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The pros and cons of a foreclosure moratorium
A foreclosure sign in front of a home in Miami Beach, Fla.
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TEXT OF INTERVIEW
Kai Ryssdal: The chairman of the Fed weighed in on the foreclosure mess today. Ben Bernanke said he and the gang at the Federal Reserve are concerned about potential irregularities -- those are his words -- in foreclosure practices at some of the big banks. They're working on a report that's going to be ready sometime next month or so.
In the meanwhile, the banks say it's all just a paperwork glitch. Critics say it's substantively more than that. So we're going to start this Monday by dissecting those arguments a little bit. Here to help us do that we've called Richard Green. He teaches real estate at the University of Southern California. Mike Konczal is a fellow at the Roosevelt Institute in New York City.
Good to have you both with us.
Richard Green: Pleasure to be here.
Mike Konczal: Thanks for having us.
Ryssdal: Richard Green, the first question, I suppose, goes to you: Why not just sit back and wait and let Bank of America and JPMorgan just really figure out the paperwork and have a moratorium.
Green: I think a couple of reasons: First of all, a moratorium will extend the crisis further, because it will delay resolution of the problems that we have in the market. And we do ultimately have to resolve this problem one way or the other, either through foreclosure, through loan modification, there needs to be a sense of urgency about this. And second, I think it sets a bad precedent. And if lenders in the future don't think they're going to be able to take houses back from people who haven't paid for them, they're going to be reluctant to come back to the market.
Ryssdal: What if though, Mike Konczal, we just say, "Wait a second. Let's sit back and look at the documents and figure out what's going on?"
Konczal: Well, exactly, and what do we do for people who are purchasing homes, people who are being foreclosed on right now? So, a mortgage has two parts to it: It has the lien and it has the note. The note is the actual debt, it's the terms of your debt, it's what late fees you pay if you don't have pay it. And the lien just says that they can take your house if you don't pay the note. But ultimately, if you have a problem with your mortgage, you need to consult the note.
Ryssdal: Right, those notes are the things that are basically lost, that we don't know where they are.
Konczal: People are checking right now, and they can't find them, which is why we need a moratorium to figure out where these things are and what we can do about it.
Richard Green, does it matter that we don't know where the notes are? I mean, isn't it all a paperwork drill?
Green: Of course it matters. And I don't want to, in any way, be seen as defending the practices of many lenders and servicers. But the problem is that a moratorium is such a blunt instrument and it says everybody -- even if you've done your job right -- is going to be subject to delaying their ability to foreclose on houses. And I think that creates a whole other set of problems.
Konczal: Well, I do want to push against the idea that liquidating the home owners is what's best for our economy. A lot of people seem to have the opinion that we just have so many foreclosures we have to get through, and once we get through them, we're done. This is very dangerous. What we know is that a foreclosure's a lose-lose-lose scenario. It's bad for the home owner, it's bad for the investors -- that's why all these investors are suing the servicers, because they end up with properties that are worth nothing -- and it's bad for communities. There's well-documented spillover effects, it devastates local municipality budgets, there's crime -- there's all kinds of really bad things that go with foreclosures. What we need is a system in place to allow people to renegotiate their mortgages.
Ryssdal: Well that goes to a bigger point, Richard Green, which is that the reason capitalism works is 'cause we know that when a seller sells, he or she has clear title to sell, and the buyer has clear options to purchase. Seems to me that capitalism doesn't work if the mortgage system in this country and the documentation of these loans is ineffective.
Green: That's absolutely correct. And that's why this is. I mean, I agree with Mike. This is a huge problem and it is very disturbing to see the kind of sloppiness in the foreclosure process that we saw in the lending process. But that doesn't mean we need to help out every single borrower who has taken money out from his or her house. If there is no ability to foreclose on people -- I mean, this is an unpleasant reality -- if you can't take people's houses away from them, you're not going to have a mortgage system.
Ryssdal: So, Mike Konczal, let me ask you this though: Congress is otherwise occupied -- they've got the election -- the banks are trying to move past this as briskly as they can. What then happens if nobody's paying attention?
Konczal: Well exactly. If we don't do a moratorium -- if we just say, "Things are in motion, let's just let them play out" -- we know what we're going to see. This is not very good for class-action suits. People are with different claims across different states, and it's going to be very hard to mobilize them in order to make banks accountable. The investors are going to slow down this process on their end, by suing themselves. And we're going to suddenly have lawsuits that are floating out there and foreclosures going through even though there's lawsuits that have them at stake. But ultimately, we saw this problem back during TARP. We saw this problem with a large history of servicer fraud through the 2000s. Ultimately, it's the same problem over and over again -- it's that the servicers are not accountable to either investors or home owners.
Ryssdal: Richard Green at the Lusk Center for Real Estate at the University of Southern California just down the street. And Mike Konczal at the Roosevelt Institute in New York. Gentlemen, thanks.
Green and Konczal: Thank you.
@ Jonathan Lovelace:
Yes, "contract enforcement" is at the heart of all of this, and these banks do not have the necessary documentation to enforce their contracts, or institute the necessary legal proceedings to foreclose. You stated "[w]hat we need to do is strictly enforce the law, not change the rules in the middle of things", but change the rules is exactly what the banks are attempting to do, and have done. If you can't prove you own the mortgage in a court of law, you have no right to foreclose, but banks are characterizing this as a mere "paperwork problem".
Second, your comment regarding how "[m]oratoriums have a tendency to become permanent" is unsupported. Almost all moratoriums I am aware of are temporary, unless legislation is passed to patch over the underlying issue that gave rise to the moratorium. For example, the offshore drilling moratorium has been lifted recently, despite the devastation another BP-like incident would pose. Also, moratoriums are used to address a break down in trust in a system due to corruption or other issues that create uncertainty as to the validity of that system's outcomes.
Finally, your comment that "if foreclosure was impossible banks would have no reason to lend" is true, but it is the banks' responsibility to make sure the proof of ownership of those loans that allow them to foreclose are all in order. We now have plenty of documented evidence whereby affidavits to prove the existence of these promissory notes were fraudulently manufactured by the banks' "robo-signers". Since the banks have eroded their own credibility on this subject, a moratorium would be most helpful to them, giving them a chance to get their house in order, before they attempt to take someone else's home.
There should be a total FREEZE on foreclosures! Let's not forget that the people who are losing their homes since 2Q09 are those who have lost their employment (full or partial) because the very same Banks torpedoed the Entire World's Economy.
They can't pay on their mortgage because the Big Banks &Wall St recklessly Gambled and Lost Big Time. They were bailed out from their foolishness, but not the American Family.
A man-made "Act of God".
My neighbor lost her home to foreclosure after applying for a remodification. Chase sold it even though there was a viable short sale offer - way above market price - which she worked to get after being turned down for the mod. She had paid 15% cash down and had a 30 year fixed rate mortgage which she paid for 5 years.
The guests left out these factors:
Home values in this area are down by 66%.
The banks are partly responsible for the crisis because they created the bubble through their lending practices. The real estate market is a huge factor in the whole downturn. They need to accept their culpability and take some of the losses.
When a bank refuses to restructure a mortgage and forecloses, if they can sell the property it is sold at a huge loss. Why not reduce the principle as well as the lending rate - the loss would be less.
These banks got taxpayer money. They have not accepted any responsibility or stepped up to the plate to fix the problems.
A combination of principle reduction and remodification must be part of the solution. To foreclose without trying is unacceptaable - it affects each family as well as the lender.
It seems as though the market is just looking to get the foreclosed properties out of the pipeline. Are there buyers for all of these properties? I am sure many homeowners who are under water can afford to keep their homes if the bank shares in the loss and reduces the principle. Not all, but many. The banks must not be allowed to rush foreclosure just to clear the pipeline.
I agree with both of your guests: a moratorium on contract enforcement, which is what foreclosure *is*, would be disastrous for the long-term health of the economy. What we need to do is strictly enforce the law, not change the rules in the middle of things. But there's one additional daunting factor they didn't mention: Moratoriums have a tendency to become permanent, and like they said, if foreclosure was impossible banks would have no reason to lend.
If hindsight is really 20-20 vision, then in the wake of slow-moving mortgage modifications and questionnable foreclouse practices by the lending community, perhaps Congress should consider granting U.S. Bankruptcy Court judges the authority to re-write certain mortgages.
While I do not believe that all residential mortgages should be modified and acknowledge that some borrowers never had sufficient income/assets to cover the cost of homeownership, for those homeowners who are working and could meet FHA housing expense-to-income ratios, a modification would be appropriate. Lenders have already received substantial government [taxpayer]support during the crisis and allowing a federal judge to reduce mortgage interest rates, lengthen the mortgage term and slice off some principal after examining current market values, the result would likely be an easing of the foreclosure mess, which would allow eligible homeowners to remain in place, stem the flood of homes coming into the resale market and allow banks to have a performing asset on their books.
In other words, the pain would be more evenly spread among all of the actors, known of which are blameless.
At the start of the mortgage crisis, we heard that if judges could modify mortgages, then in the future, lenders would be less likely to lend or the cost would go up. Maybe that isn't such a bad thing, especially if the lenders are unwilling or unable to modify loans of their own volition.
What about a moratorium for folks who are getting the HAMP runaround and really have tried to work out a modification? Banks have been incredibly devious in ignoring guidelines, strategically, in order to take back homes when it suits them.
Andrea Silverthorne wrote me tis morning 10/25/'10:
See link below; another cover story. Now that the cat has his head and two paws out of the bag, the whole cat is soon to come. Hey, the banks never had a right to foreclose because the investors own them.
So the REITs and the banks are terror stricken and are cooking up a scheme to give the loans back to the banks so they do have the right to foreclose, but of course there are more loans than there are properties.
I hope the Feds and the Fed Res do not allow this.
I just figured out that the REITS are so liable for allowing their REIT properties to be so badly managed and devalued they owe the IRS enough money to pay off the national debt. I just hope the government has the proverbials to go after it. I think perhaps it was this and not currency that Geithner skulked into the Chinese airport for.
Also there is the point that the American Tax payer already paid the REITs for the loans.
So how can they demand a second buy back. This is such baloney. Why does the press not see the incongruities.
http://money.cnn.com/2010/10/22/real_estate/repurchase_banks/index.htm?s...
We figured out this scam 18 months ago and it took the gov, the Fed, and the media that long to start legal action.
Here's what wesent the OIG and the DOJ.
April 2, 2009
I am a long time South Florida Realtor aided by a friend and retired gov manager, Robert Bostick. We have discovered that the reason South Florida values have fallen so sharply, in just the last nine to twelve months, is due solely to the illegal actions of the Federal Reserve, who put pressure on the Appraisal Foundation Standards Board to add a new standard that specifically allowed this Lemming- like fall in property values.
Before I go further I would like to preface my findings with two facts:
1.South Florida values, given they are residential improved property, have never fallen before. Repeat . . . never, not during the Great Depression, not during the post World War II recession, not during the period of eighteen percent interest rates, or in any other recessionary period. When the real estate market dies, there are no buyers to take value down; when the real estate market returns, it returns at where it left off. This is the tensile strength of real estate, and therefore, as it is the main asset of most Americans, it was also the tensile strength of the nation. Repeat. It was the tensel strength of the nation.
1.The Sub Prime is a scapegoat for the bad judgment and illegal activity of Wall Street and the banks. What initiated the economic fiasco we now face, which is in my opinion careening beyond a fiasco toward economic holocaust, was the halting of the sub prime, yes, I repeat, the halting of sub prime lending is what went wrong. The sub prime was, in the beginning, basically, a creative combination of FHA credit standards, in use for a very long time, and also long time conventional lending packaging. Stated income of both 80 % and 90 % and variable rate mortgages have been around for decades, without not only not causing financial debacle, but without causing any harm at all, and they created a lot of homeowners that otherwise could not have owned a home.
2.Interest rates remained relatively stable during the last five years, and had the sub prime been around when the victims of the predatory lending got a new mortgage bill, usually 3-4 times what the preliminary payment was, they would have been able to go back to the sub prime, refinance, tack the closing costs on, and keep their houses and our economy going.
Here's what we've discovered:
Wall Street- and certain banks and mortgage companies- have created a smoke screen to cover up the effect of:
•Their predatory lending: The sub prime was the catch phrase of lending when they decided to incorporate their predatory lending practices, with a trend toward a murky index call the LIBOR from that same country as the foreign corporation that got American’s tax payer dollars bailout, London based AIG.
•Certain lenders direct culpability in allowing outright fraud by ignoring long established underwriting practices. Repeat . . . direct culpability.
Strict underwriting guidelines were put into effect after the Savings and Loan debacle of the 80’s and the nature of the alleged fraud that occurred could only have happened if these standards were deliberately ignored by bank underwriters.
If you read the 2004 advise to Congress from the Appraisal Foundation Board, just as the fraud was beginning and the Libor index came into play, you will see the Appraisal Foundation Standards Board's representative bragged about the complete reliability of the Standards put in after the S and L problems in 1987 and 1989. And he was right; certain banks just ignored them.
I am tired of reading stories about buyers who whited out a W 2; that is not possible, because the standards call for arms length employment verification.
I personally experienced a call from an appraiser, after I had sent her comparable sales, asking me if I had sent her additional comparables; I had not. Someone had sent her closing statements on properties that were not even sold or under contract, let alone legally closed; and I told her so. There is no way that type of circumstance could escape even the most basic underwriting parameters, and yet it apparently did; the loans funded and closed.
I know by hearsay that the FBI was investigating this buyer for 750 fraudulent loans in South Florida alone. This equates to about 191 billion dollars in mortgage fraud, but after two years there have been no arrests. I have recently asked the Attorney General to look at the facts surrounding this particular buyer, whose activity, together with others like him, have destroyed our state and our country. I do not understand why the banks and, or the states have not pushed for fraud investigations. Until just last week, the FBI had arrested no one in two years, and it had only arrested people that represented about 200 sales country-wide. Last week they arrested more people who did another 150 loans all over the country. Here was one buyer who did 750 in South Florida alone.
These loans never had even the first payment made on them. When, not if, they were sold to Fannie Mae- and subsequently to an REIT, the banks involved had to know they were bad when they sold them. In addition, despite the fact securities laws say that when banks and Fannie Mae and Freddie Mack sell their loans to REITs, they must transfer ownership, they have not, and therefore, they are foreclosing on American homeowners and property investors illegally. Every one whose loan sold to a REIT, which is every one of them . . . has been foreclosed on by an entity that either does not own the loan or does not legally own it. Certain Judges are beginning to throw these types of suits out of court. Certain law enforcement institutions should be throwing the people, who failed to transfer ownership, when they knew they had to . . . in jail. This is what Fannie Mae, Freddie Mac, Wall Street and the Federal Reserve are hiding from the American public and Congress.
I saw a report that 50% of America ’s loans were sold to the REITs. That is not so, and am tired of my press, the supposed, 4th estate of America , acccepting facts from established institutions as accurate, without checking.
The banks must sell there loans in order to get more capital to lend. They sell 100% of their mortgages that are underwritten with Fannie Mae standards to Fannie Mae, the bulk of the rest get sold directly to investment packages, which equates to about 98% of all loans, so they lost no money; Fannie Mae sold them to Wall Street to get more money to buy loans from the banks, so they lost no money; Wall Street packaged all of them, Fannie Mae and non Fannie Mae, and sold them to REITs, so Wall Street lost no money; REITs insured the packages with AIG for 150% of their value, so not only did no one loose any money, but someone made a bundle of money on the insurance overage payment, and the American public paid AIG, a foreign corporation, REPEAT, American tax payer money was used to pay a foreign corporation for their loses. This could not be legal, and no one has opened a challenge to it. How can my government give American taxpayer money to a foreign corporation . . . AIG, and how can you buy interest in a foreign corporation with American tax payer money
Part 2
Better than average real estate value escalation, between late 2003 and 2005, was legitimate and warranted because of an increasing trend for Americans to put their money into income real estate properties, not the stock market. After 9/11 both investment vehicles died, but while the stock market lateraled for five years, during this saga of predatory lending and rampant unchecked fraud, the real estate market took off like the proverbial bat out of the proverbial hot place, just four short months after 9/11/2001. This steam engine of buyers was driven by money removed from the stock market to put in the more stable terra firma we commonly know as income real estate, and by the creative, albeit soon to be compromised, Sub Prime that allowed conventional mortgage lenders to use FHA credit standards. Unfortunately it was bound to get a bad name, when it was also used for fraudulent and predatory lending tied to the Libor.
And the escalation in property values was valid; it was real, because of limited land near urban centers, and because of a growing population in this country.
The increase in values in South Florida the first quarter of 2008 was well after fraud had stopped, and by then financing was the most difficult it had ever been. The increase had nothing to do with inflated appraisals; repeat, it was real; it was the beginning of a normal two year come back that was squashed by the Federal Reserve’s helping the banks dump their inventory by making the Foundation agree to tie the new Scope of Work Appraisal Standard to their risk management, and as the banks lost no money, they are making a bundle even at the low prices.
We are being victimized by a plain and simple scam. Congress, or someone, needs to make these mysterious toxic assets show up on a grid with the following information. Buyers name;
Original Lenders name;
Date of Closing;
Date of first Mortgage payment;
Date of last Mortgage payment made by borrower;
Owner occupied or non owner occupied.;
Current occupancy status of the property;
Date of all sales of the mortgage, and to whom, and was ownership also transferred. Date transferred to a REIT;
Date the actual ownership transferred to the REIT, as it should have been;
Market value just prior to when the Scope of Work Rule combined with a risk management mandate to the appraiser from the bank in 2008;
Has it been foreclosed, or is it in process, and finally
If their was a short sale what percentage of value did the owner loose.
That these upward value trends created an affordable housing issue is another problem!
And, the fact that someone who saved enough to buy a home and lost their 400 thousand dollar home to a 200 thousand dollar buyer is not a bitter sweet story:
It is a horror story, because every home owner in the area of that 200 thousand dollar foreclosure lost 200 thousand dollars worth of equity too, the day that first home closed, and the communities lost the tax dollars, and any bank with an equity line on the property lost their collateral If any of these home owners in the community effected by the 50% discounted sale gets into financial trouble, they will let their home - worth less than they owe- go.
SHORT SALES ARE ILLEGAL AND MUST BE STOPPED
This is highway robbery of American equity by the banks’ predatory lending and the Federal Reserves machination of Appraisal Standards, which were designed to be a neutral buffer between the American property owner and the lenders, and now can only be described as predatory, with not a vestige of consideration for American property rights.
In the spring of 2005, Alan Greenspan opened his mouth and said that the real estate market was doomed. At that point in time the market was slowing on its own accord, because income buyers found their losses too high to carry, but the normal first and second home buyer carried on.
As Realtors, we were perplexed at his statement; we had had two year cycles of ups and downs regularly for decades. Doomed? We wondered why he was not saying that about the stock market, if it lateraled for five more years, there would be no stock market. Mr. Greenspan’s remarks were immediately followed by a press onslaught about the certainty that real estate investors were going to take a big hit, a very big hit.
We had never seen anything like it before. There was no reason for the press to tell stories of certain value lost, when that is never what happens when the market dies, because there are no buyers to take the market down. Perhaps, Mr. Greenspan was trying to get everyone ready for the new Scope of Work Rule use advisories, which he would later tie to the bank’s risk management, or perhaps he was getting everyone ready for the pulling of the plug on the sub prime, just as home owners and investors loans were about to escalate, forcing everyone into foreclosure with no way to refinance.
What ever the reason, Mr. Greenspan predicted doom for our industry, and what ever the reason, the press fell in line and marched to his tune, with unending noise, without any research at all, we will, perhaps, never know, but the effect was immediate. Mr. Greenspan bears a lot of weight and the public is not a Realtor; they did not know that when the market dies there are no buyers to take the market down, and they stopped buying because no one wants to buy a house and loose money on the way to closing
This portrait of the biggest equity grab in the history of the nation is almost finished.
The new Home Valuation Code eliminates local appraisal and puts the liability of determining market values on Realtors, with "Opinion of Value" letters, which are to based on"market conditions." Mr. Geitner only has to get permission to use the tax payer’s dollar to finance 80% of the foreign national acquisition of American’s lost equity. An owner of a 400 thousand dollar house is not rich, and the Federal Reserve is no Robin Hood
On February 7, 2008, I read a story about the condition of the real estate market in the South Florida Business Journal. The story quoted Michael Cannon, a respected owner of a large appraisal firm and consulting company.. He said Wall Street Did not understand real estate I sent Michael Cannon an email complimenting him on the article, and then I asked him a question about what I had recently observed on appraisals; they were beginning to use foreclosures and short sales when computing values. This had never been allowed before. During the Savings and Loan Scandal of the 80’s, a short sale meant only forgiving the unpaid interest, late and legal fees, because the bank could not sell the property for less than market value and meet their fiduciary responsibility to their Directors and investors, unless they could prove market value was less, and they could not use the foreclosure, any. . . or duress sale to do it; you had to use arms length sales.
Mr. Cannon responded to my email thanking me for my compliments, but he did not answer my question: “…had appraisal standards been changed?â€
Three weeks ago, I saw a graph that accompanied a story on George Perez; it demonstrated South Florida property value median costs from 2005 on; showing the market becoming becalmed and running in a straight line, neither up nor down, then it showed small increases and decreases, ending with a substantial increase the first quarter of 2008, repeat, a substantial increase, before it dropped straight down, almost 50%.
This time I did not email Michael Cannon. I got on the Internet; it took me ten minutes to find out how the Federal Reserve destroyed America in three years. I have a series of emails that tell the story.
If reporters are ignoring the mass destruction that has been visited upon the American public’s real estate equity, because you think values had to come down anyway, please think again, because Michael Cannon was right; the Federal Reserve did not understand real estate, and I am right: We effectively became the economy after outsourcing did its damage; it is too late to bring the jobs back; they will be lost no matter where they are, and if American property equity is not restored to Americans, rather than foreign investors, I predict, as I did to Michael Cannon that we will have a depression that will last decades.
While I have made some headway, I am worried about a clear conflict of interest with the National Association of Realtor's dedication to telling this story. The large firms are being kept alive with income from short sales, despite the fact that if the standard change was illegal, the short sales are illegal. They are too short sighted to see that as soon as Obama and the Federal Reserve get the next money package through, which will finance the foreign acquisition of American’s lost properties, with American tax payer’s money, the short sales that are keeping Realtors barely alive will be removed from the market.
It is the Federal Reserve that owes America money . . . both their lost equity and punitive damages. The media reporting of it, without discovering the real reason values were going down, has cause great damage, which is going to take a long time to repair. It will be a great stimulus program. I for one promise to use my lost 600 thousand dollars in equity to stimulate the economy. I will save all the punitive damage awards for my old age. If this makes you laugh, because you think it is not possible, because it is the Federal Reserve, then this demonstrates that the law does not apply to the powerful, because the Federal Reserve is clearly libel.
Case in point: A unit at Brickell Bay Club, in Miami sold all cash for $114,000.00; that is a price that is less than the sum of the units sold new for in 1975! The unit last sold for $400,000.00. Now, according to the combined S of W rule and the Fed's risk management advisory, every unit like it in the building assumes that value. Say goodbye to the equity lines in the building; say goodbye to the banks that gave them, and say hello to more and more foreclosures in that building, because owners will all walk away in this new dog eat dog world we are living in.
The movement in the market is overwhelmingly investing cash buyers, not real primary home buyers; the new apartment starts are government funded to developers through the NSP. CNN let the cat out of the bag; the banks are bringing in Chinese buyers to buy up America .
Real estate can not be the sacrifical fly in this scenario. Our restoration of values and a real National Stabilization Program that is not a thinly veiled developer bail out is our only hope.
Thank you for reading our email, and if you would like any of the documents such as the Scope of Work Rule, the change to the Foundation’s preamble that they had to make to do it, and or the Federal Reserves 2007-2008 Advisories to the Appraisal Foundation Board, please advise me, and I will send them.
Andrea Silverthorne
Robert Bostick
