FHA-Backed Loans, Subprime, and Fraud - Is it Happening All Over Again?

Here we go again, it looks like the same sharks, just another ocean. As reported by BusinessWeek - "FHA-Backed Loans: The New Subprime"?

The same people whose reckless practices triggered the global financial crisis are onto a similar scheme that could cost taxpayers tons more.

As if they haven't done enough damage. Thousands of subprime mortgage lenders and brokers—many of them the very sorts of firms that helped create the current financial crisis—are going strong. Their new strategy: taking advantage of a long-standing federal program designed to encourage homeownership by insuring mortgages for buyers of modest means.

You read that correctly. Some of the same people who propelled us toward the housing market calamity are now seeking to profit by exploiting billions in federally insured mortgages. Washington, meanwhile, has vastly expanded the availability of such taxpayer-backed loans as part of the emergency campaign to rescue the country's swooning economy. - (BusinessWeek)

There seems to be no end to the corruption. The tool to fix one problem is the door to another. In fact, if there was any question in your mind as to how this financial game of life is played, simply have a look at what's transpired over this past year in terms of the economic bailouts handed out by our government. How's your pocketbook?

Capitalism not at it's finest!

Loan Modification Programs - IndyMac and B of A Lead the Way

As reported by CNNMoney.com - "One failed bank gets the housing fix right":

... Chairwoman Sheila Bair told the Senate Banking Committee about the success her agency has had in helping struggling borrowers at IndyMac, which the FDIC took over this summer.

Bair, the nation's leading bank regulator, thinks this foreclosure prevention program can work for other banks.

"Our hope is that the program we announced at IndyMac Federal will serve as a catalyst to promote more loan modifications for troubled borrowers across the country," she told the committee.

She's not alone. While individual lenders, loan servicers and non-profit foreclosure prevention outfits have been chipping away at the staggering housing crisis on a case by case basis, IndyMac, under the FDIC's leadership, became the first bank to establish a set protocol to modify home loans.

IndyMac has made some reasonable progress in the implementation of their loan modification program. Borrowers who have had their loans modified are receiving significant payment relief:

IndyMac services more than 60,000 loans that are either more than 60 days past due, in bankruptcy, in foreclosure or are otherwise not currently being paid. About two-thirds of those customers are eligible for the program, according to Bair, and more than 3,500 IndyMac borrowers have had their loans modified to affordable levels so far. Borrower payments have been cut on average by $380, she said.

Currently most lenders assess each loan on a case-by-case basis, which takes a tremendous amount of time and resources, and can hold up the process for months. Establishing set rules that a lender can apply to thousands of borrowers will speed the process, and help right the housing market more quickly

Under IndyMac's program, the lender modifies a loan so that the borrower's new mortgage payment, including insurance and taxes, eats up no more than 38% of their pre-tax income. This percentage, known as a debt to income ratio, topped 50% for some loans during the boom.

To achieve this lower payment, IndyMac can lower the interest rate, extend the life of the loan to, say, 30 or 40 years, defer some principal to the final years of the loan, or a use a combination of these strategies.

IndyMac is also trying to simplify the process for borrowers. It is overnighting loan forms to eligible customers with a signature required upon receipt. "It doesn't show up with your regular mail, coupons and junk mail, because the key is getting the consumer to open it," said FDIC spokesman David Barr.

Other banks following suite? Bank of America will begin working to modify loans as well:

Bank of America (BAC, Fortune 500) launched a similarly systematic program earlier in October. That program, scheduled to start in December, came as part of a settlement with state attorney general offices that sued Countrywide, which B of A recently acquired, for predatory lending practices. It's expected to help 400,000 troubled borrowers and is actually slightly more aggressive than IndyMac's plan.

B of A will use a 34% debt-to-income ratio to calculate the affordable monthly payment for its customers, and may also write down the principal balance of some negative amortizing loans. IndyMac will not forgive debt, but instead will add principal to the final years of a loan if necessary.

The loan modification program to be expanded:

IndyMac's program is now being applied to many delinquent loans owned by Freddie Mac (FRE, Fortune 500), Fannie Mae (FNM, Fortune 500) and other investors, Bair said in her testimony ...

The implementation of these "loan modification" programs are definitely a step in the right direction in terms of helping to stabilize the battered housing market. Only time will tell if these programs can catch on with a multitude of banks. If the banks do overwhelmingly adopt similar types of "loan modification" programs the question then turns to how efficient will they be in their implementation. To date, most banks have shown little discipline and grave incompetence in dealing with the housing crisis. At this point, to expect anything more would be naive, but we do hold out hope that they can get their act together.

Apartments - The Only Housing Sector Not Oversupplied?

As reported by Multi-Housing News - Apartments are the Only Housing Sector That Is Not Oversupplied, Affirms Witten:

Washington, D.C. - The apartment market remains healthy although rental demand is slowing, said Ron Witten, president of Witten Advisors LLC, speaking this week at the National Association of Home Builders' (NAHB) Fall Construction Forecast Conference.

Witten said that apartment occupancy level has decreased by only half a point in the past 12 months, and is now at 95 percent on a national basis. Rent growth continues, but it has declined from 4 to 5 percent at its peak in 2006-07 to 2.3 percent in the second quarter this year.

"Fundamentals are still quite good in the multifamily rental sector," said Witten.

However, he said that rental demand is "definitely" declining. Witten said the "real threat" to apartments comes from the single-family "shadow" rental market. However, he added that in early-2008 there was a significant trailing off in rental singlefamily move-ins due to renters' avoidance of living in remote locations because of high gas prices.

Witten forecasts that job losses will continue through 2009 before modestly recovering in 2010, and he said there will be a "strong" 2011.

Witten said there are about 100,000 units of empty apartments, which is not a big overhang given the base of about 20 million-plus apartment properties. He said no significant progress will be made in reducing the inventory as long as there are job losses through the end of 2009.

"This is the only housing sector that is not oversupplied," he said. 2009 he said will see the end of job losses, and by the end of 2010, any excess inventory will be "behind us."

David Seiders, chief economist of NAHB, said at the forecast that there has been a strong increase in multifamily rental production in the past year. However, he said the NAHB forecasts this increase was "overdone" and expects a decline in apartment starts, which will continue for about a year before stabilizing.

We believe the rental market in general should remain strong due to the misfortune of large numbers of homeowners who have lost their homes, are continuing to lose their homes, and will ultimately be forced to rent.

The single-family residential dwellings should begin to present an increasingly larger drag on apartment type rentals as more homes will continue to flood the market due to the sub-prime / credit crisis and investors, in increasingly larger numbers, will begin to take advantage of attractive and significantly lower housing prices now found in many of the overheated markets.

As reported by MercuryNews.com, a local example of this can be found in California's Silicon Valley - Foreclosures add to tight rental market:

Record numbers of Silicon Valley homeowners have been foreclosed upon this year, and most must seek rental housing once they leave their homes. If tenant-occupied houses are in foreclosure, tenants nearly always get evicted, pushing them into the rental market again. And many renters who could afford to buy homes size up the bleak economy and opt not to take on mortgages and home ownership.

The result: It's a competitive market for those seeking reasonably priced rentals, and it's a pretty good time to be a landlord.

"The rental market has definitely become tighter in the sense that rents are going up," said Martin Eichner of Project Sentinel in Sunnyvale, an organization that provides landlord-tenant dispute resolution services, as well as foreclosure prevention help.

Average apartment rents rose 5.2 percent in Santa Clara County in the third quarter, to $1,708 a month, according to RealFacts, a Marin County firm that measures average monthly rents for all types of units in complexes of at least 50 units.

But rent increases in the third quarter were not as steep as in the second quarter, a sign of the softening economy. And RealFacts said apartment complexes were 95.6 percent full in the July-to-September quarter, down from 96.7 percent a year earlier.

One reason apartment occupancy rates are slipping is that more single-family houses are coming onto the market as rentals, said Joshua Howard, executive director of the local division of the California Apartment Association. Some of those houses are previous foreclosures that were purchased by investors.

"That's providing competition to multi-unit buildings," Howard said. "The rental housing economy has more options available right now."

Again, this trend will continue and should become more pronounced as the housing market begins to find a bottom. Many markets may not have bottomed in terms of pricing, but leveling inventories (this past year has brought subsiding rates of vigorously increasing inventory levels found in many markets during 2006 and 2007), steady rental rates, battered housing prices, and a volatile stock market are all favorable indicators leading a fair number of investors to believe that they can hear some homes rightfully screaming, "it's time, buy me!"

Greenspan Admits That He Too Partially Missed the Boat

As reported by Bloomberg: Greenspan Concedes to 'Flaw' in His Market Ideology:

"Former Federal Reserve Chairman Alan Greenspan said a 'once-in-a-century credit tsunami' has engulfed financial markets and conceded that his free-market ideology shunning regulation was flawed.

'Yes, I found a flaw,' Greenspan said in response to grilling from the House Committee on Oversight and Government Reform. 'That is precisely the reason I was shocked because I'd been going for 40 years or more with very considerable evidence that it was working exceptionally well.'

Greenspan said he was 'partially' wrong in opposing regulation of derivatives and acknowledged that financial institutions didn't protect shareholders and investments as well as he expected.

'We cannot expect perfection in any area where forecasting is required,' he said. 'We have to do our best but not expect infallibility or omniscience.'

Part of the problem was that the Fed's ability to forecast the economy's trajectory is an inexact science, he said.

'If we are right 60 percent of the time in forecasting, we are doing exceptionally well; that means we are wrong 40 percent of the time,' Greenspan said. 'Forecasting never gets to the point where it is 100 percent accurate.'"

What happened?

"Today, the former Fed chairman asked: 'What went wrong with global economic policies that had worked so effectively for nearly four decades?'

Greenspan reiterated his 'shocked disbelief' that financial companies failed to execute sufficient 'surveillance' on their trading counterparties to prevent surging losses. The 'breakdown' was clearest in the market where securities firms packaged home mortgages into debt sold on to other investors, he said.

'As much as I would prefer it otherwise, in this financial environment I see no choice but to require that all securitizers retain a meaningful part of the securities they issue,' Greenspan said. That would give the companies an incentive to ensure the assets are properly priced for their risk, advocates say."

It's a bit disconcerting that so many of our leading economists comment that they didn't see this economic crisis coming. In hindsight, the signs are quite clear. Many will argue that the signs were there and quite clear all along. Nonetheless, easy money, the lack of basic regulations, and greed made for a bad cocktail. Still dazed and confused, the hangover continues.