Federal agencies, including the Federal Housing Finance Agency (FHFA), HUD, and the Treasury Department recently issued a Request for Information and will be accepting proposals for how best to deal with the large inventory of foreclosed homes held by Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA).
While the current thinking is that selling pools of properties to investors under the condition that they rent them for a specified period of time – thus keeping them off the market in the short-term – is ideal, federal officials are accepting alternative proposals.
In its RPX Monthly Housing Market Report for August, Radar Logic expressed concerns that selling homes in bulk to investors might negatively affect home prices in the broader market.
“[U]nless careful steps are taken to prevent it, we fear that bulk sales of REO properties could have an adverse effect on the appraised values of homes, and therefore home sales,” Radar Logic states in its report.
Radar Logic believes the REOs sold in bulk to investors will come at lower prices than if they were sold individually – prices much lower than non-distressed sales, and these low prices could lead to low appraisals for other homes on the market.
“Even if local appraisers do not use the bulk-sale properties as comps, there are many automated valuation models (AVMs) that would likely incorporate the prices of those homes unless there was some way to designate them as bulk-sale properties,” Radar Logic states in its report.
Radar Logic also expressed concern that the bulk sales would translate to large losses on Fannie Mae’s and Freddie Mac’s books – losses that ultimately would be absorbed by taxpayers.
Radar Logic will present its two-step strategy of reducing the GSEs’ REO inventory to FHFA next month.
First, Radar Logic proposes there be no more foreclosures. Instead, all distressed mortgages would be restructured.
Distressed mortgages would be replaced with bundles of debt and equity securities, which would be distributed to investors.
Secondly, the GSEs would rent their REOs through private-sector property managers. The GSEs would continue to own the properties rather than sell them to investors to rent.
Attorney General Kamala Harris has sued Philip Kramer, the Law Offices of Kramer & Kaslow, two other law firms, three other lawyers, and 14 other defendants who are accused of working together to defraud homeowners across the country through the deceptive marketing of “mass joinder” lawsuits. Mass joinder lawsuits involve hundreds, or more, individually named plaintiffs.
Kramer’s firm and other defendants were placed into receivership on August 15. The legal actions were designed to shut down a scheme operated by attorneys and their marketing partners, in which defendants used false and misleading representations to induce thousands of homeowners into joining the mass joinder lawsuits against their mortgage lenders.
Defendants also had their assets seized and were enjoined from continuing their operations. Nineteen special agents from the California Department of Justice participated as the firms were taken over on August 17, along with 42 agents and other personnel from HUD’s Office of Inspector General, the California State Bar, and the Office of Receiver Thomas McNamara.
Fourteen office locations in Los Angeles and Orange counties and 16 bank accounts were seized in the massive sweep.
“The defendants in this case fraudulently promised to win prompt mortgage relief for millions of vulnerable homeowners across the country,” said Attorney General
Harris. “Innocent people, already battered by the housing crisis, were targeted for fraud in their moment of distress.”
It is believed that at least two million pieces of mail were sent out by the defendants to victims in at least 17 states. The defendants’ revenue from this scam is estimated to be in the millions of dollars.
“The number of lawyers who have tried to take advantage of distressed homeowners in these tough economic times is nothing short of shocking,” said William Hebert, president of the State Bar. “By taking over the practices of four attorneys accused of fraudulent marketing practices, the State Bar can put a stop to their deplorable conduct as part of our ongoing effort to protect the public.”
The California attorney general’s office says the defendants led homeowners to believe that by joining these lawsuits, they would stop pending foreclosures, reduce their loan balances or interest rates, obtain money damages, and even receive title to their homes free and clear of their existing mortgage. Defendants charged homeowners retainer fees of up to $10,000 to join as plaintiffs in a mass joinder lawsuit against their lender or loan servicer.
This mass joinder scam began with deceptive mass mailers, the attorney general’s lawsuit alleges. Some mailers, designed to appear as official settlement notices or government documents, informed homeowners that they were potential plaintiffs in a “national litigation settlement” against their lender.
No settlements existed and in many cases no lawsuit had even been filed, Harris says. Some consumers lost their homes shortly after paying the retainer fees demanded by defendants.
The Department of Justice has seized the practices of the following non-attorney defendants: Attorneys Processing Center, LLC; Data Management, LLC; Gary DiGirolamo; Bill Stephenson; Mitigation Professionals, LLC; Glen Reneau; Pate Marier & Associates, Inc.; James Pate; Ryan Marier; Home Retention Division; Michael Tapia; Lewis Marketing Corp.; Clarence Butt; and Thomas Phanco.
The State Bar has seized the practices and attorney accounts of the attorney defendants: the Law Offices of Kramer & Kaslow; Philip Kramer, Esq; Mitchell J. Stein & Associates; Mitchell Stein, Esq.; Christopher Van Son, Esq.; Mesa Law Group Corp.; and Paul Petersen, Esq.
Maryland passed a law a year ago that gave homeowners in foreclosure the right to mediation, if they ask for it. The Justice Department reported in a November study that there were 25 mediation programs in 14 states.
As of May 31, just 56 homeowners in the state have gotten a modification of their loan through the mediation program. Borrowers complain that lenders are more interested in foreclosing than negotiating. One borrower was horrified to discover that the bank had sold her home during the mediation process.
Foreclosures slowed in the early part of 2011, as lenders dealt with accusations of “robo-signing”—approving foreclosure documents without looking at them. But now, they're coming back with a vengeance: In March, almost 30,000 notices of intent to foreclose were filed, more than twice as many than in any month since the state began keeping records in 2008, according to an analysis of state records by the Investigative Reporting Workshop at American University.
For communities of color around the country, a “lagging collapse” may be ahead, said Alan Mallach, a nationally known housing expert who has done extensive on-the-ground research into the foreclosure crisis. Prince George's county is a case in point. The nation's wealthiest majority-Black county, it has been devastated by the foreclosure crisis. Heavily targeted by subprime lenders in the boom years, the county is now staggering under the weight of abandoned homes and plummeting prices. The county received more than 7,100 notices of intent to foreclose in March.
“I think it's grim. And it's going to be grim for a while. I'm not sure we're anywhere near the aftermath yet. We're still in the middle of the storm,” said Mr. Mallach.
A year after the Maryland law was passed, fewer than 1,000 borrowers had applied for mediation, and just 56 borrowers had received a loan modification as of the end of May, according to the Maryland Department of Labor, Licensing and Regulation.
Another 159 cases ended with a so-called contingent resolution, meaning that the borrowers were promised a modification pending additional paperwork. In total, 829 mediation cases have been closed since the law took effect.
Despite the low participation rates, mediation sessions have been good for borrowers, said Carol Gilbert, assistant secretary for neighborhood stabilization at the Maryland Department of Housing and Community Development.
“Whether or not they prevent foreclosure, they do get to closure, by understanding what their lender's position is and understanding what their options are, or are not,” she said.
What the mediation program has accomplished is “getting both sides of the (lending) shop to communicate,” Ms.Gilbert said. “The foreclosure side of the shop that's working in turbo drive is very effective, and the modification side is not.”
“We were seeing so many consumers fall through the cracks who were midstream in their modification process and next week they were getting foreclosed upon,” she said.
Except that's still happening.
Antoinette Barber, a homeowner in Baltimore, requested a mediation session, using the information provided by her lender, HSBC Bank. But paperwork problems plagued her case from the start, including that HSBC listed her home as abandoned, said her attorney, Legal Aid lawyer Gretchen Reimert.
Trouble started when the envelope that foreclosure attorneys representing HSBC gave to Ms. Barber to send in her mediation request was labeled with an incomplete address. The paperwork never arrived at its destination, so no mediation session was scheduled. Ms. Barber received a second notification of her mediation rights and submitted a second request on March 9.
But HSBC's attorneys had already scheduled a foreclosure sale for March 11. And although the court scheduled a mediation session for April 13, and notified the foreclosure attorneys about it, the foreclosure firm didn't cancel the sale. Ms. Barber's house was sold two weeks later. Ms. Barber, a single mom with two children, arrived at the April mediation session in tears.
HSBC's servicer said that Ms. Barber's file had been transferred to another department and couldn't be found. HSBC's foreclosure attorney said she wouldn't agree to anything that day, unless Ms. Barber would allow the foreclosure sale to go through. Ms. Barber refused, and Mr. Reimert has filed a motion to rescind the sale and stop the foreclosure.
“Mediation is a joke,”Ms. Barber said. “I was really counting on it helping me. But they did nothing for me. It was a waste of time.”
“HSBC has a strong commitment to home preservation and regards foreclosure as a last resort. We are looking into the matter,” said Neil Brazil, vice president for public affairs at HSBC. He said the company had no further comment, citing pending litigation.
Borrowers and counselors around the country have complained that the modification process breaks down because the people at the servicer call centers don't have the power to change the terms or balance on a loan.
The mediation problems in Maryland are yet another indication that so far, government efforts aren't putting a dent in the foreclosure problem. Mr. Mallach isn't optimistic they will any time soon.
“This is the disgrace of the whole thing,” Mr. Mallach said. “Basically, the lenders who made these loans are paying huge amounts of money to the investors that they defrauded. But the problem for these communities is that basically the lenders got away with murder, and they are continuing to get away with murder.”
Kat Aaron is with the Investigative Reporting Workshop and Mary Kane is a 2011 Alicia Patterson Fellow. Investigative Reporting Workshop data editor Jacob Fenton contributed to this report.
Sen. Patrick Leahy (D-Vermont), chairman of the Senate Judiciary Committee, and Sen. Richard Blumenthal (D-Connecticut), a member of the committee, sent the letters after a review by the Executive Office for the United States Trustee “revealed that the rate of obvious, facial errors in proofs of claim in the bankruptcy courts may be 10 times higher than previously disclosed,” according to the letter.
The senators called this “a shocking and disappointing statistic.”
According to Leahy and Blumenthal, homeowners are receiving confusing and contradictory information from
servicers about what they must do to remain in their homes.
“[W]e write to seek clarification of the policies and procedures in place at your institution or mortgage servicing subsidiary that affect mortgage foreclosures, and your practices and policies related to filing proofs of claim and motions for relief from stay in the bankruptcy courts,” the senators wrote.
The senators note several major obstacles homeowners are facing when trying to work with their servicers.
“In some cases, these individuals struggle to even have a conversation with lenders and servicers regarding their mortgages, are unable to get the terms of their agreements in writing, or discover in follow-up interactions that no record was kept of previous discussions. And to make matters worse, it is clear that these problems are continuing within the bankruptcy courts,” the letter states.
As the nation’s largest servicers hold nearly one million properties, are foreclosing on almost one million more, and are likely to hold several million more over the next several years, Leahy and Blumenthal believe it is important to ensure servicers are following the laws and providing homeowners fair, consistent treatment.
In order to allow servicers a chance to respond to the letters, Leahy and Blumenthal have not yet revealed which servicers received their letters.
The 33-percent decline in housing values since the beginning of 2006 translates to an even greater decline when the dollar value is compared with some foreign currencies, such as the Chinese renminbi, Canadian dollars, and the euro.
In fact, for Canadians, the U.S. homes are more affordable now than any time in the past 35 years.
The 33-percent decline represents a 45-percent decline when converted to Chines renminbi and a 43-percent decline for Canadian dollars.
While these percentages relate to average prices, “if overseas buyers are attracted to the many foreclosed properties, which tend to be sold with an extra discount of around 25%, then US housing looks even more attractive,” states the Capital Economics report.
For the 12-month period ending March 2011, international buyers made up 3.8 percent of existing home sales values. This is down from 4.6 percent during the same period last year.
The decline may be more a result of falling prices and the lower dollar value than a decline in foreign interest. According to Capital Economics, the actual number of homes bought by foreign clients has either fallen slightly or not at all.
Similarly, the percent of Realtors who worked with at least one overseas client for the year remained the same as the previous year – 28 percent.
Nevertheless, restoring international sales to their 1998-to-2010 value levels would require a fivefold increase, which is highly unlikely, especially in the short term, according to Capital Economics.
While foreign investors may not restore the U.S. housing market over the next few years, they may boost some states’ real estate markets.
According to NAR, 58 percent of all international transactions in the 12-month period ending March 2011 took place in Arizona, California, Florida, and Texas.
The lion’s share – 43 percent – occurred in Florida and California.
Florida is seeing an increase in Canadian buyers, while California is experiencing increasing interest from China.
Florida’s high number of foreclosures – and thus high number of discounted homes – is likely part of the draw for Canadian buyers.
Barring another global financial crisis, foreign investing in the U.S. housing market is likely to increase over the next 10 to 20 years. However, the increase over the next five years will not be enough to recover the market.
The Neighborhood Preservation Act (H.R. 2636) would authorize FDIC-member banks, Fannie Mae, and Freddie Mac to enter into five-year lease agreements to rent REO properties back to the foreclosed homeowner or another individual.
The bipartisan bill was introduced by Rep. Gary Miller (R-California). He says the legislation would address two key issues of the crisis – it would give families a chance to remain in their homes and it would help stabilize home values by reining in large inventories of unsold foreclosures.
Miller says in June, distressed home sales accounted for 69 percent of single-family home sales in San Bernardino
County and nearly half of all sales in Los Angeles County in his home state of California.
“Something must be done to reduce the inventory of available homes and stop the further decline in home prices,” Miller said.
News surfaced last month that the administration was considering such a policy for Fannie and Freddie. Now, Rep. Miller wants to enact it with legislation.
It’s not the first time Miller has pushed for a foreclosure rental policy. He championed a similar bill in the 111th Congress (H.R. 2529), which passed the House by a bipartisan voice vote, but was never acted on by the Senate.
“In the end, the Neighborhood Preservation Act will reduce the number of houses coming into the housing inventory and will preserve the physical condition of foreclosed properties, which will ultimately help stabilize the aesthetic and economic values of homes and neighborhoods,” said Rep. Miller.
“As Americans across the country are affected by this unrelenting foreclosure crisis, it is imperative that Congress address this issue and restore overall confidence in the housing sector,” Miller added.
The Neighborhood Preservation Act is cosponsored by House Financial Services Committee Chairman Spencer Bachus (R-Alabama), Ranking Member Barney Frank (D-Massachusetts), and Rep. Carolyn McCarthy (D-New York).
Declaring that “real estate lending institutions have failed to provide a simple method of loan modification and foreclosure prevention,” David A. Benson’s Foreclosure Modification Act would require lenders to provide principal reductions and interest rate reductions to help borrowers keep their homes.
Benson asserts that loan servicers are “not taking into account the devalue that has occurred in property values,” and thus, his amendment would require lenders
and servicers to offer refinancing options with lower interest rates to all homeowners.
According to the amendment, any home loan “shall be able to be refinanced without credit review or penalty at minimum cost, within 45 days of being requested by the original loan borrower or home owner” given the borrower has maintained the loan for at least three years.
“It is a fundamental right for every Californian to purchase and own a home and real property,” the proposed amendment states. “As such no township, city, county, municipality, corporate entity, the Legislature or agents thereof shall infringe on this given right of the State of California to its citizens.”
The proposal, already cleared by the Secretary of State, now requires 807,615 signatures — 8 percent of the total votes cast in California’s 2010 gubernatorial election — in order to be listed on the ballot for California voters to consider.
Benson has until December 27 to collect the signatures.
A nonpartisan legislative analyst and the California governor’s director of finance say the amendment might conflict with the U.S. and California Constitutions and other federal laws, according to an article in the Central Valley Business Times.
