A task force of state attorneys general recently updated a report on what’s being done to assist subprime borrowers avoid foreclosure and came to the conclusion there was a lot of fraud in subprime lending at the tail end of the housing boom.
The State Foreclosure Prevention Working Group came to this conclusion after noticing a “worsening trend” of subprime loans going into delinquency prior to an increase in monthly payments due to the end of a low introductory teaser rate. For example, in the group’s first report based on data from Oct. 2007 it found the percentage of loans facing reset in Q3 2009 that are currently delinquent was 21.4%. That figure increased to 28.5%, based on more recent data from January 2008. The report says:
While delinquency rates increase during the early life of a loan pool, this worsening trend confirms our initial assessment that very weak underwriting and mortgage origination fraud, and not simply payment resets, has been the primary cause for elevated subprime loan delinquencies for loans originated through at least the middle of 2007.
The main conclusion of the report is that while loan servicers in an absolute sense are doing more loan modifications to help borrowers avoid foreclosure, the ratio of borrowers helped remains low — the study found 7 out of 10 seriously delinquent loans were not in any work-out process during the period covered by the report, Oct. 2007 to Jan. 2008. (Seriously delinquent here means more than 60 days late in payment.)
For a more detailed review of the report, I recommend blogs Housing Wire and Calculated Risk.
And in a separate report, it was discovered that the sky is blue!
I love “hard hitting” government reports! They tell you months or years after something happened what everybody already knows! Brilliant!
And here’s a golden Nugget: Subprime loans “subprime loans going into delinquency prior to an increase in monthly payments due to the end of a low introductory teaser rate. For example, in the group’s first report based on data from Oct. 2007 it found the percentage of loans facing reset in Q3 2009 that are currently delinquent was 21.4%. That figure increased to 28.5%, based on more recent data from January 2008.” Hmmm…could that be because they were SUBPRIME borrowers to begin and to be subprime means you have a HISTORY of bad credit? Nah! Folks, subprime people are ALWAYS subprime because they either have no clue about paying their bills OR they are more vulnerable to economic downturns because they either they work in lower income industries or are non-native one-income families! That’s almost all I ever saw at the lower credit score levels. As I have stated here MANY times, you lose your job, it doesn’t matter what kind of mortgage you have…you can’t pay it unless you have CASH IN THE BANK! Subprime people NEVER do! And guess what? If you lose your job you can’t pay your rent either…I wonder how many rental evictions are going on these days?
It’s not just subprime people who couldn’t pay, it’s those who never had any intention of paying. A small house in Santa Ana recently went into foreclosure and the outstanding mortgages were over 1.2 million! The money is gone and the house is worth about 400,000 (if that). Some people were definitely duped into mortgages, but others duped the bank.
The story doesn’t support the charges. Yes, there was fraud out there, but less than is being presumed in this story. Many of the mortgages that went into default were not due to inability to pay, as much unwillingness to pay, in some very distressed areas. Stockton is a perfect example of this. So is Santa Ana. Does anyone really believe that all those people in Santa Ana had their finances change so quickly….and all at once? They are clearly voluntarily walking. And frankly, who can blame them, with all recent immigrant bashing that has taken place? Payback is a biatch.
People are walking not necessarily because they cannot afford their homes, but because their homes are worth less than they paid for it. That is not mortgage fraud, bad underwriting, etc…that is someone borrowing money and not wanting to pay back.
The housing market is like the stock market, highs and lows. If you cannot except the roller coaster ride, you should never have gotten on.
Yes, it is mortgage fraud when a mortgage broker calls every appraiser in town, until he convinces one to inflate value: Or as mortgage brokers call it: “estimated value”, or “needed value”, or, “hey buddy, I have this appraisal order for you in Fontana. I just need to make sure (you) can hit the value I need, before I send you the order. If you can, I will send you 10 orders a week.”
Sure sounds like fraud to me.
Oh, yea. Dont forget the idiot “appraiser” form filler, who is always happy to help. After all, the appraiser actually thinks its “good” customer service to give “comp checks”. All the while in complete violation of USPAP, which the OREA recognizes as law.
I’m telling you folks. Fraud is what made the mortgage business so profitable and popular amoung the young slacker types that live in So Cal. Something for nothing. I just need to funge a number here, or pressure a guy there. And the appraiser does the same. Everyone gets paid. Shoot, even the borrower is happy, and he/she doesnt even realize they just stole money from a bank, and “they” are the drivers of the getaway car. Mid 2003 price points i where you will find the bottom of the housing market.
Again, greed, from the borrower to the investment banks is what triggered all this. Had everyone been a little more vigilant to what the market was doing then maybe it would have been a little less volitile. If anyone wants a simple solution that would help homeowners as well as the banks then here it is.
As I take in the current foreclosure crisis I have come to the conclusion that the best available answer to all parties involved, homeowners, banks, lenders, servicers and everyone else involved is very simple. As I have been consulting large companies as well as homeowners in trouble I have see all sides to the problem. The homeowners want to stay in their homes. The banks want to either sell the properties in trouble and or do some kind of loan workout. The problem is most of the loans in trouble will NOT qualify for a workout or loan modification as the values have dropped 50% in some cases of what the homeowner paid for the home. So, IF a homeowner COULD stay in the home, taking care of all maintenance, plumbing, gardening, etc the home will probably maintain the value. The problem is why they would do this. Well, IF the lender was to rent the property back to the homeowner AFTER getting a deed in Lieu (the homeowner actually deeds the property over to the bank instead of going through a foreclosure), the homeowner would not have to move, eliminating a social stigma at the very least, and lowering their house payment as well as instead of a $6000.00 mortgage payment on a $700-800,000 loan, they would be paying market rent, or about $3000.00! The family gets to stay in their home, the kids are not uprooted, and they now have actual hope. The deal for the banks will be just as advantageous as for the homeowners as one of the conditions will be that the former homeowner must stipulate that they will cooperate with the banks marketing of the property by allowing a lock box, a sign, and agree to show the property. They could also be required to have renters insurance to relieve the bank of liability. Also, the former homeowner will be allowed a first right of refusal IF the property sells! Talk about incentive to keep the property up and to make the lease payments! The bank would otherwise be stuck with a vacant, dirty and rundown property that will sit, at the current rate in Orange County for well over a YEAR! Also after 30 years in this business, I can assure you a vacant, run down property (as the lenders will not make any repairs or fix up a property they only sell as is) will not sell as fast as a well maintained OCCUPIED property. So let’s recap, the homeowner will get to save their credit, they get to stay in their home, they get to pay less per month, they also get a GREAT chance to buy the property back. The bank gets the property back; they also get the property maintained for free. They still will list the home for sale as before. Now the best part for the bank. They will now have money coming in! Take 1000 properties in Southern California alone that one bank is currently trying to sell and that is $300,000.00 A MONTH they have coming in. IF it does take a year to sell the home, the bank would recoup over $36000.00 on the average OC home. Well more than the typical operating expense (which is $250.000.00 a month) for a 50 person servicing platform in Orange County servicing over 100,000 mostly delinquent mortgages. So, again there is scheduled to be over 1.5 - 2 Million FORECLOSURES THIS YEAR ALONE according to the National Association of Mortgage Bankers. IF you could apply this plan to only half of those it would provide at least a hope for all involved. There are solutions to this devasting real estate mess in California, but the loan servicers, the majority of which are out of State, are insensitive to the plight of the communities here. We, as real estate professionals, were an integral part of their business acquisition plan in past years. We can be a huge part of the solution process at this time. The loan servicing community just has to ask.
This is an original idea I have come up with and it HAS been presented to several large banks and servicers. Lou Pacific
Lou Pacific
Real Estate and Mortgage Company Consultant
Serving OC for 30 Years
“The problem is most of the loans in trouble will NOT qualify for a workout or loan modification as the values have dropped 50% in some cases of what the homeowner paid for the home.”
There’s also the issue of the homeowner having 0 or virtually 0 equity in the home to begin with because of a low or 0 downpayment. Compound that with the issue of negative amortization loans or I/O loans where no equity is being achieved (this assumes the value of the home is flat, we know values are falling), and you can see why so many are going wrong.
Lou,
I don’t think your plan is workable in the least. Servicers have enough trouble processing foreclosures and REO’s without now going into the rental business. Here are some of the faulty assumptions you’ve made:
“The problem is most of the loans in trouble will NOT qualify for a workout or loan modification as the values have dropped 50% in some cases of what the homeowner paid for the home.”
There’s no rule that requires a new appraisal in order to do a loan modification. The main requirement is the amount of borrower income and modifying the loan to make it affordable. If they’ve had a one time hardship, all that’s necessary is a recapitalization of the past due interest and bringing them current again. By the way, most areas have not lost 50% of value. If you’re talking about Stockton, then maybe, but that’s a silly blanket statement to make.
“The family gets to stay in their home, the kids are not uprooted, and they now have actual hope. The deal for the banks will be just as advantageous as for the homeowners as one of the conditions will be that the former homeowner must stipulate that they will cooperate with the banks marketing of the property by allowing a lock box, a sign, and agree to show the property.”
Well, which is it? Do they have hope of staying in the property or do they have to move when the bank sells it? This doesn’t sound much different than a typical REO requiring an eviction.
“Also, the former homeowner will be allowed a first right of refusal IF the property sells!”
Why would ANY bank agree to this? If they have a potential sale that meets their loss guidelines, they’re going to want to SELL it.
“Talk about incentive to keep the property up and to make the lease payments!”
Here’s a hint Lou: People that can’t afford their payment typically don’t put a lot of time, effort, or MONEY into keeping a property up. By the time it reaches the stage you’re talking about, it’s going to be in disrepair.
“The bank would otherwise be stuck with a vacant, dirty and rundown property that will sit, at the current rate in Orange County for well over a YEAR!”
Actually, REOs are selling better than anything else in OC with multiple offers in many cases.
“So let’s recap, the homeowner will get to save their credit, they get to stay in their home, they get to pay less per month, they also get a GREAT chance to buy the property back.”
Their credit will already be shot by the time they’ve missed 3 payments. How in the heck will they buy the property back if they couldn’t afford it to begin with???????????
“Take 1000 properties in Southern California alone that one bank is currently trying to sell and that is $300,000.00 A MONTH they have coming in.”
Sorry, but most REOs will not command a $3,000/month rent. Not even in Orange County.
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Lou, the bottom line is your idea isn’t that original. It’s been around for decades and it’s called a Lease Option. This is just a variation on the “find a homeowner in trouble and rent their home back to them” strategy that some RE investors use. There are huge potential legal pitfalls when using a lease option and it’s not a liability most REO depts would be willing to take on. Loan Servicers are in the business of servicing LOANS, not managing rental property. The more REO’s a bank holds, the worse their liquidity position is, so they want to move properties quickly and limit their losses.
Good work calling out the shyster Lou Pacific. Memba him, with his 8% conforming loan scare tactics? He strikes me (and others) extremely slimy.
Harry S. - I didn’t read your link, but I know a bit about mortgages. Here’s the problem. While it is true that rates are coming down, that doesn’t mean that interest rate resets will not result in very large payment increases (thus potential inability to pay resulting in a potential foreclosures) for a significant subset of Borrowers - again Sub-Prime is the problem.
ARM Loans, other than Option ARMS (excluded because they work much differently) , have three built in “protections” (at least that is the theory) for the Borrower ; the initial cap, a periodic cap, and a lifetime cap. When a loan resets, the lender takes the current index (for Sub-Prime loans, the index is almost always the 6 month Libor), and adds the margin in the Note to determine the effective rate for the next “period”. After the initial rate change, Sub-Prime loans typically reset every 6 months thereafter using the same methodology.
The problem is the “margin” and the initial rate cap. Unlike A and MOST Alt-A loans which typically have a 2.25% -2.75% margin (as an aside they are also usually tied to a different index - either a shorter term Libor or the 12 month rolling T-Bill average), Sub-Prime loans frequently have a margin between 5.99% - 7.99%. As importantly, the initial cap on Sub-Prime loans is usually 2.00% - 3.00% above the start rate - which typically in the heyday of Sub-Prime lending was 4.99% - 6.99%.
Almost all Sub-Prime loans are 2/28’s or 3/27’s meaning the loan is fixed for 2 or 3 years respectively prior to going to an adjustable rate. Here’s the math for a Sub-Prime loan using EXTREMELY conservative values:
Initial loan amount = $300,000.
Initial interest rate = 4.99%
Initial cap =2%
Term = 2/28
Margin = 5.99%
The payment for the first two years is $1608.63
The loan is resetting this month. The currrent yield on the 6 month Libor is 2.6798%,.
Index of 2.6798 + margin @ 5.99% = 8.6698%. In this case, since the index and margin exceeds the initial cap, the rate will go up 2% - the initial cap.
Borrower’s new payment @ 4.99% + 2% (6.99%) is $1933.44. FYI, the new payment is based on a current loan balance of $290,905. to reflect the reduction in principal from the original principal based on timely payments for the 2 years at the 4.99% rate.
That is a 20% increase in monthly payment.
On October 1st, the new payment will LIKELY be $2132.53 based on a new interest rate of 7.99% ,and a balance of $289,450. Remember, after the first change, the rate changes every 6 months. The periodic cap on Sub-Prime loans is almost always 1%.
The Libor would need to go down to
It seems my comments were “cut-off” . Here’s the rest:
The Libor would need to go down to
Last try — Here’s the rest:
The Libor would need to go down to
Is it the bottom yet? Is it time to buy?
Matt,
I have a great local OC story of some nasty fraud. Just a taste, it has rags to riches to soon to be in pinstripes, a FBI investigation, exotic cars, Lehman Bros., fleeing to a foreign country and a NOD at the Marquee towers all together in some good ol’ greediness. And, the best part… it isn’t Sadek.
Let me know if you are interested. It will be published at some point.
Argent Mortgage former guidelines:
620 middle credit score
100% cltv (80/20)
Stated Income / Stated Asset
As long as the loan application stated that the borrower has been on their job for at least 2 years, that was their proof.
As long as the loan application stated that the borrower was the general manager of a restaurant, that was their proof.
This company never called the borrower’s employer to ask these specific questions. They would simply call and ask if that person worked at the job as stated on the loan app. As long as whoever answered said yes, the Argent employee verifying employment would hang up and push the loan through.
A dish washer became a restaurant general manager or a gardener became a salesman for a landscaping company and their six figure salaries were supported by their job title.
This type of loan was sold throughout the United States….rampant fraud.
graphix-
That sounds like some fascinating reading. Perhaps you should e-mail Matt directly.
“task force of state attorneys ”
Again, our tax money going to a cause just because people:
1.) Did not read the paper before they signed
2.) Lack common Economic 101 sense
3.) Actually thought that their realtor was telling them the truth about the house price will just keep going up
4.) I think my favorite line from a realtor is “You could just work overtime 2-3 times a month to get into this place”
That one is my favorite and I think I would like to needle point that one on a pillow!
Thank goodness we did not buy!
Do not feel sorry for people who don’t read the fine print. Especially when the fine print cost upwards to $500K or more!