Mortgage Mess Creates Lending Drought

Mortgage Mess Creates Lending Drought

By MICHAEL LIEDTKE
The Associated Press
Friday, August 17, 2007; 7:34 PM



SAN FRANCISCO -- Mortgage broker Ed Smith Jr. has been arranging home loans for 24 years and it's never been tougher for him to close a deal than during the past few weeks of turmoil.

As more lenders collapse, the skittish survivors are raising their rates and changing the rules for getting a loan every few hours as they scramble to stay alive. The upheaval has made it virtually impossible to secure financing for scores of borrowers who would have easily qualified for mortgages just a few months ago, creating a lending drought likely to deepen the housing slump.

"You have a ripple effect in the marketplace that is devastating," said Smith, who is based in San Diego.

The fallout figures to be especially hard on homeowners facing dramatically higher payments on exotic mortgages that they obtained two or three years ago. These mortgages began with bargain-basement, or "teaser," interest rates that offered extremely low payments so borrowers could buy a home and refinance later.

But falling home prices and stricter lending criteria have chained these borrowers to their current mortgages, lumping them with higher payments that they can no longer afford.

"I have three borrowers who desperately need to refinance and they aren't going to be able to do it. They are going to lose their homes," said Patrick Schwerdtfeger, a Walnut Creek mortgage broker for Windsor Capital.

Orange County mortgage broker Jack Williams has seen nine mortgage deals unravel in the past 11 days. He has since been able to secure financing for two of the borrowers, but "it doesn't look real promising" for the others as lenders hunker down. "You can have one rate sheet in the morning, then it will change at noon and then it will be completely different again at 5 p.m."

Borrowers with blemished credit records and inadequate paperwork to verify their incomes are having the most trouble getting mortgages.

But the lending crackdown also is affecting more creditworthy borrowers who need to borrow more than $417,000 so they can buy or refinance homes. These so-called "jumbo" loans are common in expensive housing markets like California, where a mid-price home sold for $478,000 in July.

In the past few weeks, the jumbo rates have climbed 0.75 to 1.25 percentage points above the rates for mortgages below $417,000. That higher premium has put the financing out of reach for many borrowers.

The daunting conditions are shriveling the incomes of mortgage brokers, some of whom are making about half the money that they were raking in a year ago, said Thomas Kaiser of Empire Equity Group in San Jose. "Normally, this would be a busy time of the year, but it's completely opposite."

The lending slowdown is bound to drive some mortgage brokers out of the industry and prompt layoffs in other related businesses such as title insurers, predicted Wayne Repich, founding partner of Vanguard Mortgage & Title Inc. in Concord.

With Little Cash Flow and Lots of Equity, Seniors 'Reverse' Mortgages

With Little Cash Flow and Lots of Equity, Seniors 'Reverse' Mortgages

Sitting on mounds of equity but faced with mounting bills, senior homeowners are increasingly turning to reverse mortgages for extra cash.

By KELLY BENNETT Voice Staff Writer

Monday, April 23, 2007 | When Myrna Reese was still healing from a near-fatal accident six years ago, doctors realized her husband, Lou, had a serious heart problem requiring a quintuple-bypass surgery.

As self-employed public relations consultants, the couple's ability to make the mortgage payments on their Rancho Bernardo home depended on their ability to work. With both of them in poor health, they realized it would be difficult to keep up without draining their savings.

A Reversing Trend

The Issue: Reverse mortgages allow homeowners 62 and older a chance to tap into the equity they’ve amassed in their homes over the last few decades. Fourteen times more people took them out in 2006 than they did in 2001 in San Diego County.

What It Means: Senior homeowners whose monthly mortgage payment eats up a chunk of their pension or Social Security income can let the reverse mortgage pay off their initial loans, eradicating their monthly payment. And leftover equity can be withdrawn like a credit line or in monthly installments or in a lump sum.

The Bigger Picture: With increasing health care and living costs for the region’s senior citizens, many say tapping into the investment they’ve made in their home is their only chance at a decent standard of living for retirement.

They had paid $138,000 for the two-story home in 1980, but its value had ballooned to $750,000 in the two decades since. So they took out a reverse mortgage that allowed them to receive some additional monthly income from the equity they'd built up in their home, while eliminating their monthly house payment.

Then, just a few weeks later, Lou died. The timing was quicker than they'd expected. The couple had taken out the reverse mortgage just in time, Reese said. "It saved me from having to worry about paying the mortgage," she said. "I wanted to stay here. There were a lot of memories."

The Reeses fit into a growing trend of San Diego senior citizens who are using these reverse mortgages to tap into the enormous amounts of equity they've amassed in their homes over the last few decades. Exponential increases in home values in San Diego mean many such homeowners are still paying off their initial mortgage, while if they were to sell, they'd profit hundreds of thousands of dollars.

Instead of selling, though, these seniors leverage the vast equity they've built up into a sort of loan that can be used to cover their living and health costs.

And the loans don't need to be paid back until the home ceases to be the borrower's primary residence -- either by death or because of another living arrangement. That loan is usually covered by profits from the eventual home sale.

Most popular is the option to treat the equity like a credit line, where homeowners just withdraw as much as they need, when they need it. Others choose to receive monthly checks or a lump sum to cover a renovation or a health procedure. They first must use the reverse mortgage to pay off their initial home loans, eradicating their monthly payments.

"Our homes have appreciated so much," said Liliane Choney, who runs a Reverse Mortgage Experts program through a local nonprofit organization. "Someone may be living in a $600,000 home, but how do you tear off a piece of your house? You can't chip off the window frame and take it to the grocery store."

With an aging baby boomer population, rising health care costs, pension uncertainty and an ever-climbing cost of living, the popularity of these loans among elderly homeowners and their children has soared in San Diego County. The National Reverse Mortgage Lenders Association estimates 1,759 reverse mortgages were made in San Diego last year, more than 14 times the volume in 2001.

"California's the hottest reverse mortgage loan state in the country," said Darryl Hicks, spokesman for the association.

Advocates of reverse mortgages say they fight a laundry list of stigmas and misconceptions about the loans, largely because of the growing distrust of mortgages -- and brokers -- that sound too good to be true. But they still stress the reverse mortgage option as a lifesaver for elderly homeowners.

The loans are sufficiently confusing for those choosing them that a counseling session is required by the federal government before signing the contract. But once homeowners understand what the loans can do, industry advocates say it can be the difference between enjoying the last 20 years of your life or struggling to pay for groceries and prescriptions until you die.

"If they're living a hand-to-mouth existence, but sitting on a half-million dollars of equity, it's honestly like sitting there and thirsting to death with a cup of water sitting right there in front of you," said Dan Holbrook, president of the AtVantage mortgage brokerage firm.

The loan amount varies based on the age of the homeowners and how much equity has amassed. At least one of the primary homeowners must be 62 or older. The Federal Housing Administration's reverse mortgage program, called the Home Equity Conversion Mortgage, limits the equity that can be withdrawn at $362,790.

The loan is repaid when the home is no longer the primary residence of the homeowners. Whatever equity is withdrawn through the reverse mortgage, plus the fees and closing costs and interest accrued, is taken out of the proceeds of the sale of the home, whenever that happens.

Nine of 10 reverse mortgages are under that federal program, Hicks estimates. The industry group represents about 550 lenders nationwide, and those lenders offer about 95 percent of the reverse mortgages in the country, he said.

Because of the counseling requirement and other time-intensive aspects of the closing process involved in making one of these loans, it takes a special kind of lender -- most likely, a patient one -- to specialize in this area, Hicks said.

"There's a lot more care that goes into this product," Hicks said. "A lot more hand-holding. I'm not saying that every senior has difficulty dealing with financial matters, but in these types of cases, it takes a gentle hand and a patient loan officer."

Because many elderly homeowners have little cash flow but a lot of equity, they're often financially vulnerable to marketers offering solutions to their problems. Not all loan officers are qualified to offer the reverse mortgages, so some target the elderly homeowners with the products they can offer, including high-cost refinancing loans, even the risky subprime loans designed for poor-credit borrowers.

Those often start with manageable monthly payments but can skyrocket down the line, potentially sending someone with $400,000 in equity into foreclosure if they miss too many payments.

Holbrook said such loan officers aren't solely to blame for elderly consumers getting into the wrong loan.

"People sell what they have," he said. "If you go into a mechanic, he's going to fix what's there; he's not going to sell you a new car."

That's why Roger Reynolds of Security One Lending, a local firm specializing in reverse mortgages, said he's found counseling to be one of the most important parts of the program.

"It's kind of like your first-time homebuyers counseling," he said. "Sometimes seniors don't even need a loan; sometimes they need some help with their taxes."

Choney, who runs the experts program, said her biggest goal is increasing awareness of the reverse mortgage option in the senior citizen community, especially for those whose Social Security allowances and pension falls short of covering their monthly expenses.

She partners with Kenneth Terrill, a reverse mortgage lender with American Mortgage Professionals, to guide consumers through the process, from dealing with their initial fears to signing the papers.

Terrill and other reverse mortgage professionals said one of the biggest hurdles they face in their conversations with potential clients is their aversion to withdrawing from what they consider to be their children's inheritance. But as the life expectancy increases, so does the number of years people are forced to live on their retirement savings.

Hicks said kids are often the ones making the first call.

"Some seniors still have the notion that they've got to leave something for their kids," he said. "But more kids are encouraging their parents to get reverse mortgages because they themselves can't take care of Mom and Dad."

And Reese, the homeowner with the reverse mortgage, said there's plenty left for the five children she and her husband had between them. Reese said she can't imagine her life without access to the equity in her home.

Her accident left her unable to smell or taste, but with three small dogs who tend to "piddle here and piddle there," Ziggy, Shetzi and Suzie, the carpet began to smell, visitors to her home told her. So she withdrew money from her equity to have the floors retiled.

American Home Mortgage Investment upgraded to "buy"

American Home Mortgage Investment upgraded to "buy"

Thursday, April 12, 2007 11:44:56 AM ET
A.G. Edwards & Sons

NEW YORK, April 12 (newratings.com) - Analyst Greg Mason of AG Edwards upgrades American Home Mortgage Investment Corp (AHMH.NAS) from "hold" to "buy," while raising his estimates for the company. The target price is set to $23.50.

In a research note published yesterday, the analyst mentions that the market has overreacted to the company’s downwardly revised dividend and earnings guidance. American Home Mortgage Investment’s early payment defaults are expected to decline going ahead, since the company is discontinuing the sales of its high-risk products, the analyst says. The company is unlikely to announce additional dividend targets going forward, AG Edwards adds. The EPS estimate for 2007 has been raised from $1.19 to $1.20.

Mortgage woes are moving up a step

Mortgage woes are moving up a step
Associated Press
NEW YORK - The deterioration of the market for mortgage debt at the bottom of the credit ladder may be climbing up to the next rung.

M&T Bank Corp., a Buffalo, N.Y.-based regional bank, said in a Friday regulatory filing that it is having trouble selling some of its loans.

It's not unusual to hear a subprime mortgage lender -- or a mortgage bank that caters to borrowers with bad credit -- complain that investors don't want to buy its loans. What's unusual is that M&T Bank is not a subprime mortgage lender.

Shares of M&T fell 8.5 percent Monday, the first day of trading since its filing. Shares of its competitors fell sharply as well.

M&T Bank said prices dropped more than anticipated in its recent auction of some of its Alt-A loans, which carry better credit than subprime loans but don't require borrowers to provide as much documentation as prime loans. That puts the credit quality of Alt-A loans somewhere above subprime and shy of prime.

The results of the auction don't bode well for investors who believed the credit problems plaguing subprime mortgages would stay contained in subprime mortgages.

The bank cited fewer investors than expected in the bidding, and said the subprime mortgage market, which this year has been wracked by a spike in payment defaults and falling home prices, appears to be hurting the rest of the mortgage market, the bank said.

Subprime Mortgage Woes Harm Calif., Nat'l Economy

Subprime Mortgage Woes Harm Calif., Nat'l Economy
(AP) LOS ANGELES The subprime mortgage implosion will take even more steam out of the already slowing real estate market this year and beyond, according to a new economic report.

More than two dozen subprime lenders have shut down in recent months and others are scrambling to stay in business as a spike in defaults caused by borrowers unable to make payments has rocked the mortgage industry.

Now, as lenders tighten credit standards, the housing market will likely see further declines in price and output, senior economist David Shulman wrote in the quarterly Anderson Report released Monday by the University of California, Los Angeles.

밯e suspect the problem in the subprime area is just the tip of the iceberg for the mortgage market as a whole,?Shulman wrote. 밊or all practical purposes, the subprime market is in the process of shutting down.?br />
A tougher credit environment will limit the number of first-time home buyers entering the market and make it tougher for others to refinance their subprime loans before they face a default or foreclosure.

Shulman expects housing starts to hit 1.33 million units this year, down from a previous forecast of 1.48 million units.

밊or a housing market that has already witnessed housing starts decline by 36 percent, this is not good news,?he wrote.

Still, he does not forecast a recession but only a softening of the economy.

He expects growth in the nation뭩 gross domestic product to range from 1.7 percent to 2.5 percent through the first nine months of the year, and to average 3.25 percent next year.

The nation뭩 unemployment rate will tick up from February뭩 4.5 percent to 5 percent by the third quarter before beginning a gradual decline, Shulman wrote.

Home sales in California will also take a hit from the subprime mortgage woes, economist Ryan Ratcliff forecast in his outlook for the state.

"Since the subprime market was almost the only thing keeping sales volumes buoyant in the last years of the boom, the drying up of subprime credit suggests that home sales in California will be stagnant for some time to come," Ratcliff wrote.

Meanwhile, recent employment data from the state suggests California has so far weathered the real estate slowdown better than expected.

Last year, California added 52,000 jobs, up 1.8 percent over the prior-year period.

Still, Ratcliff forecasts the state's economy to slow significantly this year, as the woes in the construction and mortgage finance sectors drag on the economy.

Mortgage bankers group cuts ties with subprime lenders

Mortgage bankers group cuts ties with subprime lenders


BOSTON The Massachusetts Mortgage Bankers Association has removed three subprime lenders from its membership rolls.

The Boston Herald reports the organization cut ties with Fremont General, New Century Financial and the Mortgage Lenders Network of Connecticut.

The moves come a year after the state mortgage bankers' group also cut ties with Ameriquest, another provider of high-interest loans to people with poor credit.

Subprime lenders have come under financial pressure recently amid growing numbers of defaults and foreclosures involving high-interest mortgages. Federal and state lawmakers are considering legislation to more closely regulate the industry.

Different Ways To Repay Your Mortgage

Editors Note: There are many issues to consider when looking for a mortgage home loan. What about Interest Only Loans (IO)? Reverse Mortgages? There are many options to consider. Here is an article on the subject:

When you are searching for a mortgage, no matter if it is a first, second, or refinance, you have different options on repaying it which some people don't realize. So, before you just take whatever is on the paperwork, you should consider the following options:

Capital and Interest Payments


This is the most common way to repay your mortgage, since you make your payments each month on the capital, or principle, of the loan. In the U.S., this is called amortization and in the U.K., this is called a repayment mortgage.



These types of loans are set anywhere from 10 to 50 years, depending on the lender and where you live. The payments that you give to the mortgage company each month take a percentage and place it toward the interest and the rest goes toward the capital of the loan. Earlier in the loan, most of the payment goes toward the interest and toward the end most of the payment goes to the capital.

Interest only repayment.

While this type of mortgage is not widely used in the United States, it is in the UK. Basically, in this type of mortgage, the capital isn't repaid through the term of the loan, instead, you make regular 'payments' to an investment account or plan that helps you to build up a large lump sum that will in turn repay the mortgage completely at the end of the loan. This is usually referred to as an “investment-backed mortgage” or as any of these types of mortgages: “Personal Equity Plan Mortgage”, “Individual Savings Account Mortgage”, or a “pension mortgage”. So, when you hear any of these terms, you will know what the mortgage broker is talking about. These types of mortgages offer some great tax advantages, so just ask your mortgage broker about them.

No interest or capital payments.

If you are an older person, this might be the way for you to go. Some mortgage companies offer a mortgage that is usually referred to as a “reverse mortgage”, “lifetime mortgage” or an “equity release mortgage”, it just depends on where you live and where the mortgage company is located. Basically this type of mortgage is just compounded each year, with the interest rolled up into the capital. The only problem is that the debt increases each year that the mortgage is open. One of the reasons that these loans are meant for older people is that they are not usually repaid until the borrowers pass away.

There are also several other, less common, ways of repaying your mortgage you will just need to check with your lender to see what types of payment plans and options they offer before you sign your mortgage paperwork. You might be able to get a better payment plan by going with a less conventional way of repayment.

By: Connie Barker

US mortgage applications dip in week, subprime eyed

US mortgage applications dip in week, subprime eyed
Wed Mar 28, 2007 11:02 AM ET



(Adds economists' quotes, changes headline, adds byline)

By Lynn Adler

NEW YORK, March 28 (Reuters) - U.S. mortgage applications declined last week as refinancing dipped, while purchase activity barely budged, an industry group said on Wednesday.

Mortgage application levels are being scrutinized as the subprime mortgage crisis causes lenders to clamp down on loans to borrowers with weak credit.

There is growing concern that fallout from tighter lending practices will hurt consumers, home builders, lenders and the broader economy.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications dipped 0.2 percent to 671.0 in the week ended March 23.

The association's seasonally adjusted purchase index edged up 0.1 percent to 411.1 while refinancing applications index slipped 0.5 percent to 2,197.7.

The week's loan levels "certainly don't show new mortgage demand lurching down; they suggest it seems to have stabilized in the short term," said Richard Iley, economist at BNP Paribas.

"But it remains a moot point," he said. "... The tightening of mortgage standards now under way because of the subprime crisis is almost certainly going to crimp demand at the margins."

All three of the association's application measures were higher in terms of a four-week moving average, which smooths out volatility.

The market index was up 1.7 percent to 676.3, the purchase index rose 0.6 percent to 410.3 and the refinancing index gained 2.9 percent to 2,238.2, according to the group. The market index stood at about 572 in the same week a year ago.

PICTURE CLOUDED BY SUBPRIME

The substantial housing market correction has been the main factor behind slowing economic growth that began last spring, Federal Reserve Chairman Ben Bernanke told the congressional Joint Economic Committee on Wednesday.

"The near-term prospects for the housing market remain uncertain," he said, adding that subprime mortgage developments had raised added questions about the housing sector.

This week, a major builder blamed a huge profit slump partly on turmoil in the subprime sector, which caters to home loan borrowers with spotty credit histories.

Lennar Corp. , the No. 3 U.S. home builder, on Tuesday said its 73.4 percent profit slide in the quarter ended Feb. 28 was due to widening subprime problems weakening an already soft housing market.

Sales of new homes fell 3.9 percent in February to the lowest in almost seven years, the Commerce Department reported on Monday. The supply of these houses lingering unsold in the market rose to its highest since January 1991.

Sales of existing homes rose 3.9 percent in February, the biggest gain since March 2004, the National Association of Realtors said last week. Home resales represent 85 percent of the U.S. housing market.

The mortgage bankers group forecast declines in sales to subprime borrowers of as much as 250,000 units a year over the next two years, and said that will slow the recovery in housing.

Home prices slid in January, staging the first year-over-year drop in more than a decade, according to the Standard & Poor's/Case-Shiller index released on Tuesday.

Some industry experts say lower home prices and low long-term mortgage rates could be compelling to buyers.

"I don't think that the subprime woes will infect the broader mortgage market or the overall economy," said Greg McBride, senior financial analyst at Bankrate Inc. in North Palm Beach, Florida.

"This is a buyer's market now," he said. "You add to that the attractive mortgage rates, and anybody that can document their income, has decent credit and a respectable debt ratio has some notable buying power."

Average 30-year fixed-rate mortgages, excluding fees, dropped 0.02 percentage point from the prior week to 6.04 percent, well below the 6.35 percent registered in the same week a year earlier, the Mortgage Bankers Association said.

Collapse of the "Subprime" Mortgage Market in California

Collapse of the "Subprime" Mortgage Market in California
Increased foreclosures will have major impacts on the state, individuals, and businesses


Paul Leonard, center, testifies before California Senate Banking Committee

Testimony of Paul Leonard
California Office Director
Center for Responsible Lending http://responsiblelending.org

Before the California Senate Banking Committee
March 26, 2007

[Editor's note: Yesterday, the California State Senate Banking, Finance, and Insurance Committee held an informational hearing to inquire into the collapse in this state and the nation of the "subprime" mortgage market. You will be hearing more about this issue in coming days and perhaps years as it is predicted there will be a marked increase in defaults and delinquencies in home loans.

When "teaser" rates on adjustable rate mortgages expire and the interest rate, and therefore the monthly payments on a significant number of home loans goes up, it is predicted there will be more foreclosures, more houses on the market, which will depress prices further and make it difficult for some of these owners to "unload" their properties.

Since a booming housing market has been part of what has fueled the California economy, the committee, and the state are looking at solutions or ameliorative steps to be taken. This could further worsen the revenues the state collects and our budget deficit. For the individual families and individuals, the results can be devastating. Segments of home loans are considered "predatory" by many and that is another facet of this issue.

Here is the first part of Mr. Leonard's testimony. There are two other installments.]

Chairman Machado and members of the Senate Banking Committee: Thank you for holding this hearing to examine the problems of the subprime market and their impact on Californians and the state of California. I appreciate your inviting me to participate. Time could not be more precious, as my organization expects a California foreclosure rate of 21.4 percent – a rate that translates to a direct loss of more than 450,000 homes by the time the dust has settled.

I am Paul Leonard, director of the California office of the Center for Responsible Lending(CRL). CRL is a not-for-profit, non-partisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL began as a coalition of groups in North Carolina that shared a concern about the rise of predatory lending in the late 1990s.

CRL is an affiliate of Self-Help, which consists of a credit union and a non-profit loan fund. For the past 26 years, Self-Help has focused on creating ownership opportunities for low-wealth families, primarily through financing home loans. Self-Help has provided over $5 billion of financing to over 50,000 low-wealth families, small businesses and nonprofit organizations in North Carolina and across the country, with an annual loan loss rate of under one percent. We are also a responsible subprime lender. In fact, we began making loans to people with less-than-perfect credit in 1985,when that was unusual in the industry. We believe that homeownership represents the best possible opportunity for families to build wealth and economic security, taking their first steps into the middle class.

In my testimony today, I’d like to make two major points about the implosion of the subprime market and its impact on consumers, communities and the economy:

• Help Current Borrowers: Immediate action is needed to help borrowers who are trapped in damaging subprime loans that should have never been originated. Public officials at all levels of government must hold industry players accountable for their actions. Responsibility rests with lenders, servicers, investors and trustees to stem the tide of foreclosures by proactively modifying loans to make them sustainable. There is no longer any dispute that brokers and lenders have placed borrowers into loans that set them up for foreclosures, and the secondary market provided key support and high demand for this reckless lending. Specific remedies will vary depending on the homeowner’s situation, but examples of positive actions include converting loans to fixed-rate mortgages with affordable interest rates, writing down principal loan balances, and waiving prepayment penalties. For those borrowers with no equity and no hope of refinancing, the best we can hope for is a “soft landing,” but for those who have maintained a degree of equity in their home, this would mean a restructuring of their current mortgage to an affordable level.

• Strengthen Mortgage Laws to Prevent Future Problems: While the market has recently “corrected” to tighten underwriting standards, we must establish statutory underwriting standards to prevent a repeat of this crisis when housing prices turn upward. By implementing statutory requirements on all subprime loans—including an assessment of a borrower’s ability to repay; requiring escrow for taxes and insurance and income verification, as well as increasing accountability at all stages of the mortgage transaction and crafting a meaningful enforcement framework that enables state regulators to be more effective.

These points are underscored by the speed with which the subprime market has imploded. On January 31, 2007, the Senate Banking Committee convened a hearing to discuss nontraditional residential mortgage products, including the types of loans initiated by many subprime lenders who have since closed their doors.

What a difference a few weeks makes.

Since we last discussed this issue in your committee in January, Wall Street, federal regulators and the media have been in a frenzy as the subprime mortgage market has imploded before our very eyes. We have read reports in all of the nation’s leading papers, listened to talk, business and public radio broadcasts and cable and network news reports of the implications of the implosion on housing prices, the economy and borrowers faced with possible foreclosures.

Federal regulators have issued for public comment a new statement applying the principles of their earlier guidance on nontraditional mortgages to subprime hybrid ARMs – requiring new underwriting standards and disclosure requirements for federally-regulated institutions.

Freddie Mac, one of the two large government-sponsored enterprises has promised to stop buying any subprime hybrid ARMs that do not meet the federally-established guidelines.

And some of the nation’s largest subprime lenders – many based here in California – have ceased making new loans, announced massive layoffs and seem perilously close to outright bankruptcy. Thousands of California employees have been laid off. “Mortgage Insider,” Orange County Register by Matthew Padilla.

In my remarks today, I will focus on subprime home loans—the development and downfall of the market, its consequences—particularly for families in California—and potential solutions that will prevent similar crises from recurring in the future. I will also offer solutions to rescue current borrowers trapped in mortgages they cannot pay. As I will discuss in more detail, inequities in the market and massive foreclosures are having a devastating effect all over the nation. Regions of California (particularly in the Central Valley) are experiencing sharply increased foreclosures at the moment, and we estimate that the Golden State will lead the nation in foreclosures as our housing prices flatten.

The performance of the subprime market and subprime foreclosures matter because homeownership is by far the most important wealth-building tool in this country. For millions of families, it ultimately makes the difference between merely surviving between paychecks or building savings for a better future. Nearly 60 percent of the total wealth held by middle-class families resides in their home equity – the value of their home minus the amount they owe on it.

Communities of color are particularly vulnerable to damage in the subprime market. It is well established that African Americans and Latinos are paying higher costs for mortgages, according to data from both the Board of Governors of the Federal Reserve and my organization, the Center for Responsible Lending; our research has found that African American and Latino borrowers were commonly 30 percent more likely to receive a higher-rate loan than white borrowers.

Robert B. Avery, Glenn B. Canner and Robert E. Cook, in “New Information Reported Under HMDA and Its Implication in Fair Lending Enforcement,” Federal Reserve Bulletin (Summer 2005) found that after accounting for a borrower’s income, gender, property location and loan amount, African-Americans who took a loan to purchase a home were 3.1 times more likely than white non-Hispanic borrowers to receive a higher-rate home loan; for Latino borrowers, the same disparity stood at 1.9 times.

The San Jose Mercury News recently reported on the plight of subprime limited English borrowers in the San Jose area who have been victims of the subprime lending industry’s recklessness. Pete Carey, “The harsh side of the housing boom,” San Jose Mercury News, March 11, 2007.

In a nation where homeownership is so important to financial security, irresponsible subprime lending has the potential to push vulnerable consumers backward instead of forward. In California in particular, where skyrocketing home prices in recent years caused many families to wonder if they could ever afford to own a home, subprime adjustable rate products with discounted initial payments made homeownership temporarily accessible, but didn’t necessarily make homeownership any more affordable.

The bottom line is that access to homeownership means very little if it ultimately ends in home “losership.” Over the past nine years, the subprime market has produced more than two trillion dollars in home loans, but only a relatively small portion of these loans have supported first-time ownership—the majority of subprime loans are refinance loans. Between 1998 and 2006, only an estimated 1.4 million first-time homebuyers purchased their home with a subprime loan. Yet over that same time period, there have been many more foreclosures on all subprime loans. In our recent research on subprime foreclosures, CRL estimated that over 2.2 million borrowers who obtained subprime loans will lose or have already lost their home to foreclosure. When we update the analysis to include subprime originations for fourth quarter 2006, the total number of projected subprime foreclosures increases to 2.4 million.

[All figures in this analysis cover only loans to owner-occupants in the 50 states and the District of Columbia secured by a first-lien on a single-family home, condominium, townhouse, or a unit in a planned development. 1998-2004 figured derived from a proprietary database of subprime loans sold in the secondary mortgage market between 1998 and 2004. We modified 2005-2006 estimates from Inside Mortgage Finance and SMR Research Corporation to account for these criteria.]

That means that since 1998, subprime lending has led to a net loss of homeownership for almost one million families. In fact, a net homeownership loss occurs in subprime loans made in every one of the past nine years.

ur numbers are conservative for two reasons. First, the proprietary database used consists of loans sold on the secondary market, and contains a higher proportion of subprime loans for used home purchase than the overall subprime market. Second, the foreclosure projections were developed by CRL for its recent study Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowner (see full cite in note 7 below), and are based on conservative assumptions. Since that report was published in December 2006, other analyses suggest that foreclosures in the subprime market could actually be higher than CRL’s projections. See, e.g., Lehman Brothers projects 30% losses over time for subprime loans originated in 2006 (Mortgage Finance Industry Overview, p. 4. Lehman Brothers Equity Research, December 22, 2006). If Lehman Brothers’ foreclosure projections for 2006 are incorporated with CRL’s projections for prior years, the total number of subprime foreclosures originated 1998-2006 climbs to 2.7 million households.]

Ultimately, the perfect storm of risky loan products, rising home appreciation and aggressive and deceptive marketing to the riskiest of borrowers and a weak regulatory oversight has led us to the subprime market implosion that we are here today to discuss. Much of the press attention, and in fact today’s hearing, is focused on whether the collapse will spread to the prime market or its impacts on the national economy. These are important questions. But let us not forget: the most disastrous affects will be felt by borrowers who face the loss of their homes and the ruin of their credit records for years to come.

I would like to address two major themes this afternoon: How we as a state and nation were steered into this crisis, and how we can get out with the best possible outcomes for the most borrowers in trouble. I’d like to start with discussing the characteristics and consequences of the subprime market, and end with recommendations to prevent a recurrence of this or similar crises, as well as offer lifelines to those borrowers who need help immediately.

U.S. subprime crisis exposes mortgage scams

U.S. subprime crisis exposes mortgage scams

Reuters
Published: Monday, March 26, 2007




MIAMI -- Gabriellee Cunningham had fallen behind on the mortgage on her modest suburban Miami home and was mired in debt when she was approached in June by a door-to-door "mortgage lender" who promised to help her.

Nine months later, her US$89,000 mortgage has ballooned into a US$234,000 loan, her monthly payments have doubled and she faces foreclosure on a house she no longer owns.

Housing officials call Cunningham the victim of one of the worst cases of predatory lending they've ever seen and warn, as the U.S. subprime mortgage crisis grows, of a rising tide of scams in which homeowners are being cheated out of their home equity.


"I know I did something stupid but I am going to fight these people 'til my last breath because they are trying to rob me," said Cunningham, 48, who works at three jobs. She says she fell behind on her payments while trying to fund college educations for two daughters.

Consumer advocates have seen a surge in "foreclosure rescue" and "equity stripping" scams in recent months as the subprime mortgage crisis developed.

Lenders launched foreclosure actions against more than one in every 200 mortgage borrowers in the fourth quarter of 2006, according to a Mortgage Bankers Association survey that hammered equity markets this month.

That figure was the highest in the association's history. Subprime adjustable-rate mortgage delinquencies jumped to nearly 14.5 percent in the quarter.

CRISIS JUST BEGINNING?

Florida is among the states hardest hit by the crisis, which some advocates believe is in its infancy. Florida ranks second to California in the percentage of subprime loans, or loans granted to people with poor credit histories, many of whom are finding they can't make their payments.

By some estimates, up to 30 percent of loans in Miami, a metropolitan area with large poor and immigrant populations, are subprime.

The non-profit National Consumer Law Center said no one tracks the number of people trapped by mortgage scams but it agrees with the views of lawyers and consumer agencies that loan scams, which routinely target the poor and minorities, have proliferated with rising property values.

Jeffrey Hearne, a lawyer with Legal Services of Greater Miami, said his office saw few cases until two years ago but now has two dozen and sees one or two new ones each week.

"We are having to turn them away," he said.

Cunningham said she was panicked about her finances when a sweet-talking lender knocked on her door. He promised to refinance her house and relieve her of mortgage payments for a year to allow her to catch her breath.

Cunningham said the scam artists used race and religion to lure her -- "affinity marketing" tactics that experts say are typical.

"They sent a black guy. I'm black," Cunningham said. "He said he was a Christian. I'm a Christian."

The result: Cunningham says her mortgage, an $89,000 loan at 8.5 percent when she bought the home in 2000, is now a $234,000 loan at 11 percent. Monthly payments have gone from $1,038 to $2,275. And her name is no longer on the title.

"How do you think I'm going to pay $2,275 if I fell behind at $1,038?" she said. "I'm afraid I don't even own my home anymore. I'll be homeless."

PREDATORY LENDING

Attempts to track down the company that talked Cunningham out of her home have been unsuccessful and state prosecutors may get involved, said Ryan Neubauer of the Miami-Dade Housing Finance Authority.

"It's one of the clearest cases of predatory lending we've seen," he said. "She was basically convinced to sign over title to her home."

Typically, the con-men pounce when a homeowner faces foreclosure. In some instances, borrowers are asked to sign over title but told they can buy it back. In others, they are told the scam artist will pay off and refinance the mortgage.

"We have that combination of people behind in their mortgages who have equity in their property," said NCLC attorney Lauren Saunders. The equity makes them attractive targets for cons.

At least 12 states -- California, Colorado, Georgia, Illinois, Maryland, Michigan, Minnesota, Missouri, New York, Washington, Florida and Rhode Island -- have passed consumer protection laws against foreclosure scams.

But Saunders said the laws do not carry blanket protections and cannot guard against scammers who quickly flip a property and make off with the cash.

"If you're signing away your home you're signing away your home," she said. "Don't expect to ever get it back."

Choose the right type of mortgage for your needs

Choose the right type of mortgage for your needs

Written by Jason Alderman
Friday, 23 March 2007

You'll likely face many major decisions to make when you're ready to take the homeownership plunge, not the least of which is choosing the right kind of mortgage for your needs. Mortgage options used to be fairly limited, but in recent years new varieties have abounded.


Here are some of the more common types:


Fixed-rate mortgage. You make the same monthly payment throughout the term of your loan, usually 15, 30 or even 40 years. Shorter-term mortgages offer lower interest rates but higher monthly payments, so you may not be able to afford as expensive a house. However, over the life of the loan you'll pay thousands of dollars less in interest - and, you'll build equity in your home much more quickly.

Adjustable-rate mortgage (ARM). Your interest rate and monthly payment move up or down, depending on how the market index it's tied to performs. Initially, ARM interest rates are relatively low and don't change; then the rate becomes "adjustable" and may change at predetermined intervals, depending on market conditions. Warning: When rates climb, ARM payments can rise sharply, often by hundreds of dollars a month.


Interest-only loan. Usually ARMs, these loans require you to pay only the interest portion of the loan for a specified period - often 10 years. After that, you begin paying the loan principal amount at an accelerated rate.


Veterans Administration (VA) loans. Designed for honorably discharged, active-duty veterans, these loans feature no down payment, low origination fees and low interest rates. To see if you qualify, go to www.homeloans.va.gov.


Federal Housing Administration (FHA) loans. These loans are guaranteed by the FHA and offer low down payments and less-stringent credit guidelines than conventional loans. To learn more, go to www.fha.gov.


Subprime mortgages. People with damaged credit can sometimes secure these loans, albeit at much higher interest rates than "prime" loans. Subprime rates and terms vary widely because lenders weigh credit risk differently, so if you fall into this category, comparison shop - and do everything you can to improve your credit score so you can refinance later at a better rate.


Jumbo mortgage. If you need to borrow more than $417,000 to buy your home (except in certain higher-priced areas, where the limit is higher), you'll need a Jumbo mortgage; loans under that amount are called conventional mortgages. These dollar limits are set each year by Fannie Mae and Freddie Mac, the publicly chartered corporations that buy mortgages from lenders. Jumbo loans typically come with higher interest rates than conventional loans.


Balloon mortgage. These loans offer lower rates and payments for a specified term (usually three to 10 years); then a lump-sum payment of the principal balance becomes due. Balloon mortgages can sometimes be converted to fixed- or adjustable-rate loans, but borrowers often either sell their home or are forced to refinance.


There are many other mortgage variations out there. The main thing is to find a lender you can trust, either at a bank, credit union, Internet lender, mortgage broker or through your home builder or real estate agency. Bankrate.com features a handy guide Mortgage Basics, including a chapter on choosing the right type of lender (www.bankrate.com).


Another good resource is Practical Money Skills for Life, a free personal financial management site sponsored by Visa USA (www.practicalmoneyskills.com/homeowner). It contains a nine-step guide to homeownership, including preparations you should take to qualify for financing.

Countrywide Financial executive says mortgage foreclosures could rise to nearly 10 percent

Countrywide Financial executive says mortgage foreclosures could rise to nearly 10 percent


WASHINGTON – A top executive at Countrywide Financial Corp. said Thursday that dropping home prices could produce record-high levels of foreclosures on loans made in 2006 to people with poor credit records.


Sandy Samuels, executive managing director and chief legal officer of the Calabasas, Calif.-based mortgage lender, said in prepared remarks to the Senate Banking Committee that foreclosure rates on high-risk, or subprime, mortgages taken out last year may approach or exceed the level for similar loans taken out in 2000, when the foreclosure rate was nearly 10 percent.



Advertisement However, Samuels urged Congress not to “lose sight of the reality that more than 90 percent of Countrywide's subprime borrowers will not lose their homes to foreclosure.”
Samuels also warned lawmakers not to create overly tight restrictions on high-risk mortgages, saying that could lock out many would-be homebuyers.

Over the past 10 years, Countrywide's overall foreclosure rate for adjustable rate subprime loans was 3.4 percent, Samuels said. The so-called subprime mortgage market represents 7 percent of Countrywide's home loan volume, compared with 20 percent of the overall U.S. market, he said.

Samuels' testimony came as federal regulators said they lacked authority over expanding areas of the high-risk mortgage market, and as lawmakers pressed them on whether they were lax and helped fuel the spike in delinquent payments and foreclosures.

Sen. Christopher Dodd, D-Conn., the banking committee's chairman, laid out what he called a “chronology of regulatory neglect” as banks and other lenders loosened their standards for making riskier mortgage loans during the housing market boom in late 2003 and early 2004.

Dodd blamed the Federal Reserve and other regulators for setting off the crisis in subprime loans, which are higher-priced home loans for people with tarnished credit or low incomes who are considered at greater risk of default. Now, some 2.2 million homeowners could lose their homes in the next few years, said Dodd, a contender for the Democratic presidential nomination in 2008.

“Our nation's financial regulators were supposed to be the cops on the beat, protecting hardworking Americans from unscrupulous financial actors,” Dodd said. “Yet they were spectators for far too long. “

Foreclosures have accelerated in recent months, especially among homeowners who took out subprime loans, raising worries that many people could lose their homes as mortgage delinquencies mount.

Shares of Countrywide fell 57 cents, or 1.5 percent, to $36.38 on the New York Stock Exchange.