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Source of Title Blog : Subprime Lending

Government's Poor Judgment Making Things Worse
by Robert Franco | 2008/03/05

There is an interesting New York Times article, Bush and Fed Step Toward a Mortgage Rescue, that describes what appears to me to be a series of bad moves that will threaten the viability of Freddie Mac, Fannie Mae, and the FHA. If the question is "What are we going to do with all of the bad mortgages out there?" Well, the governments answer seems to be "We'll take 'em." The private sector got themselves into trouble making bad loans - having the government buy them up seems to be an exercise of incredibly poor judgment.

He (Bernanke) also suggested that the Federal Housing Administration expand its insurance program to let more people switch from expensive subprime mortgages to federally insured loans.

And he urged the two government-sponsored mortgage companies, Fannie Mae and Freddie Mac, to raise more capital so they could buy more mortgages. The companies already guarantee or hold as investments about $1.5 trillion in mortgages.

What is the logic here? These mortgage are the ones that caused this whole mess - making them federally insured isn't likely to make them better loans. All this will do is shift the risk from the private sector to the taxpayers. If that happens, a full government bailout will be inevitable.

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Categories: Legislation, Mortgage Industry, Subprime Lending

Source of Title Blog :: 6 comments ::

Bernanke: Reduce The Amount Of The Loan
by Robert Franco | 2008/03/04

Feberal Reserve Chairman, Ben Bernanke calls for a vigorous response from lenders to aid distressed homeowners. In what he calls a "longer-term permanent solution," Bernanke believes that lenders should write down principal on mortgages. That is certainly a tough sell to lenders, but the idea has some merit.

"Reducing the rate of preventable foreclosures would promote economic stability for households, neighborhoods and the nation as a whole," Bernanke said. "Although lenders and servicers have scaled up their efforts and adopted a wider variety of loss-mitigation techniques, more can, and should, be done," the Fed chief said.

One of the suggestions Bernanke made was for mortgage and other financial companies to reduce the amount of the loan to provide relief to a struggling owner. "Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure," Bernanke said.

With low or negative equity in their home, a stressed borrower has less ability — because there is no home equity to tap — and less financial incentive to try to remain in the home, he said.
(See Fed Chief: Mortgage Crisis to Continue)

There is a problem here, however, that would make his suggestion very difficult to pull off. How do you determine who gets the reduction in principal? Lenders do not want to reduce principal for everyone - and definitely not those who have the ability to repay their mortgages in full. To the extent that borrowers can repay their obligations, they should. So who would determine who can and who cannot afford to payback their mortgages?

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Categories: Foreclosures, Innovation, Legislation, Mortgage Industry, Subprime Lending

Source of Title Blog :: 4 comments ::

God On The Mortgage Crisis
by Robert Franco | 2008/01/02

When all else fails, pray! A recent Reuters article, Clergy Take on U.S. Mortgage Mess, examines the religious aspect of the mortgage crisis. Foreclosures have become a topic at church services around the country as many church-goers seek advice from their spiritual advisers. Below are a few snippets from the the article and my thoughts on the subject.

While the financial fallout of the mortgage meltdown has been well documented, the moral dimensions have not been widely discussed, religion experts say. They say they are particularly troubled on a moral level by the explosion of subprime mortgages, which allowed lower-income people with weak credit to buy homes based on attractive teaser interest rates that now are resetting to levels they cannot afford.

Though I am not a particularly religious person (at least compared to some), I did complete my undergraduate business degree at a Christian university. Embodied in most of our courses was an underlying theme of good Christian values and moral practices. I found them to be common sense ethical guidelines whether you choose to label them as Christian values, or not. Corporations, through their officers and boards of directors, have to answer to shareholders in their pursuit of profits but I always found it odd that so many people automatically assume that means higher stock prices and more dividends. Why don't they believe that shareholders expect their investment money to be used ethically? Perhaps that is a commentary on the decline of modern society. Do shareholders indirectly support unethical, immoral behavior through their investments? Furthermore, do they expect it?

Answering to shareholders should include strong moral and ethical leadership, as well as profits. Of course, profits are important for the success of a business - but they should not come at the price of integrity.

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Categories: Ethics, Mortgage Industry, Subprime Lending

Source of Title Blog :: 5 comments ::

More Support For Bankruptcy Reform
by Robert Franco | 2007/12/05

As I mentioned in a previous post, there is a movement in the House of Representatives to reform the bankruptcy code to allow the approval of a plan that would modify the terms of mortgages. (See Bankruptcy: The Subprime Borrowers' New Best Friend) The idea seems to be spreading to the Senate. Senator Banking Chairman Christopher Dodd is planning to introduce similar legislation.

Senate Banking Chairman Christopher J. Dodd (D-CT) said Wednesday that he plans to introduce legislation soon that would rewrite portions of the bankruptcy code. His package will include language that would change the treatment of mortgage debt to help struggling property owners hold on to their homes, considering debtors’ “individual circumstances” when determining their ability to pay off their debts. It also would ensure that medical debts can always be discharged in bankruptcy.

In response to problems in the subprime mortgage market, other lawmakers in both chambers already have been pressing changes to the bankruptcy law similar to Dodd’s mortgage proposal. His measure would allow bankruptcy courts to modify the terms of home mortgages during bankruptcy proceedings, something prohibited under current law. In the House, members also have been working on a deal to pass similar legislation (HR 3609). The Judiciary Committee on November 7, postponed a scheduled markup of the measure after a compromise designed to win some Republican support fell through.

This type of change would allow for case by case application of remedies for those who need it most, those who qualify for bankruptcy protection. The most recent changes to the bankruptcy code were creditor friendly, making it more difficult for debts to be discharged. I'm not so sure that makes good sense - after all, bankruptcy is supposed to be a way for those in need to get a fresh start.

On one hand, most of these debtors got themselves into their predicament. On the other, creditors, who are much more sophisticated, have extended loans to many who could not afford them. Should we reward those who intentionally made bad loans?

In my opinion, some form of this legislation will pass and mortgage creditors will be subject to some degree of control by the bankruptcy process. Perhaps this will light a fire under their loss mitigation teams to help distraught homeowners before they are forced in to bankruptcy.

Robert A. Franco

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Categories: Legislation, Subprime Lending

Source of Title Blog :: 0 comments ::

The Big Freeze of 2008
by Robert Franco | 2007/12/03

The "Big Freeze" this winter does not refer to a particularly cold winter - rather it refers to a freeze on interest rates of subprime loans. Mortgage industry executives are working on a rescue plan that would freeze interest rates for up to seven years on some subprime loans.

According to Reuters:
Details over which mortgages would be considered for an automatic interest rate freeze of five to seven years are still sketchy. The source said that initially, only subprime loans with two- or three-year periods of low "teaser" rates would be considered, but more traditional subprime loans with longer fixed-rate periods could also be modified.


Federal Reserve officials estimate that 2 million mortgages face resets and as many as 500,000 of these could lose their homes.

Deutsche Bank said in a report on Friday that the population [the] plan is aimed at -- owner-occupants with at least some equity and facing their first reset -- comprises 1.2 million loans valued at $258 billion, or one third of outstanding "first-lien" subprime loans.

The problem with such a blanket plan is that it may invite lawsuits from investors who bought mortgage backed securities valued with anticipated interest rate hikes. Changing the yield of their investments at this point could be a sticking point that could nix any broad-reaching automatic fix. Furthermore, though the goal is to provide relief to many borrowers who may not be able to afford the payments on their mortgages once the interest rates adjust, a blanket freeze on interest rate hikes may benefit some borrowers who are capable of making their payments as agreed.

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Categories: Foreclosures, Mortgage Industry, Subprime Lending

Source of Title Blog :: 8 comments ::

Bankruptcy: The Subprime Borrowers' New Best Friend
by Robert Franco | 2007/11/15

In response to evidence that as many as 2.2 million homeowners will lose their homes due to unsustainable subprime mortgages, Rep. Brad Miller (NC) and Rep. Linda Sánchez (CA) have introduced legislation that will provide some relief with a relatively simple change to the bankruptcy code. (H.R. 3609: Emergency Home Ownership and Mortgage Equity Protection Act of 2007) Currently, in a chapter 13 bankruptcy, the bankruptcy judge may approve a plan to "modify the rights of holders of secured claims, other than a claim secured by an interest in real property that is the debtor's principal residence." The proposed legislation, along a with a few other provisions, would strike the principal residence exception. What this means is that the judge would be able to reduce the principal of the mortgage, the interest rate, or the length of the loan. This would allow homeowners to keep their homes and make lower, affordable mortgage payments.

To understand why this type of legislation makes good economic sense, one only needs to look at the numbers. In an article on The News & Observer, A Coming Foreclosure Flood, Jerry Hartzell, a Raleigh attorney explains:

The numbers are so large as to be almost incomprehensible. In 2003, $332 billion in subprime mortgages were outstanding. Today subprime mortgage loans total $1.3 trillion. A recent congressional report says studies "show that cumulative default rates are very high. Estimates range from almost 18 percent to more than 20 percent."

Hartzell goes on to explain why those numbers are conservative figures. First, roughly 90 percent of subprime mortgages originated in 2004 through 2006 and were adjustable rate mortgages (ARMs) - the peak of the adjustments will occur during January through June of next year. Second, home prices are falling which will make it more difficult for many borrowers to refinance out their predicament. And, third, lenders are exiting the subprime market leaving virtually no opportunities for troubled borrowers to refinance. Most of these borrowers will not qualify for prime loans.

Allowing the terms of a loan to be modified in bankruptcy is nothing new. It can already be done on claims secured by other types of collateral, including yachts and vacation homes, only the primary residence is off-limits currently. This hasn't always been the case, however. From 1976 to 1993, bankruptcy courts could "cramdown" debt secured by a primary residence - this legislation will restore that provision.

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Categories: Legislation, Subprime Lending

Source of Title Blog :: 6 comments ::

Mortgage Reform and Anti-Predatory Lending Act of 2007
by Robert Franco | 2007/11/09

For those of you who may not be aware, the U.S. House Committee on Financial Services has been working on H.R. 3915, dubbed "The Mortgage Reform and Anti-Predatory Lending Act of 2007." The bill provides for licensing and registration of individual mortgage brokers and registration of bank employees that originate mortgages, creates residential mortgage loan origination standards, and establishes minimum standards for all mortgages. Not surprisingly, there are some provisions in the bill that have stirred up some controversy - mainly with mortgage brokers. But, there is no doubt that this is an extremely consumer-friendly bill.

Here are some of the highlights from the committee's press release and the full text of the Act:
Federal Duty of Care: All mortgage originators (including individuals as well as companies and banks that originate mortgages) will be subject to a federal duty of care that requires (1) licensing and registration, as applicable, under State or Federal law (including under subtitle A), (2) presenting consumers with appropriate mortgage loans (i.e., consumer has reasonable ability to repay and receives net tangible benefit, and loan does not have predatory characteristics), (3) making full disclosures to consumers, (4) certifying to lenders compliance with mortgage origination requirements, and (5) including a mortgage originator’s unique identifier in loan documents.

Anti-Steering: For mortgage loans that are not prime loans, no mortgage originator can receive, and no person can pay, any incentive compensation (including yield spread premiums) that varies with the terms of the mortgage loan (except for size of the loan and number of loans). Regulations will be promulgated to prohibit mortgage originators from (1) steering any consumer to a loan that the consumer lacks a reasonable ability to repay, does not provide net tangible benefit, or has predatory characteristics, (2) steering any consumer from a prime loan to a subprime loan, and (3) engaging in abusive or unfair lending practices that promote disparities among consumers of equal credit worthiness but different race, ethnicity, gender, or age.

Remedies: Remedies will be up to three times broker fees plus costs, including a reasonable attorney's fee.

There is quite a lot of benefit packed into just this short section and the Act goes on to define the specifics in great detail. And, really, it seems like a lot of common sense. License loan originators, require them to put consumers in appropriate loans that they can afford to repay and give the consumers a private right of action for violations that includes reasonable attorney's fees. That sounds like a good plan to me.

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Categories: Consumer Advocacy, Legislation, Mortgage Industry, Subprime Lending

Source of Title Blog :: 21 comments ::

Lou The Mortgage Broker
by Robert Franco | 2007/10/23

Lou was a mortgage broker with a decent size business. He found a niche with several of the slum lords, helping them buy more dilapidated properties. Lou also had an appraiser in his pocket who helped the slum lords obtain financing, often for double the "real value" of the home. With this extra money, they were supposed to fix up the properties and sell them for a nice profit. Unfortunately that never happened.

One of the slum lords, when he could no longer qualify for financing, even with Lou's help, found buyers for the properties he wanted to purchase. He convinced buyers to take out mortgages with Lou with the understanding that he would fix up the properties and get them rented to provide income to the buyer. However, none of the work ever got done. The slum lord found buyers to take out mortgages for twice the actual value of the homes and he simply kept their money and forced many buyers into foreclosure and bankruptcy.

A friend of mine was a contractor who did some work with a few of the slum lords. Through them, he was introduced to Lou. When he refinanced his house, he went through Lou. He didn't borrow more than the value of his home, everything seemed to be kosher. However, when it became apparent what Lou and the slum lords were up to, he went to a local bank and refinanced his mortgage. Lou was paid off.

Shortly thereafter, Lou went to prison where he resides today. His company is now defunct. So why am I writing about Lou today? Well, Lou never released the paid-off mortgage and my friend is in the process of selling his home. He was told that there is an unreleased mortgage and the title company will not close unless he can obtain a release. Obviously, there is nobody around from Lou's mortgage company to issue a release - in fact, the company doesn't even exist.

In this real estate market, it is a shame to lose a willing buyer because of a title problem. It is unlikely that anyone would be willing to accept the property with the cloud on the title; surely it would be a problem for them any time they refinance or when they are ready to sell years from now.

This made me wonder about all of the lenders that have gone under during the subprime bust. According to The Mortgage Lender Implode-O-Meter, 172 major U.S. lending operations have "imploded" since late 2006. Could problems like my friend's become even more common? More than likely, yes. Unreleased mortgages, or missing assignments, will be more difficult to correct. Many borrowers who thought that they escaped the devastation of the subprime market may find out that they too are in a jam.

What options are available to my friend? It seems that the only way to clear the title will be a quiet title action. Surely that will work, and it really isn't that complicated to take care of. However, it will take time. The adverse party must be notified and most likely, publication will be required. He will have to wait for any answers before a judge can clear his title. Will his buyer wait? Who knows. With so many homes available right now for buyers, many sitting vacant ready for immediate occupancy, buyers don't have to wait.

While Lou is most certainly getting what he deserves, my friend doesn't deserve this. He is yet another casualty of a defunct lender. While Lou's problem wasn't caused by the subprime market collapse, he was just another crook, there may be others out there that will be jammed up by the vast number of imploded lenders.

Robert A. Franco

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Categories: Crime, Mortgage Industry, Subprime Lending

Source of Title Blog :: 9 comments ::

Osama The Mortgage Broker
by Robert Franco | 2007/08/27

According to a survey by the National Association of Business Economists, the biggest threat to the economy is no longer terrorism and the Middle East - its the threat of subrpime mortgage defaults and "excessive indebtedness." Obviously, the lending crisis has had quite an effect on Wall Street already. But, the real problems may be just beginning as the supply of cheap money dries up and so many debt ladened Americans find themselves unable to continue their borrow and spend habits.

According to an article in the Financial Post, Debt Crisis Tops Terrorism as Threat to U.S. Growth:

The meltdown in the US$2-trillion subprime mortgage has led to the bankruptcy of dozens of mortgage firms and is threatening to spill over into the broader economy as more and more homeowners face foreclosure.

The U.S. Center for Responsible Lending recently estimated that 2.2 million subprime home loans made in recent years have -- or soon will -- end in foreclosure.

Who is going to buy all of those foreclosed properties? The housing market is already fairly stagnant and adding more homes that will likely be sold below fair market value will inevitably lead to a further decline of home prices. That will mean less equity to borrow against and put more pressure on a struggling economy.

The article goes on to indicate that this may just be a temporary bump in the road:

However, Mr. Tannenbaum [president of NABE and chief economist at La Salle Bank/ABN-AMRO] said he expects the crisis will soon pass, largely because of the strength of the broader economy, the world's largest.

"These concerns appear to be somewhat transitory as the five-year outlook for housing remains positive," he said.

I'm not so sure I agree. Once the effect of the 2.2 million foreclosures, and the realization that the American debtor is already carrying an excessive debt-load sinks in, the five-year outlook will likely be adjusted. But, regardless, we are in for a bumpy ride the next few years.

Robert A. Franco

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Categories: Economic Indicators, Mortgage Industry, Subprime Lending

Source of Title Blog :: 3 comments ::

I Love FHA, But...
by Robert Franco | 2007/08/14

I love FHA, but an article in the USA Today, Good Old FHA Loans Make a Comeback, irked me a bit. The gist of the article was that FHA applications were up considerably since December - 76.8%. Yet, the article states that "FHA is flawed and in need of some major improvements." With that contention, I must disagree.

When the FHA was created in 1934, it provided the only way many low- and middle-income families could afford a home. Over the years, it changed little.

But in recent years, private lenders have launched innovative mortgage products targeted at first-time home buyers and borrowers with impaired credit. In addition, private lenders can approve applications more quickly than the FHA.

Despite the rebound, FHA is flawed and in need of some major improvements, industry experts say. "FHA is definitely a step behind where the private markets have gone," says Keith Gumbinger, vice president of HSH Associates, which publishes loan information.

If we have learned anything this year from the "private lenders" that ventured into subprime lending, its that the subprime market is extremely risky and the business model chosen by the private market doesn't work. The Mortgage Lender Implode-O-Meter is currently reporting that 117 major U.S. lenders have "imploded" since late 2006. The fall out from the subprime bust has been astonishing, not just here, but around the world.

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Categories: Subprime Lending

Source of Title Blog :: 7 comments ::

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Source of Title Blog

Robert A. FrancoThe focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco



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