By Dong-Phuong Nguyen, St. Petersburg Times, Tuesday, December 30, 2008
NEW TAMPA — Homeowners association fees are what keep deed-restricted communities from falling into disrepair. They pay for landscaping and upkeep, security and gym equipment.
But what happens when more and more homes go into foreclosure or enter into short sales, or when paying the fees becomes a low priority for struggling families?
The rest of the homeowners must cover the costs. And it's not just the shortfall they need to make up — a litany of items goes with it.
For a more detailed look at how this growing problem is affecting communities, consider the 1,100 households in Live Oak Preserve in New Tampa, where more than $500,000 in assessments have gone uncollected.
Recently, the homeowners association board approved a 2009 budget that increases fees by more than 40 percent — to $163.79 per household per month — to cover the bad debt and items associated with it, such as stamps and legal bills.
"These are very bad times," Ellen De Haan, the board's attorney, told the more than 60 residents at the budget meeting. "And it's happening everywhere."
Residents must now shell out almost $2,000 a year in assessments — about $200 more than last year — mainly because of foreclosures and short sales. The fees will cover such items as:
• $22,500 for postage and supplies that the association is anticipating it will need for mailings and certified letters to collect the fees. In the first nine months of this year, it spent $16,700 — $7,000 more than what was budgeted.
• $42,000 in legal fees because lawyers will be busy drafting the letters to collect the fees. The board had budgeted $5,900 this year and ended up spending $34,700 through September.
• $250,000 in anticipated uncollected fees.
The board also decided to make the assessments due monthly instead of quarterly, to make the smaller, more frequent payments appear less painful.
"It's pretty steep for some people to pay on a quarterly basis," said board chairman Rick Feather, adding that late fees will not be assessed during the first quarter of 2009.
Feather also emphasized that several contracts, such as for lawn and landscaping work, were renegotiated, bringing some costs down.
But one issue that has rankled residents in Live Oak is a bulk cable deal between the developer and a cable company that charges the community $1.1-million for cable — including cable for the unoccupied homes.
Many residents who attended the meeting blasted Feather for his role in the agreement, asking for ways to get out of the contract. The contract does not expire for 11 more years. Some residents have taken their fight to the federal level, meeting with Federal Communications Commission officials earlier this year for help. The FCC has not made a decision.
"If our neighbors need food, we will gladly step up and give it to them," said resident John Cutter. "We just don't want to pay for their cable."
Another resident, Realtor Martha David, said she thought she knew what she was getting into when she moved into Live Oak, but she feels she was misled.
"(The developer) presented to us that we would be saving money and have all these extra features,' " she said. Today, 25 houses in her 125-home village within Live Oak are vacant. "Now we're paying for people that have foreclosed and people who have walked away."
De Haan, the board attorney, likened living in a deed-restricted community to establishing a business with others.
"You went into a full equity partnership with everybody who lives in this community," she said. "As homeowners, you have to make it up. You're all partners in this business."
Comment: This situation is also becoming a major issue for the condominium market as foreclosures are running well above the single family residential market.
Tuesday, December 30, 2008
Thursday, December 25, 2008
Once Trusted Mortgage Pioneers, Now Pariahs
By MICHAEL MOSS and GERALDINE FABRIKANT
Published: December 24, 2008 - New York Times
“We are team-oriented, highly ethical, extremely competitive, profit-oriented, risk-averse, consumer-focused, and we try as much as possible to squeeze out any ego. Hubris is the beginning of the end.” — Herbert Sandler, June 2005
SAN FRANCISCO — Herbert Sandler, the founder of the Center for Responsible Lending, is standing in his bayfront office watching a DVD that trains brokers to pitch mortgages by extolling the glories of the real estate boom.
The video reeks of hucksterism, and it infuriates Mr. Sandler.
“I would not have approved that!” he declares. “I don’t think we should be selling our loans based on home prices continuing to go up.”
But the DVD was produced in 2005 by a mortgage lender that Mr. Sandler and his wife, Marion, ran at the time: World Savings Bank. And the video was a small part of a broad and aggressive effort by their company to market risky loans at the height of the housing bubble.
The Sandlers long viewed themselves — and were viewed by many others — as the mortgage industry’s model citizens. Now they too have been swept into the maelstrom surrounding who is to blame for the housing bust and the growing number of home foreclosures.
Once invited by Congress to testify about good lending practices, the Sandlers were recently parodied on “Saturday Night Live” as greedy bankers who handily sold their bank — and pocketed $2.3 billion in shares and cash — in 2006 before many of their loans began to sour.
Last month, the United States attorney’s office in San Francisco announced dual inquiries into whether World Savings engaged in predatory lending practices or misled investors about its financial well-being. And the bank has been sued by numerous borrowers who claim they were misled into taking out mortgages they could not afford.
At the center of the controversy is an exotic but popular mortgage the Sandlers pioneered that helped generate billions of dollars of revenue at their bank.
Known as an option ARM — and named “Pick-A-Pay” by World Savings — it is now seen by an array of housing analysts and regulators as the Typhoid Mary of the mortgage industry.
Pick-A-Pay allowed homeowners to make monthly mortgage payments that were so small they did not cover their interest charges. That meant the total principal owed would actually grow over time, not shrink as is normally the case.
Now held by an estimated two million homeowners, the option adjustable rate mortgage will be at the forefront of a further wave of homeowner distress that could greatly delay or even derail an economic recovery, mortgage industry analysts say.
The Wachovia Corporation, which bought the Sandlers’ bank two years ago, was so battered by the souring portfolio of World Savings that it began writing off losses now projected at tens of billions of dollars and eventually stopped offering option ARMs.
Through it all, the Sandlers have maintained they did nothing wrong beyond misjudging the real estate bubble.
“I didn’t mislead anybody, and to the best of my knowledge, our company didn’t, though there may have been an isolated case here and there,” Mr. Sandler said. “If home prices hadn’t declined by 50 percent, nobody would be raising these questions.”
Mr. Sandler also finds it incredible that borrowers feel victimized by Pick-A-Pay. “All of a sudden their home is worth half of what it was, and they say they didn’t know.”
Yet the Sandlers embraced practices like the use of independent brokers who used questionable methods to reel in borrowers. These and other practices, critics contend, undermined the conservative lending practices that the Sandlers built their reputations upon.
“This product is the most destructive financial weapon ever deployed against the American middle class,” said William J. Purdy III, a housing lawyer in California who is representing elderly World Savings customers struggling to repay their loans. “People who have this loan are now trapped, and they can’t get another loan.”
The Birth of Pick-A-Pay
Marion Sandler, now 78, was a Wall Street analyst in the early 1960s when she and her husband decided to buy a bank that took only savings deposits and made mortgage loans — a thrift, or savings and loan, in banking shorthand — and run it themselves.
Mr. Sandler, now 77, was a lawyer in Manhattan who grew up poor on the Lower East Side, the son of a compulsive gambler whose earnings were consumed by loan sharks.
The Sandlers searched for a thrift in the sizzling California market and paid $3.8 million in 1963 for an Oakland enterprise called Golden West Savings and Loan Association, which later became the parent company of World Savings. It had a main office and one branch.
When Reagan era deregulation arrived, the Sandlers and two other competitors were able to market option ARMs for the first time in 1981. Before that, lawmakers balked at the loan because of its potential peril to borrowers.
World Savings initially attracted borrowers whose incomes fluctuated, like professionals with big year-end bonuses. In the recent housing boom, when World Savings started calling the loan Pick-A-Pay, they began marketing it to a much broader audience, including people with financial troubles, like deeply indebted blue-collar workers.
As the entire thrift industry soared after deregulation, the Sandlers’ business also took off. They avoided financial problems by doing things like scrutinizing borrowers’ incomes to make sure loans were manageable and performing astute appraisals so the size of a mortgage was in line with the value of a home.
“Our protection was our total underwriting of the loan,” Mr. Sandler said. “From scratch.”
When many of the Sandlers’ competitors in the thrift industry later began collapsing under the weight of bad loans and investments, Congress and the media invited the couple to speak about the proper way to do business.
“The deregulatory situation attracted bums, charlatans, crooks, phonies, con men,” Mr. Sandler told an ABC News program in 1990.
The Sandlers also held onto World Savings’ loans rather than selling them off to Wall Street to be repackaged as securities. They say this made them more alert to risky borrowers than were lenders who sold off their loans.
When foreclosures occurred, World Savings executives would drive to the house to see if they had made mistakes appraising the property or underwriting the loan. “We called these the van tours,” Mr. Sandler said. “And we would say, ‘O.K., have we done anything wrong here?’ ”
More Philanthropic Work
As the Sandlers’ wealth increased, so did their philanthropy. Over the years, they financed scientific research and groups like Human Rights Watch and the American Civil Liberties Union. More recently they founded and financed ProPublica, a nonprofit investigative journalism enterprise that has collaborated with The New York Times on coverage and a news archive. Its 14-member advisory board includes two top New York Times Company editors.
The Sandlers’ giving intersected most directly with their business interests in 2002 when they helped create an advocacy group for low-income borrowers called the Center for Responsible Lending.
The center was the successor to a smaller organization in North Carolina, whose director, Martin Eakes, had helped the elderly and minorities avoid predatory banking practices.
“I said, ‘Isn’t that incredible what he is doing?’ ” Mr. Sandler recalled. “I said to Martin, ‘What would it take to do what you do on a national scale?’ ”
Mr. Eakes, who became the center’s executive director, had also just helped secure a new mortgage lending law in North Carolina that prohibited, among other things, the use of prepayment penalties.
“I hated prepayment penalties,” Mr. Eakes recalled, noting that such charges make it hard for cash-poor borrowers to refinance a loan for one with more manageable terms.
While Mr. Sandler supported the center’s antipredatory goals, he disagreed with Mr. Eakes’s position on prepayment penalties and sought to change his mind. Mr. Eakes says the Sandlers convinced him to drop his opposition to prepayment penalties, “but they never dictated to us what to do.”
Mr. Sandler acknowledges that some lenders used the penalties to lock borrowers into “absolutely awful” loans. But he said his bank used the penalties to fend off unethical brokers who enticed borrowers with low-interest-rate loans that often had hidden fees.
“You have to understand how independent brokers work,” Mr. Sandler says. “They are the whores of the world.”
Despite that distaste, World Savings made extensive use of brokers. By 2006, they were generating some 60 percent of its loan business, he acknowledged. He said he was compelled to do so because of brokers were a dominant force in the mortgage industry.
As a check on the representations that brokers made to borrowers, World Savings sought to telephone applicants to ensure that they understood the terms of their loan. These calls reached only about half of the borrowers, however, according to a former World Savings executive. Mr. Sandler did not dispute that point.
Customer complaints that an unethical broker had misrepresented the terms of World Savings loans is at the heart of a lawsuit filed against the bank and others in Alameda County, Calif. The broker was sentenced to a year in prison for misleading at least 90 World Savings borrowers.
Mr. Sandler points out that the company was itself a victim of this broker, that it cooperated fully with authorities, and that it was not charged with any wrongdoing.
Others have also raised questions about how carefully World Savings disclosed lending terms to its borrowers.
In August, a federal judge in South Carolina ruled that World Savings had violated the federal Truth in Lending Act by telling borrowers that choosing to make minimum monthly payments on Pick-A-Pay mortgages might cause their principal to grow — when in fact it certainly would occur.
Wachovia, which is defending the case, has appealed the ruling. Mr. Sandler said he was not familiar with this lawsuit, but generally, he says, “Wachovia’s legal defense is deficient.”
A Speedy Merger
By 2005, World Savings lending had started to slow, after more than quadrupling since 1998. The next year, Wachovia bought the bank in a hastily arranged deal. The Sandlers say they sold their firm at the top of the market because they were growing older and wanted to devote themselves to philanthropy.
Some current and former Wachovia officials say that the merger was agreed to in days and that it was impossible to conduct a thorough vetting of World Savings’ loans. Others say the portfolio was adequately scrutinized.
“Herb and his wife had run a tight ship,” said Robert Brown, a Wachovia board member. “There was not a huge concern about it because they had not had any delinquencies and foreclosures.”
Others were less sanguine. The creditworthiness of World Savings borrowers edged down from 2004 to 2006, according to Wachovia’s data. Over all, Pick-A-Pay borrowers had credit scores well below the industry average for traditional loans.
“I don’t think anyone thought a Pick-A-Pay product was a customer friendly product,” says a former Wachovia executive who requested anonymity to preserve professional relationships. “It is easy to mislead them.”
World Savings lending volume dipped again in 2006 shortly after the sale to Wachovia was initiated, according to the company’s federal filings.
This prompted World Savings to attract more borrowers by taking a step that some regulators were starting to frown upon, and which the company had been resisting for years: it allowed borrowers to make monthly payments based on an annual interest rate of just 1 percent. While World Savings continued to scrutinize borrowers’ ability to manage increased payments, the move to rock-bottom rates lured customers whose financial reliability was harder to verify.
Russell W. Kettell, a former chief financial officer of World Savings, says the merger created “pressure” for “a pretty good-sized increase in loan volume.”
Asked if Wachovia ordered World Savings to drop its rate, Mr. Kettell said, “No, but they wanted volume and wanted growth.”
A swift increase in option ARM lending had prompted federal regulators to weigh tougher controls on lending standards in 2005. Of the $238 billion in option ARM loans made nationally in 2005, World Savings issued about $52 billion, or more than one-fifth of the total.
Susan Schmidt Bies, a governor of the Federal Reserve System until last year, said the surge in volume caught regulators by surprise, and that she regrets not acting more quickly to protect borrowers because she believes that they could not understand the risky nature of option ARMs.
“When you get into people whose mortgage payments are taking half of their cash flow, they are in over their heads, and these loans should not have been sold to this customer base,” she said. “This makes me sick when I see this happening.”
In March 2006, two months before the Wachovia deal, Mr. Sandler wrote regulators and objected to several aspects of the new rules, including the regulator’s conclusion that option ARMS “were untested in a stress environment.”
He argued in the letter that World Savings had few loan losses in the recession of the early 1990s. Then again, the current financial crisis is far more severe than what occurred then — far more severe than anything the country has faced since the Great Depression.
By the third quarter of this year, Wachovia was projecting $26.1 billion of losses on a World Savings loan portfolio worth a total of about $124 billion. About 6.2 percent of the Pick-A-Pay loans were more than 90 days late, it said, compared with an industry average of 8 percent on option ARMs and 1 percent on Wachovia’s traditional loans.
Wells Fargo, which is now buying Wachovia, is more pessimistic: it expects losses of $36 billion on the loans unless efforts to stem foreclosures help rescue part of the portfolio. The losses caused analysts and others to reassess the Sandlers’ legacy.
After the “Saturday Night Live” skit, Paul Steiger, the former executive editor of The Wall Street Journal and the editor in chief of ProPublica, was among those who wrote to the show’s producer, Lorne Michaels, saying the Sandlers had been unfairly vilified. Mr. Michaels apologized for the skit (which suggested that the Sandlers “should be shot”) and removed it from NBC’s Web site.
Mr. Sandler says Wachovia did not work hard enough to help struggling borrowers, and that his loans became scapegoats for other problems at Wachovia. He remains confident that losses on its loans will not reach Wells Fargo’s projections.
He says World Savings was hit especially hard because it had made so many loans in volatile markets like inland California, but he disputes homeowner assertions that his option ARMs are at fault.
“We have not been able to identify one delinquency, much less a foreclosure, that is due to the product,” Mr. Sandler said, adding that “if home prices had not dropped, you wouldn’t see” a single article.
Over all, analysts expect the option ARM fallout to be brutal. Fitch Ratings, a leading credit rating agency, recently reported that payments on nearly half of the $200 billion worth of option ARMs it tracks will jump 63 percent in the next two years — causing mortgage delinquencies to rise sharply.
Mr. Sandler says that his loans are not in the pool that will become distressed in the next few years; he says they reset at a later date. He adds that were he not sure that the market would recover he would have sold his Wachovia stock at the time of the takeover. His charity has sold off much of its Wachovia stock, but he said he and his wife retain a substantial portion of their personal holdings.
Still, the Sandlers have their detractors.
“As the largest and most respected regulated institution providing option ARMs, I hold the Sandlers responsible because a large percentage of home borrowers — but not all — should have been advised that it was in their best interest to have a fixed-rate mortgage,” said Robert Gnaizda, general counsel for the Greenlining Institute, a homeowner advocacy group. “I believe that financial institutions have a quasi-fiduciary responsibility not to mislead the borrower.”
Mr. Sandler insists that World Savings prided itself on ethical conduct and that untoward behavior was never tolerated. “We were also a family, and you expected people to live their personal and business lives in a particular way,” he said.
Published: December 24, 2008 - New York Times
“We are team-oriented, highly ethical, extremely competitive, profit-oriented, risk-averse, consumer-focused, and we try as much as possible to squeeze out any ego. Hubris is the beginning of the end.” — Herbert Sandler, June 2005
SAN FRANCISCO — Herbert Sandler, the founder of the Center for Responsible Lending, is standing in his bayfront office watching a DVD that trains brokers to pitch mortgages by extolling the glories of the real estate boom.
The video reeks of hucksterism, and it infuriates Mr. Sandler.
“I would not have approved that!” he declares. “I don’t think we should be selling our loans based on home prices continuing to go up.”
But the DVD was produced in 2005 by a mortgage lender that Mr. Sandler and his wife, Marion, ran at the time: World Savings Bank. And the video was a small part of a broad and aggressive effort by their company to market risky loans at the height of the housing bubble.
The Sandlers long viewed themselves — and were viewed by many others — as the mortgage industry’s model citizens. Now they too have been swept into the maelstrom surrounding who is to blame for the housing bust and the growing number of home foreclosures.
Once invited by Congress to testify about good lending practices, the Sandlers were recently parodied on “Saturday Night Live” as greedy bankers who handily sold their bank — and pocketed $2.3 billion in shares and cash — in 2006 before many of their loans began to sour.
Last month, the United States attorney’s office in San Francisco announced dual inquiries into whether World Savings engaged in predatory lending practices or misled investors about its financial well-being. And the bank has been sued by numerous borrowers who claim they were misled into taking out mortgages they could not afford.
At the center of the controversy is an exotic but popular mortgage the Sandlers pioneered that helped generate billions of dollars of revenue at their bank.
Known as an option ARM — and named “Pick-A-Pay” by World Savings — it is now seen by an array of housing analysts and regulators as the Typhoid Mary of the mortgage industry.
Pick-A-Pay allowed homeowners to make monthly mortgage payments that were so small they did not cover their interest charges. That meant the total principal owed would actually grow over time, not shrink as is normally the case.
Now held by an estimated two million homeowners, the option adjustable rate mortgage will be at the forefront of a further wave of homeowner distress that could greatly delay or even derail an economic recovery, mortgage industry analysts say.
The Wachovia Corporation, which bought the Sandlers’ bank two years ago, was so battered by the souring portfolio of World Savings that it began writing off losses now projected at tens of billions of dollars and eventually stopped offering option ARMs.
Through it all, the Sandlers have maintained they did nothing wrong beyond misjudging the real estate bubble.
“I didn’t mislead anybody, and to the best of my knowledge, our company didn’t, though there may have been an isolated case here and there,” Mr. Sandler said. “If home prices hadn’t declined by 50 percent, nobody would be raising these questions.”
Mr. Sandler also finds it incredible that borrowers feel victimized by Pick-A-Pay. “All of a sudden their home is worth half of what it was, and they say they didn’t know.”
Yet the Sandlers embraced practices like the use of independent brokers who used questionable methods to reel in borrowers. These and other practices, critics contend, undermined the conservative lending practices that the Sandlers built their reputations upon.
“This product is the most destructive financial weapon ever deployed against the American middle class,” said William J. Purdy III, a housing lawyer in California who is representing elderly World Savings customers struggling to repay their loans. “People who have this loan are now trapped, and they can’t get another loan.”
The Birth of Pick-A-Pay
Marion Sandler, now 78, was a Wall Street analyst in the early 1960s when she and her husband decided to buy a bank that took only savings deposits and made mortgage loans — a thrift, or savings and loan, in banking shorthand — and run it themselves.
Mr. Sandler, now 77, was a lawyer in Manhattan who grew up poor on the Lower East Side, the son of a compulsive gambler whose earnings were consumed by loan sharks.
The Sandlers searched for a thrift in the sizzling California market and paid $3.8 million in 1963 for an Oakland enterprise called Golden West Savings and Loan Association, which later became the parent company of World Savings. It had a main office and one branch.
When Reagan era deregulation arrived, the Sandlers and two other competitors were able to market option ARMs for the first time in 1981. Before that, lawmakers balked at the loan because of its potential peril to borrowers.
World Savings initially attracted borrowers whose incomes fluctuated, like professionals with big year-end bonuses. In the recent housing boom, when World Savings started calling the loan Pick-A-Pay, they began marketing it to a much broader audience, including people with financial troubles, like deeply indebted blue-collar workers.
As the entire thrift industry soared after deregulation, the Sandlers’ business also took off. They avoided financial problems by doing things like scrutinizing borrowers’ incomes to make sure loans were manageable and performing astute appraisals so the size of a mortgage was in line with the value of a home.
“Our protection was our total underwriting of the loan,” Mr. Sandler said. “From scratch.”
When many of the Sandlers’ competitors in the thrift industry later began collapsing under the weight of bad loans and investments, Congress and the media invited the couple to speak about the proper way to do business.
“The deregulatory situation attracted bums, charlatans, crooks, phonies, con men,” Mr. Sandler told an ABC News program in 1990.
The Sandlers also held onto World Savings’ loans rather than selling them off to Wall Street to be repackaged as securities. They say this made them more alert to risky borrowers than were lenders who sold off their loans.
When foreclosures occurred, World Savings executives would drive to the house to see if they had made mistakes appraising the property or underwriting the loan. “We called these the van tours,” Mr. Sandler said. “And we would say, ‘O.K., have we done anything wrong here?’ ”
More Philanthropic Work
As the Sandlers’ wealth increased, so did their philanthropy. Over the years, they financed scientific research and groups like Human Rights Watch and the American Civil Liberties Union. More recently they founded and financed ProPublica, a nonprofit investigative journalism enterprise that has collaborated with The New York Times on coverage and a news archive. Its 14-member advisory board includes two top New York Times Company editors.
The Sandlers’ giving intersected most directly with their business interests in 2002 when they helped create an advocacy group for low-income borrowers called the Center for Responsible Lending.
The center was the successor to a smaller organization in North Carolina, whose director, Martin Eakes, had helped the elderly and minorities avoid predatory banking practices.
“I said, ‘Isn’t that incredible what he is doing?’ ” Mr. Sandler recalled. “I said to Martin, ‘What would it take to do what you do on a national scale?’ ”
Mr. Eakes, who became the center’s executive director, had also just helped secure a new mortgage lending law in North Carolina that prohibited, among other things, the use of prepayment penalties.
“I hated prepayment penalties,” Mr. Eakes recalled, noting that such charges make it hard for cash-poor borrowers to refinance a loan for one with more manageable terms.
While Mr. Sandler supported the center’s antipredatory goals, he disagreed with Mr. Eakes’s position on prepayment penalties and sought to change his mind. Mr. Eakes says the Sandlers convinced him to drop his opposition to prepayment penalties, “but they never dictated to us what to do.”
Mr. Sandler acknowledges that some lenders used the penalties to lock borrowers into “absolutely awful” loans. But he said his bank used the penalties to fend off unethical brokers who enticed borrowers with low-interest-rate loans that often had hidden fees.
“You have to understand how independent brokers work,” Mr. Sandler says. “They are the whores of the world.”
Despite that distaste, World Savings made extensive use of brokers. By 2006, they were generating some 60 percent of its loan business, he acknowledged. He said he was compelled to do so because of brokers were a dominant force in the mortgage industry.
As a check on the representations that brokers made to borrowers, World Savings sought to telephone applicants to ensure that they understood the terms of their loan. These calls reached only about half of the borrowers, however, according to a former World Savings executive. Mr. Sandler did not dispute that point.
Customer complaints that an unethical broker had misrepresented the terms of World Savings loans is at the heart of a lawsuit filed against the bank and others in Alameda County, Calif. The broker was sentenced to a year in prison for misleading at least 90 World Savings borrowers.
Mr. Sandler points out that the company was itself a victim of this broker, that it cooperated fully with authorities, and that it was not charged with any wrongdoing.
Others have also raised questions about how carefully World Savings disclosed lending terms to its borrowers.
In August, a federal judge in South Carolina ruled that World Savings had violated the federal Truth in Lending Act by telling borrowers that choosing to make minimum monthly payments on Pick-A-Pay mortgages might cause their principal to grow — when in fact it certainly would occur.
Wachovia, which is defending the case, has appealed the ruling. Mr. Sandler said he was not familiar with this lawsuit, but generally, he says, “Wachovia’s legal defense is deficient.”
A Speedy Merger
By 2005, World Savings lending had started to slow, after more than quadrupling since 1998. The next year, Wachovia bought the bank in a hastily arranged deal. The Sandlers say they sold their firm at the top of the market because they were growing older and wanted to devote themselves to philanthropy.
Some current and former Wachovia officials say that the merger was agreed to in days and that it was impossible to conduct a thorough vetting of World Savings’ loans. Others say the portfolio was adequately scrutinized.
“Herb and his wife had run a tight ship,” said Robert Brown, a Wachovia board member. “There was not a huge concern about it because they had not had any delinquencies and foreclosures.”
Others were less sanguine. The creditworthiness of World Savings borrowers edged down from 2004 to 2006, according to Wachovia’s data. Over all, Pick-A-Pay borrowers had credit scores well below the industry average for traditional loans.
“I don’t think anyone thought a Pick-A-Pay product was a customer friendly product,” says a former Wachovia executive who requested anonymity to preserve professional relationships. “It is easy to mislead them.”
World Savings lending volume dipped again in 2006 shortly after the sale to Wachovia was initiated, according to the company’s federal filings.
This prompted World Savings to attract more borrowers by taking a step that some regulators were starting to frown upon, and which the company had been resisting for years: it allowed borrowers to make monthly payments based on an annual interest rate of just 1 percent. While World Savings continued to scrutinize borrowers’ ability to manage increased payments, the move to rock-bottom rates lured customers whose financial reliability was harder to verify.
Russell W. Kettell, a former chief financial officer of World Savings, says the merger created “pressure” for “a pretty good-sized increase in loan volume.”
Asked if Wachovia ordered World Savings to drop its rate, Mr. Kettell said, “No, but they wanted volume and wanted growth.”
A swift increase in option ARM lending had prompted federal regulators to weigh tougher controls on lending standards in 2005. Of the $238 billion in option ARM loans made nationally in 2005, World Savings issued about $52 billion, or more than one-fifth of the total.
Susan Schmidt Bies, a governor of the Federal Reserve System until last year, said the surge in volume caught regulators by surprise, and that she regrets not acting more quickly to protect borrowers because she believes that they could not understand the risky nature of option ARMs.
“When you get into people whose mortgage payments are taking half of their cash flow, they are in over their heads, and these loans should not have been sold to this customer base,” she said. “This makes me sick when I see this happening.”
In March 2006, two months before the Wachovia deal, Mr. Sandler wrote regulators and objected to several aspects of the new rules, including the regulator’s conclusion that option ARMS “were untested in a stress environment.”
He argued in the letter that World Savings had few loan losses in the recession of the early 1990s. Then again, the current financial crisis is far more severe than what occurred then — far more severe than anything the country has faced since the Great Depression.
By the third quarter of this year, Wachovia was projecting $26.1 billion of losses on a World Savings loan portfolio worth a total of about $124 billion. About 6.2 percent of the Pick-A-Pay loans were more than 90 days late, it said, compared with an industry average of 8 percent on option ARMs and 1 percent on Wachovia’s traditional loans.
Wells Fargo, which is now buying Wachovia, is more pessimistic: it expects losses of $36 billion on the loans unless efforts to stem foreclosures help rescue part of the portfolio. The losses caused analysts and others to reassess the Sandlers’ legacy.
After the “Saturday Night Live” skit, Paul Steiger, the former executive editor of The Wall Street Journal and the editor in chief of ProPublica, was among those who wrote to the show’s producer, Lorne Michaels, saying the Sandlers had been unfairly vilified. Mr. Michaels apologized for the skit (which suggested that the Sandlers “should be shot”) and removed it from NBC’s Web site.
Mr. Sandler says Wachovia did not work hard enough to help struggling borrowers, and that his loans became scapegoats for other problems at Wachovia. He remains confident that losses on its loans will not reach Wells Fargo’s projections.
He says World Savings was hit especially hard because it had made so many loans in volatile markets like inland California, but he disputes homeowner assertions that his option ARMs are at fault.
“We have not been able to identify one delinquency, much less a foreclosure, that is due to the product,” Mr. Sandler said, adding that “if home prices had not dropped, you wouldn’t see” a single article.
Over all, analysts expect the option ARM fallout to be brutal. Fitch Ratings, a leading credit rating agency, recently reported that payments on nearly half of the $200 billion worth of option ARMs it tracks will jump 63 percent in the next two years — causing mortgage delinquencies to rise sharply.
Mr. Sandler says that his loans are not in the pool that will become distressed in the next few years; he says they reset at a later date. He adds that were he not sure that the market would recover he would have sold his Wachovia stock at the time of the takeover. His charity has sold off much of its Wachovia stock, but he said he and his wife retain a substantial portion of their personal holdings.
Still, the Sandlers have their detractors.
“As the largest and most respected regulated institution providing option ARMs, I hold the Sandlers responsible because a large percentage of home borrowers — but not all — should have been advised that it was in their best interest to have a fixed-rate mortgage,” said Robert Gnaizda, general counsel for the Greenlining Institute, a homeowner advocacy group. “I believe that financial institutions have a quasi-fiduciary responsibility not to mislead the borrower.”
Mr. Sandler insists that World Savings prided itself on ethical conduct and that untoward behavior was never tolerated. “We were also a family, and you expected people to live their personal and business lives in a particular way,” he said.
Monday, December 22, 2008
RATE CUTS GIVE ONLY SOME HELP FOR ARMs
By Michael Braga, Bradenton Herald Tribune, Published: Monday, December 22, 2008 at 1:00 a.m.
The historic drop in interest rates will help some people whose adjustable-rate mortgages are scheduled to reset in the near future, enabling them to remain in their homes and avoid foreclosure.
Adjustable-rate loans tied to LIBOR, or the London Interbank Offered Rate -- the international interest rate that banks charge each other -- dropped to as low as 4.5 percent last week, while adjustable-rate loans tied to the one-year Treasury bond dropped even lower.
"People with adjustable-rate mortgages have definitely gotten some relief," said John O'Neill, chief executive of Sarasota-based Century Bank.
But O'Neill and others noted that the rate drops have done nothing to address a fundamental stumbling block in the housing market: Most people who sought ARMs during the boom did so with the idea of refinancing or selling their homes before their mortgage rates reset to higher levels.
When the real estate market ended its historic climb with a swoon, many owners found they owed more on their houses than they were worth. They began to ask whether it made sense to keep making payments.
"Half of the problem is interest rates and the other half is value," said Peter Lyddy, a mortgage broker with Gulf Coast Mortgages of Southwest Florida. "If people don't have the wherewithal to stay with the market and wait for home values to rise, then a drop in interest rates is not going to help them."
That said, the Federal Reserve's recent moves to reduce interest rates from 1 percent to virtually zero will provide temporary relief for those struggling to make payments.
For example, someone who got a $300,000 adjustable rate mortgage in September 2005 with a 3.85 percent introductory rate that was supposed to reset monthly to LIBOR plus 4 percent starting in September would now be paying an interest rate of 4.88 percent, or $257.50 more each month than he was paying three years ago.
Last month, before the Federal Reserve made its big move, that same person would have paid an interest rate of 5.45 percent, or $400 per month more than he was paying three years ago.
His savings from a month ago: $142.50. But calculating the potential savings across the entire economy is more difficult, mortgage brokers say, because interest rates on adjustable-rate mortgages, or ARMs, are impacted by a multitude of factors.
"There are a lot of different adjustable rate loans -- ones that adjust every month and others that adjust annually or semiannually," said Frank Fontanetta, president of Sentinel Mortgage in Sarasota. "Most people who have adjustable rate mortgages are being affected in a very positive way right now. Indexes are dropping and if they have mortgages that adjust monthly, they will see their payments drop next month."
How much payments drop depends on whether their loans are tied to LIBOR or Treasury bills or some other index, Fontanetta said. That is because all these indexes are adjusting at different speeds.
The LIBOR rate has been running high in recent months -- and during the financial crisis -- as banks have hoarded cash and worried that other lenders might collapse and not pay them back.
Meanwhile, the average rate for a conventional 30-year fixed mortgage on a owner-occupied, single-family home with 20 percent down on Friday was 5.375 percent, which is up slightly for the week from Monday's rate of 5.25 percent.
Ground zero
The problem with the adjustable rate mortgages offered during the boom is that they were issued to people with more of an investor mentality than a homeowner mentality, said Jack McCabe, a Deerfield Beach real estate consultant. Those people were expecting their homes to appreciate in value. When the opposite happened, they wanted out.
"Many will default regardless of how low rates go," McCabe said. "Their houses have lost 20, 30 and even 40 percent of their value and they do not know how long it will be before prices go up by 20 to 40 percent again. It could be several years."
It may make sense for some of these borrowers to default on their loans and allow their credit ratings to drop, he said.
The only way to avoid that would be for banks to allow homeowners to reduce the total amount of money owed to levels more in line with current property values, McCabe said.
"There will be no bottoming out until banks are willing to agree on principal reductions of loan balances," he said. "We need to reappraise every property, determine the percentage decrease in value and reduce the principal owed to the new value of the home."
If someone bought a house for $400,000 with 10 percent down and the house is now worth 200,000, then the lender should reduce the amount owed to $180,000, McCabe said.
"That will give the homeowner some equity that he can borrow against in the future to make other purchases," he said. "That is what has always driven our economy, and until that happens we are not going to see any improvement."
Jim Wright, a mortgage broker with Eagle Mortgage Company in Venice, believes homeowners will soon be able to do what McCabe suggests through the federal government's much maligned "Hope for Homeowners" program.
Launched by the Bush administration in October, the program allows homeowners to refinance their existing loans based on current market values with the understanding that their lender will share in upside appreciation when the real estate market recovers.
For example, if someone owes $300,000 on their house that is now worth $200,000, they could get a new $193,000 Federal Housing Administration mortgage, Wright said. In return for forgiving $107,000 from the previous loan, the lender would get the right to collect up to 90 percent of the profits from the sale of the house after the first year and 50 percent after five years.
"Getting 50 percent of the net proceeds is a better option for the lender than going through a short sale or a foreclosure," Wright said. "At the same time, borrowers are able to protect their credit and get lower payments."
The program requires a lot of work on the part of both mortgage brokers and homeowners because the homeowner has to prove that paying the current loan is a hardship, Wright said. The homeowner also must have a minimum credit score of 580 and a loan of no more than $417,000.
Few of these loans have been negotiated to date, but Wright predicted that changes will be made when Barack Obama becomes president.
McCabe is skeptical. "The program was projected to help 400,000 homeowners, but so far it has helped zippo" because banks have been unwilling to reduce the money they are owed, he said.
O'Neill, the Century Bank CEO, acknowledged that, too.
"We're not willing to take haircuts on principal," he said.
Century will do short sales, in which the bank agrees to receive less money from the sale of a house than is owed on the property.
It also will help borrowers by allowing them to make interest-only payments or run up the principal owed in return for lower interest payments.
"We are doing whatever we can to restructure and keep people in their homes," O'Neill said.
But the fundamental attitudes toward home ownership have changed and far more people are willing to default on their mortgages than they were ten years ago, O'Neill said.
"There is not as much sentimental attachment to a home," he said.
"People see it more as an investment, and if the investment has gone bad, they are willing to walk."
The historic drop in interest rates will help some people whose adjustable-rate mortgages are scheduled to reset in the near future, enabling them to remain in their homes and avoid foreclosure.
Adjustable-rate loans tied to LIBOR, or the London Interbank Offered Rate -- the international interest rate that banks charge each other -- dropped to as low as 4.5 percent last week, while adjustable-rate loans tied to the one-year Treasury bond dropped even lower.
"People with adjustable-rate mortgages have definitely gotten some relief," said John O'Neill, chief executive of Sarasota-based Century Bank.
But O'Neill and others noted that the rate drops have done nothing to address a fundamental stumbling block in the housing market: Most people who sought ARMs during the boom did so with the idea of refinancing or selling their homes before their mortgage rates reset to higher levels.
When the real estate market ended its historic climb with a swoon, many owners found they owed more on their houses than they were worth. They began to ask whether it made sense to keep making payments.
"Half of the problem is interest rates and the other half is value," said Peter Lyddy, a mortgage broker with Gulf Coast Mortgages of Southwest Florida. "If people don't have the wherewithal to stay with the market and wait for home values to rise, then a drop in interest rates is not going to help them."
That said, the Federal Reserve's recent moves to reduce interest rates from 1 percent to virtually zero will provide temporary relief for those struggling to make payments.
For example, someone who got a $300,000 adjustable rate mortgage in September 2005 with a 3.85 percent introductory rate that was supposed to reset monthly to LIBOR plus 4 percent starting in September would now be paying an interest rate of 4.88 percent, or $257.50 more each month than he was paying three years ago.
Last month, before the Federal Reserve made its big move, that same person would have paid an interest rate of 5.45 percent, or $400 per month more than he was paying three years ago.
His savings from a month ago: $142.50. But calculating the potential savings across the entire economy is more difficult, mortgage brokers say, because interest rates on adjustable-rate mortgages, or ARMs, are impacted by a multitude of factors.
"There are a lot of different adjustable rate loans -- ones that adjust every month and others that adjust annually or semiannually," said Frank Fontanetta, president of Sentinel Mortgage in Sarasota. "Most people who have adjustable rate mortgages are being affected in a very positive way right now. Indexes are dropping and if they have mortgages that adjust monthly, they will see their payments drop next month."
How much payments drop depends on whether their loans are tied to LIBOR or Treasury bills or some other index, Fontanetta said. That is because all these indexes are adjusting at different speeds.
The LIBOR rate has been running high in recent months -- and during the financial crisis -- as banks have hoarded cash and worried that other lenders might collapse and not pay them back.
Meanwhile, the average rate for a conventional 30-year fixed mortgage on a owner-occupied, single-family home with 20 percent down on Friday was 5.375 percent, which is up slightly for the week from Monday's rate of 5.25 percent.
Ground zero
The problem with the adjustable rate mortgages offered during the boom is that they were issued to people with more of an investor mentality than a homeowner mentality, said Jack McCabe, a Deerfield Beach real estate consultant. Those people were expecting their homes to appreciate in value. When the opposite happened, they wanted out.
"Many will default regardless of how low rates go," McCabe said. "Their houses have lost 20, 30 and even 40 percent of their value and they do not know how long it will be before prices go up by 20 to 40 percent again. It could be several years."
It may make sense for some of these borrowers to default on their loans and allow their credit ratings to drop, he said.
The only way to avoid that would be for banks to allow homeowners to reduce the total amount of money owed to levels more in line with current property values, McCabe said.
"There will be no bottoming out until banks are willing to agree on principal reductions of loan balances," he said. "We need to reappraise every property, determine the percentage decrease in value and reduce the principal owed to the new value of the home."
If someone bought a house for $400,000 with 10 percent down and the house is now worth 200,000, then the lender should reduce the amount owed to $180,000, McCabe said.
"That will give the homeowner some equity that he can borrow against in the future to make other purchases," he said. "That is what has always driven our economy, and until that happens we are not going to see any improvement."
Jim Wright, a mortgage broker with Eagle Mortgage Company in Venice, believes homeowners will soon be able to do what McCabe suggests through the federal government's much maligned "Hope for Homeowners" program.
Launched by the Bush administration in October, the program allows homeowners to refinance their existing loans based on current market values with the understanding that their lender will share in upside appreciation when the real estate market recovers.
For example, if someone owes $300,000 on their house that is now worth $200,000, they could get a new $193,000 Federal Housing Administration mortgage, Wright said. In return for forgiving $107,000 from the previous loan, the lender would get the right to collect up to 90 percent of the profits from the sale of the house after the first year and 50 percent after five years.
"Getting 50 percent of the net proceeds is a better option for the lender than going through a short sale or a foreclosure," Wright said. "At the same time, borrowers are able to protect their credit and get lower payments."
The program requires a lot of work on the part of both mortgage brokers and homeowners because the homeowner has to prove that paying the current loan is a hardship, Wright said. The homeowner also must have a minimum credit score of 580 and a loan of no more than $417,000.
Few of these loans have been negotiated to date, but Wright predicted that changes will be made when Barack Obama becomes president.
McCabe is skeptical. "The program was projected to help 400,000 homeowners, but so far it has helped zippo" because banks have been unwilling to reduce the money they are owed, he said.
O'Neill, the Century Bank CEO, acknowledged that, too.
"We're not willing to take haircuts on principal," he said.
Century will do short sales, in which the bank agrees to receive less money from the sale of a house than is owed on the property.
It also will help borrowers by allowing them to make interest-only payments or run up the principal owed in return for lower interest payments.
"We are doing whatever we can to restructure and keep people in their homes," O'Neill said.
But the fundamental attitudes toward home ownership have changed and far more people are willing to default on their mortgages than they were ten years ago, O'Neill said.
"There is not as much sentimental attachment to a home," he said.
"People see it more as an investment, and if the investment has gone bad, they are willing to walk."
Thursday, December 18, 2008
Brokers jump as mortgage rates drop
By Aaron Kessler - Bradenton Herald Tribune - Published: Thursday, December 18, 2008
LAKEWOOD RANCH - One day after the Federal Reserve said it was prepared to print vast sums of money to shore up the credit markets and buy up troubled debt, the effect on mortgages is already being felt in Southwest Florida.
Interest rates for 30-year fixed mortgages fell below 5 percent for the first time since summer 2003, when they broke that barrier for just a few days. Sustained rates in the 4 percent range have not been seen since the 1950s.
The average rate was 4.875 percent Wednesday afternoon — a drop of 0.625 percentage points in less than 24 hours and a number that has not been seen since August 1956. Late in the day, rates rose back to 5.25 percent, likely the result of a flood of applicants clogging the system, experts said.
On Wednesday morning, a dozen mortgage brokers braved the fog to gather at a Lakewood Ranch coffee house. Billed as “Mortgage Mocha,” the networking event organized by the local chapter of the Florida Association of Mortgage Brokers brought out a crowd energized by the Fed’s move.
“Who would have thought rates would be under five?” asked Mike Tullio, senior mortgage consultant at Blue Skye Lending. “I’m psyched. This is incredible.”
Don Stilts, regional manager for 1st Signature Lending, told the group, who sat in a circle sipping on their coffee: “We’re in uncharted waters. I’ve never seen anything like this before.”
Several other brokers also traded tales of increased activity, as both new buyers and those looking to refinance were calling to take advantage of the historically low rates.
The Fed’s short-term rate cut to virtually zero likely had little effect on mortgage rates, which have traditionally followed 10-year U.S. Treasury notes instead. But 10-year notes dropped as well this week, to their lowest yield since the 1960s, as investors poured in to scoop them up after the Fed’s indication that overall interest rates could be kept low for the foreseeable future.
There were 30-year fixed mortgages available Wednesday in Southwest Florida for about 4.87 percent with no points or extra fees. Adding a few points — each point is equal to one percent of the purchase price — could bring the rate down past 4.5 percent or even close to 4 percent.
Mortgage application volume jumped last week, fueled by borrowers seizing on lower rates to refinance home loans, the Mortgage Bankers Association said. The trade group’s seasonally adjusted application index rose 2.9 percent to 841.4 in the week ended Dec 12. The index stood at a revised 817.7 a week earlier.
The federal government had recently floated the idea that getting rates to 4.5 percent would help spur home sales and re-energize the refinancing market.
The Fed’s move also caused the “prime” rate charged by commercial banks, which many adjustable home equity lines and second mortgages are tied to, to fall to 3.25 percent — also its lowest rate in more than 50 years.
“It’s like they’re giving money away right now,” Tullio said of the prime rate drop.
But the positive developments may leave one important class of homeowners still twisting in the wind — those who are “underwater,” owing more on their mortgages than their homes are now worth.
“This is the greatest opportunity that I’ve ever seen to buy, but there are a couple of notable stumbling blocks,” said Sentinel Mortgage’s Frank Fontanetta in a separate interview on Wednesday.
Those blocks are the diminished home values plaguing the underwater owners, for whom lower interest rates unfortunately do not mean much.
“Those people cannot refinance; there’s really nothing they can do,” he said. “Generally they can’t sell it either. They’re just stuck.”
So far, government programs like the Hope for Homeowners, which provides a guarantee for lenders if they reduce the loan principal by a specified level, have not caught fire with banks. In fact, only a few hundred borrowers in the entire country have been helped so far by the program, which was intended to save more than 400,000 from foreclosure.
Congressional leaders as well as the Federal Deposit Insurance Corp. have pushed the Treasury Department to use money from the Troubled Asset Relief Program, known as TARP, to help underwater homeowners at risk of defaulting. Treasury has thus far resisted.
Meanwhile, for mortgage brokers looking to survive, lower interest rates that can prime the pump for new borrowers are a very welcome development.
Bryan Ehrlich woke up at 5:30 a.m. to drive nearly 80 miles from New Port Richey just to attend the brokers’ gathering on Wednesday. He said it was worth the trip to learn more about the new programs and brainstorm with his fellow brokers.
He also told those gathered that as the market struggles to right itself, the most important thing for those in the mortgage business is to be trustworthy because post-boom borrowers want the confidence to know they are in good hands. They have already seen what the dark side of the lending business can bring, and they have no desire to go down that road again.
“We should be fighting for higher entry standards into the industry,” said Ehrlich, president of Innovative Mortgage Services, based in Trinity. “Those who have less-than-desirable intentions should not be coming in anymore.”
LAKEWOOD RANCH - One day after the Federal Reserve said it was prepared to print vast sums of money to shore up the credit markets and buy up troubled debt, the effect on mortgages is already being felt in Southwest Florida.
Interest rates for 30-year fixed mortgages fell below 5 percent for the first time since summer 2003, when they broke that barrier for just a few days. Sustained rates in the 4 percent range have not been seen since the 1950s.
The average rate was 4.875 percent Wednesday afternoon — a drop of 0.625 percentage points in less than 24 hours and a number that has not been seen since August 1956. Late in the day, rates rose back to 5.25 percent, likely the result of a flood of applicants clogging the system, experts said.
On Wednesday morning, a dozen mortgage brokers braved the fog to gather at a Lakewood Ranch coffee house. Billed as “Mortgage Mocha,” the networking event organized by the local chapter of the Florida Association of Mortgage Brokers brought out a crowd energized by the Fed’s move.
“Who would have thought rates would be under five?” asked Mike Tullio, senior mortgage consultant at Blue Skye Lending. “I’m psyched. This is incredible.”
Don Stilts, regional manager for 1st Signature Lending, told the group, who sat in a circle sipping on their coffee: “We’re in uncharted waters. I’ve never seen anything like this before.”
Several other brokers also traded tales of increased activity, as both new buyers and those looking to refinance were calling to take advantage of the historically low rates.
The Fed’s short-term rate cut to virtually zero likely had little effect on mortgage rates, which have traditionally followed 10-year U.S. Treasury notes instead. But 10-year notes dropped as well this week, to their lowest yield since the 1960s, as investors poured in to scoop them up after the Fed’s indication that overall interest rates could be kept low for the foreseeable future.
There were 30-year fixed mortgages available Wednesday in Southwest Florida for about 4.87 percent with no points or extra fees. Adding a few points — each point is equal to one percent of the purchase price — could bring the rate down past 4.5 percent or even close to 4 percent.
Mortgage application volume jumped last week, fueled by borrowers seizing on lower rates to refinance home loans, the Mortgage Bankers Association said. The trade group’s seasonally adjusted application index rose 2.9 percent to 841.4 in the week ended Dec 12. The index stood at a revised 817.7 a week earlier.
The federal government had recently floated the idea that getting rates to 4.5 percent would help spur home sales and re-energize the refinancing market.
The Fed’s move also caused the “prime” rate charged by commercial banks, which many adjustable home equity lines and second mortgages are tied to, to fall to 3.25 percent — also its lowest rate in more than 50 years.
“It’s like they’re giving money away right now,” Tullio said of the prime rate drop.
But the positive developments may leave one important class of homeowners still twisting in the wind — those who are “underwater,” owing more on their mortgages than their homes are now worth.
“This is the greatest opportunity that I’ve ever seen to buy, but there are a couple of notable stumbling blocks,” said Sentinel Mortgage’s Frank Fontanetta in a separate interview on Wednesday.
Those blocks are the diminished home values plaguing the underwater owners, for whom lower interest rates unfortunately do not mean much.
“Those people cannot refinance; there’s really nothing they can do,” he said. “Generally they can’t sell it either. They’re just stuck.”
So far, government programs like the Hope for Homeowners, which provides a guarantee for lenders if they reduce the loan principal by a specified level, have not caught fire with banks. In fact, only a few hundred borrowers in the entire country have been helped so far by the program, which was intended to save more than 400,000 from foreclosure.
Congressional leaders as well as the Federal Deposit Insurance Corp. have pushed the Treasury Department to use money from the Troubled Asset Relief Program, known as TARP, to help underwater homeowners at risk of defaulting. Treasury has thus far resisted.
Meanwhile, for mortgage brokers looking to survive, lower interest rates that can prime the pump for new borrowers are a very welcome development.
Bryan Ehrlich woke up at 5:30 a.m. to drive nearly 80 miles from New Port Richey just to attend the brokers’ gathering on Wednesday. He said it was worth the trip to learn more about the new programs and brainstorm with his fellow brokers.
He also told those gathered that as the market struggles to right itself, the most important thing for those in the mortgage business is to be trustworthy because post-boom borrowers want the confidence to know they are in good hands. They have already seen what the dark side of the lending business can bring, and they have no desire to go down that road again.
“We should be fighting for higher entry standards into the industry,” said Ehrlich, president of Innovative Mortgage Services, based in Trinity. “Those who have less-than-desirable intentions should not be coming in anymore.”
Thursday, December 11, 2008
Foreclosures in Florida fall sharply
By Michael Braga
Published: Thursday, December 11, 2008 at 1:00 a.m. - Bradenton Herald Tribune
The number of foreclosures filed in Southwest Florida and across the state fell dramatically in November and is expected to fall further in December because of moratoriums declared by the state's lenders at the urging of Gov. Charlie Crist.
Manatee County saw the biggest drop in the region, reporting 363 foreclosure filings, 59 percent fewer than in October and 24 percent less than in November 2007, according to statistics released Wednesday by RealtyTrac, an Irvine Calif.-based market research firm.
Charlotte County logged 472 filings, down 28 percent from October, while Sarasota recorded 1,111 filings, a 3 percent drop from a month earlier.
The dramatic declines had at least one Realtor who specializes in foreclosed properties declaring that the foreclosure crisis has peaked.
"We may have passed the top of the cycle," said Matt Augustyniak, broker and owner of Horizon Realty in Bradenton. "Three years ago takes us to the end of 2005 when sales dropped off. There were not as many mortgages in 2006."
Foreclosure filings dropped 9 percent to 49,190 in Florida during November when compared with the previous month, and by 7 percent to 259,085 in the United States as a whole.
"Foreclosure activity in November hit the lowest level we've seen since June thanks in part to recently enacted laws that have extended the foreclosure process in some states, along with more aggressive loan modification programs and self-imposed holiday foreclosure moratoriums introduced by some lenders," said James J. Saccacio, RealtyTrac's chief executive, in a statement.
"There are several indications, however, that this lower activity is simply a temporary lull before another foreclosure storm hits in the coming months.
Saccacio noted that the Mortgage Bankers Association reported that delinquencies on loans not yet in the foreclosure process jumped to nearly 7 percent in the third quarter, a record high.
He also noted that U.S. Office of Thrift Supervision reported that more than half of the homeowners who received loan modifications to reduce monthly mortgage payments in the first half of 2008 are already delinquent again.
"Many of these delinquencies could turn into foreclosures next year," Saccacio said.
Dennis Black, a Port Charlotte real estate consultant, also believes the November drop is a temporary blip. "Remember, November is a month with a holiday. People tend to work less," he said.
Black also believes that the only thing the current 45-day moratorium on foreclosures will do is create a landslide of filings on the 46th day. "It's not going to change the fact that people are in houses they can't afford," he said.
It also is not going to change the fact that some people are victims of the crisis and others have found ways to profit from it.
Augustyniak, for example, says his firm is selling 35 foreclosed properties each month and another 25 through short sales in which buyers are paying less for properties than what banks are owed by former owners.
"Investors are coming in hot and heavy," Augustyniak said. "To me this is better than 2004 and 2005."
Margaret Amador, an agent with Allison James Estates & Homes who specializes in short sales, sees other investors holding off because of the financial crisis.
"I have a little three-bedroom house I am trying to sell on North Lockwood Ridge Road and I had a cash buyer who was willing to pay $77,000," Amador said. "But when the crisis deepened, this buyer decided he wanted to hold on to his cash."
For Venice resident Steven Baker, the crisis has produced nothing but frustration. He is trying to work with a bank on a commercial property he and his wife bought in 2006.
"In November 2007, we came to the bank in good faith to advise them we needed some options regarding our loan as we had been unable to sell, rent, or use the property," Baker said in an e-mail to the Herald-Tribune. "They managed to drag the process on and on, not returning phone calls, e-mails, etc."
"I think it all comes down to the fact the financial institutions really don't know how to handle the current situation to protect themselves, so will do whatever they can do at the cost of the borrowers, no matter what that cost is," Baker said. "They are finding the government will continue to issue handouts to themselves, so why make an effort to help the borrowers? They will get their money no matter what. It's a combination of greed and stupidity."
During November, Florida had the second most foreclosures in the country, with one for every 173 households. Nevada came was first with one filing for every 76 houses.
California and Florida cities accounted for 9 of the top 10 metro foreclosure rates. Cape Coral-Fort Myers posted the highest foreclosure rate with one filing for every 59 houses. Two other Florida cities ranked among the top 10: Fort Lauderdale at No. 7, with one for every 117 housing units; and Port Lucie-Fort Pierce at No. 8, with one for every 118 housing units.
Sarasota County had one filing for every 195 houses; Charlotte one for every 203; while Manatee had one for every 458.
Monday, December 1, 2008
A case study in housing collapse
By Michael Van Sickler, Times staff writer In print: Sunday, November 30, 2008
TAMPA — Thousands of miles from the trading floors of global stock markets, an abandoned house in one of Tampa's poorest neighborhoods is an improbable place to learn about why the world's financial system is collapsing.
But if you want to understand how we got into this mess, the stucco house at 4809 N 17th St. isn't a bad place to start.
Beer bottles and shards of glass litter the yard. A blue tarp covers much of the rotting roof. Boards shutter the windows.
This husk sold for $300,000 in 2006 with the help of a no-money-down mortgage from a subsidiary of Washington Mutual Bank. The owner defaulted; WaMu owns it now. Listed for $52,000, the house could be yours for $35,000 cash.
"What we had here was an obvious case of mortgage fraud," said Josh Parker, a Coldwell Banker Realtor.
The 17th Street house is one of a constellation of 90 homes stretching across Tampa, all bought and sold in the past four years by a 34-year-old tattoo parlor owner.
Most of the homes Sang-Min Kim sold are empty now. Many have code violations, and are clustered in impoverished neighborhoods such as Belmont Heights and Sulphur Springs.
The trail of foreclosures and blight is lined with the bad mortgages approved or assigned by Wachovia, Washington Mutual, Bank of America, National City Bank, Lehman Bros., Fannie Mae, Freddie Mac and Wells Fargo.
The loans — many made by banks now getting billions in a taxpayer bailout — dwarfed the true value of the properties. Some borrowers had no prospects to suggest they could pay off the loans. Multiple loans from the same bank branch sometimes went to a questionable borrower within weeks of each other.
"It's obvious the banks weren't paying attention, or worse," said Richard Hagar, a property fraud expert.
• • •
Kim, who has no criminal record in Florida, made millions selling houses. More than a third of the homes he sold are in default, with more expected. Some of the buyers have criminal records as drug dealers.
Real estate is popular among drug dealers, experts say. It's a cash investment that allows them to launder money, and the returns are terrific. Flipping a single house, a dealer can score more than he can grinding it out on a street corner for a year.
A common scam works like this: Someone with cash buys a crummy house cheap. A mortgage broker signs on and finds an appraiser to inflate the value. The broker shops the loan application, with false data about the borrower and the house. Bank loan officers approve it.
In recent years, this scam went unchecked as bank oversight mostly vanished. Banks had traditionally held onto mortgages for 30 years and had a self-interest in seeing that borrowers could repay the loans. But as lending rules were relaxed, banks sold the riskiest loans to investment firms, which dumped them into pools of thousands of other mortgages that investors would buy.
This pass-the-buck system did such a poor job policing itself, Hagar said, that "government now considers (mortgage fraud) a national security threat that's undermining our banking system.''
All it takes to prevent, Hagar said, is someone at the bank to ask a couple of questions. "This kind of fraud should be easy to spot."
• • •
"Sonny'' Kim, who was born in South Korea, owns Body Design Tattoos, an Asian-themed tattoo and body piercing parlor on N Florida Avenue. He's also listed as an owner of a flea market.
He started flipping property four years ago. In late 2005, he formed a real estate investment firm. Buyers paid Kim $10.7-million for homes he bought for $6.5-million, according to Hillsborough County property records.
What's his secret? Kim won't say. He politely declined any comment for this story.
His homestead tax exemption is on a house in Pasco's Meadow Pointe subdivision appraised at $215,000.
Kim lived there until recently, said Greg Ingram, who lives next door but never got to know his neighbor. Judging from a steady rotation of flashy cars in the driveway — a Hummer, a Mercedes, a Lexus, a Cadillac — Ingram assumed Kim worked at a car dealership.
In 2006, Kim bought an empty lot in a gated Lutz subdivision for $220,000 where he built a two-story, five-bedroom, five-bath house. Although it is not registered as his homestead, Kim lives there. Valued at $1.1-million, it's a world away from the homes Kim sells for profit.
Take the 54-year-old stucco house slumped at 7016 N Oregon Ave. in central Tampa. The back facade is crumbling. In October, a large maple branch lay in the front yard, tangled in an electrical wire it snapped on the way down.
Neighbors said they had not seen anyone in the house for six months. A June 18 legal notice tacked to the door cited the owner for weeds, debris and junk.
The deed from 2006 lists Kim's investment company as the seller and a Tampa woman as the buyer. Haydee Llanes got a $200,000 mortgage — more than double the property appraiser's current market value — and defaulted this year.
Her phone is disconnected. Her address is listed at a house that's abandoned. She defaulted on two other loans issued that same year. One was for a house she bought from one of Kim's business associates.
His name is Francisco Acevedo. Law enforcement knows him well.
• • •
In 1999, Acevedo made the mistake of paying a midnight visit to a home in Land O' Lakes that Pasco County sheriff's deputies were watching. They stopped him after he left the home and found $24,000 cash in the trunk of his car.
Prosecutors said Acevedo was the main source in a drug ring that sold $70,000 of cocaine a week in Hernando, Hillsborough and Pasco counties.
He shows up time and again in Sonny Kim real estate deals. He and his wife acquired seven homes from Kim. In more than a dozen other deals where Acevedo bought or sold homes, Kim prepared the paperwork.
After Acevedo's arrest for cocaine trafficking, Kim wrote the judge, describing Acevedo as a "hard-working citizen" deserving of a second chance.
Acevedo pleaded guilty to trafficking and got two years in prison. After his release on probation, he and Kim managed a property maintenance company together.
Now 31, Acevedo has his own real estate investment company called the Acevedo Investment Group. "Take control of your future," says the company Web site. "In America, the most common way to accumulate wealth is through home ownership."
Since February, he has been sued four times for foreclosure. His wife has defaulted on three mortgages. His father defaulted on a $164,000 mortgage for a home he bought from Sonny Kim.
Acevedo did not respond to messages seeking comment.
• • •
It takes 29 pages for the Florida Department of Law Enforcement to list the 45 times Thermozi Thomas has been arrested since 1980. Marijuana and cocaine possession and distribution. Arson. Insurance fraud.
He pleaded guilty for the 1999 false imprisonment of a woman he drove home from a bar. The arrest report said he wouldn't let her go until she had sex with him. While he smoked crack, the woman called 911.
Last year, a judge ruled he was "incompetent to proceed'' on a cocaine charge and let him go.
Through the years, most of the charges against the 46-year-old Thomas have been dropped, often because he was deemed incompetent to stand trial. His former lawyer says Thomas is schizophrenic.
Since 2000, Thomas has bought and sold about 35 homes, most with quit-claim deeds that don't show the true sales price. Kim acquired at least six homes from Thomas.
Thomas — repeatedly ruled incompetent for trial — prepared documents in at least two deals with Kim. After his latest arrest, Thomas was placed in a state hospital, said his former attorney, Ronald Young.
"I can't imagine this guy as a real estate magnate," Young said. "Unless he's the greatest actor in the world, I have a funny feeling that someone took advantage of him. There's no way he was in any shape to flip homes."
Then there is Andre Scott, arrested in 2003 after delivering cocaine to an undercover officer in a Kash n' Karry parking lot.
While on probation, Scott started flipping subpar houses. He said in a 2006 interview with a promotional magazine that "house hustling'' gave him an honest way to live a life of luxury.
"I drive a Hummer and own a 1970 vintage Oldsmobile 442," Scott said then. "I always wanted diamonds and now I own them legally and no one can take them away."
Scott is a witness on at least one-third of the deeds for homes sold to Kim. Of those, Kim sold more than a dozen homes to people who later defaulted. Kim sold two homes to Scott in August and September. Scott paid him nearly $100,000 more than Kim paid for the properties.
In October, when Scott was arrested on a domestic battery charge, he listed his home address as the Pasco house that Kim owns.
Scott declined to comment.
• • •
Deanna Jones notarized dozens of Kim's deals, including many where the buyers are now in default.
"I can go home and sleep at night," she said. "That's all that matters."
Jones said Kim did nothing wrong by involving ex-felons in his deals.
"You're saying criminals can't buy or sell property?" she said. "Why don't you write about all the teachers molesting kids? That's a bigger problem, don't you think?"
Jones pleaded guilty this year to grand theft and criminal use of personal information after she ran up about $10,000 in fraudulent credit card charges. She got 18 months probation.
Jones works for a Broward County title agency operated by Howard Gaines. A federal grand jury in Fort Lauderdale indicted him in June. Gaines was part of a conspiracy to obtain mortgages by using straw buyers, according to the indictment. As title attorney, he was accused of falsifying documents to the bank to make it look like the buyers qualified for the loans.
The indictment covered only transactions in South Florida. Gaines has a Tampa office that leases space in a building owned by Kim. His company processed more than one-third of Sonny Kim's sales in Hillsborough County. Of those, at least 18 have defaulted.
When asked if Gaines would comment, Jones instant messaged him, then read aloud his reply message. "He just said, 'Don't give (the reporter) my number, I have nothing to say.' "
• • •
Five mortgages for people buying homes from Kim in Tampa were approved in Florence, S.C., by a subsidiary of Washington Mutual Bank. The deals, worth a total of $1-million, went through within five months of each other. All defaulted.
Asked if the banks saw any red flags, a WaMu spokeswoman cited privacy and would not address specific cases.
Nor would officials at Wachovia comment on three loans for a total of $597,000 that were made to Frank and Sarah Acevedo within two months of each other for homes they bought from Kim. All three defaulted.
Kim sold six homes to buyers using $1.2-million in mortgages bearing a lender address of Suite 250, Bayport Plaza: the local home of First Franklin, then a division of National City Bank. The mortgages were approved in a matter of months; all defaulted.
Near Tampa International Airport, with its gleaming glass facade, marble floors and tenants such as Boeing and Morgan Stanley, the 11-story Bayport Plaza is a high-rent repository for a series of deals involving near-worthless real estate.
From here, First Franklin approved a $138,000 mortgage for a yellow clapboard house on N 34th Street that Kim sold in 2006. It has particle board nailed across a side window and dirt smeared along its front. The buyer defaulted within months. It's listed now at $29,000.
"Amazing. I didn't know you could get such high prices in that part of Tampa," said Dianne Hart, CEO of the East Tampa Business and Civic Association, which builds houses in struggling neighborhoods. "And the banks approved these mortgages? Well, I guess that explains why we're in the situation that we're in."
Inez Albury is the only name from First Franklin that appears on the public documents for that loan and two others in Sonny Kim deals that defaulted.
Her job was "closer," meaning Albury processed the loan applications after an underwriter had reviewed the appraisal justifying the loan amount and the borrower's credit and criminal history. She lost her job in late 2007 as the boom ended with a thud.
During the good times, Albury described an assembly line approach to keep up with demand at her office. Managers made it clear they needed to hit their numbers each month.
The pressure was intense by 2006 and early 2007, she said. She reviewed as many as 20 loan applications a day, sending each one down the line to a title agency, sometimes just minutes before a closing. She never rejected one.
"We had quotas we had to meet," Albury said. "We didn't have time to look at them."
The house at N 34th Street is now listed at one-fifth of the loan amount she processed. The loan was approved for a man arrested for delivering cocaine and multiple other charges.
"That's ridiculous," Albury said. "I felt like it had to be a good loan by the time it reached me. I was just doing the job I was taught to do. I wasn't the one making the decisions."
Getting an explanation from First Franklin is impossible. Its Tampa office closed this year. The company was bought in late 2006 by Merrill Lynch, which was trying to grab a share of the sub-prime profits it saw competitors like Lehman Bros. making.
When that market tanked, Merrill Lynch found itself stuck with billions in junk mortgages. Under pressure, it merged with Bank of America in September.
Washington Mutual and Wachovia also have gone under or were forced to merge.
• • •
Kim's sales represent a miniscule fraction of mortgages these banks approved, but they illustrate how reckless the lenders became.
Dissect any of the 35 sales involving homes that ended up in foreclosure after they were sold by Sonny Kim, and it's hard to believe that lenders made any attempt to verify anything.
That's no surprise to prosecutors and experts who have reviewed thousands of mortgage fraud files. They say that often what allowed scams to work were banks that freely approved loans for borrowers who made absurd claims, like the carwash employee who supposedly earned $40,000 a month.
"Saying there was lax oversight is too kind, there was no oversight," said Doug Pollock, an expert witness for federal agencies prosecuting fraud. "The whole reason we're in this mess is because of the lenders. This is corporate greed all the way up the ladder."
Nothing will improve without accountability on all levels, Pollock said, especially as the same banks get billions in a taxpayer bailout.
"The bad guys took advantage of a weak system," he said. "Law enforcement needs to prosecute these guys. But we're forgetting who's really responsible, and that's the bankers. No one is holding them accountable or making them change the way they do business.''
But the nation's top regulators suggest there's little payoff in a crackdown.
"There's no question that somewhere in this terrible mess many laws were broken," the chairman of the Securities and Exchange Commission, Christopher Cox, recently told Congress. "But, you know, cleaning up the mess through law enforcement after the fact, while important, is not ideal."
Federal mortgage fraud investigations are typically triggered after a lender files a "suspicious activity'' report. In the FBI's Tampa division, the number of such reports nearly quintupled between 2004 and 2007, from 430 to 2,041. This expanding caseload is swamping an agency that since 9/11 diverted most of its investigators to counterterrorism.
Rampant fraud has created market conditions that encourage more manipulation. As home prices fall because of the glut of foreclosures, the banks are desperate to sell. Someone flush with cash could do well.
Despite the bleakest market in years, Sonny Kim has sold 25 homes this year.
He fetched $185,000 in September for a home in Belmont Heights that had an appraised value of $128,000.
Kim keeps buying, too. On Oct. 20, he snapped up a house south of Bearss Avenue that sold for $198,000 in 2006. Kim paid just $83,000.
Kim bought it from WaMu. The owner had defaulted on his mortgage, and the bank needed to unload the house.
TAMPA — Thousands of miles from the trading floors of global stock markets, an abandoned house in one of Tampa's poorest neighborhoods is an improbable place to learn about why the world's financial system is collapsing.
But if you want to understand how we got into this mess, the stucco house at 4809 N 17th St. isn't a bad place to start.
Beer bottles and shards of glass litter the yard. A blue tarp covers much of the rotting roof. Boards shutter the windows.
This husk sold for $300,000 in 2006 with the help of a no-money-down mortgage from a subsidiary of Washington Mutual Bank. The owner defaulted; WaMu owns it now. Listed for $52,000, the house could be yours for $35,000 cash.
"What we had here was an obvious case of mortgage fraud," said Josh Parker, a Coldwell Banker Realtor.
The 17th Street house is one of a constellation of 90 homes stretching across Tampa, all bought and sold in the past four years by a 34-year-old tattoo parlor owner.
Most of the homes Sang-Min Kim sold are empty now. Many have code violations, and are clustered in impoverished neighborhoods such as Belmont Heights and Sulphur Springs.
The trail of foreclosures and blight is lined with the bad mortgages approved or assigned by Wachovia, Washington Mutual, Bank of America, National City Bank, Lehman Bros., Fannie Mae, Freddie Mac and Wells Fargo.
The loans — many made by banks now getting billions in a taxpayer bailout — dwarfed the true value of the properties. Some borrowers had no prospects to suggest they could pay off the loans. Multiple loans from the same bank branch sometimes went to a questionable borrower within weeks of each other.
"It's obvious the banks weren't paying attention, or worse," said Richard Hagar, a property fraud expert.
• • •
Kim, who has no criminal record in Florida, made millions selling houses. More than a third of the homes he sold are in default, with more expected. Some of the buyers have criminal records as drug dealers.
Real estate is popular among drug dealers, experts say. It's a cash investment that allows them to launder money, and the returns are terrific. Flipping a single house, a dealer can score more than he can grinding it out on a street corner for a year.
A common scam works like this: Someone with cash buys a crummy house cheap. A mortgage broker signs on and finds an appraiser to inflate the value. The broker shops the loan application, with false data about the borrower and the house. Bank loan officers approve it.
In recent years, this scam went unchecked as bank oversight mostly vanished. Banks had traditionally held onto mortgages for 30 years and had a self-interest in seeing that borrowers could repay the loans. But as lending rules were relaxed, banks sold the riskiest loans to investment firms, which dumped them into pools of thousands of other mortgages that investors would buy.
This pass-the-buck system did such a poor job policing itself, Hagar said, that "government now considers (mortgage fraud) a national security threat that's undermining our banking system.''
All it takes to prevent, Hagar said, is someone at the bank to ask a couple of questions. "This kind of fraud should be easy to spot."
• • •
"Sonny'' Kim, who was born in South Korea, owns Body Design Tattoos, an Asian-themed tattoo and body piercing parlor on N Florida Avenue. He's also listed as an owner of a flea market.
He started flipping property four years ago. In late 2005, he formed a real estate investment firm. Buyers paid Kim $10.7-million for homes he bought for $6.5-million, according to Hillsborough County property records.
What's his secret? Kim won't say. He politely declined any comment for this story.
His homestead tax exemption is on a house in Pasco's Meadow Pointe subdivision appraised at $215,000.
Kim lived there until recently, said Greg Ingram, who lives next door but never got to know his neighbor. Judging from a steady rotation of flashy cars in the driveway — a Hummer, a Mercedes, a Lexus, a Cadillac — Ingram assumed Kim worked at a car dealership.
In 2006, Kim bought an empty lot in a gated Lutz subdivision for $220,000 where he built a two-story, five-bedroom, five-bath house. Although it is not registered as his homestead, Kim lives there. Valued at $1.1-million, it's a world away from the homes Kim sells for profit.
Take the 54-year-old stucco house slumped at 7016 N Oregon Ave. in central Tampa. The back facade is crumbling. In October, a large maple branch lay in the front yard, tangled in an electrical wire it snapped on the way down.
Neighbors said they had not seen anyone in the house for six months. A June 18 legal notice tacked to the door cited the owner for weeds, debris and junk.
The deed from 2006 lists Kim's investment company as the seller and a Tampa woman as the buyer. Haydee Llanes got a $200,000 mortgage — more than double the property appraiser's current market value — and defaulted this year.
Her phone is disconnected. Her address is listed at a house that's abandoned. She defaulted on two other loans issued that same year. One was for a house she bought from one of Kim's business associates.
His name is Francisco Acevedo. Law enforcement knows him well.
• • •
In 1999, Acevedo made the mistake of paying a midnight visit to a home in Land O' Lakes that Pasco County sheriff's deputies were watching. They stopped him after he left the home and found $24,000 cash in the trunk of his car.
Prosecutors said Acevedo was the main source in a drug ring that sold $70,000 of cocaine a week in Hernando, Hillsborough and Pasco counties.
He shows up time and again in Sonny Kim real estate deals. He and his wife acquired seven homes from Kim. In more than a dozen other deals where Acevedo bought or sold homes, Kim prepared the paperwork.
After Acevedo's arrest for cocaine trafficking, Kim wrote the judge, describing Acevedo as a "hard-working citizen" deserving of a second chance.
Acevedo pleaded guilty to trafficking and got two years in prison. After his release on probation, he and Kim managed a property maintenance company together.
Now 31, Acevedo has his own real estate investment company called the Acevedo Investment Group. "Take control of your future," says the company Web site. "In America, the most common way to accumulate wealth is through home ownership."
Since February, he has been sued four times for foreclosure. His wife has defaulted on three mortgages. His father defaulted on a $164,000 mortgage for a home he bought from Sonny Kim.
Acevedo did not respond to messages seeking comment.
• • •
It takes 29 pages for the Florida Department of Law Enforcement to list the 45 times Thermozi Thomas has been arrested since 1980. Marijuana and cocaine possession and distribution. Arson. Insurance fraud.
He pleaded guilty for the 1999 false imprisonment of a woman he drove home from a bar. The arrest report said he wouldn't let her go until she had sex with him. While he smoked crack, the woman called 911.
Last year, a judge ruled he was "incompetent to proceed'' on a cocaine charge and let him go.
Through the years, most of the charges against the 46-year-old Thomas have been dropped, often because he was deemed incompetent to stand trial. His former lawyer says Thomas is schizophrenic.
Since 2000, Thomas has bought and sold about 35 homes, most with quit-claim deeds that don't show the true sales price. Kim acquired at least six homes from Thomas.
Thomas — repeatedly ruled incompetent for trial — prepared documents in at least two deals with Kim. After his latest arrest, Thomas was placed in a state hospital, said his former attorney, Ronald Young.
"I can't imagine this guy as a real estate magnate," Young said. "Unless he's the greatest actor in the world, I have a funny feeling that someone took advantage of him. There's no way he was in any shape to flip homes."
Then there is Andre Scott, arrested in 2003 after delivering cocaine to an undercover officer in a Kash n' Karry parking lot.
While on probation, Scott started flipping subpar houses. He said in a 2006 interview with a promotional magazine that "house hustling'' gave him an honest way to live a life of luxury.
"I drive a Hummer and own a 1970 vintage Oldsmobile 442," Scott said then. "I always wanted diamonds and now I own them legally and no one can take them away."
Scott is a witness on at least one-third of the deeds for homes sold to Kim. Of those, Kim sold more than a dozen homes to people who later defaulted. Kim sold two homes to Scott in August and September. Scott paid him nearly $100,000 more than Kim paid for the properties.
In October, when Scott was arrested on a domestic battery charge, he listed his home address as the Pasco house that Kim owns.
Scott declined to comment.
• • •
Deanna Jones notarized dozens of Kim's deals, including many where the buyers are now in default.
"I can go home and sleep at night," she said. "That's all that matters."
Jones said Kim did nothing wrong by involving ex-felons in his deals.
"You're saying criminals can't buy or sell property?" she said. "Why don't you write about all the teachers molesting kids? That's a bigger problem, don't you think?"
Jones pleaded guilty this year to grand theft and criminal use of personal information after she ran up about $10,000 in fraudulent credit card charges. She got 18 months probation.
Jones works for a Broward County title agency operated by Howard Gaines. A federal grand jury in Fort Lauderdale indicted him in June. Gaines was part of a conspiracy to obtain mortgages by using straw buyers, according to the indictment. As title attorney, he was accused of falsifying documents to the bank to make it look like the buyers qualified for the loans.
The indictment covered only transactions in South Florida. Gaines has a Tampa office that leases space in a building owned by Kim. His company processed more than one-third of Sonny Kim's sales in Hillsborough County. Of those, at least 18 have defaulted.
When asked if Gaines would comment, Jones instant messaged him, then read aloud his reply message. "He just said, 'Don't give (the reporter) my number, I have nothing to say.' "
• • •
Five mortgages for people buying homes from Kim in Tampa were approved in Florence, S.C., by a subsidiary of Washington Mutual Bank. The deals, worth a total of $1-million, went through within five months of each other. All defaulted.
Asked if the banks saw any red flags, a WaMu spokeswoman cited privacy and would not address specific cases.
Nor would officials at Wachovia comment on three loans for a total of $597,000 that were made to Frank and Sarah Acevedo within two months of each other for homes they bought from Kim. All three defaulted.
Kim sold six homes to buyers using $1.2-million in mortgages bearing a lender address of Suite 250, Bayport Plaza: the local home of First Franklin, then a division of National City Bank. The mortgages were approved in a matter of months; all defaulted.
Near Tampa International Airport, with its gleaming glass facade, marble floors and tenants such as Boeing and Morgan Stanley, the 11-story Bayport Plaza is a high-rent repository for a series of deals involving near-worthless real estate.
From here, First Franklin approved a $138,000 mortgage for a yellow clapboard house on N 34th Street that Kim sold in 2006. It has particle board nailed across a side window and dirt smeared along its front. The buyer defaulted within months. It's listed now at $29,000.
"Amazing. I didn't know you could get such high prices in that part of Tampa," said Dianne Hart, CEO of the East Tampa Business and Civic Association, which builds houses in struggling neighborhoods. "And the banks approved these mortgages? Well, I guess that explains why we're in the situation that we're in."
Inez Albury is the only name from First Franklin that appears on the public documents for that loan and two others in Sonny Kim deals that defaulted.
Her job was "closer," meaning Albury processed the loan applications after an underwriter had reviewed the appraisal justifying the loan amount and the borrower's credit and criminal history. She lost her job in late 2007 as the boom ended with a thud.
During the good times, Albury described an assembly line approach to keep up with demand at her office. Managers made it clear they needed to hit their numbers each month.
The pressure was intense by 2006 and early 2007, she said. She reviewed as many as 20 loan applications a day, sending each one down the line to a title agency, sometimes just minutes before a closing. She never rejected one.
"We had quotas we had to meet," Albury said. "We didn't have time to look at them."
The house at N 34th Street is now listed at one-fifth of the loan amount she processed. The loan was approved for a man arrested for delivering cocaine and multiple other charges.
"That's ridiculous," Albury said. "I felt like it had to be a good loan by the time it reached me. I was just doing the job I was taught to do. I wasn't the one making the decisions."
Getting an explanation from First Franklin is impossible. Its Tampa office closed this year. The company was bought in late 2006 by Merrill Lynch, which was trying to grab a share of the sub-prime profits it saw competitors like Lehman Bros. making.
When that market tanked, Merrill Lynch found itself stuck with billions in junk mortgages. Under pressure, it merged with Bank of America in September.
Washington Mutual and Wachovia also have gone under or were forced to merge.
• • •
Kim's sales represent a miniscule fraction of mortgages these banks approved, but they illustrate how reckless the lenders became.
Dissect any of the 35 sales involving homes that ended up in foreclosure after they were sold by Sonny Kim, and it's hard to believe that lenders made any attempt to verify anything.
That's no surprise to prosecutors and experts who have reviewed thousands of mortgage fraud files. They say that often what allowed scams to work were banks that freely approved loans for borrowers who made absurd claims, like the carwash employee who supposedly earned $40,000 a month.
"Saying there was lax oversight is too kind, there was no oversight," said Doug Pollock, an expert witness for federal agencies prosecuting fraud. "The whole reason we're in this mess is because of the lenders. This is corporate greed all the way up the ladder."
Nothing will improve without accountability on all levels, Pollock said, especially as the same banks get billions in a taxpayer bailout.
"The bad guys took advantage of a weak system," he said. "Law enforcement needs to prosecute these guys. But we're forgetting who's really responsible, and that's the bankers. No one is holding them accountable or making them change the way they do business.''
But the nation's top regulators suggest there's little payoff in a crackdown.
"There's no question that somewhere in this terrible mess many laws were broken," the chairman of the Securities and Exchange Commission, Christopher Cox, recently told Congress. "But, you know, cleaning up the mess through law enforcement after the fact, while important, is not ideal."
Federal mortgage fraud investigations are typically triggered after a lender files a "suspicious activity'' report. In the FBI's Tampa division, the number of such reports nearly quintupled between 2004 and 2007, from 430 to 2,041. This expanding caseload is swamping an agency that since 9/11 diverted most of its investigators to counterterrorism.
Rampant fraud has created market conditions that encourage more manipulation. As home prices fall because of the glut of foreclosures, the banks are desperate to sell. Someone flush with cash could do well.
Despite the bleakest market in years, Sonny Kim has sold 25 homes this year.
He fetched $185,000 in September for a home in Belmont Heights that had an appraised value of $128,000.
Kim keeps buying, too. On Oct. 20, he snapped up a house south of Bearss Avenue that sold for $198,000 in 2006. Kim paid just $83,000.
Kim bought it from WaMu. The owner had defaulted on his mortgage, and the bank needed to unload the house.
Wednesday, November 26, 2008
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.
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.
Friday, November 21, 2008
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.
Thursday, November 20, 2008
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.
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