“It’s now been more than 150 years since Professor Charles Minnigerode decorated Williamsburg’s first Christmas tree,” says Robert C. Wilburn, president of the Colonial Williamsburg Foundation.

“A German native, the College of William and Mary professor brought the festive tradition with him to the United States. When Nathaniel Beverley Tucker invited Professor Minnigerode to celebrate the holiday season at the St. George Tucker House, he trimmed a tree with candles and fancy paper decoration as a present for Tucker’s children.”

Beverley Randolph Tucker, a descendant, says “regular sized candles were cut down and fastened on the tree, nuts were gilded, and other ornaments made. Presents were probably not distributed at this time, but there were songs, games, and refreshments.” (See: Tales of the Tuckers, Dietz Printing Co., Richmond, VA, 1942).

From that humble beginning (and no doubt similar celebrations with other immigrants), evolved what is now a tradition observed in millions of American homes.

The St. George Tucker House

As to the St. George Tucker house, it was donated to Williamsburg in 1993 after more than 200 years of family ownership. Used now as a donor hospitality center, the home is one of the most unusual examples of original colonial architecture to be found.

St. George Tucker was born in Bermuda in 1752 and came to the colonies to study law at William and Mary under George Wythe, whom he later succeeded. He was a member of the collegiate Flat Hat Society — a fraternity that evolved into what we today know as Phi Beta Kappa.

In 1788, Tucker bought three lots on the green in Williamsburg near the governor’s palace. This was once the site of the first theater in America (Levingstone’s) as well a small house. Tucker then built a home on the property which was expanded, wing after wing, until he decided to try something different: the house was pushed forward with the result that a visitor now finds parlors that have windows looking over the Williamsburg green as well as windows which look into the home’s central hallway. (Today there is actually a modern version designed in the style of original house.)

Such expansion was a necessity because Tucker had nine children and five stepchildren from two wives. While not all lived to adulthood, a family dinner could include Tucker as well as three children who served in the Congress at the same time: Beverley Tucker, Henry St. George Tucker and John Randolph (a stepson). His brother, Thomas T. Tucker, a physician, was appointed Treasurer of the United States by Jefferson and served from 1801 to 1828.

(A third brother, Henry Tucker, was President of the Bermuda Governor’s Council. Today the Tucker House in St. George’s Bermuda is a national museum while in Hamilton the famous Bermuda Underwater Exploration Institute was founded by a family descendant, Teddy Tucker. Teddy Tucker, in turn, was the basis for Peter Benchley’s book, The Deep.)

The Revolution

“When he was in his early twenties,” writes Beverly Randolph Tucker of St. George Tucker, “he happened to be in Richmond during the meeting of the Assembly at St. John’s Church and to have been sitting in the gallery when Patrick Henry made his famous ‘Give me Liberty or Give me Death‘ speech and immediately afterward St. George Tucker wrote what we know of the speech today.”

When the Revolution began, the British seized the Williamsburg magazine to deprive the colonialists of ammunition and powder. Believing that fair is fair, Tucker sailed to Bermuda, “liberated” the British magazine, and brought tons of arms and ammo back to the colonialists.

Legacy

After the revolution, Tucker taught law at William and Mary, became a judge, and in 1803 published an Americanized edition of Blackstone’s Commentaries. This five-volume set is one of the foundations of our legal system and today is still in print.

St. George Tucker held a number of opinions which are at the core of American law and custom.

On religion he wrote, “liberty of conscience in matters of religion consists in the absolute and unrestrained exercise of our religious opinions, and duties, in that mode which our own reason and conviction dictate, without the control or intervention of any human power or authority whatsoever.”

Tucker was also a strong believer in the concept of a free press.

“Liberty of speech and of discussion in all speculative matters, consists in the absolute and uncontrollable right of speaking, writing, and publishing, our opinions concerning any subject, whether religious, philosophical, or political….”

Perhaps most remarkably, in a state and a society where the ownership of slaves was equated with wealth and status, and where Tucker was among the wealthiest people in Virginia, he wrote in 1796 — more than 60 years before the start of the Civil War — an essay entitled A Dissertation on Slavery: With a Proposal for the Gradual Abolition of It in the State of Virginia.

“Whilst America hath been the land of promise to Europeans, and their descendants, it hath been the vale of death to millions of the wretched sons of Africa,” he wrote. “The genial light of liberty, which hath here shone with unrivalled lustre on the former, hath yielded no comfort to the latter, but to them hath proved a pillar of darkness, whilst it hath conducted the former to the most enviable state of human existence. Whilst we were offering up vows at the shrine of Liberty, and sacrificing hecatombs upon her altars; whilst we swore irreconcilable hostility to her enemies, and hurled defiance in their faces; whilst we adjured the God of Hosts to witness our resolution to live free, or die, and imprecated curses on their heads who refused to unite with us in establishing the empire of freedom; we were imposing upon our fellow men, who differ in complexion from us, a slavery, ten thousand times more cruel than the utmost extremity of those grievances and oppressions, of which we complained.”

Tucker died in 1827, and it was his son, Nathaniel Beverley Tucker, also a judge and professor of law at William and Mary, who hosted the famous tree in 1842.

No doubt if Mr. Tucker were with us today he would extend to one and all the very best wishes for this holiday season and the coming New Year.

————————
Published originally by Realty Times on December 25, 2005, posted with permission and expanded from the original. This post is re-published annually and with good wishes to all.

How America got its first Christmas tree is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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If enacted, the legislation would have ended all mortgage lending in the state because the higher valuations shown in appraisal reports would not reflect marketplace realities. Moreover, the legislation would have required licensed appraisers to violate both professional standards and federal law.

Introduced by 13 members of the House of Delegates, the legislation, HB 1309, provided that “in appraising a residential property, the licensed real estate appraiser or certified real estate appraiser shall use comparable sales only for an arms–length transaction in which the buyer and seller are not related in any way and are not entering into the transaction under duress or unusual circumstances, such as a foreclosure sale or short sale.”

So what’s wrong with this? Two things:

First, by excluding short sales and foreclosures appraised values would suddenly increase. This may seem like good news for sellers, but if you were a buyer would you pay full price for a property with an inflated value, say a house with a foreclosure across the street? No less important, if you were a lender would you make a loan based on a souped-up appraisal?

Second, according to the Appraisal Institute, “if these bills were enacted into law, appraisers would be put in the difficult position of having to choose which law to violate. Appraisers are required to adhere to comply with the Uniform Standards of Professional Appraisal Practice in federally related transactions. The standard mandates that appraisers ‘must analyze such comparables sales as are available.’ Further, the standard cannot be voided by a state or local government.”

When presented to the Maryland House Economic Matters Committee the non-partisan vote was 21 against and none in favor — a vote which included three of the original sponsors.

Huh? Why would sponsors vote against their own proposed legislation?

It’s a common practice in legislatures — including on Capitol Hill — for bills to be introduced as a courtesy to constituents (and lobbyists). In theory this means that proposed laws get a chance for enactment, in practice such bills tend to quickly die.

As to Maryland, the House Economic Matters Committee rejected the appraisal proposal with an unfavorable report, a cute expression meaning not now, not ever. Given that similar legislation has been introduced in other states, one hopes that the fate of such proposed laws is equally quick, decisive and non-partisan.

Maryland Rejects Foreclosure-Free Appraisals — What About Your State? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Now, however, the old rules are out and very much better rules are in. Under the?,? Helping Families Save Their Homes Act of 2009, tenants now have new rights.

First, a bona fide tenant must get at least 90 days notice before an eviction.

Second, if a bona fide tenant has a lease, the tenant may stay on the property until the end of the remaining term, except if the buyer of the foreclosure is going to occupy the property as a prime residence — then there must be 90 days notice.

Third, in some cases tenants may be able to hold over even longer. This would be the case for any Federal- or State-subsidized tenancy or of any State or local law that provides longer time periods or other additional protections for tenants.

Bona Fide Tenants

Notice that the legislation does not protect all tenants — only bona fide tenants. Okay, so who is a bona fide tenant?

First, if the borrower or the child, spouse, or parent of the borrower under the contract is not the tenant;

Second, if the lease or tenancy was the result of an arms-length transaction; and

Third, if the lease or tenancy requires the receipt of rent that is not substantially less than fair market rent for the property or the unit’s rent is reduced or subsidized due to a Federal, State, or local subsidy.

For a good explanation of the new rules, see the information posted by the National Low Income Housing Coalition.

Tenants Get New Rights When Homes Are Foreclosed is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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“Nationally and internationally, we must be on guard against predatory lending. It is nothing more than a scam, a crime, a lie.” Alphonso Jackson

It’s doubtful that anyone who has ever looked at the mortgage industry would disagree with the sentiments offered by former HUD Secretary Jackson. Predatory loans are terrible, a scam and certainly a lie.

But oddly enough, predatory lending is not a crime.

For all the talk about predatory lending, and despite the assumption that such activities must be illegal on their face, the truth is different: There is no federal sanction against predatory lending.

Huh?

According to attorney Benny Kass, a long-term real estate columnist for The Washington Post and an authority in his field, “there are no federal laws making predatory lending illegal.”

“Congress and the Fed keep claiming that they don’t understand it,” says Kass. “Perhaps it’s like pornography: ‘I can’t define it but I know it when I see it.’”

Kass points out that the Home Ownership Equity Protection Act (HOEPA) is a disclosure law, it requires that lenders provide additional notices for loans which charge interest rates, fees or both above a given level. However, HOEPA does not say that such high-cost loans are prohibited

Also, Kass notes that while some subprime loans are predatory mortgages, most are not.

So what’s a predatory loan and isn’t it the same thing as mortgage fraud?

When it comes to federal law there’s a huge difference between “mortgage fraud” and “predatory” lending. As the Mortgage Bankers Association explains:

“It is critical to recognize the difference between mortgage fraud and predatory lending. ‘Mortgage fraud,’ as understood by law enforcement and the real estate finance industry, is the ‘material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase or insure a loan.’ A lending institution is deliberately deceived by another actor in the real estate purchase process — such as a borrower, broker, appraiser or one of its own employees — into funding a mortgage it would not otherwise have funded, had all the facts been known.”

And predatory lending?

Predatory lending, says the MBA, “is a term used to describe a range of lending practices harmful to borrowers, including equity stripping and lending based solely on the foreclosure value of the property. Some of these practices can be fraudulent, but defining an exact set of predatory lending practices has been difficult.”

In other words, when a lender suffers then the problem is the well-defined crime of “mortgage fraud.” When a borrower is hurt by the acts of a lender or someone in the lending process then there are no federal standards to breach.

“It’s fair and appropriate that we protect lenders from acts of mortgage fraud,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com, the leading online foreclosure marketplace. “At the same time, it is equally fair and appropriate that we also protect borrowers from predatory lending. Given the lending community’s persistent calls for an end to predatory lending, you have to wonder: Who benefits from the absence of effective federal laws against predatory lending? Reduced levels of predatory lending would result in fewer foreclosures and bankruptcies and that’s good for borrowers, lenders and mortgage investors.”

The FBI says in its 2006 Financial Crimes Report To The Public, that “the defrauding of mortgage lenders should not be compared to predatory lending practices which primarily affect borrowers. Predatory lending typically effects senior citizens, lower income and challenged credit borrowers. Predatory lending forces borrowers to pay exorbitant loan origination/settlement fees, sub-prime or higher interest rates and in some cases, unreasonable service fees. These practices often result in the borrower defaulting on his mortgage payment and undergoing foreclosure or forced refinancing.”

In fiscal 2006 the FBI reports there were suspicious activity reports (SARS) indicating 35,617 possible mortgage fraud violations, 2,409 commercial loan fraud reports and as many as 21,203 false statement cases.

And the total number of possible predatory loan cases shown in the report? Zero.

The FBI is entirely right. There are no predatory lending crimes to list because unjustified interest levels, bloated origination fees and inflated servicing costs are not federal crimes, therefore there is nothing to measure.

If we can define mortgage fraud why is it that we cannot define predatory lending? Why can we protect lenders but not borrowers?

Predatory lending comes in many flavors, so we can’t just say it’s one thing or another. Instead, we have to look at predatory lending as a crime with a variety of possible components.

For instance, we could define “predatory lending” as any lien secured by real estate which includes one or more of the following characteristics:

• Requires borrowers to pay interest rates, fees and/or charges not justified by marketplace economics in place at the time the lien was originated.
• Is based on a loan application which is inappropriate for the borrower. For instance, the use of a stated-income loan application from an employed individual who has or can obtain pay stubs, W-2 forms and tax returns.
• Is materially more expensive in terms of fees, charges and/or interest rates than alternative financing for which the borrower qualifies. For instance, financing a borrower who qualifies for an FHA loan with a higher-cost subprime mortgage.
• Is marketed in a way which first, fails to fully disclose all material terms; second, includes content designed to mimic federal documents or envelopes; and/or third; includes a mock or facsimile “check” made out to a specific prospective borrower.
• Includes any terms or provisions which are unfair, fraudulent or unconscionable.
• Does not include, in a format established by federal regulators, contact information for the party servicing the loan as well as the initial loan owner.
• Is marketed in whole or in part on the basis of fraud, exaggeration, misrepresentation or the concealment of a material fact.
• Does not plainly and prominently disclose on the good faith estimate of closing costs the size of any yield spread premium paid directly or indirectly, in whole or in part, to a mortgage loan officer.
• Allows servicing and collection fees and charges above cost when payments are late or not made. This provision would prevent so-called “predatory servicing” fees.
• Allows interest rates to increase when payments are late or not made. This provision would end the classic predatory strategy of making loans with initial low rates to individuals who are unlikely to make prompt payments, and then increasing interest levels when a borrower is late.
• Is underwritten without due diligence by the party originating the loan. This would force lenders to fully document loans.
• Is originated by an individual or entity compensated for two or more real estate liens during any 12-month period to parties other than immediate family members. “Immediate family members” shall be defined to include an individual’s parents, grandparents, spouse, inlaws, siblings and/or children.

Looking at the list of predatory acts above, one can expect members of the lending community to object because such rules will increase their liability to borrowers and investors. But why is that unfair? If borrowers can have liabilities for mortgage fraud, why should lenders be exempt from any penalties or prohibitions related to predatory lending?

As the old expression goes, what’s good for the goose is good for the gander.

————————

Published originally by RealtyTrac.com during October 2007 and posted with permission.

Why Aren’t Predatory Loans Illegal? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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But while states are busily trying to stamp-out foreclosure rescue schemes they’re also enacting laws which are so broad they may snare legitimate investors. As you’ll shortly see, investors have a need for extra caution these days as we enter a new period of state activism.

To see how mortgage rescue programs work, imagine that Mr. Sherman lost his job. It quickly happens that a few mortgage payments are missed and Sherman is soon desperate and scared. Bought for $200,000 and refinanced once, the property has been Sherman’s home for nine years. He pays $1,200 a month for the loan, but now foreclosure looms. Instead of contacting his lender or asking a community group for assistance, he sees a flyer for a company that promises to stop foreclosures.

Sure enough, says a representative for the Arcola Foreclosure Rescue League, they can help. They’ll stop the foreclosure instantly. How? They’ll pay off the mortgage, they’ll give Sherman $20,000 in cash to pay off credit card bills and Sherman can stay at the property.

“Don’t worry about a thing,” said the Arcola rep. “We have money and we help people all the time. We’ll do all we can to save your home from those evil lenders.”

The paperwork is signed and magically worries about foreclosure are gone. But what really happened is this: Sherman didn’t get a new loan. Instead, he actually sold his home to Arcola for the remaining mortgage balance, closing costs and $20,000 in cash, a total in this case of $190,000 for a property with a market value of $400,000.

Arcola, however, is there to “help.” It offers to instantly sell the property back to Sherman for $250,000.

As to the rent, Arcola is as good as its word. It rents the property back to Sherman — for $2,000 a month.

The situation is impossible for Sherman. He cannot finance a re-purchase because of the late payments on his credit report. He can’t make the monthly rent payments for long because even if he again becomes employed the cost is too great. In a few months he leaves, powered in part by a “moving allowance” that will soon lapse if he stays.

As the number of foreclosures nationwide increases, the number of foreclosure rescue scams is also on the rise, a trend which has not gone unnoticed.

“Foreclosure assistance scams kick consumers who are already down, so we’re working to shut down the scammers,” says North Carolina state attorney general Roy Cooper.

“Consumers facing foreclosure should be wary of companies that solicit them with offers to help them avoid the loss of their home,” says California attorney general Bill Lockyer. “Foreclosure consultants often charge high fees, but take the money and run.”

“Mortgage rescue fraud is a cancer that is eating away at our neighborhoods,” says Illinois attorney general Lisa Madigan.

You get the picture. State governments across the country are going after bad apples. But there’s a catch.

It’s tough to write legislation which targets scammers and cheats. How do you say in proper legal language that it’s illegal to buy a home from someone facing foreclosure? Arcola, after all, did stop any possible foreclosure. It did allow Sherman to stay at the property.

What Arcola did not do is this: It did not rescue the property for Sherman. In the end he lost his home and most of his equity — and Arcola knew full well that would happen the minute they answered the phone. The basic fraud in this situation was that Arcola represented itself as an agent trying to help Sherman when in fact it was nothing other than a buyer seeking to acquire Sherman’s property.

“There’s a real challenge here,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com. “You want to get rid of the scammers but if you discourage legitimate investors the number of homes going to foreclosure will skyrocket. Balance is needed to assure we do not throw out the baby with the bathwater.”

State lawmakers have been busy crafting laws to stifle foreclosure rescue specialists, mortgage fraudsters and “equity-stripping” schemes. Recent examples of legislation addressing such issues can be found in California, Illinois, Maryland, Minnesota, New York and Rhode Island.

Laws in a growing number of states set stiff requirements for foreclosure rescue specialists, update mortgage fraud rules and outline extensive disclosure regulations. Some state rules effectively require that foreclosure rescue consultants must pay 82 percent of all sale profits back to original owners if a property is re-sold within a given period, perhaps as long as 18 months in some jurisdictions.

The caveat though is that anti-fraud legislation may inadvertently include investors generally and not just illicit foreclosure rescue consultants.

What are the lessons for legitimate foreclosure investors? Three points stand out.

First, the rules regarding foreclosure purchases are changing. New legislation — which can include stiff fines, damages, and jail time for violations — must be taken seriously. Before entering the marketplace, consult with a knowledgeable real estate attorney to determine what’s allowed — and what’s required — in your jurisdiction.

Second, be certain your real estate broker is familiar with the latest rules and regulations. This is important because when a broker is acting as your agent you may be held responsible for his or her acts.

Third, speak with lawmakers and ask them to clarify state rules. Unlike fraud and misrepresentation, buying distressed properties is not a crime. Lawmakers need to be careful that in curtailing the bad guys they do not inadvertently punish legitimate investors and marketplace activities that are both lawful and necessary.

————————

Published originally by RealtyTrac.com during September 2006 and posted with permission.

Don’t Get Caught By Changing Foreclosure Rules is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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It’s been a very good century for real estate, at least so far. According to the National Association of Realtors, the typical home that sold for $139,000 in 2000 was worth $208,700 in 2005.

Not only have home values increased, unit volume has also grown. There were 5,152,000 existing home sales in 2000 compared with 7,072,000 in 2005. The National Association of Home Builders says new home sales rose from 877,000 units in 2000 to 1,285,000 in 2005. Average sale prices increased from $207,000 to $295,100 during the period.

If you do the math you see something else: Home sales involve a lot of money. The gross market, units x cost, was $897.7 billion in 2000 versus $1.78 trillion in 2005.

While everyone likes to see increased sales, these numbers hide an impending problem. Homes which may have been affordable in 2000 were less affordable in 2005. In fact, in February the NAHB/Wells Fargo Housing Opportunity Index reached a record low — “only 41% of new and existing homes that were sold during the final quarter of 2005 were affordable to families earning the national median income.”

So how is it possible that sales and prices are at record levels while affordability is in the ditch?

The answer for large numbers of buyers is that they bought real estate with the presumption that monthly costs — not purchase prices — were the key to future wealth.

Essentially the strategy has been this: Since real estate was presumed to be an eternally-appreciating asset, it made sense to buy as much as possible. For instance, if values are going up 10 percent a year buyers benefit by purchasing a home priced at $500,000 rather than $300,000. Why? Because at the end of the year their equity would have increased by $50,000 rather than $30,000.

With such thinking, what counts are monthly costs. The concept is to buy, hold for a few years and then sell. Even better, buy, flip the contract, pocket the cash, and do it again.

If you look at the numbers you can see that for many buyers the pricing gamble has been a huge success during the past few years. Home values have risen substantially in most areas. The odds are overwhelming that if you bought in 2000 or before and sold in 2005 or thereabouts you made money. A lot of money.

But looming in the background is the potential for financial disaster that will impact home values nationwide, spur foreclosure rates to new highs and devalue insurance funds, pension holdings and investor accounts. The value of your home, no matter how you financed, is at stake.

How could such a good plan go wrong?

The whole theory of wealth accumulation as it has been practiced for the past few years relies on two constants: Home values must rise and monthly payments must remain affordable. Unfortunately, neither constant is assured.

Home Values

If it happens that appreciation slows that’s not an instant issue. Most owners at any given time do not want to sell and do not have to sell as long as payments are affordable or the property can be rented on at least break-even basis.

However, prices do become a problem if appreciation slows and weaker owners begin to unload their properties because they cannot carry the monthly costs. A cascade effect sets in: Seeing that values are not rising, owners with shaky financing begin to sell. Marketplace inventory increases. More inventory creates additional supply at the moment of slower demand. As prices slow or actually fall, more units become available for rent. Rental rates fall and an increasing number of investors seek a way out.

You can see the changes by tracking local MLS statistics: Average days on the market will increase. Average appreciation will slow or decline. The number of units for sale will grow. Sale prices as a percentage of list prices will decline.

Or you can just look in the paper.

In my area there have been recent builder ads offering homes with discounts of $70,000 to $100,000.

These ads are enormously important because many small investors have purchased condo units and new homes. They buy when projects are first announced and then hope to sell as the property is built out and builder prices rise.

However, if builders are offering discounts it means that contract holders and recent buyers must now compete with developers who are offering like units at lower prices. The only options are to hold properties and hope for higher prices or sell at a loss.

Monthly Payments

The new theory of investment has been to get in and get out quickly. Since values always rise under the new thinking, pricing doesn’t matter as long as monthly payments are as low as possible. However, if values stagnate or actually decline, then properties must be occupied, rented or sold.

Across the country we now see a general softening of prices. NAR reported that in January the median price for an existing home was $211,000, up 11.6 percent from a year earlier. In February that same home sold for $209,000, up 10.6 percent from 2005. In other words, prices fell from January to February.

Some will say that month-to-month price changes are irrelevant, but that’s not how the game of expectations is played. Can you picture a buyer broker telling a client, “well, you know now is the time to buy, before the price of the home drops any further.”

The public during the past few years has come to expect rising home prices; any change from the accepted script is troubling. However, lurking below the surface are those monthly payments.

The issue is not that ARMs or interest-only loans are new, it’s that they’re available to a larger percentage of borrowers than in the past.

Monthly payments are not an immediate financial issue for 40% of U.S. homeowners, those who hold property free and clear.

Nor are changing payments a concern for those with fixed-rate financing. According to the Mortgage Bankers Association, half the loans originated in the first six months of 2005 were fixed-rate products.

And the other half?

Adjustable-rate loans — excluding interest-only products — represented 34 percent of all mortgages originations for the period, says MBA.

MBA divided interest-only loans into two categories, fixed and adjustable. Fixed-rate interest-only loans represented 2 percent of all originations in the study while adjustable interest-only loans amounted to 14 percent.

When you look at the dollar amounts, however, the study shows something different. Fixed rate loans are 40 percent of all originations, ARMs are 36 percent and interest-only products are 23 percent. The dollar value of adjustable interest-only loans is more than 10 times greater than fixed-rate interest-only products.

In other words, riskier ARMs loans are disproportionately larger than typical fixed-rate mortgages. Equally important, fixed-rate loans are disappearing.

According to a recent Federal Reserve study the use of fixed-rate financing is declining at a rapid rate. As the Fed explains, “roughly 85 percent of first mortgages were fixed-rate in 2001, slightly more than 10 percent were adjustable-rate, and the rest were balloon.” Now, of course, fixed-rate loans by dollar value are just 40 percent of all originations.

You can also see more risk in the marketplace in terms of qualification standards. As an example, consider FHA financing. Qualifying ratios last April went from 29/41 to 31/43. You have to wonder why this happened: Do you think borrowers now represent less risk? Or, could it have anything to do with the decline in FHA originations, from 1.53 million in 2003 to 556,000 in 2005?

Perhaps the FHA revised its standards because incomes are up. Whoops, that can’t be right. According to the Census Bureau, real household income — money expressed in terms of buying power — actually has declined since 1999.

But FHA mortgages are not a core concern. Instead, we need to look at stated-income loans, option or hybrid ARMs, interest-only mortgages, and excess equity financing. These are the financing options of choice for today’s real estate gamblers — those who buy property on the basis of monthly costs.

Between 1990 and 2003 interest rates fell overall. ARMs were generally safe because principal was being reduced and interest levels, by and large, were falling. Figures from the Federal Housing Finance Board show that the national average contract mortgage rate stood at 13.74 percent in May of 1980 and reached 5.34 percent in July 2003.

But rates have been rising from the lows seen in 2003 and we will soon see if the presumptions which powered risky mortgages are correct. Let’s look at the four types of loans most likely to fail.

1. Stated Income Financing

Historically lenders have been extremely concerned with loan application data. For many borrowers, it seemed that getting a national security clearance required fewer verifications and less paperwork than a new mortgage. But with “stated income” loans we have a new theory: We check credit scores and tell borrowers that whatever income they claim will not be verified.

The result is that with stated income financing a loan officer might say: “Mrs. Johnson, you have certainly found the home of your dreams. I can easily see how you and your family will really enjoy this house. We can finance your lovely home with a stated-income loan. With this type of financing you tell us how much you earn and we will not check. To buy this wonderful property you need a household income of $90,000 a year to qualify. So tell me Mrs. Johnson, how much is it that you earn each year?”

What do you think Mrs. Johnson will say?

Unfortunately, the loan officer did not tell the whole story. Stated income loans are sometimes examined when loans are packaged, sold and audited. And if a home is foreclosed, do you think a lender will not review the application?

2. Option or Hybrid ARMs

Option loans are ARM products where during the first three, five or ten years borrowers can pay on the basis of four choices: A fully amortizing payment that will retire the loan in 30 years, a higher payment that will amortize the loan in 15 years, an interest-only payment, or a low, low payment that creates negative amortization and adds to the loan amount. After the initial phase, the mortgage typically becomes a one-year ARM for the rest of the loan term.

Imagine that you have a $300,000 option loan. The margin is 2.75 percent and the 11th District COFI index is 3.347. We’ll say the initial rate is 1.25 percent and the annual rate cap is 7.5 percent.

Here’s what happens with a $300,000 option loan: The minimum payment is $997.78. The interest-only payment is $1,524.25. The 30-year amortizing payment is $1,817.40. The 15-year amortizing payment is $2,547.32.

If our borrower makes minimum payments then in month #60 the loan balance will be $328,812 and the monthly payment will be $2,284. These numbers assume that the interest rates have not soared. But what if the rate goes to 7 percent or 7.5 percent or 8 percent? By historic standards, these are not high interest levels.

Of course, the owner can sell. But after five years the loan balance has increased. Hopefully the value of the home has also gone up and is greater than the remaining mortgage debt. But as I tell folks, there are no stone tablets which say the value of real estate must rise.

3. Interest-Only Loans

Interest-only loans can be fixed-rate or adjustable mortgage products where the borrower’s debt never increases. However, during the interest-only payment period, typically the first five years of the loan term, the debt never falls.

The risk here for lender and borrower is two-fold: First, monthly payments can rise for those with adjustable rates. Second, once the loan begins to amortize the payment can rise significantly.

Consider a $500,000 interest-only with a 6.5 percent fixed rate. In the first five years the monthly payment for principal and interest is $2,708. For the next 25 years the payment is $3,376.04, a higher payment created by the fact that the remaining loan term has been reduced to 25 years.

4. Excess Equity Loans

Excess equity loans allow borrowers to obtain financing equal to more than the appraised value of a property — 104 percent, 107 percent, 110 percent, 125 percent and even 145 percent. Plainly the interest rates for such financing soar as the loan becomes increasingly unsecured, but this has not deterred borrowers.

If you look at the four loan options discussed here you notice they all have a common root: Borrowers have good credit and qualify on the basis of short-term calculations.

But the loan which is affordable at $998 a month may not be affordable at $2,300 a month. No less important, mortgage payments do not exist in isolation. Borrowers may also face ballooning utility bills as well as rising property taxes.

The Coming Storm

We now have a situation where stated income loans, interest-only financing, option ARMs and excess equity loans have begun to season. That means we will soon begin to see more and more of these mortgages convert to phase two, a time when monthly payments must be substantially higher to amortize the loan.

The result is that a growing number of recent property owners will find that they have homes and investments which cannot be sold at a profit — as well as homes and investments which cost too much to carry. The fruits of this impossible dilemma will be more properties for sale, more supply, more pressure to moderate if not lower prices, more foreclosures and more bankruptcies. Even those without a mortgage may find that the value of their home will drop as neighbors who financed imprudently rush to dump their properties on the market.

How substantial is this problem? USA Today has reported that an estimated 7.7 million adjustables have been issued in the past two years — and that up to 1 million may wind up in foreclosure during the next five years as a result of rising monthly costs. (See: “Some homeowners struggle to keep up with adjustable rates”, April 3, 2006)

According to the Mortgage Bankers Association the percentage of homes being processed for foreclosures at this time is about 1 percent of all loans. If the projection reported by USA Today is correct, then we’re looking at a foreclosure rate for recent ARMs — the loan category which includes most toxic mortgage products — that’s 13 times higher than normal.

John C. Dugan, the Comptroller of the Currency, framed the issue this way last December:

“Too many consumers have been attracted to products by the seductive prospect of low minimum payments that delay the day of reckoning, but often make ultimate repayment of growing principal far more difficult.”

“At the same time, too many lenders have been attracted to the product by the prospect of booking immediate revenue without receiving cash in hand, a process that often masks underlying credit problems that could ultimately produce substantial losses.”

“Is this an appropriate product,” Dugan also asked, “to mass market to customers who may be looking at the less than fully amortizing minimum payment as the only way to afford a larger mortgage — at least for the five years before the onset of payment shock? And are lenders really prepared to deal with the consequences — including litigation risk — of providing such products in markets where real estate prices soften or decline, or where interest rates substantially increase?”

The problem with regulatory concerns at this point is that huge numbers of non-traditional loans have already been issued. Surely this matter would have been better addressed several years ago, when toxic financing was relatively rare and the stakes far smaller.

But we must deal with what is rather than what might have been.

High-risk loans have allowed many individuals to buy property who might otherwise not have the chance, thus increasing demand and pushing prices higher. And in many cases high-risk loans have enabled borrowers to make substantial profits.

But at no time has the marketplace been without risk. Today, more than in the past few years, we see a market in transition. For those who assist buyers and borrowers the question regarding toxic loans is this: Are individuals really being helped with financing which allows them to buy property today — but may lead to financial distress tomorrow?

Over the years one of the most helpful trends in real estate has been the expanded use of disclosures and waivers. They protect consumers — and they also protect brokers and lenders.

And so I would make a modest suggestion: A few minutes of consumer education should be the responsibility of every broker and every lender. In other words: disclosure and waiver. All it takes is some discussion and a few print-outs which show projected monthly payments for several baseline mortgages: Say a 30-year fixed, 3/1 ARM, 5-year interest-only loan and option ARM financing. The material should at least cover the start-rate periods plus the next two years. The best case and the worst case scenarios should be shown.

In addition, consumers should be plainly told that interest rates can rise, that increases in home values cannot be guaranteed, that past performance does not assure future results and that information provided for stated income loans must be verifiable — just in case the loan file is ever audited.

And for the protection of brokers and lenders it would be a good idea to get a signed and dated receipt showing that the information was provided.

Does anyone doubt that consumers need such information? A study released in March by the Federal Reserve explains that “in 2005 the payments on many ARMs were governed by ‘option’ or ‘hybrid’ features that were largely unknown in 2001.”

The Fed report also shows that 35 percent of all ARM borrowers do not know how much payments can rise month to month and 41 percent don’t know the maximum interest level for their loan. For that matter, 20 percent didn’t know the original rate for their ARM.

The idea of better explaining newly-emerging loan concepts is not to drive away buyers and borrowers, rather it’s to assure that consumers have a strong stake in the homeownership process. While toxic loans may produce sales in the short term, they may also demolish long-term notions of value and benefit that are essential to real estate.

In the same way that mandatory disclosures regarding agency and condition were first opposed, I expect that the notion of toxic loan disclosures and waivers will also generate little support.

The alternative is that one day foreclosed homeowners will turn around and take brokers and lenders to court claiming they knew full well that borrowers could not afford inevitably higher payments and that, essentially, they engaged in the encouragement of default. The motive: Quick commissions and fees.

Think it can’t happen. Think jurors won’t buy it? Are you willing to bet your company and your career on the answer? Somehow disclosure seems a lot more attractive.

Toxic Loans: The Coming Storm is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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