10 Questions – And Answers – To Help You Understand the Foreclosure Crisis

by Blair Hickman ProPublica, April 18, 2012, 10:56 a.m.Answers to homeowners’ questions about the Independent Foreclosure Review.The administration’s website for the foreclosure prevention program. Provides an FAQ, homeowner examples, and other tools to see whether you might qualify for the program.A list of HUD-approved housing counseling agencies nationwide.Tips for homeowners from the Federal Trade Commission.These rules lay out how mortgage servicers are supposed to conduct the program.A finance and economics blog that provides news and metrics on the state of the housing market.

Reporter Paul Kiel took time to answer reader questions on Reddit about the foreclosure crisis, buying a home and how he got started as an investigative journalist. Rounded up some of the best questions, trying to represent a full view of the chat (and the crisis.)

What caused the foreclosure crisis and what can be done to fix this problem? — erkapathy

Big questions! Causes: well, two big causes. The crisis started with subprime loans, or loans made to risky borrowers, like the one I write about in my new e-book. Starting in 2007, housing prices turn downward. That meant people with loans they couldn’t afford couldn’t sell to get out of it any more.

And there were lots of really crappy loans out there, loans that really were never affordable for people to start with. Those loans got made because …unscrupulous mortgage brokers were pushing them, and yes, because borrowers were willing to take them on. Fraud was really common — brokers just making up income numbers. Some of the loans didn’t even require proof of income or assets.

So the first big cause was bad, mostly subprime lending.

The second big cause was that the economy tanked, and there was a spike in unemployment. Mortgage servicers handling these loans made matters worse. They had a financial incentive to just push people toward foreclosure, to be understaffed, etc.

For years, the government mainly took a carrot approach. They tried to provide subsidies to convince banks to competently handle modifications and foreclosures. It didn’t work. So now there’s more of a stick approach. If there are real consequences, it might work, but it’s sure taken a long time for the approach to change.

I should mention that I discuss one big policy alternative in the piece: allowing bankruptcy judges to modify loans. Obama had supported that when campaigning, but essentially ditched the issue once he was in office.

I’ve been surprised at the public’s relative lack of anger…everything just seems to roll along like it always has. Do you see some sort of breaking point? — AndyRooney

Even at the height of the crisis, this was a problem affecting a relatively small minority of the population. Six or seven million delinquencies sounds like a lot, and it’s historically high, but you have to keep in mind that’s out of about 50-55 million total mortgages. So I think there’s always been some wariness among policymakers about seeming to favor that minority. But the robo-signing scandal did at least prompt some change as far as that goes.

I keep hearing that “banks don’t want to be in the housing business.” But if not, why didn’t they try harder to work with people on their mortgages? I know two different homeowners who couldn’t get their lenders to even return their calls when they began to have trouble paying their mortgages. Is this a simple transfer of assets from the poorer to the richer? Why did the crisis play out this way, if the banks aren’t truly better off because of it? — krrush5

Keep in mind that roughly 90 percent of the time, the bank handling your mortgage payments doesn’t actually own your loan. They’re just acting as the mortgage servicer — their job is to process your payments and then deal with you if you fall behind. A lot of what’s happened over the past few years flows from that simple fact.

Basically, during the housing boom, the banks saw servicing as an easy way to make some good money. The model, essentially, was: let’s take on as many loans as we can while dealing with those customers as little as possible. It worked great as long as the boom continued. But when housing prices started dropping and millions of people started calling their servicer, it proved a recipe for disaster.

The [foreclosure] problem seems so large, so intractable — do you see an end in sight? And How long do you estimate it will take for the market to recover? For all these underwater homes to be dealt with? — AndyRooney

I think it’s too soon to say that the end is in sight, but the homeowner facing foreclosure now at least has a bit better of a shot than someone facing foreclosure two or three years ago.

Oddly enough, some of that is due to the robo-signing scandal. That finally prompted regulators and law enforcement to take some sort of meaningful action. Regulators swear up and down that this time if the banks break the rules, there will be consequences. We’ll see about that, but at least it’s movement in the right direction.

And it depends on what you think “recovering” means. A number of analysts think house prices will bottom this year. But it will likely take until 2014 or so before the number of homes facing foreclosure descends to something like normal levels.

Moving forward, are there any workable proposals out there to cure the dysfunction and prevent this from happening again? – teaperson

In the past few years, there really weren’t real rules governing how banks had to deal with homeowners facing foreclosure. That’s been changing, as I said above, in large part due to the robo-signing scandal.

The Justice Department and attorneys general say that these new rules will have teeth behind them. There’s reason to be skeptical of that, but there’s no doubt that someone facing foreclosure now has at least some actual rules to point to.

The Consumer Financial Protection Bureau announced earlier this week that they would also be formulating new rules in this area.

Because the crisis is dragging on so long and there’s still a large number of people facing foreclosure, I don’t think we will have to wait for the next housing crisis to see if these new rules actually work. If people are still facing the same problems in 2013 that they were in 2009, then it’s clear the system is still broken.

Reducing mortgage principal, either through Fannie/Freddie or by forcing private banks to do so: good idea, terrible, or mixed? – MDA123

Yeah, that’s the big question of the day.

Keep this in mind: Of the mortgages that big banks service, they only actually hold roughly 10% on their balance sheets. And they’ve been doing modifications that reduce the borrower’s principal for years on those loans. Last quarter, about 25% of the mods the banks did on their own loans involved principal reduction. That’s not a new development.

One big focus of the $25 billion mortgage/robo-signing settlement was forcing the big banks to do principal reductions. But it seems to me that they’re just going to be getting credit for something they were already doing.

Now, the current fight is over Fannie and Freddie, who forbid principal reduction. Because the Treasury Department has offered to boost the subsidies to support principal reduction, that’s taken away the argument that it would be a money-loser for Fannie and Freddie. The only remaining objection is supposed “moral hazard:” that homeowners would start defaulting in droves because they see that their neighbor fell behind on his payments and then got a break on his mortgage.

I don’t think there’s any good evidence that this would happen. Would people risk foreclosure in order to get a break on their debt? Certainly nobody who’s been paying any attention to the disaster over the past several years can think it’s going to be easy to get that principal reduction. (It’s also worth noting that some people were making the “moral hazard” argument against any kind of broad mortgage modification program back in 2008, and there was no huge movement in strategic defaults.)

On the other hand, Fannie and Freddie are unique institutions. It would be a major shirt and would probably get some publicity. I guess anything’s possible, but I’m skeptical. Hope that answers your question?

It answers it, yes. My big concern regarding Fannie/Freddie is worsening their already-horrific balance sheets. Any Treasury efforts to defray that will just involve cost-shifting, if I understand things correctly. The bottom line is that Fannie/Freddie still pose enormous risks to taxpayers at this point and principal reduction is unlikely to improve that. — MDA123

Fair enough. Yes, it would involve using subsidies from TARP to defray the immediate cost. The idea would be that it would involve a short-term hit to Fan & Fred’s balance sheets with a long-term benefit. It’s certainly a reasonable concern.

As a Realtor – what advice would you suggest I give to first-time home buyers to help them be better prepared for the financial responsibility of owning a home? More specifically, are there good/better/best loan programs less likely to lead first-time homeowners to foreclosure? – MonkeyHouse

This is a little out of my area of expertise, but it’s probably instructive to start with a simple debt-to-income (DTI) calculation. The government’s mortgage modification program considers a 31% DTI ratio as affordable. In other words, no more than 31 percent of the borrowers’ pre-tax income should go toward the monthly mortgage payment (mortgage insurance and escrow included).

It’s a really rough calculation, because it excludes whatever other debt the homeowner may have. But it’s a good starting point. Many people think 31% is too high and prefer something more like 28% or even 25%.

There’s also the option of housing counseling. Anyway, hope that’s helpful.

If you had to place the blame on one individual or group of individuals for the “foreclosure” crisis, and subsequently, the economic crisis? — rsherm25

I don’t mean to be slippery on this, but I want to avoid oversimplifying. You can blame the government for lack of regulation and enforcement; you can blame lenders and banks for exploiting those weaknesses; you can blame (some) borrowers. One thing I tried to do with the e-book was paint a complete picture so people could see all these pieces worked together.

From my standpoint as a 16 year old, I feel that oversimplification on this subject would be helpful in my understanding on the ‘crisis’ as a whole. I think I understand for the most part of what is going on, but at the same time, you say (some) of the borrowers. I don’t see how any of the borrowers could be blamed for this. Even if they didn’t have the means to pay back their loans, the banks giving them their loans was a sure sign that it was the banks fault, and through that the governments fault for lack of oversight and regulation.

I agree that most of the blame should be put on the financial institutions (and by extension the government regulators who let them run wild). I just meant that there were certainly cases of borrowers who made the problem worse: mainly investors who bought up two, three, or more houses and exploited the broken system. I’ve talked to people who admitted to me that they lied about their income on their loan applications. But I don’t think that describes most borrowers during the boom.

How about this: read the story and if you come away still confused about anything, write me an email at paul.kiel (at) propublica.org.

Some journalism questions for you: How’d you get into journalism, and what’s its appeal to you?… benkeith

My first journalism job was as an intern at Harper’s Magazine. We were paid with pizza (on Fridays). Eventually I made my way to Talking Points Memo, where I reported and blogged about corrupt congressmen. I’ve always wanted to write for a living, and I like to think it’s useful, important work.

What advice do you have for aspiring journalists? – benkeith

It’s really hard to give career advice in journalism, because as I say, everything is still in flux. It used to be that you’d get an internship at a newspaper and work your way up. It doesn’t really work like that any more. The only advice I can give is based on my own experience. I took what work I could get, did the best I could at it, and bugged the hell out of Josh Marshall at TPM until he hired me. And I was lucky.

Know a military family looking for a home of their own? The PenFed Foundation may be able to help with a grant of up to $5,000 for down payment and closing costs.

Applying for a Dream Makers Grant

The Dream Makers Program offers grants for down payments to first-time homebuyers of modest means who valiantly work to protect our country’s national security.

You don’t have to be a Pentagon Federal Credit Union member to benefit from Dream Makers, and you can apply the grant to a mortgage from any financial institution.

How Do I Qualify?

You’re eligible for a Dream Makers grant if:

1. You’re Military (Active Duty, Reserve, National Guard or Veteran), a Department of Defense employee or a Department of Homeland Security employee.
2. You’re a first-time home buyer, or you have not owned a home for the last three years, or you have lost your home through divorce or disaster.
3. The gross annual income of all applicants used to qualify for mortgage is no more than the greater of:
   • $55,000, or
   • 80% of area median income, adjusted for family size

For more information, go to www.pentagonfoundation.org

Buyers Rejected for Loans Can Now Find Out Why

Daily Real Estate News | Thursday, July 21, 2011

A provision in the Dodd-Frank financial reform law, which took effect this week, is requiring lenders to provide consumers with a free credit score, which will help provide new insights into why they may have been rejected for a loan or did not qualify for the best, lowest rate.

While borrowers can access their credit scores from the credit bureaus, the credit score that a lender uses isn’t always the same one that the credit bureau provides you. According to a report by the Consumer Financial Protection Bureau, some credit bureaus sell consumers “educational” scores that aren’t the same ones used by lenders, or these bureaus may base the score on a different model than the one lenders use.

Now, borrowers for the first time will get a more accurate view of what credit score lenders are using to base their mortgage on. Under the new provision, lenders will be required to provide potential borrowers with a free credit score whenever they reject an application for a loan. Lenders must provide borrowers with an “adverse action” notice, which will include their credit scores as well as an explanation of why they were rejected for a loan.

Lenders will also be required to provide a free credit score and an explanation whenever they approve a loan but at a higher rate than what is given to their best customers.

Mark Greene, CEO of FICO, says that many borrowers may be surprised to learn that they didn’t qualify for a lender’s lowest rate when applying for a loan.

Pay Close Attention to What is Happening with Mortgage Rates..

If you happened to hear the President’s State of the Union speech a couple weeks back, you may recall the President discussing the Fed’s desire to exit from the “market.”  Ultimately, the Fed is trying to prepare the country to ride our own proverbial bike without the training wheels.  Obviously, the labor market has a long way to go but at some point the economy and housing market needs to naturally correct itself.  The President’s proposal calls for a spending freeze towards the end of this year.  While a spending freeze today would certainly devastate a recovery, it is obvious that the Fed is ready to start slowly backing out of the financial picture to see how the country responds.  While the initial pullback from the Fed’s may be a bit rocky, this move will certainly benefit the country in the long run.

First on their agenda could very well be the $1.25 Trillion Mortgage Backed Security Program (MBS Program) that is set to expire in the next six weeks.  This program has certainly been the “training wheels” for interest rates for the past year and a half now.  The MBS program has essentially kept rates artificially low for this time period.  It’s important to note that the while interest rates are certain to rise as a result of the termination of this program, the rise will not be as dramatic as the media would like us to believe.  However, this is important information to pass on to your potential clients that are “waiting” for interest rates to drop.  Towards the end of March, it is very likely we will see long term interest rates tick up a bit. 

On Wednesday, recently re-elected Fed Chairman Ben Bernanke (the man widely credited with preventing another Great Depression) is scheduled to testify before the House Financial Services Committee to discuss the Fed’s plan to withdraw emergency stimulus from the economy – including the $1.25 Trillion Mortgage Backed Security Program.  The speech will be VERY closely followed by the financial markets not only here but across the world.  Mr. Bernanke will certainly be mindful of his tone and his words but we can probably expect some sort of volatility either in stocks or bonds…possibly both on Wednesday. 

The above information was provided with permission, by Michael McDermott, Mortgage Planner with PrimeLending, A PlainsCapital Company

www.arizonamortgageplanner.com

FHA Announces New Changes

FHA Announces Policy Enhancements to Better Manage Risk

On January 20, 2010, the Federal Housing Administration (FHA) announced major changes to ensure its long-term financial soundness. NAR has met with the FHA Commissioner on several occasions to discuss the state of the housing market and to underscore FHA’s invaluable role. By all accounts the new changes are a victory for home buyers. FHA has carefully balanced the need to make financial reforms with the need to keep FHA available to a large segment of consumers. This is evident by retaining the 3.5 percent minimum down payment requirement and allowing the upfront mortgage insurance premium to be financed.

FHA announced changes in the following areas: 1) The upfront mortgage insurance premium (UFMIP) will increase but may be financed; 2) Borrowers with a credit score below 580 will be required to have at least a 10 percent down payment, however, the minimum down payment will remain at 3.5 percent for all other borrowers; 3) FHA will seek legislative authority to increase the annual premium (currently capped at .55 percent); and 4) Seller concessions will be reduced to 3 percent from 6 percent.

On January 21, 2010, FHA released Mortgagee Letter 2010-02 and 2010-03, which provide details on the UFMIP increase and new procedures for terminating lenders underwriting authority for FHA insured mortgages. The UFMIP increased to 2.25 percent up from 1.75 percent for purchase mortgages and streamline refinances. ML 2010-03 states that HUD will review defaults and claims of approved lenders every 3 months. Lenders will be evaluated based on their default rate within the geographic area served by a HUD office and a default rate that also exceeds the national rate.

New RESPA Rules – Effective January 1, 2010

HUD is requiring that loan originators provide borrowers with a standard Good Faith Estimate that clearly discloses key loan terms and closing costs and that closing agents provide borrowers with a new HUD-1 settlement statement. New RESPA regulations were published November 17, 2008 and are scheduled to take full effect on January 1, 2010. The “New RESPA Rule FAQs” were comprised from industry questions and are posted to facilitate implementation of these new requirements.
“New RESPA Highlights” click here!

Fannie Mae Tightens Underwriting Criteria

NEWS

Thu, Dec 03

Fannie Mae Tightens Underwriting Criteria

Fannie Mae is tightening its underwriting criteria by raising the minimum credit score for automated underwriting (Desktop Underwriter) from 580 to at least 620 for all loans, justified on the grounds that this action “will support prudent risk management and better ensure sustainable homeownership.” Even higher minimum credit scores may apply for both manual and automated underwriting, depending on factors such as the loan-to-value ratio and the number of units in the structure. The minimum credit score applies to all mortgage loans delivered to Fannie Mae, including FHA and other government-backed loans. Fannie is also changing the maximum debt-to-income ratio for Desktop Underwriter to 45 percent, but will allow 50 percent if there are “strong compensating factors.” Other changes are also being made, as described in relevant Fannie documents (see below).

The new Desktop Underwriter Version 8.0, including the new underwriting criteria, takes effect the weekend of December 12, 2009. The revised minimum credit scores are already in effect for manual underwriting.

Summary and FAQs

 

Feds Scold Bank of America, Wells Fargo on Loan Modifications

Daily Real Estate News  |  August 5, 2009  |   

The Treasury Department on Tuesday announced that only 9 percent of eligible home owners had been helped by the federal program to modify home loans and prevent foreclosure.

It scolded banking giants Bank of America and Wells Fargo, both of which received federal bailout money, pointing out that these banks have been among the least willing to assist troubled borrowers.

Bank of American modified 4 percent of eligible loans, and Wells Fargo modified 6 percent. Big banks that did better included JPMorgan Chase & Co., which modified 20 percent of eligible loans, and Citigroup Inc., which modified 15 percent.

The bank with the best results was Saxon Mortgage Services Inc., which helped about 25 percent of its eligible borrowers.

Source: The Associated Press, Alan Zibel (08/04/2009)

News Release

July 1, 2009

Fannie Mae Implementing New Loan-To-Value Ceiling for Home Affordable Refinance Program; Loans Eligible for Delivery September 1

 WASHINGTON,DC – Fannie Mae (FMN/NYSE) announced today that the company is providing information to servicers regarding changes to the Home Affordable Refinance Program (HARP) that permits refinancing of existing Fannie Mae loans with loan-to-value (LTV) ratios up to 125 percent.  The loans will be eligible for delivery on or after September 1, 2009.

“This step aims to reach even more borrowers who would benefit from a lower payment,” said Michael J. Williams, President and Chief Executive Officer.  “Many borrowers in good standing have been shut out from the benefits of refinancing due to significant declines in property values across the country. By broadening the scope of the initiative, more borrowers will experience savings on their monthly mortgage payments and have a better chance of sustaining homeownership over the long term.

Previously, HARP allowed for refinancing of Fannie Mae loans with LTVs up to 105 percent.  With the expansion, loans with LTVs above 105 percent and up to 125 percent will be eligible for refinancing through the company’s Refi Plus manual underwriting option.  For loans with LTVs above 105 percent, borrowers must refinance through their existing servicer and the new loans must be fully amortizing fixed-rate mortgages with terms greater than 15 years up to 30 uears.

 In conjunction with the LTV eligibility expansion, Fannie Mae will offer a special .50 percent reduction in the loan-level price adjustment charged for loans with LTVs above 105 percent and loan terms of 20 and 25 years.  The reduction is intended to incent borrowers to select shorter terms and build positive equity in their homes sooner than with a typical 30-year mortgage.

 HARP is part of the Administration’s Making Home Affordable plan aimed at stabilizing the housing market, helping Americans reduce their mortgage payments to more affordable levels, and preventing avoidable foreclosures.

What the Heck?! Your Lender Would Not Approve Your Loan? What..because of the HOA Certification?!

It’s beyond me to try and explain to the “powers at be” how to finally understand the physics of the real estate domino effect.  What the heck?  Won’t the cat ever catch its tail?  NO…NEVER!  But, certainly it can come close.  Let’s see here….isn’t it great that the government has reconstructed the Fannie Mae and Freddie Mac guidelines to provide new loan programs?  The idea was to take control over the previous heinous management and to reconstruct opportunities for the investors, lenders and for the public. Right? Wrong?  What the heck happened?  Government control happened.  Reactionary resolution happened.  No thinking happened.  Let’s print monopoly money and let’s start playing even though NOBODY will pass “Go”! 

OK…this was not intended to be a political view on my Real Estate Blog, but I just can’t help myself right now.  Let’s go round and round the merry-go-round with “who’s on first” and “who’s on second” and “who said what to whom” and “can I now live in a home or do I still live under a cardboard box” while the elves are running around making the toys without making sure they can first work.  You all following so far?

Whooaa for the new loan programs released by the government and those few who actually qualify!  And if you qualify, you might be able to afford to now purchase a property that falls within the conforming loan limits, if your credit score hasn’t been lowered beyond recovery due to either unemployment or credit card survival and oops….credit card lowered limits and cancellations, lack of downpayment money, etc.  OK, OK!! Don’t worry about the downpayment because you can now utilize some of the $8,000 tax credit IN ADVANCE (tax credit in advance…I  have never heard of such a thing)  towards some of the closing costs if you are a first time homebuyer!  

Oh wait!…….you mean, that will now let you free up some of the money to use toward a downpayment? That is fabulous since now you realize, you can buy one of those fabulous condos or townhomes in a development that was either converted or not actually completed by the developer who actually either ran out of funds or couldn’t obtain the funds from the bank to complete the project.  You are so ready to buy either a Lender Owned property, Short Sale or a unit that has never been occupied but is being sold by the owner as a regular transaction.  Here we go!  The Purchase Contract is executed by both the Seller and Buyer, Escrow opens…..you are starting to pack your boxes in anticipation of moving into your new home.  How exciting!  Yipee!  You have a garage sale to get rid of your junk! You buy new furniture and accessories to go into your new home!  You are finally going to be a homeowner of either your first property or a different property or even a second home or investment property!  Whooaa!!!!

NOT!!!  OMG! Your lender kills the deal and escrow was about to close! Why? What happened???  OMG!!  What?????  The HOA Certification came through and the stat ratios are not within acceptable range for your Lender to approve your loan?  Why not?!  You fell within all of the guidelines just short of giving up your first born son!  OMG!  This can’t be happening!  Well, guess what?  It is happening. 

Oops!!  The government forgot that they need to also rectify the HOA reporting requirements to reflect new guidelines for Lenders to approve loaning money on ailing developments, due to HOA dues and delinquencies.  They forgot to try and save these failing HOAs so as to preserve the condo and townhome developments from going under. They forgot to help save the homes of these owners.  Did anybody ask what happens to the owners who live there now if that happens?  What happens now that nobody can qualify for a loan to purchase a unit in these developments unless they have cash?  The Lenders cannot approve loaning money and taking a risk on a failing development. 

So, now what? Does the government print more monopoly money?  Does the government finally sit down and figure out that in order for the bread to rise, you need to put yeast in it first?  Duh.