KeNo's Housing and Economic Portal: Monday September 14 Housing and Economic stories

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Incentives between brokers, banks, and borrowers encouraged false mortgage applications - (gsb.columbia.edu) Liar's Loans: How misaligned incentives between brokers, banks and borrowers encouraged widespread falsification on mortgage applications. During normal times, the rate of mortgage delinquency is between 1 and 3 percent. The average delinquency rate on home loans is just over 10 percent at this stage in the credit crisis. At a handful of banks, the rate is about 25 percent. While many explanations have been offered up to explain these disproportionately high delinquency rates, professor Wei Jiangbelieves the best way to understand what went wrong is to look closely at micro-level data. Jiang worked with Ashlyn Nelson of Indiana University and Edward Vytlacil of Yale University to examine the documentation of more than 700,000 loans issued by one bank that recorded a 25 percent delinquency rate. The bank provided data that included every piece of information recorded at loan origination — including address, reported income, length of time in job and other similar data that lenders typically use to assess the credit-worthiness of mortgage applicants, a large field of data that allowed the researchers to determine how the bank made each loan position. The researchers categorized each of the mortgages as either high-documentation (hi-doc) or low-documentation (low-doc), depending on the amount of supporting data accompanying the loan application. Across both categories, Jiang and coresearchers found that the greatest delinquency rates came from the broker channel — loans originated by brokers were 50 percent more likely to be delinquent than loans originated by the bank. They also confirmed that brokers approached lower quality borrowers — people with lower income, lower credit scores and who live in poor neighborhoods. But Jiang and her coresearchers found that while low-doc borrowers had higher rates of delinquency, the loan applicants actually looked better on paper than high-doc borrowers. “Low-doc borrowers had slightly better credit scores, slightly better incomes — slightly better everything,” Jiang says. “But we estimate that low-doc applicants exaggerated their income by about 20 percent on average.” A look at documentation alone without considering the point of origin would not reveal a true sense of default risk, but a look at origination alone could provide a good sense of which loans are at higher risk of default. Jiang says the problem with the low-doc loans is not necessarily a visibly lower lending standard. Rather, it’s the lack of verification of the numbers provided in loan applications. “Is there undisclosed debt? Is the job stable? Neither the bank nor its brokers held the application data to any standard verification test.” The highly imperfect result of such laxity reflects a common economics problem. “When you delegate a job to someone else,” Jiang says, “that person doesn’t take your full interest to heart.” The interests of the bank and the broker are misaligned: the banker will eventually take on the loans as assets, but the broker’s incentive stops once the deal is closed and a commission is earned. Consistent with this, Jiang found that correspondent brokers — those who contract through a single bank and thus have an interest in maintaining a good relationship with the bank — are far less likely than non-correspondent brokers to bring in loans that later result in high delinquency rates. A second pair of misaligned interests exists between banks and borrowers, who are not always motivated to provide accurate information to the bank. Jiang found that low-doc borrowers whose applications were not verified tended to exaggerate their income by about 20 percent: hence the higher the reported income the greater the likelihood of delinquency. (In a full-doc loan the reverse is true: the lower the reported — and verified — income, the greater the likelihood of default.) The bank also applied lower standards to mortgages that were more likely to be securitized. “People argue that a bank cares more about broker lending standards since the bank gets stuck with the loan permanently,” says Jiang. “But if a bank can sell the loan to the secondary market three weeks after it’s made, then the bank cares less about standards.”

Online database lists salaries of more than 134,000 workers across Bay Area- (www.contracostatimes.com) A public health care district in southern Alameda County paid its chief executive $876,831 in 2008 — more than twice as much as any other local government employee in the East Bay, San Francisco,San Mateo County and San Joaquin County, an extensive survey of salary data by the Bay Area News Group found. The pay of Nancy Farber, CEO of Washington Township health care district, was nearly three times as much as what Contra Costa County paid the chief of its hospital in Martinez and four times as much as the top administrator at San Francisco General Hospital. Farber's pay more than doubled the salaries of administrators at government agencies with thousands more employees and budgets that dwarf that of the Washington district. The district has an elected board of directors that runs one hospital. What appears to be the only comparable salary in the Bay Area is that of the CEO of the Marin Healthcare District, Lee Domanico, whose contracted base salary is $498,000 and whose contracts allows for bonuses of as much as $209,016. The district has not answered a request for the exact amount of Domanico's 2008 pay. Farber's pay is but one example of data culled from the salaries of more than 134,000 local gover acrosnment workers in the Bay Area through Public Records Act requests. The disclosures follow a 2007 California Supreme Court ruling stating that the information is public, a decision in a case brought in 2004 by the Bay Area News Group's Contra Costa Times. Salaries ranging from those of firefighters and janitors to health care administrators and lawyers in 64 counties, cities and districts is now posted atContraCostaTimes.com and InsideBayArea.com. The salary data will be a growing presence on the Web sites of the Bay Area News Group. Information on additional government entities will continue to be added. The data show wide discrepancies in pay and sometimes high salaries in government agencies, such as the Port of Oakland, where a semiskilled laborer grossed $123,450 in 2008, and in Newark, in southern Alameda County, where more than half of the 215 city employees were each paid more than $100,000 last year and the average gross pay was $109,027. As governments struggle through layoffs, furloughs and attrition, leaders are realizing that they have "given away too much" in salaries during flush budget years, said Gary Wyatt, president of the California State Association of Counties. More than 80 percent of general fund expenditures on a given government level are related to personnel, said Wyatt, an Imperial County supervisor. High salaries, he said, are often the result of "people being just too generous" with public money.

Record 8,000 mortgages face foreclosure in Orange County - (mortgage.freedombloggingcom) There were 8,346 outstanding foreclosure auction notices in Orange County at the end of July, up 12% from June and more than double the year ago total, reports ForeclosureRadar.com. I previously blogged the July total (it has been revised slightly), but I now have a chart showing the rise in active notices of trustee’s sale (NTS) since the credit crunch got serious in September ‘06 (click on it twice for larger image.). An NTS is filed on a home loan after a notice of default and it announces a property will face a foreclosure auction to pay off debt owed. Sean O’Toole, president of ForeclosureRadar, said not all auction notices result in foreclosure, though most do. However, the data is skewed because of the Obama administration’s mortgage modification plan, he said. An unknown portion of the active NTS are likely people in the trial modification period, he said. And the political environment has changed. Where regulators once pushed banks to deal promptly with bad loans, now they are focused on helping people avoid foreclosure — at least according to their public statements — O’Toole said. In such a climate loan servicers and banks can take their time dealing with bad loans. O’Toole also speculated lenders that retained servicing rights to loans may fear being sued by investors. As servicers foreclose on more home loans losses will mount, and investors will notice. He said investor litigation could rival the tobacco trials and Congressional hearings, with lenders swearing they never thought the loans would default. Interesting analogy.

Government as Wall Street's enabler - (www.ocala.com) Many people were outraged when Goldman Sachs returned $10 billion in federal bailout money just in time to report its biggest quarterly profit ever, along with a plan to pay $11 billion in employee bonuses. Barry Ritholtz, who writes The Big Picture, a popular financial blog, wasn't heartened by the news, either. Ritholtz, however, tried to keep his sense of humor. He posted a satirical story on his Web site by the comedian Andy Borowitz, titled "Goldman Sachs in Talks to Acquire Treasury Department: Sister Entities to Share Employees, Money." This is very much in the spirit of Ritholtz's book, "Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy" in which he argues that the American financial system has been twisted beyond recognition by cynical bankers and their Washington enablers, who champion the free market in good times but cry out for government rescue when times are hard. The author writes with the fury of an insider mortified by the behavior of his heretical peers. Ritholtz is himself a creature of Wall Street -- the chief executive of FusionIQ, an online equity research firm that profited last year by shorting the shares of companies like A.I.G. and Lehman Brothers. The way the author sees it, there are two kinds of people on Wall Street. There are the ones, like himself, who believe that the industry should be a "brutal meritocracy" where "you eat what you kill." Then, he writes, there are the ones at the top of some institutions that made billions of dollars disappear in the last 12 months through misuse of numbingly complex derivative products. When it appeared that they might go hungry, they hurried to Washington to feed on the government's bailout package, which the author calculates will leave taxpayers with $14 trillion in liabilities if you also factor in the rescues of General Motors, Fannie Mae and Freddie Mac. "Yes, that's $14 trillion (plus) -- about equal to the gross domestic of the United States in 2007," Ritholtz laments. "And as 2008 came to a close, even more industries caught the scent of easy money: Automakers, home builders, insurers, and even state and local governments were clamoring for a piece of the bailout pie." Many argue that the government averted a catastrophe by pumping money into the banking system. Ritholtz isn't so sure. He thinks the rescue of Bear Stearns emboldened the ailing Lehman Brothers to brush off potential saviors like Warren E. Buffett, who were ready to invest in it. In September, Lehman went bankrupt and all hell broke loose. Suddenly, the government couldn't dole out money fast enough.

Nudist Property Market Survives U.S. Housing Disaster - (www.bloomberg.com) The U.S. naturist property market has survived the global recession because the majority of house- buyers in unclothed communities are older and don’t need mortgages, the Financial Times reported. Naturism has grown to a $450 million industry from $400 million five years ago, primarily because of real estate values, the newspaper said, citing a spokeswoman for the American Association for Nude Recreation. House prices in naturist communities haven’t dropped as much as those in the general market, the FT said, citing Marc Seligman, who manages a naturist real estate Web site.

Orlando-area suburbs face foreclosure crisis -- OrlandoSentinel.com - (www.orlandosentinel.com) When first-time homebuyer James Wentworth left South Florida three years ago and purchased a new house in the burgeoning suburb of Poinciana, he had tired of city living and was drawn by the quiet neighborhood streets an hour south of Orlando. But now that the former bus driver and his roommate have lost their jobs, had their water shut off and found themselves facing foreclosure, suburbia has become a dead-end street. The two men represent the extreme of what experts describe as a new "outer edge" of poverty in remote suburbs hit hard by foreclosures. Fueled by "subprime" mortgages that made new homes suddenly affordable for those who otherwise might not have qualified, outlying communities mushroomed during the middle of this decade. Wentworth's roommate recently enraged neighbors by walking the streets with a hand-lettered sign that pleaded for gas money to make the 20-mile round trip for a loaf of bread and boxes of macaroni and cheese. The same remoteness that drew them to the community that straddles Polk and Osceola counties has left them stranded in a sparsely furnished house. The nearest bus stop is a two-hour walk. Existing without running water for more than a week, they have no church or emergency housing within seven miles. Every day they face the prospect of losing power and cell-phone service, which would further isolate them. "I would like to stay here. But in the dark, with no light, no water, no phone?" said Wentworth, 42. "... I've got no place to go." Some of the new suburbanites are losing their jobs as unemployment nears 9 percent, and they're losing their homes as adjustable-rate mortgages double their monthly payments. Most of the 7,700 foreclosure filings reported for Metro Orlando in February by RealtyTrac Inc. were in outlying areas that don't have the social-service safety nets that have long served needy residents in towns and cities.
"In the outer-edge suburbs, there are no nonprofits. Charitable support is much weaker. We're likely to see outer-edge ghettos with higher home-vacancy rates for quite some time," said John K. McIlwain, senior fellow for housing at the Urban Land Institute in Washington.

Banks Postponing Day of Reckoning, But Not To Help Borrowers - (www.bankinvestmentconsultant.com) Pick up just about any city's newspaper or turn on any news show, and if the topic is real estate, the banking industry is likely being lambasted for foreclosing on troubled homeowners. But industry data and anecdotal evidence suggest banks and servicers have been dragging out the process-not rushing to kick people out of their homes. Granted, the deferrals may not be motivated by compassion, or even political pressure. Rather, banks and mortgage investors want to avoid repossessing hundreds of thousands of homes, which would produce losses and hits to capital. "The goal is to hold off on foreclosures and take losses as slowly as possible to keep balance sheets up," said Deborah Voelz, the chief financial officer of National Asset Direct Inc., a New York buyer and servicer of distressed loans. "Everyone is looking at what the ultimate loss is going to be and whether it makes sense to hold off another year or two and mitigate the results." The foreclosure process — and it is a process — now takes, on average, 18 months to two years, up from 15 months a year ago, according to Amherst Securities Group LP. Backlogs in county courts and at servicing companies, along with local government moratoriums, have contributed to the delays. But plenty of signs indicate that the mortgage companies themselves are in no hurry to seize their collateral. Rick Sharga, a senior vice president at RealtyTrac Inc., an Irvine, Calif., company that monitors foreclosure filings, said banks often start proceedings but then decide "they don't want the property" and suspend the process indefinitely. Of the 2.3 million homes that received foreclosure notices last year, one-third had been repossessed by yearend, according to RealtyTrac. Banks also "are allowing borrowers to be delinquent for longer and longer periods of time before initiating foreclosures," Sharga said. Tom Booker, a senior vice president in the default information unit at First American Corp. in Santa Ana, Calif., concurred. "There are borrowers who are six or eight months in default; they may have exhausted their workout options; but they're put on a forbearance plan because it's an interim to a final resolution, which is foreclosure," he said. "Banks don't want to take the losses now." Deferring foreclosures could have bottom-line benefits, experts say. With fewer foreclosed properties hitting the market, housing prices have rebounded slightly. Moreover, properties might recover more of their value later on, so by waiting, banks may be able to cut their ultimate losses. "Everybody is waiting to see what the market is going to do from a property price perspective," Voelz said. "At some point, they have to liquidate these assets."

Caught in foreclosure relief scam, a couple loses their house - (www.journalstar.com) Denise and Kevin Barret thought they had found a solution earlier this year after they fell behind on their mortgage. One night in February, they saw a television ad for the Federal Loan Modification Law Center, a very official-sounding entity that promised it could reduce homeowners' payments while saving their homes from foreclosure. So the Barrets called the number and were told that for an initial payment of $995 the company could renegotiate the couple's delinquent mortgage and get them a better interest rate and more affordable payments. It sounded like a good deal, and the company at the time had a reasonable rating with the Better Business Bureau, Denise Barret said. So the Barrets signed up. Denise said she was in contact with the company weekly as representatives told her they were negotiating with Liberty First Credit Union, the Barrets' lender. Every time the Barrets got a letter or phone call from Liberty First, Federal Loan Modification Law Center representatives told them to ignore it, saying it was just a scare tactic, Denise said. "They kept telling us, 'Don't call the bank, it will just slow down the process. Don't offer them any money,'" said Kevin Barret. That's exactly the opposite of what credible experts advise for homeowners who fall behind on their mortgages. The result: Around the first of May, the Barrets received a letter from Liberty First, informing them their home was scheduled to be sold at auction. Frantic, Denise said she called the credit union. "Liberty First said they had never heard from them," she said. The Barrets bought a century-old house near 120th and Nebraska 2 in 2004. They paid $165,000. The couple had moved back to Nebraska in 1999 after Kevin served in the Marine Corps. They initially settled in Eagle. Denise said they fell in love with the converted bunkhouse on seven acres, which is not far from Otoe County, where the Barrets both grew up - she in Nebraska City, he in Syracuse. At first they had a rent-to-own arrangement with the previous homeowners, and things went pretty well for a couple of years. But then came 2006. In February of that year, Kevin, who was 46 at the time, had a heart attack. He underwent quadruple bypass surgery the next month. He had barely recovered when Denise was struck by a brain aneurysm in August of that year. To help pay for their medical bills, the couple refinanced their mortgage and cashed out some of the equity in their home, which Kevin said at one time was as much as $60,000. Things seemed as though they couldn't get any worse for the couple, but then Kevin lost his job right before Thanksgiving. The bad news continued just a few months later, when Denise, too, lost her job. The Barrets again refinanced their mortgage in November 2007, increasing the mortgage debt from $148,000 to nearly $178,000 between a first and second mortgage, according to county real estate records. Denise said their mortgage payment jumped from around $1,300 a month to more than $1,800. In August 2008, the couple filed bankruptcy, just after they started falling behind on their mortgage payments. County real estate records show Liberty First issued a default notice at the end of June 2008. Kevin said they'd fall behind on payments, catch up, only to fall behind again.