Feds sue biggest US banks over risky mortgages

Funny, if the suit forces bankruptcy on the bank, then does the FDIC (with also federal backing) come in a bail the depositors, probably with tax money?  This lawsuit is very illogical.

In a sweeping move, the government on Friday sued 17 financial firms, including the largest U.S. banks, for selling Fannie Mae and Freddie Mac billions of dollars worth of mortgage-backed securities that turned toxic when the housing market collapsed.

Among the 17 targeted by the lawsuits were Bank of America Corp., Citigroup Inc., JP Morgan Chase & Co., Goldman Sachs.

The lawsuits were filed Friday by the Federal Housing Finance Agency which oversees Fannie and Freddie, the two agencies that buy mortgages loans and mortgage securities issued by the lenders.

The total price tag for the securities bought by Fannie and Freddie affected by the lawsuits: $196 billion.

The government didn't provide a dollar amount of how much it seeks in damages. It said that it wants to have the purchases of the securities canceled, be compensated for lost principal and interest payments as well as attorney fees and costs. The lawsuits allege the financial firms broke federal and state laws with the sales.

Home mortgage-backed securities were risky investments that collapsed after the real-estate bust and helped fuel the financial crisis in late 2008.

Finally, what is the ultimate purchase of this lawsuit.

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U.S. Government Struggles As The Biggest Seller of Homes

Activists of all sort are pushing the Federal government to lease out foreclosed home, but there are some major problems with that.

Moreover, it remains to be seen whether converting REO to rental will work. Leasing requires money to bring properties up to code, adds to liability costs and requires an infrastructure to manage the inventory. It also delays the government’s ability to recover anything from their repossessed properties, said FHA Acting Commissioner Carol Galante.

“It isn’t necessarily our preference that FHA is going to itself continue to hold these properties,” Galante said in an interview. “We want to move homes through the system so we can recover.”

At the same time, the agency can’t maximize returns if it sells too many houses at once.

“If you’re putting too much through that system you are helping to drive down prices,” Galante said. “If there’s some siphoning off of some of that stock, it can help stabilize the prices. We could be better off. The proof will be in the pudding.”

 And this regards to refinancing homeowners with negative equity.

Current low interest rates offer an opportunity, with 30- year-fixed loans hovering just above 4 percent. The administration is weighing ways to allow distressed or underwater borrowers to refinance into a lower-rate mortgage, freeing up billions of dollars to boost consumer spending.

The complexity of mortgage finance promises to make any housing fix difficult to implement, as the administration discovered when it launched a mosaic of loan-modification programs three years ago.

Since the 2008 financial collapse, Obama and his aides have focused housing efforts on extricating borrowers from high-cost loans, aiding delinquent homeowners, and stabilizing neighborhoods. Now the most pressing problem has shifted to what to do with properties left by borrowers who couldn’t be helped.

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HUD extends deadline for unemployed mortgage assistance

The Department of Housing and Urban Development will begin taking applications again for a new program providing interest-free loans to unemployed borrowers struggling with their mortgage payments.

Under Dodd-Frank Act authority, HUD launched the $1 billion Emergency Homeowners Loan Program in June. Unemployed homeowners in 27 states including five others that operate similar existing programs could apply for up to $50,000 in assistance.

The deadline expired July 27 after a brief three-day extension. On Monday, HUD said it would take applications through Sept. 15 as resources remain available.

HUD initially targeted 30,000 borrowers through EHLP at an average $35,000 loan size. Recipients must still be able to contribute $150 per month to the mortgage.

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FHA/VA insured bonds are in trouble

I hate to post articles that are too technical, but this one is revealing.  FHA/VA bonds are failing, which means FHA and VA mortgages are defaulting.  All of these defaults cost these programs losses, since they insure loans for lenders.  If these defaults continue to grow, then these program might not be able to insure any additional loans.

Moody's admits FHA/VA loan delinquency levels have been relatively stable, but analysts believe that could change with home prices still falling and unemployment consistently high.

"FHA/VA borrowers are typically low-income borrowers with poor credit histories who have been affected by the weak economy and housing market," Moody's said. "Securitized FHA/VA pools typically have high delinquency levels at inception, with the majority of loans being 90-days late or more. Because of the insurance coverage loss severities and overall losses have been fairly low. Loss severities, which have been rising, are now currently around 12% on average."

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Obama administration expects new push for REO rentals

It's more mission drift.  Now Fannie and Freddie are going to become landlords.  Their original mission was to provide secondary market so lenders could sell their loans and free up capital to originate more loans.

The Obama administration will begin working on new strategies for how to better sell previously foreclosed homes held by Fannie Mae, Freddie Mac and the Federal Housing Administration, which may include renting more REO.

The Federal Housing Finance Agency, the Treasury Department and the Department of Housing and Urban Development put out a request for information, seeking new ideas from market participants for selling REO. Currently, the government owns roughly half of the REO inventory in the U.S.

The agencies called on private property managers to submit ideas on how to reduce the REO portfolios at the GSEs and the FHA in a cost-effective manner. They also seek new ideas on property repair, sales strategies in specific hard-hit areas and new analysis of when to sell or even rent these properties.

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More borrowers default on second liens in April

While default rates are down mostly so far this year, borrowers with second mortgages went against trend with their default rate rising in April for the first time in five months, according to data from Standard & Poor's and Experian.

The firms produce the S&P/Experian Consumer Credit Default Indices, which showed the default rate for second mortgages grew to 1.51% in April from 1.42% a month earlier.

At the same time, first mortgages experienced a decline in defaults, with that segment's default rate dropping to 2.16% from 2.33% between March and April.

"We had seen default rates fall across all major categories and most major cities during the prior six months, but given April's data that might be coming to end. The real question is whether April was temporary or are household balance sheets worsening?" said David Blitzer, managing director and chairman of the index committee for S&P Indices.

"In addition, there are some significant differences across credit types and MSAs. Bank card default rates went up in April, after having fallen each of the past 11 months; and the data indicate that the rate of default on credit cards is still 5.9%, more than twice any of the other loan classes," he said.

Source

Leading Mortgage Firms May Be Forced To Reduce Loan Balances For Distressed Homeowners

Breaking news from Huff Po.

Mortgage principal reductions would comprise part of a larger fine levied on Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial. Penalties could reach $30 billion, officials said.

The forced reduction of mortgage principal as a penalty against flawed past practices has proven contentious. Some Republican attorneys general have objected, as have some Republican members of Congress.

On Tuesday, however, a state official told The Huffington Post on condition of anonymity that the option "very much remains on the table."

While officials have not determined how much would be exacted from the banks -- and specific dollar amounts to settle the probes have not yet been discussed between the state and federal governments and the banks -- the proposal to compel financial firms to cut loan balances is part of one of two documents circulated Tuesday at a hotel in northern Virginia, where bankers, state officials and policy makers from the Obama administration began a three-day meeting.

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California expands its foreclosure relief effort

This is opposite on the new congress is doing, which is to rein Freddie Mac, Fannie Mae, and FHA.  The Feds goal is to privatized the secondary mortgage market.

Many people tapped their rising equity during the boom years, using their homes as ATMs to fuel spending. The California Housing Finance Agency had initially excluded people who used their home equity in such a manner from participating in its Keep Your Home initiative, which launched this year with federal funds reserved for the 2008 rescue of the financial system.

But California's high unemployment rate caused the agency to reconsider its policy, agency Executive Director Steven Spears said in a statement.

"In the two short months since the launch of these programs, we have collected information that has helped us identify areas of improvement to make the programs more effective, particularly given the continued high level of unemployment in California," he said.

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Foreclosure Aid on Chopping Block as Democratic Support Fades

I usually try to report only on laws that have past, not proposed legislation.   Because legislation can change or even be rejected.  However, this looks like this will past and it will have big impact on the mortgage industry.

While the attack on the program has been led by the chamber’s majority Republicans, 18 House Democrats said in a letter dated March 7 to Vice President Joe Biden that HAMP is flawed and abandons distressed homeowners to “abusive” mortgage servicers. They said foreclosure problems have grown too urgent to wait for a legal settlement being negotiated by regulators, the states and banks including Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM)

The letter, sent by a group led by Representative George Miller of California, demanded a meeting with Biden, who leads a White House task force on the middle class. The lawmakers asked for the meeting after what Miller called an “unsatisfactory” session last week with Treasury Secretary Timothy F. Geithner and Housing and Urban Development Secretary Shaun Donovan.

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Calculated Risk: Options for the Long-Term Structure of Housing Finance

Great Article on the separation of the Federal government from the mortgage finance market.

The Obama Administration released an outline this morning on winding down Fannie and Freddie, and for the future of government involvement in the housing finance market.

Here is the Treasury press release on Fannie and Freddie. And here is the report.

The wind down of Fannie and Freddie will be slow and take a number of years, but the key question is what, if anything, will replace them? The plan offers three options

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HAMP and other housing programs may be cut from federal budget

With the federal government deep in debt, it's looking to divorce itself from the housing/lending industry and assume more a regulatory roll.

The Federal Housing Administration Refinance Program is also on the chopping block because of its less than impressive performance in the first two months it was implemented. The $8 billion program, designed to offer underwater borrowers a refinance, received only 35 applications between Sept. 7, 2010 and the end of October that same year, according to the HFSC.

The committee is aimed to discontinue NeighborWorks America, a government-charter, nonprofit corporation with a national network of affiliated organizations that focus on community reinvestment activities such as mediation counseling. The program, an allocated cost of $195 million, overlaps the functions of the Department of Housing and Urban Development and "are duplicative of existing HUD programs and can be consolidated," the oversight plan says.

Only HOPE IV will be replaced. The program uses funds to convert distressed or dangerous public housing developments into mixed-use housing and costs $200 million annually. The committee is proposing to replace it with Choice Neighborhoods, an existing program that serves the same function and costs $140 million less.

Among other programs the committee also wants to abolish are Rural Housing and Economic Development, which currently receives $25 million annually to provide grants to non-profit organizations for capacity home building in rural areas, and the Neighborhood Stabilization Program, which gives federal funds to states and local governments with high concentrations of foreclosed homes, subprime mortgage loans and delinquent home mortgages. Approximately $1 billion was allocated for NSP.

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Ten Arguments Against a Government Guarantee for Housing Finance

This is great.  There are two major ways the US guarantee's housing with 1) Purchasing mortgages through Fannie Mae and Freddie Mac 2) guaranteeing loans for low down payment purchases. 

There is a growing belief among mortgage investors, industry groups and some policymakers in Washington that some type of explicit government guarantees for mortgage lending will be necessary to undergird a new housing finance system in America. Yet whether by the sale of insurance on mortgage-backed securities or a public utility model replacing Fannie Mae and Freddie Mac with new government-sponsored enterprises, this would be a tragic mistake, repeating the errors of history, and putting taxpayers and the housing industry itself at risk. This policy summary offers ten arguments for why there should be no government role—explicit or implicit—in guaranteeing housing finance

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Bill would cut all funding to HUD

This is big.  HUD runs the FHA program, which allows first time home buyers low down payments to purchase homes usually at 3.5%  Currently  FHA sponsored and insured home loans make up about 30% of the market, so you would see a huge decrease in the number of first time buyers.

HUD's fiscal year 2010 budget totaled $43.7 billion, a 9% increase from 2009.

"By removing programs that are beyond the constitutional role of the federal government, such as education and housing, we are cutting nearly 40% of our projected deficit and removing the big-government bureaucrats who stand in the way of efficiency in our federal government," Paul said in a statement released Tuesday

I need to find more information on what programs will be cut, if approved.

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HAMP and other programs are completely failing

No surprise, I have reporting this since August.  Most mortgage modifications are now private.

The Treasury Department's acting assistant secretary for financial stability, Tim Massad, defended the administration's housing rescues in a conference call with reporters. While the administration hasn't achieved as many home loan modifications as originally expected, he said, the government has reached a "large percentage" of eligible homeowners.

The government's newer programs, he said, are just getting started. "It's a little too early to reach a conclusion," Mr. Massad said, noting that the Treasury has two more years before its housing programs end.

But Mr. Barofsky's report noted that newer mortgage assistance initiatives are off to a slow start. For example, a program launched by the Federal Housing Administration last September to assist borrowers who owe more on their home loans than their properties are worth has landed with a thud, the report said. As of the end of last year, only 15 homeowners had refinanced their mortgages through the FHA's "short refinance" program, it said.

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FHA's Stevens: Mortgage servicers are falling short of HUD expectations

This is just a small part of the continuing foreclosure-gate problem.

Stevens said when he first entered office in 2008 significant reviews into servicers were not being done. So, in May, the FHA launched a review of several of its largest servicers that, combined, accounted for over 70% of HUD's single-family servicing portfolio.

"The early returns suggest that some servicers may be falling short – that in varying degrees many of the servicers under review may not have met HUD’s expectations in assisting borrowers through the loss mitigation process," Stevens said.

He added that FHA analysts have found some servicers even lack knowledge of the FHA loss mitigation process, necessary technology and enough experienced staff necessary to clear modification request backlogs.

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Fannie and Freddie may need another $215 billion: FHFA

This should really be labeled bailout.

Fannie Mae and Freddie Mac, whose programs fund the lion's share of all new home loans, are at the center of debate as Congress sets to overhaul a U.S. mortgage finance system that contributed to the worst housing crisis since the 1930s.

The cumulative capital needs of the two housing finance giants, which were seized by the government in late 2008, will likely fall between $221 billion and $363 billion through 2013, the Federal Housing Finance Agency estimated.

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FHA still not meeting funding requirements

Actually, it's the Senate that wants FHA to improve their bottom line.  Why is this important?  Well, FHA loans are now 37% of the loan market and FHA delinquencies continue to grow.

FHA insures that if a buyer comes in with a low down payment, it will insure to the bank up to 20% of the loan to value ratio, mitigating the loss to the bank.  Also, FHA has taken up the role of the sub-prime lender in some cases.  If this program is not financially sound, then up to 37% of the buyers might disappear and the tax payers might be on the hook to bail this program out.  Fannie Mae is also trying to start up sub-prime sales.

"We should all have a concern of FHA, and I am concerned about it. 2007 and 2008 were terrible books that were originated with limited scrutiny, and we are going to pay the price on those books for some time to come," Stevens said. "We are absolutely not out of the woods."

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37% of new mortgages now issued by FHA

Why is this figure is so important to the current price of housing>  In 2005-2006 lenders were willing to underwrite low-down payment purchase loans, and FHA was only about <2% of the market share.  Now lenders are unwilling to take that risk, so the Federal government through HUD is now insuring these low-down payments loans in case they foreclose.  Recently, the PMI fees have increased for these loans.   

Mortgages insured by the Federal Housing Administration accounted for 37% of all originations in 2009, up from 26% in 2008 and 7% in 2007, according to the Federal Financial Institutions Examination Council.

In addition, you can have a FICO score as low as 500 to qualify for an FHA loan., making us  responsible for the bad debt since we back the loans as new sub-prime lender. Now what happens if this program is pulled or goes bankrupt and now you lost 37% of potential buyers.   This will impact the housing market and put pressure on the price of homes.

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Freddie Mac is pushing a government sponsored program to purchase their REO's

The first incarnation of the program launched on Sept. 1, through a partnership between the Department of Housing and Urban Development (HUD) and the National Community Stabilization Trust (NCST). In that program, groups that receive funds from the Neighborhood Stabilization Program (NSP) and/or are nonprofit groups working with NCST get the first shot at purchasing HUD, Fannie Mae and Freddie Mac REO properties before they’re listed on the open market, so the homes can either be rehabilitated, rented, resold as affordable housing or demolished when necessary. That first look happens five to 12 days before they are listed for sale.

So, Freddie Mac which 79.9% federally own is working with two government agencies  (HUD and NSP) to help you purchase a home.  Here is an overview of the program from NSP:

Nature of Program

NSP is a component of the Community Development Block Grant (CDBG). The CDBG regulatory structure is the platform used to implement NSP and the HOME program provides a safe harbor for NSP affordability requirements. 

NSP grantees develop their own programs and funding priorities. However, NSP grantees must use at least 25 percent of the funds appropriated for the purchase and redevelopment of abandoned or foreclosed homes or residential properties that will be used to house individuals or families whose incomes do not exceed 50 percent of the area median income. In addition, all activities funded by NSP must benefit low- and moderate-income persons whose income does not exceed 120 percent of area median income. Activities may not qualify under NSP using the "prevent or eliminate slums and blight" or "address urgent community development needs" objectives.

 I think we should re-evaluate these programs to see if they are really needed.

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