The unfolding foreclosure fraud crisis isn’t easy to understand, but here it is boiled down. Banks need proper documentation to repossess a home from a family. They need documents about everything from the family’s financial situation to its history of missed payments to its assets. And they need to verify that the information in those documents is correct. But they didn’t. They hired individuals to sign thousands of mortgage papers — legal affidavits, swearing to a judge that they had personal knowledge of the information within — without checking a thing.

Only 23 states require a judge to sign off on a foreclosure, but some banks are now stopping foreclosures in all 50 states. Moreover, they are halting the sale of foreclosed properties to new homeowners.

So who stands to gain? And who stands to lose? Let’s go through the possible impacts on major players and markets, one by one.

The winners:

* Homeowners undergoing foreclosure. Borrowers undergoing foreclosure might benefit from the various state moratoriums: The process is stalled for now, meaning some might have a few more months in their homes, and they know they will not be evicted without due process. States and federal agencies might also work with banks to provide principal write-downs and right-to-rent to ameliorate the foreclosure crisis in the meantime.

The losers:

* Recent purchasers of foreclosed homes. A nightmare scenario: Banks probably foreclosed on and evicted families without proper mortgage documentation. It is unclear whether or how courts might overturn those foreclosures. (One expert I spoke with said it would be more likely that the bank would have to offer some sort of restitution to the evicted family, but nobody really knows.) What if you recently bought one of those houses? There’s a whole lot of uncertainty for you, right now.
* The housing market. The fraud crisis looks certain to prolong the foreclosure crisis — dragging out how long families undergoing foreclosure will remain in limbo, and preventing banks from clearing properties off of their books. It seems possible that the foreclosure fraud crisis will weaken an already-weak housing market.
* The banks and investors. This could be a complete catastrophe. For a detailed but clear explanation of the various liabilities, see Mike Konczal’s description of who owns what and who stands to lose — and an explanation of why this might create a new too-big-to-fail scenario. Rep. Brad Miller (D-N.C.) also provided a clear explanation to The Washington Post yesterday:

There is massive potential liability for the securitizers, which are mostly the biggest banks. The contract was that if mortgages didn’t meet certain requirements, then the securitizer would buy them back. The mortgage servicers and trustees have exclusive control over the paperwork. Both the investors, the people who own the mortgage-backed securities, and the homeowners, really depend on them. There’s been lots of litigation where investors try to get securitizers to buy back the bad mortgages because they were flawed, but that litigation has been stymied by procedural objections. If the private investors can break through that defense and require the mortgages that don’t meet the requirements to be bought back, the liabilities for the biggest banks will be enormous.

A little of each:

* Communities with concentrations of homes in foreclosure. Good news and bad news. On the one hand, families should be able to stay in their homes until the banks and Washington work out the foreclosure fraud crisis. That will benefit communities with lots of families undergoing foreclosure. On the other hand, neighborhoods with high concentrations of bank-owned properties for sale will see a lot of homes remain vacant, pulled off of the market.
* The courts. State attorney generals — Beau Biden in Delaware, Richard Cordray in Ohio, Tom Miller in Iowa and many others — are going hard after the banks. This looks to be just the first wave of what might be thousands of cases for judges to handle. Many housing advocates argue that judges should have had a more prominent role in foreclosure decisions before, anyway — and this might give new life to cramdown legislation in Washington. But the scandal certainly has the potential to swamp courts and cost billions in legal fees. In that sense, lawyers might be the clearest winner from the whole thing thus far.

By Annie Lowrey

Here’s last night’s 60 Minutes report by Scott Pelley on the mortgage meltdown that’s far from over, with a second wave of expected defaults on the way that will likely deepen the bottom of our current recession (notice though that the word “fraud” never appears once in the report):

A Second Mortgage Disaster On The Horizon?
Dec. 14, 2008

(CBS) When it comes to bailouts of American business, Barney Frank and the Congress may be just getting started. Nearly two trillion tax dollars have been shoveled into the hole that Wall Street dug and people wonder where the bottom is.

As correspondent Scott Pelley reports, it turns out the abyss is deeper than most people think because there is a second mortgage shock heading for the economy. In the executive suites of Wall Street and Washington, you’re beginning to hear alarm about a new wave of mortgages with strange names that are about to become all too familiar. If you thought sub-primes were insanely reckless wait until you hear what’s coming.

One of the best guides to the danger ahead is Whitney Tilson. He’s an investment fund manager who has made such a name for himself recently that investors, who manage about $10 billion, gathered to hear him last week. Tilson saw, a year ago, that sub-prime mortgages were just the start.

“We had the greatest asset bubble in history and now that bubble is bursting. The single biggest piece of the bubble is the U.S. mortgage market and we’re probably about halfway through the unwinding and bursting of the bubble,” Tilson explains. “It may seem like all the carnage out there, we must be almost finished. But there’s still a lot of pain to come in terms of write-downs and losses that have yet to be recognized.”

In 2007, Tilson teamed up with Amherst Securities, an investment firm that specializes in mortgages. Amherst had done some financial detective work, analyzing the millions of mortgages that were bundled into those mortgage-backed securities that Wall Street was peddling. It found that the sub-primes, loans to the least credit-worthy borrowers, were defaulting. But Amherst also ran the numbers on what were supposed to be higher quality mortgages.

“It was data we’d never seen before and that’s what made us realize, ‘Holy cow, things are gonna be much worse than anyone anticipates,’” Tilson says.

The trouble now is that the insanity didn’t end with sub-primes. There were two other kinds of exotic mortgages that became popular, called “Alt-A” and “option ARM.” The option ARMs, in particular, lured borrowers in with low initial interest rates – so-called teaser rates – sometimes as low as one percent. But after two, three or five years those rates “reset.” They went up. And so did the monthly payment. A mortgage of $800 dollars a month could easily jump to $1,500.

Now the Alt-A and option ARM loans made back in the heyday are starting to reset, causing the mortgage payments to go up and homeowners to default.

“The defaults right now are incredibly high. At unprecedented levels. And there’s no evidence that the default rate is tapering off. Those defaults almost inevitably are leading to foreclosures, and homes being auctioned, and home prices continuing to fall,” Tilson explains.

“What you seem to be saying is that there is a very predictable time bomb effect here?” Pelley asks.

“Exactly. I mean, you can look back at what was written in ’05 and ’07. You can look at the reset dates. You can look at the current default rates, and it’s really very clear and predictable what’s gonna happen here,” Tilson says.

Just look at a projection from the investment bank of Credit Suisse: there are the billions of dollars in sub-prime mortgages that reset last year and this year. But what hasn’t hit yet are Alt-A and option ARM resets, when homeowners will pay higher interest rates in the next three years. We’re at the beginning of a second wave.

“How big is the potential damage from the Alt As compared to what we just saw in the sub-primes?” Pelley asks.

“Well, the sub-prime is, was approaching $1 trillion, the Alt-A is about $1 trillion. And then you have option ARMs on top of that. That’s probably another $500 billion to $600 billion on top of that,” Tilson says.

Asked how many of these option ARMs he imagines are going to fail, Tilson says, “Well north of 50 percent. My gut would be 70 percent of these option ARMs will default.”

“How do you know that?” Pelley asks.

“Well we know it based on current default rates. And this is before the reset. So people are defaulting even on the little three percent teaser interest-only rates they’re being asked to pay today,” Tilson says.

That second wave is coming ashore at a place you might call the “Repo Riviera” – Miami Dade County. Oscar Munoz used to sell real estate; now his company clears out foreclosed homes.

“Business is just going through the roof for us. Fortunately for us, unfortunately for the poor families who are going through this,” Munoz explains.

“I wonder do you ever come to houses where the people are still here?” Pelley asks.

“Absolutely,” Munoz says. “That’s really a sad situation. I’d rather not meet the people.”

Asked why not, Munoz says, “It’s not easy to come in and move a family out. It’s just our job to do it for the bank. It’s just the nature of what’s going in the market right now.”

Munoz says his company alone gets about 20 to 30 assignments per day. “And we’re one of the few companies right now who are hiring. We have to hire people because the demand is so high,” he tells Pelley.

People who’ve been evicted tend to leave stuff behind. The next house is usually much smaller. Banks hire Munoz to move the possessions out where, by law, they remain for 24 hours. Often the neighbors pick through the remains.

Once the homes are empty the hard part starts – trying to find buyers in a free-fall market.

Miami real estate broker Peter Zalewski talks like a man with a lot of real estate to move. “We have 110,000 properties for sale in South Florida today, 55,000 foreclosures, 19,000 bank owned properties. Sixty-eight percent of the available inventory is in some form of distress. They need someone to clean it up.”

Asked what the name of his company is, Zalewski says, “It’s called Condo Vultures Realty.”

What does that mean?

“That in times of distress, and in times of downturn, there’s opportunity. And you know, vultures clean up the mess. A lot of people seem to think they kill, but they don’t actually kill, they clean,” he says.

The killing, in Miami, was done by the developers back when it seemed that the party would never end. They sold hyper-inflated condos at what amounted to real estate orgies-sales parties for invited guests who were armed with option ARM and Alt-A loans. “There were red ropes outside. They had hired cameramen, and they had hired photographers to almost set the scene of a paparazzi,” Zalewski remembers.

“They were hiring fake paparazzi? To make the customers feel like they were special?” Pelley asks.

“You were selling a lifestyle,” Zalewski says.

Asked what roles these exotic mortgages played, Zalewski says, “They were essential. They were necessary. Without the Alt A or option ARM mortgage, this boom never would’ve occurred.”

It never would have occurred because without the Alt As and the option ARMs, many buyers never would have qualified for a loan. The banks and brokers were getting their money up front in fees, so the more they wrote, the more they made.

“They stopped checking whether the income was even real. They turned to low and no-doc loans, so-called ‘liar’s loans’ and jokingly referred to as ‘ninja loans.’ No income, no job, no assets. And they were still willing to lend,” Tilson says.

“But help me out here. How does that make sense for the lender? It would seem to be reckless, in the extreme,” Pelley remarks.

“It was,” Tilson agrees. “But the key assumption underlying, the willingness to do this was that home prices would keep going up forever. And in fact, home prices nationwide had never declined since the Great Depression.”

On the way up, everyone wanted in. No one expected to feel any pain. People like acupuncturist Rula Giosmas became real estate speculators.

Giosmas says she bought about six properties in this last five-year period as investments. She says she put 20 percent down on each. Now they’re all financed with option ARM loans.

Asked what she understood about the loans, Giosmas says, “Well, unfortunately, I didn’t ask too many questions. I mean in the old days, I would shop around. But because of the frenzy, and I was so busy looking to buy other properties, I didn’t really focus on shopping around for mortgage brokers.”

“But if you’re investing in real estate, you’re buying multiple properties, you should be asking a lot of questions,” Pelley remarks. “Why didn’t you ask?”

“I was busy. I was really busy looking at property all the time, all day long,” she replies.

She also acknowledges that she didn’t read the paperwork. Now she’s losing money on every property.

“You know that there are people watching this interview who are saying, ‘You know, she was just foolish. She was greedy and foolish. She was buying small apartment buildings and wasn’t paying enough attention to how they were financed,’” Pelley points out.

“My full-time job is I’m an acupuncturist. So, this was just a side thing,” she says.

Giosmas says she was misled and she hopes to renegotiate her loans. But many other buyers have simply walked away from their properties. One Miami luxury building was a sellout, but when 60 Minutes visited, a quarter of the condos were in foreclosure.

Zalewski says one of those condos was originally purchased in October 2006 for $2.4 million. Now he says the asking price from the lender is $939,000.

And there are tough years to come because, just like the sub-primes, the Alt-A and option ARM mortgages were bundled into Wall Street securities and sold to investors.

Sean Egan, who runs a credit rating firm that analyzes corporate debt, says he expects 2009 to be miserable and 2010 also miserable and even worse.

Fortune Magazine cited Egan as one of six Wall Street pros who predicted the fall of the financial giants.

“This next wave of defaults, which everyone agrees is inevitably going to happen, how central is that to what happens to the rest of the economy?” Pelley asks.

“It’s core. It’s core, because housing is such an important part. We’re not going to get the housing industry back on track until we clear out this garbage that’s in there,” Egan explains.

“That hasn’t cleared out yet. We haven’t seen the bottom,” Pelley remarks.

“It’s getting worse,” Egan says. “There are some statistics from the National Association of Realtors, and they track the supply of housing units on the market. And that’s grown from 2.2 million units about three years ago, up to 4.5 million units earlier this year. So you have the massive supply out there of units that need to be sold.”

“What with the housing supply increasing that much, what does it mean?” Pelley asks.

“It means that this problem, the economic difficulties, are not going to be resolved in a short period of time. It’s not gonna take six months, it’s not gonna 12 months, we’re looking at probably about three, four, five years, before this overhang, this supply overhang is worked through,” Egan says.

In the next four years, eight million American families are expected to lose their homes. But even after the residential meltdown, Whitney Tilson says blows to the financial system will keep coming.

“The same craziness that occurred in the mortgage market occurred in the commercial real estate markets. And that’s taking a little longer to show. But there are gonna be big losses there. Credit cars, auto loans. You name it. So, we’re still, you know, we’re maybe halfway through the mortgage bubble. But we may only be in the third inning of the overall bursting of this asset bubble,” Tilson says.

“Does that mean that the stock market is gonna continue plunging as we’ve seen the last several months?” Pelley asks.

“Actually we’re the most bullish we’ve been in 10 years of managing money. And the reason is because the stock market, for the first time I can say this, in years, has finally figured out how bad things are going to be. And the stock market is forward looking. And with U.S. stocks down nearly 50 percent from their highs, we’re actually finding bargains galore. We think corporate America’s on sale,” Tilson says.

The stock market will still have a lot of figuring to do with more troubling news on the horizon. The mortgage bankers association says one out of 10 Americans is now behind on their mortgage. That’s the most since they started keeping records in 1979.

Produced by David Gelber and Joel Bach

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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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On the heels of news from the Mortgage Bankers Associations that the the delinquency rate for mortgage loans now sits at its highest since 1986, President Bush today announced what the White House is spinning as a major initiative to “limit the rise in foreclosures that would have negative consequences for our economy” (said differently, the President’s plan targets the estimated 1.2 million American homeowners who can afford their mortgages at the current rate, but not at the higher interest rate that their adjustable-rate loans are about to reset to).

First up on the President’s plan: “FHA Secure.” A program that gives the FHA greater flexibility to offset refinancing to homeowners — to offer refinancing to homeowners who have good credit histories but cannot afford their current payments. In just three months, according to the President, the FHA has helped more than 35,000 people refinance. And in the coming year, the FHA expects this program to help more than 300,000 families.

Next up: “HOPE NOW Alliance.” in August, President Bush asked members of his Cabinet to work with trade associations, lenders, loan servicers, mortgage counselors and investors (including American Financial Services Association, American Securitization Forum, Assurant, Inc., Bank of America, CCCS Atlanta, Inc., Citigroup Inc., Consumer Bankers Association, Consumer Mortgage Coalition, Countrywide Financial Corporation, Fannie Mae, The Financial Services Roundtable, First Horizon National Corporation, Freddie Mac, GMAC ResCap, Homeownership Preservation Foundation, Housing Partnership Network, The Housing Policy Council, HSBC North America Holdings, Inc., JPMorgan Chase & Co, National City, NeighborWorks America, Mortgage Bankers Association, Option One Mortgage, PMI Mortgage Insurance Co., Securities Industry and Financial Markets Association, State Farm Insurance Companies, SunTrust Mortgage, Inc., Washington Mutual, Inc., Wells Fargo & Company.) on an initiative to help struggling homeowners find a way to refinance. HOPE NOW, according to the President, is an example of government bringing together members of the private sector to voluntarily address a national challenge — without taxpayer subsidies and without government mandates.

According to the President, representatives of the HOPE NOW Alliance plan to help homeowners who will not be able to make the higher payments on their sub-prime loan once the interest rates goes up — but only those who can at least afford the current, starter rate. HOPE NOW members have agreed on a set of industry-wide standards to provide relief to these borrowers in one of three ways:

1. By refinancing an existing loan into a new private mortgage
2. By moving them into an FHA Secure loan
3. Or by freezing their current interest rate for five years

Lenders, President Bush says, are already refinancing and modifying mortgages on a case-by-case basis. With this systematic approach, HOPE NOW says it will be able to help large groups of homeowners all at once. This will bring relief to more homeowners more quickly, says President Bush. The HOPE NOW Alliance estimates there are up to 1.2 million American homeowners who could be eligible for their assistance.

Finally, according to the President, the federal government is taking several regulatory actions to make the mortgage industry more transparent, reliable and fair (sorry, no catchy name for this program). President Bush says later this month, the Federal Reserve intends to announce stronger lending standards that will help protect borrowers. At the same time, HUD and federal banking regulators said to be taking steps to improve disclosure requirements — so that homeowners can be confident they are receiving complete, accurate and understandable information about their mortgages.

As the federal government take these steps, President Bush indicated that the Department of Justice will continue to pursue fraud in the banking and housing industries — so we can help ensure that those who defraud American consumers face justice.

So there you have it. This is how President Bush and members of his Cabinet intend to stop foreclosure-related bleeding in the housing market and save our current economy. While homeowners with good credit scores are going to be able to refinance their loans (with some lenders reportedly ready to waive prepayment penalties), the millions upon millions of Americans with poor credit — regardless of why the have a low credit score — and many of those American’s already facing foreclosure, are most likely going to be bounced to the curb.

While response to the President’s plan is sure to be swift, you yourself may be wondering how all of this impacts you (that is, if you are currently facing foreclosure or rent a property that is facing the same). For more on that, I am going to quote an often reliable source, BusinessWeek:

Can you get your mortgage payments lowered because of the bailout?

It depends. If you’ve got an adjustable-rate mortgage, you may qualify under certain conditions. If you’ve got a standard mortgage with a fixed interest rate, you’re not affected.

Which adjustable-rate mortgage holders are affected?

Only a small group. To qualify, you need to have received your loan sometime between Jan. 1, 2005 and July 31, 2007, and you need to be facing a reset of your interest rate sometime between Jan. 1, 2008 and July 31, 2010. If you’re within this range, you may be eligible to have your interest rate frozen, so you can keep your current, lower rate for five years.

Who qualifies within that range?

The bailout is really designed for homeowners who could run into trouble if their mortgage payments are raised sharply and face the prospect of losing their homes. If you’re well enough off that you can afford the higher mortgage payments after a reset, you won’t qualify. And if you’re in bad enough shape that you can’t handle the current low interest rate, you won’t qualify. For example, if you’ve already fallen behind on your mortgage payments, you’re not eligible for the rate freeze.

Do you need to live in your home to qualify?

Yes. The plan excludes people who don’t live in the homes for which they have mortgages so that speculators can’t benefit.

Why is there going to be a bailout?

Bush, Paulson, and the Administration are concerned about the fallout from the housing slump. If many people fall behind on their mortgages and have to give up their houses, there will be a series of negative repercussions. First, tens of thousands of Americans could be forced to leave their homes. They would lose whatever equity they had. Consumer spending more broadly would likely slow, hurting the economy overall. In addition, home prices could fall even more quickly than they are now. That could hurt consumer confidence well beyond those people directly affected.

Is the bailout going to be enough?

It depends on your definition of enough. The deal will add some stability to the housing market, but it won’t stop all the problems in the troubled sector. The same day Bush unveiled his plan, the Mortgage Bankers Assn. said that foreclosures had reached a record high in the third quarter. The share of mortgages that have entered foreclosure hit 0.78% in the quarter, up from the previous high of 0.65% set in the previous quarter. At the same time, delinquencies for all mortgages rose to 5.59%, from 5.12%, in the second quarter. None of the people who are delinquent or facing foreclosure will be helped by the plan.

Questions, comments, concerns? Please click on the “Comments” link below and let’s get some dialogue started on this one. We have a lot of experts that read and comment on a daily basis, as well as a lot of homeowners in need of help!

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.

As we scramble here in the United States to pick up the pieces from the latest credit crisis and housing market crash, we often overlook the fact that U.S. lenders did not simply sell risky mortgages to homeowners. No, once they were done fleecing homeowners, lenders decided to sell those risky mortgages to overseas investors. After all, why hold onto mortgages that you know homeowners are going to be unable to pay? The U.S. mortgage lending industry essentially pulled off a Ponzi scheme of global proportions, and now the United States stands to pay the price.

Here’s how the scam went down. Back in 2000, the American economy was floundering. Some sort of correction needed to happen, but Alan Greenspan, the Federal Reserve Chairman at the time, decided that we could give the economy a bit of a boost by cutting interest rates.

Mortgage interest rates dropped, more Americans could afford to buy homes, housing prices rose, and suddenly, Americans were rich with equity. Housing values were climbing like there was no tomorrow, and with loans being so cheap, people started cashing out that inflated equity in their homes to finance their enjoyment of the good life.

Unfortunately, housing prices hit a critical tipping point. Fewer and fewer Americans could afford these overpriced abodes. Again, a market correction was in order, but the banks didn’t want that. Instead of letting the housing bubble naturally burst, which would have resulted in more affordable houses, they decided to offer more affordable mortgages–adjustable rate mortgages (ARMs) with low introductory interest rates. This enabled more people to continue buying homes, and home prices to continue to rise.

Everyone was happy. Interest rates were low, so more people could afford to buy houses, lenders and mortgage brokers were processing more loans, Real Estate agents were earning higher commissions, builders were selling more newly constructed homes, and state and local governments were raking in higher property taxes. Life was good.

The only trouble was that the banks failed to account for the fact that eventually the housing market would tank and the teaser rates on the adjustable rate mortgages were scheduled to skyrocket. The banks failed to think ahead… or did they?

Based on what you read in the mainstream press, you might tend to believe that the banks did not know what was going to happen. After all, many mortgage lenders had to fold up shop. Others were brutally punished in the stock market when their share price took a nose dive. The thought the banks were clueless, however, is simply not true. The banks were fully aware of the looming sub-prime mortgage crisis. In fact, they were well prepared to quite literally pass the buck… to foreign investors.

Passing the buck

To get these risky sub-prime mortgages off their books, the banks diversified and then bundled their mortgages, repackaged them, and peddled them to the international community as safe investments. Through financial sleight of hand, the banks tricked investment-rating agencies including Moody’s and Standard & Poor’s to assign these mortgage securities higher ratings and valuations than subprime mortgages would generally receive.

Trusting the U.S. banks and America’s well-known investment-rating agencies, foreign investors bought these securities hook, line, and sinker.

As long as the party was in high gear and housing prices were soaring, foreign investors were completely unaware of what was about to happen on the other side of the ocean (their investments were performing quite nicely, thank you very much). Unseen to them, however, interest rates on many sub-prime mortgages were scheduled to rise, making mortgage payments unaffordable for millions of Americans. When what was fated actually started to happen, foreclosure rates skyrocketed, and foreign investors were left holding the bag.

Now, the U.S. is in quite a financial pickle. Deep in debt and stripped of equity, the U.S. relied on consumer confidence and foreign investment to fuel its economy. Now that both of those assets have been shredded by the mortgage lending industry and rampant real estate fraud, what can we rely on to fuel our economy in years to come?

How toxic is your mortgage? That’s what BusinessWeek magazine wants to know (see the September 11th issue, on newsstands now):

While the article and accompanying sidebars and graphics focus on the many problems associated with adjustable rate mortgages and “mortgage payment reset” (topics FlippingFrenzy.com covered in the past), real estate and mortgage fraud are not entirely absent from the conversation:

Then there’s the illegal stuff. Mortgage fraud is one of the fastest-growing white-collar crimes in the nation, costing $1 billion in 2005, double the year before. A slower housing market could foster more wrongdoing. “With a tighter market, you are going to find there is more incentive to manipulate,” says Tim Irvin of Irvin Investigations & Research Services in Spring, Texas. “Brokers are having a harder time getting business, so they’re getting creative.”

Click here for a very detailed yet dummied-down article from a pretty well qualified source.

An article in yesterday’s online edition of U.S. News & World Report points out something that may not be obvious to your average next door neighbor… as $1 trillion worth of adjustable rates mortgages are due to reset in the next two years, more and more homeowners will find themselves unable to meet their financial obligations, which, long story short, will more likely than not lead to foreclosure and the potential destruction of property values neighborhood-wide.

From the August 7, 2006 print edition of U.S. News & World Report (on newsstands now):

Call it the worst worst-case scenario. The interest rate on your adjustable-rate mortgage jumps just as the housing market enters a prolonged slump.

Then something really bad happens: You lose your job. There’s a medical emergency. You get divorced. You fall behind on your mortgage payments, and the bank forecloses on your home.

Those scenarios are now playing out for growing numbers of homeowners. Nearly 90,000 homes entered foreclosure in June, about a 17 percent increase over a year ago, according to RealtyTrac. Especially hard hit are homeowners in Massachusetts, where foreclosure filings jumped 66 percent in the second quarter as the housing market continued a sharp downturn. Foreclosure rates could increase more over the next year or so, “especially if we end up in a recession and see a lot of job loss,” says Doug Duncan, chief economist with the Mortgage Bankers Association.

Warning. In the past, foreclosures have largely been the result of a bad economy. Yet this time around, with a record number of borrowers exposed to rising mortgage payments through adjustable-rate and subprime mortgages, the increase in foreclosures could be a bad omen.

Click here for the rest of the article. As I mentioned back in mid-February, experts suggest that looses from adjustable-rate loan conversions will tally somewhere in the $110,000,000,000 range, and yet that figure represents less that one percent (1%) of total U.S. mortgage lending annually. Until all of us–-Realtors, Brokers, Regulators, Lenders, Law Enforcement, Appraisers, and Consumers–-get on-board with understanding what makes a real estate-related transaction go bad, the $110 billion in losses from mortgage payment reset will seem like a drop in the bucket when compared to the losses we’ll be facing as a result of the onslaught of fraudulent offers unsuspecting and desperate homeowners will fall victim to.

First American Real Estate Solutions–a provider of advanced property and ownership information–released a new study earlier today that investigates the impact of mortgage payment reset. The study, entitled “Mortgage Payment Reset: The Rumor and the Reality,” provides insight into who will be most affected when adjustable-rate loans convert from low, teaser interest rates to the higher prevailing mortgage market rates we’ve all become accustomed to.

The study concludes exactly as I suspected it would… that the most vulnerable among us those who do not have substantial equity in their homes, and who hold adjustable rate mortgages (ARMs) with low initial rates, often with interest-only and negative-amortization features. Individual families and firms that are involved with the riskiest of these loans are expected to suffer the most, while on a national basis the impact of mortgage payment reset and subsequent default will result in approximately $110 billion in losses, which by the way is less than one percent (1%) of total U.S. mortgage lending annually.

The states with the lowest percentage of high-risk properties–where borrowers have more equity and are therefore less likely to experience the impact of reset–include New York, Hawaii, Massachusetts, Connecticut and New Jersey. The states with the highest percentage of risky properties–those where fewer borrowers have significant equity and where people face a greater likelihood of experiencing reset sensitivity–include Tennessee, Colorado, Minnesota, Alabama and Arkansas.

It’s interesting, isn’t it, that the anticipated losses from adjustable-rate loan conversion are somewhere in the neighborhood of $110,000,000,000.00, and yet that figure represents less that one percent (1%) of total U.S. mortgage lending annually. If you can fathom that–and trust me, I myself–even after 25-plus years of being in this industry–am still trying wrap my brain around the size and scope of the lending market, then it’s easy to see why fraud is so seamlessly committed against individuals and the lenders who serve them.

Three words… Education, Education, Education. Until all of us–REALTORS, Brokers, Regulators, Lenders, Law Enforcement, Appraisers, and Consumers–get on-board with understanding what makes a real estate-related transaction go bad, the $110 billion in losses from mortgage payment reset will soon seem like a drop in the bucket when compared to the losses we’ll be facing as a result of real estate fraud.