgages.

Deficiency judgments can be obtained long after the fact

Many people who are facing foreclosure now don’t realize that the lender won’t necessarily act immediately to recover a deficiency on the mortgage. Sometimes mortgage holders wait until real estate prices start to rise, sell the house, and then (based on the assumption that your financial situation will have improved right along with the housing market) pursue you for the difference, with interest. In Florida, for example, a bank may wait five years before bringing suit to collect a deficiency and can renew a deficiency judgment for up to 20 years.

Negotiate a legal release

It’s important to know your legal rights if you have to give up your home, so get legal advice from an experienced attorney in your area. An attorney may be able to negotiate a release from your obligation to compensate the lender for a deficiency in the event of a foreclosure or short sale. If you get proper legal advice and assistance, and you’ll know where you stand and can make a new start without the threat of a deficiency judgment.

Photo from Picasa

Americans surveyed

Foreclosures, bad money lenders, and unscrupulous credit card company tactics took their toll on the American public throughout 2009. According to a new poll done by the AP-Gfk, 42% of Americans labeled 2009 as a “very bad year.” The last time the poll was done was back in 2006 when 39% considered it a “good year.” The results of the survey are telling of how the public is processing the hard recession and its affect on the economy.

On the bright side

Results of the survey showed that though Americans believe that 2009 was a harrowing year in terms of the economy, they also believe that 2010 will be a good year. The traditional optimism of the American public is still alive despite the recession. In fact, 72% of those surveyed are anticipating better times for the economy and almost 80% are anticipating better times for their individual families.

Mari Flanigan of South Milwaukee, Wisconsin is one of the country’s hopefuls. Flanigan is a 36-year old unemployed woman whose business was pushed out of the market due to competition. She said, “My finances now are in shambles, but I believe that now the recession is over, things should turn around.” Despite her optimism she still admitted, “Financially, I am scared.” Her plan to recover includes going back to school, rather than jumping into the job market again. She said, “I’d rather find something where I make less money, but do something I love.”

The hopeful future and a resilient nation

The survey done by the AP-Gfk also showed how resilient the American public is. Take Marcia Andrews of Blairsville, Pennsylvania, for example. She was a high school nurse in the beginning of 2009 but due to budget cuts in education, her position was eliminated. At 69-years old, there were not a lot of options readily available. She said, “It was the wrong place and the wrong time for me.” Now, almost a year later she is in the beginning stages of converting an old house into a bed-and-breakfast. Though the economy is down, she was able to sort through money lenders, personal finances and debt to find a great business loan for funding.

Then there is James Lewis of Alton, Illinois. His view on the recession is harsh. He stated, “Everything [was] done wrong. Everybody [was] losing their 401k. Some people losing their house and their retirement.” Though he is critical of government ways, he also acknowledges that 2009 was not “too bad” for him personally. His hope is that once the economy stabilizes he will have another shot at finding a better job.

What will 2010 hold

Regardless of how people are responding now, the true state of the economy will unfold in just a few short months. Though 2009 was riddled with record numbers of foreclosures, bad money lenders, and heightened unemployment rates, there is still hope that the unknown of 2010 will be positive. Only time will tell what state the economy will be in, but surveys are showing that public perception is optimistic. As one unemployed American said, “In times like these, sometimes all you have is your attitude.”

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Do mortgage brokers profit excessively from yield spread premium charges? Will borrowers ever discover credit repair?

The subprime mortgage crisis helped make a mess of America’s economy, to the point where credit repair has become a questionably attainable goal at best. The path toward more house than Joe Consumer can handle financially was paved by upside down transactions with mortgage brokers. When compared with direct lenders, working with mortgage brokers generally stretches out the time it takes in which to close a mortgage loan and introduces the consumer into murkier financial waters.

Swimming with Yield Spread Premiums

A yield spread premium (YSP), according to the Center for Responsible Lending (CRL), is “a bonus a lender pays to reward a mortgage broker for placing, or steering, a borrower into a higher-cost loan than the borrower qualifies for.” That would typically include hefty prepayment penalties that keep the consumer stuck in the loan long enough to extract higher profits. The CRL points out that resulting foreclosure cases harm not only the borrower, but society as a whole in the form of lessened property values and tax revenues.

Studying the Gross Profits of Yield Spread Premiums

That’s what Antje Berndt, Burton Hollifield and Patrik Sandas of Carnegie Mellon University and the University of Virginia set out to expose in their paper “The Role of Mortgage Brokers in the Subprime Crisis.” They play a large role in the recent American mortgage market, as they are a centerpiece of subprime loans. And by the authors’ estimate, subprime mortgage loans accounted for at least 75 percent of all mortgages originated as late as 2006.

“What were the explicit and implicit incentives for mortgage brokers to match borrowers with different types of mortgages?” ask the authors. Furthermore, “Did these incentives change during the run up to the crisis?”

How Does the Yield Spread Premium Work?

Lenders provide the mortgage broker with a set of incentives. One example the authors give is a lender paying the broker a kick-back for offering more expensive loans to consumers. Sure, it gets them in a home for a while, but it works against their financial best interests. The broker, given this incentive, is working to aid the borrower first and the consumer a distant second. Or at least that’s the theory that the authors explore. They search for evidence in the records of one of the largest subprime loan originators – New Century Financial Corporation – from 1997 through March 2007. The authors study info on borrower creditworthiness, loan purpose, appraised value of the property, property location and type, type and terms of the mortgage loan, loan service records and info on broker involvement. This leads to the profit portrait.

How Does the Loan Origination Process Work?

In five steps, here’s what New Century does:

1. Brokers attract borrowers to complete loan applications. Applications are sent to a New Century account executive (AE) or the company’s Web portal.
2. AEs forward apps to New Century managers for documentation review.
3. If documentation is in place, AEs send loans through the underwriting process, where the approval or denial decision is made, based upon the consumer’s credit and mortgage histories. The interest rate and terms are set at this time and the home is appraised.
4. If approved, the loan goes to a closing agent.
5. After loan documents are sent, documents are sent via closing agent to a funding officer, who sets the wire process in motion.

Think New Century was Approving Every Subprime Consumer?

You’d be wrong, say the authors. Of the 330,000 subprime loans funded in 2006, there were nearly that many who were either withdrawn by the consumer (buyer’s remorse) or denied outright. Either way, brokers were being compensated for a good year’s work in the subprime market, it would seem.

Speaking of compensation, loan origination and credit fees play a significant role in a broker’s payment. But then there are those YSPs. The more higher-rate loans brokers originate, the more they stand to make in profit. Think that customers were being nudged (perhaps too gentle a term?) toward YSPs? Considering that brokers don’t have to disclose the yield spread premium until after the closing statement is signed, there’s very little mess until after the consumer has already opened a vein to sign the contract in blood, so to speak. YSPs account for around 65 percent of broker revenue, according to the authors. The average dollar revenue per loan was around $7,000.

Underwriting the Risky

Based upon a borrower’s characteristics (credit quality, willingness to pay, etc), the broker presents financing options to the consumer. One or more lenders receive funding requests from the broker, and the lenders make the ultimate decision. “The loan will be originated,” write the authors, “if the lender’s surplus is positive so that the lender agrees to the funding, if the gains from trade between the borrower and the broker are positive, and the fees will be set so that the surplus is split between the borrower and broker in proportion to their bargaining power.”

Other Mortgage Loan Profits

A hybrid mortgage loan (aka a fixed-period adjustable rate mortgage) is another profit machine for brokers, pumping up their returns by about 28 percent. Mortgages with “limited documentation or stated documentation” increase broker profits by 33 percent and 18 percent, respectively. Those mortgages that have prepayment penalties (yield spread premium territory) offer 29 percent greater profits. In the case of a refinancing where cash is taken out, the authors found that broker profits nearly doubled.

Some other factors that influenced ability to reap excess profit included broker experience and strength of broker-lender relationship. Lenders likely viewed such brokers as have greater bargaining power over consumers, particularly with mortgage contracts where documentation was minimal and the consumer was gullible enough to sign on. Complex mortgages with minimal documentation for the consumer (not to mention a skilled broker) roped in their share of what amount to many foreclosures. That’s hardly an environment for consumer credit repair, it would seem.

High Profit Loans and Borrower Delinquency

You can only ask so much from borrowers with limited means. As the underwriting criteria for New Century and numerous other mortgage lenders was too slack, the result was expensive mortgages without people who could pay for them. Yield spread premiums created the profits brokers desired and the lenders were happy just to see loans originated, regardless of realistic ability to pay in many cases. Thankfully, the Obama administration has paid close attention to restructuring the mortgage loan market, but will it be enough to allow consumers to find avenues for credit repair? That remains to be seen. In the meantime, if you’re looking to take out a mortgage or refinance, here’s a mortgage calculator. Do the math before a lender or broker does it for you and has you paying their yield spread premiums.

(Photo Credit: http://www.flickr.com/photos/fibonacciblue/ / CC BY 2.0)

The real estate foreclosure industry remains a fertile place to invest money. In a wounded American economy, banks and other lenders specializing in real estate finance have accumulated a surplus of foreclosed properties. However, this misfortune has created a unique environment for those in a position to invest money in the market. In fact, this damaged economy has ushered in a highly profitable investment niche, commonly referred to as bulk REO investing.

What Does REO Mean?

REO is an acronym for Real Estate Owned and is popularly used in real estate finance communities. More specifically, it most commonly refers to real estate owned by a bank or other real estate finance company as a result of the property’s former owner defaulting on mortgage payments. Although bulk REO investing sounds like a new real estate finance term, it is actually founded upon the age-old concept of purchasing multiple foreclosed properties in a single transaction. To better understand how this particular investing niche functions, it is helpful to first gain a basic understanding about how the foreclosure market works and why this is such a lucrative opportunity for those who can afford to invest money in bulk REO purchases.

Why Do Banks and Real Estate Finance Companies Sell Properties So Cheap?

Banks and other real estate finance lenders prefer to loan money and are not in the business of stockpiling real estate. In fact, having too many foreclosed properties on their books quickly turns into an accounting nightmare, as what was once deemed an asset when it was in the form of a healthy loan quickly turns into a liability when the real property is actually returned. In an attempt to protect their own credit and financial interests, banks routinely auction or outright sell their real estate surpluses at much less than their original cost or even their current retail value. Real estate finance companies far prefer to take a loss than to be burdened with the responsibilities of real estate ownership. Banks are not interested in trying to rent the property, lease it or even sell it on a retail market, as this would mean having to do things like invest money to make necessary repairs to the property and protecting it from vandalism during periods of vacancy. Instead, they far prefer to give others who are willing to invest money and time in these efforts, an opportunity to buy the property for less than its retail value as an incentive for a fast sale.

Why Are Banks Willing to Sell REO Properties in Bulk Quantities?

Even in this turbulent economy, those able to invest money in real estate are buying foreclosed properties in order to sell them for profit. These are mostly individuals who can afford to not only buy the property, but make any necessary repairs and improvements before listing it on the retail market. However, because banks own so many foreclosed properties in this market, they are eager to sell more of them than they normally would. Therefore, in an effort to avoid the liabilities discussed earlier, real estate finance professionals have created bulk REO investing packages.

Are Properties Included in a Bulk REO Sale Worth the Investment?

It is not uncommon for bulk REO packages to include properties that are in need of extensive repairs. However, those looking to invest money in real estate, and who are often buying such properties for a mere fraction of their retail price, are eager to do so regardless of their condition and sometimes are even willing to purchase them sight unseen, as they realize the profit potential involved.

As bulk REO offerings become more common, those looking to invest money in the foreclosure market are discovering an enormous opportunity to create substantial real estate wealth. Though the original owner unfortunately lost their property, smart investors who realize the opportunities being handed to them by real estate finance companies have been able use a downtrodden real estate market to their utmost benefit.

Renters are using short term loans to help with the loss of their homes. Since the recession, many homes have fallen into foreclosure and a lot of those homes have renters living in them. These renters are in difficult situations, not knowing when to leave, what the procedure is or what to do. Now a new federal law has been enacted that offers renters protection from eviction if the property they are renting is lost in a foreclosure.

The Protecting Tenants at Foreclosure Act

A Federal Reserve release reads, “The fundamental purpose of The Protecting Tenants at Foreclosure Act is to ensure that tenants facing eviction from a foreclosed property have adequate time to find alternative housing. To that end, the law establishes a minimum time period that the tenant can remain in the foreclosed property before eviction.”

The National Low Income Housing Coalition, or NLIHC, estimates that about 40% of houses in foreclosure have renters in them. NLIHC President Sheila Crowley stated, “This bill brings long overdue relief for the most blameless victims of the foreclosure crisis—the families who, after paying their rent each month, are suddenly told they must move out of the homes because their landlords have been foreclosed on.”

How the new law works

The Protecting Tenants at Foreclosure Act gives renters with existing leases the ability to stay in their homes until the leases terminate. The only way an existing lease can be altered is if the property is purchased by new owners who plan to use the home as their primary residence. In that case, the renter is still allotted 90 days to vacate the property, and the law overrides the lease termination date. Crowley added, “There are stresses when the home you are renting is going into foreclosure and most people have budgetary issues that won’t allow them to immediately relocate.”

How renters are managing

Increasingly, families that have to relocate rely on short term loans, family help, and savings to facilitate the move. Howard Gregory of Plainfield, Illinois said, “It was hard when we had to move, but having financial resources was what kept us hopeful for a solution.” Industry experts are cautioning every renter to have some emergency fund to fall back on. It is imperative that they have the means to act quickly if need be.

The Protecting Tenants at Foreclosure Act also helps tenants who do not have existing leases. According to the new law, they still have 90 days to manage their move. This gives them enough time to search, move and get settled before any evictions proceedings even start. That’s good news to the millions of Americans who are renting. It’s a way for them to manage a difficult situation.

The future of renters and foreclosures

The numbers speak for themselves. Foreclosures are rampant in the US market today. It is estimated that more than 60% of homes in Las Vegas, for example, are foreclosures. That means many renters may have difficult times ahead of them. They may need savings or short term loans to fund moves. With the Protecting Tenants at Foreclosure Act, however, things should be a little easier.

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Underwater on your mortgage? You're one in four.

As the nation’s housing crisis enters its fourth year, the option of walking away from mortgages on over-encumbered homes is gaining social acceptance.  Recently, University of Arizona law professor Brent White published a paper about the tactic of abandoning a home, (“Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis,” University of Arizona, Discussion Paper No. 09-35 November 2009).  While it’s not the first time the subject has ever been broached, debt survival is a sensitive topic today, and White’s suggestions have hit a nerve.

It’s crowded underwater

According to First American CoreLogic, some 10.7 million Americans are presently underwater on their mortgages, meaning that their mortgage balances exceed their home values.  White states:

As of June 2009, more than 32% of all mortgaged properties in the U.S. were “underwater,” meaning that the homeowner owed more on their mortgage than their home was worth. This percentage is expected to increase to 48% by the first quarter of 2011, by which time housing prices in the largest 100 metropolitan areas are predicted to have dropped 42% from their peak.

One in four homeowners would be better off renting

Walking away from over-mortgaged homes is a move that can save people money if they’re willing to take personal financial risks.  One of those disconcerting risks, of course, is that a foreclosure remains on an individual’s credit report for seven years, making it difficult to obtain new credit.  Although it’s possible that people with otherwise good credit might begin to overcome lending hurdles sooner than that, people in general are hesitant to wreck their credit. This hesitancy is borne out by the fact that millions of people – about one in four — would be much better off financially if they walked away from their mortgages, and yet, they do not.

Homeowners tend to take the highroad

If all owners of over-mortgaged homes walked away, economic havoc would no doubt ensue.  Home prices would take a deeper plunge, and banks would become even more hesitant to make loans to both individuals and businesses.  Still, it’s odd that in the midst of a severe housing crisis, borrowers have taken the high road and struggled to honor their mortgage commitments, while the lenders that doled out high-risk mortgages in the housing boom have eagerly taken in billions of taxpayer dollars.  These are the same lenders that now shamelessly resist the modification of troubled mortgages.  As White points out, this is a double standard involving contradictory lending moralities.

White, who is a scholar of both behavioral economics and law, just may know what he’s talking about. Clearly, the norms governing borrower behavior are at odds with those governing the tactics of lenders.  Lenders, as recently demonstrated in stark relief, seek to protect the bottom line without concern for morality or social responsibility. “Wall Street gets to maximize profits and minimize losses irrespective of concerns about morality,” he says.

Homeowners, on the other hand, are expected to honor their promises, however unmanageable a change of circumstance may be. This moral asymmetry, White concludes, results in a distributional inequality with homeowners bearing a disproportionate burden from the housing collapse.

Emotional constraints deter strategic defaults

White suggests that the choices of most homeowners not to strategically default are the result of two emotional constraints.  The first is a desire to avoid the shame and guilt of foreclosure and the second is an exaggerated anxiety about the perceived consequences of a foreclosure.  These emotional forces, he continues, are “actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations – and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision.”

Suboptimal economic decisions are irrational

White believes that shame and an exaggerated anxiety about the effects of a foreclosure may be keeping homeowners from walking away in droves.  Even in non-recourse states such as California and Arizona where foreclosure is the lender’s only remedy and personal deficiency judgments cannot be obtained against borrowers, “the vast majority of underwater homeowners continue to make their mortgage payments – even when they are hundreds of thousands of dollars underwater and have no reasonable prospect of recouping their losses.”

While such behavior may appear irrational on its face, behavioral economists liken the behavior of underwater homeowners to the irrationality that leads people to make other suboptimal economic decisions.  “Underwater homeowners aren’t knowingly making bad choices, they just can’t cognitively grasp that they would be better off if they walked away from their mortgages,” White explains.

The moral playing field requires leveling

Walking away from over-encumbered homes may well undermine the basic tenants of mortgage lending, but no more than does taxpayer assistance for lenders who remain unwilling to make interest-rate or other concessions.  Rewriting interest rates on existing mortgages would keep many of distressed borrowers in their homes, but lenders have little incentive to make any concessions. Over the last couple of years, we have seen that banks cannot be shamed into action.  Congress briefly considered a bill that would have allowed bankruptcy judges rewrite mortgages, but even that relatively modest proposal languished and died last spring.

Walking away may be the most financially responsible choice

Struggle as they may against the emotional constraints pinpointed by White, plenty of homeowners arrive at turning points where they have no choice but to walk away.  With 10.7 million Americans underwater on their mortgages, it may be time to reconsider the prevailing lending morality.  Walking away just may be the most financially responsible choice a distressed homeowner can make, when doing so makes it possible to meet other, unsecured credit obligations and provide a stable income for his or her dependents.