Coining phrases is always an interesting part of a catastrophic economic event. While brokers have come under fire as the lynchpin of deceit and corruption in the meltdown, I believe it is fitting that we now see borrowers – the doe-eyed innocents – jobbing the system and themselves in the process. BUY AND BAIL… sounds like a bail bonding convenience store right? Nope, it is the practice of “swapping” your home for a new one by lying about your current house becoming an investment property.
Let’s say that you bought your home in 2003 for $250K and that home is worth $200K now with a principal balance on the mortgage of $240K. The house two streets over has more square footage, a pool and a 2 car garage… much nicer than your carport and kiddy pool… going at $210K today with seller concessions. Creative homebuyers have been maintaining the payments on their own home… then attempting to purchase the upgrade using rental income they anticipate on their current home. Soon after they purchase the nicer home at the lower price, they stop making payments on their original home. Buy and bail… three years of bad credit seem to be worth saving $30K and getting a nicer home as the result.
Today FHA implemented a temporary policy for underwriting rental income on existing homes:
Mortgagee Letter 2008-25: Prohibits the use of rental income to qualify when the borrowers are converting their existing homes to rentals.
Exceptions:
Sufficient Equity in Vacated Property: minimum of 25% equity as evidenced by a residential appraisal which is no older than 6 months old or by comparing the current balance to the original sales price.
Rental income must be reduced by the appropriate vacancy factor as determined by the appropriate FHA Home Ownership Center
Relocations: The borrower is relocating to a new employer or is being transferred to an area that is not within reasonable commuting distance. In order to use the income, a fully executed lease for a duration of at least one year must be provided. The DE Underwriter must obtain evidence of receipt of deposit / one month’s pre-paid rent.
This policy only applies to properties that are being vacated for a new residence and does not apply to preexisting rental properties.
While I am not as confident as Bill Gross in the efficacy of handing the “keys to the kingdom” over to Paulson and Bernanke with no oversight or ability to challenge in court, he is one of the more interesting characters as Founder and Co-CIO of PIMCO, the world’s largest holder of MBSs.
LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY
TO PURCHASE MORTGAGE-RELATED ASSETS
Section 1. Short Title.
This Act may be cited as ____________________.
Sec. 2. Purchases of Mortgage-Related Assets.
(a) Authority to Purchase.–The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.
(b) Necessary Actions.–The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:
(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;
(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;
(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;
(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and
(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.
“Americans are very angry about the proposed bailout of the banking sector and Wall Street…and with good reason. There should be outrage. We should all be disgusted that the government was forced into this situation. I’m infuriated that it came to this.
Of course, we should cap executive pay, which was obscene at many financial firms, immediately. And we should make sure that the CEOs, CFOs and other big wigs that drove their companies into near ruin with overleveraged bets on risky mortgages should not get big severance packages.
But make no mistake. The alternative that many CNNMoney.com readers seem to be calling for - i.e. let all the banks and Wall Street crash and burn - is not viable. In fact, it’s incredibly short-sighted.
So once the blind rage subsides, people will hopefully take a long-hard look at what the government has proposed and come to the realization that doing nothing to rid the nation’s banks of all the poisonous mortgage assets on their balance sheets would be far far worse.”
Unfortunately, for the American taxpayer, getting mad is a realistic by-product Wall Street and banking firm’s of the excess and mismanagement of the mortgage market.
Coakley: Foreclosure Relief Program Has Failed
By Matthew L. Brown
Worcester Business Journal Staff Writer
09/17/08
State Attorney General Martha Coakley has submitted testimony to the U.S. House Financial Services Committee blasting what she calls the mortgage industry’s lack of action on loan modifications.
Coakley is scheduled to testify before the committee, which is chaired by U.S. Rep. Barney Frank, D-Mass., tomorrow regarding the state’s investigation into auction-rate securities fraud.
In the testimony submitted to the committee, Coakley argues that the spiking number of home loan foreclosures in Massachusetts is “due in large measure to unsound and predatory lending practices.”
I read an opinion piece today entitled: OUR OPINION: Regulating resistance in mortgage industry. My problem with this article is it’s misunderstanding of the mortgage industry and of the way regulatory bodies can and should be acting to support a market rebound. The author writes:
“Government regulation in a free market economy can be stifling but if the actions – or, more accurately, inactions – of the nations’ lenders in helping ease the foreclosure crisis is any indication, it’s time to bring the hammer down on those who continue to prey on vulnerable homebuyers.”
And goes on to say:
“Massachusetts approach to loan modification has been three-pronged: a) assess the borrower’s ability to pay, which is a no-brainer first step in any credible loan program; b) compare the value of the income stream to projected foreclosure losses; and c) push lenders for loan modifications that serves the borrower’s needs while meeting the servicer’s economic interest.
Why is that so controversial or difficult? The answer is because predatory lenders make their money on loan origination fees, which generally are not part of a loan modification.”
As I said, my main concern with this article is the nonsense about origination fees being the reason that predatory lenders don’t modify loans… that is just not understanding the industry. Servicers don’t participate in origination often… they make money on the fees that are charged. For a while the reason that they couldn’t just modify the loan is because they don’t OWN the loan…they own the servicing rights – or the right to collect payments and fees associated with that … they pay the escrows (taxes and insurance) and handle the 1098s etc… but they don’t make money on origination – that is a primary market transaction…while servicing is squarely in the secondary. Laws have freed up the statutory ability of the servicer to perform these actions…but they again…DON’T OWN the loan… they have to get permission from the owners to just cede 20-30% of the value of the asset to the distressed borrower for tax purposes and out of the goodness of their heart.
Essentially, if you lend your brother in law $100,000 dollars…which he is supposed to pay $1000 per month on. He used his IRA as collateral. The IRA, which when you lent the money was worth $150,000 is now worth $75,000. The brother in law stops paying the loan. Now brother in law comes to you and says… ok… I can’t make the payment – so can you just reduce what I owe you to the value of my collateral or $75K… basically just give me 25K. And I would like for you to reduce my interest rate and re-amortize the payment to the new principal balance. The reason I would do this would be because if I foreclose on the collateral …and require my BIL to liquidate his IRA… I know that I am not going to get the full $75K after penalties and fees. But I also have no idea if my BIL will even pay the loan at the lesser rate… and now I have a smaller equity position. Now what if the money wasn’t yours that you lent the BIL… what if it was from a family inheritance… you would need to get permission from them to just reduce the principal amount owed.
This is a great video that gives a authoritative, globally-focused perspective on the sub-prime real estate crisis in US and its global impact on banking, mortgages, home loans and financial services, and why the banking system remains at risk from complex processes that most people don’t understand.
Everyone wants to know when this “market correction” is going to end. You can watch media pundits and dime store economists throwing their expertise into the ring. CEOs of the largest Wall Street firms underscore the monkey with a dart theory of prognostication, considering that we have reached the “bottom” almost every quarter since the inception of this fiasco. In reality, it doesn’t seem that anyone really has a clue. Paulsen has been wrong on at least three occasions; however, to his credit, it’s his job to inspire confidence in the market knowing that his words carry the possibility of dismantling entire economies. The Administration still maintains a delusional optimism that things really aren’t as bad as they seem.
This month we hit a new bottom… Foreclosures are at an all time high….unemployment is exceeding gloomy expectations… the Fed doesn’t have a lot of wiggle room to lower interest rates… the stock market had its worse selloff since June. Fortunately, the price of gasoline has finally started to drop… easing the pain on the middle class. Visa and Mastercard are having a great year, as many Americans leverage their credit again to maintain some quality of life.
Great article from Bloomberg yesterday giving another perspective on the current economy from Federal Reserve Bank of San Francisco President Janet Yellen.
“Federal Reserve Bank of San Francisco President Janet Yellen said there are “substantial” risks of slower U.S. economic growth, and inflation is likely to slow, declining to rule out the chance of an interest-rate cut.”
“Yellen is the second policy maker in two days to argue that the yearlong credit crunch has blunted the effect of the rate cuts. While most investors expect officials to keep the benchmark rate unchanged through December, there’s a higher likelihood of a cut than an increase, futures prices show.”
Regulators and legislators are scrambling to prove their value in an election year. Following the federal response with the Housing and Economic Recovery Act of 2008, state legislatures are clamoring to offer their own resolution to the local crisis. With most information coming from consumer groups and the media, the initial proposal to “cure” subprime is often diluted in the reality of the mortgage market.
Stumble it!