GLC solicitor Lorraine Barrie goes to NYC to help HIV+ clients in Brooklyn

Govanhill Law Centre solicitor Lorraine Barrie has taken a period of leave to commence a temporary volunteer position with South Brooklyn Legal Services (SBLS) in New York City.

SBLS is a free legal resource for low income Brooklyn residents, and provides advice on subjects including employment, consumer law, domestic violence, mortgage repossession, and benefits. Lorraine will work for their HIV project to enforce legal rights for HIV+ clients.

Project successes include an award of $10,000 for a client whose confidentially was breached when a Social Security Administration employee revealed her HIV status to a family member without her consent.

Lorraine said: “I wanted to work for an organisation committed to challenging injustice and poverty, similar to Govan Law Centre. I am particularly interested in access to civil justice, and look forward to comparing the experiences of clients in New York to those in Glasgow”.

Lorraine will be writing about her work via a blog (details will be given here shortly). She will return to her post at Govanhill Law Centre in January 2011.

Factor cases ‘swamp courts’

The Evening Times reports today: Courts are being “swamped” by cases of property factors taking legal action against home owners, the Scottish Parliament heard. And two Glasgow MSPs revealed they have been inundated with complaints about factor disputes.  Maryhill MSP Patricia Ferguson and lawyer Mike Dailly, of Govan Law Centre, told the Local Government Committee how big a problem disputes with factors had become and that a new law was essential.

Ms Ferguson’s Property Factors Bill would set up a compulsory registration scheme with a set of standards designed to root out rogue factors. It would also provide an independent dispute resolution system to prevent costly court cases. Ms Ferguson said problems with factors has become her biggest caseload, prompting the Bill. She said: “Not a day goes by without someone from across Scotland contacting me for advice. Not one day.”

A series of Evening Times investigations published over the last two years have also uncovered a catalogue of complaints and shocking cases of overcharging and poor work. Our reports were passed to the committee for it to consider. Mr Dailly said that as well as contacting politicians the courts were under pressure and people put into debt, which could be avoided. He said: “The reason Govan Law Centre got involved was because we were seeing what is happening day in, day out. Sheriff courts are swamped with property factors raising actions for payments. “A lot have added on costs, expenses are attached, and I have seen many people sequestrated by factors.”

Glasgow SNP MSP Bob Doris also confirmed the frequency of complaints. He said: “I am not short on the number of these cases I have on a weekly basis from people in factoring disputes.” Ms Ferguson said: There are property factors who threaten court action, but never see it through. Yet the charges are still added to bills.That is not acceptable.” It was the final session of evidence to the committee and it will now consider it before submitting it for the Bill.

GLC's evidence can be seen on the Scottish Parliament's Holyrood TV here (opens as video); and the Bill's Committee Page is here.

Elizabeth Warren Gets to Work as Head of the CFPB

The ink was barely dry on the press announcements naming Elizabeth Warren as the new head of the new Consumer Financial Protection Bureau when she and Tim Geithner held their first forum--a self proclaimed event bringing together "stakeholders to discuss the path forward to simplify mortgage disclosure forms, [and] empower consumers with better, easier to understand information."  The Mortgage Disclosure Forum, which took place September 21, 2010, was meant to be a meeting among industry stakeholders to redesign the good faith estimate and truth in lending forms as mandated by the Dodd Frank Act.  According to the U.S. Treasury press release, invited participants include "consumer advocacy groups, housing counselors, financial literacy experts, mortgage companies, and other stakeholders."

Although the Dodd Frank act mandates that the Consumer Financial Protection Bureau creates a new form which combines both the good faith estimate and the truth in lending into one new disclosure, the bill gives the new agency until June of 2012 to complete the form.  But Warren and her new agency are eager to get the process rolling.  Says Warren in the press announcement, "Simplifying these forms is a prime example of where we can and will accelerate our efforts to deliver real benefits to consumers as soon as possible.  Fine print obscures the cost of credit and makes it impossible for families to compare products. Too often, families come to understand the legalese only when they get bitten by it.  Streamlined disclosure can level the playing field and give families better tools to make better choices.  This is particularly true in the mortgage market, where borrowers receive stacks of incomprehensible paperwork when they're looking for a loan."

My question to the Treasury Department and to Warren herself would be, "What's the rush?"  If you recall, Warren was named interim director of the massive new agency on September 17, 2010.  The White House did not believe that she would survive confirmation hearings, and so they chose the safe route of appointing Warren to the post pending an eventual confirmation of a permanent nominee.  Four days into the job which involves setting up a multi billion dollar agency with unprecedented regulatory authority over financial service providers ranging from tiny mortgage broker shops to mega banks, should redesigning the good faith estimate and truth in lending into a new combined form really be a priority?

Another issue I have with this is the whole anti business, pro-consumer advocacy bent of the announcement, which I assume will also be the tone of this process.  The press release lists the invited participants, "consumer advocacy groups, housing counselors, financial literacy experts, mortgage companies, and other stakeholders."  The "mortgage company" participants are the fourth group listed, as if their contribution to the form restructuring is negligible at best.  And when Warren complains about consumers receiving "stacks of incomprehensible paperwork" she is ignoring the fact that both the good faith estimate and the truth in lending have been revised in the last eighteen months.  The good faith estimate that we have been using since January is the result of a 6 year study by HUD.  While I, personally, think the new three page form is ridiculous, the entire industry was forced to implement it January 1, 2010 at considerable cost.  In July of 2009, the Federal Reserve changed the Truth in Lending Disclosure to require that if the APR goes up more than 1/8% between application and closing, the new APR must be redisclosed to the borrower on a new form and the borrower must wait three business days before closing.  The new Truth in Lending also contains a statement in prominent letters reminding the borrower that he or she is not obligated to complete the application merely because he or she has received the form.  So we now have a three page good faith estimate which is a binding contract on the part of the originator and a truth in lending which has to be redisclosed if any of the fees increase.  Yet, Warren complains that "fine print obscures the cost of lending." 

Maybe one way to consolidate the two forms would be a one page large print disclosure that would read something like this,  "Buying a home is really expensive.  You will probably pay up to three times the sales price in interest over the life of a thirty year mortgage.  And five years into the mortgage you will probably be tired of both the house and the payments and ready to move, but if the market is bad, or you have lost your job or not taken care of your credit, you may not be able to sell the house or qualify to buy a new one. Consider carefully and complete this transaction at your own risk."

The real question, though, is why, four days into the job of creating and leading a new Bureau as comprehensive as the CFPB, Warren is spending her time rewriting forms at all? According to one bio I read, Warren has been twice named one of Time Magazine's 100 most influential people in the world.  With her appointment as CFPB czar, she surely catapulted into at least the top 10. Shouldn't the head of one of the most powerful new agencies have other priorities than mortgage disclosures?

The answer, I think, is that mortgage disclosures are great targets for all consumer advocacy groups, who seem to believe that if the disclosures are worded properly, even more potential home buyers can be discouraged from completing loan applications to buy or refinance housing.  With sales stagnant and even refinance applications dropping off now in spite of low interest rates and housing prices, Warren and her new CFPB just have to find the right wording on the disclosures to completely kill off the housing industry.

It will be interesting to see what this new combined form actually looks like and how it compares to all the revisions we have already seen.  Since the Treasury press release assures us that "the CFPB implementation team is committed to getting the CFPB ready to propose a consolidated form well ahead of the Dodd-Frank Act's July 2012 statutory deadline," we should not have long to wait.


New Fannie Mae Incentives To Make Home Buying More Attractive

Just in time for the holidays, Fannie Mae has introduced some new incentives to make purchasing a Fannie Mae owned home more palatable.  These new incentives apply to homes which Fannie Mae owns and which have been designated for the HomePath program, and they are exciting enough that a few buyers might decide that all they want for Christmas is a house!  Real estate professionals are encouraged to advertise and promote the incentive program using  Home Path approved materials.  Fannie Mae is asking that any promotional materials to be used in connection with these homes be submitted to Fannie Mae for review and approval at

Here's how it works:  For contracts signed after September 23, 2010, and before December 31, 2010, Fannie Mae will pay up to 3.5% of the buyer's closing costs.  The 3.5% can also be used to pay part of the costs of the home warranty.  Additionally, Fannie Mae is also offering a $1500.00 bonus to the selling agent on the home.

The transaction must close within 60 days of the execution of the contract, so it is important to have financing in place before signing.  Also, these incentives apply only to properties that are being purchased as primary residences--no investors or second homes.  To keep everyone honest on this point, Fannie Mae is asking that any person falsely purchasing a home as a primary when really intending to use it as an investment property be reported to Fannie Mae by email.

The great thing about these incentives for properties that are designated HomePath is that they can be used in connection with HomePath financing.  Fannie Mae offers special financing with only a 3% down payment and no mortgage insurance for these properties.  The 3% down payment can come from the buyer's own funds, or a gift from a family member or a grant, or a gift from an employer.  The HomePath Financing program also allows for up to 6% of the buyer's closing costs to be paid by the seller.  With FHA currently requiring a 3.5% down payment and increased MIP, the Fannie Mae HomePath program has no competition.

So let's look at how this could breakdown.  Sam has finished school and gotten his first job.  Now he wants to buy his first house.  His agent finds him a HomePath home with a sales price of $120,000.  The seller agrees to pay 3% of Sam's closing costs.  Using the Fannie Mae incentives, Sam can get the remainder of his closing costs and his home warranty paid for by Fannie Mae.   So all he needs to close is his 3% down payment of $3600. 

But let's say that Sam's dad decides to give Sam the down payment as a belated graduation present.  If the dad gifts the funds of $3600.00 then Sam does not need any money to close.  He can keep his cash to pay for the costs of moving and to purchase some furniture.  And with interest rates at record lows, Sam can have a low fixed monthly payment with no mortgage insurance.  The low fixed interest rate for thirty years means that he will never have to refinance the house, and he can budget a fixed monthly payment while building equity in his own home.

This truly is a great program for the buyer and the $1500 bonus to the selling agent is a terrific incentive to get some of this property sold before the end of the year.  A list of Fannie Mae HomePath homes in your area is available by going to and clicking on the green HomePath logo on the center right side of the webpage.  Check it out and let me know in the comments section how the program actually works for you if you do take advantage of it.


Why we believe 'There is a Better Way ...'

Here, our Principal Solicitor explains why we support the 'Better Way' campaign, led by the Scottish Trades Union Congress (STUC). The STUC's position is that there is an economic crisis in the UK – a crisis of high unemployment and stagnant growth; and not, as the UK Government insists, a crisis of the public finances. The Better Way campaign provides an alternative economic strategy to unprecedented cuts to welfare and public sector funding in Scotland and the UK.

The Bush Tax Cuts, Health Care, Housing, and You

It seems as if the biggest debate of the fall is whether the Bush tax cuts should be extended or allowed to expire, and if they should be extended, for whom.  As liberals and conservatives debate the impact on the economy, the focus of the media's coverage of the debate seems to focus mainly on the increases to the top income tax rate.  In the latest poll that I saw, Americans appear to be pretty evenly divided on whether the cuts should be extended only to the middle class or to everyone. 

I think that framing the Bush tax cuts debate only in terms of income tax increases really minimizes the full effect of allowing the tax cuts to expire.  Remember that the tax cuts did more than just lower the income tax rate; they also gave a hefty shot in the arm to the real estate market.

Under the Bush tax cuts, an individual could sell his or her primary residence and realize up to a $250,000 gain tax free.  A couple could sell their primary residence and realize up to a $500,000 gain tax free.  And this gain did not have to be reinvested in a new primary residence to reap the tax advantages; the sellers could choose just to put the money from the sale in an investment account and rent for the rest of their lives.  The capital gains tax holiday gave a powerful boost to the real estate market because it allowed Americans to purchase a home and benefit in a very direct way from their properties' appreciation.

If all of the tax cuts are allowed to expire, next year the sales of primary residences will again be subject to capital gains tax.  (Presumably the tax will revert back to the prior law before the tax cuts where no capital gains is owed if a new primary residence of equal or greater value is purchased within a set period of time.)  But what if the tax cuts are extended to the middle class and only allowed to expire for taxpayers with incomes of $250,000 a year or more?  What effect will that have on the housing market?

Remember that Fannie Mae and Freddie Mac's average borrower today has a credit score of 751 and a down payment of more than 30%.  That means essentially that these two agencies, both of which have received about $148 billion combined in tax dollar bailouts, are basically making loans to upper middle class borrowers--the ones who typically have higher incomes.  A capital gains' tax on primary residences, combined with higher income taxes and a looming threat to discontinue the tax deduction for mortgage interest, may discourage these borrowers from investing in real estate.  At the very minimum, it is going to discourage them from buying higher priced homes.  Discouraging the very borrowers who are in the best position financially to purchase homes and pay the mortgages on them can only result in a further slowdown of the real estate market, and potentially greater declines in housing prices.  Many of the taxpayers in the $250,000 bracket are actually small business owners.  With increasing economic problems, and dropping market values, how comfortable are they going to feel going through the pain of purchasing a home knowing upon sale the gain will be subject to taxes because they earn over $250,000 a year.

I know that it can be argued that for many years primary residences were subject to capital gains tax upon sale, and that the tax did not stop people from buying or selling property.  But I would counter that there is a strange phenomenon that comes into play when people are used to getting something (in this case a capital gains' tax holiday on their primary residence) and then see it taken away.  We saw this with the home buyer tax credit.  Buyers had bought and sold houses without an $8,000 tax credit since the beginning of civilization, but in the short time that it was implemented, buyers came to believe that they should expect a tax credit.  Consequently, when the tax credit expired, buyers largely stopped putting in contracts on houses.  The credit should not have provided all that much incentive--after all, the primary reward for purchasing a home is having a place to live--but once the inducement was offered and then removed, borrowers did not seem to see the point of buying a home for which they would not receive a tax credit.

There are so many differing opinions on the tax cuts--one blog I read today recommended extending the tax cuts for two years for everyone--including those making over $250,000--and then ending them for everyone in 2013.  But this plan poses an additional set of challenges.  The new health care law signed in March also contains a tax on real estate.  The 3.8% tax on the sale of residential real estate applies to individuals with incomes higher than $200,000 and couples with combined incomes over $250,000.  On a sale of a $300,000 home, the tax would be $11,400.00.  This would be in additional to the capital gains tax.  And since the health care tax is on the sales price and not on the gain, it would apply to any borrower in the income bracket being taxed.  In other words, if you sell your house for enough to cover what you owe the bank plus the agent's commission and your costs as seller, you could still owe Uncle Sam a check.

We like to think that "rich" people, whom we have defined as a society as people with incomes over $200,000 or $250,000, have so much money that they don't feel these taxes at all and that any complaining that they do is only a result of greedy whining.  But at what point do the more affluent people in our society decide that real estate is too heavily taxed and that they are better off renting rather buying?  At what point do current homeowners who do have extra cash decide to offer their homes for rent rather than for sale because they are rebelling against a plethora of taxes which gobble up their equity?  And what are the consequences of this shift in thinking for an already lethargic housing market?

All of the numbers coming out of the housing sector--mortgage applications, existing home sales and new home sales--have been depressingly low for the past couple of months.  And as the housing market remains in a slump, those who make their living primarily through real estate will continue to lose their jobs, which will continue to feed growing unemployment. Maybe what the Treasury needs to do is a study of the net income to the U.S. government from the increased taxes versus the losses incurred by the society as a whole from increased unemployment, foreclosure and bankruptcy as a result of the steady decline of the housing industry.  A U.S. News and World Report article posted Friday April 23, 2010 used final quarter 2009 figures from 10 U.S cities to show the real cost of the housing market crash.  For example, in Las Vegas, Nevada, where construction was the primary job provider until the market crash, unemployment was 13% in the fourth quarter of 2009.  In Merced California, where a large portion of the population worked in real estate or real estate related industries--"home building, home financing, or home sales"--by the fourth quarter of 2009 the unemployment rate was 19% in a city of 77,000 residents.  Other cities where unemployment was between 14 and 30% by the fourth quarter of 2009 due to the loss of real estate related jobs include Fort Myers, Florida, Rockford, Illinois,  and El Centro, California.  Those job losses led in turn to higher real estate defaults in these areas as homeowners could not pay their mortgages.

Raising taxes--even for the top income brackets--may generate a lot of money for the U.S. Treasury in the short term,  but in the long term it will lead to increased unemployment which will lead to increased mortgage defaults and delinquencies at a cost to lenders, Fannie Mae, Freddie Mac, and ultimately the American taxpayers.  Taxing the life out of what is left of the housing industry is really just cooking and eating the goose that laid the golden egg.



The Top Three Reasons Why It Is Hard to Get a Residential Loan

As we officially move into fall, underwriting is backed up as much as thirty days with homeowners who want to refinance and one or two who want to take advantage of historically low interest rates and the most affordable housing market the U.S. has seen in years.  But even for the "perfect" borrower, closing a loan still feels like running through mud. So, on hump day, I thought I would devote this post to three reasons why it is so hard to get those loans closed.

1.  Buybacks.  When a loan is sold to Fannie Mae or Freddie Mac, the lender's contracts obligate the lender to buy back the loan if the loan does not perform either due to fraud in the file or poor underwriting which does not meet the guidelines of Fannie and Freddie.  Both entities have been in conservatorship for the last two years and according to a report last week from Edward DeMarco, acting director of the Federal Housing Finance Agency, both enterprises have lost over $226 billion since 2007.  Of that amount, about $148 billion in losses has been borne by taxpayers and the balance was borne by shareholders of Fannie Mae and Freddie Mac prior to the government takeover of both entities in 2008.  To stem the tide of losses, Fannie and Freddie appear to be concentrating their primary efforts in two areas--forcing the lenders to buyback non-performing loans and requiring lenders to modify existing homeowners.  According to DeMarco, during 2009 lenders had to buy back $8.7 billion of single family mortgages and for the second quarter of 2010 lenders owe $11 billion to Fannie Mae and Freddie Mac in loans that need to be repurchased.  According to DeMarco one third of these repurchase requests are 90 days old, and "many of lenders with aged, outstanding repurchase requests are among the largest financial institutions in the United States...If these discussions do not yield reasonable outcomes soon, FHFA may look to its supervisory and conservatorship authorities provided under the statute to resolve the situation."

Fear of buybacks is a major reason that lenders refuse to sign off on good files.  Some very honest underwriters will admit that--they simply cannot afford to repurchase these loans. If they know that the government is going to be taking legal action against them to make them repurchase $11 billion in loans in a few months, they are going to look long and hard at the loan on their desk today to see if they think they will have to buy it back in the future.  That is also a key reason that an exception to underwriting guidelines is almost as difficult to come by as a presidential pardon.

2. No new products.  Demarco makes the point in his testimony on September 15 that Fannie and Freddie are focused on limiting risk exposure.  "Rather than developing and offering new products [Fannie Mae and Freddie Mac] must maintain their focus on mitigating credit losses and remediating internal operational weaknesses while employing prudent underwriting standards and guaranteeing proven mortgage products."  In other words, Fannie Mae and Freddie Mac will not be introducing any new products with more lax underwriting standards.  DeMarco states that  since the end of 2008 Fannie and Freddie have stopped buying Alt-A and interest only loans which he calls "two of the poorest performing mortgage products in the market."  DeMarco goes on to say that interest only loans purchased by Fannie and Freddie prior to 2008 have a delinquency rate higher than 18% and Alt-A, which were the stated income and reduced income documentation loans, have a delinquency rate of 12%.  .  With a track record that bad, we cannot expect to see these loan products return any time in the foreseeable future.

3. They only drink cream.  Years ago, a local mortgage banker said of his mortgage business here in El Paso, "I only drink cream."  I think those words could become the new motto for the government owned versions of Fannie and Freddie.  Consider these facts:  In 2006, credit scores below 620 made up 6% of Fannie Mae's portfolio--in 2010 loans with a credit score under 620 comprise less than 1%.  The average loan to value for a loan with Fannie Mae today is 69% and the average credit score is 758.  A credit score above 750 no longer makes a borrower special--that is the credit profile that the Fannie and Freddie expect to see, along with a low debt to income ratio and a steady source of consistent provable income.  And according to DeMarco, the insistence on purchasing higher quality loans is making a difference in the bottom line: "Due to the focus on improved purchase quality and underwriting standards, the loans that [Fannie and Freddie] purchased in 2009 and 2010 have had much lower rates of delinquency in their initial months of repayment than did mortgages originated between 2006 and 2008."  Unfortunately, if you are a borrower with a few dings on your credit or income problems, a conventional loan is not going to be the right product.  And that creates a real challenge, because while Fannie Mae and Freddie Mac are focused solely on avoiding risk and defaults, the housing market as a whole is suffering because buyers who don't fit into the narrow guidelines which these two mortgage giants have created are struggling to get financing.  And while FHA can make up some of the shortfall, it cannot make up for all of it.  In El Paso, Texas, the Fannie Mae conforming loan limit is $417,000.  The FHA loan limiting is $275, 000.  For borrowers who do not fit into Fannie Mae or Freddie Mac guidelines, they cannot borrow more than $275,000 for a home loan unless they can take advantage of VA or USDA.

The new plan to restructure housing finance and replace or restructure Fannie and Freddie will be released by the Treasury in January of 2011.  Until that time, we just have to be patient and hope that one day soon we will private market competition to provide options and solutions for frustrated home buyers.


Reversal of Fortune

If we needed more evidence that we are living in a truly upside-down world, our suspicions would be confirmed by a small paragraph in the September 20, MAA newsletter--the grassroots newsletter of the Mortgage Banker's Association.  "On Tuesday, September 14, 2010, MBA attended a meeting hosted by Vicki Bott, Deputy Assistant Secretary for Single Family Programs, HUD, to strategize with mortgage servicers and housing counselors on ways to resolve tax and insurance advances made by servicers on behalf of borrowers of home equity conversion mortgages.  HUD will be issuing a mortgagee letter on how to handle these tax and insurance defaults within the next thirty days.  The meeting follows a report by the office of Inspector General highlighting the estimated 13,000 tax and insurance defaults."

For anyone unfamiliar with the term, the home equity conversion mortgage, more commonly called a reverse mortgage, is a loan which allows a home owner of over 62 years of age to borrow the equity out of his house as either a lump sum or in monthly payments, similar to an annuity. The amount of the loan is low in comparison to the value of the home because the borrower does not make any payments on the loan for as long as he or she lives in the house.  Borrowers do not qualify for this type of loan based on credit or income since they will not make any payments on it.  Rather, the entire qualification is based strictly on the value of the house and the age of the borrower. 

Reverse mortgages are an FHA product which means that FHA guarantees them.  Since I have never done FHA loans, I have never worked with reverse mortgages, but when the product was first introduced about 10 years ago I did attend a number of workshops on them.  The average reverse mortgage borrower (and target audience for this product) was a 72 year old widow who lived an average of 7 years after getting the loan.  The payments from the mortgage were supposed to supplement Social Security to make it easier for seniors to stay in their own homes while also paying for medication and meeting other living expenses.  After the borrower died, the heirs could reclaim the home by paying off the mortgage, or they could sell the home, pay the mortgage and keep the difference between the sales price and what was owed, or if they chose, they could leave the keys to the house in the mailbox and let the bank deal with the property.  Reverse mortgages were touted as great products to help seniors live better lives and ideal financial instruments for people who did not have heirs.  The only way that the loan became due and payable during the lifetime of the homeowner was if he or she had to go into an assisted living facility for more than one year.  In the case of a married couple, the spouse in better health could remain in the home and the note would not become due unless both of them went into an assisted living facility.

When reverse mortgages were introduced, they required mandatory counseling for the seniors on the benefits and responsibilities of this type of mortgage.  And that counseling was very important because although borrowers do not make any payments on the home loan, they are responsible for paying the taxes and insurance on the home.  To fail to do so places the loan in default.  But a homeowner who received his equity in a lump sum payment and spent the money may not have the funds to pay the taxes and the insurance on the house, and therefore, may ignore these two responsibilities.

Enter the Office of the Inspector General whose August 25, 2010 summary of Audit Report 2010-FW-0003 is posted on HUD's website.  According to the report, "We performed an internal audit of the U.S. Department of Housing and Urban Development's (HUD) Home Equity Conversion Mortgage (HECM) program because we found that an increasing number of borrowers had not paid  taxes or home owner's insurance premiums as required, thus placing the loan in default.  Also, we noted that HUD had granted foreclosure deferrals routinely on defaulted loans, but it had no formal procedures."  In other words, HUD had an informal policy to not foreclose on seniors with reverse mortgages, and no formal policies and procedures for how to handle tax and insurance defaults.  So, as seniors stopped paying the taxes and insurance on their houses, the mortgage companies who were servicing the loans paid the insurance and tax bills for them, but they did not bother to notify HUD.  As a result, the audit found four servicers (banks holding reverse mortgage notes) with 13,000 mortgage loans which had defaulted on their taxes and insurance.  The maximum possible losses of these loans are estimated to be $2.5 billion.  According to the audit, two of the four servicers stated that they were waiting for HUD to tell them how to deal with this problem, and in the meantime, these lenders had paid more than $35 million in taxes and insurance for the 12,958 delinquent homeowners.

Since HUD does not have a tracking system for borrowers who have defaulted on taxes and insurance, they do not have any way of measuring how many loan balances are actually increasing because the lender is adding the taxes and the insurance to the original loan amounts.  The inspector general audited loans from only four of the 16 companies that service HUD reverse mortgage loans, so the real extent of the problem is still not known, but the report reveals that if the 7,673 defaults that HUD was aware of and and the 12958 loans that HUD was not aware of all land in foreclosure, the potential cost to HUD, and ultimately the taxpayers, will be $1.4 billion.

The Inspector General's recommendation is that HUD stop deferring foreclosures for seniors behind on their tax and insurance payments and that they issue formal guidance to their 16 servicers about how to handle defaults.  They also recommend that HUD develops a plan to implement a tracking system so that HUD will be aware of defaults when they occur, and that they set up a plan to minimize the risk of defaults.

All of this means that we are going to see a lot more seniors getting foreclosed on, which is going to be a public relations nightmare for the servicers and also for HUD.  The media is going to have a field day with  photos of grandma and grandpa being kicked out of their homes because they can't pay the taxes and insurance, and a plethora of foreclosures is going to give a lot of bad publicity to a program that encouraged seniors to tap into the equity in their homes so that they could have a better standard of living in their golden years.  In one of the great ironies of our time, we will see the banks taking the homes of older Americans who were told that they would never have to make a payment on their loan.  Amazing!


The Recession Has Ended?

A report out today from the National Bureau of Economic Research states that the recession actually ended in June of 2009. According to the report, the recession actually began in December of 2007 and ended 18 months later, last June.  The committee used the Gross Domestic Product and Gross Domestic Income as indicators of the end of the recession.

The report ties in nicely to the "Recovery Summer" tour that the White House and Tim Geithner have been promoting this year.  The message is the same--the economy is improving; it is just improving slowly.

Fortunately, the National Bureau of Economic Research and the Administration are not using real estate statistics as benchmarks for the recovery.  Consider that the Mortgage Bankers Association is reporting an 8.9% decrease in mortgage applications--both purchase and refinance--for the week ending September 10, even though mortgage rates remain at record lows.  One reason for the declines is the loss of equity in homes, which makes it very difficult for borrowers to refinance unless they can get their current mortgage servicer to voluntarily reduce the principle amount owed on the house.   But another reason is that many borrowers cannot qualify under strict new financing guidelines, so lowering the interest rate and the payments is not an option for many borrowers.

August also saw bank repossessions increase 3% from the previous month to 95,364.  This figure represents a 25% increase in foreclosure activity since August of 2009.  The number of homeowners receiving a new notice of default decreased 1%--indicating that banks are concentrating on processing pending foreclosures before starting new ones.  This is not entirely bad news--homeowners who have been sitting in their homes for over 400 days without making any payments to the mortgage company probably need to go through the foreclosure process.  But it's nothing to celebrate either.  High rates of foreclosures tend to further push down property values in an already declining market.  These numbers are reflected in new statistics showing that nationwide 26% of sellers reduced their home prices as of September 1.  The average price reduction is still about 10%,  but the total dollar amount of reductions is about $29 billion in lost equity.  That is $29 billion that will never go into the economy in the form of expenditures or even taxes.

And it is not just homeowners who suffer from dropping home prices.  The National Association of Home Builders chief economist David Crowe told Realty Check today that the rising foreclosures are hurting the new home market.  "Builders report that the two leading obstacles to new home sales right now are consumer reluctance in the face of the poor job market and the large number of foreclosed properties for sale."

And then there is the study by Boston College's Center for Retirement Research which says that Americans are $6.6 trillion short of what they need to retire.  According to the Federal Reserve, household net worth fell $1.5 trillion dollars from April to June of 2010.  The biggest factor in declining net worth was the drop in stock portfolios, but loss of equity in homes also contributed to this figure.   And according to a study by Milliman, Inc, during August of 2010, the funded status of the 100 largest corporate defined benefit pension plans fell $108 billion dollars.  This news comes as the nation wrestles with the future of Social Security and the retirement age.

The National Bureau of Economic Research says that they wanted to be sure that the June 2009 date for the end of the recession was correct before releasing their findings.  As Douglas McIntyre writes in Daily Finance, "there was no need to call an end to the downturn until it was clear that a meaningful recovery had begun."  Funny--fifteen months after the recession supposedly ended,  many of us are still not experiencing a "meaningful recovery."

Livable Communities--or Just Another Government Take Over?

Chris Dodd, whose name is permanently affixed to the financial reform bill that is going to reshape lending and access to credit in the United States, wants to dictate more than how we finance our homes.  It seems that the retiring Senator also wants to control where and how we are allowed to live.  That seems to be the focus of his final bill, S 1619, which was approved through the Senate Banking Committee on August 3 and is expected to go to a vote in the full Senate next week.

The Livable Communities  Act "Creating Better and More Affordable Places to Live and Work and Raise Families," has a price tag of several billion dollars in grants which the federal government will make available to local communities to update zoning, land use, and building code enforcement.  The Comprehensive Planning Grant Program will authorize grants of up to $475 million in competitive grants over four years for community planning that will incorporate "long term affordable and accessible housing, community and economic development, and environmental needs."  All types of communities are encouraged to apply--rural, suburban and urban.

The Challenge Grant Program will provide 2.2 billion in competitive grants over three years to help communities create affordable housing, develop public transit, create pedestrian and bicycle walkways, and foster economic development.  Communities which are not ready for a complete regional developmental plan can apply for smaller grants to update building codes, zoning laws and land use laws.  The purpose of these targeted grants would be to improve building code enforcement and energy efficiency.

The whole idea of allocating billions of dollars to sustainable living programs at a time when the U.S. is already dealing with staggering deficits seems ridiculous.   But there is a level of "Big Brother" control in this bill that is just downright scary.  On August 3, Chris Dodd read a statement for his press conference which is excerpted here:

"With our population expected to grow by over 150 million people between 2000 and 2050, it is clear that our current path is unsustainable. The Livable Communities Act before us represents a comprehensive and flexible approach to the diverse issues facing communities....This legislation provides for planning and capital grants so that regions can coordinate transportation, housing, and community development policies to reduce traffic congestion, generate economic growth, create and preserve affordable housing and meet environmental and energy goals.  These grants will encourage regions to think about how best to preserve rural areas and green spaces, link commuters with energy efficient, affordable public transit, and develop our Main Streets, urban centers, and suburban communities into places that are accessible and vibrant.  This 'location efficient' development model will also save money by maximizing the use of existing infrastructure--which helps minimize the need to construct new roads, schools and utility infrastructure.  Not only will this save money for communities, but it will also help households save money.  Communities with multiple transportation options will lessen the burden on the family car, and reduce the amount a family spends at the pump.  Several new studies have also shown that homes in 'location-efficient' communities are less likely to be at risk of foreclosure due to lower transportation costs....An AARP survey showed that 71 percent of older Americans want to live within walking distance of transit. More walkable communities that offer access to shopping, medical services, and social amenities can help older Americans age in place and preserve their independence--even while they curtail their driving.  Other studies indicate similar trends among the younger generations and households without children."

"Location-efficient" is really code for the government telling Americans where they can live, work and play.  After all, many cities, including El Paso, Texas, are trying to revitalize their downtown areas and make them attractive as centers for citizens to live and work and play.  In a society with an emphasis on public transportation, it is extremely important to encourage citizens to live and work as close to the inner city areas as possible.  That is really the only way to insure that people are within walking distance of public transit.  The problem is that many Americans have chosen to flee to the suburbs and many prefer to stay there.  But Dodd's new act will fix that problem as each community decides for itself which areas are "location-efficient" for issuing building permits for new home builders and businesses wanting to come into the community.

And the bill will not just affect those purchasing new homes.  As communities take grant money targeted at making the community "energy efficient", local boards can tell homeowners that they need new roofs and new windows and energy efficient appliances.  If the homeowner cannot afford the upgrades, he may be subject to liens and fines.  We are already beginning to experience a foretaste of this in El Paso where a new ordinance for vacant buildings requires that buildings that are unoccupied for a certain period of time must be brought up to 2010 fire codes.  Requiring that homeowners bring their homes up to new energy efficient standards may actually increase foreclosures as financially strapped sellers are unable to get the money to comply with the new standards before selling their home.

Of course, like every other piece of bloated legislation being passed this year, the Act creates a new department of the federal government--The Office  of Sustainable Housing and Communities with its own czar.  The department will oversee development to make sure that each local community is marching in lock step with Uncle Sam.

If Americans want to live in the city, they should be free to do so.  But if they want to live in the suburbs or in rural areas far from conveniences, that should also be their choice.  To enact a law tied to billions of  taxpayer dollars doled out as grant money to enable local boards answerable to a new agency of the federal government to micromanage the local citizens is wrong. 

Dodd talks about senior citizens who want to live within walking distance of public transit, but he does not mention the many seniors who own their homes free and clear but may not be able to afford to upgrade their current houses to meet new energy efficiency standards.  How will the quality of life of these people be affected?  What about families with young children who are struggling to keep a roof over everybody's head?  If a young father working multiple jobs to support his family cannot afford to put energy efficient windows on his house to make it environmentally friendly, what happens?  What about the many Americans who own a piece of land somewhere and have dreamed all of their lives of building a small home on it and spending their golden years fishing?  Will the local board tell them that their dream is not "location efficient" and they cannot build their home?

Opponents of this bill are asking everyone who disagrees with the intent of this act to contact Republican Senate Minority Leader Mitch McConnell and ask him to filibuster the bill.  Supporters don't need to act--barring a filibuster this should pass the Senate in the next few days.

Part of the American Dream is freedom to make our own choices.  The cities and towns in this country need to make their own zoning decisions based on the desires of the citizenry--not the desires of the federal government.  And they need to pay for whatever they are spending on community development themselves--not with federal tax dollars. Private citizens and private business making independent decisions about what the people want and are willing to pay for on a local level is the only real key to creating better places to live work and raise families.

Legal Personality of the Year award for GLC's Principal Solicitor & Ian Smart

GLC's Principal Solicitor has been honoured at the 2010 Law Awards of Scotland. The prestegious Legal Personality of the Year award went jointly to GLC's Mike Dailly, and past President of the Law Society of Scotland, Ian Smart. Last night, awards host Richard Draycott explained the thinking behind the decision of the Judges as follows:

"Surely nobody would argue with the proposition that we have had an unprecedented 12 months in the history of the Scottish legal profession. It has been a year of argument for the hearts and minds - a battle for the very soul - of the Scottish solicitors’ profession. The Law Award judges were unanimous that it would be disingenuous – perverse even - to look beyond the furore over ABS to find the Legal Personality of the Year".

"The publication of the Legal Services (Scotland) Bill in late 2009 reignited a debate that had been dormant since the Law Society’s 2008 AGM. What followed was months of passionate argument – evidence to the Justice Committee, blogs, press releases, newspaper reports, journal articles, road-shows – the whole interspersed with what to many outsiders seemed a baffling succession of Law Society general meetings, alleged general meetings and referenda, with outcomes no more comprehensible than the proceedings themselves. Solicitors truly living up to their reputation for obfuscation".

 "The battle lines were drawn between: on the one hand, those urging regulatory change and ABS as commercial and practical necessities for Scottish solicitors to remain competitive and seize the opportunities of globalisation and technology, and on the other, those urging caution and the maintenance of the traditional model of independence as both more in keeping with Scottish legal values and a better competitive bet in the long-term".

"Both sides had one thing in common: both saw themselves as the true defenders of the values, traditions and ambitions of Scottish solicitors. Both sides also had in common some of the most articulate, and entertainingly trenchant, debaters in the profession today. Two personalities from opposite sides of the argument stand out amidst the swirling smoke and gun fire of the battlefield".

"Both have in common tenacity and stamina. Both can be argumentative and combative. Both have a tendency to hyperbole. Both have the common touch. Both have a sense of humour. Both have engaged us. Both have entertained us. Both share the distinction of debating the future of the Scottish legal profession from the same sofa on national television".

"One found himself cast as what he would see as the improbable advocate of the establishment position and master of political spin. One found himself cast as the rebel outsider, master of the campaigning blog. One is Ian Smart, past President of the Law Society of Scotland. The other is Mike Dailly, Principal Solicitor of Govan Law Centre.  The Judges are unanimous in awarding the Legal Personality of the Year award jointly to Ian Smart and Mike Dailly".

Rumor Has It...

Rumors are flying that President Obama is about to appoint Linda Warren, Harvard Law Professor and Chair of the TARP Oversight Committee to be the new head of the Consumer Financial Protection Bureau. Supporters of the Bureau applaud Ms. Warren's possible nomination, since she is vocally on the side of consumer advocates and against the lending and credit industries.  Ms. Warren's anti-business and anti lending positions seem to conflict somewhat with her position as chair of TARP oversight where she was responsible for handing out bailouts to the very banking giants whom she claimed needed policing.  Still, the White House seems committed to its choice--so much so that President Obama may appoint Warren as an interim chair so that she can avoid the Senate confirmation process.

Senator Jeff Merkley (D- Oregon) posted an article on Huffington Post yesterday defending Warren.  "The new consumer watchdog will only be effective, however, if it has strong leadership.  There is no doubt in my mind that Elizabeth Warren is that leader.  She has been America's leading voice on behalf of financial fairness for families and the driving force behind the creation of the Consumer Financial Protection Bureau."  Not everyone in the Senate is such a fan, however.  Even Chris Dodd, for whom the Dodd Frank Financial bill is named, says that the votes may not be there to get Warren confirmed.  Senator Richard Shelby, (R Tx) wants a confirmation process so that Warren can be questioned and vetted  properly before the Senate turns over to her the responsibility for such a huge, powerful new agency.

My issue with Warren and, others like her, is that, political differences aside, she is an academic.  Rather than having our laws and policies written by business people, many of the new rules coming out of Washington are being written by professional politicians and university professors.  Teaching law at Harvard does not qualify any individual to head a major agency that writes rules for business.  In fact, in my opinion, it does not qualify an individual for anything except going into legal practice or being appointed to a judgeship.

The Consumer Financial Protection Bureau is going to have broad, sweeping powers to write whatever regulations it sees fit to govern and regulate all types of lending transactions including mortgages and credit cards.  It will have life and death power over many different types of businesses, from very tiny mortgage companies like mine to huge banking centers with assets of over $10 billion.  It will track consumer spending habits and purchases, and will determine what types of credit cards we can have and what types of mortgages are available.  It has not only the right, but the responsibility, to call in the IRS on any business that it supervises which it suspects might not be paying its taxes properly.  It seems to me that if such an agency is going to exist at all, it should be headed by an individual with many years of real world business and lending experience.  The director should be someone who knows in practical terms what works and what does not work in lending and credit.  He or she should be a person who understands the possible unintended consequences of legislation that might sound good but may end up costing the consumer a lot more money or might lead to even more credit restriction. 

To me this is one of the greatest problems with our country right now.  We have people with a lot of theory about how the economy should be run but no practical experience, so when their ideas do not work in the real world, they are shocked.  The politicians simply do not know how to react to real world crises that do not line up with their theoretical ideas.

Chris Dodd has warned the White House that if the President appoints Warren as interim director to sidestep the Senate confirmation process, Congress and the Senate may retaliate by de-funding the Consumer Financial Protection Bureau, essentially killing it before it has a chance to be born.  If that happens, Warren's appointment will have been responsible for the death of her beloved newly formed agency, and many businesses in this country will have dodged a bullet.  Maybe I was wrong--maybe the president should go ahead with his plans to appoint Warren after all.

Unlawful private sector tenancy charges in Scotland

GLC's contribution to BBC Newsnight Scotland's story on unlawful tenancy fees (or 'premiums') charged by private sector landlords and letting agents in Scotland is available to watch on BBC iPlayer here (18 min into the show).  For more information on how to challenge the charges see GLC's online information here.

Happy Anniversary

It seems inconceivable to me that tomorrow will mark two years since the collapse of Lehman Brothers.  I am sure that no one working in real estate or finance can forget October of 2008, when the world actually appeared to be turning in super slow motion.  Buyers who were ready to buy walked away from the transactions; homeowners who had home improvement loans approved decided not to go forward with their loans because they were afraid of what the markets were doing.

In some ways it seems like yesterday, and in others it could have been 10 years ago.  So much has happened since the fall of 2008--we have seen Fannie Mae and Freddie Mac go into conservatorship costing taxpayers billions of dollars and counting.  We have seen battles over health care and financial reform and huge changes to mortgage lending.

The collapse of Wall Street giants such as Lehman Brothers, Merrill Lynch and Bear Stearns is repeatedly blamed on "toxic assets"--bad investments in the mortgage markets.  "Toxic assets" sounds so sexy--so much better than "really stupid loans anybody with sense would know could not possibly work."  After all, Lehman Brothers owned Aurora Home Loans which was originating 100% investment property mortgages.  Through their program, a buyer could purchase single family residences as rental properties with no down payment.  Since statistically, borrowers who get into trouble will tend to allow their investment properties to go into foreclosure before they allow their primary residences to be foreclosed on, this type of loan carried an extremely high degree of risk.  For the real estate investor who had watched one too many infomercials, the ability to purchase up to 10 single family homes as rental properties was a huge temptation.  After all, most of them had been led to believe once they got these properties, the money would come rolling in and they could spend their days on a yacht somewhere in the South Pacific.  However, since  many of these investors were largely overextended, all they needed was a couple of months of vacancy in some of these houses to not be able to meet the mortgage obligations, and soon they were in default.  Multiply that problem by a lot of real estate investors, and soon the companies that owned these mortgages were bankrupt.

We have heard a lot over the last two to three years about responsible lending, and today we would decry these practices I just described as completely irresponsible.  And while I would like to point out that the loans themselves were irresponsible, not all of the borrowers were.  I had an investor who purchased 10 properties between 2004 and 2008.  At least one of those was purchased using 100% financing--others were purchased with 5% to 10% down.  When the market began to struggle, my borrower paid  cash toward the mortgages of the properties to make sure that he had some equity and refinanced his high interest rate, low down payment purchase mortgages into much lower interest rate loans that would allow him to cash flow.  Last fall, we took advantage of dropping rates to refinance 4 of the homes into better terms.  So not every borrower defaulted, although certainly many did. 

I wonder, though, if our practices today are truly more responsible, or just different.  Even though we have heard a lot about the importance of down payments in discouraging defaults,  the government is still providing 100% financing for primary residences through USDA and VA loans.  In fact, after a long hiatus, USDA funding became available again last week.  We are worried about homeowners going into foreclosure, but the average homeowner in foreclosure is now living free in their own home without making a payment for over 460 days.  Banks prefer to allow the homeowner to stay rather than to have the house vacant and open to vandalism, so they allow borrowers to stay in the house for over a year.  No one wants to see Americans foreclosed on, but does rewarding not making the house payment by allowing the homeowner to live there free encourage responsible behavior?  Does encouraging borrowers to ask their mortgage company for a 10% reduction in principle so that they can refinance into an FHA loan encourage responsible behavior on the part of the homeowner?  Does paying a mortgage for up to 2 years for a person who has lost his job and is drawing unemployment encourage the homeowner to sit in a house that he needs to sell rather than moving to a new area where he could get a job?

If we accept the premise that the "Great Recession" was caused by greed and irresponsibility on the part of banks and brokers who wanted make loans without consequences and borrowers who wanted to live in homes they could not afford or build real estate empires with no cash investment, then we should also recognize that rewarding irresponsibility and greed on an individual level is as great a mistake as rewarding it on a corporate level.  If handouts are a mistake on Wall Street, they are an equal mistake on Main Street.  As a society, we should not be "too big to fail," or "too small to fail."  We should be allowed to fail, period.  And from those failures, we should be allowed to learn. 

When Thomas Edison was accused of failing at 2000 attempts to invent the light bulb, he famously replied that he had never failed; he had only discovered 2000 ways not to make a light bulb.  And there was truth to that--the light bulbs in all of our homes and offices bear testimony to the fact that he learned enough from each of his mistakes to finally succeed.  But what if there had been some sort of "inventor bailout program" to protect Edison from his mistakes so that they were not so readily apparent?  What if his wrong turns and poor choices had been taxpayer subsidized?  Would he have been motivated to keep trying until he got it right?

Will the homeowner sitting in their home for 460 days without making a payment really learn to live within their means and consider the monthly payment and terms carefully when looking at housing options, or will they just have learned that it doesn't matter whether they can afford the house or not, because somebody is going to allow them to live in it anyway? Maybe the only thing that other home buyers will have learned is that it does not matter whether real estate values are up or down, because the government will come to their rescue and get their principle balance reduced.

As we near the two year anniversary of the failure of Lehman Brothers, Fannie Mae, Freddie Mac and other corporate titans, we should not just be looking back.  We should be looking forward at where our present actions are going to take us two years from now.

No Laughing Matter

Today, President Obama named Austan Goolsbee to take Christian Romer's place as the new chairman of the White House Council of Economic Advisers.  The 41 year old Goolsbee was chosen partly because he is already part of the President's  economic team, sending a message to detractors like John Boehner who are calling for the resignation of the president's current team.  Also, according to Politico  who is quoting an unnamed senior administration official, "It was hard to find someone on the outside who wanted to come inside."

Certainly in times of recession where unemployment is high, the real estate market is sagging, and Americans are very unhappy on the eve of a major election, taking on the chairmanship of the Economic Advisers Council  could be considered something of a suicide mission.  Goolsbee's qualifications for the job appear to be his Ph.D. in economics from MIT and his years as a professor of economics at the University of Chicago.  But according to the unnamed administration official quoted by Politico, his primary qualification is his great personality which he will use to sell the President's policies to a skeptical nation.  Politico quotes this administration official as saying, "He's young and energetic, and good on TV."

Apparently, he's very good on TV.  Goolsbee appears frequently on Comedy Central and last year won the 16th annual "D.C's Funniest Celebrity Contest."  He has been a guest on the Daily Show and is by all accounts comfortable in front of the camera and good with an interviewer.  Good skills to have no doubt, but do they qualify him to be the chief economic adviser to the president?  Does a man who has spent his adult life cracking jokes in an ivory tower really have a clear, real world understanding of how economic policies and laws governing finance affect the day-to-day lives of ordinary people?

In a personality driven, media driven society such as ours, where even the reality TV is staged, it is easy to blur the line between facts and fantasy.  We are surrounded by entertainment, so we expect to be entertained by everyone, including our government.  And as long as the messenger is personable, entertaining, attractive and outgoing, we tend to ignore the message.

The truth is that the economy is in bad shape right now.  For those working in real estate, things are very bad indeed.  For people buying and selling houses, these are tough times.  And the basic stagnation of the real estate market and fear of the higher taxes associated with new debt and new programs is causing many people to lose jobs and businesses and keeping many others unemployed.  So we don't need a court jester to make us laugh; we need a leader who can use real world experience to find solutions that will work.  "Young and energetic" with a winning personality may be a good wish list for your next E-Harmony date, but it is hardly a qualification for someone who needs to be providing answers to Americans who can't find jobs and cannot keep their businesses open.  I, personally, would prefer to see someone old and boring with many years of real world experience in this job.  At least he or she would bring some depth of knowledge to work everyday instead of just great sense of humor.

Rather than using his skills as a comic to defend policies that clearly are not working, maybe Goolsbee needs to get out into mainstream American society to find out what small business owners and regular people really need right now.  Unless his comedy routine includes lower taxes and less regulation and cutting government spending, he may find that this time, no one is laughing.

Chancellor's further £4bn benefits cuts 'ruthless and reckless'

GLC believes that the announcement today of an extra £4bn of social security cuts by the Chancellor of the Exchequer, in addition to the £11bn of benefit cuts announced in June, is ruthless and reckless behaviour by the UK Coalition Government to vulnerable citizens.  Describing unemployment as a 'life-style choice', as Mr Osborne has chosen to do, is the classic language of scapegoating, and GLC believes that such an approach is particulary unhelpful when the future of 10,000 shipbuilding and related jobs in Govan, Rosyth and wider Scotland have been threatened by the UK Government's uncertainty over the construction of the Royal Navy's carrier programme.

GLC fully supports the 'Better Way' campaign led by the Scottish Trades Union Congress (STUC).  The STUC's position is that there is an economic crisis in the UK – a crisis of high unemployment and stagnant growth; and not, as the Government insists, a crisis of the public finances. The Better Way campaign argues that the UK Government has systematically distorted and exaggerated problems with the public finances.

The STUC argues that the UK was never in danger of becoming the next Greece. The rising deficit reflected the collapse in tax revenues and rising cost of unemployment benefits during the recession. It was not caused by out of control public spending. History does not support the Government's assertion that cuts will be good for growth and jobs. But history does support the STUC’s belief that deep and premature cuts will lead to persistently high unemployment. There is a Better Way! (visit the site to find out more).

The End of Life as We Know it?

A scary article on AOL today details the reasons that writer Rob Hahn believes thirty year fixed rate mortgages (and 10 and 15 and 20) could be about to become as extinct as the dinosaur.  Hahn's basis for his argument is the Treasury summit on finance conducted last month and some of the findings coming out of it.  If his premise is correct, it will radically reshape the society in terms of home ownership and expectations.

Of course the point of the summit was to look for new solutions to the continuing problem of Fannie Mae and Freddie Mac.  Both agencies are now functioning like lenders who are going out of business.  In my twelve years as a mortgage broker, I have learned to identify the warning signs that a lender who appears to be fine is about to close their doors without warning--they start turning down good loans.  Private lenders do that months before they announce their closure to clear their portfolios, but it appears to me that this is what Fannie and Freddie are now doing to reduce their own portfolios.  That growing restriction of credit is what is currently killing the housing industry.

But  according to Hahn, the problem will only get worse.  He predicts that Fannie and Freddie will both be nationalized.  Of course, Barney Frank has said publicly that a private/public hybrid does not work, but he also advocated for a new agency which would have new guidelines and no private ownership.  Hahn seems to believe that the agencies will survive, but no longer as profitable entities.  As wholly owned government agencies, they will simply seek to further the goals of the administration rather than to make money.  And one of those goals appears clearly to be to transform the US from a nation where home ownership is the American dream to a nation where we are content as renters.  All of the initiatives that we have seen have been towards postponing foreclosures through all kinds of artificial means--something akin to keeping a comatose person alive on life supports.  But at the same time we see a real move to make purchases increasingly more difficult, and we also see a media push to encourage renting as a prudent alternative to buying a home.

Hahn believes that the new and improved government-owned Fannie and Freddie will concentrate on loans for apartments and multifamily units rather than single family homes.  According to an article in Housing Wire published August 18, the day after the Treasury Finance Summit,  the summit extolled the virtues of a society in which Fannie and Freddie would invest heavily in rental space.  According to the article, one of the participants in the summit was Alan Boyce, CEO of Absalon, which is a venture of George Soros, who touted the virtues of Danish society, where many renters are assisted by the government and the taxes are extremely high.   As Fannie and Freddie invest more in multi family, apartment housing, they can offer better rates and terms than private companies, and they can, as a result, acquire much of the apartment industry as collateral.   We can also look for more focus on renting as a preferred lifestyle through media outlets and through government information programs.

So how does this impact on the thirty year fixed rate mortgage?  Hahn believes that as Fannie and Freddie assume their new roles in apartment finance, they will ease out of the single family mortgage market.  This will result in banks and private investment firms having to decide whether they want to make loans on houses and at what terms.  Bill Gross of Pimco, who was also at the housing finance summit, made the statement that if his firm were going to loan on single family mortgages, he would want to see 30% down and an adjustable rate mortgage for a 10 or 15 year term.  So all mortgage financing will become very much like hard money lending today.

Interestingly, Fannie Mae was started during the Great Depression, along with FHA, to make it possible for Americans to own homes without depending on the local banks for a source of capital.  Because the banks could sell the loans, they did not have to loan just the amount of money that they had on reserve at any one time.  This system, which is unlike any other system in the world, has made possible the highest rate of home ownership in the world.  Why we would now want to model ourselves after Denmark and transform from a nation of homeowners to a nation of renters is incomprehensible to me.

When my parents bought their first home in the late 1960's, they used my father's VA loan to get the house.  At that time, borrowers who did not have VA had to put 20% on the house.  My mother describes that many Americans saved money until their late thirties to buy their first home.  The difference between then and now--my parents' first home, which they purchased brand new from a builder with a great floor plan and a nice neighborhood, cost $16,000.  The average price of a home today is $204,000.   A $61,200 down payment is beyond the capacity of many Americans to save, so renting will become the only option.  Home ownership will go from being the American dream to being an unattainable fantasy for many working families.  That doesn't sound like progress to me.

Property firm tries to evade new Bill

The Herald reports that a controversial property management firm has tried to exclude itself from a Bill to impose standards on property factors.  Glasgow Labour MSP Patricia Ferguson’s Property Factors Bill began its first parliamentary stage yesterday, with factors giving evidence to the Scottish Local Government Committee.

Glasgow-based Greenbelt Group Ltd, which charges owners for land management in developments, claimed it would not be covered in the bill because it is a landowner. The Bill would introduce a compulsory register of property managers to root out rogue factors, and also set up a dispute resolution process to give homeowners right to redress.

Yesterday, Greenbelt’s managing director Alex Middleton was told by MSPs his company was effectively doing the same job as a property factor, and Ms Ferguson said the Bill would cover Greenbelt.  Mr Middleton said: “The Bill recognised the need for registration, regulation and resolution. Greenbelt is not a property factor so we don’t feel it applies to us.” Greenbelt owns the land around developments and charges the owners a management fee, billing owners for maintenance.

Conservative MSP David McLetchie said Greenbelt served the same purpose s other factors. He said: “Ultimately, it is no different if land was owned in common and they paid a factor. You bill them for the same services. The issue is not about ownership, but services and costs associated with that.” Ms Ferguson said the Bill was drafted to ensure it also included Greenbelt.

The Property Factors (Scotland) Bill, drafted by Govan Law Centre, expressly includes companies, such as Greenbelt, as the definition of 'property factor' in section 2(1)(c) includes: "a person who owns and manages or maintains land which is available for use by the owners of any adjoining or neighbouring residential properties (but only where the owners of those properties are required by the terms of the title deeds relating to the properties to pay for the cost of the management or maintenance of that land)".

Establishing Value

Remember the old rule for value that most of us were taught when we first got into the real estate business: "The value of any item is what a willing and qualified buyer will pay."  That mantra has certainly changed as we have seen real estate values skyrocket and then crash.  Now the value of a piece of real estate can vary widely depending on who appraises it and what the underwriter thinks of the report when it comes to her desk.  I have personally seen two appraisals that differ by more than $100,000 on the opinion of value of a piece of property, and both were done by competent appraisers.

Of course, the appraisers and the mortgage brokers have taken most of the blame for the economic distress this country is in and the problems with the real estate industry.  To hear the media tell the story, everything bad that has happened for the last two years has been the fault of evil appraisers who artificially inflated values and evil mortgage brokers who pressured them to do so.  And because of those evils, mandates which separated the loan originator from the appraiser were necessary, according to the government, so that there could be no collusion between these two wicked, self-serving entities.

And that makes Fannie Mae's new announcement especially interesting.  On Friday, September 3, Fannie Mae sent out an email stating that its new version 8.1 which will be released October 16 is being updated to increase the number of property that might be eligible for a property fieldwork waiver in DU refi plus.  Put simply, the computer program will determine that more property owners do not need an appraisal in order to refinance--even up to 125% of the property's value.

Just before the market crashed, Fannie Mae had programmed their systems to allow quite a few homes to get property inspection waivers.  That meant that the system looked at the address of the home and determined whether it agreed with the value that had been entered by the loan officer.  If the computer program agreed that the value was acceptable, no appraisal was necessary.  As the market began to crash, however, I began to see property inspection waivers go away, and rightly so since values were generally declining.

Last week I had findings for a property inspection waiver--the first one I have seen for a long time.  I thought they were gone forever, but last week, I got authorization to waive the appraisal.  Granted that the house currently  has a mortgage for less than half of what it is worth, and I took the estimated value off the tax rolls in order to have a figure for the underwriting system.  But still--a property inspection waiver based on tax rolls is really a return to the old way of doing loans.

I sell to one lender who does not allow property inspection waivers, but they do allow exterior only property inspections with no appraised value.  To me, that is more reasonable.  The appraiser does not value the house, but he does go by, photograph it, and fill out a form with a general statement of the neighborhood.  This saves the borrower a lot of money and it protects the lender from outright mortgage fraud--for instance submitting a loan for a house that is partially burned down or in such horrible condition that the lender would never knowingly make a loan on such a property if he had seen a photograph of it.  An exterior inspection appears to be a reasonable compromise if there is really no doubt about the property's value.

The problem with rigging the underwriting system to accept the stated value for a property up to 125% of the home's value is that it is a basic denial of the fact that home values are declining in many areas.  This is just a way of refinancing people who would not qualify if they had to stand up to the scrutiny of an actual property valuation.   A real appraisal might show that they owe twice as much as the house is worth; so let's avoid doing a real appraisal and pretend instead that the value is higher than it really is. This approach seems to be based on the theory that what we don't know won't hurt us.  I thought that was what got this industry into trouble in the first place.

When I wrote last month that the real estate industry is not going to improve until credit restrictions relax, I was talking about not putting unduly burdensome underwriting guidelines for credit, income, and assets on otherwise qualified borrowers.  I was not talking about rewriting the mortgage underwriting systems to play with property values so that people can refinance homes that could not qualify using reasonable standards.  It would make much more sense to go back to the old system of brokers hiring a local appraiser who knows the market than to use a computer model which has been skewed to produce the desired answer.  At least a real person has a license and some accountability.   The only good news is that when the next round of decreasing property values begins to get attention, Fannie Mae and the government will have no one to blame but themselves.

New Hope or Just More Hype?

Today the newest FHA program to refinance borrowers who owe more on their home than the property is actually worth went into effect.  This new program, made possible under the Emergency Economic Stabilization Act, will be available to homeowners starting today and lasting through December of 2012.

The impetus behind this new rule is to allow homeowners who are underwater because of dropping values to refinance into a lower interest rate so that they can better afford the payment.  The existing mortgage holder has to agree to voluntarily reduce the principal balance of the existing mortgage 10%, and then the borrower can refinance into an FHA loan up to 97.75% of the home's value.  If the borrower has a second lien, the second lien can stay in place for total loans of up to 115% of the home's value.  Notice that the principal reduction is voluntary on the part of the the current mortgage company, so if they do not agree to take a 10% write down on the loan, the borrower is out of luck. 

The program has some other interesting caveats.  For instance, it cannot be used to refinance an existing FHA loan, so if the borrower is upside down with FHA, he is still out of luck.  Also, the homeowner must be current on his house payment and must have a credit score of at least 500.  The loan may be a loan that was previously modified under Making Home Affordable but other than that it cannot have been delinquent and caught up by the servicer.  Loans that are in the HAMP trial period are not eligible for this refinance--FHA really wants to weed out dog loans on this program, so they require that you must be current on the house payment up until the month that the new refinanced loan closes.

The program also requires that other credit be acceptable.  According to HUD, major negative credit such as judgments or collections or other recent credit problems must be explained by the borrower and the explanation must be satisfactory to the lender.

HUD also wants to remind us that a short refinance in which the principal balance of the loan is reduced by 10% may negatively impact  the credit score of the borrower as it may be reported as a short refinance.  Further, the borrower should consult with a tax preparer because he may have to pay taxes on the amount of  the debt forgiveness since as far as the IRS is concerned, this could be considered income.  To put that into perspective, if you owe $400,000 on your home and you have your principal reduced 10% on your mortgage by your current lien holder, that is $40,000 in debt forgiveness which could potentially be added to your income for income tax purposes. 

HUD estimates that between 500,000 and 1,500,000 borrowers will refinance on this new program.  And that figure may be true.  What HUD is not saying is that the Making Home Affordable Program, which is the stepmother of FHA's new program, has given trial modifications to about 1.3 million borrowers so far.  The trial modifications last three or four months.  But of those 1.3 million, nearly 600,000 homeowners have dropped out of the program because they could not make their house payments, and another 250,000 are still waiting to see if they will qualify for modification.  An August 27 article in Daily Finance cites a Barclay's Bank study that 60% of homeowners who complete the Making Home Affordable Program and refinance their homes will ultimately go back into default.  The reason--they simply cannot afford the houses in the first place.

The problem is so serious that Daily Finance referred to the Making Home Affordable Program as "Real Estate Mortuary's Waiting Room," because the loans that are in HAMP are going to eventually end up in foreclosure.

HUD is hoping that the new FHA refinance will be more effective and more promising.  But with unemployment still high and sales dropping, another program to try to fix everything by lowering the house payments of homeowners who cannot afford their homes may just be a lot of hype after all.