Archive for January, 2009

Fed takes major step toward stalling foreclosures

what are you thoughts on this article today in reuters?

WASHINGTON (Reuters) – The Federal Reserve on Tuesday took a step toward easing mortgage foreclosures threatening millions of Americans, announcing that it would write down troubled mortgages to keep people in their homes.

Fed Chairman Ben Bernanke said the initiative would specifically include $74 billion of assets held in connection with the bailout last year of Bear Stearns and American International Group.

“The goal of the policy is to avoid preventable foreclosures on residential mortgage assets that are held, owned or controlled by a Federal Reserve Bank,” he said in a letter to Rep. Barney Frank, chairman of the House of Representatives financial services committee.

The Fed was instructed by the law last year that authorized a $700 billion bank bailout with public money that it must do what it can to minimize foreclosures.

The Bear Stearns and AIG rescues were done outside of this emergency measure, and President Barack Obama has said that part of the second $350 billion tranche of the money, that was released to him by Congress earlier this month, will be used to stem the tide of foreclosures.

Private economists estimate that millions of Americans are at risk of losing their homes after the collapse of the U.S. housing market savaged house prices and forced up unemployment as the economy slid into recession at the end of 2007.

Frank, a Massachusetts Democrat, has been among U.S. lawmakers pressing the Fed and the government to do more to prevent mortgage foreclosures and he said the decision by the Fed was a “major breakthrough.”

“We just had very good news from Mr. Bernanke from the Federal Reserve, who has just announced a very significant increase in Federal Reserve policies to reduce foreclosures,” Frank told MSNBC television in an interview.

MODIFYING RISKY LOANS

Research firm RealtyTrac says 850,000 foreclosed homes are already on the market and expects this number to rise by another 1 million homes in 2009, with 2 million more homes entering the foreclosure process during the same period.

Senate Banking Committee Chairman Christopher Dodd separately said that the Fed’s decision was an important step.

“I am delighted to hear the news. I don’t know details of it yet. I am very encouraged by that,” he told reporters.

“We have been trying to get, as you know, for some time in the previous administration (of President George W. Bush) for them to take steps on foreclosure mitigation.

“They refused to do so for whatever reason. I am very pleased that the Fed is stepping up,” Dodd said.

In a bold effort to unscramble complex mortgage-backed securities at the heart of a financial crisis sparked by the housing market decline, the Fed said it would encourage mortgage servicers to modify loans at risk of default.

It will also “assist” the loan servicer in making modifications, according to a document made public by the Fed on Tuesday, entitled “Homeownership Preservation Policy for Residential Mortgage Assets.”

The Fed has said it will purchase up to $500 billion of mortgage-backed securities by the end of June to make home loans more affordable to boost demand for houses.

Mortgage-backed securities pool many different mortgages, which makes them extremely tricky to separate in a loan modification designed to prevent foreclosure.

The Fed said it would consider reducing the interest rate paid on mortgages at risk of default, extending the term of the loan, and accepting “a deferral or reduction of the outstanding principal balance of the loan,” according to the Fed document.

(Additional reporting by Rachelle Younglai in Washington and Helen Chernikoff in New York; Editing by Jan Paschal)

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What Loan Modifications Mean To You!

This article was from November, now we are in January and things continue the same.

Once again this problem will not be solved in full by the government or banks!

There has been a lot of talk over the past few days about the new proposal by the Bush Administration to help stabilize the housing market by encouraging banks to modify loans for at-risk homeowners.  The plan is to secure 31 million mortgages worth approximately $5 trillion which were underwritten by Fannie Mae and Freddie Mac and prevent them from going into default.  The federal government took control of Fannie Mae and Freddie Mac in September when waves of foreclosures resulted in mounting losses on their portfolios.  The Bush proposal mirrors what Citigroup, JPMorgan-Chase, and Bank of America have already been doing with their at-risk mortgages backed by Fannie Mae and Freddie Mac.

In order for homeowners to be eligible, they must meet the following criteria: they must be over 90 days behind on their mortgage payments, owe at least 90% of their homes current value, have not filed bankruptcy and it must be their primary residence.

Like a standard modification program, the payments would be adjusted either one of three ways; lower interest rates, longer repayment schedules or shifting the difference of the modified payment after being adjusted to below 38-40% of the homeowner’s monthly income and amount of what the payment actually should be to the payoff of the loan.

James Lockhart, the director of the new Federal Housing Finance Agency which was created to oversee Fannie Mae and Freddie Mac, was quoted as saying, “We expect that it could significantly increase the number of modifications completed.”

This all sounds good and seems to be getting a lot of positive media coverage.  However, there are major issues with this plan that need to be resolved.

The main problem with this plan is the Bush Administration doesn’t know if it will work because they are unable to determine the number of homeowners who will be eligible. Faith Schwartz, executive director of HOPE NOW was quoted in CNN Money as saying, “We think over time this going to affect a couple hundred thousand homeowners.” This would equate to about 1% of the total number of mortgages Fannie Mae and Freddie Mac currently have in their portfolio.

Second, the majority of homeowners with Fannie Mae and Freddie Mac backed mortgages are not at risk because of the guidelines that Fannie and Freddie had in place for years.  Unless the homeowner suffers a job loss or some other catastrophic event, his/her primary concern is being upside down and this plan does not address that issue.

Robert Van Order, an adjunct finance professor at the University of Michigan, who was chief economist for Fannie Mae until 2003, told the Detroit Free Press that he thinks the loan modification plans could be somewhat effective but it is not the solution to the housing problem.  “There is an underlying problem they can’t fix with this and that is people who are underwater on their mortgages.  More people are going to be in trouble because they have negative equity.”

It also doesn’t address the issue of homeowners whose mortgages were not backed by Fannie Mae and Freddie Mac. Many of these toxic mortgages were acquired in the past two years when JP Morgan-Chase took control of Washington Mutual and their subprime division Long Beach Mortgage, Bank of America bought Countrywide and Merrill-Lynch (owners of sub-prime lender First Franklin), Citigroup bought Ameriquest and its wholesale operation Argent Mortgage.  Many of these consumers were put in stated deals, adjustable rates, sub-prime loans or were improperly qualified for Option-ARM programs.   These loans have a value of over $1.3 Trillion with over 7.5 million first lien sub-prime mortgages outstanding. Yet, these homeowners are considered low priority.

Another problem with the proposal is it encourages homeowners to destroy their credit ratings by telling them to fall 90+ days behind on their mortgage in order to get help.  American Home Mortgage Servicing and Countrywide, among other sub-prime lenders are telling homeowners not to make their mortgage payments if they want a loan modification.  Yet, they continue to report the delinquencies to the major credit bureaus.

There is a definite benefit to banks that modify these loans and on the surface it looks like a benefit to the homeowner.  However, the banks are not promoting, and are not disclosing to the homeowner, the indemnification clauses in these agreements that hold the banks and servicers harmless for any fraud or misrepresentation that may have been used to induce the homeowner into signing the original mortgage.   This means the homeowner is prevented from exercising their rights under TILA, RESPA and many other Consumer Protection laws.

One of first people to criticize this plan was Senator Chuck Schumer, D-NY, who says the plan does not go far enough.  He said that too many of these loans won’t be modified because the investors who own the loan will be able to block any arrangements made by the servicer and the homeowner.  Schumer said, “These voluntary plans sound nice, but they don’t do the job.”


This initiative doesn’t help the nearly one million people in non-Fannie Mae and Freddie Mac backed mortgages whose payments are set to recast by the end of the year or people who were victims of fraud-fraud that was committed by the same companies that now want to help these homeowners. With that said, the actions of the Bush Administration could be seen as something a bit more Machiavellian.

First, it gives the impression to the public something is being done when it really isn’t.  Perception is politics and politics is perception. What is more Machiavellian than the idea that deceit being a legitimate tool of statecraft? Henry Paulson was after all an assistant to Watergate conspirator and convicted felon, John Erlichman, who created, “The Plumbers” for Richard Nixon.

Second, the credit crisis has created an atmosphere of self-preservation with executives and managers of the major financial institutions.  As mentioned, because these loan modifications have indemnification clauses in them, they are a way to insulate these executives from lengthy and costly litigation whose final judgment would rest in the hands of an unfriendly jury.

Right now, it is quite possible that juries are the homeowner’s best and last hope to keep their homes.  If lenders and banks are refusing to atone for their past sins by not offering all at-risk homeowners a viable opportunity to keep their homes then shouldn’t lenders feel the wrath of the consumer?

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The Fake Loan Modification

Fannie Mae, Freddie Mac and the big banks have instituted an aggressive new loan modification program that has nothing to do with loan modifications. The new scam is designed to keep payments flowing to banks at the expense of mortgagors being sunk with negative amortizations and teaser rates. Hear ye:

The great new and improved big plan to save the housing sector involves giving 40-year terms, adding balances to the end of the loan and offering teaser rates. IT WAS THESE EXACT PRACTICES THAT GOT US HERE IN THE FIRST PLACE! They were called ‘interest only’ and ‘Pay Option ARMs’.

This ‘new’ program is nothing new at all. It is simply an aggregation of a bunch of stuff brought forth previously that just makes everyone renters. The government’s new plan of reducing rates, extending terms and allowing negative amortization is being done primarily to keep borrowers from walking and renting by competing with rentals.

This plan does not solve the problem – that home owners are hopelessly underwater and over-leveraged to their home. They can’t sell or refi. In turn, they are making a wise financial decision and walking away. Negative equity cuts across all loan types and borrower demographics.

Sooner or later, house prices will to collapse. All the king’s horses and all the king’s men cannot stop it. In fact, all the world’s kings couldn’t stop it either. These new programs are swimming upstream in a river of subprime sludge. Witness:

The re-leveraging of the US home owner has begun. It was just reported on CNBC that part of CITI’s plan was to give temporary teaser rates of 1-2% to ‘help’ borrowers avoid foreclosure. I have reported in the past that other banks are opting for this route because it costs them far less than a permanent modification involving principal reduction. But ultimately, this route will lead to lost decades in housing.

Its sad when the only way to ’save’ housing and get borrowers out of default is keep them terribly leveraged by cutting their rates to 1-2%. Exotic loans with teaser rates is what got us here in the first place!

What is also sad is 1-2% is about the rate needed to compete with the exotic loans given to everyone in the past 6 years. This emphasizes how much leverage is in the housing system. This really does nothing to save housing it just keeps housing propped by allowing the borrowers to stay terribly leveraged.

To date, four banks have joined the new program. Most recently, Citigroup penned its signature to the list:

Citi becomes the fourth major bank to garner press for a pronouncement of mass modifications, and an associated freeze in foreclosures. The FDIC kicked off the loan modification party in August by announcing a plan to refinance troubled homeowners into “affordable” mortgages at IndyMac Federal Bank; Bank of America Corp. (BAC: 17.10 +0.59%), saddled with legal pressure tied to its Countrywide unit, later announced its own $8.4 billion loan modification program/settlement in early October, which is also expected to target 400,000 borrowers. Just last week, JP Morgan Chase & Co. (JPM: 37.19 +7.58%) launched an aggressive loan modification plan estimated to impact roughly $70 billion in mortgages

Similar programs motivated by legislation have shown tepid success slowing down foreclosure rates in California, but they cannot solve the foreclosure crisis.

Foreclosure sales in California dropped a sharp 39.1 percent between September and October, according to a report released by ForeclosureRadar late Wednesday. The drop, however, has largely been ascribed to recent legislation in the state that is effectively stalling most foreclosures amid new borrower notice requirements.

“It would be a mistake to conclude declines in foreclosure activity indicate an end to the foreclosure crisis,” said ForeclosureRadar CEO Sean O’Toole, echoing comments made by many industry observers in recent weeks amid falling foreclosure statistics within the state. But O’Toole also suggested that lenders themselves may be slowing the foreclosure roll within the state, as they look to modify more loans.

And if you believe the lenders are truly concerned about stemming the foreclosure crisis, then you’re just along for the ride they want to take you on.

“While lenders now appear to be embracing the concept of foreclosure moratoriums and loan modifications, neither typically address the core issue of negative equity,” O’Toole said. “Most loan modifications focus on lowering payments to affordable levels by using unsustainably low interest rates, not unlike the ‘teaser rates’ that many have blamed for the current crisis.”

In the end, it comes full circle. Greed led to teaser rates and option ARMs, which led to a credit crisis, to desperation, back to teaser rates and to option ARMs.

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This is what CBS news Says about our mortgage crisis and it’s future!

http://www.cbsnews.com/video/watch/?id=4668112n

will the problems fix themselves magically?

will banks be nice and fix your problems?

are they in it to help you? or to help themselves?

when was the last time government fixed all your issues?

are you a victim of option arms? or Alt-A( loans that are stated income with good credit score)

this is where the real crisis will begin as most people are stuck with these mortgages and will be foreclosed due to banks unwillingness to take losses on all mortgages to limit the market spiral down and homelessness that will occur in 2009 and 2010.

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