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The weather has been weird this year, the rains lasting surprisingly long into spring/summer. I watered my flowers for the first time this year. And in other summer signs, the for sale signs are popping up in our East Bay Redwood Heights neighborhood. The next door neighbors are selling surprisingly enough, and we’ve been watching the prep effort on a nice house in the neighborhood, on Jordan Street, in the valley behind the hill we live on. The house on 3253 Jordan St. just listed at $699,000, which while below the peak of a few years ago, is still not cheap by any measure.

Am I the only one or is the fact that the loan to deposit ratios (blue lines) are so high scary?

Bank Health Ratios - Wells Fargo, Citibank, Chase, Bank of America

Bank Health Ratios - Wells Fargo, Citibank, Chase, Bank of America

What happens if the non performing ratio goes up?

Full article: How’s your bank doing?

Loan Modifications, touted as one solution to the housing crisis, haven’t lived up to their promise. For one thing, they seem quite difficult to get. A cbsnews article suggests this is because of potential problems with the banks’ balance sheet causing by lurking bad home equity loans. The theory goes, if the banks recognized the true value of these loans, the writedowns to their balance sheets would be in the billions, causing losses and a possible need to increase the amount of regulatory capital they have on hand. For those of you that have been following the financial crisis, you’ll know there has been efforts to force the banks to increase the amount of cash they have to offset the amount of money they have lent out in loans. This is what is meant by regulatory capital.

The article shows a Reuters image I’ve captured here.

Bank exposure to unsecured home equity loans

Bank exposure to unsecured home equity loans

This raised some questions in my mind.

  • Why is this impacting requested loan modifications where there is no second lien present? I can understand the reluctance to modify the second lien so that it loses most of it’s value, but I don’t think this explain the many loan modifications that are not getting through as there is no second lien or home equity loan.
  • What the heck is a “unsecured home equity loan”? A home equity loan by definition is secured by real estate. Otherwise it is just a personal loan. So I did some research. Apparently, a home equity loan becomes “unsecured” when the there is no equity to support it (it’s an underwater loan). If this is the explanation I think the “40% writedown” may be too conservative. In distress situations, the second lien is usually wiped out almost completely.

Looking for a real estate investment? What if I had an investment for you that …

  • Had no annual property taxes
  • Had little or no insurance costs
  • None of those annoying extra costs, such as landscaping or HOA fees
  • No concern regarding theft or vandalization of empty property, because the property had no appliances, or anything else to steal! (including toliets)
  • And, bonus, this empty concrete shell is considered desirable and new!!

Interested?

Well, if you are a Chinese national, this is an compelling investment opportunity! See you don’t have much else to invest in and real estate never goes down, right?

Forget that there are realms of empty, investor owned properties (in fact a whole city of them), all across China. Chinese economy is strong, right? Prices always go up. Surely the real estate bust that wiped out thousand of US investors can’t happen in China, right? Buy China!

And BTW, read this.

The Obama administration has not been happy with the lenders’ effort to help property owners in the housing crisis. For the more than 6.5 million property owners currently late on their mortgage only 170,000 loan modifications have been completed.

Under increasing government pressure, Bank Of America launched a new program to erase as much as 30% off the principal in underwater home loans. The program should be available sometime in May, and before you ask, yes it is only available to homeowners with principal residences.

The enhancements to the National Homeownership Retention Program (as they call it) are coming soon according to their web site.

Bank of America has not been my favorite bank, but I am cheered to see a major bank lead the way towards measures that must be taken. Both property owners and the banks are going to have to compromise and meet somewhere in the middle for us to get out of this mess.

Forensic Loan Audits is another tool underwater and delinquent borrowers are using to fight foreclosure. The idea is that you find problems with the mortgage documentation and use this to pressure the lenders into a loan modification or other outcome favorable to you the borrower.

During the height of the housing boom, not only did lenders get careless with who they would lend to, but also with following the RESPA and TILA regulations. RESPA, Real Estate Settlement Procedures Act, mandates improved disclosures (and timelines for those disclosures) for real estate transactions, such as the good faith estimate of closing costs and the HUD statement. The serving transfer notice you get when your bank sells your loan to another is part of RESPA. TILA, the Truth in Lending Act, governs disclosures about the cost of credit, such as the APR (annual percentage rate).

A forensic loan audit may find violations of RESPA and TILA. However an recent article by Marilyn Bowden is finding that even though 98% of loan audits find violations, it doesn’t buy you much. For one thing pursuing this with your lender is a legal matter with all the costs that come with that, including litigation. Another is that the lenders are not really responding to the legal pressure. Think about it, you are in a long line of people threatening to sue the bank.

However, comments on the web indicate some success when the bank can’t produce the mortgage documentation at all. With the dicing and repackaging (securitization) of mortgages done for the now hapless investors, some mortgages may have gotten lost and that might be something worth hiring a lawyer for.

Bank of America seems to be rather organizationally challenged. I’ve experienced this first hand with their property claims process.

I’ve seen cases where a troubled homeowner has received two completely different letters from them within the SAME WEEK. One threatening to foreclose, the other saying they were working on the “loan workout request”.

When I worked out a temporary forbearance with them due to the fire and rehab, they then apparently fedex’ed some loan modification (??) papers to the property address (I bet the tenants were confused) and then called and told me that they would be doing a loan modification with me to adjust my loan payment to … wait for it .. wait for it .. to exactly the same amount as my current loan payment!

So, some major internal problems. Now it appears they are busy foreclosing on the wrong houses. Below are three cases, the “parrot one” in particular has gotten a lot of press.

Note that in the Angela Iannelli case, B of A first blamed the contractor.

I wrote about series LLCs (Delaware Series LLCs) in this blog many years ago. Recently I got an email from the folks at TACPAS warning against using them.

What Warren said:

  • Whether a liability could be contained within a single LLC within the series has not been proven in court.
  • States may differ in their interpretation of series LLCs.
  • Tax treatment, particular with different types of entities, is unclear.

Troubled homeowners who have gone through a foreclosure or a short sale may have a lurking problem that could cause them problems years down the road. Even though you think you may have put a bad chapter in your life behind you, the lender can still come after you with a deficiency judgment.

A deficiency judgment is when the lender sues you for the difference between the loan amount and the amount they (the lender) realized when the house was sold. Whether it was through a short sale or sold as a bank owned property may not matter.

Yahoo finance published an article that illustrates the problem with several examples. In one, a borrower even signed a document at a short sale closing that gave the lender permission to come after him.

If you are in a short sale, make sure you get agreement (in writing) that the lender will not pursue a deficiency judgment against you. If you have lost a house through foreclosure, whether the lender can come after you will depend on the state the house was in.

If you are in a recourse state, the lender can pursue a deficiency judgment against you. Per The New Republic blog, the non recourse states are Alaska, Arizona, California, Iowa, Minnesota, Montana, North Carolina, North Dakota, Oregon, Washington and Wisconsin. However, even iin these states, a lender may have recourse with second liens and refinanced loans. Regardless, consulting an attorney is needed for advice on your specific situation.

Strategic defaults are on the rise. The number of “strategic defaults” doubled from 2007 and 2008 (588,000 in 2008) and now comprise more than a quarter of mortgage defaults. I’ve also seen both 16% and 17% quoted.

So what is a strategic default? A strategic default is when a homeowner (presumably includes investors) walks away from his mortgage payment when he or she is still fully able to pay.

Strategic defaulters get special scorn for their actions. Never mind that it would take fully 60 years, in one example, to recoup their losses, you are a deadbeat for walking away according to Henry Paulson (even though it’s a “good business decision” in other arenas).

I wanted a more precise definition of is considered a strategic default, while I’m sure there are situations where it is perfectly clear that the borrower could afford the mortgage, it’s not always a black and white scenario. What if you could scrape together the money every month but it required a second job to do so? If you decided that after a year of insane workweeks you couldn’t keep it up, would you fall into the “strategically defaulting” camp?

Per studies done by Experian and Oliver Wyman people who strategically default have a different profile than the classic borrower in trouble. Borrowers who are strategic defaulters will typically have a high credit score and suddenly default on the mortgage without warning, but on no other debts. Compare this to the typical pattern of financial distress on multiple debts, where the mortgage payment is the last thing that a borrower will give up paying on. Strategic defaulters are typically concentrated in the negative equity markets and often have large mortgage balances.

The exact criteria that Experian-Wyman used to mine 24 million credit histories to find the 588,000 strategic defaults in 2008, is the following: “We define such borrowers as those who rolled straight from current to 180+ [days past due], while staying current on all their non-real estate debt obligations, 6 months after they first went 60 [days past due] on their mortgage.” With this definition, my “second job” scenario I outlined above, would be considered in scope.

The recommendation is to not offer these borrowers loan modifications. I guess the option of offering to reduce the principal balance still appears to be a foreign concept to the lenders.