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Wednesday, September 7th, 2011

Federal Government Sues Major American Banks over Mortgage-Backed Securities

On September 2, the Federal Housing and Finance Authority (FHFA) sued 17 companies over sales of toxic mortgage-backed securities to Fannie Mae and Freddie Mac. Among those named in the suit were many of the country’s largest banks, including Bank of America, JP Morgan Chase, CitiGroup, and Morgan Stanley.

The suit does not currently request a specific amount of money in damages, but according to the Associated Press, Fannie and Freddie bought $196 billion worth of toxic securities during the housing boom. Here’s a closer look at the suit and what might happen.

FHFA: Financial Firms Broke State & Federal Laws

One of the suit’s allegations is that the financial firms violated federal and state laws by selling the securities to Fannie Mae and Freddie Mac, two government-sponsored companies that help make mortgages more affordable to Americans. Specifically, the lawsuit claims that the banks and other lenders:

  • Sold mortgage-backed securities that had “materially false or misleading” statements and omissions of critical information;
  • Falsely indicated that the mortgages met legal underwriting guidelines and were all thoroughly reviewed; and
  • Substantially overstated borrowers’ ability to make mortgage payments on their loans.

At its core, the lawsuit claims that the 17 sellers lied to Fannie Mae and Freddie Mac to get them to buy loans that they knew were toxic, yet sold them as low-risk to the government agencies.

Housing Market Bubble, Burst & Fallout

The housing boom allowed millions of Americans to get mortgage loans. Many of those loans were sub-prime, had adjustable rates or were ultimately unaffordable to the borrowers. When interest rates reset a few years after the loans were originated, many borrowers were unable to make payments and defaulted.

While those borrowers faced the problem of foreclosure and perhaps filed for bankruptcy to help ease their debt burden, they were not the only ones affected by their inability to pay.

Investors that bought their mortgages (often after the loans were pooled and sold off in sections in a process called “securitization”) stopped earning money on their investments. Because Fannie and Freddie were big investors, they stood to lose a lot of cash – which put into question their ability to continue supporting the U.S. housing market by buying mortgage debt.

The FHFA (which oversees Fannie and Freddie) is taking legal action in part because of the devastating financial consequences the two companies faced. In July 2008, the federal government had to take action to make sure the two enterprises didn’t fail because, at the time, they guaranteed or owned about half of the residential mortgages in the U.S. (worth about $6 trillion).

Theoretically, the lawsuit could help recover losses that Fannie and Freddie suffered from the collapse of the housing bubble. It might also serve as a warning and/or deterrent to other financial institutions and could prompt legislative change to regulate how residential mortgages are originated, securitized and sold.

The lawsuit was filed in New York and Connecticut.

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Posted in Home Foreclosure, Predatory Lending | No Comments »

Wednesday, May 11th, 2011

Lawsuit Alleges Mortgage Fraud by Deutsche Bank

News reports this week announce that the U.S. Department of Justice has initiated a lawsuit against Deutsche Bank, one of the world’s largest, claiming that the institution lied to federal regulators in order to secure taxpayer-funded insurance for less-than-secure mortgages.

Here’s a look at the details and some of the underlying issues.

The Charges against Deutsche Bank

According to the lawsuit, Deutsche Bank and its subsidiary MortgageIT:

  • Initiated risky mortgage loans to homebuyers. Some of these loans may have been subprime, and since their initiation, sources indicate, about a third have defaulted.
  • Lied to federal regulators. While the loans themselves may have been a bad move financially, what interests prosecutors is what happens next: that Deutsche Bank allegedly lied to officials with the Federal Housing Authority (FHA) in order to secure insurance for the shoddy loans.
  • Got taxpayer-backed insurance for questionable loans. Because of its reportedly false claims that it was evaluating its mortgages for default risk, Deutsche Bank managed to secure FHA funding (which comes from tax dollars) for the questionable loans.
  • Required money from the government when the loans defaulted. Now, as many as 12,500 of Deutsche Bank’s loans have apparently defaulted (meaning that the homes have gone into foreclosure), leaving the government responsible for covering the losses. The money goes to those investors who own the mortgage debt. Sources note that, to date, defaulted Deutsche Bank loans have cost the government more than $386 million.

Because of all these allegations, the Justice Department is reportedly suing the bank for $1 billion, an amount that represents the dollar amount lost plus individual penalties for each mortgage that went into default.

What Mortgage Lending Rules Were Broken?

The government’s lawsuit charges that Deutsche Bank and MortgageIT failed to follow the rules required of anyone interested in federal mortgage insurance. These rules require lenders to:

  • Annually verify various records of mortgage borrowers, including credit reports, incomes and record of employment. This measure is to make sure borrowers are not at risk of defaulting.
  • Examine any loan that goes into default shortly after being originated in an effort to prevent and eliminate careless lending techniques.
  • Act in the government’s best interest, because any money needed to guarantee loans that defaulted would come directly from taxpayers’ pockets.

The lawsuit claims that Deutsche Bank did none of these things and so is both on the hook for the money lost by the government and responsible for paying penalties for breaking the rules of engagement for obtaining federal insurance.

Some sources suggest that the Deutsche Bank lawsuit could be the first of many; after all, reckless lending techniques were fairly common during the housing boom that touched off the current recession.

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Wednesday, April 27th, 2011

Mortgage Scammers on the Loose

Despite the best efforts of groups like the Better Business Bureau and the Federal Trade Commission, scammers manage to find new ways to take money from unsuspecting consumers on a regular basis. Here’s a look at one of the latest warnings that’s been posted by consumer advocates.

A New Mortgage Scam Afoot

The latest in a long line of mortgage and foreclosure “rescue” scams seems to be one that involves attempting to trick homeowners into thinking they qualify for money from a lawsuit against their lenders. According to the BBB, the scam works like this:

  • An official-looking letter arrives: Victims have reportedly noted that they received a letter indicating that they were eligible to join a “joinder action suit” against certain mortgage lenders and banks. The letters noted the potential for winning significant financial compensation in the suit.
  • Unrealistic promises: Victims who called the number listed on the letter were apparently directed to employees of the scammer, who falsely suggested that, by joining the suit, victims might win thousands of dollars, have their interest rates slashed to two percent or have their mortgage principal reduced by 80 percent.
  • Request for upfront payment: In classic scam fashion, victims were then told that they must pay a $5,000 retainer fee to ensure their spot in the lawsuit.

Unsurprisingly, none of the information presented in the letters or during follow-up phone calls was true. But what many victims found disturbing was that the scammer had access to their personal information, including name, address, loan information and even loan amount. In other words, this particular scam may have seemed frighteningly legitimate.

How to Spot a Scam

If you’re among the millions of Americans currently struggling with your mortgage, be sure to follow these safety tips (from the BBB) if and when you decide to seek mortgage assistance.

  • Go directly to your lender first. Third-party “relief” providers, especially those that approach you unsolicited, are much less trustworthy and much more likely to take your money and offer you nothing in return.
  • Be suspicious of mailings from strangers. If you receive a letter about any class action or mass joinder lawsuit, be sure to check online to learn about the latest scams. Then, contact your bank or connect with a lawyer to assess the nature and legitimacy of the letter.
  • Shy away from advance fees. Thanks to new consumer protection rules that took effect this year, advance fees are only permitted in rare cases. In many cases, those that ask for money upfront are interested only in your money and may not stick around long enough to provide the help they promised.
  • Beware of forensic loan audits. These are hot scamming ground and often have no effect on a person’s mortgage payments.

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Tuesday, April 19th, 2011

Financial Literacy Survey Shows Our Weaknesses

The National Foundation for Credit Counseling reported results from its annual survey of consumer financial literacy recently, and the findings suggest that, as a nation, we’re still not as well equipped to deal with financial stumbling blocks as we need to be.

Specifically, the survey revealed the following about American consumers:

  • 26 percent of survey respondents reported spending more than they did last year, a percentage higher than it has been for two years. While this could be good for the nation’s economic recovery, it’s only one part of the puzzle.
  • More than 40 percent of respondents graded themselves as earning a C or lower in their personal finance know-how. This is alarming but not surprising: in more official tests of financial literacy (often given to high school students), it’s often common for the majority of students to fail.
  • While more than two-thirds of Americans reported paying for most purchases with cash or debit cards, 40 percent still reportedly carry revolving debt on their credit cards from month to month. This sort of behavior can be dangerous and debilitating, especially if a consumer is hit with unexpected job loss or income reduction. In fact, one of the most commonly cited factors for bankruptcy filings is overextension on credit.
  • More than 80 percent of the those polled apparently voiced the opinion that walking away from a mortgage can be justified in certain circumstances, particularly if the borrower was misled at the time of the loan or if the borrower can no longer afford mortgage payments. If many people get a chance to act on these beliefs, the effect on the housing market could be seriously detrimental, especially during a period of recovery.

Why Does Financial Literacy Matter?

The issue of financial literacy education has been a hot one in recent years, ever since the bubble in the housing market burst and the abuses (by lenders and borrowers alike) came to light.

Since the beginning of the Great Recession, we’ve seen legislation like the Credit CARD Act to improve the transparency of credit products for consumers, the creation of the Consumer Financial Protection Bureau, and proposals to change debit card fees and other consumer credit products.

When the Bankruptcy Abuse Prevention and Consumer Protection Act took effect in 2005, one of its provisions was the introduction of a Debtor Education (also called a Financial Management) course for all bankruptcy filers – the idea was that those who filed for bankruptcy could certainly benefit from a little guidance on financial matters. And the idea seems to be a good one.

But what about those who aren’t ready to file for bankruptcy? Luckily, the U.S. Government has set up a financial literacy destination, MyMoney.gov, for people who have never set foot in the bankruptcy court.

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Posted in Finance 101: Secure Your Future | 1 Comment »

Saturday, July 17th, 2010

Foreclosures Likely to Top One Million This Year

A recent report from NPR notes that mortgage foreclosures are likely to reach the one million mark in 2010. To put this figure in context, consider these statistics, pulled from the real estate tracking site RealtyTrac.com:

  • In a typical year, the United States sees about 100,000 homes enter foreclosure—a mere tenth of the number expected this year.
  • In 2009, considered a big year for foreclosures, 900,000 homes were foreclosed on by banks.
  • In the first five months of 2010 alone, 528,000 homes have entered foreclosure—already more than five times the yearly average.
  • A whopping 1.7 million U.S. homeowners got some kind of foreclosure-related notice between January and June of this year (some of those houses have already gone into foreclosure). This translates to one in 78 homes in the country.

Understanding the Foreclosure Process

So what causes a bank to foreclose on a home? It can take as long as 15 months for a bank to repossess a home once a borrower is 30 days overdue on payments, according to sources. Here’s an idea of what might happen:

  • Missed payments

    • : If a mortgage payment is thirty days or more late, the homeowner is said to be delinquent on payments. At this point, the lending bank may send a notice of foreclosure. This is kind of the first warning of foreclosure a homeowner can get. At this point, it’s a good idea to contact your lender if you’re having financial difficulties. You may also want to consider consulting with a bankruptcy lawyer about whether Chapter 13 bankruptcy is a viable option to stop your home’s foreclosure.

  • Bank notifications: If a borrower continues to miss payments or stops making payments altogether, the bank will likely send notice that foreclosure proceedings have begun. While procedures and laws differ from state to state, homeowners can generally expect various types of notification in the mail and/or via telephone.
  • Eviction: Once the bank has processed various paperwork, it can evict the residents of the house and reclaim the property as its own. Because of the unprecedented number of foreclosure cases currently active in the U.S., banks may (but won’t necessarily) take longer than usual to actually evict tenants.
  • Foreclosure auction or sale: The bank now owns the home and may choose to sell it at a foreclosure auction or via short sale. Often, as sources note, any proceeds the bank makes from such a sale might be used to cover legal costs for the foreclosure process or the unpaid portion of the mortgage.

Clearly, the news of massive foreclosure action isn’t good for individuals and families who are losing their homes, but it’s also a bad sign for the larger economy. As more and more properties glut the real estate market, prices fall and the chances of a swift recovery in that area diminish.

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Friday, July 2nd, 2010

A New Unexpected Cause of Foreclosure Examined

A recent report from NPR describes a shocking and troubling occurrence happening in certain neighborhoods in the United States. Apparently, some homeowners are finding their houses foreclosed on—but not because they fell behind on mortgage payments.

It seems that failure to pay homeowners association (HOA) dues constitutes legal ground for the HOA to foreclose on and resell a property.

A Devastating Oversight

The case detailed in the NPR story involves a deployed Captain serving in Iraq and his wife: they had, according to reports, paid for their home in full but missed two HOA payments—and their house was foreclosed on, sold for the amount of the overdue dues plus legal costs, and sold again for a profit.

Here’s what you need to know in order to protect yourself and your family from facing such an unfortunate fate:

  • In the U.S., 33 states have laws that permit HOAs to place liens on homes for which dues are not paid and collect on those liens (i.e. foreclose on the home) without putting the case before a judge.
  • In some states, processing a foreclosure takes less than a month—meaning that families have little time to take action to protect their property.
  • Because of the tough economy, it seems more families than ever are missing payments and don’t believe it when they’re told they could lose their home for failure to pay a couple hundred dollars’ worth of fees or dues.

The truth of the matter, though, is that you can lose your home in many states simply for missing payments to your HOA. If you’re pressed for cash and worried about making such payments, contact your HOA and explain the situation.

The most important thing to do is to attack the problem head on rather than waiting until it’s too late—if you can’t afford the dues now, you definitely can’t afford to make alternate housing arrangements, but that could be the position you’re in if you miss too many checks.

And, while it may be the least appealing thing you can think of if you’re falling behind on various financial obligations, be sure to open mail as soon as you receive it, as it could contain important and time-sensitive information about some of all of your debts. Remember: avoiding debt doesn’t make it go away, and in this economy it’s important to take any and all warning signs of personal economic turmoil seriously.

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Friday, June 25th, 2010

Oil Spill Making Flood Insurance Difficult to Come By

The price of premiums for flood insurance for homeowners is on the rise and extra coverage is going to be harder to get, with the coming hurricane season and Gulf oil spill are making insurers more wary, according to the Wall Street Journal.

In general, the price of homeowner’s insurance is on a significant rise. Thomas J. Crowley, an independent insurance agent in New York was quoted saying, "the average price of a homeowner policy on Long Island is above $2,000 a year now, five years ago it was probably half that… my own policy has doubled in five years to over $3,000."

One of the main concerns for this year’s hurricane season is the oil spill in the Gulf. Most standard homeowners’ policies would not cover contamination done by the oil in the case of a flood, which could cause even more destruction than the standard high winds and rain.

According the Robert Hartwig, president of the Insurance Information Institute, "In general, whatever is mixed in with the water is part of the flood, hence excluded from a [traditional] homeowner policy."

Congress has failed to renew the National Flood Insurance Program, which is responsible for providing the vast majority of flood policies in the U.S., after it expired on June 1st.

An estimated 1,200 real-estate closings a day have been delayed this month because of the inaccessibility to flood insurance coverage, according to the National Association of Mutual Insurance Companies. Federal law requires homes with federally backed mortgages in designated “flood-hazard” areas to have flood insurance, and without the NFIP, many homes can’t get flood insurance.

If you’re in the market for hurricane-related coverage, you should always be sure you have enough insurance to rebuild fully if the worst happens. Your cost to rebuild may be different than the market value of your house, and you shouldn’t wait until you need the money to find out that your policy hasn’t kept up with the cost of construction.

Another good tip is to fully understand your deductibles. Hurricane and wind deductibles can vary greatly, from 1% to 5%, depending on the state. On a $300,000 house, the difference between having to put up $3,000 and $15,000 can be a game changer.

One cost that can catch a storm victim by surprise is emergency living expenses. If your house is unlivable for several months, you need to make sure you can cover your expenses.

It may seem difficult in this economy to spend the money on a good homeowners insurance policy, but as Chari and Bob Hust found out, it can be more than worth it.

After Hurricane Ike caused significant damage to their two houses in Texas in 2008, the couple received combined over $600,000 to repair the houses. They essentially ended up rebuilding their houses, but they had no problem settling their claim with the insurance company. “You may pay more… but if you have a catastrophe, it is worth having the right insurance,” said Chari.

If a hurricane-related flood causes more damage than homeowners can afford, it could result in home foreclosure, and even bankruptcy.

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Thursday, May 20th, 2010

Mortgage Application Guidelines Tough for Self-Employed

During the real estate boom that caused the housing bubble that eventually sent the country into a serious recession, it was common practice for borrowers to apply for a mortgage by using "stated income," which meant indicating their income without offering proof.

But mortgage lenders have learned their lesson and now, according to the New York Times, qualifying for a mortgage loan is harder than ever for those working for themselves.

Providing Proof of Income

In order to convince a bank to lend you the money to buy a home, you have to prove that you can afford to repay it. Generally, that entails showing official records of your earnings and current credit situation. People who work for themselves or own a small business, though, may not have regular paychecks to present, which may mean:

  • Higher interest rates: According to the Times, the few banks that still extend stated-income loans charge significantly higher interest rates than they do for standard loans. From an economic perspective, this makes sense: when there’s a greater risk involved, there must be a greater potential gain. But it can mean a much more expensive loan for borrowers.
  • Careful bookkeeping: Some banks will apparently initiate loans with two years' tax receipts, but this might also present a problem for some self-employed borrowers. It seems that, in order to offset losses in the rough economy, many people have been taking liberal tax deductions, thus lowering their overall reported income. This, naturally, could hinder their ability to qualify for a large loan.
  • Solid finances required: One expert quoted suggested that self-employed borrowers with considerable cash reserves and credit scores of at least 700 should be able to get traditional loans, but those who have lost income (or filed bankruptcy) during the recession may have difficulties.

But, according to the piece, self-employed Americans shouldn’t despair. It seems that as many as 30 to 40 percent of those who work for themselves qualify for mortgage loans they apply for. If you aren’t sure how your finances currently look, consider starting the mortgage application process by viewing your credit report (for free) at www.annualcreditreport.com.

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Posted in Home Foreclosure | 1 Comment »

Saturday, February 13th, 2010

Protecting Your Best Financial Interests

Part of becoming truly financially responsible and independent involves accepting responsibility for your financial situation. Not only do you have the power to improve your finances, you’re the only person who can (and will) consistently watch out for your rights as a consumer.

This point was driven home once again in a post from CreditBloggers.com, in which the author examines one aspect of banking that people probably don’t realize can cost them serious money.

Understanding Overages

Here's a look at how you could end up losing a couple thousand dollars in a few minutes (without even realizing it):

  • You go into your bank to apply for a mortgage loan. A loan officer presents some numbers to you and offers you a loan, which comes with an interest rate that is determined largely by your credit score.
  • If you’re lucky, you were offered the lowest interest rate that your credit status qualified you for.
  • If you’re unlucky (as many thousands of Americans are), you were offered an interest rate with an "overage"—an interest rate slightly higher than the best rate your credit score allowed.

Too much debt ruining your credit score? Learn if bankruptcy may help with a local attorney.

Why would lenders even offer such loans? Because it can be profitable for them:

  • A higher interest rate equals a more profitable loan (because you, the borrower, pay more in interest).
  • A more profitable loan is more attractive to investors (because they can collect more money on it).
  • The bank gets a higher price for the loan, some of which goes to the loan officer as a reward.

According to the post, issuing loans with overages is fairly common, even at some large, well-established banks, which is why you must act as your own advocate when investigating significant purchases.

Protecting Yourself and Your Money

If you aren’t already monitoring your credit report, consider doing so. At the web site annualcreditreport.com, you can view a free copy of your credit report from each of the Big Three reporting bureaus once per year.

And, if you’re getting ready to apply for a mortgage, you may want to pay to view your actual credit score (visit MyFico.com). To determine what mortgage rate you’re likely to get, do some online research or speak with a financial guru you know before hitting the banks.

Additional Resources

Get more great financial advice and debt-elimination tips from The Debtress.

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Friday, November 13th, 2009

October Foreclosures Dip from September, Soar from ‘08

RealtyTrac, a company that follows foreclosure data for the United States, released October numbers on Thursday. It seems foreclosure rates have decreased slightly since last month, but are still significantly higher than they were a year ago.

Foreclosure by the Numbers

Here’s a look at the statistical breakdown of recent foreclosure activity in the country.

  • 332,292 property filings in October: This number includes three specific types of action: notices of bank repossession, auction and borrower default. That means one in every 385 American households is in some phase of the foreclosure process.
  • Percentage changed: The numbers translate to a three percent drop from September of this year, but a 19 percent increase from October of 2008, suggesting that the moderate improvement is only relative.
  • Estimate for the year: Based on information gathered thus far, RealtyTrac is reportedly predicting as many as 3.4 million foreclosures this year, a 48 percent jump from 2008’s total of 2.3 million.

These numbers may seem astoundingly high, and they are – remember that this recession started in the real estate industry, and continues to plague homeowners.

So why are foreclosures still inching up even when the economy is showing signs of recovery? Most likely, sources suggest, the unemployment rate is to blame. Even though consumer spending may be on the rise, millions of Americans are still without jobs – and without serious hope of getting jobs in the near future, which means missed house payments.

Foreclosure Prevention or Just Delays?

The Obama administration has taken some action to try to ease the pain in the housing market. The Home Affordable Mortgage Program, an initiative designed to encourage lenders to offer mortgage loan modifications with cash incentives, apparently helped as many as 20 percent of eligible borrowers last month, up from 16 percent in September.

But those numbers still represent far less than the majority of struggling homeowners – and some other laws may be offering less help than they seem to be.

Nevada, for example, allegedly has a law in place that mandates foreclosure mediation for at-risk borrowers. Not surprisingly, Nevada also has one of the nation's highest bankruptcy rates. And, while sources indicate that the state saw a drop in foreclosures this month, it could very well see a jump later on, if and when mediations have been completed and proven unsuccessful.

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Posted in Home Foreclosure | 1 Comment »

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