TARP Watchdogs Say Government's Not Doing Enough to Stop Foreclosures

The Congressional Oversight Panel, set up to police the U.S. $700 billion bailout of financial markets, said in a report last week that the federal government isn’t doing enough to help homeowners who face foreclosure.

A majority of the panel’s members signed on to the Oct. 9 report, titled “An Assessment of Foreclosure Mitigation Efforts after Six Months.” The panel’s two Republican members distanced themselves from the findings.

The report expressed doubts that the “scale, scope, and permanence” of the Treasury Department’s Making Home Affordable Modification Program would adequately protect U.S. homeowners. The Treasury had previously said HAMP would help prevent as many as 4 million foreclosures with loan modifications through approved servicers and lenders.

“Rising unemployment, weak home prices, and impending mortgage rate resets still threaten to cast millions of Americans out of their homes, with devastating effects on families, local communities, and the broader economy,” the report said, noting that one in eight U.S. mortgages was currently in foreclosure or default, ultimately producing “10 to 12 million foreclosures.”
But panel member Jeb Hensarling – a Republican Texas Congressman who calls himself a “lifelong conservative” on the COP Web site – disagreed with the report. “Instead of focusing its attention on taxpayer protection and oversight,” he wrote in his dissent, “the panel’s majority report implies that the administration should commit additional taxpayer funds in hopes of helping distressed homeowners — both deserving and undeserving — with a taxpayer subsidized rescue.”

The report was the latest in a series of monthly opinions issued by the panel, which is charged with finding ways to improve the $700 billion Troubled Asset Relief Program. Its blistering critique came this week on the heels of an Oct. 6 announcement by officials from the Treasury and the Department of Housing and Urban Development that HAMP had resulted in 500,000 trial modifications for home loans, a month ahead of its self-imposed target date.

The Treasury took that milestone moment as an opportunity to argue for HAMP’s effectiveness, noting that the pace of loan modifications was now greater that the pace of new foreclosures.
But Treasury Secretary Timothy Geithner still acknowledged “a large number of families” were still at risk of foreclosure.

Treasury Officials Deceived Public on TARP Bailout: Inspector General

An inspector general tasked with overseeing the government’s bank bailout program says the Treasury Department misled the public last year and raised doubts about the fairness of its payouts to the nation’s biggest banks.

In a report released Monday, Special Inspector General Neil M. Barofsky alleged that federal officials made bad statements about the health of major institutions that received the first round of massive funding under the government’s $700 billion Troubled Asset Relief Program, the New York Times reported.

The report singled out a statement last Oct. 14 by former Treasury Secretary Henry M. Paulson Jr., who said the big banks were “healthy” and accepted the bailout funds for “the good of the U.S. economy,” so they could continue to extend consumer and business lending even as credit markets tightened.

But the fact was that Paulson and his fellow regulators were gravely concerned that some of those banks would not survive the downturn, Barofsky wrote.

The Federal Reserve and the Treasury were given the opportunity to include their reactions to Barofsky’s conclusions in the report. While the Fed generally agreed with the inspector general’s concern over the public statements, the Treasury criticized his judgment. The official’s public pronouncements “must be considered in light of the unprecedented circumstances in which they were made,” the Treasury said.

The report also suggested that TARP regulators were inconsistent in how they distributed the money, especially in the already-controversial merger of Merrill Lynch and Bank of America.

Under the bailout rules, all institutions were eligible for a capital infusion of as much as $25billion. Yet Bank of America and Merrill were counted as a single institution – BoA was given only $15 billion initially, since Merrill was already set to receive $10 billion. That arrangement was set by regulators even before the companies’ boards and shareholders had approved a full merger.

BoA had to wait until the following January to receive Merrill’s more modest share of the bailout dollars.

Adding to the perceived inconsistency was the fact that when Wells Fargo merged with Wachovia, Wells received both banks’ combined funds at the outset.

But Barofsky reserved the lion’s share of his anger for the Treasury’s glossing statements about the bailout recipients’ health.

“Statements that are less than careful or forthright – like those made in this case – may ultimately undermine the public’s understanding and support,” his report said. “This loss of public support could damage the government’s credibility and have long-term unintended consequences that actually hamper the government’s ability to respond to crises.”

HOPE NOW Data Shows Increase in Workouts, Drop in Foreclosures

An industry report released by the HOPE NOW Alliance this week reveals more promising news for the housing sector. The organization says both foreclosure starts and foreclosure sales are waning, and at the same time, workouts for troubled home loans are rising. If such imbalanced stats continue, it could mean the industry is finally beginning to put a dent in the dark cloud of foreclosures hanging so heavily overhead.

Based on HOPE NOW’s market data, lenders initiated 224,000 foreclosures during the month of August, a drop of 21 percent compared to July’s numbers. Foreclosure sales – 75,000 recorded in August – also fell 16 percent from July.

Lenders and servicers completed 325,000 mortgage workouts during August, an overall increase from the month prior of 28 percent. Repayment plans rose 38 percent and loan modifications were up 7 percent.

The Treasury Department reported last month that 360,000 trial modifications had been started under the administration’s Making Home Affordable Program.

“Our data suggests a correlation between the drop in foreclosures and the increase in workout solutions to help at-risk borrowers,” said Faith Schwartz, executive director of HOPE NOW.
“This shift suggests progress is being made using all of the tools available, such as HAMP – the government backed modification program – and other workout solutions, to slow the pace of foreclosures.”

HOPE NOW’s survey data, though, shows a 6 percent increase in homeowners who are 60 or more days behind on their mortgage payments – bringing that number to 3.3 million borrowers in August. The alliance explained that this jump may include the significant number of trial modifications under the government’s mod program that are not yet permanent.

“Mortgage servicers and non-profit housing counselors are working hard to help homeowners who are facing hardship in these tough economic times,” said Schwartz. “We see firsthand the commitment to offer consumers the best solution that meets their individual needs.”

HOPE NOW and the mortgage industry have helped an estimated 2.1 million homeowners since January 2009. In August and September, alone, HOPE NOW and partners have brought together more than 4,000 homeowners with servicers and non-profit housing counselors through outreach forums that offer face-to-face counseling. Outreach events in southern California and Atlanta are scheduled for October.

Geithner, Holder and State Officials Vow to Crack Down on Mortgage Fraud

The heads of the Treasury, Justice Department, Department of Housing and Urban Development and Federal Trade Commission met with 12 state attorneys general and other authorities Thursday, vowing to crack down on mortgage fraud schemes that have proliferated since the start of the U.S. housing crisis.

“A clear lesson of this financial crisis is that American consumers need better protection against fraud,” said Treasury Secretary Tim Geithner, who along with Attorney General Eric Holder hosted the state and federal authorities. “While we will prosecute anyone who violated the law, going forward we will not wait for problems to peak before we respond. The Obama Administration is acting preemptively, across federal agencies and alongside state governments, to stop consumer fraud.”

The concerted move to target mortgage scams, especially illegal loan-modification and foreclosure swindles, came after Federal Bureau of Investigation Director Robert Mueller announced that mortgage fraud cases under investigation by the FBI had jumped 63 percent in the last year – and more than 300 percent since 2006.

“The schemes have evolved with the changing economy, targeting vulnerable individuals, victimizing them even as they are about to lose their homes,” Mueller said in testimony before the Senate Judiciary Committee Wednesday.

Officials are puzzling over just how to deal with a problem that they agreed was running rampant across the nation. Home foreclosure filings remained around their record highs last month, accounting for one of every 357 households in the U.S., the data provider RealtyTrac said.

The result: Many homeowners who are in arrears are falling for predatory scams online, in the mail and on the phone that promise to relieve them of their debt problems. But with luck and deft, the scammers can end up with borrowers’ personal and financial information, their money, and even their homes.

“These mortgage rescue scams raise false hopes and then cruelly exploit them, which is why my office is fighting them and welcomes the federal government as a strong ally,” said Attorney General Richard Blumenthal of Connecticut, which recently became the first state to ban up-front fees for mortgage repairs – a proposal that’s now being considered by other states.

The FTC also took the opportunity to announce it was initiating legal action against fraud perpetrators, bringing to 22 the number of such cases it has initiated this year.

The authorities also agreed they’d focus on preempting future violations by expanding consumer education programs and improving government efficiency to detect red flags.

“Consumer education is the new burglar alarm, and state-federal cooperative enforcement is the deadbolt that will protect homeowners from today’s crooks – fraudsters who claim to offer mortgage relief,” said Washington State Attorney General Rob McKenna.

New Housing Crash Looms as Shadow Inventory Climbs past 7 Million: Analysts

The housing crash is about to come back with a vengeance, as 7 million new foreclosure properties are about to hit the market, analysts at Amherst Securities Group LP said this week.
The New York-based mortgage-bond analysts called that number – which is about five-and-a-half times larger than 2005’s national tally of delinquencies and foreclosures – a “huge shadow inventory” that threatens to further destabilize a housing market that had shown signs of righting itself over the summer.

Despite some recent optimism, many market observers now agree on several factors that are expanding the nation’s shadow inventory. Loan modifications, legal wrangling, redefaults and bank practices have delayed foreclosures while actually worsening many homeowners’ positions.
As a result, the analysts say a so-far undisclosed glut of homes is about to come to light, and it’s likely to further depress values and sales.

“There’s going to be a flood [of bank-owned homes] listed for sale at some point,” John Burns, a real-estate consultant based in Irvine, California, told the Wall Street Journal this week. He expects prices to decline another 6 percent this year. The analysts at Amherst predicted an 8 percent drop, while a Sept. 11 report by Barclays forecasted a further 13 percent drop, saying the worst of the crash is “decidedly underway,” with increased foreclosures sapping “the strength of the recovery in all but the most optimistic of scenarios.”

One cause of the problem, the Journal says, is unintended fallout from “well-meaning efforts to keep families in their homes.” Foreclosures have been stalled by state moratoriums, as well as by lenders and servicers who are using the time to determine if troubled borrowers are eligible for loan modifications.

“We are going to see a spike from now to the end of the year in foreclosures as we take people out of the running” for modifications or other alternatives to foreclosing, a Bank of America Corp. spokeswoman told the Journal, adding that government pressure to stem foreclosures had reduced their foreclosure sales to “abnormally low” levels.

But as many proposed modifications result in higher monthly payments or other terms the borrowers don’t like, more potential foreclosures are getting held up in court, too. That’s what happened to Debra and Arthur Scriven of Columbia, South Carolina, who told the Journal that Citigroup had attempted to foreclose on them 15 months ago. Since then, the lender offered a modification they felt was unfair, and their situation has stalled as they await a date for a hearing in foreclosure court.

But evidence is mounting that even when modifications are successfully written, the likelihood of a borrower defaulting again – and heading for foreclosure again – is alarmingly high. That’s because even a significant reduction in interest or principal can’t save a homeowner who’s underwater or overleveraged. Modifications have made “not much” of a difference in the shadow inventory, the Amherst analysts’ report said. “And many of these borrowers would default later, if they remain in a negative equity position,” they added.

Banks, too, are contributing to the shadow inventory problem. Fearful of the added costs of acquiring foreclosure properties and trying to sell them, many banks have simply declined to foreclose on some of their most non-performing borrowers. According to a report by LPS Applied Statistics, banks hadn’t even begun the foreclosure process on 1.2 million properties that are 90 days or more past due. In July, 217,000 mortgages that hadn’t seen a payment in a year still weren’t being foreclosed on – a number that’s more than doubled since last year.

Lenders have also scaled back their bidding at the public auctions and trustee sales that usually precede a bank foreclosure. That’s letting outside investors pick up the properties at a deep discount: According to the research firm ForeclosureRadar.com, 19 percent of homes sold in August in California trustee sales went to investors and not lenders – a 500 percent increase in the past year.

What this all means, the Amherst analysts say, is that the shadow inventory will soon eclipse the economy’s recent sunny outlook. “The favorable seasonal will disappear over the coming months, and the reality of a 7 million-unit housing overhang is likely to set in,” they said.

Mortgage Demand Drops Even as Rates Decline

Despite a dip in long-term mortgage rates, the number of people applying for a mortgage fell 2.2 percent last week, according to a weekly survey released by the Mortgage Bankers Association (MBA) Wednesday.

Although week-to-week demand declined, mortgage application volume is still up 22.7 percent compared to this time last year.

For the week ending August 28, 2009, MBA’s refinance index decreased 3.1 percent from the previous week, while the purchase index fell 1.0 percent.

The only segment of the survey that posted an increase in activity was the government purchase index, which rose 0.5 percent — the seventh consecutive weekly gain.

For the month of August, the government-insured share of purchase applications was 40.4 percent for the month of August, up from 38.3 percent in July and 31.7 percent in August 2008. The distribution of government-backed home loans has reached its highest level since February 1991.

MBA reported the average rate for 30-year fixed-rate mortgages at 5.15 percent last week. That’s an improvement over the 5.24 percent average rate the week prior.

Rates for 15-year fixed-rate mortgages averaged 4.57 percent during the final full week of August, down slightly from 4.58 percent one week earlier.

Distressed Sales Prove to Be a Drag on Local Home Prices

With the deepening mortgage crisis came a flood of foreclosed homes repossessed by lenders. The longer these houses sit vacant, they become cesspools for blight and drive down neighboring property values. And evenwhen these homes are successfully sold off, the price reductions required to move them can drag down surrounding home prices with them.

Lender Processing Services, Inc. (LPS) released a nationwide study Thursday that reveals the impact of foreclosure sales on home prices.

According to Nima Nattagh, Ph.D., an SVP at LPS Applied Analytics, sales of foreclosed REO properties account for as much as 60 percent of housing activity in some states.

Based on LPS’ analysis, Michigan and Nevada are the highest ranking states in REO sales, with more than 60 percent of home buys being bank-owned properties in the first half of 2009. California and Arizona followed, with REO sales comprising 50 percent.

“Our study contains specific data to show [a spike in REO sales] is causing precipitous drops in home values,” Nattagh said.

In Michigan, where REO sales accounted for 64 percent of sales in the first six months of 2009, non-REO home prices have dropped by more than 26 percent since their peak in 2005. However, when REO sales are included, the decrease in home prices approaches 47 percent.

In contrast, in Massachusetts, where only 14 percent of homes sold during the first half of the year were REO sales, home prices, excluding REOs, have dropped by 15 percent. When REO sales are included the home price decrease climbs only slightly to 19 percent.

“This study clearly shows that when foreclosure levels are high and REO sales dominate the majority of transactions, their impact on the rest of the market should be taken into account accordingly,” said Nattagh.

In 2006, at the peak of the most recent housing boom, REO sales accounted for a little more than 3 percent of overall sales in California, the nation’s largest housing market. Today, LPS says REO sales account for more than 52 percent of all sales in California – and prices have plummeted.

LPS says in its report that the Northeast and Northwest regions of the country do not appear to have been as hard hit as the West and Midwest states, where a prevalence of subprime and exotic mortgage products, as well as general economic downturn, have elevated mortgage delinquencies to an all-time high.

“While REO sales activity has increased significantly across all regions in the country, there is clearly a dichotomy between states that have seen unprecedented levels of mortgage delinquency and those where the impact of the current housing crisis has been much more moderate,” Nattagh said.

Using a proprietary home price index (HPI) that gauges changes in the value of homes that have sold at least twice, LPS evaluated the influence of REO sales on regional housing markets. The company’s study demonstrates that in states with a relatively high share of REO sales, the impact of these sales on the rest of the market has been much more pronounced.