Tuesday, August 24, 2010
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||THE NEW "F" WORDS: FORECLOSURES AND FRAUD
MORE "F" WORDS: FIXING FANNIE AND FREDDIE
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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
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
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.
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.
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
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
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.
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)
(Down 63.23 or 5.67% since 12/31/09)
(Down 145.39 or 6.41% since 12/31/09)
|10 Year Treasury Bond Yield
On The World Wide Web
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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.
"We can't become what we need to be by remaining what we are." -
Today in History
79 - Mount Vesuvius erupted in southern Italy, destroying the cities
of Pompeii, Stabiae and Herculaneum.
Doors in London in the eighteenth century had up to ten keyholes to
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