Posts tagged ‘Foreclosure Crisis’

05/11/2012

Adjustable Interest: Still A Big Problem

Between 2001 and 2007, “Adjustable Rate Mortgages” were sold by predatory lenders like Countrywide, who profited quickly by pocketing high closing costs, and then by promptly selling their Notes to Fannie Mae or Freddie Mac, so they could recoup their principle. When unsuspecting borrowers later faced significant interest rate increases, millions found themselves unable to pay, and fell into default. While mortgage foreclosures grew at a galloping rate, the crisis turned into a housing sector depression. As fair market values fell precipitously, millions of homes took on the label of being “underwater,” because their mortgage balances exceeded what could be realized in an arms-length sale.

Even though “adjustable rate mortgages” and “interest only” loans were a major contributing factor in the 2008 housing collapse, they are still used today, because wealthy financiers continue to purchase the votes of House and Senate members, and this keeps Congress from banning usurious lending practices. Despite the best efforts of Democrats through the Dodd-Frank Bill, variable rate mortgages are not eliminated, and are not even regulated.

There was a time in America, however, not so long ago, when “variable interest rates” were not allowed, and relatively low caps were set on “fixed rate mortgages.” Historically, each state had laws that set maximum interest rates. After the United States was formed, most states limited interest rates to no more than 6%.

During the right-wing Reagan Revolution, conservatives started pushing de-regulation as to nearly everything, including interest rates. When South Dakota completely eliminated their cap on interest in 1978, many credit card companies relocated there. With the approval of a conservative U.S. Supreme Court, they started charging unlimited sums of interest under South Dakota law, even though their credit cards were being used in states that had caps.

The loss of control on interest rates got another boost under the federal Depository Institutions Deregulation and Monetary Control Act, which exempted federal banks from state usury laws in 1980.

Before the reckless Reagan Revolution, the country had witnessed a great expansion in housing after WW II, during the 1950s and 1960s, when banks and savings and loans were limited by law to using only “fixed rate mortgages” with capped low interest rates. Payment schedules remained unchanged for 15 to 30 years, and there were no spikes or adjustments to throw buyers into default.

While Wall Street banks make billions from variable interest rates, they are nowhere near as good for consumers as fixed rates. The absence of caps on the amount of interest that can be charged, only leads to unnecessary profit-taking, and many hardships for the millions of victims who lost their homes in the crash of 2008.

01/31/2012

Housing: What Are “Freddie” & “Fannie?”

FANNIE MAE: CREATED IN 1938 IN GREAT DEPRESSION: The U.S. government enacted the National Housing Act (NHA) in 1934, during the Great Depression, with a goal of making home mortgages more affordable. “Fannie Mae,” the Federal National Mortgage Association (FNMA), was formed under a 1938 amendment.

SECONDARY MORTGAGE MARKET INCREASED LOANS: As local banks had consumers sign Notes and Mortgages, they promptly turned around, and assigned their paperwork to Fannie Mae, in consideration for cash, so they could make even more loans, thereby increasing the level of home ownership. Fannie’s practice of buying mortgages from local lenders became known as the “secondary mortgage market.”

FANNIE WAS PRIVATIZED IN 1968: The Congress changed the nature of Fannie Mae in 1950 from a purely governmental agency, to a “mixed ownership corporation,” by allowing private investors to purchase their common stock. To completely remove Fannie Mae from the federal budget, it was converted in 1968 to a private corporation, with the authority to buy “private mortgages.”

“FREDDIE MAC” WAS FORMED IN 1970: Mortgages backed by government agencies, such as the FHA, VA, and FmHA, fell under the control of a new agency, known as Ginnie Mae, the Government National Mortgage Association. In 1970, it became part of the Federal Home Loan Mortgage Corporation (FHLMC), commonly known as “Freddie Mac.”

MORTGAGES STARTED BEING SOLD AS SECURITIES: Private mortgages were sold and assigned to Fannie Mae, while government-backed paper was sent to Freddie Mac. Although Fannie no longer had a government guarantee, they still enjoyed a line of credit from the U.S. Treasury. Fannie and Freddie both started re-selling their mortgages as securities.

FANNIE ASSUMED GREATER RISK UNDER 1992 LAW: The Housing and Community Development Act of 1992, signed into law by President George H. W. Bush, was intended to make financing more affordable for low and moderate income people. While Freddie Mac maintained their traditional high standards, Fannie started taking risks in the sub-prime market in the 1990s.

EASY CREDIT FOR MORTGAGE LOANS: In the past, borrowers had to put up to 20% down and present tax returns and other documents that showed they were credit worthy. Lenders started bypassing traditional qualifying income documentation, and no longer insisted on down-payments.

VARIABLE INTEREST RATES DOOMED NOTES TO FAIL: Notes were drafted for short-term gain, by taking “interest only,” meaning borrowers would never pay off their mortgages. “Variable interest rates” were used instead of “fixed rates,” which allowed monthly payments to be increased at later dates to levels lenders knew, or should have known, borrowers could not afford.

FANNIE AND FREDDIE CONSUMED HALF OF MARKET: Fannie became the largest purchaser of risky mortgages sold by Countrywide Financial. Fannie and Freddie either owned or guaranteed about 5 trillion of debt.

MORTGAGE-BACKED SECURITIES TRADING GREW: Around 2003 and 2004, when evidence of a sub-prime mortgage crisis began to emerge, the market nevertheless continued trading in Mortgage-Backed Securities (MBS).

HIGHER INTEREST RATES LED TO FORECLOSURES: When higher amounts were charged under “adjustable rate mortgages,” borrowers with poor credit ratings, and no money down, simply walked away from properties in what became a foreclosure crisis.

FORECLOSURES CAUSED HOUSING PRICES TO DROP: Foreclosures and an excess housing supply, caused prices to drop, and they have remained down since then, because few now qualify for loans under traditional lending standards requiring down-payments, employment, and good credit ratings.

CONSERVATOR TOOK OVER FREDDIE & FANNIE: Freddie and Fannie were placed under a conservatorship by the Federal Housing Finance Agency in Sep. 2008. Their stocks, trading at less than $1 a share, dropped off the NYSE in 2010. The Federal Reserve has been granting low interest loans to Fannie and Freddie, which are estimated to ultimately cost the federal government between 224 and 360 billion.

06/28/2011

Florida: Reflections on Sunshine State

After 2½ years in Florida, we are moving back to Wisconsin, where Irene accepted a job in Madison, with the VA. After packing our boxes, I had a chance to reflect on our stay in the Sunshine State.

Climate was the primary reason we moved here in the first place. Although Florida is hot much of the year, humid all the time, and rainy in the summer, we picked it over the low humidity and clear skies of Phoenix, mainly because the southwest lacks water. Charlotte, Atlanta and Dallas were also ruled out, because their winters are not warm enough.

Although the temperature in Tampa-St. Pete reached 92 F each day, every year, for five months straight, like winter in Wisconsin, people just stay inside, in their climate-controlled buildings and cars. While northerners question the risk of hurricanes in Florida, not one hit the state in 2½ years. For me, the best part of Florida was the ability to go outside and take a walk nearly every day.

Health care was the second consideration when we moved. The Medicare crowd is a major industry in Florida, due to the number of retirees. On the plus side, I found a primary care physician I liked, and had a reasonably good hospital stay for an appendix operation. On the bad end, five different people at an eye clinic examined me one morning (four too many), because they needed to justify pay-for-service billing practices, on the incorrect assumption I was a Medicare patient; an orthopedic doctor also would have run unneeded X-rays for a shoulder issue one time, until I told him I had no health insurance; and as to the dentist, I could have flown back and forth to Wisconsin and still paid less than what I paid.

The cost of living was a consideration when we left Wisconsin. The foreclosure crisis here actually kept us from buying. The old saying is “you get what you pay for.” Here, we looked at bargain properties and ultimately learned of the reasons they were low-priced. Also, Florida condo dues are uniformly too high, homeowners insurance is too expensive, and real estate taxes are just as bad as they are in Wisconsin. There are a lot of available properties in Tampa-St-Pete, but the financial well-being of condo associations was a major concern.

Transportation was good and bad. The Tampa Airport is convenient, and urban areas are connected by freeways and large streets. The problem was the number of bad drivers in Tampa-Bay. Does Florida mandate driver’s education in high school? If not, why not? While turning, no one uses a simple blinker, except cars driven by Snow Birds from the Upper Midwest. Many just cut in front of others, hoping for the best. It’s almost like Cairo or Ho Chi Minh City. It’s a jungle out there. No wonder auto insurance is more than double what it was in Wisconsin.

In the category of recreation, to be honest, we did not use the Gulf Coast as much as we could have. There are nice beaches, boat cruises, and golf courses, but we always seemed to be doing something else.

In the final analysis, life is about people, not places. A person in the middle of a desert, surrounded by a few friends, can have a better time, than a single person all alone, in the midst of a big city. Since we have family in the north, our decision to return was motivated by that. To the nice people we met while down here, good-bye. Perhaps we will meet again. My blog will be down for a least a week. Once we are resettled again in Wisconsin, I hope to start writing again.

06/09/2011

Foreclosures Should Be Simple

A headline in the St. Petersburg Times asked: “What should foreclosure help cost?” While most foreclosure cases are simple and routine and should not cost very much, it is impossible to categorically determine the amount of attorney’s fees in every case, since some present unique issues that require more work than others. What can be said is the first hour or so of advice in nearly all cases is perhaps the most useful and worthwhile.

Defendants in foreclosures need some legal advice, so they can understand the process and intelligently decide what to do next. At a minimum, they should understand they gave the lender a note and mortgage, in consideration for a loan. A note is a contract in which they agreed to repay the lender, and a mortgage is an instrument that created a lien to secure the amounts due.

If a borrower fails to pay as agreed, they are deemed in default and the lender proceeds with a foreclosure. The case starts with a complaint, which alleges a breach of the note. A summons is also served with the complaint, commanding an answer.

In the vast majority of cases, the defendant does not bother to file an answer, because there is nothing to deny, and the bank takes a default judgment. If the defendant files an answer, denying some or all of the allegations, the case slows down, but not by much.

In most foreclosure cases, there is generally no need for a trial, because the facts are truly not in dispute. The bank seeks what is known as a Summary Judgment. Without a factual dispute, the court simply decides which side is correct, based on the law of the case. For example, a banker may swear in an affidavit $100,000 was loaned and the borrower failed to make payments as agreed. If the defendant files no counter-affidavit, because the banker is correct, there is no factual dispute, and no reason for a trial. The court simply enters a Summary Judgment for the bank.

In the Judgment of Foreclosure, the court sets a period of redemption, and orders the land sold, if the defendant fails to redeem by paying the entire judgment plus costs, within the time allotted. At a sheriff’s sale, the bank bids what they are owed. If someone outbids the bank, the bank is paid from the proceeds. If no one outbids them, the bank receives a sheriff’s deed. The sale process must then be confirmed by the court.

Many banks are now slow to complete the foreclosure process, because they do not wish to end up owning real estate they cannot resell. They do not want to be stuck owing real estate taxes, insurance, dues, upkeep, and other expenses on the property. Judges should force the banks to complete their foreclosure cases, or suffer a dismissal with prejudice, for a want of prosecution. The country needs to move all of the foreclosed properties through the system, so the nation can get on with a recovery in the housing market.

05/19/2011

Housing: Basic Supply and Demand

The news reported the ongoing lack of progress in the building construction industry. The problem is easy to understand, when applying basic supply and demand economics.

The supply of housing increased due to foreclosures. Buildings that a few years ago would have been owner-occupied are empty now, because of defaults on mortgage notes. One cause of the problem was the easing of regulation, and the promotion of adjustable-rate mortgages (ARM) that allow payments to be increased during the life of the loan. In the old days, fixed-rate mortgages were the norm, and borrowers made monthly payments, without worrying about increases.

The demand for purchasing homes simultaneously declined, as fewer people now qualify for mortgages. In the old days, a potential buyer needed a substantial down-payment, which generally stopped them from simply walking away upon default. The easing of regulation allowed the financially unqualified to buy, and as they defaulted, they simply stopped paying, and allowed the bank to foreclosure without trying to redeem, since they had no skin in the game. During the period of easy credit, too many buyers entered the market, and now that they no longer qualify for loans, due to a return to traditional lending standards, such as the requirement of a down-payment, there are too few qualified people available to purchase too many buildings.

With the supply of homes exceeding the number of qualified buyers on the demand side, prices have dropped, or at best stayed flat. This is simple economics. So until the oversupply of homes is removed from the equation, there will not be any real growth in the construction industry. Only when new construction is no longer competing against the oversupply of existing foreclosed properties, will the situation improve.

The flat-line growth in the value of homes has also affected those who could bring cash to the table, or who could qualify for loans. This is true despite the availability of relatively low interest rates. In my case, for example, we moved from Wisconsin to Florida 2½ years ago and intended to buy, but as we examined the market, several factors caused us to continue renting for the time being.

First, housing values are not increasing, and in some areas they are actually declining. If after just a few years, we wanted to sell again, any sale, after paying the sales agent, would result in a loss.

Second, the cost of Florida condo generally includes relatively large monthly dues, twice as much as one would pay in the Midwest. It appears a lot of profit-taking is built into them that could be cut out. Dues are like taxes, as they cannot be recouped.

Third, the cost of insurance in Pinellas County is too high, based largely on unfounded fears of a direct hit by a hurricane. Once again, these payments are not recoverable in any future resale.

Fourth, since wealthy Floridians enjoy no state income tax, much of the burden of running local government is based on a relatively high real estate tax, which is not offset by state revenue-sharing.

Fifth, when looking for a condo, one has to consider the number of neighboring tenant-occupied or vacant units in foreclosure, since owner-occupied units are generally better maintained. In this regard, the number of foreclosed units was a factor.

To comfortably buy, purchasers need to know their investment is more likely to grow than decline; the dues, insurance and real estate taxes must be minimal; and the vast majority of the units in any condo project must be financially above water. Given the current situation, at least for now, we will continue renting.