Tag Archives: Borrowers

Beware The Marginal Buyer, Borrower, And Renter

 

Bubbles always look unstoppable, yet they always burst.

When times are good, the impact of the marginal buyer, borrower and renter on the market is often overlooked. By “marginal” I mean buyers, borrowers and renters who have to stretch their finances to the maximum to afford the purchase, loan or rent.

In bubble manias, buyers of real estate reckon the potential appreciation gains are worth the risk of buying a house they really can’t afford with the intention of flipping the home for a profit.

Workers moving to high-rent cities reckon they’ll either make more money going forward or find a cheaper flat later, so they pony up the high rent.

When there’s steady overtime or generous tips adding to the household income, buying a new car or getting a new auto lease looks do-able.

It’s difficult to assess how many recent buyers, borrowers and renters are marginal, but given the stagnation in household incomes and rising debt loads, it seems reasonable to guess that a substantial number of recent buyers, borrowers and renters are one lay-off or one missed bonus or one unexpected expense away from being unable to pay their mortgage, loan payment or rent.

On the surface, home and auto sales and the rental market all look robust because there’s no differentiation in sales data between people paying cash, qualified buyers/renters and marginal buyers/renters for whom every month is a stretch.

There have been times in my life when I was down to my last $100, and if things don’t turn up very quickly and in a sustained fashion when finances are that fragile, then payments will be missed at the first unexpected drop in income or first unexpected expense. Budget-killers include medical emergency, illness/lost work time, major car repairs and a host of other everyday risks.

There’s another layer of recent buyers who don’t feel they’re marginal–but their financial stability is more contingent than they realize. Their employment seems solid, but their employers sales and profits are more contingent and fragile than they realize.

When good times reverse to bad times, every enterprise with marginal sales takes a hit, and layoffs follow as night follows day. When times are good, layoffs are not even on the horizon. But when the economic tides recede, skittish, hollowed-out, and/or debt-burdened employers push the layoff button sooner rather than later because their own financial structure is so fragile.

Those laid off assume they will find another job quickly because in good times, there appears to be a labor shortage. But when the tide ebbs, the job offers dry up seemingly overnight.

The Grand Illusion being pushed by central bankers and conventional pundits is that another round of interest rate cuts and quantitative easing (QE) will restart the economy should it falter. This is illusion because it ignores how much of the market is dependent on marginal businesses, buyers, borrowers and renters who will not benefit from QE or a tiny decline in interest rates.

Conventional economists don’t quantify marginal businesses, buyers, borrowers and renters, and so the rapidity of the next drop in the economy will come as a great surprise to them. There is little to no awareness of how many enterprises, buyers, borrowers and renters are hanging on by a slender thread–and how many who reckon their finances are robust are one layoff away from insolvency.

Bubbles always look unstoppable, yet they always burst. The symmetry in this chart of the Case Shiller Housing Index for San Francisco suggests the clock is ticking on markets being propped up by marginal buyers, borrowers and renters:

https://i1.wp.com/www.oftwominds.com/photos2017/SF-Case-Shiller4-17a.png

By Charles Hugh Smith | Of Two Minds

New RICO-Fraud Class Action Against Ocwen For Abusive Fee Schemes Against Home Loans Serviced

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by
Reclaim Our Republic

This new class action against Ocwen addresses the marked-up default services fees that Ocwen is charging homeowners, particularly distressed homeowners, as part of a scheme of self-dealing with companies such as Altisource, and with the involvement of William C. Erbey, Executive Chairman, who has a leadership role on the Board of Ocwen and Altisource:

Weiner v Ocwen Financial Corporation a Florida Corporation COMPLAINT.
Weiner v. Ocwen Fin. Corp. and Ocwen Loan Servicing, LLC, No 2:14-cv-02597 (E.D.Cal.), filed Nov. 5, 2014.

52. Ocwen’s scheme works as follows: Ocwen directs Altisource to order and coordinate default-related services, and, in turn, Altisource places orders for such services with third-party vendors. The third-party vendors charge Altisource for the performance of the default-related services, Altisource then marks up the price of the vendors’ services, in numerous instances by 100% or more, before “charging” the services to Ocwen. In turn, Ocwen bills the marked-up fees to homeowners.

58.Thus, the mortgage contract discloses to homeowners that the servicer will pay for default-related services when reasonably necessary, and will be reimbursed or “paid back” by the homeowner for amounts “disbursed.” Nowhere is it disclosed to borrowers that the servicer may engage in self-dealing to mark up the actual cost of those services to make a profit. Nevertheless, that is exactly what Ocwen does.

[Ed.: Explanation of Modern Relationship Between Loan Servicers and Home Loan Borrowers]

America’s Lending Industry Has Divorced itself from the Borrowers it Once Served

18. Ocwen’s unlawful loan servicing practices exemplify how America’s lending industry has run off the rails.

19. Traditionally, when people wanted to borrow money, they went to a bank or a “savings and loan.” Banks loaned money and homeowners promised to repay the bank, with interest, over a specific period of time. The originating bank kept the loan on its balance sheet, and serviced the loan — processing payments, and sending out applicable notices and other information — until the loan was repaid. The originating bank had a financial interest in ensuring that the borrower was able to repay the loan.

20. Today, however, the process has changed. Mortgages are now packaged, bundled, and sold to investors on Wall Street through what is referred to in the financial industry as mortgage backed securities or MBS. This process is called securitization. Securitization of mortgage loans provides financial institutions with the benefit of immediately being able to recover the amounts loaned. It also effectively eliminates the financial institution’s risk from potential default. But, by eliminating the risk of default, mortgage backed securities have disassociated the lending community from homeowners.

21. Numerous unexpected consequences have resulted from the divide between lenders and homeowners. Among other things, securitization has led to the development of an industry of companies which make money primarily through servicing mortgages for the hedge funds and investment houses who own the loans.

22. Loan servicers do not profit directly from interest payments made by homeowners. Instead, these companies are paid a set fee for their loan administration services. Servicing fees are usually earned as a percentage of the unpaid principal balance of the mortgages that are being serviced. A typical servicing fee is approximately 0.50% per year.

23. Additionally, under pooling and servicing agreements (“PSAs”) with investors and note holders, loan servicers assess fees on borrowers’ accounts for default-related services. These fees include, inter alia, Broker’s Price Opinion (“BPO”) fees, appraisal fees, and title examination fees.

24. Under this arrangement, a loan servicer’s primary concern is not ensuring that homeowners stay current on their loans. Instead, they are focused on minimizing any costs that would reduce profit from the set servicing fee, and generating as much revenue as possible from fees assessed against the mortgage accounts they service. As such, their “business model . . . encourages them to cut costs wherever possible, even if [that] involves cutting corners on legal requirements, and to lard on junk fees and in-sourced expenses at inflated prices.”3

25. As one Member of the Board of Governors of the Federal Reserve System has explained:
While an investor’s financial interests are tied more or less directly to the performance of a loan, the interests of a third-party servicer are tied to it only indirectly, at best. The servicer makes money, to oversimplify it a bit, by maximizing fees earned and minimizing expenses while performing the actions spelled out in its contract with the investor. . . . The broad grant of delegated authority that servicers enjoy under pooling and servicing agreements (PSAs), combined with an effective lack of choice on the part of consumers, creates an environment ripe for abuse.4 (citing See Sarah Bloom Raskin, Member Board of Governors of the Federal Reserve System, Remarks at the National Consumer Law Center’s Consumer Rights Litigation Conference, Boston Massachusetts, Nov. 12, 2010, available at http://www.federalreserve.gov/newsevents/speech/raskin20101112a.htm (last visited Jan. 23, 2012).