HELOC Extraction in Lake Hopatcong

It would seem that people who bought well before the Great Housing Bubble would be immune to the current foreclosure crisis. Sure if one bought in 2006 it may be understandable that they are underwater. It seems like common sense that if one purchased in 1997 they would be safe.

But foreclosures are a big net. The underwater crowd is not just limited to those that bought late in the housing boom. The second big composition of the underwater group involves those that extracted all their equity and then some. These owners also find themselves owing significantly more than their house is worth. In some ways this group is a much sadder group. They had something that they gambled away. That appears to be what happened in today's featured example.

Here is a view of the house -





Here is the property info -

Single Family Property, County: Morris, Approximately 0.17 acre(s), Year Built: 1961, Parking space(s): 4, Fireplace(s), Den, Laundry room, Hardwood floors


Here are the financials -

• The property was purchased in May 1997 for $115,000.
• The original mortgage taken in May 1997 is not available on the database.
• Three subsequent mortgages were taken in 1998 but none are available on the database.
• The mortgage was refinanced in March 2002 for $152,000 with Chase Manhattan Bank.
• In March 2003 a second mortgage for $28,300 was taken with Chase Manhattan Bank.
• A cash-out refinance was taken in October 2003 for $223,250 with an ARM through BNC Mortgage Inc.
• In January 2004 a cash-out refinance was taken, this time for $259,250 with an ARM from Home Loan and Investment Bank.
• Another cash-our refi was taken for $282,000 in March 2005, another ARM this time with Citimortgage.
• A HELOC was opened in July 2005 for $33,000 through Citibank.
• In June 2006 another cash-out refi was taken with Countrywide with an ARM for $335,000.
• The foreclosure process started with the filing of a Lis Pendens in January 2007.
• The property is currently for sale through a realtor for $235,900 reduced from $258,900.

Due to the limited info on the database we do not know how much was put down on the initial purchase. But we do know that within five years any down payment plus another $37,000 was extracted. Also it is interesting to note the habitual equity extraction of the homeowner. In 10 years of home ownership equity was extracted 10 different times. Sometimes through a HELOC, other times through a cash-out ReFi.

By the time of foreclosure the owners extracted at least $220,000 out of the property. That averages out to a second income of $22,000 per year. Not a bad second income just for purchasing a home and signing a few papers.

Unfortunately the loss will also be significant. The current loss will be a minimum of at least $113,254 if the house sells for the full asking price and standard realtor fees.

Look at the other ironic part of this example - the loss it almost the same as the original purchase price and the equity extracted is almost the same as the current purchase price.

Mortgage Broker Requirements

Our recent post reviewed what the FBI classifies as mortgage fraud. In another post we looked at what NJ was doing to prevent mortgage fraud.

After reviewing the issues in Florida regarding the ease in which anyone, absolutely anyone, could become a mortgage broker it is interesting to see the different requirements throughout various states. The easier entrance to the field is the easier it can be for criminals to become involved.

Thomas Law has compiled a list of requirements for all the states. These requirements are just for brokers. Lets take a look at the varying requirements -

Alaska - NO LICENSE REQUIRED

Florida - Key Requirements:

• $200 filing fee
• Evidence of Education
• Fingerprint Cards and Fees
• Florida Exam

Illinois - Key Requirements:

• $1500 filing fee
• $20,000 Surety Bond
• $100,000 Fidelity Bond
• IL Loan Officer Exam
• Additional $1200 filing fee upon approval

Massachusetts - Key Requirements

• $115 filing fee
• References
• Credit Reports

New Jersey - Key Requirements:

• $2,100 filing fee
• $100,000 Surety Bond
• Physical Office
• Audited Financials
• Evidence Education
• Fingerprint Cards and Fees

Nevada - Key Requirements:

• $1500 filing fee
• Physical Office
• Fingerprint Cards
• Qualified Employee
• Company Financials

South Dakota - Key Requirements:

• $365 filing fee
• Registered Agent Confirmation

Utah - Key Requirements:

• $250 filing fee and $275 processing fee
• Fingerprint Cards and Fees
• Evidence of Education
• List of loan officers

Wisconsin - Key Requirements:

• $750 filing fee
• $120,000 Surety Bond
• Complete Loan Originator Application

The states with the highest bond rates were Illinois and Wisconsin, New Jersey is third.

Several states require just the initial fee and little else. There is little hindrance to becoming a mortgage broker in several states, and actually nothing in Alaska. Some reasons why certain areas may have less

Let's compare the above list to the FBI's list of Hot Spots for Mortgage Fraud -

Although the map is hard to read the states are California, Nevada, Utah, Colorado, Florida, Georgia, South Carolina, Missouri, Illinois, and Michigan. The data we have found is not broken down by type of mortgage fraud. But it is not surprising that the states several of the states with little barriers for anyone to become a mortgage broker are listed. Illinois was the only state we were surprised. But since "mortgage fraud" is a large definition involving many different crimes the numbers may come from other factors.

NJ Mortgage Fraud Prevention

Mortgage fraud is costly. Aside from the financial harm, there can be the hardship of housing and credit losses to the individuals involved. There is also the differing categories about what exactly constitutes mortgage fraud. But like all crimes a big part is prevention in the first place. Today that topic is addressed in an article titled Mortgage Fraud rates are up from The Philadelphia Inquirer. The article addresses both New Jersey and Pennsylvania, but lets focus on the NJ aspect of the article -

A study released this week by the Mortgage Asset Research Institute Inc., of Reston, Va., showed that areas already affected by high rates of foreclosure were experiencing increased fraud levels.

...
Pennsylvania and New Jersey did not appear on the institute's list for the quarter, nor were they among the top 10 states in the Mortgage Asset Research Institute's Fraud Index rankings for fiscal 2007.

...

New Jersey law requires the brokerage to be licensed and at least one individual in the company to pass a similar test.

...
Pennsylvania and New Jersey also fared well in a report released yesterday by the Consumer Federation of America, which said the two states were among eight and the District of Columbia that have laws protecting consumers against abusive lending practices for all small-dollar loan products.

In both states, the $250, two-week payday loan and the $300, one-month auto-title loan are prohibited, while interest rates are capped on the $500, six-month loan and the $1,000, one-year loan.

As from the article both states seem very active in prevention of mortgage fraud that can be done from mortgage brokers. It is nice to see that the pro-active measures also prevent limits on interest rates.

Strict compliance on who can become a mortgage broker and/or loan originator are important in protecting consumers while also being an impediment to fraud. In an upcoming post we will examine several different states mortgage broker requirements to understand why some states became hot spots for criminal activity.

What is Mortgage Fraud?

This is a follow-up on the $1 billion of mortgage fraud post. Mortgage Fraud is an often used term so it is interesting to know what exactly it encompasses. The FBI has a list of indicators of Mortgage Fraud. There are several different types of fraud perpetrated by several different actors. Here is the FBI's list -

Inflated Appraisals
• Exclusive use of one appraiser

Increased Commissions/Bonuses - Brokers and Appraisers
• Bonuses paid (outside or at settlement) for fee-based services
• Higher than customary fees

Falsifications on Loan Applications
• Buyers told/explained how to falsify the mortgage application
• Requested to sign blank application

Fake Supporting Loan Documentation
• Requested to sign blank employee or bank forms
• Requested to sign other types of blank forms

Purchase Loans Disguised as Refinance
• Purchase loans that are disguised as refinances requires less documentation/lender scrutiny

Investors-Short Term Investments with Guaranteed Re-Purchase
• Investors used to flip property prices for fixed percentage
• Multiple "Holding Companies" utilized to increase property values.

There are several areas that are limited to the business side of the transactions - mortgage lenders, loan originators, real estate agents, and appraisers. Some categories can be done solely by non-industry affiliated individuals such as flipping, falsifying loan records and having "holding companies" to increase values. Others categories need an industry accomplice.

But looking at the list, it seems almost impossible that only $1 billion of mortgage fraud occurred during the last ten years. In just our little real estate scam post the amount extracted was over half a million.

Mortgage Rates and House Prices

Recently there was an article from Reuters we profiled discussed the relationship between interest rates and the numbers of houses that had the potential to be underwater. Lets take a look at the key quote -

If borrowing costs eased to 5.5 percent, the Case-Shiller index may have only another 7 percent to fall, Credit Suisse said, but if rates rise to 7.5 percent, house prices may tumble another 24 percent. A 24 percent decline would wipe out the entire home equity for millions of homeowners, many of whom were counting on their homes to finance their retirement or pay for their childrens' college education. Without that nest egg, spending would suffer, triggering a consumer-led recession that some economists predict would be the worst since the early 1980s.

Well, today CNN Money is reporting that the interest rates are increasing. The article is titled Housing fix backfires, raising rates for everyone. Lets take a look -

As part of the economic stimulus plan, lawmakers raised the limit on the size of home loans mortgage giants Fannie Mae and Freddie Mac can guarantee, from $417,000 to as high as $729,750 in some of the most expensive U.S. markets. That was supposed to bring down mortgage rates on jumbo loans and help goose sales in cities across the country - mostly on the East and West coasts - where even outhouses go for close to half a mil.

So just how much help has this change been for homeowners? Not much. Six months ago, the rate on a $500,000 30-year fixed mortgage was 6.73%. Today the rate today is only slightly lower at 6.69%. No surprise then that the housing market is still stuck in reverse.

...
The idea was to narrow the spread between the interest rates for buyers taking out loans of less than $417,000, and those borrowing between $417,000 and roughly $730,000. By February, the rate on a loan over $417,000 was as much as 1.5 percentage points higher than loans beneath that cap, according to mortgage industry research firm HSH Associates.

But rates haven't fallen for those hoping to get a larger mortgage, and they've actually risen for everyone else. The average rate for a mortgage of $417,000 or less is now at 6.57%, while loans larger than that have rates about 0.12 of a percentage point higher. Sure, the spread narrowed, but only because rates are going up for everyone.

Several factors are at work. Since Fannie and Freddie look shakier than ever, fewer investors are willing to buy their bonds - even with the government's guarantee. And the raised caps forced the mortgage giants to spread their limited capital across a much larger market of mortgages.

The rising interest rates are going to suppress the prices of houses even more. A downward push of house values is just going to perpetuate and exacerbate an already shaky housing market.

Can it really only be $1 billion?

Supposedly that is the amount of mortgage fraud that has occurred during the last decade. It seems much to low. $1 billion sounds low just for California or Florida alone. Perhaps the amount is limited to convictions of mortgage fraud. The article on mortgage fraud comes to us from AP via The Record and is titled Mortgage fraud soars by 42% in first quarter. Lets take a look -

Reported incidents of mortgage fraud jumped 42 percent nationwide, with Florida reporting the highest number of cases, according to industry data released Monday.

Properties in the Sunshine State accounted for nearly a quarter of all mortgage fraud incidents, the Mortgage Asset Research Institute said. California ranked second, followed by a three-way tie for third among Illinois, Maryland and Michigan.

...
The most common mortgage fraud cases included misrepresenting income, employment history and debt and assets. Maryland, for example, had an unusually high percentage - 69 percent - of its cases involved in tax return and financial statement misrepresentation.

Mortgage fraud has represented about $1 billion in losses over the past decade, the Mortgage Bankers Association has said.

It would be nice to have an outside evaluation of what the real costs of mortgage fraud. Is this billion only limited to banks' specific losses or are these numbers all encompassing? What about the people who lose their homes due to mortgage fraud by brokers? Are these included?

The Backdoor Bailout

There are only so much loss that can be sustained. Then a breaking point is reached. Depending on the depth of the loss some organizations can rebound - but others just fold. With a high level of risky mortgages being dumped on the FHA sound like trouble is coming. The burden will be shifted onto to the taxpayers. This article from Forbes titled Lending over backwards illustrates how potentially costly the issue may be. Lets take a look -

Heralded as a savior in reversing the mortgage market’s woes, risks to the agency could cost taxpayers dearly, says one mortgage expert, as Washington morphs the FHA from a helping hand for low-income home buyers into a back door bailout for the imploding mortgage industry. Trouble is, there's little choice at this point.

“Nobody is talking is talking about it, but in three years the FHA bailout is going to cost taxpayers at least $100 billion dollars,” said Guy Cecala, a mortgage industry insider and publisher of Inside Mortgage Finance. “Everybody on Capital Hill recognizes that there will be significant costs, but they’re trying to keep the housing spigot open even if it will bring in some bad water down the road.”

...
Even in this sinking market, borrowers only need to put 3% down to qualify for FHA backing, and borrowers currently unable to pay their adjustable-rate mortgages after the rates reset are allowed to refinance into FHA-backed mortgages.

...

With U.S. home prices down 10% in the last 12 months and expected to fall perhaps 10% more in the coming year, the vast majority of homes the FHA insures in 2008 will be underwater. Requiring only a small down payment in a declining market is extremely risky because negative home equity has proved the best indicator for default in this housing cycle.

...
“If it costs upwards of $500 billion down the road, should it not be done?” asks Cecala. “If it keeps the market running and FHA becomes the lender of last resort, policymakers really don't have an alternative.”

The bind is that the government wants people out there buying houses. So even though with only 3% down lenders know it is almost a sure bet that the house will be underwater after the purchase the system will not change. The gamble appears to be propping up the housing issues now while hoping that things get better in the future. This can be done by still trying to create the largest possible pool of homebuyers - and 3% down allows alot more new buyers. But how many of these 3% downers will need a bailout in a few years? This is a combination of bailing out the current homeowners by propping up the market.

What's really happening in Passaic?

Sales are still falling. Home prices are falling. But the number of houses on the market is increasing. This BusinessWeek article titled Home sales, prices mostly fall in Northeast puts a regional perspective on the issue. Let's take a look -

Homes sales tumbled in most big Northeastern cities last month -- with only Passaic, N.J., showing a healthy jump in activity -- while sales of distressed properties dragged down median prices in the entire region, according to two reports released Monday.

Sales of existing homes in the Northeast declined nearly 12 percent in July from a year ago, the National Association of Realtors said. The median price in the Northeast was $278,700, down almost 5 percent from July 2007.

That reflected the national trend: sales dropped more than 13 percent year-over-year, while the median price decreased 7.1 percent to $212,000.

But the Associated Press-Re/Max Monthly Housing Report, also released Monday, showed July sales dropped by at least 20 percent in five of the nine Northeast cities tracked. The report analyzed home sales recorded by all real estate agents in those cities, regardless of company affiliation.

In the one bright spot, Passaic, sales jumped 38 percent over July last year. But the rapid sales pace could be stymied by glut of properties coming onto the market. The supply of unsold homes grew 32 percent to 10.6 months, and the median price slid 6 percent to $400,000.

Several areas of Passaic have high foreclosure numbers. This info can be found here. The foreclosure numbers are greatest in Paterson, Clifton, Haledon, North Haledon and the City of Passaic. It will be interesting to find where exactly in Passaic this huge uptick took place. Was this dispersed throughout or isolated to the really distressed areas?

Opposite Directions?

The headlines are making the current housing situation seem like mixed news. Just take a look at this article from CNN Money titled Existing home sales rise, but prices still sinking. It sounds like there is a rebound - home sales rise. But the rebound is really a thud - home sales really fell by 13.2% in year-over-year stats. Lets take a look at the article -

Sales of existing homes rose more than expected in July, but prices continued to fall and inventory increased. That's according to the latest reading on the battered housing market by an industry trade group released Monday.

The National Association of Realtors reported that sales by homeowners in July increased to an annual pace of 5 million, up from the revised June reading of 4.85 million.

That's better than the annual pace of 4.9 million that economists surveyed by Briefing.com expected, and it's the highest pace since February. Still, July sales were down 13.2% from a year earlier.

...
Even as sales picked, up, the excess supply of homes on the market still rose 3.9% in July to a record high of 4.67 million. Realtors estimated that represents an 11.2 month supply.

That is up from the 11.1-month supply in June, though NAR said the rise in inventories was due to a sharp jump in the number of condominiums on the market. Inventory of single family homes declined slightly, falling to a 10.6 month supply from 11 months in June.

It sounds like more bad news topped of with worse news. Home prices down. Home sales down. The only increases are from the number of houses on the market.

The spinners are trying to make it look like this is the turning point. But we still have the Option ARMS fallout to contend with. We will not reach any turning point until after Option ARM issues unfold.

The Great Disappearing Equity

Many people think that the figure quoted on a home's value either stays the same or goes up. Unfortunately, as we know both of these assumptions can be wrong. House values can go a third direction - down. The problem is compounded when people began counting on an ever increasing house prices to pay for retirement, college for the kids, or having a non-otherwise affordable lifestyle. With the downward flow of home values people, the equity is also disappearing.

Part of the decline of home values is the ever shrinking pool of potential buyers. During the Great Housing Bubble low interest rates and exotic new mortgages that did not require any down payments produced an ever expanding pool of potential home buyers. But the exotic mortgages were not supported by the fundamentals. And interest rates would never stay at record lows forever. This article from Reuters, Home buyers hold fate of U.S. economy, illustrate how bad the potential problems could be. Lets take a look -

Many economists say that home prices have another 10 percent to fall to bring them into balance with rents and incomes. A fall of that magnitude would elicit a huge sigh of relief from Wall Street and Washington.

...
If banks tighten lending standards further, denying loans to borrowers with good credit histories, affordability won't be enough to keep people buying homes. And a sharper housing bust would leave deep scars in consumer sentiment, which would likely lead to a deep recession.

...
If borrowing costs eased to 5.5 percent, the Case-Shiller index may have only another 7 percent to fall, Credit Suisse said, but if rates rise to 7.5 percent, house prices may tumble another 24 percent. A 24 percent decline would wipe out the entire home equity for millions of homeowners, many of whom were counting on their homes to finance their retirement or pay for their childrens' college education. Without that nest egg, spending would suffer, triggering a consumer-led recession that some economists predict would be the worst since the early 1980s.

"If there's a consensus, it's probably that prices will fall another 10 percent between now and next summer, which would be 25 percent down from peak to trough," said [Mark] Zandi of Moody's Economy.com.

There are definitely parts of the country that are experiencing a significant recession. There are also places, even locally, that really never had any of the boom benefits but are feeling the aftereffects of the crashing prices.

The potential devastation for those who budgeted their lives based on the value of their home are going to feel an enormous impact either way. The real question now is how bad the impact of falling prices will be - a tidal wave or a tsunami?

HELOC or ReFi? Do both in Roxbury

The great housing bubble brought easy refinancing and even easier HELOCs. Many people were lulled into the belief that they could refinance forever. Need to pay off that credit card - just use the money that your house is making you with a HELOC. When you ran through that cash one could just refinance again and take out even more money. It seemed that house prices went only one way - up. And for a few years that up was even in the double digits. But the bubble burst. And many of those who took everything out and then some are facing dire consequences. Today's featured home looks at a homeowner that refinanced and HELOCed themselves all the way into foreclosure. Let's take a look -

Here is the property -
Here is the property info -

Single Family Property Status: Active County: Morris Year Built: 1972 4 total bedroom(s) 3 total bath(s) 3 total full bath(s) 11 total rooms Type: Split Level Master bedroom

Living room Family room Kitchen Den Basement Master bedroom is 20x19 Living room is 12x10 Dining room is 17x13 Family room is 31x21 Kitchen is 27x10

Basement is Finished 2 car garage Attached parking Heating features: Baseboard - Hotwater,Oil Interior features: Eat-In Kitchen,Ground Level Rooms: 1 Bedroom, Bath(s) Other, Kitchen, Utility Room, Walkout, First Level Rooms: Den, Family Room, Foyer, Porch, Second Level Rooms: Dining Room, Kitchen, Living Room, Third Level Rooms: 3 Bedrooms, Bath Main, Bath(s) Other, Inlaw Suite, Inlaw Suit Includes: One Bedroom, Full Bath, Kitchen, Second Bedroom is: 12x11, Third Bedroom is: 11x9, Fourth Bedroom is: 18x14 Exterior construction: Aluminum Siding Roofing: Asphalt Shingle Approximately 2.77 acre(s)

Here are the financials -

• The property was purchased in June 2000 for $312,500.

• The original mortgage at the time of purchase is not available on the internet database.

• In October 2001 a second mortgage was taken for $88,000 with Bank One.

• The property was refinanced in March 2002 for $342,800 with Federal Mortgage Investment Corp.

• A new second mortgage was taken later in the month of March 2002 for $64,275 Also with Federal Mortgage Investment Corp.

• In September 2004 the property was refinanced again with a cash-out totaling $518,500 through an ARM with Ameriquest Mortgage.

• The property was refinanced again in March 2005 for $531,250 with an ARM by Accredited Home Lenders.

• The foreclosure process started in August 2007 with a Lis Pendens filing.
  

• The property is currently for sale with a realtor for $406,500 reduced from $427,500 as listed last month.
  

Unfortunately we can not see what the homeowner put down at the purchase. But most likely bu October for 2001 they pulled everything out. And if it did not happen in 2001 it any original investment was extracted in March 2002 with another $30,300. Within the same month the total additional extraction aside from the full purchase price was $94,575. They took a bit of a breather then took out another $111,425 just two years later. The next year they took out an additional $12,750.

Within 5 years of ownership the extraction totaled at least $218,750 - maybe more if the second mortgages were not closed. However the final extraction proved to be too much and the owners fell into foreclosure just over 2 years - perhaps the ARM reset to an unaffordable payment. Whatever happened the property provided the former owner a second income of $31,250 a year.

And for the lender, who ever currently owns the mortgage will lose at least $149,140 if the house sells for the full asking price and the realtor receives the standard fees.

Interesting case today - the previous owners won over $218,750 with the house but lost it in the end along with some of their credit ratings. The final lender just lost.

Well,

Friday's Bank Failure

Another Friday brings us another Bank Failure - this time its The Columbian Bank and Trust from Topeka.

And courtesy of the FDIC here is a list how the year has progressed so far -

Bank Name Closing Date Updated Date The Columbian Bank and Trust, Topeka, KS August 22, 2008 August 22, 2008 First Priority Bank, Bradenton, FL August 1, 2008 August 1, 2008 First Heritage Bank, NA, Newport Beach, CA July 25, 2008 July 25, 2008 First National Bank of Nevada, Reno, NV July 25, 2008 July 25, 2008 IndyMac Bank, Pasadena, CA July 11, 2008 July 11, 2008 First Integrity Bank, NA, Staples, MN May 30, 2008 July 25, 2008 ANB Financial, NA, Bentonville, AR May 9, 2008 July 25, 2008 Hume Bank, Hume, MO March 7, 2008 July 25, 2008 Douglass National Bank, Kansas City, MO January 25, 2008 July 25, 2008

We're Number #1

In the list of most unaffordable areas to live. This info was found in a Boston.com has an article on the Cheapest Places to Buy. The New York - White Plains - Wayne N.J. area was dead last, listed as the least affordable area to live. The process was determined by dividing the regional median house prices by the regional median income. Lets take a look at the article -

According to the National Association of Home Builders, Indianapolis is currently the most affordable major US housing market. During the second quarter, 91.6% of the homes sold in that city were affordable to families that earn the area�s median income of $65,100.

The least affordable major market was the New York-White Plains-Wayne, N.J., area, where 11.4% of the homes sold were affordable to families earning the area�s median income of $63,000, according to the NAHB/Wells Fargo Housing Opportunity Index released this week.

But note that if Manhattan is included in the region it really throws off everything. Also for some reason many of these analyses leave out Bergen County. Leaving out Bergen may not affect calculations that include Manhattan that much, but they really affect Jersey inclusive stats.

Lower House Values Lowers the Divorce Rate

Lowering house values are saving marriages! Well, maybe not but they are making people post-pone getting the actual divorce. During the boom all one needed to do was pull some equity out to pay for the divorce. Now, that is not so easy. So the housing bust is making people put off the inevitable. Will the results of this be better or worse? Who knows? But this article from the Chicago Sun Times titled Housing market keeping couples together. Lets take a look -

Divorce is rarely an easy process, and falling home values and sluggish real-estate sales are combining to make it particularly difficult right now.

Couples aren't fighting over who gets to keep the house. They're scrambling to get away from the burden of it. It's too soon to see the trend in official statistics; the most recent marriage and divorce numbers compiled by the National Center for Health Statistics date back to 2005 -- just when real-estate markets started to turn down from their boom years.

But lawyers and financial planners anecdotally say they are seeing more clients staying married -- if only for the time being -- simply because they cannot afford to break up.

...
If the home's value has fallen below the amount owed on the mortgage, neither spouse wants to be saddled with that liability. If one wants to keep the home, it's difficult to refinance the mortgage so the departing spouse can be cut loose from the debt. And evaporated home equity can take with it the means to pay lawyers for the divorce itself.

Dan Couvrette, chief executive officer of Divorce Marketing Group, a Canadian company that publishes Divorce Magazine, said he's also hearing anecdotally that some couples cannot afford to divorce. ''One of the ways they pay their legal fees is by selling or refinancing their home, and selling the home is getting is more difficult,'' he says.

Hopefully we remember in a few years when we see a decline in divorce rates that the couples are probably not together in any meaningful sense. They just do not have the funds to cover a divorce. Instead of fighting over who will get the money couples instead are fighting over who gets burdened with the most debt.

Another HELOC Sob Story

Once again we are offered up a story about someone doing work on their home and finding they have their HELOC line reduced. This time the story is brought to us by the San Diego Union-Tribune with a story titled Homeowners left in the lurch. This time the surprised victim (/sarcasm) manages a ReMax office. Maybe when the new comps came in he just did not realize that the prices were substantially lower over the last year. That would ruin the victim status that these stories seem to seek out. The real part of the story is that either he is still drinking way too much of the real estate Koolaid or he is not very bright and is unqualified for his job.

Either way it does not sound to good - but it is sure fun to read. Sounds as bright as the math teacher that had monthly housing payments of $10,000 on the $50,000 salary. Maybe the bubble blogs should start a RE Darwin awards - there is definitely a lot of material out there, just this week we have two good contenders this week. Well, lets get started with the story -

When he took out a $206,000 home-equity line of credit in 2007, Kevin Hall thought he'd secured all the funding he'd ever need for a major remodeling project at his Carlsbad home.

That's why his heart skipped a beat when he went online in February to transfer money from his account. He discovered that his credit line had been slashed to $72,000. Formal notification wouldn't arrive in the mail for several weeks.

“I got sucker-punched on the thing,” said Hall, who manages a ReMax real estate office in La Jolla. “I was at the point in construction where the drywall was going up. I was flabbergasted.”

Deep into his project, which included kitchen remodeling, landscaping and the construction of a granny flat, Hall contacted his lender to find out if there had been a mistake. There hadn't.

Like thousands of borrowers, Hall was a victim of falling real estate values. In Washington Mutual's judgment, the home equity used to secure the credit line had significantly declined. And under the terms of the agreement, the bank had the right to pull the plug.

Once again he is in the real estate field and now decided would be a good time to get into more RE debt. Well since bubbles are for bathtubs and real estate always goes up and now is a good time to buy he probably knew what he was doing. At least there are some intelligent people out there, lets take a look -

Mark Goldman, a real estate finance instructor at San Diego State University, said it makes no sense for banks to notify borrowers before they reduce their line of credit.

“Of course they aren't going to call you up and say we're taking a look at your loan,” he said. “The borrower, upon receiving that notice, would likely draw down the remaining available balance on the home-equity line.”

People really think that any amount quoted during their bubble is their to spend. The advertising used to sell HELOCs seemed to have worked too good. Now everyone is convinced they are brilliant and know the best way to use their own money. Only problem is the money is not there and most of us are really not that smart.

No Mortgage, No HELOC, Next No Credit Cards

During the bubble it seemed like anyone could get any kind of mortgage. But the bubble burst and the exotic mortgages disappeared. Then lenders started shutting down or reducing HELOCs. Now comes a report that lenders will have to start trimming some of our credit card debt. The never ending limits of $40,000 to over $100,000 of credit card debt is not sustainable. What?

It does not matter that large credit card debt was never sustainable for the customers, this Fortune CNN Money report illustrates how it is not sustainable for the lenders. So changes will be made. Credit cards shall be cut and/or limited. The article titled The Next Credit Crunch illustrates how the problems are emerging in the credit card industries. Lets take a look -

That conclusion comes from the latest data on credit card debt. It's growing fast, but the problem is bigger than that - and to understand what it means, we have to take a few steps back.

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That's where the credit card reports come in. Last year, just as the subprime crisis happened, credit card debt took off. The home-equity ATM had been shut down, so people turned to the last source of easy money they had left, the most expensive debt on the menu, credit card borrowing.

Since credit card debt has been growing much faster than the economy - more than 8% in last year's third and fourth quarters and over 7% in May (the most recent month reported)- people are apparently using it as a substitute for income. Thus, for the past year or so we have still maintained the standard-of-living illusion.

But a big crunch is coming - and here's why. Credit card debt, like mortgage debt, gets bundled, securitized, and sold off by banks. Citigroup (C, Fortune 500), one of America's largest credit card lenders, just reported that it lost $176 million in the second quarter through securitizing such debt. That happens when the buyers of those securities observe rising delinquency rates and rising interest rates, and decide the debt is worth less than Citi thought. More generally, the amount of credit card debt that is securitized nationwide has plunged by more than half in the past five months because it's getting riskier. That means credit card issuers will be charging customers higher interest rates, and since the banks can't offload as much of the debt as before, they'll have less money to lend to cardholders.

...
It may be that the standard-of-living bubble finally has to deflate. Sustainable increases in living standards have to be earned, not borrowed, and that means performing ever higher value work that can't be outsourced. We haven't been meeting that challenge very well; doing so will probably require much more and better education for millions of Americans, which takes time and money.

There may be some problems with the credit lines closing - many of them are already filled up. Unlike equity lines where people may be planning big projects or big pay-offs of other debt, credit cards are use for day to day transactions that can fill up a credit card fast. During the bubble it became very common for people to pay off their credit cards with their home equity, then run the charges right back up again. Now with HELOC lock-downs many people are just getting another credit card to max out. These changes will have to be internalized.

It sounds as this is not an if, rather a when. It probably is already happening but lenders are using other excuses - like a missed payment somewhere else. But when it starts happening to large swaths of the upper-middle-class we will probably see article after article of upset consumers.

Trump Wannabes

The whole generation of Trump wannabe real estate moguls seem to forget that Trump has had his fair share of money and bankruptcy issues. But that did not seem to enter their mind when they decided to invest (or put their name on) their own real estate investments. This article from Crain's New York titled Many Go Bust in Mortgage Meltdown illustrates the illusions.

The article focuses on rising bankruptcies due to liar loans, no money downs and the huge downturn in the real estate market. But the real interesting story is about the over his head investor. Let's take a look -

Noel, a 28-year-old math teacher from Harlem who asked that his last name not be used, always thought it would be smart to invest in real estate. So when his cousin introduced him to a mortgage broker who promised he wouldn't have to put a penny down on a $1 million piece of property in New Rochelle, he jumped at the chance. Then, the same broker told him about a home in Yonkers. Again, he didn't have to put any money down.

...
Before he realized what he was getting into, Noel says, he was scammed into signing two mortgages totaling more than $1.5 million. The mortgage broker even provided a lawyer for the closing.

"I make $50,000 as a schoolteacher," he says. "There's no way I should have been approved for loans that big."

Hemmed in by monthly payments totaling more than $10,000 and bills for maintaining a third property on Long Island, Noel had no choice but to file for bankruptcy, he says. He filed without the help of a lawyer—he couldn't afford one—and he plans to walk away from the three homes and get a fresh start, this time without dreams of making it big.

"I thought real estate was a good business," he says. "But I guess it's not for me. I'm not buying property again—ever again."

It sounds like the only one who will make out in this deal is the broker. The real sad cases are the older people who raided their retirements thinking that RE investing would make them millionaires and make their golden years gold.

Liar, Liar, Foreclosure is Dire

One of the strangest parts of the Great Housing Bubble was the reliance on the credit score. If you had a good credit score you could get any mortgage you wanted and buy any house you desired. People could take no doc loans that did not require proof of income or assets. In fact with the higher interest rates and fees many mortgage professionals preferred giving these loans. It is no surprise when when we come across this article from MSNBC titled 'Liar Loans' threaten to prolong mortgage mess.

The nation's struggling housing market, already awash in subprime foreclosures, is now getting hit with a second wave of losses as homeowners with liar loans default in record numbers. In some parts of the country, the loans are threatening to drag out the mortgage crisis for another two years.

"Those loans are going to perform very badly," said Thomas Lawler, a Virginia housing economist. "They're heavily concentrated in states where home prices are plummeting" such as California, Florida, Nevada and Arizona.

Many homeowners with liar loans are stuck. They can't refinance because housing prices in those markets have nose-dived, and lenders are now demanding full documentation of income and assets.

Losses on liar loans could total $100 billion, according to Moody's Economy.com. That's on top of the $400 billion in expected losses from subprime loans.

....
The loans were also immensely profitable for the mortgage industry because they carried higher fees and higher interest rates. A broker who signed up a borrower for a liar loan could reap as much as $15,000 in fees for a $300,000 loan. Traditional lending is far less lucrative, netting brokers around $2,000 to $4,000 in fees for a fixed-rate loan.

Although the idea of these loans were incredibly illogical especially on such a large scale, they allowed unlimited amounts of greed. Greed of homeowners to purchase any house they wanted. Greed of mortgage investors to get significantly higher commissions and greed of investors to buy and sell more profitable products. Now we, collectively, will be paying for that greed.

Let the Lawsuits Commence

Fraud ran rampant during the Great Housing Bubble, and from our recent review of the Miami Herald's Borrowers Betrayed Series.

This Orlando Sentinal headline speaks for itself - Sold for $380,200, now appraised at $125,000: Investors helped heat up Orlando-area housing market, got burned. Lets take a look at a few snippets -

Shaeffer, one of the first investors in Orlando's Cay Club, was part of the mad rush. He was captivated by the promise of two years' worth of rental income upfront. He bought one unit and persuaded his sister to use her late husband's life-insurance proceeds to buy two more.

Cay Club brochures, Internet presentations and sales agents promised buyers across the country $35,000 in condo furnishings and membership privileges that included a jet available for club members to charter for personal use. The reality, as Shaeffer would later learn during a visit, was far from the sales pitch.

...
Dozens of Cay Club buyers are now suing. Investors from as far away as Hungary paid an average $300,000 in the development, while similar units nearby cost less than half that amount, appraisers reported. One Cay Club unit that sold for $510,000 two years ago was appraised recently for $90,000, said Chris Cantrell, a Birmingham, Ala., attorney for several buyers who are suing EW Sunvest Development and IMG Academies. The lawsuit contends that Sunvest and IMG shared responsibility for developing Cay Club.

EW Sunvest owns the property, and company attorney Richard W. Epstein said his clients gave Cay Club developers an option to buy the property but that EW had nothing to do with converting or selling the condos. A spokesman for IMG Academies had no comment on any plans for Cay Club, although marketing materials emphasized IMG's development of a "challenging field sports training and tournament destination."

...
The network of Cay Clubs stretching from Las Vegas to Key West is now defunct, and the development company has dissolved. Fort Myers attorneys Holly Bower and Charles Phoenix, who previously represented club principals Dave Clark and David Schwarz, each said they have no contact with them. They could not be located to comment for this article.

Now the lawsuits against developers has begun. Expect to see lawsuits for the appraisers to follow suit, as well as the reatlors who sold the properties. Especially in Florida and the other super bubble states where people now can see how they were ripped off.

Losing as a Landlord in Morristown

During the Great Housing Bubble some people were investing in properties, others were trying to buy homes, and a few were trying to do both at the same time. That is part of the two family property idea - live in one unit and rent the other - part investment, part home. If everything works out as hoped the owner ends with a hefty profit in the end. But things do not always work out as planned.

That is where today's landlord in Morristown comes in. Instead of winding up with a huge profit, everyone involved ends up with a giant loss - especially the home buyer. Well, of course assuming everything in the deal it legit - but we will save those issues for another day.

Here is the property (yes the realtor actually put this picture up) -


Here is the property info -

Multi-family Property Status: Active County: Morris 2 total unit(s) Year Built: 1900 Complex features: Unfinished Basement,Total Bedrooms: 6,Total Full Bath: 2 Type: Duplex-Side by Side Parking space(s): 2

Heating features: Oil Exterior features: 1 Car Width Driveway Roofing: Asphalt Shingle Unit 1 has 6 room(s) Unit 1 has 3 bedroom(s) Unit 1 has 1 bath(s) Unit 1 features: Bedrooms, Dining Room, Kitchen, Living Room

Unit 2 has 6 room(s) Unit 2 has 3 bedroom(s) Unit 2 has 1 bath(s) Unit 2 features: Bedrooms, Dining Room, Kitchen, Living Room Approximately 0.18 acre(s) Lot size is less than 1/2 acre Utilities present: Electric Service

Here are the financials -

• The property was purchased for $390,000 in January 2006.

• The original mortgage was an ARM for $312,000 also in January 2006 with Commonwealth United Mortgage.

• A Lis Pendens was filed October 2007.

• The property is currently for sale with a realtor for $301,000.

This property was purchased with a huge down payment of $78,000 which was a whopping 20%. That is a fantastic down payment, almost unheard of during this time period.

Although the initial investment was there the owner decided to take out an ARM - perhaps signifying that monthly payments on a 30-year-fixed would be difficult. Well the ARM ended up being difficult as well. Since within 22 months of the purchase the homeowner was in the foreclosure process.

Now the owner is out their $78,000 and the lender is out $29,060 if the property actually sells for the full asking price. The total loss on the property will be at least $107,060.

Being a landlord can be hard - tenant issues, rental issues, etc, but losses of over $107,000 is even harder.

Investigating NJ Numbers Part 1

This is a follow-up on our previous post regarding RealtyTrac's numbers.

First we like the services that RealtyTrac offers. We like their output and their statistics are very interesting. But upon reading the differing numbers between their second quarter 2008 numbers and the July numbers we felt something was askew. From a little research it appears we are just another in a long line of questioners.

Unfortunately the media treats their press releases as industry experts, however the main goal of RealtyTrac is to sell properties. From their website -

Welcome to RealtyTrac, the nation’s leading online foreclosure marketplace and the most trusted source of foreclosure information.

Over the last year there have been several articles regarding the reliability of their statistics. Here are two excellent articles -

Here is an excerpt from Business and Media -

“RealtyTrac's monthly foreclosure data is still inflated, because they haven't changed their methodology on a month-by-month basis,” Sam Ali, a reporter for the Star-Ledger, told BMI. “So a single property may still get counted several times based on the number of filings it has accrued over time. They did release a six-month (January-June) roundup where they did include what they described as ‘Unique Households.’ They claim this figure eliminates the double and triple counting of the same properties.”

But even with the adjustments in the RealtyTrac data, Ali determined it would not be possible to compare their “tweaked” data of this year to last year’s and come up with an accurate number of increased foreclosures.

“In New Jersey that reduced the number of foreclosure filings from January through June from something like 27,000 to 13,000 – so it cut the figure in half, but for some reason they do not break down ‘Unique Households’ on a month-by-month basis,” Ali said. “Nor did they include a ‘Unique Household’ number for January through June 2006, so it’s impossible to compare year-over-year figures.”

Yet the media continue to use RealtyTrac’s questionable numbers.

“Sadly, I think all of us in the media are to blame for that,” Ali said. “Call it the lemming factor. RealtyTrac has been pretty aggressive about sandblasting their press releases to every media outlet on the planet with catchy, eye-popping headlines. When one person reports the figures, pretty soon, everyone starts reporting the figures. RealtyTrac first and foremost is not a research firm – it’s a company that sells foreclosure lists to real estate investors.”

Here is an exerpt from the Atlanta Journal Constitution (unfortunately one needs a subscription form original so here is a copy)-

RealtyTrac, one of the nation's leading sources of foreclosure statistics, reported 12,602 July foreclosure actions for Georgia. But that total counted more than 2,000 properties twice, and sometimes more, The Atlanta Journal-Constitution found in a review of the data.

There is little dispute that Georgia faces a foreclosure crisis, but the company's July report overstated the magnitude of the problem. After a preliminary investigation, the company said Friday that its data show foreclosure filings in July actually rose by 14 percent — not by 75 percent.

...
RealtyTrac said it also provides data to the Federal Reserve, the Federal Deposit Insurance Corp. and the FBI.

At a time when mortgage failures top the public agenda, no one knows the precise scope of the problem.

No government agency collects nationwide foreclosure statistics. The Mortgage Bankers Association reports quarterly on delinquent mortgages and foreclosures, but its survey covers only 80 percent of mortgages and does not include a breakdown below the state level. Other organizations use credit files and lender surveys to produce estimates.

The numbers are touted as gospel from the major networks and main national papers, however when people do some digging in the numbers there are some questions. Various states have various timelines so being in the foreclosure process with states that have timelines that are over a year will, by default, have higher numbers just since people stay in the foreclosure process longer. There is also the issue involving actual counting and double counting. We will look at NJ actual numbers in an upcoming post.

Second Mortgage = Bad, HELOC = Good

Home equity does sound significantly better than "second mortgage." And the acronym HELOC sounds even better yet. "Second mortgage" sounds like a weight around ones neck - HELOC sounds like freedom. Both through word choice and how we think about them. Mortgage bad, equity line good.

Today there is an excellent article form The New York Times debt trap series titled Home Equity Frenzy Was a Bank Ad Come True. If you want to skip the graphics, page scrolls and a one page version of the same article can be found here.

There is a lot to this article and the snippets here just go into a small part of it. Definitely worth the read to anyone interested in the recent explosion and changing mindset regarding equity withdrawal. Lets take a look -

Since the early 1980s, the value of home equity loans outstanding has ballooned to more than $1 trillion from $1 billion, and nearly a quarter of Americans with first mortgages have them. That explosive growth has been a boon for banks. Banks’ returns on fixed-rate home equity loans and lines of credit, which are the most popular, are 25 percent to 50 percent higher than returns on consumer loans over all, with much of that premium coming from relatively high fees.

However, what has been a highly lucrative business for banks has become a disaster for many borrowers, who are falling behind on their payments at near record levels and could lose their homes.

...
None of this would have been possible without a conscious effort by lenders, who have spent billions of dollars in advertising to change the language of home loans and with it Americans’ attitudes toward debt.

“Calling it a ‘second mortgage,’ that’s like hocking your house,” said Pei-Yuan Chia, a former vice chairman at Citicorp who oversaw the bank’s consumer business in the 1980s and 1990s. “But call it ‘equity access,’ and it sounds more innocent.”

...
As a result, the United States has become a nation of half-home owners. For the first time since World War II, the portion of home value that Americans own has fallen to less than 50 percent. In the 1980s, that figure was 70 percent.

Over a billion dollars was invested in advertising to change our views on debt. Slogans proclaiming people who utilized their equity as "brilliant" came about. Second mortgages had bad connotations - such as increased debt to the bank. But a equity line illustrated one using money trapped by their house. It was your money and who knew how to spend it better than you.

This passage from the article focusing on the great Elizabeth Warren sums it up best -

Still, Elizabeth Warren, a professor at Harvard Law School who has studied consumer debt and bankruptcy, said that financial companies used advertising to foster the idea that it is good, even smart, to borrow money.

“That ‘unused home equity in your house? Put it to work for you.’ ” Professor Warren said, mimicking the ads. “Doesn’t that sound financially sophisticated?” Not to Professor Warren. “Put it to work,” she said, is just a euphemism for borrowing.

House Prices Fall 7.6% Nationally

First Zillow, then Realty Trac and now National Realtors Association. The bad news is coming fast and furious the last fews days. Now we find through an article titled Home prices down 7.6% from CNN Money the latest house values trend.

Real estate prices continued to post steep year-over-year declines during the three months ended June 30, according to a new report from the National Association of Realtors (NAR).

Nationwide, the median existing single family home price plunged 7.6% to $206,500 in the second quarter, down from $223,500 in the same period of 2007. The median price represents the point at which half of all homes sold for more and half sold for less.

A record number of foreclosures helped drive down prices, according to NAR. In fact, foreclosures and short sales accounted for about one third of all existing homes sales.

...
The Northeast median home sold for $269,000, down 9.6%, and prices in the Midwest were down 4.1% to $161,500.

...
Condo prices fell much less than single family homes, down just 3% year-over-year to $220,000 from $226,900. A couple of cities actually recorded double-digit condo price gains, led by Syracuse, N.Y., up 17.8% to $144,900, and New Orleans, up 15.9% to $192,100. Houston condo prices rose 9.9% to $141,100.

Interesting that condo sales fell were only down 3%. Also interesting to note that there is a table on the bottom of the article with various cities and regions. NJ is listed 6 times on the list, all declines except the Trenton-Ewing area which had an increase of 1.6%.

NJ Schizophrenic Housing Data (Or is RealtyTrac Comparing Apples and Oranges)

This is a follow-up to our earlier post here. Notice the numbers from The Record as provided from RealtyTrac are -

One in every 751 households in New Jersey was in some stage of foreclosure in July.

However just last month in our post here we note from Bloomberg this number for New Jersey also cited as from RealtyTrac -

New Jersey filings rose 140 percent. One in every 201 households in the state received notice, the 12th-highest rate in the U.S.

The one in 751 number for July is at some stage of foreclosure. The one in 201 number is for the second quarter (April to June) also at some stage of foreclosure. The foreclosure process has a lengthy time line. Wonder why such a large discrepancy between the numbers?

Here are some other numbers from RealtyTrac -

The number of foreclosure filings in New Jersey jumped 140 percent from April to June to more than 17,000, according to RealtyTrac.

The we have these numbers -

The state had 4,622 filings -- a mix of default notices, scheduled auctions and bank repossessions.

From what we can tell ReatyTrac numbers quarterly numbers are just April, May and June data added up. There is no provisions for the different states having different foreclosure processes. States requiring more foreclosure submissions will show higher foreclosure rates. There also seems no provisions for counting the same property show up as multiple data-points therefore again skewing the numbers.

Interesting. It seems as if RealtyTrac may be comparing apples and oranges for the state statistics. They also be comparing double and triple counted apples with oranges. Very Interesting.

Update - We know what RealtyTrac Report Methodology states and are working on a post scrutinizing some of the past data to get a better sense of New Jersey numbers and how they are portrayed. Hopefully we will have this up later today or early tomorrow.

Jersey Foreclosure Numbers (This Time With Spin)

As a follow-up to our previous post - The Record illustrates how year over year the numbers are up - but the Star Ledger brings us a positive spin on the numbers in an article titled N.J. foreclosure filings fell in July. Here is their spin -

New Jersey foreclosure filings fell 7.6 percent in July, compared to the previous month, bucking a national trend, according to a firm that tracks the data.

The state had 4,622 filings -- a mix of default notices, scheduled auctions and bank repossessions -- during the month, said RealtyTrac of Irvine, Calif. That represented an 11 percent jump year-over-year.

The numbers are much starker nationally. U.S. filings rose 8 percent in July compared to the previous month, with bank repossessions forming the fastest growing segment, RealtyTrac found. Compared to last year, the nation's foreclosure filings are up 55 percent.

New Jersey is one of only 14 states that saw a decline in filings from June. The state now ranks 19th in its foreclosure activity rate, which RealtyTrac calculates as one filing for every 751 households.

The article acknowledges that year over year the numbers are worse but the spin is that they are better than June's numbers.

Jersey Foreclosure Numbers

Following up on regional underwater numbers, today we have foreclosure data. The report comes to us via the Record and is titled New Jersey foreclosures up 11 percent. Better than some previous reports and New Jersey is doing better than the national averages. Howver, New Jersey is still up year over year. Lets take a look at the article -

Foreclosures in New Jersey rose 11 percent from July 2007 to July 2008, RealtyTrac said today. Nationally, foreclosures were up 55 percent, RealtyTrac said.

One in every 751 households in New Jersey was in some stage of foreclosure in July, compared with one in every 464 nationwide, RealtyTrac said.

...
Foreclosures are rising because many homeowners who got adjustable, subprime, interest-only or other exotic mortgages during the housing boom now find that their monthly payments have re-set to higher levels that they cannot afford. Because property values have declined across most of the nation, these homeowners can’t simply sell their homes to shed their mortgage burden.

In addition, as home prices soared during the first half of this decade, many homeowners borrowed against their home equity, but now can’t afford to repay those loans.

As in our profiled examples - these are the same two common reasons why people lose their homes. Both areas show people taking on too much debt - either buying the house at peak and having payments that are not affordable or buying prior to peak and then withdrawing all the equity to the point where payments are also not affordable. During the bubble people felt they could either refinance again with low down payments (read as not paying down equity) or just sell the property. However the bubbles burst and now people are stuck. Foreclosures and short sales are the only way out for many people.

New York Metro Underwater Numbers

In a follow-up to our post here about Zillow's nationwide statistics on the home-owners being underwater, The Star Ledger brings us an article on locally underwater statistics. In an article titled Home Equity takes dive provides us with some New York Metro regional data. Lets take a look -

In the New York metropolitan market, including northern New Jersey, home prices in the April-June period fell an average of 6.6 percent from the second quarter of 2007, and 14.2 percent of homeowners who bought during the last five years are under water, Zillow.com said.

"That means one out of every seven people in New Jersey are facing negative equity, and that number rings true to me," said Jeffrey Otteau, head of Otteau Appraisal Group in East Brunswick and an expert on the state's housing market. "The subprime lending boom was characterized by little or no money down, where borrowers financed their entire transaction, and in some cases financed more than the full purchase price."

Mirroring the national trend, the highest rates of negative equity in the New York-New Jersey market are affecting those who bought their homes in 2006, with 26.6 percent of them now underwater.

...
In the New York-New Jersey area, 14.6 percent of homes sold for a loss during the second quarter. And 5.3 percent of all transactions during the quarter involved homes in foreclosure, the Zillow.com report said.

First these numbers given in the article are just for the New York-New Jersey region. There are some things to note about these numbers - first they include Manhattan. Second Zillow does not usually include Bergen County or most of Middlesex County. See the New York metro Zillow map here for the regional represented in this article.

This is not to dismiss the regional numbers. Some of the numbers are not surprising. House values have dropped in the last year. Late 2005 through 2006 purchases were at the highest, most inflated prices. Those who did not have a substantial down-payment will be underwater. In normal growth times it takes many years just to recover all the closing costs. Therefor even in normal times there will always be people who would have to sell at a loss. Given the zero down-payments available during the bubble these buyers will almost always sell for a loss.

Pay-off HELOC get 2% bonus

We all know the FDIC took over IndyMac. They have been implementing various changes. An article today titled FDIC slashes estimate of IndyMac's uninsured deposits from the LA Times mostly focuses on uninsured accounts. However the last two paragraphs are perhaps the most interesting. First the HELOC related paragraph -

IndyMac is offering holders of home equity credit lines a rebate of 2% of their line of credit’s maximum, up to $1,500, if they pay off their unpaid balance and close down their line of credit. IndyMac has 27,000 such customers, Bovenzi said. (note - bold in original)

This seems like a very low incentive. Even though savings are being hit there are still many places an investment can make over 2%. Plus one wonders how many people actually utilized their HELOCs but still have that type of money laying around to pay off the lines. Perhaps there are a few people who will think they are getting a deal.

So now onto the very interesting paragraph about foreclosures -

The bank has followed through on promises from FDIC Chairwoman Sheila Bair to stop foreclosure proceedings for owner-occupied homes pending a review of whether the loans can be modified to mutually benefit the borrower and the FDIC. More than 60,000 borrowers with loans serviced by IndyMac are 60 or more days behind on payments, according to Bovenzi, who said he would provide more details on the modification program soon. (note - bold in original)

This is a huge decision. Hopefully people will remember in a few months when the reports come out that 60,000 foreclosures were stopped from the FDIC to workout the loans. Notice that the numbers will dip a bit just before the election. Interesting.

A few quick questions - How many of these loans really have any potential of being reworked? Will any real numbers of reworked loans every be revealed? How many of these owner-occupieds are really owner-occupied? Oh stupid question, no one ever lied on their mortgage application.

Houses Underwater

This article from Bloomberg titled Many U.S. Homeowners Owe More Than House Is Worth, Zillow Says is pretty alarming. People can not refinance, can not sell, are just stuck. Unfortunately as the article illustrates the only way out for many ends up being foreclosure. Hopefully lenders start to streamline the short sales option. We are at a point where there are no good options - just a choice between what is the best of the difficult. Let's take a look -

Almost one-third of U.S. homeowners who bought in the last five years now owe more on their mortgages than their properties are worth, according to Zillow.com, an Internet provider of home valuations.

Second-quarter home prices fell 9.9 percent from a year earlier, giving 29 percent of owners negative equity, said Zillow, the Seattle-based service that offers values for more than 80 million homes. For those who bought at the 2006 peak of the housing market, 45 percent are now underwater, Zillow said.

Negative equity and declining prices are making it difficult for homeowners to sell property for a profit. Almost one-quarter of U.S. homes sold in the past year were for a loss, Zillow said. That contributes to the foreclosure rate because some homeowners can't absorb the loss and end up surrendering their homes to the bank that holds the mortgage, said Stan Humphries, Zillow's vice president of data and analytics.

Of course some of the hardest hit areas were in California.

The highest percentages of homeowners with negative equity were located in California. In four of the state's metropolitan areas -- Stockton, Modesto, Merced and Vallejo-Fairfield -- the number of homeowners whose mortgage debts exceeded the values of their properties topped 90 percent, Zillow said.

In five more California areas -- the Inland Empire (Riverside-San Bernardino), Bakersfield, Yuba City, El Centro and Madera -- the percentages were more than 80 percent.

Ninety percent of the homeowners that bought in these California communities within the last 5 years are underwater! Now that hurts. We know that with falling prices that some properties are worth less than half of the peak prices. The financial situation of many of these homeowners will take years to get back in the black. The brutal economics of the bubble implosion will take years rectify. With some areas never returning to the glorious bubble days.

Crime in the Mortgage Industry Part 3

Last month we discussed the first two parts of the Borrowers Betrayed investigative series from the Miami Herald. The first part discussed the criminal histories of several Floridian mortgage brokers. The second part delved into the shady history of several loan originators. The example of crime and negligence were very powerful in the first two parts.

The third part of the series is now available. This part involves the probe regarding the lackadaisical (probably even criminally negligent) enforcement of regulators. While the first two parts were devastating, this profile on the regulators is even worse. The people who were in charge to protect the consumers seem to be doing nothing. Hopefully Floridians demand the firing of those responsible as well as a full investigation of every dollar spent and every activity undertaken by the regulators.

And just when the negligence could not seem to get any worse the probe uncovers even more. Let's take a look at what the Miami Herald uncovered during their eight month investigation of 1400 orders issues from the Office of Financial Regulation -

[Complaints to the Office of Financial Regulation,] the state agency created to police the industry -- were routinely ignored, leaving consumers to fend for themselves, according to public records and interviews.

...
While the agency was reaping a windfall during the land boom -- licensing fees drove the OFR's bank balance from $2.7 million in 2000 to $29 million last year -- Florida's mortgage fraud rate was steadily rising.

State law gives the OFR sweeping powers to police the industry. Not only can state agents screen license applicants for prior crimes, but they are entrusted to monitor by investigating brokerages, examining files, levying fines, suspending violators and, ultimately, revoking licenses.

Now onto the results of the investigation -

• One in three brokers the OFR discovered committing fraud -- the most serious offense under state law -- were allowed to keep working in the industry with no monitoring.

• Eighty-one brokers were caught siphoning funds from clients' escrow accounts and gouging customers with excessive fees but were allowed to keep peddling loans.

• While the number of fraud cases soared this decade, regulators opened fewer examinations of brokers' books each year, greatly reducing the threat of state sanctions to fraud mills.

• Suspensions -- another tool to protect consumers -- were used so infrequently that for three years, they weren't imposed at all, records show.

• The most frequent reason brokers were booted out of the industry: bouncing checks for licensing fees to the OFR.

The regulators were more interested in collecting fees rather than monitor then protecting the public. From this article the OFR acted more like a trade organization or union - they were more interested in receiving their fees (read as dues) and protecting their members than looking out for the public. The fines they OFR imposed were minuscule compared to the money stolen. In some cases the fines were less than one percent of the money that mortgage brokers and originators stole from their clients.

The OFR was not doing their job. Now Florida will pay the price for years to come. Aside from all of the stolen money, investors will enter the state with great trepidation. Here are the results of the lax enforcement coupled with the Great Housing Bubble -

Time and again, regulators caught mortgage professionals breaking the law -- fraud, forgery, and stealing from clients -- but allowed them to stay in the business with few consequences during the richest housing boom in state history, The Miami Herald found.

...
Industry experts say the new opportunities for easy money, and the sheer numbers of new brokers entering the business, drove a nationwide epidemic of fraud. Florida became the center.

The state had the seventh-highest rate of mortgage fraud in the country in 2003. It ranked 5th in 2004, 3rd in 2005 and 1st in 2006 and 2007.

By last year, one out of every five fraudulent mortgage applications filed in the United States was written in Florida, according the Mortgage Asset Research Institute, a Virginia-based industry analyst.

But instead of more aggressive enforcement, state regulators actually did less. In fact, the single most effective tool they had, license revocations, declined as the fraud rate soared, records show.

One out of every five fraudulent mortgage applications filed in the US was written in Florida. This is not the area where anyone wants to be number one. Hopefully this will prompt Florida to investigate their regulatory industry. Perhaps the most efficient thing for Florida to do would be to just close this entire agency and develop a new one. The current system is definitely, definitely not working.

This third part of the series also features several brokers that regularly took advantage of their clients. Some were already in jail on mortgage fraud charges for months before the regulators took any action. Others have only paid a pittance in fees and are still working. The examples are shocking - the stories of people taken advantage of going to a state agency for help and getting nothing, absolutely nothing in return. Make sure to take a look at the article for all of the appalling details.