Federal Reserve Chairman Ben S. Bernanke told a gathering of members of the Independent Community of Bankers of America (ICBA) today that they need to do more to help distressed homeowners, especially those facing foreclosure. Bernanke told the audience of ICBA-affiliated bankers that it’s time for a “vigorous response” to help stem the tide of rising home foreclosures, essentially saying that banks and lenders could do a heck of lot more to help ease the U.S. housing crisis and keep more American’s in their homes.

Bernanke’s remarks, which can be read in their entirety here, are very much in line with what Flipping Frenzy Guest Blogger Larry Rubinoff asked here on FlippingFrenzy.com this past weekend… namely, what’s the point in forcing people out of their homes when they can afford to pay their pre-ARM payments.

At the end of the day, if the bankers chose to respond vigorously, more of us will win. If they do not, Bernanke’s 3,175-word speech will have been for not.

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Editor’s Note: The following Guest Commentary was written exclusively for FlippingFrenzy.com by Larry Rubinoff, branch manager of a Clearwater Beach, Florida office of Mortgage Lending Direct, a dba of MLD Mortgage, Inc.

Larry’s commentary is his and his alone and does not necessarily reflect the views or opinions of the management of FlippingFrenzy.com. You can read Larry’s thoughts here on FlippingFrenzy.com most Saturdays or Sundays.
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As mentioned in the recent post, “Rally Is on to Stem Foreclosure Epidemic,” the government, mortgage lenders, and consumer advocacy groups are scrambling to come up with all sorts of solutions to stem the rising tide of foreclosures in the United States and resuscitate a flagging economy. Unfortunately, all of these fixes tend to be stopgap measures designed to make their proponents look good rather than offering real long-term solutions to suffering homeowners.

I say that we need to take this foreclosure crisis personally. By that, I mean that we need to toss out all the traditional policies and automated foreclosure systems and put people in charge of solving this very human crisis. We need to replace the collection robots with living, breathing, caring people. We need to give management back the decision-making powers based on their knowledge and knowledge of the situation. Throw away the policies and procedure manual that might read like this:

“…upon a 90 day default from a borrower, no remedial action shall be taken by our firm and the file is to be immediately turned over to our attorneys for foreclosure action regardless of any extenuating circumstances that may exist with a borrower which would otherwise have us rethink and possibly restructure our loan with them.”

No, this isn’t a real policy quoted from anyone’s manual, but it’s a pretty good depiction of how the system currently operates. In fact, I was told by one lender when attempting to work out a loan for a client, “They will have to bring the account current before we can even begin to discuss anything.” That’s just mind boggling — a Catch 22 if there ever was one. “Well,” I replied, “if they could do that they wouldn’t be delinquent nor need my services and we wouldn’t be having this conversation.”

Where is the logic? A lender forecloses, incurs thousands of dollars in legal fees, earns no interest, pays thousands of dollars to prepare the property for sale (in addition to holding costs, including property taxes and insurance), sells the home for well below what was owed them, and pays the listing agent a commission. They take the write down, diminishing the value of their own company and reducing their operating income. As a result, they have to lay off a good portion of their personnel to compensate. (GMAC had to lay off 15% of its automotive finance unit due to collection problems. Citigroup recently laid off 20,000 due to their mortgage shortfalls. Employees of Merrill Lynch faced similar layoffs, as did employees at other lending institutions.)

Would it not be better to freeze a rate for a homeowner who has been paying at that rate rather than foreclosing and kicking the person (and his or her family) out on the streets? In the extreme, would it not be better to cut the rate in half rather than foreclose? Any contractual obligation can be renegotiated by both parties. If the lenders/mortgage note holders wanted to offer solutions to borrowers, they could.

Look at the benefit of the extreme — cutting the rate in half.

Say someone is paying 8%. Due to extenuating circumstances, such as an expensive family illness or company layoffs (see “Homeowners Aren’t the Only Ones Hurt by the Mortgage Meltdown“), the person is unable to make the monthly mortgage payments.
If you were the lender, would you rather have:

1. A non-performing loan that will cost you tens maybe even hundreds of thousands of dollars if you foreclose.
2. A property physically deteriorating, as vacant foreclosed homes typically do.
3. A further reduction of the property value and neighborhood value.
4. A loan returning zero percent income prior to, during, and after the long foreclosure process that can last for 12 months or more.
5. A loan that loses value for the investor in the mortgage-backed security (MBS).
6. Moreover, most of all, creating a homeless situation for an American family.
7. A LOSE/LOSE situation for EVERYONE.

1. A well maintained property, maintaining value.
2. A property maintaining the value of the neighborhood.
3. A loan that is no longer a complete write off but is still producing income.
4. A return to the investor in the MBS, albeit smaller. Isn’t something better then nothing?
5. No cash expense and loss to the lender.
6. A steady stock value of the lender.
7. A family that remains in its home.
8. A WIN/WIN situation for EVERYONE.

This solution is not for everyone. The speculative “investor” earning $25,000 a year who purchased 10 properties while living in an apartment (true story) should not be saved. Investors in general, who purchased for little or no down payment with the intent to “flip” and got caught up in this crisis, BY NO MEANS deserve a break. However, to the owner occupant, with qualifications, I say why not?

We don’t need legislation or political maneuvering. The government can’t and shouldn’t bail out mortgage lenders and homeowners. The people who created this crisis are the best people to resolve it, and “people” is the key word; this crisis requires people working together to develop rational, practical solutions. Our country has always prided itself in coming together when times are tough. Now, times are tough. Corporate America, you are part of the citizenry and should “come together.” Your profit motives brought this crisis on, and the fallout is destroying you as well. Do you not see the potential for self-preservation?

There is more to this story and additional solutions. More is coming. Stay tuned.

With complaints about real estate and mortgage fraud at an all-time high, the FBI on Tuesday announced it has launched a criminal investigation into the dealings of 14 major corporations servicing the real estate industry. FBI officials told reporters yesterday afternoon that the probes involved potential violations, including accounting fraud and insider trading, but they would not identify the specific companies under investigation. Neil Power, who heads the FBI’s economic crimes unit, did say the probe reaches across the real estate industry to include developers, subprime lenders, companies that reviewed loans and the investment banks that held them.

“On insider trading, we’re looking in some cases at whether executives were aware that the value of their holdings would be going down and the executives traded on that information,” said Power, according to CNN. “On accounting fraud, we’re looking at housing developers who may have reported cash reserve accounts to reflect falsely inflated values.”

Power and other senior officials told CNN that the number of suspicious activity reports related to real estate and mortgage fraud they review for potential investigation skyrocketed from 3,000 in 2003 to about 35,000 in 2006, to 48,000 in 2007. In the first quarter of this fiscal year, Power told CNN, officials have already received 15,000 such reports, putting us on pace to receive 60,000 complaints this year.

“We anticipate in the next year that another wave of adjustable rate mortgages will reset and with that we anticipate that the mortgage corporate fraud potential cases to increase,” said Sharon Ormsby, head of the FBI’s financial crimes section, according to Reuters.

The FBI’s investigation is being run in parallel with the SEC (Securities and Exchange Commission), which has opened more than 30 civil investigations into the subprime market collapse. Some of the probes overlap, an official told Reuters. Targets of the SEC probe include Morgan Stanley, Merrill Lynch, Bear Stearns, as well as bond insurer MBIA.

One interesting figure being reported: According to CNN, the FBI says it investigates only cases involving losses of $500,000 or more, and that last year 56 percent of all cases had losses of more than $1 million.

“Subprime loans are decreasing but … suspicions of mortgage fraud are increasing,” the FBI’s Sharon Ormsby is quoted as saying.

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Editor’s Note: The following Guest Commentary was written exclusively for FlippingFrenzy.com by W. Greg Sugg.
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Financing and refinancing the purchase of a home has become incredibly easy. Mortgage lenders eager for your business are just a phone call or Web visit away. Fewer than 40 years ago, however, mortgage loans were not nearly as accessible, especially if you were seeking a loan to cash out the equity in your home or to purchase a vacation home or income or rental property. Money and credit were tight.

Until Fannie Mae (FNMA) and Freddie Mac (FHLMC) came along, local sources were pretty much solely responsible for providing money to buy homes. Once the local bank met its lending limit based on its deposit pool, it was closed for loans until either a loan was paid off or more deposits came in.

Over the course of a few short decades, all that has changed. The source for capital to finance mortgages has moved from Main Street to Wall Street. This revolutionary change in the mortgage lending industry has had its share of benefits and drawbacks. While it has made more money available for more people to purchase homes, it has also contributed significantly to the current mortgage meltdown and credit crunch.

The whole idea behind the creation of Fannie Mae and Freddie Mac was brilliant. Created and chartered as “quasi-government agencies” these companies could raise capital at more affordable rates than the private sector. Investors could purchase mortgage loans from local and national banks and other lenders, enabling lenders to get their money back to lend again and again.

The concept was very simple, but to make it run smoothly, guidelines needed to be established to define which loans the agencies would purchase. These guidelines would need to set standards for things like down payment, borrower income, credit, and appraised value. Creating standards for mortgage loans made the pooling of these common types of loans into batches or securities easier and enabled investors to have a clearer understanding of what they were buying.

To simplify the process even more, Fannie and Freddie became the purchaser, packager, and re-seller of mortgage loans from all over the country. This worked so well over the last several decades that pretty much anyone who knew the standards could sell loans to these agencies. The agencies would then, with the assistance of Wall Street bankers, bundle the loans and sell them as mortgage-backed securities (MBS) to investors.

Contrary to what many people assume, the investors who purchase mortgage-backed securities are not all Wall Street fat cats with tons of money. An investor could be you, your neighbor, or the widow down the street. Anyone with money invested in a savings plan, IRA, mutual fund, insurance annuity, or any other managed fund may be an investor in all sorts of things. In fact, if you read the “prospectus” or simply the list of what the fund manager has your money invested in, you likely will see a mention of mortgage-backed securities among other things like stocks and bonds.

These pooled loans traditionally have provided a safe stable rate of return with little risk and therefore have functioned as good investment choices to balance against other more volatile investments, such as stocks.

By enabling investors to indirectly finance the purchase of homes, the American dream of homeownership became much more accessible to many more people and enabled the mortgage banking and real estate industry to grow to the enormous size we see today. In fact, several trillions of dollars are lent annually by all types of lenders in an industry that employs hundreds of thousands of people.

Until recently, the system was very reliable, primarily because the standards that Fannie and Freddie set for mortgage loans were strict. Lenders simply wouldn’t approve a mortgage loan for borrowers unless they could put 20% down, had a good job with a couple years tenure, had an excellent credit history, and were purchasing in a solid neighborhood with appreciating values. Many borrowers could qualify under the more liberal FHA or VA guidelines, but those loans were insured by the federal government. If neither of those government agencies approved your loan and you couldn’t convince the seller to finance it for you, you were out of luck.

During the last major credit squeeze of the early 80’s when mortgage interest rates were in the upper teens, many people who wanted to purchase homes simply could not qualify for mortgage loans under the strict guidelines. As a result, Fannie, Freddie, Wall Street, and the lending community decided to do something to make credit more affordable and attainable. First came the creation of adjustable rate and graduated payment mortgages with starting rates less than the fixed rate programs. After those types of loans became common, the industry began to relax certain guidelines. For example, borrowers were allowed to make lower down payments as long as they purchased private mortgage insurance (PMI), or they could make a larger down payment, say 30%, to avoid having to provide employment verification. All of these changes were designed to make the process faster, more affordable, and more accessible to more people. In many cases it did, but it also opened the door to fraud.

We relaxed standards and created a host of products to make the American dream of homeownership more accessible to more people, to create a higher demand for our products, and to feed Wall Street’s insatiable appetite for mortgage-backed securities. In the process, we took our eye off the ball. In fact, this industry should have gone through a natural slow down when rates edged up in 2005, but instead, with much help from Wall Street and its big banking houses, we created products such as payment option arms (POI’s) that allowed anyone, and I mean anyone, the ability to purchase not only one home, but pretty much as many as they wanted on the “if come” that values would never fall because demand was so high. However, the demand was artificially created by allowing the pool of buyers and potential buyers to grow on the promise of cheap money and cash-out capital from endless appreciation.

The loosening of underwriting guidelines and cheap money compounded the problem by attracting people to the industry who were not fully qualified and committed to the health of the industry.

With rising property values and an influx of cash from Wall Street, money was abundant, greed soon followed, and close on its heels was fraud. The relaxation of the standards that made an industry grow began to undermine its very foundation. Our current “mortgage meltdown,” “credit crunch,” and “sub prime crisis” are all products of greed and fraud. Please don’t confuse this with “predatory lending” which is entirely another issue. Mortgage fraud occurs when a borrower knowingly engages in a transaction, usually with the assistance of one or more industry insiders (such as a loan officer, real estate agent, or appraiser), to fool a lender into approving a loan that the lender would not approve if it knew the truth. Usually, mortgage fraud is committed to gain profit or housing; either way, it is illegal.

The winners in fraudulent transactions are typically a select few. The losers are many. Lenders and investors lose money. Investors lose confidence in the market. Housing markets become unstable. Credit tightens making the American dream of homeownership less accessible. Home values crash, so homeowners cannot even refinance their way out of trouble. Foreclosures, as we have already begun to see, skyrocket, and neighborhoods begin to crumble. Local, state, national economies suffer. Even the global economy takes a hit.

The big story and likely the most costly tragedy impacts all the loans that currently are serviced and being paid by those of us that own a home and have a mortgage. One of the biggest financial crises yet to totally unfold as I write this, are the astronomical losses that banks and mortgage servicers are taking to adjust the values of the mortgages and mortgage-backed securities they hold and collect payments for. As the quality of the loans in default have become known and the numbers of them have increased, Wall Street and the rating agencies have downgraded their views on purchasing mortgage-backed securities and credit has dried up for all but the most ridiculously pristine borrowers.

Even though the vast majority of homeowners with mortgages are still paying on their loans, the value the mortgage banker carries it for on their books has to be reduced, resulting in large losses against current earnings. This further hurts the housing industry as those write downs take the capital that would normally be used to run the business and provide credit.

Experts have estimated that we will not be out of this housing mess until 2009 in most areas of the country. It is amazing to me what going too far to bend the rules and create demand has done. Interestingly enough, in the last five or so years Europe and other places throughout the world used the U.S. mortgage industry as a model for efficient flow of capital. They were fast followers and unfortunately, they too are feeling the sting of their own credit crunch. There is no doubt this cycle will end sometime, but when and at what permanent cost are still unanswered questions.

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Editor’s Note: The proceeding Guest Commentary was written exclusively for FlippingFrenzy.com by W. Greg Sugg. To leave a comment for Mr. Sugg, please click on the “Comments” link below.
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I received a press release the other day announcing that The U.S. Conference of Mayors would be holding a special meeting in Detroit tomorrow to address the “growing foreclosure crisis and its impact on American families, property values, neighborhood blight and crime.”

Outstanding, glad to here it… may I attend?

Nope… it’s a closed door meeting for a “select group of mayors” and leading non-profit counseling agencies, mortgage providers, and financial institutions to discuss crisis intervention strategies, loan modification and rescue programs and the maintenance and management of foreclosed properties to mitigate their negative effects on neighborhoods.

How interesting… why are Realtors not invited? (Sorry, I was told when I called; that is just the way it is.)

The press release goes on to say:

During the meeting, mayors will also release a report highlighting the economic ripple impact of the foreclosure crisis on U.S. cities/metros — specifically cities in Arizona, California, Michigan, Nevada and Ohio where the effects of the crisis are most prominent.

So in addition to discussing strategy, The U.S. Conference of Mayors is going to release a report telling us what RealtyTrac tells us in mind-blowing detail each and every quarter… namely, that the foreclosure crisis is worsening and is getting really, really bad in states like Arizona, California, Michigan, Nevada and Ohio? Well, thank God, because the cavalry is about to arrive… The U.S. Conference of Mayors is about to tell us how the bad the problem is, and better yet, how to fix it, boys and girls!

Here is a suggestion for the U.S. Conference of Mayors:

Update your precious Mayors 10-Point Plan: Strong Cities, Strong Families for a Strong America to include something–anything–related to protecting homeowners facing foreclosure.> The fact that your widely publicized and circulated plan contains not one single word related to the mortgage meltdown, foreclosure crisis, and Real Estate and Mortgage Fraud just goes to show how significant out of touch you really are!

How on Earth could these so called “leaders” have developed and released a 10-point legislative agenda on issues impacting cities and families back at the beginning of 2007 and not made any plans whatsoever to address foreclosure, the impact of mortgage payment reset, or Real Estate and Mortgage Fraud? For years now the FBI has been telling us that the fastest-growing white-collar crime in the United States is Real Estate and Mortgage Fraud, yet the much-heralded U.S. Conference of Mayors completely ignored the trend and chose instead to promote the following in its 10-point plan:

1. Energy and Environment Block Grant

2. Federal-Local Partnership on Crime Prevention (violent crime, not white-collar, in case you were wondering)
3. Community Development Block Grants
4. Affordable Housing Fund
5. Public Housing
6. Infrastructure Tax Incentive and Bonds
7. Competitive Workforce
8. Children and Youth (children’s health insurance, and summer and after-school youth programs)
9. Homeland Security
10. Unfunded Mandates/Preemptions

“The fastest-growing white collar crime in the United States.”

I’m not making that up–that statement comes directly from the FBI and has been repeated in 2006 and 2007, and yet the U.S. Conferences of Mayors doesn’t think to include boo about it in its 2007 10-point legislative agenda on issues impacting cities and families. Unreal. Simply jaw-dropping.

Here is another suggestion for The U.S. Conference of Mayors:

Rather than grandstand and issue hollow statements about how bad the problem is and that you’re now on the scene taking care of business, do something tangible:

• Start by doing what California recently did… negotiate with leading loan servicing companies–like Countrywide, GMAC, Litton, and HomEq–to streamline “fast-track” procedures that result in helping keep more sub-prime borrowers in their homes.
• Spur loan servicers to publicly commit to modifying loans in a streamlined and scalable manner.
• Bring Realtors to the table. Do not ignore us–we are a part of this mess too, and if you are sincere about moving forward with an educated base of homeowners, you must involve us.
• Commit to funding public awareness campaigns aimed at educating the masses on their rights, how to avoid foreclosure, and the warning signs associated with Real Estate and Mortgage Fraud.

Yes, this is a rant but an extremely timely and relevant one. When an organization as powerful and representative as The U.S. Conference of Mayors holds a meeting to discuss the growing foreclosure crisis and its impact on our families, property values, and crime, and fails to include Realtors as a part of the discussion, well, they should be called out and told what to do about it!

With California impacted more than any other state by the current mortgage meltdown and foreclosure crisis (seven of the top 16 metropolitan areas with the highest rates of foreclosures in the nation are in California), Governor Arnold Schwarzenegger announced last week that his office has reached an agreement with Countrywide, GMAC, Litton, and HomEq to streamline “fast-track” procedures to help keep more subprime borrowers in their homes. Together, Countrywide, GMAC, Litton, and HomEq service more than 25 percent of issued subprime mortgage loans in California.

With this type of cooperation from loan servicers, thousands of homeowners may be saved from being added to California’s growing list of foreclosures. Governor Schwarzenegger’s efforts appear to have resulted in a common-sense approach that does not involve any government subsidy or bailout.

“Borrowers need to do their part too,” said Governor Schwarzenegger in a prepared statement. “If these lenders are willing to meet more than halfway, it’s important that consumers don’t run when they reach out. It was a two-way street that got us into this mess and it will be a two-way street that gets us out.”

The agreement the Governor’s office negotiated with lenders builds off a proposal put forward by the FDIC (Federal Deposit Insurance Corporation) that encourages lending agencies to keep subprime mortgage borrowers at their initial interest rate if they are living in their home, making timely payments, but can’t afford the loan re-set or jump to a higher rate.

A half million Californians have subprime loans that will jump to higher rates in the next two years. The FDIC’s proposal has been endorsed by the Wall Street Journal and New York Times as well as public and community leaders. California is the first state to spur servicers to publicly commit to modifying loans in a streamlined and scalable manner.

California also announced additional steps the state is taking to help homeowners avoid foreclosure:

• Through a statewide outreach campaign, which will include public service announcements, California will help reinforce the importance for consumers to reach out to their lender if they are at risk of foreclosure.
• Governor Schwarzenegger will also lobby Congress to raise federal loan limits so that more California families can take advantage of secure products, rather than relying on subprime loans.
• The State’s “HOPE Hotline” (1-888-995-HOPE) now provides free mortgage counseling 24 hours a day, seven days a week, and can even be reached online at www.995hope.org.

“Losing your home in a foreclosure is an emotional crash that can take years to recover from, but we don’t have to sit idly by and watch the American dream turn into the American nightmare. We must take steps at both the state and federal level to make sure future mortgages are on more sound economic footing. In the meantime, by working together, we can protect the American dream and our economy without hurting the American taxpayer,” said Governor Schwarzenegger.

Earlier this year, Governor Schwarzenegger signed legislation to increase protections for Californians who own or plan to purchase homes and to expand affordable housing opportunities, and directed his staff to form the Interdepartmental Task Force on Non-Traditional Mortgages. California was one of the first states in the nation to form a task force to examine the alarming developments in the non-traditional mortgage market.

According to the latest data, in the Stockton, Riverside/San Bernardino, Sacramento, Bakersfield, Oakland, Fresno and San Diego metropolitan areas, there is an average rate of approximately one foreclosure filing for every 60 households.

Recently, I was discussing the mortgage meltdown with a reporter who made the mistake of asking me who or what I believed was primarily responsible for the mortgage meltdown and housing crash of 2007. My reply consisted of a single word: “fraud.” My conservative estimates target fraud as being responsible for at least 80% of the problem, and most of this fraud was perpetrated by industry insiders (both in the Real Estate and mortgage loan industries) on the consumers.