On a lighter note

Because sometimes we just have to laugh. Some tickle my funny bone more than others, but as has been pointed out on other blogs humor can reach and educate some more than others, take note of the mister housing bubble 2/3 of the way down, great stuff.

Housing related Suicides

ABC news had a couple of different articles highlighting recent suicides that are related to housing issues and the economic crisis as a whole. Last night the acting chief financial officer for Freddie Mac committed suicide by hanging himself in his basement. I, like many others, believe there was a great deal of deceit and unethical behavior by the up and ups in Freddie Mac and Fannie Mae, but I wouldn't want to see them committing suicide. Some might see it as a sign of guilt, perhaps this man felt the company and situation was beyond repair. If he has a family I wish them the best.

ABC also had an article detailing foreclosure related suicides. With financial woes comes increased levels of depression and suicide.

I reiterate what I noted on my post detailing the additional costs of foreclosure....while we are trying to "fix" the market we need to be providing additional resources to help those impacted by it. Failure to do so could prove costly in the long run, not because it is our fault they committed suicide, but because I honestly believe we lost something because they did.

I have an extended family member who committed suicide many years ago over financial issues. I wouldn't wish it on any family.

Enter the Staw Man

Perhaps justice will be served on some of those who have contributed to the current housing and economic crisis. The article discusses the activities of two businessmen who acted as "straw buyers", allowing their name and fico score to be used to purchase properties. Usually these properties are rented out, but the rent "paid" is pocketed rather than paid to the mortgage company. The homes are then either allowed to go into foreclosure (unbeknown to the renters) or resold using inflated appraisals to turn a tidy profit.

The straw men get kickbacks for the use of their name and score, but are not usually directly involved with the rest of the scam. In this case they also inappropriately utilized money to "pay" for false fees involved in the buying process.

"The trio is accused of one count of conspiracy as well as multiple counts of mail fraud, wire fraud and money laundering."

The primary vicitms in this case were lenders and builders....oddly enough the renters who were fooled were not included in the list.

Home Run: Can it get around the bases

The Utah Legislature recently passed the Home Run grant, administered by Utah Housing Corporation. In short the grant provides $6,000 if you purchase new construction (single family) in the state of Utah. Why are we encouraging them to buy new homes? Well, its because we have hundreds of homes sitting empty from unsustainable building (encouraged by irresponsible financing and real estate speculation). Some are calling the grant the "Clark Ivory Bailout Bill". Lets talk about the good, and the bad.

THE GOOD

Right now we have hundreds of empty new homes. Empty houses are a target for vandalism and theft. The more empty homes there are the greater the risk. Moving them is good.

Contractors are struggling. They have huge loans on these subdivisions that they cannot pay on....because the borrowed planning on selling homes to pay along the way (fairly standard procedure). This could keep some of them from going under and save jobs.

The grant is for anyone buying a new home, not just a first time home buyer. Those who may be ready to move up could do so, and their cheaper affordable homes would become available to families who should be buying those rather than newer more expensive homes.

The grant requires a fixed interest rate 30 year loan.

Income guidelines are pretty loose.....$75k for single, $150k for a couple.

THE BAD

As noted above, some see this as a bailout for builders who overextended themselves. Are we really helping homeowners or are we encouraging them to purchase overpriced homes?

This hurts homeowners who are trying to sell. A family whose home is being foreclosed upon will have an even harder time selling their home, since the an incentive to buy new is essentially a disincentive to buy existing used homes. This is really poor judgment on the part of the legislature, as it increases the risk of foreclosures in Utah.

Why buy new when there are so many more affordable homes out there? My fear is we are once again encouraging potential buyers to look at homes that are out of their price range. Contractors are not the only ones who stand to benefit here. Lenders and realtors are paid commission based on the sales price. If they can get consumers to buy newer more expensive homes, who are we really helping? Is this an incentive for homebuyers or a subsidy for builders, realtors and lenders?

No education requirement for new home buyers. Of course not. That would make sense.

My overall Impression: Not good. The bill seems designed to help lenders, builders, and realtors. It encourages the purchase of newer homes (most of which are more expensive than existing market options) while hurting families that are already struggling. It does NOTHING to address the issue of households in foreclosure and will probably exacerbate the problem. How many families could we have helped with this money? 1,600 grants for new homes...... The amount of help it will provide, cash incentive to borrowers, commission to realtors/lender, bailing out builders, compare to the costs; higher risk of unaffordable loans, money "lost" in higher commissions on higher home sales, and the collateral damage caused by a disincentive to buy existing homes that are in trouble. I touched on the real costs of foreclosure in a prior post, we are talking tens of thousands of dollards (minimum) for each foreclosure, and over a hundred thousand dollars when you consider the collateral damage to credit, surrounding homes, crime etc. Now imagine 1,600 of those homes foreclosing because some one purchased a new home instead. Who is the Utah legislature looking out for, their constituents or an aggressive lobby by real estate professionals? I think the answer is clear.

Utah: Welcome to Fraudville

Utah enjoys a particular distinction, the testing ground for new forms of fraud. If it works in Utah, the crooks take it on the road elsewhere. How bad is the problem?

The article points out some interesting facts:

Fraud charges are almost twice what they were a decade ago.

We continue to enjoy new fraud schemes as well as provide continued support for old frauds.

Despite our record for high fraud we still don't have a fraud prosecutor. Funding for the position was cut with the budget.

Fraud is difficult and time consuming to investigate.

In Utah County alone, the FBI says it is investigating mortgage fraud cases in which losses have exceeded $150 million. I wonder what it is for the whole state......

With these kind of losses, I have to wonder why it isn't receiving more attention.
Part of the reason we are in the situation we are now is a result of home value inflation scams that pushed prices up in targeted neighborhoods, contributing to the number of homes that are underwater. Yet due to the difficulty of investigating these types of scams many of the perpetrators will walk away to scam again another day.

Dealing with these scams are difficult for another reason. Those in the best position to identify the scams often benefit from them. Lenders and realty agents are paid on commission, so seeing higher home values equals more money for them when the home sells. This creates a disincentive for them to report suspicious price levels and activities.

What kind of disincentives can we create for scammers? How can real estate and lending professionals help?













http://www.abc4.com/news/local/story/Insurance-fraud-on-the-rise/SQWVJTUdHU-BsBKIJTDSqA.cspx

The Financial Stability Plan: Take Two

More details have emerged regarding this particular piece of the stimulus package. I felt that some of the details were worth a correction on my part.

The affordable refinance program is only available to borrowers who have loans that are owned/securitized by Fannie and Freddie. This reduces the number available to utilize the program, in particular among minorities and low income households. Studies have found that minorities were much more likely to receive a sub prime loan, even if their credit qualified them for a prime one, than other groups. If the loan was such that is cannot be conforming, then it will not be purchased by Fannie or Freddie. As such a higher proportion of low income and minority borrowers will be excluded from the program. Indirectly the program states it will not work with any nonconforming loan, (since they are not purchased by Fannie and Freddie).

The loan modification program comes right out and says that nonconforming loans do not qualify....well...it says it in the Q&A for housing counselors (how many regular joes are going to dig that deep?). This means once again that a higher percentage of minority and low income borrowers will be excluded from utilizing the program due to higher incidents of nonconforming loans. This is a real shame, since the loan modification program targets loans before they go bad, a proactive move I approve of.

Not all of the news is bad news. One of my criticisms of the program hinged on the high dollar figure, Roughly three quarters of a million, that qualifying homes could have. By requiring qualified loans to be conforming this automatically adjusts by area, since conforming loans have a maximum limit set by FHA that varies from area to area. So, someone in Cache Valley with a $700,000 or even $400,000 home will not qualify. Their loan is above the limits, and is considered a "jumbo loan", therefore nonconforming and ineligible for either of the programs listed above. To see what the limits are for where you live look here.

So what do you think? Does the conforming limitation unfairly impact minorities and low income families who should have qualified for a prime loan but were sold a different product by their lender?

Reaction to the Action

Obama has finally opened up and showed us the guts of his housing plan. USA Today does a fair job of outlining the details. This is a program that appears to have some potential, and addresses three core areas, refinances, loan modifications, and lender incentives.

What I like:

The loan refinancing is only available to those with good payment histories. We are rewarding those who have acted responsibly and paid their mortgage in a timely manner. This is the sort of thing that we should have been doing in the first place.

The loan modification requires proof of hardship. Those who simply overextended themselves will not qualify. The borrower must prove they can sustain payments on the new loan. The cost of the home has a maximum, so we won't see 5 million dollar mansion qualify. The plan is proactive and can be used BEFORE they fall into default.

Incentives to servicers have a set dollar value. I like this because it keeps them prioritizing high cost loans over lower value loans. The loan is reduced to 31% of income, IE affordable terms, through reducing the first mortgage and extending the loan term.

What I don't like/see:

No requirement for financial education. This is the magic wand approach. We fix the loan but do nothing to help the borrower keep themselves out of this situation in the first place.

The dollar cap on homes is still pretty high, and does not appeared to be adjusted by where they live. Lots of homes in LA cost more than $720,000...none of them will qualify. In contrast I am guessing 98% of the homes in Cache Valley would meet this requirement. We shouldn't be modifying a mortgage on a $700,000 home in Cache Valley!! It may be a regular home in LA, but here that is a mansion. FHA already has loan limits that are established and adjusted by area, why on earth aren't we using those, (or some percentage of them, like 120% of the limit or something?). Any time the government takes a blanket approach it is both unequal and unfair, and families lose.

Dealing with lenders/servicers is all carrot no stick. Asking them to play nice is fine and dandy, what about legislation that penalizes lenders who give loans that are blatantly unaffordable/inappropriate? Many of the subprime loans that were issued over the last 5 years were to families who would have qualified for prime loans.....but the lenders don't make as much money that way.....

Conclusion:
Anything is better than nothing. While it begins to address the problem we have today, it does nothing to lay the framework for avoiding this in the future. We are seeing more reaction to the problem, rather than action that leads us to a more permanent solution.