Foreclosure Buzz

Even in retirement, Henry Paulson is giving money away to his favorite charity — the financial industry.  It seems that the former Treasury Secretary made his book deal and is giving all the profits to the Homeownership Preservation Foundation. See book deal article.  Of course the foundation does run the Hope Hotline that allegedly provides help to people.

My questions are these:

1. I wonder if he defined profits in the contract using the same mechanism for valuing troubled assets in the TARP?  You remember when he explained to Congress and the public that he needed one trillion dollars to buy all the troubled assets and put the financial markets on the road to recovery.  You remember his version of the TARP (Troubled Asset Relief Program) bill he submitted that was three pages and gave him absolute discretion.  He tried to scare everyone he needed it passed in just two days.  Good thing Congress slowed it down some and put some restrictions on it otherwise we would not know where the money went.  It might have just ended up as bonuses or vacations for industry executives.

2. Does he realize that the Homeownership Preservation Foundation is not a typical foundation — it was started by the industry and is run by the industry (using its staff).  The board is composed of … yep, the industry.  For awhile they even were located in an industry building. Article.  Does it give money away to lots of great little agencies?  Hardly.  Its claim to fame is the Hope Hotline. So does he know the truth about the foundation?  Answer: No doubt.

3. Does he understand that the Hope Hotline was created by the industry to save them money and divert people to counselors that are taught to merely get borrowers to pay up? Article.  Answer: Probably.

4. Is he trying to start a movement so that the public starts giving money to the industry?  He already did that to the tune of what will be trillions of dollars. 

This reminds me of my local foreclosure prevention task force that was started with NeighborWorks money.  The task force is mostly a group of servicers who still rake in their cut of 1-2 percent of the loans they service (plus they keep 100 percent of the late fees and other fees they charge) – making them millions.  These servicers are the same folks who are looking for more handouts for doing workouts under Obama’s plan.  They are having a 5k run to raise money for some more hand-picked counselors in a few weeks.  Maybe Hank will come and run.

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While the lending industry, through its propaganda machine called the Hope Now Alliance, brags about all the modifications they have done, the problem is their modifications usually result in redefault in six months — and they are increasingly defensive about it (see below).  The dirty truth was confirmed again by a report released this month by the Office of the Comptroller of the Currency and the Office of Thrift Supervision:

The OCC has told the lenders it regulates that they “need to review their programs” and make sure that modifications implemented in 2008 and in the future result in loans that are affordable and sustainable, Mr. Dugan said. Lenders also have been told to review the modifications they did last year and “see if there are classes of borrowers” whose modifications may be further restructured to make them more effective, he said.

“Study Buoys Mortgage Modification, Wall Street Journal, April 3, 2009

In a stunning realization the report found:

The redefault rate was just 26% after nine months when monthly payments were cut by more than 10%, compared with about 50% when the payment increased or remained the same.

For more on the study see the OCC and OTS release.  So, when the payments are increased more people fail, and when they go down, more people succeed.  This is truly amazing research, and the redefault rate is nothing new either (article).

 The HOPE Now Alliance should either step up the PR campaign or start doing things the right way because the cat is out of the bag:

Servicers have stepped up their efforts to modify loans and reduce borrowers’ payments in response to pressure to reduce foreclosures. The percentage of modifications that reduced loan payments by more than 10% increased to 37% in the fourth quarter from 26% in the third quarter. Still, roughly one in four borrowers saw their payments increase after their loan was modified.

“Study Buoys Mortgage Modification, Wall Street Journal, April 3, 2009

So far, the Alliance opts for more PR.  The HOPE Now Alliance, as detailed here, thinks it can avoid responsibility for putting homeowners in yet more bad loans and came out with a statement:

The OCC-OTS report shows that the volume of mortgage modifications increased as the economy turned downward in the second half of 2008. The data also confirms what HOPE NOW has been reporting for some time: that the mortgage industry has been increasingly utilizing loan modifications and is continuing to do so as serious economic conditions make this option the most appropriate choice to help homeowners avoid foreclosure.

Faith Schwartz, Executive Director, HOPE Now Alliance here.

Wow, that says it all.  It says that the HOPE Now Alliance either did not read the report or thought nobody else did.  How long does the Hope Now Alliance think it can continue to fool anyone?  The Alliance put people in bad loans once, and they continue to do so without shame.

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The word is getting out on mortgage brokers more and more everyday.

On April 9, 2009, the New York Times Editorial Board saw fit to take the time to walk folks through it.

Too many brokers were far more interested in earning fat fees for steering their clients to ruinously priced loans that the borrowers could never hope to repay.   …  Lenders were, of course, complicit, happily issuing high-priced loans to people with little or no hope of repaying them. But it was often the brokers who steered borrowers away from affordable loans and toward the high-priced loans in the first place.

“Predatory Brokers”, New York Times Editorial, April 9, 2008

Not that there has ever been much love from the mortgage bankers toward brokers, but the Morgage Bankers Assocation took the gloves off and came out with a publication for folks to keep under their pillow: “MORTGAGE BANKERS AND MORTGAGE BROKERS: Distinct Businesses Warranting Distinct Regulation.”  The mortgage bankers want to make sure everyone knows they are not brokers in terms of their relationship to the borrower, compensation and disclosure requirements.  They list some recommendations:

• Borrowers receive clear disclosures of brokers’ responsibilities and compensation;
• Mortgage brokers who claim to be or act as borrower agents be treated legally as agents; Mortgage brokers have sufficient financial resources — through a national minimum net worth requirement — to provide protection to borrowers and mortgage bankers where necessary;
• Mortgage brokers be appropriately bonded to give consumers greater protection; and
• All loan originators, including mortgage brokers and mortgage bankers, be appropriately licensed and registered in accordance with rigorous standards.

Of course the last one is easier to agree with since it is already the law — the SAFE Act (passed as a part of the Housing and Economic Recovery Act of 2008) requires all originators to be licensed.  See SAFE description by HUD.  Funny thing is the mortgage bankers are fighting the thing on some of the details in the state houses.

But back to the brokers — they are losing business other ways besides the general financial crisis they helped create.  For example, Chase will not lend money to a borrower with a broker anymore (or at least when they decide to change that practice) and PMI Group, one of the largest mortgage insurance businesses, is refusing to insure loans that started with a broker.  See New York Times article.  Given that brokers at one point originated 80 percent of the mortgage loans, their market share will still be significant after these changes, and if market conditions warrant Chase, PMI and others will be back using brokers again.  Moreover, for the present brokers who once had many different lenders to work with, now have far fewer which spells even more trouble for borrowers who are persuaded to use a broker.

That’s an important fact for consumers looking to buy or refinance a home. With fewer lenders to choose from, it’s harder for brokers to insure you’ll pay the lowest possible interest rate and fees.

“Mortgage brokers have fewer lenders to work with“ by Interest.com

This is why reforms are needed now, rather than later.  Instead of passing legislation that puts a duty on mortgage brokers to put the interests of their clients first as many states have done or in the process of doing, Congress is looking to at least partially ban the practice of lenders giving brokers kickbacks — affectionately known as “Yield Spread Premiums” or (YSPs). See article.  This is certainly a good start given that the Federal Reserve was looking to a variety of fixes and pulled back a proposal that would merely have given borrowers improved disclosure. See ForeclosureBuzz article.

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