Money Money Everywhere But....

The money supply to Banks is there. Interest rates for Bank borrowing is still near 0%. But, homeowners are now subject to much tighter rules for borrowing because the Banks follow the BOOK, or in this case the Federal Reserve Regs. As a result, home mortgages are MORE DIFFICULT to get than anytime in the past decade or two.

There are new rules to try to reign in the high-cost, so-called "subprime" predatory loans. As of October 1st "High Cost Loans" have a new definition: any loan that is "1.5 percentage points" above the average prime mortgage rate. (Note: that is not the prime rate mortgage index but a prime rate mortgage - a mortgage given to a "prime borrower" or a so-called "a" borrower - great credit). If a loan is a "high-cost loan" under the new definition lenders must verify that the borrower can repay the loan through earnings and other income, not simply by a foreclosure or refinance.

That rule may not appear to be a departure from the "old" way but it is. The crisis we are still in was caused by some large lenders/brokers making loans to anyone who could pass a basic screening:"Can you hear thunder and see lightning?". Greedy and ignorant brokers/lenders would often give loans to borrowers without requiring any proof of the borrowers ability to pay.

Sometimes the borrowers knew exactly what they were doing and did not care - they gambled that the market for houses would keep rising and that they could refinance their way out of any problem There were no verifications of employment or verifications of deposits send. No bank statements showing a steady balance, for the self employed were requested, and often, for employed borrowers, W-2 copies were ignored or not sought.

Basically, the new rules that the Federal Reserve has put into effect as of October 1, 2009, merely force lenders/brokers AND borrowers to do what they should have been doing all along. That borrowers would fabricate income and lie on applications was ignored, or even encouraged.

Some states, like Massachusetts, Connecticut, Rhode Island, and a handful of others across the country have already put regulations in place that make the lender/broker certify that the loan is in the best interests of the borrower. In fact, Massachusetts REQUIRES this criteria be met for high cost loans, as defined by the Commonwealth General Laws. Also, many states, Massachusetts among them, have enacted legislation or have had the highest court in the state rule that certain threshold questions (like can the borrower repay and is does the loan lower payments or allow for home improvements, or lengthen the term) must be met on a refinance before the lender/broker can consider itself safe from violating such laws. UNFORTUNATELY, many of the National Banks, and some Savings Institutions governed by the Office of Thrift Supervision, claim that state law does NOT apply to them.

The Federal Reserve Rules also state, in part, that Prepayment penalties are banned if the mortgage payment can change in the initial four years of the loan. For other higher-priced, mortgage loans, a prepayment penalty period cannot last for more than two years. (this is the link to the 65 page Regulation:

http://www.federalreserve.gov/reportforms/formsreview/RegZ_20080109_ifr.pdf

Banks have over-reacted so NO MONEY TO HOMEOWNERS. Foreclosure proceedings are still climbing. The worst may not be over for the average homeowner who has a financial problem, or a first-time home buyer who does not have a high (700s) credit score.

Author's Copyright by Richard I. Isacoff, Esq, October 2009

http://www.isacofflaw.com/
rii@isacofflaw.com

Sub-Prime? The Next Generation! FHA? (really?)

SUB-PRIME - PREDATORY - LOANS LENDING - BAILOUT -FINANCIAL CRISIS


They're Baaack! Just when we thought it was safe to go into the wate.. no no no, I meant the mortgage market! This time, FHA loans are the mark.

With the drying-up (or is that drying-down?) of the credit and especially the mortgage market, as announced, the Federal government is trying to re-start the housing market. One way to do that is to use already existing programs, like VA, FHA, USDA Rural Home, etc. Each of these programs is very good at what it does, and with all three of them it is to make loans, specifically mortgage loans to current or existing homeowners.

There is always a catch - some mortgage brokers are committing the same kind of fraud with FHA loans as were prevalent with other loans, such as those made by IndyMacBank, Wells Fargo, Option One, Ameriquest et al. Mortgage applications and documentation is not meant to be an exercise in creative writing. Unfortunately too many mortgage originators do not understand that.

The tricks are the same -altering an application after the borrower has signed it so income can be added to make the loan more attractive to an underwriter. Getting someone in a Bank to falsify Verifications of Deposit or Verifications of Mortgage, also works well to fool the folks making the decisions. Having fake appraisals done, where the value is placed well above the market is another favorite. In June of 2008, the Massachusetts Attorney General announced that the principals of Direct Finance Corporation, which was licensed by the Division of Banks, and at least two employees of community banks were indicted for mortgage fraud and various other matters, for doing just those things.

FHA was too trusting of its originators because they were usually trustworthy. Once the "bad guys" lost the ability to do conventional non-agency loans, like to the lenders mentioned above, these middlemen/women just took the same techniques and applied them to the VA/FHA/USDA field. We might think that these groups would have been more vigilant but...

In the 1980s, while I was working with the Maryland S&L crisis, running failed S&Ls I came across a true story about mortgage fraud that seems both comical and sad now. There were two older women who had been in the mortgage business for years. Keep in mind, that in the mid 80s interest rates were in the mid teens, like 15% for a NORMAL residential mortgage rate.

These women worked with FHA and VA loans almost exclusively. To make a loan more appealing, they would alter an application, make up Verifications, change documents before, during and after closings. Remember, PCs were just getting started so the method was the comical (now) side. They had no fewer than 10 typewriters of different manufacture so they could match the type style. Additionally, they had several IBM Selectrics, the ones with the little interchangeable steel ball, so they could use a hundred different type faces and fonts. They were caught by chance and went to jail for several years (the sad part). Point is that the mortgage fraud business has always been alive and well.

Author's Copyright by Richard I. Isacoff, Esq - November 2008

http://www.isacofflaw.com/