Tag Archives: mortgage

Even Mortgage Lenders Are Repeating Their 2006 Mistakes

You’d think the previous decade’s housing bust would still be fresh in the minds of mortgage lenders, if no one else. But apparently not.

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One of the drivers of that bubble was the emergence of private label mortgage “originators” who, as the name implies, simply created mortgages and then sold them off to securitizers, who bundled them into the toxic bonds that nearly brought down the global financial system.

The originators weren’t banks in the commonly understood sense. That is, they didn’t build long-term relationships with customers and so didn’t need to care whether a borrower could actually pay back a loan. With zero skin in the game, they were willing to write mortgages for anyone with a paycheck and a heartbeat. And frequently the paycheck was optional.

In retrospect, that was both stupid and reckless. But here we are a scant decade later, and the industry is headed back towards those same practices. Today’s Wall Street Journal, for instance, profiles a formerly-miniscule private label mortgage originator that now has a bigger market share than Bank of America or Citigroup:

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Its rise points to a bigger shift in the home-lending business to specialized mortgage lenders that fall outside the banking sector. Such non-banks, critically wounded in the housing crisis, have re-emerged to become the market’s dominant players, with 52% of U.S. mortgage originations, up from 9% in 2009. Six of the 10 biggest U.S. mortgage lenders today are non-banks, according to the research group.

They symbolize both the healthy reinvention of a mortgage market brought to its knees a decade ago—and how the growth in that market almost exclusively has been in its less-regulated corner.

Post crisis regulations curb bank and non-bank lenders alike from making the “liar loans” that wiped out many lenders and forced a wave of foreclosures during the crisis. What worries some industry participants is that little has changed about non-bank lenders’ structure.

Their capital levels aren’t as heavily regulated as banks, and they don’t have deposits or other substantive business lines. Instead they usually take short-term loans from banks to fund their lending. If the housing market sours, banks could cut off their funding—which doomed some non-banks in the last crisis. In that scenario, first-time buyers or borrowers with little savings would be the first to get locked out of the mortgage market.

“As long as the good times roll on, it’s fine,” said Ed Pinto, co-director of the Center on Housing Markets and Finance at the American Enterprise Institute. “But all I can say is, we’re in a boom, and you cannot keep going up like this forever.”

Freedom was just a small lender in the last crisis. When it became hard to borrow money, Freedom Chief Executive Stan Middleman embraced government-backed loans on the theory they would offer more stability.

As Quicken Loans Inc., the biggest and best-known non-bank, grew with the help of flashy technology and advertising campaigns, Freedom stayed under the radar, buying smaller lenders and scooping up other companies’ huge portfolios of loans, often made to relatively risky borrowers.

Mr. Middleman is fond of saying that one man’s trash is another man’s treasure. “I always believed that, if somebody is applying for a loan, we should try to make it for them,” says Mr. Middleman.

The New Mortgage Kings: They’re Not Banks

One afternoon this spring, a dozen or so employees lined up in front of Freedom Mortgage’s office in Mount Laurel, N.J., to get their picture taken. Clutching helium balloons shaped like dollar signs, they were being honored for the number of mortgages they had sold.

Freedom is nowhere near the size of behemoths like Citigroup or Bank of America; yet last year it originated more mortgages than either of them, some $51.1 billion, according to industry research group Inside Mortgage Finance. It is now the 11th-largest mortgage lender in the U.S., up from No. 78 in 2012.

What does this mean? Several things, depending on the resolution of the lens you’re using.

In the mortgage market it means that emerging private sector lenders are taking market share – presumably by being more aggressive – which puts pressure on the relatively stodgy brand-name banks to lower their own standards to keep up. To grasp the truth of this, just re-read the last sentence in the above article: “I always believed that, if somebody is applying for a loan, we should try to make it for them.” That is fundamentally not how banks work. Their job is to write profitable loans by weeding out the applicants who probably won’t make their payments.

Now, faced with competitors from the “No Credit, No Problem!” part of the business spectrum, the big guys will once again have to choose between adopting that attitude or leaving the business. See Bad Bankers Drive Out Good Bankers: Wells Fargo, Wall Street, And Gresham’s Law. Since the biggest mortgage lender is currently Wells Fargo, for which cutting corners is standard practice, it presumably won’t be long before variants of liar loans and interest only mortgages will be back on the menu.

From a broader societal perspective, this is par for the late-cycle course. After a long expansion, most banks have already lent money to their high-quality customers. But Wall Street continues to demand that those banks maintain double-digit earnings growth, and will punish their market caps if they fall short.

This leaves formerly-good banks with no choice but to loosen standards to keep the fee income flowing. So they start working their way towards the bottom of the customer barrel, while instructing their prop trading desks and/or investment bankers to explore riskier bets. Miss allocation of capital becomes ever-more-common until the system blows up.

The signs that we’re back there (2007 in some cases, 2008 in others) are spreading, which means the reckoning is moving from “inevitable” to “imminent”.

Source: by John Rubino via DollarCollapse.com | ZeroHedge

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Australians Face Huge Spike in Repayments as Interest-Only Home Loans Expire

Day of Reckoning: Hundreds of thousands of interest-only loan terms expire each year for the next few years.

The Reserve Bank of Australia (RBA), Australia’s central bank, warns of a $7000 Spike in Loan Repayments as interest-only term periods expire.

Every year for the next three years, up to an estimated 200,000 home loans will be moved from low repayments to higher repayments as their interest-only loans expire. The median increase in payments is around $7000 a year, according to the RBA.

What happens if people can’t afford the big hike in loan repayments? They may have to sell up, which could see a wave of houses being sold into a falling market. The RBA has been paying careful attention to this because the scale of the issue is potentially enough to send shockwaves through the whole economy.

Interest Only Period

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In 2017, the government cracked down hard on interest-only loans. Those loans generally have an interest-only period lasting five years. When it expires, some borrowers would simply roll it over for another five years. Now, however, many will not all be able to, and will instead have to start paying back the loan itself.

That extra repayment is a big increase. Even though the interest rate falls slightly when you start paying off the principal, the extra payment required is substantial.

Loan Payments

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RBA Unconcerned

For now, the RBA is unconcerned: “This upper-bound estimate of the effect is relatively modest,” the RBA said.

Good luck with that.

Source: By Mike “Mish” Shedlock

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Australian Government Rolls Out Universal Reverse Mortgage Plan

The Australian government has proposed a wide-ranging reverse mortgage plan that would make an equity release program available to every senior over the age of 65.

Previously restricted to those who partially participate in the country’s social pension program, the government-sponsored plan will extend to any homeowner above the age cutoff, according to a report from Australian housing publication Domain.

Under the terms of the government-sponsored plan, homeowners can receive up to $11,799 each year for the remainder of their lives, essentially taken out of the equity already built up in their homes. Domain gives the example of a 66-year-old who can receive a total of $295,000 during a lifetime that ends at age 91.

As in the United States, older Australians have a significant amount of wealth tied up in their homes; the publication cited research showing that homeowners aged 65 to 74 would likely have to sell their homes in order to realize the $480,000 increase in personal wealth the cohort enjoyed over the previous 12-year span.

In fact, the Australian government last year attempted to encourage aging baby boomers to sell their empty nests to free up the properties for younger families. Under that plan, homeowners 65 and older could get a $300,000 benefit from the government, a powerful incentive in a tough housing market for downsizers — and in a government structure that counts income against seniors when calculating pension amounts.

“Typically, older homeowners have been reluctant to sell for both sentimental and financial reasons,” Domain reported last year. “Often selling property is costly, and funds left over after buying a smaller home  could then be considered in the means test.”

But the baked-in reverse mortgage benefit represents a shift toward helping seniors age in place instead of downsizing. The Australian government’s “More Choices for a Longer Life” plan also expands in-home care access by 14,000 seniors, according to the Financial Review, while boosting funding for elder physical-fitness initiatives and other efforts to reduce isolation among aging Australians.

The reverse mortgage plan will offer interest rates of 5.25%, which Domain noted is less than most banks, and will cost taxpayers about $11 million through 2022. Loan-to-value ratios are calculated to ensure that the loan balance can never exceed the eventual sale price of the home.

Source: By Alex Spanko | Reverse Mortgage Daily

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Australia Debating Universal Basic Income Plans

Greens leader Richard Di Natale has proposed a radical overhaul of Australia’s welfare system through the introduction of a universal basic income scheme, but critics believe this would only increase inequality.

Di Natale gave a speech at the National Press Club on Wednesday, outlining why he thought Australia’s current social security system was inadequate.

“With the radical way that the nature of work is changing, along with increasing inequality, our current social security system is outdated,” Di Natale said.

“It can’t properly support those experiencing underemployment, insecure work and uncertain hours.

“A modern, flexible and responsive safety net would increase their resilience and enable them to make a greater contribution to our community and economy.”

To address this, Di Natale called for the introduction of a universal basic income scheme, which he labelled a “bold move towards equality”.

“We need a universal basic income. We need a UBI that ensures everyone has access to an adequate level of income, as well as access to universal social services, health, education and housing,” he said.

“A UBI is a bold move towards equality. It epitomises a government which looks after its citizens, in contrast to the old parties, who say ‘look out for yourselves’. It’s about an increased role for government in our rapidly changing world.

“The Greens are the only party proudly arguing for a much stronger role for government. Today’s problems require government to be more active and more interventionist, not less.”

However Labor’s shadow assistant treasurer Andrew Leigh, responded on Twitter that Australia had the most targeted social safety net in the world and that Di Natale’s plan would increase inequality.

Leigh was unavailable for comment when contacted by Pro Bono News, but in a speech given at the Crawford School of Public Policy in April last year, he explained why he opposed a UBI.

“As it happens, using social policy to reduce inequality is almost precisely the opposite of the suggestion that Australia adopt a ‘universal basic income’,” Leigh said.

“Some argue that a universal basic income should be paid for by increasing taxes, rather than by destroying our targeted welfare system. But I’m not sure they’ve considered how big the increase would need to be.

“Suppose we wanted the universal basic income to be the same amount as the single age pension (currently $23,000, including supplements). That would require an increase in taxes of $17,000 per person, or around 23 percent of GDP. This would make Australia’s tax to GDP ratio among the highest in the world.”

Liberal Senator Eric Abetz described Di Natale’s plan as “economic lunacy”.

“Its catastrophic impact would see the biggest taxpayers in Australia, the banking sector, become unprofitable and shut down and his plan for universal taxpayer handouts would see our nation bankrupted in a matter of years,” Abetz said.

“This regressive and ultra-socialist approach of less work, higher welfare and killing profitable businesses has been tried and failed around the world and you need only look at the levels of poverty and riots in Venezuela.

“Senator Di Natale must explain… who will pay for this regressive agenda when he runs out of other people’s money.”

Despite this criticism, welfare groups said they welcomed a conversation on a “decent income for all”.                                                                

Dr Cassandra Goldie, the CEO of the Australian Council of Social Service, indicated that a UBI would be discussed among their member organisations.

“We are very glad a decent income for all is being discussed. Too many people lack the income they need to cover even the very basic essentials such as housing, food and the costs of children,” Goldie told Pro Bono News.

“We will be discussing basic income options with our member organisations.

“Our social security system has a job to protect people from poverty and help with essential costs and life transitions such as the costs of children and decent housing. It is failing at this. The basic minimum allowance for unemployed people is just $278 per week.

“Budget cuts – including the freezing of family payments – have made matters worse.”

Goldie said that working out if a basic income proposal would increase or reduce inequality depended on the detail.

“We don’t oppose universal payments on principle, but reform of social security should begin with those who have the least. This must be the first priority,” she said.

“The principle that everyone should have access to at least a decent basic income is a good starting point for reform. Let’s have that debate.”

The convenor of the Anti-Poverty Network SA, Pas Forgione, told Pro Bono News that a UBI would only address inequality if payments were set to an adequate level.

“If universal basic income means that everyone gets the same income that people on Newstart gets, roughly $260 a week, then I don’t think that’s going to do much to alleviate poverty,” Forgione said.

“It needs to be set at an adequate level. And I think that involves looking at what it takes to have a reasonable standard of living and a reasonable quality of life in a country like Australia. So it depends on the details.

“If it is set at an adequate level, than it would be a terrific thing for the quality of life for a number of very low income people. I’m not saying that it’s a panacea… but I think you could make a very strong case for looking at a UBI.”

Di Natale’s speech also called for the creation of a nationalised “People’s Bank”, to give more people access to affordable banking services and to add “real competition” to the banking sector.

“A people’s bank, along with more support for co-operatives and mutuals, would inject some real competition into the banking sector,” he said.

“We have a housing crisis that has been created by governments.

“So now is the time for government to step in: through a People’s Bank, by ending policies skewed in favour of investors like negative gearing and the capital gains tax discount, and through a massive injection of funds for social and public housing.”

Source: By Luke Michael | Probono Australia

 

Refinance Window Closing Fast: Recent Applications Plunge 22 Percent

Even after adjusting for the holidays, Mortgage Refinance Activity plunged a steep 22%.

The Mortgage Bankers Association returned from its holiday hiatus today, issuing its first update on mortgage applications’ activity since that for the week ended December 16. The results thus include data for the last two weeks and an adjustment to account for the Christmas holiday.

The Market Composite Index, a measure of application volume, for the week ended December 30 was down 12 percent on a seasonally adjusted basis compared to the December 9 summary. Before the adjustment, the drop in application activity was 48 percent.

The Refinance Index decreased 22 percent from two weeks earlier and the seasonally adjusted Purchase Index declined by 2 percent. The unadjusted Purchase Index was 41 percent lower than the two-week old reading and lost 1 percent when compared to the same week in 2015.

Purchase Applications vs. 30-Year Rates:

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Its difficult to say at what point consumers thrown in the towel on new home purchases as a number of factors are in play.

Refinance Window Closing Fast:

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Refis show a clear pattern. Only those whose interest rate is above the red dotted line is likely to refi. Given closing costs, it’s only profitable to refi when rates are substantially above the red line.

Bear in mind this data is for a slow holiday period. Nonetheless, refi applications behave as expected.

Three rate hikes in 2017? I don’t think so.

By Mike “Mish” Shedlock


Mortgage Application Activity Wraps Up 2016 on a Down Note

Residential loan application activity continued its post-election slump, declining for the sixth time in the eight weeks, according to the Mortgage Bankers Association’s survey for the week ending Dec. 30. The results included adjustments to account for the Christmas holiday.

The Market Composite Index, a measure of mortgage loan application volume, decreased 12% on a seasonally adjusted basis from two weeks earlier, the last time the MBA conducted its Weekly Application Survey. On an unadjusted basis, the index decreased 48% compared with two weeks ago. The refinance index decreased 22% from two weeks ago.

The seasonally adjusted purchase index decreased 2% from two weeks earlier, while the unadjusted purchase index decreased 41% compared with two weeks ago and was 1% lower than the same week one year ago.

The refinance share of mortgage activity increased to 52.2% of total applications from 51.8% over the previous seven-day period.

Interest rate comparisons are made with the period ended Dec. 23. The adjustable-rate mortgage share of activity decreased to 5.4%, while the Federal Housing Administration share increased to 11.6% from 10.7% the week prior.

The VA share decreased to 12.3% from 12.4% and the USDA share increased to 1.1% from 1% the week prior.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.39% from 4.45%. For 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,000), the average contract rate decreased to 4.37% from 4.41%.

The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA remained unchanged at 4.22%, while for 15-year fixed-rate mortgages backed by the FHA, the average decreased to 3.64% from 3.7%.

The average contract interest rate for 5/1 ARMs decreased to 3.28% from 3.41%.

By Glenn McCullom | National Mortgage News

Big Banks Have Nearly Abandoned the FHA Market

Big banks have drastically reduced their share of the Federal Housing Administration market, a massive shift that has big implications, according to new analysis by the American Enterprise Institute.

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Large banks — which had a 60% share of FHA refinancings in late 2013 — had a 6% share as of May 31, according to Stephen Oliner, a resident scholar at AEI. Nonbank lenders currently originate 90% of FHA-insured refinancings, according to new data released by the group.

Large banks also had a 65% share of the FHA purchase market in 2012, which is now down to 20%, according to AEI.

“The shift away from large banks to non-banks and mortgage brokers has been truly massive,” Oliner said.


The recent drop in interest rates is expected to spur another surge in refinancings due to Britain’s unexpected decision to leave the European Union.

But the large banks have decided that refinancing FHA loans is “not a good business” due to the regulatory environment and litigation risk, Oliner said.

“They are getting out,” he said, noting that many FHA lenders have been sued under the False Claims Act and had to pay huge fines to the Justice Department.

Banks also don’t get Community Reinvestment Act credit for refinancings. “So this is pretty much a lose-lose business for them,” Oliner said.

by Brian Collins | National Mortgage News

The Subprime Mortgage Is Back: It’s 2008 All Over Again!

Apparently the biggest banks in the US didn’t learn their lesson the first time around…

Because a few days ago, Wells Fargo, Bank of America, and many of the usual suspects made a stunning announcement that they would start making crappy subprime loans once again!

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I’m sure you remember how this all blew up back in 2008.

Banks spent years making the most insane loans imaginable, giving no-money-down mortgages to people with bad credit, and intentionally doing almost zero due diligence on their borrowers.

With the infamous “stated income” loans, a borrower could qualify for a loan by simply writing down his/her income on the loan application, without having to show any proof whatsoever.

Fraud was rampant. If you wanted to qualify for a $500,000 mortgage, all you had to do was tell your banker that you made $1 million per year. Simple. They didn’t ask, and you didn’t have to prove it.

Fast forward eight years and the banks are dusting off the old playbook once again.

Here’s the skinny: through these special new loan programs, borrowers are able to obtain a mortgage with just 3% down.

Now, 3% isn’t as magical as 0% down, but just wait ‘til you hear the rest.

At Wells Fargo, borrowers who have almost no savings for a down payment can actually qualify for a LOWER interest rate as long as you go to some silly government-sponsored personal finance class.

I looked at the interest rates: today, Wells Fargo is offering the exact same interest rate of 3.75% on a 30-year fixed rate, whether you have bad credit and put down 3%, or have great credit and put down 30%.

But if you put down 3% and take the government’s personal finance class, they’ll shave an eighth of a percent off the interest rate.

In other words, if you are a creditworthy borrower with ample savings and a hefty down payment, you will actually end up getting penalized with a HIGHER interest rate.

The banks have also drastically lowered their credit guidelines as well… so if you have bad credit, or difficulty demonstrating any credit at all, they’re now willing to accept documentation from “nontraditional sources”.

In its heroic effort to lead this gaggle of madness, Bank of America’s subprime loan program actually requires you to prove that your income is below-average in order to qualify.

Think about that again: this bank is making home loans with just 3% down (because, of course, housing prices always go up) to borrowers with bad credit who MUST PROVE that their income is below average.

[As an aside, it’s amazing to see banks actively competing for consumers with bad credit and minimal savings… apparently this market of subprime borrowers is extremely large, another depressing sign of how rapidly the American Middle Class is vanishing.]

Now, here’s the craziest part: the US government is in on the scam.

The federal housing agencies, specifically Fannie Mae, are all set up to buy these subprime loans from the banks.

Wells Fargo even puts this on its website: “Wells Fargo will service the loans, but Fannie Mae will buy them.” Hilarious.

They might as well say, “Wells Fargo will make the profit, but the taxpayer will assume the risk.”

Because that’s precisely what happens.

The banks rake in fees when they close the loan, then book another small profit when they flip the loan to the government.

This essentially takes the risk off the shoulders of the banks and puts it right onto the shoulders of where it always ends up: you. The consumer. The depositor. The TAXPAYER.

You would be forgiven for mistaking these loan programs as a sign of dementia… because ALL the parties involved are wading right back into the same gigantic, shark-infested ocean of risk that nearly brought down the financial system in 2008.

Except last time around the US government ‘only’ had a debt level of $9 trillion. Today it’s more than double that amount at $19.2 trillion, well over 100% of GDP.

In 2008 the Federal Reserve actually had the capacity to rapidly expand its balance sheet and slash interest rates.

Today interest rates are barely above zero, and the Fed is technically insolvent.

Back in 2008 they were at least able to -just barely- prevent an all-out collapse.

This time around the government, central bank, and FDIC are all out of ammunition to fight another crisis. The math is pretty simple.

Look, this isn’t any cause for alarm or panic. No one makes good decisions when they’re emotional.

But it is important to look at objective data and recognize that the colossal stupidity in the banking system never ends.

So ask yourself, rationally, is it worth tying up 100% of your savings in a banking system that routinely gambles away your deposits with such wanton irresponsibility…

… especially when they’re only paying you 0.1% interest anyhow. What’s the point?

There are so many other options available to store your wealth. Physical cash. Precious metals. Conservative foreign banks located in solvent jurisdictions with minimal debt.

You can generate safe returns through peer-to-peer arrangements, earning up as much as 12% on secured loans.

(In comparison, your savings account is nothing more than an unsecured loan you make to your banker, for which you are paid 0.1%…)

There are even a number of cryptocurrency options.

Bottom line, it’s 2016. Banks no longer have a monopoly on your savings. You have options. You have the power to fix this.

by Simon Black | ZeroHedge

Can FHA Lending Be Saved from the Department of Justice?

The purpose of the Federal Housing Administration is “to help creditworthy low-income and first-time home buyers“, individuals and families often denied traditional credit, to obtain a mortgage and purchase a home.” This system has been successful, and has aided in promoting home ownership. However, the FHA loan program and its related benefits are under threat as the Department of Justice continues to bring investigations and actions against lenders under the False Claims Act.

Criticism of the DOJ’s approach is that the department is using the threat of treble damages available under the False Claims Act to intimidate lenders into paying outsized settlements and having lenders admit guilt simply to avoid the threat of the enormous liability and the cost of a prolonged defense. If the DOJ wanted to go after bad actors who are truly defrauding the government with dishonest underwriting practices or nonexistent quality control procedures, then that would be acceptable to the industry.

But the DOJ seems to be simply going after deep pockets, where the intentions of the lenders are well-placed and the errors found are legitimate mistakes. Case in point: as of December 2015, Quicken Loans was the largest originator of FHA loans in the country, and they are currently facing the threat of a False Claims Act violation. To date Quicken has vowed to continue to fight, and stated they will expose the truth about the DOJ’s egregious attempts to coerce these unjust “settlements.”

Shortly after filing a pre-emptive lawsuit over the matter last year, Quicken Loans CEO Bill Emerson said the DOJ has “hijacked” the FHA program, adding its pursuits are having a “chilling effect on the market.” (A judge dismissed the primary claims in Quicken’s initial lawsuit earlier this year.)

When an originator participates in the FHA program, they are operating under the Housing and Urban Development’s FHA guidelines. As HUD cannot, and does not, check each and every loan guaranteed by FHA to confirm unflawed origination, the agency requires certification that the lender originating the file did so in compliance with the applicable guidelines. If the loan defaults, the lender submits a claim and the FHA will pay out the balance of the loan under the guarantee.

The False Claims Act provides that any person who presents a false claim or makes a false record or statement material to a false claim, “is liable to the United States Government for a civil penalty of not less than $5,500 and not more than $11,000…plus 3 times the amount of damages which the Government sustains because of the act.”

The DOJ argues that when a loan with known origination errors is certified by the lender to the FHA, with a subsequent claim submitted by the lender to the FHA after a default, the lender is in violation of the False Claims Act — because they knew or should have known the loan had defects when they submitted their certification, and yet still allowed the government to sustain a loss when the FHA paid out of the loan balance.

In the mortgage space the potential liability is astronomical because of the aforementioned penalties. The major issues in a False Claims Act violation can be boiled down to two major points: lack of clarity and specificity around what the DOJ considers “errors;” and what constitutes knowing loans were defective under the DOJ’s application of the act.

To the first point: are the errors of the innocuous, ever-present type found in a large lender’s portfolio, or egregious underwriting errors knowingly committed to increase production while offsetting risk through the FHA program? Obviously, lenders are arguing the former.

Prior to Justice’s aggressive pursuit of these settlements, if the FHA identified an underwriting error the lender would simply indemnify the FHA and not process the claim, effectively making it a lender-owned loan. This was an acceptable risk to lenders, as an error in the origination process could not become such an oversized loss. The liability would be capped to any difference between the borrower’s total debt at the time of foreclosure sale and what the lender could recoup when the property was liquidated. The DOJ’s use of the False Claims Act now triples a lender’s risk when originating FHA loans by threatening damages that are triple the value of the amount paid out by FHA.

In his letter to all JPMorgan Chase & Co. shareholders in April, Chief Executive Officer Jamie Dimon outlined the bank’s reasons for discontinuing its involvement with FHA loans. This perfectly illustrates how the DOJ is basically restoring all the lender risk to FHA-backed originations. Banks originating FHA loans are left with two choices: price in the new risk of underwriting errors into and pass the cost to the end borrower, making the product so costly it becomes pointless to offer; or cease or severely limit FHA offerings. If lenders take either approach, the DOJ will have negated the purpose of the FHA by limiting borrowers’ access to credit.

Walking away from FHA lending is not as simple as it sounds. Most FHA borrowers tend to have lower credit scores and/or require lower down payments. Most FHA loans also tend to be for homes located in low- and moderate-income neighborhoods. Any decline in an institution’s FHA offerings most likely will have a negative impact on an institution’s Community Reinvestment Act ratings. One has to think the DOJ is well aware of this fact and believes it will keep lenders in the FHA business even with the elevated risk, and can simply continue to strong-arm lenders into settlements.

If the Justice Department continues to aggressively utilize the False Claims Act, originators will be forced to evolve and create a product that they can keep as a portfolio loan or sell privately that can reach the same borrowers the FHA-insured products currently do. Again, there is a high likelihood that these products will not have as attractive terms as the FHA loans that borrowers are currently enjoying.

Large lenders will continue to step away from FHA originations, and smaller lenders originating FHA loans should be strongly aware of the risk they are taking on by continuing to originate FHA loans and increasing their portfolios as the larger banks exit the FHA market. Many large lenders have faced or are currently facing these actions, and from the Justice Department’s recent statements it does not appear they will abate anytime soon.

by Craig Nazzaro | National Mortgage News

Forget Houses — These Retail Investors Are Flipping Mortgages

It’s 9:30 a.m. on a recent sunny Friday, and 60 people have crammed into an airport hotel conference room in Northern Virginia to hear Kevin Shortle, a veteran real estate professional with a million-watt smile, talk about “architecting a deal.”

Some have worked in real estate before, flipping houses or managing rentals. But the deals Shortle, lead national instructor for a company called Note School, is describing are different: He teaches people how to buy home notes, the building blocks of housing finance.

While titles and deeds establish property ownership, notes — the financial agreements between lenders and home buyers — set the terms by which a borrower will pay for the home. Financial institutions have long passed them back and forth as they re-balance their portfolios.

But the trade in delinquent notes has exploded in the post-financial-crisis world. As government entities like Fannie Mae and Freddie Mac have struggled with the legacies of the housing bust, they’ve sold billions of dollars’ of delinquent notes to big institutional investors, who resell them in turn.

A sign outside a foreclosed home for sale in Princeton, Ill, in January 2014.

And people like the ones in the Sheraton now pay good money to learn how to pursue what Note School calls “rich rewards.” The result: a marketplace where thousands of notes are bought and sold for a fraction of the value of the homes they secure.

A buyer can renegotiate with the homeowner, collecting steady cash. Or she might offer a “cash for keys” payout and seek a tenant or new owner. If all else fails, she can foreclose.

For some housing market observers, the churn in notes is a sign that the financial crisis hasn’t fully healed — and a fresh source of potential abuses. But the people listening to Shortle saw opportunity as he explained how they can “be the bank” for people with mortgage-payment problems.

“You can make a lot of money in the problem-solving business,” Shortle said.

How home notes move through a healing housing market

Since most people buy homes using mortgage financing, notes can be thought of as another name for mortgage agreements. After the home purchase closes, banks and other lenders usually sell them to government entities like Fannie Mae, Freddie Mac, and the Federal Housing Administration.

The housing market has improved since the bust, but hasn’t healed fully. There were 1.4 million foreclosures in 2015, according to real estate data firm RealtyTrac, and more than 17% of all transactions last year were deemed “distressed” — more than double pre-bust levels — in some way.

As the dust has settled, government agencies have begun selling delinquent notes to big institutional investors like Lone Star Funds, Goldman Sachs GS, +2.76% and Fortress Investments FIG, +3.96% as well as some community nonprofits, in bulk. The agencies have sold more than $28 billion in distressed loans since 2012, according to government data.

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The big investors then sell some to buyers such as Colonial Capital Management, which is run by the same people who run Note School. Colonial, which buys about 2,000 notes a year, sells most of them one by one to people like the ones who gathered in the Virginia Sheraton.

It’s difficult to know how much this happens and what it has meant for homeowners.

Anyone who buys notes from the government must follow reporting requirements that include information on how the loans perform. Those requirements stay with the notes if they’re resold; they expire four years after the government’s initial sale. But nobody tracks note sales that weren’t made by the government, and even the government’s records don’t link outcomes and note owners.

March data from the Federal Housing Administration only hint at a broad view of how post-sale loans perform. The FHA has sold roughly 89,000 loans since 2012; less than 11% of those homeowners now pay their mortgages on time. Many are simply classified as “unresolved.” More than 34% had been foreclosed upon.

Fannie Mae and Freddie Mac, which began selling notes in 2014, were supposed to report similar data by the end of March. A spokeswoman for the agencies’ regulator said she did not know when that report, still incomplete, would be submitted.

And not all notes are initially sold by the government, making comprehensive oversight of the marketplace even harder. Banks and other lenders often sell notes directly; Colonial doesn’t buy notes from the government, according to Eddie Speed, founder of both Note School and Colonial.

For investors, a cleaner deal than the world of ‘tenants and toilets’

Note buying has attractions for both investors and the communities where the homeowners live.

Delinquent notes can be bought cheaply, often for about a third of a home’s market value. Note buyers get an investment that’s more like a financial asset — and less dirty than the landlord’s world of “tenants and toilets.”

Meanwhile, investors can often afford to cut homeowners a significant break, avoiding foreclosure while still making a profit.

And there’s government money for the taking in the name of helping homeowners. Since the housing crisis, the federal government has allocated nearly $10 billion to states deemed hardest-hit by the bust. Those states funnel the money to borrowers, often to help them reach new agreements with their lenders.

That can help municipalities that lose out on property taxes when homeowners don’t make payments, and which benefit from having more involved owners, Speed says.

Eddie Speed

When Tj Osterman, 38, and Rick Allen, 36, who have worked together as real-estate investors for about 10 years in the Orlando area, first explored note buying, they thought it little different than flipping abandoned houses.

But when they realized homeowners were often still in the picture, they changed their approach to try to work with them. Some of their motivation came from personal experience: Allen went through foreclosure in 2007. “It was a tough time,” he said. “I wish there was someone like me who said, let’s help you keep your house.”

They can buy notes cheaply enough that they can reduce the principal owed by homeowners “as much as 50%, and still turn a nice profit, pay back taxes, [and] get these people feeling good about themselves again,” said Osterman.

They now have a goal of helping save 10,000 homeowners from foreclosure. “I’m so addicted to the socially responsible side of stuff,” Osterman said. “We talk with borrowers like human beings and underwrite to real-world standards.”

‘There’s a system out there that’s broken’

Some housing observers have concerns about drawing nonprofessionals into an often-opaque market. A recent example Shortle used as a case study during the Virginia seminar helps explain why.

A note on an Atlanta-area home was being sold for $24,360; according to estimates from Zillow and local agents, its market value was between $50,000 and $70,000.

Some back taxes were owed, and a payment history showed that while the homeowner was making erratic or partial payments on her $500 monthly mortgage, she hadn’t quit. She had some equity built up in the house, another sign of commitment.

Real-estate investment firm Stonecrest sold her the home in 2012; she had used Stonecrest’s own financing at 9%. Her payment record was spotless until 2014. Stonecrest sold the note to Colonial in 2015 and Colonial offered it for resale in early 2016.

Most notes underpin mortgages. But this one was linked to a land contract, a financial agreement more typical when the seller is offering financing. Land contracts are sometimes criticized for being almost predatory: If a buyer skips a payment, the house and all the money he’s put toward it can be taken away.

And buyers don’t hold the deeds to the home, so the homes can be taken more quickly if they’re delinquent. Note School often steers students to scenarios where government programs like Hardest Hit can be tapped, but those programs don’t apply to land contracts.

Shortle walked his class through different strategies. The new note owner could foreclose; they could also induce the home buyer to walk. “It may be time to give this person a little cash for keys to move on,” he told the class. “They can’t afford it.”

Other data indicated that the house would rent for roughly $750. It might make sense, Shortle suggested, to remove the homeowner, fix up the house, rent it out, then sell the entire arrangement to a cash investor.

If a new note owner took that tack, the note would change hands four times in about as many years—even as the homeowner changed just once. The homeowner might never notice.

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Some analysts see evidence of a still-hurting housing market behind all that activity.

By diffusing distressed loans out into a broader marketplace, lenders avoid the negative publicity that comes with foreclosing on delinquent homeowners. That masks “a layer of distress in the housing market that’s being overlooked,” said Daren Blomquist, vice president at RealtyTrac.

“This has been a way to push aside the crisis and sweep it under the rug,” Blomquist told MarketWatch.

Some analysts see evidence of a still-hurting housing market behind all that activity.

By diffusing distressed loans out into a broader marketplace, lenders avoid the negative publicity that comes with foreclosing on delinquent homeowners. That masks “a layer of distress in the housing market that’s being overlooked,” said Daren Blomquist, vice president at RealtyTrac.

“This has been a way to push aside the crisis and sweep it under the rug,” Blomquist told MarketWatch.

Osterman, left, and Allen

Note investors say they can offer a service others can’t or won’t. “There’s a real issue with how we’re treating hardships,” said Osterman. “There’s a system out there that’s broken and needs to be disrupted in a good way.”

Note School’s founder says the goal is a ‘win-win’

While newer investors like Osterman and Allen have a sense of mission forged during the recent housing crisis, Speed has been in the note business for more than 30 years. He is adamant that it’s in Note School’s best interest to teach students to observe regulation and treat homeowners respectfully. There’s no reason it can’t be a “win-win,” he said.

‘”We’re not teaching people to go and do ‘Wild West investing.’

Eddie Speed”

Colonial Funding doesn’t make buyers of its notes go through Note School, but it does require them to work with licensed mortgage servicers. Note School offers connections to armies of vendors offering services for every step of the process: people who will assess the property’s real market value, “door-knockers” who will hand-deliver letters to homeowners, title research companies, insurers, and more.

“We’ve been in the note buying business for 30 years,” said Speed. “We’re not teaching people to go and do ‘Wild West investing.’”

Speed believes buying distressed notes is a process tailor-made for people with an entrepreneurial approach to doing well by solving problems — and maintains that he is mindful of the postcrisis environment in which they work.

“I’m walking into where the disaster has already happened,” he said. “If I walk into a loan where the customer has vacated, they probably want out. Common sense tells us if the borrower can deed it over to the lender and walk away with dignity, that seems like a good deal for him. We’re trying to do everything we can to reach resolution.”

by Andrea Riquier | Marketwatch