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.

Housing Tax Credit: Take Two

Second verse, same as the first, a little bit louder, a little bit....better?

The word is out on the new housing "tax credit" compliments of the Obama administration. The bill looked too good to be true coming in, and endured a good trimming before an end result was reached. The lighter bill will certainly be cheaper for the government (and us, our money after all).

First things first. The amount was cut from $15,000 to $8,000, bringing it closer in line to the false "tax credit" we currently have. The reduction in cost means they could in theory serve more people and will keep the whining down from those who purchased last year and only qualified for the $7,500 interest free loan version.

This brings me to my second point. This one is a genuine credit. It is fully refundable, meaning even if you have no tax liability you can get paid the full $8,000. Since it is a credit and not a tax deduction we are talking dollar for dollar benefits.

While the reduction from $15,000 to $8,000 may seem like a big deal, it isn't the most important change made in the bill. That honor goes elsewhere. The senate version allowed the credit to be claimed by any home buyer who purchased during the time frame. The house bill, the one ultimately adopted, limits this to first time home buyers who purchase from 1/1/2009 to 11/30/09. This cuts the majority of those who might have claimed the credit out of the picture. Think of it this way. Bob the first time home buyer purchases a home from Ted...who is buying a house somewhere else from Jerry, who is buying a home in the city where his new job is etc... Under the senate plan all of these individuals would claim the credit. Under the new bill only Bob gets the credit. The limitation may keep some homeowners, who would have viewed this as an ideal time to purchase somewhere else, sitting on the fence while waiting for the market to stabilize.

Now, what do I think of the above? Well, it certainly is cheaper! I am guessing the cost of the new bill will be 1/5 or less of what he old one would have cost us. This would be good news if I didn't believe that the money will simply be spent elsewhere rather than "saved". If if is for rum exports to Puerto Rico, as some of the stimulus package is, well, I can't help but think it would have been better spent in the housing tax credit.

What will it do? Some are estimating as many as 300,000 first time home buyers will take advantage of the incentive and take the plunge. Sadly, this is only a drop in the bucket compared to the number of foreclosures we are seeing. Heck, households lost more jobs in the last couple of months than that paltry number! It will benefit a few...it won't do much to stimulate the economy (a familiar refrain the more I look at the "stimulus" bill).

Other problems remain as well. The credit does nothing to address the issue of down payments. Our savings rate has been ridiculously low over the last few years...how many of those first time buyers have actually saved anything at all? Are they purchasing homes with no money down....at with 100% LTV ratios....haven't we been down this road before? There is a reason private mortgage insurance exists (the insurance the borrower pays if they have less than 20% down payment, this insurance protects the lender). It exists because studies show that those who make smaller down payments are more likely to walk away from their home and/or let payments lapse.

Proverbs say that "Where there is no vision, the people perish". Until we catch the vision of personal responsibility and SACRIFICE, understanding that a home is something to be worked for and not a right, I think we will continue to see home owners perish.

I am going to pretend it is my bill now. The credit is only available in the form of a match, 2:1, for what the family is bringing to the table. They want $8,000, they better bring $4,000 for down payment. What about those who don't have it? They could set up a plan with a bank to save X number of dollars a month to reach their goal, and those who enrolled during the time frame of 1/1/09 to 11/30/19 and stick to their plan would still qualify for credit. For example: Bob wants to buy that house, but hasn't saved a dime. He decides to he can save $150 a month. He sets up a savings account with Wiser Bank and commits to saving $150 a month for the next 27 months. At the end of 27 months he has his downpayment, and his $8,000 match. This won't do much to stimulate the economy now (if anything saving money will hurt it a bit) but in the long run I think it is a smarter move than throwing good money after bad and allow potential homeowners who can't buy now a chance to work towards it in the future. I suspect those who worked and sacrificed to get the credit are more likely to make their payments than those who got $8,000 back from Uncle Sam with no effort and used it to pay for their new living room furniture.

The second thing I would require is education. Home buyer education can help them actually understand the documents they are signing, avoid being taken advantage of by sellers, ensure they have a budget (in theory, they still have to choose to follow it), and help them understand what to do if they fall behind on payments (or even think they will). If they don't want to get education....they can find their own $8,000.

In the meantime we won't see this make much of an impact. Some might buy homes who wouldn't have. Some of them might spend the $8,000 they get from Uncle Sam, and thereby stimulate the economy that much more. Maybe a third verse is in order....Third verse, where is the harm, give it one more shot, third times a charm.

Foreclosure: What families really pay

We all know what the F word means...it means someone is losing their home. A family that has a foreclosure loses what is usually their largest financial asset, but what happens after that? I want to take a minute to explore the real impact of foreclosures on families.

1: First things first. Any equity in the home is lost. Depending on how long they have been in the home this may or may not be that big of a deal. For some, like the family from the Washington Post article a couple of blogs back, it was to the tune of $300,000 . It is hard enough for me to imaging having that kind of money, let alone losing it ;).

2: Deficiency. Whether the home is sold in a short sale, returned via a deed in lieu, or foreclosed upon a lender can seek a deficiency judgment against the borrower for losses. If you owed $200,000 on the mortgage and the lender can only sell it for $150,000 they can come after the original borrower for the difference by taking them to court. The lender will add those pesky court fees to this amount (as they should)as well. Once a deficiency judgment is in place the borrower may find their future wages garnished, liens placed against other property, and may even have financial assets seized. Sometimes the lender won't come after you to pay the money, that sounds good, right? Well, except for the fact they will tell the IRS the money was forgiven.....which means the family has to claim it on their taxes as income! With deficiencies in the hundreds of thousands of dollars in some areas you can imagine what that could do to a tax return......Maybe you could cover it with you $7,500 tax "credit" :) A family who cant pay may turn to....

3. Bankruptcy. Bankruptcy and foreclosure often go hand in hand. The loss of the home may have been precipitated by the loss of a job or major medical problem that will take time to resolve. Just because the home goes away doesn't mean these other problem do as well. Often families in trouble are missing payments on credit cars, cars, student loans, and other obligations as well. Throw a deficiency judgment or increased taxes on top and the elaborate mess is complete. While this may be good news to some, it certainly isn't for the families.

4. Finding a new "home". If you don't have the money to pay your mortgage, how much are you going to have to pay the deposit on your new apartment? Will a change in where you live affect basic expenses, such as travel to work, school, and to purchase goods? Will your children need to change schools? Will the time taken to secure housing impact work schedules while they try to move? How will family and friends be impacted if they crash with them until they get back on their feet or procure new housing? What kind of choices for housing will they have when they now have bad.....

5. Credit. Potential landlords can, and do, check your credit history. When they see a family just lost their home what kind of message does that send to the landlord about their capacity to make payments? For many families that mean they may not be able to obtain reputable housing, accepting landlords who are less scrupulous because they cannot find a place anywhere else. They are unlikely to report bad landlords if they feel that is their only housing option.

Our credit problems don't stop with housing though. Families with poor credit pay more for everything, from credit cards to vehicle loans and even insurance rates. With the family already down on their luck the last thing they want to see is higher insurance rates for their car and credit card rates jump to 29%, yet that is exactly what happens. If they have problems with an overdraft account or auto loan they may find difficulty using that bank again in the future. A family may not even be able to secure a checking account, requiring them to use check cashing services that come with a price.

6. Hard to measure impacts. Money is the easy problem to track. What about lost time? How can depression and stress from financial situations impact parents at work or children at school? Foreclosures are linked to higher levels of deviant behavior including domestic abuse, drinking, suicide, and risk taking behaviors like gambling. While we are busy bailing out banks who will foot the bill, or even more importantly provide the counseling/supports for families after they lose their homes? (Not every one lost it because they overextended their credit or obtained a stupid loan). High density foreclosure areas often have higher levels of crime and unoccupied buildings can serve as safe havens for illegal activities and contribute to neighborhood/price decline. Yet with our economy struggling social service agencies and police departments who need extra help to cope are finding their budgets cut instead.

The real irony here is this does not even look at the impact it has on banks, investors, and neighborhoods as a whole. The cost is truly staggering.

The foreclosure is a hard pill to swallow, but its the after taste that has me worried.

So where do we go from here? Like it or not, keeping families in their home is usually the best option. That means we need loan servicers, and more importantly the investors they represent, to be willing to work with borrowers who can reasonably afford to pay for their homes. This may require some kind of loan modification to ensure the solution is a long term one.

Perhaps its time we supported building smaller homes? If the homes were smaller, and more affordable in the first place, would we still have this problem?

We need to look for supports to families who need assistance procuring safe affordable housing and dealing with stresses on the family stemming from the foreclosures. We need more money headed towards social services, not tax breaks for race track owners and rum exports from Puerto Rico. Perhaps the main thing that needs to be cut from government spending is the paychecks and benefits of lawmakers who waste our time and money.