End of Line for Two Homeowners

First appeared in Contra Costa Times

Business at two Antioch banks was disrupted Friday by protesters demanding help for two homeowners who haven't been able to pay their mortgage.

About three dozen members and supporters of a grass roots social justice organization went to the Bank of America and Wells Fargo Bank branches on Somersville Road asking officials there to intervene on behalf of an elderly Antioch woman who lost her home just days ago as well as a Concord couple that received an eviction notice last month.

Holding signs and chanting, they asked employees to fax a letter to the banks' chief executive officers insisting that the companies work with these people they had victimized with their "predatory lending practices."

Bank of America refused and called the police, who dispersed the crowd by warning that they would be arrested if they didn't leave, said John Adams, local director of the Alliance of Californians for Community Empowerment.

The crowd then walked to Wells Fargo, where the branch manager agreed to fax the plea to rescind its foreclosure on Eva Cader, a 78-year-old Antioch woman who was evicted Jan. 3 while trying to obtain a loan modification, Adams said.

Although the Bank of America branch didn't comply with the group's request, its manager discovered she knew Jessi Koritz, a small-business owner who frequents the Concord branch where she used to work.

The woman promised she would bring his case to the attention of those who mightbe able to forestall his eviction and modify the terms of his loan.

Grappling with financial setbacks from a job loss and workplace injuries, Koritz and his wife, Pamela, have been struggling to keep the first home they have owned for most of the 5½ years they have been in it.

"We're just trying to live the American dream," said Koritz, who hasn't made a mortgage payment since July 2008.

He initially had tried to renegotiate the loan but says the bank told him it couldn't do anything unless he was delinquent.

Although Koritz is reluctant to pin his hopes on Bank of America having a change of heart, Adams says he's optimistic because of what the groundswell of opposition to lending practices already has accomplished.

"We're acting on the knowledge that this is happening across the country," he said. "People are shining a light on their case and -- lo and behold -- the bank will take a look and end up working something out."

That's exactly what Bank of America has been doing, said media relations director Britney Sheehan, noting that the company has made more Home Affordable Modification Program loans than any other lender.

The bank has processed about 200,000 of those loans in California alone since the housing crisis began in 2008, she said.

Moreover, Bank of America works with nonprofits like the housing counseling agency NACA to prevent foreclosures and has opened dozens of customer assistance centers in the hardest hit housing markets around the country -- it's opening one in San Mateo in the next few weeks -- where homeowners can talk to mortgage specialists about their loan, Sheehan said.

It's not in the bank's interest for customers to lose their homes, she said.

"While some would have the public believe that banks make a profit on foreclosures and evictions, the truth is that the process is tremendously costly for all parties," she said.

Foreclosure Freezes could put Security Clearances at Risk

The Washington Post

 

The sudden moratorium on many foreclosures across the country has unexpectedly put some federal workers and contractors in jeopardy of losing their security clearances because of the heightened uncertainty clouding their finances, according to top lawyers who handle these cases.

Employees with security clearances are monitored by the government for financial problems that would make them vulnerable to bribery or blackmail. And with many financial companies adopting some form of foreclosure freeze in recent weeks, it's taking longer for some delinquent borrowers to resolve their mortgage cases and put their troubles behind them, the lawyers said.

This problem is especially acute in the Washington region, home to nearly a third of the the nation's 854,000 employees with top-secret clearances.

"Resolving debt is more complicated when the lenders are in paralysis," said Dennis Sysko, a national security lawyer in Glen Burnie. "The longer it is unresolved, the longer the cloud remains."

Lawyers in the Washington area said they are starting to field inquiries about foreclosure delays from workers who have security clearances or are trying to get them. Many don't know whether they should be elated or concerned by the turn of events.

"I'm just really confused because nobody has made clear to me what this foreclosure delay means," said Brian Young, a federal employee from Capitol Heights.

Young bought his first home in October 2007 with a first and second mortgage from Bank of America. At the time, he had the interim secret clearance he needed to do his electrical engineering job at a Defense Department agency, he said. He applied for a permanent clearance soon thereafter.

When the permanent clearance did not come through as quickly as he'd hoped, Young said, his pay was cut, and he fell behind on his mortgage in August. He was engaged in talks with his lender to modify his loan when his security clearance was revoked. His supervisors suspended him from his job, citing him as a financial risk, mostly because of his mortgage problems, he said.

Young is appealing the decision. But as he waits, he's fallen further behind on his mortgage and other bills, including child support payments. Bank of America informed him that it would expedite foreclosure and seize his home, but then the lender suddenly announced a halt to all its foreclosure sales nationwide. This week, the bank said that it would restart foreclosures in some states, but not yet in the Washington region.

"This is just dragging everything out, and my credit keeps taking more hits," Young said. "If it helps me in some way, cool. But I just don't know if it does."

The moratorium comes to D.C.

Foreclosure delays started when Ally Financial, formerly GMAC, suspended evictions last month after concerns arose about flaws in court documents used to seize homes. The firm limited its freeze to the 23 states where lenders have to win a court order to initiate a foreclosure. Other major lenders, including J.P. Morgan Chase and Bank of America, also suspended foreclosures in those states.

Virginia, Maryland and the District were not immediately affected by the lenders' actions. But then Bank of America suspended foreclosures nationwide. Others have since selectively halted foreclosures here. And at least two area circuit courts - in Prince George's and Montgomery counties - are reviewing cases for paperwork flaws.

Under government guidelines, the failure of security-cleared workers to live within their means and pay off debt suggests poor self-control, bad judgment and an unwillingness to abide by rules, raising concerns about their ability to protect classified information.

Only a few government agencies make public their decisions to revoke or deny security clearances. Among them is the Defense Department's Office of Hearings and Appeals (DOHA), which reviews cases involving contractors for the Pentagon and about two dozen agencies, according to lawyers.

From January 2006 through June 2010, about 70 appeals involving foreclosures and other distressed sales were considered by that office, and security clearances were revoked or denied in 62 of those cases, according to Sheldon I. Cohen, an Arlington Virginia lawyer who recently wrote a paper about the rulings.

"In many cases, they act as a court of morality," Cohen said.

Based on his study of the DOHA appeals cases in the past 41/2 years, Cohen said that the number of security clearance denials and revocations has kept pace with the number of mortgage defaults, foreclosures and other distressed sales in the country.

'Emotionally charged issue'

The number of security-cleared workers who are in trouble with their loans is not public. But John P. Mahoney, a lawyer at Tully Rinckey in the District, said there is no reason to believe that these employees are insulated from the problems that plague the housing market at large.

"Now they are concerned that their clearance will be pulled or they will be fired because their real estate investments have gone bad," Mahoney said. "It's a very emotionally charged issue, because some of these people have had high-level clearances for decades and never dreamed they would face a problem like this."

Two weeks ago, Mahoney was contacted by a government contractor panicked about the payments she's missed on three investment properties she can no longer afford. She can't refinance or sell the homes because each has lost value.

The contractor, who asked not to be named for fear of losing her job, said in an interview that she has had a security clearance for more than 20 years. She is talking to Bank of America, her lender, about modifying the loans to avoid foreclosure.

"I'm hoping the freeze will work for me instead of against me," she said.

But anything that keeps her from resolving the problems leaves her in limbo. And that means it will take that much longer for her to regain her financial footing, reestablish her credit and reassure the government that she's trustworthy.

"If the foreclosure moratorium continues and she is unable to successfully modify her loans, she's left with the financial concerns that could lead to her termination," Mahoney said. He added, "Action needs to be taken, a government-wide approach, so that people who add value to the government's mission and have a long record of trusted service don't lose their jobs for no other reason than an economic downturn."

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.”

Mortgage Windfall Misses Many

The Wall Street Journal

The Federal Reserve has pushed mortgage rates to near half-century lows, but millions of U.S. homeowners haven't benefited from that because they can't—or won't—refinance.

Falling home prices have left many owners with little or no equity, making it harder to qualify for refinancing. Moreover, stricter lending standards and higher fees by banks and mortgage giants Fannie Mae and Freddie Mac and declining incomes have made it tougher and less attractive for borrowers to seek new loans.

Around 37% of all borrowers with 30-year conforming fixed-rate mortgages—who collectively hold about $1.2 trillion of home loans—have mortgage rates of 6% or higher, according to investment bank Credit Suisse. Many could reduce their rates by a full percentage point if they refinanced at current rates, about 5%. More than half could lower their rates nearly three-quarters of a percentage point, according to Credit Suisse.

New refinance applications in January stood near their lowest levels in the past year. Weekly data compiled by the Mortgage Bankers Association also show that refinance activity has been muted, considering that rates are so low. "Traditionally, these borrowers would be aggressively refinancing," said Mahesh Swaminathan, senior mortgage strategist at Credit Suisse.

One indicator of the economic impact of refinancing: Loans that refinanced in 2009 will result in $3.4 billion in savings for consumers this year, according to a report by First American CoreLogic, a research firm based in Santa Ana, Calif. That will return an additional $17.2 billion in savings to borrowers over the next five years. That's money consumers can potentially use to help spur economic recovery.

About a quarter of all mortgage holders are "underwater"—they owe more on the house than it's worth—which normally makes it impossible to get refinancing: Banks want collateral to back the value of home loans they make. The Obama administration recently extended a program intended to help underwater homeowners refinance, but few people have tapped it so far. The program has faced logistical hurdles, delays and confusion from brokers and lenders.

Some people are so far underwater, refinancing ends up being out of the question. John Albright, a retired Navy officer in Manassas, Va., hasn't been able to refinance because the value of his home has plunged. He figures its market value is now around $275,000, but he and his wife still owe more than $500,000 on their mortgage.

Their refinance application was turned down last year because they lacked equity in the home. He says his lender told him he could refinance only if he could come up with about $200,000 to pay down his mortgage. So they are stuck with an interest rate of about 6.5% at a time when his wife's income has declined. "We're going from paycheck to paycheck, but what can you do?" Mr. Albright says.

Some mortgage bankers say higher fees by lenders have undermined the effort to encourage refinancing. Fees that Fannie and Freddie began imposing in 2008, as loan delinquencies began to rise, have made it unattractive for some borrowers to refinance. For example, a borrower with 20% down and a 695 credit score seeking to refinance must pay fees equal to 1% of the loan amount. Those fees rise for borrowers with weaker credit scores, higher loan-to-value ratios, or other risk factors.

Overcorrecting for the abuses of financial institutions "has defeated the Fed's purchase program," said Alan Boyce, a mortgage-securities-market veteran. Those loan fees, he said, are partly "responsible for why there's been no refi boom."

The higher fees and tight credit standards show the tensions facing Fannie and Freddie. As the government-controlled companies try to raise revenue to offset their losses, those efforts can conflict with their basic public-policy mission: to help stabilize the housing market.

Fannie and Freddie have to strike a balance between risk and access to credit. Figuring out "where that line is involves some trade-offs," said Edward DeMarco, acting head of the Federal Housing Finance Agency, which oversees Fannie and Freddie. The last time mortgage rates were at current levels, in 2003, refinancing activity hit $2.9 trillion, according to trade publication Inside Mortgage Finance. Last year, refinance volume reached $1.2 trillion, the highest amount since 2003 but not nearly as much as expected, considering how low interest rates have fallen. Traditionally, borrowers have an incentive to refinance when they can reduce their mortgage rate by one percentage point or more.

Borrowers who are refinancing tend to be those who need it least. Fannie and Freddie refinanced 4.2 million borrowers last year. On average, borrowers who refinanced through Freddie Mac saved $2,600 annually. But the savings on the whole have gone to "very, very good credit borrowers and it really isn't going very far down the credit spectrum," said Michael Fratantoni, the head of research and economics for the MBA.

The experience of Connecticut resident Cathy Grandahl shows some of the trade-offs borrowers must grapple with in today's low-interest-rate, high-fee environment. She wanted to refinance two loans on her West Simsbury, Conn., home: a fixed-rate mortgage with a 5.75% rate and a second mortgage with an adjustable rate that she worries will rise sharply in coming years.

Refinancing would save them around $125 a month on their first mortgage while providing a fixed rate on their second loan. But extinguishing that mortgage by refinancing into one larger loan—considered a "cash-out" refinance—would trigger an additional fee.

That, plus several thousand dollars in closing costs, ultimately persuaded the couple not to refinance after all. "It's not a matter of our credit. We just can't get a good enough rate to make the refi worth it," says Ms. Grandahl, a 53-year-old land-records researcher who has three children in college.

Falling home values are one of the biggest factors raising borrowers' refinancing costs. Borrowers with less than 20% equity may have to pay for mortgage insurance.

On Monday, the Obama administration said it would extend for a year a program launched last April to help homeowners with little or no equity to refinance. That program, which had been set to expire this June, was called a "failure" last week by analysts at Barclays Capital. While the administration had said it would benefit millions, so far just 188,000 borrowers who owe between 80% and 105% of the value of their homes had refinanced through December.

Last September, it was expanded to include borrowers who owe up to 125% of their home value, but fewer than 2,000 borrowers have used that program through December.

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.”

Many Still Struggling After Mortgage Modifications

Story from USA Today

WASHINGTON — Lenders are ramping up efforts to avoid home foreclosures, but a report by bank regulators says more than half of borrowers who get help fall behind again.

More than 50% of homeowners with loans modified in the first half of last year had missed at least two months of payments a year later, the federal Office of the Comptroller of the Currency and the Office of Thrift Supervision said Wednesday.

But the results were better among those who saw their payments drop substantially.

About one in three borrowers whose monthly payments were reduced 20% or more had fallen behind again within a year. That compares with more than 60% for borrowers whose loan payments were left unchanged or increased.

The report highlights a significant challenge for the Obama administration's plan to tackle the foreclosure crisis, backed by $50 billion in money from the financial industry bailout fund.

High rates of redefault have typically plagued loan modification programs, and critics argue that there is little point to modify loans that will fall into trouble again.

Officials in the Obama administration, however, counter that their plan requires the lending industry to make far more substantive changes — for example, reducing a borrower's interest rate to as low as 2% — than was common in the past.

The administration's effort got off to a slow start, but has picked up speed in recent months. As of last month, about 360,000 borrowers, or 12% of those eligible, have signed up for three-month trial modifications. They are supposed to be extended for five years if the homeowners make their payments on time. There is currently no data on redefaults within the plan.

Traditionally, most lenders have offered payment plans that allowed borrowers to catch up on missed payments. But those modifications often do not involve an interest rate reduction and result in a higher monthly payment.

But the bank regulators' quarterly report shows that lenders were shifting their focus to modifications that reduced borrowers payments. They made up nearly 80% of new modifications in the April-June quarter, up from about half in the first three months of the year.

The report covers 34 million loans, representing more than 60% of primary home mortgages. Consistent with other reports, it showed borrowers are continuing to fall behind as job losses mount. More than 11% of borrowers covered by the report had missed at least one payment as of June 30, up from 10% in April.

It also highlighted mounting problems with an especially troubling category of loans — "pick-a-payment" or option ARM loans, which allowed borrowers to defer some of their interest payments and add them to the principal. At the end of June, 10% of these loans were in foreclosure, more than triple the rate for all mortgages in the survey.

Jump in Mortgage Rates Disappoints Home Buyers

Mortgage rates have jumped in the last two days even as rates on Treasurys have fallen, disappointing homeowners and potential home buyers.

Rates on 30-year fixed-rate conforming mortgages currently average 6.11%, according to HSH Associates, a financial publisher in Pompton Plains, N.J., after dropping below 6% last week. Rates slid a bit more on Monday before jumping by roughly one-eighth to one-quarter of a percentage point in the past two days, mortgage lenders and mortgage brokers say. Rates currently average 7.42% for 30-year fixed-rate jumbo mortgages, which are loans too large to be eligible for purchase by government-sponsored mortgage investors Fannie Mae or Freddie Mac.

Mortgages are still well below their recent highs of 6.7% in July. But the latest increase is notable because rates on 10-year Treasurys have fallen by roughly 0.32 percentage point since Friday, to 3.41%.

Rates on 30-year fixed-rate loans have tended to move in line with rates on 10-year Treasurys. But the relationship has weakened in the past year or so. "When people look at the 10-year Treasury and mortgage rates don't follow, that's a surprise," says Wells Fargo & Co. Executive Vice President Joe Rogers. "But the two rates do not move in tandem." Even with the latest increase, mortgage rates are still "quite attractive," he says.

In the past week, the spread between 10-year Treasurys and 30-year fixed-rate mortgages has risen by roughly 0.35 percentage point, says Mahesh Swaminathan, a mortgage strategist at Credit Suisse Group. The wider gap reflects a variety of factors, he says, including reduced demand for mortgages because of the bankruptcy filing by Lehman Brothers Holdings Inc. and the planned sale of Merrill Lynch & Co. to Bank of America Corp. Both Merrill and Lehman have in the past been buyers of mortgages. At the same time, investors are fleeing from all but the very safest assets in the wake of financial troubles at Lehman and insurer AIG Corp.

"There's a credit panic going on, and people are afraid of buying anything but U.S. Treasurys," says Thomas Zimmerman, a managing director at Credit Suisse.

The result has been confusion for borrowers seeking to lock in a good rate. "It's been a roller coaster," says Melissa Cohn, president of the Manhattan Mortgage Co. in New York. "The whole market seemed to unravel" on Tuesday.

Rising rates aren't the only issue for borrowers. Many who would like to refinance can't because of tighter standards and falling home prices. "You have people who can't fully document their income, but are still making their payments, still have good incomes and good reserves, but under the new rules can't qualify for a new loan," says Jon Eisen, a mortgage broker in San Diego.

One big problem for borrowers is that over the past year, Fannie and Freddie -- the two main providers of funds for U.S. home mortgages -- have raised the fees they charge to lenders, and those fees get passed on to consumers.

Fannie and Freddie recently raised their "delivery" charge for loans that will be bought or guaranteed by the companies to 0.5% of the loan amount from 0.25%. That 0.5% fee translates into an interest rate about 0.125 percentage point higher than it would have been before such fees were imposed last year.

In addition, Fannie and Freddie charge another set of fees to all but the most solid borrowers including many people who own Charlotte condos. These fees are highest for borrowers with weaker credit scores or smaller down payments. For instance, effective for loans purchased on or after Nov. 1, Fannie will impose a fee of 1.25% on a borrower with a credit score of 660 to 679 who is making a hefty down payment of 25%. On a $400,000 loan, that means $5,000 in extra fees, some or all of which might be paid in the form of a higher interest rate.

The median credit score for Americans is about 720, according to Fair Isaac Corp.

If the goal is to revive demand for housing, "it isn't going to work this way," says Lou Barnes, a mortgage banker in Boulder, Colo.

The regulator of Fannie and Freddie, the Federal Housing Finance Agency, or FHFA, took over management control of the companies early this month, partly because of worries that they no longer had the financial strength to provide enough support to the housing market. Mortgage bankers hope the companies, backed by promises of financial support from the Treasury, will now be able to reduce some of the fees. A spokeswoman for the FHFA said Fannie and Freddie are reviewing their fees, but she declined to discuss when they might adjust them.

A Fannie spokesman declined to comment on the fees. A spokesman for Freddie said: "We are always looking at the market and making appropriate adjustments."

By: Ruth Simon and James Hagerty
Wall Street Journal; September 18, 2008

What Rescue Means for Mortgage Rates

Mortgage applicants rejoice!

Sunday's federal takeover of Fannie Mae and Freddie Mac will likely translate into lower mortgage rates and greater availability of credit, experts said. Rates could drop by 1 percentage point from the stubbornly-high 6.39% for a 30-year fixed rate mortgage.

"This could be good for would-be homeowners," said Tom LaMalfa, managing director, Wholesale Access, a research and consulting firm. "It would reduce the cost of financing at the new and improved Fannie and Freddie."

The government bailout is aimed at making mortgages easier to obtain and afford. By shoring up the mortgage financing giants, they can continue buying mortgages from lenders and injecting much-needed cash into the system.

"Fannie Mae and Freddie Mac are crucial to turning the corner on housing," said Treasury Henry Paulson. "Therefore, the primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance. Our economy and our markets will not recover until the bulk of this housing correction is behind us."

But the news isn't all good. With Friday's report that foreclosures and delinquencies are at all-time highs, Fannie and Freddie are expected to maintain - if not ratchet up - tighter lending standards. And the fees they have introduced for borrowers with weaker credit histories won't go away anytime soon.

High borrowing costs

Mortgage rates borrowers pay are dependent on the yields that investors demand when buying mortgage-backed securities from Fannie and Freddie.

Investors' doubts about the companies' viability have sent interest rates on those securities soaring. Despite regulators' July promise that they would step in to save the mortgage companies, investors are still demanding rates of 2.25% to 2.45% above Treasuries, LaMalfa said. Historically, the spread has been 1.25%.

With the government now taking over the companies and minimizing the risk associated with their debt, investors may be willing to ease off their need for higher rates, especially if a house is covered by things like a home warranty or is thoroughly inspected by a home inspector.

High borrowing costs have led, in part, to a decline in mortgage borrowing. Applications are down 27% from a year ago, according to the Mortgage Bankers Association.

Also Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) will likely reverse their recent pullback from the mortgage markets. In early August, when they reported just over $3 billion in combined second-quarter losses, both said they would scale back their purchases of mortgage securities to preserve their capital.

Tight standards and fees will remain

Borrowers, however, shouldn't expect the ever-tightening lending standards to ease. With defaults and delinquencies multiplying and home prices falling, Fannie and Freddie will likely keep a close eye on underwriting practices. Lenders are demanding credit scores above 700 these days, up from 620 in the past, and downpayments of 20%, up from zero in some cases, experts said.

The mortgage titans have also increased their fees in hopes of shoring up their finances. Just last month, Fannie Mae announced higher surcharges for loans to weaker borrowers. For instance, applicants with credit scores between 640 and 659 who are putting down 15% to 20% will pay an additional 2.25% charge.

The same borrower would pay 1.7 percentage points more because of higher fees and rates for the same loan today as he or she would have paid 18 months ago, LaMalfa said.

If the market continues to worsen, standards could further tighten and fees could rise more, he said.

"We may have more stringent standards over the next few weeks because of the continued deterioration," he said. "We don't know where the bottom is yet. It's a falling knife."

Also, while investors have initially cheered regulators' moves in the past, their confidence has been short-lived. It remains to be seen whether and for how long Sunday's action will placate them, said Kurt Eggert, law professor at the Chapman University School of Law. And if investors' spook again, rates will rise.

"If I were an investor, I'm not sure this would be enough to make me want to jump in with a lot of money," Eggert said.

By: Tami Luhby
CNNmoney.com; September 8, 2008