FedUpUSA

Archive for the ‘Loan modifications’ Category

From AmpedStatus

Entire Cobb Mtn. Estate to be demolished by couple with dueling  dozers rather than allow Bank of America to auction it off in the  fraudulent foreclosure Ponzi scheme, bogus modification scam now  sweeping our nation! An estimated 15 Million homes/families’ lives hang  in the balance! We’re all in this together – How are you fighting back?

This was originally posted and flagged down within an hour the first  time I posted two nights ago on Craigslist under: real estate and in  just 18 minutes the second time I posted it under: free stuff. Please  leave this up as it a serious commentary about the very real, current  state of our nation!

More here…

From OhioFraudclosure…

NOT… Just another Foreclosure Story

NOT ..an America Birthday or 4^th of July Celebration

Sadly – it’s another Bank of America foreclosure story………OR IS IT ???

Over the last few days everyone had emailed or linked me to the below insane HEADLINES

Craigslist Couple to give away contents of entire home….or

Couple to deploy Dueling Dozers in demo of own home

As it was, the only reason their story came out…was in trying to give away the contents of their home as “Free Stuff“ on  Craigslist… What! ..Can you believe it? Someone trying to give away  ALL the contents of their home!…Well no…and neither could  Craigslist…so the ad was quickly flagged and taken down. Surely it was  some type of fraudulent posting or someone “pranking” this couple…you  know..trying to give away all their stuff. Frustrated – homeowner  Robert posted again…..this time under Craigslist “Real Estate” Once again the ad was flagged and taken down.  So Robert tried posting it – a third time. Yet again it was removed. By this time …Robert was so frustrated  he attached “an explanation” to assure any Craigslist monitors….they were giving away…everything ….adding…..they(Ana & Rob) were going to bulldoze the house. Finally – Craigslist allowed his posting…..but only in the “Politics” category with the bizarre explanation of dueling dozers.

So we (OHIO FRAUDclosure)  had to find out….Who was this “Insane Guy” and what kind of  ”Crazy  People”…give everything away and then plan – to bulldoze their home.

Behind  the sensational headlines – I found a real couple – suffering real  pain. And no matter how the Bank of America spokesperson tries to spin  this story….it stops HERE and NOW. This is NOT another  California family looking for a “Free Home.” This is NOT some crazy  couple that ”overbought” during the real estate boom. And NO… they  didn’t refinance 2 or 3 times to buy boats and cars so they could live  it up somewhere near the California Coastline.

This is…the story ……of Ana and Robert Somerton…..real people & real victims – first suffering  through a Counrtywide FRAUDulent loan, then with all Bank of Americas  (BOA) failures with  phony servicing attempts to implement …any of the  Goverments’ failed “FRAUDclosure prevention” programs.

Ana & Robert Somerton

In  1990 Robert’s father (Ronald) bought a small 1.3 acre parcel of land,  on which he planned to build a small 820 sq foot 1 bedroom 1 bath  retirement cabin. Robert was excited for his father, who slowly, was  building the home “out of pocket” (no loans) on weekends. Some six years  later, and nearing completion of his dream home ..sadly.. Ronald passed  away. Robert could not bear to have the home and property…slip away.  He was determined to finish the home that his dad had so wanted. But, in  order to buy out his sisters half of the estate and finish the  home …Robert took out a loan against the value the property.

It was at this same time that he decided he should slightly increase the size … to a more usable 1275 sq. ft. He and his wife  – Ana – eventually decided they would finish ”Ronald’s dream”. Robert told me ”We  first painted the place, then we fenced in the yard for our dogs Magic  and Pascual. We also converted the garage into our master bedroom, and  added a new walk-thru closet and master bath to the end of house. I did  all the drawings and most of the construction …with Ana helping out…  on her days off.”

Be sure to check out the rest here…

4closureFraud

The dynamics for housing moving forward point to a very bleak future and a potential lost decade yet again from 2010 to 2020.  Housing has a treacherous path moving forward and deep down demographic shifts will keep a lid on any significant housing appreciation moving forward.  The economy is in the process of deleveraging from a market highly dependent on real estate.  Wall Street and the government are doing everything they can to bring back the economy of yesterday but have had little success.  This recession has shrunk the middle class so those looking to buy homes have declined simply because many can no longer afford to purchase a home even at today’s lower prices.  Focusing on housing first was a big expensive policy mistake where we should have focused on creating sustainable jobs.  The market is slowly shifting to a new housing paradigm.  Family growth rates, employment trends, baby boomers, and wages will all keep a lid on housing prices moving forward.

First we should break down the entire housing market:

Source:  Census

The U.S. has a large number of homeowners.  A total of 75 million Americans can lay the claim to owning their home.  23 million of this group (31 percent) actually owns their homes outright with no mortgage.  Of course not having a mortgage does not mean that these homeowners have no housing associated cost.  They still need to pay yearly property taxes, insurance, and all the cost in maintaining a home.  Another 37 million American households rent.  These are the basic dynamics of the housing market.

Of those homeowners with a mortgage, 7.2 million (14%) are in foreclosure or 30+ days late on their mortgage.  This practically guarantees a few years of cheaper housing hitting the market in a steady trickle.  This puts a herculean hold on any significant home building going forward.

From the recent Federal Reserve Flow of Funds Report, we find that current outstanding mortgage debt is $10.334 trillion.  We have to break out the renters and the homeowners with no mortgage and find that the average mortgage debt for homeowners is:

$10.334 trillion / 51.575 million mortgaged households =             $200,374

The current median home price comes in at approximately $170,000.  Now some would argue that housing will regain traction and go on to rising to new levels.  Yet this assumption assumes that middle class wages will be growing moving forward.  If we look closely at the data the only real winner so far in this economic crisis is Wall Street but average Americans have seen very little benefit from the current bailout measures.  Now those with big investment bank salaries can afford their piece of prime real estate in Manhattan or the Hamptons but this does not make up the bulk of the housing market.  The bulk of the housing market is highly dependent on how middle class Americans are doing.

If we look at the current unemployment levels by age group, we see that those in the household forming age ranges or those entering into these categories, are taking on the brunt of this recession:

You can see that up to age 34, the unemployment rate is trending much higher than the total national average.  These are prime age groups for forming households and if a family is not feeling safe financially, they will delay on purchasing a home.  The middle class young family is also delaying on having children so the necessity for a bigger home is also being pushed out.  This demographic shift is happening at the same time that baby boomers start entering retirement age and many will want to downsize.

And many of these people have a buffer for equity to sell since they bought prior to the housing bubble.  Take for example data on current owner households:

Moved in before 1989:                  20.5% of all homeowners

Moved in before 1990:                  40.9% of all homeowners

It is highly likely that in this group, you have many baby boomers that will sell to downsize in the years coming forward and the current decline in prices will only cut into their equity but not put them underwater given the decade long bubble.  They purchased before that.  Those that moved in before 1989 will have a much larger cushion.  So there is a large group of people that will sell regardless of market trends because they will have to simply because of life changing events.

And then on the other hand we have the fact that one-third of homeowners in certain states are underwater on their mortgages.  Take for example California:

California has a large renting population and most that own a home carry a mortgage (77 percent).  Of those that carry a mortgage a stunning one-third are underwater.  In other words 1.76 million mortgages in California are attached to homes that are worth less than the actual balance of the mortgage creating a large incentive to walk-away.  Many of these loans come from Alt-A paper and option ARMs.  These loans will impact the market at least until 2012 and hurt the state.  California isn’t immune and other states like Nevada, Florida, and Arizona have similar dynamics.  In fact, here is the amount of mortgage debt in a negative equity position according to a recent Deutsche Bank analysis:

California: $969 billion

Florida: $432 billion

Arizona: $140 billion

The only way that things would improve for banks is if prices moved higher.  But how can prices move higher if middle class Americans are dealing with high unemployment and stagnant wages?  The Federal Reserve and U.S. Treasury have really reached the end of options in terms of what they can do.  Even the 30 year fixed mortgage is at all time lows in the midst of all this turmoil:

The 40 year average for 30 year rates is closer to 9 percent. Today it is under 5 percent.  That is unsustainable and as we move forward with insurmountable levels of national debt, the rate will have to rise.  I know this seems impossible for many but as we have seen with other debt ridden countries, the market can turn on like a tornado and quickly change the dynamics of the situation.  For the housing market, this will mean even more pressure to keep prices muted.  

The only way home prices can rise in a healthy manner is if we start seeing wage inflation.  We saw some of this in the 1970s where wages went up in tandem with home prices.  In the last decade, wages moved sideways while home prices went into a bubble.  As far as the economy going forward, the big job sectors seem to be in low paying service sector jobs.  Certainly someone can purchase a house with these jobs but not at current prices even though they appear to be solid.

The Federal Reserve and the U.S. Treasury have done everything to slam the dollar and create some level of inflation.  Yet other central banks are doing the same.  So what happens is easy money flows to Wall Street for gambling while the real economy stagnates.  It is hard for many to believe that we will have another lost decade in housing but there is little reason to believe that prices will soon start to outpace inflation.  In fact, in the last year or two we have been dealing more with aspects of deflation.  We need to keep an eye on the real value of home prices adjusting for inflation/deflation.

My Budget 360

The Future of U.S. Housing – Projections of Household Formation, Loan Modification Data, 500,000 Option ARMs Still Active, and a Decade of Stagnation.

Posted by mybudget360

Take what you knew about projecting housing for the last fifty years and throw it out the window.  The big problem with using models post-World War II is that they base growth on a baby boomer population that was the largest affluent middle class cohort known to the world.  That model is now disappearing.  Some point back to the Great Depression but forget to mention that life expectancies in the first half of the 1900s weren’t that fantastic.  So you had a population that was constantly churning and emptying out homes that many had paid down.  Yet after World War II the Levittown model of housing took hold with suburban life being the driving force of future home building.  When linked up to cheap oil and 30 year fixed mortgages this seemed to be a good balance for entry into the middle class.  Those days are seemingly no longer here.

This isn’t to say that our best days are behind us.  But if you base excellence on massive consumption, you will be hard pressed to adapt in the new world.  For example, today our birth rate is near replacement levels:

One of the biggest pushes to buy a home was based on the “household formation” stages.  But many Americans are now delaying this stage.  Part of it has to do with shifting values but another cause is more practical.  People don’t want to start a family in a horrible economy:

“(WaPo) That same survey found that women with low incomes were particularly likely to report postponing having a child. Nine percent of those earning less than $25,000 annually postponed having a child, while only 2 percent of those earning more than $75,000 did so.

“Certainly younger folks have the ‘luxury’ of delaying their childbearing in an attempt to hold out for better economic conditions, while older people may feel the press of the biological clock prevents too much of a delay,” said Gretchen Livingston, a senior researcher at Pew.”

This is understandable.  But another more hidden reason has to do with the near religious idea that housing is always a great investment.  You have an entirely new generation of Americans who will never believe the hollow mantra that real estate only goes up.  There have even been articles talking about the new American Dream revolving around renting.  Times and motivations change.

Is There Such a Thing as Too Much Homeownership?

We found out that owning a home should be based on economic fundamentals.  For so long have we lived in this Wall Street bubble machine that people have forgotten what sound lending involved.  People fret about “high interest rates” shattering the housing market but back in the early 1980s people were still buying homes with double-digit mortgage rates.  Why?  Because prices still made sense and people came in with a down payment.  Today, we still have a market artificially being pumped up by the Federal Reserve.  Wall Street would like you to believe that things are so complex that only a Ph.D. can understand what is going on and therefore we warrant complex securities.  Nonsense.  We had over 150,000,000 Americans in 1950 and somehow boring banking and lending seemed to work.  And we certainly didn’t have a financial crisis like the one we just had that was the worst since the Great Depression.  We reached the apex of homeownership in this bubble and are quickly reversing course:

Source:  The Urban Land Institute

69 percent was the absolute upper-bound range.  And keep in mind what it took to get there.  This involved using every toxic mortgage product imaginable and actually creating rampant accepted fraud where people didn’t even verify incomes.  In fact, we had a period where you could structure a housing deal where you received money (i.e., cash back deals, 125% LTV products).  Wall Street knew this was the case and fueled the fire over and over so they could structure deals to keep the casino card game going.  Why?  Every person that wanted a home with good credit and income had one.  The next group was basically anyone that wanted a home irrespective of income and credit.  The birth of subprime, Alt-A, and other junk.  And these toxic products still linger on bank balance sheets even while they announce record profits:

Source:  OCC/OTS

Just look at the amount of active loans.  Nearly 20 percent of active loans fall in the Alt-A and subprime category.  The “other” category also has questionable loans.  So total that up and you have roughly 10 million active mortgages that fall in this risky category.  We have yet to work through this.  Banks keep announcing solid profits and putting on a smile for the public but behind closed doors they are keeping their money tight and are churning profits internally for their corporatocracy.  The last thing they are doing is placing a bet on the American people even though they have taken $13 trillion in bailouts and handouts.

For all the hype regarding loan modifications most are failing only after a few months:

After 9 months nearly half of modified loans re-default.  And this is what you would expect when 17 percent of the population is underemployed.  How are they going to pay their mortgage?  The problem of course stems from the inability to pay at nearly any cost.  That is why we have lost over 1 million households since the recession started.  People are moving in with friends, families, and consolidating households.  This too is another reason why new home formation will be lagging in the next few years.

All you need to do is look at those who have their ear to the ground, home builders:

That minor bump is merely the reflective reaction of cheap money trying to do something.  Yet you can see for yourself above that homebuilders are not optimistic about building to meet new demand.  And why should they?  A large part of the current sales are occurring with existing home sale inventory.  We have plenty of that to last us for years.

The massive concentration of all this debt is put into the hands of a few big banks:

Source:  SIGTARP

The top six banks in the U.S. control 60 percent of all banking wealth.  This in a market where 8,000 banks exist.  But that number is dwindling but only because those banks that are able to fail are doing so:

And this year is quickly outpacing 2009.  So banks are failing yet the too big to fail are turning giant profits even as we have shown, still have the bulk of toxic loans on their books.  At a certain point this has to break and as we saw with the case against Goldman Sachs, even the mere mention of shedding light on banking balance sheets is enough to cause a market tremble.  Why?  Everyone still understands that toxic debt is still alive and well.

What About Short Sales and Option ARMS?

There is this hype regarding short sales and how they’ll be a big factor in today’s market.  I highly doubt that.  Will we see more?  Of course.  But not enough to shift the dynamic of the housing correction.  All this will do is push more inventory out:

37,000 completed short sales in the last reported quarter.  Measure that with 128,000 actual completed foreclosures.  Foreclosures still dominate the market.  Until that foreclosure number settles down, the housing market will be in a complete state of flux.

The broccoli of the housing dinner plate, option ARMs is still alive and well.  It is still sitting there, waiting to be eaten after the steak is devoured.  Most of the over 536,000 option ARMs are in housing battered states like California and Florida.  Maybe this is why national attention has fallen by the wayside for this topic but these states should care because it is another shoe to drop.  And the data on these loans gets worse and worse:

34 percent of option ARMs are non-performing.  This is astronomical given that most won’t hit their recast periods until 2010 and 2012.  The data gets worse as time goes along.  There is little reason to believe that these will turn out to be good deals.  You’ll notice above how the number has quickly fallen.  Part of this is because of foreclosures but another reason involves banks shifting these loans into “other” categories like interest only loans but that doesn’t make them any better.  It buys more time.

Where Next?

Mortgages rates will rise and this seems to be an obvious reality that few even factor in:

Current rates are absurdly low because of the Federal Reserve monetizing debt.  They recently completed buying up $1.25 trillion in mortgage backed securities.  Why did they have to buy? Because no one else would buy this debt at this artificially low rate.  Even as early as 2000 the 30 year mortgage rate was close to 8.5 percent.  With current rates near 5 percent, people fail to understand how big a move back to 8.5 percent would be (the 40 year historical average is 9 percent).

How big is this difference?  For a $300,000 mortgage it works out like this:

@ 5% PI          =          $1,610

@8.5% PI        =          $2,306 (a 43 percent increase)

With household budgets running tight, this is a massive jump.  Current rates are unsustainable and by definition something that is unsustainable will change.

Next, you have many baby boomers remaining put because they have now had to reevaluate retirement options.  This was thought to be a new boom for vacation resort areas where many new condos went up.  Yet that vision isn’t coming to pass.  Right now, the market seems to be pushing sales by one person losing their home and another one picking that home up for a price that was unthinkable just a few years ago.  Yet all that does is churn current inventory.  No new home building and move up buying is stagnant.

The trend is rather clear.  Housing is in for a long and hard struggle.  Things are being held together with a thin string right now.  With so many balls in the air, it is hard to envision what breaks the current back of the system.  Wall Street hasn’t had any serious reform so there is no reason to believe that things are now somehow better.  In fact, the too big to fail have now gotten even bigger.  They are earning profits from merely stock market voodoo.  The real economy is still languishing and current home data tells us that story in vivid color.

3 Underground Real Estate Practices Moving the Market – Short Sale Fraud, Squatter Stimulus, and Buying Before Foreclosing.

Posted by mybudget360

In the early days of the housing bubble here in California and other bubble states a handful of people were raising alarm bells that mortgage fraud was occurring at unprecedented levels.  The housing industry initially came out skeptically stating this was only a handful of wayward people. As it turns out, it was the vast majority of the industry sticking people into the most toxic loans for the highest level of commission.  What was good for the borrower wasn’t necessarily what was the best for the mortgage broker’s bottom-line.  After the housing bubble burst, we realized the industry was corrupt to the core and that practices that were standard were largely a joke.  The housing market became one big free grab bag of money.  Some now think that we somehow have stopped this massive fraud but that is a big misconception.  The fix is in.

The irony of this bubble is the industry that created the housing mess (i.e., mortgage brokers, agents, appraisers, banks, and Wall Street) are now on the other end offering loan modifications and assistance on foreclosures.  Without any actual financial reform, those that perpetrated the crime actually have firsthand knowledge on what went wrong and are now working the other end of the con.  Let us first examine how many bad loans exist in the U.S.:

Source:  Census; MBA

The U.S. has 51 million housing units with a mortgage.  Another 23 million housing units have no mortgage.  A recent MBA survey shows that 15 percent of all mortgage holders are either in foreclosure or 30+ days late (7.7 million mortgages).  So in total over 43 million Americans with mortgages are paying on time but all current policy is guided by ignoring what is good for the middle class. Many of those 7.7 million loans are toxic loans and policy is being guided to protect the bottom line of the too big to fail who didn’t practice an iota of due diligence.  This is being subsidized by the prudent and those who are paying even though it is antithetical to what is good for them.

So the crux of the problem is how to deal with the 7.7 million homes in foreclosure or that are 30+ days late.  The HAMP program has pushed 168,000 mortgages into permanent modification but that leaves over 7.5 million mortgages in distress (and more are entering foreclosure each month).  Leave it to the housing industry experts to create additional levels of fraud to siphon off money from the average American.

Con #1 – Short Sale Fraud

Part of the new “help” coming down the pipeline is HAFA.  This program is designed to grease the wheels of short sales this year to get those distress properties moving.  The central force with HAFA is getting second lien holders to let go of their rights on second mortgages to allow the first lien holder to sell a property.  The low $1,000 incentive will not move the market.  Short sales have been a tiny part of the market in the last two years so why are we to expect $1,000 is going to make this a big game changer?  Keep in mind that in places like California, those second mortgages can range from $50,000 to $200,000 or even higher so banks would rather pretend that loan is worth the book value instead of forcing a major write down.

But the major fraud in short sales occurs off the balance sheet:

“(CNBC) But here’s what’s not legal and what’s apparently happening quite often recently. Since many second lien holders are getting very little, they are now allegedly requesting money on the side from either real estate agents or the buyers in the short sale. When I say “on the side,” I mean in cash, off the HUD settlement statements, so the first lien holder doesn’t see it.

“They are pretty clear and pretty upfront about the fact that if the first lender knows they are getting paid, the first lender will kill the short sale,” says Brandt. “So these second lenders are asking for the payments off the closing documents, off the HUD statement, usually in a cashiers check prior to closing. Once they receive that payment, they will allow the short sale to go through, which according to RESPA laws and the lawyers that we have spoken to on the topic is not legal.”

This is absolutely illegal.  Anyone that has been in a real estate deal realizes that the HUD settlement statement accounts for every piece of cash or like money in the transaction.  What the above amounts to is a form of extortion.  The second lien holder is saying, “give us money under the table or we won’t allow the deal to happen.”  In 2009 it appears that 12 percent of all sales were short sales.  How many had fraud involved?

Another fraud with short sales occurs with the real estate agent doing a quick flip.  Say for example a home has a mortgage of $150,000.  The agent negotiates with the bank a $100,000 short sale but has a buyer willing to pay $140,000.  He then brings the property under contract for $100,000 then quickly flips it for $140,000.  This of course is highly illegal and many buyers don’t even realize this happened unless they carefully scrutinize their records.  During this housing bubble how much due diligence occurred?  Short sales are designed and setup for massive amounts of fraud.  Since we haven’t had any sensible regulation in virtually any industry expect this con to go on for some time.

Con #2 – Squatter Stimulus

It isn’t just toxic loans going bad but also prime loans.  Outside of Wall Street the economy is in bad shape:

Source:  HousingWire

Loans are going bad across all categories.  And as many Americans struggle with the reality of 17 percent underemployment making the mortgage payment is becoming harder and harder.  But there is something dubious going on.  Banks are no longer going through with the foreclosure process in any stated timeline.  In fact, you can live rent free for many months:

“(HousingWire) What the above chart should call attention to is the aging of loans in the default pipeline. Again using LPS data, for all loans more than 90 days in arrears, the average days delinquent is now at 272 days—up from 204 days in early 2008. For loans in foreclosure, the aging numbers are even more staggering: loans in this bucket average 410 days delinquent, up from 260 days delinquent in early 2008.

Ponder those numbers for just a second. On average, severely delinquent borrowers have gone more than 9 months without making a mortgage payment—and yet foreclosure has not yet started for them. For those borrowers who are in the foreclosure process, it’s been an average of 13.6 months—more than one full year—since they last made any payment on their mortgage.”

Now think about that.  The average foreclosure timeline is now 13.6 months.  Imagine what this does.  Let us say you bought a home in California for $500,000.  It is now worth $250,000.  Your mortgage payment on your toxic loan is $4,000.  You don’t qualify for HAMP or any other modification.  You decide that you will strategically default.  Now, you’ve freed up at least one year of no housing payment.  This will give your balance sheet a new cash flow of $4,000 for whatever else you want to do.  Even renters have to pay something.  It is interesting that banks seem fine with this because the majority of Americans who are paying on time and bailed out Wall Street are subsidizing this kind of action (remember mark to market being suspended?).  Aren’t you glad your tax dollars are going to things like this?

“(WSJ) Mr. Fernandez says he made four attempts to modify the larger of the two mortgages on his home, which add up to $423,000. Ultimately, he was offered a monthly payment that, together with back taxes, was higher than what he had been paying. Today he’s working to partially reimburse his lenders, IndyMac Bank (now OneWest Bank) and American First Credit Union, by selling the home, which he expects to fetch about $300,000.

A spokeswoman for OneWest Bank said the bank “offered Mr. Fernandez the lowest payment possible under the [Federal Deposit Insurance Corp.] loan modification guidelines.” A spokesman for American First said the company always seeks to help clients stay in their homes.

With an income of about $8,300 a month and a rent of $2,200, Mr. Fernandez says he now has the wherewithal to do things he couldn’t when he was stretching to pay the mortgage. He recently went to concerts by Rob Thomas and Mat Kearney. He also kept his black BMW 6 Series coupe, which has payments of about $700 a month.”

Loan Modifications at Work

Now when was the last time your bank offered you a modification for paying your mortgage on time?  We must be happy that we are allowing some of these poor homeowners to keep their BMWs.  Your tax dollars at work.

Con #3 – Buying Before the Foreclosure

Another big issue in areas where prices have fallen includes buying before the foreclosure.  Many already know they are purposefully going to strategically default.  They also realize their credit will be damaged for a few years.  So what is done is this. Say this person bought a home for $600,000 at the peak.  These properties are now selling for $300,000.  The owner already has made up their mind that they are foreclosing but like their area.  So what they do is they purchase the second place for $300,000 while their credit is still good and then let the first place default.  End result?  They now have a mortgage obligation of $300,000 and that $600,000 property goes back to the bank (which is subsidized by the trillions in bailouts).  These are the kind of cons that simply are not reported and are happening more than you would expect.

Conclusion

What we should learn about this housing mess is that people need to come in with a sizeable down payment of their own money.  When I say sizeable I mean at least 10 percent of actual saved cash.  The big game in town now is FHA insured loans that now make up 4 to 5 loans out of every 10.  And these only require 3.5% down but with the current buyer credit, many are buying with zero down.  And what a shock that these are now going bad:

“NEW YORK (CNNMoney.com) — The recent spike in the number of delinquent Federal Housing Administration-insured loans has some people worried that taxpayers will eventually have to bail the agency out.

Seriously delinquent FHA loans, those 90 days or more late, jumped 62.1% in the past year to 558,944, or 9.4% of FHA loans, as of the end of January, according to agency statistics released on Friday.”

And this will setup even more cons like the cases we described above.  If you bought a place for say $200,000 and you had to put $20,000 of your hard earned money in, you would think twice about leaving.  Plus, you have a nice equity cushion.  But say you go with a 3.5% (down payment $7,000) but the current buyer credit is $8,000 so you are paying zero when all is said and done.  You will be more apt to walk.  But again, this is a Wall Street subsidized con game and the majority of the prudent average Americans are getting taken for a walk on both ends of this crisis.

From Diana Olick at CNBC: Bank of America: 2/3 of Borrowers May Lose Mods (ht montas ankle)

[Jack Schakett, credit loss mitigation strategies executive at B of A.] told me that of the 65 thousand trial modifications set to expire Dec. 31st with B of A, a full two thirds of the borrowers, while current on their payments, have not submitted the full documentation required to turn a trial mod permanent under the HAMP guidelines.

“We don’t really know the major reason why the customers are not returning the documentation,” Schakett claims.

Borrowers are complaining that the banks are losing documentation and that they have to submit it multiple times. Ms. Olick also suggests the possibility that some borrowers can’t document their income.

BofA’s Mr. Schakett said it was too soon to know why the documentation is incomplete, but this suggests that the number of permanent modifications announced this week will be very low (in the 10s of thousands).

CR Note: This is a guest post from albrt.

MERS v. Kansas

Although the internet discussion has died down considerably, I thought it might be helpful to offer some background and some explanation of what happened in the recent Kansas MERS case. I am not involved in the case, but I used to read Tanta’s posts about this sort of thing and I did some research, so I guess I am well-qualified to opine.

What is MERS?

MERS is part of an attempt by bankers to homogenize mortgages so they can be traded among banks more easily. In many cases the ultimate goal is to bundle the mortgages into bonds. From the MERS website:

About MERS

MERS was created by the mortgage banking industry to streamline the mortgage process by using electronic commerce to eliminate paper. Our mission is to register every mortgage loan in the United States on the MERS® System.

MERS acts as nominee in the county land records for the lender and servicer. Any loan registered on the MERS® System is inoculated against future assignments because MERS remains the nominal mortgagee no matter how many times servicing is traded. MERS as original mortgagee (MOM) is approved by Fannie Mae, Freddie Mac, Ginnie Mae, FHA and VA, California and Utah Housing Finance Agencies, as well as all of the major Wall Street rating agencies.

Got it? I didn’t think so. MERS’ claim that its loans are “inoculated against future assignments” is an unmixed, but also unenlightening metaphor. Inoculation most commonly means exposing someone to a pathogenic organism or other immunologically active material in order to promote the development of antibodies. I can’t think of anything in the MERS process that can be profitably compared to either a pathogen or an antibody.

What actually happens is that a MERS mortgage is recorded once, usually with MERS shown as the “nominee” of the lender. MERS then tracks loan assignments, including both repayment rights and servicing rights. The output of the tracking system is approximately as good as the input from the lenders. When something happens, MERS is supposed to notify the interested parties.

In some cases MERS will act for the interested parties in lawsuits. If a MERS lender wants MERS to file a foreclosure suit, the lender is supposed to find the original note, endorse it in blank, and give it to a certifying MERS officer before the foreclosure is filed. That makes MERS a “holder” of the note, even if MERS is not actually the owner of the note. Being a holder is generally sufficient to allow MERS to foreclose.

Tanta explained how endorsement works here. MERS apparently has more computers involved, but when it comes time to produce the note in litigation it still amounts to pretty much the same thing. Pathogens and antibodies aside, MERS can’t really provide protection from all the potential errors and problems that came up when loans were being traded and securitized at warp speed all over the country. Many of the cases where MERS has gotten in trouble involved a misplaced note, but it is generally not clear that the problem was MERS’ fault, and it is not all that much different from what happens when a non-MERS lender files a foreclosure suit without having the original note handy.

This should be enough background to understand what happened (and did not happen) in the recent Kansas Supreme Court case.

The Kansas Supreme Court case

In Landmark National Bank v. Kesler , Landmark held a first mortgage and foreclosed on Mr. Kesler’s property. Landmark obtained a default judgment and was able to sell the property for more than the balance due on the first mortgage.

There was also a second mortgage on the property. The document for the second mortgage showed an outfit called “Millennia” as the lender, and showed MERS as the lender’s nominee. The document said notice should be sent to the lender, and did not say much about the nominee. Landmark sent notice of the foreclosure suit to Millennia, but not to MERS.

As it turned out, the second mortgage had been sold to an outfit called “Sovereign,” so Millennia no longer had an interest in the case. After the foreclosure judgment and sale, but before the distribution of the proceeds from the sale, Sovereign entered the case and tried to set aside the foreclosure judgment. Sovereign’s problem was that it never recorded anything to show that it held an interest in the property, so it really didn’t have much of an argument that it was entitled to notice of the foreclosure.

In order to address this problem, MERS joined in the case a couple of months later. MERS was essentially on Sovereign’s side, arguing that even if Sovereign wasn’t entitled to notice, MERS was on the original mortgage and was entitled to notice, and MERS would have notified Sovereign if MERS had received notice.

Not surprisingly, the judge held Sovereign was not entitled to notice because it didn’t register the assignment of the loan in the public records. The judge also held MERS was an agent of the lender at most, and did not have a sufficient interest to be able to show up late and overturn the judgment.

The Kansas Supreme Court upheld the judge’s decision, based in part on the conclusion that MERS didn’t own an interest in the note or the mortgage. This is what got a lot of attention on the internets, but most commentators seem to have missed the point. The court did not say the mortgage was invalidated because MERS separated the mortgage from the note. The court said MERS did not appear to own either the mortgage or the note. Part of the reason for the court’s conclusion was that you can’t separate a mortgage from the note it secures.

The key to the Kansas decision, like most judicial decisions, is in the details. The actual mortgage document required notice to the lender, not to MERS. The mortgage document listed MERS as a “nominee,” but never really defined what a nominee was or provided any basis for arguing that a nominee is entitled to notice above and beyond the notice given to the lender.

The only broad effect of this decision is that the court refused to make a special exception for MERS mortgages and require precautionary notice to MERS regardless of what the document said. Most MERS mortgages do say that MERS should get notice. If the mortgage document says that, most courts will enforce it.

There are other cases discussing MERS, some of which provide more general information than the Kansas case. One I would recommend is a decision by bankruptcy judge Linda Riegle on a group of bankruptcy cases in Nevada. The essence of Judge Riegle’s decision is that MERS isn’t entitled to any special status, and needs to have the note in order to take any action on it. The decision is available on Westlaw under the name Hawkins at 2009 WL 901766. Substantially the same decision is publicly available under the case name Mitchell, No. BK-S-07-16226-LBR .

What is the problem?

Mortgages are complicated. Most mortgage primers start with the distinction between states maintaining a “title” theory of mortgages and states maintaining a “lien” theory. This is mostly nonsense, as summed up by an eminent commentator nearly a hundred years ago: “There is no complete adoption of a logical theory in any of the American jurisdictions.” Manley O. Hudson, Law of Mortgages Real & Chattel, in 8 Modern American Law, at 297 (E. A. Gilmore & W. C. Wermuth eds. 1917).

So there are really two basic problems reflected in the MERS cases: (1) mortgages are complicated, and (2) the creation of MERS did not really reduce the complications, it just papered over them.

1. Mortgages are complicated

Mortgages are not homogenous. Not at any level. The borrowers are different, the mortgaged real estate is different, the practices of the banks are different, state laws are different, and federal government involvement is different for different types of lenders and borrowers. An important corollary of principle number one is that whatever a lender does, and whatever MERS does on behalf of lenders, will have different effects in different cases.

As Tanta wisely noted a few years ago, it is very difficult to see how an increasingly centralized industry can deal with all these details, and do it cheaply enough to make a profit when interest rates are at five percent and spreads are thin. In order to do it cheaply enough, the industry got rid of most of its Tanta-caliber people and replaced them with inexperienced temps, or perhaps with MERS. The main reason it worked for a few years was because problem mortgages could be refinanced so easily, and fees could be charged for each refinancing.

2. The creation of MERS did not really reduce the complications.

MERS undoubtedly provides some useful services to banks, but it does not “inoculate” them from dealing with necessary administrative costs. The administrative costs, especially in a lousy market, will probably make high-velocity mortgage loan trading and securitizing an unprofitable venture. As Tanta said, “the true cost of doing business is belatedly showing up.”

The goal of the people who created MERS was to design a system that has traction in local recording systems, and is flexible enough that it could be made to work under the law of every state. The MERS system probably meets this goal when it is done right. In theory, using the term “nominee” gives MERS flexibility in defining the duties and obligations of the relationship. It may also give MERS some flexibility in explaining how the court should treat a nominee after something has gone wrong, as the law of the jurisdiction or the facts of a particular case seem to require. Unfortunately for MERS, experienced judges are wise to this trick and will most likely to continue placing reasonable limits on the ability of MERS to claim it is all things to all lenders.

But setting all the cleverness of the MERS system aside, the system still requires the last lender in the chain to endorse the note over to MERS before the foreclosure can begin. If the lenders have been ignoring their paperwork because they think they are “inoculated against future assignments,” it is possible the lenders are worse off than they would have been without MERS. From what I can see, that is not the case. The way lenders were acting in 2005, if left to their own devices they would probably have lost about 90% of everything. With MERS, they probably did better than that.

So is this a nothingburger?

Sort of. MERS isn’t obscuring land titles in a way that will interfere with future transactions. If a mortgage is paid off, it should be released in the local public records. The odds that somebody screwed something up may go up a little or down a little, but a title company should be able to insure any subsequent sale.

We can also be reasonably certain the MERS cases are not going to invalidate millions of mortgages at one swipe. Because mortgages are complicated, whatever a lender does and whatever MERS does on behalf of lenders will have different effects in different cases. Most of the problems can be attributed to non-standard mortgage documents, poorly drafted foreclosure complaints, or foreclosure complaints filed prematurely without verifying the status of the mortgage and who is holding the note. These problems affect non-MERS lenders in more or less the same way they affect MERS lenders. Having MERS involved might help get things straightened out in some cases, or it might make the problem worse in some cases.

I think the important question is whether, on balance and in the aggregate, the MERS system works well enough to allow lenders to re-start the private label securitization money machine in a few years. I think the answer is probably no.

Of course, since the residential lending industry has effectively been nationalized, it would not be particularly surprising to see fundamental change on a national level that would allow the resumption of securitization. But that would probably bring us back to something like the plain vanilla Fannie and Freddie system that existed before 2000, not the insanely profitable liar loan system that Wall Street had created by 2005.

This post is intended as a tribute to Tanta, who already wrote pretty much everything you need to know to understand these issues, and did it much more cleverly than I can. I have not been able to read all the comments recently, so I apologize if I have inadvertently stolen anyone’s ideas besides Tanta’s.