Are All Deeds Since 2005 (Not Just Foreclosed Ones) At Risk?

I was listening to a radio program this week (The Kojo Nnamdi show on WAMU in Washington, D.C.) and the topic was–what else–the foreclosure crisis and robo-signing. OK, I thought, this might be interesting. And it was. Not from Kojo’s guests–who were OK but pretty predictable–but from one of the callers. It was a guy named Matthew (who I think is Matthew Weidner, a Florida attorney) who raised a scary point about the foreclosure mess.

Incidentally, Matthew Weidner’s blog has all sorts of fascinating information on it. Some of it’s a bit technical, and some of it’s Florida-specific (that’s where he is), but it’s worth looking at.

While robo-signing is the most recent problem to arise, a deeper problem is all the paperwork that accompanied all the purchase and sale transactions since about 2004 or 2005. Basically, the paperwork is a mess–severely flawed–since all those loans were sliced and diced over and over again to sell to investors. Heck, I even blogged about that–a book review called The Big Short by Michael Lewis. [Tip: Buy it. Read it.]

But caller Matthew’s point was that none of these properties–foreclosure or not–really can be said to have clear title. The paperwork’s bad on all of them. He called this “the elephant in the room” that no one wants to talk about. And, obviously, for good reason.

A lot of the problems with the foreclosure paperwork are coming to light because one of the parties (the owner) is highlighting the problem and using it to block further action. You don’t have the same situation in cases where you’ve got a willing seller, a willing buyer, and no bank in the middle of that transaction.

However, just because no one’s raising a fuss doesn’t mean the problem doesn’t exist. And as those rocks start getting turned over and the worms start wiggling out, someone’s going to notice that a lot of those worms are crawling out from supposedly “clean” sales.

Stop Those Foreclosures Now!

Stop those foreclosures now!

The Washington Post reported on September 22 that Ally Financial and some other large mortgage lenders did not follow proper procedures when processing foreclosures. An excerpt:

Some of the nation’s largest mortgage companies used a single document processor who said he signed off on foreclosures without having read the paperwork – an admission that may open the door for homeowners across the country to challenge foreclosure proceedings.

The legal predicament compelled Ally Financial, the nation’s fourth-largest home lender, to halt evictions of homeowners in 23 states this week. Now it appears hundreds of other companies, including mortgage giants Fannie Mae and Freddie Mac, may also be affected because they use Ally to service their loans.

As head of Ally’s foreclosure document processing team, 41-year-old Jeffrey Stephan was required to review cases to make sure the proceedings were legally justified and the information was accurate. He was also required to sign the documents in the presence of a notary.

In a sworn deposition, he testified that he did neither.

The reason may be the sheer volume of the documents he had to hand-sign: 10,000 a month. Stephan had been at that job for five years.

Wow. 10,000 a month for five years. You do the math.

Let me say that I have precious little sympathy for homeowners who lied about their incomes in order to obtain loans. Or buyers who bought, knowing there was no way they could afford the homes, but figured they could sell for a nice profit. Or for others who gamed the system. Or for others who are now walking away from homes that they’re fully capable of making payments on, just because the home’s lost value. If there was mortgage fraud, then prosecute them to the full extent of the law. (I do have sympathy who, through job loss, illness, or other tragedy beyond their control lost their homes.) Hopefully, I’m making myself clear.

But it looks like Ally may not have been playing by the rules, either. If that’s the case, then let’s go after them to the full extent of the law. And if that means stopping hundreds of thousands of foreclosures, then so be it. And if that means going after them for already completed foreclosures that can’t be undone, let’s do that, too.

Here’s a passage I love from Robert Bolt’s A Man for All Seasons about Sir Thomas Moore:

ROPER So now you’d give the Devil benefit of law!

MORE Yes. What would you do? Cut a great road through the law to get after the Devil?

ROPER I’d cut down every law in England to do that!

MORE (Roused and excited) Oh? (Advances on ROPER) And when the last law was down, and the Devil turned round on you-where would you hide, Roper, the laws all being flat? (He leaves him) This country’s planted thick with laws from coast to coast-man’s laws, not God’s-and if you cut them down-and you’re just the man to do it-d’you really think you could stand upright in the winds that would blow then? (Quietly) Yes, I’d give the Devil benefit of law, for my own safety’s sake.

It may be distasteful. It may be messy. It may stick in your craw. But if Ally failed to comply with the law or applicable regulations, then it must be held accountable.

Bankruptcies, Home Losses Tied To Failed Health Care System

More than half a million families who own homes will file for bankruptcy this year because of illness and medical bills, according to a new study by the Physicians for a National Health Program (PNHP). The study will be published in the August issue of the American Journal of Medicine. PNHP, a membership organization of over 16,000 physicians, supports a single-payer national health insurance program. 

Himmelstein D, Thorne D, Warren E, Woolhandler, S. National bankruptcy in the United States, 2007: results of a national study. American Journal of Medicine. [August: prepublication] Available online at http://www.pnhp.org/new_bankruptcy_study or through the American Journal of Medicine, aimmedia@elsevier.com (212) 633-3944. 

The PNHP study was a broader look at medical bankruptcy: Medical Bankruptcy in the United States, 2007: Results of a National Study. (But because we’re a real estate blog, we’re especially considering the real estate implications of the study.)

The study looked at bankruptcy data from 2007. It found that:

• Illness and medical bills were a cause of at least 62.1% of all personal bankruptcies that year.
• Based on the current bankruptcy rate (expected to reach 1.4 million in 2009), the study’s authors project that medical bankruptcies will total 866,000.
• The proportion of bankruptcies attributable to medical problems rose by 49.6% between 2001 and 2007.

Surprisingly, most of those bankrupted by medical problems had health insurance. More than three-quarters (77.9%) were insured at the start of the bankrupting illness, including 60.3% who had private coverage. Most of the medically bankrupt were middle class before their financial problems. Two-thirds (66.4%) had owned a home.

Out-of-pocket medical costs averaged $17,943 for all medically bankrupt families ($26,971 for uninsured patients, $17,749 for those with private insurance at the outset, $14,633 for those with Medicaid, $12,021 for those with Medicare, and $6,545 for those with VA/military coverage).

Among common diagnoses, nonstroke neurologic illnesses such as multiple sclerosis were associated with the highest out-of-pocket expenditures (mean $34,167), followed by diabetes ($26,971), injuries ($25,096), stroke ($23,380), mental illness ($23,178), and heart disease ($21,955).

Bottom line (according to an accompanying Q&A paper): “It appears that health insurance offers only modest protection against medical bankruptcy.” And from the study itself: “Being uninsured at filing did not predict a medical cause of bankruptcy.”

Among the items that did predict the filing of medical bankruptcy: a gap in coverage, older age, marriage, being female, larger household, and lower income quartile.

The study concludes: “The US health care financing system is broken, and not only for the poor and uninsured. Middle-class families frequently collapse under the strain of a health care system that treats physical wounds, but often inflicts financial ones.”

While the study didn’t get into the real estate implications, other than to observe that 66.4% had owned a home, it would appear that a steady stream of foreclosures will continue–in fact, increase–regardless of what Congress or the Administration does if those actions only address lending practices or other specific real estate issues. What appears to be needed, from my reading of the implications of the report, is a multimodal approach that addresses the underlying causes of bankruptcies. And that includes . . . well, I was going to say a restructuring of the health care system, but maybe something more radical is needed. After all, to borrow a phrase from the last Presidential election, stopping at a so-called restructuring might be akin to putting lipstick on a pig.

Foreclosures and Short Sales: Are They Good Buys?

There’s a general belief that foreclosures and short sales represent good values. Especially in today’s market, a growing number of buyers are asking their Realtors to find foreclosures or short sales for them. Even–perhaps even particularly–first-time buyers assume that a short sale or foreclosure must be a bargain.

But are they the bargains many assume them to be?

Sometimes yes. Often no.

Let me get very specific. There’s a house that’s active right now in Woodbridge, Virginia. I ran across it when checking comps on a property recommended by an investor. (More about that in another post. That lesson, in brief: Always, always, verify claims as to value.)

The house that I ran across is a 3 bedroom, 1.5 bath townhouse. It was bought on January 18, 2006 for $285,000. In early 2007, it was on the market as a short sale at $198,900. Was that a good deal? Well, gee, that’s a 30% discount, right?

The bank foreclosed and took it back on July 3, 2007. It’s now an REO (“real estate owned,” or bank-owned), listed at $186,900. Now, THAT must be a bargain, right? That’s a 34% discount from the $285,000 purchase price. Ready to write a check? I hope not.

I ran the comps on that neighborhood today. There were 34 comps–3 bedroom, 1.5 bath townhouses in that subdivision–properties that had been listed for sale within the past 180 days. Of those 34, 4 had sold. Here’s the information on those 4…the only 4 to have sold. (Note the downward price trend):

4610 Whitaker Place
Close Price: $130,000
Seller Subsidy: $3,900
Close Date: April 14, 2008
Days on Market: 278

4747 Hedrick Lane
Close Price: $140,000
Seller Subsidy: $5,600
Close Date: March 26, 2008
Days on Market: 230

4682 Hercules Lane
Close Price: $172,000
Seller Subsidy: $13,760
Close Date: March 15, 2008
Days on Market: 71

4666 Prather Place
Close Price: $180,000
Seller Subsidy: $5,400
Close Date: December 10, 2007
Days on Market: 113

There are two houses in the subdivision under contract. Because they’re under contract, we don’t know the sale price or whether any seller subsidy was involved. However, we can assume that the effective sales price is below what the properties were listed for:

4646 Charlton Ct.
List Price: $134,900
Days on Market: 6

4728 Still Place
List Price: $94,000
Days on Market: 344

Among the active listings:

4667 Charlton Court
List Price: $120,000
Days on Market: 143

4645 Charlton Court
List Price: $125,000
Days on Market: 167

4675 Whitaker Pl.
List Price: $125,910
Days on Market: 65

So what’s that tell us? The fair market value of that REO at $186,900…that had been a short sale at $198,900…is probably in the neighborhood of $110,000.

And notice the “days on market.” Even the houses that are selling are taking months to sell.

Now, most of the other REOs in the neighborhood aren’t as badly overpriced. But others are priced at $139,000, $135,900, $129,900, and another at $129,900.

Are those good deals? Well, maybe when compared to what they sold for a few years ago. Maybe when compared to what they’ll sell for 5 years from now. But not when they’re compared to what’s selling…and not when you taken the downward price slide into consideration.

So: Don’t assume that just because a property is a foreclosure or a short sale, that it’s a good value. It may not be. Always check the comps.

How Will The Real Estate Market Be Affected By The Presidential Elections?

The residential real estate market has slumped across the country. Some areas have been hit worse than others.

In the search for solutions, some are looking to the presidential elections. There’s a hope that, somehow, the election of a new president will re-energize the markets. But will it?

First, any effect will be psychological. Now, that’s not to discount psychology. A lot of what’s affecting the current market is buyer (and seller) psychology. And that was certainly the case a couple of years ago, before the real estate bubble burst. People were buying on emotion, not facts and reality. The market was soaring; their friends were making fortunes in a matter of months, and they wanted in on the action. The facts suggested that the growth rate was unsustainable. And reality suggested that soon, with continued escalation of prices, no one would be able to afford a home.

So, what might the psychological effect of the presidential election be? Considering that many people blame the current Bush Administration and its policies for the position we’re in now, the election of someone who supports the current policies probably would have very little effect. The election of someone who represents a break with the past could have a significant psychological effect.

Note: I know it sounds as if I’m saying Obama would help the real estate market and McCain wouldn’t. Again, we’re talking psychology, not actual policy. From that perspective, then, an Obama victory might help, and probably more than a McCain victory.

But it could be possible for McCain to stake out a far different economic position than Bush has. Or he might select someone as his vice presidential running mate who would do that. Or announce people he’d like to appoint to his Cabinet.

On the other side, while Obama in general reflects change, he’d still have to articulate a position of change as it applies to the economy in general and to real estate in particular. And, yes, if Clinton somehow got the nomination, the same conditions would apply.

Obama’s website, at the moment, doesn’t have much detail on the subject. He does say:

“Obama will crack down on fraudulent brokers and lenders. He will also make sure homebuyers have honest and complete information about their mortgage options, and he will give a tax credit to all middle-class homeowners.”

But that’s not the root of the problem.

Obama’s site also says:

“Obama will create a fund to help people refinance their mortgages and provide comprehensive supports to innocent homeowners. The fund will be partially paid for by Obama’s increased penalties on lenders who act irresponsibly and commit fraud.”

That might help a small portion of those in trouble. But it won’t help anyone who’s already lost their home, either via a foreclosure or short sale. And it doesn’t appear to help people whose homes have lost substantial value. If someone bought a home in 2006 for $500,000 and it’s now worth $350,000, refinancing that $500,000 mortgage, while lowering payments slightly, still leaves the homeowner “upside down” by $150,000. And all the other homes in that neighborhood are still only worth $350,000…versus $500,000 a couple of years ago.

Meanwhile, McCain does have a proposal, but when you consider the paperwork, the hoops homeowners would have to jump through, and the bureaucracy it’s sure to spawn, there’s a real question of whether it would benefit many homeowners.

McCain’s website says:

John McCain Is Proposing A New “HOME Plan” To Provide Robust, Timely And Targeted Help To Those Hurt By The Housing Crisis. Under his HOME Plan, every deserving American family or homeowner will be afforded the opportunity to trade a burdensome mortgage for a manageable loan that reflects their home’s market value.

Eligibility: Holders of a non-conventional mortgage taken after 2005 who live in their home (primary residence only); can prove creditworthiness at the time of the original loan; are either delinquent, in arrears on payments, facing a reset or otherwise demonstrate that they will be unable to continue to meet their mortgage obligations; and can meet the terms of a new 30-year fixed-rate mortgage on the existing home.

How It Works: An individual picks up a form at any Post Office and apply for a HOME loan. The FHA HOME Office certifies that the individual is qualified and contacts the individual’s mortgage servicer. The mortgage servicer writes down and retires the existing loan, which is replaced by an FHA guaranteed HOME loan from a lender.

So, under McCain’s plan the homeowner had to be creditworthy after 2005…but nevertheless have accepted an “unconventional loan”…and must be in trouble now…but still must be able to qualify for a 30 year conventional loan. That eliminates a huge chunk of the population in trouble.

And then there’s the fact–as with Obama’s plan–that you’d still be refinancing a $500,000 mortgage on a $350,000 property. When Harry Homeowner wants to sell in a year or two, and his property is still worth under $500,000, what then? Are we just postponing tens of thousands of short sales?

If any of the candidates came in with a “Marshall Plan for Housing,” a major program, well laid-out, with some freshness and creativity, that could have a positive effect. Otherwise, I wouldn’t expect much.

One exception: The housing market around Washington, D.C. Every time there’s a presidential election, housing activity increases simply because a lot of people (administration officials, staffers on the Hill, congressmen and representatives, and so on) leave, and others come to replace them. I think it’s safe to say that there might be a greater turnover in all those categories than in past years. So, it’ll help the DC area. As for the rest of the country? Highly unlikely.

Don Tepper,
www.Solutions3DHome.com
www.WeBuyFairfaxHouses.com
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Realtor with Long & Foster licensed in Virginia