Just when we thought that the housing market could not get into a bigger mess, the major banks started announcing that they are putting a hold on pending foreclosures. To many commentators this appears to be a good idea--over the weekend commentators on Fox News remarked that this would give troubled homeowners more opportunity to straighten out their problems and keep their homes. But does it really?
Apparently the foreclosure process has created about as many villains as the origination process. Many people outside of the industry are blaming the MERS system which allows lenders to sell home notes without re-recording the deed of trust. I read the comments' section today of a website called 4closurefraud.org which urges distressed homeowners who are about to be foreclosed on to find an attorney to argue that they do not have a legal obligation to pay anyone but their original lender. If the note has been sold to a new lender, and the original lender has been paid off, they do not have any obligation to make payments under the note.
This argument is nothing short of insanity. I wonder if the people who advocate using technical loopholes like MERS and the presence of a new lender to avoid foreclosure realize that the secondary market (which allows lenders to buy and sell home loans and therefore creates more capital for originating new mortgages) is the very reason that they were able to buy a home in the first place. If you dismantle the secondary market by claiming that the current note holder does not have a legal right to foreclose on the property, you effectively destroy the very system that has allowed the U.S. to become a nation of homeowners.
Then there are complaints about "foreclosure mills." A letter signed by Barney Frank, Alan Grayson and Corrine Brown dated September 24, 2010, addressed to Michael Williams, CEO of Fannie Mae, complains that Fannie Mae servicers in Florida are employing law firms that specialize in speeding up the foreclosure process, "without regard to process, substance, or legal propriety. According to the New York Times, four of these mills are both among the busiest of the firms and are under investigation by the Attorney General of Florida for fraud...Several of the busiest of these mills show up as members of Fannie Mae's Retained Attorney Network." The letter complains that pressure to foreclose upon properties is leading Fannie Mae and its servicers to rely on attorneys who "specialize in kicking people out of their homes" noting that this same network of attorneys is retained to do pre-filing mediation between troubled homeowners and banks.
I do not know whether Williams responded to the letter or in what fashion he did so, but I do know this week, one wholesale lender suspended its operations in Florida. If foreclosures are going to be under the scrutiny of Congress, why lend there at all?
In the meantime, Bank of America, Ally and Chase are putting a hold on foreclosures in 23 states requiring court ordered foreclosures. According to an October 1, article in the Washington Post, Bank of America executive Renee Hertzler admitted in a deposition that she signed up to 8,000 foreclosure documents a month without reviewing them. The attorney general of California has ordered that Ally Financial stop foreclosures in the state--California does not have judicial foreclosure--and Connecticut attorney general Richard Blumenthal has announced a 60 day moratorium on all foreclosures by all lenders in the state.
So where is all of this headed? The elephant in the room in this situation is, that legal maneuvering aside, the homeowners being foreclosed on cannot afford the houses. The reason that the HAMP program--Making Home Affordable--has been such an ongoing failure is that even if the loans are modified into more affordable terms, the homeowners still cannot afford them. We currently have homeowners living in their homes over 400 days after foreclosure while they wait for the bank to sell the house. Is a person who has been living in his or her home without making a payment for 400 days going to want to start making payments on that home again if the loan can be modified? I don't think so. After not making a house payment for over a year, those homeowners are not going to be happy with anything less than have the lien invalidated so that they can own the house free and clear--a move which would cause a financial crash that would make the one two years ago look like a minor hiccup.
And then there is the issue of the title companies who insured title on the sale of foreclosed properties. If the foreclosures themselves are ruled illegal, they will face claims on the title they insured. In the worst case scenario, the new buyers could potentially forfeit the property as it is returned to its original owners. If the title company is responsible, will they have to reimburse all of the costs to the individual who purchased one of these homes in good faith and is now going to be homeless himself? Apparently, the title companies are getting nervous, as Old Republic Title has stopped issuing title insurance on foreclosed properties owned by Ally.
Frustrated homeowners who feel embattled by the banks may be cheering these moratoriums on, but they do not understand the full consequences of what is happening right now. And while the individual homeowners may not understand this reality, I believe that the major players in the housing industry such as Barney Frank certainly do understand it.
Is this all just political appeasement ahead of an important midterm election? Maybe partially, but I think this issue of stalling foreclosures on technicalities is a much more important issue than merely scoring brownie points with angry voters. A court ruling that a note holder who purchased a home note on the secondary market does not have a legal claim to foreclose on that property could fundamentally and radically change housing finance in the United States. If a judge were actually to rule that the lien holder does not have legitimate claim to the property the secondary market would effectively end, which would mean that banks and lenders would be able to make significantly fewer home loans at significantly shorter terms knowing that they were not going to be able to sell the notes. This new halting of foreclosures is much more than just a political move for voters, or a stall tactic for unhappy homeowners--it is a power play to restructure homeownership in this country as the government moves us from a society of homeowners to a society of renters.
Some of you may remember a few years ago, before the market crash and the murderous drug war in Mexico--when there was a lot of interest in providing housing finance in Mexico. Stewart Title even opened a title office in Mexico City. At that time, the idea was that so many Americans wanted to retire to Mexico that if the proper mechanisms were in place, they could buy houses with mortgage loans and title insurance similar to what they enjoyed in the U.S.
Efforts to duplicate the mortgage system were unsuccessful though. Living here on the U.S.-Mexico border, I used to get phone calls from people wanting to buy both commercial and residential properties in Mexico and wanting to get them financed. Financing was almost impossible to obtain, and after a few years I asked one lender why that was true. They answered that Mexican law made it almost impossible to foreclose on a property owner, and for that reason, lending was very scarce.
As we work through the process of foreclosures, we need to remember as a society that what makes mortgage debt an attractive financial instrument is that unlike credit card debt or auto loans, mortgage debt is secured against an immovable piece of collateral which under normal circumstances usually appreciates in value. A homeowner in trouble cannot run away with his house. So the debt is a good risk because the collateral is the lender's security. But when we make foreclosures impossible, we take away the collateral, and without the collateral, the entire system crashes.
Tomorrow: Whose fault is the foreclosure mess anyway?
Showing posts with label Barney Frank SB 3217. Show all posts
Showing posts with label Barney Frank SB 3217. Show all posts
How Will Financial Reform Affect the Future of HVCC?
As the two financial reform bills (HR 4173 and SB 3217) go to conference committee this week, one of the major questions on the minds of those in various aspects of the real estate industry is how the bills will ultimately affect the future of the HVCC (Home Valuation Code of Conduct).
The Home Valuation Code of Conduct was the outgrowth of a settlement between New York attorney general Andrew Cuomo and Fannie Mae and Freddie Mac. Cuomo agreed to drop an investigation against the two mortgage giants if they would agree to accept the code. HVCC went into effect of May of 2009 and has presented a number of challenges for the industry ever since.
HVCC was supposed to guarantee appraisal independence by banning mortgage loan originators from ordering appraisals, choosing appraisers, or speaking to appraisers directly. Retail banks can have a separate department that is not compensated based on loan volume order the appraisals, but the code expressly states that no mortgage broker or employee of a mortgage broker can order an appraisal.
In order to ensure compliance with the code, the appraisal-ordering process was turned over to appraisal management companies who take down the order, charge the loan originator for the appraisal, select the appraiser, handle all interaction with the appraiser, and send the completed report back to the loan originator.
The problems arose as AMCs hired out of area appraisers who did not understand the real estate market, undervalued houses, and refused to acknowledge errors or look at different comps. The costs also rose for the consumer (in some cases dramatically) since the AMC added its fees for managing the process to the fees of the appraiser who was actually doing all of the work.
Both mortgage brokers and many appraisers have opposed the provisions of the code, and widespread industry opposition has led to lobbying efforts to include a "fix" in the financial reform bill. In fact, the house bill, HR 4173, section 4312, specifically deals with the Home Valuation Code of Conduct and appraisal independence issues. Under the provisions of the house bill a negotiated rulemaking committee would be set up to review and set in place new standards for appraisal independence. The Negotiated Rulemaking Committee: "shall not prohibit lenders, the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) from accepting any appraisal report completed by an appraiser selected, retained or compensated in any manner by a mortgage loan originator" (provided that the originator is properly licensed under the SAFE ACT). The bill also mandates appraisal independence, sets clear guidelines for maintaining the autonomy of appraisers and seeks to enforce, "state or federal laws that make it unlawful for a mortgage originator to make any payment, threat or promise, directly or indirectly, to any appraiser of a property, for the purposes of influencing the independent judgment of the appraiser with respect to the value of the property, except that nothing in this section shall prohibit a person with an interest in a real estate transaction from asking an appraiser to consider additional appropriate property information; provide further detail, substantiation or explanation for the appraiser's value conclusion, or correct errors in the appraisal report." The bill also covers appraiser compensation, which has become a huge issue since HVCC was enacted. Once appraisals on loans which were sold to Fannie Mae and Freddie Mac had to be ordered through third party AMCs, the AMCs could dictate how much money appraisers were paid. HR 4173 does address this issue, and states that "lenders and their agents [must] compensate appraisers at a rate that is customary and reasonable for appraisal services performed in the market area."
Effective on the date that the new rules are introduced, the problematic Home Valuation Code of Conduct will no longer remain in effect.
While the House bill spells out this section very clearly, the Senate bill ignores HVCC and appraisal independence totally, so it will be up to the conference committee to see whether the final bill includes the verbage from section 4173 or whether the current Home Valuation Code of Conduct is allowed to stand. But regardless of what happens in conference for the final bill, HVCC's days are probably numbered. The reason? HVCC is not federal law--it was a legal agreement among Fannie Mae, Freddie Mac and the attorney general of New York. Loans that are not sold to Fannie Mae and Freddie Mac are not governed by the agreement, although most lenders do require the use of AMCs on all loans now. And the Senate Bill does call for a study of exit strategies for Fannie Mae and Freddie Mac to be completed no later than January of 2011. Barney Frank and Tim Geithner have both stated that a whole new system of housing finance needs to be introduced. That new agency, whatever it turns out to be, will not be bound by HVCC; it will be subject to whatever laws and guidelines are set in place by its creators. So for everyone who is hoping for an end to all of the problems caused by HVCC, help appears to be on the way--one way or another.
The Home Valuation Code of Conduct was the outgrowth of a settlement between New York attorney general Andrew Cuomo and Fannie Mae and Freddie Mac. Cuomo agreed to drop an investigation against the two mortgage giants if they would agree to accept the code. HVCC went into effect of May of 2009 and has presented a number of challenges for the industry ever since.
HVCC was supposed to guarantee appraisal independence by banning mortgage loan originators from ordering appraisals, choosing appraisers, or speaking to appraisers directly. Retail banks can have a separate department that is not compensated based on loan volume order the appraisals, but the code expressly states that no mortgage broker or employee of a mortgage broker can order an appraisal.
In order to ensure compliance with the code, the appraisal-ordering process was turned over to appraisal management companies who take down the order, charge the loan originator for the appraisal, select the appraiser, handle all interaction with the appraiser, and send the completed report back to the loan originator.
The problems arose as AMCs hired out of area appraisers who did not understand the real estate market, undervalued houses, and refused to acknowledge errors or look at different comps. The costs also rose for the consumer (in some cases dramatically) since the AMC added its fees for managing the process to the fees of the appraiser who was actually doing all of the work.
Both mortgage brokers and many appraisers have opposed the provisions of the code, and widespread industry opposition has led to lobbying efforts to include a "fix" in the financial reform bill. In fact, the house bill, HR 4173, section 4312, specifically deals with the Home Valuation Code of Conduct and appraisal independence issues. Under the provisions of the house bill a negotiated rulemaking committee would be set up to review and set in place new standards for appraisal independence. The Negotiated Rulemaking Committee: "shall not prohibit lenders, the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) from accepting any appraisal report completed by an appraiser selected, retained or compensated in any manner by a mortgage loan originator" (provided that the originator is properly licensed under the SAFE ACT). The bill also mandates appraisal independence, sets clear guidelines for maintaining the autonomy of appraisers and seeks to enforce, "state or federal laws that make it unlawful for a mortgage originator to make any payment, threat or promise, directly or indirectly, to any appraiser of a property, for the purposes of influencing the independent judgment of the appraiser with respect to the value of the property, except that nothing in this section shall prohibit a person with an interest in a real estate transaction from asking an appraiser to consider additional appropriate property information; provide further detail, substantiation or explanation for the appraiser's value conclusion, or correct errors in the appraisal report." The bill also covers appraiser compensation, which has become a huge issue since HVCC was enacted. Once appraisals on loans which were sold to Fannie Mae and Freddie Mac had to be ordered through third party AMCs, the AMCs could dictate how much money appraisers were paid. HR 4173 does address this issue, and states that "lenders and their agents [must] compensate appraisers at a rate that is customary and reasonable for appraisal services performed in the market area."
Effective on the date that the new rules are introduced, the problematic Home Valuation Code of Conduct will no longer remain in effect.
While the House bill spells out this section very clearly, the Senate bill ignores HVCC and appraisal independence totally, so it will be up to the conference committee to see whether the final bill includes the verbage from section 4173 or whether the current Home Valuation Code of Conduct is allowed to stand. But regardless of what happens in conference for the final bill, HVCC's days are probably numbered. The reason? HVCC is not federal law--it was a legal agreement among Fannie Mae, Freddie Mac and the attorney general of New York. Loans that are not sold to Fannie Mae and Freddie Mac are not governed by the agreement, although most lenders do require the use of AMCs on all loans now. And the Senate Bill does call for a study of exit strategies for Fannie Mae and Freddie Mac to be completed no later than January of 2011. Barney Frank and Tim Geithner have both stated that a whole new system of housing finance needs to be introduced. That new agency, whatever it turns out to be, will not be bound by HVCC; it will be subject to whatever laws and guidelines are set in place by its creators. So for everyone who is hoping for an end to all of the problems caused by HVCC, help appears to be on the way--one way or another.
Financial Reform and the Future of Fannie Mae and Freddie Mac
What is conspicuously missing from the over 1500 page financial reform bill passed by the Senate last month (SB 3217) or any of its more than 100 pages of amendments, is a clear strategy to exit Fannie Mae and Freddie Mac from their conservatorship and either dissolve or re-privatize these two entities. Traditionally Fannie Mae (The Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation) were public/private hybrids which meant that the U.S. government owned a minority interest in the two congressionally chartered, mostly private entities. In September of 2008, the U.S. government took both Fannie Mae and Freddie Mac into conservatorship in response to their huge losses, and since that time tax dollars have provided over $126 billion dollars to keep both entities open. Late last year, the Obama administration promised that it would cover unlimited losses through 2012 for both entities. (The pledged covered losses had been capped at $400 billion dollars prior to this.) Fannie and Freddie own or guarantee about $5.5 trillion dollars worth of U.S. residential mortgages or about 31 million mortgages, and in spite of recent credit and underwriting changes, they remain key players in the housing industry.
Both entities have been blamed in part for the financial meltdown and the problems with the mortgage crisis. Sharp criticism rose early this year when regulators announced that the CEO's of both Fannie Mae and Freddie Mac could be paid as much as $6,000,000 for 2009--a year when they were under conservatorship.
Many lawmakers agree that it is time to stop the bleeding on these two entities, which still provide an estimated 50-70% of mortgage loans in the United States. An amendment was offered to Senate bill 3217 which would have forced lawmakers to begin exiting Fannie and Freddie from conservatorship. This amendment was voted down. The one which passed, proposed by Harry Reid (D. NV) for Chris Dodd (D. CT) and Blanche Lincoln (D AR) calls instead for a Department of Treasury Study on "ending the conservatorship of Fannie Mae, Freddie Mac and Reforming the Housing System." The study is to include such options as "the gradual wind-down and liquidation of such entities; the privatization of such entities; the incorporation of the functions of such entities into a Federal Agency; the dissolution of Fannie Mae and Freddie Mac into smaller companies, or any other measures the Secretary (of the Treasury] deems appropriate." Other matters that this study is to consider include ways to restructure housing finance in the US to ensure that consumers will be able to access "30 year fixed rate prepayable mortgages and other mortgage products that have simple terms that can be easily understood; the role of the Federal Housing Adminstration and the Department of Veterans Affairs in a future housing system; the impact of reforms of the housing finance system on the financing of rental housing; the role of standardization in the housing finance system, and the options for transition to a reformed housing finance system." The study is to be completed no later than January 31, 2011 and it is to be delivered to the Senate Committee on Banking, Housing and Urban Affairs and the House Committee on Financial Services.
It is interesting that a bill which spends hundreds of pages creating and detailing the role of a new Bureau of Consumer Financial Protection, which has not previously existed, could not find space to do more than call for a study of two entities that are currently bleeding U.S. tax dollars. Although the amendment is laconic in its treatment of Fannie and Freddie, statements made by Treasury Secretary Tim Geithner and Congressman Barney Frank (D MA), who has been a major proponent of financial reform, suggest that actually the government does have plans for Fannie and Freddie--they just aren't telling us what those plans are yet.
For instance, the January 22, 2010 issue of the Wall Street Journal quotes Frank as saying that "The remedy here is...as I believe this committee will be recommending, abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance." In March, Frank went further and was quoted in the Washington Post warning investors that "People who own Fannie and Freddie debt are not in the same legal position as Treasury bonds, and I don't want them to be." According to the article, Frank says that he wants investors to understand that the Fannie and Freddie are not as safe as the U.S. government. The statement was unnerving to market analysts who feared that international investors would shy away from purchasing the debt. But Frank's comments are interesting in light of the current debate over whether the mortgage giants (or their replacements) should be privatized or owned completely by the government. One point on which everyone seems to agree is that a public/private hybrid, which the entities were before conservatorship, does not work. Frank has publicly expressed his dislike of public/private hybrids and Treasury Secretary Tim Geithner echoed his comments via Politico on April 9, 2010 when he called the hybrid concept "unworkable."
But the chances for privatization are not looking good. Former Fannie Mae CEO Daniel Mudd testified before the Financial Crisis Inquiry Commission in April of 2010 regarding the financial collapse of Fannie Mae. During his testimony Mudd was asked whether the government should be involved in the residential mortgage business. Citing the U.S. government's involvement in 90% of mortgage loans, Mudd's response was that "the notion that you could go back to a fully private structure cannot be accomplished within our lifetime." A study by Standard and Poor's released in January reaches a similar conclusion--it would be nearly impossible to attract enough capital to replace Fannie Mae and Freddie Mac with self-sustaining private companies which would offer affordable 30 year fixed rate mortgages.
That just leaves the government. This makes the parameters of the study particularly interesting, especially in light of Barney Frank's comments that we need to abolish Fannie and Freddie and come up with "a whole new system of housing finance."
What would such a system look like? No one is saying. But in a January interview with the Wall Street Journal Tim Geithner said that the process would not begin this year. "It's just a complicated thing to get right... But we are completely supportive and agree completely with the need to take a cold, hard look at what the future of those institutions should be in our country."
Both entities have been blamed in part for the financial meltdown and the problems with the mortgage crisis. Sharp criticism rose early this year when regulators announced that the CEO's of both Fannie Mae and Freddie Mac could be paid as much as $6,000,000 for 2009--a year when they were under conservatorship.
Many lawmakers agree that it is time to stop the bleeding on these two entities, which still provide an estimated 50-70% of mortgage loans in the United States. An amendment was offered to Senate bill 3217 which would have forced lawmakers to begin exiting Fannie and Freddie from conservatorship. This amendment was voted down. The one which passed, proposed by Harry Reid (D. NV) for Chris Dodd (D. CT) and Blanche Lincoln (D AR) calls instead for a Department of Treasury Study on "ending the conservatorship of Fannie Mae, Freddie Mac and Reforming the Housing System." The study is to include such options as "the gradual wind-down and liquidation of such entities; the privatization of such entities; the incorporation of the functions of such entities into a Federal Agency; the dissolution of Fannie Mae and Freddie Mac into smaller companies, or any other measures the Secretary (of the Treasury] deems appropriate." Other matters that this study is to consider include ways to restructure housing finance in the US to ensure that consumers will be able to access "30 year fixed rate prepayable mortgages and other mortgage products that have simple terms that can be easily understood; the role of the Federal Housing Adminstration and the Department of Veterans Affairs in a future housing system; the impact of reforms of the housing finance system on the financing of rental housing; the role of standardization in the housing finance system, and the options for transition to a reformed housing finance system." The study is to be completed no later than January 31, 2011 and it is to be delivered to the Senate Committee on Banking, Housing and Urban Affairs and the House Committee on Financial Services.
It is interesting that a bill which spends hundreds of pages creating and detailing the role of a new Bureau of Consumer Financial Protection, which has not previously existed, could not find space to do more than call for a study of two entities that are currently bleeding U.S. tax dollars. Although the amendment is laconic in its treatment of Fannie and Freddie, statements made by Treasury Secretary Tim Geithner and Congressman Barney Frank (D MA), who has been a major proponent of financial reform, suggest that actually the government does have plans for Fannie and Freddie--they just aren't telling us what those plans are yet.
For instance, the January 22, 2010 issue of the Wall Street Journal quotes Frank as saying that "The remedy here is...as I believe this committee will be recommending, abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance." In March, Frank went further and was quoted in the Washington Post warning investors that "People who own Fannie and Freddie debt are not in the same legal position as Treasury bonds, and I don't want them to be." According to the article, Frank says that he wants investors to understand that the Fannie and Freddie are not as safe as the U.S. government. The statement was unnerving to market analysts who feared that international investors would shy away from purchasing the debt. But Frank's comments are interesting in light of the current debate over whether the mortgage giants (or their replacements) should be privatized or owned completely by the government. One point on which everyone seems to agree is that a public/private hybrid, which the entities were before conservatorship, does not work. Frank has publicly expressed his dislike of public/private hybrids and Treasury Secretary Tim Geithner echoed his comments via Politico on April 9, 2010 when he called the hybrid concept "unworkable."
But the chances for privatization are not looking good. Former Fannie Mae CEO Daniel Mudd testified before the Financial Crisis Inquiry Commission in April of 2010 regarding the financial collapse of Fannie Mae. During his testimony Mudd was asked whether the government should be involved in the residential mortgage business. Citing the U.S. government's involvement in 90% of mortgage loans, Mudd's response was that "the notion that you could go back to a fully private structure cannot be accomplished within our lifetime." A study by Standard and Poor's released in January reaches a similar conclusion--it would be nearly impossible to attract enough capital to replace Fannie Mae and Freddie Mac with self-sustaining private companies which would offer affordable 30 year fixed rate mortgages.
That just leaves the government. This makes the parameters of the study particularly interesting, especially in light of Barney Frank's comments that we need to abolish Fannie and Freddie and come up with "a whole new system of housing finance."
What would such a system look like? No one is saying. But in a January interview with the Wall Street Journal Tim Geithner said that the process would not begin this year. "It's just a complicated thing to get right... But we are completely supportive and agree completely with the need to take a cold, hard look at what the future of those institutions should be in our country."
Subscribe to:
Posts (Atom)
