In basic terms the world of lending can be divided into two groups, regulated lenders such as banks, S&Ls and credit unions and lenders who are not regulated such as your Uncle Ralph, friends and local investors.

In the first category we have national lenders and their mortgage subsidiaries who are regulated by the federal government. We also have stated-based lenders who are regulated by, well, individual states.

The regulated lenders must play by the rules — but since lenders have lots of PAC money and many lobbyists in Washington the “rules” are hardly tough — how else would you explain why regulators allowed lenders to offer toxic loans such as option ARMs and interest-only mortgages to borrowers who plainly would be unable to repay?

Private Lenders

The attraction of cash from private lenders is that it can be available very quickly, an underwriting process may not exist and in the best case there will be little cost to originate the loan.

On the other side of the spectrum we have private lenders, a wide-ranging species of folks with cash to lend.

First, we have friends and relatives who are distinguished by the fact that they have money and are willing to provide mortgage financing for you. There are not too many of these people, in part because few individuals want to lend money for a period of 15 to 30 years.

But, if you can find friends and family who will advance you money, then you need to consider two ideas. First, congratulations, you have found a lender. Second, beware of the sticky stuff.

When you borrow money from people you know your relationship will change. Egos and status may shift. If it happens that your relationship sours over time there can be big problems. There can also be problems with other friends and relatives become jealous, or if your benefactor dies or becomes incapacitated.

To protect the lender — and to protect you — there must always be a written mortgage agreement. One source to consider is Virgin Mortgage which offers a program tailored to social lending among friends and family. Alternatively, you can have a local attorney draw up a proper loan agreement.

It could happen that when a private lender passes away that the loan will be forgiven by the will — but maybe not. In any case you need to protect yourself with a proper loan agreement just in case Uncle Ralph suddenly wants his money back or there is some question regarding interest rates or other loan terms.

Hard Money Lenders

You may also be able to get money from hard money lenders. These are lenders who seek to finance individuals who really need cash. And, as you might guess, those who need cash have lousy credit credit. The result is that they pay very high interest rates.

Hard money lenders are often unregulated because they make few loans in a given jurisdiction. Sometimes several individuals get together to create an investment group or club to share risk and to increase funding.

Whatever the situation, with a hard money lender you’re likely to need considerable equity (say 25 to 50 percent, depending on local market conditions) and you will face big up-front costs that are taken from the loan — say three to five points.

Given the enormous costs of hard-money lending you can bet that a lot of borrowers fail. However, with a lot of equity the hard money lender does okay because they can foreclose and re-sell the property.

In other words, if you have a need for a hard money lender you should really consider selling the property or getting a loan modification. For specifics, speak with a HUD counselor, a local attorney or legal clinic, or find help with a community housing group or local bar association.

Should I Use Private Mortgage Lenders? is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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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.

What are foreclosure brokers? is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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I last held a job in 1971, and since then have managed to cobble together a reasonable existence as an author and consultant. Clients and publishers pay for my thoughts and words, and I gleefully deposit their checks.

This was a fine arrangement and everyone seemed pleased until a few weeks ago when the huge financial institution where I have banked for nearly 15 years suddenly decided they could not accept my deposits. The problem, it seems, was that some checks were made out to the business name I use in trade and not the name on my birth certificate.

“These checks were good last month,” I said to the banker. “In fact, this bank has been taking these checks for more than a decade and not one has bounced. I operate a sole proprietorship. I have no partners and no shareholders. There is no difference between me and the name on this check.”

“Well,” explained the bank officer, “You operate a business and thus require a business account. You can deposit this check into the business account and shift it into the personal account. I can sign you up for a business account right now. The cost is only $13 a month, plus a fee for checks.”

“You mean you will only take my money if I give you $13 a month?”

“Yes. That’s our policy.”

Well, okay, two can play this game. Depositors of the world unite — you have nothing to lose but excess fees and indifferent service. If bankers can have policies, so can consumers. Here are mine.

First, I don’t do business with any bank that has more personnel than the Norwegian Army. What used to be my local bank has been bought, sold, absorbed, and downsized to the point where it is now a minor outpost of some distant financial colossus. Since I don’t need $500 million to open an electronics plant in Thailand, it’s fairly plain that my status as a desirable client is in question.

Second, I don’t do business with any bank where the president cannot be reached with a local phone call. With the old bank, the president seems to have moved over the years from downtown, to the suburbs, to another part of the state, and finally to a different time zone.

Third, I don’t do business with any bank that plays employee roulette. For years on end I could go into my bank and know the officers and tellers. It was good to see people starting as tellers and working their way up the system. They knew me and they knew my business. Now my big bank seems to have a new branch manager each month, and neither the tellers nor officers can identify me without a computer printout, photo ID, and thumbprint.

Do these principles work? You bet. While big banks are getting bigger, more distant, more expensive, and less useful, there are plenty of little banks that actually want my business — and your’s.

After being rejected by my big bank, I went to see if I could do better at a smaller institution. In about six minutes I found one that was a hundred years old, had about local 20 branches, didn’t have a company jet, and was glad to see me.

“Can I open an account here so I can cash my checks?”

“Sure,” said the branch manager at the little bank.

“But it’s made out to the name I trade under,” I said, testing the waters.

“So what,” said the manager, as she handed me a Norman Rockwell appointment calendar. “There’s no difference between you and the name on this check.”

“I think I heard that somewhere. What will it cost to set up accounts?”

“You’ll need a business account,” said the manager, my hopes quickly fading. “But we can open one at no charge and waive all fees for the next three years. We’ll give you a $50 credit so you can get some checks to start. And then we can provide a personal account as well.”

But as good as all of this sounded, I still had one lingering question for the branch manager at the little bank.

“You think anyone will buy this place in the next few years?”

“Not a chance,” she said, “our president doesn’t know anything about financing electronic plants in Thailand.”

I’m now in the process of moving various accounts and services to my new bank — checking, savings, credit, children’s accounts, safety deposit boxes, everything. My new bank has lots of parking, short lines (or no lines) drive-in windows, ATMs, credit cards, and Saturday hours. Most importantly, they want my business.

As to the big bank, they don’t seem to miss me. I haven’t heard from this month’s manager. Perhaps next month the new person will call.

Postscript: I’m still with the same community bank, they still know my name and I can still reach the bank president with a local phone call.
_____________

Published originally by The Washington Post on December 22, 1997.

Tales Of A Big Bank Refugee is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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“American consumers have made it crystal clear that few things annoy them more than the billions of commercial telemarketing robocalls they receive every year,” says Jon Leibowitz, Chairman of the Federal Trade Commission. “Starting September 1, this bombardment of prerecorded pitches, senseless solicitations, and malicious marketing will be illegal. If consumers think they’re being harassed by robocallers, they need to let us know, and we will go after them.”

Unfortunately, the Telemarketing Sales Rule (TSR) has some fat exceptions.

For instance: Calls from banks and politicians are not covered by the new prohibition.

Why is a robo call from a bank not an example of a prerecorded pitch, a senseless solicitation, or malicious marketing?

A bank is nothing but a business. Why are banks always a “special case” that require some sort of exemption? If a bank sells mortgage loans, why can it use robo calls to drum up business but not a mortgage broker?

Mind you, the argument is not that mortgage brokers should be allowed to use robo calls, it is instead the idea that banks should not get still-more special preferences.

Politicians, of course, never vote against their own interests, regardless of party affiliation or political creed.

Be sure to sign-up for the FTC’s do-not call list. There’s no cost, and if you get an illegal robo call the fine for that one call can be as much as $16,000.

Real Estate: Banks Excluded From Robo Call Ban is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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>>>Instead of a majority of valuation assignments going to appraisal managment companies we now have virtually ALL assignments being controlled by these joint venture arrangments. Notice how the market is doing?

There is a certain irony here. The worry pre-NVCC used to be that lenders and loan officers would pressure appraisers to come up with the “right” valuation. Now the worry is the cost and speed of services. Here’s a concept, why not let the borrower — who is paying for the appraisal — select the appraiser from the names on a local roster approved by the lender? The list would have to have at least 50 names for properties within a major metro area. No management companies would be needed.

>>>These appraisal managment companies, usually someway affiliated with First American Title, will have data on almost every home in America through their data collection process. Taken right from the appraisal reports, floorplans, interior and exterior photos, upgrades all the data that can be misused, abused but most importantly; resold. Because thats what its all about.

This is not really an HVCC problem; rather this is an issue which now confronts many professions: How do we deal with technological change? Many in real estate plainly believe there will be lower appraisal fees and fewer revenue opportunities for appraisers in the future. Many also believe that reduced appraisal costs should be passed through to borrowers and not used to pump up profits elsewhere in the lending process. As always, it pays to follow the money.

Automated appraisals may well work when you have a thousand identical townhouses with three models and lots of recent sales. The problem is that if an appraisal is inaccurate the lender is safe because it’s risk is spread among thousands of loans. The borrower, however, typically has one house — for the borrower an errant appraisal can be a disaster.

I think, though, that borrowers are better served when appraisers physically see the inside of a property and borrowers are certainly better off with a full appraisal when a property is in anyway distinctive — think of a homes in an older neighborhood with no common model or a house which has been unusually well maintained (or not).

>>>Just another line of easy profit by our big banking system. We should never have bailed them out, they have not demonstrated any gratitude to the taxpayer. Rates are still to high, credit is way to tight and no loans are being modified. Refinancing is not even an option. Best way to purchase is cash if you want to close in less than two months.

I suspect the dawning conclusion among the public is that bank reform is urgently needed. Let’s start with a Consumer Financial Protection Agency that can subpoena records and documents and let’s allow state regulators to finally have a real voice in the banking system.

>>>So how is this HVCC deal working out ?

Not badly enough that the entire idea should be “suspended” for 18 months. Fixed and made better, sure.

We thank Tim for a great post.

Appraisal Worries Really About The Future is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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We have lobbyists for real estate brokers, mortgage bankers, mortgage brokers and banks, but name the organization that represents you? Where are you sending your PAC money to have a stronger voice in Washington?

There is no PAC for borrowers and the result is that not one federal agency thought it was unfair or deceptive for lenders to offer toxic loans. Lenders are always explaining that the marketplace will weed out the bad players, not saying that before they are weeded out large numbers of borrowers will be foreclosed and bankrupted.

Now there is a serious effort in Washington to establish a Consumer Financial Protection Agency. It would represent people who borrow. Mortgage borrowers, credit card borrowers, auto borrowers, etc.

As you can imagine, the lending community is aghast at the thought that their DC monopoly would be broken with the establishment of an actual consumer agency.

Are opponents right? Could it be that borrowers do not need representation in Washington?

Such a view is just nonsense. There is probably no better explanation for the screwing of the American family than the testimony from Assistant Treasury Secretary for Financial Institutions Michael Barr that was presented earlier this week before the Senate Committee on Banking, Housing and Urban Affairs.

Here is what Mr. Barr said:

July 14, 2009

Assistant Secretary for Financial Institutions Michael Barr Written Testimony before the Senate Committee on Banking, Housing and Urban Affairs

Thank you, Chairman Dodd and Ranking Member Shelby, for providing me with this opportunity to testify about the Administration’s proposal to establish a new, strong financial regulatory agency charged with just one job: looking out for consumers across the financial services landscape.

The need could not be clearer.  Today’s consumer protection regime just experienced massive failure.  It could not stem a plague of abusive and unaffordable mortgages and exploitative credit cards despite clear warning signs.  It cost millions of responsible consumers their homes, their savings, and their dignity.  And it contributed to the near-collapse of our financial system.  We did not have just a financial crisis; we had a consumer crisis.  Americans are still paying the price, and those forced into foreclosure or bankruptcy or put through other wrenching dislocations will pay for years.

There are voices saying that the status quo is fine or good enough.  That we should keep the bank regulators in charge of protecting consumers.  That we just need some patches.  They even claim consumers are better off with the current approach.

It is not surprising we are hearing these voices.  As Secretary Geithner observed last week, the President’s proposals would reduce the ability of financial institutions to choose their regulator, to shape the content of future regulation, and to continue financial practices that were lucrative for a time, but that ultimately proved so damaging.  Entrenched interests always resist change.  Major reform always brings out fear mongering.  But responsible financial institutions and providers have nothing to fear.

We all aspire to the same objectives for consumer protection regulation: independence, accountability, effectiveness, and balance.  The question is how to achieve them.  A successful regulatory structure for consumer protection requires mission focus, market-wide coverage, and consolidated authority.

Today’s system has none of these qualities.  It fragments jurisdiction and authority for consumer protection over many federal regulators, most of which have higher priorities than protecting consumers.  Non-banks avoid federal supervision; no federal consumer compliance examiner lands at their doorsteps.  Banks can choose the least restrictive supervisor among several different banking agencies.  Fragmentation of rule writing, supervision, and enforcement leads to finger-pointing in place of action and makes actions taken less effective.

The President’s proposal for one agency for one marketplace with one mission – protecting consumers – will resolve these problems.  The Consumer Financial Protection Agency will create a level playing field for all providers, regardless of their charter or corporate form.  It will ensure high and uniform standards across the market.  It will end profits based on misleading sales pitches and hidden traps, but there will be profits made on a level playing field where banks and nonbanks can compete on the basis of price and quality.

If we create one federal regulator with consolidated authority, we will be able to leave behind regulatory arbitrage and inter-agency finger-pointing.  And we will be assured of accountability.

Our proposal ensures, not limits, consumer choice; preserves, not stifles, innovation; strengthens, not weakens, depository institutions; reduces, not increases, regulatory costs; and increases, not reduces, national regulatory uniformity.

Successful consumer protection regulation requires mission focus, market-wide coverage, and consolidated authority

Consumer protection regulation should be effective and balanced, independent and accountable.  It can be none of these without three essential qualities: mission focus, market-wide coverage, and consolidated authority. 

First, consumer protection regulation requires mission focus.  A clear mission is the handmaiden of accountability.  It is also the basis for the expertise and effectiveness that are essential to maintaining independence.

Second, the regulator must have market-wide jurisdiction.  This ensures consistent and high standards for everyone.  And it prevents providers from choosing a less restrictive regulator.  Carving up markets in artificial, non-economic ways is a recipe for weak and inconsistent consumer protection standards and captured regulators.

Third, authorities for regulation, supervision, and enforcement must be consolidated.  A regulator without the full kit of tools is frequently forced to choose between acting without the right tool and not acting at all.  Moreover, if different regulators have different authorities, each can point the finger at the other instead of acting, and the sum of their actions will be less than the parts.  The rule writer that does not supervise providers lacks information it needs to determine when to write or revise rules, and how best to do so.  The supervisor that does not write rules lacks a market-wide perspective or adequate incentives to act.  Splitting authorities is a recipe for inertia, inefficiency, and unaccountability.

The present system of consumer protection regulation is designed for failure

The present system of consumer protection regulation is not designed to be independent or accountable, effective or balanced.  It is designed to fail.  It is simply incapable of earning and keeping the trust of responsible consumers and providers.

Today’s system does not meet a single one of the requirements I just laid out: mission focus, market-wide coverage, or consolidated authority.  It does not even come close.  The system fragments jurisdiction and authority for consumer protection over many federal regulators, most of which have higher priorities than protecting consumers.  Non-banks avoid federal supervision and banks can choose the least restrictive supervisor among several different banking agencies.  Fragmentation of rule writing, supervision, and enforcement among several agencies lead to finger-pointing in place of action and make actions taken less effective.

This structure is a welcome mat for bad actors and irresponsible practices.  Responsible providers are forced to choose between keeping market share and treating consumers fairly.  The least common denominator sets the standard, standards inevitably erode, and consumers pay the price.  Let me spell out these failures in more detail.

Lack of mission focus: protecting consumers is not the banking agencies’ priority. The primary mission of federal banking agencies, in law and in practice, is to ensure that banks act prudently so they remain safe and sound.  Ensuring that banks act transparently and fairly with consumers is not their highest priority.  Consumer protection regulation and supervision was added to the agencies’ responsibilities relatively late in their histories, and it has never fit snugly in their missions, structures, or agency cultures.

In fact, consumer protection supervision is generally conducted through the prism of bank safety and soundness.  The goal of such supervision has too often been to protect banks or thrifts from excessive litigation or reputation risk, rather than to protect consumers.  It was thought that supervising the banks for their effective management of “reputation risk” and “litigation risk” – aspects of a safe and sound institution – would ensure the banks treated their customers fairly.  It didn’t.  It did not prevent our major banks and thrifts from retroactively raising rates on credit cards as a matter of policy, or from selling exploding mortgages to unwitting consumers as a business expansion plan.

It should not have come as a surprise that the agencies’ “check-the-box” approach to consumer compliance supervision missed the forest for the trees.  Examiners are well trained to ascertain whether the annual percentage rate on a loan is calculated as prescribed and displayed with a large enough type size.  Equally or more important questions – Could this consumer reasonably have understood this complicated loan?  Is this risky loan remotely suitable for this consumer? – are not a priority for an agency whose main job is to limit risks to banks, not consumers.

Managing risks to the bank does not and cannot protect consumers effectively.  This approach judges a bank’s conduct toward consumers by its effect on the bank, not its effect on consumers.  Consumer protection regulation must be based first and foremost on a keen awareness of the perspectives and interests of consumers, and a strong motivation to understand how products and practices affect them – for good and for bad.  Agencies charged primarily with safeguarding banks will lack this awareness or motivation.

Fragmented jurisdiction: there are two regulatory regimes for one market, and non-banks escape federal supervision. There is one market for residential mortgages, one market for consumer credit, and one market for payment services – but two different and uncoordinated regimes for these and other consumer financial products and services.  Banks are subject to an extensive supervisory regime, with lengthy and intensive consumer compliance examinations on-site and off-site as well as a legal obligation to respond to requests for internal information.

This regime, when it works, identifies and resolves weaknesses in banks’ consumer protection systems before they harm consumers.  The major failures of this regime were not for lack of examination hours or paperwork burdens.  Failures occurred for lack of asking the right questions and taking the right perspective.  These failures were rooted in the absence of mission focus.  A federal regime of consumer compliance supervision can be very effective in the right hands.

Non-bank providers, however, are not subject to any federal supervision.  No federal regulator sends consumer compliance examiners to non-bank providers to review their files or interview their salespeople. Nor does any federal regulator regularly collects information from them, except limited mortgage data.

Non-bank providers are subject only to after-the-fact, targeted investigations and enforcement actions by the Federal Trade Commission or state attorneys general.  Supervision by the states of these providers is limited, uneven, and not necessarily coordinated.  In general the same federal consumer protection laws apply to this sector as apply to banks, but lack of federal supervision and inherent limitations of the after-the-fact approach of investigations and enforcement resources leave the sector much less closely regulated.

Lack of federal supervision of non-banks brings down standards across the board.  Capital and financing flow to the unsupervised sector in part because it enjoys the advantages of weak consumer oversight.  Less responsible actors face good odds that the FTC and state agencies lack the resources to detect and investigate them.  This puts enormous pressure on banks, thrifts, and credit unions to lower their standards to compete – and on their regulators to let them.

This is precisely what happened in the mortgage market.  Independent mortgage companies and brokers grew apace with little oversight; capital and financing flowed their way.  The independents peddled subprime and exotic mortgages – such as “option ARMs” with exploding payments and rising loan balances – in misleading ways, to consumers demonstrably unable to understand or handle their complex terms and hidden, costly features.  The FTC and the states took enforcement actions, but their resources were no match for rapid market growth.  And they could not set rules of the road for the whole industry, or examine institutions to uncover bad practices and prevent their spread.

To compete over time, banks and thrifts and their affiliates came to offer the same risky products as their less regulated competitors and relaxed their standards for underwriting and sales.  About one half of the subprime originations in 2005 and 2006 – the shoddy originations that set off the wave of foreclosures – were by banks and thrifts and their affiliates.  Lenders of all types paid their mortgage brokers and loan officers more to bring in riskier and higher-priced loans, with predictable results.  Bank regulators were slow to recognize these problems, and even slower to act.  The consequences for homeowners were devastating, and our economy is still paying the price.

Mortgages are the most dramatic example of the harm that regulatory fragmentation causes consumers, but not the only one.  Take the case of short-term, small-dollar credit.  Payday lenders have grown rapidly outside the banking sector.  They are not typically subject to state examinations or information collections.  On the other side of the bank-nonbank divide, banks compete in the short-term, small-dollar credit market with cash advances on credit cards and “overdraft protection” programs.

Each one of these three competing products is disclosed to the consumer differently, and each has been associated with abusive or unfair practices.  There is a clear need for a consistent approach to regulating short-term, small-dollar credit that protects consumers while ensuring their access to responsible credit – but our fragmented system cannot deliver.

The list goes on.  A wide range of credit products are offered–from payday loans to pawn shops, to auto loans and car title loans, many from large national chains–with little supervision or enforcement.  Credit unions and community banks with straightforward credit products struggle to compete with less scrupulous providers who appear to offer a good deal and then pull a switch on the consumer.  

Banks and thrifts can – and do – choose the most permissive supervisor, further depressing standards.  Just as capital flows from the bank sector to the non-bank sector in search of less regulation, banks and thrifts can freely choose their federal supervisor on the basis of which one has less restrictive oversight of consumer compliance.  We saw this choice in action during the mortgage boom.

But institutions do not actually have to switch supervisors to bring down standards.  The mere fact that institutions have a choice exerts a subtle but pernicious drag on standards.  It has little to do with who runs the agency.  It is simply that government agencies, like all other organizations, respond to incentives.  The banking agencies, naturally, seek to retain or even compete to gain “market share.”

Incomplete and fragmented supervision delays and impedes responses to emerging problems.  When a consumer protection problem emerges, a new regulation is not necessarily the first and best response.  It takes many months, even years, to adopt a new rule.  And rules are often fairly rigid, detailed, and technical, especially if the underlying statute allows private suits.  Supervisory guidance can be a much faster and more flexible, principles-based method to prevent problems.

But guidance is a much weaker tool than it should be because of incomplete and fragmented federal supervisory authority.  There is no federal supervision over nonbanks, and supervision of banks is divided among several agencies.  This means that any effort to use supervisory guidance requires a massive and prolonged effort to bring many different federal bank regulators, and state regulators of bank and non-bank institutions, to agreement on the precise wording of the document.

It took the federal banking agencies until June 2007 to reach final consensus on supervisory guidance imposing even general standards on the sale and underwriting of subprime mortgages – two years after evidence of declining underwriting standards emerged publicly in a regulator’s survey of loan officers.  By that time the subprime explosion was nearly over.  It took additional time for states to adopt parallel guidance for independent mortgage companies.  And it took a third year for the federal agencies to settle on a model disclosure of subprime mortgages, by which point the subprime market had long ago imploded.

Fragmented authorities: rule writing is divided across agencies and largely divorced from enforcement and supervision.  Fragmented rule writing authority produces delays and inefficiencies.  Separation of rule writing from supervision and enforcement invites finger-pointing in place of action and reduces the effectiveness of actions taken.

Rule writing authority is fragmented, producing delays and inefficiencies.  While authority to write most federal consumer protection regulations is exclusively in the Federal Reserve, other agencies have joint or concurrent authority to implement several statutes.  It is a recipe for delay and inefficiency.

For example, HUD and the Federal Reserve each implement a different statute governing mortgage disclosure, the Real Estate Settlement Procedure Act and Truth in Lending Act, respectively.  The result is two forms emphasizing different aspects of the same transaction and using different language to describe some of the same aspects.  It has been eleven years since the agencies recommended an integrated form.  Even if they succeed in adopting an integrated form, their ability to act jointly to keep it up-to-date as the market changes will be limited at best.

As another example, Congress mandated joint or coordinated rulemaking by six federal agencies under the Fair and Accurate Credit Transactions Act of 2003 to improve the accuracy of information reported to credit bureaus and, to establish procedures for consumers to file disputes with information furnishers. Those agencies published final rules less than two weeks ago, on July 1, 2009.  Clearly consumers deserve faster action on issues as important in their financial lives as accuracy of credit reports.

Rule writing is divorced from enforcement and supervision, causing inertia and undermining effectiveness.  The authority to write regulations implementing the federal consumer protection statutes is largely divorced from the authority for supervision and enforcement.  This deprives the rule writer of critical information about the marketplace that is essential to effective and balanced regulation.

That is one reason we did not have federal regulations for the subprime market.  The Federal Reserve has authority to write regulations under the Truth in Lending Act and Homeownership and Equity Protection Act to ensure proper disclosure and prevent abusive lending.  But it cannot examine, obtain information from, or investigate independent mortgage companies or mortgage brokers.  So it is not surprising that the agency was slow to recognize the need for new subprime regulations.  By the time it proposed rules, the subprime market had evaporated.

The separation of rule writing from supervision and enforcement also leads to finger-pointing and inertia.  Take the case of credit cards.  Some banks found they could boost fee and interest income with complex and opaque terms and features that most consumers would not notice or understand.  These tricks enabled banks to advertise seductively low annual percentage rates and grab market share.  Other banks found they could not compete if they offered fair credit cards with more transparent pricing.  So consumers got retroactive rate hikes, rate hikes without notice, and low-rate balance transfer offers that trapped them in high-rate purchase balances.

A major culprit, once again, was fragmented regulation: one agency held the pen on regulations, another supervised most of the major card issuers.  Each looked to the other to act, and neither acted until public outrage reached a crescendo.  By then it was too late for millions of debt-entrapped consumers.

There is only one solution to these deep structural flaws: one regulator for one market with one mission – protecting consumers – and the authority and resources to achieve it

These deep structural flaws cannot be solved by tinkering with the consumer protection mandates or authorities of our existing agencies.  The structure itself is the problem.  There are too many agencies with consumer protection responsibilities, their authorities are too divided, and their primary missions are too distant from consumer protection.

These problems have only one effective solution: a single federal financial consumer protection agency.  We need one agency for one marketplace with one mission – to protect consumers of financial products and services – and the authority to achieve that mission.

A new agency with a focused mission, comprehensive jurisdiction, and broad authorities is the only way to ensure consumers and providers high and consistent standards and a level playing field across the whole marketplace without regard to the form of a product – or the type of its provider.  It is the only way to ensure independence, accountability, effectiveness, and balance in consumer protection regulation.

The CFPA will have one mission: to protect consumers.  Mission focus will not be a problem for this agency.  It will have no other mission that competes for attention or resources. And it will have the resources it needs to fulfill this mission and maintain its independence.  The agency will have a stable funding stream in the form of appropriations and fee assessments akin to those regulators impose today.

A mission of protecting consumers requires weighing competing considerations.  Our proposal explicitly recognizes this complexity.  It charges the CFPA with requiring effective disclosures and preventing abusive or unfair practices; and it also charges the CFPA with ensuring markets are efficient and innovative and preserving consumers’ access to financial services.  A statutory mandate to weigh these potentially competing considerations will help ensure the CFPA’s regulations are balanced.

The banking agencies will be able to concentrate their attention on bank safety and soundness.  The Federal Reserve will be able to focus on monetary policy, financial stability, and holding company supervision without the major distractions it has experienced because it holds the pen on most major consumer protection regulations.

The CFPA will have jurisdiction over the entire market. Our proposal for comprehensive jurisdiction will ensure accountability.  The CFPA will not have the luxury of pointing the finger at someone else.  If a problem arises in the non-bank sector, the agency will be as accountable as it will be for problems in the banking sector.

Comprehensive jurisdiction will also make regulatory arbitrage a thing of the past.  Providers will not have a choice of regulators.  So, by definition, they will not be able to choose a less restrictive regulator.  The CFPA will not have to fear losing “market share” because our legislation gives it authority over the whole market.  Ending arbitrage will prevent the vicious cycles that weaken standards across the market.

Comprehensive jurisdiction will protect consumers no matter with whom they do business, and level the playing field for all institutions and providers.  For the first time, a federal agency would apply to non-bank providers the tools of supervision that regulators now apply to banks – including setting compliance standards, conducting compliance examinations, reviewing files, obtaining data, issuing supervisory guidance and entering into consent decrees or formal orders.  With these tools, the Agency would be able to identify problems before they spread, stop them before they cause serious injury, and relieve pressures on responsible providers to lower their standards.

The CFPA’s market-wide perspective and authority will help it work with the states to target federal and state examination resources to nonbank providers based on risks to consumers.  The CFPA can set and enforce national standards and supplement state efforts with its own examiners and analytics.  The agency will be able to use efficient supervisory techniques in the non-bank sector such as risk-based examinations.  The CFPA will provide leadership to the states, improve information sharing, and leverage state resources.  The FTC will continue to have full authority to investigate and stop financial frauds.

The CFPA will have the full range of authorities: rule writing, supervision and enforcement.  CFPA’s regulations will be based on a deep understanding of markets, providers, and products gained from the power to examine and collect information from the full range of bank and non-bank financial service providers.  Combining rule writing authorities with supervision and enforcement authorities in one agency will ensure faster and more effective rules.

Where speed and flexibility are at a high premium, the CFPA will be able to exploit the full potential of supervisory guidance to address emerging concerns. Years-long delays to issue guidance because of inter-agency wrangling will be a thing of the past.

For example, the CFPA will both implement the new Credit CARD Act of 2009 – to ban retroactive rate hikes and rate hikes without notice – and supervise the credit card banks for compliance.  So the agency will have a feedback loop from the examiners of the banks to the staff who write the regulations, allowing staff to determine quickly how well the regulations are working in practice and whether they need to be tightened or adjusted.  It will also be able to improve credit card practices with supervisory guidance.

The CFPA’s rule writing authority will be comprehensive and robust.  The CFPA will be able to write rules for all consumer financial services and products and anyone who provides these products.  (Its authority will not extend to entities registered with the Securities and Exchange Commission when these entities are acting within their registered capacities.)  The CFPA will assume existing statutory authorities – such as the Truth in Lending Act and Equal Credit Opportunity Act.  New authorities we propose – to require transparent disclosure, make it easier for consumers to choose simple products, and ensure fair terms and conditions and fair dealing – will enable the agency to fill gaps as markets change and to provide strong and consistent regulation across all types of consumer financial service providers.

For example, our proposal gives the CFPA the power to strengthen mortgage regulation by requiring lenders and brokers to clearly disclose major product risks, and offer simple, transparent products if they decide to offer exotic, complex products.  The CFPA will also be able to impose duties on salespeople and mortgage brokers to offer appropriate loans, take care with the financial advice they offer, and meet a duty of best execution. And it will be able to prevent lenders from paying higher commissions to brokers or salespeople (”yield spread premiums”) for delivering loans with higher rates than consumers qualify for.  Lenders and consumers would finally have an integrated mortgage disclosure.

Comprehensive standard-setting authority would improve other markets, too.   For example, the CFPA could adopt consistent regulations for short-term loans – establishing disclosure requirements – whether these loans come in the form of bank overdraft protection plans or payday loans or car title loans from non-bank providers.  The agency also could adopt standards for licensing and monitoring check cashers and pawn brokers.

The new CFPA will bring higher and more consistent standards; stronger, faster responses to problems; the end of regulatory arbitrage; a more level playing field for all providers; and more efficient regulation.  A dedicated consumer protection agency will help restore the trust and confidence on which our financial system so critically depends.

The CFPA will ensure, not limit, consumer choice; preserve, not stifle, innovation; strengthen, not weaken, depository institutions; and reduce, not increase, regulatory burden; and increase, not reduce, uniformity

The CFPA will ensure, not limit, consumer choice.  The agency will have a mandate to promote simplicity.  It will also be charged with preserving efficient and innovative markets and consumer access to financial services and products.  The point is to make it easier for consumers to choose simpler products while preserving their ability to choose more complex products if they better suit consumers’ needs.

For example, the CFPA will have the authority to require providers that offer exotic, complex, and riskier products to offer at least one standard, simple, less risky product.  In the mortgage market, a lender or broker that peddles mortgages with potentially exploding monthly payments, hidden fees and prepayment penalties, and growing loan balances – such as the “pay option ARMs” of recent years – might also be required to offer consumers 30-year, fixed-rate mortgages or conventional ARMs with straightforward terms.

The idea is not new.  A division between “traditional” and “nontraditional” products is deeply embedded in our mortgage markets.  A similar consensus about standard and alternative products may emerge in other product markets.  The CFPA’s rigorous study of consumer understanding and product performance may help produce a consensus in a given market about the appropriate dividing line.

This approach, to be sure, may not work in all contexts.  Our draft legislation requires the agency to consider its effect on consumer access to financial services or products.  In some cases the costs may outweigh the benefits – that will be for the agency to determine.  In other cases, using this approach will obviate the need for costlier restrictions on terms and practices that would limit consumer choices.

The CFPA will preserve, not stifle, innovation.  The present regulatory system clearly failed to strike the right balance between financial innovation and efficiency, on the one hand, and stability and protection, on the other. This imbalance was a major cause of the financial crisis. Ensuring that consumers who want simple products can get them, and that consumers who take complex products understand their risks, will re-right the scales.

The benefits of innovation will continue to flow.  By helping ensure that significant risks are assumed only by knowing and willing consumers, the CFPA will improve confidence in innovation and make it sustainable rather than tied to quarterly results.

The CFPA will strengthen, not weaken, depository institutions.  Protecting consumer is not unsafe or unsound for banks.  Protecting consumers is good for banks.  If we had protected consumers from banks that sold risky mortgages like option ARMs in misleading ways, then we would have made the banks more sound, not less.

We reject the notion that profits based on unfair practices are sound.  The opposite appears true.  Massive credit card revenue, for example, was not sustainable.  It depended on unfair practices that bore the seeds of their own demise.  These practices led this Congress to pass, and President Obama to sign, tough new restrictions on credit cards.

Examiners in the field will resolve the rare conflict that arises just as they do today.  For larger banks, CFPA examiners could reside in the bank just as consumer compliance examiners often do today, right next door to safety and soundness examiners. They would regularly share information – our draft legislation mandates the exchange of examination reports – and coordinate approaches.  Moreover, the CFPA could work with the banking agencies to ensure bank consumer compliance examiners are trained to understand safety and soundness, as they are today.

For the even rarer conflict that arises and cannot be resolved on the ground, our proposal provides mechanisms for its resolution.  A safety and soundness regulator will have one of five board seats, ensuring a strong voice within the agency for prudential concerns.  In addition, the agency must consult with safety and soundness regulators before adopting rules.  The Financial Services Oversight Council will bring these agencies together on a regular basis.

The CFPA will reduce, not increase, regulatory costs.  The CFPA is not a new layer of regulation; it will consolidate existing regulators and authorities.  I have already discussed the tremendous benefits this will bring to responsible providers by ensuring consistent standards and a level playing field.  And consolidating authority does not just increase accountability for protecting consumers, it also increases accountability for removing unnecessary regulatory burdens.

Consolidation will also bring direct efficiencies.  The agency would help to simplify and reduce regulatory burdens in areas where current authorities overlap or conflict.  For instance, the agency would ensure we have a single federal mortgage disclosure – eliminating confusing and unnecessary paperwork.

Other efficiencies will flow from the CFPA’s ability to choose the best tool for the problem.  The agency’s authority to restrict terms and conditions of contracts by regulation – as the Congress did in the Credit CARD Act of 2009 – will be just one of many authorities. With comprehensive supervisory authority over the whole market, the agency will also be able to use more flexible, potentially less costly tools such as supervisory guidance.

The breadth and diversity of the authorities we propose will ensure the agency can tailor its solution to the underlying problem with the least cost to consumers and institutions.  The agency will have ample authority to harness the benefits of market discipline by improving the quality of, and access to, information in the marketplace. The CFPA will have authority to ensure that consumers receive relevant and concrete information in a timely manner.  These measures, and measures that make it easier for consumers to choose simpler products, should reduce the need for more burdensome regulations.

Imposing federal supervisory authority on non-bank institutions for the first time will increase compliance requirements on that sector.  But this is well worth the benefit of higher and more consistent standards.

The CFPA will increase, not reduce, national regulatory uniformity.   The CFPA’s rules and regulations will set a floor for the states, not a ceiling. The contention that this will somehow increase variations in state laws is a red herring.  Our proposal does not alter the law of the status quo: major federal consumer protection statutes such as the Truth in Lending Act and Homeownership and Equity Protection Act explicitly make federal regulations a floor, not a ceiling.

In fact, a strong federal consumer protection regulator should be able to increase regulatory uniformity.  States sometimes adopt new financial services laws because they perceive a lack of federal will and leadership.  That is exactly what happened in the mortgage context, where states filled a vacuum of predatory mortgage law with state statutes and regulations.  If the states believe an expert, independent federal agency is on the job and working with the states to protect their consumers, the states will feel less need to adopt new laws.

Conclusion

We need consumer protection regulation that is independent and accountable, effective and balanced.  These goals are achievable, but only if we address fundamental flaws in the structure of consumer protection.  The only real solution to these flaws is creating an agency with a focused consumer protection mission; comprehensive jurisdiction over all financial services providers, both banks and non-banks; and the full range of regulatory, enforcement, and supervisory authorities.

It is time for a level playing field for financial services competition based on strong rules, not based on exploiting consumer confusion.  And it is time for an agency that consumers – and their elected representatives – can hold fully accountable.  The Administration’s legislation fulfills these needs.  Thank you for this opportunity to discuss our proposal, and I will be happy to answer any questions.

Should Borrowers Be Represented In Washington? is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Why is anyone amazed? Combine a new and different program with a huge number of interactions and there are certain to be bumps in the road.

That said, why don’t we get to the core issue? Is it really a good idea for bankers, brokerages, lenders and builders to have captive appraisers? If not, what are we going to do about it?

Any Conflicts Here?

Let’s imagine this situation: Smith is a buyer broker. Smith has an agency obligation to his client. A home is found. The deal is funded by the lending affiliate of Smith’s broker. The lending affiliate has a record for pressuring appraisers — remember that 11,000 appraisers signed an online petition saying that they had encountered pressure to come up with a “right” price, so such pressure is not unknown. After closing, the purchasers come down with buyer’s remorse. They feel they over-paid for the property. They’re attorney connects the dots — a pressured appraiser produces the “right” valuation, which allows the broker’s lender to justify the funding of the property, which permits the broker to collect a commission, the lender to get a fee, buyer broker Smith to get paid and the buyer to get screwed. All get sued.

Not a plausible claim? No conflicts of interest, real or imagined? Want to test this idea in court?

The point is not that the HVCC is perfect or can be perfect, but then that was not the standard we used previously. Instead, the idea is that we should try to make the marketplace better and more transparent to assure that purchasers do not overpay, lenders do not lend more than they should and mortgage investors do not overvalue mortgage-backed securities. Gross and overt conflicts should not be applauded merely because they’re faster, more convenient and long allowed.

We need independent appraisers and by independent I mean appraisers who are licensed, qualified, local and not pressured into coming up with the “right” valuation to keep their jobs and their livelihoods.

Suspend the HVCC

There is now an effort to “suspend” the HVCC for 18 months, after which there will no doubt be more pressure for additional suspensions. If this comes about, ask yourself if borrowers and mortgage investors benefit. If not, who does? And if we tilt the system so that buyers and mortgage investors feel less comfortable than they should, then who will buy real estate and who will fund mortgages?

Since When Are Appraisal Conflicts Okay? is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Now you might think, aha, a Consumer Advisory Council…wouldn’t that be a panel which consists largely or entirely of, er, well, consumers?

You might think so, but the Federal Reserve plainly disagrees. In a call for nominations it wants would-be appointees to list their organizational affiliation as well as “positions held in community and banking associations and on councils and boards.”

Why on earth would a consumer panel need MORE banking representatives? The whole point of a consumer panel is to represent borrowers and depositors, the people who use banking services and not the people who profit from them.

Lobbyists & The Federal Reserve

It’s not like the banking lobby is unknown to the Federal Reserve. Indeed, it’s often difficult to tell the difference between government “regulators” and the industries they allegedly regulate.

For instance, under the Home Ownership and Equity Protection Act of 1994 (HOEPA), the Federal Reserve by “regulation or order, shall prohibit acts or practices in connection with (A) mortgage loans that the Board finds to be unfair, deceptive, or designed to evade the provisions of this section; and (B) refinancing of mortgage loans that the Board finds to be associated with abusive lending practices, or that are otherwise not in the interest of the borrower.”

As the Philadelphia Federal Reserve Bank explains, “it is important to note that while the existing HOEPA provisions only apply to high-rate or high-fee non-purchase loans, the Board’s HOEPA rulemaking authority applies to all mortgage loans. HOEPA authorizes the Board to prohibit any mortgage act or practice if the Board finds it is unfair or deceptive and to prohibit any mortgage refinancing practice if the Board finds it is abusive or not in the interest of the borrower.”

Notice that the Fed’s power applies to all loans, not just subprime mortgages.

Of course, the Federal Reserve never exercised such authority. You know the rest of the story, it’s called the mortgage meltdown and it’s largely responsible for today’s financial mess.

Would you like to serve on the consumer panel? Would you like to recommend someone? For details see the Federal Reserve Consumer Advisory Council application.

Good luck….

The “Consumer” Protection Panel That Isn’t is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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For much of human history mortgage lenders have been vehemently opposed to loan modifications — except when it’s to their advantage. Now, however, a nationwide foreclosure glut is forcing lenders to re-think the issue and for the first time do-it-yourself mortgage modifications are possible.

Not likely. Not guaranteed. But possible.

What we commonly call a “mortgage” is really a contract between a borrower and a lender. The borrower gets cash up-front and in exchange the lender gets a promise of full repayment with interest over time. Importantly, a mortgage is secured by the property — if the borrower doesn’t pay, the lender has the right to sell the property to get back its money.

The paragraph above pretty-much describes the traditional lending system. A local lender — say a bank, savings and loan association or a credit union — made a loan to a local homeowner. The lender made sure the borrower was qualified for the loan and that the property value was sufficient to repay the debt if something went wrong. Why? The lender kept the loan for as long as it was outstanding. The lender’s profit was in the cashflow from the loan — the difference between the interest being paid each month by the borrower and the lender’s cost of funds.

In other words, mortgages were traditionally made by so-called “spread” lenders, companies that had a vested interest in getting loans right. Such lenders wanted fully-documented loans, careful property appraisals and sizeable downpayments because they were prepared to hold the loan for many years. What they didn’t want were foreclosures because foreclosures mean losses. Examples of spread lenders today include community banks, credit unions, Hudson City Bancorp and ING DIRECT USA.

Lenders Without Cash

In recent years the system has changed. Now we have lots of companies that look like “lenders” and who make loans to local borrowers. The catch is that such “lenders” either don’t have any cash to fund mortgages or they have the money but don’t want to keep the loan.

Huh? How can companies without money make loans? They sell the mortgage in an electronic arena called the secondary market. Money from the sale of the mortgage on the secondary market funds the loan.

The benefit of this system is that by selling a loan the lender now has more dollars to lend. More loans, in turn, mean more fees, charges and profits. No less important, the secondary system means that local lenders will not run out of money. If a lender has $5,00,000 and makes 10 loans for $500,000 each then it might seem as though the lender could not fund any more mortgages. However, by selling the loans in the secondary market the lender gets fresh cash and therefore can make new loans.

Now the loan — most-likely your loan — is owned by an investor, not a lender. That investor paid a given amount for your loan under the assumption that your loan would generate a certain interest rate. No less important, you probably don’t know the investor that owns your loan. Instead, your payments are likely being collected by a servicer.

Fannie & Freddie

We now know that your mortgage most probably is not owned by the company that sold you the loan. If that’s the case then who does own it?

Remember we said the loan was sold in the secondary market to an investor. Buyers on the secondary market include pension funds, insurance companies and investors worldwide. However, the two biggest buyers of local loans are Fannie Mae and Freddie Mac.

To understand the importance of Fannie Mae and Freddie Mac consider some numbers. First, it’s generally estimated that there are about 50 million homes which have been financed with a mortgage. Second, Fannie Mae and Freddie Mac own more than 30 million of those loans.

Because Fannie Mae and Freddie Mac own so many mortgages other mortgage investors — but not all — have generally adopted their standards. If you want to know how the loan system generally works it’s good to keep your eyes on Fannie Mae and Freddie Mac.

No Modifications, Not Now, Not Ever

The mortgage system generally worked well until the past few years. There surely were foreclosures in the past, but typically there were very few foreclosures and most were related to such issues as the loss of a job, the death of a spouse, medical bills and divorce.

In the last few years the situation has changed. As the federal government reported in late 2008, “delinquencies on mortgages have tripled, not just for subprime and Alt-A, but also for prime mortgages. Foreclosures have increased almost 150% from two years ago.” Figures from the foreclosure listing site, RealtyTrac.com, show that during the months of March, April and May 2009 there were more than 1,00,000 foreclosure filings nationwide –more filings than in all of 2005.

Despite new and higher foreclosure levels, investors — the folks who own loans — have generally refused to modify mortgages. Their reasoning goes like this:

First, a contract is a contract. You got the money we promised and you should pay the money you promised.

Second, if loan terms are modified we’ll get a lower rate of return.

Third, if we have an asset with a lower rate of return it’s worth less and we will have made a bad investment.

In fact, investors have a pretty good argument except for one looming problem: Foreclosure rates are high and climbing — and the loss from a foreclosure according to a Congressional report is typically $40,000 to $80,000 per property. Given the lousy choice of foreclosure or the less-lousy choice of a loan modification, investors are beginning to consider modifications.

Workouts

When lenders talk about loan workouts what they typically mean are two options:

• Modifications. A situation where the debt is restructured. For example, the loan term might be increased from 30 years to 40 years, thus reducing the monthly payment.
• Payment Plans. Loans where there’s a change in contract terms. For instance, the interest rate is reduced 1 percent for the next 12 months or penalties and fees are forgiven.

Notice that with workouts there’s one option lenders typically do not offer: A principal reduction. Notice also that in some cases monthly payments can actually rise with new mortgage terms.

Claim Advances

If you have mortgage insurance (MI), if you’re facing foreclosure and if you’re having a tough time that’s temporary then you may be able to get help from your mortgage insurance company with a claim advance.

If the property is foreclosed then the mortgage insurance company can owe big money to the lender. Instead, if your situation is short term, the mortgage insurance company may be willing to lend you money to bring the mortgage current, typically with little interest and very soft terms. Ask your lender and your mortgage insurance company about such help.

The New Deal

In November 2008 the Bush Administration announced that Fannie Mae and Freddie Mac would now offer a streamlined modification program (SMP) so that borrowers could more easily obtain loan modifications.

However, a look at the SMP standards suggests that meaningful modifications — if any — were enormously difficult to get under the program.

• SMP targets borrowers who have missed three payments or more, own and occupy their property as a primary residence and have not filed for bankruptcy.
• SMP creates a standard definition of an “affordable mortgage payment” — no more than 38 percent of a household’s monthly gross income.
• Servicers will have flexibility in modifying loans, including reducing the mortgage interest rate, extending the life of the loan or even deferring payment on part of the principal. The servicer receives an $800 payment for each modification.

The SMP standards are ridiculously impractical. Here’s why:

First, they require borrowers to miss three or more monthly payments, meaning that homeowners who participate must have lousy credit.

Some lenders counsel borrowers to purposely miss payments so they can qualify for the SMP. The view here is that such advice is terribly harmful because there’s no guarantee that the borrower will, in fact, get SMP relief and also because whether or not an SMP arrangement is possible the borrower will now have terrible credit, meaning that a new loan on sane terms from other sources will be virtually impossible.

Second, the SMP applies only to owner-occupants. This means the SMP effort is useless when an investment owner is in trouble. This anti-investor approach may seem somehow warranted because investors are supposed to face more risks than owner-occupants, but if you think about the consequences of this policy you can see that it’s misguided: If a property down the street is foreclosed and the value of YOUR home declines, no one cares if the foreclosed property was owned by an investor or an owner-occupant. All anyone sees is that there was a foreclosure and therefore a lower price shows when buyers look at local sales.

Third, the SMP says borrowers must devote at least 38 percent of their gross, pre-tax income to housing costs. In comparison, the usual qualification standard for a conventional loan is that 28 percent of the borrower’s income can be devoted to principal, interest, property taxes and insurance, what is known as “PITI” to lenders. In effect, borrowers who qualify for the SMP are required to spend vastly more money on housing than baseline conventional borrowers. The better idea is to lower monthly housing costs for troubled borrowers so their homes are not foreclosed.

Fourth, if you have declared bankruptcy you do not qualify for a loan modification under SMP — the very modification which may prevent the loss of all your assets.

Early Workouts

In December 2008, Fannie Mae — which held 18 million mortgages at the start of 2008 — said it would offer an “early workout” program as an alternative to the SMP.

How does the early workout program differ from the SMP?

• Early workouts, says the company, are “a separate Fannie Mae effort to assist a wider spectrum of distressed borrowers in various stages of delinquency, including those who are current on their loan payments but facing imminent default.” Translation: The new program can apply to borrowers who are current. You don’t have to miss mortgage payments to qualify, you don’t have to lose your credit standing.
• The early workout program has two phases, a trial period and then a modification. During the trial period a non-delinquent borrower must complete four timely, consecutive monthly payments at the new level. A delinquent borrower must make at least three consecutive monthly payments. Translation: Make certain you make all trial-period payments in full and on time. In fact, be smart — pay early.
• “Preforeclosure sales, acceptance of deeds-in-lieu of foreclosure, and short payoffs (accepting a payoff for less than the amount owed), will not be permitted loss mitigation alternatives for use with borrowers whose loans are current but are determined to be in imminent default,” says Fannie Mae. Translation: If you’re not in default why not try to save both the home and the mortgage?

While the early workout program has started with Fannie Mae it will logically be expanded to other lenders and investors. Since investor programs can differ, it’s important to know who or what actually owns your loan. Most probably, the people you identify as your “lender” are actually loan “servicers” and not the loan owners. The ability of servicers to make modification decisions may be limited — or non-existent — depending on the arrangement they have with the loan owner, something usually called a “pooling-and-servicing” (PAS) agreement.

The Obama Plan

In February 2009 the Obama Administration came out with a $75 billion foreclosure prevention plan which combines the best approaches from Fannie Mae and the FDIC.

The program is complex, but in basic terms it has two elements:

First, if you’re facing foreclosure and your loan is one of the 30 million owned by Fannie Mae and Freddie Mac, you may be able to refinance if the value of the property is not more than 25 percent greater than the remaining mortgage balance (originally the government limited refinancing to a 5 percent shortfall). In other words, the program does not require borrowers to have any equity in the property, but it does limit the amount of risk which the government is willing to take.

As the government explains: “The unpaid principal balance of the first lien mortgage does not exceed 125 percent of the current market value of the property. (For example, if the property is worth $200,000, the borrower must owe $250,000 or less on that first lien mortgage).”

Second, imagine that you’re not facing foreclosure but have a toxic loan. Payments have risen rapidly or about to rise. You’re not in trouble yet, you’re making all your payments, but you could be in hot water within the next few months.

In this case, hopefully, the lender will try to reduce your interest rate so that no more than 38 percent of your gross (pre-tax) income is set aside for housing. The government will then subsidize your loan to bring the monthly housing cost down to 31 percent. Note that not all lenders are participating in the Obama plan as of this writing.

In other words, this is the Fannie Mae early workout program supported, finally, with government funds.

The Obama plan, for the first time, uses federal dollars for real people with real mortgage problems, not just bankers and Wall Street insiders.

It’s estimated that as many as 7 to 9 million borrowers will be helped by the Obama program, however the program will not protect everyone against foreclosure. If the value of your home is too low, if you do not earn enough income or if you have a rental property that’s in trouble, you won’t be eligible for help. Unfortunately, for millions of people who have bought in recent years with little or no money down, or have bought with loans that negatively amortize, or who have lost their jobs, the Obama program will not work for them. For a list of specific limitations and exclusions, press here.

The Obama plan if successful could substantially reduce the inventory of unsold homes in many areas and thus bring a halt to home-price declines — assuming job losses can be contained. We should get some sense of the program’s success or failure by mid- to late-summer, 2009.

For additional information, try:

• http://www.financialstability.gov/makinghomeaffordable/
• http://www.freddiemac.com/avoidforeclosure/
• http://www.fanniemae.com/homeowners/index.html

Steps To Take

As you look at loan modification options you can see that loan owners logically do not want to make such arrangements if they can be avoided and they are not required to modify loans. Thus, if you want a loan modification, if you want to avoid foreclosure, you must make the first move.

What should you do? The first step is to analyze your financial situation,

1. What percentage of your gross income (your income before tax deductions) is now devoted to housing costs, meaning mortgage principal, interest, taxes and insurance — PITI.
2. How much could you pay each month if PITI was limited to 38 percent of your gross income?
3. How much could you pay each month if PITI was limited to 31 percent of your gross income? This is an important question because the FDIC has been using a 31-percent benchmark when modifying loans made by IndyMac, the lender taken over by the FDIC in 2008. The 31-percent standard has now spread to other programs.
4. What are your assets? Include such items as savings accounts, IRAs, other retirement accounts, certificates of deposit, stock, bonds, vehicles, other real estate. Be sure to include account numbers, the date when valued, contact information for the account holder such as a brokerage or bank, balances and required payments.
5. What is the value of your home? Local real estate brokers may be willing to help provide a general valuation on a pro bono basis with a comparative market analysis (CMA) or a broker’s price opinion (BPO)– it’s good PR for the broker and you could be a future source of referrals and business.
6. What are your debts? Include credit cards with account numbers, account information, total debt and required monthly payments. Also, student debts, auto loans, other mortgages, etc. Again, show account numbers, balances, required payments and contact information.
7. What are your typical monthly expenses for utilities, condo fees, gasoline, health insurance, child care, alimony, etc.
8. Have in hand your tax returns for the past three years and payment stubs for the last three payment periods.
9. Make sure your information is accurate and current. Have receipts and documents to support your statements.
10. No matter how enticing, do NOT sell your home with a quitclaim deed, especially if the property is being sold “subject to” the mortgage without FIRST speaking with a real estate attorney or legal clinic of your choice or to your state attorney general.
11. No matter how enticing, do NOT sell your home by making a payment to someone else. Remember, when you sell a home buyers pay YOU — not the other way around. Again, for specifics FIRST speak with a real estate attorney or legal clinic of your choice or to your state attorney general.

Once you’ve gathered baseline information arrange your data with a spreadsheet so it’s easy to follow — income, assets, debts, etc. Then review your numbers and write out a one-page letter explaining why your need for a modification is compelling.

One useful approach is to download and complete the free loan modification forms used under the Obama Administration’s Make Homes Affordable loan modification program.

1. Request Form (Request for Modification and Affidavit)
2. The Help Guide you can use to complete the Request Form (Request for Modification and Affidavit)
3. Tax Authorization (IRS 4506T-EZ Form)
4. Proof of Income
5. Proof of Income Checklist
6. Get contact information for major mortgage servicers that are participating in the program.

Your goal is to convince the loan owner that a modification is in HIS best interest. This is a business matter, it must reflect cold hard facts and it must be documented. Make sure your letter is properly written, properly spelled and grammatically correct. Write and re-write your letter until it discusses only the need for a modification and the probable consequences to the lender if you cannot modify the loan.

To see an example, go to LoanSafe.org and read their model hardship letter and related information.

Contacting The Lender

Take a look at your loan document. What is the loan number?

Who do you contact regarding mortgage payments? This will be the lender or the loan servicer, most likely there is an 800-number on your monthly bill. Check and see if there’s a specific number for the “loss mitigation” department or something similar.

As you communicate with the lender take these steps.

• Always write down the name of the person with whom you are speaking, the date and the time. Get their direct phone number if possible. Keep notes in a file of each and every phone call you make, with whom you spoke, the date and time, the number you called and what was said.
• Never yell at the person on the other end of the line. Their goal in life is not to make things hard for you. They may have instructions from the loan owner which makes it difficult or impossible for them to help in your situation. Always assume they’re trying their best. Remember the old saying, you catch more flies with honey than with vinegar. Treat lender representatives with respect and dignity.
• Ask for the name and number of people who actually make modification decisions. This usually means someone in the loss mitigation department. If you can’t get such information by phone, search around the lender’s website or search Google for the lender and the term “loss mitigation.”

Once you get to speak with a loss mitigator offer all the data you’ve put together. Make certain to send your materials by certified mail with a return receipt requested — this way you will have proof showing when the material was mailed, that it was received and when it was received.

Once the lender has your materials the real question then becomes will he make the modification? If yes, what changes will be made and how long will they last?

Be persistent. You must follow-up because there is no chance that a modification can be done with one letter or one phone call. Always ask what you can do to make the matter easier and faster for the loan owner — and then do it.

In the end what is your goal, what would you like from the lender? The best possible result would be a smaller and more-affordable monthly mortgage payment which has been created by a lower interest rate, a longer loan term, or both. In addition, getting the lender to waive accumulated fees, penalties and charges is also a benefit.

Once you have a lower payment then you must keep your end of the bargain — every payment, without exception, must be made in full and on time. This is not only fair to the lender, it will also help build your credit standing.

Getting Help

If you have mortgage problems there are plenty of people who are willing to help you — for a fee. Unfortunately, while there are experienced individuals and organizations who can provide assistance, there are others who simply want your money.

You are vastly more-likely to get a loan modification if you have assistance. Good sources of such assistance include:

• Local attorneys and legal clinics that specialize in real estate.
• Local law schools with pro bono or low-cost programs to assist members of the community.
• Local bar associations with pro bono programs. In Maryland, for example, the Washington Post reports that more than 600 lawyers have volunteered to help homeowners with mortgage problems.
• HUD has a list of foreclosure avoidance counselors at: http://www.hud.gov/offices/hsg/sfh/hcc/fc/.
• Your state attorney general. State attorneys general often have existing contacts with lenders. Contact your state attorney general directly for help and assistance.
• Community housing organizations — they often have contacts with local attorneys.
• Legal Services Corporation — Funds 900 offices around the country to help the poor obtain legal services.
• National Consumer Law Center — An excellent source of legal information for the public.
• LoanSafe.org has online tools and information and has been featured in the New York Times.
• The Neighborhood Assistance Corporation of America has been a forceful and effective advocate for those facing foreclosure.

Homeowners Assistance Program (HAP) For Military & Civilian Personnel

The government has established a Homeowners Assistance Program (HAP) to “assist eligible homeowners who face financial loss when selling their primary residence homes in areas where real estate values have declined because of a base closure or realignment announcement.” Translation: It’s a program to help those who may be forced to have a short sale or foreclosure because a local base has closed or contracted.

HAP offers significant benefits — if you have any association with the military please go to the HAP site to see who qualifies and what benefits are available.

Making Home Affordable

Be certain to check the government’s loan modification web site, MakingHomeAffordable.com. This site is entirely-free and contains the latest information regarding loan modifications under the Obama program.

To Check The Stats

To see how lenders are doing, look for the latest Making Home Affordable Program Reports issued by the Treasury Department.

To Contact Lenders

The government maintains an extensive list of individual lender foreclosure and modification contacts including names, addresses, websites, phone numbers and fax numbers. Be sure to press the show all servicers link if you cannot find a lender in the search box.

Help for Lenders

If you’re a lender and want additional information, information, policies and news regarding the Making Home Affordable program, please see HUD’s special site for lenders at www.hmpadmin.com.

How To Get A Successful Loan Modification (With Obama Update) is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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That, however, does not seem to be the case. Lender after lender is cutting back. Today we have lenders who are requiring more money down in distressed areas, slashing access to existing home equity lines of credit, dropping subprime and Alt-A loans and inventing new fees for the few loans they actually originate.

You’re now going to hear a lot of pleas to loosen credit standards. Easy money, it will be said, is the sure way to boost home sales. Such arguments sound great and used to make a lot of sense except for one problem: Loose credit standards — coupled with docile federal regulation that failed the public — played a central role in creating the mortgage meltdown.

Until four or five years ago, whoever heard of the widespread use of stated-income loan applications? Does anyone think that reduced underwriting standards make loans less risky or that interest-only mortgages or option ARMs are really good for many borrowers?

In the same way that yesterday is not coming back, neither are the lending standards that were in place between 2002 and 2007. Instead we are about to see something new: lenders who lend less, builders who build smaller and borrowers who want less debt.

Some will see these shifts as frightening because the old order is about the change, but the better strategy is to see that a new reality is dawning — one with fresh opportunities for income and profits.

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Published originally by Realty Times on April 30, 2008 and posted with permission.

Can You Profit From The Real Estate Meltdown? is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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