Wall Street Journal

Let’s hope this comes to pass soon.  We could use some improvement in that area!  Let’s make short sales…SHORT on time!

Recent years have seen a dramatic increase in the number of reported mortgage frauds in the U.S. According to a recent article in The Wall Street Journal, banks are reviewing their loan portfolios for questionable loans made during the housing boom, and that has caused a 31 percent increase in the number of mortgage fraud reports filed with the Financial Crimes Enforcement Network, a U.S. Treasury Department agency, in the first three months of this year.

The FBI’s pending investigations of mortgage fraud increased 71 percent from 2008 to 2009. According to the FBI, $14 billion in fraudulent loans are estimated to have originated in 2009 alone, and there have been increases in gang members, organized criminal groups and domestic extremists perpetrating mortgage fraud and the resurgence of debt elimination/redemption schemes. The FBI has also reported that 66 percent of all pending FBI mortgage fraud investigations during 2009 involved dollar losses totaling more than $1 million.

Types of mortgage fraud schemes include:

“Straw” buyers / “Air” loans (nonexistent or front buyers, nonexistent properties)

Loan origination

Double sales (mortgage notes sold to more than one buyer)

Inflated appraisals / property flips

Shot-gunning (mortgaging several properties simultaneously)

Buy and bail

Builder bailout

Foreclosure rescue schemes / advance pay schemes

Short sale schemes

The trend is sure to squeeze local communities already faced with the prospect of declining federal aid, as they struggle to pay for basics ranging from schools to roads to public safety.

The latest bad news came Tuesday from the Standard & Poor’s/Case-Shiller 20-city index. The round-up of home prices in large metropolitan areas showed prices in a dozen regions hit their lowest level in March since the housing market collapsed in 2006.

Nationally, prices fell by more than 4 percent in the first quarter of 2011 and have roughly returned to 2002 levels. David Blitzer, chairman of the Index Committee, claimed the numbers confirmed a “double-dip in home prices” in many U.S. markets.

“Home prices continue on their downward spiral with no relief in sight,” Blitzer said.

The economic developments pose a political challenge for President Obama, who faces a raft of Republican challengers entering the 2012 White House race armed with claims that his administration has not done enough to improve the economy. Ahead of a new monthly unemployment report, an industry board reported Tuesday that consumer confidence also dipped in May. The S&P report followed one by the National Association of Realtors that showed the number of new home contracts falling in April.

White House Press Secretary Jay Carney said the administration is “working aggressively” to help homeowners avoid foreclosure and lift the housing market.

Though the administration has faced criticism over a mortgage modification program that has fallen short of the president’s predictions, Carney defended the administration’s efforts — noting 600,000 homeowners have extracted “permanent” changes to their mortgages under the system.

“The domestic housing market was hit very hard. … And it remains a challenge that we’re addressing,” Carney said, adding: “More work needs to be done.”

The political complications for Obama are outweighed, though, by the economic complications for families and local governments — both of which view property as a nest egg. For homeowners, their property value is a factor in retirement planning, and the movement in the market has already changed the way Americans think about their retirement. A Gallup poll released last year showed just 20 percent of non-retired Americans viewed their home equity as a major source of retirement income — compared with 30 percent in 2007.

For local governments, those home values feed a significant portion of annual tax revenue.

And only recently have those revenues started to decline. Though the housing bubble burst in 2006, assessments didn’t start to catch up until last year, when local governments first logged a decline in property tax revenue.

With assessments going down, some governments have responded by raising tax rates.

According to the National Association of Counties, 15 percent of counties raised rates last year; according to the National League of Cities, 23 percent of cities did the same.

In an anti-tax climate, many jurisdictions instead favored cuts to personnel and capital projects to balance their budgets in 2010. But the League of Cities warned in a report last fall that “the full weight of the decline in housing values has yet to hit the budgets of many cities.”

Maureen Maitland, vice president for index services at S&P, said the falling values will make it “very hard” for local governments to expect higher revenue based on assessments.

“They’re going to either have to cut costs somewhere else or raise revenues,” she said. “That’s going to be a big challenge for a lot of localities.”

She said forecasters thought the market bottomed out last year, but chalked the optimism up to a temporary boost caused by tax incentives.

“We haven’t quite hit that bottom yet,” Maitland told FoxNews.com.

Walter Molony, spokesman with the National Association of Realtors, acknowledged that some governments are looking at raising rates to make up the difference in their budgets. But he advised against “unnecessary tax burdens on homeowners.”

Molony also took issue with Blitzer’s bleak characterization of the market. He said foreclosures and short sales are creating a “downward skew” in prices nationally, but predicted the number of foreclosures would start to decline next year, gradually balancing out the rest of the market. He urged lenders to loosen up credit requirements to ease the recovery along.

“We’re into a broad trough. It’s a very slow recovery,” Molony said.

Amid reports confirming how slow that recovery truly is, Obama has tried to lift spirits by touting Chrysler’s repayment of its U.S. auto bailout money — the Detroit automaker said last week it paid back $5.9 billion to the U.S. government.

The president plans to travel to a Chrysler plant in Toledo Friday. Vice President Biden said in a radio address over the weekend that “because of what we did, the auto industry is rising again.”

“Manufacturing is coming back. And our economy is recovering and it’s gaining traction,” Biden said.

Republicans who believe otherwise unveiled a new plan last week in the House of Representatives aimed at spurring job growth.

Read more: http://www.foxnews.com/politics/2011/05/31/falling-home-prices-erode-nest-eggs-local-government-budgets/#ixzz1NyskAZjw

Fannie Mae and Freddie Mac are putting into effect agreements calling for banks to repurchase loans that did not comply with the government’s underwriting regulations.  By end of September, lenders had yet to react to these calls to buy back $13 billion in loans.  Freddie Mac has already begun the process to impose penalties for the bad loans, one-third of which are four months old and older.

The banks’ defiance of the Virginia-based Freddie Mac and Washington-based Fannie Mae stem from their belief that the federal mortgage agencies are doubting appraisals done by loan originators whom, they also claim, failed to verify income.  Fannie Mae and Freddie Mac have also been nit-picking defaulted loans for every petty procedural fault.  Smaller lenders are complaining that forced buy backs might lead to them going under, even if  bigger banks are  capable of the shouldering the burden.  

In the interview with Bloomberg News, John A Courson, chief executive officer of the Mortgage Bankers Association, estimated that 40 percent of buy back requests are retracted once banks come up with supplementary supporting documents,   Courson said, “We’re burning a lot of stockholder resources, and clearly a lot of Fannie and Freddie resources, to have 40 percent of these things rescinded.  It hurts the banks and frankly we’re wasting government resources, too.”

Since 2008, the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have been operating as the federal government’s supervisory arm on mortgage lending practices.  Under them, tighter credit limits have been imposed while they cut their budgets in preparation for a restructuring of mortgage financing under the current Obama administration.   They deny that their demands for banks to repurchase loans as part of a new regulation, classifying them instead as an essential move to curb the increasing number of default loans. 

 “This is the first time in history you’ve seen this much pushback against the GSEs,” said Guy Cecala, publisher of Inside Mortgage Finance, an industry trade publication in Bethesda, Maryland, also quoted by Bloomberg News. “It’s just the volume of it. It’s bigger numbers. And this time the reasons are a lot grayer.”

The banks’ total exposure to losses from the buy back requests will likely be limited to an amount that big banks can handle, analysts say.  33 to 39 percent of the problem loans identified by Fannie Mae and Freddie Mac end up in the repurchase program.  That could mean $20 billion to $33 billion in losses for the banks, according to an analysis by FBR Capital Markets dated Nov. 29.  Credit Suisse Group AG analysts, in an Oct. 29 research note, projected that the GSEs would be able to recover $15 to $20 billion if they succeed in pushing back 5 percent of their delinquent loans.

Sub-prime private mortgage riskier to large banks

Mahesh Swaminathan, a Credit Suisse mortgage strategist, was reported by Bloomberg News as saying, “The overall loss amount is pretty contained from the GSEs.”  What could be riskier for large banks, say analysts, are private mortgage-backed securities issued by investment banks at the peak of the subprime lending period.

Buy back requests by both the GSEs and private investors could lead to financial institutions having to cough up $54 billion to $106 billion, according to the Nov. 29 FBR analyses.  In an Oct. 15 report by JPMorgan, the costs were estimated at $55 billion to $120 billion.  Back in August, Chris Gamaitoni, an analyst with Compass Point Research and Trading LLC, had revealed that private-investment buy backs and connected legal costs will put a $179.2 billion hole in the banks.

On Nov. 18, the Federal Housing Finance Agency that oversees Fannie and Freddy, reported that out of the 30 million mortgages guaranteed or owned by the GSEs, 1.3 million were past due 90 days.  The GSEs have always claimed they routinely check new loans for any mistakes which inevitably result in buy back requests.  “There’s no new policy. This is something that’s always been done,” said Freddie Mac spokesman Brad German to Bloomberg News. “The fact that more defaulted loans are triggering reviews that may lead to repurchase requests, given the volume of defaults, is not entirely surprising.”

Courson, CEO of Mortgage Bankers Association, said the industry’s concerns about the buybacks go beyond the volume. “It’s the nature of the requests, where so many try to assert a defect that has no actual bearing on the individual loan’s performance.”

Fannie Mae and Freddie Mac are insisting that loans went awry due to errors in underwriting but the real cause of the problem is unemployment, lenders argue.   “If a loan’s paid for five years, then the client lost their job and somebody goes back and says, ‘You didn’t dot that I or cross that T,’ technically the originator has to buy that loan back,” William C. Emerson, chief executive officer of Detroit- based Quicken Loans, was quoted as saying.  “Loans are being put back for very vague, gray reasons.”

Last quarter, Fannie Mae lenders had to pay the company for losses on $1.6 million worth of loans and the GSE still has outstanding buy back demands on loans worth $7.7 billion.  These figures were filed by the GSE in the third-quarter with the US Securities and Exchange Commission.  That was the first time the GSE had made public the amount of its outstanding buy back demands.

At the end of September, Freddie Mac reported that it had gained payments on $1.7 billion worth of loans and made demands on another $5.6 billion, about the same as the previous three months, an increase from $4.8 billion at the end of March.  Lenders might actually owe less.  It’s all a matter of how much the loan has been paid down and whether the GSEs have recovered any costs, for instance, from the sale of a foreclosed property.

Demands Manageable To Large Lenders

Larger lenders and servicers say they can manage the demands from Fannie Mae and Freddy Mac.  Bank of America, which took over the sinking Countrywide Financial Corp. in 2008, has received $18 billion in claims from both the GSEs for loans made before the bursting of the housing bubble, with another $6.6 billion pending.  The bank reckons that it is nearly two-thirds through on its way on GSE claims.

Wells Fargo, which bought out Wachovia and its home loans division during the financial meltdown of 2008, has cut back its reserves to re-purchase delinquent mortgages down to $1.3 billion from $1.4 billion, also indicating a decline in GSE demands.

In contrast, JPMorgan reported an increase in demands from the GSEs and private investors in November. The New York-based company reported $2.9 billion in repurchase demands so far this year, compared with $3 billion for all of 2009 and $2 billion the year before.  Concurrently, the company made a deal with the GSEs to buy back demands for a segment of the loan portfolio it had obtained by acquiring Washington Mutual in 2008, after the latter had collapsed under the weight of sub-prime lending. “We should be near the end of the process as it relates to the GSEs,” JPMorgan’s Chief Financial Officer Doug Braunstein, was reported as saying Nov. 17 in New York.

The prospects for smaller lending firms to hold up to the situation are less bright.  Executives of these firms believe that ultimately, homebuyers would be the ones most affected because they would find it harder to be approved for loans even if they meet all the requirements of the GSEs. 

 “On one hand you’ve got the administration saying we want you out there lending money to help bring on the recovery, but we find ourselves as an industry rejecting loans because of fear of future buybacks,” said Ron J. McCord, chairman of First Mortgage Co., an Oklahoma City lender and servicer, as reported by Bloomberg News.  The company originates more than $1 billion in loans a year.

The government role in the mortgage market is still being hotly debated back in Washington.  A plan to overhaul the GSEs in January has been scheduled by the Obama Administration amidst calls by Republicans to disband the agencies altogether.    Both Democrats and Republicans are pressuring Fannie Mae and Freddie Mac to become solvent again and reimburse taxpayers for playing their roles in government bailouts.  “We need to pursue all available legal claims to limit the losses to taxpayers,” said Representative Brad Miller, a North Carolina Democrat who serves on the House Financial Services Committee as reported by Bloomberg News.

Fannie Mae and Freddie Mac should take what they are owed and leave it to regulators to make the decision to take action down the road if buy backs are causing problems to banks, said Phillip Swagel, a former assistant Treasury secretary under President George W. Bush.  “It’s better to uncover everything and for people to face up to their obligations,” Swagel concluded.

By: Faridah Huller, Editor
Mortgage Lending News, LLC

Fiserv, which provides the data for the widely watched Standard & Poor’s/Case-Shiller Home Price Index, said San Diego prices rose 11.6 percent from the second quarter of 2009 to the second quarter this year. But a double-dip is now in the works for various reasons.

That decline would place San Diego as the 40th worst housing market out of 384 studied. No. 1 biggest depreciation market is the Punta Gorda area of Florida, forecasted to drop 28.1 percent from its second quarter price of $135,000. The highest appreciating market is the Kennewick-Pasco-Richland area of Washington state, up 1.8 percent from $177,000 over the same period.

“Factors weighing on the housing market include chronic high unemployment, the expiration of the homebuyer tax credit that expired in June and the large number of distressed properties that remain in markets, such as Florida, Arizona and Nevada,” the company said.

Increased sales in high-priced areas, such as San Francisco and Washington, as well as San Diego, helped push national prices up 3.6 percent in the 12 months ended June 30.”Some of the largest declines in prices will occur in markets that had strong spring and summer 2010 price increases,” said David Stiff, Fiserv chief economist. “This is because the homebuyer tax credit delayed the correction in home prices that is necessary to return housing affordability to pre-bubble levels.”He said San Diego and the other markets that had upturns will “experience double-dip price declines.” “If there are no downside surprises for the economy or the housing and mortgage markets, home prices should start to stabilize at the end of 2011,” he said.

Nationally, Fiserv expects prices to fall another 7.1 percent, from $177,000 in the second quarter of this year to $164,400 by the second quarter of next year. San Diego’s prices are projected to fall from $390,000 to $356,850 over the same period.

By the second quarter of 2012, Fiserv predicts San Diego prices will be up .8 percent year-over-year to about $359,700.

Fiserv bases its prices on paired sales of same single-family-resale homes over time on a three-month rolling average.

By: Roger Showley, (619) 293-1286, roger.showley@uniontrib.com, Twitter: @rmshowley
The San Diego Union Tribune
www.signonsandiego.com