California foreclosure blog

It's definitely been a wild, hold-your-breath kind of week regarding America's current "big three" mortgage players.

Countrywide's internal practices are now out in the open, thanks to California Attorney General Jerry Brown. In a court filing yesterday, the A.G. outlines the company's incentives to loan officers and wholesale brokers to sell more expensive loans to borrowers than their credit ratings warranted, and the poor quality of the company's current loan portfolio. Subprime and option ARMs, which account for about one sixth of Countrywide's entire portfolio, have delinquency rates that indicate many loans should never have been made: nearly half of one portfolio's subprime loans, and over 20% of its option ARMs were delinquent as of April 30, 2008 according to the court documents. A Bank of America spokesperson notes that nearly 10% of all Countrywide loans are currently in some stage of delinquency. That means Countrywide's loan delinquency rate is more than double the current national rate of 4.5%. The current national rate is triple the high end of the historical delinquency cycle: usually, loan delinquencies range between 0.5% and 1.5%.

Meanwhile, the saga with Fannie Mae and Freddie Mac continues in Washington and New York. Freddie has filed a registration statement with the SEC to make a new stock offering, with hopes of raising up to $10 billion in new capital, mostly from current shareholders, On Capitol Hill, the Congress plans to vote on the Fannie/Freddie rescue as part of the larger foreclosure rescue bill. Congressional Democrats are playing a high-stakes game of chicken with the Administration over how the funds get allocated. Many in Congress want to cap taxpayer exposure to Fannie and Freddie losses, but Treasury Secretary Paulson contends that a cap would scare investors away. Before this week, the President threatened to veto any housing bill that included a proposed $3.9 billion for local governments to buy and rehab foreclosed properties. Now, each side needs the other to get the deal done because the Fannie/Freddie measures have been added to the housing bill.

Hopefully, we'll be breathing a collective sigh of relief by this time next week.

Well, they call economics the "dismal science" for a reason: economists at Moody's estimate that U.S. defaults will reach 2.5 million for 2008, a rate of about 4.5 percent of all home loans.

That's roughly triple the historical high end of the foreclosure cycle - defaults have generally ranged from 0.5% to 1.5% of outstanding loans.

The Moody's 2008 default estimate is significantly more than the earlier estimate of 1.69 million predicted by Credit Suisse back in June.

JULY 15, 2008 UPDATE**: Congress is working with the Bush Administration to include the proposed Fannie and Freddie plan with the Congress' larger foreclosure aid plan. As recently as last week, the House and Senate were working on a revised version of the bill that would garner enough votes to override a promised Presidential veto. Now, it looks like a deal is in the works that would allow passage of nearly all of the proposed borrower protections, along with the Fannie and Freddie provisions.

What a difference a week makes.

Over the weekend, the Federal Reserve and the Treasury Department announced the preliminary details of a plan to assist Fannie Mae and Freddie Mac. The faltering mortgage giants are going to get expanded access to short term loans at the Fed's discount rate.

While all the details are not yet clear (mainly because Congress has to approve some of the proposed measures), the announcements have started to stem off fears of an imminent failure of one or both of the companies. Stocks are trading higher, and the US Dollar gained in early trading Monday. The dollar increase is welcome news because it has the effect of driving down the price of oil.

There are some who think that the worst is not quite over for shareholders, because the announcements do nothing tangible for shareholders. Goldman Sachs analyst Daniel Zimmerman thinks that Fannie & Freddie shares could still lose an additional 35% of their value.

While the Fed and Treasury announcements may not save shareholders, the plan may help bolster the economy. And let's face it, our economy can use avery little bit of help it can get right now.

**UPDATE: The government is getting more specific in discussing possible bailout or takeover options for Fannie Mae and Freddie Mac, which has sent both stocks tumbling in trading on Friday. As of 10:20 Eastern Time, Fannie Mae is down nearly 40% from yesterday's low, and Freddie Mac is down about 43% from yesterday's close. Brace yourselves folks, as we're hitting some major turbulence...

Rumors are circulating about the possible takeover(s) of Fannie Mae and/or Freddie Mac. Fannie, the Federal National Mortgage Association, and Freddie, the Federal Home Loan Mortgage Corporation, were created by Congress to foster the expansion of the home loan market by buying mortgages and reselling them as securities.

When Fannie and Freddie buy loans and repackage them as securities, they make money by charging the securities investors a guarantee fee. The guarantee obligates Fannie and Freddie to pay investors the principal and interest due in case of a borrower default.

We all know what's been happening with borrower defaults.

Sluggish loan originations, mounting losses on their guarantees, and no market to sell securitized loans for new revenue, have all combined to make a perfect storm for the troubled companies, with shares losing 67% (Fannie) and 77% (Freddie) since January 2008.

The two entities own or guarantee nearly half of all home loans in the U.S. market (about $5 trillion of the $12 trillion total). They also have bond obligations on their books for another $1.5 trillion. The reason the government may step in is that Fannie and Freddie are so big, a failure of either could pose a real threat to the economy.

The rumor mill as to possible government action runs the gamut from conservatorship to a government guarantee of their obligations, but any way you slice it, it would amount to a taxpayer bailout. Hell, with the way the government's been spending money in the Middle East, maybe the electorate has become numb to the concept of actually doubling our national debt.

National foreclosure filings, while still at historic highs, decreased slightly in June 2008 compared to May 2008. However, the year over year figure (June 2008 compared to June 2007), is still up significantly.

The latest numbers from RealtyTrac indicate the following: new foreclosures in June 2008 were down 3% compared to May 2008, but were up 53% compared to June 2007. For California, June 2008 filings were down 5% compared to May 2008, but up 77% compared to June 2007. New Notices of Default in California totaled 68,666 for June 2008.

The most disturbing figure is the increase in REOs: in June 2008, bank owned properties increased 171% over June 2007. Banks took back over 71,000 properties in June.

The big foreclosure bill making its way through Congress contains important additional protections for distressed homeowners.

Senator Herb Kohl (D-WI) added an amendment to the bill which will enact a federal version of rules very similar to California's Foreclosure Consultant Act. Kohl's bill was co-sponsored by Senators Susan Collins (R-ME), Blanche Lincoln (D-AR), and Barbara Mikulski (D-MD). The Senate approved the amendment.

Among other things, the proposed rules will require foreclosure consultants to provide a three day right for a homeowner to cancel a contract and disclose any third party consideration in a property, and will prohibit consultants from collecting fees before rendering services, or obtaining a power of attorney from the borrower.

The new rules leave any existing state rules intact, and allow states without consultant acts to enforce the federal rules to punish those who prey upon distressed owners.

The Hope Now program is not keeping up with the increasing troubles facing many borrowers, according to critics. An article in today's Orlando Sentinel highlights the experience of a local family that tried to work with Hope Now for months, only to end up being foreclosed on.

Hope Now is a voluntary alliance of several major mortgage lenders who pledged to adhere to a set of guidelines aimed at helping borrowers avoid foreclosure. The group claims that it has helped nearly 2 million borrowers avoid foreclosure since its formation in 2007.

Critics, including the Center for Responsible Lending and the Joint Center for Housing Studies at Harvard University, contend that Hope Now is failing far too many borrowers. If one assumes that Hope Now's numbers are accurate, then by their own estimate, they are only helping 28% of borrowers in trouble. Moreover, as delinquency and default rates are increasing at an accelerated pace, critics contend that lenders are not putting enough people in their Hope Departments to meet the need.

The real root of why Hope Now isn't working as well as it could is because it is, like so many initiatives sponsored by industry, completely voluntary. Borrowers have absolutely no recourse against a lender who fails to adhere to the Hope Now guidelines. There's a saying in legal circles: a right without a remedy is no right at all. Because there is no tangible downside to the lender for ignoring their Hope Now pledge, there is no real incentive to offer real solutions.

Some may claim that the financial and public image incentives should be enough to encourage lenders to try harder, and I agree - they should. But when the most common outcome for a borrower in trouble (nearly three quarters) is foreclosure, it becomes very clear that too many lenders really don't get it yet.

Yesterday, the United States Senate overwhelmingly approved a bill to help struggling homeowners avoid foreclosure. The bill must now be approved in the House of Representatives, and the two versions must be reconciled (there were some differences between the two versions) and a final form approved before sending the bill to the President who has promised a veto. Of course, if the House approves the bill with a two thirds majority, the bill would be insulated from a Presidential veto.

News of the Senate approval, combined with a Lehman Brothers report about the impact of the bill, sent shares of Fannie Mae and Freddie Mac down 16% and 18% respectively. The analysis by Lehman Brothers indicates that the two mortgage market giants may have to raise a combined $75 billion to comply with new accounting rules included in the pending legislation. The report also pointed out that Fannie and Freddie may be exempt from the proposed rule changes, in large part because both companies were originally created by the federal government.

Many California property owners have just received some news from their County Assessor's Office. That news is both a blessing and a curse. Many counties have reduced proprety tax bills because of the current slide in property values.

On the one hand, who wouldn't like to find out that they owe less in taxes? On the other hand, who wants more evidence that their home is now worth less than they paid for and/or owe against it?

The value reductions are built into our tax system thanks to Proposition 13, which allows temporary relief during housing value slumps. During the last slump of the 1990s, values were kept for some areas for several years - right up until the last boom cycle.

The other downside regarding the value reductions is that local services, already feeling the pinch of the State's budget shortfalls, will see even fewer dollars: a significant part of local public safety services are paid through property taxes. With wildfires and a drought to deal with, this isn't the best time for cities and counties to be going broke.

According to a survey of 42 California loan counseling nonprofits, lenders are providing little more than lip service when it comes to working with borrowers to avoid foreclosure.

The survey was conducted by the California Reinvestment Coalition, a nonprofit organization that advocates for equal banking and financial services access rights for low income communities. The full report is available here.

Some noteworthy findings:

• Foreclosure is still the most common outcome for borrowers in distress
• Loan counselors are generally unable to get loan servicers to work with borrowers, especially before default
  
• Loan servicers are not modifying loans on a noticeable scale, especially for long-term affordability
  

When you add the fact that most loan servicers get to keep most or all of the late fees, interest, and other junk fees associated with delinquent loans, it's no wonder that most servicers aren't interested in making a deal that works for the lender and borrower. Of course, the real root of any possible solution still rests with the lenders. Perhaps the recent passage of SB 1137 will help Californians get more timely and realistic responses from lenders.