Wednesday, December 31, 2008

Fed to Begin Purchasing Agency MBS in January

By Paul Jackson at the Housing Wire:

Let the quantitative easing roll forward — the somewhat controversial policy, involving flooding markets with fresh money during times of economic distress, will directly push its way into the nation’s secondary mortgage markets in January, according to a statement from the Federal Reserve late Tuesday. The Fed said it expects to begin operations in early January under a previously-announced program to purchase agency MBS, and that it had selected a group of private investment managers to run the program.

The Fed had announced on Nov. 25 that it would initiate a program to purchase up to $100 billion GSE direct obligations and $500 billion MBS backed by Fannie Mae (FNM: 0.7273 +5.41%), Freddie Mac (FRE: 0.721 +4.49%) and Ginnie Mae, in an effort to replace waning demand from foreign and other more traditional buyers of mortgage bonds.

“The potential size of the Fed’s purchase program can take down most of the 2009 agency MBS net supply,” analysts Derek Chen and Nicholas Strand at Barclays Capital said late Tuesday evening in a research report. Both Chen and Strand believe the Fed program will drive primary mortgage rates down to 4.5 percent, stimulating further refinancing activity, although a huge refi boom — last seen in 2003 — isn’t likely without looser underwriting.

BlackRock Inc. (BLK: 131.89 +1.70%), Goldman Sachs Asset Management, PIMCO and Wellington Management Company, LLP were selected to manage the purchase transactions, characterized as a “buy and hold” operation by officials at the New York Fed. No word on what really got each firm a cut of the deal here, and the Fed said it was still searching for a custodian.

Under the program, only fixed-rate agency MBS securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are eligible assets for the program, including 30-year, 20-year and 15-year securities of these issuers. The program does not include CMOs, REMICs, Trust IOs/Trust POs and other mortgage derivatives or cash equivalents, a program information sheet said; the Fed will trade in specified pools, TBA transactions, and in the dollar roll market — in other words, every nook and cranny of the agency MBS market.

“Purchases will be financed through the creation of additional bank reserves,” the Fed said, code-speak for printing more money. The question that should naturally be asked here is not if inflation concerns re-enter the economic picture, but when. The practice of “quantitative easing” is predicated on the idea that flooding markets with cash will entice at least some participants to deploy capital, rather than hoard it. But, as numerous market participants have already suggested, at some point all of that excess money supply comes full circle.

MarketWatch’s Irwin Kellner is among those that believe the longer-term threat to the U.S. economy remains inflation. “While virtually no one is raising prices in today’s depressed economy, all this liquidity will soon become an accident looking for a place to happen,” he wrote in a recent column. “The trick then, for the Fed, is to drain this excess liquidity before it turns into inflation.

“This is easier said than done, because the Fed will have to begin weaning us off easy money long before the recession ends. By the way, this could happen sooner than you think.”

For now, however, the Fed is clearly content to print money to finance the purchase of government-backed mortgage assets — which means, oddly enough, that the government is printing money in order to buy from the government. Both Fannie and Freddie are currently under federal conservatorship, while Ginnie Mae is itself a government agency.

Read the NY Fed’s FAQ on the MBS purchase program.

Home prices drop to 2004 levels

By Lauren Baier Kim in the

If you have the cash and are looking to retire to the Sun Belt, now may be a good time to start house hunting. While home prices no doubt are still on their way down, there are some big values out there.

The S&P/Case-Shiller 20-city home price index, released yesterday, shows that in October, Sun Belt cities showed some of the largest home-price declines in the U.S. Some of the biggest drops in home prices were seen in Phoenix, where prices fell 32.7 percent from October 2007; Las Vegas, where prices dropped 31.7 percent, and Miami, which saw a decline of 29 percent over a year's period. There were also large drops in California, where San Francisco prices dropped 31 percent and San Diego prices dipped 26.7 percent.

Overall, the S&P 20-city index showed a record 18 percent price drop in October from October 2007, marking the 27th straight month of losses and bringing home prices back to March 2004 levels, says

The Wall Street Journal's Developments blog has a handy sortable chart of the S&P data for those interested in seeing the data for all of the cities in the S&P 20-city index.

Tuesday, December 30, 2008

Breaking Up Is Harder to Do After Housing Fall

By John Leland in the NY Times:

When Marci Needle and her husband began to contemplate divorce in June, they thought they had enough money to go their separate ways. They owned a million-dollar home near Atlanta and another in Jacksonville, Fla., as well as investment properties.

Now the market for both houses has crashed, and the couple are left arguing about whether the homes are worth what they owe on them, and whether there are any assets left to divide, Ms. Needle said.

“We’re really trying very hard to be amicable, but it puts a strain on us,” said Ms. Needle, the friction audible in her voice. “I want him to buy me out. It’s in everybody’s interest to settle quickly. That would be my only income. It’s been incredibly stressful.”

Chalk up another victim for the crashing real estate market: the easy divorce.

With nearly one in six homes worth less than the mortgage owed on it, according to Moody’s, divorce lawyers and financial advisers around the country say the logistics of divorce have been turned around. “We used to fight about who gets to keep the house,” said Gary Nickelson, president of the American Academy of Matrimonial Lawyers. “Now we fight about who gets stuck with the dead cow.”

As a result, divorce has become more complicated and often more expensive, with lower prospects for money on the other side. Some divorce lawyers say that business has slowed or that clients are deciding to stay together because there are no assets left to help them start over.

“There’s an old joke,” said Randall M. Kessler, Ms. Needle’s lawyer. “Why is a divorce so expensive? Because it’s worth it. Now it better really be worth it.”

In a normal economy, couples typically build equity in their homes, then divide that equity in a divorce, either after selling the house or with one partner buying out the other’s share. But after the recent boom-and-bust cycle, more couples own houses that neither spouse can afford to maintain, and that they cannot sell for what they owe. For couples already under stress, the family home has become a toxic asset.

“It’s much harder to move on with their lives,” said Alton L. Abramowitz, a partner in the New York firm Mayerson Stutman Abramowitz Royer.

Mr. Abramowitz said he was in the middle of several cases where the value of the real estate could not be determined. “All of a sudden,” he said, “prices are all over the place, people aren’t closing, and it becomes virtually impossible to judge how far the market has fallen, because nothing is selling.”

For John and Laurel Goerke, in Santa Barbara, Calif., the housing market crashed in the middle of what Mr. Goerke said had been an orderly legal proceeding. At the height of the market, Mr. Goerke said, they had their house appraised at $2.3 million, which would have given them about $1 million to divide after paying off the mortgage. But by the time they sold last year, the value had fallen by $600,000, cutting their equity by more than half.

“That changed everything,” said Mr. Goerke, who is now nearly two years into the divorce process, with legal and other fees of several hundred thousand dollars. “The prospect of us both being able to buy modest homes was eliminated. The money’s not there.”

Now, with both spouses living in rental properties, their lawyers still cannot agree on what their remaining assets are worth. Their wealth is ticking away at $350 an hour, times two.

“It’s got to end,” Mr. Goerke said, “because at some point there’s nothing left to argue about.”

For other couples it does not have to end. Lisa Decker, a certified divorce financial analyst in Atlanta, said she was seeing couples who were determined to stay together even after divorce because they could not sell their home, a phenomenon rarely seen before outside Manhattan.

“We’re finding the husband on one floor, the wife on the other,” Ms. Decker said. “Now one is coming home with a new boyfriend or girlfriend, and it’s creating a layer to relationships that we haven’t seen before. Unfortunately, we’re seeing ‘The War of the Roses’ for real, not just in a Hollywood movie.”

In California, James Hennenhoefer, a divorce lawyer, said couples were taking advantage of the housing crisis to save money by stopping their mortgage payments but continuing to live together for as long as they can.

“Most of the lenders around here are in complete disarray,” Mr. Hennenhoefer said. “They’re not as aggressive about evictions. Everyone’s hanging around in properties hoping the government will buy all that bad paper and then they’ll negotiate a new deal with the government. They just live in different parts of the house and say, ‘We’ll stay here for as long as we can, and save our money, so we have the ability to move when and if the sheriff comes to toss us out.’ ”

Mr. Hennenhoefer said this tactic worked only with first mortgages; on second and third mortgages, the lenders pursue repayment even after the homeowners have lost the home.

Dee Dee Tomasko, a nursing student and mother in suburban Cleveland, expected to leave her marriage with about $200,000 in starter money, primarily from the marital home, which was appraised at about $1 million in 2006. By the time of her divorce last year, however, the house was appraised at $800,000; her share of the equity came to about $105,000.

Though she is relieved to be out of the marriage, if she had known how little money she would get “I might have stuck with it a little more; I don’t know,” Ms. Tomasko said, adding, “Maybe it would’ve made me think a little harder.”

For divorcing spouses with resources, though, there can be opportunities in the falling housing market.

Josh Kaufman and his wife bought a new 6,500-square-foot house outside Cleveland on five and a half acres, with four bedrooms and two three-car garages, that was worth $1.5 million at the height of the market. When they divorced in June, Mr. Kaufman knew his wife could not afford to carry the home. The longer the divorce process continued, the more the house depreciated; by the time he assumed the house, its appraised value was half what the couple had put into it; he did not pay her anything for her share.

“From a negotiating standpoint we knew that she couldn’t afford to stay in it,” Mr. Kaufman said. “It appeared as an opportunity to turn the negative situation around. There was no emotion involved. It was a business decision on what made most financial sense. It wasn’t an attempt to take advantage of someone.”

Still, his lawyer, Andrew A. Zashin, said, “He bought this house at a bargain basement price.”

For Nancy R., who spoke on condition of anonymity because her colleagues do not know her marital status, the impediments to divorce are visible every time she opens her door.

“There’s three other houses for sale on our same road,” she said. “There’s no way our house would sell.”

For now the couple are separated, waiting for real estate prices to recover. But for Ms. R., that means remaining financially dependent on her husband. He moved out; she remains in the house.

“I still feel kept in certain ways, and I don’t want to rock the boat,” she said. “And it’s draining. So suddenly, when there’s an economic crunch, we’re paying for two places. And we’re both eating out more, because it’s no fun to eat alone.”

The same dynamics that marked their marriage now hang over their separation, she said: “He has the ultimate control.”

“We can’t sell the house,” she said, “and whatever settlement I get depends on a good relationship with him, based on his good will. The lines get blurry and confused quickly, which makes emotions fly easily” — especially if she were to start dating.

“Any icing on the cake is going to come from his good will,” she said, “and that means being the peacemaker. I’m the underdog in this situation. We’re basically forced to remain in a relationship after we’ve decided to end it.”

Sunday, December 28, 2008

By Saying Yes, WaMu Built Empire on Shaky Loans

By Peter S. Goodman and Gretchen Morgenson at the NY Times:

“We hope to do to this industry what Wal-Mart did to theirs, Starbucks did to theirs, Costco did to theirs and Lowe’s-Home Depot did to their industry. And I think if we’ve done our job, five years from now you’re not going to call us a bank.”

— Kerry K. Killinger, chief executive of Washington Mutual, 2003

SAN DIEGO — As a supervisor at a Washington Mutual mortgage processing center, John D. Parsons was accustomed to seeing baby sitters claiming salaries worthy of college presidents, and schoolteachers with incomes rivaling stockbrokers’. He rarely questioned them. A real estate frenzy was under way and WaMu, as his bank was known, was all about saying yes.

Yet even by WaMu’s relaxed standards, one mortgage four years ago raised eyebrows. The borrower was claiming a six-figure income and an unusual profession: mariachi singer.

Mr. Parsons could not verify the singer’s income, so he had him photographed in front of his home dressed in his mariachi outfit. The photo went into a WaMu file. Approved.

“I’d lie if I said every piece of documentation was properly signed and dated,” said Mr. Parsons, speaking through wire-reinforced glass at a California prison near here, where he is serving 16 months for theft after his fourth arrest — all involving drugs.

While Mr. Parsons, whose incarceration is not related to his work for WaMu, oversaw a team screening mortgage applications, he was snorting methamphetamine daily, he said.

“In our world, it was tolerated,” said Sherri Zaback, who worked for Mr. Parsons and recalls seeing drug paraphernalia on his desk. “Everybody said, ‘He gets the job done.’ ”

At WaMu, getting the job done meant lending money to nearly anyone who asked for it — the force behind the bank’s meteoric rise and its precipitous collapse this year in the biggest bank failure in American history.

On a financial landscape littered with wreckage, WaMu, a Seattle-based bank that opened branches at a clip worthy of a fast-food chain, stands out as a singularly brazen case of lax lending. By the first half of this year, the value of its bad loans had reached $11.5 billion, nearly tripling from $4.2 billion a year earlier.

Interviews with two dozen former employees, mortgage brokers, real estate agents and appraisers reveal the relentless pressure to churn out loans that produced such results. While that sample may not fully represent a bank with tens of thousands of people, it does reflect the views of employees in WaMu mortgage operations in California, Florida, Illinois and Texas.

Their accounts are consistent with those of 89 other former employees who are confidential witnesses in a class action filed against WaMu in federal court in Seattle by former shareholders.

According to these accounts, pressure to keep lending emanated from the top, where executives profited from the swift expansion — not least, Kerry K. Killinger, who was WaMu’s chief executive from 1990 until he was forced out in September.

Between 2001 and 2007, Mr. Killinger received compensation of $88 million, according to the Corporate Library, a research firm. He declined to respond to a list of questions, and his spokesman said he was unavailable for an interview.

During Mr. Killinger’s tenure, WaMu pressed sales agents to pump out loans while disregarding borrowers’ incomes and assets, according to former employees. The bank set up what insiders described as a system of dubious legality that enabled real estate agents to collect fees of more than $10,000 for bringing in borrowers, sometimes making the agents more beholden to WaMu than they were to their clients.

WaMu gave mortgage brokers handsome commissions for selling the riskiest loans, which carried higher fees, bolstering profits and ultimately the compensation of the bank’s executives. WaMu pressured appraisers to provide inflated property values that made loans appear less risky, enabling Wall Street to bundle them more easily for sale to investors.

“It was the Wild West,” said Steven M. Knobel, a founder of an appraisal company, Mitchell, Maxwell & Jackson, that did business with WaMu until 2007. “If you were alive, they would give you a loan. Actually, I think if you were dead, they would still give you a loan.”

JPMorgan Chase, which bought WaMu for $1.9 billion in September and received $25 billion a few weeks later as part of the taxpayer bailout of the financial services industry, declined to make former WaMu executives available for interviews.

JPMorgan also declined to comment on WaMu’s operations before it bought the company. “It is a different era for our customers and for the company,” a spokesman said.

For those who placed their faith and money in WaMu, the bank’s implosion came as a shock.

“I never had a clue about the amount of off-the-cliff activity that was going on at Washington Mutual, and I was in constant contact with the company,” said Vincent Au, president of Avalon Partners, an investment firm. “There were people at WaMu that orchestrated nothing more than a sham or charade. These people broke every fundamental rule of running a company.”

‘Like a Sweatshop’

Some WaMu employees who worked for the bank during the boom now have regrets.

“It was a disgrace,” said Dana Zweibel, a former financial representative at a WaMu branch in Tampa, Fla. “We were giving loans to people that never should have had loans.”

If Ms. Zweibel doubted whether customers could pay, supervisors directed her to keep selling, she said.

“We were told from up above that that’s not our concern,” she said. “Our concern is just to write the loan.”

The ultimate supervisor at WaMu was Mr. Killinger, who joined the company in 1983 and became chief executive in 1990. He inherited a bank that was founded in 1889 and had survived the Depression and the savings and loan scandal of the 1980s.

An investment analyst by training, he was attuned to Wall Street’s hunger for growth. Between late 1996 and early 2002, he transformed WaMu into the nation’s sixth-largest bank through a series of acquisitions.

A crucial deal came in 1999, with the purchase of Long Beach Financial, a California lender specializing in subprime mortgages, loans extended to borrowers with troubled credit.

WaMu underscored its eagerness to lend with an advertising campaign introduced during the 2003 Academy Awards: “The Power of Yes.” No mere advertising pitch, this was also the mantra inside the bank, underwriters said.

“WaMu came out with that slogan, and that was what we had to live by,” Ms. Zaback said. “We joked about it a lot.” A file would get marked problematic and then somehow get approved. “We’d say: ‘O.K.! The power of yes.’ ”

Revenue at WaMu’s home-lending unit swelled from $707 million in 2002 to almost $2 billion the following year, when the “The Power of Yes” campaign started.

Between 2000 and 2003, WaMu’s retail branches grew 70 percent, reaching 2,200 across 38 states, as the bank used an image of cheeky irreverence to attract new customers. In offbeat television ads, casually dressed WaMu employees ridiculed staid bankers in suits.

Branches were pushed to increase lending. “It was just disgusting,” said Ms. Zweibel, the Tampa representative. “They wanted you to spend time, while you’re running teller transactions and opening checking accounts, selling people loans.”

Employees in Tampa who fell short were ordered to drive to a WaMu office in Sarasota, an hour away. There, they sat in a phone bank with 20 other people, calling customers to push home equity loans.

“The regional manager would be over your shoulder, listening to every word,” Ms. Zweibel recalled. “They treated us like we were in a sweatshop.”

On the other end of the country, at WaMu’s San Diego processing office, Ms. Zaback’s job was to take loan applications from branches in Southern California and make sure they passed muster. Most of the loans she said she handled merely required borrowers to provide an address and Social Security number, and to state their income and assets.

She ran applications through WaMu’s computer system for approval. If she needed more information, she had to consult with a loan officer — which she described as an unpleasant experience. “They would be furious,” Ms. Zaback said. “They would put it on you, that they weren’t going to get paid if you stood in the way.”

On one loan application in 2005, a borrower identified himself as a gardener and listed his monthly income at $12,000, Ms. Zaback recalled. She could not verify his business license, so she took the file to her boss, Mr. Parsons.

He used the mariachi singer as inspiration: a photo of the borrower’s truck emblazoned with the name of his landscaping business went into the file. Approved.

Mr. Parsons, who worked for WaMu in San Diego from about 2002 through 2005, said his supervisors constantly praised his performance. “My numbers were through the roof,” he said.

On another occasion, Ms. Zaback asked a loan officer for verification of an applicant’s assets. The officer sent a letter from a bank showing a balance of about $150,000 in the borrower’s account, she recalled. But when Ms. Zaback called the bank to confirm, she was told the balance was only $5,000.

The loan officer yelled at her, Ms. Zaback recalled. “She said, ‘We don’t call the bank to verify.’ ” Ms. Zaback said she told Mr. Parsons that she no longer wanted to work with that loan officer, but he replied: “Too bad.”

Shortly thereafter, Mr. Parsons disappeared from the office. Ms. Zaback later learned of his arrest for burglary and drug possession.

The sheer workload at WaMu ensured that loan reviews were limited. Ms. Zaback’s office had 108 people, and several hundred new files a day. She was required to process at least 10 files daily.

“I’d typically spend a maximum of 35 minutes per file,” she said. “It was just disheartening. Just spit it out and get it done. That’s what they wanted us to do. Garbage in, and garbage out.”

Referral Fees for Loans

WaMu’s boiler room culture flourished in Southern California, where housing prices rose so rapidly during the bubble that creative financing was needed to attract buyers.

To that end, WaMu embraced so-called option ARMs, adjustable rate mortgages that enticed borrowers with a selection of low initial rates and allowed them to decide how much to pay each month. But people who opted for minimum payments were underpaying the interest due and adding to their principal, eventually causing loan payments to balloon.

Customers were often left with the impression that low payments would continue long term, according to former WaMu sales agents.

For WaMu, variable-rate loans — option ARMs, in particular — were especially attractive because they carried higher fees than other loans, and allowed WaMu to book profits on interest payments that borrowers deferred. Because WaMu was selling many of its loans to investors, it did not worry about defaults: by the time loans went bad, they were often in other hands.

WaMu’s adjustable-rate mortgages expanded from about one-fourth of new home loans in 2003 to 70 percent by 2006. In 2005 and 2006 — when WaMu pushed option ARMs most aggressively — Mr. Killinger received pay of $19 million and $24 million respectively.

The ARM Loan Niche

WaMu’s retail mortgage office in Downey, Calif., specialized in selling option ARMs to Latino customers who spoke little English and depended on advice from real estate brokers, according to a former sales agent who requested anonymity because he was still in the mortgage business.

According to that agent, WaMu turned real estate agents into a pipeline for loan applications by enabling them to collect “referral fees” for clients who became WaMu borrowers.

Buyers were typically oblivious to agents’ fees, the agent said, and agents rarely explained the loan terms.

“Their Realtor was their trusted friend,” the agent said. “The Realtors would sell them on a minimum payment, and that was an outright lie.”

According to the agent, the strategy was the brainchild of Thomas Ramirez, who oversaw a sales team of about 20 agents at the Downey branch during the first half of this decade, and now works for Wells Fargo.

Mr. Ramirez confirmed that he and his team enabled real estate agents to collect commissions, but he maintained that the fees were fully disclosed.

“I don’t think the bank would have let us do the program if it was bad,” Mr. Ramirez said.

Mr. Ramirez’s team sold nearly $1 billion worth of loans in 2004, he said. His performance made him a perennial member of WaMu’s President’s Club, which brought big bonuses and recognition at an awards ceremony typically hosted by Mr. Killinger in tropical venues like Hawaii.

Mr. Ramirez’s success prompted WaMu to populate a neighboring building in Downey with loan processors, underwriters and appraisers who worked for him. The fees proved so enticing that real estate agents arrived in Downey from all over Southern California, bearing six and seven loan applications at a time, the former agent said.

WaMu banned referral fees in 2006, fearing they could be construed as illegal payments from the bank to agents. But the bank allowed Mr. Ramirez’s team to continue using the referral fees, the agent said.

Forced Out With Millions

By 2005, the word was out that WaMu would accept applications with a mere statement of the borrower’s income and assets — often with no documentation required — so long as credit scores were adequate, according to Ms. Zaback and other underwriters.

“We had a flier that said, ‘A thin file is a good file,’ ” recalled Michele Culbertson, a wholesale sales agent with WaMu.

Martine Lado, an agent in the Irvine, Calif., office, said she coached brokers to leave parts of applications blank to avoid prompting verification if the borrower’s job or income was sketchy.

“We were looking for people who understood how to do loans at WaMu,” Ms. Lado said.

Top producers became heroes. Craig Clark, called the “king of the option ARM” by colleagues, closed loans totaling about $1 billion in 2005, according to four of his former coworkers, a tally he amassed in part by challenging anyone who doubted him.

“He was a bulldozer when it came to getting his stuff done,” said Lisa Alvarez, who worked in the Irvine office from 2003 to 2006.

Christine Crocker, who managed WaMu’s wholesale underwriting division in Irvine, recalled one mortgage to an elderly couple from a broker on Mr. Clark’s team.

With a fixed income of about $3,200 a month, the couple needed a fixed-rate loan. But their broker earned a commission of three percentage points by arranging an option ARM for them, and did so by listing their income as $7,000 a month. Soon, their payment jumped from roughly $1,000 a month to about $3,000, causing them to fall behind.

Mr. Clark, who now works for JPMorgan, referred calls to a company spokesman, who provided no further details.

In 2006, WaMu slowed option ARM lending. But earlier, ill-considered loans had already begun hurting its results. In 2007, it recorded a $67 million loss and shut down its subprime lending unit.

By the time shareholders joined WaMu for its annual meeting in Seattle last April, WaMu had posted a first-quarter loss of $1.14 billion and increased its loan loss reserve to $3.5 billion. Its stock had lost more than half its value in the previous two months. Anger was in the air.

Some shareholders were irate that Mr. Killinger and other executives were excluding mortgage losses from the computation of their bonuses. Others were enraged that WaMu turned down an $8-a-share takeover bid from JPMorgan.

“Calm down and have a little faith,” Mr. Killinger told the crowd. “We will get through this.”

WaMu asked shareholders to approve a $7 billion investment by Texas Pacific Group, a private equity firm, and other unnamed investors. David Bonderman, a founder of Texas Pacific and a former WaMu director, declined to comment.

Hostile shareholders argued that the deal would dilute their holdings, but Mr. Killinger forced it through, saying WaMu desperately needed new capital.

Weeks later, with WaMu in tatters, directors stripped Mr. Killinger of his board chairmanship. And the bank began including mortgage losses when calculating executive bonuses.

In September, Mr. Killinger was forced to retire. Later that month, with WaMu buckling under roughly $180 billion in mortgage-related loans, regulators seized the bank and sold it to JPMorgan for $1.9 billion, a fraction of the $40 billion valuation the stock market gave WaMu at its peak.

Billions that investors had plowed into WaMu were wiped out, as were prospects for many of the bank’s 50,000 employees. But Mr. Killinger still had his millions, rankling laid-off workers and shareholders alike.

“Kerry has made over $100 million over his tenure based on the aggressiveness that sunk the company,” said Mr. Au, the money manager. “How does he justify taking that money?”

In June, Mr. Au sent an e-mail message to the company asking executives to return some of their pay. He says he has not heard back.

Friday, December 26, 2008

Firms Charge Thousands To Modify Mortgages

By Renae Merle at the Washington Post:

A growing industry has emerged to take advantage of the unprecedented wave of foreclosures, charging distressed homeowners for help negotiating better loan terms -- a service provided for free or for a nominal fee by many nonprofits.

Such companies charge $500 to $2,500 or more and are drawing the ire of consumer advocates, regulators and lenders, who say many are just the latest version of foreclosure rescue scams and can make it more difficult for homeowners to get help.

"You don't need to go out and hire someone to help you," said Michael Gross, managing director of mortgage servicing for Bank of America. "It is very, at times, frustrating to find a homeowner who has paid a for-profit company $3,000 to $5,000 in an upfront fee, when they could have gotten the same or better assistance free."

Loan modification firms say they are taking up the slack left by unresponsive lenders and overwhelmed nonprofit groups. "Nonprofits are not as efficient as the regular market," said Moose M. Scheib, the head of Michigan-based, a loan modification firm that charges homeowners $1,500 to help renegotiate their mortgages. "I think the difference is probably more attention you get from us."

There do not appear to be federal laws that prohibit charging for this service, several law-enforcement officials and law professors said. Instead the practice is governed by a hodgepodge of state and local laws. Virginia does not appear to restrict its practice, according to the state's consumer services department. Officials with the District's Department of Insurance, Securities and Banking said these companies would fall under statutes covering credit counseling services, and therefore must be registered.

Maryland has received several complaints and issued an alert in September warning that under its existing laws, loan modification firms cannot charge an upfront fee.

Maryland's Department of Labor, Licensing and Regulation has helped recover at least $10,000 for homeowners who say they were misled, according to the agency. But the state says the problem is bigger than the fees.

"Once a borrower pays an unscrupulous loss-mitigation consultant and time is wasted, the damage has been done," said Sarah Bloom Raskin, Maryland's commissioner of financial regulation. "While we may be able to recover fees, we can never recover the lost time -- time that the borrower could have used to work out a bona fide loan modification."

"We are extremely concerned about the huge proliferation of for-profit companies making a buck on these people," said Laurie Maggiano, senior policy adviser at HUD's Office of Housing. The department has certified 2,300 nonprofit housing counseling agencies across the country, which are required have at least one year of experience administering a housing counseling program, Maggiano said.

Legal Services of Northern Virginia, a nonprofit group, investigated a case involving U.S. Homeowners Assistance of Irvine, Calif., after a client paid the firm $2,500 for help modifying the loan for her Alexandria home. After receiving the money, the company did not return her calls, said Kristi Cahoon, a lawyer with the nonprofit group.

By the time the homeowner, a 75-year-old retired nurse, realized no help was forthcoming, she had fallen behind in her payments and was facing foreclosure, Cahoon said.

U.S. Homeowners Assistance said in an e-mailed statement that the borrower's money could be returned if she requested a refund and a review of her file was conducted.

Clayton Sampson, founder of U.S. Housing Assist of Nevada, which launched in July, said nonprofits provide a great service, but added, "We have a lot of clients that need us."

Sampson said he spent five years at a mortgage brokerage and his contacts have enabled him to customize workout plans for a homeowner's lender. His firm charges a minimum of $2,500, but he said he would return the money if he was unable to help the homeowner.

The pitch companies make varies. But one approach includes paying a company to challenge the legality of a loan -- a process housing experts say can be long and complicated.

Vienna-based Mortgage Analysis and Consulting, for example, charges $150 for a consultation and $250 to $500 for a preliminary audit. If the audit finds problems with the loan document, Mortgage Analysis will refer the borrower to a lawyer, who may charge an additional $2,000 retainer. If the lawyer requests a more in-depth audit, Mortgage Analysis charges up to $1,750, which clients can pay in installments.

In several cases, the introduction of a lawyer has helped spur the lender to agree to a better loan modification, said Jose Semidey, the firm's founder.

Semidey, a former real estate broker, said he planned to open a nonprofit firm earlier this year to help homeowners. But, he said, he quickly found himself inundated with distressed homeowners willing to pay for his service.

"I am not in this for the money or to get rich. I see it as a mission and a duty," he said. "And yes, we are a for-profit company, but that only makes [us] do a better job."

Virginia's State Bar is investigating a complaint that Semidey has illegally practiced law. Semidey said he makes clear he is not a lawyer and refers clients to a list of lawyers he has compiled.

One of Semidey's former clients, Edwin Monge, said he became concerned that he would no longer be able to afford the payments on his Woodbridge townhouse after the adjustable interest rate rose and the payments increased. The home's value had tumbled, making it impossible for him to refinance. Monge said he met Semidey through a friend and eventually paid him $7,000, some of which was to be used to pay a lawyer.

"I was blind," Monge said. "I wasted my money, and they lied to me and they didn't tell about the community groups."

Some of the money eventually was returned. And in the end, with the help of a nonprofit legal group, Monge was able to get into a new loan -- at no cost -- through a Federal Housing Administration program.

Semidey said the process did not work out because Monge could not find a local lawyer to represent him and a large portion of the money was spent on an outside auditor. "He came to our office 10 or 15 times," he said. "We translated for him. We sat with him. . . . You cannot make everyone happy."

He said, "We did not profit from the interaction."

Mortgage refinance rates low; few qualify

By Monica Hatcher at the Miami Herald:

Recent drops in interest rates have homeowners rushing to call local banks and mortgage lenders about refinancing. Loan applications are pouring in.

Yet, South Florida homeowners are mostly getting a big fat ''No!'' from the bank when they ask to refinance. The chief reason: Falling home values mean they owe more than their homes are worth.

''We got 53 calls to my branch on Friday,'' said Todd LaPenta, a private mortgage banker at Wells Fargo on Lincoln Road in South Beach. ``We could only help about five.''

Average rates for a 30-year, fixed-rate mortgage fell to 5.14 percent on Wednesday, the lowest level since 1971, reported Freddie Mac, the government-controlled mortgage giant. The number of people applying for mortgages rose by 50 percent last week, the Mortgage Bankers Association also reported.

It's another painful irony of living in one of the nation's worst hit housing markets -- borrowers who owe more than their homes are worth cannot refinance without ponying up thousands of dollars in cash to cover the difference between the old and new loan amounts.

And they're the ones in most dire need.

In South Florida, four in 10 homeowners who bought or refinanced over the past five years owe more on their home than it is worth, according to sales and mortgage data analyzed by, a web-based real estate services firm. Many of them chose adjustable-rate loans and other expensive mortgages because that was the only way they could afford the payments.

Justin Miller, a broker with Resource Mortgage Group in Plantation, said the current rates, which essentially amount to ''free money,'' are, in a sense, unavailable to those most in need.

''This is only putting people who are in a good position in a better position,'' Miller said.

Even when borrowers have the home equity they need to avoid a big cash payment, they must still meet rigorous underwriting demands that have become the bane of consumers. Equity refers to a borrower's ownership stake in a property, usually the home's market value minus any loans owed against it.

Before LaPenta begins processing an application, he said he makes sure customers are aware of the essential criteria needed to refinance: 20 percent equity in the property, a homestead exemption, a credit score of 700 or higher, a mortgage debt-to-income ratio of no more than 45 percent and the ability to fully document income and assets.

''If not, we're just wasting our time,'' LaPenta said. Still, it's hard to turn down desperate borrowers, whose harangues invariably end in accusations of hoarding federal bailout money, LaPenta said.

'They say, `We provided all the billions and you guys aren't helping us. Why aren't you lending it?' '' said LaPenta. He tells them he works on the front lines and has no say in the bank's underwriting policies.

Still, if you can qualify, the low interest rates offer a welcome financial boon.

Joshua Estrin, a dance and drama teacher in Broward County, on Monday locked in a 4.87 percent fixed rate for a 30-year loan on the Plantation home he refinanced in 2006, reducing his monthly payments by about $300.

''It's wonderful, and I feel very lucky, and every little bit helps. But I'm not the one losing my house,'' Estrin said.

Despite his stellar credit score, his lender showed no leniency in his application, he said. He also had 20 percent equity, though he had to have his home reappraised because the bank's automated valuation found him short by $7,000.

''The bank was putting me through the wringer, so I can only imagine someone who has been responsible, then being hit with hard times and now has a 600 or 650 credit score,'' Estrin said.

When it comes to cheap financing, home buyers -- not refinancers -- may be the biggest winners if they can brave the prospects of further price declines.

Though it still may be too soon to tell whether low rates will spur new sales, Madeleine Romanello, a real estate agent for Douglas Elliman Florida, said there are lots of fence-sitters still too worried about the market to take the plunge. People have learned from the boom years the perils of buying an overpriced property just because interest rates are low, Romanello said.

Florida, however, is basically ''on sale'' right now, Miller said, and buyers would be foolish not to take advantage of low home prices and low interest rates. Even if home price fall another 7 percent in six months, he said, buyers would still have a lower monthly payment if they financed their purchase at today's rates.

''The hardest thing about my job right now is seeing the great deals everybody else is getting,'' Miller said.

Fading Housing Hope: A mortgage bailout plan's paltry results, and their lessons

Washington Post editorial:

PASSED BY Congress in July and put into effect on Oct. 1, the federal government's Hope for Homeowners program was billed as strong medicine for the twin ills of rampant foreclosures and sagging home prices. Advocates argued that it would help stave off recession by delivering mortgage relief to the most deserving of distressed homeowners -- all while creating the least possible taxpayer expense and avoiding perverse incentives. Basically, the plan was to offer as much as $300 billion in government-guaranteed home loans to people whose current mortgages exceed the value of their houses; 400,000 people would benefit, it was said. Well, the early returns are in, and the program is, at this point, a flop. There have been only 312 applications, according to the Department of Housing and Urban Development. At that rate, the three-year program would help only about 5,400 borrowers.

We hate to say we told you so, but -- we told you so. Except that we never guessed that the program would perform quite this poorly. The Bush administration and the program's congressional author, House Financial Services Committee Chairman Barney Frank (D-Mass.), are now engaged in a blame game, with Bush officials saying that the program is a victim of burdensome conditions imposed by Congress and Frank asserting that he only agreed to those conditions as the price of a politically acceptable bill. Each side has a point. Mortgage relief causes genuine ambivalence among Americans of good faith. They feel sorry for their neighbors and want protection against an uncontrolled housing collapse, but they don't think it's fair to spend taxpayers' money bailing out people who took on unaffordable loans and the bankers who enabled them. Hope for Homeowners tried to keep everyone happy by requiring lenders to sacrifice some of the principal value of homes while requiring borrowers to give up future profits and assume monthly payments of at least 31 percent of their incomes. This may have been the best available deal, politically, but it doesn't make sense, economically, for very many people. Therefore, hardly anyone has chosen it.

After the reports of Hope for Homeowners's dismal start came another good news-bad news story about housing. Hope Now, a government-backed alliance of mortgage lenders, said it is on track to keep 2.2 million homeowners out of foreclosure in 2008 -- but banking regulators said that about half of the loans modified in the first three months of the year fell back into delinquency within six months. Consumer groups attribute the problem to the modifications' insufficiently generous terms, particularly lenders' refusal to reduce principal amounts or interest rates. There is some truth to this. But declining interest rates have lessened the problem of "exploding" adjustable-rate mortgages. Increasingly, loan delinquencies and foreclosures result from unemployment; people who lose their jobs find it hard to make house payments on time. This suggests that even if loan modifications double in 2009, as Hope Now predicts, they may not keep pace with foreclosures.

There is much discussion now of adding an even bigger anti-foreclosure measure to an economic stimulus plan in the first days of the Obama administration . But recent experience teaches that it is hard to design an anti-foreclosure plan that is both targeted and effective -- and that the recession is now driving housing's woes, not the other way around.

Thursday, December 25, 2008

Once Trusted Mortgage Pioneers, Now Pariahs

By Michael Moss and Geraldine Fabrikant at the NY Times:

“We are team-oriented, highly ethical, extremely competitive, profit-oriented, risk-averse, consumer-focused, and we try as much as possible to squeeze out any ego. Hubris is the beginning of the end.”

— Herbert Sandler, June 2005

SAN FRANCISCO — Herbert Sandler, the founder of the Center for Responsible Lending, is standing in his bayfront office watching a DVD that trains brokers to pitch mortgages by extolling the glories of the real estate boom.

The video reeks of hucksterism, and it infuriates Mr. Sandler.

“I would not have approved that!” he declares. “I don’t think we should be selling our loans based on home prices continuing to go up.”

But the DVD was produced in 2005 by a mortgage lender that Mr. Sandler and his wife, Marion, ran at the time: World Savings Bank. And the video was a small part of a broad and aggressive effort by their company to market risky loans at the height of the housing bubble.

The Sandlers long viewed themselves — and were viewed by many others — as the mortgage industry’s model citizens. Now they too have been swept into the maelstrom surrounding who is to blame for the housing bust and the growing number of home foreclosures.

Once invited by Congress to testify about good lending practices, the Sandlers were recently parodied on “Saturday Night Live” as greedy bankers who handily sold their bank — and pocketed $2.3 billion in shares and cash — in 2006 before many of their loans began to sour.

Last month, the United States attorney’s office in San Francisco announced dual inquiries into whether World Savings engaged in predatory lending practices or misled investors about its financial well-being. And the bank has been sued by numerous borrowers who claim they were misled into taking out mortgages they could not afford.

At the center of the controversy is an exotic but popular mortgage the Sandlers pioneered that helped generate billions of dollars of revenue at their bank.

Known as an option ARM — and named “Pick-A-Pay” by World Savings — it is now seen by an array of housing analysts and regulators as the Typhoid Mary of the mortgage industry.

Pick-A-Pay allowed homeowners to make monthly mortgage payments that were so small they did not cover their interest charges. That meant the total principal owed would actually grow over time, not shrink as is normally the case.

Now held by an estimated two million homeowners, the option adjustable rate mortgage will be at the forefront of a further wave of homeowner distress that could greatly delay or even derail an economic recovery, mortgage industry analysts say.

The Wachovia Corporation, which bought the Sandlers’ bank two years ago, was so battered by the souring portfolio of World Savings that it began writing off losses now projected at tens of billions of dollars and eventually stopped offering option ARMs.

Through it all, the Sandlers have maintained they did nothing wrong beyond misjudging the real estate bubble.

“I didn’t mislead anybody, and to the best of my knowledge, our company didn’t, though there may have been an isolated case here and there,” Mr. Sandler said. “If home prices hadn’t declined by 50 percent, nobody would be raising these questions.”

Mr. Sandler also finds it incredible that borrowers feel victimized by Pick-A-Pay. “All of a sudden their home is worth half of what it was, and they say they didn’t know.”

Yet the Sandlers embraced practices like the use of independent brokers who used questionable methods to reel in borrowers. These and other practices, critics contend, undermined the conservative lending practices that the Sandlers built their reputations upon.

“This product is the most destructive financial weapon ever deployed against the American middle class,” said William J. Purdy III, a housing lawyer in California who is representing elderly World Savings customers struggling to repay their loans. “People who have this loan are now trapped, and they can’t get another loan.”

The Birth of Pick-A-Pay

Marion Sandler, now 78, was a Wall Street analyst in the early 1960s when she and her husband decided to buy a bank that took only savings deposits and made mortgage loans — a thrift, or savings and loan, in banking shorthand — and run it themselves.

Mr. Sandler, now 77, was a lawyer in Manhattan who grew up poor on the Lower East Side, the son of a compulsive gambler whose earnings were consumed by loan sharks.

The Sandlers searched for a thrift in the sizzling California market and paid $3.8 million in 1963 for an Oakland enterprise called Golden West Savings and Loan Association, which later became the parent company of World Savings. It had a main office and one branch.

When Reagan era deregulation arrived, the Sandlers and two other competitors were able to market option ARMs for the first time in 1981. Before that, lawmakers balked at the loan because of its potential peril to borrowers.

World Savings initially attracted borrowers whose incomes fluctuated, like professionals with big year-end bonuses. In the recent housing boom, when World Savings started calling the loan Pick-A-Pay, they began marketing it to a much broader audience, including people with financial troubles, like deeply indebted blue-collar workers.

As the entire thrift industry soared after deregulation, the Sandlers’ business also took off. They avoided financial problems by doing things like scrutinizing borrowers’ incomes to make sure loans were manageable and performing astute appraisals so the size of a mortgage was in line with the value of a home.

“Our protection was our total underwriting of the loan,” Mr. Sandler said. “From scratch.”

When many of the Sandlers’ competitors in the thrift industry later began collapsing under the weight of bad loans and investments, Congress and the media invited the couple to speak about the proper way to do business.

“The deregulatory situation attracted bums, charlatans, crooks, phonies, con men,” Mr. Sandler told an ABC News program in 1990.

The Sandlers also held onto World Savings’ loans rather than selling them off to Wall Street to be repackaged as securities. They say this made them more alert to risky borrowers than were lenders who sold off their loans.

When foreclosures occurred, World Savings executives would drive to the house to see if they had made mistakes appraising the property or underwriting the loan. “We called these the van tours,” Mr. Sandler said. “And we would say, ‘O.K., have we done anything wrong here?’ ”

More Philanthropic Work

As the Sandlers’ wealth increased, so did their philanthropy. Over the years, they financed scientific research and groups like Human Rights Watch and the American Civil Liberties Union. More recently they founded and financed ProPublica, a nonprofit investigative journalism enterprise that has collaborated with The New York Times on coverage and a news archive. Its 14-member advisory board includes two top New York Times Company editors.

The Sandlers’ giving intersected most directly with their business interests in 2002 when they helped create an advocacy group for low-income borrowers called the Center for Responsible Lending.

The center was the successor to a smaller organization in North Carolina, whose director, Martin Eakes, had helped the elderly and minorities avoid predatory banking practices.

“I said, ‘Isn’t that incredible what he is doing?’ ” Mr. Sandler recalled. “I said to Martin, ‘What would it take to do what you do on a national scale?’ ”

Mr. Eakes, who became the center’s executive director, had also just helped secure a new mortgage lending law in North Carolina that prohibited, among other things, the use of prepayment penalties.

“I hated prepayment penalties,” Mr. Eakes recalled, noting that such charges make it hard for cash-poor borrowers to refinance a loan for one with more manageable terms.

While Mr. Sandler supported the center’s antipredatory goals, he disagreed with Mr. Eakes’s position on prepayment penalties and sought to change his mind. Mr. Eakes says the Sandlers convinced him to drop his opposition to prepayment penalties, “but they never dictated to us what to do.”

Mr. Sandler acknowledges that some lenders used the penalties to lock borrowers into “absolutely awful” loans. But he said his bank used the penalties to fend off unethical brokers who enticed borrowers with low-interest-rate loans that often had hidden fees.

“You have to understand how independent brokers work,” Mr. Sandler says. “They are the whores of the world.”

Despite that distaste, World Savings made extensive use of brokers. By 2006, they were generating some 60 percent of its loan business, he acknowledged. He said he was compelled to do so because of brokers were a dominant force in the mortgage industry.

As a check on the representations that brokers made to borrowers, World Savings sought to telephone applicants to ensure that they understood the terms of their loan. These calls reached only about half of the borrowers, however, according to a former World Savings executive. Mr. Sandler did not dispute that point.

Customer complaints that an unethical broker had misrepresented the terms of World Savings loans is at the heart of a lawsuit filed against the bank and others in Alameda County, Calif. The broker was sentenced to a year in prison for misleading at least 90 World Savings borrowers.

Mr. Sandler points out that the company was itself a victim of this broker, that it cooperated fully with authorities, and that it was not charged with any wrongdoing.

Others have also raised questions about how carefully World Savings disclosed lending terms to its borrowers.

In August, a federal judge in South Carolina ruled that World Savings had violated the federal Truth in Lending Act by telling borrowers that choosing to make minimum monthly payments on Pick-A-Pay mortgages might cause their principal to grow — when in fact it certainly would occur.

Wachovia, which is defending the case, has appealed the ruling. Mr. Sandler said he was not familiar with this lawsuit, but generally, he says, “Wachovia’s legal defense is deficient.”

A Speedy Merger

By 2005, World Savings lending had started to slow, after more than quadrupling since 1998. The next year, Wachovia bought the bank in a hastily arranged deal. The Sandlers say they sold their firm at the top of the market because they were growing older and wanted to devote themselves to philanthropy.

Some current and former Wachovia officials say that the merger was agreed to in days and that it was impossible to conduct a thorough vetting of World Savings’ loans. Others say the portfolio was adequately scrutinized.

“Herb and his wife had run a tight ship,” said Robert Brown, a Wachovia board member. “There was not a huge concern about it because they had not had any delinquencies and foreclosures.”

Others were less sanguine. The creditworthiness of World Savings borrowers edged down from 2004 to 2006, according to Wachovia’s data. Over all, Pick-A-Pay borrowers had credit scores well below the industry average for traditional loans.

“I don’t think anyone thought a Pick-A-Pay product was a customer friendly product,” says a former Wachovia executive who requested anonymity to preserve professional relationships. “It is easy to mislead them.”

World Savings lending volume dipped again in 2006 shortly after the sale to Wachovia was initiated, according to the company’s federal filings.

This prompted World Savings to attract more borrowers by taking a step that some regulators were starting to frown upon, and which the company had been resisting for years: it allowed borrowers to make monthly payments based on an annual interest rate of just 1 percent. While World Savings continued to scrutinize borrowers’ ability to manage increased payments, the move to rock-bottom rates lured customers whose financial reliability was harder to verify.

Russell W. Kettell, a former chief financial officer of World Savings, says the merger created “pressure” for “a pretty good-sized increase in loan volume.”

Asked if Wachovia ordered World Savings to drop its rate, Mr. Kettell said, “No, but they wanted volume and wanted growth.”

A swift increase in option ARM lending had prompted federal regulators to weigh tougher controls on lending standards in 2005. Of the $238 billion in option ARM loans made nationally in 2005, World Savings issued about $52 billion, or more than one-fifth of the total.

Susan Schmidt Bies, a governor of the Federal Reserve System until last year, said the surge in volume caught regulators by surprise, and that she regrets not acting more quickly to protect borrowers because she believes that they could not understand the risky nature of option ARMs.

“When you get into people whose mortgage payments are taking half of their cash flow, they are in over their heads, and these loans should not have been sold to this customer base,” she said. “This makes me sick when I see this happening.”

In March 2006, two months before the Wachovia deal, Mr. Sandler wrote regulators and objected to several aspects of the new rules, including the regulator’s conclusion that option ARMS “were untested in a stress environment.”

He argued in the letter that World Savings had few loan losses in the recession of the early 1990s. Then again, the current financial crisis is far more severe than what occurred then — far more severe than anything the country has faced since the Great Depression.

By the third quarter of this year, Wachovia was projecting $26.1 billion of losses on a World Savings loan portfolio worth a total of about $124 billion. About 6.2 percent of the Pick-A-Pay loans were more than 90 days late, it said, compared with an industry average of 8 percent on option ARMs and 1 percent on Wachovia’s traditional loans.

Wells Fargo, which is now buying Wachovia, is more pessimistic: it expects losses of $36 billion on the loans unless efforts to stem foreclosures help rescue part of the portfolio. The losses caused analysts and others to reassess the Sandlers’ legacy.

After the “Saturday Night Live” skit, Paul Steiger, the former executive editor of The Wall Street Journal and the editor in chief of ProPublica, was among those who wrote to the show’s producer, Lorne Michaels, saying the Sandlers had been unfairly vilified. Mr. Michaels apologized for the skit (which suggested that the Sandlers “should be shot”) and removed it from NBC’s Web site.

Mr. Sandler says Wachovia did not work hard enough to help struggling borrowers, and that his loans became scapegoats for other problems at Wachovia. He remains confident that losses on its loans will not reach Wells Fargo’s projections.

He says World Savings was hit especially hard because it had made so many loans in volatile markets like inland California, but he disputes homeowner assertions that his option ARMs are at fault.

“We have not been able to identify one delinquency, much less a foreclosure, that is due to the product,” Mr. Sandler said, adding that “if home prices had not dropped, you wouldn’t see” a single article.

Over all, analysts expect the option ARM fallout to be brutal. Fitch Ratings, a leading credit rating agency, recently reported that payments on nearly half of the $200 billion worth of option ARMs it tracks will jump 63 percent in the next two years — causing mortgage delinquencies to rise sharply.

Mr. Sandler says that his loans are not in the pool that will become distressed in the next few years; he says they reset at a later date. He adds that were he not sure that the market would recover he would have sold his Wachovia stock at the time of the takeover. His charity has sold off much of its Wachovia stock, but he said he and his wife retain a substantial portion of their personal holdings.

Still, the Sandlers have their detractors.

“As the largest and most respected regulated institution providing option ARMs, I hold the Sandlers responsible because a large percentage of home borrowers — but not all — should have been advised that it was in their best interest to have a fixed-rate mortgage,” said Robert Gnaizda, general counsel for the Greenlining Institute, a homeowner advocacy group. “I believe that financial institutions have a quasi-fiduciary responsibility not to mislead the borrower.”

Mr. Sandler insists that World Savings prided itself on ethical conduct and that untoward behavior was never tolerated. “We were also a family, and you expected people to live their personal and business lives in a particular way,” he said.

Wednesday, December 24, 2008

$300 billion FHA rescue funds available to homeowners -- with a hitch

From the Inland Empire & Inland Valley Breaking News:

A $300 billion Federal Housing Administration rescue plan aimed at cutting troubled homeowners' monthly payments by hundreds of dollars a month is available to lenders willing to use it.The White House has said the Hope for Homeowners plan has the potential of keeping as many as 400,000 homeowners from going into foreclosure.

But there's a hitch.

Kurt Eggert, a Chapman University law professor and former member of the Federal Reserve Board's Consumer Advisory Council, said the FHA program's challenge is to "build in enough motivation for the financial industry to play along."

For some banks, that motivation is in offering the same high-dollar incentives to loan officers and independent mortgage brokers that were offered before the housing crash, according to mortgage industry insiders in Washington, D.C.

The fear is that these middle men will use the rescue plan to once again line their pockets by putting borrowers into loans with inflated interest rates, which means higher monthly mortgage payments than what some of the plan's proponents intended."

They have to give lenders something so they'll do the FHA refinances, and so mortgage brokers will handle it," Eggert said. "The challenge is, how much do you give them? Certainly we don't want to give (loan officers and brokers) so much where we have a repeat of the abuses of the past, where borrowers were jammed into loans that weren't appropriate for them. I don't know if they've struck that balance."

On Oct. 1, FHA started administering the rescue program, which is mandated by the 2008 Housing and Economic Recovery Act.

The program doesn't put credit-score requirements on borrowers, whose scores drop with every payment they've missed. But there are no provisions mandating that banks and lenders buy into that approach.In fact, some mortgage lenders plan on turning away homeowners with credit scores below 580, sources in Washington, D.C., say.

For homeowners with credit scores above 580, and who are upside-down in their loans, mortgage lenders would write new government-backed mortgages. Upside-down homeowners are those who owe more on their mortgages than their properties are worth.

The new loans would be written based on a home's current value, which likely would be drastically lower than the original mortgage.Writing down these mortgages means huge losses for the lenders. Still, many homeowners with rewritten loans will be able to keep their homes, which lets the banks bypass the higher cost of foreclosure.

That's a win for all parties.But there's no provision in the law that stops lenders from shifting qualified borrowers into higher-cost loans, which is how much of the current mortgage mess was created.Because of this, lenders may push financially fragile homeowners into loans that generate extra income for independent mortgage brokers and bank loan officers.

The higher income comes through an incentive called a yield-spread premium, which allows independent brokers and bank loan officers to make more money when they sell a loan with a higher interest rate.And if a debt-straddled homeowner still ends up defaulting on the mortgage and goes into foreclosure, the lender is assured to be paid in full by the U.S. government.

Bill Glavin, special assistant to the FHA commissioner, said his agency has no control over banks and lenders' decision to do that."There's not much we can do about that," Glavin said.Congressman Joe Baca, D-San Bernardino and co-author of the Hope for Homeowners program, said a provision in the program forces independent brokers to disclose details on those higher-cost loans in a loan document's closing statement.

That's nothing new. Independent brokers are already mandated to do that by the Real Estate Settlement Procedures Act of 1974.But given their complexity, it's very possible some borrowers simply won't understand the yield-spread premiums -- a common occurrence during the housing boom.

And federal real-estate law has never required banks to disclose details on yield-spread premiums. Borrowers dealing with a bank loan officer may ask to see paperwork which shows the amount the officer is making on the deal, but the bank isn't required to show customers that information.

The problem with regulating yield-spread premiums: There's a higher chance that banks and lenders wouldn't participate in the FHA program if they can't use incentives, Baca said.

But if troubled homeowners getting loans through Hope for Homeowners don't understand how to read yield-spread premiums, there's a higher chance they'll sign off on these loans and never know how much money their independent brokers or bank loan officers made, said mortgage broker Paul Ostrowski, owner of Anaheim-based

Borrowers will most likely be paying higher mortgage rates than if they understood the yield-spread premium incentive and decided to shop around for a better deal, he said.Ostrowski and others are questioning why lenders are using this incentive model with a program that's backed by taxpayer money.

Some FHA participants on the brink of foreclosure might end up losing their homes anyway. Those FHA mortgages are government-insured, which means the government is holding the bag on any loans that go belly up.

Ostrowski, who has deep roots in the mortgage industry, worked as a home-loan officer for Wells Fargo in 2004 when the housing boom and subprime market were in full swing."I realized back then that there were going to be major problems because of the loans given to borrowers," he said.

Now, Ostrowski said, he's bewildered at banks and lenders being allowed to put their own spin on the FHA program.Martin Eakes, chief executive officer of the Durham, N.C.-based Center for Responsible Lending -- a nonprofit research and policy group -- said it's just not right."

If lenders are indeed using yield-spread premiums or credit scores to encourage mortgage brokers to steer distressed homeowners into FHA-backed loans that are more expensive than they need be, that is ethically outrageous and certainly not what Congress intended for this program," he said.

Yield Spread Premium: What You Need to Know (from the RefiAdviser)

The number one reason homeowners overpay for their mortgage loans is a little known fee known as Yield Spread Premium. Yield Spread Premium is so bad that the Secretary of Housing and Urban Development was recently quoted that American homeowners will overpay sixteen billion dollars this year alone.

What is Yield Spread Premium? Simply put Yield Spread Premium is the markup of your mortgage interest rate for a commission by the mortgage company or broker. The problem with this markup is that it is rarely disclosed and will cost you in addition to any other fees you pay for loan origination.

Here’s an example of how hidden Yield Spread Premium drives up your monthly mortgage payment costing you thousands of dollars unnecessarily. Suppose you are refinancing your existing home loan for $350,000. Your mortgage company quotes you a mortgage rate of 6.25% and charges you an origination fee of 3% for their part in arranging your loan. This means you will be required to pay $10,500 at closing for loan origination.

What your mortgage company isn’t telling you is that you actually qualified for a 5.5% mortgage rate and they have marked it up for a commission from the lender. The lender behind your loan rewards the mortgage company or broker for overcharging you by paying one percent of your loan amount for every .25% they markup your mortgage rate. In this example the mortgage company was paid an additional $10,500 for overcharging you in addition to the $10,500 you’re paying for loan origination. That’s right; your mortgage company doubled their commission by lying to you about your mortgage rate.

What does this mean for your monthly mortgage payment? With the mortgage rate you got at 6.25% your monthly payment will be $2155. If you had gotten the mortgage rate you deserve at 5.5% your payment would have been only $1980. That’s a difference of $175 per month or $2,100 you’re overpaying every year!

There is good news today since you’ve found this website. The free mortgage videos available online will show you how to avoid Yield Spread Premium when refinancing your mortgage and will get a wholesale mortgage rate. You will also learn which fees charged by the mortgage company and broker are garbage and can be avoided. There are a number of fees mortgage companies and brokers charge like rate lock fees that are complete garbage…if you want the best deal for your home loan you’ll need to avoid these fees in addition to Yield Spread Premium.

HUD Dumps Limits on FHA Origination Fees (Peter G. Miller at FHALoanPros)

As a parting gift to the lending industry, HUD has published its final rule to “Simplify and Improve the Process of Obtaining Mortgages and Reduce Consumer Settlement Costs.”

“Millions of families go to the settlement table each year without clearly understanding what they are paying for,” says HUD Secretary Steve Preston. “In many respects, it’s clear that the current way people buy and refinance their homes isn’t serving us very well at all and has contributed to the current housing crisis.”

But, oh my, buried on page 68227 what do we find but a decision to dump limits on loan origination fees.Previously FHA mortgage borrowers were protected because HUD limited origination fees to 1 percent of the mortgage amount for most FHA loans. However, with the new final rule, the limitations are out and borrower beware is in.

Why? Because HUD says that its new good faith estimate (GFE) forms should protect borrowers.

What’s remarkable about HUD’s explanation of the matter is that its proposed ruling was opposed by the National Community Reinvestment Coalition. No one, apparently, agreed with HUD’s position otherwise another comment would surely have been cited.

No matter. HUD did what it was going to do in a last-minute ruling that the new Administration will have to undo. Meanwhile, borrowers have still-another complexity with which to deal.
ruling and comment are below.

3. FHA Limitation on Origination Fees of Mortgagees
Under its codified regulations, HUD places specific limits on the amount a mortgagee may collect from a mortgagor to compensate the mortgagee for expenses incurred in originating and closing a FHA-insured mortgage loan (see 24 CFR 203.27).1 The March 2008 proposed rule would have removed the current specific limitations on the amounts mortgagees are presently allowed to charge borrowers directly for originating and closing an FHA loan. Under HUD’s proposal, the FHA Commissioner would have retained authority to set limits on the amount of any fees that mortgagees charge borrowers directly for obtaining an FHA loan. In addition, the proposed rule would have also permitted other government program charges to be disclosed on the blank lines in Section 800 of the HUD1/1A.

There was little comment on this issue. NCRC (the National Community Reinvestment Coalition) disagreed with the proposal to remove the specific limitations on the amount mortgagees are allowed to charge for originating and closing an FHA loan. NCRC stated that a government-guaranteed loan product should shield borrowers from excessive charges by establishing reasonable limits on fees. According to NCRC, while it may be acceptable to carefully raise origination fee limits, this should be done only in conjunction with establishing reasonable limits on YSPs. This commenter stated that by establishing standard limits on origination fees and YSPs, the FHA loan product can keep the nongovernment guaranteed products competing by constraining direct fee and YSP costs.

HUD Determination
HUD believes that its RESPA policy statements on lender payments to mortgage brokers restrict the total origination charges for mortgages, including FHA mortgages, to reasonable compensation for goods, facilities, or services. (See Statement of Policy 1999-1, 64 FR 10080, March 1, 1999, and Statement of Policy 2001-1, 66 FR 53052, October 18, 2001.) Moreover, the improvements to the disclosure requirements for all loans sought to be achieved as a result of this rulemaking should make total loan charges more transparent and allow market forces to lower these charges for all borrowers, including FHA borrowers. Therefore, HUD has determined to finalize the proposed rule to remove the current specific limitations on the amounts mortgagees presently are allowed to charge borrowers directly for originating and closing an FHA loan. The FHA Commissioner retains authority to set limits on the amount of any fees that mortgagees charge borrowers directly for obtaining an FHA loan.

Note 1: Under 24 CFR 203.27(a)(2)(i), origination fees are limited to one percent of the mortgage amount. For new construction involving construction advances, that charge may be increased to a maximum of 2.5 percent of the original principal amount of the mortgage to compensate the mortgagee for necessary inspections and administrative costs connected with making construction advances. For mortgages on properties requiring repair or rehabilitation, mortgagor charges may be assessed at a maximum of 2.5 percent of the mortgage attributable to the repair or rehabilitation, plus one percent on the balance of the mortgage. (See 24 CFR 203.27(a)(2)(ii), and (iii).)

Jumbo Mortgage Shoppers Get Little Relief From Fed Rate Cuts

(Bloomberg) Jumbo mortgage shoppers in the most expensive U.S. housing markets such as New York and San Francisco aren’t getting much relief from lower borrowing costs.

The average 30-year fixed rate for home loans of more than $729,750 remains almost 2 percentage points above conforming rates and the spread between them may set a record this month, according to financial data firm BanxQuote.

Banks remain reluctant to lend after recording $678 billion in mortgage-related losses and writedowns in the past year and as house prices plunge. Jumbo mortgage rates may come down next year as more buyers refinance, helping banks improve liquidity, said Keith Gumbinger, vice president of mortgage-research firm HSH Associates Inc. in Pompton Plains, New Jersey.

“A guy in a low-cost market like Des Moines probably doesn’t care much about helping someone in New York buy a million-dollar apartment, but if he refinances his conventional loan, that’s exactly what he’ll be doing,” Gumbinger said. “He’ll be giving lenders the liquidity they need to rebalance their loan portfolios and compete for jumbo borrowers who typically are the best in terms of credit quality.”

The average 30-year fixed jumbo loan rate was 7.32 percent on Dec. 22, compared with 5.38 percent for a conforming loan, according to BanxQuote of White Plains, New York.

Wide Spread
The difference between them has averaged 2.13 percentage points in December, 10 times the average spread from 2000 to 2006 and above last month’s 1.95 percentage points that was the highest on record.

Jumbo borrowers New York, San Francisco, and Boston may see rates fall in 2009 because of Federal Reserve Chairman Ben Bernanke’s plan to buy at least $500 billion of agency debt, said Gumbinger.

The Fed’s mortgage-bond buying program, announced Nov. 25, also provides for the purchase of $100 billion in direct debt of Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

Bernanke’s plan adds to previous government actions aimed at lower home-financing costs, including the September seizure of mortgage-finance companies Fannie Mae and Freddie Mac. As part of that takeover, the Treasury announced its own program to buy mortgage-backed securities to bolster the worst housing market in at least 70 years.

Loan Applications Rise
Mortgage applications in the U.S. jumped 48 percent last week as the lowest borrowing costs in five years promoted a surge in refinancing.

The Mortgage Bankers Association’s index of applications to buy a home or refinance a loan rose to 1,245.4, the highest since 2003, from 841.4 a week earlier. The group’s refinancing gauge rose 63 percent and purchases gained 11 percent.

While many homeowners are trying to lower their mortgage payments, buyers remain on the sidelines as prices fall.

The median U.S. home price plunged 13 percent in November from a year earlier, the largest drop on record and likely the biggest decline since the Great Depression of the 1930s, the National Association of Realtors said yesterday in a report.

Home prices are tumbling as foreclosure-related sales accounted for 45 percent of the month’s transactions, according to the Chicago-based trade group.

“The real elephant in the room is falling house prices,” Glenn Hubbard, former chairman of the Council of Economic Advisers under President George W. Bush who is now dean of the Columbia University Graduate Business School, said in an interview on Monday. “We can fix this by lowering mortgage interest rates.”

Prices Sink
Declining prices won’t be helped by the Federal Housing Finance Agency’s announcement last month that it will lower the size of so-called jumbo conforming mortgages that can be purchased by Fannie Mae and Freddie Mac. Congress authorized raising the conforming limit of $417,000 to as high as $729,750 in about 90 of the nation’s most expensive housing markets in 2008 as a temporary measure to support

On Jan. 1 that cap drops to $625,500 following the formula set out by July’s Housing and Economic Recovery Act. The law, known as HERA, specified a loan limit of 115 percent of an area’s median home price, rather than the 125 percent limit approved for this year by Congress, said Andrew Leventis, an FHFA economist. The change means more buyers in high-priced areas will have to use jumbo mortgages, he said.

The Fed on Dec. 16 cut its benchmark interest rate target to a range of zero to 0.25 percent and said it will add to the announced $500 billion in mortgage bond purchases as needed.

“Over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities,” the policy makers said in a statement.