Invest in Real Estate With a IRA

Marilyn  fed up with her financial planner. He had invested the 57-year-old’s Roth IRA in stock mutual funds that tanked in 2008, and then he put it in bond funds that yielded next to nothing. So in late 2009, Cotterman, a quality assurance manager at a printing company in Brownsburg, Indiana, decided to move the $40,000 she had with her planner into a self-directed IRA so she could invest in mobile homes.

Today, Cotterman says her investments yield double-digits and her portfolio is a multiple of that initial $40,000. Because her self-directed account is still a Self Directed Roth IRA, her gains and income accrue free of taxes. “We bought a $6,000 mobile home and fixed it up,” she says of her first IRA real estate purchase. “We found someone who wanted to buy it for $10,500. We sold it to them but held a promissory note on the home so that they have to pay us $215.34 a month over a six-year period.” After factoring in costs, Cotterman says she's earning 15 percent on her $10,000 promissory note.

While most retirement accounts let you buy only paper securities, self-directed IRAs offered by companies such as Equity Trust (the company Cotterman uses), Guidant Financial and The Entrust Group allow individuals to invest directly in hard assets such as real estate and gold bullion. Such IRAs, which have annual account fees ranging from $125 to about $300, have become increasingly popular. “Our asset growth rate has normally been about 15 percent a year, but this year it’s 25 percent,” says Hubert Bromma, chief executive of the Entrust Group, custodian for $3 billion in self-directed IRA assets.

Today's hot real estate markets are distressed ones in Florida, Nevada, Michigan, Arizona and California. Many of the sellers are people who got ahead of themselves in the housing bubble and now wind up renting in the same neighborhood. That makes the rental market stable while the housing market is depressed -- the ideal scenario for a real estate investor. “In every major metropolitan market, you face the same issues,” says Jeff Desich, chief executive of Equity Trust. “There are people now who need to rent and can’t get credit any more to buy, so there's a pool of homes that have been reduced dramatically in price.”

Tax twists

Self-directed IRAs are complex legal structures that, if managed incorrectly, can lead to stiff penalties from the Internal Revenue Service. The primary mistake is any appearance of self-dealing, where you benefit financially or otherwise from the property in the account before the minimum distribution age of 59 1/2. That means if your IRA owns real estate, you or any immediate family members can’t live in it or get any rental income from it directly. Otherwise, you could invalidate the status of your IRA account and be subject to a 10 percent tax penalty for the account’s value.

Moreover, all repairs, management and property tax costs must be paid with the IRA’s funds. So you must either have a buffer in the account to pay for unforeseen expenses, or hope that the annual maximum allowable IRA contribution, currently $5,000, will cover costs. You can’t even make repairs by yourself without your own “sweat equity” being considered a contribution to the account. Desich recommends that investors keep 5 percent to 10 percent of their property’s value in liquid securities such as cash or bonds to cover future repairs.

Nor can investors employ a traditional mortgage to finance IRA properties. An IRA account doesn't allow its owner to be held personally liable for any unpaid debt. The only permissible loans are so-called non-recourse loans that use the property itself as collateral. These have higher interest rates than conventional mortgages, and any income earned with the portion of the property owned with this leverage is considered outside the IRA and fully taxable. “Such loans aren't always easy to find,” says Bromma. The rates he sees range from 5 percent to 7 percent.

All-cash deals

As a result, most self-directed IRA real estate deals tend to be all-cash. For most people, the lack of easily available leverage creates concentrated portfolios of a handful of properties. That's why experts recommend multi-family rental properties with two to four apartments, instead of single-family rental homes; if you lose one tenant, you still have a second apartment rented. Las Vegas realtor Kirby Scofield, of Cosmopolitan Real Estate, has been selling such properties at prices ranging from $20,000 to $30,000 per apartment. Annual rental yields after expenses run from 12 percent to 25 percent at current prices, he says.

Cotterman has investments in 20 mobile homes, 10 of which are in her IRA. She prefers dealing with buyers because she feels they have more respect for her property than renters do. With her promissory note, she essentially becomes their mortgage lender and is still able to earn hefty yields because her properties are cheap and the value of the loans she offers is small. “Buyers don’t care about the interest rate, just the total monthly payment,” she says.

Her strategy has additional perks. Since her properties are in mobile home parks, the park managers do a lot of screening for her as to the credit quality of the buyers. Residents also have to pay lot rent to be in the parks. If they default, they often default on both their lot rent and Cotterman, so the park does the evicting for her. She’s had six defaults, but says it isn't a problem because of the low cost and high turnover. “You just turn around and sell the property to someone else,” she says.

Avoiding scams

Perhaps the biggest risk of self-directed IRAs isn't tenants bolting or tax twists but what you choose to put into it. Self-directed IRAs allow you to invest in things that aren't normally regulated by the SEC. Since companies like Entrust are just custodians, they don't check the legitimacy of what you buy. This lack of oversight is a magnet for scam artists with promises of easy returns. That's why in August the North American Securities Administrator's Association issued an Investor Alert citing these risks.

Entrust offers seminars that try to teach people how to avoid common scams. The most important thing is simply to make sure any deal is completely legit. "As people reach retirement age, they get desperate because they haven't saved enough," says Bromma. "They invest in things they know nothing about in an attempt to generate big returns. Unfortunately, there are so many bad people out there operating Ponzi schemes, trying to rip people off. Due diligence is the biggest thing people aren't doing.

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How to Play a Real Estate Game

For investors, the real estate roller coaster ride continues. They made billions -- probably trillions if you add it all up -- flipping houses, leasing offices and constructing condo towers. Then the real estate market collapsed, throwing the U.S. into the 2007-2009 recession.

Now the prognosis for real estate investments is looking much better, though it's anything but simple. Some commercial real estate has rebounded, with investors craving income that real estate provides, while residential real estate -- particularly single-family homes -- may be at once-in-a-lifetime bargain prices.

Bloomberg.com asked four top experts for their take on the the opportunities and potential pitfalls facing real estate investors in the coming years. Edited excerpts of their interviews follow:

Jim Sullivan, managing director of REIT research, Green Street Advisors

Every diversified investor should have some exposure to commercial real estate, and REITs [real estate investmenttrusts] provide a terrific, transparent and liquid way to get that exposure. Operating fundamentals in most property types range from good to great, with good being the shopping center business and industrial business and great being the apartment business. The economy is not doing great, but the silver lining for commercial real estate is how little new supply is coming on the market. Too much new construction is typically what puts a halt to real estate recoveries. This time around, it's just not an issue.

REITs tend to be specialized by property type. You can pick and choose, depending on what your economic outlook might be. If your forecast is a little rosier, you'd want to be in property types that respond well in economic recoveries -- hotels, for example, or REITs that own shopping centers with lots of small tenants. If you wanted to be a bit more defensive, health care REITs are a terrific place to be.

The question of whether REITs are cheap or not depends on what you compare them to. If you're thinking about selling bonds and buying REITs, that looks like a good trade. If you're thinking of selling some of your S&P 500 [stock funds] to buy REITs, that's a trade that doesn't look as good today as it might have a year ago. I have to throw out a warning that there's a whole world of REITs called "non-traded REITs." Unlike publicly traded REITs, the valuations are hard to discern and there are a ton of fees for individual investors.

John Burns, chairman and president, John Burns Real Estate Consulting

The biggest opportunity is buying distressed single-family homes, because that market has been completely beat up. The next biggest opportunity is buying land because very few people have been focused on it. If you have a long-term view, you'll probably see a significant multiple return. Buying land is a complicated business, though. Mom-and-pop investors should not be buying land.

Investing in apartments has gotten very expensive in gateway cities like New York, San Francisco, Los Angeles and San Diego. I'm not going to say those are bad investments, but you're paying a premium to get in those markets. There are opportunities for B- and C-class properties in the non-gateway cities like Phoenix, Dallas, Houston and Chicago. Renters are in for a rude awakening over the next three years. They're going to get significant rent hikes, which is going to cause far more of them to start looking at home ownership.

Lauren Pressman, director of investment research at wealth management firm Aspiriant

The U.S. is in a period of sustained but very slow growth. Job reports are huge factors for real estate, because jobs create demand for housing, for offices, for travel and at retail establishments. We're wary of things like retail and office, except in very unique circumstances. Multifamily real estate (apartment buildings) arguably had all the tail winds at its back to do the best of all asset classes. However, be careful. There is so much capital chasing multifamily, and that can lift prices beyond a point where your return is commensurate with risk.

Our overriding philosophy now is to look for opportunities that don't require a strong recovery to make money. So, for example: debt. Instead of bidding on apartment buildings, funds will provide debt for a new apartment owner. They can provide it at fairly high interest rates because debt is very hard to come by these days.

We're very cautious. You need to choose the right asset with the right manager with the right business plan. If you go and buy something because you think rents are going to go back to 2007 levels, that's not a good strategy.

Jack Chandler, global head of real estate, BlackRock

We're very focused on cities we think are going to compete for jobs. As opposed to 2000 to 2006, when there was job growth everywhere, it's much trickier. There is going to be a much bigger spread between the performance of winners and the losers. So the New York, San Francisco, Washington markets are pretty fully priced. Secondary assets in secondary locations -- especially in areas that have not seen job growth resume -- have seen a very small amount of interest from the capital markets.

We like mezzanine debt [a form of debt that is riskier and thus pays higher interest rates than more senior, secured forms of debt]. In debt, as they always say, your upside is you get your money back. If you think equity is going to earn 6 to 9 percent over the next three to five years, and debt's earning 7 to 12 percent (while the debt has a more senior part in the capital structure), that's a compelling risk proposition. You give up the potential upside for the extra yield.

Forecloses in black,Latino neighborhoods get little maintenance

Foreclosed homes in heavily-black and Latino neighborhoods are far more likely to be left with inadequate maintenance than those in majority-white neighborhoods, according to a recent investigation by the National Fair Housing Alliance.
Investigators from the group looked at more than 1,000 foreclosed homes in nine major metropolitan areas around the country, including Gary Indiana,Detroit,Atlanta, Baltimore and Oakland and found patterns of unequal treatment of the foreclosed homes across the country.
"While REO (real-estate owned) properties in predominantly White neighborhoods were more likely to have neatly manicured lawns, securely locked doors, and attractive "for sale" signs out front, homes in communities of color were more likely to have overgrown yards littered with trash, unsecured doors, broken windows, and indications of marketing as a distressed sale," the report concludes, "REO properties in communities of color generally appeared vacant, abandoned, blighted and unappealing to real estate agents who might market the unit to homebuyers."
The alliance argues that not maintaining these homes will hurt minority neighborhoods, both discouraging people from buying the foreclosed homes, and driving down the value of other residences in those neighborhoods.
The report is the latest illustration of the damage caused by the foreclosure crisis, particularly among Black Americans.

Man Buys Texas Home For $16

Kenneth Robinson of Texas used an obscure law known as adverse possession to get the rights to a house for sixteen dollars

Propose Plan to Address Government Bank owned Properties

Radar Logic plans to publish a response to the government’s proposal to sell pools of foreclosed homes to investors to rent.

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.

California Officials Take Down Foreclosure Rescue Fraud Ring

California’s attorney general and the state’s Department of Justice have taken down a fraud ring of legal firms and attorneys that officials say swindled thousands of homeowners out of millions of dollars by convincing them to take part in mass lawsuits against their lenders.

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.

Foreclosures mount,mediation fails,wealthiest Blacks suffers

PRINCE GEORGE'S COUNTY, Md. - A widely touted strategy aimed at keeping Maryland residents from losing their homes by bringing banks and homeowners to the bargaining table has met with little success as the nation braces for another wave of foreclosures.

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.

Servicers' Policies on Foreclosures in Bankruptcy Courts Being Examined

Eleven mortgage servicers recently received letters from two senators inquiring about their policies regarding foreclosures in bankruptcy courts.

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.

Foreign Investors Will Not Save U.S. Housing But May Help Some States

The combination of declines in dollar value and home prices is making U.S. homes very affordable for some foreign buyers, according to a Capital Economics report released Thursday. However, foreign demand is not likely to bring recovery to the American housing market in the near future, according to the report.

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.

Bill Introduced to Support Foreclosure Rentals

The House Financial Services Committee is considering a bill to ease the pressure that unsold inventories of vacant, foreclosed homes are putting on the housing 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).

California Citizen Proposes Amendment Outlawing Foreclosures

A Sacramento, California citizen has proposed an amendment to the California Constitution that would outlaw foreclosures.

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.

Mortgage Paperwork Mess:Who owns your home?

Brookstone Law investigates - As more and more Americans face mortgage foreclosure, banks' crucial ownership documents for the properties are often unclear and are sometimes even bogus, a condition that's causing lawsuits and hampering an already weak housing market. Scott Pelley reports for CBS News 60 Minutes.

Public Fines Are Coming for Robo-Signing Offenses

The retrospective foreclosure reviews mandated by the formal enforcement actions handed down to servicers will help regulators evaluate the extent of the problem and determine the amount of monetary fines that should be assessed, according to John Walsh.

The OCC, along with the Federal Reserve and the Office of Thrift Supervision, issued cease and desist orders Wednesday against 14 mortgage servicers, as well as Lender Processing Services and the Mortgage Electronic Registration Systems, that are intended to correct deficiencies the regulators found in foreclosure processes and the way customers are treated.

The orders laid out a laundry list of procedural reforms and best practices to be implemented, but did not give a dollar amount for monetary sanctions, although officials from both the OCC and Fed said such penalties would be forthcoming.

Speaking to attendees at a meeting hosted by Women in Housing and Finance Thursday, Walsh described the problems uncovered in the investigation as “extensive.” He says servicers will have to absorb “substantial expense” to fix the problems.

One of the provisions laid out in the cease and desist orders is for each servicer to hire an independent, third-party firm to check all foreclosure actions processed in 2009 and 2010. Any cases that are found to identify borrowers that suffered financial harm as a result of foreclosure processing deficiencies, the servicer is obligated to provide restitution.

“This is an open-ended obligation, with no dollar cap, and we will be supervising compliance very closely,” Walsh said, adding that servicers must evaluate the cases of any borrower who asks for a review.

“As we gather additional information from continuing exam work and the look-back about the extent of harm from processing failures, this will inform our decision on civil money penalties,” Walsh said.

Critics of the regulators’ response have voiced concern that although the third-party review firms must be approved by the supervising federal agency, the fact that the hiring

decision rests with the bank will likely lead to skewed results.

“You have an outside reviewer chosen by the bank reviewing things under an uncertain standard and then also deciding what the harm was,” Georgetown University law professor Adam Levitin, who has been critical of the mortgage industry and its record-keeping, opined to Dave Clark of Reuters.

FDIC Chairman Sheila Bair, whose agency participated in the federal probe last fall but is not the primary regulator for any of the mortgage servicers, stressed that the “look-back” exams of past foreclosure actions must be carried out with integrity and transparency in order to return a semblance of credibility to the reputation-tarnished institutions involved.

“There is evidence that some level of wrongful foreclosures has occurred. It is important that servicers identify any harmed homeowners and provide appropriate remedies,” Bair said.

In his speech Thursday, Walsh said, “As bad as the mortgage servicing breakdown was, it was not the cause of mortgage delinquencies that led to the surge in foreclosures. Rather, it was the unprecedented surge in foreclosures that exposed and exacerbated weaknesses that already existed in the process.”

Walsh says even with the changes mandated to solve the processing problem and ensure troubled borrowers are treated fairly, “our actions are unlikely to fundamentally change the trajectory of the foreclosure problem.”

“If there is any reassurance here, and there is sadly very little, it is that borrowers subject to foreclosure in our sample were indeed seriously delinquent,” Walsh reiterated again.

He added that the cases evaluated in the sample also showed that servicers “generally had the documents they needed to foreclose” and that only a “small number of sales should not have gone forward” because they involved active duty service members, a bankruptcy filing, or approved trial modifications.

“In general, we found that servicers had considered whether borrowers facing foreclosures might qualify for some alternative program, such as a modification,” Walsh said.

It’s this type of argument that pundits say gives servicers an edge in the negotiations that are still pending with state attorneys general, who are reportedly pushing for more stringent reforms and a hefty punitive fine, as well as the federal Justice Department.

However, in his remarks Walsh added, “[W]hile the sample of foreclosures we examined was adequate to expose these flaws in the process and provide a basis for developing enforcement actions, it did not capture the full extent of harm to borrowers.”

Federal Reserve BANK CON exposed

Federal Reserve BANK CON exposed Part 2

Louis Farrakhan - FED & Monetary Policy

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Will new rules protect those facing foreclosure?

Will new rules protect those facing foreclosure?

Will foreclosure scandal lead to better laws or just a pause?

MILPITAS, Calif. - Ching Sun has been trying for nearly two years to renegotiate his mortgage and stave off foreclosure on his family's modest home in this San Jose suburb.
So he ought to feel heartened by a push for a national moratorium on foreclosures in the wake of a growing scandal involving some of the largest U.S. lenders.

But Mr. Sun, who fell behind on his mortgage payments after his import-export business collapsed in 2008, is skeptical that a moratorium would do much beyond provide borrowers like him a temporary “breather.” After six fruitless attempts to modify his loan, Mr. Sun received a notice from PNC Financial Services last month that his house is now formally in foreclosure. He and his wife don't know if and when they will have to leave.

“People need something like (a moratorium by Congress), because there is nothing we can do anymore,” Mr. Sun said. But ultimately, instead of merely delaying foreclosures, “we need legislation to prevent them. I think (the banks) should be mandated to do loan modifications. This will be most helpful.”

Calls for a national moratorium have grown louder in recent days, fueled by outrage over revelations that some of the nation's biggest financial institutions broke the law by failing to properly verify foreclosure filings. Court documents revealed the widespread practice by bank employees of rubber-stamping—“robo-signing”—foreclosure paperwork that they did not personally review.

Mr. Sun's lender, PNC Financial, as well as Bank of America, JPMorgan Chase, and Ally Financial Inc, are among the institutions that have joined in temporarily halting foreclosures while they review their procedures. (Bank of America said Oct. 18 that it will resume foreclosures in 23 states in coming weeks.)

Foreclosures approaching record levels
Meanwhile, foreclosures have been approaching record levels. From July through September, banks seized 288,345 properties around the country, the most ever in a three-month period, according to data released by RealtyTrac, a foreclosure listing service. In the same quarter, some 930,437 U.S. homeowners received a foreclosure-related warning—or approximately one in 139 households, up 4 percent from the April-June period.

Banks have repossessed more than 816,000 homes through the first nine months of 2010, RealtyTrac reported.

“If (the big banks) are concerned (about the foreclosure process), the rest of us should be, too,” Dean Baker, co-director of the Center for Economic and Policy Research, told TheHill.com's Congress Blog. “A (congressionally imposed) moratorium would give regulators an opportunity to review the procedures that each lender has in place. It would prevent them from moving forward until they could prove they were conducting foreclosures in compliance with the law. In this way, it would be very similar in purpose to the moratorium that President Obama imposed on deepwater drilling in the Gulf following the BP spill.”

A number of lawmakers—mainly Democrats—have also been pressing regulatory agencies to take action. Dean DeBuck, spokesperson for the Office of the Comptroller of the Currency, said in an email: “Immediately after concerns surfaced regarding Ally foreclosure processing issues, the OCC ordered large national bank servicers to review their procedures to ensure compliance with state and federal law before foreclosing on seriously delinquent borrowers.” The lenders targeted by the OCC include JPMorgan Chase, Bank of America, Citigroup, HSBC Finance Corp., PNC, and Wells Fargo.

Meanwhile, attorneys general of all 50 states have launched their own probes.

In California, prior to foreclosing on a property, banks are required to do due diligence and make a good-faith effort to contact homeowners, discuss the various options, and work out a solution, according to Jim Finefrock, spokesperson for the state Attorney General's Office. Jerry Brown, the current holder of that office, is locked in a tight race for governor against Republican Meg Whitman.

But the banks' actions in other states suggest that they might not be obeying California's foreclosure laws, Mr. Finefrock said. His office has sent letters to Ally Financial, previously known as GMAC, and JP Morgan Chase, both of which have acknowledged engaging in sham verifications of foreclosure filings, and has ordered them to prove that they are complying with state law “or stop doing foreclosures in California,” Mr. Finefrock added.

Mr. Finefrock said the state is also in discussion with other banks to ensure they comply with state law.

Too little, too late
While Ching Sun welcomes the investigations, he also sees them as too little, too late. “They should have done this a long time ago,” he said. In his effort to get his mortgage modified, he has consulted lawyers and written to Senator Dianne Feinstein, the Federal Reserve and the Better Business Bureau—all to no avail. “I have a better chance of winning the lottery than getting a loan modification,” he said.

Adding to Mr. Sun's frustration is the fact that PNC Financial—formerly National City Bank—has never explained why his applications have been denied. His wife is employed, so they have some income, and their house—which they purchased for $460,000 in 2004—is underwater (meaning the mortgage exceeds the current value) by only 20 to 30 percent.

“Banks will modify loans if they see that it's to their own benefit,” Mr. Sun said. “If you lose 50 percent of your (home's value) or more, they lose a lot of money, so they would never foreclose on you.” But in his case, he adds, “they would rather foreclose on us. … If (the lender resells) the property, anyway, why (not let) the former owner buy it back?”

Stringing borrowers along
Maeve Elise Brown, executive director of Housing and Economic Rights Advocates in Oakland, Calif., echoed Mr. Sun's concerns.

“A moratorium could be very helpful for people in our own state,” she said, “but you have to crack down on lenders for failing homeowners and stringing them along.”

As Mr. Sun has discovered, lenders are not obligated to explain why a loan modification was denied, which encourages many people to reapply even if their chances are nil, Ms. Brown said. “A moratorium doesn't fix the problem of false hope.”

Preeti Vissa, community reinvestment director with the Berkeley, Calif.–based Greenlining Institute, said homeowners would benefit most in the near term from options that reduce the total amount of their loan.

“We know today that principal reduction is the most sustainable part of a loan modification,” Ms. Vissa said. “We're seeing that without that, the homeowner is paying (perhaps just) $15 less a month (on their mortgage), and they end up defaulting in 90 days anyway.”

But she notes that homeowners face severe hurdles in trying to renegotiate their loan principal, because 80 percent of home loans are owned by investors, “and (banks) can't reduce principal without investor approval.”

Ms. Vissa said the current scrutiny on big lenders and a foreclosure moratorium could be opportunities for housing advocates, policymakers and bankers to step back and see what they could do to lessen the foreclosure crisis.

“I see the banks are doing a lot to contact the homeowner,” she said. “About a year ago, you wouldn't have seen that, but there still is a lot to be done. … They are discussing options, but are they really following through and aggressively pursuing the options that keep the homeowner in the home?”

Are you a renter and your landlord is in Foreclosure?

WHAT ARE YOUR RIGHTS?

Federal legislation signed in May 2009 gives important rights to tenants whose landlords have lost their properties through foreclosure.

Renters and tenants are now being affected by foreclosures almost as often as homeowners. The mortgage industry crisis that started in 2006 has resulted in thousands -- no, make that millions -- of foreclosed homes. Most of the occupants are the homeowners themselves, who must scramble to find alternate housing with very little notice. They're being joined by scores of renters who discover, often with no warning, that their rented house or apartment is now owned by a bank, which wants them out.
Who Are the Renters?

Renters who lose their homes to foreclosures don't fit a single profile. Many of them live in smaller buildings, condos, and single-family homes. They're located in cities and surrounding suburbs, in low-income and upscale neighborhoods. In short, foreclosed homes are everywhere, and they're rented by people with widely varying incomes, including some with "Section 8" (federal housing assistance) vouchers.
Who Are the Defaulting Owners?

The typical foreclosed home may have originally been owner-occupied, but more often it's owned by investors and speculators who were hoping to profit from the rents. Caught between the slump in housing values and the rise of mortgage interest rates, these owners could not feasibly sell or extract enough rent to cover their monthly costs. In droves, they lost their investments. For example, in Minneapolis and its surrounding suburbs, 38% of the 2006 foreclosures involved rental properties; in Minneapolis alone, 65% were rentals.
Who Are the New Landlords?

When an owner defaults on a mortgage, the mortgage holder, often a bank, either becomes the new owner or sells the property at a public sale. If the bank becomes the owner, it may pay a servicing company to handle the property. But don't expect close attention -- these companies are focused on financial matters, not mundane things like maintenance.

Some renters find themselves with a new owner even before the foreclosure. Lawyers in Massachusetts, for example, contend that many new rental property owners are investment trusts that specialize in purchasing troubled loans directly from banks, then foreclosing, evicting, and selling.
New Owners Means No Maintenance

Many tenants have no idea that their building has been taken at foreclosure. They continue to pay rent to the former owner, who often pockets the money but is hardly inclined to maintain the building it no longer owns. In the meantime, the new owners simply refuse to be landlords, never making repairs or even paying utility bills. Because the banks are stuck with increasing numbers of foreclosed properties that they can't sell, they remain non-landlords for some time, making life impossible for their tenants until those tenants are evicted.
Renters in Foreclosed Properties No Longer Lose Their Leases

Before May 20, 2009, most renters lost their leases upon foreclosure. The rule in most states was that if the mortgage was recorded before the lease was signed, a foreclosure wiped out the lease (this rule is known as "first in time, first in right"). Because most leases last no longer than a year, it was all too common for the mortgage to predate the lease and destroy it upon foreclosure.

These rules changed dramatically on May 20, 2009, when President Obama signed the "Protecting Tenants at Foreclosure Act of 2009." This legislation provided that leases would survive a foreclosure -- meaning the tenant could stay at least until the end of the lease, and that month-to-month tenants would be entitled to 90 days' notice before having to move out (this notice period is longer than any state's non-foreclosure notice period, a real boon to tenants).

An exception was carved out for the buyer who intends to live on the property -- this buyer may terminate a lease with 90 days' notice. Importantly, the law provides that any state legislation that is more generous to tenants will not be preempted by the federal law. These protections apply to Section 8 tenants, too.

Importantly, tenants who live in cities with rent control "just cause" eviction protection are also protected from terminations at the hands of an acquiring bank or new owner. These tenants can rely on their ordinance's list of allowable, or "just causes," for termination. Because a change of ownership, without more, does not justify a termination, the fact that the change occurred through foreclosure will not justify a termination.
Does It Make Sense to Evict Tenants?

New owners may want to terminate existing tenants because they believe that vacant properties are easier to sell. Common sense suggests otherwise. In many situations a building full of stable, rent-paying tenants will be more valuable (and command a higher price) than an empty building. Emptied buildings are also prone to vandalism and other deterioration -- after all, no one is on site to monitor their condition. When entire neighborhoods become a wasteland of empty foreclosed multifamily buildings, their value drops even further. It's hard to understand why new owners choose to pay lawyers to start eviction procedures instead of paying a modest fee to a management company to collect rent and manage the property while they wait to sell.
"Cash for Keys"

To encourage tenants to leave quickly and save on the court costs associated with an eviction, banks offer tenants a cash payout in exchange for their rapid departure. Thinking that they have little choice, many tenants -- even Section 8, protected tenants -- take the deal. It doesn't help them much as they join the swelling ranks of newly displaced tenants (and former homeowners) who are competing to find an affordable new rental.
What Can a Foreclosed-Upon Tenant Do?

Thanks to the 2009 federal legislation, most tenants with leases will keep their leases, and month-to-month tenants will have at least 90 days to relocate. Tenants with leases have no legal recourse against their former landlords, because they are in the same position vis a vis the new owner as they were with the old: The lease survives and ends as it would had there been no foreclosure. Similarly, month-to-month tenants always know that they can be terminated with proper notice, and 90 days is longer than any state's termination period.

However, a lease-holding tenant whose rental has been bought by a buyer who want to move in to the property ends up less fortunate than before the new law -- he may lose his lease with 90 days' notice, a result that probably would not have happened had the owner simply sold the property to a buyer who intended to occupy the property. (Normally, the new owner has to wait until the lease ends, absent a lease clause providing for termination upon sale, though such clauses may not be legal in all situations.)
Suing in Small Claims Court

A lease-holng tenant who has to move out so that new owners may move in might consider suing their former landlord in small claims court. Here's how it works.

After signing a lease, the landlord is legally bound to deliver the rental for the entire lease term. In legalese, this duty is known as the "covenant of quiet enjoyment." A landlord who defaults on a mortgage, which sets in motion the loss of the lease, violates this covenant, and the tenant can sue for the damages it causes.

Small claims court is a perfect place to bring such a lawsuit. The tenant can sue the original landlord for moving and apartment-searching costs, application fees, and the difference, if any, between the new rent for a comparable rental and the rent under the old lease. Though the former owner is probably not flush with money, the awards in these cases won't be very much, and the court judgment and award will stay on the books for many years. A persistent tenant can probably collect what's owed eventually.


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