Irvine Housing Blog

Banks expected to get off easy in settlement of foreclosure practices

Posted: 09 Nov 2011 02:30 AM PST

The bank settlement deal being negotiated limits future exposure and inflicts little pain on the banks.

Irvine Home Address ... 71 GOLDENROD #47 Irvine, CA 92614
Resale Home Price ...... $458,900

Lighten up while you still can
Don't even try to understand
Just find a place to take your stand
and take it easy

The Eagles -- Take It Easy

The negotiations with banks over their shoddy foreclosure practices are working out in the banks' favor. I contend Robo-signer and other issues which have delayed foreclosures are merely a ruse to buy time for the banks who are praying the market will come back and bail them out. Banks managed to turn this issue to their favor. By negotiating immunity from further lawsuits, banks are limiting their risk and shoring up a gaping hole in their balance sheets. When its over, they can take it easy, and push forward with foreclosing on the squatters and restoring the nation's housing markets.

A Deal That Wouldn’t Sting

By GRETCHEN MORGENSON
Published: October 29, 2011

AFTER months of back and forth, a deal that is supposed to punish large financial institutions for foreclosure misconduct may be nigh.

While the exact terms remain under wraps, some aspects of this agreement — between banks on one side, and the federal government and a raft of state attorneys general on the other — are coming into focus.

Things could change, of course, and the deal could go by the boards. But here’s the state of play, according to people who have been briefed on the negotiations but were not authorized to discuss them publicly.
Cutting to the chase: if you thought this was the deal that would hold banks accountable for filing phony documents in courts, foreclosing without showing they had the legal right to do so and generally running roughshod over anyone who opposed them, you are likely to be disappointed.

By and large, banks have not been foreclosing improperly. There are very few stories of errors by the banks where they foreclosed on a debtor who was current on their payments. 99.9% of the foreclosed were not paying their mortgage and should have expected to be foreclosed on. Despite beliefs to the contrary, banks are under no obligation to "work with" delinquent mortgage squatters, and loan modifications are not an entitlement.

That being said, I do want to see the banks punished -- not because of their foreclosure practices but because their activities inflated a massive housing bubble which required them to foreclose on millions of people. Banks need to bear the full brunt of their losses or they will repeat this mistake.

This may not qualify as a shock. Accountability has been mostly A.W.O.L. in the aftermath of the 2008 financial crisis. A handful of state attorneys general became so troubled by the direction this deal was taking that they dropped out of the talks. Officials from Delaware, New York, Massachusetts and Nevada feared that the settlement would preclude further investigations, and would wind up being a gift to the banks.

Banks are only interested in a settlement because they want to preclude further investigations to limit their ongoing liability. This is essential for the banks to recover. Otherwise, as they make profits, the attorneys both public and private will sue them to take their money. These lawsuits will be endless. This is why banks are pushing for this settlement, and it's why their are willing to pay billions to get it. It's better to plug the leak for $5 billion than sink slowly into a $30 billion hole.

It looks as if they were right to worry. As things stand, the settlement, said to total about $25 billion, would cost banks very little in actual cash — $3.5 billion to $5 billion. A dozen or so financial companies would contribute that money.
The rest — an estimated $20 billion — would consist of credits to banks that agree to reduce a predetermined dollar amount of principal owed on mortgages that they own or service for private investors. How many credits would accrue to a bank is unclear, but the amount would be based on a formula agreed to by the negotiators. A bank that writes down a second lien, for example, would receive a different amount from one that writes down a first lien.

The loans they reduce principal on are likely to be the lost causes they were going to lose anyway in a foreclosure. Most likely they will forgive part of the principal on some deeply underwater loan owners to induce them to make a few more payments. By giving false hope to the hopeless, they will actually gain a few additional payments they would otherwise miss to strategic default.

Sure, $5 billion in cash isn’t nada. But government officials have held out this deal as the penalty for years of what they saw as unlawful foreclosure practices. A few billion spread among a dozen or so institutions wouldn’t seem a heavy burden, especially when considering the harm that was done.

What harm? She makes it sound like millions of people who were current on their mortgages were foreclosed on. This simply isn't true.

What we have seen in the mainstream media is a focus on a few sensational incidents which they have blown all out of proportion. For example, Bank of America foreclosing on home that no longer exists, no missed payments is a story about a rare clercal error, the type of which occurs when you are servicing several million loans, and this rare incident is being portrayed as a huge systemic problem with bank servicing. It isn't.

The real purpose stories like this serve is to demonize the banks and make delinquent mortgage squatters feel better about sticking it to the man. Don't get me wong, I want to see the banks suffer, but not because they are foreclosing on those who don't make their payments but because their shoddy lending practices inflated a massive housing bubble which precipitated the economic decline we are still struggling with today.

The banks contend that they have seen no evidence that they evicted homeowners who were paying their mortgages. Then again, state and federal officials conducted few, if any, in-depth investigations before sitting down to cut a deal.

The two sentences together above represent the worse form of tawdry reporting. She reveals a fact, which is that banks are not foreclosing on their good customers, but then she smears them by implication by insinuating if investigations were conducted, they would find all manners of wrongdoing. Yellow journalism is alive and well.

Shaun Donovan, secretary of Housing and Urban Development, said the settlement, which is still being worked out, would hold banks accountable. “We continue to make progress toward the key goals of the settlement, which are to establish strong protections for homeowners in the way their loans are serviced across every type of loan and to ensure real relief for homeowners, including the most substantial principal writedown that has occurred throughout this crisis.”

All principal reduction is a bad idea, but as I noted above, banks will use this as a loss mitigation measure to try to induce some deeply underwater loan owners to make a few more payments.

Still, a mountain of troubled mortgages would not be covered by this deal. Borrowers with loans held by Fannie Mae and Freddie Mac would be excluded, for example. Only loans that the banks hold on their books or that they service for investors would be involved.
One of the oddest terms is that the banks would give $1,500 to any borrower who lost his or her home to foreclosure since September 2008. For people whose foreclosures were done properly, this would be a windfall. For those wrongfully evicted, it would be pathetic. Roughly $1.5 billion in cash is expected to go into this pot.

Doesn't this feel like guilt money? The banks did nothing wrong in the foreclosure process. Why should they be giving former loan owner's money? It is because they screwed the masses when they inflated the housing bubble and they are paying guilt money for that misdeed? Of course, this further rips off those who haven't gone through foreclosure and are struggling with bloated payments. Doling out bailout money is never fair.

The rest of the cash that would be paid by the banks is expected to be split this way: the federal government would get about $750 million, state bank regulators about $90 million. Participating states would share about $2.7 billion. That money is expected to finance legal aid programs, housing counselors and other borrower support. If 45 states participated, that would work out to about $60 million apiece.
OBVIOUSLY, the loan modifications would make up a majority of the deal. And this is where real questions arise. For example, how can we be sure this plan won’t reward banks for modifications that they would have agreed to or should already have done absent the deal?

Why is that important? Banks are going to do what's in their best interest financially. They want to keep borrowers paying. The deal doesn't have to be punitive to be effective.

Perhaps most important, will the banks change the terms of loans enough to ensure that borrowers can actually meet their obligations over time? Or will these modifications default again, as is often the case? If so, the banks will have received a lucrative credit, even though borrowers fall back into trouble.

Why do we want to give borrowers who foolishly overextended themselves a break. I would be more upset if irresponsible loan owners were given a break than if the banks foreclosed on all of them.

Such concerns are justified because past settlements promising big help to borrowers have failed to live up to their hype. An example is the 2008 settlement with Countrywide Financial that was struck by Illinois and California. Characterized as providing $8.7 billion in relief to troubled borrowers, it turned out to generate nowhere near that benefit.

She obviously has not figured out that the only purpose behind the fanfare associated with the various bailouts has been to create false hope in the minds of loan owners sot they keep paying mortgages they cannot afford. Politicians got involved to look like they were doing something when they really weren't.

The deal being discussed now may also release the big banks that are members of MERS, the electronic mortgage registry, from the threat of some future legal liability for actions involving that organization. MERS, which wreaked havoc with land records across the country, was sued last week by Beau Biden, Delaware’s attorney general, on accusations of deceptive trade practices.
The MERS registry was also subpoenaed last week by Eric Schneiderman, the attorney general of New York, as part of his investigation into the fun-while-it-lasted mortgage securitization fest. If he were to sign on to the settlement, his investigation into MERS could not move forward.
“Rules matter,” Mr. Biden said in announcing his suit. “A homeowner has the obligation to pay the mortgage on time and lenders must follow the rules if they are seeking to take away someone’s house through foreclosure.”
Abiding by the rules has not been the modus operandi in the foreclosure arena. That’s why any settlement must be tough, truly beneficial to borrowers and monitored for compliance. Otherwise, the deal would be another case where our government let the big banks win while Main Street loses.

Gretchen Morgenson is full of crap -- as usual. This poor article panders to the emotions of loan owners but fails to identify the real behind-the-scenes workings of this issue. The New York Times must feel her reporting helps sell papers, but it does little to enhance the reputation of the newspaper.

She couldn't afford it

The main thing which kept me from buying during the housing bubble was a recognition of the fact I couldn't afford a property equivalent to what I could rent with a 30-year fixed rate mortgage. I never researched beyond that. I knew from my finance background that terms other than a fixed-rate amortizing mortgage are not stable, so I didn't look around for other alternatives. Unfortunately, I was in the minority.

Everyone else embraced the financial innovation and its embedded Ponzi financing scheme, and they believed they could afford properties as long as another creditor would always be around to give them Ponzi loans to make their payments. Obviously, these borrowers were wrong.

The former owner of today's featured REO bought back in 2003, increased her mortgage once, and took out an $80,000 HELOC later on. It isn't clear whether or not she needed the cash out or even took it, but what is clear is that she could not keep up with the payments, and the property went to auction on 3/16/2011.

Fannie Mae owns the property now, and despite it taking seven months to get to market, they will not fool around with its disposition. Expect this to be sold in the next 120 days for whatever the market will bear. During this time of year, that won't be much.

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This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707
949.769.1599
sales@idealhomebrokers.com

Irvine House Address ... 71 GOLDENROD #47 Irvine, CA 92614
Resale House Price ...... $458,900

Beds: 3
Baths: 2
Sq. Ft.: 1370
$335/SF
Property Type: Residential, Condominium
Style: Two Level, Mediterranean
Year Built: 1986
Community: Woodbridge
County: Orange
MLS#: U11004357
Source: CRMLS
Status: Active
On Redfin: 22 days
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WELCOME HOME TO THE CITY OF IRVINE AND TO ONE OF THE VERY BEST CITIES IN ORANGE COUNTY. THIS IS A CONDOMINIUM THAT LIVES LIKE A SINGLE FAMILY HOME. LOCATED IN THE SOUGHT AFTER COMMUNITY OF WOODBRIDGE. THE PROPERTY FEATURES 3 BEDROOMS, TWO AND ONE HALF BATHROOMS, WITH CLOSE TO 1,370 SQUARE FEET OF INTERIOR LIVING SPACE THAT MAY BE JUST THE RIGHT SIZE FOR YOUR ACTIVE LIFESTYLE. WE THINK THAT YOU WILL AGREE, THAT THE HOME IS IN MOVE IN CONDITION, AS IT HAS BEEN REFRESHE WITH NEW PIANT AND CARPET AND MORE. YOU ARE PART OF AN ASSOCIATION THAT CREATES THE FEELING OF BEING ON VACATION IN AN EXCLUSIVE RESORT. YOU WILL ENJOY THE ASSOCIATION POOL, SPA, AND MANICURED COMMON AREAS. THE LOCATION IS FANTASTIC YOU ARE CLOSE TO ALL THE GREAT THINGS IN IRVINE; PARKS, SCHOOLS, RECREATION, TRANSPORTATION AND SO MUCH MORE. SO COME HOME TO IRVINE, AND START TO LIVE THE ORANGE COUNTY LIFESTYLE TODAY.
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Proprietary IHB commentary and analysis

Resale Home Price ...... $458,900
House Purchase Price … $445,000
House Purchase Date .... 12/19/2003

Net Gain (Loss) .......... ($13,634)
Percent Change .......... -3.1%
Annual Appreciation … 0.4%

Cost of Home Ownership
-------------------------------------------------
$458,900 .......... Asking Price
$16,062 .......... 3.5% Down FHA Financing
4.08% ............... Mortgage Interest Rate
$442,838 .......... 30-Year Mortgage
$132,938 .......... Income Requirement

$2,135 .......... Monthly Mortgage Payment
$398 .......... Property Tax (@1.04%)
$0 .......... Special Taxes and Levies (Mello Roos)
$96 .......... Homeowners Insurance (@ 0.25%)
$509 .......... Private Mortgage Insurance
$297 .......... Homeowners Association Fees
============================================
$3,434 .......... Monthly Cash Outlays

-$333 .......... Tax Savings (% of Interest and Property Tax)
-$629 .......... Equity Hidden in Payment (Amortization)
$23 .......... Lost Income to Down Payment (net of taxes)
$77 .......... Maintenance and Replacement Reserves
============================================
$2,573 .......... Monthly Cost of Ownership

Cash Acquisition Demands
------------------------------------------------------------------------------
$4,589 .......... Furnishing and Move In @1%
$4,589 .......... Closing Costs @1%
$4,428 ............ Interest Points @1% of Loan
$16,062 .......... Down Payment
============================================
$29,668 .......... Total Cash Costs
$39,400 ............ Emergency Cash Reserves
============================================
$69,068 .......... Total Savings Needed
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November's presentations have been moved

Due to competing demands from holiday parties, we have decided to move the November and December presentations to the classroom at the offices of Intercap Lending.

Larry Roberts is hosting a Las Vegas cashflow properties presentation at the offices of Intercap Lending (9401 Jeronimo, Suite 200, Irvine, CA 92618) on November 9, 2011. Please RSVP at sales@idealhomebrokers.com. Register online here: Las Vegas cashflow property - Intercap Lending

Larry Roberts and Shevy Akason are hosting an OC housing market presentation at the offices of Intercap Lending (9401 Jeronimo, Suite 200, Irvine, CA 92618) on November 9, 2011. Please RSVP at sales@idealhomebrokers.com. Register online here: OC Housing Market - Intercap Lending