Bank Lawyer's Blog

Increase In Foreclosures=Increase In Crime?

Not long ago, Pravda National Public Radio had a story on its "All Things Considered" afternoon show (to listen, follow this link) that discussed some of the aftershocks suffered by residents of California's "Inland Empire" due to the earthquake caused by the collapse of the subprime lending market. In addition to the negative effects on the financial well-being of residents and local governments caused by the "trauma of foreclosure," the reporter alleged that there was concern about the rise of crime due to all the vacant homes, presumably vacant because their owners are subprime borrowers who have either been kicked out of the houses by foreclosing lenders or have walked away from a loan that they no longer can afford to, or wish to, repay. No statistical evidence was cited by NPR to back up the contention that more vacant homes meant more crime, although the lead incident in the report related the story of a female realtor who was brutally attacked in a vacant home by a renter of room in a nearby single-family home. The family that owned the home was in danger of losing it by foreclosure, and had taken in a boarder to meet the mortgage payments. I thought that this incident could be used to argue that socially responsible human beings, who take extra measures to meet their legal obligations (like renting a room in their home to meet the mortgage payment) are to blame for increased crime, but NPR seemed to believe otherwise. Dallas is one of the real estate markets least affected by the national downturn, and, yet, had its own recent incident of a female realtor murdered in a fully-furnished model home by a man who was gainfully employed but was simply a sociopath who engaged in a crime of opportunity. That tragic incident was not cited by NPR, perhaps out of ignorance, or perhaps because it would have conflicted with the pre-conceived conclusion of the reporter and/or producer of the story.

Yesterday's Housing Wire reminds us of another facet of crime related to the foreclosure crisis: mortgage-related fraud.

The Federal Bureau of Investigation said late Tuesday that mortgage fraud looked to be a rampant problem during 2007, with the number of mortgage fraud Suspicious Activity Reports referred to law enforcement increasing 31 percent last year, to 46,717.

The total dollar loss attributed to mortgage fraud is unknown, the FBI said; however, seven percent of reports filed during 2007 indicated a specific dollar loss, which totaled more than $813 million.

"The $813 million loss denoted in this report is just the tip of the iceberg, reflecting only a small percentage of financial damage suffered by victims of mortgage fraud," said Assistant Director Kenneth W. Kaiser, on the FBI’s Criminal Investigative Division.

[...]

Fraud was a problem on the way up in many housing markets, to be sure, but FBI’s report signals an interesting shift towards the effect of the housing downturn on mortgage fraud activity, which is increasingly centered on suspect "foreclosure assistance" programs.

"The downward trend in the housing market provides an ideal climate for mortgage fraud perpetrators to employ a myriad of schemes," FBI analysts said in a mortgage fraud report, released Tuesday. "Emerging and re-emerging schemes in 2007 included builder-bailouts, seller assistance, short sales, foreclosure rescue, and identity theft exploiting home equity lines of credit."

It's true that crime is rampant in this country, and as hard as it is to believe, it's not all of it is connected to the "trauma of foreclosure," or even to residential real estate. Luke Mullins of US News & World Report's blog "The Collar," writes about a 72 year-old criminal who recently managed to get 330 years in prison. He wasn't traumatized by foreclosure and he didn't attack anyone in a vacant house, much less a female realtor. He did, however, bilk hundreds of investors out of tens of millions of dollars. As Luke wryly notes, "[b]arring a scientific breakthrough in cryogenic technology, Schmidt will spend the rest of his days behind bars...Under the terms of the sentence, Schmidt would be released from prison in 2338." Luke then cites fellow blogger and law professor Douglas Berman, who's a glass-half-full kind of guy (as is Bank Lawyer's Blog's author): "'Then again,' Berman says in his blog post, 'with 15 percent good-time credit, Schmidt may be able to get out as early as the year 2289.'"

For those patriotic citizens who feel all this talk about US crime is a tad disloyal, we'll point out that crime has worldwide appeal, even in corners of the earth where one man's subprime is another man's palace, and where the governing class makes the American Mafia look like a cloister of Carmelite nuns. Two men from former Soviet Socialist republics (and one from Miami, which some Americans allege is a foreign capital masquerading as an American metropolis) were charged with hacking into restaurant chain Dave & Buster's computer system and stealing the credit card information of 5,000 customers, causing at least $600,000 in losses. I suppose $600,000 isn't enough to merit anything close to 330 years; however, one defendant was unlucky enough to be arrested and imprisoned in Turkey since July 2007. If he's subject to some of that good old Turkish "Midnight Express" action, he may want to trade 330 years in a US prison.

As we've said many times before, Eastern Europe is a hotbed of cybercrime, a land where amorality and intellectual prowess merge to create a super breed of cybercriminal. There's no need for the "trauma of foreclosure" to spur these crooks onward and downward. 

NAR President-Elect Brays About Banks

The National Association of Realtors has long been a favorite target of this blog, primarily because we love to bag game that's easy to hunt, and NAR is so easy that it really ought to be considered roadkill. Last year, NAR President Pat Vredevoogd Combs boldly predicted that Congress would enact a permanent ban on national banks entering real estate brokerage by the end of 2007.  Didn't happen. Then there was the long -standing battle to prevent Wal-Mart from getting a bank charter, which NAR looped into the national bank/real estate debate. NAR also made a helpful suggestion last year that FHA step into the breach to solve the subprime lending crisis by refinancing subprime loans of delinquent borrowers after the subprime mortgage holder agreed to write-offs of principal balances (which is the same idea Barney Frank has been pushing with his legislation, which was recently passed by the House and which the White House has promised that the President will veto). Again, bankers said "Thanks but no thanks."

Last week, the president-elect of NAR, Charles McMillan, carried on NAR's fine tradition of bank bashing by blaming the entire state of the depressed real market nationally on conservative lenders who impose prudent underwriting guidelines on residential loans.

A rebound in the housing market is being held back by stingy lending standards, the president-elect of the National Association of Realtors said Thursday.

Irving real estate agent Charles McMillan – who takes over as head of the 1.3 million-member Realtors association later this year – faults mortgage companies for keeping some potential homebuyers out of the market.

"All of the relief that's been given to the banks in the marketplace has not trickled down to the consumer," Mr. McMillan said at the annual meeting of the National Association of Real Estate Editors in Dallas.      

"What they have done is raise fees and make qualifications almost impossible for people to get loans," he said.

In particular, Mr. McMillan criticized the high costs of so-called jumbo loans – mortgages of $417,000 and more – that are chilling buyer demand in many markets. Interest rates on such mortgages now are much higher than those on smaller loans.

And Mr. McMillan said that in some depressed housing markets lenders are raising costs even higher to homebuyers and making it tougher for them to qualify for loans. "That stigmatizes properties unfairly," he said.

You knew this was coming, didn't you bankers? Politicians are lambasting you and your regulators for lax lending standards, for making "liar loans," for tricking unsuspecting borrowers into loans that they couldn't afford to repay. The regulators are looking up your nether regions with electron proctoscopes, yammering at you to tighten up lending standards, increase loan loss reserves, and beef up capital. Right on cue, here comes this idiot from Irving (Texas, unfortunately) complaining that not only are you too darn conservative, you're taking "all the relief that's been given to you" and keeping it for yourself. You're not letting it "trickle down" to the little guy: the realtor.

What's "all that relief" you ask? Don't bother confusing Mr. McMillan with his lack of facts, bankers. He's got to blame somebody that the residential real estate market sucks, and he certainly wouldn't want to acknowledge the fact that realtors have been putting people into homes they can't afford for years, finding them mortgage brokers who will make a loan to a corpse as long as there's a yield spread premium and an origination fee in it, and that's fine by them as long as they get their real estate commissions paid.

Put simply, lenders haven't been given relief except with respect to access to liquidity, which they need to survive in the face of sustained losses from operations. Many lenders don't have the capital to fund growth, and if they did, they wouldn't pump it into assets like residential mortgage loans, for which the market's shrunk dramatically. As to underwriting standards being "too tight," tougher underwriting standards are long overdue, are required by all mortgage market participants and their regulators, and for the foreseeable future will be a fact of life. Get used to it, Chuck. Whining makes it appear, perhaps accurately, that you don't understand the new paradigm.

NAR also is concerned about homeowner anger management.

"We have consumers angry that they can't sell their homes," Mr. McMillan said. "America is hurting now."

Here's a helpful suggestion for alleviating the anger and the pain. NAR should fund a financing vehicle to buy all these great loans they want banks to originate with looser underwriting standards. In fact, NAR ought to set up a program in which realtors invest half of their commission in such loans, since they're obviously a great investment and, in doing so, they would help everyone concerned, including, especially, those hurt and angry home sellers. In addition, realtors should personally guarantee these loans, which (assuming the realtors have sufficient net worth and/or income streams) would make these loans a lot more attractive to lenders who might be a bit gun shy. Or, perhaps, NAR and/or its members could fund private mortgage insurance for such loans. That way, realtors will be performing a public service and simultaneously making themselves rich by taking advantage of the fact that banks and other mortgage lenders have overestimated the risk inherent in residential mortgage loans. They'll also provide the grease that will get this residential real estate wheel rolling again, just like in the good old days before the crash.

On the other hand, NAR might start treating its members like the adults they are, realize that real estate's a cyclical business, and that we're going through a down cycle, which will take time to work itself out, and stop making such a public ass out of itself.

I have a feeling that NAR represents the views of its rank and file members as well as the American Bar Association represents its members. In other words, not well. I know too many savvy realtors who understand reality as well as realty to believe that hysterics like those put out by Mr. MacMillan represent their considered views.

Not So Astonishing

Law professors Elizabeth Warren and Adam Levitin over at Credit Slips have got themselves worked up about "a new idea," an "astonishing" one (according to Professor Levitin), concocted by those dastardly  national banks and federal thrifts: "They  shouldn't have to obey state law when they foreclose on someone's home." That would exercise me, too, if it were true. I'd even agree with Professor Levitin that it demonstrates plenty of chutzpah and with Professor Warren that "the scope of this argument is stunning," except I don't see that national banks and federal thrifts are making that argument, at least not based upon the source cited by the professors.

The article, written by the American Banker's Cheyenne Hopkins, states that national banks are considering a challenge to changes to state foreclosure laws that would, in fact, severely impair the lenders' contractual rights under the loan documents. Foreclosure moratorium laws, for example, would likely not generate a  challenge unless the moratorium period was excessive (an eye-of-the-beholder judgment, I acknowledge). However, some states are going well beyond traditional foreclosure matters.

Some of these measures would go further than delaying foreclosures and include changes to a loan's terms or underwriting standards — provisions that are more easily preempted by federal regulators.

The state measure causing the industry the most angst is a Minnesota one that, in addition to allowing a year delay in foreclosure proceedings, would allow a struggling borrower to make monthly payments equal to the minimum monthly payment when the loan was originated or 65% of the monthly payment at the time of the default, whichever is smaller.

Many industry representatives say that would be going too far, since it would affect how a bank can do business — a criteria that more clearly falls under preemption power.

"There comes a point where states and localities are using foreclosure laws as a pretext or to impair the enforceability of lawful loans, and that's the point where preemption may come back into the picture," said Laurence Platt, a lawyer at Kirkpatrick & Lockhart Preston Gates Ellis LLP. "A little bit of breathing room for the borrower is not going to trigger preemption, but if they in fact choke the lender to death by effectively declaring the loan unenforceable with its terms, that will trigger constitutional and preemption issues."

That hardly seems like an "astonishing" position to take, nor does it demonstrate much chutzpah, unless refusing to stand by, drooling, while your contractual rights are abrogated by a change of state law, when settled federal preemption principles would prevent that from occurring, now constitutes chutzpah. It seems more like sechel to me, but then my Yiddish is a bit rusty. 

My friend and former partner Joe Lynyak also correctly notes in the article the practical risks of national banks taking an aggressive position vis-a-vis state foreclosure laws.

"If someone is going to take an aggressive stance regarding preemption, the concerns are reputational risk in front of the public for taking the legal position, and the the legal risk that ultimately the claimed preemption is either not found to be valid or the validity of the foreclosures are then called into question," said Joe Lynyak, a partner at Buckley Kolar LLP. "This is really right at the edge of the battle on preemption and is a very, very complicated analysis."

Joe's now with Venable LLP, by the way, but I doubt that change would change his position on the issues. By "very, very complicated analysis" I think he means "very, very expensive." At least, that's what I meant when I used the term back when I was an equity partner in "Big Law."

Perhaps the professors have access to other articles or court cases where these "astonishing" threats of federal preemption of local foreclosure laws have been made by national banks or federal thrifts. If so, they should cite them, because based upon the lone article they do cite as the basis for their concern, I'd say they're exercised about a non-existent threat.

To be fair, however, I have to admit that the OCC's quest for power is insatiable. I've previously warned that the OCC's need for lebensraum will eventually compel it to make a bid for universal domination. Therefore, I can appreciate why the professors, both apparent consumer champions, might assume the worst. Eventually, they'll be correct. On the other hand, I plan on joining the OCC stormtroopers right before the final blitzkrieg that will be launched to wipe out the National Association of Realtors and bring all consumers everywhere (even on that frozen rock, the former "planet" Pluto) under the jackbooted heel of the OCC. I'm superficial enough to always back the winner, but cautious enough not to jump on board while the outcome's still in doubt. I'll know the time is right to start sucking up to the OCC when we finally repeal that pesky Tenth Amendment.

Cynicism or Stupidity? You Be The Judge

At the end of a long day, I tried to catch up with my "professional reading" (The Economist, The Wall Street Journal, a trade paper that doesn't list this blog in its roundup and, therefore, is dead to me, Sports Illustrated's Swimsuit Issue, etc.), and what did I read right out of the gate but this cynical nonsense.  I was about ready to start fisking the report when I decided to check with a few of my favorite bloggers first and, sure enough, Tanta and PJ had already taken care of business.

Paul Jackson at Housing Wire pummeled this sorry report today like Jake LaMotta pounded Sugar Ray when he was really, really cranky. As I read his piece, I couldn't get Robert De Niro in "Raging Bull" out of my mind ("I'm the boss-boss-boss-boss-boss-boss-boss-boss-boss!"). Just a sampling, then read the rest.

There isn’t an effective loss mitigation strategy I know of that can solve for fraud. Extending foreclosure timelines, or introducing more uniform standards for loss mitigation — both “solutions” proferred by the state AGs in their report — will actually serve to make fraud even more costly for everyone involved. And that’s the last thing anyone who wants to see housing recover should be rooting for.

[...]

In no small part, fixing the current mess is tied to fixing fraud; and that means fraud at all levels, from borrower to broker to lender. It’s both as simple and as complex as that.

Which means that it’s time borrowers, consumer groups and erstwhile working groups stop floating a revisionist history of the “hapless borrower” — you know, the one where greedy, mean lenders duped those innocent and pure borrowers? — as a substitute for what’s really going on in the real world.

Yeah, it's time, Paul, but what are the odds?

Although Tanta claims that she's merely "piling on," she actually dissects the report like a scalpel-wielding Hannibal Lechter looking for a liver to go with her fava beans ("When I opened the cranium, I found little grey matter but much fecal matter."). Her always spot-on dissection is, of course, greatly aided by the fact that she (as does Paul) has an unfair advantage over the report's authors: she actually understands the mortgage business. Her carefully considered conclusion coincides with my initial gut reaction.

The lesson of the "stated" disaster--stated income, stated assets, stated appraised values, oral "promises" of loan originators rather than clear written disclosures, the whole cluster of practices that removed the "barrier" of "paperwork"--is apparently still lost on the Working Group. We started this by being "efficient" about the documentation and casual about the borrower's own statements; we aren't going to get out of it that way. This report just reeks of political grandstanding. I'm sure I know at least one journalist who will love it.

"Political grandstanding"? You betcha.

I was talking today with an attorney who represents a financial institutions trade association, and is intimately involved in legislative efforts at the state level to "solve the subrime mortgage mess." I was commiserating with him over the apparently limitless supply of clueless legislators (my phrase, not his) who insist on doing precisely the wrong thing at exactly the wrong time. I know it's an election year, which means political cynicism is elevated above its normally high levels, but I told him that it's got to be especially tiring this legislative session trying to beat back wave after wave of ill-advised legislative interventions in the mortgage markets that even quarter-wits like yours truly can see will not only not address the intended problems, but will likely make the problems worse and, simultaneously, create a whole batch of new ones. He agreed wholeheartedly, and ruefully observed that we've still got a long way to go until November.

I asked him whether the legislators who were so eager to "do something" were amenable to listening to reasoned explanations as to how their legislation might be useless or much, much worse. His reply is that they don't want to listen because they simply don't care. They don't care about the facts and they don't care about the actual effect of the legislation. All they care about is being able to go back to their constituents, who understand  the mortgage market even less than they do, and tell them that they "did something." Adverse results likely will surface down the line, and a reasonably competent politician can always spin the story so that someone else is to blame.

This may be a long, hot, tiresome summer.

 

The More Things Change, The More They Really Change

What difference a decade (or two) makes. This time around, while other parts of the country are being hit by declining prices and increasing foreclosures, Texas looks comparatively peachy.

Texas is bucking the national trend of rising property foreclosure rates, according to a California-based research company.

A total of 10,700 Texas properties entered the foreclosure process during March, down more than 16 percent from the volume of filings recorded in March 2007, a recent report by Calif.-based RealtyTrac shows. The March foreclosure figure also represents a decrease of almost 13 percent from filings reported this past February.

Nationally, foreclosures are up 57% annually and 5% from the previous month. Texans ought to be absolutely giddy. Well, somewhat relieved, anyway. It could be worse. We could live in California, Florida or Ohio. Then again, a friend of mine in Colorado (fifth in foreclosures, by the way) observes that "you still have to live in Texas." He thinks that is the ultimate downside, while "we'all" think it's the cherry on top of the sundae.

The recently released national figures also show an increasing trend of deeds-in-lieu-of-foreclosure being used by borrowers who default on their loans.

James J. Saccacio, CEO of RealtyTRAC, points out that on a year-over-year basis as of the end of March, default notices and bank repossessions nationwide were up nearly 57 percent and 129 percent, respectively -- an indication "that more defaulting homeowners are simply walking away and deeding their properties back to the foreclosing lender," Saccacio says.

Auction notices, by comparison, jumped by 32 percent during the period.

"This deed-in-lieu-of-foreclosure process allows the lender to take possession of a property without putting it up for public foreclosure auction," Saccacio adds.

At first blush, the number of borrowers who are willing to "walk away" (a highly charged term to use, by the way) from their home-sweet-home seems to call into question all the previous hand-wringing about the need for foreclosure moratoriums and similar measures designed to force lenders to change their evil ways and to prevent them from seizing borrowers' homes through the foreclosure process and then kicking the borrowers, bawling their eyes out, into the streets. Increasingly, it appears, more and more borrowers are willing to cough up the keys without going through the foreclosure process.

In a customary deed-in-lieu situation, the consideration for the deed is the release of the borrower from liability for any deficiency (with some protections to the lender for such things as fraud, waste and bankruptcy within a certain period). Apparently, a rapidly increasing proportion of borrowers who can't afford the loans believe that's a fair trade, and it's hard to argue with them if the lender's willing to forgive the loan balance and either (a) the borrowers can't afford the loan or (b) the collateral is underwater and they simply don't want to pay the loan back even if they could do so. Emotionally, these may not be homes to some of them, but rather merely an investment in real estate that simply didn't work out. It's impossible to generalize, and RealtyTrack doesn't give us much insight into why borrowers are increasingly willing to give lenders a deed-in-lieu.

Lenders apparently have decided that in many cases they'll take the entire risk of a declining home price if it saves them the cost and time of foreclosure. They must also be deciding either that the borrowers don't have the financial resources to satisfy a deficiency (in those states where a deficiency is permitted) or that the cost of the struggle to collect it outweighs the benefit. Perhaps the moratorium bills and other strong-arm tactics are achieving a purpose, after all, albeit not the announced purpose of keeping delinquent homeowners in their homes.

Interesting. I wish we had more data about this phenomenon that gave us the percentage of defaulting borrowers who have given a deed-in-lieu-of foreclosure and that broke that group down further according to the different reasons for that decision. Without that information, we're guessing, and, in some cases, letting our personal prejudices factor into our use of the limited information we do have available.

Subprime (Sorta) Mea Culpa

Dallas Morning News business columnist Cheryl Hall recently interviewed Richard Bitner, a former subprime lender based in the Dallas suburb of Plano, Texas, and the author of an ex-insider's look at how the subprime debacle occurred and how to prevent it from happening again, entitled Greed, Fraud & Ignorance: A Subprime Insider's Look at the Mortgage Collapse. Cheryl calls the book "part confessional and part sermon."

Rating agencies, paid by the investment banks, handed out Triple-A ratings on mortgage-backed securities that were clearly not that safe. Appraisers said homes were worth much more than they were to keep the mortgage brokers coming in. Mortgage brokers were free to play fast and loose without being held accountable.    

Well-intentioned companies like his realized the situation was nuts but thought the industry would regain its sanity.

It didn't.   

Proving either that he was prescient or the truth of the old adage that it's better to be lucky than smart, Bitner sold old his interest in his firm (Kellner Mortgage Investment) to his partners in 2005, well ahead of the deluge. As in many walks of life, timing is everything. He made a boat-load of money and, according to Ms. Hall, appears a bit defensive about that fact. He shouldn't be. As he notes, early on, no one was concerned about "creative" loans that helped the poorer members of society realize "the American dream" of home ownership. It was when, as Mr. Bitner notes, "loan terms became more and more screwy" that mortgage brokers like Bitner saw the handwriting on the wall.

Home appraisals were fantasy-based. Mortgage brokers were cattle herders roping in customers regardless of their creditworthiness. "These loans [usually a two-year adjustable-rate loan] were always designed to be a Band-Aid or an in-between for somebody," he says. "You lost your job. You had a problem. But you can still afford this payment. You keep it for two years, fix your credit and you move on. "Unfortunately, it went from being a niche product to being a standard staple given out to 25 percent of the mortgage business in the United States."

Many were too addicted to the money "jones" to stop being enablers. While no one should get dew-eyed over Mr. Bitner's timing, they should give him his "props" for his foresight and, perhaps, having a conscience. I don't know if I agree with his contention that Kellner Mortgage Company "did far more good than harm in the long run," but I don't know what it's track record was. He may very well be right.

Mr. Bitner occasionally posts opinion pieces on this topic and related topics at Housing Wire, an excellent information source, by the way. It's publisher, Paul Jackson, thinks that Bitner posts intelligent thoughts about how to fix the mess. I agree.

Much of what Mr. Jackson hears from consumer groups is "a gross oversimplification of things – 'lenders bad, consumers good' caveman logic."

He wants policymakers and regulators – among the 2,500 subscribers of his site – to have more informed information when they put together the next bill or regulatory standard. He says Mr. Bitner offers that.

"It's not popular to say now, but the concept of subprime lending was rooted in a good idea," Mr. Jackson says.

"It was just executed beyond horribly, thanks to a complex and unregulated financial web that spun out of control."

Mr. Bitner boils it down to a simple truth: "If the industry had correctly charged interest rates commensurate with the risk, there's a strong chance none of this ever happens."

There's also a strong chance that the same policymakers who now are calling for the heads of the "crooks" in the subprime mortgage business would have excoriated that same group for its failure to address the mortgage needs of the poor and downtrodden. "Informed information" has little to do with any legislator's thought process when proposing, supporting or opposing legislation. "Caveman logic" rules.

Barney's Big Bailout

Last Thursday’s The Wall Street Journal had a scathing editorial entitled "Uncle Subprime." The gist of it is that Congress is aiming to make Uncle Sam the "subprime lender of last resort."

In the name of preventing foreclosures, House Financial Services Chairman Barney Frank wants to transfer the risk of further declines in home prices to taxpayers from lenders and borrowers.

Here’s Barney’s "risk transfer plan":

Mr. Frank's idea is that, for mortgages originated between the start of 2005 and mid-2007, a lender and borrower would be able to agree on a federal refinancing plan. Lenders would have to write down their loan to no more than 85% of the current appraised value of the property – which means the banks will use this opportunity to unload the biggest stinkers in their loan portfolios.

For the borrower, the deal is even sweeter: a low fixed monthly payment and a reduction in the principal to market value. The Federal Housing Administration would then guarantee the loan, up to a total of $300 billion in total Frank Refis. The deal is so sweet that even Mr. Frank is concerned that otherwise reliable borrowers may "purposely default" to be eligible for assistance. His solution is to require borrowers to "certify" that they really, truly aren't doing this simply to get on the taxpayer gravy train.

As you would expect, The Wall Street Journal thinks that bailing out buyers who made a bad bet on the future rapid increase of housing prices to hedge a poor credit decision, and the inevitable bailout of the lenders who were their enablers, makes lousy public policy. Not only were a large number of the borrowers fraudsters, but The WSJ makes the case that many of the non-fraudsters are hardly "victims" of being duped into taking on debt that they can’t repay. Instead, they’re "players" without "sufficient skin in the game" to incentivize them to repay their loans when the value of the collateral that secures the loan, to the chagrin of all parties concerned, heads south.

A new study from the Boston Federal Reserve destroys the myth of the victimized subprime borrower. Boston Fed economists examined 1.5 million homeownerships over nearly 20 years and found that the overwhelming reason for subprime foreclosures is not unsustainable debt foisted on ignorant borrowers or even financial setbacks. People walk out on subprime mortgages when the value of their home declines.

Homeowners who've suffered a 20% decline in home prices are 14 times as likely to default as those who have enjoyed a 20% gain. "Subprime lending played a role but that role was in creating a class of homeowners who were particularly sensitive to declining house price appreciation, rather than, as is commonly believed, by placing people in inherently problematic mortgages," says the Boston Fed study. In other words, even if the government moves these borrowers into FHA-guaranteed mortgages with fixed rates, but home prices keep falling, lots of borrowers will stiff the taxpayers like they've been stiffing private lenders.

In the old days ("B.S.": before subprime), I couldn’t get a loan to buy a house without putting at least 5% down (I never qualified for an FHA loan, which requires 3%, although borrowers can scam that through DAP). There was a reason for that. If I walked away from the loan, I lost my downpayment. With the advent of the subprime lunacy, and the arrival of borrowers who aren't required to put any money down, when the collateral’s value subsequently declines below the outstanding balance of the loan, they often simply say "hasta la vista, baby," and head on down the road.

The editorial also notes that Barney’s bill would "water down" the FHA underwriting guidelines by raising the permissible percentage of debt to gross monthly income from 43% to 55%. I’m so old I remember when that figure was 33% for conventional loans. The bill would also prohibit the FHA from denying a borrower FHA insurance solely on the basis of delinquency on an existing loan or because of a low credit score. Inasmuch as the intent of Frank’s legislation is to bail out subprime borrowers who financed during the period from 2005 to mid-2007, those lax underwriting guidelines for this subset of loans make sense as a matter of logic, if not as a matter of public policy.

Barney wants $300 billion of taxpayer dollars for this purpose. Chris Dodd wants $400 billion.Pretty soon, they'll start discussing real money.  As The WSJ observes, this is all to bail out, under a worst case scenario, a few million bowers. The Mortgage Bankers Association, which tracks 46 million borrowers, asserts that 42 million of them are paying their loans on time.

Don’t expect any objective analysis of what might be the actual expected affect on the economy if such a bailout doesn’t occur. This is an election year. In addition, inasmuch as the US Government recently stepped in to arrange the "rescue" of Bear Stearns (although at a price that ensures that its shareholders will lose most of their equity), the Democrats can always make the apples-to-oranges argument that if the government rescues big business, it certainly can’t deny the "little guy" his time to stick his snout in the public through and grunt. There are enough voters who don’t understand the economic basics, and a sufficient lack of objective information and analysis, to support the superficial political case for a bailout.

After all, whether it’s a big biz broadsheet like The WSJ or some liberal rag like the WAPO or The Grey Lady, the last thing anyone wants is a balanced approach, much less the old Joe Friday admonition: "The facts, mam. Nothing but the facts."

How do you plan to spend that $300 to $1200 tax rebate that's coming down the pike? Me, I’m banking mine and assuming that I’m giving it all back to bailout subprime borrowers or on some other government boondoggle. Then again, I’m a "glass-half-full" kind of guy.

Crime and Punishment

When we last looked in on Taiwan Lee a couple of years ago, he had "vanished" while out on parole, then resurfaced after committing multiple instances of mortgage fraud in Colorado. He was caught, and became a poster child for the burgeoning problem in Denver (and elsewhere) of professional criminals passing along to their brethren behind bars the ins and outs of mortgage fraud.

Recently, the Denver Business Journal gave a summation of the sentences handed out to Taiwan and his cohorts.

A Centennial man has been sentenced to more than 12 years in federal prison for mortgage fraud, federal officials said Wednesday.

Torrence James, 44, pleaded guilty on Jan. 10 to wire fraud and money laundering charges related to mortgage fraud. He was sentenced Wednesday by Chief U.S. District Judge Edward Nottingham to 151 months in prison, according to a statement from the U.S. Attorney's Office in Denver.

According to the plea agreement, James and co-defendant Ronald Fontenot conducted a scheme to obtain loans using false statements to lenders about the purchase and sale of real estate. Lenders lost a total of $3.7 million through the scheme, federal officials said.

James was among seven people charged in the scheme. The other defendants and their federal prison sentences were: Nicole Puller, 34 months; Glenn Puller, 12 months; Talita James, 24 months; Taiwan Lee, 30 months; Cindy Ingram, 28 months; and Fontenot, 72 months.

Unfortunately, the breakup of Tawain's Gang is not likely to be the end of the road for mortgage fraudsters in the Mile High City. Our secret sources inform us that Taiwan's second cousin (twice removed), "Formosa Lee," is being groomed to take over the family business, but is waiting until the "Paulson Blueprint" is put into effect. The expected runoff of renegade OTS personnel who will be purged in the planned liquidation of that agency is expected to pump up the expertise of mortgage fraud gangs throughout the country and to fuel a new wave of residential real estate related crime. Formosa plans to pick off a few OTS outriders (I can recommend a few myself) to round out his mortgage fraud "tong."

After all, as Housing Wire pointed out last Friday, mortgage fraud is a "growth business."

UPDATE (4/2/08): A reader sent me a link to the FBI's web page that contains statistics and information on mortgage fraud. It's always nice to get information from a primary source. Unfortunately, the FBI's site demonstrates just how widespread this crime has become.

Six Simple Rules

Banking Law Prof gives everyone a hit list of "takeaways" from the subprime mortgage mess:

    1. There’s blame enough to go around.
    2. Those who do not remember the past are condemned to repeat it.
    3. If it sounds too good to be true, it probably is.
    4. If you don’t understand it, don’t invest in it.
    5. What goes around comes around.
    6. It’s still good to be the little pig who built his house of brick.

I especially like the last one, and appreciate the irony of the fact that in this the Lone Star State, the brick houses have been built by folks who a sizable portion of the American public apparently desires to ship "back home" pronto, no matter what the effect of that forced exodus might be on an economy currently teetering on the brink. The ripple effects of the housing debacle continue to roll out, and as today's The Wall Street Journal noted, homebuilders are under the gun. Which, of course, means that their "anxious lenders" (as the Journal describes them) are also under the gun, as we observed a few moons ago. With all due respect to the Tom Tancredos and Lou Dobbs of American politics and media, what we don't need to do at the moment is to ship the homebuilders' labor force "off-site" for an extended  siesta in their "home country." Homebuilders may not be throwing houses up like bluebonnets anymore, but at least in this part of the world, they're still building and selling them. Let's remember lesson number 2 above and exercise not only a little compassion, but a little common sense. Before we learn lesson number 5 the hard way.

This message was NOT approved by John McCain, Barack Obama or Hillary Clinton.

Separating Some Of The Chaff From The Rest Of The Chaff

Colorado's new mortgage broker licensing law has already kept some questionable characters out of a profession where a good man (or woman) is sometimes hard to find. According to a recent story in The Rocky Mountain News, Colorado's Director of Real Estate Erin Toll (whose battles with title insurers as Insurance Commissioner were previously profiled here) has, like Melanie Griffith's character in the movie "Working Girl," a bod for sin but a head for business (or "bidness" as we like to say in The Lone Star State).

One person pleaded guilty to criminally negligent homicide.

Another committed lewd and lascivious acts in the presence of a child. Another is a burglar and thief and is being sued by the office of the attorney general for alleged violations of the Colorado Consumer Protection Act.

What they have in common was a desire to be licensed as mortgage brokers in Colorado.

These criminals were among 73 people who have had their request denied or have been disciplined by the Colorado Division of Real Estate since Gov. Bill Ritter signed a law last year licensing brokers for the first time.

The law went into effect Jan. 1.

Erin Toll, the director of the real estate division, believes the actions will help reduce the record foreclosures in the state and save consumers millions of dollars.

"What this means is that we are doing our job of protecting consumers," Toll said.

"We're left to imagine where we would be in terms of foreclosures if we didn't have so many bad actors in the mortgage business in the first place," Toll said.

"Now that we're getting bad actors off the street, it is bound to mean that foreclosures will not grow as fast as they were," she said.

[...]

"I do think it's fair to say we have spared millions of dollars in potential fraud," Toll said.

Just think how many more millions you would have saved if you'd licensed legislators!

However severe the crackdown on scofflaws might seem, it's not as if you have to be fresh out of the seminary to get a broker's license in Colorful Colorado.

Still, the vast majority of people who have applied for licenses have received them.

As of early March, there were 9,146 licensed brokers in the state.

"We have about another 680 in the pipeline, so we are almost at 10,000," Toll said.

At the rate they're grinding out mortgage brokers, they'll soon be pressing attorneys as the fastest growing license to steal.

The benefits of licensing are difficult to quantify, but some observers are giving it a shot anyway.

Zachary Urban, who runs the Colorado Foreclosure Hotline (1-877-601-HOPE) and who also sits on the real estate division's board, said the biggest benefit of the licensing can't be measured.

"What I think licensing is doing is making a much larger number of folks make the conscious effort not to even begin the process" because they know they won't meet minimum standards.

Not all of those who have been denied a license are merely going to fade into the sunset, return to robbing banks, or run for Congress. Some are engaging in a favorite American pastime: civil litigation.

Senate Bill 203, which created the Mortgage Broker Licensing Act, among other things, prohibits brokers from engaging in 24 specific activities, including misrepresentation, fraud, conflicts of interest and obligations to consumers.

It does not prohibit a convicted murderer, for example, from becoming a mortgage broker. Several of the convicted felons are challenging their denial of a license by Toll, but none of the cases has been resolved yet.

"Murder may not fit exactly as fraud, but under common law, I think if we asked the (murder) victim's family, we might find that the victim may have been lured or deceived before they were dragged into the bushes and killed," Toll said.

"It's sort of a gray area, and we've decided to err on the side of the consumer. After all, mortgage brokers often go into people's homes."

If Osama bin-Laden eventually gets flushed out of Pakistan, it's nice to know that there will be a plaintiff's attorney willing to take up his cause and take on fascists like Erin Toll who are blatantly exercising their "homicide-o-phobia" in an attempt to deny murderers the right to earn an honest buck as a Colorado mortgage broker. After all, even a Holy Warrior has to make a living.