Unethical


Brokers Expect REOs to Trigger More Legal Disputes

Nearly 60 percent of real estate professionals say they believe REO-related disputes will increase over the next two years. What’s more, 76 percent said they believe it will be among the top three issues they will face in real estate, according to the National Association of REALTORS®‘ newly released 2011 Legal Scan: Legal Issues Facing Real-Estate Professional.

In the survey of real estate agents, brokers, attorneys, and educators, survey respondents said disclosure in these transactions remain a main culprit to problems, pointing to banks and listing brokers who sometimes fail to disclose known material defects about a property.

Overall, according to the 2011 Legal Scan, the top three issues that cause the most disputes in a real estate transaction are dual agency, disclosure, and breach of fiduciary duty.

Short sales, in particular, are causing more disputes in some of these areas, the survey found. Short sales are more commonly being listed in “as-is” condition, which has “resulted in a decline of quality of seller disclosures,” the survey notes. Another disclosure problem reported is the failure of listing agents to report that the property is or will soon be in a short sale situation.

Source: “Brokers Foresee an Increasing Number of Lawsuits Related to Short Sales,” Realty Times (July 26, 2011)

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Strategic default smarts

By Tara Tran • Jul 7th, 2011 • Category: Feature Articles, Journal Articles, July 2011 Journal

 

This article reviews a newly-developed Fair Issac Company (FICO) analytics model which predicts a borrower’s likelihood to exercise a strategic default and revisits the financial advantages of a strategic default for a negative equity homeowner.

 

FICO findings

Fair Issac Company (FICO) researchers have developed new analytics to predict a borrower’s likelihood of walking away from a mortgage – a strategic default – whether or not he is delinquent on his payments. The rise in strategic defaults over the past year is of concern to mortgage lenders. Thus, FICO consulted with them (not underwater homeowners) to develop the analytics with the purpose of preventing strategic defaults and their costly impact on lenders, investors, homeowners and the housing market.

35% of mortgage defaults in September 2010 were strategic, an increase from the 26% more than a year earlier in March 2009 according to a University of Chicago Booth School of Business study. 22.5% of residential mortgage defaults nationwide were strategic in the third quarter of 2010. This number increased to 23.1% in the fourth quarter of the same year.

In negative-equity-laden California, strategic defaults are also widespread (more so than the nation as a whole since California is a nonrecourse state and lenders cannot viably threaten to sue for their losses). There were 45,380 strategic defaults in 2009 – 80 times the number in 2005. [For more information on the strategic default trend, see the August 2010 first tuesday article, Fannie Mae, our government and strategic defaults.]

FICO researchers found borrowers who walked away from their mortgages had common traits including:

  • higher FICO scores;
  • better credit management (understood financial statements);
  • less retail balance (did not need credit to buy);
  • shorter length of residence on the property and thus greater likelihood of a negative equity; and
  • more open credit in the past six months with which to purchase items. [For more information on FICO’s findings on strategic defaulters, see the FICO article Predicting Strategic Default.]

 

The study concluded the degree of difference in the loan-to-value (LTV) ratio between the current market price for a home and the mortgage owed on the home (home price depreciation) is not as strong of an indicator for predicting a homeowner’s ability or willingness to strategically default. However, the study did conclude a borrower with a stronger history of good money management and a higher credit score tended to strategically default at a higher rate than other borrowers.

FICO and mortgage servicers are alarmed of the increasing frequency of strategic defaulters and warn homeowners of the consequences of walking away from their mortgage payments. Not only will homeowners suffer a 150+ point hit to their credit scores, but they may also face higher rates, tighter terms for other types of credit and a bump in insurance premiums. FICO goes on to implicitly threaten the homeowner who reverts to renting after walking away by saying landlords will be more unwilling to accept them as a tenant when they see a strategic default on the tenant’s credit record. [For more information about the fallacy of FICO’s argument, see the June 2010 first tuesday article, The FICO score delusion.]

This is a fabrication of the worst type. FICO and the lenders they consulted with (who incidentally are the ones who pay FICO for the use of their algorithms) have an economic interest in keeping California’s population of negative equity homeowners imprisoned in their underwater homes. The truth is, any landlord fully understands that a strategic defaulter is going to make a very fine, long-term tenant if they have a job and otherwise pay their bills – and most all do since they made the sound decision to strategically default.

Walking away is for smart people, and lenders know it

Several studies over the past years have already observed strategic defaulters tend to hail from a more financially savvy crop of people. The recent FICO study repeats this conclusion of which many of us are familiar.

What it also advertises — to the endorsement of lenders — are the detrimental effects of walking away from a mortgage. Agents and brokers must construct the bigger picture, especially in California where underwater homeowners collectively hold over 2,000,000 negative equity mortgages. [For more information on the relationship between higher credit scores and strategic defaults, see the October 2009 first tuesday article, Financially savvy homeowners turn to mortgage defaulting as a strategy.]

California negative equity homeowners have the short end of the stick with black-hole assets on their hands, so the question they should be answering is not whether a strategic default would be a in the best interest of their lenders. Rather, they should be considering whether a strategic default would be a prudent choice for their personal financial situation.

It’s true, homeowners will see a hit to their credit scores from a strategic default — and of course FICO will highlight this since the media often overstates this figure — but homeowners must not be inveigled into staying in negative equity properties by the vague economic threat of a lower FICO score. It’s not about the FICO score alone, but the costs versus benefits analysis of the homeowner’s individual situation.

Either a homeowner can continue to siphon his money into a dead-end loan, or he can save that money and invest it into a much more lively investment — improving his family’s standard of living.

Paying lenders the full amount on an underwater home is not what is going to fuel the recovery of a family or the California economy — what we need is to put cash in the hands of negative equity Californians.

A strategic default when the LTV is above 125% is not a dishonest financial bailout – it is prudent business decision. It may temporarily hurt the pride and credit scores of California homeowners, but these things are soon remedied. [For more information on when to strategically default, see the May 2011 first tuesday article, Short sale or foreclosure? The naked truth for underwater homeowners.]

Paying lenders the full amount on an underwater home is not what is going to fuel the recovery of a family or the California economy — what we need is to put cash in the hands of negative equity Californians. If they aren’t going to get any cramdowns in bankruptcy courts, they need to exercise their legal right to strategically default — that “put option” in every trust deed. Besides, it’s what all the smart people are doing anyway, right?

– ftCopyright © 2011 by the first tuesday Journal Online – firsttuesdayjournal.com;
P.O. Box 20069, Riverside, CA 92516

Readers are encouraged to reproduce and/or distribute this article.

A Dodd-Frank report card

By Kelli Galippo • Jun 28th, 2011 • Category: real estate newsflash

The one-year anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) is swiftly approaching, and government officials, lawyers and media outlets are all anxiously tracking the progress of regulations being formulated to implement the required changes.

So far, 28 deadlines for the drafting of new regulations have been missed. Of the 385 new rules to be written, only 24 have been completed.

It has become undeniable that many on Wall Street (and in Congress) are using highly-paid, aggressive lobbyists to resist the changes demanded by Dodd-Frank. As a result of the delays, most of the new safeguards may not become effective until after the next election — giving newly-elected officials (supported by lenders) an opportunity to stop them altogether.

Regulators overseeing the transition process of the overhaul are struggling to discern whether the requests to slow the process down are genuinely in the interest of the consumer or just excuses for delay conjured up by those with only an interest in their own pocketbooks.

first tuesday take: Dodd-Frank is going to take longer to implement than expected. We anticipated lenders (and choice members of Congress) would do whatever they could to slow or kill the process. For them, lending is all about how much money can be taken from the consumer. Lenders are part of the rentier society that makes money simply by having money, versus the American homeowners who must contribute their skills to society and “rent” the money they need from the rentiers.

Among the many changes, (Dodd-Frank) strictly defines a qualified residential mortgage (QRM) as a Real Estate Settlement Procedures Act (RESPA)-controlled loan (for personal purposes, not business-related) which is not a Section 32, high-cost RESPA loan typical of equity loans and private money non-business loans. Tighter parameters will be placed on a borrower’s ability to obtain a mortgage not in the QRM category. [For more information regarding the Dodd-Frank changes, see the October 2010 first tuesday Legislative Watch, TILA circa 2010; consumer protection enhancement; for more information about the QRM, see the May 2011 first tuesday article, How much medicine can the sick housing market stomach?]

These tighter lending standards and increased consumer protection measures mean less business for lenders who made a killing during the Millennium Boom originating subprime loans and adjustable rate mortgages (ARMs).

Furthermore, the legislation prevents mortgage loan brokers (MLBs) from being compensated through yield spread premiums, or undisclosed kickbacks in an effort to remove MLB incentives for originating mortgages homebuyers can’t afford to repay. This is a good thing, which many MLBs remaining in the business acknowledge. Those who participated in the carnage have mostly lost their licenses or let them expire. [For more information regarding kickbacks, see the October 2010 first tuesday article, How to make money as an endorsed, registered, law-abiding RESPA mortgage loan broker.]

It is crucial for regulators to remember the purpose of these changes is to protect the mortgage borrowers. Further delay of the changes leaves homeowners and homebuyers vulnerable to the game played and (thus far) always won by lenders.

Re: “Financial overhaul is mired in detail and dissent” from the NY Times

American mortgages

Not quite settled

Bank of America’s settlement will worry other lenders

Jun 30th 2011 | NEW YORK | from the print edition

  • NOT for the first time, the tough talk was merely a prelude to a hefty settlement. Brian Moynihan, Bank of America’s boss, had vowed to engage in “hand to hand combat” with investors suing to recover losses on mortgage-backed securities (MBSs) peddled before the housing market collapsed. He had even likened them, none too diplomatically, to buyers of a Chevy who wanted it to be a Mercedes. In the end, though, BofA rolled over surprisingly quickly in order to relieve the worst of its housing-related headaches, a product of its ill-advised purchase of Countrywide, a gung-ho mortgage lender.

The bank will pay $8.5 billion to investors in more than 500 Countrywide-linked securitisations who had claimed the loans breached basic underwriting standards. The deal is backed by the loans’ trustee, Bank of New York Mellon, and 22 of the biggest out-of-pocket money managers, including BlackRock and PIMCO.

The forceful involvement of these big investors—lucrative BofA clients in a host of areas—was an incentive for the bank to agree terms. So was the fact that the Federal Reserve Bank of New York was a plaintiff, thanks to securities inherited in the rescue of AIG. And for all his combative rhetoric, Mr Moynihan has been keen to draw a line under BofA’s problems since taking over from the hapless Ken Lewis 18 months ago. He has shoved dodgy loans into a “bad bank” and restructured key businesses, while completing the integration of Merrill Lynch, an investment bank acquired during the crisis. Analysts saw MBS lawsuits as the biggest of the legacy risks dragging the bank’s share price below its book value.

Some dangers remain. The settlement deals with much of the Countrywide dross but it doesn’t cover loans handled by other BofA units or those securitised after being sold to third parties. Merrill faces $11 billion of residential-mortgage claims, reckons Christopher Whalen of Institutional Risk Analytics, a ratings firm.

BofA still has lots of haggling to do with Fannie Mae and Freddie Mac, the housing-finance agencies that guaranteed piles of duff loans, and with private bond insurers. The final bill will be far higher than the cheque written this week. The bank plans to set aside a further $12 billion for mortgage-related charges and thinks another $5 billion may be needed on top of that, though given the waywardness of BofA’s past estimates, it could be more. The prices paid at the time for Countrywide and Merrill were, it turns out, just deposits.

The capitulation will worry other large banks even though they are less exposed than BofA, which services one in five American mortgages. The two most vulnerable are Wells Fargo and JPMorgan Chase—again, largely thanks to crisis-era acquisitions (of Wachovia and Bear Stearns, respectively). Bear Stearns alone faces $18 billion in securities-fraud claims out of an industry total of roughly $200 billion, calculates Mr Whalen.

Worse, new legal challenges are emerging all the time, the latest from the federal agency that oversees credit unions, some of which were felled by bad mortgage investments. Mortgage servicers are also bracing for combined fines of between $5 billion and $20 billion as part of a settlement with state attorneys-general over foreclosure practices (remember robosigning?). And that’s to say nothing of further loan losses as house prices fall.

Mr Moynihan deserves praise for biting the bullet on MBSs. He is determined to end talk of his firm having replaced Citigroup as America’s clumsiest bank. Still, it will be quite some time before BofA itself looks more like a gleaming S-Class than a lumbering old banger.