Behind the Bailout, is it Really a Bad Loan, or a Lack of Confidence
Ever since the Enron mess, the government has required banks to give consumers reports that show a truer reflection of the current asset value on their books. This means when the value of a house drops, resulting change in the loan to value the loan will be considered a “bad loan.” Even though the homeowner may be current on all payments, the loan is now reported, on paper, as a bad investment.
For example, let’s say newly married Tom and Mary take out a mortgage with 5% down. So they have a 95% loan to value mortgage on their $200,000 home. So the the house is purchased for $200,000, the mortgage is $190,000, they put $10,000 down. They have conscientiously made all payments on time for the last 3 years. However, in the last three years their home’s value has dropped by 10%, reducing its asset book value to $180,000. The bank (or FNMA/FHLMC) depending on who holds the loan) must now must report the lower asset value on their books. This means they do not show enough value on the books to cover their loan in case of foreclosure.
In reality, if Tom and Mary continue to pay, there’s no problem. Except, it looks bad on the books, and the confidence level of the mortgage holder may wane.
But the financial institution now files its required report, and the investors see that the assets protecting their (mortgage backed) securities are no longer enough to repay the loan in the event of foreclosure. Remember, Tom and Mary are paying their mortgage on time, each and every month- as are the vast majority of people with a mortgage. Yet, if the loan to value is short because the house value dropped, the lender believes it may be in trouble and in need of funds to shore-up his balance sheet for the investors who purchased the securities backed by these mortgages. To some extent, it is a matter of confidence. Just as it is in the stock market. If Tom and Mary make payments, as most homeowners do, no problem. But what if they don’t. The mortgage holder’s confidence wanes. Will Tom and Mary continue to make their payments?
However, it gets worse. When people have taken out second and third mortgages worth significantly more than the property is currently worth, they made bail. This leaves the investor holding the bag, particularly because of the recent change in moving away from Private Mortgage Insurance. For many years PMI protected the lenders against falling asset value, by double checking the likelihood of repayment, and writing insurance against default. But in order to save the money on PMI, many took out first and second mortgages simultaneously (known as piggybacks) in order to circumvent PMI payments. The banks got a slightly higher yield on these loans, but much higher exposure because there is no PMI to fall back on.
There is no doubt that poor lending practices and greed are primary causes of this mess. Consumers lied on unethical and illegal loan applications, lenders were negligent in checking loan applications, financial advisers told the public to take out second and third mortgages to pay for cars and boats, to pay down credit cards, etc., and regulators, they did nothing. All of this has led to a tightening of credit that ought to help alleviate the problem in the future. However, today, tightening credit is a disaster for the average consumer. Because although most of us pay our bills on time, the system no longer trusts us to pay. The system doesn’t have the safety net of enough value in our houses, tightening credit. So legitimate, needed credit will be almost impossible to get. The parents wanting to send their child to college will not be able to pay because they can’t get a loan. The car that breaks down cannot be fixed because the owner can’t afford to fix it and can’t get a loan. The small business that has the cash flow problem and can’t get a loan, will be unable to make payroll, putting people out of jobs.
It’s not over. Our next round will be rise in rates for adjustable-rate home equity lines of credit (HELOC). Because of the dropped value of homes, many of these loans are now subprime. Many of these adjustable rate mortgages are set by the LIBOR. LIBOR went up 50% last week. A tightening of credit. Now, when they go to refinance out of this expensive adjustable-rate product, they will be in trouble because there’s no longer enough equity in their house to cover it. We got ourselves into this one. In order to get new computers, new cars, new boats, and the latest television sets, we all borrowed unwisely. Recognizing that we could write off the interest on that second mortgage, and recognizing that it had a lower interest rate than our credit cards, we bought, and bought, and bought. Those with 2nd and 3rd ARM’s are in trouble. They will have to make some tough decisions. Take a second job, sell the new boat, take Johnny out of that private school? But as consumers, we knowingly put ourselves there. In most cases, we have no one to blame but ourselves. Somehow we believed that the value of our house would always go up, up, up and we could sell it tomorrow for much more than we paid for today.
This will be a difficult lesson for us all. Our parents and grandparents worked hard to pay off the mortgage. Remember the black and white movies where a grandma and grandpa danced as they tore up the mortgage? Where mom and dad saved to buy a new couch or dining room set. It’s a scene from the past. Somewhere along the line we lost the vision to own things free and clear, and the desire to be mortgage free. We saw our home only as an asset to be borrowed against for a new car or TV set. But I believe we are smart people, and that we can learn from hard knock lessons. Let’s hope the government steps up and bales us out from this disaster once again, there is no other way. Let’s hope we all learn from this. We must all pay our own way, as we go.
Proposed RESPA Changes have Value for the Consumer
We all know the bad apple loan officer, title agent or appraiser. We all know the consumer, who anzious to move into that new home, signed on for a bad deal. Well, RESPA is looking to help out that consumer.
The vast majority of consumers shop for a mortgage focusing not on rates or settlement costs or other loan features, but on the one key number that signals to them whether they can afford the loan: the grand total that they will have to pay each month for their home. Most people know how much income they take home each month, and they try to figure out whether out of that monthly amount, the monthly mortgage payment will fit into their budget.
The new RESPA rules propose that the GFE disclose the monthly total of principal, interest, and mortgage insurance. I believe the GFE also disclose the estimated monthly payment for property taxes and insurance as well and for any adjustable rate mortgages, the GFE should provide the grand total both for the initial monthly payment and for the maximum monthly payment that could be reached under the loan terms.
The proposed RESPA law is designed to improve the life of the consumer, by requiring advance disclosure of accurate settlement costs, including higher enforcement of the existing law that requires delivery of the HUD-1 settlement statement three days prior to closing. It seeks to penalize those who hand out “bad” Good Faith Estimates (i.e. those where the estimated charges on the GFE bore little or no relationship to the actual charges shown on the HUD-1 closing statement.)
In the past, RESPA has had none of the proverbial “teeth” to enforce the law. So that, theoretically, handing out a blank piece of paper that said Good Faith Estimate with just about anything filled in would qualify. The proposed law would create a new GFE form to assist a line-by-line comparison between the GFE and the HUD-1 at closing. The plan is to better monitor compliance with newly defined tolerance limits that restrict the allowable differences between estimated and actual closing costs. The rule would also clarify and update consistent escrow account requirements and mortgage servicing transfer provisions for lenders.
To put teeth in the plan, HUD says it plans to seek legal amendments to RESPA to obtain specific enforcement authority including money penalties; the ability to obtain court orders to prohibit actions; and authority to require restitution for violations as well as the ability to further amend and enforce disclosures. They will be focusing particularly on the GFE and Special Information Booklet; loan servicing; prohibition against kickbacks; illegal referral fees; unearned junk fees; title insurance, and escrow account fees. RESPA will also seek such authority for HUD and State Regulators.
The proposed rule does not include the packaging or bundling stipulations that proved controversial in 2005 and provides a 12-month transition period for compliance once finalized. The proposed rule will also allow RESPA disclosures to be given to consumers in electronic form (so long as the consumer consents.) And will permit documents to be retained in electronic form, so long as certain requirements for document retention are met.
While HUD estimates that consumers will save on average $518 to $670 per transaction, industry insiders speculate the changes may actually cost consumers more per closing. I think it will make everyone a bit more honest, or at least a bit more careful in our disclosures.
RESPA – Pick your Battles
I am distressed when I hear RESPA in reference to knit-picking minor issues, and even more so when they turn to Law Suits. Point in case:
In Idaho, three Boise title companies each paid a $150 fine last year for providing gift certificates that were used as door prizes during a showcase of homes, according to orders by the Department of Insurance. They were found in violation of a 2007 rule issued by the department to address “an accumulation of past and present abuses that had previously gone unreported.”
Should items such as door prizes, presumably going to any random person who happens to attend the showcase of homes, really a RESPA violation. I mean, is that really an inducement to do business with a title company? To me is seems more like a good will gesture. Now, I don’t know if only one title company gave the door prize, and I don’t know how many builders were in the showcase, but really, don’t we have better things to worry about?
Mr. Eborall, an Idaho Land Title Association board member and an executive with Alliance Title & Escrow Corp. in Boise, makes comments in the article above are correct. The comparison to other forms of insurance is not fair. Property insurance is paid annually. Title Insurance is only paid ONCE and protects the lender for the life of the loan and owners for so long as they own, and even after they sell, if they give a Warranty deed to their buyer.
Title Insurance is a difficult business. It requires lots of skill and knowledge, and a significant cost for the research of public records. The one-time charges are generally quite reasonable for such a potentially large loss – the price of a home. Yes, there are some real issues for RESPA to protect the consumer, but please, let’s pick the battles.
How Bad Are Title Insurance Kickbacks?
I am certainly aware of what I consider not only unethical, but illegal kackbacks in the title industry going back well into the 1980′s. For example, giving real estate agents their commission check at the closing only if they close with the affiated title company for one. I mean, tell me, as a real estate agent, living from paycheck to paycheck, is it NOT an inducement to do business when your employer says “well you can get paid immediately if you close with us, or we can pay you next month if you choose to close with any other title company.” But here is a blog item that I think tops them all, showing that problems are more egregious than ever. (To see the full blog, and to see what the public is seeing about us, go to: LATimes.)
“I used to work for a Title Company. When I was working for a competitor this Title Company recuited me with a hefty Bonus. Then told me to bring them all the business I had at ANY cost. I did! Flew me out of state to a Lenders Main Branch 3 times. They gave this Lender a kickback for every closing. Then the market changed, people were asking questions. Guess what, they found a way to get rid of me How corrupt is that. Now this “Bloodless Empire”, that’s what everybody calls them now, gets away with murder. Trust me, this is a “Bad Industry” today. 20 years ago a “Great” Industry and a nessesaty. Today, I’ve seen so much and can tell you a lot that has gone on, one for instance, is a golfing trip to La Jolla for 2 days including a dinner out in Downtown San Diego on a weekend, ran by a Title Co. Sales Rep in which my company paid for. Also, a golfing excursion to Mexico, Las Vegas, Cocktail parties, Tickets to Laker/Dodger games, a tent at the Buick Invitational. All with R.E agents and Lenders…. I can go on and on!!! You tell me…. Legal????”
Another Class Action Lawsuit against Title Underwriters
A recent lawsuit out of NY alleges that the four dominant title underwriters illegally fixed prices and paid illegal kickbacks to individuals or firms to recommend their services to consumers in specific violation of Federal Law under RESPA. It states that examinations of title insurers’ financial statements have revealed millions of dollars spent on gifts, auto expenses, and travel and entertainment expenses paid to real estate agents and mortgage brokers in return for referrals. and that the rates submitted by the title insurance companies also overcharged consumers because they concealed the illegal referrals and kickback payments that make up much of the cost of a title policy.
In addition, a District Judge has certified a class action lawsuit from Pennsylvania against Commonwealth Land Title. The suit is the second one approved in just days in federal courts on behalf of homeowners who claim they were overcharged for title insurance policies after they refinanced their home loans. In this specific case, homeowners claim they were never told they should have qualified for discounted re-issue pricing on refinance policies.
Does your underwriter have a filed rate for either a substitution loan or a re-issue rate that you should be using?
According to The Wall Street Journal, a report by the Government Accountability Office found that at least six states, including California, Colorado, Florida and New York, have targeted alleged kickbacks and payments by title insurers to agents and others. Since 2003, title insurers, their agents or affiliates have paid more than $100 million in fines, penalties and settlement money in cases brought by state and federal regulators.
Home Closing 101: An Educational Initiative of the American Land Title Association
