Bank of America, the country’s largest bank, said on Friday that it was halting foreclosures in all 50 states indefinitely.

The action is likely to increase pressure on other lenders to declare their own moratoriums. Lawmakers and state law enforcement officials have been widely calling for such halts.

The banks were criticized when they resisted modifying past due home mortgages when the loan balance significantly exceeded the value of home.  The banks were urged to modify those loans because it seemed that it was the best and only way for the banks to avoid taking huge losses on the loans.

The question was: Why not modify a loan at face value rather than foreclosing on the house and usually losing something like 50% of the amount of the loan? If only 25% of the modified loans work out the banks are better off. This is the process used to handle most troubled commercial real estate loans.

We know the banks flunked underwriting home loans. We knew that they were unable or unwilling to modify troubled home mortgages.  We heard that they were not equipped to manage bank owned properties. Now we learn they can’t even manage the foreclosure process.

According to the courts in 23 states, in certain cases the banks made false statements, forged signatures, did not properly notarize signatures on foreclosure documents, and generally made a huge mess of the process.

The mess is big enough that more than 100,000 foreclosures have been halted.  Some title companies are refusing to write title insurance on previously foreclosed homes. Some homes may be returned to the former previously foreclosed owners.

Three major mortgage lenders; Bank of America, GMAC Mortgage and JPMorgan Chase reported they are suspending foreclosures in the 23 states where a judge’s approval is required. In these states, they are also asking Fannie Mae to refrain from selling any of the foreclosed homes whose loans they sold to Fannie.

This whole mess will become a bigger problem if the courts find it impossible to determine who owns the mortgage on an individual home.

In some cases, the banks have outsourced the servicing and ministerial work of processing loans, including foreclosures, to the lowest bidder. No one knows if the banks have hired loan servicers and lawyers from China, Mexico, or India but nothing seems to be off limits if it is cheaper.   

It is time for the banks to be responsible for their mortgage loan business and hire competent firms or employees to service the business.  The banks are killing their reputation, the American public is quickly losing faith in these institutions, and the subsequent mess will clog the courts for years with mortgage litigation.

• Experts now project that a higher percentage of home loans in excess of $1 million will default than home loans under $1 million. The banks and Wall Street have turned the sub-prime mortgage problem into a super-prime mortgage problem.  Underwater homeowners with the cash to pay off their home loans are also defaulting and are called “Strategic Defaulters”.
• The subprime AAA CDO’s became worthless as defaults climbed.
• Case and Shiller, who publish housing information, projects that it will take years, maybe 10 years before the housing market recovers.
• Huge numbers of homeowners are in dire risk of foreclosure; South Florida foreclosures are up 80% from last year. 
• The Obama Administration’s program to help homeowners is a failure. It is very difficult to help an unemployed homeowner when their house is worth less than the mortgage loan.  The banks were no help even though their investors take huge losses when they finally foreclose.
• Housing starts are at an all time low even though housing prices are up some 3.5% over a year ago in the top 20 U. S.  Housing markets.
•  Fanny Mae and Freddie Mac guaranteed 60% of mortgages and have taken big losses.  Both entities are in conservatorship and are expected to be liquidated.  Current losses are approximately $150 billion and are expected to exceed $390 billion or more.  Many real estate experts don’t think the markets will function without Fannie Mae and Freddie Mac.

What Should We Do?

We can’t do much about the construction business and housing markets.  There is no way to stimulate demand until more people are employed, are confident in the economy, and we absorb the oversupply of housing. 

No one really wants the government to be the solution; however, we all expect for the Federal Government to have the answers. We measure our economy during recessions through the unemployment numbers and that is the way we are measuring this recession. 

What can we do about unemployment?

 Unemployment is officially at 9.5% but many believe it is really worse.  Domestic construction workers amounted to 11% of the US workforce in 2008. Many believe we have lost at least ½ of the construction workers since the bubble burst. Most of these jobs will not come back for at least 5 to 10 years because of the oversupply of housing and the economy.

Most of our manufacturing is outsourced to China and Asia; our clothing is made in Thailand. If you have a technical computer question, the person answering the 800 number you call is usually in India. As an example, paper mills are closing in the U.S. and are being replaced with mills in China. The mills in China have the latest mechanized equipment paid for by the Chinese government. They pay their workers $45 per week with no medical benefits, vacations, or severance pay.  Can we compete with that? Not until their workers demand and are paid more. That will take time.

The Democrats want a stimulus bill to stimulate employment; the Republicans advocate tax breaks for the investor class so the U.S. will have more investment capital. All that sounds fine; but, if the investment is in equipment in Asia and the jobs we create in the US are at McDonalds, Wal-Mart or in Asia; we are not improving our lifestyle or solving our unemployment problems.  

At the same time, we are fighting two wars where the most of the jobs we create are in Afghanistan and Iraq.

• My first suggestion is to cut overseas military expenditures dramatically unless we can prove that the expenditures are actually making us safer.  I am talking about NATO, Korea, Afghanistan, and Iraq and anyplace overseas.
• Next, we should rescind the Bush Tax Cuts for the investor class.

Then, we should take the savings from both sources and design targeted tax cuts, tax credits and other incentives to entrepreneurs and businesses that create new jobs in America. These tax cuts and incentives should actually generate more income and tax receipts as they are implemented.

Most of the emphasis should be placed on areas where we need solutions; high tech, green energy, energy conservation, more energy efficient houses and buildings,  energy efficient lightening, etc. 

However each tax cut, credit, or incentive must create job in the US.

Enough is enough; I think our representatives should spend more time working on solutions rather than slogans and speeches.  It is time to fix our country and its economy.

Economy Shattered-Dreams Destroyed, Jobs lost and Homes Foreclosed

Was it a bird, a plane or a tulip? No, It wasn’t Tulip Mania or the South Sea Bubble. It was our own invented in the U.S. “Housing Bubble”. Housing prices went up 25% between 2002 and 2006 and fell 30% since then. Housing starts have cratered.  10% percent of US workers are unemployed and the unemployment rate is effectively higher.  Foreclosures have soared and as many as 10% of US homeowners are expected to lose their homes. Many people’s retirement plans are worthless and families are overwhelmed with debt.  Merrill Lynch failed, Lehman went bankrupt and Bear Stearns is just a memory.  Bank of America and Citibank continue to wobble as they deal with housing and credit card losses.

US Debt climbed during 2000’s and helped fuel the housing bubble.  As tax revenues fall, unemployment benefits increase, and the government attempts to stimulate the economy; the U.S. Debt heads to record levels.  60% of the U.S. thinks unemployment is our major problem and 40% think the national debt is the real problem. 

Most People Missed the Signs

David Lereah, former chief economist of the National Association of Realtors (NAR), distributed “Anti-Bubble Reports” in August 2005 to “respond to the irresponsible bubble accusations made by your local media and local academics.”

Former U.S. Federal Reserve Board Chairman Alan Greenspan said “We had a bubble in housing”, and also said in the wake of the subprime mortgage and credit crisis in 2007, “I really didn’t get it until very late in 2005 and 2006.”

He was better than some; In July of 2010, Phil Gramm, John McCain’s economic advisor said that we were in a mental recession and that our economic problems were caused by a bunch of whiners.  He added that McCain would implement a program of reduced taxes and spending.

Why didn’t we see the crisis coming and take steps to head it off?  The crisis was not obvious to the general public until the summer of 2008 or later. However, the housing bubble was obvious to many people including speculators such as John Paulson who made millions of dollars at the expense of certain banks and their customers.

 There were some clues:

• Housing prices peaked in 2005 after increasing by 25% in early 2000’s
• November 2006 new home permits dropped 28% from year before ( a big clue)
• The subprime mortgage industry collapsed in March of 2007 because of record defaults.
• On December 30, 2008 the Case-Shiller home price index reported its largest price drop in history (an even bigger clue).

What happened?

• The Federal Reserve and the administration kept interest rates low to fight any sign of recession
• Congress lowered taxes on investors to increase supply of investment capital.
• Oil money from the Middle East flooded in looking for a place to invest.
• We had a huge increase in the supply of low cost money all chasing a return on their investment Government bond were at 4% to 5%, prime mortgage loans were at 7.5% and subprime loans were yielding 10%.
• If you pooled the subprime loans and sliced and diced them so they could be rated; the ban

Low cost money was flooding the markets and Wall Street came up with a high profit plan to help the investors find a new place to put their hot money.

The bankers had an all American plan:

• Wall Street convinced the rating agencies that a pool of subprime loans placed into a tranched mortgage pool or CDO qualified as a “AAA” investment as long as the originator diversified the risk geographically and set aside a tranche of about 15% of the pool to protect the AAA investor from defaults.
• A pool of tranched, sliced, rated subprime loans enabled the banks to make an additional 5 basis points; an extra $50,000 for every $1,000,000 pooled. Many were placed in pools called CDO’s. The CDO’s enabled the banks to put other loans, other mortgages and credit card paper in the CDO’s.
• Wall Street devised the Credit Default Swap that enabled banks and investors to buy a type of credit insurance that spared them the task of checking out or doing “due diligence”,  on the portfolios.
• Unscrupulous mortgage brokers found that they could falsify loan applications because no one performing due diligence. 60% of subprime loans were originated by independent mortgage brokers rather than banks or S & L’s.
• Subprime loan originations increased from $160 billion in 1996 to $600 billion in 2006.
• AIG sold a record number of Credit Default Swaps.
• The Wall Street guys invented the Synthetic CDO’s and mortgage pools using Credit Default Swaps. With a Synthetic CDO or mortgage pool, a bank or investor could bet on the market without having to actually buy or sell all those mortgages.  The Synthetic CDO, which was also rated, simply tracked an existing CDO. Wall Street issued more Synthetic CDO’s than regular CDO’s. One of the nice things about regular mortgage pools and CDO’s is that they actually funded real home building.
• Bankers could buy CDO’s at a 6% return; buy a credit default swap that protected them from loss for ½ % per year and make money by borrowing all the money at a rate of 3% to 3.5% per year. The Banks could make $2 million per year for each $100 million of subprime loans they purchased if they financed 100% of the purchase. Demand soared for both real and synthetic mortgage pools and CDO’s.

Everyone was happy. The mortgage brokers made big fees. The Wall Street Banks made record profits, individual bankers made million dollar bonuses and guys that never owned a home had a home with a pool. The average American felt wealthier because of the appreciated value of his home. Many Americans took out second mortgages and spent the money on everything from breast implants to new cars.

What Happened to All that Pretty Music?  

• First the subprime loans started defaulting and the default rate quickly went to about 40% and higher.  The 15% cushion made no difference. Mixing Arizona and Florida loans with Detroit loans did not help either.
• The banks obscured the losses as long as possible and claimed the Credit Default Swaps protected them against loss.
• Credit Default Swaps defaulted.
•  The panic spread to US businesses
• Housing prices dropped from 30% to 60% from their peak value and 25% of all home loans were underwater.
• The newly unemployed homeowners whose home was often worth 25% less than their mortgage loan and they began defaulting in large numbers.

Where Are We Now- Next Post

Third-quarter results were largely due to $22.0 billion of credit-related expenses, reflecting the continued build of the company’s combined loss reserves and fair value losses associated with the increasing number of loans that were acquired from mortgage-backed securities trusts in order to pursue loan modifications.

Servicers make more money on foreclosures than on mortgage modifications. They collect more fees on a foreclosure and they don’t need to hire more staff. So the servicers are not that motivated to modify home loans.  

A recent report titled “Why Servicers Foreclose, When They Should Modify and Other Puzzles of Servicer Behavior states  “And it’s pretty clear that servicers are more certain to recover their money and thereby make a profit better, if they foreclose, than if they modify.”

The paperwork requirements for loan modifications are a problem. It takes 45 pages of home owner paperwork to document a loan modification request. Then the bank sometimes loses the papers.

 The process is not at all transparent. The servicer does not have to disclose their reason for turning down a loan modification, their assumptions or the result of their Net Present Value test. The NPV test is required for a loan modification.

 Banks own about 20% of the $11 Trillion in home mortgages. $7 Trillion or 65% of all home loans are guaranteed by FNMA, GNMA, and FHLMC. The Federal Government has a strong moral obligation to support the agencies. So the Federal Government is very motivated to keep home loan losses at a minimum.   

Investors in home loans are usually against the modification of home loans. 

Investors in home loans are concerned that a loan modification will 1) jeopardize their claims against the originators, often also the servicer, of the loan or 2) delay their action against the loan guarantors.

The beat goes on and on. More mortgages are 90 days or more past due. Lenders are not filing foreclosure suits at the pace the past due loans are piling up.  The government pushes loan modifications while servicers resist performing loan modifications.

GNMA, FHLMC, FNMA, Investors and homeowners seem to have the most to lose while the Investors and the Servicers sue each other while the government dithers.

We have concluded that the servicers need some sort of legal protection from the owners of the home loans. The servicers report that they are being sued by home loan owners (“Investors”) when they modify loans and the courts are supporting the Investors.

 Most of the servicers are banks regulated by the U.S. Banking authorities but most of the loans are owned by entities other than U. S. banks. At this time, the non regulated loan owners or Investors believe they are damaged by loan modifications. This may change when they discover the extent of their losses but at this time they are telling the servicers they don’t want them to modify home loans. The Investors have gone to court in several high profile cases and have won most of the court cases.

 The servicers tell us the Federal Judges do not listen to arguments about the HAMP loan modification rules and kick the cases back to the State Courts who then authorize the foreclosure pursuant to state laws.

 In a recent case between Countrywide (and Bank of America since they purchased Countrywide)  and the owners of the 374 Countrywide loan pools, the judge ruled against Countrywide. This case has really spooked the servicers. The case was filed when Country Wide now Bank of America agree to modify thousands of mortgages written by Countrywide in a predatory lending settlement agreement with 11 state attorney generals.

 In this case and in many cases, Countrywide/Bank of America wore two hats, they produced the loans and they serviced the loans. Countrywide/Bank of America now owns a very small portion of the loan pools. The Investors wanted Countrywide to buy back the loans pursuant to a buyback clause in the mortgage security agreements; Countrywide as servicer used the immunity granted servicers under the loan modification legislation as a defense against having to buy back the loans. The judge said that the immunity granted under the modification legislation did not prevent Countrywide’s Investor’s from enforcing the terms of the mortgage securities contracts.

 To complicate matters, servicers have a duty not to do anything that jeopardizes the income stream to the holder of the loans or securities.                                                                                        

The problem is that banks who originated poorly underwritten home loans are trying to use the loan modification laws to avoid liability.  The Investors who purchased the loans are trying to sabotage the loan modification program so they can collect from the banks that originated or pooled the loans.

 In either case the U.S. tax payer loses. If the Investors take down Bank of A because of Countrywide’s possible fraud or if the Investors stop the loan modification process, then, U.S. home owners lose.  You can bet that both parties will come up with real some self serving recommendations.  

 Choosing winners in this deal is like trying to decide whether to root for Frankenstein or Dracula in a wrestling match.

 The court system will take years to sort this out, so we can’t wait for that. It is up to Congress to make some rules.

 Zillow cited a recent study by Amherst Securities Group that showed higher delinquency rates for underwater mortgages  and the strong relationship between increased negative equity and the decreased probability of resolving delinquency status when the loan is underwater.

 As of the end of the second quarter of this year, Zillow estimated that 23 percent of single-family homes with mortgages are underwater, indicating that cure rates are likely to remain lower than than historical cure rates.

The problem is that many former high earners are making much less money even though they are still on the employed list.  Typically, these homeowner’s income is down from the $250k range to $60k per year; their house payments plus  taxes and insurance plus POA dues in $4k per month range.

The responsible borrower does not want to walk out on their lender but if  the lender trashes their credit rating while jerking them around on a loan modification, then, that homeowner will often make the bank foreclose or agree to short sale.  Often the bank will lose a couple of hundred thousand on the foreclosure.  

The overwhelming majority of homeowners think the banks are purposely deceiving them and are incompetent.  This this happens because the banks have not  trained their collectors to deal with then new market realities.  

I predict  this will  be a big customer relationship and political problem for the banks in the future.

BofA has doubled the number of employees handling loan modifications to 11,000, and the bank still has 240 openings.

Wells Fargo hired an additional 5,800 employees for loan modifications.

Citigroup increased its loss-mitigation department from 450 employees in early 2008 to more than 4,000.

Alt first B of A took a slow cautious approach, requiring that borrowers document their income and complete other paperwork before granting preliminary approval for a modification. In August they eased the requirement and began authorizing some modifications without getting all the documents first.

B of A erroneously wrote a letter to eligible customers that gave them false information about the requirements and suggested BofA was not participating in the program, according to the Post.

A big problem is that BofA more than doubled its mortgage portfolio with the acquisition of Countrywide. 

Bank of America has a lot riding on the foreclosure prevention program, the newspaper said. The company stands to collect about $6 billion – some of which will be passed on to investors – of the $75 billion the administration has set aside for the Making Home Affordable program.

As You Might Expect-Losing your Job is Killer Problem

Successfully modifying loans has proved elusive at times because of multiple factors, including under-trained negotiators, lost paperwork and foreclosure proceedings inadvertently begun before trial loan modifications.  

Modifying mortgages for the unemployed can be ineffective if their income is insufficient to pay even the reduced payment of the modified loan. “When people don’t have any income, then it becomes really, really tough,” said Deputy HUD Secretary Ron Sims recently. Few servicers will offer loan modifications to the jobless.

Will the Pennsylvania Solution Work?

However, there is a solution that has yet to be tried but has worked in past. That is to provide loans directly to unemployed homeowners to pay their mortgages until they get back to work. The state of Pennsylvania has a program enacted in the severe recession of 1983 that does just that. The Homeowners Emergency Mortgage Assistance Program (HEMAP) has provided loans to over 43,000 homeowners since 1984 at a cost to the state of $236 million. Assisted homeowners have repaid $246 million to date, which works out to a $10 million profit for the state after 25 years of helping families keep their houses. To be eligible for HEMAP, homeowners must be in default through no fault of their own and have a reasonable prospect of resuming their mortgage payments within 36 months. Repayment is a token $25 per month until the family has sufficient income to pay their existing mortgage and begin to reimburse the state.

I think you should expect more action from the government. There is a huge amount of heat from the public to help individuals rather than banks or companies. People are tired of hearing about big bonuses for banks who were beneficiaries of bailout money, such as Goldman Sachs, whose employees earn an average of $600,000 per year. At the same time, traders such as Rick Santelli on CNBC call ordinary Americans “Losers”. The traders who played their role in this economic fiasco don’t like the banks either but they reserve their real scorn for Americans whose employers had a bad business plan. Of course, any support they have received was earned.  

http://www.youtube.com/watch?v=bEZB4taSEoA&feature=related

Back to subject; Remember, nobody has the loan modification approval process nailed down but if it fails we are in big trouble.

I have read several CDO prospectuses.  When you play with that stuff you really need a lawyer to review the docs to see if your financial play has any legal holes in it.  Then, if the assets are home mortgages you still have to worry about Barney Frank and Congress.  Will they let you enforce your legal rights???  

Our Response to Barney Franks Comment

The big questions with respect with concept that Barney Franks will not let banks enforce their legal rights are:

Should Feds push mortgage modification or force foreclosures? Is it good for banks, homeowners or the economy?

The Too Often Normal Fact Situation

Initial Home Value at time of loan-$210,000,Loan -$200,000, Current home value-$147,000 (30% loss in value), Foreclosure Costs-$60,000, Sales Cost-$8,800, Estimated net value 78,200, Total Loss  $121,000.

Case Shiller projects that values will go down another 20%.

Is it best for banks to exercise legal rights and take the $121,000 loss?  Will losses be more in future if they modify notes or will losses be less? Many borrower’s income has significantly declined plus US home prices are down an average of 30%.

What is best for homeowner?  Is it  to  pay smaller payments and stay in home; or give it back to bank and rent?  I am more familiar with Florida market where you can rent a home or condo for much less than the modified house payments would be. In many cases, the homeowner’s credit rating has already been beaten to death and they really have little to lose by letting bank foreclose. Banks are not able to obtain a deficiency judgment in FL. If homeowners agree to modify their loan, they still own the bank the full amount of the loan even if the loan is much more than the value of the home.

 What is best for economy and banks? Most likely it is to modify notes to keep home prices from really nose diving.  At best the market is more orderly if homes are sold over a period of time. At worst, the losses will be greater if prices continue to decline.

 My advice to most homeowners is if their house is down 40% in value or more and their credit is already trashed, then, let the bank have the house. The homeowner should offer to short sale the housat market value if the bank will agree to forgive debt. A short sale allows the bank to save on foreclosure costs; otherwise, have them foreclose.

 Many banks have resisted modifying past due underwater home loans but they don’t want the homeowner to offer them the keys. If there are 4 million mortgages to modify, then there are potential losses of $484 billion hanging over the market.