The CEO of Chase disclosed that the federal probe into the robosigning scandal reached a settlement. Image from Wikimedia Commons.

A settlement is soon to be announced regarding the robosigning foreclosure controversy. Some of the nation’s largest mortgage lenders rubber-stamped foreclosure documents without looking at them and may have foreclosed on some people who didn’t deserve it. A legal probe into foreclosure practices has reportedly reached a settlement with those lenders.

JPMorgan exec discloses deal with some federal agencies

Chief Executive Officer of JPMorgan Chase Jamie Dimon recently disclosed that the government probe into the robosigning controversy had come to an agreement with the mortgage lenders being investigated, according to Reuters. Dimon confirmed that no fines had been levied yet, but they are likely to come. The nation’s largest mortgage lenders and servicers were the subject of a sweeping investigation by nearly a dozen federal agencies and the attorney general of every state in the union. The agreement is not complete; it is only the settlement between the financial institutions involved and the Federal Reserve, the Office of the Comptroller of the Currency and the Office of Thrift Supervision. A settlement with all 50 state attorneys general has not been reached.

State settlements to come

The controversy stemmed from the discovery that a lot of foreclosure proceedings started when paperwork to begin foreclosures was approved in a robotic fashion, or “robo-signed,” without proper review. The resolution of the robosigning foreclosure debacle is important, as foreclosure practices may change. JPMorgan, for instance, expects to hire at least 3,000 more employees to ensure compliance with the settlement agreement, according to Bloomberg. In other words, there will be an increased amount of regulation in the mortgage industry when it comes to foreclosures, which means it will cost the lenders in the mortgage industry more to lend and service a loan. Those costs will be passed on to the consumer at some point, likely in the form of requiring more money up front to get a loan. There is also a backlog of foreclosures on the books at these banks, as they have become more skittish about foreclosing on borrowers who are delinquent in paying their mortgage.

Mortgage modification failed participants

One failure of the Obama administration and the various stimulus programs was the various mortgage modification programs that were made available through the federal government. People who were behind on their mortgages or facing foreclosure could apply for a modification. The distressed homeowner’s lender would receive an incentive payment from the government if it modified the borrowers’ mortgage on a trial basis. However, according to USA Today, not many people were helped. The goal was to keep 3 million to 4 million people in their homes; instead only about 630,000 people had their mortgages permanently modified.

Sources

Reuters

Bloomberg

USA Today

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

Congressional Republicans are looking to cut mortgage modification programs that don't work. Photo Credit: respres/Flickr.com/CC-BY

The federal mortgage modification program is fast becoming a target for criticism as a failed program. Congressional Republicans have announced intentions on scrapping federal mortgage relief programs, which have been dismal failures. Foreclosures on failing mortgages  have slowed, but procedural issues are hampering the foreclosure processes nationwide.

Failed mortgage relief programs prime target for spending cuts

Congressional Republicans are taking aim at failing programs that throw money down the drain, and mortgage modification programs are prime targets, according to CNN. Republican members of the House of Representatives have announced intentions to put federal programs aimed at saving failing mortgages on the chopping block in order to cut about $38 billion in instant cash from the budget. The Home Affordable Modification Program is a prime target, as Inspector General for the Troubled Asset Relief Program Neil Barofsky described the program as a failure.

On the chopping block

Other programs slated for demolition include the Neighborhood Stabilization Program, refinance programs under the Federal Housing Administration and the Emergency Homeowner Relief Fund, all of which lend emergency loans to aid troubled mortgages. However, these programs haven’t been smashing successes, either. Spencer Bacchus, a Representative from Mississippi and chair of the House Financial Services Committee, said that “it’s time to pull the plug” and end programs that don’t work. Only about 500,000 permanent mortgage modifications have been performed on troubled mortgages through these programs, which is a success rate of less than 50 percent. Foreclosures are also taking far longer to process.

Foreclosures take longer

Because of new procedural rules for foreclosure and increased scrutiny of foreclosure practices, loan lenders are taking far longer to foreclose on a home, according to USA Today. A distressed homeowner will spend about 19 to 20 months living in a foreclosed home at current rates, which may increase to 22 to 23 months. The average person in a foreclosed home would normally have gone 250 days without making a payment prior to the mortgage crisis, but that stretched from 410 days in January 2010 to 507 days in December 2010. Increased scrutiny due to the “robo-signing” controversy has led to foreclosures taking far longer, which causes loan lenders to lose considerable amounts of money.

Sources

CNN

USA Today

At a recent congressional hearing, the government mortgage modification program was blasted as being a "failure." Image from Wikimedia Commons.

The Inspector General of government bailout programs has labeled the mortgage modification program a failure. Neal Barofsky, appointed to oversee the bailout programs including the Home Affordable Modification Program, blasted the program in a Congressional hearing for being ineffective. More than half a million applicants have gotten their mortgages modified.

Mortgage modification program blasted in hearing

Recently, there was a joint Congressional hearing about whether certain programs in government bailouts had been effective, including the mortgage modification program. The program, which was nicknamed Make Home Affordable, but titled the Home Affordable Modification Program or HAMP, was blasted in the hearing as “a failure,” according to USA Today. Neil Barofsky was appointed as a special Inspector General in charge of bailout programs and funding and told the Congressional oversight committee that the mortgage modification program was not working. He went on to say that an increasing number of people will continue to want the program canceled, “and understandably so.” However, some have pointed to slow moving loan lenders as being part of the cause of the program’s problems.

Call to repeal HAMP

An increasing number of people are calling for the HAMP program to be cut. On the same day that the oversight committee met, three House Republicans submitted a bill that would end the  HAMP program. Doing so would cut $30 billion from unused funding for bailout emergency loans. HAMP was intended to help 3 million to 4 million people avoid foreclosure by modifying existing loans with loan companies, but only 549,620 mortgages have been successfully modified. However, the cash advances lent to banks, more than $341 billion, have been viewed as very successful.

Foreclosures still epidemic

The rate of foreclosure has started to fall in the worst hit areas, especially states like Arizona with higher than normal real estate values, according to CNN. Las Vegas, the worst hit city in the United States, has seen the rate of foreclosure fall by 7 percent over the last year, but one in nine homes there has been in some form of foreclosure activity. However, in a survey of more than 200 metro areas by RealtyTrac, the overall foreclosure rate rose by 72 percent in 2010.

Sources

USA Today

CNN

More people get bank loan modification than federal modifications, but more default on banks mods. Image from Wikimedia Commons.

More people are likely to get bank loan modification than through the government. Troubled homeowners, under certain conditions, could apply through a government-run program for mortgage modification. However a good idea it seemed, the program has been less successful than hoped. As a result, banks have been stepping into the void to modify the mortgages of customers on their own. However, there is an unfortunate corollary. Homeowners are more likely to default on payments if they receive a bank modification.

Bank loan modifications outpace HAMP

The Home Affordable Modification Program, or HAMP is pretty simple. Distressed homeowners apply for a loan modification through the federal government. If certain criteria are met, they receive a trial modification on the bank loan for their home. If the trial is successful, then they get a permanent modification. Unfortunately, less than 45 percent of all permanent modifications stick. According to CNN, of those that default out of the federal program, 44.5 percent end up with a modification from their loan lenders anyway. There are two bank modifications made for every single HAMP modification.

More default on bank modifications

Unfortunately, there are also more defaults on bank modifications. Of the permanent modifications made by HAMP, 11 percent default again. On the modifications made by lenders, 22 percent default. However, there is a reason for that. Of the few who are successful in the HAMP program, the average reduction in monthly payments is $608. Bank modifications lower monthly payments by an average of $307. That may be enough to create breathing room for some, but obviously some homeowners will still be running for payday loans to keep up.

Housing tied to employment

Until employment reaches pre-recession levels again, the real estate industry is likely to make only modest improvements, if any. There have been some causes for hope. Most indicators point to the recovery being slow but steady.

Sources

CNN

Just like a placebo, the mortgage modification program seemed like medicine but it was only a sugar pill. Image from Wikimedia Commons.

After the presidential election in 2008, President Obama went on a bit of  a glut when it came to stimulus programs. Among the first announced was a program called Make Home Affordable, which was a mortgage modification program through the Federal Housing Administration. The FHA works with an applicant’s loan lender, and try to find a way to rearrange the loan to the benefit of all involved. However, the cash advance that was drawn from the Treasury for this program may have been ill spent.

Loan modification from Uncle Sam

The way that the Make Home Affordable program works is that a person who wants to modify the bank loans on their home has to apply for the modification. If the application is accepted, the government, working in coordination with the applicant’s lender, sets up a trial program for a few months. The payments and the loan are restructured on a trial basis, to see if the person can still meet their payment obligations. If the temporary modification is successful, then a permanent modification is made. It sounds simple enough. However, the question becomes whether enough modifications become permanent to justify the program.

Fewer than half are successful

According to the Wall Street Journal, less than 50 percent of all such modifications are successful. In August, an audit of the Home Affordable Modification Program, or HAMP, revealed that only 434, 716 successful permanent modifications have gone through so far. There were 616,839 trial modifications that were canceled. That is a lot of fast cash down the drain. Also, the people who apply are already at incredible risk. The average ratio of debt to income for HAMP participants is 63.5 percent. A person has to have a debt to income ratio of 41 percent or lower to get an FHA mortgage, usually the biggest source of bad credit loans for homes.

Some stimulus

This program was intended to help keep people out of foreclosure. Given that about 40 percent of applicants end up back at square one anyway, it might be time that this program was cut, and modification was left to the private market.

Sources

Wall Street Journal

Some people who got homebuyer tax credits owe the IRS, as their credit was no refund. Image from Wikimedia Commons.

One of the few things that helped to prop up an anemic housing market was the homebuyer tax credit from the government. The way it worked was that a person that bought a home could get some fast cash from Uncle Sam as a gift for doing their part in stimulating recovery, under certain conditions. A fair portion of those people are going to have to pay that credit back, as the initial tax credit offered for a purchase of a home was no credit; those refunds were essentially low interest loans.

Quick cash from Washington

When the recession began, it hit the housing market like a hurricane. Foreclosures shot through the roof, prices and available capital for home finance loans plummeted. Almost right away, part of the initial stimulus programs was a homebuyer tax credit. In 2008, qualified buyers could deduct the lesser of $7,500 or 10 percent of the purchase price from their income taxes. In 2009, the credit was extended but augmented to a refund, rather than a deduction. The hitch is that the deduction from the initial tax credit, according to CNN, was not just a break on the tax bill. It was a loan.

Due to the IRS in 15 years

Those who claimed the tax credit have 15 years to pay it back. There are 950,000 people who owe for the low cost loans, according to the Internal Revenue Service. However, the IRS does not know exactly who owes and who doesn’t, and is investigating inaccurate and fraudulent paperwork. Among the discrepancies is that there were tax credits filed for people who are dead. There were 1,326 homebuyer tax credits claimed by people listed as deceased by the Social Security Administration, but over 500 were tossed out.

The worth of the stimulus

The effectiveness of the stimulus programs has been questioned rigorously in the past months. Rightly so; the mortgage modification program hasn’t been very successful, and the bonus that 950,000 or more people believed they were getting for a home purchase has to be paid back. There is also the question of whether these people would have bought homes had they known they weren’t really getting a tax break.

Sources

CNN

Real estate may be a veritable desert, but there are some signs of life. Image from Wikimedia Commons.

The housing market in the past year has been a series of small hits and big misses. Banks, buyers, sellers and real estate agents alike are awaiting a return to at least some decent activity. Some signs of life are beginning to show. There was a recorded uptick in the number of new mortgage applications for purchasing a home. Not only that, but applications for loan modification dropped a little bit. However, applications to modify existing loans into low cost loans, or at least lower cost, are still the bulk of mortgage activity, which is significantly low.

New mortgage applications increase

The number of mortgage applications for the purchase of a new home has increased. The Mortgage Bankers Association recorded an increase of 6.3 percent in applications for a purchase, according to Reuters, which is the first significant increase since May of this year. However, it isn’t exactly great news. An increase is an increase, but the number of applications turned in to loan lenders for a home loan is at record low levels. Mortgage loan applications rates are down about 40 percent since May 2009.

Modifications are the bulk of activity

The vast majority of mortgage applications are still for mortgage modification. Applications for a modification dipped 3.1 percent, a slight decrease since May of this year, but modification applications made up almost 82 percent of all mortgage applications. Currently, mortgages of nearly any configuration are low interest loans, as the rate for 30-year fixed mortgages is at 4.5 percent, a 20 year low. The MBA started calculating these statistics in 1990, and the current rates are nearly the lowest they have ever been. The low rates make for a great opportunity to refinance. However, since finance loans are so much harder to access, it is difficult for many to reap the benefits.

Little stimulated

The stimulus seems to not have worked. As the tax credit only managed to temporarily propped up home sales, and the federal refinance program barely works, it seems that the recovery to housing must come from below. More people will need to be working for housing as an industry to have a chance.

Sources

Reuters

Even the golfing and country club crowd runs into financial trouble. Image From Wikimedia Commons.

Recessions take a toll on every social class, believe it or not. Some of the wealthiest of the wealthy do pay cash for everything and carry very low debt loads. However, some wealthy people simply take out way bigger bank loans. Some people would rather risk debt and disaster to have the biggest house and flashiest car, and it is showing. Foreclosures on large properties are increasing, as even the wealthy lack the instant money to pay the mortgage. Even rich people could use loan modification.

Recessions affect even the rich

There have been some high profile tumbles for some incredibly wealthy people. Just look at Nicolas Cage; he wound up losing more than one property, among them a $35 million mansion which was foreclosed. The home is listed for only $11.5 million. Granted, millionaires aren’t worried about their credit scores. That said, too much debt is bad. People should aim to have the fewest encumbrances, even of low interest loans, as possible at a time. Remember also that banks can sue delinquent homeowners for the difference in foreclosure sales. Three families from the “Real Housewives” series nearly lost their homes. Jim and Alexis Bellino, from the “Orange County” show of that series had to get mortgage modification after they defaulted.

Aren’t rich people supposed to be good with money?

According to ABC, the Los Angeles County area has exploded with foreclosures on incredibly expensive properties. In fact, the number of foreclosed on properties worth $1 million or more in that area has gone up 300 percent since April of this year. However, it isn’t so much that rich people are careless with their money. In fact, it’s the opposite. People who are more plugged into the realm of finance know that there’s a time to cut your losses and walk away.

Is real estate still a good investment?

The question of whether real estate is a good investment is becoming more pertinent. Plenty of people put a lot into houses for years, even decades, only to lose more than half that value thanks to the market tanking.

Sources

ABC

Low mortgage rates doesn't mean you can get a mansion for pennies, but you can score a sweet deal with low interest loans. Image from Wikimedia Commons.

If you’re looking at buying a home, right now is the time to do it. There are, unfortunately, a lot of foreclosed properties on the market at discounted prices. Not only that, but a lot of people are looking to sell. There is also a lot of inventory to move. As luck would have it, mortgage interest rates for 30 year fixed mortgages are at an all time low. So if you want to get low interest loans for a home, now is the time. You may never even need mortgage modification at prices this low.

Mortgage rates hit record low

Currently, the interest rates on 30 year fixed rate mortgages are at the lowest point they have ever been on record. Freddie Mac has kept track of the data since 1971, and the current market interest rate for 30 year mortgages dropped this week to 4.36 percent from 4.42 percent, according to Bloomberg. Granted, these are low cost loans compared to several years ago, but the rates are not exactly on short term loans. After all, it is for a 30 year mortgage. The rate for 15 year fixed mortgages is at 3.86 percent. At this rate, 30 year mortgages will be at that rate by Thanksgiving.

Plenty of inventory to move

As of right now, there is a greater supply of homes on the market than there has been since 1983. The real estate market has a 27 year all time high supply of homes for sale. However, that usually means that fewer people are buying. According to Reuters, home resales are at a 15 year low, and more people are getting refinancing if they can. The unfortunate corollary to all this is that getting credit from money lenders is harder than ever, and the era of unchecked loans for bad credit for purchasing a home is completely over.

Buy low and sell high

However, if you have the credit and a down payment ready, this is the time to buy. In the right area, you could actually get into a sweet house for half the cost you normally would pay. At these rates, you may never need to refinance or even have to think about mortgage modification.

Further Reading

Reuters

Bloomberg

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.

Mortgage modification is key to the federal government's recovery plan - but deceptive lenders might undermine that effort. Image from Bohman on Flickr.

The Making Home Affordable Modification Program is a federal government program started in early 2009 as a response to the foreclosure crisis. It is intended to support mortgage modification, mortgage refinancing and other affordable home options for homeowners stuck in mortgages they cannot pay. This program, however, has been running into consistent problems with lenders. Bank of America’s recent settlement of a Countrywide lawsuit highlights mortgage industry practices that could be undermining economic recovery from the beginning.

Bank of America settles federal charges against Countrywide

The Federal Trade Commission has been investigating alleged deceptive mortgage practices at Countrywide for almost a year. In June of 2008, Bank of America purchased Countrywide in a $4 billion stock deal. Bank of America and the FTC have reached a $108 million agreement where BoA will pay restitution without admitting any wrongdoing on the part of Countrywide. This $108 million will be split between the approximately 200,000 Countrywide mortgage holders that the FTC has found were overcharged.

Complaints to the Making Home Affordable mortgage modification program

The Making Home Affordable federal mortgage program is administered through private lenders. The government provides support and guarantees, while private lenders are required to comply with federal guidelines and qualifications for mortgage loan modification. According to the most recent report from the Making Home Affordable Call Center, more than 31,000 callers in February of 2010 alleged that lenders were not complying with Making Home Affordable guidelines. 103,762 homes defaulting on their loans in just April, this means approximately 38 percent of borrowers seeking mortgage modification are finding lenders they believe aren’t complying with federal guidelines.

Alleged deceptive mortgage lending practices

The investigation into Countrywide’s alleged deceptive lending practices does not end with that lender. Some industry watchers allege that predatory lending practices permeate the entire mortgage lending industry. The four most common allegations from borrowers and the FTC include:

• Charging fees and fines that are not actually due
• Overstating the balance on a home loan, therefore extending payments
• Intentionally incorrect fees and charges
• Not complying with basic industry regulations, such as providing documented proof that the lender holds the mortgage

The end result of mortgage modification problems

It seems the the efforts of the federal government to rein in mortgage lending practices are coming in a day late and dollar short. The Justice Department has created a new unit to promote fair lending while StopFraud.gov aims to crowd-source uncovering predatory lending practices. For the Making Home Affordable program to work, however, the federal government is going to have to work hard to root out and stop the deceptive lending practices that nearly every large mortgage lender has been accused of.

Sources:

MortgageLoan.com
RealtyTrac.com
FinancialStability.gov February report