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RealtyTrac Foreclosure Report - Oct. 2014

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RealtyTrac: This is the first article in a two-part investigating series focusing on the devastating effects of ballooning debt among U.S. mortgage borrowers. The “Housing Landmine” series will examine how a tetrad of staggering mortgage debt — in the form of HAMP re-default, HELOC resets, underwater mortgages and non-performing loans, or NPLs — are hindering the nascent residential real estate market. Part one will explore two legs of the tetrad — the federal government’s failed HAMP program and the potentially dangerous effects on housing that billions of dollars of outstanding home equity lines of credit, or HELOCs, pose to the fragile U.S. economy. Next month, we will investigate how underwater borrowers and non-performing loans are putting a strain on new and existing home sales. And examine how these four boulders of housing debt could come cascading down on the still fragile housing “recovery.”
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  OCTOBER 2014   After the housing bubble burst in 2006, it ushered in the foreclosure crisis, with 5.5 million borrowers losing their homes to banks. Now that the foreclosure tidal wave has receded, most believe that the foreclose storm is over. Nationwide, foreclosure activity is down 9 percent from a year ago in  July, according to RealtyTrac — the 47th consecutive month where foreclosure activity decreased annually. But the foreclosure numbers could be reversed in 2015, as a tetrad of housing landmines — HAMP re-defaults, HELOC resets, a staggering 8.1 million underwater borrowers and non-performing loans — could upend the shaky housing “recovery.” This tetrad of mortgage risk could threaten the nascent housing recovery, triggering a surge in defaults, repossessions and short sales. In other words, the foreclosure crisis hasn’t receded; it was intentionally delayed by government manipulation. The can was kicked down the road. And next year, foreclosure activity could spike again. Here’s why. Housing Landmines: Are Mortgage Flares Ups Coming Soon? OCTOBER 2014 volume 8 issue 10 CONTENTS 7  My Take by Brian Mushaney   9  News Briefs 10  Legal Briefs 11  Financial News 12   State Spotlight: Central Florida 18  Book Review: “Other People’s Houses” By  Jennifer Taub Continued Next Page This is the rst article in a two-part investigating series focusing on the devastating eects of ballooning debt among U.S. mortgage borrowers. The “Housing Landmine” series will examine how a tetrad of staggering mortgage debt — in the form of HAMP redefault, HELOC resets, underwater mortgages and non-performing loans, or NPLs — are hindering the nascent residential real estate market. Part one will explore two legs of the tetrad — the federal  government’s failed HAMP program and the potentially dangerous eects on housing that billions of dollars of outstanding home equity lines of credit, or HELOCs, pose to the fragile U.S. economy. Next month, we will investigate how underwater borrowers and non-performing loans are putting a strain on new and existing home sales. And examine how these four boulders of housing debt could come cascading down on the still fragile housing “recovery.” By Octavio Nuiry, Managing Editor    Named the Nation’s Best Newsletter by the National Association of Real Estate Editors  2 OCTOBER 2014 HAMPered by Government Loans Five years ago, when President Barack Obama traveled to Meza, Ariz. on February 18, 2009, along with Treasury Department secretary Timothy J. Geithner, HUD chairman Shaun Donovan and FDIC chairman Sheila Bair, to announce his signature housing recovery program, one in ve borrowers owed more on their mortgage than their home was worth, banks were repossessing over 300,000 homes every month and home prices had tumbled 30 percent from their 2009 peak. The cornerstone of Obama’s $75 billion agship Making Homes Aordable Program was a loan modication plan named the Home Aordability Modication Program, or HAMP, and a renance program, known as the Home Aordable Renance Program, or HARP, which paid lenders an incentive fee for each modied loan. “All of us will pay a steeper price if we allow this crisis to continue to deepen — a crisis which is unraveling home ownership, the middle class and the American Dream itself,” Obama told an audience gathered at Dobson High School in Meza, Ariz. “And we will pursue the housing plan I’m outlining today. And through this plan, we will help between 7 and 9 million families restructure or renance their mortgages.”  Critics pounced on the president’s ambitious plan, arguing HAMP was too strict on its qualication requirements. Some argued that HAMP was not appealing to lenders. Others claimed the voluntary program was destined to fail. “I cringed as he threw out what I considered to be wildly inated numbers on the programs impact,” wrote Sheila Bair in her 2012 book “Bull By the Horns,” referring to president Obama’s rosy pledge to help 9 million families modify their underwater loans. “To require every borrower to essentially prove that he or she could qualify for a new loan was stupid — the loan had already been made. And given the huge number of loans that needed to be reworked, as well as the problem of ill-trained, understaed servicers, the cumbersome process was doomed to failure. HAMP was a program designed to look good in a press release, not to x the housing market. I don’t think helping home owners was ever a priority for them.” Bair believed that the program was too rigid in its qualication requirements, claiming that the HAMP program was destine to fail because it was voluntary and that the banks would scuttle it. Almost immediately, the HAMP program ran into trouble. Instead of saving a borrowers home, the process of applying for a HAMP loan modication often led to foreclosure. Many borrowers didn’t qualify for the voluntary program. Most lenders lost renancing documents. And millions of applicants were rejected. Not surprisingly, the extensive documentation scared o  millions of other underwater borrowers. Sadly, Obama’s housing x faltered. It didn’t deliver on the vow to modify as many as 9 million delinquent loans. In the end, by July 2014, ve years since it debuted, only 1.4 million borrowers had received a mortgage modication through HAMP — a far cry from the promised 9 million. And 350,000 borrowers defaulted again on their mortgages and were evicted from their homes. Nobody should be surprised by HAMP’s failure, according to Neil M. Barofsky, the former special inspector general of Troubled Asset Relief Program from 2010 to 2012. Barofsky said that in 2012 Treasury Secretary Timothy Geithner had told him HAMP was not designed to help distressed borrowers, but was implemented to help the banks ride out the foreclosure crisis. “We estimate that they can handle ten million foreclosures, over time” Geithner told Barofsky, referring to the banks. “This program will help foam the runway for them.” So HAMP was designed to “foam the runway” for Wall Street banks by “stretching out the foreclosures, giving the banks more time to absorb losses while the other parts of the bailouts juiced bank prots that could then Continued Next Page Sheila Bair Former ChairmanFederal Deposit InsurnaceCorporation   I cringed as he threw out what I considered to be wildly inated numbers on the programs impact. To require every borrower to essentially  prove that he or she could qualify for a new loan was stupid ... HAMP was a  program designed to look  good in a press release, not to x the housing market. I don’t think helping home owners was ever a priority for them.  3 OCTOBER 2014 ll the capital holes created by housing losses,” writes Barofsky. At the start, TARP earmarked only $75 billion for HAMP remods out of a $700 billion bank bailout approved by Congress in 2008 to help homeowners. By 2010, the HAMP program was cut to $30 billion. As of July 2014, a mere $4 billion total has been spent for loan modications, according to the latest Oce of the Comptroller of the Currency report. “After almost ve years, HAMP continues to face considerable challenges, including getting new homeowners into permanent mortgage modications and keeping homeowners in those modications from re-defaulting,” according to the latest SIGTARP report released July 30, 2014. “Through June 30, 2014, only 1.4 million homeowners have received a permanent HAMP modication, while servicers rejected more than 5.5 million homeowners from HAMP. Overall, only 1 in 6 homeowners that applied for HAMP received a permanent modication. Additionally, the number of homeowners entering HAMP has steadily declined from 512,712 in 2010 to just 141,920 in 2013.” But things could get worse, the report said. To understand the Kafkaesque HAMP numbers, it’s important to know how government bureaucrats tally HAMP numbers. First, borrowers who have defaulted on a HAMP renance or who are close to defaulting, have to be approved for a “trial” payment period. Next, if everything goes smoothly, struggling borrowers are moved into the “permanent” modication column, where they are placed in debtor limbo for three months.  “However, HAMP also faces a signicant challenge of borrowers re-defaulting out of HAMP,” the report warned. “Already, 398,222 homeowners have not been able to keep up with their mortgage payments even though payments were lowered by HAMP. Overall 29 percent of homeowners in HAMP have already fallen out of the program. However, the bulk of homeowners in HAMP who started participating in the program in 2009 and 2010 are falling out of the program at ever more alarming rates. Approximately half of all homeowners who entered HAMP in 2009 have fallen out of the program. Homeowners who entered the program in 2010 have re-defaulted at a rate of 40 percent.” But now the chickens are coming home to roost. Got HAMP? Mortgage Payments Will Increase Soon and So Will Re-Defaults Already, nearly 400,000 have re-defaulted on their HAMP modications. Between now and 2021, almost 90 percent of the HAMP loan modications will see increases in their mortgage interest rate, including almost 300,000 next year, according to the SIGTARP report. And with almost half of homeowners who got help in 2009 re-defaulting on their mortgages, we could potentially see a spike in foreclosures in the next few years. “The longer a homeowner remains in HAMP, the more likely he or she is to re-default out of the program,” according to the TARP report. “Re-defaults of the oldest HAMP modications are at a 46 percent re-default rate, a rate that continues to increase as the modications age.”  Nevertheless, Treasury Secretary Jack Lew announced in June that the Making Home Aordable program, which includes HAMP and HARP, which were slated to expire at the end of 2014, would be extended through 2015. Attorney Jennifer Taub, author of “Other People’s Houses,” believes the banks are to blame, writing: “HAMP didn’t work because the banks didn’t want it to. Homeowners were being dual-tracked; strung along on their modications applications while the foreclosure process proceeded. In sworn statements led in federal court, several Bank of America employees claimed that they had frequently lied to homeowners and were paid bonuses if they sent them into foreclosure.”  Borrowers who got government loan modications Continued Next Page Neil Barofsky Former Special Inspector General    Troubled Asset Relief Program (TARP) So HAMP would ‘foam the runway’ by stretching out the  foreclosures, giving the banks more time to absorb losses while the other parts of the bailouts  juiced bank prots that could then ll the capital holes created by housing losses.  4 OCTOBER 2014 during the nancial crisis to avoid foreclosures will begin to see monthly payments rise starting this year, fueling fears that borrowers will re-default on their mortgages at an alarming rate, a federal watchdog report said. The rst higher payments will hit an estimated 30,000 HAMP homeowners this year, and the interest rate will go up one percentage point per year until it adjusts to the rate agreed upon at modication. The reset rates will range from 4 percent to 5.4 percent, according to a TARP Inspector General report. Half of all HAMP loan mods reside in just four states: California, Florida, Illinois and New York. In the next two years, these interest rate adjustments made on mortgage modications in 2009 will reset to higher rates and could cause additional defaults. If a homeowner cannot make the payment, they could lose their home to foreclosure. HELOC “Payment Shock” The sad truth, however, is that HAMP re-defaults are the rst big boulder in an avalanche of mortgage debt resets that will cascade down the still troubled lending market, rattling through much of the housing market next year and peaking in 2017. Next year, in addition to a surge in HAMP re-defaults, an overhang of home equity lines of credit — or HELOCs — that borrowers took out during the housing boom, will adjust to higher interest rates, forcing many borrowers into increased payments, as borrowers are compelled to pay both principal and interest on second loans. As of December 2013, some 16 million U.S. consumers held $474 billion in HELOC debt that is outstanding today, according to TransUnion. Broke USA: Renance Boom Fuels Next Recession Starting in 2002, there was a wave of cash-out renancing, along with a surge in second mortgages and home equity lines of credit that began to wipe out the equity of homes all across America. Increasingly, prudent mortgages were converted into non-prime mortgages by borrowers who were house rich but cash poor. During the renancing boom, equity extraction started at $613 billion in 2002, and rose to $914 billion by 2005, according to Robert Stowe England, author of the “Black Box Casino: How Wall Street’s Risky Shadow Banking Crashed Global Finance.” In only four years, total equity extraction hit $3.08 trillion. During the housing boom, two things made HELOCs attractive to borrowers — historically low interest rates and the tax advantages of using your home as an ATM, or automatic teller machine. Income tax rules made borrowing against a home’s equity attractive. Because mortgage interest payments could be deducted for income tax purposes, the interest paid on home equity lines of credit could also be deducted, while interest on credit card debt or other debt was not deductible. Therefore, borrowers often paid o other debt with a home equity loan, whose interest would be deducted for income tax purposes. Outstanding debt on banks’ home equity lines of credit stood at $499 billion in July, according to FDIC data. And borrowers who opened home equity lines of credit during the housing boom should brace themselves for increases in their monthly mortgage payments. HELOCs are also known as a second lien, second mortgage, closed-end second (CES) or a junior lien, and oer borrowers a great deal of exibility in terms of the amount borrowed and when to repay the loan — most home equity loans only require that interest be paid until the end of the so-called “draw period” (typically 5 to 10-years), after which the loan amortizes. During the “draw period” borrowers pay only interest and payments are low. After the “draw period” ends, the “pay-down period” begins where withdrawals are not allowed and the balance must be paid in full. During the “pay-down period,” typically during the 11th year, borrowers have to start paying both interest and principal, triggering a payment spike that often leads to default. On an $80,000 balance, for example, monthly payments could nearly double from $467 to $719 — a payment shock of an additional $252 each month, according to TransUnion. Continued Next Page  Jennifer Taub  Attorney and author of    “Other People’s Houses”  HAMP didn’t work because the banks didn’t want it to. Homeowners were being dual-tracked; strung along on their modication applications while the foreclosure  process proceeded.
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