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Subprime crisis shines light on criminal mortgage brokers
Subprime crisis shines light on mortgage brokers
Class action suit against NovaStar alleges hidden fees; lender to fight back
By Alistair Barr, MarketWatch
Apr 10, 2007

SAN FRANCISCO (MarketWatch) -- The subprime mortgage crisis has re-ignited scrutiny of the industry and people who broker home loans, with some critics arguing that hidden fees and other dubious practices have contributed to the surge in delinquencies.

The main problem is that, counter to common perception, mortgage brokers do not represent the borrowers who pay them for advice. Instead, they are more like independent salespeople who are often paid as much by the lenders offering loans as the borrowers.

A controversial fee called a Yield Spread Premium, which is paid by the lender to the broker, has come in for particular criticism and is the subject of a class-action lawsuit against NovaStar Financial (NFINFI
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Subprime mortgages are sold to home buyers with lower credit scores. This corner of the home loan business has been hit hard as borrowing costs climbed and the housing market cooled. In January, more than 14% of subprime mortgages were at least 60 days delinquent, almost double the rate a year earlier, according to real estate data specialist First American Loan Performance.

As the housing market boomed, mortgage brokers' influence grew as they became involved in arranging the majority of home loans. Now the broking business should bear some of the blame for the ensuing crisis, say critics, including some who are brokers themselves.

"We all have some culpability," said Steve Heideman, a mortgage broker who heads an organization dedicated to improving disclosure in the business. "The problems and abuses are happening because brokers see it as their right to make as much money as they can on a loan."

There's a basic problem with mortgage brokers being paid by lenders as well as borrowers and "very few" people know this happens, he added.

"It's a dirty little secret of this business," he said. "It shows a lack of confidence on the part of a mortgage broker to not tell the client what they're making on the back side."

Official industry associations also admit to some of the system's shortcomings.

There are "isolated instances" in which mortgage brokers steer borrowers to the lender that pays the highest fees to the broker, the California Association of Mortgage Brokers, which represents more than 4,000 brokers and other service providers, says on its Web site.
But these associations are against more regulation and argue that it is up to consumers in the end to decide which mortgage is best for them.
During Congressional hearings on the subprime crisis last month, Harry Dinham, president of the National Association of Mortgage Brokers, stressed that brokers do not exclusively represent the interests of borrowers or lenders.

"Mortgage brokers do not represent every loan product available in the marketplace, nor do we have the 'best' loan available," he said, according to a copy of his prepared testimony. "As the decision-maker, the role of the consumer is to acquire the financial acumen necessary and take advantage of the competitive marketplace, shop compare, ask questions and expect answers."

Some say the problem of mortgage brokers being paid by both borrowers and lenders makes them indistinguishable from salespeople hired by banks to sell loans. That means borrowers should beware when hiring a broker to help them get a mortgage.

"Any loan provider - whether they're an independent broker or a loan officer employed by a bank -- is in sales mode and is trying to get deals done," said Jack Guttentag, professor of finance emeritus at the Wharton School of the University of Pennsylvania.

"The basic problem is the way that mortgage brokers present their services," added Guttentag, who runs the Web site mtgprofessor.com.

"They bill themselves as independent operators but try to maximize their markup on the deal."

Yield spread premiums

One of the most controversial payments that mortgage brokers receive from lenders is called a Yield Spread Premium (YSP).

The YSP, which averages almost $2,000 according to one study, was originally developed as a way to help poorer people buy houses. It is still used legitimately in many mortgages.

It works like this: A lender may be willing to offer a mortgage at a specific interest rate - 6% for example. That's called the par rate.
But the originator will also offer other alternatives through mortgage brokers. If a broker can persuade a borrower to accept a mortgage with a 6.25% rate, that broker will get a fee from the lender equal to perhaps 1% of the value of the mortgage. That's the YSP, which rewards the broker for arranging a loan that pays an above-market interest rate. The higher the interest rate, the higher the YSP.

The originator likes this arrangement because it can sell that loan on in the secondary market at a higher price than a mortgage paying the par, or market, interest rate.

YSPs are helpful because if poorer home buyers can't afford all the upfront closing costs on a mortgage, the fees spread out those costs over the many years the loan is in force. This works because when the mortgage broker gets paid by the lender, the broker's client is charged fewer fees.

But some experts counter that the YSP is being abused by mortgage brokers who want to collect as many fees as possible for arranging a loan and don't care that borrowers can end up paying a higher interest rate without even knowing it.

"The broker has discretion to set the loan rate where he wants. If it's a higher rate than you could have gotten elsewhere, then that's sleazy," Mark Adelson, head of structured finance research at Nomura Securities International, said. "This is where the whole issue of YSP becomes distasteful."

The practice gets especially troublesome when YSPs aren't disclosed clearly and early on in the loan application process - something that most mortgage brokers are required to do by law, experts say.

"Sometimes brokers earn exorbitant fees this way," Guttentag said. "If borrowers really understood how this worked, they'd say 'that's ridiculous' and go somewhere else for a loan."

Poor disclosure

But poor or non-existent disclosure of YSP may be widespread, according to a recent investigation by Carolyn Warren, who spent a decade in the business as a mortgage broker and an account executive for subprime specialist First Franklin and other lenders.

Warren said she posed as a home buyer and applied for 10 mortgages with 10 different brokers. When borrowers apply, they're supposed to get a good faith estimate (GFE) of the costs of arranging and closing the loan. That GFE is supposed to disclose any YSP clearly in dollar terms.
Roughly half the GFEs Warren received had no YSP disclosure and the other half didn't disclose the fees properly. Some brokers described the payments as a percentage of the loan value, which isn't enough, she said. Another just put the number '1' in the YSP section, she added.
"That's illegal," said Warren. "You're supposed to disclose an estimated dollar amount clearly."

Warren called the brokers back and asked them why they hadn't disclosed the YSPs properly. Some answers were legitimate, some "lies," she said.

NovaStar suit

Weak YSP disclosure is being challenged in a class action lawsuit against subprime originator NovaStar.

The suit claims that NovaStar worked with brokers to sign homeowners in Washington state to loans with higher interest rates than were available from the lender itself. The borrowers didn't know this happened and are now stuck paying higher rates on their mortgages, the complaint adds.
NovaStar failed to inform the borrowers properly about the YSPs it was paying brokers to help them place these above-market-rate mortgages, the suit alleges.

NovaStar spokesman Dick Johnson said the company believes the allegations in the lawsuit are without merit and plans to "vigorously" defend itself in court.

An attorney representing NovaStar said that one of the plaintiffs involved in the case signed a document early on in their application that disclosed a YSP of 0% to 4% of the loan value, despite claiming that the fee wasn't disclosed.

In one exhibit supporting the suit, a marketing flyer that those filing the suit claim NovaStar sent to mortgage brokers through its Web site says "Use your NovaStar Warehouse Line and close in your name without disclosing YSP!"

Excerpts from NovaStar's account executive training manual include references to reducing customer shopping and getting borrowers off the market, the suit claims.

NovaStar's attorney declined to comment on whether the documents are authentic.

John Kotalik, a mortgage broker who arranged one of the loans involved in the suit, said he listed his YSP on the Good Faith Estimate of closing costs. But after submitting the documents to NovaStar, a processor from the lender contacted him to say he didn't need to disclose the fact he'd be getting a YSP, Kotalik said in a signed declaration included as part of the suit.

Correspondent lending

NovaStar told Kotalik's broking firm America One Finance that all loans it originates with the lender need not disclose YSPs because the company is considered a "correspondent lender" for America One, Kotalik added.
The attorney representing NovaStar said it's up to brokers to decide whether to disclose YSP. By law, brokers who are correspondent lenders do not have to disclose the fee, the lawyer noted.

Correspondent lenders are a cross between mortgage brokers and banks. Like a bank, they fund the mortgage with their own money, or from a line of credit provided by a larger lender. Once the deal closes, they immediately sell the loan on to another lender at a pre-negotiated price. But like a broker, correspondent lenders can initially shop around for mortgages from different providers.

"Operationally, the line between who is a mortgage broker and who is a correspondent lender gets muddy," Professor Guttentag says. "Most correspondent lenders started out life as brokers. They evolved into correspondent lenders as they grew, built up capital and started to close loans with their own money."

Correspondent lenders don't have to disclose YSP, which Guttentag says is "stupid." Mortgage brokers get "very upset" by this, because they think it's unfair that they have to disclose YSP and their correspondent brethren don't, he added.

Mortgage brokers wanting to avoid YSP disclosure will sometimes do a deal with a correspondent lender, rather than a regular lender, even though the borrower ends up with a higher interest rate, Warren said.
When she was a mortgage broker, Warren said she had correspondent lending relationships with many different companies including Countrywide Financial (CFCCFC

Brokers have tried to get around these requirements in other ways too.
So-called table financing involves mortgage brokers ushering the loan process all the way to the closing table. But instead of the lender funding the mortgage with its own money, the company advances the money to the broker, who closes the deal in his name, Guttentag explained.
But the Department of Housing and Urban Development, which oversees mortgage lending practices, has ruled that table financing transactions still have to disclose YSP, he noted.

So what's the difference between correspondent lending and table financing?

Correspondent lenders hold the loans they close for usually about four weeks before delivering them to another larger lender, Guttentag explained. On a table-funded loan, ownership of the loan changes immediately after closing.

Correspondent lenders also have to buy back mortgages they've sold on if any of the borrowers on those loans miss the first or second payment. Brokers don't have such a requirement, he added.

A more recent movement is "net branching," said Heideman, which he adds is another example of brokers becoming "glorified mortgage bankers."

Brokers basically become a virtual branch of a mortgage lender and get to keep any markups they include when the loan is closed, he explained. One of the major selling points of these branches is that you don't have to disclose YSP, he noted.

"Something just feels wrong about it," he said. "It's getting more and more common all the time. There are quite a few big mortgage lenders involved."

He didn't want to name any companies involved. "I don't want to get sued," he added.

'Dirty dozen'

Home buyers should watch out for other dubious mortgage broker practices, said Warren, who's written a book called Mortgage Ripoffs and Money Savers, which is being published later this year by Wiley & Sons.
Some brokers charge other "junk" fees and Warren has listed a "dirty dozen" of such unnecessary costs in her book. These include "administration" fees, "processing" fees and even "ancillary" fees, she said.

"A banker or a broker decide they'd like to make a little more profit on a loan, so they come up with these fees, which are typically around $395," Warren explained. "Then they have to make up a name for them. No one should pay an extra admin fee."

Another common tactic is not to tell borrowers about the prepayment penalty on their mortgage, Warren added. Prepayment penalties require home owners to pay a large fee if they pay off their loan early, usually through refinancing.

Mortgages that come with large YSPs for the brokers often carry big prepayment penalties too, Heideman noted. That helps the lender recoup some of the cost of paying the broker because it ensures that borrowers either keep paying their current loan off at the higher interest rate, or pay a penalty to get into a cheaper mortgage, he explained.
Bi-weekly mortgage payment plans are now being advertised by brokers. These make sense, but the fee that brokers are charging for this - which averages roughly $400 - is a rip-off, Warren added. Borrowers can set up a payment system like this by themselves for free, she noted.
Mortgage brokers also sometimes tell clients that they shouldn't talk to other mortgage lenders because too many inquiries will dent their credit score. Warren says this is a lie, noting that credit bureau risk models allow multiple mortgage-related inquiries within a 14-day period without affecting your score.

More disclosure

Despite problems, most industry experts say the answer is not draconian new regulations, but more disclosure.

"Those of us on the company side believe that given proper disclosure it's a good thing to create more flexible products," said Brian Brooks, a partner at law firm O'Melveny & Myers, which represents mortgage finance companies.

The subprime crisis that's erupted this year has led some to question that basic premise, he noted.

"Critics are taking the position that it's not a good thing to get people into these loans on this basis," Brooks added. "But the biggest risk is to make it harder for credit-challenged people to buy houses. That's a dangerous proposition."

Heideman is president of the Upfront Mortgage Brokers Association, a non-profit organization which represents brokers who agree to disclose all their fees clearly and early in the loan application process.
The fees are about $3,500, according to Guttentag, who created the organization, but passed it on to Heideman to run. Guttentag remains a director.

Upfront Mortgage Brokers also disclose the wholesale interest rates that mortgage lenders offer to brokers, rather than adding a markup and presenting "retail" prices to clients, as traditional brokers do, according to the organization's Web site.

Any fees that the Upfront brokers get from lenders later in the process are credited back to the borrowers.

"The borrower needs to be informed," Heideman said. "I'm not against making money -- I'm not a commie -- but how can a client make the best decision on a mortgage when all the pieces aren't laid out before them?"
But more disclosure has probably come too late for the homeowners suing NovaStar, according to their lawyer Ari Brown.

"People have a right to know that they're paying a higher interest rate because their mortgage broker is getting paid by the lender," he said. NovaStar "developed an entire business model that focuses on not disclosing these yield spread premiums."
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Alistair Barr is a reporter for MarketWatch in San Francisco.

Bear Stearns Shakes Up Funds Unit
June 30, 2007
Bear Stearns Shakes Up Funds Unit
By VIKAS BAJAJ
New York Times

Bear Stearns moved quickly yesterday to replace a senior executive whose unit ran two hedge funds that nearly collapsed this month because of aggressive bets on mortgage securities.

The executive, Richard A. Marin, was succeeded as chairman and chief executive of Bear Stearns Asset Management by Jeffrey B. Lane, a vice chairman at Lehman Brothers and a Wall Street veteran known for his administrative skills.

Bear Stearns said Mr. Marin would remain as a special adviser to Mr. Lane. Through a spokesman, Mr. Marin declined to comment.

That Bear Stearns is bringing in a new leader for its asset management business, a small but fast-growing division, was not a surprise; executives inside the firm had called the near-collapse of the funds a black eye dealt to the firm's reputation for prudent risk management. What is striking is how quickly the firm moved.

In an interview early this week, the chief executive of Bear Stearns, James E. Cayne, described the hedge funds' problem as a "body blow of massive proportions."

Mr. Lane, who was approached about the job earlier this week by Warren J. Spector, a president and co-chief operating officer at Bear, knows his new colleagues well. Neuberger Berman, an asset management firm that Mr. Lane previously led, held merger talks with Bear Stearns before it was eventually acquired by Lehman Brothers in 2003.

Shares of Bear Stearns, which until recently had performed better than those of other investment banks, have fallen 6.7 percent in the last two weeks. They closed down 2.8 percent, or $4, to $140 yesterday.

In addition to Mr. Marin, questions have arisen about Ralph R. Cioffi, the manager of the two hedge funds that had borrowed more than $10 billion to invest in complex securities that trade infrequently and are hard to value.

In a telephone interview yesterday, Mr. Lane said that Mr. Cioffi was still with the firm and working with Thomas Marano, the head of the firm's mortgage business and a respected trader, to help unwind the two funds in an orderly manner.

"Everybody is an employee at will," Mr. Lane said, "and there is never too much talent at the company."

The Securities and Exchange Commission has also started an informal inquiry into issues surrounding the Bear hedge funds and how the industry is valuing mortgage-related securities like those that Bear holds.

Though Bear and its executives had only invested $40 million of their own money in the fund, the firm was compelled to initially pledge a $3.2 billion credit line to rescue the older of the two funds when lenders demanded more collateral to secure their loans. The bank later reduced that amount to $1.6 billion.

Investors had also sought to redeem their stakes in the fund, but they have been unable to do so since May.

Yesterday's announcement came after a day after reports that Mr. Marin maintained a personal blog, on which he described the efforts to save the two funds, which had borrowed billions of dollars from other investment banks, as "trying to defend Sparta against the Persian hordes of Wall Street."

Mr. Lane, 65, a native of Brooklyn and a first lieutenant in the Army, worked his way up on Wall Street, holding several administrative and managerial roles. Under his leadership, Neuberger, which for most of its history was a private partnership known for its mutual funds, went public and sold itself for $2.6 billion to Lehman Brothers.

Some analysts said yesterday that Mr. Lane would bring a steady hand to Bear Stearns Asset Management, which had set an aggressive goal to account for 10 percent of the firm's revenue by 2010.

But Mr. Lane, who for the last four years has not been involved in day-to-day management of a business at Lehman, said he was not interested in baby-sitting a child suffering from growing pains. He said he expected to expand the business through acquisitions.

"I don't think anybody here is interested in retreating," he said. "From adversity comes opportunity. This is a great franchise, and we are going to move forward."

Mortgage vultures swoop on US housing crisis
Mortgage vultures swoop on US housing crisis
By Philip Sherwell in New York, Sunday Telegraph
08/07/2007
Telegraph UK

Home owners who have become mired in debt during America's growing housing crisis are falling prey to a booming new industry in "mortgage rescue" scams that end up depriving them of their properties permanently.

The scams lure owners into signing over their deeds to a temporary purchaser after being falsely assured that they will be able to buy the property back when their financial situation improves. Often the paperwork is so complicated that they do not realise they have surrendered ownership.

It is the latest example, say critics, of the predatory financial practices that have exacerbated the slump in the American housing sector.

During the previous decade-long housing boom, high-risk "subprime" mortgages were granted with few checks to borrowers on low incomes or with bad credit, many of whom cannot now meet their repayments. Repossessions in the first quarter of this year were up 35 per cent on the same period last year, itself a record for mortgage defaults.

Against this depressed backdrop, "rescue" scams have proliferated as companies aggressively target troubled homeowners when their financial woes are made public in local authority records.

Aleem Morris was one of them. After losing his job as a forklift operator, the 30-year-old fell behind on the mortgage repayments on the house in Newark, New Jersey, where he lives with his grandfather, a frail pensioner.

Despite borrowing money from family and friends, he owed $148,000 and his home went into the repossession (or "foreclosure") process. It was then that he replied to a flier from a "foreclosure specialist" with the message: "Are you losing sleep because of mounting debt and harassing bill collectors?"

Mr Morris said the company offered to purchase the house from him, give him $20,000 in cash and allow him and his 81-year-old grandfather to live in the family home rent-free while he worked to improve his credit rating so that he could buy the property back.

"It sounded like a great offer. I had no suspicions," he said last week.

Although Mr Morris received his $20,000 and his debts were paid off, he was no longer the owner of the house and $127,000 from the sale went not to him but to a New York finance company.

Worse was to come. Not only was Mr Morris not able to buy the property back, he recently received a bank notice indicating that the house was again about to be repossessed, confounding his expectations that he would be allowed to remain as a tenant.

"I trusted these guys and now an 81-year-old man could be thrown out of the house where he has lived since 1984," he said. "It makes me sick."

His lawyer, Abbott Gorin, an attorney in the anti-predatory unit at Essex-Newark Legal Services, said: "These companies are like sharks biting into prey. They are looking to see if there is any equity in the house, if there is any fat on the bones. If there is, they strike.

"They bombard the aged, jobless and disadvantaged, people with debt or health problems, with phone calls, mail solicitations and personal visits. And some people are so desperate that in a weak moment, they accept the offer of so-called help."

Mr Morris's case is typical of those being reported across America as "rescue" schemes take advantage of the homeowners' vulnerability. The complex mortgage loan documents are written in such dense language that five in 10 borrowers cannot tell how much they are borrowing, according to the Federal Trade Commission.

As calls for federal legislation grow, Massachusetts became the latest state to act last month when it banned all "rescue" schemes that entice homeowners to transfer their deeds to a supposedly temporary purchaser.

"We've seen no instances where they actually help and they are rife with fraud and abuse," said Christopher Barry-Smith, the head of the state Consumer Protection Division, who added that dozens of "foreclosure rescue artists" operated in Massachusetts.

The move was welcomed by the state's Mortgage Bankers Association. According to executive director Kevin Cuff, "no reputable mortgage lender would approve any kind of rescue scheme" which was run primarily by "unlicensed, fly-by-night operations".

In another sign of the scale of the housing crisis, the powerful investment bank Bear Stearns has just announced a $3.2 billion bailout of two of its hedge funds that were close to collapse after investing heavily in the subprime market.

Banks may freeze subprime loan rates to avoid home foreclosu
McClatchy Washington Bureau
Posted on Fri, Nov. 30, 2007
Banks may freeze subprime loan rates to avoid home foreclosures
Kevin G. Hall | McClatchy Newspapers

WASHINGTON ?- A coalition of major banks with exposure to problem subprime mortgages is finalizing a plan to freeze hundreds of thousands of adjustable-rate home loans at low introductory rates. That would prevent the loans from adjusting to much higher rates, which could trigger mass defaults and foreclosures.

Should subprime ARMs reset, many homeowners could be forced into costly foreclosure proceedings that could prevent a rebound of slumping local housing markets and spread to other industries, potentially even tipping the economy into recession.

The coalition met Thursday at the Treasury Department and briefed Treasury Secretary Henry Paulson and federal banking regulators on their progress toward creating an industry-wide approach to subprime loans, mortgages given to borrowers with weak credit.

"Treasury was encouraged by the progress we heard from mortgage-industry participants," said Jennifer Zuccarelli, a Treasury spokeswoman.

The rescue package targets adjustable-rate subprime loans for owner-occupied homes, not loans for investment properties. Eligible homeowners must be current on their payments and face costly resets that they can't afford. How they must prove that they can't afford the higher rates hasn't been revealed.

The plan would be voluntary for lenders, but the banks involved in the discussions hold, directly or indirectly, about four out of every five subprime adjustable-rate mortgages, or ARMS.

The banks' plan recognizes that, absent a proactive move, many subprime ARMs could reset next year to 12 percent or more from current rates of 7 percent to 9 percent.

"I think there is a basic assumption here that there is money that is going to be lost one way or the other," said Wayne Abernathy, the executive director of financial institution policy at the American Bankers Association.

"I think there's a realization among investors that maybe getting some interest, even if it wasn't the interest (rate) envisaged under the terms of the mortgage ... is better than having to go through the foreclosure process," said Nigel Gault, an economist with forecaster Global Insight. "Stemming the number of foreclosures may reduce the severity of the overall downturn in the housing market."

One key point in the talks has been to limit who can get a workout.

"The test is to come up with a plan that doesn't spook the secondary market," said Abernathy, who wasn't at the meeting but is familiar with the issues.

Traditionally, banks held home loans on their books. But over the past decade, there's been an explosion in the secondary mortgage market, where home loans are sold and bundled together with other loans to be sold again as mortgage bonds. This process is called securitization, and this market has seized up amid concerns that massive foreclosures are coming that will slash the bonds' value.

Paulson and other regulators met with representatives from Washington Mutual, Wells Fargo & Co. and Citigroup. The meeting brought together loan underwriters, mortgage servicers who place the loans into the secondary market and the trade group American Securitization Forum.

The workout concept was aided earlier this year by the Securities and Exchange Commission, which held that loan servicers could work with borrowers before they got into trouble in order to preserve the integrity of the bundled mortgage bonds.

Wall Street analysts believe there are roughly 1.5 million subprime loans resetting next year, with a value exceeding $350 billion. Federal regulators believe there are 2 million "exotic" ARMs that have low introductory teaser rates and that 30 percent of them are already behind on payments. The number of homeowners who could benefit from the rescue package remains unclear.

Community activists working with homeowners complain that banks have been slow to help individuals with workouts.

"It's nowhere near satisfactory," said Paul Dylan, a community organizer in Minneapolis for ACORN, a national housing advocacy group. ACORN has pushed local and federal government officials to pressure banks, but it was only recently that the federal government began paying attention to the pending resets.

Federal Deposit Insurance Commission Chairman Sheila Bair suggested a five-year freeze on the resets of certain exotic ARMs. Paulson initially rejected that idea. John M. Reich, the director of the Office of Thrift Supervision, has suggested a minimum three-year freeze on resets.

On Mortgage Relief, Who Gains the Most?
On Mortgage Relief, Who Gains the Most?
By Edmund L. Andrews
The New York Times
Friday 07 December 2007

Washington - At least one thing is clear about President Bush's plan to help people trapped by the mortgage meltdown: it is an industry-led plan, not a government bailout.

Although Mr. Bush unveiled the plan at the White House on Thursday, its terms were set by the mortgage industry and Wall Street firms. The effort is voluntary and it leaves plenty of wiggle room for lenders. Moreover, it would affect only a small number of subprime borrowers.

The plan was the target of criticism from consumer advocates who said its scope was too narrow, and from investment firms, who said it went too far. Others warned that the plan, by letting some stretched homeowners off the hook, could encourage more reckless borrowing in the future.

"The approach announced today is not a silver bullet," said Treasury Secretary Henry M. Paulson Jr., who hammered out the agreement. "We face a difficult problem for which there is no perfect solution."

The heart of Mr. Bush's plan is a cautious attempt to help troubled homeowners by persuading financiers to freeze mortgages at low introductory rates for five years, but without actually forcing the hands of lenders and investors who hold the mortgages.

One of the financial industry's lead negotiators estimated that at most 20 percent of subprime borrowers whose payments will increase sharply over the next 18 months - 360,000 out of 1.8 million people - would qualify for rapid consideration of a special five-year freeze on interest rates.

The number of people who actually obtain help would be smaller, because each borrower would face tests aimed at weeding out those considered too hopelessly in debt and those who make too much money to justify relief.

In one curious twist, the plan could eliminate many who have good credit scores or managed to improve their credit scores, because the good ratings would be a sign they do not need help.

"Talk about moral hazard," remarked Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee. "We've all told people, don't go any more deeply into debt. Now we're saying that people who go more deeply into debt will have an advantage over people who don't go more deeply into debt."

The administration's theory is that there is a "sweet spot" in the market where it makes more financial sense for lenders to offer some relief than it does to foreclose on homeowners.

Most analysts agree there is a sweet spot of some sort. Investors typically lose 40 percent or 50 percent on homes that go into foreclosure, and the cost of shielding borrowers from a big jump in rates can be much less.

"I think there is a sweet spot," said Bert Ely, a banking consultant in Alexandria, Va. "But I worry that the sweet spot is much smaller than people think it is. And as housing prices continue to decline and debts pile up, I fear the sweet spot will shrink."

Administration officials estimate about 500,000 subprime borrowers are in danger of losing homes in the next 18 months as their low teaser rates expire and their monthly payments jump by 30 percent or more. Outside analysts warn the number of foreclosures could be much higher.

The Mortgage Bankers Association reported that the number of new foreclosure proceedings hit a record in the third quarter and that the delinquency rate on mortgages climbed to the highest level since 1986. The biggest problem, according to the survey, was in subprime loans, which are typically made at higher interest rates to people with shaky credit records or weak incomes.

But Mr. Paulson and the president's other top economic advisers have remained staunchly opposed to anything that resembled a government-financed bailout for people who took out foolish mortgages or investors who bought the mortgages.

As a result, administration officials have walked a narrow line. They have held meetings bringing together mortgage-servicing companies and groups representing investors holding mortgages.

Instead of pressuring the industry to come up with specific relief, Mr. Paulson pushed the players to come up with a streamlined approach for deciding when to modify loan terms.

But Tom Deutsch, deputy director of the American Securitization Forum, which represented investment funds in the negotiations, made it clear that any rate freeze would be strictly voluntary and based on what investors decided was in their self-interest.

"This is not a government bailout program," Mr. Deutsch said. "This is an industry-led framework for providing the best market standards and practices. There is no mandate here."

President Bush and other top administration officials emphasized that the plan could help as many as 1.2 million subprime borrowers - about two-thirds of all people with subprime loans.

But that estimate covers hundreds of thousands of borrowers who are believed to qualify without any extra help for cheaper conventional mortgages, like those insured by the Federal Housing Administration.

Nonprofit housing groups that try to help troubled homeowners renegotiate mortgages were underwhelmed by Mr. Bush's plan.

The Greenlining Institute, a housing advocacy group in California that began raising alarms about subprime loans nearly four years ago, estimated that only 12 percent of all subprime borrowers and only 5 percent of minority homeowners would benefit from the rate freeze. The Center for Responsible Lending, a nonprofit group that supports homeownership, said the freeze would help only about 145,000 people.

"This grossly inadequate plan is likely to harm the president's desire to close the minority homeownership gap and create an ownership society," said Robert Gnaizda, general counsel for the Greenlining Institute.

Some Wall Street analysts were equally unenthusiastic. "This plan only really amounts to a set of recommendations for lenders that is sure to meet some resistance from investors" in the mortgage-backed securities, wrote Paul Ashworth, an economist at Capital Economics.

Indeed, there were rumblings of rebellion among some institutional investors. "Why would anybody in his right financial mind agree to a five-year price freeze, especially when we're staring in the face of possible inflation?" asked Roger W. Kirby, managing partner at Kirby McInerney, which has represented investors in class-action lawsuits over securities. "Mr. Paulson has overestimated the generosity of people on Wall Street."

Bush lets banks write rules for mortgage relief
Bush lets banks write rules for mortgage relief
By Jaimeson Champion
Published Dec 13, 2007

President George W. Bush and Treasury Secretary Henry Paulson have unveiled their subprime mortgage relief plan, which they call the "New Hope Alliance." The corporate media coverage of Bush's Dec. 6 announcement was massive. Sadly, the number of families whom this plan will help is miniscule.

Subprime mortgage loans are characterized by interest rates that start at 1 percent to 2 percent but soon "reset" to much higher rates. The Bush administration claims its plan will help families avoid foreclosure by freezing interest rates on some subprime loans for the next five years.

The administration has attempted to portray its mortgage relief plan as a lifeline for at-risk borrowers. But the plan is more akin to a wish list for the very same banks and mortgage lenders whose insatiable greed helped create the currently unfolding economic crisis.

The Bush-Paulson plan includes a maze of eligibility requirements that are designed to disqualify all but a handful of the more than 2 million households facing foreclosure. Housing advocacy groups estimate that less than 2 percent of subprime borrowers nationwide would qualify for a rate freeze under the administration's plan. And it provides no help for the growing number of renters across the country who have been left homeless since their landlords entered foreclosure due to a subprime loan.

The Bush administration has ensured, however, that the plan is agreeable to mortgage lenders and Wall Street banks by making lender participation in the relief plan completely voluntary. In other words, the banks and mortgage lenders don't have to freeze interest rates if they don't want to. They are likely to do so only if they decide that the housing market is so glutted that going the foreclosure route could leave them stuck with property that can't be sold.

This hollow "relief" plan stands in stark contrast to the hundreds of billions of dollars in bailout money that the Federal Reserve has handed the Wall Street banks and investment funds over the past few months.

These bailout funds have come in the form of massive liquidity infusions and central bank purchases of collateralized debt obligations. CDOs are asset-backed securities that are tied to mortgage loans. Banks such as Citigroup and Bank of America hold this now-worthless paper in massive quantities. The Federal Reserve has been attempting to bail the major banks out of their crisis by essentially taking the worthless paper off the banks' balance sheets.

Working-class households are entering into foreclosure and bankruptcy at levels not seen since the Great Depression, yet it is the rich capitalist investors and bankers who are given hundreds of billions of dollars in rescue funds.

Across the country, once-vibrant working-class communities have turned into near ghost towns as "For Sale" signs and boarded-up windows have become ubiquitous. Workers are also suffering under the weight of rising food and energy costs at the same time that the economic downturn is intensifying the bosses' drive to slash wages and cut jobs. Yet the only relief plan the president can conjure up is to tell workers to "hope" that banks will voluntarily freeze interest rates on some mortgages.

Recent polls suggest that the economy is fast becoming the number one issue on the minds of potential voters in the 2008 election. Eager to garner votes, the Democrats have also been outlining proposals for mortgage relief. It's part of a debate within the ruling class over how to smooth over some of the massive fallout from the currently unfolding crisis.

"Relief" for the working class will not come through the empty proposals of ruling-class politicians. It takes the organized resistance of the multinational working class against the banks and swindlers on Wall Street who are robbing workers of their homes. Democrats and Republicans can debate back and forth endlessly over their mortgage plans, with little consequence. But millions of workers in the streets demanding a moratorium on foreclosures, layoffs and wage cuts would create the potential for truly lasting relief.

Deception hits mortgage market once again: reverse mortgages
Deception hits mortgage market once again
By Tony Pugh | McClatchy Newspapers
Posted on Friday, December 14, 2007

WASHINGTON ?- With the housing market in decline, unscrupulous sales agents are popping up in the booming reverse mortgage industry, where reports of deceptive and high-pressure sales tactics are worrying lawmakers and consumer advocates alike.

Both say thousands of older Americans could be steered into inappropriate loans, just as millions were lured into now-shaky sub-prime loans. Their solution? Better loan counseling and stronger government supervision and regulation.

"We have gone through a savings and loan collapse, a stock market bubble and are currently in the middle of a lending mess. Our goal is to make sure that the reverse mortgages don't become the scandal of the next decade," said Sen. Claire McCaskill, D-Mo., said at a hearing this week before the Senate Special Committee on Aging.

Reverse mortgages typically allow homeowners who are 62 and older to borrow against their home equity without having to repay the money until the home is sold or the borrower dies or permanently moves out. The older the borrower and the greater the value of the home, the more money that can be borrowed.

Ninety percent of reverse mortgages are issued through the federally insured Home Equity Conversion Mortgage program. The number of HECM loans issued annually has grown from 157 in 1990 to more than 76,000 last year. Lenders expect to issue more than 214,000 loans this year.

Most agree that reverse mortgages, used properly, can provide cash to help seniors live more comfortably. In fact, the Senate on Friday passed bipartisan legislation that removes the cap on the number of reverse mortgage loans that the Federal Housing Administration can insure.

But as the popularity of reverse mortgages grows, the industry is proving fertile ground for predatory lenders, loan agents and brokers who see older, cash-strapped borrowers as easy pickings.

Peter Bell, president of the National Reverse Mortgage Loan Association, said he doesn't believe the problem is widespread. But he conceded that sales agents left jobless by the housing crisis are migrating to the reverse mortgage industry and may "have a different type of mentality about moving transactions through quickly."

More than 12.5 million seniors ages 65 and over own their homes with no mortgage debt, representing more than $4 trillion in home equity. Those numbers will only increase as the first of nearly 80 million baby boomers born before1964 begin retiring in the next few years.

Bell said empathy for the customer is the most important quality for long-term success in the reverse mortgage industry. "The motivation has to be pure," he said.

In committee testimony, however, Prescott Cole, a lawyer from San Francisco, said some sales agents seeking larger commissions are wrongly advising seniors to buy tax-deferred annuities with their loan proceeds.

Deferred annuities are a popular retirement savings vehicle but are not always the best choice, especially for older seniors, according to experts.

In one case, a 92-year-old man put $650,000 in a deferred annuity and died two years later, Cole said. But because the annuity didn't mature until 2063, the dead man's family had to pay a $150,000 fee to break the contract and access the money, said Cole, who works on behalf of the national Coalition to End Elder Financial Abuse.

"Long-term annuities are almost always inappropriate for seniors, as they can tie up retirement savings far beyond one's life expectancy," said Sen. Herb Kohl, D-Wis.

The nation's largest provider of reverse mortgages, Financial Freedom Senior Funding Corp. of Irvine, Calif., is at the center of the controversy due to several lawsuits that claim borrowers were steered into inappropriate loans and annuities by sales agents and insurance brokers working in concert.

In one lawsuit, San Francisco attorney Ingrid Evans is seeking class-action status on behalf of Mary Munoz, a 79-year-old Los Angeles woman who claims she was advised to take out a $209,000 reverse mortgage from Financial Freedom in 2004.

Munoz later purchased $80,000 in annuities, which she was told would be used to pay off the reverse mortgage when she died. Months later, Munoz was forced to withdraw more than $26,000 from the deferred annuity in order to make home repairs required under terms of the reverse mortgage. The withdrawal triggered penalties that Munoz claims she was not aware of when she purchased the annuity.

The suit claims that excessive fees, penalties and other costs effectively depleted Munoz's equity in her property and that thousands of other borrowers across the country have had similar experiences.

Representatives of Financial Freedom would not comment on the litigation, except to say they believed the allegations were "baseless and without merit."

After declining an invitation to appear before the Senate subcommittee, Financial Freedom's general counsel Joel Schiffman said in written testimony that the company provides annuity disclosure information about combining annuities and reverse mortgages, but "does not offer, endorse or recommend the purchase of any other financial or insurance product or service."

While loan counseling is required on federally insured reverse mortgages, it is insufficient by many accounts. Individual counselors get no specific training and instead of helping borrowers determine if a loan is appropriate, they only make sure that borrowers understand the loan's terms, said Cole.

"The funding is severely inadequate," said Meg Burns, director of single-family programs at the Federal Housing Authority.

On Friday, McCaskill and Kohl introduced legislation that would increase federal funding for reverse mortgage loan counseling. The bill also would bar sales agents from acting as loan counselors.

ON THE WEB A new report on reverse mortgages by AARP.
http://www.aarp.org/research/credit-debt/mortgages/2007_22_revmortgage.html

Mortgage Crisis Spreads Past Subprime Loans
Mortgage Crisis Spreads Past Subprime Loans
By Vikas Bajaj and Louise Story
The New York Times
Tuesday 12 February 2008

The credit crisis is no longer just a subprime mortgage problem.

As home prices fall and banks tighten lending standards, people with good, or prime, credit histories are falling behind on their payments for home loans, auto loans and credit cards at a quickening pace, according to industry data and economists.

The rise in prime delinquencies, while less severe than the one in the subprime market, nonetheless poses a threat to the battered housing market and weakening economy, which some specialists say is in a recession or headed for one.

Until recently, people with good credit, who tend to pay their bills on time and manage their finances well, were viewed as a bulwark against the economic strains posed by rising defaults among borrowers with blemished, or subprime, credit.

"This collapse in housing value is sucking in all borrowers," said Mark Zandi, chief economist at Moody's Economy.com.

Like subprime mortgages, many prime loans made in recent years allowed borrowers to pay less initially and face higher adjustable payments a few years later. As long as home prices were rising, these borrowers could refinance their loans or sell their properties to pay off their mortgages. But now, with prices falling and lenders clamping down, homeowners with solid credit are starting to come under the same financial stress as those with subprime credit.

"Subprime was a symptom of the problem," said James F. Keegan, a bond portfolio manager at American Century Investments, a mutual fund company. "The problem was we had a debt or credit bubble."

The bursting of that bubble has led to steep losses across the financial industry. American International Group said on Monday that auditors found it may have understated losses on complex financial instruments linked to mortgages and corporate loans.

The running turmoil is also stirring fears that some hedge funds may run into trouble. At the end of September, nearly 4 percent of prime mortgages were past due or in foreclosure, according to the Mortgage Bankers Association.

That was the highest rate since the group started tracking prime and subprime mortgages separately in 1998. The delinquency and foreclosure rate for all mortgages, 7.3 percent, is higher than at any time since the group started tracking that data in 1979, largely as a result of the surge in subprime lending during the last few years.

An example of the spreading credit crisis is seen in Don Doyle, a computer engineer at Lockheed Martin who makes a six-figure income and had a stellar credit score in 2004, when he refinanced his home in Northern California to take cash out to pay for his daughter's college tuition.

Mr. Doyle, 52, is now worried that he will have to file for bankruptcy, because he cannot afford to make the higher variable payments on his mortgage, and he cannot sell his home for more than his $740,000 mortgage.

"The whole plan was to get out" before his rate reset, he said. "Now I am caught. I can't sell my house. I'm having a hard time refinancing. I've avoided bankruptcy for months trying to pull this out of my savings."

The default rate for prime mortgages is still far lower than for subprime loans, about 24 percent of which are delinquent or in foreclosure. Some economists note that slightly more than a third of American homeowners have paid off their mortgages completely. This group is generally more affluent and contributes more to consumer spending and the economy relative to its size.

Unlike subprime borrowers, who tend to have lower incomes and fewer assets, prime borrowers have greater means to restructure their debt if they lose jobs or encounter other financial challenges. The recent reductions in short term interest rates by the Federal Reserve should also help by reducing the reset rate for adjustable loans.

Still, economists say the rate cuts and the $168 billion fiscal stimulus package are unlikely to make a significant dent in the large debts weighing on many Americans, because banks have tightened lending standards and expected rebates from the government will not cover most house payments.

The problems are most acute in areas that experienced a big boom in housing - California, the Southwest, Florida and other coastal markets - and in the Midwest, which is suffering from job losses in the manufacturing sector.

And it is not just first-mortgage default rates that are rising. About 5.7 percent of home equity lines of credit were delinquent or in default at the end of last year, up from 4.5 percent a year earlier, according to Moody's Economy.com and Equifax, the credit bureau.

About 7.1 percent of auto loans were in trouble, up from 6.1 percent. Personal bankruptcy filings, which fell significantly after a 2005 federal law made it harder to wipe out debts in bankruptcy, are starting to inch up.

On Monday, Fitch Ratings, the debt rating firm, reported that credit card companies wrote off 5.4 percent of their prime card balances in January, up from 4.3 percent a year ago. The so-called charge-off rate is still lower than before the 2005 law went into effect.

Banks are responding to the rise in delinquencies by capping home equity lines of credit in areas with falling real estate prices. A few credit card companies have also moved to reduce the credit limits of customers they deem more risky.

Bank of America, Citigroup, Countrywide Financial, JPMorgan Chase, Washington Mutual and Wells Fargo are expected to announce on Tuesday at the Treasury Department that they will offer both prime and subprime borrowers who are more than three months behind a chance to halt foreclosure proceedings for 30 days and work out new loan terms.

In a conference call with analysts in December, Kenneth Lewis, the chief executive of Bank of America, said more borrowers appear to be giving up on their homes as prices fall, noting a "change in social attitudes toward default."

"You don't mind making a $2,000 payment when the house is going up" in value, said Steve Walsh, a mortgage broker in Scottsdale, Arizona, who has seen several clients walk away from their homes because they couldn't refinance or sell. "When it's going down, it becomes a weight around your neck, it becomes an anchor."

Home prices in the North Las Vegas neighborhood of Brenda Harris, a technology analyst at a casino company, have fallen 20 percent to 30 percent. The builder who sold her a new three-bedroom home on Pink Flamingos Place for about $392,000 in 2006 is now listing similar properties for $314,000. A larger house a block down from Ms. Harris was recently listed online for $310,000.

But Ms. Harris does not want to leave her home. She estimates that she has spent close to $40,000 on her property, about half for a down payment and much of the rest on a deck and landscaping.

"I'm not behind in my payments, but I'm trying to prevent getting behind," Ms. Harris said. "I don't want to ruin my credit."

In addition to the declining value of her home, Ms. Harris, 53, will soon be hit with a sharply higher house payment. She has an option adjustable-rate mortgage, a loan that allows borrowers to pay less than the interest and principal due every month. The unpaid interest gets added to the principal balance. She is making the minimum monthly payments due on her loan, about $2,400.

But she knows she will not be able to pay the $3,400 needed to cover her interest and principal, which she will be required to pay once her loan balance reaches 115 percent of her starting balance. And under the terms of her loan, which was made by Countrywide Financial, she would have to pay a prepayment penalty of about $40,000 if she chose to refinance or sell her home before May 2009.

She said that she now wishes she had taken a traditional fixed-rate loan when she bought the home. At the time, she asked for a loan that could be refinanced after one year without penalty. She said her broker had told her a week before the closing that the penalty would extend until May 2009 and that she reluctantly agreed because she had already started moving.

A nonprofit community group, Acorn Housing, is trying to broker a modification of Ms. Harris's loan. In a statement Friday, Countrywide said the company had been in touch with Ms. Harris and would work with her.

Credit counselors say many borrowers like Ms. Harris were cajoled or pushed into risky mortgages that they never had the ability to repay.

Others disregarded warnings about complex loans because they wanted to be a part of the housing boom, which like the technology stock bubble lured people in with seemingly instant and risk-free profits, said Mory Brenner, vice president of Financial Firebird Corporation, a company based in Pittsfield, Mass., that publishes consumer debt information and refers borrowers to credit counselors.

"I'd say, Let me tell you something, this is crazy," Mr. Brenner said. "You cannot afford this house, even if nothing happens and rates stay as low as they are today. And the response would be: I don't care."

Lenders extended credit to people without verifying their incomes and allowing them to make little or no down payments.

But borrowers like Mr. Doyle, the engineer in Northern California, say they are victims of their circumstances - housing prices collapsed and lending standards tightened just as they needed to sell or refinance.

In refinancing their home in 2004, Mr. Doyle and his wife were doing what millions of other homeowners did in the last decade - tapping into the rising value of their homes for home improvements, paying off credit card debt, college tuition and for other spending.

The Doyles took advantage of the housing boom by refinancing their home nearly every year since they bought it in 1995 for $275,000. Until their most recent loan they never had a problem making their payments. They invested much of the money in shares of companies that subsequently went bankrupt.

Still, Mr. Doyle does not regret refinancing in 2004. "My goal was clear: I wanted to help my daughter go through college," he said. "It wasn't like it was for us."

McCain guru linked to subprime crisis
The only thing that prevented Phil Gramm and his wife from being indicted was the Republican dominated congress protected him in his financial corruption. Another person with responsibility for the sub-prime mortgage crisis is Alan Greenspan, who constantly pushed for people to apply for adjustable rate home mortgages instead of fixed rate mortgages. Greenspan said they would help grow the economy. ---BBB

McCain guru linked to subprime crisis
By LISA LERER - Politico
3/28/08

The general co-chairman of John McCain's presidential campaign, former Sen. Phil Gramm (R-Texas), led the charge in 1999 to repeal a Depression-era banking regulation law that Democrat Barack Obama claimed on Thursday contributed significantly to today's economic turmoil.

"A regulatory structure set up for banks in the 1930s needed to change because the nature of business had changed," the Illinois senator running for president said in a New York economic speech. "But by the time [it] was repealed in 1999, the $300 million lobbying effort that drove deregulation was more about facilitating mergers than creating an efficient regulatory framework."

Gramm's role in the swift and dramatic recent restructuring of the nation's investment houses and practices didn't stop there.

A year after the Gramm-Leach-Bliley Act repealed the old regulations, Swiss Bank UBS gobbled up brokerage house Paine Weber. Two years later, Gramm settled in as a vice chairman of UBS's new investment banking arm.

Later, he became a major player in its government affairs operation. According to federal lobbying disclosure records, Gramm lobbied Congress, the Federal Reserve and Treasury Department about banking and mortgage issues in 2005 and 2006.

During those years, the mortgage industry pressed Congress to roll back strong state rules that sought to stem the rise of predatory tactics used by lenders and brokers to place homeowners in high-cost mortgages.

For his work, Gramm and two other lobbyists collected $750,000 in fees from UBS's American subsidiary. In the past year, UBS has written down more then $18 billion in exposure to subprime loans and other risky securities and is considering cutting as many as 8,000 jobs.

Gramm did not respond to an e-mail, and was unavailable for comment, according to a UBS spokesman. The bank has no official position on the subprime crisis, the spokesman said, but is a member of the Financial Services Roundtable and other industry groups that are actively lobbying Congress on the issue.

Now, some housing experts and economists see Gramm's thinking in the recent housing proposal from McCain, the Republican Party's presumed presidential nominee. Gramm is often a surrogate for the Arizona senator, particularly in meetings focused on the economy. And McCain has hinted he'd consider the former Texas senator for Treasury secretary in a McCain administration.

McCain delievered an economic speech Tuesday that had Gramm's input, but it was written by domestic policy adviser Douglas Holtz-Eakin.

"Sen. Gramm was one of dozens of folks who Sen. McCain has consulted on the housing issue, including Carly Fiorina and Meg Whitman from eBay," said McCain campaign spokesman Brian Rogers. "They've been friends for years and he values Sen. Gramm's advice."

In the speech, McCain rejected the type of aggressive government intervention in the economic meltdown that has been embraced by his Democratic opponents ?- and even some Bush advisers.

"I have always been committed to the principle that it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers," McCain said. "Government assistance to the banking system should be based solely on preventing systemic risk that would endanger the entire financial system and the economy."

McCain's campaign later clarified that he would support programs for "deserving" homeowners and reforms that would improve transparency and accountability in capital markets.

Andrew Jakabovics, a housing expert at the liberal Center for American Progress, said McCain's interpretation of the crisis puts little blame on investment banks for their role in packaging the subprime loans into dangerously complex and ultimately hard to value financial instruments.

"I'd characterize this as the deux ex machina theory of financial products," Jakabovics said. "He views this as a market problem that manifests at the local level as housing, meaning he's more likely to argue in favor these guys when they argue for deregulation."

Wall Street firms are increasingly under scrutiny for contributing to the economic downturn by packaging and selling risky mortgage securities. When the home loans tied to the mortgages defaulted, investors and the banks lost billions, contributing to a widespread credit crunch.

"I think [McCain's] attitude is the market can basically handle this and government doesn't need to be heavily involved," said David Wyss, chief economist at Standard and Poor's.

McCain and Gramm have a long political history. The two became close when they worked together as senators to defeat Hillary Rodham Clinton's 1993 health care plan, holding meetings at hospitals and clinics across the country.

In 1996, McCain was national chairman of Gramm's unsuccessful presidential bid.

In 2000, the duo had a rare parting when Gramm backed his home-state governor, George W. Bush, for president instead of McCain. But they've reunited in this presidential race.

Gramm stood by his former Senate colleague in his worst days last summer when his campaign went broke and his candidacy was all but written off by political observers.

Gramm, who had joined the campaign in March as a domestic policy adviser, was among those who helped cut staff and shrink the budgets. He traveled with McCain in Iowa, New Hampshire and South Carolina and stumped for him in Georgia.
------------------------------------------------

Staff writer Victoria McGrane contributed to this story.

Struggling homeowners find little hope in federal program
Struggling homeowners find little hope in federal program
By Kevin G. Hall | McClatchy Newspapers
Posted on Saturday, March 29, 2008

WASHINGTON ?- In the nearly four months since Treasury Secretary Henry Paulson challenged mortgage lenders to modify distressed home loans voluntarily to ease record numbers of foreclosures, it remains difficult to gauge the program's success.

McClatchy followed several homeowners as they worked with ?- and sometimes battled ?- lenders and loan collectors during the mortgage modification process, called Hope Now.

These homeowners got their loan problems fixed, either temporarily or permanently, but the process was arduous and varied. Some got stays from foreclosure, while others merely saw the threat pushed into the future. For many, the total values of their loans didn't drop and remained larger than the current values of their homes.

"You have to fight for your house. If you are in my situation, you have to be persistent and do everything you can imagine," said Chris Jennings, a homeowner in Shasta Lake, Calif., a sleepy town not far from the Oregon border.

An antiques dealer without a fixed income, Jennings had refinanced his home two years ago with an adjustable-rate loan that was about to tick up on Feb. 15, adding $440 to his monthly payment. He'd assumed, like many other Americans, that he'd be able to refinance again when the time came for rates to change. His house was appraised at $225,000 in 2005, but nearby foreclosed properties now sell for $191,000 or less.

Jennings reached out in December to Litton Loan Servicing, a Houston company that collects his mortgage payments for holders of mortgage bonds. Banks rarely keep home loans on their books, instead selling them into a secondary market where they're pooled and sold as mortgage bonds. Loan servicers collect mortgage payments, which then serve as the return on investment in mortgage bonds.

Litton told Jennings he didn't qualify for a modification, even though he mentioned the Hope Now effort that had been launched Dec. 6, just days before his call.

Less than two weeks later, he tried again and was told that he'd be considered. He then waited for weeks as his Feb. 15 deadline moved closer. Already struggling to make his regular mortgage payments, he pulled cash from his credit cards and borrowed from friends to stay current on his loan.

Litton alternately told him that a modification looked probable, then improbable. The turning point came, Jennings said, when he threatened to hand over the keys to his home. Soon afterward, Litton gave him a 30-year, fixed-rate mortgage at 7.1 percent. The new loan knocked $200 off his monthly payment.

"It certainly wasn't for my benefit. They researched it well enough to know that if they'd foreclosed it, it would sit for a year or two with no income coming in," Jennings said.

He agreed to allow McClatchy to follow his negotiations, and Litton was told that a reporter was covering his case.

Donna Marie Jendritza, Litton's public relations manager, said that the industry initially struggled "to turn a big ship" because of the massive increase in requests for help from borrowers.

To cope, Litton increased its staffing for loss mitigation, the industry term for loan modification, by 150 percent last year, she said. The company services more than 340,000 home loans and now is modifying about 3,000 loans a month, she added, most of them involving permanent changes to the loans.

Those permanent modifications are important, but hard to verify.

Among the chief complaints about Hope Now is a lack of transparent data. Even Federal Reserve Chairman Ben Bernanke has said that he can't get reliable data on loan modifications.

At the time of its creation, Hope Now sought to modify up to 1.2 million adjustable-rate mortgages issued to sub-prime borrowers, those with the weakest credit. In a statement March 3 on its Web site, operated by mortgage-industry players, Hope Now said that more than 1 million homeowners had received loan workouts since last July.

That just muddied the waters. It included a period well before Hope Now began, and didn't distinguish among one-month payment deferrals, temporary freezes on adjustable rates and modifications into fixed-rate loans.

"The big question is how many real loan modifications are happening, and I don't think they know," said Kurt Eggert, a professor at the Chapman University School of Law in Orange, Calif., and a member of a Federal Reserve consumer advisory board. "How can you say you are on top of the problem if you don't know how broadly the 'best solution' is being applied?"

McClatchy also closely followed another borrower, in this case without revealing to the lender that a reporter was watching.

Julie Mickley and her husband bought their home 12 years ago in Tracy, Calif., and refinanced two years ago at the urging of a mortgage broker, who they wrongly assumed had a duty to serve them and not the lender.

Interest-only loans have low initial rates, and during that period the payments go toward interest, not principal. In Mickley's case, a higher rate kicked in after 24 months, along with a first payment of principal. Together that added $1,200 to her payments.

Mickley, 48, said the broker never fully explained that the loan's rate would adjust, and she acknowledged that she didn't read the complicated contract closely enough. New federal proposals expected to pass later this year would force clearer disclosure of payment increases at the time that a loan is agreed to.

Interest-only loans usually are for borrowers who don't plan on living in areas long and can count on home prices to keep appreciating.

Unfortunately for Mickley, she was planning to stay and home prices plunged. She was upside down on her loan, owing about $120,000 more than her house was worth.

To make matters worse, the required uptick in her monthly payments was substantial. When she paid only the interest on the loan, her monthly payment was $2,800. After the first adjustment, when the rate rose from 6.5 percent to 8.5 percent and principal was included, her payment jumped to $4,011. In March, the loan terms were to change again and her monthly payment would have been $4,354.

"It's a double whammy. Not only can you not refinance and get yourself straight . . . but you're stuck with an adjustable-rate mortgage," said Mickley, a manager for a telecommunications firm.

For months, she battled loan servicer EMC Mortgage, owned by investment bank Bear Stearns. When she began calling about a loan modification last fall, unable to refinance, she was treated rudely, she said, sometimes left on hold for hours at a time.

Mickley was asked to document all her expenses, then was told that she could afford her mortgage because she still had $250 left every month after all expenses.

"When you take into consideration where we live, $250, anything from a vet visit to a birthday party (would eat that up) . . . it would basically make us a prisoner in our home," she said.

Mickley grew so angry that she sent a certified letter of complaint to the chief financial officer of Bear Stearns. Around Christmastime, just after Hope Now began, she got a call back and was told that her loan rate would be frozen at the starter rate of 6.5 percent for five years.

Even then, she was instructed to skip her January payment, which technically made her a delinquent borrower. She could never talk to the same person twice, and constantly had to start conversations from scratch.

"It actually put us into a spot where we looked at the house and said, 'Is it worth it,' because of what they were putting us through," Mickley said. She added that it took until late January before her temporary fix was finalized. "They handled all of the paperwork poorly, but by the time we got to the official documents, I was too beat up to argue."

EMC Mortgage declined to discuss her case, citing privacy restrictions.

In a statement, Renu Aldrich, a spokesman for parent company Bear Stearns, said, "Modifications can take as little as a few weeks to process, but more often it takes additional time to work through the issues and the legal constraints. We are pleased that we have helped this borrower reach a realistic resolution satisfactory to all involved."

Graph:
http://www.mcclatchydc.com/227/story/31892.html

Where Was Media When Sub-Prime Disaster Unfolded?
Where Was Media When Sub-Prime Disaster Unfolded?
By Danny Schechter - E & P
March 27, 2008

If we were long on the edge of "disaster" with a "financial nuclear winter" waiting in the wings, why were American news consumers among the last to know?

"It is somewhat surprising," Larry Elliott, economics editor of London's The Guardian observed recently, "that there is not already rioting in the streets, given the gigantic fraud perpetrated by the financial elite at the expense of ordinary Americans." If such a fraud was taking place, and if Wall Street's financial crisis, according to the usually staid Economist, was on the edge of "disaster" with a "financial nuclear winter" waiting in the wings, why were American news consumers among the last to know?

On the fifth anniversary of the war in Iraq, our press was papered with retrospectives that dealt with every aspect of the conflict except its own miscoverage. At the same time, another and, arguably, more serious crisis had been underway longer and covered even more poorly.

The New York Times finally got around to examining war reporting as a business not journalism story on March 24 (below the fold), well after the unhappy anniversary. The story cited as a prime excuse for the fall-off in coverage, a study suggesting a "decline in public interest" as if that was not influenced by the lack of the issue's visibility. Other factors were the expense and danger of covering a Iraq.

Those excuses cannot justify the fact that most of the reporting on Wall Street's woes started only after the market melted down in August 2007,and not as this crisis built in intensity since 2001 when a housing bubble was engineered to replace the failed dot.com bubble. The financial world is not in Baghdad, not risky or expensive to cover. In fact, most media outlets have correspondents on the scene every day.

Was the press just not paying attention as hundreds of billions of dollars were swept into exotic structure investment vehicles over years, and then sliced and diced into CDO's and so-called asset based securities? A New York Times columnist even admitted that experts and advocates first warned them in 2001 that predatory lending practices were devastating poor neighborhoods but the issue was not covered in any depth for five years. This has resulted in nearly three million families facing foreclosure and the rest of us losing share and home values.

A day before its "analysis" of the fall off in war coverage, the Times business section devoted a staggering 2905 words to explaining the mortgage crisis. This opus followed a similar spread in the Washington Post by two weeks. Both stories explained that the downfall was sparked by the use of overly complex securities designed not to be understood.

Noted the Times story: "It is the private trading of complex instruments that lurk in the financial shadows that worries regulators and Wall Street and that have created stresses in the broader economy. Economic downturns and panics have occurred before, of course. Few, however, have posed such a serious threat to the entire financial system that regulators have responded as if they were confronting a potential epidemic."

Most of the coverage has been relegated to not widely read business sections that focus on the ups and downs of the markets and the way the collapse of these arrangements have affected the fortunes of CEOS and business enterprises, not citizens, consumers and most of all homeowners, many of whom are or will be losing their homes.

Dean Starkman ,who studied the spotty "business" coverage in detail for the Columbia Journalism Review, concluded: "Today, as the credit crisis unravels, the business press can be fairly blamed for inattentiveness to the growing strains on middle-income borrowers. Maybe that's why so many middle-income people don't read it."

There is more to this very sad failure. Many newspapers and TV outlets were complicit. They accepted and made tons of money carrying slick and often deceptive advertising for shady mortgage lenders and credit card companies encouraging readers and viewers to accept more debt. Some major newspaper are tied into local real estate syndicates and get kickbacks from sales tied to their extensive advertising of homes for sale.

Was there a conflict of interest perceived in taking these ads?-which were important sources of revenue in a soft ad market---and producing watchdog journalism warning of the dangers of buying into subprime loans and other injurious products?

Is the press too imbued to our government's mission of inspiring consumer confidence? Is that, in turn, connected to using the news pages to benefit advertisers? Think of all those local TV reports "live at the mall" at Christmas time cheerleading for more shopping? At the time, it appeared as if everyone was buying everything. It was only later, well after the fact, that we learned that it was the worst Christmas season in five years.

What's worse is that the coverage may have missed the truly criminal aspects of this crisis, the issue so far being raised mostly overseas. This will be fought out in courtrooms worldwide when those who purchased worthless mortgages sue the companies who sold them knowing their true value. Why are the RICO laws not being used to prosecute a scam involving so many "entangled" companies? There is no shortage of data on this fraudulent and discriminatory scheme.

Already the FBI is investigating 17 mortgage companies. Attorney General Michael Mukasey, who never figured out that waterboarding is torture, now says his department is trying to figure out whether there is a larger criminal story.

Don't hold your breath for him to figure it out. Where is our mighty media that devoted so many acres of print to investigating Eliot Spitzer's victimless hypocrisy in looking into a far deeper failure that affects all of us and the future of our society?

Will we wait for the first credit-inspired riots to recognize the size and scale of this catastrophe or only read about it in the British press?
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Danny Schechter ([email protected]) , editor of Mediachannel.org, directed the film "In Debt We Trust" warning of this crisis. He also has written two books about the Iraq debacle.