Mortgage crisis shows why financial regulation is needed

Why didn't Wall Street firms tell potential investors that the bonds they were selling them were rotten? Why did their business partners, including subprime mortgage lenders, ignore glaring evidence that borrowers weren't qualified and give loans to virtually anyone with a heartbeat?

The answer is simple: Because they could.

In many cases, no law or regulation prohibited these firms from doing what they did. In others, former regulations that might have impeded them had been rolled back.
After 30 years of a national political culture that damned government regulation and celebrated unfettered markets, the lions of Wall Street were free to practice the social Darwinism at the heart of their world — survival of the fittest, and the winner feasts on the spoils. Smaller players down the financial food chain played by the same ethics-free ethos.

That's the back story to the U.S. financial crisis. At every turn where regulation was missing in action, the actors did the wrong thing, all along the long, interconnected trail of transactions that make up mortgage finance."This crisis started one household at a time. As much as everyone wants to talk about derivatives and shadow markets and rating agencies, it started as one lousy mortgage sold to one family, repeated millions of times," said Elizabeth Warren, a Harvard University business law professor whose thinking has helped shape the regulatory overhaul efforts now under way in Congress.

At the front of the chain were homeowners who took out loans with no documentation or little verification of income, bidding for more home than they could afford and betting that prices would keep rising forever. Mortgage brokers who originated their loans often received legal kickbacks from conscience-free lenders if they got borrowers into creative loans with high and adjusting interest rates.

The mortgage brokers churned volume for big subprime lenders such as New Century Financial and Ameriquest Financial, both now defunct. They exploited a regulatory gap to become nonbank lenders, which were regulated only on the state level, and spottily at that.

To address the "liar's loans" and mortgage-broker trickery, Congress is pushing to create a Consumer Financial Protection Agency. It would regulate consumer credit products such as mortgages, credit cards and payday loans.

The agency would force lenders to offer products with simpler terms and greater disclosure. It would regulate consumer credit in the interest of borrowers, not lenders. This agency, Warren's brainchild, would address directly the weakened lending standards that Wall Street exploited, and which led to the financial crisis.

Source:LosAngeles Time

Expanded Home Buyer Tax Credits Proposed

Many first time home buyers have been rushing to complete purchases before expiration of the first time home owner tax credit at the end of November. Sales of homes in cities such as Los Angeles, San Diego and Las Vegas, where foreclosures are booming have been attributed to a combination of attractive prices, low interest rates and the first time home buyer tax credit.

The current tax credit provides for a credit of 10% of the sales price, up to $8,000 for first time home buyers. U.S. Senators recently agreed to extend this credit and offer a reduced credit of up to $6,500 to repeat buyers who have owned their current homes for at least 5 years. If approved, this tax credit would be available to buyers who enter into a contract to purchase a home by the end of April and close such purchase by the end of June. After passage by the Senate, the bill goes to the House for approval.

Approximately 1.4 Million homes buyers qualified for the existing credit through the end of the summer. The National Assoc. of Realtors estimates that 350,000 of them would not have bought their

homes without this tax credit.

New home sales fell 3.6% last month. Many builders said the drop was due to the uncertainty about whether the tax credit would be extended. Since it typically takes 45 to 60 days to complete a transaction, the purchase of a home today would probably not close by the November deadline. The tax credit is so important to some buyers that they are adding a clause to their contracts which would entitle them to cancel their sale if it is not able to close by November 30.

Nouriel Roubini, one of the few economists to accurately predict the financial crisis, predicts that huge losses in commercial real estate loans will add to our economic woes. Although the number of unsold homes may be stabilizing, he says prices are poised to fall further.

While the number of home sales have risen after hitting bottom earlier this year, many economists believe that the worst is not over for home values. These economists say prices will continue to dip because of rising unemployment. As a result, more people will be unable to make their mortgage payments. The chief economist at real estate web site Zillow.com expects more supply to come into the market and says “additional supply will outpace demand.”

Despite substantial unsold inventory, once a property on the Westside is reduced to what is perceived as current fair market value, the property can sell quickly and even generate multiple offers. Pricing in this market is critical in order to attract offers. As a seller, you do not want to chase what could be a down-trending market. Do not hesitate to contact Bess to discuss your options.

To find short pays and foreclosures in your area or for a free consultation to assess your real estate or financing options, please contact Bess. Bess Hochman is a Real Estate Broker & top producer for more than 15 years. Bess is also distinguished by holding a law degree. Her high-end clientele include celebrities, attorneys, and other professionals that understand the value of a real estate broker with legal expertise and experience. A native of Beverly Hills, Bess credits her success to repeat referrals by her satisfied clients.

Source:LosAngeles Time

Fighting Loan Modification Scams

In Los Angeles, two thirds of the families facing foreclosure who walk through the doors of our HUD-approved housing counseling agencies have been scammed by so-called mortgage modification consultants. These consultants promise the world to vulnerable homeowners desperate to stay in their homes, charge advanced fees as high as $5,000 and then take the money and run.

Today, I took a big step in increasing the resources that homeowners need in order to combat loan scams and foreclosure fraud. I announced the start of NeighborWorks America's national campaign against loan modification scams. I stood with Eileen Fitzgerald, Chief Operating Officer of NeighborWorks America, to deliver this simple message to Angelenos and the rest of country:

1. You don't need to pay for a loan modification.

2. If you are facing foreclosure, there are HUD-approved housing counseling agencies ready and able to assist you FOR FREE.

3. If a deal sounds too good to be true, it is!

I was honored that NeighborWorks America chose Los Angeles to launch this valuable campaign. Over the past two and a half years, more than 28,000 Angelenos have fallen victim to foreclosure. That's 28,000 friends and neighbors who lost their homes and their stake in the American dream.

Over the past year, we have worked tirelessly to get the message out about the dangers of loan scams to our residents. In fact, in this crisis, we were the first city in the country to ban mortgage modification consultants from charging advanced fees.

It's high time that elected officials, non-profit organizations, and banks work together to shut the door on loan scams and foreclosure fraud once and for all.

As they say, forewarned is forearmed. By giving our homeowners credible information and directing them to reliable resources, we can beat these scammers! To report a scam or to spot a scam, homeowners should go to the NeighborWorks campaign website.

Source:LosAngeles Times

California Mortgage Defaults Trend Down Again

The number of mortgage default notices filed against California homeowners fell last quarter compared with the prior three-month period, the result of lenders' evolving foreclosure policies, an uncertain legislative environment and an uptick in the number of mortgages being renegotiated, a real estate information service reported.

A total of 111,689 default notices were sent out during the July-through-September period. That was down 10.3 percent from 124,562 for the prior quarter, and up 18.5 percent from 94,240 in third quarter 2008, according to San Diego-based MDA DataQuick.

The number of recorded default notices peaked in the first quarter of this year at 135,431, although that number was inflated by deferred activity from the prior four months.

"It may well be that lenders have intentionally slowed down the pace of formal foreclosure proceedings. If so, it's not out of the goodness of their hearts. It's because they've concluded that flooding the market with cheap foreclosures in this economic environment may not be in their best financial interest. Trying to keep motivated, employed homeowners in their homes might be the most cost-efficient way to stem losses," said John Walsh, DataQuick president.

The median origination month for last quarter's defaulted loans was July 2006, the same as during this year's first and second quarters. A year ago the median origination month was June 2006, so the foreclosure process has moved one month forward during the past 12 months.

"There's a batch of truly nasty loans that were made in mid 2006. There's another batch made in late 2006. These are worse than the mortgages before and after, and it's taking a long time to process them," Walsh said.

The lenders that originated the most loans that went into default last quarter were Countrywide (7,583), Washington Mutual (5,146) and Wells Fargo (4,425). Along with Bank of America (1,979) and World Savings (4,237), they were also the most active lenders in the second half of 2006. Last quarter's default rate on loans originated in the second half of 2006 ranged from 1.7 percent for Bank of America to 11.9 percent for World Savings.

Smaller subprime lenders had far higher default rates for that period: ResMAE Mortgage was at 73.9 percent, Own it Mortgage 69.5 percent, BNC Mortgage 61.4 percent, Argent Mortgage 59.9 percent and First Franklin 59.4 percent. While these and most other subprime lenders are long gone, their loans were bundled, resold and now live on as "troubled assets".

Indeed, many, if not most, of the loans made in 2006 are owned and/or serviced by lending institutions other than those that made the loans. The servicers pursuing the highest number of delinquencies last quarter were ReconTrust Co, Quality Loan Service Corp and Cal-Western Reconveyance Corp.

While most foreclosure activity was still concentrated in affordable inland communities, the foreclosure problem continued to slowly migrate into more expensive areas. The state's most affordable sub-markets, which represent 25 percent of the state's housing stock, accounted for 52.2 percent of all default activity a year ago. In third-quarter 2009 it fell to 42.9 percent.

On primary mortgages, California homeowners were a median five months behind on their payments when the lender filed the notice of default. The borrowers owed a median $12,665 on a median $343,200 mortgage.

On home equity loans and lines of credit in default, borrowers owed a median $3,948 on a median $62,800 credit line. However the amount of the credit line that was actually in use cannot be determined from public records.

San Diego-based MDA DataQuick is a division of MDA Lending Solutions, a subsidiary of Vancouver-based MacDonald Dettwiler and Associates. MDA DataQuick monitors real estate activity nationwide and provides information to consumers, educational institutions, public agencies, lending institutions, title companies and industry analysts. Notices of Default are recorded at county recorders offices and mark the first step of the formal foreclosure process.

Although 111,689 default notices were filed last quarter, they involved 108,372 homes because some borrowers were in default on multiple loans (e.g. a primary mortgage and a line of credit). Multiple default recordings on the same home are trending down, DataQuick reported.

Mortgages were least likely to go into default in San Francisco, Marin and Santa Cruz counties. The probability was highest in Merced, San Joaquin, and Riverside counties.

Trustees Deeds recorded, or the actual loss of a home to foreclosure, totaled 50,013 during the third quarter. That was up 9.5 percent from 45,667 for the prior quarter, and down 37.1 percent from 79,511 for third-quarter 2008, which was the all-time peak.

In the last real estate cycle, Trustees Deeds peaked at 15,418 in third-quarter 1996. The state's all-time low was 637 in the second quarter of 2005, MDA DataQuick reported.

There are 8.5 million houses and condos in the state.

Foreclosure resales continued to decline as a market factor, accounting for 42.8 percent of all California resale activity last quarter. It was 49.9 percent the prior quarter, and a year ago it was 47.5 percent. It peaked at 57.8 percent in the first quarter of this year. Foreclosure resales varied significantly by area last quarter, from 9.6 percent in San Francisco County to 70.2 percent in Merced County.

Of the homes foreclosed on statewide in an 18-month period ending this July, about 82 percent have re-sold on the open market, while 18 percent, or more than 57,000 homes, have not. Of those that have not re-sold, it cannot be determined from public records what portion is currently being marketed for sale, as opposed to, among other things, being used as rentals or being left vacant and not for sale. Over the past year California buyers have snapped up an average of nearly 18,000 foreclosure resales a month.

A year ago the percentage of foreclosures that had not yet re-sold was about twice as great, while the number of unsold foreclosures from the 18-month period ending in July 2008 was about 50 percent higher than it is now.

Source:Los Angeles Times.

Home buyer tax credit draws scrutiny

As some urge that the first-time buyer tax credit be extended, Congress hears testimony about questionable claims.This year's $8,000 federal tax credit for first-time home buyers has attracted as many as 90,000 ineligible claimants -- including a 4-year-old child -- raising questions about efforts to extend the popular program.

In all, tax credit claims totaling more than $600 million are suspicious, tax officials testified Thursday before Congress.

The credit, on home sales to first-time buyers that close through Nov. 30, is an important piece of the $787-billion stimulus package enacted in February and is part of the Obama administration's effort to lift housing sales.

The housing industry has been pushing to extend the credit or even expand it to include more home buyers to keep momentum going in the nascent recovery of home sales and prices.

But the White House, eyeing the estimated $1-billion monthly cost, has been less eager.

"Based on the administration of the credit today, I am very concerned about the IRS's ability to effectively administer the credits that are claimed before the Dec. 1 deadline, let alone any credits that may be claimed within future extended deadlines," Treasury Inspector General J. Russell George testified before the House Ways and Means Oversight subcommittee.
The tax credit goes to buyers who had not owned a primary residence in the last three years and earned less than $75,000 as an individual or less than $150,000 as a married couple.

But through late August, more than 19,000 taxpayers had listed the credit for properties that hadn't been purchased, filing claims worth nearly $140 million, George said. Nearly 74,000, claiming nearly $504 million, appeared to have already owned a home, he said.

An additional 582 supposed first-time home buyers turned out to be younger than 18 years old, claiming nearly $4 million.

Although officials said some circumstances would allow minors to purchase a home, most of the suspicious cases seemed to involve parents pulling the strings because their own incomes were too high.

George said more than 3,200 taxpayers claimed nearly $21 million through tax returns filed with individual taxpayer identification numbers, often used by nonresident aliens, who are excluded from the program.

Several Internal Revenue Service employees were among the taxpayers who wrongly claimed the credit, he said.

Meanwhile, 48,580 taxpayers still working with the less-generous 2008 version of the credit may have claimed less than they were entitled to.

In direct response to Thursday's testimony, subcommittee Chairman John Lewis (D-Georgia) introduced legislation that would boost the minimum age of credit seekers to 18 and require claimants to include documents proving their eligibility.

The quick implementation of the tax credit program caused the IRS to process more than 1 million returns before new fraud filters were in place, he said.

"This tax credit is an important resource for families seeking to purchase a home and a vital part of our economic recovery efforts," Lewis said in a statement. "We must ensure that we are administering the credit accurately and strike a balance between issuing timely refunds of the credit and protecting federal resources."

The IRS has so far discovered 167 criminal schemes, opened 115 criminal investigations and temporarily frozen more than 110,000 refunds.

Some cases, officials said, could reveal innocent errors, but the agency has already agreed to the inspector general's recommendations to take corrective action.

"The IRS recognized that there is potential for both fraud and error whenever a new refundable tax credit, like the first time home buyers, is enacted," testified Linda Stiff, the agency's deputy commissioner for enforcement. "We cannot let fraudulent activity undermine a program that has benefited so many."

Through late August, more than 1.4 million claims have been made for the home buyer's credit, with hundreds of thousands more expected when tax returns are filed in 2010. Lewis estimated that Americans, 60% of them with incomes below $50,000, will end up claiming around $18 billion in tax credits.

Source:Los Angeles Time

Click here to find out more! Sales of U.S. existing homes surged 9.4% in September, data show

The reason for the rise: Buyers taking advantage of the tax credit for first-time owners before it expires next month. The median price for an existing home was $174,900, down 9% from a year earlier.
Sales of existing homes surged in September as buyers raced to take advantage of the tax credit for first-time home buyers before it expires next month.

Nationwide, sales of previously owned homes jumped 9.4% in September to a seasonally adjusted annual rate of 5.6 million from a downwardly revised 5.1 million in August, the National Assn. of Realtors reported Friday.

It was the fifth increase in the last sixth months, and sales activity is at its highest level since July 2007, the association said. Sales typically drop from August to September.

On the downside, home prices continued to skid, weighed down by foreclosures and short sales. Nationally, the median price for an existing home was $174,900, down almost 9% from $191,200 a year earlier and slightly lower than August's median price of $177,300.Analysts noted that the strong sales pace helped pull the inventory of unsold homes down 7.5% from August. That left the industry with a 7.8-month supply of homes for sale.

Drawing down the inventory of unsold homes "is critical to stemming the decline in prices," Deutsche Bank economist Joseph Lavorgna wrote in a note to clients, adding that "we think the housing market has touched bottom."

Other analysts weren't so sanguine, noting that the home buyer tax credit of up to $8,000 is set to expire Nov. 30, and efforts in Congress to extend it are uncertain.

"This is basically a false bottom driven by a mad scramble caused by the end of the tax credit and artificially low interest rates," said Christopher Thornberg, a principal with Beacon Economics in Los Angeles.

Because the tax credit applies only to home sales that close by Nov. 30, "you basically would have to sign a contract to buy a house today to qualify," said Lawrence Yun, chief economist for the Realtors association.

The Western region, which includes California, notched the biggest sales increase -- 13% -- of the four regions tracked by the association. It also recorded the biggest year-over-year price drop. The median price in the West was $219,000 last month, 15% below September 2008's median.

Sales rose 4.4% in the Northeast, 9.6% in the Midwest and 9% in the South.

Source:Los Angeles Times

Home prices in major cities continue to climb

Standard & Poor's/Case-Shiller index rises 1% in August from July in its third consecutive monthly gain. Southern California cities, led by L.A. and San Diego, show notable increases.The nation's biggest cities are posting steady gains in home prices, a closely followed index showed Tuesday, adding fresh evidence that the U.S. housing market is stirring to life.

But economists are divided over whether the recent improvement is the result of temporary federal policies or a sign that homes have gotten cheap enough to spur a lasting recovery.

Home prices in 20 metropolitan areas rose 1% in August from the month before, according to the Standard & Poor's/Case-Shiller index released Tuesday. The index has posted three consecutive month-to-month gains, bringing home prices in August to pre-bubble levels of autumn 2003. The price index is down 30% from its May 2006 peak.

"We are seeing stabilization," said Patrick Newport, an economist with IHS Global Insight.

A variety of federal policies has contributed to the steadying of home prices. The federal government has offered an $8,000 tax credit for first-time buyers. Interest rates on mortgages have hit their lowest levels in years as a result of the Federal Reserve's campaign to keep credit flowing throughout the economy. And a dreaded wave of foreclosures appears to have been averted as banks responded to government pressure to work with borrowers facing foreclosure.
What remains uncertain is where the housing market will go if these policies ease.

Michael D. Larson, an interest rate and real estate analyst for Weiss Research, said he expects the real estate market to stumble with the expiration of the tax credit at the end of November.

Still, he said, relatively low prices will continue to spur demand from shoppers.

"You are going to see some give-back; you are probably going to see a pause in the recovery," Larson said.

"But I think the fundamental story is that housing got way too expensive and now you could argue that housing is cheap again, and that is what it boils down to."

Christopher Thornberg, a Los Angeles economist who was an early predictor of the housing bubble, disagreed.

"I can't emphasize enough how this rally in the market is being driven by policy and not fundamentals," he said.

August home prices declined 11.3% compared with the same month a year earlier, according to the index, although the year-to-year decline wasn't as steep as in recent months.

The index's annual rate of decline has been improving since early 2009, S&P said.

Looking at the seasonally adjusted monthly data, 17 of the metro areas tracked by the index showed improvements in August compared with July. Meanwhile, 19 of the 20 markets showed moderation in their year-over-year rates of decline.
Southern California cities -- San Diego and, in particular, Los Angeles -- have seen notable gains, separating themselves from other Sun Belt cities, including Las Vegas and Phoenix, Blitzer said.

Los Angeles-area prices in August improved 1.3% over July on a seasonally adjusted basis. The index for Los Angeles was down 12% compared with the same month a year earlier.

Home prices in San Diego rose 1.5% on a seasonal basis from July but fell 8.9% compared with August 2008.

San Francisco-area homes gained 2.6% on a seasonally adjusted basis over the month of July.
On a year-over-year basis, San Francisco-area homes declined 12.5% in August.

Only the cities of Las Vegas, Charlotte, N.C., and Cleveland reported monthly declines in August.

August home prices in the Las Vegas area dropped 0.8% over July on a seasonally adjusted basis. Las Vegas also had the biggest year-over-year drop, falling 29.9% in August.

Las Vegas has been hit hard by the drop in tourism, oversupply in housing, construction crash and high unemployment, said Larson, the analyst with Weiss Research.

Phoenix fared better, posting a 1% home price increase in August over July. But the city had the second-largest year-over-year drop with a 25.1% decline in August.

The index compares the latest sales of detached houses and accounts for factors such as remodeling that might affect a home's sale price over time.

Using those data, an index score is determined to show price changes, with a score of 100 reflecting January 2000 prices.

Source:Los Angeles Time