MORE SENIORS ARE BEING BURIED BY HOUSING DEBT

Original Story: usatoday.com

WASHINGTON (AP) — Al and Saundra Karp have found an unconventional way to raise money and help save their Miami-area home from foreclosure: They're lining up gigs for their family jazz band.

They enjoy performing. But it isn't exactly how Al, an 86-year-old Korean War vet, or Saundra, 76, had expected to spend their retirement.

Of all the financial threats facing Americans of retirement age — outliving savings, falling for scams, paying for long-term care — housing isn't supposed to be one. A Rochester estate planning attorney represents clients in the preparation of wills, codicils, and trusts. But after a home-price collapse, the worst recession since the 1930s and some calamitous decisions to turn homes into cash machines, millions of them are straining to make house payments.

The consequences can be severe. Retirees who use retirement money to pay housing costs can face disaster if their health deteriorates or their savings run short. They're more likely to need help from the government, charities or their children. Or they must keep working deep into retirement.

"It's a big problem coming off the housing bubble," says Cary Sternberg, who advises seniors on housing issues in The Villages, a Florida retirement community. "A growing number of seniors are struggling with what to do about their home and their mortgage and their retirement."

The Baby Boom generation was already facing a retirement crunch: Over the past two decades, employers have largely eliminated traditional pensions, forcing workers to manage their retirement savings. Many Boomers didn't save enough, invested badly or raided their retirement accounts.

In Las Vegas, Janet Snyder, struggling with a financial burden left by her late husband, is bracing for what happens if her lender proceeds with plans to evict her from her home in July.

"I'll live on the streets, I guess," she says ruefully, contemplating homelessness at age 74.

The Consumer Financial Protection Bureau's Office for Older Americans says 30% of homeowners 65 and older (6.5 million people) were paying a mortgage in 2013, up from 22% in 2001. Federal Reserve numbers show the share of people 75 and older carrying home loans jumped from 8% in 2001 to 21% in 2011. A Denver banking lawyer represents both lenders and borrowers in a diverse array of financing transactions.

What's more, the median mortgage held by Americans 65 and older has more than doubled since 2001 — to $88,000 from $43,400, the financial protection bureau says.

In markets hit hardest by the housing bust, a substantial share of older Americans are stuck with mortgages that exceed their home's value. In Atlanta, it's 23% of homeowners 50 and older, according to the real-estate research firm Zillow. In Las Vegas, it's 26%.

In the worst cases, hundreds of thousands of older Americans have lost homes to foreclosure. A 2012 study by the AARP found that 1.5 million Americans 50 and older lost homes between 2007 and 2011. The numbers are probably higher now, says Lori Trawinski, a director at the AARP's Public Policy Institute. And among homeowners 50 and older, foreclosure rates are highest for those 75 and up.

Foreclosures help explain why homeownership among those 50 to 64 dropped 5 percentage points to 75% from 2005 to 2013, according to Harvard University's Joint Center for Housing Studies.

In mid-2010, Tod Lindner lost his oceanfront home in California's Marin County. He ran into trouble after the finance company that employed him was acquired and the new owners refused to pay him fees he thought he was owed and which he was counting on.

Lindner had bought the house for $330,000 in the late 1980s. But he'd refinanced to pull out money to invest, swelling the mortgage to $680,000. Lindner tried to work out a modified mortgage, but his bank foreclosed instead. He and his wife sought bankruptcy protection, rented an apartment and slashed their spending.

"At age 70, I just started working for another company" in banking, Lindner says. "My plan would have been to retire."

Seniors fell into housing trouble in varying ways. Some lost jobs in the recession or its aftermath. Some overpaid for homes during the housing boom, thinking they could cash in later.

Prices crashed instead.

Some made unwise decisions to refinance mortgages and pull cash out to meet unexpected costs, help their children or go on spending sprees.

Ralph Kanz, 60, and Martha Lowe, 56, of Oakland bought too much house at the wrong time: They paid $487,000 for a home in Oakland, California, in 2005.

At the time, Lowe was making $51,000 at an environmental consultant. Kanz was experimenting in commercial fishing and earning around $10,000. Drawing on an inheritance, they made a down payment of $137,000 and took on a $350,000 mortgage.

They say they shouldn't have qualified for a loan that big. They alleged in an unsuccessful lawsuit against two mortgage firms and a title company that "someone" without their knowledge had inflated Lowe's income on the loan application to get the mortgage approved. (A court ruled in 2013 that "a reasonably prudent person" should have spotted "the alleged wrongdoing" in the application in 2005.) A Texarkana banking lawyer is following this story closely.

Worse, the couple took on a dangerous mortgage: They had to pay only interest for 10 years. They would then be hit with bigger payments, including the principal, for the next 20. The bigger payments are set to begin in June.

In the meantime, Lowe contracted a rare disease and went on disability. They still hope to renegotiate the mortgage.

West Virginia natives Jim, 67, and LaRue Carnes, 63, moved to Sacramento, California, in 1978 and bought a house for $54,000. For 33 years, Jim worked as a newspaper reporter and editor. They refinanced their mortgage several times and pulled money out of the house and took on higher mortgage payments.

"Foolishly, like so many Americans, we used the house as a bank," LaRue says.

In 2011, Jim was laid off, and the Carnes fell behind on mortgage payments. Three times, they dipped into their retirement savings to fend off foreclosure. Eventually, with a $25,000 grant from a state program, Keep Your Home California, they negotiated a new mortgage they could afford.

Still, they're still straining to meet the lower payments. Once a month, they eat a free breakfast at a church, bringing home bagels and fruit. They "never thought we would be partaking of such," LaRue says.

They've haven't gone on a vacation in years. When they want to see a movie — Jim is an entertainment writer — they attend discounted matinees.

Some retirees ran into trouble with reverse mortgages. These are loans against the equity in a home that provide cash but come due once the homeowners die or sell the house.

Problems can arise when only one spouse signs a reverse mortgage — in order to qualify for a bigger loan — and dies relatively soon. The lender can then demand repayment in full — and foreclose if it doesn't collect.

Janet Snyder, who gets by on a $1,215 monthly Social Security check, says she didn't even know that her husband, Theodore, had taken out a $225,000 reverse mortgage on their Las Vegas town house. When he died in 2010 at age 77, the bank wanted its money back and "would not talk to me," Janet says. To prepare for retirement, a Rochester estate planning lawyer assists clients in developing wealth management plans.

She's working with Christine Miller of the Legal Aid Center of Southern Nevada to try to keep her home. But unless they engineer a delay, "I have to move out by July 24," she says.

"I'm 74 years old… I don't know where I'm going to go from here."

When seniors seek to renegotiate mortgages they can't afford, lenders often refuse. One reason is that the elderly typically have less time to repay. And many are "just not going to have enough income to qualify for a new plan," says Brian Korte, a foreclosure lawyer in West Palm Beach, Florida.

Al and Saundra Karp bought their three-bedroom home in North Miami Beach, Florida, for $77,000 in 1980. Over the years, they refinanced, partly to pay down credit-card debt, and their mortgage swelled to $288,000.

Al, 86, kept working as a tax accountant into his late 70s. But Alzheimer's disease forced him into retirement.

The couple is getting by on about $2,500 a month in Social Security and Veterans Administration benefits, plus food stamps and help from their two sons. They stopped paying the mortgage and are fighting foreclosure in court. And they've failed to persuade the bank to modify their mortgage and lower the $1,900 monthly payments.

To ease the stress and earn some cash, they perform old musical standards as the Karp Family — Saundra on vocals, Al on sax, son Larry on keyboards.

"I'm trying desperately to stay here," Saundra says. As for Al: "He thinks the mortgage is paid. He hasn't got a clue."

Third California City Files for Bankruptcy

Story first reported from CNN.com


A California city filed for bankruptcy Wednesday, the third in the Golden State to do so in recent weeks, stoking experts' concerns that other cities could follow suit.

The city of San Bernardino, with more than 200,000 residents on the eastern tip of greater Los Angeles, "filed an emergency petition for Chapter 9 Bankruptcy" with a regional U.S. bankruptcy court, according to a news release from the city's interim manager.

The other two to file recently were Stockton, with around 300,000 residents, according to 2010 U.S. census data, and Mammoth Lakes, a resort town, where visitors and seasonal residents outnumber the just over 8,000 permanent inhabitants.


Many municipalities in the Golden State and around the nation are struggling to cover their costs as the economic malaise continues to hurt tax revenue streams, experts said. This will lead to more municipal bankruptcies, which have been rare until now.

"This is not the end. This is the beginning," Peter Navarro, business professor at University of California, Irvine, told CNN recently. "As cities see it can be done and is being done, it will give them the idea to do it."

Eric Hoffman, an analyst at Moody's Investor Service agreed, saying more city bankruptcies are likely in California and throughout the nation.

Cities have also struggled from budget changes made on the state level. Because of massive budget shortfalls, Gov. Jerry Brown and the state legislature made changes to vehicle tax money and redevelopment agencies that stripped locales of hundreds of millions in state funding.

San Bernardino said it will continue to provide services during the bankruptcy phase.

"There will be no immediate service reductions or changes in service to the community as a result of the filing," interim city manager Andrea Travis-Miller said Wednesday. But "reductions may occur" in the future.

In a prior statement Travis-Miller hinted the city may continue to "negotiate in good faith with its creditors."

In early July, Miller and finance director Jason Simpson issued a report stating that the city was facing insolvency and its expenditures were projected to exceed revenues by $45 million. The city's general fund reserves had been as high as $19 million in 2001 but are now depleted, the report said.
"The city has reached a breaking point," the report said.

Some $10 million to $16 million in annual revenue has evaporated in recent years as taxable sales dried up and property values plummeted in the city, the report said.

Mammoth Lakes sought protection July 2 after a property developer won a $43 million court judgment against the resort town. Experts say this filing should not be lumped in with the other two California municipal bankruptcies since it was an unusual circumstance.

Stockton, however, filed for bankruptcy in late June after three months of mediation when creditors failed to close a $26 million budget shortfall. The city had already addressed $90 million in deficits over the past three years, mainly through reducing services and employee compensation.


Both Stockton's and San Bernardino's fiscal troubles are due in large part to the massive housing downturn and recession that swept across California. Both towns were hit particularly hard by the foreclosure crisis, which left numerous abandoned homes and reduced property values in its wake. That led to lower property tax revenues, critical to supporting public services.

While some areas of the Golden State are starting to recover, the regions containing those two towns are not, said Chris McKenna, executive director of the League of California Cities.

By filing for bankruptcy, cities will be able to keep police and firefighters on the street and possibly keep some parks and libraries open while they work out their finances, he said.

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Strategic Default Penalties Threaten Struggling Homeowners

Minnesota Independent

 

Last week, Fannie Mae, the government-sponsored enterprise that buys up mortgage contracts from loan originators to keep the housing market liquid, announced new penalties for homeowners who strategically default.

“Defaulting borrowers who walk away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure,” the company announced, adding that the policy goes into effect this Thursday, July 1. “Fannie Mae will also take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments.”

The new provisions mean that if you strategically default, you likely cannot get a conforming mortgage for seven years. And if you strategically default in some areas, Fannie Mae will come after you in court.

But the Fannie Mae rule — one of several new provisions aimed at penalizing strategic defaulters — raises the possibility that the government and loan servicers might imminently begin targeting an economically vulnerable population, one characterized by housing insecurity and joblessness. It brings up the immediate concern — for both defaulting homeowners and the agencies trying to keep them paying — of how to distinguish “strategic” defaulters from those defaulting because they have no choice. And the data shows that those considering default are by most metrics in financial straits, whether solvent or not.

Consider, for instance, the situation of Charlene Mueller-Holden of Newark, Del. Mueller-Holden is a wife and the mother of two young boys, ages three and six. She lost her $60,000-a-year job as an instructional designer in January 2008. Two and a half years later she has not found a job, despite persistent searching.

“My family is slowly starting to lose the things that everyone takes for granted — a roof over our head and food on the table,” she says. “I was living the American dream. I did everything that everyone tells you to do. I had a great 401k, life insurance and five months’ [worth of] bills sitting in the bank in case of an emergency,” she notes.

The family lives in a modest three-bedroom. After Mueller-Holden exhausted her $1,200-a-month unemployment benefits and the family traded in for a cheaper car, exhausted its savings and tapped its retirement accounts, it has still had trouble keeping up on the mortgage. Her husband brings home around $1,800 a month — the family’s only source of income now. The $1,046.73 monthly mortgage payment started eating up 60 percent of the family’s income. Given food, gas and utilities — plus the cost of keeping the kids clothed and unexpected car repairs — the Mueller-Holdens became hard-up. They refinanced their mortgage under the Home Affordable Modification Plan, seeking to bring the payment down to a sustainable level. Their new payment? $1008.77 — 56 percent of their monthly income. And the balance on the mortgage increased.

“This year my husband’s overtime has been cut out and his hourly salary has been cut and now we are just grateful he has a job,” Mueller-Holden says. “We are beyond struggling. Each month I have to go through our bills to see which one might be able to wait, because we have to buy bread and peanut butter so the kids have something to eat. No more vegetables, no more fresh fruit. No new or used clothes for them this year.”

According to Mueller-Holden, it is not a question of whether the family will default on the mortgage if she does not find work, and fast. It is a question of when and how. The family’s credit score is already seriously tarnished. “I used to have an 820,” Mueller-Holden, says, referring to her FICO score. Imminent default and the six- or twelve-month period before actual foreclosure would provide some relief. No other federal program or bank refinancing initiative will. Indeed, the government itself is on the verge of penalizing strategic defaulters. The FHA Reform Act passed by the House but not yet taken up by the Senate excludes strategic defaulters from receiving Federal Housing Administration-backed loans — a provision included with bipartisan backing, including from most Republicans and Rep. Barney Frank (D-Mass.), the head of the House Financial Services Committee.

The question confronting Mueller-Holdens and the millions of other homeowners facing default is this: How will Fannie Mae and other entities going after defaulters decide what “strategic” default really is? Will they qualify? Will the government or their bank come after them, even when they are on the verge of poverty?

Certainly, over the course of the recession, strategic default has emerged as a phenomenon, with a few particularly famous cases of families pulling the plug on the mortgage and heading to Disney World. The most cited study of strategic default, from credit firm Experian and consulting firm Oliver Wyman, found that as many as 588,000 families strategically defaulted nationwide in 2008 — mostly prime and subprime borrowers in the “sand states” worst hit by declines in home values. Experian and Oliver Wyman deemed people defaulters strategic if they went from having “perfect payment histories” to stopping paying the mortgage entirely, intentionally and suddenly. (All in all, more than three million homeowners received foreclosure filings from banks that year, and banks repossessed 850,000 houses.) But a more recent study by the Federal Reserve showed that four in five strategic defaulters walked away only when deeply underwater, and generally after an “income shock,” such as job loss.

Fannie Mae did not respond to repeated requests for clarification about how hard-up homeowners will need to be before they can default without the new penalties. Thus far, none of the housing experts reached by TWI knew the definition either. The FHA Reform Act that might institute federal penalties for some defaulters instructs the Department of Housing and Urban Development to figure it out. But Mike Konczal of the Roosevelt Institute points to the strictures used by one subprime lender in the 1990s: post-mortgage income of less than $400 a month per family member.

By that standard, Fannie Mae would let homeowners like the Mueller-Holdens off of the hook. They live on just $790 a month after taxes and mortgage payments, but before utilities and all other expenses. (Additionally, they attempted to ameliorate their situation through a HAMP refinancing that ultimately proved useless, as Fannie requests hard-hit borrowers do.) But they exemplify the 5.5 million Americans currently in the foreclosure pipeline. A majority have suffered an “income shock,” like job loss. For many, their mortgage is eating up more than half of their post-tax income.

And now, they have Fannie to worry about.

Homeowners Stop Paying Mortgages and Stop Worrying

NY Times

 

For Alex Pemberton and Susan Reboyras, foreclosure is becoming a way of life — something they did not want but are in no hurry to get out of.

Foreclosure has allowed them to stabilize the family business. Go to Outback occasionally for a steak. Take their gas-guzzling airboat out for the weekend. Visit the Hard Rock Casino.

“Instead of the house dragging us down, it’s become a life raft,” said Mr. Pemberton, who stopped paying the mortgage on their house here last summer. “It’s really been a blessing.”

A growing number of the people whose homes are in foreclosure are refusing to slink away in shame. They are fashioning a sort of homemade mortgage modification, one that brings their payments all the way down to zero. They use the money they save to get back on their feet or just get by.

This type of modification does not beg for a lender’s permission but is delivered as an ultimatum: Force me out if you can. Any moral qualms are overshadowed by a conviction that the banks created the crisis by snookering homeowners with loans that got them in over their heads.

“I tried to explain my situation to the lender, but they wouldn’t help,” said Mr. Pemberton’s mother, Wendy Pemberton, herself in foreclosure on a small house a few blocks away from her son’s. She stopped paying her mortgage two years ago after a bout with lung cancer. “They’re all crooks.”

Foreclosure procedures have been initiated against 1.7 million of the nation’s households. The pace of resolving these problem loans is slow and getting slower because of legal challenges, foreclosure moratoriums, government pressure to offer modifications and the inability of the lenders to cope with so many souring mortgages.

The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics.

While there are no firm figures on how many households are following the Pemberton-Reboyras path of passive resistance, real estate agents and other experts say the number of overextended borrowers taking the “free rent” approach is on the rise.

There is no question, though, that for some borrowers in default, foreclosure is only a theoretical threat for a long time.

More than 650,000 households had not paid in 18 months, LPS calculated earlier this year. With 19 percent of those homes, the lender had not even begun to take action to repossess the property — double the rate of a year earlier.

In some states, including California and Texas, lenders can pursue foreclosures outside of the courts. With the lender in control, the pace can be brisk. But in Florida, New York and 19 other states, judicial foreclosure is the rule, which slows the process substantially.

In Pinellas and Pasco counties, which include St. Petersburg and the suburbs to the north, there are 34,000 open foreclosure cases, said J. Thomas McGrady, chief judge of the Pinellas-Pasco Circuit. Ten years ago, the average was about 4,000. “The volume is killing us,” Judge McGrady said.

Mr. Pemberton and Ms. Reboyras decided to stop paying because their business, which restores attics that have been invaded by pests, was on the verge of failing. Scrambling to get by, their credit already shot, they had little to lose.

“We could pay the mortgage company way more than the house is worth and starve to death,” said Mr. Pemberton, 43. “Or we could pay ourselves so our business could sustain us and people who work for us over a long period of time. It may sound very horrible, but it comes down to a self-preservation thing.”

They used the $1,837 a month that they were not paying their lender to publicize A Plus Restorations, first with print ads, then local television. Word apparently got around, because the business is recovering.

The couple owe $280,000 on the house, where they live with Ms. Reboyras’s two daughters, their two dogs and a very round pet raccoon named Roxanne. The house is worth less than half that amount — which they say would be their starting point in future negotiations with their lender.

“If they took the house from us, that’s all they would end up getting for it anyway,” said Ms. Reboyras, 46.

One reason the house is worth so much less than the debt is because of the real estate crash. But the couple also refinanced at the height of the market, taking out cash to buy a truck they used as a contest prize for their hired animal trappers.

It was a stupid move by their lender, according to Mr. Pemberton. “They went outside their own guidelines on debt to income,” he said. “And when they did, they put themselves in jeopardy.”

His mother, Wendy Pemberton, who has been cutting hair at the same barber shop for 30 years, has been in default since spring 2008. Mrs. Pemberton, 68, refinanced several times during the boom but says she benefited only once, when she got enough money for a new roof. The other times, she said, unscrupulous salesmen promised her lower rates but simply charged her high fees.

Even without the burden of paying $938 a month for her decaying house, Mrs. Pemberton is having a tough time. Most of her customers are senior citizens who pay only $8 for a cut, and they are spacing out their visits.

“The longer I’m in foreclosure, the better,” she said.

In Florida, the average property spends 518 days in foreclosure, second only to New York’s 561 days. Defense attorneys stress they can keep this number high.

Both generations of Pembertons have hired a local lawyer, Mark P. Stopa. He sends out letters — 1,700 in a recent week — to Floridians who have had a foreclosure suit filed against them by a lender.

Even if you have “no defenses,” the form letter says, “you may be able to keep living in your home for weeks, months or even years without paying your mortgage.”

About 10 new clients a week sign up, according to Mr. Stopa, who says he now has 350 clients in foreclosure, each of whom pays $1,500 a year for a maximum of six hours of attorney time. “I just do as much as needs to be done to force the bank to prove its case,” Mr. Stopa said.

Many mortgages were sold by the original lender, a circumstance that homeowners’ lawyers try to exploit by asking them to prove they own the loan. In Mrs. Pemberton’s case, Mr. Stopa filed a motion to dismiss on March 17, 2009, and the case has not moved since then. He filed a similar motion in her son’s case last December.

From the lenders’ standpoint, people who stay in their homes without paying the mortgage or actively trying to work out some other solution, like selling it, are “milking the process,” said Kyle Lundstedt, managing director of Lender Processing Service’s analytics group. LPS provides technology, services and data to the mortgage industry.

These “free riders” are “the unintended and unfortunate consequence” of lenders struggling to work out a solution, Mr. Lundstedt said. “These people are playing a dangerous game. There are processes in many states to go after folks who have substantial assets postforeclosure.”

But for borrowers like Jim Tsiogas, the benefits of not paying now outweigh any worries about the future.

“I stopped paying in August 2008,” said Mr. Tsiogas, who is in foreclosure on his house and two rental properties. “I told the lady at the bank, ‘I can’t afford $2,500. I can only afford $1,300.’ ”

Mr. Tsiogas, who lives on the coast south of St. Petersburg, blames his lenders for being unwilling to help when the crash began and his properties needed shoring up.

Their attitude seems to have changed since he went into foreclosure. Now their letters say things like “we’re willing to work with you.” But Mr. Tsiogas feels little urge to respond.

“I need another year,” he said, “and I’m going to be pretty comfortable.”

Aid Plan Could Lower Payments on More Underwater Mortgages

USA Today

After months of criticism that it hasn't done enough to prevent foreclosures, the Obama administration is announcing a plan to reduce the amount some troubled borrowers owe on their home loans.

The effort will let people who owe more on their mortgages than their properties are worth get new loans backed by the Federal Housing Administration, a government agency that insures home loans against default.

That would be funded by $14 billion from the administration's existing $75 billion foreclosure-prevention program. In addition, the homeowner's existing mortgage company will get incentives to lower the principal balances on underwater loans.

The plan, announced Friday, would also enable the borrowers' existing mortgage companies to receive incentives to lower their principal balances.

To be eligible for the FHA refinancing program, borrowers who owe more than the value of their homes, known as being "under water," must not have fallen behind on their existing mortgage payments.

Separately, the program also would reduce monthly payments for unemployed homeowners for up to six months.

The administration cautioned that the plan isn't intended to stop all foreclosures or assist all troubled homeowners.

"There's no intention here of tackling what may be 10 to 12 million foreclosures over the course of the next three years," said Diana Farrell, a White House economic adviser.

Instead, officials said, the goal is to make it more likely the administration will meet its original target, announced last year, of assisting 3 million to 4 million struggling homeowners.

That would be "enough to provide help to those for whom help is worthwhile ... and to provide some kind of stability in the market."

The plan won't assist investors and speculators or "Americans living in million dollar homes or defaulters on vacation homes," an administration fact sheet said.

Some homeowners will not be able to afford to stay in their homes because they bought more than they could afford, officials said.

To help borrowers who have been hurt by falling home prices, the government also will require mortgage servicers to consider cutting a loan's principal if it is up to 15% more than the home is worth, officials said.

The principal would be reduced over three years as long as the borrower stays current on payments.

In addition, servicers will get more incentives — double the amount the government now pays to lenders — if they reduce the unpaid balance of second loans.

The changes reflect a new attack by the Obama administration to address the foreclosure crisis, which at first was driven by subprime mortgages going delinquent, and now is being fueled by unemployment.

The current program provides modified mortgages to homeowners who show proof of income.

"The cost is going to depend on the participation rate. In terms of the cost to taxpayers, the cost of not doing something is greater than doing something," says Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable. "Up to now, there was no government program to help the unemployed, and that was the biggest problem."

The federal program, known as the Home Affordable Modification Program (HAMP), is aimed at helping up to 4 million Americans avoid foreclosure. So far, about 170,000 homeowners have been granted permanent modifications with lower monthly payments through the plan.

Also Thursday, the Treasury Department announced new measures that buy time for some borrowers to avoid losing their homes to foreclosure.

Lenders soon will be unable to start foreclosures unless they've determined borrowers aren't eligible for a modification.

Other changes announced Thursday will provide other protections for troubled homeowners. They include:

•Ensuring servicers intervene once two or more mortgage payments are missed and actively solicit borrowers for the federal program.

•Setting a 30-day deadline for lenders to decide applications for trial modifications.

•Requiring servicers to consider borrowers who file for bankruptcy-court protection for the HAMP program if the borrower, their lawyer or bankruptcy trustee make a request.

The four big holders of second mortgages —Citigroup, Bank of America, Wells Fargo and JPMorgan Chase — have now joined the government's program to modify second mortgages. That program was delayed for months but with Citi on board, the major players in the New York homeowners insurance industry are now participating.

Critics have complained that the Obama administration has done little until now to encourage banks to cut borrowers' principal balances on their primary loans. Nearly one in every three homeowners with a mortgage are "under water" — they owe more than their property is worth — according to Moody's Economy.com.

Administration May Prohibit Home-Loan Foreclosure without HAMP Review

Bloomberg

The Obama administration may expand efforts to ease the housing crisis by banning all foreclosures on home loans unless they have been screened and rejected by the government’s Home Affordable Modification Program.

The proposal, reviewed by lenders last week on a White House conference call, “prohibits referral to foreclosure until borrower is evaluated and found ineligible for HAMP or reasonable contact efforts have failed,” according to a Treasury Department document outlining the plan.

“It is one of the many ideas under consideration in the administration’s ongoing housing stabilization efforts,” Treasury spokeswoman Meg Reilly said in an e-mail. “This proposal has not been approved and there are no immediate planned announcements on the issue.”

She confirmed the authenticity of the document, which hasn’t been made public.

At present, lenders can initiate foreclosure proceedings on any loan that hasn’t been submitted for HAMP eligibility. Under current HAMP rules, foreclosure litigation can proceed while borrowers are under review for the program or even in a trial modification.

The proposed changes would prohibit lenders from initiating new foreclosure actions before loan screening by HAMP and would require lenders to halt existing proceedings for borrowers once they are in a trial repayment plan.

‘Improved Protections’

The Treasury Department will soon release guidance “which will include a set of improved protections for borrowers” in HAMP, Phyllis Caldwell, chief of Treasury’s Homeownership Preservation Office, said today in testimony prepared for a House Oversight and Government Reform subcommittee. She didn’t provide details.

The proposal goes further than rules adopted amid the crisis by federally controlled mortgage-finance companies Freddie Mac and Fannie Mae, which require lenders to review borrowers for a federal loan modification before a foreclosed property can be sold.

Foreclosure proceedings can still be initiated without a review, said Freddie Mac spokesman Doug Duvall. Fannie Mae spokeswoman Amy Bonitatibus said it adopted the same policy last March.

About 89 percent of outstanding residential mortgage loans are covered by the voluntary HAMP program.

About 2.82 million U.S. homeowners lost properties to foreclosure last year and 4.5 million filings are expected in 2010, RealtyTrac Inc., an Irvine, California data company, said last month.

Seven Million

Obama’s foreclosure prevention initiative, announced in February 2009 to help as many as 4 million Americans avert foreclosure, has modified 116,297 loans through steps such as lowering interest rates or lengthening repayment terms. More than 830,000 borrowers received trial repayment plans through January, according to Treasury data.

“Foreclosure processes differ among states, and the process is often confusing to homeowners already facing distress,” Caldwell said in her prepared testimony. “Treasury has been reviewing guidelines around outreach and the foreclosure process as part of its continual assessment of program effectiveness and transparency.”

Foreclosures may reach as many as 7 million mortgages, and an additional 5 million are at risk of default because borrowers owe more than the property is worth, Laurie Goodman, senior managing director at Amherst Securities Group LP in New York, said in a Feb. 17 interview.

Republican Criticism

“This is a problem of mammoth proportions,” Goodman said. “You can’t throw 12 million people out of their homes, so you need a successful modification program. My fear is that this isn’t it, but I’m highly confident that the administration will continue to iterate until they succeed.”

The Treasury proposal would require all borrowers who are 60 or more days delinquent on their mortgage to be sought out for participation in HAMP. Mortgage companies would need to try to contact the borrower at least four times by phone and twice by certified mail over 30 or more days before going to foreclosure.

Under current Treasury policy, foreclosure proceedings are only halted when a borrower receives a permanent modification plan.

House Republicans criticized HAMP as a failure today, saying in a report that it is prolonging the economic crisis and harming homeowners.

“By every empirical measure, HAMP has failed,” according to the 18-page report released by Republicans on the House Oversight and Government Reform Committee. “In its current form, HAMP both hurts homeowners who might otherwise spend their trial-period mortgage payments on rent and also distorts the housing market, delaying any recovery.”

Home Builders Competing Against Foreclosure Prices
As Originally Posted at The Wall Street Journal

As the normally hot spring selling season begins, two houses in the Inland Empire region of Southern California sum up the big problem facing many of the nation's largest home builders.

One of the houses, a four bedroom built in 2006 that was seized by a lender in a foreclosure action, is listed for sale at $229,900. Meanwhile, in the same housing development, D.R. Horton Inc. is trying to sell a new house that looks nearly identical for $299,000, or 23% more.

Or consider Pulte Homes Inc.'s predicament in Henderson, Nev., near Las Vegas. The builder is trying to sell a new, four-bedroom house for $214,990, while a home owner is trying to dump a similar house, which Pulte built two years ago, for $149,999. That price is less than the owner's mortgage under a "short sale" approved by the lender.

In many markets, "we are no longer competing with other builders. We are competing with foreclosures," said Steve Ruffner, president of the Southern California division of KB Home.

Sales of used homes are actually rising in some regions because of foreclosures, but new-home sales fell to a four-decade low in January, down 77% from their peak in summer 2005. Altogether, home builders sold houses at a seasonally adjusted annual rate of 309,000 units in January, down from a peak of 1.4 million in July 2005.

Home builders are confronting the competition from foreclosures at a difficult time in their history. Small builders are dying by the dozens, while some large companies are staying afloat by cutting expenses and scrambling to restructure debt.

President Barack Obama's foreclosure-prevention plan is likely to help stem the supply of bank-owned houses somewhat, and the administration's proposed budget would extend builders a lifeline through a lucrative tax break. But the foreclosure problem won't disappear.

"I don't know how the builders are going to compete," said Credit Suisse analyst Daniel Oppenheim, who downgraded his ratings for Centex Corp. and D.R. Horton stock last week, partly out of concern about foreclosure competition.

The problem is particularly vexing because many buyers are bypassing new houses for foreclosed ones that are virtually new and are often located in the companies' own developments. "Buyers think they are going to get the best bargain with a foreclosed house, and they aren't even looking at new homes," said Graham Holmes, owner of Reviron Realty, which sells bank-owned properties in the Inland Empire.

Home builders' responses to the foreclosure threat vary. Los Angeles-based KB Home is focusing on building smaller, lower-priced houses that can compete with foreclosures head on. The builder has shrunk its house size from an average of 3,200 square feet during the housing boom to an average of 1,600 square feet in many markets today. "We're finding that if we can get a product to market that is priced competitively with foreclosures, [we] can sell pretty well, even in these times," said Jeffrey Mezger, KB's chief executive.

Dallas-based Centex, on the other hand, says it's not trying to beat lenders on price. Instead, the nation's third largest builder by volume is trying to entice buyers with perks like mortgage interest rates as low as 4.25%, energy-efficient designs and warranties.

D.R. Horton also offers incentives, including covering the buyer's closing costs, and touts a $10,000 California tax credit for buying a new house. And it notes that buyers often need to spend money to fix up foreclosed properties before they can move in.

Builders also argue that while they may look alike, new and foreclosed houses aren't comparable. "Our brand-new homes appeal to the buyer who wants up-to-date features, a chance to make their own selections like carpeting and paint colors," a Pulte spokesman said.

Some buyers clearly agree. "A foreclosure is like a used car," said Danny Hernandez, who bought a new, $237,000, five-bedroom KB house in Beaumont, Calif., in the hard-hit Inland Empire. Mr. Hernandez, a 41-year-old warehouse worker, said the fact KB paid his closing costs and a nonprofit group subsidized his down payment helped make the sale.

Another strategy: build in new neighborhoods that aren't filled with vacant, bank-owned houses. "In general, we try not to compete with foreclosures," said Centex Chief Executive Tim Eller. "It's not all about price, it's about value. Buyers determine value by the look and feel of the neighborhood."

KB said its smaller houses are selling well, but the prices keep sinking. In November, KB was selling its line of smaller houses at a development in Beaumont for as little as $207,990. Now, it has dropped its starting price to $169,990 to match recent foreclosure values in Beaumont. Since it opened the Highland Vista development last summer, KB has sold 28 homes out of about 110 house lots.

Analysts question how low builders can go before building a house costs more than they can charge for it. In some markets in California and Florida, builders have reached that point and have stopped building.

Housing Bill Relies on Banks To Take Loan Losses

Lawmakers Pressure Lenders to Pitch In To Curb Foreclosures

The housing rescue bill passed by the Senate Saturday hasn't been signed into law, but top Democrats already are putting pressure on regulators and bankers to make sure a major program to prevent foreclosures doesn't fall flat.

For struggling U.S. homeowners, the success or failure of the program -- which would let roughly 400,000 owners refinance into affordable, government-backed loans -- depends largely on bankers' willingness to take a partial loss on the loans and to reduce the amount of money borrowers owe.

Bankers say they will do it, but it isn't clear how many loans they might be willing to restructure.

"I absolutely do believe that there will be more principal reductions," Michael Gross, Bank of America Corp.'s managing director for loss mitigation, mortgage, home-equity and insurance services, told a congressional panel Friday.

If successful, the program could put a dent in the rising foreclosure figures as interest rates on adjustable-rate loans continue to increase while house prices in many areas slip. RealtyTrac Inc. reported last week that 739,714 homeowners received foreclosure warnings and other related notices in the second quarter.

Experts say the program's eventual participation could rise dramatically if home prices continue to drop -- which could put more pressure on lenders to offer borrowers more assistance. Lawmakers are already pressing regulators and lenders to prepare now so the program can begin without delay when it goes into effect Oct. 1.

The Senate approved the bill 72-13 after the House of Representatives passed it Wednesday in a 272-152 vote. Minutes after the Senate vote, Senate Banking Committee Chairman Christopher Dodd (D., Conn.) called for a prompt meeting with the Federal Reserve, the Department of Housing and Urban Development, and other regulators to determine the quickest way to get the program up and running.

House Financial Services Committee Chairman Barney Frank (D., Mass.) on Friday asked lenders to hold off on foreclosures until Oct. 1 if it is possible the borrower would qualify for the government program. He threatened legislation if loan servicers and investors don't work together to help prevent foreclosures.

Taking a loss on a loan by writing down the principal owed is one of the least desirable options for loan servicers. They typically prefer to lower the interest rate or extend the life of the loan -- from 30 years, for example, to 40 years, and also offer a home warranty.

"The real problem is going to be, just like with every program out there, are the banks going to take this seriously?" said Rebecca Case-Grammatico, a staff attorney at the Empire Justice Center in Rochester, N.Y., who advises clients facing foreclosure. "And if they don't, we're in the same position we've been in all along."

Whether banks embrace the program could mean the difference between foreclosure and homeownership for people like Kimberly Cox, 37 years old. Ms. Cox refinanced the $254,000 mortgage on her New Boston, Mich. house three years ago into a mortgage that had a flat interest rate for the first two years and then switched to an adjustable rate. When rates reset a year ago, her monthly payments jumped from $2,100 to $2,800, far more than she and her husband could afford.

The program will be run by the Federal Housing Administration, a division of HUD, and will insure up to $300 billion in refinanced 30-year, fixed-rate loans. The mortgages can't be for more than 90% of a home's newly appraised value. For mortgages that exceed the value of the home, the lender would have to voluntarily write down the principal to the qualifying level. If the home goes up in value, the borrower must share newly created equity with the FHA.

The program will begin Oct. 1 and end Sept. 30, 2011. Borrowers won't be able to qualify if they have intentionally defaulted on their loans or if they had a debt-to-income ratio of less than 31% as of March 1.

Karen Yule, a retired schoolteacher and counselor in Denver, hopes the program could help her save her two-story townhouse from foreclosure. She consolidated two mortgages on the home into one loan through a refinancing several years ago.

Her new adjustable-rate loan gave her multiple options each month, and she typically paid the lowest amount. Recently, her loan servicer told her she could no longer pay the lower amount she had been paying -- $1,200 -- and her payments doubled to $2,400, well above what she was able to pay. She has tried to move into a more affordable loan, but there is a hefty prepayment penalty if she moves out of her current loan before next year.

By: Damian Paletta
Wall Street Journal; July 28, 2008