Study: In some areas, risky loans punished the rich more than the poor

 

Five years into the housing bust, are rich or poor homeowners more likely to suffer foreclosure?

It all depends on which part of the country you're in, according to a Center for Responsible Lending study.

Low- and moderate-income borrowers have been most affected in cities such as Detroit, Cleveland and St. Louis, where weak economies meant home prices didn't rise much even while much of the nation was caught up in the housing bubble, the nonprofit CRL said.

However, in areas that had strong housing appreciation before the collapse, such as California and Nevada, the opposite is true. In these areas, middle- and higher-income borrowers have been most likely to fall into foreclosure, according to CRL's study of 27 million mortgages over five years.

The explanation, CRL said Thursday, is that higher-income borrowers in expensive boom states wound up with a disproportionate number of high-risk loans, as did the lower-income residents of cities with weak economies and housing markets.

The rich borrowers were stretching to buy homes by using supposedly prime adjustable-rate loans requiring interest-only payments at first, or pay-option mortgages that allowed them to pay so little that their loan balance rose instead of fell. 

Fewer home loans going bad but foreclosures on rise

Far fewer borrowers are delinquent on their home loans these days, a Mortgage Bankers Assn. report shows, but new foreclosure actions are on the rise in states like California, showing the nation still has much pain to endure before the housing crisis subsides.

Private analysts say the nation is only halfway through the wrenching grip of the foreclosure epidemic. And that's reflected in the housing market, where home sales and prices continue to sag in many areas despite record low interest rates.

Five years into the crisis, 7.99% of all U.S. home loans were behind by at least one payment in the third quarter but not yet in foreclosure, the mortgage trade group said Thursday. That's down by nearly half a percentage point from the second quarter and more than a percentage point from a year earlier.

But the group's statistics showed how banks are reasserting themselves against troubled borrowers after slowing the process for nearly a year amid increased scrutiny from regulators.

The percentage of loans on which foreclosure actions were started during the third quarter was 1.08%, up from 0.96% in the second quarter. California had the nation's fifth-highest rate of new foreclosures: nearly 1.5% in the latest quarter.

The percentage of U.S.loans somewhere in the foreclosure process at the end of the third quarter was 4.43%, up slightly from a year earlier. The rate of homes in foreclosure was highest in Eastern and Midwestern states that route all home repossessions through the courts, with Florida at more than 14% and New Jersey at 8%.

California, which for years had one of the highest rates of loans in foreclosure, has fallen to 19th on the list because its foreclosure process doesn't normally require court action and is among the most streamlined in the nation. In other words, even as the rate of new foreclosures increases, the repossessions are being handled quickly.

Of states that handle foreclosures without going through court procedures, Nevada was the only one high on the total foreclosure-rate list, with nearly 8% of its mortgages in foreclosure.  

In a separate report Thursday, mortgage finance giant Freddie Mac said the typical rate on a 30-year fixed-rate home loan early this week was an even 4.0%, a statistically insignificant rise from 3.99% a week earlier. The 15-year fixed loan rates rose to 3.31% from 3.30%.

Expressing some optimism, Frank Nothaft, an economist for the trade group, said the economy "is showing potential for further gains in the near term" as the near-record low mortgage rates persist.

Retail sales rose for the fifth straight month in October, consumer confidence rose for the third straight month in early November to the highest reading since June, and home-builder confidence exhibited a back-to-back monthly increase in November to the strongest level since May 2010, Nothaft said, citing various surveys.

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Lawmakers slam Fannie Mae, Freddie Mac CEOs over pay and bonuses

 

The chief executives of Fannie Mae and Freddie Mac faced bipartisan outrage Wednesday over multimillion-dollar salaries and large bonuses at the seized housing finance giants, which still owe the government a combined $150 billion in the largest financial crisis bailout.

"Should you profit while the taxpayer is paying the bill?" asked Rep. Darrell Issa (R-Vista), chairman of the House Oversight and Government Reform Committee.

He summoned Fannie Mae CEO Michael Williams and Freddie Mac CEO Charles "Ed" Haldeman Jr. to testify before his committee. The hearing came a day after another House panel voted overwhelmingly to suspend large executive compensation packages at the two companies and align their salaries with that of government employees.

The total compensation for the top six executives at Fannie and Freddie for 2009 and 2010 was $35.4 million, with Williams and Haldeman receiving about half of that. Each of them could take home as much as $6 million apiece in salary and bonuses in 2011.

Rep. Carolyn Maloney (D-N.Y.) said taxpayers were upset because Fannie and Freddie continue to lose money and require additional bailout money.

"It’s hard for them to understand how executives get $6 million in pay for a failing entity," she said.

The salary and compensation were defended by Williams, Haldeman and Edward DeMarco, the latter of whom is the acting director of the Federal Housing Finance Agency, which has overseen Fannie and Freddie since they were put in a government conservatorship in 2008 because they were on the brink of failure.

The three said executive compensation has been dramatically reduced since the companies were seized but that it remained important to attract and keep skilled people to manage the firms' combined $5 trillion in mortgage-backed securities to prevent further taxpayer losses and additional damage to the housing market.

"I understand the outrage," Haldeman said. "We have significantly reduced executive compensation and overall spending at Freddie Mac, but we have tried to do it in a way that does not risk disrupting the functioning of the company."

DeMarco, who earns $239,555 a year as the independent government regulator of Fannie and Freddie, said that the top executives who caused the problems at Fannie and Freddie before 2008 are no longer there and  that it was difficult to find qualified people to help run the companies.

"Others may believe that this sort of talent is easily and quickly hired at compensation far below that of  competing private firms, but I do not," DeMarco said.

But that didn't satisfy some lawmakers, who said Fannie and Freddie should be able to find people who do not need to make six-figure salaries.

Rep. Trey Gowdy (R-S.C.) said that there have been complaints for years about the pay of federal judges compared with that in the private sector and that those jobs are still coveted by lawyers.

"I find it bitterly ironic that the total compensation for the United States Supreme Court justices is less than [what] either of these two men made," Gowdy said.

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Photo: Fannie Mae Chief Executive Michael Williams and Freddie Mac Chief Executive Charles "Ed" Haldeman Jr. take the oath before testifying before the House Oversight and Government Reform Committee on  Wednesday. Credit: Getty Images

Home prices fall in October as mortgage changes take hold

Uncle Sam’s steps to exit the mortgage market took a toll on Southern California’s housing market in October as fewer higher-cost homes sold.

The median price, the point at which half the properties sold for more and half for less, dropped because sales of more expensive homes took a dive with government-backed financing for those homes scaling back last month.

CHART: Southern California home prices for October

The region’s median sale price was $270,000 in October, according to real estate market tracker DataQuick. That was the lowest since January, a 3.6% decline from September and a 4.6% drop from October 2010.

“For a few months now, lower prices and amazingly low mortgage rates have kept resale activity slightly ahead of last year,” John Walsh, DataQuick president, said in a statement. “Of course, that’s not saying a lot when you consider sales were 25% to 30% below average.”

With 16,829 new and previously owned homes sold, October’s sales pace was 29.3% below the average for that month going back to 1988, when DataQuick records start. Sales were down 7.3% from September and up 0.5% from October 2010.

One big change to the market last month was the federal government's first step to reduce its role in the mortgage business by lowering the size of home loans it will guarantee.

The government currently supports about 90% of new mortgages — essentially propping up the home loan market after credit dried up and home sales plunged in the wake of the subprime mortgage crisis. The loan limit determines the maximum size of a mortgage that the Federal Housing Administration, Fannie Mae and Freddie Mac can buy or guarantee.

So-called nonconforming jumbo loans that are offered on the private mortgage market typically require bigger down payments and carry a higher interest rate, resulting in higher monthly payments for borrowers. In Los Angeles and Orange counties, the limit for FHA, Fannie and Freddie loans dropped from $729,750 to $625,500.

According to DataQuick, sales of properties in those two counties with loans between those limits fell 71% from the month before and 71.5% from a year earlier.

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Falling prices mean rising affordability, California Realtors say

Call it the silver lining of falling home prices.

With low interest rates and cheaper housing throughout the Golden State, the percentage of homebuyers who could afford to purchase a home increased in the third quarter, a real estate group said Thursday.

The number of households who could afford a home priced at the statewide median of $292,120 rose in the third quarter, according to an index produced by the California Assn. of Realtors. Fifty-two percent of California households could afford that price, compared to 51% in the second quarter.

Now if these households would only buy.

Beth L. Peerce, president of the group, said in the news release that one problem potential homebuyers could face is tight credit. Many first-time buyers don’t qualify for a loan, she said. Indeed, some analysts have noted that banks have tightened their loan criteria since the housing crash. But it was those loose lending standards that caused the real estate bubble in the first place, so many other analysts also argue that more carefully scrutinizing borrowers is appropriate.

The federal government has been providing enormous support to the mortgage market through loans backed by the Federal Housing Administration, though it has recently taken steps to scale back that support.

In California, potential buyers needed to earn at least $61,530 a year per household to qualify for the median-priced home. The median is the point at which half the homes in the state sold for more and half for less.

The real estate group calculated the monthly payment for a mortgage on such a home to be $1,540, including taxes and insurance, and assuming a 20% down payment and a 4.63% effective composite interest rate.

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Photo: A home on the market in Altadena features a sign of the times. Credit: Associated Press

 

Freddie Mac: 30-year mortgage rate back below 4%

The typical rate that lenders are offering on a standard 30-year mortgage is back below 4% for the second time this year, Freddie Mac says.

The rate fell from an even 4% in Freddie's survey last week to 3.99% in the survey released Thursday. The 3.94% recorded in the Oct. 6 report was the lowest in the 40 years that Freddie Mac has been asking lenders across the country about the rate they are offering on the 30-year loan.

The typical interest rate on the 15-year fixed home loan dropped from 3.31% to 3.30% in the latest survey. Borrowers would have paid less than 1% of the loan balance in fees to obtain the loans, Freddie Mac said.

Solid borrowers who shop around often find slightly better rates than those in the survey, and paying additional points upfront to lenders also can lower the rate.

The mortgage rates are a huge boon for home buyers and refinancers with solid credit and income, 20% down payments or 20% home equity -- the kind that would qualify for the loans of up to $417,000 that the survey focuses on.

But they are available at a cloudy time. Foreclosures are rising again, and the rates are scraping bottom mainly because investors are so spooked by the European debt crisis. That has increased demand for U.S. debt securities, still presumed to be a safe haven.

That demand has depressed the yield on Treasury securities, and mortgage rates tend to track Treasury yields. And there is too little in the recent mixed economic news to suggest that inflation could reassert itself in the United States, driving interest rates higher.

"The economy added 80,000 net jobs in October, below the market consensus forecast, but employment gains over the prior two months were revised up by 102,000 and the unemployment rate fell to 9.0 percent, the lowest in six months," Freddie Mac economist Frank Nothaft said. "Factory orders improved in September, yet the expansion in the service industry slowed in October."

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Photo: Freddie Mac headquarters, McLean, Va. Credit: Pablo Martinez Monsivais / Associated Press

30-year mortgage rate drops to 4%, Freddie Mac says

Investor worries over the European debt crisis helped drive the average rate for a 30-year fixed home loan down to 4% this week, according to Freddie Mac.

The figure, down from 4.1% last week, was the second lowest in the 40 years Freddie has been conducting a weekly survey of the terms being offered by home lenders. The lowest average rate recorded was 3.94% four weeks ago.

Freddie Mac said lenders were offering 15-year loans, a popular choice for homeowners who are refinancing, at an average rate of 3.31%, down from 3.38% a week earlier. That rate was below 3.3% for three weeks in late September and early October.

To obtain the loans at the rates being offered this week, a borrower would have to pay upfront fees averaging 0.7% of the amount borrowed.

Worried about the possibility of defaults on European debt, investors rushed to buy U.S. Treasury securities early this week, driving down interest rates.

The low mortgage rates have created an opportunity for some homeowners who are current on their loans to trade them in for new mortgages, often lowering their interest costs dramatically.

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Banks, regulators start massive review of foreclosures

Some people who lost their homes to a foreclosure system wrought with error and misconduct may now request their cases be independently reviewed and potentially may be compensated.

A large-scale review of foreclosures that occurred in 2009 and 2010 began on Tuesday with federal regulators requiring the nation’s largest mortgage servicers to start mailing letters to potential victims. Independent consultants that the banks were ordered to hire in April will conduct the assessments. More than 4 million borrowers could be eligible.

“The independent foreclosure review is a significant component of the mortgage servicers’ compliance with our enforcement actions,” said John Walsh, acting Comptroller of the Currency, who along with the Federal Reserve and Office of Thrift Supervision ordered the reviews. “These requirements help ensure that the servicers provide appropriate compensation to borrowers who suffered financial harm as a result of improper practices identified in our enforcement actions.”

The actions affect 14 large mortgage servicers that were required to correct the shortcomings and errors in their foreclosure processes. The outreach effort that began Tuesday is a first step.

Each mortgage servicer is required to mail one letter to each customer who is eligible for the review. An advertising campaign will also begin shortly to get the word out to people potentially harmed by the errors, federal officials and bank representatives said Tuesday.

A financial compensation schema for borrowers found to have been foreclosed on improperly has not been developed yet, and neither banking officials nor regulators gave an estimate for how much the actions would cost the banks.

The actions by the federal regulators come after it was revealed last year that banks employed so-called robo-signers, people who signed foreclosure documents en masse without properly reviewing them; took back their homes even though they were being reviewed for a loan modification; and made other errors in the foreclosure and servicing processes.

The enforcement orders are separate from work being done by a committee of attorneys general that also hope to reach a settlement with the nation’s largest banks over faulty foreclosure practices. Those negotiations remain ongoing, even though some states have voiced concern over the direction of the negotiations, and California has dropped out altogether.

A website for borrowers who want to learn more about the federal claims process has been created, IndependentForeclosureReview.com, as has a toll-free phone line, (888) 952-9105.

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Photo: A foreclosure notice hangs in the window of a home on Sand Pine Trail in the gated Willow Walk community in Hemet. Credit: Gina Ferazzi / Los Angeles Times

 

Mortgage rates flat, Freddie Mac says, but hike may be near

The typical fixed rate for a 30-year home loan edged barely lower early this week amid mixed economic data, Freddie Mac said.

But news that the U.S. economy is growing and that European leaders have reached a deal to reduce Greece's staggering debt load could push the cost of borrowing back higher.

Freddie Mac said Thursday in its weekly report that the 30-year rate averaged 4.10% this week for solid borrowers who paid 0.8% of the loan amount in lender fees and discount points. That was down a notch from 4.11% last week.

The typical 15-year fixed rate held steady at 3.38% with an average of 0.7% of the loan amount paid in extra fees upfront.

Freddie Mac asks lenders across the country what rates they are offering to borrowers who pay only small fees to get the loans. The rates are for borrowers with solid credit and 20% down payments or home equity.

Freddie Mac economist Frank Nothaft said housing market indicators were mixed, with consumer confidence soft, house prices largely flat and new home sales up -- but from very low levels.

However, today's good news on the European debt crisis and the U.S. economy, which the government said grew 2.5% in the third quarter, may exert some pressure for higher rates.

When things are looking better, fewer investors tend to seek shelter in U.S. Treasury securities. That in turn could send the yield on the 10-year Treasury higher, and mortgage rates generally follow the lead of that benchmark.

Sure enough, the 10-year Treasury yield was moving higher early Thursday.

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New Obama refi plan could get help from Fed

Another Federal Reserve policymaker signaled Monday that the central bank may launch a new round of mortgage-bond purchases to boost the housing market.

The comments by New York Fed President Bill Dudley came on the same day that the Obama administration announced a major overhaul of its mortgage-refinancing program for loans owned or backed by Fannie Mae and Freddie Mac.

A new Fed program “would complement the goals of the administration in helping the housing market,” said Quincy Krosby, chief market strategist at Prudential Financial in Newark, N.J.

Dudley, speaking in New York on the economy, said that the continued weakness in housing was “a serious impediment to a stronger economic recovery. . . . Mortgage rates are at record lows and house prices no longer appear overvalued on affordability measures. But obstacles to refinancing and access to credit for home purchases are limiting the support provided by low rates to house prices and consumption.”

Noting that the Fed last month decided to shift more of its massive securities portfolio toward longer-term Treasury bonds to pull down long-term interest rates in general -- including mortgage rates -- Dudley said in response to audience questions that the Fed “potentially could move to do more in that direction.”

Recent market speculation has centered on the idea of the Fed printing money to buy another large chunk of mortgage-backed bonds. The idea would be try to push mortgage rates even lower, which could help spur home purchases and refinancings.

On Friday, Fed Vice Chairwoman Janet Yellen said that another large bond-buying program “might become appropriate if evolving economic conditions called for significantly greater monetary accommodation.”

The average 30-year mortgage rate fell to a generational low of 3.94% in the first week of October, but has since edged up a bit, to 4.11% last week, according to Freddie Mac.

Long-term Treasury bond yields have risen since late September as worries about another U.S. recession have faded, eroding some of the “haven” demand for government bonds. That has helped to put upward pressure on mortgage rates.

The Fed bought $1.25 trillion of mortgage-backed bonds in 2009 and 2010, but it has allowed that portfolio to decline to $860 billion as securities have matured.

Yellen and Dudley are allies of Fed Chairman Ben S. Bernanke. But they face opposition from some Fed officials who believe the central bank already has done enough to boost the economy.

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Photo: New York Fed President Bill Dudley speaking in New York on Monday. Credit: Ramin Talaie / Bloomberg News

California housing agency forcing foreclosures

A state agency that provides low-interest mortgages is foreclosing on a small number of clients even though they are making their monthly payments, a state Senate watchdog group reported.

The California Housing Finance Agency is foreclosing on homes because their financially strapped owners temporarily rent them out and move into cheaper rental properties, the Senate Office of Oversight and Outcomes said Monday.

The agency, which finances the mortgages through the sale of tax-free bonds, allows borrowers to rent their homes only if they suffer a severe economic hardship, such as losing a job.

That tight restriction was recommended to the agency by its bond counsel prior to the collapse of the state's housing market and the deep recession of 2007-09.

About 350 Housing Finance Agency borrowers rented their homes without permission and 21, so far, have been foreclosed on. Another 186 are being threatened with foreclosure despite staying current on their monthly loan payments, the oversight office said.

According to the report, the agency said it didn't know how many borrowers were denied permission to rent.

The agency did not respond to requests for further comment.

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