Like a blob in a low-budget horror film that grows larger and larger until it smothers everything, the foreclosure robo mess is ballooning. We now learn that there are robo signing problems with notices of foreclosure in at least some states having nonjudicial foreclosure procedures. (See http://www.cnbc.com/id/41250862). In nonjudicial foreclosure states, where a creditor doesn't need to go to court to foreclose, the trustee bank handling the foreclosure has to give notice to the homeowner of the impending foreclosure, and file the notice in a public office. One of the tiresome requirements of the law is that the person signing the notice should ascertain that there is a valid legal reason for foreclosure. However, it may be that employees of trustees or their agents were robo-signing notices of foreclosure--i.e., affixing their John Hancocks without first bestirring themselves to review the facts of the case and ensure that a valid basis for foreclosure existed.
Nag, nag, nag, nag, nag. The law is such a pain in the . . . assssssk a lawyer what the effect of a defective notice might be and you'd probably be told that it means questions come up whether the bank can obtain clear title from the foreclosure. The bank may be unable to resell the property. Bad debts would remain on its books. The real estate market would linger in its current morass, with the Sword of Robo-Damocles dangling over foreclosed properties the banks have resold or try to resell.
The robo-mess revealed last fall, with robo-signers gone wild in judicial foreclosures, mucked up the foreclosure process in close to two dozen states. The kicker about the latest revelations is that if robo-signing permeated the nonjudicial foreclosure states, then the robo-mess will have reached every state. We've previously suggested the foreclosure crisis needs a national solution. (See http://blogger.uncleleosden.com/2010/10/foreclosure-crisis-time-to-put-mortgage.html.) This would be all the more so, now that robo-signers seem to lurk the length and breadth of the nation.
When you think about it, the robo problem is the problem in the real estate markets. We got to where we are today with mortgage lenders robo-lending to every Tom, Dick and Harry who had a signature and a pulse, without regard to income, employment, assets, past credit history, or anything else that might be relevant to a borrower's ability to repay. Then, the big banks on Wall Street bought up vast quantities of hinky mortgages that the robo-lenders churned out and robo-stuffed them into asset pools underlying mortgage-backed securities and derivatives, making financial sausages containing a lot of things you really wouldn't want if you knew about them. (Investors are now trying to regurgitate the bad mortgages by making underwriters buy them back.) Then, when things fell apart, the big banks tried robo-signing their way through the foreclosure process, disregarding the dreary requirements of the law that might interfere with the bottom line. Somehow, all this robo-banking has to stop. If it doesn't, only a matter of time separates us from the next financial robo-wreck.
Showing posts with label foreclosure. Show all posts
Showing posts with label foreclosure. Show all posts
Tuesday, January 25, 2011
Sunday, January 9, 2011
It's Not Just a Foreclosure Problem, It's an Accounting Problem
A recent decision by the Supreme Judicial Court of Massachusetts (U.S. Bank, NA v. Ibanez, Jan. 7, 2011) to block certain foreclosures has deeper implications than has generally been reported. The court ruled that two banks, trustees holding pools of securitized mortgages that tried to foreclose on two of the mortgages, hadn't submitted the documentation required to establish valid ownership of the mortgages. Thus, the banks couldn't prove they legally held the mortgages in question, and consequently couldn't foreclose. Nor could they obtain title to the mortgaged homes when they purported to buy them at the auction, so they couldn't resell them. Although the court didn't expressly say so, the homes would appear to be still owned by the original mortgage borrowers.
The court's decision implies that, for perhaps numerous securitized mortgages in Massachusetts, foreclosure may be difficult or near impossible. Such a legal conclusion, if applied nationwide, would gum up the recovery of the real estate markets. Even though halting foreclosures will hold homes off the market (because foreclosing banks can't resell what they don't legally own), prospective buyers will be cautious with the prices they pay for the remaining houses on the market. The foreclosure problems will eventually be resolved and foreclosed homes would then be dumped onto the market. This would push prices downward. Anyone who paid an optimistic price today could end up underwater in a year or two. The real estate markets will not stabilize until the foreclosure problems are dealt with. Delaying them, which will be the result of the Massachusetts decision and similar decisions by the lower courts of other states, will only postpone the day of reckoning. And the delay will add to the costs to the banks for having been so careless about documentation requirements.
What makes things worse is that there's more than a foreclosure problem here. If mortgages haven't been legally transferred to trustee banks, the principal process for financing home purchases--securitization--would have broken down. Mortgages being securitized are supposed to be pooled together and held by trustees for the benefit of investors. The big banks that underwrote the mortgage-backed securities would have breached their contracts to the investors by failing to deliver mortgages to the securitization pool. Investors could demand their money back. And refuse to accept losses the banks claim were sustained on defaulting mortgages, on the ground that those mortgages were never validly transferred to the securitization pool and the investors have no liability for losses from mortgages not held by the pool.
Moreover, depending on how the courts interpret the law, the banks might be liable for fraud, especially if bank officers were aware of the documentation deficiencies but sold mortgage-backed investments anyway. That could result in more liabilities, to investors and in SEC enforcement actions. In the worst case scenario, criminal charges could be filed. Since trillions of dollars of mortgages have supposedly been securitized, but now perhaps weren't, the potential liabilities could be very large.
Another problem would come up with mortgages that banks bought, either directly or as part of a securitization offering. If those mortgages have the same documentation problems the Supreme Judicial Court found deficient, the banks wouldn't really own the mortgages (or securitized interests in them), but would have reported phantom assets on their balance sheets. Again, depending on how widespread the documentation problems are, the quantity of improperly reported assets could be tens of billions, or even hundreds of billions.
Banks are now closing their books for 2010, and will be filing their financial statements at the end of March. The impact of the mortgage documentation problems will grow as a result of the Massachusetts ruling. The banks will have to account for these problems, and make a variety of disclosures. The banks' auditors will likely advocate caution; the New York Attorney General's recent case against Ernst & Young over Lehman Brothers' accounting for quarter end repo transactions will surely loom large in their minds. If the banks understate their problems, they (and their auditors) could buy more fraud suits from other classes of investors or government agencies. Stay tuned. This crisis could make our times even more interesting.
The court's decision implies that, for perhaps numerous securitized mortgages in Massachusetts, foreclosure may be difficult or near impossible. Such a legal conclusion, if applied nationwide, would gum up the recovery of the real estate markets. Even though halting foreclosures will hold homes off the market (because foreclosing banks can't resell what they don't legally own), prospective buyers will be cautious with the prices they pay for the remaining houses on the market. The foreclosure problems will eventually be resolved and foreclosed homes would then be dumped onto the market. This would push prices downward. Anyone who paid an optimistic price today could end up underwater in a year or two. The real estate markets will not stabilize until the foreclosure problems are dealt with. Delaying them, which will be the result of the Massachusetts decision and similar decisions by the lower courts of other states, will only postpone the day of reckoning. And the delay will add to the costs to the banks for having been so careless about documentation requirements.
What makes things worse is that there's more than a foreclosure problem here. If mortgages haven't been legally transferred to trustee banks, the principal process for financing home purchases--securitization--would have broken down. Mortgages being securitized are supposed to be pooled together and held by trustees for the benefit of investors. The big banks that underwrote the mortgage-backed securities would have breached their contracts to the investors by failing to deliver mortgages to the securitization pool. Investors could demand their money back. And refuse to accept losses the banks claim were sustained on defaulting mortgages, on the ground that those mortgages were never validly transferred to the securitization pool and the investors have no liability for losses from mortgages not held by the pool.
Moreover, depending on how the courts interpret the law, the banks might be liable for fraud, especially if bank officers were aware of the documentation deficiencies but sold mortgage-backed investments anyway. That could result in more liabilities, to investors and in SEC enforcement actions. In the worst case scenario, criminal charges could be filed. Since trillions of dollars of mortgages have supposedly been securitized, but now perhaps weren't, the potential liabilities could be very large.
Another problem would come up with mortgages that banks bought, either directly or as part of a securitization offering. If those mortgages have the same documentation problems the Supreme Judicial Court found deficient, the banks wouldn't really own the mortgages (or securitized interests in them), but would have reported phantom assets on their balance sheets. Again, depending on how widespread the documentation problems are, the quantity of improperly reported assets could be tens of billions, or even hundreds of billions.
Banks are now closing their books for 2010, and will be filing their financial statements at the end of March. The impact of the mortgage documentation problems will grow as a result of the Massachusetts ruling. The banks will have to account for these problems, and make a variety of disclosures. The banks' auditors will likely advocate caution; the New York Attorney General's recent case against Ernst & Young over Lehman Brothers' accounting for quarter end repo transactions will surely loom large in their minds. If the banks understate their problems, they (and their auditors) could buy more fraud suits from other classes of investors or government agencies. Stay tuned. This crisis could make our times even more interesting.
Tuesday, October 12, 2010
The Foreclosure Crisis: Time to Put the Mortgage Industry in Federal Court
Another major bank, Wells Fargo, announced today that it's placing its foreclosures under review. Morgan Stanley estimated that as many as 9 million foreclosures might be open to legal challenge. (See http://www.bloomberg.com/news/2010-10-12/disputes-may-affect-9-million-foreclosures-morgan-stanley-says.html.) Mortgages whose ownership is unclear create an additional, potentially massive problem. They may have to be written off bank balance sheets. Or, if they were supposedly sold but really not, the "purchasing" investors may be entitled to reimbursement for failure of the underwriting bank to deliver the mortgages. The number of mortgages where title is unclear hasn't been reported. But it could be very large.
Legal processes are erupting nationwide. Lawsuits by the truckload are being filed. Attorneys general in 40 or more states are investigating. Federal agencies and departments are huddling and inquiring. Subpoenas are flying. The legal profession is smiling. Its recession has just ended and prosperity is around the corner.
The foreclosure crisis has become a raging bull. There are, or will be, many, many thousands of lawsuits brought over one aspect or another of the morass. The courts will be clogged for years. Title to millions of homes could be clouded for a long time. Real estate sales could slump as buyers back off and title insurance becomes far more expensive than before.
There's no easy or quick way out of the mess. Indeed, we got into this mess because banks owning or servicing mortgages wanted a quick and easy way through the complexities of recording liens against real estate and foreclosing on those liens. Those banks apparently didn't want to bother with the due process of law. They will now get a shipload of due process, from the courts of just about every state in the nation, and many federal courts as well.
Not even Charles Dickens could write so byzantine a novel, nor Mary Shelley so horrifying a story. The prospect of 50 or more judicial systems reaching every variety of result in this ocean of litigation (and taking years to do so), with no established mechanism for consistency or predictability, is stupefying. Homeowners could experience widely varying outcomes, depending on where they live. Investors in mortgage-backed investments may have little or no idea what their now increasingly illiquid investments are worth. Banks would face unenviable choices for accounting for the situation. Mortgage investors and bank shareholders may well indulge in class action litigation.
A gargantuan problem such as this needs an organized and unified nationwide process for resolution. The current multi-jurisdictional mosh pit promises only legal pandemonium. The financial markets will stomach such bedlam for only so long, and that won't be very long.
But how to institute a national claims resolution process? Federal regulators can correctly say, as they did with the Lehman situation, that they have no statutory authority to take on the problem. State officials have no authority beyond the borders of their respective states.
A claims process in federal court may offer a solution. The process would involve reviewing records relating to mortgage ownership, resolving disputes and deciding who owns what. Attorneys with appropriate backgrounds could be recruited to serve as special masters to handle the enormous amount of work this would entail. The federal claims process could also look into foreclosures, past, present and prospective, and resolve uncertainties and competing claims. (The latter process could be handled through related proceedings in federal district courts in each state, where local lawyers having knowledge of their particular state's laws could serve as special masters to resolve mortgage recordation and foreclosure issues, but as part of a national process to keep the overall resolution of the problem coordinated.) By using attorneys as special masters, the resources of the courts would be magnified exponentially. As things now stand, the foreclosure process has clogged up numerous state courts, with no obvious way to clear up the traffic jams.
Other claims, such as class actions by investors or shareholders, could also be incorporated into the master claims process and resolved as part and parcel of the nationwide cleanup of the mortgage market and foreclosure process. Judges and federal magistrates might be the best adjudicators for these other claims, as they are the most likely to resemble the kind of litigation judges and magistrates routinely handle.
A unified national process could offer at least some degree of consistency in procedures and principles. It might also provide for coordination of various claims, and some notion of a timetable. And the appeals process would be greatly simplified. Information about the mortgage problems would be centralized and presented in a more organized way, offering greater transparency to the financial markets. The big banks, which may face the greatest liabilities here, would have a single process in which to resolve the myriad claims they now likely face, simplifying their management, accounting and regulatory problems.
The federal courts have experience administering cases with vast numbers of claims. Products liability litigation over asbestos related illness and injury provides an example, in which the claims of thousands of individuals have been resolved, in some cases with substantial payments. A nationwide mortgage and foreclosure cleanup process might well be the most complex proceeding ever undertaken by the federal courts. But if there were ever a time to take on such a challenge, this is it.
There isn't an obvious way to institute such a proceeding. Perhaps a number of interested parties, including major banks, the key mortgage guarantors such as Fannie Mae and Freddie Mac, their regulator (OFHEO, or Office of Federal Housing Enterprise Oversight), the FHA, as many state attorneys general as can be mustered, federal financial regulators (citing their need to promote the safety and soundness of banks, and monitor and control systemic risk), and whoever else has legal standing to join the party could band together and petition a federal district court in Washington or New York (where the federal district courts have substantial experience handling massive litigation, and where there are hordes of lawyers who could be lined up to serve as special masters). As a legal foundation for such a process, the petitioners might invoke the equity jurisdiction of the federal courts (a body of law that, more or less, says the courts can, within certain limits, create solutions to problems that the existing legal system can't handle or doesn't handle well). Even though it's unlikely any of these parties alone could convince a court to institute such a proceeding, the combined interests of a consortium of interested parties might present a strong enough foundation that a judge would find jurisdiction.
Equity jurisprudence may be insufficient. If so, an act of Congress would be required. That's a scary thought. The temptation for the politicians to politicize such a process is obvious. But the alternative is a legal quagmire stretching from sea to shining sea. A unified national claims process, even if polluted by the underhanded, craven and disgraceful manipulations of pompous, self-interested politicians, may offer a less imperfect solution. (The biggest problem could turn out to be that Congress won't act quickly enough, a distinct possibility given today's shifting political winds; and that would aggravate a seriously aggravated situation.)
The bonfire of the mortgages is burning hot and fiercely, spreading its flames like a prairie fire on a windy day. A unified nationwide claims resolution process may be the only feasible alternative to the inferno.
Legal processes are erupting nationwide. Lawsuits by the truckload are being filed. Attorneys general in 40 or more states are investigating. Federal agencies and departments are huddling and inquiring. Subpoenas are flying. The legal profession is smiling. Its recession has just ended and prosperity is around the corner.
The foreclosure crisis has become a raging bull. There are, or will be, many, many thousands of lawsuits brought over one aspect or another of the morass. The courts will be clogged for years. Title to millions of homes could be clouded for a long time. Real estate sales could slump as buyers back off and title insurance becomes far more expensive than before.
There's no easy or quick way out of the mess. Indeed, we got into this mess because banks owning or servicing mortgages wanted a quick and easy way through the complexities of recording liens against real estate and foreclosing on those liens. Those banks apparently didn't want to bother with the due process of law. They will now get a shipload of due process, from the courts of just about every state in the nation, and many federal courts as well.
Not even Charles Dickens could write so byzantine a novel, nor Mary Shelley so horrifying a story. The prospect of 50 or more judicial systems reaching every variety of result in this ocean of litigation (and taking years to do so), with no established mechanism for consistency or predictability, is stupefying. Homeowners could experience widely varying outcomes, depending on where they live. Investors in mortgage-backed investments may have little or no idea what their now increasingly illiquid investments are worth. Banks would face unenviable choices for accounting for the situation. Mortgage investors and bank shareholders may well indulge in class action litigation.
A gargantuan problem such as this needs an organized and unified nationwide process for resolution. The current multi-jurisdictional mosh pit promises only legal pandemonium. The financial markets will stomach such bedlam for only so long, and that won't be very long.
But how to institute a national claims resolution process? Federal regulators can correctly say, as they did with the Lehman situation, that they have no statutory authority to take on the problem. State officials have no authority beyond the borders of their respective states.
A claims process in federal court may offer a solution. The process would involve reviewing records relating to mortgage ownership, resolving disputes and deciding who owns what. Attorneys with appropriate backgrounds could be recruited to serve as special masters to handle the enormous amount of work this would entail. The federal claims process could also look into foreclosures, past, present and prospective, and resolve uncertainties and competing claims. (The latter process could be handled through related proceedings in federal district courts in each state, where local lawyers having knowledge of their particular state's laws could serve as special masters to resolve mortgage recordation and foreclosure issues, but as part of a national process to keep the overall resolution of the problem coordinated.) By using attorneys as special masters, the resources of the courts would be magnified exponentially. As things now stand, the foreclosure process has clogged up numerous state courts, with no obvious way to clear up the traffic jams.
Other claims, such as class actions by investors or shareholders, could also be incorporated into the master claims process and resolved as part and parcel of the nationwide cleanup of the mortgage market and foreclosure process. Judges and federal magistrates might be the best adjudicators for these other claims, as they are the most likely to resemble the kind of litigation judges and magistrates routinely handle.
A unified national process could offer at least some degree of consistency in procedures and principles. It might also provide for coordination of various claims, and some notion of a timetable. And the appeals process would be greatly simplified. Information about the mortgage problems would be centralized and presented in a more organized way, offering greater transparency to the financial markets. The big banks, which may face the greatest liabilities here, would have a single process in which to resolve the myriad claims they now likely face, simplifying their management, accounting and regulatory problems.
The federal courts have experience administering cases with vast numbers of claims. Products liability litigation over asbestos related illness and injury provides an example, in which the claims of thousands of individuals have been resolved, in some cases with substantial payments. A nationwide mortgage and foreclosure cleanup process might well be the most complex proceeding ever undertaken by the federal courts. But if there were ever a time to take on such a challenge, this is it.
There isn't an obvious way to institute such a proceeding. Perhaps a number of interested parties, including major banks, the key mortgage guarantors such as Fannie Mae and Freddie Mac, their regulator (OFHEO, or Office of Federal Housing Enterprise Oversight), the FHA, as many state attorneys general as can be mustered, federal financial regulators (citing their need to promote the safety and soundness of banks, and monitor and control systemic risk), and whoever else has legal standing to join the party could band together and petition a federal district court in Washington or New York (where the federal district courts have substantial experience handling massive litigation, and where there are hordes of lawyers who could be lined up to serve as special masters). As a legal foundation for such a process, the petitioners might invoke the equity jurisdiction of the federal courts (a body of law that, more or less, says the courts can, within certain limits, create solutions to problems that the existing legal system can't handle or doesn't handle well). Even though it's unlikely any of these parties alone could convince a court to institute such a proceeding, the combined interests of a consortium of interested parties might present a strong enough foundation that a judge would find jurisdiction.
Equity jurisprudence may be insufficient. If so, an act of Congress would be required. That's a scary thought. The temptation for the politicians to politicize such a process is obvious. But the alternative is a legal quagmire stretching from sea to shining sea. A unified national claims process, even if polluted by the underhanded, craven and disgraceful manipulations of pompous, self-interested politicians, may offer a less imperfect solution. (The biggest problem could turn out to be that Congress won't act quickly enough, a distinct possibility given today's shifting political winds; and that would aggravate a seriously aggravated situation.)
The bonfire of the mortgages is burning hot and fiercely, spreading its flames like a prairie fire on a windy day. A unified nationwide claims resolution process may be the only feasible alternative to the inferno.
Saturday, October 9, 2010
How Big Is the Foreclosure Mess?
The size of the foreclosure morass is a crucial question. The moratoriums are hitting the real estate markets like a tractor trailer. Bank losses are inevitable. If the crisis is large enough, it could present systemic risk. Federal regulators and the rest of us need to know pronto if the banking system is going have a fainting spell just because some pennywise and pound foolish bankers thought it would be a good idea to disregard formal legal procedures for making mortgage loans, securitizing them and then foreclosing on them. Probably hundreds of thousands of foreclosures have now ground to a halt, and possibly hundreds of thousands more will be brought into question (including many foreclosures already done). Questions over ownership of mortgages and flaws in foreclosure procedures present the potential for another body blow to the banking system. Even though some of the foreclosure problems have been known for many months or even longer than a year, federal banking regulators have missed the boat again in not seeing this hot tamale right in their laps. Oh well, America will always have taxpayers, so there's a ready herd of sheep to be sacrificed if the bankers don't want to bear the losses themselves.
One potentially useful way to get a sense for the magnitude of the monster would be to read the 3rd quarter financial reports that the major banks will be filing soon. The foreclosure crisis couldn't have blown up at a worse time for them. The third quarter ended for most banks on September 30, 2010. The publicly traded ones have to file a public quarterly report by November 14, 2010. Those filings would include disclosure about the foreclosure mess, and the financial information reported would have to reflect costs and losses from the crisis (such as reserves to cover potential liabilities and writeoffs). Banks that understate the extent of the problems may find themselves sued by regulators and shareholders, so they have strong reasons to be forthright. At the same time, if the foreclosure problems are really big, being forthright might make their creditors a little weak at the knees. Memories of firms with names like Bear, Stearns and Lehman would stir. Bank creditors might be overheard muttering something about the devil taking the hindmost.
Five weeks remain until the banks must file their 3rd quarter reports. That's not much time to get a handle on the situation. They have to figure out the actual and potential losses from their own mortgage holdings, and also the extent of the blowback from mortgages they thought they sold, and securitizations they underwrote or are servicing. Because many banks issue quarterly financial results in press releases within two or three weeks after the end of the quarter, they actually have much less time than the formal filing deadline gives them. The numbers and information in those press releases must also accurately reflect the impact and ramifications of the mess. The heat is on. We may know more very soon.
One potentially useful way to get a sense for the magnitude of the monster would be to read the 3rd quarter financial reports that the major banks will be filing soon. The foreclosure crisis couldn't have blown up at a worse time for them. The third quarter ended for most banks on September 30, 2010. The publicly traded ones have to file a public quarterly report by November 14, 2010. Those filings would include disclosure about the foreclosure mess, and the financial information reported would have to reflect costs and losses from the crisis (such as reserves to cover potential liabilities and writeoffs). Banks that understate the extent of the problems may find themselves sued by regulators and shareholders, so they have strong reasons to be forthright. At the same time, if the foreclosure problems are really big, being forthright might make their creditors a little weak at the knees. Memories of firms with names like Bear, Stearns and Lehman would stir. Bank creditors might be overheard muttering something about the devil taking the hindmost.
Five weeks remain until the banks must file their 3rd quarter reports. That's not much time to get a handle on the situation. They have to figure out the actual and potential losses from their own mortgage holdings, and also the extent of the blowback from mortgages they thought they sold, and securitizations they underwrote or are servicing. Because many banks issue quarterly financial results in press releases within two or three weeks after the end of the quarter, they actually have much less time than the formal filing deadline gives them. The numbers and information in those press releases must also accurately reflect the impact and ramifications of the mess. The heat is on. We may know more very soon.
Wednesday, October 6, 2010
The Monster Within the Foreclosure Crisis
The foreclosure crisis is going from bad to worse. More foreclosures are stopping. Buyers are stepping back from bank owned properties. The U.S. Department of Justice has started looking into the mess.
The crisis is a tabloid's dream: Robo-signers gone wild, lawyers and courts operating foreclosure mills, homeowners booted through fraud, politicians pontificating, and subpoenas flying. But there's a Frankenstein that lurks within this house of horrors: the question of who owns mortgages. This is the worst aspect of the crisis, and if the problem is widespread, it could have extremely damaging consequences.
News coverage has reported that, sometimes, banks attempting to foreclose couldn't prove they owned the mortgage in question (or that they represented the true owner, if the bank was servicing the mortgage). When proof of ownership was lacking, the bank evidently provided courts with documentation that may not entirely be on the up and up. This practice, which could amount to a fraud on the court and be subject to criminal punishment, is now under review as banks, judges, plaintiffs lawyers, prosecutors, and all kinds of other folks try to sort things out.
If the ownership problem is widespread--and it might be, since it seems to have arisen from the hyper-pace of creation and securitization of trillions of dollars of mortgages in past years--the implications could be enormously bad. Banks would have to write off mortgages they can't prove they own, and reverse any past recognition of revenue and earnings from those mortgages. After all, banks can't claim as an asset a mortgage they don't own, nor can they recognize revenue from a non-owned mortgage. The sheer scale of mortgage lending and securitization is such that even if only 1% of mortgages are affected by ownership problems, the amounts involved could reach $100 billion or more of mystery mortgages. (There are about $14 trillion of mortgages outstanding, $7.5 trillion of which are securitized.) The U.S. banking industry would have a tough time swallowing another $100 billion of losses, especially now that banks already need to bulk up their capital to meet heightened capital requirements. Taxpayers, put your hands on your wallets.
Another implication of the mortgage ownership problem is that the downturn in the real estate market could be dragged out for years longer than otherwise. Foreclosures aren't legit unless the true creditor is seeking to collect the loan. It will now take months and even years to plow through legal records to establish true ownership of the many, many thousands of mortgages that might be in question. Buyers will step back from bidding for foreclosed properties. No matter, since some title companies aren't insuring title to such properties, so the banks probably couldn't sell them anyway. The foreclosures now in suspension won't be held off forever. Eventually, some resolution of the current mess will be achieved, those foreclosures will proceed, and the recovered properties resold. So these properties overhang the market, and buyers will be cautious about bidding even for non-foreclosure listings.
Then, there are the foreclosures in states where court approval isn't required. About 23 or so states that require court approvals for foreclosures. The rest allow foreclosures to proceed without court orders. But that doesn't mean that inability to prove ownership of the mortgage is okay in those states. To the contrary, booting a homeowner without being the true creditor on the mortgage probably violates the law in more than one way. Doing so may well be a fraud on the owner. If a sheriff's deputies were used to evict the owner, the lender might be deemed to have lied to sheriff. Lying to a peace officer is never a good idea. A subsequent buyer would not obtain clear title, so the lender might well be deemed to have perpetrated a second fraud. If such clouds over title are widespread, real estate markets in nonjudicial foreclosure states could be crippled for years, as title insurance companies try to sort out their risks and buyers stay away.
Another aspect of the mortgage ownership problem emerges in the securitization market. Large quantities of foreclosure mortgages are or were securitized. The mortgage ownership question implies that investors in the securitizations of those mortgages might or might not have invested in actual mortgages. To the extent, they did not, the banks that underwrote the securitizations can look forward to receiving investors' fraud claims. To make things worse, in the case of past foreclosures, investors who received the proceeds of foreclosures on mortgages they didn't actually have an interest in might be liable to repay the money. Needless to say, they would look to the banks servicing the mortgages for recompense. Given the apparently lousy state of the recordkeeping, the morass on the securitization end of the things could take years to clear up. The revival of the securitization market might be pushed back for a similarly long period. If things turn out to be really bad, securitization as a large-scale method of financing may be gone forever.
The foreclosure mess bears watching. It seems to be about where the financial crisis was in 2007: a year before we see the worst of things. If the foreclosure mess turns out to be a real monster, expect Wall Street and the real estate industry to try to dump it where the financial crisis ended up--in the laps of taxpayers. Whether that will be politically feasible is open to question. We are now witnessing the largest taxpayers' revolt since the Whiskey Rebellion in the 1790s. Maybe this time the banks will have to bear the losses they created.
The crisis is a tabloid's dream: Robo-signers gone wild, lawyers and courts operating foreclosure mills, homeowners booted through fraud, politicians pontificating, and subpoenas flying. But there's a Frankenstein that lurks within this house of horrors: the question of who owns mortgages. This is the worst aspect of the crisis, and if the problem is widespread, it could have extremely damaging consequences.
News coverage has reported that, sometimes, banks attempting to foreclose couldn't prove they owned the mortgage in question (or that they represented the true owner, if the bank was servicing the mortgage). When proof of ownership was lacking, the bank evidently provided courts with documentation that may not entirely be on the up and up. This practice, which could amount to a fraud on the court and be subject to criminal punishment, is now under review as banks, judges, plaintiffs lawyers, prosecutors, and all kinds of other folks try to sort things out.
If the ownership problem is widespread--and it might be, since it seems to have arisen from the hyper-pace of creation and securitization of trillions of dollars of mortgages in past years--the implications could be enormously bad. Banks would have to write off mortgages they can't prove they own, and reverse any past recognition of revenue and earnings from those mortgages. After all, banks can't claim as an asset a mortgage they don't own, nor can they recognize revenue from a non-owned mortgage. The sheer scale of mortgage lending and securitization is such that even if only 1% of mortgages are affected by ownership problems, the amounts involved could reach $100 billion or more of mystery mortgages. (There are about $14 trillion of mortgages outstanding, $7.5 trillion of which are securitized.) The U.S. banking industry would have a tough time swallowing another $100 billion of losses, especially now that banks already need to bulk up their capital to meet heightened capital requirements. Taxpayers, put your hands on your wallets.
Another implication of the mortgage ownership problem is that the downturn in the real estate market could be dragged out for years longer than otherwise. Foreclosures aren't legit unless the true creditor is seeking to collect the loan. It will now take months and even years to plow through legal records to establish true ownership of the many, many thousands of mortgages that might be in question. Buyers will step back from bidding for foreclosed properties. No matter, since some title companies aren't insuring title to such properties, so the banks probably couldn't sell them anyway. The foreclosures now in suspension won't be held off forever. Eventually, some resolution of the current mess will be achieved, those foreclosures will proceed, and the recovered properties resold. So these properties overhang the market, and buyers will be cautious about bidding even for non-foreclosure listings.
Then, there are the foreclosures in states where court approval isn't required. About 23 or so states that require court approvals for foreclosures. The rest allow foreclosures to proceed without court orders. But that doesn't mean that inability to prove ownership of the mortgage is okay in those states. To the contrary, booting a homeowner without being the true creditor on the mortgage probably violates the law in more than one way. Doing so may well be a fraud on the owner. If a sheriff's deputies were used to evict the owner, the lender might be deemed to have lied to sheriff. Lying to a peace officer is never a good idea. A subsequent buyer would not obtain clear title, so the lender might well be deemed to have perpetrated a second fraud. If such clouds over title are widespread, real estate markets in nonjudicial foreclosure states could be crippled for years, as title insurance companies try to sort out their risks and buyers stay away.
Another aspect of the mortgage ownership problem emerges in the securitization market. Large quantities of foreclosure mortgages are or were securitized. The mortgage ownership question implies that investors in the securitizations of those mortgages might or might not have invested in actual mortgages. To the extent, they did not, the banks that underwrote the securitizations can look forward to receiving investors' fraud claims. To make things worse, in the case of past foreclosures, investors who received the proceeds of foreclosures on mortgages they didn't actually have an interest in might be liable to repay the money. Needless to say, they would look to the banks servicing the mortgages for recompense. Given the apparently lousy state of the recordkeeping, the morass on the securitization end of the things could take years to clear up. The revival of the securitization market might be pushed back for a similarly long period. If things turn out to be really bad, securitization as a large-scale method of financing may be gone forever.
The foreclosure mess bears watching. It seems to be about where the financial crisis was in 2007: a year before we see the worst of things. If the foreclosure mess turns out to be a real monster, expect Wall Street and the real estate industry to try to dump it where the financial crisis ended up--in the laps of taxpayers. Whether that will be politically feasible is open to question. We are now witnessing the largest taxpayers' revolt since the Whiskey Rebellion in the 1790s. Maybe this time the banks will have to bear the losses they created.
Thursday, September 30, 2010
Foreclosure Mess: the Mortgage Monster Rears Its Head Again
Like a ghoul in a low budget horror flick, the mortgage morass never dies. Just when you think it's dead, its eyes snap open. Then it smiles a fang-filled grimace and gets up to lurch again in search of victims. The latest resurrection of the beast is the foreclosure mess.
Recent news reports indicate that financial firms servicing mortgages have many times foreclosed on defaulting homeowners without really knowing if they had the legal right to foreclose. Mortgage records in some cases seem to have been evanescent. But, no matter, as key employees whose job it was to review mortgage files and determine that foreclosure was warranted apparently paid scant attention to the contents of the files anyway. One such employee reportedly signed off on thousands of foreclosures a month, perhaps spending only a minute or two per file. Let's guess that his nickname is Robopen.
Other news stories in recent months have reported courts balking at foreclosures when banks couldn't prove they owned the mortgages that were supposedly in default or that they truly had authority to proceed with the foreclosure. There have been allegations of document forgeries and other irregularities. Foreclosures by two major financial institutions--Ally Financial (formerly GMAC) and J.P. Morgan Chase--are grinding to a halt. Today's Washington Post reported that other banks may follow in applying the brakes to their foreclosures. Some state attorneys general are starting to investigate and members of Congress are making noise about compensation for homeowners improperly ejected from their homes.
This is seriously bad shhhhh . . . stuff. The news reports probably reveal only the tip of the iceberg. It's impossible right now to identify all the potential ramifications of this sewage spill. But what we can see already is really stinky.
Systemic risk. With the recently enacted Dodd-Frank legislation, systemic risk is all the rage. So why don't we start with it. There are trillions of dollars of mortgages still held by America's major financial institutions. If the recordkeeping of mortgage servicers is really bad, and numerous mortgages cannot be connected to a legal owner (i.e., a lender or investor who truly has title to the mortgage), a lot of bank writedowns may be necessary. If a bank can't prove it holds the mortgage it thought it held, it will likely have to write off the entire debt. And it will have to stop taking payments from the homeowner, since it can't legally take money it's not entitled to get. We aren't just talking about defaulting and defaulted mortgages. We're talking about all mortgages. A bank that can't document its legal right to a mortgage will have to write it down because you can't count as an asset something you don't own. And the bank can't take payments from a homeowner who doesn't legally owe it any money. The recordkeeping problem here could mean many billions of losses. Federal regulators concerned about bank capital levels just got another massive migraine.
A heroic effort to straighten out the recordkeeping problems might eventually link up a lot of orphaned mortgages with their true owners. But that will probably take months and years. By all indications, each mortgage's file will have to be manually reviewed and straightened out--and not by Robopen or his clones. Such labor intensive work, which likely will require lots of lawyer time, will blow up bank legal budgets nationwide. And, given the inadequacy of the records, lawsuits will sprout like mold in damp drywall. All the while, massive amounts of bank capital will be tied down in mortgages, because the banks won't be able to sell what they can't prove they own. And they may have to reimburse mortgage investors to whom they sold mortgages they didn't own in the first place. Future lending--for new home purchases or to support economic recovery--may recede from today's sputter to a trickle.
Investors, lawyer up and stop buying mortgages. Investors who hold mortgage-backed securities just found themselves living in a world of septic content. They may, or may not, own any mortgage interests. If banks can't be sure who owns which mortgages, they can't be sure what they sold to mortgage investors. The 2007-08 mortgage crisis was bad enough. But today's clouds over title to mortgages means the pricing of numerous mortgage-backed investments may have become hazy indeed.
Fannie Mae and Freddie Mac have been backing new mortgages, so investors in newly issued debt may be at less risk. But if the recordkeeping problems include recent mortgages, the U.S taxpayer (that would be you, dear reader) just got screwed. Oh well, chalk it up to life in a world of too-big-to-fail financial institutions.
Homeowners, to the ramparts. If you're struggling to pay the mortgage, and the mortgage servicing bank or firm is getting ugly, fight back. Fight back hard, because you don't want to be shoved out of your home by someone to whom you don't legally owe any money. Demand to see documentation proving their ownership of your mortgage. Hire a lawyer if you don't understand legal documents. If you're getting the runaround, call your Representative and Senators in Congress, and your state's attorney general. If you truly have defaulted, there may well have to be a settling of accounts eventually. But don't get bullied out of your home by someone who has no legal right to foreclose.
Buyers beware. If you're looking to buy a house, don't buy at a foreclosure auction, and don't touch any property that is a bank sale after a foreclosure. Also, if the property is now owned by ordinary individuals, think about avoiding it if it was foreclosed on in the past. There's no way to tell when the recordkeeping mess might have begun; if you want to be truly careful, don't buy anything that has ever been foreclosed on. You can usually tell if there's been a foreclosure by looking at the history of ownership of the home (often available online in county or city records). If a bank, other corporation, or corporate trustee, is listed as an owner, there's a good chance the property was foreclosed on. If you buy a property with a foreclosure in its history, the mortgage mess may mean that the previous owner who was forced out may actually still own the house and might be able to reclaim it from you. You would probably be able to recover money under your title insurance policy (be sure you have one of these, even if your lender also has one). But you'd be out of the house.
There are legal rules that would probably bar prior homeowners from trying to reclaim the house after a number of years, but you'd have to hire a lawyer in the state where the house is situated to find out how many years that would be. This isn't the short time period homeowners have after foreclosure to recover the home, but a longer period that homeowners would have to recover after being forced out due to the foreclosing lender's fraud. The law may not be entirely clear on this issue, which is why you might want to avoid homes that have ever been foreclosed on.
Sellers beware. Sellers may think that with foreclosures grinding to a halt, the flood of bank sales onto the market will abate and prices will rise. They shouldn't smile too quickly. The foreclosure mess will eventually be resolved and the defaulted properties put on the market. That overhang will keep buyers on the cautious side. Mortgage loans may become harder than ever to get, as mortgage investors from Fannie and Freddie to institutional investors everywhere step back from buying more problems until the current problems are fixed. Title insurance premiums could rise sharply. Higher costs mean fewer buyers. Closings could become more difficult, as title insurers verify two or three times over that the correct mortgagor and home equity lender, if there is one, are being paid off. The home(s) down the street whose foreclosures were just suspended may not be well-maintained, as neither a defaulting homeowner nor a bank that may or may not hold the mortgage have much incentive to keep the place up. Your neighborhood could go to weeds if no one is responsible for ownership. A vibrant real estate market can't exist without good recordkeeping.
Taxpayers. Need we say it? After the bailouts of 2008 and 2009, we all know who gets nailed in the end. Senior government officials will solemnly intone well-rehearsed proclamations about protecting the viability of the financial system, etc., etc., so on, and so forth. Then they'll foist the dog doo on you. Bank bonuses might again temporarily fluctuate, but rest assured that the wealthy and powerful won't truly bear the burdens.
Recent news reports indicate that financial firms servicing mortgages have many times foreclosed on defaulting homeowners without really knowing if they had the legal right to foreclose. Mortgage records in some cases seem to have been evanescent. But, no matter, as key employees whose job it was to review mortgage files and determine that foreclosure was warranted apparently paid scant attention to the contents of the files anyway. One such employee reportedly signed off on thousands of foreclosures a month, perhaps spending only a minute or two per file. Let's guess that his nickname is Robopen.
Other news stories in recent months have reported courts balking at foreclosures when banks couldn't prove they owned the mortgages that were supposedly in default or that they truly had authority to proceed with the foreclosure. There have been allegations of document forgeries and other irregularities. Foreclosures by two major financial institutions--Ally Financial (formerly GMAC) and J.P. Morgan Chase--are grinding to a halt. Today's Washington Post reported that other banks may follow in applying the brakes to their foreclosures. Some state attorneys general are starting to investigate and members of Congress are making noise about compensation for homeowners improperly ejected from their homes.
This is seriously bad shhhhh . . . stuff. The news reports probably reveal only the tip of the iceberg. It's impossible right now to identify all the potential ramifications of this sewage spill. But what we can see already is really stinky.
Systemic risk. With the recently enacted Dodd-Frank legislation, systemic risk is all the rage. So why don't we start with it. There are trillions of dollars of mortgages still held by America's major financial institutions. If the recordkeeping of mortgage servicers is really bad, and numerous mortgages cannot be connected to a legal owner (i.e., a lender or investor who truly has title to the mortgage), a lot of bank writedowns may be necessary. If a bank can't prove it holds the mortgage it thought it held, it will likely have to write off the entire debt. And it will have to stop taking payments from the homeowner, since it can't legally take money it's not entitled to get. We aren't just talking about defaulting and defaulted mortgages. We're talking about all mortgages. A bank that can't document its legal right to a mortgage will have to write it down because you can't count as an asset something you don't own. And the bank can't take payments from a homeowner who doesn't legally owe it any money. The recordkeeping problem here could mean many billions of losses. Federal regulators concerned about bank capital levels just got another massive migraine.
A heroic effort to straighten out the recordkeeping problems might eventually link up a lot of orphaned mortgages with their true owners. But that will probably take months and years. By all indications, each mortgage's file will have to be manually reviewed and straightened out--and not by Robopen or his clones. Such labor intensive work, which likely will require lots of lawyer time, will blow up bank legal budgets nationwide. And, given the inadequacy of the records, lawsuits will sprout like mold in damp drywall. All the while, massive amounts of bank capital will be tied down in mortgages, because the banks won't be able to sell what they can't prove they own. And they may have to reimburse mortgage investors to whom they sold mortgages they didn't own in the first place. Future lending--for new home purchases or to support economic recovery--may recede from today's sputter to a trickle.
Investors, lawyer up and stop buying mortgages. Investors who hold mortgage-backed securities just found themselves living in a world of septic content. They may, or may not, own any mortgage interests. If banks can't be sure who owns which mortgages, they can't be sure what they sold to mortgage investors. The 2007-08 mortgage crisis was bad enough. But today's clouds over title to mortgages means the pricing of numerous mortgage-backed investments may have become hazy indeed.
Fannie Mae and Freddie Mac have been backing new mortgages, so investors in newly issued debt may be at less risk. But if the recordkeeping problems include recent mortgages, the U.S taxpayer (that would be you, dear reader) just got screwed. Oh well, chalk it up to life in a world of too-big-to-fail financial institutions.
Homeowners, to the ramparts. If you're struggling to pay the mortgage, and the mortgage servicing bank or firm is getting ugly, fight back. Fight back hard, because you don't want to be shoved out of your home by someone to whom you don't legally owe any money. Demand to see documentation proving their ownership of your mortgage. Hire a lawyer if you don't understand legal documents. If you're getting the runaround, call your Representative and Senators in Congress, and your state's attorney general. If you truly have defaulted, there may well have to be a settling of accounts eventually. But don't get bullied out of your home by someone who has no legal right to foreclose.
Buyers beware. If you're looking to buy a house, don't buy at a foreclosure auction, and don't touch any property that is a bank sale after a foreclosure. Also, if the property is now owned by ordinary individuals, think about avoiding it if it was foreclosed on in the past. There's no way to tell when the recordkeeping mess might have begun; if you want to be truly careful, don't buy anything that has ever been foreclosed on. You can usually tell if there's been a foreclosure by looking at the history of ownership of the home (often available online in county or city records). If a bank, other corporation, or corporate trustee, is listed as an owner, there's a good chance the property was foreclosed on. If you buy a property with a foreclosure in its history, the mortgage mess may mean that the previous owner who was forced out may actually still own the house and might be able to reclaim it from you. You would probably be able to recover money under your title insurance policy (be sure you have one of these, even if your lender also has one). But you'd be out of the house.
There are legal rules that would probably bar prior homeowners from trying to reclaim the house after a number of years, but you'd have to hire a lawyer in the state where the house is situated to find out how many years that would be. This isn't the short time period homeowners have after foreclosure to recover the home, but a longer period that homeowners would have to recover after being forced out due to the foreclosing lender's fraud. The law may not be entirely clear on this issue, which is why you might want to avoid homes that have ever been foreclosed on.
Sellers beware. Sellers may think that with foreclosures grinding to a halt, the flood of bank sales onto the market will abate and prices will rise. They shouldn't smile too quickly. The foreclosure mess will eventually be resolved and the defaulted properties put on the market. That overhang will keep buyers on the cautious side. Mortgage loans may become harder than ever to get, as mortgage investors from Fannie and Freddie to institutional investors everywhere step back from buying more problems until the current problems are fixed. Title insurance premiums could rise sharply. Higher costs mean fewer buyers. Closings could become more difficult, as title insurers verify two or three times over that the correct mortgagor and home equity lender, if there is one, are being paid off. The home(s) down the street whose foreclosures were just suspended may not be well-maintained, as neither a defaulting homeowner nor a bank that may or may not hold the mortgage have much incentive to keep the place up. Your neighborhood could go to weeds if no one is responsible for ownership. A vibrant real estate market can't exist without good recordkeeping.
Taxpayers. Need we say it? After the bailouts of 2008 and 2009, we all know who gets nailed in the end. Senior government officials will solemnly intone well-rehearsed proclamations about protecting the viability of the financial system, etc., etc., so on, and so forth. Then they'll foist the dog doo on you. Bank bonuses might again temporarily fluctuate, but rest assured that the wealthy and powerful won't truly bear the burdens.
Wednesday, July 28, 2010
Why You Should Avoid Debt
Many voters are clamoring for the federal government to reduce its debt levels. There are a few simple, bottom-line reasons for all of us to avoid borrowing, and to pay off the debts that we have.
You can't go bankrupt if you don't have debts. You can be poor. You can have a modest lifestyle. But you won't have to plead with debt collectors, seek out credit counselors, get painful scowls at the Bank of Mom and Dad, or file for bankruptcy.
You can't lose your home if it's not mortgaged. Pay off your mortgage, and no bank will have a reason to foreclose. Whether you're gaining equity or losing it, you won't go underwater. Of course, you have to keep paying property taxes and similar assessments. But if you have the money management skills to pay off your mortgage, those other obligations will be easy.
You won't have to sweat your credit rating if you don't borrow. For obscure and arcane reasons, your credit rating can fluctuate from month to month. It won't matter if you're not trying to borrow.
You'll live better in the long run if you spend less on interest payments. Why enrich banks? Pay less interest and you'll have more money to buy stuff.
You'll have a more secure retirement with no debt. Once you're on a fixed income, debt can be a real monster. Retire your debts and your retirement will be better.
It's hard to avoid borrowing for some things. Many can afford college, cars and homes only by taking out loans. But keep the borrowing to a minimum, and pay off the loans that you have as fast as possible. You'll enjoy the peace of mind.
You can't go bankrupt if you don't have debts. You can be poor. You can have a modest lifestyle. But you won't have to plead with debt collectors, seek out credit counselors, get painful scowls at the Bank of Mom and Dad, or file for bankruptcy.
You can't lose your home if it's not mortgaged. Pay off your mortgage, and no bank will have a reason to foreclose. Whether you're gaining equity or losing it, you won't go underwater. Of course, you have to keep paying property taxes and similar assessments. But if you have the money management skills to pay off your mortgage, those other obligations will be easy.
You won't have to sweat your credit rating if you don't borrow. For obscure and arcane reasons, your credit rating can fluctuate from month to month. It won't matter if you're not trying to borrow.
You'll live better in the long run if you spend less on interest payments. Why enrich banks? Pay less interest and you'll have more money to buy stuff.
You'll have a more secure retirement with no debt. Once you're on a fixed income, debt can be a real monster. Retire your debts and your retirement will be better.
It's hard to avoid borrowing for some things. Many can afford college, cars and homes only by taking out loans. But keep the borrowing to a minimum, and pay off the loans that you have as fast as possible. You'll enjoy the peace of mind.
Monday, December 24, 2007
How to Handle a Mortgage Default
November 12, 2010 Update: Mediation of mortgage defaults has become available in a number of states and other locales. The idea behind mediation is that you and the lender meet with a neutral 3rd party (the mediator) who tries to facilitate an agreement for you to avoid foreclosure and stay in the home. The mediator won't take sides or make a decision. The goal of mediation is to foster an agreement between the homeowner and the lender. You should seriously consider mediation if it is available, because it provides a way to have a dialogue, correct misunderstandings and reach a deal allowing you to stay in your home. For more information about mediation, go the the National Consumer Law Center at http://www.nclc.org/issues/foreclosure-mediation-programs.html. You can also check your state or local government's website for the availability of mediation programs.
Foreclosure Documentation Problems have recently been prominent in the news. In many cases, courts have halted foreclosure proceedings until lenders can clean up their acts. In a few cases, judges have found the documentation problems to be so severe that they have awarded homes to the owners free of any mortgage debt. Lenders are appealing these latter decisions. If you want to litigate with the lender, you'll need an attorney. Ask around for references. A resource for finding an attorney would be at the National Consumer Law Center website: http://www.nclc.org/for-consumers/how-to-get-legal-assistance.html.
March 9, 2010 Update: Some states offer loans to struggling homeowners. If you live in Delaware, Massachusetts, North Carolina or Pennsylvania, contact your state's housing finance department or agency for information. California, Florida and Nevada may institute such programs. So if you live in one of these states, contact the state housing finance department or agency to see if anything is available.
July 25, 2009 Update: The Obama administration has improved the Making Home Affordable program to give homeowners who are not yet in foreclosure an expanded opportunity to refinance. If you've been current on your monthly payments for the past year, you may now be able to refinance even if you are as much as 125% underwater on your mortgage (the earlier standard was not more than 105% underwater). This is a significant improvement over the original program. For more details, see http://blogger.uncleleosden.com/2009/07/more-mortgage-relief.html.
March 23, 2009 Update: The Obama administration has announced the "Making Home Affordable" program, an initiative to provide mortgage relief to homeowners who are not yet in foreclosure. This program could help some people who would not be assisted by other programs, such as those discussed below. See http://blogger.uncleleosden.com/2009/03/mortgage-relief.html for more on the Making Home Affordable program.
Original Blog (with a reference to a discontinued program called FHASecure deleted):
If you’ve defaulted on your mortgage, or are close to defaulting, you’ll find that the resources for assisting you are limited and scattered about. There’s no overall program, and no easy way to access the available resources. That doesn’t mean you won’t find help, though, especially if you have a moderate or low income. Here are some avenues to explore.
Rate Freeze: the federal government has sponsored a voluntary five-year rate freeze for certain subprime ARM mortgages. Covered mortgages may have their rates frozen at the initial level for five additional years past the initial teaser rate period. You could be in luck if you meet the following criteria: (a) you live in the home purchased with the mortgage and took out a subprime ARM loan made between Jan. 1, 2005 and July 31, 2007; (b) the ARM’s interest rate resets between Jan. 1, 2008 and July 31, 2010; (b) your mortgage loan was packaged into securities sold to investors; (c) you have a credit score less than 660, which hasn’t improved by more than 10% since the mortgage loan was first made; (d) the monthly payment will increase more than 10% in the first reset; and (e) you haven’t been more than 60 days late with a mortgage payment more than once in the last 12 months.
This is a narrowly defined group of mortgages. If, for example, your mortgage was not sold to investors but is still held by a bank or savings and loan association, you’re not covered by the rate freeze. If you took out your mortgage in 2004, too bad. If you’ve been conscientious about paying debts on time and your credit rating has improved more than 10% since you took out the mortgage, you’re out of luck. If you’re already in foreclosure proceedings and really need help, the rate freeze won’t be there for you. In many respects, the rate freeze was designed with the interests of Wall Street investors in mind, so its limited scope shouldn’t be surprising.
Call your mortgage servicer to find out if you qualify for a rate freeze. Most borrowers won’t get one. Here are some additional resources. They mostly focus on helping low and moderate income homeowners.
Contact the Hope Now Alliance at 888-995-4673. This organization was established by a group of nonprofits and lenders, and provides counseling services to borrowers having trouble paying their mortgages.
A national nonprofit organization that helps low and moderate income homebuyers is Acorn Housing Corp. Acorn can be reached by email at help@www.acornhousing.org or by calling 1-888-409-3557. Acorn also has offices in a number of cities. If you are one of the borrowers that Acorn aims to assist, they may help you negotiate with the lender for relief.
Another national nonprofit organization that helps low and moderate income homeowners is Neighborhood Assistance Corp. of America. Its program for distressed homeowners is described at https://www.naca.com/program/homesaveProgram.jsp, and you can call at 1-888-302-NACA. NACA also has offices in a number of cities, and may help you negotiate with the lender for relief.
Contact state and local nonprofit organizations that promote home ownership or provide credit counseling. The extent to which they can help you will vary. But for some homeowners, particularly those with modest or low incomes, these nonprofit organizations can provide a degree of negotiating leverage you would never have on your own. Stay away from mortgage brokers and other for-profit businesses that purport to provide mortgage assistance. If you’re in trouble on your mortgage, the last thing you need is someone who sees you as a profit opportunity.
Higher income people and investors will probably have to take care of themselves. If that’s your situation, here are some thoughts.
Dispassionately evaluate your situation and your ability to keep the house. The bank will be dispassionate, and so should you. Emotion won’t save your house. If necessary, assemble your financial records, go to the public library, and find a quiet corner in the reading room where you can work without distractions.
Calculate your net worth to find out what your financial situation is. Add up your assets, and subtract your debts and other liabilities. Don’t count as assets things like household furnishings, furniture and clothing, which you won’t sell to pay your mortgage. Count only financial assets, and physical assets you’re prepared to sell.
It’s very important to figure out if you’re upside down on your mortgage—i.e., whether or not the house is worth less than the mortgage debt. If so, then you have to make a hard decision whether it’s worthwhile to try to keep the house. Mortgage loans are almost always “with recourse,” which means that if the house is sold in foreclosure proceedings and doesn’t raise enough money to cover the mortgage debt, you will be legally responsible for the unpaid difference. But determining if you have positive or negative equity in the house gives you an idea of how much it’s worth your while to try to hold onto the house. The more equity you have in the house, the more it’s worth trying to keep. And it also gives you a sense for the feasibility of selling the house to pay the mortgage.
Estimate your ability to cut back on other spending in order to meet the mortgage payments. Cutting back on spending is the best option, because it preserves the part of your income that is needed to pay other debts and cover basic living expenses. If spending cutbacks won’t get you there, look at how much of your taxable savings and investments you could use for mortgage payments. Don’t forget that the sale of investment assets like mutual funds and stocks could create tax liabilities and you have to set aside enough money to cover taxes. If you have physical assets you are willing sell to raise money, like your 1971 Chevy Camaro SS with a 396 cubic inch engine, add them to the calculation (with reserves for taxes if necessary).
As a general rule, don’t tap into retirement accounts to make mortgage payments. You’ll have to pay taxes and a 10% penalty on withdrawals, and will have only the remainder for the mortgage. For most people, somewhere between a third and a half of a withdrawal will go to pay taxes and penalties. You could quickly deplete retirement savings you took years to build up. The mortgage lender can’t reach into your retirement accounts for payment (these accounts are protected by law from creditors) and you’d only be needlessly risking your retirement.
Once you have a sense of your financial resources (or lack thereof), you can then negotiate an end game with the lender. Have a bottom line, and if the negotiations get there, stop at the bottom line. Don’t give up everything to keep the house. That’s what the lender wants you to do, but you may be throwing good money after bad, and end up with nothing—no house, no savings and no retirement. Whether or not you lose the house, life will continue and you should preserve something for the future.
To stay in your home, ask if you can refinance into an affordable fixed rate mortgage. If the lender won't agree to that, ask for reduced rates and payments, and forgiveness of some of the principal of the debt. Also ask the lender not to add unpaid interest to the principal balance of the mortgage debt. This is called “negative amortization,” and only delays the pain. It really doesn’t do much to help you.
If you're 62 or older, you could think about refinancing with a reverse mortgage. Although the reverse mortgage might provide less money than you owe on your current mortgage, if you're having trouble making payments, your current lender may take what it can get from the reverse mortgage rather than face potentially larger losses from a foreclosure. One important advantage of a reverse mortgage is that you don't have to repay it until you sell the house, move permanently from the house or pass away. In other words, there are no monthly payments and you can't be kicked out of your house by foreclosure. It's worth looking into if you're 62 or older and about to lose your home. For more information about reverse mortgages, go to http://blogger.uncleleosden.com/2007/06/reverse-mortgages.html.
If you can't work out an affordable payment plan with the lender, consider selling the house. This may be a viable option if the house is worth more than the mortgage debt. If not, you might be able to negotiate a “short sale” with the lender, where you sell the house for whatever you can get, and the lender doesn’t go after you for the unpaid balance of the mortgage loan. Short sales may generate a better price than an auction, and lenders sometimes will agree to them rather than see you walk away from the house.
If you can’t feasibly pay, refinance or renegotiate the mortgage, and can't sell the house on acceptable terms, abandon the house. But let the lender know that you’re leaving and send them the keys. At a minimum, they might do a little upkeep and maintenance on the property to preserve its auction value. That’s in your interest. The more the house sells for at auction, the less recourse the bank will seek from you.
A couple of things to keep in mind. Act sooner rather than later. If you expect problems making your mortgage payments, contact the lender up front and try to work things out before you default. Once you default, the stakes are raised and positions can harden. Avoid is asking family and friends for help with the mortgage. If borrowing from friends and family doesn’t give you enough money to prevent foreclosure, you’ll lose the house, and will also have tapped out the last ditch resources you might need to rebuild your life. (Remember, life will continue after your personal mortgage crisis.) Keep family and friends out of your housing problems.
If you do lose your house, there’s one thing you could gain—wisdom. Next time around, be more prudent and conservative with the price of the house you buy and the amount you borrow. A good-sized downpayment is in everyone’s interests. It obviously protects lenders, but also gives you a cushion to refinance or sell if things go wrong. A fixed-rate mortgage that you can afford makes everyone—homeowners and lenders—better off. Since time immemorial, common sense has paid off and recklessness has been costly.
How to Save for a New Truck: http://www.wtop.com/?nid=456&sid=1315653.
Foreclosure Documentation Problems have recently been prominent in the news. In many cases, courts have halted foreclosure proceedings until lenders can clean up their acts. In a few cases, judges have found the documentation problems to be so severe that they have awarded homes to the owners free of any mortgage debt. Lenders are appealing these latter decisions. If you want to litigate with the lender, you'll need an attorney. Ask around for references. A resource for finding an attorney would be at the National Consumer Law Center website: http://www.nclc.org/for-consumers/how-to-get-legal-assistance.html.
March 9, 2010 Update: Some states offer loans to struggling homeowners. If you live in Delaware, Massachusetts, North Carolina or Pennsylvania, contact your state's housing finance department or agency for information. California, Florida and Nevada may institute such programs. So if you live in one of these states, contact the state housing finance department or agency to see if anything is available.
July 25, 2009 Update: The Obama administration has improved the Making Home Affordable program to give homeowners who are not yet in foreclosure an expanded opportunity to refinance. If you've been current on your monthly payments for the past year, you may now be able to refinance even if you are as much as 125% underwater on your mortgage (the earlier standard was not more than 105% underwater). This is a significant improvement over the original program. For more details, see http://blogger.uncleleosden.com/2009/07/more-mortgage-relief.html.
March 23, 2009 Update: The Obama administration has announced the "Making Home Affordable" program, an initiative to provide mortgage relief to homeowners who are not yet in foreclosure. This program could help some people who would not be assisted by other programs, such as those discussed below. See http://blogger.uncleleosden.com/2009/03/mortgage-relief.html for more on the Making Home Affordable program.
Original Blog (with a reference to a discontinued program called FHASecure deleted):
If you’ve defaulted on your mortgage, or are close to defaulting, you’ll find that the resources for assisting you are limited and scattered about. There’s no overall program, and no easy way to access the available resources. That doesn’t mean you won’t find help, though, especially if you have a moderate or low income. Here are some avenues to explore.
Rate Freeze: the federal government has sponsored a voluntary five-year rate freeze for certain subprime ARM mortgages. Covered mortgages may have their rates frozen at the initial level for five additional years past the initial teaser rate period. You could be in luck if you meet the following criteria: (a) you live in the home purchased with the mortgage and took out a subprime ARM loan made between Jan. 1, 2005 and July 31, 2007; (b) the ARM’s interest rate resets between Jan. 1, 2008 and July 31, 2010; (b) your mortgage loan was packaged into securities sold to investors; (c) you have a credit score less than 660, which hasn’t improved by more than 10% since the mortgage loan was first made; (d) the monthly payment will increase more than 10% in the first reset; and (e) you haven’t been more than 60 days late with a mortgage payment more than once in the last 12 months.
This is a narrowly defined group of mortgages. If, for example, your mortgage was not sold to investors but is still held by a bank or savings and loan association, you’re not covered by the rate freeze. If you took out your mortgage in 2004, too bad. If you’ve been conscientious about paying debts on time and your credit rating has improved more than 10% since you took out the mortgage, you’re out of luck. If you’re already in foreclosure proceedings and really need help, the rate freeze won’t be there for you. In many respects, the rate freeze was designed with the interests of Wall Street investors in mind, so its limited scope shouldn’t be surprising.
Call your mortgage servicer to find out if you qualify for a rate freeze. Most borrowers won’t get one. Here are some additional resources. They mostly focus on helping low and moderate income homeowners.
Contact the Hope Now Alliance at 888-995-4673. This organization was established by a group of nonprofits and lenders, and provides counseling services to borrowers having trouble paying their mortgages.
A national nonprofit organization that helps low and moderate income homebuyers is Acorn Housing Corp. Acorn can be reached by email at help@www.acornhousing.org or by calling 1-888-409-3557. Acorn also has offices in a number of cities. If you are one of the borrowers that Acorn aims to assist, they may help you negotiate with the lender for relief.
Another national nonprofit organization that helps low and moderate income homeowners is Neighborhood Assistance Corp. of America. Its program for distressed homeowners is described at https://www.naca.com/program/homesaveProgram.jsp, and you can call at 1-888-302-NACA. NACA also has offices in a number of cities, and may help you negotiate with the lender for relief.
Contact state and local nonprofit organizations that promote home ownership or provide credit counseling. The extent to which they can help you will vary. But for some homeowners, particularly those with modest or low incomes, these nonprofit organizations can provide a degree of negotiating leverage you would never have on your own. Stay away from mortgage brokers and other for-profit businesses that purport to provide mortgage assistance. If you’re in trouble on your mortgage, the last thing you need is someone who sees you as a profit opportunity.
Higher income people and investors will probably have to take care of themselves. If that’s your situation, here are some thoughts.
Dispassionately evaluate your situation and your ability to keep the house. The bank will be dispassionate, and so should you. Emotion won’t save your house. If necessary, assemble your financial records, go to the public library, and find a quiet corner in the reading room where you can work without distractions.
Calculate your net worth to find out what your financial situation is. Add up your assets, and subtract your debts and other liabilities. Don’t count as assets things like household furnishings, furniture and clothing, which you won’t sell to pay your mortgage. Count only financial assets, and physical assets you’re prepared to sell.
It’s very important to figure out if you’re upside down on your mortgage—i.e., whether or not the house is worth less than the mortgage debt. If so, then you have to make a hard decision whether it’s worthwhile to try to keep the house. Mortgage loans are almost always “with recourse,” which means that if the house is sold in foreclosure proceedings and doesn’t raise enough money to cover the mortgage debt, you will be legally responsible for the unpaid difference. But determining if you have positive or negative equity in the house gives you an idea of how much it’s worth your while to try to hold onto the house. The more equity you have in the house, the more it’s worth trying to keep. And it also gives you a sense for the feasibility of selling the house to pay the mortgage.
Estimate your ability to cut back on other spending in order to meet the mortgage payments. Cutting back on spending is the best option, because it preserves the part of your income that is needed to pay other debts and cover basic living expenses. If spending cutbacks won’t get you there, look at how much of your taxable savings and investments you could use for mortgage payments. Don’t forget that the sale of investment assets like mutual funds and stocks could create tax liabilities and you have to set aside enough money to cover taxes. If you have physical assets you are willing sell to raise money, like your 1971 Chevy Camaro SS with a 396 cubic inch engine, add them to the calculation (with reserves for taxes if necessary).
As a general rule, don’t tap into retirement accounts to make mortgage payments. You’ll have to pay taxes and a 10% penalty on withdrawals, and will have only the remainder for the mortgage. For most people, somewhere between a third and a half of a withdrawal will go to pay taxes and penalties. You could quickly deplete retirement savings you took years to build up. The mortgage lender can’t reach into your retirement accounts for payment (these accounts are protected by law from creditors) and you’d only be needlessly risking your retirement.
Once you have a sense of your financial resources (or lack thereof), you can then negotiate an end game with the lender. Have a bottom line, and if the negotiations get there, stop at the bottom line. Don’t give up everything to keep the house. That’s what the lender wants you to do, but you may be throwing good money after bad, and end up with nothing—no house, no savings and no retirement. Whether or not you lose the house, life will continue and you should preserve something for the future.
To stay in your home, ask if you can refinance into an affordable fixed rate mortgage. If the lender won't agree to that, ask for reduced rates and payments, and forgiveness of some of the principal of the debt. Also ask the lender not to add unpaid interest to the principal balance of the mortgage debt. This is called “negative amortization,” and only delays the pain. It really doesn’t do much to help you.
If you're 62 or older, you could think about refinancing with a reverse mortgage. Although the reverse mortgage might provide less money than you owe on your current mortgage, if you're having trouble making payments, your current lender may take what it can get from the reverse mortgage rather than face potentially larger losses from a foreclosure. One important advantage of a reverse mortgage is that you don't have to repay it until you sell the house, move permanently from the house or pass away. In other words, there are no monthly payments and you can't be kicked out of your house by foreclosure. It's worth looking into if you're 62 or older and about to lose your home. For more information about reverse mortgages, go to http://blogger.uncleleosden.com/2007/06/reverse-mortgages.html.
If you can't work out an affordable payment plan with the lender, consider selling the house. This may be a viable option if the house is worth more than the mortgage debt. If not, you might be able to negotiate a “short sale” with the lender, where you sell the house for whatever you can get, and the lender doesn’t go after you for the unpaid balance of the mortgage loan. Short sales may generate a better price than an auction, and lenders sometimes will agree to them rather than see you walk away from the house.
If you can’t feasibly pay, refinance or renegotiate the mortgage, and can't sell the house on acceptable terms, abandon the house. But let the lender know that you’re leaving and send them the keys. At a minimum, they might do a little upkeep and maintenance on the property to preserve its auction value. That’s in your interest. The more the house sells for at auction, the less recourse the bank will seek from you.
A couple of things to keep in mind. Act sooner rather than later. If you expect problems making your mortgage payments, contact the lender up front and try to work things out before you default. Once you default, the stakes are raised and positions can harden. Avoid is asking family and friends for help with the mortgage. If borrowing from friends and family doesn’t give you enough money to prevent foreclosure, you’ll lose the house, and will also have tapped out the last ditch resources you might need to rebuild your life. (Remember, life will continue after your personal mortgage crisis.) Keep family and friends out of your housing problems.
If you do lose your house, there’s one thing you could gain—wisdom. Next time around, be more prudent and conservative with the price of the house you buy and the amount you borrow. A good-sized downpayment is in everyone’s interests. It obviously protects lenders, but also gives you a cushion to refinance or sell if things go wrong. A fixed-rate mortgage that you can afford makes everyone—homeowners and lenders—better off. Since time immemorial, common sense has paid off and recklessness has been costly.
How to Save for a New Truck: http://www.wtop.com/?nid=456&sid=1315653.
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