foreclosure Archives - Page 7 of 8 - Real Estate News and Commentary

March 13, 2008November 23, 2021

Appraising the Mortgage Crisis

by Dan Krell
Google+

Although the mortgage meltdown and crisis is not new news, new information continues to shed light on what led to the mortgage meltdown. In addition to the scandals and fraud allegations at many levels, many are still unaware of the impact of appraisal practices on present market conditions.

Stories of appraisers being coerced into inflating values or providing favorable appraisals are not news. However, as Justice Department probes expand beyond subprime lenders to some of the country’s largest lenders, we may hear more about how underwriting and appraisal practices played a part in creating the bubble that burst. As the probes expand, we may begin to hear more about appraisals that were artificially inflated by coercion, collusion, and/or fraud. Some appraisers purportedly have already come forward to report how they were forced to provide appraisals that were consistent with an inflating market. Supposed consequences for not complying with lenders’ demands would result in loss of business for the appraiser.

Along with other factors, artificial, fraudulent, or misleading appraisals have played a role in historical mortgage crises, such as the Savings and Loan Crisis (of the 1980’s) and the flipping schemes (of the 1990’s). Prior to the critical mass of the S&L crisis, obtaining a real estate loan seemed relatively easy (at the time); the result was a $120 Billion (plus) government bailout. An article published in the CPA Journal (December 1989) reported that a 1988 FLHBB (now the FHLB) report to Congress referred to fraud and insider abuse as the leading factors leading to the S&L collapse; other factors identified by the report leading to the crisis was the collusion by thrift management, borrowers and appraisers to conceal losses and liabilities.

As a result of the S&L crises, the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) was created. FIRREA was to ensure that type of fraud and abuse that occurred in the S&L crisis would not happen again. Consequently, title XI of FIRREA led to licensure of appraisers, the creation of the Appraisal Foundation, as well as the Uniform Standards of Professional Appraisal Practice (USPAP).

In the mid to late 1990’s, mortgage and appraisal fraud hits again in the form of flipping schemes. Although not as widespread as the S&L crisis, the flipping schemes hit the subprime mortgage market very hard. In many cases, flipping schemes used artificially inflated appraisals to net a large gain to the seller (the loan officer, appraiser, and/or title agent were often in collusion).

Interestingly, real estate market declines followed both the S&L crisis and the flipping scandals. The large buyer’s market and recession occurred at the tail end of the S&L crisis in the early 1990’s.

Currently, investigations are reportedly focusing on practices to hide decreased portfolio values sold on secondary markets. In addition to the allegations surrounding appraisals, lenders’ have also used Broker Price Opinions (BPO) to ascertain values on portfolios as well as for lending purposes. BPO’s are usually completed by real estate agents or brokers who typically have no appraisal training; additionally the BPO typically does not follow USPAP.

If it is not yet clear, history is repetitive and cyclical. Our response this time, however, can undermine the next real estate crisis.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of March 10, 2008. Copyright © 2008 Dan Krell.

(Post Script – Today, Congress is to release report outlining causes for present mortgage crisis.)

January 15, 2008October 5, 2019

Mortgage workout or workover?

by Dan Krell

Earlier in December, a new mortgage relief program was announced as the Bush-Paulson Mortgage Plan. The plan, although not yet approved nor agreed to by all parties involved, is intended to help those home owners who have sub-prime mortgages with interest rates that will adjust significantly higher. Proposed details, as revealed in a December 5th, 2007 Financial Times article, include a five year interest rate freeze for sub-prime adjustable rate mortgages that were dated between 2005-2007 and whose rates are to increase between 2008-2010. Lender participation will be voluntary. Additional borrower qualifications include having less than three percent equity in their home, not being more than sixty days behind on their mortgage payment, as well as demonstrating an inability to afford any mortgage increase (www.ft.com/cms/s/0/c4b23f82-a37c-11dc-b229-0000779fd2ac.html).

Many Wall Street investors have criticized any workout plan as excessive government intervention in a market that is already correcting itself. Some in the industry have described such intervention as delaying the inevitable for those in foreclosure, explaining that many home owners who can not afford a rate increase now would possibly not be able to afford a delayed (five year) rate increase. Other critics include self described “responsible“ home owners who feel they work hard to maintain their credit and pay their mortgage timely; they claim that any government intervention to help those in foreclosure sends the wrong message.

Others, including Presidential candidates, have criticized the President for not doing enough to help those home owners already in foreclosure. For example, Senator Hillary Clinton (as posted on her website HillaryClinton.com) criticized President Bush’s plan and proposed an alternative plan that includes immediate foreclosure moratoriums and across the board rate freezes. Although well intentioned, many proposed alternatives also have market and socio-economic consequences.

Unfortunately, many home owners who are facing foreclosure don’t know that a workout plan (know as a “loan modification”) may already be possible with their present lender. Of course the home owner must request it. Additionally, the proposed workout must make sense and the home owner must demonstrate a need as well as the ability to afford the modified payments. In many cases, lenders would rather work with financially troubled borrowers than foreclose; the foreclosure process is costly – for both the lender as well as the borrower.

The key to initiating a workout plan is for the home owner to communicate with their lender. Among the many reasons why home owners facing foreclosure do not communicate with their lender include lack of information of their options, misinformed of their options, and psychological stress (including apathy and feelings of hopelessness). The latter being the most prevalent because of the psycho-social complexity, which include the events that brought the home owner to their present financial problem as well as the time and effort involved in attempting to resolve any mortgage issues.

In an effort to assist home owners who are presently facing or at risk for foreclosure, Treasury Secretary Paulson and Housing Secretary Jackson created the Hope Now Alliance as a step in President Bush’s initiative to help American families keep their home. The Hope Now Alliance was created to facilitate communication between borrowers, lenders and housing counselors. For more information on loan work outs you can visit HUD.gov or HOPENOW.com.

June 24, 2007October 5, 2019

Looking for Blame in the Mortgage Crisis

The daily media reports of abuse, fraud, and other problems in the sub-prime mortgage industry attempt to make sense of a real estate industry in turmoil. It appears that the problems in the real estate industry are similar to those in Big Business. Like many of the recent business scandals, schemes and wrongdoing are carried out because the financial rewards seem greater then the risk. Those who are caught usually point their finger at their boss claiming that they were told to do so in fear of losing their job.

The present mortgage crisis is similar to some extent. Sensationalized media accounts of what went wrong and who is to blame seem to be in the daily headlines. The blame of the present crisis was first placed on the lenders and investors, who with their lenient underwriting guidelines, allowed many to borrow beyond their means. The new focus in the crisis is on inflated appraisals and how appraisers are “forced” to provide these appraisals in order to maintain business. Additionally, there has been some discussion about the loan officers who originated the loans, without regard to the consequences to the borrower.

The story of inflated appraisals on the mortgage industry is about how some appraisers are “forced” to provide appraisals with an inflated price or they will lose business. For a real estate appraiser, the pressures of complying with lenders’ requests to inflate appraisals are inherent to the business, but not necessary. To demonstrate the extent of the problem, the Baltimore Sun reported (April 10, 2007) that appraiser groups are asking regulators to crack down on the lenders who pressure appraisers for inflated appraisals.

On the other hand, not enough has been said about the loan officers who originate these loans. Many loan officers who originate sub-prime mortgages are mortgage brokers and are paid on commission; they only get paid if the loan closes. Most mortgage originators act ethically in the borrower’s best interest. However, some will say or do just about anything to get the loan to close, including making unrealistic promises to the borrower as well as pressuring others to ensure loan closure. Unless there is blatant fraud, loan originators are not usually held responsible for a “bad loan.”

There are reports of possible federal investigations of mortgage misrepresentation and non-disclosure of loan terms. A recent MSNBC article (April 10, 2007) reports that many sub-prime borrowers who were deceived by mortgage brokers and loan officers are filing law suits for violations of the Federal Truth in Lending Act. These borrowers include those who were misled to believe the terms of their mortgage, as well as others who were misguided to obtain a high interest rate mortgage when they qualified for a more favorable loan. Under the law, the full terms and conditions of loans must be disclosed to consumers. Additionally, some have interpreted that any misrepresentation, written or verbal, is a violation of this law.

Although most real estate professionals are reputable and act within the guidelines of the law and the ethics code of their profession, unfortunately some do not. Like Big Business, it appears that some of the problems in the real estate industry exist not just because of a lack of ethical behavior, but a lack of character as well.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of April 23, 2007. Copyright © 2007 Dan Krell.

June 6, 2007October 5, 2019

Foreclosure Assistance

by Dan Krell

It is common to experience financial problems at any given time in one’s life. There are many reasons people experience financial problems. If it isn’t being surprised by loss of employment, illness, or divorce it may be due to lack of financial planning. Whatever the reason, experiencing a financial crisis, including foreclosure, is an unsettling process for anyone.

A site that is becoming more frequent in any neighborhood is the home going through the foreclosure process. The owner may still be in the home or they may have vacated months earlier leaving an empty shell to deteriorate in the ensuing months.

At first, you may not notice anything different in the home, but as time progresses it hard to not notice. You may notice your neighbor withdrawing and evading anyone coming to the door. The house numbers may disappear in an attempt to confuse those trying to identify the home. The lawn may be neglected and become overgrown with grass and weeds. The home itself may noticeably fall in disrepair as well.

Many people facing foreclosure tend to be in denial and believe that nothing is wrong and go about their lives thinking that they will not lose their home. Denial is a common defense mechanism that serves to lessen the severity of emotional pain that one may endure. However, it is not useful when facing foreclosure. Denial is a slippery slope such that people may not confront the challenges they face, and in this case-lose their home.

If you are falling behind in your mortgage, you may want to consult a bankruptcy attorney. As foreclosure is a manifestation of a larger financial problem, reorganizing your debts may help save your home.

If you find that you can no longer afford your mortgage, selling your home may be an option; however, as home prices have dropped you will have to determine if this is practical. If you can prove that your home has lost value, a common tactic is to ask the lender for a short sale, which is essentially asking them to take less than what is owed.

If you do not pay your mortgage, the mortgage company will be trying to contact you; it is important to communicate with the mortgage company so as to determine if they can assist through such measures as forbearance. You may be able to renegotiate the terms of your loan, or even have your late payments forgiven in an attempt to remedy the situation.

If you continue to not pay, you will receive a notice of default through certified mail. After receiving the notice, you may have an opportunity to reinstate your loan by paying the past due amount including late fees.

At this point, if you do not take action, the mortgage company will initiate the foreclosure process. Once the foreclosure process starts, your options are limited; the time from the initiation of the process to the foreclosure sale can be quite fast.

The foreclosure process is not pleasant, and can impact those involved with long lasting financial and psychological scars. If you know that you may be facing a foreclosure, it is important to be proactive. If you need assistance, the Maryland Attorney General offers information to those in foreclosure on the web at: www.oag.state.md.us/Consumer/foreclose.htm.

This column is not intended to provide nor should it be relied upon for legal and financial advice.This article was originally published in the Montgomery County Sentinel the week of April 2, 2007. Copyright (c) 2007 Dan Krell.

May 1, 2007November 23, 2021

How to buy a foreclosed home

by Dan Krell © 2007
Google+

With changes in the market, we have seen an increase in the amount of bank owned homes on the market. What’s happening? Foreclosure rates for the entire country are up over forty percent since last year (MSN real estate). However, in the Bethesda-Rockville area the foreclosure rate only increased above four percent and decreased in the Baltimore area. If you live in Northern Virginia, the foreclosure rate increased over fifty percent since last year.

Putting the numbers in perspective, although the numbers seem high for our area, the home owner behavior relatively the same. The difference is that those who are in trouble do not have the parachute of the expanding real estate market.

In the last few years, when a home owner fell behind in their mortgage payments it was almost assured they would be able to sell the home quickly and realize a net gain in their sale. If they were not able to sell and the home went to auction, hungry home buyers and eager speculators were ready to purchase sight unseen.

Boy has the time changed! First of all, many home owners who are in trouble with their mortgage are not in the position to sell as the home value is less than what they may have purchased the home for. Additionally, if they have some exotic mortgage, there is a good chance that the interest has eaten into any equity they may have had, in addition to late fees as well as attorney fees (the mortgage company will charge the defaulting home owner for the cost of foreclosing).

If you have fallen behind in your mortgage recently, you know that banks are becoming more difficult to deal with. I have heard stories from home owners who have been told by a bank representative that because there is equity in the home, the bank is looking to foreclose and resell at a profit. Have the banks become greedy?

No. The banks are the same way they have always been, looking for ways to make money. What has changed is real estate market and technology.

A year ago, a bank owned home on the MLS was almost non existent in the Montgomery County area. Today, there are over 25 active bank owned homes on the market just in Montgomery County. Among the listings are a couple of good buys.

Bank owned homes used to be priced for quick sales. Today, bank owned homes are priced at full retail prices, even though the condition is less than perfect. Additionally, the banks may not entertain a lower offer until the home has been on the market for a while.

Technology has been a driving force in the real estate industry for over a decade. As technology changes and gets better, the valuation models the banks use will also get better. Presently, I believe the banks and REO disposition companies have fallen behind in the curve such that the valuations they are using are skewed to because of higher home prices from last year.

As the market stabilizes, we will see an increase of bank owned homes for sale. Eventually, bank owned home prices will also find their mark as market conditions and home condition are taken into account. If you are in the market for a bank owned home, talk to your Realtor and keep an eye on the bank owned inventory.