When terror strikes at home

It’s all over the news, of course. Every day more and more folks are affected by it, and when that happens even folks who may not be threatened by it begin to be fearful, wondering if it could happen to them and how they can fight back if it does.

I’m talking about the sorry state of the economy, and specifically about what is happening to home mortgages all around the country.

While the good news is that here in Texas things are a bit more stable, that doesn’t mean that foreclosures aren’t happening, and right in our own Ellis county communities.

It occurred to me that there may be people living in a high state of anxiety who can use some information that might turn out to be useful, and I want to share it.

Now, I’m not a lawyer and I don’t play one on TV, and I’m not a mortgage lender, ditto, but as a real estate broker I can offer some anecdotal evidence, gained through fairly recent experience, that there are things a homeowner can do to make it a little easier to get through these hard times and maybe even protect from foreclosure if it comes to that.

Beginning with the best-case scenario, let’s talk about the fact that mortgage interest rates are really low right now.

If everything is just fine with your credit record and your income, there is this thing called re-financing. If you can lower your mortgage interest rate by 2% or so, it may be well worth your effort to re-finance to a lower fixed rate; this could save you a few hundred dollars a month right there. Depending, of course, on the amount you still owe on your home.

Re-financing has costs — these vary wildly with the lender, but generally include some fees to the lender, the cost of an appraisal, etc. But since most of those costs are just rolled into the new mortgage you won’t feel a thing — after all, if you add a couple thousand dollars to your 30-year loan, that’s really small change over 30 years.

And consider changing a 15-year note to 30 years – if you are just dying to pay off your loan sooner than that, well, you can always pay extra along the way, but your monthly obligation will be less when spread over 30 years. That’s a little more protection against what may be ahead during these hard times.

Talk to the lender of your choice and get a good faith estimate to learn exactly how much you can benefit, then decide your best course of action.

A scarier scenario: You’ve been working hard, playing by the rules, and suddenly hit a bump in the road — been laid off, suffered a costly medical or other family emergency, for example — and just can’t make the mortgage one month but see your way clear to recovery. If that happens to you, then don’t just panic, take action. Contact your lender and see if you can defer that month’s payment, for example. Most lenders will try to work something out, if not from kindness of heart but because they really, really don’t want to foreclose.

Foreclosure is very costly to lenders. They have to hire lawyers and appraisers and pay staff to do paperwork, then try to find a buyer for the property and maintain it in the meantime; they know that in the long run they will lose money, one way or the other. That’s why your lender is as anxious to keep you in your home as you are.

In the third-case scenario — when the job is gone forever and there’s no way of continuing your monthly mortgage payment but still have some income, you should explore with your lender the possibility of a work-out to lengthen the term of your loan and reduce your monthly payment. The Obama administration’s finance team is working on finding a way to require lenders to engage on this idea. But until that’s set up, you are well advised to try to make it happen on your own. You may have to hire a lawyer, but the cost of legal help may be worth it.

My point is, don’t give up until you’ve tried everything.

Finally, when it’s clear you will not be able to keep your home, there is one more thing you can do. It’s called a “short sale,” or selling the house for less than you need to pay off the mortgage.

Why should you care? After all, if you are going to lose your home, why not just let the bank have it?

The reason is that a foreclosure on your credit record is worse, believe it or not, than a bankruptcy.

Sure, declaring bankruptcy would stop the foreclosure, but unless you can make the payments when all is said and done, what have you gained?

A “short sale,” where the lender agrees to accept less than is owed and — this is important — then call it paid in full, is a last resort, but a resort worth trying.

If you’ve done all you can (see above) and it’s clear you are going to have to give up your home, for heaven’s sake start the process as soon as possible.

Hire yourself a real estate agent who knows about short sale marketing, who will aggressively market your home and will go all-out to get a contract in place within the limited time available. You should determine even before you get a foreclosure notice that this will be your course of action, to give yourself as much time as possible.

Three years ago I wouldn’t have known all this stuff, but the sorry news is that this is where we are at the moment and I've racked up personal experience. Too many of our friends are finding themselves overwhelmed by today’s economy.

People facing any of the circumstances I’ve described are likely to become depressed and angry, and justifiably so. But you need all the energy you can muster to be proactive, for you might just find a way forward.

If you or a friend is going through this terror, remember that you are not alone. And though it’s little consolation when you’re hurting, realize that lots of other folks are in the same boat. For what it’s worth, I believe that better days are ahead.

Years ago a friend told me, “The man who falls down gets up faster than the man who lies down.”

So, if any of this resonates with you, don’t take it lying down — DO something!

The past is prologue?

If some of our more partisan conservative commentators are to be believed, Bill Clinton and his administration are to blame for anything and everything that’s gone wrong in this country since 1992, including bin Laden, Katrina, the subprime mess, and of course the present worldwide economic crisis.

In the latter cases, the line of thought seems to be that the present crisis can be traced back to the Community Reinvestment Act, originally passed in 1977 and furthered during the Clinton administration. Here’s how it’s described on the Federal Reserve’s own web site:

The Community Reinvestment Act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations. … The regulation was … most recently amended in August 2005.

The gist always seems to be that lending to minorities is what got us here, and that it is all the fault of the Clinton administration.

Just a couple of observations: First, you’ll note that the Community Reinvestment Act required banks to operate in a way “consistent with safe and sound operations.” And, second (and perhaps most significant), the Act was “most recently amended in August 2005.”

Daniel Gross, writing in the October 7, 2008 issue of Newsweek, summed it up best:

The Community Reinvestment Act applies to depository banks. But many of the institutions that spurred the massive growth of the subprime market weren't regulated banks. They were outfits such as Argent and American Home Mortgage, which were generally not regulated by the Federal Reserve or other entities that monitored compliance with CRA. These institutions worked hand in glove with Bear Stearns and Lehman Brothers, entities to which the CRA likewise didn't apply. … Nor did the CRA force the credit-rating agencies to slap high-grade ratings on subprime debt.

Though I believed from experience that there have been many, many foreclosures that weren’t necessarily related to subprime lending, the Gross article offered some detail, pointing out that, for example, a builder of high-end condominiums in Florida filed for bankruptcy just a couple of months ago:

Very few of the tens of thousands of now-surplus condominiums in Miami were conceived to be marketed to subprime borrowers, or minorities—unless you count rich Venezuelans and Colombians as minorities.

And it’s a myth that lending to poor folks or minorities is in itself risky. Gross cites a recent New York Times report that

... a long-running initiative to build homes and sell them to the working poor in subprime areas of New York's outer boroughs, has a repayment rate that lenders in Greenwich, Conn., would envy. In 27 years, there have been fewer than 10 defaults on the project's 3,900 homes. That's a rate of 0.25 percent.

The villains in the subprime lending debacle were in it for the money. The loan fees for such loans are higher than those for conventional loans, and I’ve seen for myself cases where the buyer who would have qualified for a conventional or FHA loan was pushed into a subprime loan because the loan officer was greedy. And, of course, there were loans made that should never have passed underwriting because the loan officer was simply dishonest.

Even so, if you want to blame it all on Clinton, what do you do about the fact that, when the Act was amended in 2005, the Presidency and both houses of Congress were under the complete control of Mr. Bush and the Republicans?

Hm.

I leave the reader to think about it while I point the finger in another, more sinister, direction.

Back in 1996, in what may have been a prescient letter to the New York Times, I wrote:

I believe now that Newt Gingrich, with the perhaps unwitting support of the famous “freshmen” he so carefully recruited, programmed and brought to Washington, does have it in his mind to dismantle if not destroy our federal government. I think it’s time for someone to openly question whether his intentions are honorable.

His unrelenting “Newtspeak” attacks on existing government programs, his vilification of anyone opposing him, his brazen moves to destabilize Wall Street, his cultivation of discord and fostering of anarchy, and finally his dismissal of public disagreement with comments that amount to ‘progress is painful, but I know what’s good for America,’ suggest that Americans had better pay attention when he calls it ‘revolution.’ Those who call him brilliant would do well to recall Hitler, for one, among those revolutionaries of history who used similar tactics to take control of the existing government. It is increasingly apparent that Gingrich’s agenda includes a revised constitution that he intends to write and a ‘revolutionary’ government that he intends to control.

Judging by the ineffectiveness of our scattered protests, he seems to have convinced the American people that we cannot stop the inevitable.

Every politician in Washington claims to care most about “middle class Americans.” Well, the working people of America — the true middle class — had better stand up for themselves, or suffer the consequences.

During the recent turmoil in Washington while Congress tried to decide what to do, it was reported on good authority (Andrea Mitchell) that ol’ Newt had been working furiously behind the scenes in opposition to the “bailout” legislation – before he came out in support of it. There was also mention of the possibility that he is preparing a run for President in 2012.

Another something to think about.

But no guarantees, of course.

Saturday morning on NPR a focus group of undecided voters, gathered by the network to watch the Presidential debates, now were asked to give their reactions. Most of them said the debate had helped them get closer to deciding which candidate they prefer. But one rather grumpy-sounding fellow disagreed, complaining that he didn’t hear either of the candidates put forth a proposal for resolving the finance-industry crisis now being debated in Washington.

Well, mister, if all the king’s horses and all the king’s men haven’t been able to figure out how to put the economy together again, let alone whether to take any action at all, how can you demand that any one person, even a candidate for President of the United States, know what to do?

Frankly, I’d rather have a President who doesn’t claim to know it all, who is willing to hold off making a decision until all the information is in — and who understands the potential harm that might result from acting recklessly or in haste — than one who doesn’t think he needs more information, nor to listen to more opinions, who trusts his “gut” feeling.

We’ve been there, had that, and it didn’t work out too well, did it?

Late Sunday the Congressional leaders of both parties, after working through the weekend, announced that they had agreed on a plan to “unclog the arteries” of lending and investment institutions so that money for home and business loans would begin to flow again.

And why the rush? Here’s where it gets dicey.

The reader may recall that the subprime crisis wreaked a bit of havoc recently, with one effect being that the most egregious lending practices were ended and lenders started insisting that their borrowers be qualified and capable of paying off the loan.

Over the last few weeks now, as banks and investment companies began to fail and others go all wobbly, stock market values began to bounce up and down, and loans became harder to get.

Then, abruptly, just over a week ago President Bush and his Secretary of the Treasury came out and proclaimed a dire situation, asking Congress to immediately authorize them to take $700 billion of taxpayer-backed money and use it to buy unknown quantities of unmarketable mortgage-backed securities of undefined value held by banks and investment companies; no less was at stake than our homes, jobs and pensions, not to mention our ability to buy a new car.

In this case, it seemed, the smoking gun would be the mushroom cloud kicked up by imminent economic collapse across the country and indeed around the world.

Just like the WMD’s of yore, no one can prove or disprove any of this. Although there is plenty of agreement among respected economists that something must be done quickly to add fresh money to the system and remove moribund securities from their inventories, there are almost as many equally respected economists who disagree; some disagree about the need for speed, others about the whole idea.

No one knows exactly what the problems are, or how to fix them. Most in Congress feel obliged to take the President and Paulson seriously, without evidence to the contrary.
A few in Congress and in the press have dared to ask how the situation got so dire without anyone noticing, given that this came up so suddenly. As economist Paul Krugman suggested, you have to wonder where the grownups have been all this time.

But now the President and Paulson definitely had everyone’s attention; howls of protest arose from Democrats and Republicans in Congress, and from citizens all over the country at the mere idea that taxpayers should bail out the fat cats of Wall Street.

The candidates for President reacted in respectively characteristic ways. Obama stayed in communication with Paulson and Congressional leaders by phone and offered his conditions for support; John McCain did a bungee jump from his campaign into Washington but we still don’t know exactly what he thinks of it.

Yesterday’s announcement laid out the changes to the Paulson plan that would be acceptable to both Republicans and Democrats in the House and Senate, giving it a fair (though not certain) chance to pass.

The improved plan includes slowing the distribution of the funds by providing them incrementally; establishing a Congressional oversight board as well as a special inspector general to protect against fraud or abuse; protecting what will be considered an investment by taxpayers that must be paid back, and requiring that taxpayers benefit from any future growth in the assets that are purchased through this program; providing for renegotiation of mortgages wherever possible, to keep families in their homes; and banning golden parachutes and unearned bonuses for executives of the participating companies.

Since economists don’t all agree, and since the folks in Congress don’t all agree, and since everything the Administration is about to undertake (if the legislation passes both houses of Congress) is based on assumptions, estimates, best guesses, computer projections, and just plain opinion, I guess I’m equally entitled to offer my opinion. After all, with all the disagreement out there I’m sure someone higher up will share it.

My sense, from a local real estate broker’s experience and point of view, is that this is not so dire a situation as we are told. The real estate market is very slow, to be sure, but houses are still selling to qualified buyers.

Yes, it would be nice to have business pick up and yes, it’s harder to get loans if you are only marginally qualified, but isn’t that the way it’s supposed to be?

If I’m wrong and the legislation passes, after which miraculously everything gets (and stays) better, pass the Tabasco and I’ll eat my words.

With all of this, the point that advocates for the plan keep making is that this promise of a bailout is needed to reassure “the market,” to help the economy stabilize.

That begs the questions: What if the market, like some child who is terrified of the unknown, decides not to be reassured? Or what if we did nothing, but let nature take its course?

I’m going to slip into a somewhat partisan outlook, and wonder if the emergency is a product of the Administration’s desire to help out Wall Street. But of course that couldn’t be true, could it?

One thing I do know is that I don’t know the answers, and it looks like we won’t get to find out.


Originally published September 29, 2008

How did we get here and where do we go?

During my real estate career I’ve come across more than a few predatory lenders — lenders who do not, as a rule, serve the buyer’s best interests. Unlike reputable mortgage brokers and banks, they are willing to subordinate the buyer’s interests to their own, and that almost inevitably causes trouble.

A subset of the predatory lender is the inexperienced loan officer who, due to lack of experience, education, or oversight, hasn’t a clue that what he’s doing is not quite right.

I’ve had cases where the loan officer continued to assure everyone involved — the buyer, the agent for the buyer, and the agent for the seller — that “this is definitely going to close,” even up to the morning of closing, only to have it turn out that his underwriting department didn’t share his opinion.

I don’t know if you ever saw “Glengarry Glen Ross,” but its grim lesson is the state of denial that a desperate salesman may get himself into, even without malicious motives. And the one who pays will be the buyer.

And eventually, as we learned over the past couple of weeks, the American taxpayer.

“I can get you into a house with absolutely no money down!” cannot ever be true, yet how many hopeful buyers have succumbed to the lure? The fact is that every buyer will need to have at least $500 – 1,000 cash on hand to cover the costs of earnest money to be deposited, a home inspection, and an appraisal — all of these amounts are generally “pay-as-you-go.”

The risk of purchasing with "no money down" is that you’ll end up owing more on the house at closing than you could sell it for. Particularly if all your closing costs are rolled into the mortgage, it would be virtually impossible to turn around the day after closing and recover your investment; the costs of sale will come back to bite you.

Then there are lenders who make it possible for you to afford the monthly payments on the dream house you didn’t think you could afford by offering you an adjustable rate mortgage. They don’t make a big deal out of the fact that “adjustable” almost always means “upwards,” of course, but if you do ask about that they are likely to reassure you that “the way houses are appreciating, you’ll be able to refinance before your interest rate goes up.”

And here lately we’ve learned what happened to THAT option.

There have even been loan officers who falsified income information (without the buyer’s knowledge) in order to get the loan approved by higher-ups. But it gets worse:

In one case, the lender manipulated the transaction to the point where the poor buyer ended up with a mortgage on the property that well exceeded its value. The usual checks and balances didn’t exist because the buyer’s agent, the lender and the appraiser all worked for the same company; in addition, that company styled itself a “charitable” organization that collected a “non-taxable donation” of several thousand dollars from the seller and transferred a portion of it as a “gift” from seller to buyer. And added it to the mortgage, of course, while giving the seller a charitable donation receipt for funds he never paid.

As it turned out, just over a year later that buyer lost the home to foreclosure.

But before that happened there’s no doubt that, quick as a wink, that lender sold the note. A mortgage note has value, after all, as an income producer. And whoever bought it — a bank or investment company — almost certainly sold it to someone else. By the time the buyer defaulted, who knows where it had landed? But one thing for sure, it could no longer be sold. And that made one less pool of money available for the investor to use to buy more mortgages.

As more and more “subprime” mortgages went into foreclosure, the inventories of more and more investors became unmarketable, and the investors had less and less money to invest. The amount of money available for loans of any kind dwindled and the economy slowed to a crawl.

At the same time, more and more foreclosures began to force down the market values of homes around them as well as increasing the time it took to sell any home.

So now we end up with Wall Street investment companies being sold, going bankrupt or having to be bailed out, and with our nation in a precarious situation not unlike that which brought on the Great Depression. Last week, the Bush Administration proposed to buy up those bad mortgage notes in order that the investors can get a fresh start and maybe perk up the economy as a result.

The Administration, fearing considerable worsening of the situation, has urged Congress to take immediate action and vote this week to provide the $700 billion that it believes will be needed just to begin the bailout. It is proposed that Henry Paulson, the Secretary of the Treasury, be given absolute discretion in using the funds — what to buy, how much to pay, and so forth. And doesn’t want legislation held up by too much debate.

Gives me a queasy, been-there, feeling.

I believe that there are just a few tweaks needed in the proposed legislation.
As it stands, the investors would get rid of their losers, while the American taxpayer would acquire them. I say there should be something there for the taxpayers, who being asked to take on the risk.

Some decent additions to the legislation that have been proposed include forbidding the beneficiaries of bailout to give multimillion-dollar “golden parachutes” to the CEO’s that are responsible, a restriction that was imposed in the case of Fannie Mae and Freddie Mac.

There is legislation that was proposed back in the spring, that would empower bankruptcy judges to rewrite the terms of a mortgage with the goal of keeping the homeowner in the home. This should be included because it makes sense and because foreclosures have a negative effect on the community. And to the extent that the lender took advantage of a buyer, or should have known better than to lend to someone who was obviously not qualified, it’s justice.

I wrote to Elizabeth Warren, a nationally recognized authority in bankruptcy at Harvard Law, because I wanted to be sure I have this right. Here’s what she replied:

Congress should amend the ill-advised bankruptcy statute enacted just a few years ago to permit neutral bankruptcy judges to adjust mortgages, principal and interest to keep people in their homes and to keep payments flowing on mortgages.

If a homeowner can afford a long-term, fixed rate mortgage that will pay off 100% of the current market value of the home, then everyone is better off … and the family stays in the home. If the family can't afford that, then it is time to give up the house and move on.

Either way, we can reach a bottom on the housing market, force the investors to take their losses, and move forward.

This plan won't cost the taxpayers a single dollar. And it will force the lenders to come to the table to negotiate over the value of these mortgages instead of waiting for another government bailout.

It has also been proposed that a new stimulus tax credit be given the vast majority of Americans, the poor and the middle-class, to help them get over the hump that has resulted from all this.

And finally, for now, it is imperative that regulations be put in place over the lending industry to make sure this never happens again.

Put all this together, which can be done immediately, and it just makes sense.


Originally published September 22, 2008