FHA-Backed Loans: The New Subprime

The same people whose reckless practices triggered the global financial crisis are onto a similar scheme that could cost taxpayers tons more

By Chad Terhune and Robert Berner of Business Week, 11/19/2008

As if they haven't done enough damage. Thousands of subprime mortgage lenders and brokers—many of them the very sorts of firms that helped create the current financial crisis—are going strong. Their new strategy: taking advantage of a long-standing federal program designed to encourage homeownership by insuring mortgages for buyers of modest means.

You read that correctly. Some of the same people who propelled us toward the housing market calamity are now seeking to profit by exploiting billions in federally insured mortgages. Washington, meanwhile, has vastly expanded the availability of such taxpayer-backed loans as part of the emergency campaign to rescue the country's swooning economy.

For generations, these loans, backed by the Federal Housing Administration, have offered working-class families a legitimate means to purchase their own homes. But now there's a severe danger that aggressive lenders and brokers schooled in the rash ways of the subprime industry will overwhelm the FHA with loans for people unlikely to make their payments. Exacerbating matters, FHA officials seem oblivious to what's happening—or incapable of stopping it. They're giving mortgage firms licenses to dole out 100%-insured loans despite lender records blotted by state sanctions, bankruptcy filings, civil lawsuits, and even criminal convictions.

More Bad Debt

As a result, the nation could soon suffer a fresh wave of defaults and foreclosures, with Washington obliged to respond with yet another gargantuan bailout. Inside Mortgage Finance, a research and newsletter firm in Bethesda, Md., estimates that over the next five years fresh loans backed by the FHA that go sour will cost taxpayers $100 billion or more. That's on top of the $700 billion financial-system rescue Congress has already approved. Gary E. Lacefield, a former federal mortgage investigator who now runs Risk Mitigation Group, a consultancy in Arlington, Tex., predicts: "Within the next 12 to 18 months, there is going to be FHA-insurance Armageddon."

The resilient entrepreneurs who populate this dubious field are often obscure, but not puny. Jerry Cugno started Premier Mortgage Funding in Clearwater, on the Gulf Coast of Florida, in 2002. Over the next four years, it became one of the country's largest subprime lenders, with 750 branches and 5,000 brokers across the U.S. Cugno, now 59, took home millions of dollars and rewarded top salesmen with Caribbean cruises and shiny Hummers, according to court records and interviews with former employees. But along the way, Premier accumulated a dismal regulatory record. Five states—Florida, Georgia, North Carolina, Ohio, and Wisconsin—revoked its license for various abuses; four others disciplined the company for using unlicensed brokers or similar violations. The crash of the subprime market and a barrage of lawsuits prompted Premier to file for U.S. bankruptcy court protection in Tampa in July 2007. Then, in March, a Premier unit in Cleveland and its manager pleaded guilty to felony charges related to fraudulent mortgage schemes.

But Premier didn't just close down. Since it declared bankruptcy, federal records show, it has issued more than 2,000 taxpayer-insured mortgages—worth a total of $250 million. According to the FHA, Premier failed to notify the agency of its Chapter 11 filing, as required by law. In late October, an FHA spokesman admitted it was unaware of Premier's situation and welcomed any information BusinessWeek could provide.

You'd think the government would have had Premier on a watch list. According to data compiled by the FHA's parent, the U.S. Housing & Urban Development Dept. (HUD), the firm's borrowers have a 9.2% default rate, the second highest among large-volume FHA lenders nationally.

Now, members of the Cugno family have started a brand new company called Paramount Mortgage Funding. It operates a floor below Premier's headquarters in a three-story black-glass office building Jerry Cugno owns in Clearwater. In August 2007, only weeks after Premier sought bankruptcy court protection, the FHA granted Paramount a license to issue government-backed mortgages. "I am the only person in the country who really understands FHA," Cugno says with characteristic bravado.

One day recently, Nicole Cugno, his 27-year-old daughter and a Paramount vice-president, was on the phone at her desk, giving advice to new branch managers. Despite past troubles with Premier, the family says Paramount dutifully serves borrowers. The Cugnos stress that the two companies are legally separate organizations.

Similarly worrisome stories are playing out around the country. In Tucson, First Magnus Financial specialized in risky "Alt-A" mortgages, which didn't require borrowers to verify their income. State and federal regulators cited the company for misleading borrowers, using unlicensed brokers, and other infractions. It shut down last summer and laid off its 5,500 employees. But in May, the FHA issued a group of former First Magnus executives a new license to make taxpayer-insured home loans. They have opened a company called StoneWater Mortgage in the same office building that First Magnus had occupied.

G. Todd Jackson, an attorney for StoneWater, said in a written statement that the new company "is not First Magnus." StoneWater employs "a new business model, with different loan products, in a different market," he added. First Magnus had "a long record of compliance," he said. "Isolated incidents and personnel problems occurred, but none were remotely systemic, and all were promptly addressed and corrected by management when discovered."

Back to Life

Nationstar Mortgage, based in suburban Dallas, closed its 75 retail branches in September 2007 after the subprime market crashed. But in August, Chief Information Officer Peter Schwartz told the trade paper American Banker that Nationstar now plans to emphasize FHA-backed loans, which he called a "high-growth channel." The lender received federal approval in March to offer government-guaranteed loans. Just a year earlier, it agreed to pay the Kentucky Financial Institutions Dept. a $105,000 settlement—one of the largest of its kind in that state—to resolve allegations that Nationstar employed unlicensed loan officers and falsified borrowers' credit scores. Nationstar didn't admit wrongdoing in the case.

"All loans we originate conform to industry best practices, as well as all applicable federal and state laws," says Executive Vice-President Steven Hess. The settlement in Kentucky, he adds, isn't "relevant to our FHA status."

Lend America in Melville, N.Y., uses cable television infomercials and a toll-free number (1-800-FHA-FIXED) to encourage borrowers in trouble with adjustable-rate mortgages to refinance with fixed-rate loans guaranteed by the FHA. Anticipating the real estate crash, the Long Island firm switched its strategy in 2005 from subprime to FHA-backed mortgages, says Michael Ashley, Lend America's chief business strategist. This year, the company will make 7,500 FHA loans, worth $1.5 billion, he says. "FHA is a big part of the future," Ashley adds. "It's the major vehicle for the government to bail out the housing industry."

But why the federal government would want to do business with Lend America is perplexing. Ashley has a long history of legal scrapes. One of them led to his pleading guilty in 1996 in federal court in Uniondale, N.Y., to two counts of wire fraud related to a mortgage scam at another company his family ran called Liberty Mortgage. He was sentenced to five years' probation and ordered to pay a $30,000 fine. His father, Kenneth Ashley, was sentenced to nearly four years in prison. "I was just a pawn in a chess game between my father and the government," says the younger Ashley, who is 43. "It doesn't affect my ability to do lending." The default rate on Lend America's current FHA loans is 5.7%, or 53% above the national average, according to government records.

Asked about FHA oversight of former subprime firms, agency spokesman Lemar Wooley says: "FHA has taken appropriate actions, where necessary, with these lenders with respect to their participation in FHA programs." First Magnus, Nationstar, and Lend America met all applicable federal rules, Wooley says. But on two occasions since 2000 one office of Lend America in New York temporarily lost its authority to originate FHA-backed loans because of an excessive default rate, he says. Wooley says the FHA wasn't aware that Lend America's Ashley had been convicted. The firm didn't list Ashley as a principal, Wooley says. FHA lenders are required to disclose past regulatory sanctions and are forbidden to employ people with criminal records.

Founded during the New Deal, the FHA is supposed to promote first-time home purchases. Open to all applicants, it allows small down payments—as little as 3%—and lenient standards on borrower income, as long as mortgage and related expenses don't exceed 31% of household earnings. In exchange for taxpayer-backed insurance on attractively priced fixed-rate loans, buyers pay a modest fee. Lenders and brokers can get a license to participate in FHA programs if they demonstrate industry experience and knowledge of agency rules.

During the subprime boom, the FHA atrophied as borrowers migrated to the too-good-to-be-true deals that featured terms such as extremely low introductory interest rates that later jumped skyward. But since the subprime market vaporized in 2007, FHA-backed loans have become all that's available for many borrowers. By fall 2008, FHA loans accounted for 26% of all new mortgages being issued nationwide, up from only 4% a year earlier. As of Sept. 30, the most recent date for which data are publicly available, the FHA had 4.4 million single-family mortgages under guarantee, worth a total of $475 billion.

A Swelling "Tsunami"

Congress and the Bush Administration are strongly encouraging lenders to apply for FHA approval and tap into the government's loan-guarantee reservoir. In September, the agency guaranteed 140,000 new loans, up from 60,000 in January. In October, as Congress and the White House scrambled to respond to the spreading financial disaster, the FHA began to extend $300 billion in additional loan guarantees under the banner of a new program called HOPE for Homeowners. The limit on the amount buyers may borrow will rise in January to $625,000 from $362,790 in 2007.

Some current and former federal housing officials say the agency isn't anywhere close to being equipped to deal with the onslaught of lenders seeking to cash in. Thirty-six thousand lenders now have FHA licenses, up from 16,000 in mid-2007. FHA "faces a tsunami" in the form of ex-subprime lenders who favor aggressive sales tactics and sometimes engage in outright fraud, says Kenneth M. Donohue Sr., the inspector general for HUD. "I am very concerned that the same players who brought us problems in the subprime area are now reconstituting themselves and bringing loans into the FHA portfolio," he adds.

FHA staffing has remained roughly level over the past five years, at just under 1,000 employees, even as that tsunami has been building, Donohue points out. The FHA unit that approves new lenders, recertifies existing ones, and oversees quality assurance has only five slots; two of those were vacant this fall, according to HUD's Web site. Former housing officials say lender evaluations sometimes amount to little more than a brief phone call, which helps explain why questionable ex-subprime operations can re­invent themselves and gain approval. "They are absolutely understaffed," says Donohue, "and they need a much better IT system in place. That is one of their great vulnerabilities."

Joseph McCloskey, a former director of FHA's single-family asset management branch, says workers reviewing lender applications have had difficulty for years tracking whether executives of previously disciplined mortgage firms were applying for new FHA licenses. "Technologically, they are challenged," McCloskey, now a consultant to FHA lenders, says of his overmatched former colleagues.

The FHA's Wooley disputes these criticisms. The agency can cross-check names and thoroughly examine lender applications, he says.

Like Flies to Honey

There are numerous law-abiding FHA lenders and brokers, just as there are subprime mortgage firms that behaved honestly and cautiously in recent years. But the current economic crisis has turned the FHA into a profit magnet for all kinds of financial players. Major Wall Street investment firms are finding their own angles, which are entirely legal.

In April 2007, Goldman Sachs (GS) purchased a controlling stake in Senderra Funding, a former subprime lender in Fort Mill, S.C. Goldman, which has received $10 billion in direct federal rescue money, converted Senderra into an FHA lender and refinance organization. The strategy appears likely to produce hefty margins. In September, Goldman paid 63¢ on the dollar in a $760 million deal with Equity One (EQY), a unit of Banco Popular (BPOP), for a batch of subprime mortgage and auto loans. Through Senderra, Goldman plans to refinance at least some of the mortgages into FHA-backed loans. Because of the government guarantee, it can then sell those loans to other financial firms for as much as 90¢ on the dollar, according to people familiar with the mortgage market. That's a profit margin of more than 40%.

Goldman's dealings suggest another reason FHA-insured lending is booming: The federal guarantee creates an incentive for banks to buy FHA loans and bundle them as securities to be sold to investors. This is happening as the securitization of subprime and conventional mortgages has largely ceased.

Operating far from Wall Street, the Cugno clan of Clearwater exemplifies a certain indefatigable American spirit in the face of economic setbacks. Whether that enterprising drive is always something to celebrate is less clear.

The Cugnos concede that their older mortgage firm, Premier, had its flaws. "My dad's company got too big," says Nicole Cugno. "It was too hard to control." At its peak in 2006, Premier originated $1 billion in loans each month and had annual revenue of more than $200 million. It sold what amounted to franchises to brokers around the country who frequently operated with little supervision from the 200-employee home office. "Everybody had a few bad apples, and I had a few of them," Nicole's father, Jerry, says. "If they got in trouble, we fired them."

Mark Pearce, deputy commissioner of banks in North Carolina, one of the five states that banned Premier, counters that the company seems to have invited abuses. North Carolina investigators concluded that Premier's branch in Charlotte allowed, among other deceptive practices, unlicensed brokers from around the country to "park" loans there for a fee. The aim was to make it appear that the mortgages were associated with a licensed broker trained and supervised by a substantial firm. "This is a company that should not be doing business in North Carolina," Pearce says.

But the Cugnos are very much staying in business. While Premier's bankruptcy proceedings continue in Tampa, members of the family are employing essentially the same model with their new company, Paramount. Only this time they are stressing federally guaranteed FHA loans. Paramount charges branches $1,625 a month to use its name, FHA license, and software. On its Web site, it tells brokers that FHA loans are "the new subprime."

"We're taking some of the things Premier did and tweaking [them]," says Barry McNab, a former Premier executive who now heads FHA lending for Paramount. About 9 out of 10 Paramount loans have FHA backing, he explains. It's difficult to evaluate most of those guaranteed loans, since they are so new. But a look at the experiences of some past Premier borrowers isn't encouraging.

U.S. District Judge Richard Alan Enslen in Kalamazoo, Mich., began a June 2007 written opinion about Premier's practices with this observation: "The crooks in prison-wear (orange jump suits) are easy to spot. Those in business-wear are not, though they do no less harm to their unsuspecting victims."

The case before Judge Enslen concerned Marcia Clifford, 53. She won a civil verdict that Premier had violated federal mortgage law when it replaced the fixed-rate loan it had promised her with one bearing an adjustable rate. Enslen also found that Premier had misrepresented Clifford on her application as employed when she was out of work and living on $700 a month in disability payments. Despite his ire, the judge decided to award Clifford, who did sign the deceptive documents, only $3,720 in damages, an amount based on unauthorized fees Premier had pocketed.

Clifford's name now appears along with a lengthy list of Premier's other creditors in the bankruptcy court in Tampa. Unable to make her $600 monthly mortgage payment, she received an eviction notice in June and says she is likely to lose her three-bedroom house in Belding, Mich. "It was a bait and switch," Clifford says, sobbing. "The folks at Premier are coldhearted."

Janice Dixon is also owed money by Premier. In March 2006 an Alabama jury awarded her $127,000 in damages related to a fraudulent refinancing in which, she alleged, the company didn't disclose the full costs of her borrowing. "Who will fix this?" Dixon, 49, asks. "They will continue to do these same things over and over."

Wooley, the FHA spokesman, says the agency noticed Premier's default rate rising earlier this year. But he adds that both Premier and Paramount met FHA requirements.

Low Income? No Problem

Like the Cugnos, Hector J. Hernandez lately has shifted his mortgage business away from subprime and toward FHA loans. The Coral Gables (Fla.) lender has a different twist on the business: He uses FHA-backed loans to help hard-pressed borrowers buy condominiums in buildings he owns.

Sascha Pierson was an unlikely borrower. She had no employment income when she bought a three-bedroom condo in Palmetto Towers, a Hernandez property in Miami, in July 2007 for $318,000. She borrowed almost the entire purchase price from Great Country Mortgage Bankers, Hernandez's loan company. Pierson, 29, says she is pursuing a psychology degree online from Kaplan University. She lives on a $42,000 annual educational grant from the government of the Cayman Islands, where she is a citizen. But the grant ends this year, and even with two roommates, she doesn't know how she's going to pay the $2,600 monthly bill for her mortgage and condo fee. "I am seriously worried about defaulting on my loan," she says.

Less extreme versions of Pierson's situation seem common at Palmetto Towers, a pair of eight-story stucco buildings Hernandez acquired in 1996. BusinessWeek interviewed eight condo owners at the complex, all of whom had obtained FHA-backed loans from Great Country. All eight, including Pierson, say they agreed to terms that required them to make mortgage and condo-fee payments that total considerably more than the FHA's guideline of 31% of their monthly income. Four of the eight owners say they received cash payments at closing of $10,000 or more as incentives to buy. The payments, which the FHA says are prohibited, were included in the loans. Pierson says she received $19,500. "They called it a 'cash-back opportunity,'" she explains.

Her neighbor, Lorena Merlo, 27, received a Great Country check for $14,640 at the closing in April on her $316,375 three-bedroom unit. Merlo, a part-time legal assistant, and her husband, Renny Rivas, a drywall laborer, earn a total of $52,000 a year and have two young sons. Their monthly home payments amount to 58% of their gross income, way over the FHA limit. "We are four months behind on our mortgage," says a mournful Merlo.

Defaults and Denials

Of the 158 units in Palmetto Towers, 66 are in foreclosure, records show. An additional 33 are unsold. Great Country has originated 1,855 FHA mortgages since November 2006; 923 of those were in default proceedings as of Oct. 31. The firm's 50% default rate is the highest in the entire FHA program.

Hernandez blames the high failure rate on the disastrous South Florida real estate market, not Great Country's practices, which he says are all legitimate. Asked in a phone interview whether he encourages buyers to purchase condos they can't afford, paying them questionable cash incentives, he says flatly, "That is not true." He adds: "[The buyers] are lying. They are disappointed by falling prices."

In October, however, the FHA decided it had seen enough. It ended Great Country's guaranteed-lending privileges in the Miami and Orlando markets where it had been active. Borrowers on nearly half of the company's defaulted loans made payments for only three months or less; 105 borrowers never made any payments at all. Brian Sullivan, another FHA spokesman, says the agency has referred the case to its inspector general's office. In response to BusinessWeek's questions, the Florida Financial Services Dept. has started a separate investigation, a person close to the state agency says.

But don't assume that Hernandez is through with FHA-guaranteed loans. At the Palmetto Towers sales office, Alexis Curbelo, a loan officer for Great Country, explains in an interview that buyers can now obtain FHA loans through Ikon Mortgage Lenders in Fort Lauderdale. Public records show Ikon closed a Palmetto Towers FHA loan in September for $222,957. Edgard Detrinidad, Ikon's president and a former business associate of Hernandez, denies he is financing any other loans for Hernandez's buyers.

Market gradually absorbing inventory

By Greg Lane • Tallahassee Democrat • November 18, 2008

The past two years were like a whirlwind to those of us in the real estate business. The market was like a record wind gust.

When the excitement stopped in the fall of 2007, the slowdown hit us hard and fast, like a tornado. Real estate professionals, buyers and sellers seemed unprepared for the torrential drop in volume from August 2007 to September 2007.

This pivotal period is a traditional seasonal slowdown, a time when local real estate activity takes a back seat to school preparations, parades and family gatherings. But during the pivotal period in 2007 we were not prepared for the 45-percent drop in the amount of transactions of condos, townhouses and single-family homes.

In contrast, there was virtually no change in volume from July to August 2007; this left us ill prepared for such a plunge a month later. Fast forward to 2008. How did our market react this time during the same pivotal period? Surprisingly, we only noticed a 15-percent decrease from August to September, not the monumental landslide like the year before.

Is this a sign that our market has hit bottom? Might we see a recovery soon? I don't think we can rush to any major conclusions based on this data. First of all, our October 2008 was no better than September — sales volume actually decreased again, compared to virtually no change for the same time period in 2007.

The good news is that building permits are down, new construction activity has come to a halt and active listings are down. The peak of our listing inventory in Leon County this year (single-family homes, townhouses and condos in MLS) was 3,430 in May. It is now down to 2,941, a 15-percent decrease. Existing new construction is slowly being absorbed and we are starting to see the bottom in many market segments.

It used to seem that buyers were sitting on the fence, and then it appeared that they were sleeping on the fence. Today, the buyers are still there, but they are hiding behind the fence, waiting for the right price.

Our forecast for this quarter is the same as it was every year before the "gold rush" of 2006-07. We should see slow activity in October and November, with a typical increase the first few weeks of December. Based on historical data, our market will warm up again in the spring, but we will need a red-hot summer to carry us through the fall of 2009.

In Times Like This, Only the Freshest Comps Will Do

By Kenneth R. Harney, Washington Post, Saturday, November 8, 2008

How fresh are your "comps," the comparable sales of properties used as benchmarks in home real estate appraisals? Buyers and sellers rarely had to be concerned about such a question -- or even understand it -- when values were on the upswing.

But in soft and declining markets, lenders are making comps a big deal. Some sellers are forced to renegotiate lower prices with buyers, even after they have a signed contract.
Rather than accepting sales of similar properties that closed as much as six to 12 months ago, lenders and mortgage investors are demanding that appraisers include only the freshest comps, ideally those closed within the previous 90 days, to support their valuations.

They're also pushing for more extensive data on local listings, pending sales and listing-price-to-selling-price ratios before they agree to fund a mortgage.

As a result, growing numbers of sales transactions are being complicated, even knocked off track, as buyers demand that sellers lower agreed-upon contract prices to reflect the lower loan amounts lenders are offering.

"Appraisals have become a real hassle," said Steve Stamets, a loan officer with 20 years of experience at Nationwide Home Mortgage in Rockville. "Some sellers are taking a beating," he said, citing a recent transaction where the appraisal came in thousands of dollars below the signed contract price. Had the seller not agreed to eat the difference -- take a lower price than the buyer had agreed to in the contract -- "the whole deal could have fallen through," Stamets said.

Major lenders and investors such as Fannie Mae and Freddie Mac are "beating down on the appraisal" by demanding 90-day comps or fresher, he said

In Richmond, appraiser Perry Turner of P.E. Turner & Co. said his firm has seen numerous cases where using newly mandated 90-day or more recent comps, as opposed to those six months or older, has contributed to valuations lower than the price on the sales contract.
"In 95 percent of those cases," he said, "the [listing and selling] agents have gotten together and renegotiated the contract" rather than lose the deal.

In Woodland Hills, Calif., appraiser Kerry Leiman, owner of Leiman Appraisal, defends the tougher standards as producing valuations that are much more finely tuned to short-term changes in local prices.

"Shorter is far better," Leiman said, even if sometimes there are not enough comparable closed sales that fit the lender's tighter time requirements. In those instances, he said, appraisers can look to current listings and use time adjustments based on local market pricing trend data to come up with appropriate estimates.

Turner said that when there are not enough 90-day comparables, he can sometimes persuade real estate agents to disclose in confidence the prices on pending sales, which otherwise are not reported or listed until closing. Pushed by lenders for the freshest possible data on properties, Turner also can tap into the local multiple listing service and statistically derive adjustment indexes for small geographic areas based on the percentage difference between original asking prices and selling prices.

That, in turn, allows him to adjust estimated prices for current listings that are comparable to the property he's appraising. If the listing is for $400,000 and the index suggests that houses in the area are selling for an average of 4 percent below the original list or asking price, the appraiser can estimate the probable value of the unsold comparable house at $16,000 less, or $384,000.

Tim McCarthy, an appraiser in Tinley Park, Ill., agrees that requirements for fresher comps generally improve valuation accuracy for lenders' purposes, but pointed out that they are not foolproof. To the extent that appraisers have to focus on listing-price-to-selling-price and time-on-market indexes, they may miss some of the games that sellers and agents can play, he said.

For example, McCarthy said, a seller with a current listing at an unreasonable price that hasn't sold for months might pull the house off the market, then come back with it as a "new" listing with the same excessive price. As long as the listing date is at least three months from the date the house was pulled off the market, the listing will be counted as new under some multiple listing service rules, and the high asking price may get factored into new appraisals.

In that case, the whole push for fresh data "just totally misses the mark," McCarthy said.

Foreclosures may alter home values

By Will Van Sant, St Petersburg Times Staff Writer In print: Friday, November 14, 2008

In a sign of how the real estate market has imploded, property appraisers plan to figure in foreclosure sales when they value homes next year.

State Department of Revenue rules advise county property appraisers to ignore foreclosures and other types of "distressed" sales in favor of arms-length deals between willing buyers and sellers.

The belief is that such open market sales are truer indicators of home values. But that's only the case when foreclosure sales are relatively rare, not rampant like they are now, property appraisers are saying.

"The number of foreclosure sales we are dealing with now is so much greater than I have ever seen that I believe they have become part of the market," said Pam Dubov, Pinellas County's property appraiser-elect.

Warren Weathers, Hillsborough County's chief deputy appraiser, said that Dubov is right and that his office also will look at how to gauge the effect of foreclosure sales on values. In Pasco County, Appraiser Mike Wells has already done so for this year's tax roll.

"Some of the Department of Revenue rules are for a normal market," Weathers said, "and this is not a normal market."

Dubov and Weathers have yet to come up with a method for weighing how the inclusion of foreclosure sales will effect homeowners' property tax bills.

It's complex and uncharted territory, they said. Next week, appraisers from across Florida are meeting in St. Petersburg, and Dubov said she plans to raise the issue.

"We have to do some gaming of this and see what it looks like," she said. "I just know we can't do business as usual."

But both she and Weathers agree one likely result is that homeowners in areas with lots of foreclosure sales whose homes are assessed near market value will see their property tax bills drop next year, assuming governments don't raise tax rates.

In Pasco, Property Appraiser Wells said that in the spring he told his staff to consider foreclosure sales when developing the current tax roll. Wells said he did so after talking with his staff, his attorney and few others. He has yet to hear complaints from the state, or from homeowners who saw their tax bills dip.

"I believe it allowed me to come up with a fairer picture of the market, and what is going on out there," Wells said.

Jim Overton, Duval County property appraiser and president of the Florida Association of Property Appraisers, said he was unaware of Wells' move but isn't surprised others are eager to follow. The issue was discussed recently among appraisers at the national level, he said, and will be taken up by his association in coming months.

According to Dubov, Gov. Charlie Crist's office has asked the Department of Revenue for a review of the matter. Other than to say two or three appraisers have been in contact about the issue, the department declined to discuss what Dubov, Weathers and others plan.
Hernando County Property Appraiser Alvin Mazourek said he also was considering how to incorporate distressed sales into next year's values.

Though some homeowners may see their tax burden lift a bit, the decision by property appraisers to include foreclosure sales in their market analysis could reduce the amount of revenue going to already strapped local governments.

Incoming Pinellas administrator Bob LaSala said that in such a precarious economy it makes sense for appraisers to innovate and change their practices, even if it makes his job tougher.
"I wouldn't begrudge the home­owner who is struggling with a tax bill a solution that might make sense in this broader picture just because I've got constraints as well," LaSala said.

Florida is second only to California in the number of struggling borrowers who have lost their homes to lenders. In Tampa Bay area counties last month, 26 percent of real estate deals involved banks selling off properties reclaimed through foreclosure. Another 9 percent were "short sales," where borrowers behind on mortgages settle with lenders for less than what's owed.

That means in October more than one in three deals were distressed. The figure in September was 28 percent.

By comparison, in September 2007, 6 percent of sales were distressed; in September 2006, just 1 percent.

Peter K. Murphy, a real estate consultant with Home Encounter in Ybor City who provided the data on distressed deals, said that last month banks were selling foreclosed homes for 60 percent of market value.

Federal grants to be used to buy up South Florida foreclosures

South Florida governments are gearing up to spend more than $161 million in federal grant money to stimulate the housing market.

The buyer of that ramshackle foreclosure down the street just might be the government.
In coming months, South Florida cities and counties will be armed with more than $161 million in new federal grant money and a mandate to stabilize falling home values and decay in neighborhoods hardest hit by the real estate downturn.

Their spending plans include buying and rehabbing, reselling or renting out property repossessed by banks through foreclosure, a first for many small municipalities without housing authorities. Cities may also use money to develop new projects and tear down neighborhood eyesores.

Miami Gardens' plans include using homes to help young adults aging out of foster care. Miramar wants to give financial aid to middle-income home buyers
.
Hialeah wants to build more $300-a-month rental units. And Miami-Dade plans to use some money on the once fraud-wracked redevelopment of the Scott Carver housing project in Liberty City.

The funds represent South Florida's share of a $3.9 billion pot offered as part of a larger housing stimulus plan passed by Congress this summer.

The stimulus money comes as the state's housing market continues to slog along under historic foreclosure rates, unsold homes and growing economic malaise. In all, Florida will get $541 million, with $91 million going to state government.

When it comes to house hunting, governments don't lack for choices. As of Oct. 31, banks owned 10,725 homes in Miami-Dade and 10,234 in Broward, according to RealtyTrac data released Thursday.

And foreclosures keep rising: In October, foreclosures were up 53 percent in Broward and 97 percent in Miami-Dade over a year ago, RealtyTrac reported. The figures mean one of every 114 homes in Broward is either headed into foreclosure or already bank-owned. In Miami-Dade, it's one of every 93 homes.

Lenders have already begun knocking on doors at Miami-Dade agencies, county officials said. The county will get $62.2 million, the largest share of any locality in the country.
''This is not a whole lot of money in reality, but I think there will be a whole broad spectrum of people we can help. The magnitude of the problem is really huge,'' said Robert Cruz, chief economist for Miami-Dade.

NEW UNITS

Housing administrators' tentative plan is to spend almost $37 million buying bank-owned single- and multi-family properties, hoping to add roughly 342 new units to its affordable housing stock. The county now owns 10,000 units. There are 71,000 people on the waiting list for those as well as privately owned units through Section 8.

The rest will be spent demolishing 80 blighted structures as well as on homeownership counseling and mortgage assistance for about 130 families. The county will leverage nearly $9 million for infrastructure needed to complete work on the Scott Carver HOPE VI housing project, which will help bring 236 new units online when finished. In all, they expect to directly aid 1,500 families.

The County Commission will vote on the plan next Thursday. Broward approved its plan Thursday.

FORMULA USED

To decide how much money communities get, the U.S. Department of Housing and Urban Development used a formula accounting for the number of subprime loans, bank-owned homes and defaults. How they use the money is largely up to them, provided they create more affordable housing for low- to middle-income families.

''The fact you got a large amount indicates the size of the problem in your community,'' said Dan Rosemond, Miami Gardens' community development director. The city will get $6.86 million it will use to buy 25 homes. Code enforcement officers have already identified 25 that will be demolished.

Four other Miami-Dade cities qualified -- Miami, North Miami, Hialeah and Homestead, widely known for their foreclosure problems.

Other municipalities could get money from the state's entitlement.

Thirteen jurisdictions in Broward will get money, including the county's $17.76 million. Miramar gets more than $9 million, which it plans to use to help an estimated 75 new buyers with financing and grants.

Some government administrators who are entitled to far less question how much good the money can do.

North Miami housing manager Tom Calderon said with only $2.84 million, the city may be able to buy 12 bank-owned foreclosures among the roughly 1,000 within its boundaries.
Calderon said ideally the money would be used to target areas with the most foreclosures. Studies have shown a single foreclosure can lower the values of all homes within an eighth of a mile by 0.9 percent. The impact is amplified as the number of foreclosures on the block increase. But in North Miami they are everywhere, Calderon said.

''The money is for neighborhood stabilization, but how do you stabilize an area when there might be three or four on the same block and you can only buy one or two? You still have the vacant homes,'' Calderon said.

CHALLENGES

Cities face other challenges in using the money as prescribed, such as suddenly bearing the burden of owning and managing property.

''The city of Homestead does not want to be a landlord, I'll tell you that right now,'' said Laurin Yoder, the city's community development manager. Homestead was considering hiring a property management company or deeding their foreclosures to a nonprofit that would maintain the homes until they could be sold.

Miami Gardens plans to hire real estate agents to do the negotiating.

Cities will be responsible for their homes' upkeep, property taxes and insurance. Another challenge: The homes must be sold to income-eligible buyers who intend to live there. The sluggish housing market and credit crunch could make that difficult.

''Are we going to get banks to loan to people? Because money is still tight. And we have to find qualified individuals,'' said Dan Keefe, assistant to the Plantation mayor.

To line up homes with potential buyers, Keefe said Plantation would likely start by reaching out to city employees first. North Miami plans on doing the same, since financial help can be offered to households making 120 percent of the area's median income, or up to $72,350 for a family of four. The income limits are high enough to help people like police officers and teachers, Calderon said. In Broward, families of four making as much as $85,440 are eligible.
EARNINGS OBSTACLE

A separate obstacle comes, though, in making sure 25 percent of city grant money goes to families of four earning less than roughly $30,000 in Miami-Dade and roughly $36,000 in Broward.

''It's difficult to put a family of four making $30,000 into a home because even if you gift it to them, there are taxes, insurance and the regular cost of owning a home,'' said Homestead's Yoder. ``We're not exactly sure how we're going to make it work.''

Hialeah's solution is to use its entire $5.38 million to build a rental complex similar to a recently finished 300-unit affordable housing project on Okeechobee Road, said Fred Marinelli, director of the city's grants and human services department.

''We would rather get it close to the people, rather than turn around and give it to the banks,'' Marinelli said, adding the grant allows the city to develop these units on Hialeah-owned land. He expects to build around 45 units that will be leased to residents on the county's affordable housing waiting list for $300 a month.

HUD RULES

Cities that have decided to buy, though, are also concerned about adhering to HUD rules requiring them to negotiate a 5 percent discount with lenders for each property and a 15 percent discount for all properties combined. Smaller cities, who may be able to buy only a handful of homes, wonder if lenders will cooperate.

''The county's $62 million is a lot different than our $7 million, and banks have a little more economy of scale in terms of trying to negotiate with the county,'' Miami Gardens' Rosemond said.

Of the many obstacles cities must navigate in spending the grant money, perhaps the most daunting is the time in which to get it all done. Local governments had six weeks to pull together their spending plans to meet a Dec. 1 deadline. After they get the green light, all the money must be obligated in 18 months and projects done in four years.

''The government expects us to act quickly, so we're not going to have time to create a new program because those need to be tested, and time is of the essence,'' said Gus Zambrano, Miramar's economic development director. The city will use a program that is already in place to distribute its $9.31 million in grants and loans to individuals who will buy foreclosures, in some cases sharing future profits with homeowners.

The biggest flaw Calderon of North Miami sees is that none of the grant money may be used to help people currently at risk of foreclosure, a point of confusion for many current homeowners.

''We're not allowed to use one penny for prevention,'' Calderon said, ``It's for neighborhood stabilization. But how do you stabilize a neighborhood better than making sure people stay in their homes?''

Is Help Finally on the Way?

FOR IMMEDIATE RELEASE

November 11, 2008

Statement of FHFA Director
James B. Lockhart

Welcome. I am pleased that you are able to be here. I would also like to welcome Brian Montgomery, HUD Assistant Secretary and FHA Commissioner; Neel Kashkari, Interim Assistant Treasury Secretary for Financial Stability; Faith Schwartz, Executive Director of HOPE NOW and Michael Heid, Wells Fargo. As a Navy veteran, I do not like interfering with your Veterans Day, but as you all know there is a battle going on in the housing market.

As housing prices have fallen, delinquencies on mortgages have tripled, not just for subprime and Alt-A, but also for prime mortgages. Foreclosures have increased almost 150% from two years ago. Foreclosures hurt families, their neighbors, whole communities and the overall housing market. We need to stop this downward spiral.

Today we are announcing a major program designed to greatly reduce preventable foreclosures with a simplified, streamlined loan modification program to get struggling homeowners into mortgages that they can afford. It is an achievable goal if homeowners, banks, mortgage servicers, investors, Fannie Mae and Freddie Mac all work together.

As the regulator of Fannie Mae, Freddie Mac and the Federal Home Loan Banks (FHLBanks), the Federal Housing Finance Agency (FHFA) strongly supports the Enterprises’ leadership role in setting industry standards for assisting "at risk" borrowers who could lose their homes to foreclosure. This streamlined modification program with uniform eligibility requirements will be supported by a consistent, efficient process approved by key industry participants. This program resulted from a unified effort among the Enterprises, Hope Now and its twenty-seven servicer partners, the Department of the Treasury, the Federal Housing Administration (FHA) and FHFA.

In developing this program, we have drawn on the FDIC’s experience and assistance, and have greatly benefited from the FDIC’s input.

Fannie Mae and Freddie Mac own or guarantee almost 31 million mortgages, about 58% of all single family mortgages. Although these mortgages only represent 20% of serious delinquencies, I believe their leadership role combined with the many partners of HOPE NOW should spread this approach throughout the whole mortgage loan servicing business. The performance of private label mortgage backed securities that were sliced and diced and sold to investors is just the opposite of Fannie Mae’s and Freddie Mac’s. Private label securities represent less than 20% of the mortgages but 60% of the serious delinquencies. As the regulator of the housing GSEs that own over a quarter of a trillion dollars of private label securities, I ask the private label MBS servicers and investors to rapidly adopt this program as the industry standard. Not only will this streamlined program assist borrowers, but broad acceptance and effective implementation could stabilize communities and property values.

The program targets the highest risk borrower who has missed three payments or more, owns and occupies the property as a primary residence, and has not filed for bankruptcy. To be considered for the program, a seriously delinquent borrower should contact his or her servicer and provide the requested income information. The program creates a fast-track method of getting troubled borrowers to an affordable monthly payment where "affordable" is defined as a first mortgage payment, including homeowner association dues, of no more than 38 percent of the household’s monthly gross income. This affordable payment will be achieved through a mix of reducing the mortgage interest rate, extending the life of the loan or even deferring payment on part of the principal. Servicers will have flexibility in the mix used to get there, but the goal is to create a more affordable payment.

If the servicer is unable to create an affordable payment with this streamlined program, it will further evaluate the borrower’s situation through a customized process. The key to success is the borrower’s ongoing cooperation and communication with the servicer. Borrowers shouldn’t fear working with servicers. They have dedicated personnel who are experienced in working with borrowers who are struggling with finances, but who are eager to keep their homes.
The streamlined modification program complements existing loss mitigation programs. We expect that it could significantly increase the number of modifications completed. Borrowers who participate will be strongly encouraged to seek financial counseling through HUD-approved agencies – particularly, if the default is a result of being overextended or due to financial mismanagement.

Fannie Mae and Freddie Mac will soon issue specific guidance to their servicers implementing this program requiring implementation by December 15th. To encourage participation, servicers will receive a fixed payment of $800 for each loan modified through this program.
Troubled borrowers eligible for this program have already experienced significant erosion in their credit scores, making them unlikely to obtain mortgage credit, through typical means. Many also lack equity in their homes. This streamlined program is meant to reach as many of these borrowers as possible to give them a chance to save their homes and begin restoring their credit. The borrowers’ ultimate obligation to repay his or her current mortgage does not change.

Regrettably, there are many American families in this situation. This unified effort on the part of the Fannie Mae, Freddie Mac, private lenders and servicers, and the Federal agencies represented here is a bold attempt to move quickly in defining a nationwide program that can quickly and easily reach many of these troubled borrowers, thereby stabilizing those families and the communities and neighborhoods in which they live.

QUESTIONS AND ANSWERS ON THE STREAMLINED MODIFICATION PROGRAM

Q: What is a modification?
A: A modification is a change to the original mortgage terms. It may include a change to the product (an ARM to a fixed rate mortgage), interest rate, amortization term and maturity date, and/or unpaid principal balance. The change/s is made to create a more affordable payment for the borrower.

Q: What is a streamlined modification?
A: A streamlined modification is a modification that requires less documentation and less processing. In this case, the streamlined modification seeks to create a monthly mortgage payment that is sustainable for troubled borrowers by targeting a benchmark ratio of housing payment to monthly gross household income.

Q: What is the benchmark ratio?
A: This is the first time the industry has agreed on an industry standard. The benchmark ratio for calculating the affordable payment is 38 percent of monthly gross household income. Once the affordable payment is determined, there are several steps the servicer can take to create that payment – extending the term, reducing the interest rate, and forbearing interest. In the event that the affordable payment is still beyond the borrower’s means, the borrower’s situation will be reviewed on a case-by-case basis using a cash flow budget.

Q: Who participated in creating the Streamlined Modification Program? Is this identical to the FDIC’s IndyMac protocol?
A: This program resulted from a unified effort among the Enterprises, Hope Now and its twenty-seven servicer partners, Treasury, the Federal Housing Administration (FHA) and FHFA. In addition, we’ve drawn on the FDIC’s experience and assistance from developing the IndyMac streamlined approach and have greatly benefited from the FDIC’s input and example. To accommodate the need for more flexibility among a larger number of servicers, the Streamlined Modification Program does differ from the IndyMac model in a few areas. However, it uses the same fundamental tools to achieve the same affordability target.

Q: How is this different from Citi’s announcement today?
A: This effort compliments efforts of those banks that have mortgage portfolios and can reach out directly to borrowers for loans they own and service. This is a significant announcement in that Fannie Mae, Freddie Mac and FHFA have mutually agreed as major investors to a single streamlined modification program with a common affordability standard. The majority of HOPE NOW banks who own portfolio mortgages will adopt or offer programs as or more aggressive then what’s being announced.

Q: What is the role of HOPE NOW?
A: HOPE NOW has the leading servicers as members. HOPE NOW collaborated with Fannie Mae, Freddie Mac and FHFA on arriving at a standard that is consistent and addresses the capacity challenge for servicers dealing with increased delinquencies. This will take on-going work to implement for servicers. We anticipate this being implemented by December 15th.

Q: Why is there not a foreclosure moratorium?
A: Any borrower who qualifies and responds to the servicer will be given the opportunity to provide the required information for consideration. If necessary, the scheduling of a foreclosure sale will be suspended. A suspension requires that the borrower maintain contact, desires to keep his or her home, has the ability to make the affordable payment offered, and promptly respond to requests for information and signed documents.

Q: Why is it necessary?
A: With the rise in serious delinquencies and increasing number of loans in foreclosure, this program will help borrowers who have missed three or more payments, but want to keep their homes. Because the eligibility requirements and process are streamlined and consistent, the program will allow servicers to reach more borrowers more quickly.

Q: Who is eligible?
A: The highest risk borrower, who has missed three payments or more, owns and occupies the property as a primary residence, and has not filed bankruptcy. The loan is a Freddie Mac, Fannie Mae or portfolio loan with participating investors. To qualify for the streamlined modification, the borrower must certify that he or she experienced a hardship or change in financial circumstances, and did not purposely default to obtain a modification.

Q: Why must the borrower be 90 days delinquent? Why not earlier in the delinquency cycle?
A: This is a streamlined solution targeted to reach the most at risk borrower. For borrowers who do not qualify, other solutions are available. This in no way substitutes for the meaningful efforts by all servicers and investors that are currently in place. The 212,000 workouts reported by HOPE NOIW in September are testimony to that fact. We will continue to see those efforts produce meaningful results.

Q: How many people will this help?
A: While difficult to assess, it is clear delinquencies are predicted to continue well into 2009. Foreclosure estimates are significant. Having a streamlined approach will assist many borrowers who default and more quickly. We estimate this will ultimately help thousands of borrowers.

Q: What if a borrower is not eligible but still wants to save his/her home?
A: If the servicer is unable to create an affordable payment with this streamlined program, it will further evaluate the borrower’s situation via the standard process. The standard modification program requires a personal cash-flow budget customized to the borrower’s situation.
Q: How do borrowers apply?
A: To be considered for the program, a seriously delinquent borrower should contact his or her servicer and provide the requested information – monthly gross household income, association dues and fees, and a hardship statement.

Q: How do borrowers complete the modification process?
A: Upon receiving the Modification Agreement from the servicer, the borrower signs it and returns it with the 1st payment at the modified terms along with income verification. Once the borrower makes three payments at the modified terms and the account is current as of day 90 of the modified plan, the modification is complete.

Q: What are the goals of the program?
First, we hope that other industry participants -- portfolio lenders and representatives of private label security investors – readily and rapidly adopt this program as the industry standard. Second, the program could increase the number of modifications significantly. Third, broad acceptance and effective implementation could stabilize communities and property values.

Q: When will servicers start offering this program?
A: We expect that by December 15th, servicers will be positioned to work with eligible borrowers.

Q: Will servicers get more details on this program?
A: Both Fannie Mae and Freddie Mac will be communicating directly with their approved servicers through an announcement, letter or bulletin.

Homeowners Cling to False Hope About Home Prices

The housing market may have bust, but many homeowners are still living in a bubble.
Despite dismal housing headlines and reports showing falling prices nationwide, owners in some once-hot areas still believe their home is gaining value or at least holding its own. And by hanging onto too-high expectations, sellers are unwittingly keeping the market from finding a bottom.

Real estate professionals across the country are reporting difficulty convincing sellers the true market value of their homes.

"It's like pulling teeth in this market," said Twyla Rist of Reece & Nichols Realtors in Kansas City, where prices are off between 7 percent and 15 percent. "Even with everything being said, you still have people that think my house is better than everybody else's."

A recent Coldwell Banker report showed that more than three-quarters of its real estate agents surveyed said most sellers have unrealistic initial listing prices for their homes.

Likewise, an unscientific study released last week by real-estate Web site Zillow.com found that half of homeowners polled think their home's price has increased or stayed the same in the past year.

"We expected people to get a little more in touch with reality especially over the summer, because you couldn't turn on the TV or read the newspapers without seeing that home prices are falling," said Amy Bohutinsky, a spokeswoman for Zillow.com. "It was very surprising to see this kind of disconnect."

In fact, the median sales price of an existing home dropped 9 percent to $191,600 in September from a year ago, according to the National Association of Realtors.

It took John Cicero and his wife an appraisal, some convincing by their real estate agent and some hard-to-swallow facts to get them to lower the $525,000 listing price on their five-bedroom home in Valrico, Fla. They closed two weeks ago for about $380,000.

"We didn't really understand the severity of the market," Cicero said. "We lost close to $100,000 in equity so we were walking away from real money."

They built the stucco home four years ago for $380,000 and poured more than $80,000 into it, putting in hardwood floors, granite countertops, ceiling fans, blinds, drapes and a built-in surround-sound stereo system. They also expanded the deck by the pool, turning it into what Cicero called an "executive entertainment area."

"You think you have this wonderful home and people will want to buy it," he said, "but you're wrong."

Dan Ariely, a behavioral Economics professor at Duke University's Fuqua School of Business and author of "Predictably Irrational," said the "better-than-average" effect is at play. And knowing your next-door neighbors sold their house for $500,000 makes it even more imperative for a homeowner to top that price.

"We feel that we're better than other people. We're unique. We're special," he said. "It stands to reason that our houses are also special."

The attachment to a house only intensifies the more a homeowner personalizes it, creating an extension of themselves.

"The moment we invest in something, we fall in love with it," Ariely said, which applies to something as sentimental as children or as trivial as origami.

That puts real estate agents in a precarious position of pricing a house to sell, but not insulting the homeowner by recommending a lower asking price. To a homeowner, a low, but realistic, listing price is "like someone calling your kids ugly," Ariely said with a laugh.

Nancy Batchelor, a real estate agent at Esslinger Woooten & Maxwell Realtors in Miami, says she usually agrees to list the owner's asking price as long as they can reevaluate the price in 30 days if the house doesn't sell.

"I would like to believe their house is different, but I also don't want to do them a disservice," Batchelor said.

Joni Herndon, an appraiser in Tampa, Fla., said real estate agents are calling her in to help homeowners grasp the reality of their home's value. Herndon frequently fields questions from disappointed homeowners after an appraisal, and has to explain how broadly the market is declining and why what a neighbor got two months before for his house doesn't apply anymore.
"But sometimes you just can't get through to people," she said.

She said homeowners who bought newly built homes at the height of the boom are the most stubborn because they're trying to get back every penny they spent on customized changes.
One homeowner Herndon did an appraisal for refused to lower her listing price for the third time, insisting that such features like a raised roof and more space between two windows in an upstairs bonus room set her house apart from others just like it.

"It's the mine is better than yours mentality," Herndon said.

The homeowner originally asked the builder to move the windows another foot apart and raise the roof by 12 inches so the wall could fit her big-screen television. She also spent $15,000 in extra landscaping and exterior lighting, and $2,900 on designer fans, Herndon said.

"You could have put $1,000 worth of fans in the house and blown just as much air," Herndon said. "Owners are very concerned about how much they paid for particular changes, but buyers out there don't value them."

Herndon appraised the house, also in Valrico, Fla., at $430,000. The seller put it on the market in April at $500,000, and cut the asking price to $469,500 in July. The home is still on the market, and the seller declined to be interviewed.

The market would bottom out sooner if sellers weren't so stubborn and didn't keep prices artificially high, Arielly said.

Homeowners can't stand taking a loss on their properties, yet keeping their home on the market at an inflated price could wind up costing them more. Homeowners need to look at the larger financial picture, Ariely said, and determine how much there is to gain or lose by keeping a home on the sales block longer.

Real estate agents press this point on their clients, saying no one wants to buy the most expensive house on the block. After the first reduction in listing price, a psychological barrier, subsequent cuts come easier, most agents say.

"Like any type of loss, there's a grieving process," Batchelor said. "First, they're in denial, then angry, then depressed and hopeless. But then they eventually move on if they want to sell it."

Was There a Loan It Didn’t Like?

Fair Game
Was There a Loan It Didn’t Like?
By Gretchen Morgenson of the New York Times

As a senior mortgage underwriter, Keysha Cooper was proud of her ability to spot fraud and other problems in a loan application. A decade of vetting mortgage documents had taught her plenty, she says.

But as a senior mortgage underwriter at Washington Mutual during the late, great mortgage boom, Ms. Cooper says she found herself in a vise. Brokers squeezed her from one side, her superiors from the other, she says, and both pressured her to approve loans, no matter what.

“At WaMu it wasn’t about the quality of the loans; it was about the numbers,” Ms. Cooper says. “They didn’t care if we were giving loans to people that didn’t qualify. Instead, it was how many loans did you guys close and fund?”

Ms. Cooper, 35, was laid off a year ago and is still unemployed. She came forward to discuss her experiences at the bank in order to help shareholders recover money from WaMu executives.
Ms. Cooper is one of 89 employees whose stories fill a voluminous complaint filed against officers of the company by the Ontario Teachers’ Pension Plan board, a big shareholder. Topping the list of defendants is Kerry K. Killinger, the WaMu chief executive who was ousted in mid-September.

WaMu was seized by federal regulators in late September, the biggest bank failure in the nation’s history. It was sold to JPMorgan Chase for $1.9 billion.

The shareholder complaint depicts WaMu’s mortgage lending operation as a boiler room where volume was paramount and questionable loans were pushed through because they were more profitable to the company.

When underwriters refused to approve dubious loans, they were punished, she says.
MS. COOPER started at WaMu in 2003 and lasted three and a half years. At first, she was allowed to do her job, she says. In February 2007, though, the pressure became intense. WaMu executives told employees they were not making enough loans and had to get their numbers up, she says.

“They started giving loan officers free trips if they closed so many loans, fly them to Hawaii for a month,” Ms. Cooper recalls. “One of my account reps went to Jamaica for a month because he closed $3.5 million in loans that month.”

Although Ms. Cooper couldn’t see it, the wheels were already coming off the subprime bus.
“If a loan came from a top loan officer, they didn’t care what the situation was, you had to make that loan work,” she says. “You were like a bad person if you declined a loan.”

One loan file was filled with so many discrepancies that she felt certain it involved mortgage fraud. She turned the loan down, she says, only to be scolded by her supervisor.
“She told me, ‘This broker has closed over $1 million with us and there is no reason you cannot make this loan work,’ ” Ms. Cooper says. “I explained to her the loan was not good at all, but she said I had to sign it.”

The argument did not end there, however. Ms. Cooper says her immediate boss complained to the team manager about the loan rejection and asked that Ms. Cooper be “written up,” with a formal letter of complaint placed in her personnel file.

Ms. Cooper said the team manager told her to “restructure” the loan to make it work. “I said, how can you restructure fraud? This is a fraudulent loan,” she recalls.

Ms. Cooper says that her bosses placed her on probation for 30 days for refusing to approve the loan and that her team manager signed off on the loan.

Four months later, the loan was in default, she says. The borrower had not made a single payment. “They tried to hang it on me,” Ms. Cooper said, “but I said, ‘No, I put in the system that I am not approving this loan.’ ”

Brokers often tried to bribe Ms. Cooper to approve loans, she says. One offered to pay $900 to send her son to football summer boot camp if she would approve a loan that had been declined by a host of other lenders. “I told him no and not to disrespect me like that again,” Ms. Cooper says.

Hidden fees meant brokers could easily make between $20,000 and $40,000 on a $500,000 loan, Ms. Cooper says.

WaMu was allowing brokers to get 6 to 8 percent off one loan,” she says. “If I had a loan where the borrower was already tight and then I saw the broker is getting $10,000 or $20,000, I would cut their fees back. They would get so upset with me.”

Ms. Cooper says that loans she turned down were often approved by her superiors. One in particular came back to haunt WaMu.

Vetting a loan one day, Ms. Cooper says she became suspicious when a photograph of the house being bought showed one street address while documents deeper in the file showed a different address. She contacted the appraiser, and recalls that he said that he must have erred and that he would send her the correct documents.

“So then he sent me an appraisal with a picture of the same house but this time with the right number on it,” Ms. Cooper recalls. “I looked the address up in our system and could not find it. I called the appraiser and said, ‘Please investigate.’ ”

The appraiser came back, reporting that a visit to the California property had found everything in order and in agreement with the original appraisal. “I was so for sure that it was fraud I wanted to get on an airplane,” Ms. Cooper says.

The $800,000 loan was approved, but not by Ms. Cooper. Six months later, it defaulted, she says. “When they went to foreclose on the house, they found it was an empty lot,” she recalls. “I remember clear as day this manager comes over to me and asks, ‘Do you remember this loan?’ I knew just what she was talking about.”

Rejecting loan after loan, however, gave her battle fatigue. “The more you fight, the more you get in trouble,” she says. She was written up three or four times at WaMu.

After WaMu’s mortgage lending unit laid her off, she applied for work in its retail banking division. She was turned down, she suspects, because of the critical letters in her personnel file.
Ms. Cooper’s biggest regret, she says, is that she did not reject more loans. “I swear 60 percent of the loans I approved I was made to,” she says. “If I could get everyone’s name, I would write them apology letters.”

CHAD JOHNSON, a partner at Bernstein, Litowitz Berger & Grossmann, is lead counsel for shareholders in the suit. He said: “Killinger pocketed tens of millions of dollars from WaMu, while investors were left with worthless stock.” With WaMu gone, he added, “it is all the more important that Killinger and his co-defendants are held accountable.”

The lawyer representing WaMu and Mr. Killinger did not return a phone call seeking comment.
Ms. Cooper hopes to return to the mortgage business soon. “I loved underwriting because it’s about being able to put a person in their dream home,” she says. “But messing these borrowers around was wrong.”