Home Financing News

In the wake of the subprime shakeout, major lenders and Wall Street institutions are being increasingly examined for possible unsavory tactics. Several state regulators and some of the cities hardest hit by foreclosures have begun filing lawsuits against parties who they believe let greed and dishonesty get in the way of ethics. And that could cause a real headache for investors already hit by related fiscal challenges.

As we reported a few weeks ago, Las Vegas’ mortgage activity is being scrutinized by the FBI, who are on the hunt for several types of mortgage fraud in Sin City. But it’s not just small-time players who might fall foul of the Feds. Foreclosures as a percentage of all mortgages have risen to 7.3 percent according to the Mortgage Bankers Association. That, plus the upcoming elections, have put pressure on the government to identify and punish the guilty parties.

Joining the fray with accusations of questionable tactics are states such as Massachusetts, New York and Ohio, and cities which include Baltimore and Cleveland. They want a variety of outcomes, from identifications of culpability to receiving financial damages. Any financial penalties levied against guilty parties probably won’t be huge. But right or wrong, they’re sure to yield another bump on the road to recovery. Hopefully the proverbial tires will be well-inflated and able to withstand the latest challenge without much distress.

The LA Times has an interesting story today about the impact rising foreclosures are having on property renters. Such a connection might seem tenuous at first. But when you consider that about one in four foreclosed on properties are occupied by renters in states like California, it starts to make sense. Most rental properties, be they single family homes or multi-family dwellings, are a secondary priority for the owners behind their own homes. That means they are first on the chopping block if the landlord finds themselves strapped for cash.

As a result of the ongoing growth in foreclosures, some renters are getting evicted through no fault of their own. And each lost rental property creates more demand on those which remain in the local area. That of course equates to rising rent payments.

This LA Times story arrives at the same time as the latest foreclosure stats. According to RealtyTrac, who analyze foreclosure levels, three cities saw foreclosure which amounted to over 4 percent of total households in 2007. Detroit, Michigan comes in first with 4.918 percent; Stockton, California is a close second with 4.866 percent; and Las Vegas, Nevada comes in third with 4.228 percent.

Other high-ranking cities on the foreclosure list include: Riverside, Sacramento and Bakersfield in California; Miami and Fort Lauderdale in Florida; Cleveland, Ohio; and Denver, Colorado. And even cities with more modest foreclosure rates, like D.C. and Baltimore, are seeing sharp increases from their 2006 levels.

Stricter lending requirements and several banks’ stubborn refusal to accept anything less than the full note value at auction mean that foreclosure inventory levels will take a while to be absorbed. Until that occurs it’s likely foreclosure percentages will grow in many cities, and some renters will continue to be impacted by evictions and rising rent.

The steady trickle of band-aid solutions to the mortgage market downturn continued on Tuesday, when the Bush Administration and several major lenders unveiled another plan to assist struggling homeowners.

Announced by HUD Secretary Alphonso Jackson and Treasury Secretary Henry Paulson, Project Lifeline is aimed at borrowers who are currently 90 days behind in their mortgage payments. It allows them to pause the foreclosure process for 30 days while they work with their lender to renegotiate their loan terms.

The participating companies constitute the six largest lenders in America: Bank of America, JP Morgan Chase, Citigroup, Countrywide Financial, Washington Mutual, and Wells Fargo. And in theory the new strategy could assist some distressed homeowners who have home loans with one of those companies.

But the excessive fanfare for a tactic which was announced by some of the parties several months ago makes the plan appear to be nothing but media hype. And it remains to be seen whether today’s new plan will prove beneficial to any who enroll in it, thanks to the draconian lending guidelines which pervade the market today.

The proposed economic stimulus package announced two weeks ago cleared Congress yesterday and is now awaiting the President’s signature. That move seems likely to happen very soon given the President’s ongoing interest in many of the plans components.

The plan, which will cost $152 billion and accounts for about 1 percent of U.S. GDP, encompasses a number of facets and is designed to bolster the economy and mitigate the impact of a recession. The primary focus of the plan is to counteract the current turmoil in the housing and credit sectors. The news is timely given the ongoing flow of related bad news, which most recently included a decline in signed housing contracts in December 2007.

One of the more contentious proposals of the bill involved tax rebates. After much wrangling and debate a decision was made to give up to $1,200 to each U.S. household, plus $300 for each child. But to qualify families must have earned less than $150,000 and individuals must have earned under $75,000 per year.

But other aspects of the plan related directly to mortgage lending limits might have just as profound an impact to the consumer, and certainly more influence on the mortgage industry. Chief among these is a temporary increase in the upper limit of mortgages which can be accepted by government-backed companies like Fannie Mae and Freddie Mac. The maximum size of such loans will go from $417,000 to as much as $729,750, depending on geographic location, and assuming the loan was made on or after July 1, 2007.

The FHA (Federal Housing Administration) will also benefit from a similar increase in loan limits, at least until the end of 2008. But that limit might be extended as part of broader changes to FHA loan limits which are still being discussed.

Mortgage fraud is again stepping into the media limelight. NPR’s Morning Edition reports on new FBI investigations which are being carried out in Las Vegas, Nevada: a city which is fast emerging as the mortgage fraud capital of America.

Current turmoil in the city’s property market has led the FBI to uncover a number of schemes involving 14 financial institutions. The tactics which were used included paying fake buyers several thousand dollars to be listed on mortgage applications for several houses in the same neighborhood. Once these loans closed, corrupt appraisers would then exaggerate the property value and the underlying investors would sell and keep the profits.

Such schemes artificially inflated home values throughout the city, and forced many desperate buyers into adjustable rate mortgages which they couldn’t really afford. In some cases this led to a cascade effect of foreclosures. Once one or two homes in a neighborhood were foreclosed on, surrounding property values declined and more homeowners became trapped in costly mortgages they might have otherwise been able to escape.

Investigators suspect Las Vegas is just the vanguard in a growing trend of such schemes, and anticipate similar, albeit less extensive, discoveries across the country over the next year or two.

Recently, mortgage lenders have been speaking of their willingness to help distressed borrowers. And there’s no doubt some homeowners have been assisted by this back-to-basics practice. But some experts believe other more pragmatic factors are working to prevent both lenders and borrowers from reaching amicable solutions.

A flood of calls from struggling borrowers in the past few months has overwhelmed many lenders, who find themselves short of both time and infrastructure. Some companies are hiring to fulfill this demand, but organizing their new resources is proving tricky. Others are unable to expand as they’d like due to budgetary concerns. The result? Too often by the time a homeowner makes it to the front of the queue their mortgage is already beyond recovery.

The best advice for borrowers who need to speak to their lenders or servicers about restructuring their mortgages is to be proactive. If you anticipate problems don’t procrastinate or wait until the last minute. The earlier you call the better. Another good approach is to seek multiple solutions at the same time: while you’re attempting to contact your lender also look into refinancing your mortgage through a broker or a different lender. Finding out whether you have other options is often as simple as providing some basic information. And unless you sign loan documents you’re not obligated to accept any mortgage offer you receive.

The Fed has cut the Funds Rate for the second time in 9 days, amid ongoing fears that the economy is slipping into a recession. The decision sees the core interest rate drop from 3.5 percent to 3 percent, and comes after a two-day meeting in which the housing and employment sectors were scrutinized.

Wall Street was predictably pleased by the news. But the reaction of the cut on adjustable-rate mortgages has been mixed among analysts. Some are predicting the rate drop will help borrowers who have ARMs, because it will lessen the impact of a payment hike on their mortgages. But others argue today’s announcement won’t necessarily help borrowers who’s rates have a while yet to adjust. Nor will it impact fixed-rate mortgages, because these are driven by the bond market. Additionally, the skeptics suspect fixed mortgage rates may have hit about the lowest they can go, based on economic predictions and the sharpest drop in new home sales since 1980. As a result many are advising those borrowers who can to refinance away from adjustable rate mortgage as soon as possible.

But regardless, any attempts to cushion the impact of a recession will have some positive impact on the mortgage industry. In addition to soothing lenders’ anxieties, today’s move will hold off a payment jump for ARM borrowers who are about to witness a rate adjustment.

In addition to the previously reported tax rebate proposal, political leaders in Washington D.C. have drawn up plans to raise loan limits for the Federal Housing Administration and some government-backed entities. This would allow Fannie Mae, Freddie Mac and the FHA to purchase larger mortgages which are currently above their upper limit.

Right now only loans worth $417,000 or less can be bought by Fannie Mae or Freddie Mac. That means larger loans - also known as Jumbo loans - must be at least partially financed by private investors or lenders without the safety net of a government entity. Over the past year that factor has become a tangible drag on the mortgage industry in states such as California, D.C. and New York. But the proposed changes would significantly raise that cap to $625,500.

The loan limit increases for FHA loans will see the maximum allowed loan size jump from $367,000 to $729,750. The duration of this expansion is still unclear, although it’s probable it will be made permanent.

Yesterday’s announcements marked a major strategy reversal by the Bush Administration towards Fannie and Freddie. The Administration had taken a tough approach in the face of the pair’s lingering financial scandals. But considering the frail state of the industry the changes were both probable and popular. Some object to the temporary loosening of loan limits without first enacting stricter policing of the two scandal-dogged companies, while others argue that continued instability in home prices will largely negate the effectiveness of the raised limits. The FHA limit changes were less contentious and indeed almost inevitable to occur. Overall, many in the mortgage industry are celebrating the proposals, and are eager to see them enacted so that refinance deals can be made with homeowners who were previously frozen out of the market.

The House of Representatives and the White House today announced plans to issue tax rebates to most tax-paying American consumers. The scheme is designed to infuse the economy with additional money and reduce the impact of a recession. Assuming the bill is not held up or killed in the Senate, the checks should arrive in mailboxes by May.

The rebates will range from up to $600 for eligible individuals, to a maximum of $1,200 for working couples. Families with children will gain an additional $300 per child.

These extra funds, combined with normal annual tax refunds, could leave struggling homeowners flush with thousands of extra dollars just when they need it the most. And at a time when many borrowers are keen to refinance into fixed rate mortgages, the additional money could well be spent on fees, point reductions, or to pay down an existing mortgage balance.

The latest data from the National Association of Realtors claims existing sales have hit their lowest level for 25 years. December’s home sales fell 2.2 percent to an yearly rate of 4.89 million. However, while home sales look decidedly gaunt, refinance numbers were up. That’s thanks in large part to the recent stock market activity, and specifically the condition of bonds.

High inventory, falling home prices and tighter loan requirements are being blamed on the sales numbers. Housing inventory stood at 3.91 million units at the end of December, a decline of 7.4 percent when compared to the previous month. But inventory has further to go before prices pick up again and many potential buyers are convinced that the market has bottomed out.

Refinance applications look set to continue upwards, thanks to the state of government bonds, and the indirect effect of the Fed’s recent .75 percent slashing of the Funds Rate. The long-term impact of that rate drop on fixed rates remains unknown. But now that the holiday season has ended refinancing activity will likely pick up more steam regardless.

Some analysts are urging homeowners to refinance now and lock in a low fixed rate, although those with no equity, poor credit or high loan amounts might struggle to take advantage of current interest rates. But many are clearly benefiting from the current mortgage climate, and are ditching their adjustable rate mortgages for the comfort of a fixed rate loan.