In Run Up to Real Estate Bust, Lenders Pushed Appraisers To Inflate Values
By Joe Eaton The Center for Public Integrity April 14, 2009
In 2004, years before plummeting real estate values turned Fort Myers, Florida, into a top five foreclosure capital, appraiser Mike Tipton faced a dilemma.
Tipton’s employer, eAppraiseIT, sent him to value a two-bedroom home in a new subdivision built by the developer D.R. Horton. Paperwork given by the appraisal management company to Tipton included a $245,000 estimated value.
But after inspecting the home and comparing it to five similar houses that had recently sold, Tipton set the value at $237,000, $8,000 less than the estimate. He knew the difference might disappoint DHI Mortgage, the prospective buyer’s lender, which is a subsidiary of developer D.R. Horton. And indeed it did.
The lender, in a process appraisers say was common in the boom days before the housing bubble burst, asked Tipton to redo the appraisal. It sent paperwork through eAppraiseIT asking him to reconsider the value. It gave him different homes to use for comparisons.
“If you read between the lines, they wanted a larger value,” Tipton said. “I told them no, I wasn’t changing my report.”
Tipton, who like many other appraisers is paid by the job, says he was never given another appraisal for a D.R. Horton home. “All I can say is D.R. Horton has remained an active developer in Lee County,” Tipton said. “I didn’t see any further appraisals for DHI Mortgage. So you tell me.”
Carrie Gaska, a spokeswoman for First American eAppraiseIT, declined to comment on why Tipton received no further orders from the company for DHI Mortgage properties.
Tipton is among dozens of appraisers who have told the Center for Public Integrity that for years lenders across the United States have pushed them into inflating the value of homes to justify higher mortgages. Appraisers and lenders alike are demanding better oversight of the industry. In addition, the Center has obtained copies of lenders’ “blacklists” containing the names of thousands of appraisers; some appraisers say lenders used those lists to exclude those who refused to inflate home values.
The Center also found many appraisers who say they bowed to lender pressure to “hit the numbers” in order to remain in business. These appraisers, along with the lenders who pressured them, helped pump air into the housing bubble that led to widespread economic devastation, according to dozens of appraisers, lenders, and others with intimate knowledge of home loan practices.
And there’s evidence that Fannie Mae and Freddie Mac, the two largest purchasers of home loans, bought mortgages without ensuring they were made with accurate appraisals, according to an investigation by New York Attorney General Andrew Cuomo.
No one knows exactly how much of a role inflated appraisals played in the mortgage meltdown. But as an increasing number of homeowners face foreclosure, many remain unaware that the appraisal they paid for during the purchase process may not have reflected the true value of their investment, and may have allowed them to borrow more money than their home was worth.
Depending on the state where the homeowners purchased, the scheme may or may not have been against the law. Pressuring an appraiser to inflate the value of a property is a crime in at least 20 states and the District of Columbia, though it is often a misdemeanor punishable by a fine, a slap on the wrist that appraisers say does little to prevent the exertion of undue pressure.
There is rampant corruption throughout the industry,” said George Dodd, a veteran appraiser in Virginia who has been advocating for more regulation. “The way it stands now, the public doesn’t stand a chance.”
Dodd said, that in addition to the appraisal ordered by the lender, consumers can protect themselves by ordering a second independent appraisal before a purchase. They will, however, still have to pay for the lender’s appraisal.
Fudging the Numbers
Richard Frank, an appraiser in Vero Beach, Florida, started appraising homes in 1998, when values were climbing. From the beginning, Frank said he stepped into a business arrangement in which lenders forced appraisers to abandon their standards if they wanted work.
Frank said lenders commonly gave appraisers an estimated value for a home on each appraisal order. Appraisers, who usually determine values by comparing homes to recent sales of comparable properties, often worked backwards from that estimated price to find recent real estate sales that would “make the value,” he said. Working backwards from the estimate was faster. Everyone made money. And since appraising homes is subjective — both an art and a science — it was easy to fudge numbers.
“The [supposedly comparable] houses might be bigger and better, but who’s going to know?” Franks said. “In an increasing market, your sins are buried.”
If an appraisal came in lower than the purchase price, the loan likely would be denied. Since loan origination staff is typically paid by commission, a failed deal meant no paycheck for them. If that happened too many times, Frank says, lenders stopped sending the appraiser work. “Put out, and you will get more dates. It’s just that simple,” he said.
Richard Bitner, a former subprime lender in Texas who has written an insider account of the mortgage industry collapse, backs up Frank’s story. Bitner says the pressure came more from the cozy relationship between lenders and appraisers than threats.
“The pressure applied didn’t really need to be overt,” Bitner said. “If suddenly [an appraiser] can’t make the values, at the end of the day, it’s pretty easy to go to someone else. You are here to make money.”
Appraisers say lenders did just that, sometimes asking appraisers to promise a value before they officially ordered the report.
Both appraisers and lenders say the two professions have not always been at odds. Appraisers traditionally served as the front-line defense for loan underwriting departments, ensuring that the value of a home was worth the loan amount in case the lender needed to foreclose. In the past, many banks had in-house appraisal departments. And, unlike today, lenders historically kept and serviced the loan for the life of the mortgage. But when lenders began bundling loans and selling them to Wall Street and other investors, lenders carried less risk and industry analysts say they became less concerned about home values. With no “skin in the game,” lenders focused on closing deals. In this climate, many in the industry say the appraisal became a barrier to jump over.
Appraisers say making money was easy, as long as they did not cross lenders. But if they did, appraisers say lenders lashed out, adding their names to the blacklists that lenders originally kept to identify incompetent appraisers. Lenders kept their own lists, but appraisers sometimes found their names on those lists even if they never worked for that lender.
Amerisave, one of the largest online mortgage lenders, has close to 12,000 appraisers on its “ineligible appraiser list,” which was removed from the Atlanta-based company’s website after the Center made inquiries about it. In December, appraiser Tom Woolford found his name on Amerisave’s list when the list also appeared on a popular online appraisal industry forum. Woolford said he has never done an appraisal for Amerisave, and the address they used for him was at least 10 years old. He doesn’t know how he ended up on the list, but he says it could be a matter of reputation: He says he never gives in to lender pressure.
“I think you will find a lot of the people on these lists do not hit numbers,” Woolford said. “I won’t lie, and I won’t push a number for nobody.”
After conferring with top management officials, Martin Wilhelm, an Amerisave vice president, declined to answer questions about how it compiles its blacklist.
Unheard Warning Bells
Before real estate prices began to plummet in 2006, some sounded the alarm on fraudulent appraisals and lender pressure, but few listened to the warnings, least of all Congress, industry regulators, and the Justice Department.
David Callahan, a founder of the public policy think tank Demos, was one of the first people to study inflated appraisals and lender pressure. In 2005, Callahan wrote a paper describing the financial incentives for lenders and appraisers to pursue inflated appraisals. The goal of lenders, brokers, real estate agents and developers was to ensure that a home loan closed without a problem, Callahan said. All those people exert pressure on appraisers to inflate values.
In a 2007 study by October Research, a real estate news provider, 90 percent of more than 1,200 appraisers polled reported feeling pressure to change property values, usually from lenders, mortgage brokers or real estate agents.
“Congress didn’t really care about it,” Callahan said, noting the lack of reaction his report generated in Washington. “There was remarkably little legislative activity looking at the corruption in the real estate market.”
In fact, Congress had struggled with the issue of lender pressure on appraisers since the savings and loan crisis of the 1980s. In recent years, Congressman Paul Kanjorski, a Pennsylvania Democrat, has been the most vocal proponent for stronger regulation, proposing legislation in 2007 that would have set stiffer appraisal independence standards. The legislation, which would have prohibited lender coercion of appraisers and established penalties for it, was folded into the 2007 Mortgage Reform and Anti-Predatory Lending Act. The legislation faced stiff opposition and lobbying by the banking and mortgage industry, which argued it would adversely impact credit availability, and the bill was not taken up in the Senate after passing the House. In March, the legislation was reintroduced in the House as part of the Mortgage Reform and Anti-Predatory Lending Act.
Appraisal industry insiders say part of the difficulty in policing the process stems from regulatory fragmentation. Appraisers fall under the jurisdiction of state regulators, which enforce standards set up by the Appraisal Foundation, a nonprofit industry group authorized by Congress. State licensing is overseen by the Appraisal Subcommittee, an agency created by Congress in 1989.
Hyped appraisals did not escape the attention of federal banking and savings and loan regulators, but reports published since the mortgage industry collapse show that those officials did little to stop the practice. A February audit by the Treasury Inspector General on the implosion of IndyMac, a savings and loan, noted that the Office of Thrift Supervision, IndyMac’s primary regulator, identified problems with appraisals on the company’s loans in 2001, but took no formal action.
In one example from the audit report, an IndyMac file for a $1.5 million loan contained appraisals ranging from $639,000 to $1.5 million. “There was no support to show why the higher value appraisal was the appropriate one to use for approving the loan,” the report says.
In 2006, Ameriquest, then the largest subprime lender in the country, paid $325 million and agreed to reform its business practices to settle a 49-state investigation into its predatory lending practices. Among the allegations, the lawsuit claimed Ameriquest engaged in deceptive or misleading practices to obtain inflated appraisals substantially beyond the market values of homes. The company, which closed in 2007, denied the allegations.
Problems like these only seem to come to light during declining markets and concerns are put on a shelf when buyers return, says Dave Biggers, founder and CEO of the real estate technology company a la mode, inc. In an appreciating market, appraisals five to 10 percent beyond value are not an issue, he said, and home values climb beyond appraisal values soon after the sale.
But when the market peaked in 2005 and then began its sharp decline, inflated appraisals exacerbated the trouble faced by “underwater” homeowners. “We as the taxpayers are getting stuck with the bill,” Biggers said. “What has not been investigated is the systemic issues that take place on the basis of policy by many of these companies.”
“Who Has Juice with Whom”
Since the bubble burst, the FBI has focused most of its real estate efforts on appraisers and other fraudsters who developed intricate schemes to defraud banks. The Justice Department is not going through the wreckage looking at the institutionalized lender pressure on the appraisal process. An FBI official, asking not to be identified because the agency has no official position on the matter, said they view the matter as a regulatory issue to be addressed by Congress not a matter of law enforcement.
FBI Deputy Director John S. Pistole testified in March before the House Committee on Financial Services about the agency’s efforts to combat mortgage fraud, saying the bureau is focusing its limited white collar crime-fighting resources on real estate industry insiders engaged in fraud for profit. Those cases target real estate speculators and mortgage brokers who work with appraisers to sell a house for far more than its true value. So far, however, there have been no prosecutions of lenders who pressured appraisers to inflate values.
Instead, the highest-profile investigation of the appraisal industry has come from New York Attorney General Andrew Cuomo. In 2007, Cuomo filed a lawsuit against First American Corp. and its subsidiary First American eAppraiseIT, charging that eAppraiseIT allowed loan production staff at Washington Mutual to pressure appraisers to inflate home values. The suit is pending.
The suit claims the appraisal management company allowed Washington Mutual’s “loan production staff to hand-pick appraisers who bring in appraisal values high enough to permit WaMu’s loans to close, and improperly permits WaMu to pressure eAppraiseIT appraisers to change values that are too low to permit loans to close.”
In addition, the complaint alleges that executives at eAppraiseIt knew its appraisal arrangement with Washington Mutual broke the law. “I think WaMu’s new initiative is way over the line,” it quotes eAppraiseIT’s executive vice president as writing in spring of 2007 to the company’s president. “It is even possible that the current arrangement crosses the line.”
“Bingo!” replied the company president, according to the complaint. “It boils down to who has juice with whom at the regulatory level.”
In a 2007 press release, First American said the New York lawsuit “has no foundation in fact or law. The Attorney General’s allegations, largely based on a handful of e-mails that have been taken out of context, or mischaracterized, and an incomplete review of the facts, belie our record of compliance with applicable law.”
Cuomo also subpoenaed Fannie Mae and Freddie Mac. The investigation into whether the two largest loan purchasers bought loans that included inflated appraisals was dropped in March 2008 after Fannie and Freddie agreed to strict new rules — penned in part by Cuomo’s office — governing the appraisal practices for the loans they buy. They also agreed to pay $24 million to fund the Independent Valuation Protection Institute, a new organization to help implement and monitor the code.
What led Fannie and Freddie to the agreement was not made public, and Cuomo’s investigators aren’t talking, but his office did point the Center for Public Integrity to letters Cuomo sent in 2007 to the CEOs of both Fannie Mae and Freddie Mac, expanding his investigation to include a subpoena of their records.
In the letters, Cuomo wrote that his office had “uncovered a pattern of collusion between lenders and appraisers that has resulted in widespread inflation of the valuations of homes.” Further, Cuomo wrote that evidence shows mortgages Fannie and Freddie purchased from Washington Mutual “may be premised on fraudulently inflated appraisals” that do not meet regulatory standards. “We are, therefore, expanding our investigation to determine the extent of [Fannie Mae and Freddie Mac’s] knowledge of, and actions regarding, these problems as they relate to past mortgage purchases and securitizations.”
Cuomo’s office declined the Center’s request for details of its investigation’s findings.
The Home Valuation Code of Conduct, an industry standard which came about as a result of Cuomo’s investigation, is slated to go into effect on May 1, makes deep changes to the appraisal industry.
The code, which affects all loans eligible for purchase by Fannie and Freddie, bans lenders and brokers from pressuring appraisers to hype appraisals by threatening to withhold future business as punishment. Lenders must inform appraisers when they are removed from qualified use lists and allow them to appeal. It also bans loan origination staff from ordering appraisals directly — instead, the lender must use other in-house staff or go through a middleman appraisal management company. Even so, the incentive to pressure appraisers still exists, even for supposedly independent appraisal management companies.
Fox and the Hen House
Despite the changes, the new code has been panned by both the appraisal industry and some lenders. The National Association of Mortgage Brokers filed a lawsuit to try to block the rules, arguing that the code puts smaller mortgage brokerages at a disadvantage because they will be forced to rely on lenders to obtain appraisals for their customers, thereby limiting their ability to shop for loans. The association dropped the action earlier this month.
Appraisers who work for themselves or small businesses say the code will end their careers since mortgage brokers and other loan generation staff can no longer contact them directly. Instead, they say the code in effect directs all business to appraisal management companies, the unregulated middlemen that are often subsidiaries of lenders.
Appraisers say the management companies passed on pressure from lenders in the past, including in Cuomo’s case against eAppraiseIt, and see nothing in the new code to stop it from happening.
“It’s a bit of irony that the solution is the same thing that got us here,” said Bill Garber, director of government and external relations at the Appraisal Institute, a trade association representing appraisers.
The Home Valuation Code of Conduct, Garber added, is lip service to cleaning up the industry. Appraisal management companies “are just as capable of pressuring appraisers as anyone else.”
Appraisers also dislike the plan because some appraisal management companies take a hefty administrative fee and pay low rates to appraisers, which experienced appraisers say will force them out of the business and turn the industry over to less experienced appraisers who are more likely to make mistakes.
Pressure will still come from the management companies, said Dodd, the Virginia appraiser. “They could give a damn about the consumer. They don’t care if the consumer pays ten, twenty, or thirty thousand more than it’s worth.”
Cuomo hasn’t answered critics of the new code, and his office did not return calls from the Center for Public Integrity.
Lawyers, Banks, and Money
Since the real estate crash, the appraisal and lending industries have come under closer watch by regulators and Congress. But so far, no one has addressed the effect inflated appraisals have had on struggling homeowners. Buyers who moved in at the height of the boom are particularly vulnerable, and attorneys say their struggle provides fertile ground for civil litigation.
“I definitely believe that lenders have engaged in widespread illegal activities, and they will come under increased scrutiny in the next year or so as people who have been damaged by this realize there are some bad actors out there,” said Steve Berman, an attorney in Seattle.
In October, Berman’s firm, Hagens Berman Sobol Shapiro, filed a class action on behalf of blacklisted appraisers against Countrywide Financial and its subsidiary Landsafe, an appraisal management company. Like Cuomo’s suit, Berman’s case argues that Countrywide forced appraisers to hit the numbers and added them to a blacklist if they refused.
“Countrywide… has engaged in a practice of pressuring and intimidating appraisers into using appraisal techniques that meet Countrywide’s business objectives even if the use of such appraisal techniques is improper and in violation of industry standards,” the complaint alleges.
If the appraisers refused, the complaint says they were placed on a “field review list,” which disqualified them for further work for loans for Countrywide.
Because mortgage brokers shop for lenders, if an appraiser was blacklisted by Countrywide, the largest independent mortgage lender, they were in effect blacklisted by much of the industry, Berman’s complaint claims.
According to the complaint, Countrywide’s blacklist contains more than 2,000 appraisers. Berman said his firm is looking at other lenders and their blacklists as it considers further litigation.
The new appraisal code and increased scrutiny of the industry seems to have had some effect. Lender pressure is not as strong, appraisers say, but it still exists. Ray Miller, an appraiser outside Madison, Wisconsin, says the pressure is moving to FHA loans and refinancing as credit for other loans remains dried up.
In January, Miller said he did an appraisal for a lake home where the owner was looking to refinance. The original appraisal, done when the owner bought the home a few years back, listed the value at $554,000, but the comparables used to hit that number were from homes on a more upscale lake, Miller concluded.
Miller’s reappraisal came in at $400,000. “I’m just waiting for the phone call,” he said.
In February, Miller received a call from a different lender. This one wanted him to remove pictures of a cracked sidewalk he included in his appraisal. This would be prohibited under the Home Valuation Code of Conduct. But Miller expects lenders will figure out a way around the rules.
“They don’t want good appraisers,” he said. “They don’t want good numbers, even now.”
Thursday, April 23, 2009
Thursday, April 16, 2009
Why broker price opinions may cut home values
Kenneth Harney - San Francisco Chronicle - 03/29/2009
Are lowballed valuation estimates on short sales and bank-owned foreclosures artificially depressing property values in neighborhoods across the country?
Growing numbers of appraisers and consumer groups believe the answer is yes - and are demanding that either Congress or state regulators crack down. Their complaints focus on what are called "broker price opinions," also known as BPOs, that substitute for actual appraisals.
Unlike standard property valuations performed by licensed appraisers - which can run to hundreds of dollars - the opinions often cost $50 and are performed by real estate agents who may have minimal or no appraisal training and are subject to no regulatory oversight. Realty agents defend the opinions, arguing that their extensive knowledge of local market trends equips them to render accurate estimates.
The opinions have become a booming business as foreclosures and short sales have risen sharply. When banks that own foreclosed houses need to put values on them for resale, increasingly they order opinions that can be delivered quickly at rock-bottom fees.
Short sales - when a lender agrees to take less than the principal amount owed by a delinquent owner provided the property is sold to a new buyer - also frequently entail use of the opinions.
On the Internet, the opinions are hawked to realty agents as a route to quick profits in an economic downturn. "This is the easiest and fastest way to make big money in 2009," says one Web site that promises agents "six figures or more" per year. The same site suggests that "bad times put you in the ideal spot" to rack up income by churning out the opinions for lenders.
One problem is that selling opinions to value houses violates the law in 23 states, according to appraisal industry leaders. In other states, the opinions may not be prohibited, but critics say they may be far off the mark in accuracy - typically coming in below appraised values. That's partly because agents who perform the opinions may set the value extra low to ensure quicker sales.
When houses are listed at fire-sale prices, they exert a downward pull on the values of other houses in the neighborhood because, under current lending industry underwriting guidelines, appraisers must consider recent listing prices as well as closed sale prices.
In testimony March 11 before the House Subcommittee on Financial Institutions and Consumer Credit, David Berenbaum, executive vice president of the National Community Reinvestment Coalition, called on Congress to outlaw the opinions when used as appraisal substitutes in distressed property transactions. Berenbaum said that realty agents "develop hasty and inaccurate BPOs that underestimate" the value of bank-owned and other distressed real estate. That lowballing, in turn, "is often destructive to local markets and depresses the value and equity of (lender-owned) properties."
Gary Crabtree, CEO of Affiliated Appraisers in Bakersfield, says his company's research "shows very clearly" that the opinions frequently understate actual market values by as much as tens of thousands of dollars.
Why would agents lowball their valuations? Crabtree argues that there are inherent conflicts of interest: "They want to sell the property fast" to make bank asset managers "look like heroes" to their bosses. They may also want additional BPO and property listing assignments from those same bank managers, yielding them commission dollars. Many of the properties are snapped up by investors at the depressed prices driven by the low valuations. Those sales then become "comparables" for appraisers, "which simply intensifies the downward spiral" in property values, said Crabtree.
Regulators in many states recently have expressed concern about excessive use of the opinions. The Nevada Real Estate Division warned agents that when real estate agents prepare "a BPO for any reason other than listing and selling a property," and receive compensation, they have violated state law.
Nebraska regulators issued a similar warning last December, threatening to criminally prosecute realty agents who are not licensed to perform appraisals but who issue the opinions as appraisal substitutes.
The National Association of Realtors, whose 1.2 million members include many of the agents who prepare the opinions, says it has no policy guidance for Realtors on the issue, but expects to issue a statement in May. Asked whether the association would at the minimum urge members to adhere to state laws and regulations, a spokesman said "there is no policy" on the sensitive issue at present.
National appraisal groups, including the Appraisal Institute, whose members lose revenue when lenders or property owners order the opinions, are up in arms. Bill Garber, the institute's head of government relations, said the opinions are an attempt "to pay the least to obtain something" - appraised value - "that is extremely important to get right."
Are lowballed valuation estimates on short sales and bank-owned foreclosures artificially depressing property values in neighborhoods across the country?
Growing numbers of appraisers and consumer groups believe the answer is yes - and are demanding that either Congress or state regulators crack down. Their complaints focus on what are called "broker price opinions," also known as BPOs, that substitute for actual appraisals.
Unlike standard property valuations performed by licensed appraisers - which can run to hundreds of dollars - the opinions often cost $50 and are performed by real estate agents who may have minimal or no appraisal training and are subject to no regulatory oversight. Realty agents defend the opinions, arguing that their extensive knowledge of local market trends equips them to render accurate estimates.
The opinions have become a booming business as foreclosures and short sales have risen sharply. When banks that own foreclosed houses need to put values on them for resale, increasingly they order opinions that can be delivered quickly at rock-bottom fees.
Short sales - when a lender agrees to take less than the principal amount owed by a delinquent owner provided the property is sold to a new buyer - also frequently entail use of the opinions.
On the Internet, the opinions are hawked to realty agents as a route to quick profits in an economic downturn. "This is the easiest and fastest way to make big money in 2009," says one Web site that promises agents "six figures or more" per year. The same site suggests that "bad times put you in the ideal spot" to rack up income by churning out the opinions for lenders.
One problem is that selling opinions to value houses violates the law in 23 states, according to appraisal industry leaders. In other states, the opinions may not be prohibited, but critics say they may be far off the mark in accuracy - typically coming in below appraised values. That's partly because agents who perform the opinions may set the value extra low to ensure quicker sales.
When houses are listed at fire-sale prices, they exert a downward pull on the values of other houses in the neighborhood because, under current lending industry underwriting guidelines, appraisers must consider recent listing prices as well as closed sale prices.
In testimony March 11 before the House Subcommittee on Financial Institutions and Consumer Credit, David Berenbaum, executive vice president of the National Community Reinvestment Coalition, called on Congress to outlaw the opinions when used as appraisal substitutes in distressed property transactions. Berenbaum said that realty agents "develop hasty and inaccurate BPOs that underestimate" the value of bank-owned and other distressed real estate. That lowballing, in turn, "is often destructive to local markets and depresses the value and equity of (lender-owned) properties."
Gary Crabtree, CEO of Affiliated Appraisers in Bakersfield, says his company's research "shows very clearly" that the opinions frequently understate actual market values by as much as tens of thousands of dollars.
Why would agents lowball their valuations? Crabtree argues that there are inherent conflicts of interest: "They want to sell the property fast" to make bank asset managers "look like heroes" to their bosses. They may also want additional BPO and property listing assignments from those same bank managers, yielding them commission dollars. Many of the properties are snapped up by investors at the depressed prices driven by the low valuations. Those sales then become "comparables" for appraisers, "which simply intensifies the downward spiral" in property values, said Crabtree.
Regulators in many states recently have expressed concern about excessive use of the opinions. The Nevada Real Estate Division warned agents that when real estate agents prepare "a BPO for any reason other than listing and selling a property," and receive compensation, they have violated state law.
Nebraska regulators issued a similar warning last December, threatening to criminally prosecute realty agents who are not licensed to perform appraisals but who issue the opinions as appraisal substitutes.
The National Association of Realtors, whose 1.2 million members include many of the agents who prepare the opinions, says it has no policy guidance for Realtors on the issue, but expects to issue a statement in May. Asked whether the association would at the minimum urge members to adhere to state laws and regulations, a spokesman said "there is no policy" on the sensitive issue at present.
National appraisal groups, including the Appraisal Institute, whose members lose revenue when lenders or property owners order the opinions, are up in arms. Bill Garber, the institute's head of government relations, said the opinions are an attempt "to pay the least to obtain something" - appraised value - "that is extremely important to get right."
Borrowers get the gift of time
By Todd Ruger - Sarasota Herald Tribune, 04/15/2009
Heide and Ronald Felicita showed up in Circuit Court last week thinking this would be the hearing where they finally lose their home.
Their suitcases were packed and they removed all the pictures from the walls of their Venice home, which has been in foreclosure for nearly two years.
But like hundreds of foreclosed-upon residents in Manatee and Sarasota counties, the Felicitas got a reprieve -- weeks, possibly months, to stay in their home and try to clear their debt and work out a deal with their lender.
Since January, the rate of residents in Sarasota and Manatee counties who lost their homes to foreclosure has fallen 66 percent, going from more than 400 cases per month to just over 100.
The decline has nothing to do with the state of the real estate market or a sudden benevolence on the part of lenders.
Instead, it reflects a policy set down by 12th Circuit Court Judge Lee Haworth that has effectively stopped the fast track of summary judgments allowing lenders to quickly gain control of properties from distressed borrowers.
Last fall, as foreclosure cases overwhelmed the court system, Haworth ordered lenders' law firms to meet with homeowners starting in January and discuss alternatives to foreclosures. The judge's hope was that discussions could lead to resolutions that would prevent residents from losing their homes.
But lenders widely ignored the judge's request. So Haworth hit the law firms in the pocketbook, with a new rule requiring them to show up in person -- not just over the telephone -- for all hearings starting in March. They must also complete a checklist about the facts of the case.
Again, many lenders have failed to comply, leading Haworth and two other judges in the 12th Circuit to cancel cases, so many that their dockets are virtually bare. Last Wednesday, for example, Judge Donna Berlin canceled 20 of the 27 foreclosure cases on her docket, including the case against the Felicitas, whose attorney failed to show.
The reprieve is only temporary. Distressed homeowners still must find resolution with their lenders. Yet the extended time comes with opportunity because lenders have been more open in recent months to negotiate, and the Obama Administration is offering more help for homeowners.
"It gives us more time and, hopefully, the company will come up with something better," said Ronald Felicita, who lost his job as a home inspector in the real estate downturn. "Now, they could work with us."
Heide Felicita has found a job, but it is not enough to pay off what they owe on the house they bought 10 years ago. They are not sure where they might go if forced out of the home, but they might have to move in with relatives in Minnesota, Ron Felicita said.
The rules instituted by Haworth make the 12th Judicial District one of the toughest places to get a summary judgment, which gives the lender the property without lengthy litigation, attorneys said. Other circuits are starting to follow suit with similar rules.
"It's a new procedure, so people are not used to dealing with it," said Robert Schermer, who often makes the local appearance in court for the lenders' out-of-town attorneys. "And they don't really realize how serious the judges are, or how strictly they are enforcing it.
"They want every box checked and every spot filled in."
Other outside factors have worked to slow the pace of final judgments, including moratoriums on foreclosures from some of the country's largest lenders and new rules for refinancing loans.
But attorneys and judges say the new rules are the biggest cause. Attorneys for lenders, who mostly work at large, out-of-town "foreclosure mills" that handle cases across the state, are too overwhelmed to go through the careful review of cases and rules for each circuit.
"There have been days when the entire docket has been canceled from non-compliance," Circuit Judge Charles Williams said.
One day recently, Williams had four foreclosure hearings set. None of the hearings happened, though, because attorneys did not follow the rules.
Bradenton attorney John Fleck, who represents both homeowners and lenders in foreclosure cases, said the judges are doing the right thing if an attorney does not make sure his work is right.
"The judges think, 'If he didn't take the time to fill out the box, how can I be certain the rest of this was done correctly?'" Fleck said. "Until all these massive foreclosures, we didn't see this slipshod work."
Heide and Ronald Felicita showed up in Circuit Court last week thinking this would be the hearing where they finally lose their home.
Their suitcases were packed and they removed all the pictures from the walls of their Venice home, which has been in foreclosure for nearly two years.
But like hundreds of foreclosed-upon residents in Manatee and Sarasota counties, the Felicitas got a reprieve -- weeks, possibly months, to stay in their home and try to clear their debt and work out a deal with their lender.
Since January, the rate of residents in Sarasota and Manatee counties who lost their homes to foreclosure has fallen 66 percent, going from more than 400 cases per month to just over 100.
The decline has nothing to do with the state of the real estate market or a sudden benevolence on the part of lenders.
Instead, it reflects a policy set down by 12th Circuit Court Judge Lee Haworth that has effectively stopped the fast track of summary judgments allowing lenders to quickly gain control of properties from distressed borrowers.
Last fall, as foreclosure cases overwhelmed the court system, Haworth ordered lenders' law firms to meet with homeowners starting in January and discuss alternatives to foreclosures. The judge's hope was that discussions could lead to resolutions that would prevent residents from losing their homes.
But lenders widely ignored the judge's request. So Haworth hit the law firms in the pocketbook, with a new rule requiring them to show up in person -- not just over the telephone -- for all hearings starting in March. They must also complete a checklist about the facts of the case.
Again, many lenders have failed to comply, leading Haworth and two other judges in the 12th Circuit to cancel cases, so many that their dockets are virtually bare. Last Wednesday, for example, Judge Donna Berlin canceled 20 of the 27 foreclosure cases on her docket, including the case against the Felicitas, whose attorney failed to show.
The reprieve is only temporary. Distressed homeowners still must find resolution with their lenders. Yet the extended time comes with opportunity because lenders have been more open in recent months to negotiate, and the Obama Administration is offering more help for homeowners.
"It gives us more time and, hopefully, the company will come up with something better," said Ronald Felicita, who lost his job as a home inspector in the real estate downturn. "Now, they could work with us."
Heide Felicita has found a job, but it is not enough to pay off what they owe on the house they bought 10 years ago. They are not sure where they might go if forced out of the home, but they might have to move in with relatives in Minnesota, Ron Felicita said.
The rules instituted by Haworth make the 12th Judicial District one of the toughest places to get a summary judgment, which gives the lender the property without lengthy litigation, attorneys said. Other circuits are starting to follow suit with similar rules.
"It's a new procedure, so people are not used to dealing with it," said Robert Schermer, who often makes the local appearance in court for the lenders' out-of-town attorneys. "And they don't really realize how serious the judges are, or how strictly they are enforcing it.
"They want every box checked and every spot filled in."
Other outside factors have worked to slow the pace of final judgments, including moratoriums on foreclosures from some of the country's largest lenders and new rules for refinancing loans.
But attorneys and judges say the new rules are the biggest cause. Attorneys for lenders, who mostly work at large, out-of-town "foreclosure mills" that handle cases across the state, are too overwhelmed to go through the careful review of cases and rules for each circuit.
"There have been days when the entire docket has been canceled from non-compliance," Circuit Judge Charles Williams said.
One day recently, Williams had four foreclosure hearings set. None of the hearings happened, though, because attorneys did not follow the rules.
Bradenton attorney John Fleck, who represents both homeowners and lenders in foreclosure cases, said the judges are doing the right thing if an attorney does not make sure his work is right.
"The judges think, 'If he didn't take the time to fill out the box, how can I be certain the rest of this was done correctly?'" Fleck said. "Until all these massive foreclosures, we didn't see this slipshod work."
Tuesday, December 30, 2008
Empty houses mean higher fees for deed-restricted communities
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.
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.
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.”
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