California foreclosure blog

I've been receiving many calls and emails about California's so-called foreclosure moratorium, which went into effect yesterday. Frankly, I doubt it will actually do anything meaningful for struggling homeowners. Here's why:

Loan servicers can qualify for an exemption simply by filing a form with the state that claims the loan servicer has a modification program intended to keep people in their homes. Nothing in the law requires loan servicers to actually implement the programs (you know, where borrowers actually get their loans modified in a meaningful way), and there's no real mechanism in place to confirm that loan servicers are actually doing anything. Who from the state is going to audit the loan servicer activity? As far as I can tell, no people have been assigned to this task, and more importantly, the state has no money to pay such people because the state is currently broke.

But here's the really interesting part: all this law does is temporarily extend the time between a Notice of Default and Notice of Sale from 90 days to 180 days for lenders who either fail to comply with the requirements, or who choose not to comply.

Why would a loan servicer choose not to comply? Well, there are three reasons:

1) Waiting another 90 days costs the loan servicer little to nothing.

2) So many loans at risk for foreclosure have no lender insurance. If a loan is not guaranteed by the FHA, VA, Fannie / Freddie, or private mortgage insurance ("PMI"), then the note holder absorbs the entire loss when an upside down loan is foreclosed.

3) Lenders have a large inventory of homes already owned because of foreclosure, plus even more in the pipeline. Adding some more time to the foreclosure clock could actually help lenders, rather than homeowners, because it would spread out the lenders' mounting losses on all the upside down properties they are in the process of taking back. This is important because in addition to the actual losses incurred when an undersecured loan is foreclosed, banking regulations require many lenders to set aside reserve money out of their revenue to cover those losses. So for loans owned by banks, the mounting losses start to have a real impact on their ability to use their revenue for their business operations. While I am unsure of whether this reality was factored into the "stress tests" that the government put major banks through earlier this year, it certainly should have been a component.

So it seems we have a variety of opinions regarding the proverbial bottom of the market: folks with vested interests in a thriving real estate market, like Zillow.com and commercial real estate mogul Sam Zell, claim that there are signs the market will improve in the next few months. Well, actually, Zillow did an opinion poll of users and reported that a majority of respondents think the market has hit bottom...wishful thinking, perhaps?

Meanwhile, economists familiar with the details of the actual economy - you know, employment, consumer purchases, home sales, default rates - have a sobering, and ultimately more accurate assessment.

Here's why we're nowhere near the bottom of the foreclosure-driven real estate market:

1. Unemployment continues to rise. Unemployment is near 9% nationally, and over 11% here in California. The rate is expected to top 10% nationally by the end of the year, and may top 12% in California. What's more, unemployment has a ripple effect on salaries and household incomes, because the few available jobs generally offer lower salaries and fewer benefits than jobs in a healthier economy. Because housing values (in a stable, realistic market - please ignore the 2002 through 2006 fiasco) are inextricably linked to household incomes, the "real" (read: the part of the market other than foreclosure investors and bargain hunters) housing market cannot recover until household incomes stabilize.

2. The foreclosure rate of prime loans is increasing. I hope that Congress is paying attention to this figure. According to data released by First American CoreLogic , the number of prime loans at some stage of serious delinquency (90+ days late) or foreclosure is more than 1.5 million - nearly equal to the number of subprime loans in serious delinquency or foreclosure. What this means is that we can no longer pretend that the foreclosure crisis is limited to "irresponsible people who bought more than they could afford" - the problems in the housing market are hitting literally millions of people who fall outside that stereotype. Some economists estimate that more than half of the defaults this year will be caused by unemployment.

3. The shadow inventory. We have a large number of homes that are not currently on the market, but will be soon, as REOs. Banks have been dragging their heels on foreclosures, mainly due to political pressure and their requests for taxpayer handouts. But now, with foreclosure activity ramping up again, banks will end up owning a lot more real estate. This is in addition to the real estate they already own but have kept off the market. Rising inventories of REOs will have to be liquidated sooner or later. This inventory is estimated to be hundreds of thousands of homes, and as we're on track to see close to 3 million foreclosures this year, those numbers are sure to rise. Banks keen on ridding their balance sheets of non-performing real estate assets will dump their REOs at rock-bottom prices, which will keep values depressed.

Well, the banking lobby's millions have carried the day, and the Obama Administration left over 8 million American families twisting in the wind by failing to back up an Obama campaign promise.

On Thursday, the Senate failed to pass the cram down bill. The final vote was 45 in favor to 51 against. A dozen Democrats, including Democrat of convenience Arlen Specter of Pennsylvania, voted against the measure.

This is such a shame for the American people, as well as the economy.

As I've previously written, ending the cram down exclusion on primary residence loans would have: (1) forced lenders to deal honestly and fairly with homeowners regarding upside down properties with ridiculous loans; (2) provided a means to stop the spiraling rate of foreclosures; (3) helped stem off the continuing decline in property values fueled by the foreclosure crisis; and (4) allowed banks to make more money than they will by taking back millions of upside down properties. All of this would have been accomplished without spending one penny of taxpayer money.

I am, to say the least, upset, but not deterred. This relief must happen for the economy to recover, so one way or another, we will revisit this issue. I only hope that it happens soon.

The American people should be up in arms about this failure to do right by millions of struggling families. This is a disgusting display of money at work in politics, at the expense of the greater good for the common person. How did this happen? Why was the banking industry allowed to spend millions lobbying against this bill, when most of the industry's key players have taken billions in taxpayer TARP funds, and as such are forbidden from lobbying activity? Will the House (which passed the bill back in March) investigate whether institutions funneled lobbying cash illegally through banking trade groups such as the American Bankers Association and the Mortgage Bankers Association?

And where was the Obama White House in this debacle? Candidate Obama publicly declared his support for this measure on several occasions throughout the campaign, and President Obama claimed that this bill is vital to the Administration's housing and economic recovery plan. And yet, the Administration was strangely silent when push came to shove. For the past few weeks, no one from the Administration put any real effort into helping push through this important measure.

Now, the Senate's stripped down housing bill must go into a conference committee to reconcile its differences with the House version. I only hope that the rabble rousers in the House block passage of the parts of the bill that mainly benefit banks, as a return favor to the industry on behalf of the American people.

America, the banking industry is at war with your family. If you have an unsustainable loan secured by a house that is not worth enough to cover the loan balance, the banking industry just spent your tax dollars to rob you of the right to make your lender deal with you fairly. It's time for you to let Washington know that you're mad as hell. At the end of the day, politicians need your vote, and one third of the Senate is up for re-election next year. If this issue is important to you, remember how your members of Congress voted when you vote next year.

For those of you who are already at risk of losing your home, let me propose a new cram down, one that's available under the current bankruptcy rules. If you can't cram down the loan, I propose that you meet with a bankruptcy lawyer to see about cramming your upside down house down your lender's throat. A bankrupt homeowner can surrender an upside down house to their lender in bankruptcy, avoid foreclosure, and rebuild their credit faster and easier than they could after a foreclosure. Since banks keep claiming that their loans are worth more than they really are, let's make them put their money where their mouths are by forcing a new tide of upside down REOs. In the near term, with the reserve requirements and carrying costs associated with holding REOs, and the still declining real estate market, banks would hit the tipping point of having too many properties to deal with sooner or later. Under the current system, a homeowner could surrender a home in a Chapter 7 bankruptcy (presuming they qualify for a Chapter 7 - ask a lawyer), and rebuild their credit enough to qualify for a home loan in as little as two years after receiving a Discharge. Meanwhile, home values will continue to stay low, and the bankrupt former homeowner could end up buying a better house for less money with an affordable, realistic loan. In short, at this point, homeowners may be better off walking away through bankruptcy and forcing lenders to realize their losses. As noted above, be sure to talk to a lawyer about your individual situation, because the rules are complicated, and your results may vary.

After spending millions on lobbying (despite the lobbying ban in place for banks who received bailout money), it looks like the banking industry has spent and lied its way into delaying Senator Durbin's cram down bill.

I am shocked, dismayed, and disgusted that in Washington, it's business as usual when it comes to regular people getting a break against powerful interests who throw money (including taxpayer money) at politicians.

According to today's Wall Street Journal, Senate Republicans are continuing their campaign of "no" and walking in lock step to kowtow to the banking industry. The end result: banks probably get the FDIC relief they want, but regular people will not get the right to have their upside down home loan treated the same way any other upside down loan is already treated.

In my opinion, this loophole should have been closed long ago, for some very good reasons.

First, the home lending market is vastly different from what it was 30 years ago, when this special exception was written into the Bankruptcy Code. The evolution of the home lending industry is such that lenders do not need any special protection to protect the availability and affordability of home loans. Lenders and their lackeys in the Congress have continued to tell the lie that cram downs would make home loans so much more expensive than they are currently, and this tactic appears to have worked.

The second reason to get rid of this special set-aside for these loans is that it will not result in increased costs for borrowers. How do we know this? Well, as mentioned above, most loans are already subject to cramdowns, including many different types of home loans - for example, on second homes, investment properties, and multiunit properties where an owner occupies one of the units. If cram down opponents were telling the truth, then we would see pricing and availaility differences between the loan products that could be crammed down, and owner-occupied loans, which are not. According to an audit of nearly 300 different loan products offered by several large lenders (just google "Adam Levitin" "cram down" and you can read the paper and judge for yourself), there is no difference in pricing or availability based on whether a loan can be crammed down. The bottom line is that bond rates and competition determine home loan availability and pricing, not back end risk factors. For example, in this very tough economy, home loan rates are nearly half what they were in the heyday of a few years ago. Why? Because benchmark interest rates like Treasury bond rates and the Prime Rate are much lower now than they were then.

The third reason to do this is that, unlike so many other measures in Washington, this one will not cost taxpayers a penny, because the bankruptcy system pays for itself through its fee structure.

The fourth reason for a cram down is that lenders actually make more money on a cramdown when compared to foreclosing on, holding, and reselling a home whose value is less than the loan balance. For a California property, a lender will spend an average of $70,000 in hard dollars for every foreclosure. The lender's total losses (lost interest income, etc.) are estimated at nearly $150,000 per house foreclosed. This problem is compounded in a declining market, such as the one we are in now.Then there's the drag effect of REOs on housing prices and local property tax bases, which harms already hurting local communities.

And by the way, where do you think the banks look to recoup their bad loan losses? If banks are right about cramdowns increasing loan costs, then it stands to reason that foreclosure losses are already being passed on to borrowers. If they are, then why are loans cheaper now than they were when the housing boom was happening, as noted above?

But the most important reason for Congress to do this is simple: it's the right thing to do for millions of American families who are saddled with houses they cannot sell to pay off their loans because of the market, and loans that contain ridiculous terms when compared to reality.

Banks and their kept politicians may have stolen a real opportunity to fix a root cause of the current world economic crisis. People are very angry about the state of things. Unfortunately, this shameful act of greed at the expense of common sense and fairness will likely extend what now appears (despite the lip service from pundits) like it's turning into a depression - maybe not on Wall Street, but certainly on Main Street.

The Senate is officially in recess until Monday, April 20, but many senators are hard at work, trying to make - or break - the bankruptcy cram down reform bill.

At stake for banks: increased FDIC insurance, perhaps lower FDIC premiums (banks have to pay for FDIC insurance, and because of the many bank failures over the past year, rates are set to skyrocket). But for the rest of us, the American people, the stakes are much greater.

According to a few news reports, a deal may be in the works to get the banking industry to call off its dogs regarding the cram down, in return for changes to the FDIC system that would benefit banks. The possible political fallout is that banks would alienate the senators who are currently holding up the cram down bill, so it is still touch and go at this point.

Everyone understands that this economy will not stabilize unless and until we do something to stop the continuing tsunami of foreclosures. Two thirds of the American people favor helping homeowners remain homeowners, and unlike most recent efforts, the cram down bill will not cost taxpayers one red cent.

The problem? The myopia of the lending industry, and their cronies in Washington. I found a great article in the Miami Herald - it's an interview of the local chief bankruptcy judge, the Honorable A. Jay Cristol. I encourage readers to share this article with anyone (especially their Senators) who, for whatever reason, think that cram downs hurt banks or other borrowers.

Judge Cristol doesn't pull punches: he sees banks as being greedy and stupid in opposing cram downs, because banks make more money through a cram down than they do through foreclosure. Given that banks are supposed to be about making money, it makes no sense to oppose a solution that makes them more money.

Let's all hope that the Senate can muster enough votes, or better yet, use some leverage with the banking industry, to get this important legislation passed right away. Closing this loophole (remember, every other type of secured loan is already subject to well-established cram down rules) is long overdue, and our economy's recovery could be riding on it.

This is a clip from "A Day in the Neighborhood," a local San Francisco a public affairs program I appeared on back in February. We discuss how bankruptcy cram downs would work under the proposed legislation (which is still working its way through the Senate). Special thanks to Myrna Lim, the host of the program, and also to Ben Menor, the other panel member.

I just read that the cram down bill, which already passed the House of Representatives, is facing stiff opposition in the Senate from...Senate Democrats?

Senate Majority Leader Harry Reid (D-NV) has recently commented that he may have to pull the provision from the Senate banking bill, because of opposition from lender-friendly Democrats in the Senate, led by Senator Evan Bayh (D-IN). Bayh, claiming to be acting as a "centrist," is threatening to side with Republicans in opposing the Senate version of the bill, as well as the Senate Democrats' efforts to add the bill to the budget bill.

Incidentally, is it really a "centrist" position to oppose a measure that roughly two-thirds of Americans support?

Bayh's opposition is especially troublesome for his state of Indiana, which has been very hard hit by the ongoing foreclosure crisis. The cram down bill would reduce Indiana's foreclosures by at least 20%, at no cost to taxpayers.

So why would Bayh oppose a measure that could help so many of his constituents? That's easy: Bayh took in over $3 million in campaign contributions from various corporate interests - lenders, insurers, pharmaceutical companies, and their corporate law firms - between 2003 and 2008. His single biggest contributor? Goldman Sachs, at $123,750.

Ghastly.

If you live in Indiana, maybe Senator Bayh should hear what you think about his position on this important legislation. If you know people in Indiana who are struggling to keep their homes, encourage them to contact Senator Bayh. Senator Bayh can be reached online through the U.S. Senate's website, www.senate.gov.

UPDATE: In case anyone was wondering, Senator Bayh has to face voters in 2010, as he will be running for re-election. Maybe the Hoosiers out there could remind him of that...

So the bankruptcy cram down bill is currently stuck in the Senate. Opponents (read: the banking industry, and a few "let them eat cake" conservatives) continue to tell the lie that cram downs in bankruptcy will make home loans so much more expensive than they would be otherwise. I think they hope that if they tell the lie enough times, it will be accepted as the truth.

These people are full of it. Make no mistake, it is a bald faced lie to claim that bankruptcy cram downs will cause significant increases in home loan costs, or decrease availability.

Recently, I posted about Professor Adam Levitin's analysis of cram down's actual effects on mortgage costs and availability. After reading his entire paper, it seems I left out some very important information. My prior post talked about the historical period when some parts of the country allowed cram downs and others did not. But there is even more evidence that cram downs do not affect loan pricing and availability.

Professor Levitin also did an exhaustive comparison between owner occupied single family residence loans (that cannot be crammed down under current law), with other loan types: rental properties, vacation homes, and multi-family dwellings where one unit is owner-occupied (all of which can be crammed down under current bankruptcy law).

Now, if the lending industry's claims about cram downs is true, one would expect to find two-tiered pricing: lower pricing for owner occupied SFR loans, and higher pricing for the other property types, since the other types are subject to cram down risk.

The actual result? For the nearly 300 loan quotes that Professor Levitin received from four major lenders, pricing for owner occupied SFRs was exactly the same as for vacation homes, and at least one of the multi-family property types. This is in spite of the fact that vacation home and multi-family loans are already subject to cram down.

In short, there is no real risk of increased loss to a lender in a cram down. The reason is actually quite simple: lenders usually make more money even on a cram down modified loan than they would in a foreclosure. Here's why: in a cram down, the principal balance is cut to the current market value of the property. The borrower has to make loan payments on that principal balance, at an interest rate that equals current market rates for a conforming fixed-rate loan, plus a "risk premium" of 1 to 3 percent, to protect the lender. At current rates, the lender will receive 5.5% to as much as 8%. By contrast, if the lender is allowed to foreclose, they have to spend about $70,000 to take back the property, hold it, get it ready for resale, and resell it. This means that the most a lender can hope to recover in a foreclosure is current market value less about $70,000 - and that's assuming the market value of the property holds steady. All the while, the lender is collecting no interest payments.

Today, the House of Representatives passed a revised version of the bankruptcy bill. This is welcome news for the millions of homeowners at serious risk of losing their homes because their lender refuses to be realistic about the real value of the home securing the loan.

For some strange reason, recent press reports are calling the bankruptcy provision "controversial" and "sure to face stiff opposition" in the Senate.

The only real controversy is this: why the hell should mortgages secured by a borrower's primary residence be the only type of loan off-limits under the cram down rules? A short history lesson: back in 1978, the banking industry was able to convince Congress that home loans would become unavailable unless lenders were afforded special treatment in the form of an exemption from the general cram down rule. Granted, the home loan market was drastically different in 1978 than it is today; however, it is the very evolution of the home loan market that weighs in favor of ending this special treatment.

Also, as I previously mentioned, from 1981 to 1993, we actually had cram downs allowed in some parts of the country, but not others. If there were any truth to the banking industry's claims about loans costing more or being less available if cram downs are allowed, then we should see such differences in the different parts of the country during this period in history. The actual result is that there was no difference in the cost or availability of home loans between cram down jurisdictions and non-cram down jurisdictions.

The bottom line is this: the American people are really pissed off right now. There is a palpable feeling on the ground that, unless the little guy gets some real and meaningful relief, we're headed towards rioting in the streets.

If cram downs are good enough for the bank executive (who likely got taxpayer money), to cram down loan balances on his vacation home, his commercial real estate, his yacht, or his airplane, then it should be good enough for the regular folks who only want to find a way to hold on to their primary residence.

I encourage readers to contact their Senators to urge swift passage of the Senate version of this important legislation. It's time to eliminate the special treatment lenders have enjoyed, especially when the harm it does is so devastating to so many people.

Yesterday, I posted information about the bankruptcy reform proposals under consideration in the Congress. This morning, on the front page of Yahoo!, there's a story entitled "How Banks are Worsening the Foreclosure Crisis."

It's interesting reading, to say the least.

The banking industry thought that the housing market would turn around, and the foreclosure mess would work itself out. Under normal economic circumstances, this could have happened. Of course, had the banking industry pulled its head out of the sand to look at what was propping up the economy, they would have realized that the housing bubble had burst and their assumptions were invalid.

So, what are lenders doing to take on the growing problem?

They're denying that it exists.

Mortgage lenders claim that they've "modified" uhndreds of thousands of loans...I'm surprised they can keep a straight face while making such absurd statements. They also claim that there is no real problem - in their world, "irresponsible borrowers" are solely to blame for the current, but nonexistent, unpleasantness in the housing market. And yet, this same industry asks for handouts in the hundreds of billions, at taxpayer expense.

The lending industry is also going to Washington this week to lobby Congress to kill, or at least seriously curtail, the proposed bankruptcy reforms I posted about yesterday.

Here's the thing: if there's no problem, what are these guys afraid of? Having their loans treated the same as a yacht loan?

The bottom line is this: for whatever reason, there appear to be many people within the lending industry who are out of touch with objective reality. Even their own lobbyists acknowledge that lenders should have addressed the foreclosure crisis two years ago by making meaningful adjustments to bad home loans.

Now, instead of addressing the problem, banks are trying to buy their way out of a remedy that will give some real leverage and relief to regular people. If the prospect of this upsets you, I urge you to contact your Congressional Representative, and your Senators, and let them know what you think about caving in to the lending industry. Hopefully, the politicians will side with the people over the well-heeled special interests.