That’s how many signed on at AppraisersPetition.com. And what, exactly, is their beef? As the site explains, “pressure comes in many forms and includes the following:

___”the withholding of business if we refuse to inflate values,

___”the withholding of business if we refuse to guarantee a predetermined value,

___”the withholding of business if we refuse to ignore deficiencies in the property,

___”refusing to pay for an appraisal that does not give them what they want,

___”black listing honest appraisers in order to use “rubber stamp” appraisers, etc.

“We request that action be taken to hold the lenders responsible for this type of violation and provide for a penalty on any person or business who engages in the practice of pressuring appraisers to do dishonest appraisals that do not provide for independent judgment. We believe that this practice has adverse effects on our local and national economies and that the potential for great financial loss exists. We also believe that many individuals have been adversely affected by the purchase of homes which have been over-valued.”

The Same Old Story

I have had these arguments before. Long ago I advocated that real estate brokers should be allowed to represent buyers and not act merely as seller sub-agents. Nope, can’t be done, I was told. Today buyer brokerage is everywhere. NAR reports that 42 percent of all purchasers had written buyer brokerage agreements in 2008

Option ARMs are great, I was told. Just look at the credit scores. Right. But the credit scores did not account for vastly higher mortgage payments down the road, after the loan was originated.

Stated-income loan applications are fine, it was said. Why do we have to verify income when we have so many other ways of measuring borrower finances? Sure. Consider what the Mortgage Brokers Association for Responsible Lending found in one study: “A recent sample of 100 stated income loans which were compared to IRS records (which is allowed through IRS forms 4506, but hardly done) found that 90% of the income was exaggerated by 5% or more. MORE DISTURBINGLY, ALMOST 60% OF THE STATED AMOUNTS WERE EXAGGERATED BY MORE THAN 50%. These results suggest that the stated income loans deserves the nickname used by many in the industry, the ‘liar’s loan.’”

Now we’re told that accurate and independent appraisals cost too much and take too long. Right.

The idea of appraisals is to have a fair, accurate and independent property valuation to protect borrowers, lenders, mortgage investors, and lender shareholders. That’s not something you get when appraisers are bullied to come up with the “right” number, as 11,000 appraisers can explain.

Can 11,000 Appraisers Be Wrong? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: appraisers, ARM, brokers, buyer, income, loan, mortgage, option, petition, pressure, stated

I wanted to study journalism because it gave me an opportunity to travel and to meet interesting people. I have been a correspondent on Capitol Hill and at the White House, I have lived on an offshore drilling rig in pursuit of a story, I have spoken to an endless number of business leaders, senators and representatives and I have traveled to just-about every state.

There is also another aspect to journalism, the idea that reporters, columnists and the media in general are uniquely equipped to watch the government, corporations and institutions at work — and to freely report when such entities do right or wrong. The usual expression is that journalists should comfort the afflicted…and afflict the comfortable.

Jon Stewart is generally referred to as a comedian. His “Daily Show” is typically seen as entertainment. So-called serious journalists often look down their noses at Mr. Stewart.

They’re fools.

Every journalism school in the country should be studying the conversation between Jon Stewart and Wall Street commentator Jim Cramer. And so should every borrower, investor, senator, representative, regulator, shareholder, saver, and homeowner.

The Interview

Steward did exactly what journalists are supposed to do, he asked tough questions, in public, based on research and common sense. He took Cramer and the financial network, CNBC, to task for failing to fully tell the public of the risks and follies being pursued on Wall Street. Stewart essentially said the business media in general had been handmaidens and enablers of the banks and brokerages, largely repeating the what they said, doing inadequate research and rarely giving time or attention to the red flags which were so obvious.

Cramer, who is loud, bright and often insightful, had an open opportunity to defend his position. Look at the uncensored video of the show and judge what he said for yourself.

Everyone Was Responsible

At this point the claim is usually made that “everybody” is responsible for the current financial meltdown. Lenders loaned too much, borrowers borrowed too much, regulators regulated too little and journalists could only cover current events which, for several years, saw little but rising home values and stock prices.

The unstated point, of course, is that if EVERYONE was responsible than no one was specifically responsible.

This is junk.

You didn’t have to be a soothsayer to see what was coming.

Most community banks and credit unions refused to offer so-called “affordability” mortgage products, the loans with negative amortization, huge prepayment penalties and high-cost back-ends. Most homebuyers bought responsibly and borrowed no more than they could afford. They fully documented their income.

Many states wanted to halt rapacious lenders but could not because the lenders acted under the authority of the federal government and the federal government said the states could not over-ride federal authority, an authority established by the National Bank Act and confirmed by the Supreme Court in the 2007 Watters case.

Oh, and when was the National Bank Act enacted? That would be 1864.

The Real Issues

The real issues are very simple:

First, without exception every loan is supposed to be underwritten according to baseline program standards. This is the lender’s responsibility and a lot of lenders either repeatedly and routinely got it wrong or purposely failed to stop loans that should never have been made, highly-profitable errors that produced large executive bonuses, fat paychecks for loan officers and grossly overvalued stock.

Second, the Federal Reserve, under the Home Ownership Equity Protection Act (HOEPA), legislation passed in 1994, has the right under Section 129 to ban “unfair and deceptive acts or practices (UDAP).” In other words, had the Fed simply said that option ARMs, interest-only loans and stated-income loan applications were “unfair” and “deceptive” we could have prevented the current mortgage meltdown. It doesn’t matter what any other branch of government did or did not do, the Federal Reserve had an opportunity to stop the financial crisis and it absolutely failed to do so.

Third, in 2003 five federal agencies announced that they had “a plan to identify and eliminate outdated, unnecessary or unduly burdensome regulations imposed on insured depository institutions.” An official from the Office of Thrift Supervision brought a chainsaw to rip through mounds government paperwork. Could anyone miss the symbolism? Could any lender not understand that the new government policy was hands off, anything goes?

On The Record

I have repeatedly told readers since as far back as 2004 that “nontraditional” loans and practices were dangerous. Not just for borrowers but also for lenders and their shareholders.

I wish I had been wrong.

Every time I have written about rip-off mortgages I have gotten numerous emails from lenders telling me I didn’t “understand” the system.

High credit scores, they said, were a substitute for the lack of documentation. But credit scores are history, they don’t tell us what happens when mortgage payments rise 50 or 100 percent. They also didn’t say that lenders and loan officers got more money when they sold a loan with a stated-income loan application.

“Nontraditional” loan products simply reflected a new understanding of financial instruments, they said. You have to know about the secondary market, derivatives and mortgage-backed securities, I was told. And you have to look at the rates and the ability to provide financing for just about any buyer. Of course, more loan volume means more commissions and profits, something not usually mentioned.

You can see the uncensored Jim Cramer interview on the Daily Show by pressing here.

And to Jon Stewart, my congratulations — journalists ought to be ashamed that you had to do their job for them.

Mortgages, Foreclosures & The Disgrace of Journalism is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: 1864, Act, application, ARM, bank, bonus, business, columnists, Cramer, editors, Federal Reserve, HOEPA, income, Jim, Jon, journalism, journalists, lenders, loan, mortgage, national, option, profit, reporters, stated, Stewart, stock, toxic, Watters

Under the Home Ownership Equity Protection Act (HOEPA), the Fed has the power to fight “unfair and deceptive acts or practices” or, as they’re called, UDAP. In fact, the Fed has had such power since 1994 and therein lies the rub.

The purpose of financial regulation is to create something of a level playing field. In real estate, for example, you can’t have a “net” listing. Yes, such listings could produce big profits for brokers, but state regulators across the country have banned such arrangements because of their obvious potential for abuse.

Federal regulators, in contrast, have traditionally taken a cautious approach to lenders but in the past few years they left the financial marketplace untouched and the result has been obvious: You didn’t have option ARMs or the widespread use of stated-income loan applications in the past because previous administrations telegraphed their positions to lenders: You can go so far, but no further.

Until the second Bush Administration the deal with the lending community was this: You can make profits, big profits, but use some care and caution otherwise we’ll be forced to create a bunch of regulations that will reduce your revenues. In other words, a gentleman’s agreement of sorts, an unspoken arrangement that worked fairly well for everyone.

The Bush Administration has a different view. It is not a “conservative” perspective — remember, no lender issued option ARMs when Ronald Reagan was in office — instead, with Mr. Bush we have a radical and absolutist political philosophy which argues that unfettered markets are the sure solution to all problems.

Under the Bush approach if a lender makes dim-witted loans and doesn’t bother to effectively underwrite mortgage applications the marketplace will respond. There’s no need for government action because in time loans will fail and shareholders will lose money.

The Bush regulatory theory may be worth debating in some seminar regarding abstract political philosophies, but in the real world we are each inter-connected. If large numbers of lenders make large numbers of foolish loans, it’s not only shareholders who suffer, it’s the value of our house that falls when neighbors are foreclosed.

Given the radical and extreme thinking of the past few years, we are now seeing radical and extreme responses. To right the financial ship of state — if that is possible without further dislocations — the federal government has now embarked on an economic path normally associated with third-world countries. For instance:

• The federal government over the summer of 2008 quickly and with little debate established the right to buy Fannie Mae and Freddie Mac. If this were being done by governments in Malawi, Cuba, Venezuela or Rumania, we would be talking about “nationalization” and all that the term implies.
• The Securities and Exchange Commission over the summer applied special rules to prevent short-selling — but only for 19 favored companies. In effect, we replaced the free-market system with two classes of corporations, those protected from short-sellers and those which are not.

• The Federal Reserve has made hundreds of billions of dollars in friendly loans available to selected banks and private entities on Wall Street. These loans are secured by assets of dubious quality — if the quality were so good then surely such assets could just be sold on the open marketplace. Meanwhile, legislation to help 400,000 borrowers with toxic loans was stalled for months because of alleged worries that the cost might total $4 billion.

The tragedy here, the disgrace here, is that none of this was necessary.

Go back to the new Federal Reserve rules introduced over the summer of 2008. They are weak and timid; most “protections” only apply to “high-priced” loans, meaning not prime or ALT-A financing.

But imagine if the new standards had been instituted in 2002 and 2003: For instance, the new rules say that lenders must “verify the income and assets they rely upon to determine repayment ability” when making “high-priced” loans. In other words, stated-income loan applications are out for subprime borrowers. Would there be a subprime crisis today if such baseline standards had been introduced when they were actually needed?

What makes no sense is the lack of anger. If Canadian trade regulations caused $500 billion or a trillion dollars worth of damage to the U.S., the entire country would be irate. But if a few federal bureaucrats, zealots and elected officials produce the same result, no one seems especially distressed — and that should worry us all.

————————

Published originally by The Real Estate Professional and posted with permission.

Mortgages & The Unnecessary Crisis is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: application, ARM, deceptive, HOEPA, Home Ownership and Equity Protection Act, income, interest-only, Mortgages, option, stated, UDAP, unfair

To resolve this mystery, let’s go back to the 1970s when the mortgage-backed security — the MBS — was developed. The MBS was a financial device designed to resolve a problem for investors. The problem? Imagine that you’re a loan investor and bought the mortgage on a single-family home. Your total income from the investment would be impacted if your one borrower was late, didn’t make a payment or was foreclosed.

With a MBS you own a security which is supported by a large number of mortgages, perhaps thousands. If someone misses a payment your income continues with little disruption.

In theory mortgage-backed securities make a great deal of financial sense.And in practice, until the past few years, mortgage-backed securities worked well.

Today mortgage-backed securities are troubled, especially those which include subprime loans. But why should this be? Even with subprime loans, the overwhelming majority of borrowers are making their payments.

About as good as an answer as you’ll find comes from Lew Ranieri, one of the developers of the MBS concept. As Ranieri told John Cassidy in The New Yorker, today MBS securities are fundamentally different from the paper that was invented several decades ago.

“They have created the perfect loans,” Ranieri says with irony of today’s mortgage-backed securities. “They didn’t know what the home was worth, they didn’t know what the borrower earned and the borrower wasn’t putting any money into the purchase. The system had gone completely nuts. A loan without a full appraisal, thorough underwriting, and full income verification was never what anyone envisioned when we started the market for mortgage-backed securities.” (See: “Subprime Suspect,” March 31, 2008)

You listen to Ranieri and it becomes obvious why mortgages have been so freely-available during the past few years. The answer has nothing to do with a push for more homeownership or some sort of philosophical imperative: If Wall Street is going to sell more high-profit mortgage-backed securities it needs a basic feedstock. What is that feedstock? More loans.

If it happens that a mortgage fails, who suffers? The loan officer has already been paid. The “lender” is often not a lender in the sense of a company with a vault stuffed with cash, but instead a retailer that instantly re-sells any loan it originates. If the borrower makes payments for a few months, the originating lender is then largely not responsible if the mortgage goes downhill.

With mortgage-backed securities the folks on Wall Street make money selling paper, real estate brokers make money selling homes, governments make tax money every time a home is sold or refinanced, title companies and attorneys make money with each closing. The list goes on but you get the idea.

What started out as a conservative way to protect investors morphed into something strange. You could buy a typical MBS or you could get a little more interest if you bought a somewhat riskier portion of a mortgage-backed security. But why worry — credit-raters gave MBS paper strong marks.

Unfortunately, the push for higher returns outpaced the push for financial sanity. Loans without full appraisals, stated-income mortgage applications, exploding ARMs, option ARMs and large numbers of interest-only loans will inevitably produce large numbers of distressed borrowers and outright foreclosures. Add in a gross lack of federal regulation — regulation that could easily have prevented the current mortgage meltdown — and the results we see today were pre-ordained.

Once a few mortgage-backed securities failed it meant that the assumptions used to value and rate all MBS paper needed to be reviewed. The value of MBS paper fell, so investors suddenly had less net worth and thus a lot less interest in once-attractive mortgage-backed securities.

For the folks on Wall Street, the problem was not lower MBS ratings but fewer MBS buyers. Essentially, brokerages and investment banks got caught with MBS and other sagging securities in their portfolios.

And this gets worse. There are not only mortgage-backed securities (MBS) and collateralized debt obligations (CDOs — securities backed with a variety of debts, including mortgages), there are also derivatives.

Derivatives are simply bets. While there is a limit to the number of MBS and CDOs you can have, there’s no limit to the number of derivatives. The value of these derivatives amounts to hundreds of trillions of dollars.

The good news? Most derivatives are hedged so that the investor has little financial exposure. The bad news? When you deal with hundreds of trillions of dollars a minor “whoops” can be worth billions and billions of dollars.

And that’s how a few foreclosures upset the strange world of mortgage-backed securities, CDOs and derivatives.

————————

Published originally by The Real Estate Professional and posted with permission.

How Paper Mortgage Losses Turned Real is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: applications, ARMs, CDOs, derivatives, income, loans, mbs, mortgage-backed securities, Mortgages, option, risk, stated

I’m not so sure Ozzie and Harriet were off the mark. Ownit closed in December 2006.

Ozzie and Harriett — the Nelsons of early TV — didn’t do too badly. The Nelsons were a prototypical one-wage earner household. They no doubt financed their home with an afforable fixed-rate loan. The mortgage choices then available were pretty much limited to VA, FHA and conventional financing with 20 percent down, financing that usually came from a local savings & loan association.

Today’s mortgages might well have confused the Nelson’s — they certainly confuse a lot of current borrowers. How could one explain the joys of interest-only financing or option-ARMs to visitors from the 1950s? What would they think of such ideas as negative amortization, interest rates based on LIBOR movements (a European index that did not then exist) and monthly payments that might double in a few years?

The Nelson’s lived in a country that was the world’s largest producer of cars and steel and by far the largest producer and exporter of food, but let’s not idealize the ’50s — schools and neighborhoods were segregated; women were relegated to a second-class status; businesses and colleges openly discriminated against Jews; lenders engaged in redlining; there had never been a Catholic president; the Korean war had ended — and the Vietnam war loomed ahead. But at least in the sense of real estate and mortgages, things were understandable.

The worry at the start of 2007 is that the market for subprime loans is less stable then investors would like and perhaps not so understandable. For instance, a 2006 study by Friedman Billings Ramsey found that default rates for adjustable subprime loans originated in 2005 were “15.4% and 6.3% higher than the default rates of those originated in 2003 and 2004, respectively.” (See the June 2006 MarketPlus Report from FRB for details.)

Well sure, you might think, interest rates reached record lows in the summer of 2003. As rates have risen so have foreclosures.

Not quite. Yes, interest rates have risen since 2003 but the Friedman Billings Ramsey study found that most of the subprime loans (74.9%) were 2/28 hybrid adjustables — that is, financing where the payment stays the same for the first two years of the loan term. “Hence,” says the report, “most of the adjustable-rate subprime loans originated in January 2005 will not reset at the earliest until January 2007.”

If rising interest rates aren’t doing it, then why then the rash of subprime foreclosures?

FBR looked at subprime foreclosure rates in 361 metropolitan statistical areas and found that 95 had particularly steep default rates. The reason: slowdowns in areas dependent on auto manufacturing, weak labor markets in New England and Golf Coast areas still reeling from hurricanes Katrina and Rita.

If you remove these 95 metropolitan statistical areas from the mix you find, according to FBR, that default rates increased from 4.16% in in July 2005 to 5.84% in July 2006. An increase, but not as bad as a superficial figures suggest.

It’s just a guess, but I would suggest that those fiscally-conservative folks from the ’50s might look at the FBR survey results and map out a mortgage investment program that looks something like this:

If I’m a mortgage investor I’d look at rising subprime default rates and say more risk means I need more interest. That, of course, is a problem given that subprime rates are already steep. Can the market absorb higher subprime rates without steeper default levels?

I’d stay away from areas with especially high default rates — that would unfortunately mean less financing for the metropolitan statistical areas where the need for mortgage capital is especially accute.

I’d look ahead and wonder about areas that have high levels of interest-only and option ARM activity. FRB reports that in the first six months of 2006 more than a quarter (25.8%) of the loans in California allowed negative amortization. In the same period interest-only financing was remarkably popular (or necessary) in Charlottesville, VA (47.1%), Ventura, CA (46.3%) and Santa Cruz-Watsonville, CA (45.7%).

I’d wonder what would happen with those 2/28 hybrid adjustables, the ones that will begin resetting in big numbers in this month. Does anyone seriously think that higher interest rates will not compound subprime problems?

The Nelsons may not have had home computers, electronic games or DVDs, but each month they could easily pay their steady mortgage bill. For a growing number of homeowners, that’s not a bad deal.

————————

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

Should We Bring Back Ozzie & Harriet Loans? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: affordable, application, conventional, desperate, FHA, foreclosure, housewives, income, lending, loan, monthly, mortgage, payment, standards, stated, traditional, VA

That term “in the process of being foreclosed” is important. Neither borrowers nor lenders benefit from foreclosures. For borrowers the loss of a home is a personal tragedy as well as a huge credit stain that will impact finances for years. For lenders, foreclosures suggest losses, legal bills, vanished interest, unrecovered principal and lots of explaining to regulators.

The result is that a large percentage of homes which are “in the process of being foreclosed” are never actually foreclosed. The property is sold before the foreclosure, the loan is re-worked, the property is refinanced or back payments bring the loan current and the matter is resolved with as little damage as possible to both lenders and borrowers.

But figures from RealtyTrac, the online foreclosure marketplace that gets data from 2,200 counties nationwide, show that in August 2008 the number of homes entering the foreclosure process reached a new plateau: For the first time in a single month more than 300,000 American families received foreclosure notices of some kind.

Eternal optimists may say this is good news for those who deal in foreclosures. But while foreclosure clean-up is necessary, if there’s an increased number foreclosures in your neighborhood and properties begin to sell at low values, guess what happens to local home prices? Guess what happens to the value of your home?

You have to wonder: Are we seeing more foreclosures than last year as toxic mortgages mature? These are “nontraditional loans,” a sterile description for mortgages with ridiculously low monthly costs at first (but higher costs later) as well as mortgages that feature limited documentation and overly-large initial loan balances. Specifically, we’re talking about option ARMs, interest-only loans, stated-income financing and super-jumbo mortgages.

In April 2005 we asked Rick Sharga, RealtyTrac’s vice president of marketing, about the impact of toxic loans on the rising number of foreclosures and here’s what he had to say at that time:

Question: Are toxic loans linked to the rise of foreclosures?

Answer: While we haven’t seen any report that definitively links the two, it’s logical to surmise that higher risk loans will default at a higher rate than more traditional loans. And the fact that a larger percentage of home loans fall into the high risk category than at any time in recent memory makes the possibility of a spike in foreclosures more likely.

Question: Have toxic loans begun to impact the marketplace?

Answer: It’s hard to assign the increase in the number of properties in default and foreclosure specifically to high risk loans, but they’re almost certainly a contributing factor. As large numbers of ARMs reset this year and next — we’ve seen numbers as high as $300 million in loans this year and $1 billion in 2007 resetting — we’ll be better able to gauge the impact on national foreclosure rates.

Question: Will we see a further increase in foreclosure levels?

Answer: We anticipate that foreclosures will increase throughout 2006 for several reasons.

First, the number of properties in foreclosure has been below historic averages for several years, and the market appears to be moving back toward more “normal” levels.

Second, increasing interest rates are driving up monthly payments for homeowners with ARMs, and will significantly increase monthly payments for people with 3/1 or 5/1 ARMs due to reset.

Third, house values appear to be cooling off, which gives homeowners less equity to leverage in the event that they find themselves in a financial bind — and limits the opportunity to sell a property at a profit for homeowners in default.

There are ancillary economic factors that also come into play. Rising interest rates have had an effect on monthly credit card payments in an economy with a very high amount of consumer credit card debt. Energy costs have risen faster than anticipated. In some parts of the country, major employers such as Ford and GM have announced plans for massive layoffs, and there tends to be a strong correlation between higher-than-average unemployment rates and higher-than-average foreclosure rates.

Question: How long will it take to clean out weak borrowers?

Answer: It’s almost impossible to answer that question because there are so many factors involved, ranging from house appreciation rates to rising and falling interest rates to supply and demand within any given market to how far lenders are willing to extend themselves to “save” a troubled loan and even to the overall strength of the economy.

Question: Any general industry comments?

Answer: One of the trends we’re following is the number of properties that actually end up becoming REOs (bank repossessions). Over the past year, even as the general numbers of properties entering foreclosures has increased, the number of homes that actually end up as REOs has consistently stayed below 20 percent of the inventory. That relatively low number suggests that the market has been strong enough to allow owners to either re-finance, work out new terms with lenders, or sell the properties before they’re foreclosed on. It’s a statistic we’ll be watching closely, as we believe that a spike in the percentage would be a red flag.

The other statistic we’ve been tracking is the sales price of properties in foreclosure relative to estimated market value of the properties. In “hot” markets like CA, foreclosure properties have retained 80- to 88-percent of full market value over the past six months, whereas in other areas the numbers have been significantly softer (Minnesota, for example, was just below 50 percent). These relative prices also bear watching as a dramatically lower price combined with a high number of foreclosure properties could have a definite impact on home prices in a given area.

What we may be seeing is the coming together of slowing local markets at the very same time that large numbers of borrowers are facing stiffly higher payments. This combination of events will surely test those who believed that rising home values were assured, certain and guaranteed; an easy escape valve if monthly payments could not be met.

————————
Published originally by Realty Times on April 28, 2006 and posted with permission.

Foreclosure Numbers at New Highs: Are Toxic Loans To Blame? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: application, ARM, foreclosure, income, interest, jumbo, loan, mortgage, only, option, stated, toxic

With “stated income” loans borrowers tell the lender how much they make but the lender graciously does not verify the information. The borrower’s word is accepted as gospel, even if that word is sometimes inflated.

In comparison, if you apply for a mortgage and own rental property lenders are somehow less trusting. They want signed leases as well as tax returns that show income, costs and profits. They’ll knock off 25 percent your rental income as a “vacancy factor,” thus reducing your ability to qualify for a loan — even when tax returns show no vacancies for years.

But if you apply with a no-tell loan and provide no evidence supporting what you claim to make, lenders will gleefully accept your declaration without question. Only if the loan is later audited or you switch to a loan program that requires verification will anyone check your tax returns to see if what you told Uncle Sam and what you told the mortgage company are in anyway similar. The catch, of course, is that if the numbers differ a borrower can face serious legal difficulties, a situation to avoid and a chance no one should take.

Lenders will tell you that rental property represents more risk than owner-occupied housing, thus the justification for higher rates and tougher qualification standards. There is a certain logic to this view — until you get to stated-income loans.

Why is rental property more risky then someone buying or refinancing a personal residence without income verification? The investor must supply reams of leases and tax returns because of lender worries that rental income might somehow be inflated. The prospective homeowner has no such requirement with a stated-income loan.

At this point someone will say, “look, we now have credit scores which allow us to show whether a borrower is creditworthy. To some extent, the question is not whether someone earns a given income, it’s whether they can support a given level of debt.”

Not always. Look for stated-income loans and you will find that such financing is often available to those with credit problems. Not to be cynical, but aren’t these the very borrowers lenders would want to check with the greatest possible care? Do folks in such financial straights generally have great credit scores?

Another argument goes like this: “I’m a person who values privacy. I don’t want lenders contacting my employer and I don’t want people fishing through my tax returns. For these reasons I prefer a stated-income loan.”

If real estate financing is required why shouldn’t lenders reduce risk and get verified information? What is the case for less prudence? If you were lending someone money wouldn’t you want past tax returns, pay stubs and other data?

A third argument goes like this: “But we only make stated income loans in those cases where the borrower has 30 percent equity.”

This is plainly true with some loan programs — but not all. Search around and you can easily find 90 percent (or better) financing and refinancing with stated-income loans.

Some borrowers have a different issue: They’re concerned that their income is “too difficult” for lenders to comprehend, that they’re the only people since colonial times who have filed a 280-page tax return.

It just isn’t so. Lenders deal with millions of loan applications each year. They’ve seen the returns of the rich and famous. They know how to evaluate sole proprietorships, corporations, foreign income, royalties, rents, and partnerships. If income is reported to the IRS, lenders can figure out how it fits within a loan application. If income isn’t reported to the IRS, the lender should decline the loan.

Stated-income loans represent too much risk for lenders — and too much temptation for borrowers. Perhaps a little rigidity in the lending process is not so bad. After all, how hard is it to produce tax returns and pay stubs?
————————
Published originally by Realty Times on July 27, 2004 and posted with permission.

Should Lenders Dump No-Tell Loans? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: application, income, liar, loan, low doc, mortgage, no, no doc, real estate, return, risk, stated, stated income, tax, tell

That’s a question increasingly being raised in Washington, where a new interest in mortgage fraud is beginning to emerge.

“Mortgage fraud takes many forms,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com, the nation’s largest foreclosure resource. “It typically involves claims of excess income, fictional jobs, hidden debts, disguised sale discounts, tainted appraisals and manipulated credit reports. While it might seem that buyers would be the natural authors of such shams, in at least some cases it’s lenders looking for bigger fees who change the paperwork without the knowledge of unsuspecting borrowers.”

The just-issued eighth annual mortgage fraud study developed by the Mortgage Asset Research Institute found that reports of suspicious mortgage activity rose 33 percent in the first half of 2005 when compared with 2004. In turn, the 2004 report was up 150 percent when compared with 2003.

“If rising interest rates produce a significant reduction in originations for 2006,” says MARI, then “additional cases could surface in the future at a rapid rate as some originators press to maintain high origination levels.”

“Stated income and reduced documentation loans speed up the approval process, but they are open invitations to fraudsters,” according to MARI.

No one knows the extent of mortgage fraud, but MARI says that when one study compared loan applications with IRS records it found that “90 percent of the stated incomes were exaggerated by 5% or more. More disturbingly, almost 60% of the stated amounts were exaggerated by more than 50%. These results suggest that the stated income loan deserves the nickname used by many in the industry, the ‘liar’s loan.’”

With a stated income loan application, a borrower estimates his income. This estimate is generally not verified by lenders except when a loan is audited, something which might happen when a mortgage is sold or a home is foreclosed. Lenders charge a higher rate for stated-income loan applications, meaning that stated-income loans can be re-sold to mortgage buyers at a higher price.

Speaking of stated-income loans applications, John C. Dugan — the Comptroller of the Currency and one of the most important federal regulators — says that “what may be suitable in limited circumstances has now become acceptable as general practice. For subprime loans, stated income has become the rule rather than the exception, and in a very brief span of time. While this practice was relatively rare just a few years ago, last year nearly 50 percent of all subprime loans relied on stated income.

“How can this be?

“Sound underwriting — and, for that matter, simple common sense — suggests that a mortgage lender would almost always want to verify the income of a riskier subprime borrower to make sure that he or she had the means to make the required monthly payments. Most subprime borrowers are salaried employees for whom verifying income by producing copies of W-2 forms is just not that difficult. So why would these borrowers pay the higher interest rate that lenders charge for stated income loans?”

Why are borrowers paying more? Dugan offers two reasons:

First, “borrowers may not fully understand how much more they are paying for the limited convenience of not producing their W-2s or providing any other form of income verification. That lack of understanding provides a tempting target for brokers who typically have a financial incentive to skip the verification process and get the loan approved at a higher interest rate.”

And the second reason? As Dugan explains, “evidence is mounting that borrowers are frequently inflating their incomes, often substantially, to qualify for larger mortgages.”

Dugan says there are times when a stated income loan applications may make sense.

“The simplest example is a straight refinancing that doesn’t involve a cash take-out, and is underwritten by the same lender who provided the original mortgage: there, the lender has experience with the borrower and knows that the new loan will be more affordable and therefore more secure than the one it replaces. It may also make sense for individuals who are self-employed or who work on commission and have understandable difficulty in documenting income.”

But is Dugan right about stated income loans?

In the first case — the example of a lender offering a lower-cost mortgage to a current borrower — the borrower is not getting the even-lower rate that would be possible with full-documentation.

The second case — which concerns the “understandable difficulty” of the self-employed and those working on commission to document their income — would certainly raise eyebrows with another federal agency, the IRS.

All taxpayers must file annual returns and those who are self-employed must pay a portion of their projected tax obligation quarterly. In other words, the self-employed always have both tax returns for prior years plus a need to keep current records. At a time when bank records can be accessed online and easily printed out, the self-employed are able to readily document gross income and to reasonably estimate costs based on past tax returns.

“All of us,” says Dugan, “have been troubled by the recent spike in delinquencies and foreclosures, and it seems clear that one reason for the trend is the increased reliance on stated income in subprime mortgages. It’s true that in many cases it is the borrower who is deliberately inflating his or her income in order to qualify for a loan that he or she can’t really afford. But a lender is responsible for its underwriting standards, and it is fundamental that the institution ensure that it has the information it needs to make a sound judgment on the borrower’s ability to repay the loan.”

In fact, the use of stated-income loan applications is not just a problem associated with subprime loans. As the MARI study shows, “for the most part, the states that report difficulty with subprime fraud are the same ones that have problems” with all forms of financing.

Dugan offers three observations which ought to be sobering to borrowers, lenders, investors and regulators

First, “stated income is too great a temptation for misrepresentation and, in its most extreme form, outright fraud. It ought to be a truism that sound underwriting practices minimize this temptation.”

Second, Dugan asks, “how can lenders seriously talk about ‘debt-to-income’ ratios, for example, if the denominator of ‘income’ is really an unknown variable that can be whatever the borrower says it is?”

Dugan’s point is that stated income loan applications have the effect of easing “debt-to-income ratios without disclosing that fact to investors or regulators — or without disclosing how much easing has taken place. If lenders believe that higher debt-to-income ratios can be prudent, then they should be willing to disclose the actual, higher debt-to-income ratios rather than masking them through stated income loans.”

Third, it’s “not a safe and sound underwriting practice to make mortgage loans that
substitute future house price appreciation for borrower income as a key source of repayment.”

“I do find it telling,” says Dugan, that “when faced with the new housing market conditions, subprime lenders have responded first by tightening standards on stated income. And I also find it telling that one of the first things that loan servicers do in the current environment, when deciding whether to restructure or foreclose on a delinquent loan, is — you guessed it — seek verification of income. Apparently verified income is viewed as a critical factor in determining whether a loan can be saved, which of course begs the question: if loan verification is such an important predictor of the borrower’s ability to repay in the current environment, why wasn’t it equally important when the loan was first made?”

“Regulators at the federal and state level are expected to issue new mortgage guidelines for lenders in the next few months,” says Saccacio. “The trick will be to keep in place a system which largely works while getting rid of the practices most likely to be abused. Given the growing worries regarding mortgage fraud, there’s little doubt that stated-income loan applications will be greatly restricted in the future, much to the benefit of borrowers, lenders and investors.”

————————

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

Will Regulators End Liar Loans? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: application, Dugan, income, loan, mortgage, premium, stated

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

Technorati Tags: ARELLO, Association, disclosure, income, interest-only, Law, License, loans, Mortgages, Officials, stated, toxic