Tuesday, August 24, 2010 Edition #573

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Today’s Highlights:
1st Flash: THE NEW "F" WORDS: FORECLOSURES AND FRAUD
2nd Flash:  MORE "F" WORDS: FIXING FANNIE AND FREDDIE


Weekly Spotlight:

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1st Flash
THE NEW "F" WORDS: FORECLOSURES AND FRAUD

Don't expect the foreclosure rate to drop anytime soon. In fact, the number of foreclosures actually surged in July by 6 percent over last year. Unrelated to the fact that more homeowners are becoming delinquent, the statistic merely means that bad loans are working their way through the system.

Credit reporting agency TransUnion reports that the number of mortgage holders 60 days or more delinquent in the second quarter of this year was 6.67 percent, almost one full percent above the same quarter last year.

On a positive note, they also point out that the rate of increase has slowed from last year's pace.

Interestingly, the delinquency rate does not appear tied to unemployment or families facing financial hardship. Rather, it seems to reflect falling property values. The states that had the steepest declines remain those with the highest number of foreclosures. And while the rest of the nation is stabilizing, values in California, Florida, Nevada, Arizona and Georgia continue to drop.

With the upswing in delinquencies and foreclosures, we see another trend emerge. Mortgage fraud is also on the rise. Bet you didn't see that coming.

Thieves prey on those most vulnerable. Families at risk of losing their home fall right into those ranks.

Mortgage fraud cost an estimated $14 billion in 2009, and a threat to our economic recovery.

Fraud played a large role in the mortgage crisis. "No-doc" loans were granted to those with excellent credit but no paper trail to prove their income. These were especially attractive to the self- employed who reinvest profits into their business, leaving little or no income for tax purposes.

But they were also attractive to con artists who would take the approved mortgage funds and run, without ever making a payment to the bank. The property would go into foreclosure and the bank stuck with the loss. The scammer was long gone.

Today's tightened lending standards require even those with the highest credit scores to provide proof that their income is sufficient to repay the note.

Fraudsters have likewise adapted. They now rely more on falsifying documents, stealing identities and recruiting bank insiders to work for them.

Short sale fraud, builder bailouts and house flipping are still mechanisms used to defraud the system. Struggling homeowners are increasingly being targeted by rescue scams.

With private investors no longer backing the mortgage market, the U.S. government has assumed that role. And who backs the government? Yes, it's us. The taxpayers. The same ones whose home is no longer considered an investment. The same ones who have lost confidence in the housing market.

Yet regaining that confidence is key to our recovery.

The Obama administration has been cracking down on mortgage fraud, making 485 arrests over the last three and a half months and recovering more than $147 million from the 336 individual convictions already obtained. To date, 1,215 people have been charged with losses estimated at $2.3 billion.

These include individual scammers as well as shady brokers. The Justice Department is even investigating allegations of fraud in large institutions where consumers were misled as to the terms of their mortgage. Stay tuned for the results.

2nd Flash
MORE "F" WORDS: FIXING FANNIE AND FREDDIE

Everybody knows that Fannie Mae and Freddie Mac were the recipients of a $150 billion government bailout in 2008. They were the first of those deemed "too big to fail."

But who are they? And why should we care if they fail?

The Federal National Mortgage Association (FNMA), known as Fannie Mae, was born in 1938 during the Great Depression. It was established to create a secondary mortgage market that would free the loan originators to generate more loans. They did this by purchasing Federal Housing Administration (FHA) insured mortgages.

It evolved into a private shareholder-owned corporation in 1968 to keep its activity separate from the annual federal budget. At that time, it was split into the entity we know now and the Government National Mortgage Association (GNMA), or Ginnie Mae.

Ginnie Mae supported the FHA insured mortgages along with those of the Veterans Administration (VA) and Farmers Home Administration (FmHA). It operated with the full faith and credit of the U.S. government.

The federal government authorized Fannie Mae to purchase private mortgages in 1970. Private mortgages were those not insured by the FHA, VA or FmHA. In so doing, the Federal Home Loan Mortgage Corporation (FHLMC) was created, aka Freddie Mac. Its purpose was to compete with Fannie Mae, presumably creating a more robust secondary mortgage market.

It seemed like a good idea at the time.

When President Jimmy Carter enacted the Community Reinvestment Act of 1977 (CRA), it was with the intention of requiring banks to provide the same services to all who are equally qualified in the communities in which they operate. Banks were taking deposits from their entire region, but not lending to those in less than desirable neighborhoods.

The Act required that all loans be made with safe and sound lending practices. Underwriting standards were not to be lowered in complying with the CRA.

This all changed with the Clinton administration. In 1999, Fannie Mae was pressured into expanding mortgage loans to low and moderate income borrowers by increasing their portfolios in those same distressed inner city areas designated in CRA. Credit requirements had to be eased to comply, and subprime loans were developed to accommodate these borrowers.

At the same time, Fannie Mae had to keep their shareholders happy by maintaining its profitability.

The institution struggled with enforcing underwriting standards that would provide safe and stable lending to buyers with less than stellar credit. Private mortgage lenders didn't have the same restrictions, so were free to offer more risky types of subprime loans that were more attractive in the marketplace.

With signs that the agency was headed for trouble, the Bush administration recommended a plan that would create a new agency within the Treasury Department to supervise Fannie Mae in 2003. The agency would have the authority to set capital reserve requirements and determine whether its portfolio risks were managed properly.

But the ranking Democrat on the Financial Services Committee, Representative Barney Frank of Massachusetts, believed the problems were exaggerated. He felt "…the more pressure there is on these companies, the less we will see in terms of affordable housing." The measure was dropped.

We now know those problems were not exaggerated. On September 7, 2008, Fannie Mae and Freddie Mac were placed into conservatorship of the Federal Housing Finance Agency (FHFA) in what was deemed one of the most sweeping government interventions in private financial markets in decades. The firms' chief executive officers and boards of directors were dismissed.

The value of its common stock plunged. Further racked by multiple accounting scandals, Fannie Mae and Freddie Mac stocks were delisted from the New York Stock Exchange on June 16, 2010 after trading below $1 a share for over 30 days.

A stable, secure housing market is vital to America. That is the one point that regulators do agree on. Change is necessary. But nobody has any clear suggestions on how to achieve that goal. The recently passed financial overhaul legislator made no provision for revamping Fannie Mae or Freddie Mac.

Treasury Secretary Timothy Geithner led a conference of housing industry leaders earlier this month to discuss plans for reforming the institutions. It was considered a "listening" session as a launch pad to solicit ideas for further action.

Let's hope the outcome doesn't involve a taxpayer bailout.

Financial News

Housing continues to slow economic growth. The current Federal Reserve Chairman Ben Bernanke's commented to Congress last week that the economy remains "unusually uncertain," and that the Fed was readying itself to take new measures if the economy deteriorated further. His predecessor, Former Federal Reserve Chairman Alan Greenspan, was more pessimistic saying last week on NBC's "Meet the Press" that a decline in home prices could reverse any economic recovery and send the U.S. into a double-dip recession. "I think we're in a pause in a recovery, a modest recovery," Greenspan said.

July existing home sales dropped month over month by 27 percent with a 25 percent drop from the prior year. New jobless claims were 500, 000, an increase over expectations of 480,000. This negative news reinforces the unstable recovery expectations. Leading indicators were reported to have a .1 percent increase in July indicated a stall in the recovery instead of a decline. Leading indicators is a composite index of ten economic indicators that should lead economic activity. So, caution is the economic flag waving at the moment.

Today’s Market Rates
Tuesday, August 24, 2010
Dow Jones Industrial Average
(Down 387.60 or 3.72% since 12/31/09)
10,040.45 (-1.32%)
S&P 500
(Down 63.23 or 5.67% since 12/31/09)
1,051.87 (-1.45%)
Nasdaq
(Down 145.39 or 6.41% since 12/31/09)
2,123.76 (-1.66%)
10 Year Treasury Bond Yield 2.499%  
British Sterling 1.5402  
Euro 1.2620  
On The World Wide Web

Read the latest mortgage fraud news with articles on arrests, allegations, and fraud blogs.

You would be shocked to know how many deployed soldiers don't even receive mail from home. A simple cup of coffee would brighten their day. Have one delivered along with your personal note of encouragement.

Help feed a shelter animal without spending a single penny. Fight breast cancer, support children's health or promote literacy the same way. Sponsors donate for every click on the GreaterGood Network web sites. Learn more.

Tip of the Week

Are your eggs safe to eat? The recalled eggs were packaged four months ago, so its likely that you've already eaten any that may have ended up in your home. But for safety sake, visit fda.gov to be certain.

Quotable

"We can't become what we need to be by remaining what we are." - Oprah Winfrey

Today in History

79 - Mount Vesuvius erupted in southern Italy, destroying the cities of Pompeii, Stabiae and Herculaneum.

Flash Fact

Doors in London in the eighteenth century had up to ten keyholes to confuse burglars.

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