Sen. Ted Kaufman (D-DE) is now proposing systemic financial reform. One part of that reform — a big part — would clearly involve changes in the way mortgages are originated, underwritten, bundled, sold and re-sold. The impact on borrowers and the housing marketplace would be significant.

From the Senator’s speech, Wall Street Reform That Will Prevent The Next Financial Crisis:

“On one end of the securitization supply chain, regulators allowed underwriting standards to erode precipitously without strengthening mortgage origination regulations or sounding the alarm bells on harmful nonbank actors (not even those within bank holding companies over which the regulators had jurisdiction). On the other, securities backed by risky loans were transformed into securities deemed “hi-grade” by credit rating agencies, only after a dizzying array of steps where securities were packaged and repackaged into many layers of senior tranches, which had high claims to interest and principal payments, and subordinate tranches.

“The non-banking actors – investment banks, hedge funds, money market funds, off-balance-sheet investment funds — that powered structured finance came to be known as the shadow banking market. Of course, the shadow banking market could only have grown to surpass by trillions of dollars the actual banking market with the consent of regulators.”

Kaufman also looks at how companies on Wall Street sold mortgage-backed securities — and then bet that those securities would fail:

“t has also become known that some firms underwrite securities – promoting them to investors — and then short these same securities within a week and without disclosing this fact, which any reasonable investor would regard as adverse material information. In the structured finance arena, investment banks sold pieces of collateralized debt obligations — which were packages of different asset-backed securities divided into different risk classes — to their clients and then took proceeded to take short positions in those securities by purchasing credit default swaps. Some banks went further by shorting mortgage indexes tied to securities they were selling to clients and by shorting their counterparties in the CDS market. This is how a firm like Goldman Sachs could claim that they were effectively hedged to an AIG collapse.

“Unfortunately, the use of products like CDS in this way allows the banks to become empty creditors who stand to make more money if people and companies default on their debts than if they actually paid them. These and other problematic practices that place financial firms’ interests against those of their clients need to be restricted. They also completely violate the spirit of our seminal legislation from the 1930s, which insisted — for the first time — that the sellers and underwriters of securities disclose all material information. This is nothing less than a return to the unregulated days of the 1920s; to be sure, those days were heady and exciting, but only for a while — such practices always end in a major crash, with the losses disproportionately incurred by small and unsuspecting investors.”

For the full speech, see: Wall Street Reform That Will Prevent The Next Financial Crisis

Technorati Tags: housing, indexes, marketplace, mortgage, reform, securities, short selling, sold, underwritten, Wall Street

In fact, you would expect the January-to-February total to decline even if the weather was wonderful. Why? Because January has 31 days and February just 28 this year.

“The 6 percent year-over-year increase we saw in February was the smallest annual increase we’ve seen since January 2006, when we began calculating year-over-year increases, but it still marked the 50th consecutive month of year-over-year increases in foreclosure activity,” said James J. Saccacio, chief executive officer of RealtyTrac. “This leveling of the foreclosure trend is not necessarily evidence that fewer homeowners are in distress and at risk for foreclosure, but rather that foreclosure prevention programs, legislation and other processing delays are in effect capping monthly foreclosure activity — albeit at a historically high level that will likely continue for an extended period.

“In addition, severe winter weather appears to have temporarily slowed the processing of foreclosure records in some Northeastern and Mid-Atlantic states.”

Six states account for more than 60 percent of national total

Foreclosure activity was concentrated in six states: Nevada, Arizona, Florida, California, Michigan and Utah. RealtyTrac says that 61 percent of the nation’s foreclosures were located in those states. Rounding out the top ten were Idaho, Illinois, Georgia and Maryland.

In terms of metro areas, RealtyTrac says that foreclosure trends have begun to change among the 10 regions with the highest foreclosure numbers:

“Metro areas in the Sun Belt states of Nevada, Florida, California and Arizona continued to dominate the top 10 highest foreclosure rates among metropolitan areas with a population of 200,000 or more, but activity trends in these areas varied considerably.

“The Las Vegas metro area documented the highest metro foreclosure rate, with one in every 90 housing units receiving a foreclosure filing during the month, despite a 9 percent decrease in foreclosure activity from the previous month.

“Six of the other metro areas in the top 10 — all in California or Arizona — also reported decreasing foreclosure activity from the previous month. The biggest monthly decrease among the top 10 was in the Phoenix metro area, where foreclosure activity dropped nearly 18 percent.

“In contrast, the two Florida metro areas in the top 10 both posted substantial monthly increases in foreclosure activity. The Cape Coral-Fort Myers metro area saw a 31 percent increase in foreclosure activity from the previous month, giving it the second highest metro foreclosure rate — one in every 92 housing units receiving a foreclosure filing. An increase of nearly 66 percent in foreclosure activity from the previous month helped boost the foreclosure rate in Port St. Lucie to sixth highest.

Technorati Tags: 2009, 2010, Arizona, California, February, Florida, Foreclosures, Georgia, Idaho, Illinois, Maryland, Michigan, Nevada, Utah

New rules from the Federal Reserve will make it more difficult for lenders to charge overdraft fees — you’ll now have to opt-in to pay over-the-limit fees. This means lenders will have to get your agreement to charge you each time you overdraw your account.

OR

You can elect not to opt-in in which case you will simply not be able to borrow above your credit limit. This means if you go to a store, buy stuff, and don’t have enough credit you will be unable to complete your purchase.

This, after all, is the way it should be. If you have $20 in your wallet you can’t buy things worth $30.

Some lenders charge multiple over-draft fees and some charge fees which are many times the value of the overcharge — say a $39 fee for a $5 overcharge, or a string of four fees per day for each day the account is overdrawn.

The Bank of America has elected to drop the overdraft fees entirely and to simply say that your credit limit is your credit limit. Fair enough and good for BOA.

Mortgage Applications

The implications for mortgage applications are important. If there’s no ability to overdraw your credit card account you cannot face overdraft fees. No less important, you cannot have a negative item on credit reports as a result of an over-draft — and that means credit scores for many people might actually rise.

Two cautions: First, check your credit limit each month to assure that you will not be embarrassed at the check-out counter or in a restaurant.

Second, the Bank of America decision is a voluntary move — one that could be reversed in the future. Other lenders still seek to have you pay through the nose. For this reason it’s important to assure clarity in the credit system and that can be done most effectively by outlawing overdraft fees altogether.

Technorati Tags: application, credit card, credit score, Federal Reserve, finance, mortgage, opt-in, over-the-limit, qualification, refinance

What can you do?

• If you pay by check, pay 10 days early.
• If the lender has a website, check the account balance each month about 10 days after the payment is due to assure your account has been credited. If not, contact the lender immediately.
• If you pay electronically with an automated payment check your account to assure that the payment was made. Protect yourself and always have an overdraft line-of-credit. This costs about $25 a year plus interest for any advances, but it’s a lot cheaper than late fees and negative credit items.
• If you paid electronically but not automatically, think of switching to an automated payment system. Be cautious however and ask what happens if you change accounts or prefer in the future not to pay electronically.
• If you want to be sure that a mortgage payment is credited to your account, send the check by certified mail with a return receipt requested.

Mortgage Paid

Late payments set off three problems.

First, you may be hit with a late fee.

Second, predatory lenders who engage in “loan-to-own” financing will be elated if you’re late. They will hit you with a late fee, perhaps raise your interest rate and possibly foreclose — even if you’re late by five minutes.

Third, your credit report can be dinged. However, credit reports only include payments which are at least 30 days late — thus the reason to check lender sites and your bank account 10 days after a payment is due.

If you’ve made your payment in a timely manner and for some reason it has not been quickly credited to your account, call the lender and complain. I’ve had lenders waive late fees by calling and pointing to my past payment history.

Technorati Tags: bank, check, checking account, electronic payment, foreclosure, late fee, lender, mortgage paid, predatory lender

“Before writing the letters, lenders like to see proof of income, such as a pay stub or tax return. But under the Real Estate Settlement Procedures Act rule that took effect Jan. 1, lenders may not require such documents before giving the borrower a good-faith estimate of closing costs.

“Since lenders are now being held to those estimates, they want to hold off on issuing them as long as possible. So some lenders are reconsidering or backing away from preapprovals. Without them lenders could end up wasting time on loan applications that fall out.” (See: Respa Rule Has Lenders Balking on Preapprovals, US Banker, March 2010)

No one has ever believed that a pre-approval or pre-qualification letter is a loan commitment of any kind because at the time the letter is provided the value of the property is unknown and the borrower has not submitted all required documentation. Moreover, requiring documentation to obtain a pre-approval or pre-qualification letter has certainly not been a concern for lenders who have offered low-doc and no-doc loan applications.

“In too many cases,” I wrote in 1999, “lenders provide nothing more than a glorified hand-holding letter when applicants seek preapproval. The usual letter isn’t an absolute loan commitment, because it typically contains language allowing the lender to again check credit and consider the property’s appraisal and survey before proceeding.” (See: Closing fast, It Could Happen, REALTOR magazine, November 1, 1999)

A Good Faith Estimate, on the other hand, IS a commitment from a lender. The new forms developed by HUD and required as of the first of January actually show the real costs of getting a loan.

If Lender Smith will not give you a pre-approval or pre-qualification letter, go elsewhere. You can bet that Lender Jones will want your business.

And Lender Wilson and Lender Johnson, etc., etc., etc.

Technorati Tags: good faith estimate, hand-holding, letter, pre-approval, pre-qualification

For instance, in many communities the water company is actually a governmental agency. Don’t pay your water bill and there can be a lien against the property, Don’t pay the lien and the property can be foreclosed. Think about it the next time you take a shower….

And then, of course, we have property taxes. Fail to pay your property taxes and your house can be sold at auction to pay the debt.

Foreclosure Taxes

Taxes take precedence over any other claims. This is the reason why lenders want to escrow money each month from those who buy with less than 20 percent down. Lenders absolutely want to assure that property taxes are paid because otherwise their security for the loan — the house — could be at risk.

The deal with property insurance is a little different. Don’t pay your property insurance and you will be in violation of your mortgage agreement. Break your mortgage agreement and…you guessed it, you can be foreclosed.

Lenders also escrow money to pay property insurance premiums for those who purchase with less than 20 percent down. Again the reason is to protect the lender’s security. The lender does not want the house to burn down if only because the security for the loan will then have a reduced value.

I used to think that borrowers were better off paying their own taxes and insurance so they could control the money and perhaps get some interest, but now I prefer to have the lender collect the money each month as part of the mortgage payment. Why? Property taxes have turned into huge bills and it’s easier from a budgeting perspective to pay a little each month rather than a huge amount when taxes are due.

Technorati Tags: auction, escrow, foreclosure taxes, insurance, lenders, lien, property insurance, property taxes, water

Private mortgages can be alluring and in some cases financially dangerous. In the best case a private mortgage will provide a low rate with little down and fair terms, in the worst case you’ll have a hard-money loan with high interest and huge fees.

On the good side, one can get a mortgage — it’s just a loan — from a friend or a relative. In fact, Virgin Money has a program in place to create such loans with proper paperwork and administration.

Private Mortgages

Private mortgages should be treated just the way that a commercial lender would handle real estate financing. This means there should be an appraisal of the property, the borrower should provide financial information, there should be a formal written loan agreement prepared by an attorney and the loan should be properly recorded.

The reason both buyer and lender want such formalities is very simple: Relationships can change. Verbal agreements can be unclear. When everything is in writing and saved in a business-like manner then the obligations of each party are clear.

Private mortgages do not necessarily have to have the same terms as conventional financing. For instance, there can be loans where interest accumulates and the debt is paid off from time-to-time with lump sum payments. The interest rate can be lower and the qualification terms can be more liberal. With an individual as a lender, it’s actually possible for the debt to be forgiven in a will.

One concern with private mortgages is there length. Rarely can you get a 30-year private loan. Shorter terms are much more common.

I have obtained a number of loans from private sources. These typically are pension funds from law offices and medical practices which hold millions of dollars. The trustee for the fund can sometimes extend mortgage loans, depending on the terms of the pension.

Such extensions of credit are not minor matters. The trustee has fiduciary obligations to the pension and its beneficiaries and must act in a responsible manner. In my situation, there was always a formal settlement with recorded documentation. I am pleased to say that all loans were fully repaid, with interest.

Hard Money Lenders

Less attractive are asset-based loans from hard money lenders. These are typically short-term loans with high interest levels, big fees up front and small loan-to-value ratios — say a loan for as much as 65% of the property’s value.

As with all real estate loans, if the borrower does not pay the property can be lost to foreclosure. Of course, the tougher the terms the more likely default.

For specifics regarding a private mortgage, both lender and borrower should speak with an attorney.

Technorati Tags: foreclosure, hard money, loans, mortgages, private mortgages, recordation

The lender selling REOs (real estate owned by a bank or other lender) does actually care how you own title, What it does care about is that you buy the property for as much as possible (good luck) and from there on out you’re the owner.

Foreclosure Title

In basic terms you can hold title as:

An individual.

In a tenancy by the entireties. This is a form of ownership reserved for married couples. Each spouse owns 100 percent of the property, meaning if one dies there’s nothing to inherit (because ownership is already held by the living spouse) and if one is sued the property cannot be lost if the other party wins the suit. Alternatively, real estate acquired during the term of the marriage may be held as community property in several states.

The property can be bought by several people as tenants in common. In this case ownship interests need not be equal, there is no automatic right of survivorship, individual owners can sell their interests individually.

Lastly, title may be held in the form of a joint tenancy. Such a tenancy requires four unities — the unity of interest (the same form of ownership for each owner), the unity of time, the unity of title (all owners make their investment at the same time) and the unity of possession (equal access to the property).

Title options can vary according to the jurisdiction where the property is located. Because important matters may be involved — inheritances, survivorship, liability, taxes, etc. — foreclosure buyers should always consult with a knowledgeable real estate attorney for specific advice when determining the right way to hold title.

Technorati Tags: foreclosure, foreclosure title, inheritances, joint tenancy, lender, liability, real estate owned, REO, survivorship, taxes, tenancy by the entireties, tenants in common, title, unities, unity

The huge foreclosure surge has not happened everywhere — some areas have seen vastly more foreclosures than others. RealtyTrac.com reports that the six largest states in terms of foreclosure filings — California, Florida, Arizona, Illinois, Michigan and Texas — represented 60 percent of the national total in January 2010. RealtyTrac also reports that 2009 was the worst year for foreclosures since the Great Depression.

Marketshare

In many markets foreclosures are a large proportion of all homes available for sale. The general rule is that the greater the percentage of distressed homes on the market the weaker local prices. Until the massive inventory of unsold foreclosures is removed from the market it will be difficult if not impossible for local home prices to stabilize much less go up, especially in hard-hit foreclosure centers.

Foreclosure Brokers

In real estate there are brokers who specialize in neighborhoods, condos, farms, commercial property, etc. Specialization is important because the value and factors impacting the use of a given property can differ depending on the type of property and its purpose — a $500,000 house and a $500,000 store-front building are both priced the same but the factors which give them value and utility are radically different.

Foreclosure brokers, in general terms, are licensed real estate brokers and salespeople who specialize in distressed properties. Distressed properties include homes owned by people facing foreclosure, individuals who want to sell with a short-sale, and properties being sold by lenders, what are called real estate owned or REOs.

Distressed properties are typically more difficult to buy or sell then run-of-the-mill real estate because there may well be special considerations. For instance, the approval of a lender will be required to have a short sale. The approval of a court will be needed if an owner has filed for bankruptcy.

In exchange for more complications, of course, there can be significant discounts. With foreclosures bought from banks and other lenders the deal can sometimes be made more attractive with financing from the seller.

When looking for foreclosure brokers be sure to ask about practical experience such as the number of properties bought and sold during the past six months or a year. Be wary of folks who flash certificates and credentials — always ask how much time it took to acquire such documentation and endorsements.

Technorati Tags: Arizona, banks, California, distressed, Florida, foreclosure brokers, Foreclosures, lenders, REO, short-sales

“This disappointing report highlights just how fragile the economic and housing recovery is right now, and the uncertainties that continue to weigh on consumers, particularly with regard to concerns about job security,” said Bob Jones, chairman of the National Association of Home Builders (NAHB). “Even with today’s exceptionally favorable home buying conditions – including low interest rates, stabilizing house prices and the availability of home buyer tax credits – many consumers simply weren’t confident enough to go forward with a new-home purchase in the beginning of this year.”

There’s no question that the latest government numbers are dismal, and no one should rejoice in the damage done to home builders nationwide. That said, fewer new home sales may be a necessary evil.

Warren Buffett

“People,” says billionaire investor Warren Buffett in his latest letter to Berkshire Hathaway shareholders, “thought it was good news a few years back when housing starts — the supply side of the picture — were running about two million annually. But household formations — the demand side — only amounted to about 1.2 million. After a few years of such imbalances, the country unsurprisingly ended up with far too many houses.

“There were three ways to cure this overhang: (1) blow up a lot of houses, a tactic similar to the destruction of autos that occurred with the ‘cash-for-clunkers’ program; (2) speed up household formations by, say, encouraging teenagers to cohabitate, a program not likely to suffer from a lack of volunteers or; (3) reduce new housing starts to a number far below the rate of household formations.

“Our country has wisely selected the third option, which means that within a year or so residential housing problems should largely be behind us, the exceptions being only high-value houses and those in certain localities where overbuilding was particularly egregious. Prices will remain far below ‘bubble’ levels, of course, but for every seller (or lender) hurt by this there will be a buyer who benefits. Indeed, many families that couldn’t afford to buy an appropriate home a few years ago now find it well within their means because the bubble burst.” (emphasis mine)

In other words, it all goes back to supply and demand. How rudimentary. How traditional. How unsettling for home builders.

Technorati Tags: largely behind us, NAHB, National Association of Home Builders, new homes, Warren Buffett