Marc's Mortgage Matter's

I am very happy that the markets have been rallying after the Treasury said it was going to help banks sell off their toxic assets. I'm no economist, but maybe you should stop calling them “toxic assets”. It makes me want to head off to K.F.C. and buy salmonella chicken and then head to GM to buy a lemon. Goldman Sachs is looking to sell billions of new shares of stock. The plan relies on finding a few billion investors who haven't read the business news for the last 18 months.


Home equity lines of credit, sometimes known as Helocs, have been a popular financial tool for homeowners precisely for times like now, when it helps to have a monetary cushion in case of job loss or some other unforeseen fiscal glitch.

These lines of credit essentially replaced savings accounts as the fallback, with many financial advisers counseling homeowners to keep a $50,000 line open at all times.

But that fallback is evaporating. Lenders in the past year have made it much more difficult to qualify for home equity lines of credit, and even those who do get them will pay a much steeper price in interest — about 5 percent, in fact, which is somewhat higher than the average long-term mortgage.

During the real estate boom years, home equity lines of credit commonly carried interest rates that varied in accordance with the so-called prime rate. Those with good financial histories could expect their interest rates to float about one half of a percentage point below the prime rate.

Roughly a year ago, though, banks changed the terms of these loans — along with nearly every loan in which borrowers took equity out of their homes. As the economy and housing market declined, it made little sense for banks to lend money on an asset that was becoming less valuable by the week, and in an environment where borrowers had a diminishing ability to repay.

The first sign of a hiccup for home equity credit lines came in the middle of last year, when many banks began canceling unused portions of homeowners’ lines of credit. Such measures presaged interest-rate increases. Since July 2008, the average interest rate paid on a home equity line of credit has been rising, even as the prime interest rate has fallen. The prime rate now holds steady at 3.25 percent.

In New York last week, the average rate for a home equity line of credit was 5.38 percent, according to Bloomberg News. In Connecticut it was 5.07 percent, and in New Jersey, 4.74 percent.

Why the disparity? New Jersey’s borrowers have defaulted on credit lines at a lower rate than in many other states, and property values are dropping less sharply. So New Jersey’s residents enjoy better interest rates. (And, no, if you live in New York you cannot jump across the border and get better rates from a New Jersey lender.)

This is not to say that it is any easier to get a home equity line of credit in one state than another. Borrowers with credit scores of at least 720, and a stable income that they can document, are good candidates for these loans if they have more than 20 percent equity in their homes.

For a buyer to qualify for a traditional first mortgage, its monthly payment — including interest, taxes, insurance and any association fees — must not exceed 31 percent of his or her gross monthly income.

Banks will also examine the borrower’s combined debt-to-income ratio, which includes monthly debt payments like credit cards and auto loans. If, along with the first mortgage, a person’s combined monthly debt exceeds 38 percent of their monthly income, banks will not offer a loan.

On home equity credit lines, banks will more closely scrutinize the combined debt-to-income ratio — for instance, looking further into the borrower’s past credit card bills to determine whether he or she tends to spend freely. Banks that are struggling to reach profitability, have had to allocate their money carefully, choosing the loan products with the biggest profit potential. In the current market, that is 30-year fixed-rate mortgages.

Those homeowners who borrowed against their equity credit lines during the boom, meanwhile, should be thankful for the sub-3 percent rates they now enjoy. If the bank has not cut your equity line, you can start to breathe more easily. If they were going to cut yours, they probably would have already done it by now!

My 86-yr old father called me yesterday and said, “Did you realize that President Obama probably signed his stimulus package at the same desk where President Clinton got his package stimulated?” (Cackle cackle.) And folks wonder where I get my material…

The news yesterday also included the latest mortgage growth industry that is hiring. The Senate voted to hire hundreds more FBI agents and prosecutors to go after mortgage fraud and make a better attempt at dealing with the 5,000 incidents reported each month. The Senate bill is estimated to cost more than $265 million a year for the next two years, but is also expected to pay for itself because of the fines and penalties that would result from more aggressive government investigations. Another 160 special FBI agents and more than 200 support staff, including forensic analysts would be hired – a large increase from the 250 special agents currently assigned to financial fraud cases, and the Justice Department would hire 200 more prosecutors and civil enforcement attorneys, along with 100 support staff. Good news, I hope they put em all away and throw away the key!

In regard to the economy - Overheard from a long time trader, “It feels like we are in the middle of a 6-12 month window where it will be unclear if the economy & stocks have bottomed. The economy needs to digest all the stimulus, financials need time to heal their balance sheet, earn their way out of this mess. I'm much less negative than I was even 3 mo's ago, but I strongly believe there are many more interesting chapters to write.” Nicely summed up – stocks certainly continue to do well, in spite of some very poor earnings releases. That’s not what they taught us in business school!

Three sisters ages 92, 94 and 96 live in a house together. One night the 96 year old draws a bath. She puts her foot in and pauses. She yells to the other sisters, "Was I getting in or out of the bath?"

The 94 year old yells back, "I don't know. I'll come up and see." She starts up the stairs and pauses. "Was I going up the stairs or down?"

The 92 year old is sitting at the kitchen table having tea listening to her sisters. She shakes her head and says, "I sure hope I never get that forgetful, knock on wood." She then yells, "I'll come up and help both of you as soon as I see who's at the door."

With all of the loan modification activity going on, it should be of no surprise that the press is pointing out that borrowers are not required to pay fees when modifying their mortgage. The stories that I have seen generally tell borrowers that, if they are having trouble making payments, their first phone call should be to their lender. “These days lenders are instituting their own modification programs for troubled borrowers. You should not pay a "fee" to any company that says it can negotiate with your mortgage company.”

Many New York City prosecutors reacted slowly and brought few indictments as foreclosure swindles and mortgage fraud swept the city during the past decade, allowing problematic operators to flourish even as the nation’s housing market rose and crashed, according to housing lawyers, prosecutors and federal reports.

As early as 2000, the federal Department of Housing and Urban Development declared the city a foreclosure fraud “hot zone.” In 2005, the National Consumer Law Center wrote an influential report, “Dreams Foreclosed: The Rampant Theft of Americans’ Homes Through Equity-Stripping Foreclosure ‘Rescue’ Scams,” warning that the F.B.I. and local prosecutors remained dangerously understaffed in this fight.

Yet a review of civil lawsuits suggests that many fraud cases go unprosecuted.

Officials with several of New York’s district attorneys acknowledge the problem, saying they lack the staff to investigate and prosecute more than a fraction of the potential deed-theft and mortgage-fraud cases. Such cases are typically complex and time consuming; as a consequence, prosecutors say, they often know the names of sophisticated fraudulent operators but have trouble getting indictments.

“Am I frustrated and can I feel the frustration of those who send us the cases? Absolutely,” said Gregory C. Pavlides, the chief of the economic crimes unit in the Queens district attorney’s office. His unit’s 14 lawyers also handle money laundering, counterfeiting, identity theft and environmental cases.

For years many district attorneys viewed mortgage fraud as taking a second seat to traditional show-stoppers: homicides, counterfeiting, burglaries and even gambling. At least one New York district attorney still takes that view.

“Our natural inclination is that these are civil cases,” said William Smith, spokesman for the Staten Island district attorney, Daniel M. Donovan.

Yet mortgage and deed fraud, assistant district attorneys say, are among the most economically destructive crimes prosecuted by their offices. Bank robbers average less than $2,000 and face a 75 percent chance of being caught; a mortgage fraud ring walks away with hundreds of thousands of dollars per house, prosecutors say, and runs little risk of arrest.

“Robbing a bank with a gun is not as smart as going into mortgage fraud,” Mr. Pavlides said. “Because of the sheer volume, you have a decent chance of getting away with it.”

Nationwide, mortgage fraud and deed theft cost homeowners $4 billion to $6 billion annually, according to the F.B.I. In New York City, housing fraud has wiped out tens of millions of dollars for thousands of predominantly black and Latino homeowners in large parts of Brooklyn, Queens and Staten Island.

Mortgage fraud comes in several varieties. Most common today are deed thieves, who approach distressed owners and offer to straighten out finances by temporarily taking over deeds. Then they refinance and abscond with the owners’ equity. Others, more frequently during the boom years, rely on circles of appraisers who deliver inflated appraisals on demand, and on lawyers paid by the seller but purporting to represent the buyer, and on mortgage brokers, to persuade buyers to take on overpriced and often dilapidated homes.

As the foreclosure crisis has deepened, officials have promised a tougher line. Last week, Treasury Secretary Timothy F. Geithner announced plans for federal and state agencies to fight mortgage and foreclosure fraud. And last month, District Attorney Charles J. Hynes of Brooklyn and Senator Charles E. Schumer announced the creation of a real estate fraud unit in Brooklyn, to address what Mr. Hynes described as “the recent flood of mortgage fraud cases plaguing New Yorkers.”

But the lawyers who have pleaded with district attorneys, chased witnesses and pointed out the same suspected law breakers for years say that prosecutors failed to stop fraud when it was most rampant.

“We gift-wrapped these cases,” said Jessica Attie, co-director of the foreclosure prevention project at South Brooklyn Legal Services. “These are crimes committed in plain sight.”

When Doris Dickinson walked into Joe Sanders’s office at Brooklyn Legal Services Corporation A, he noted the sort of detail he thought an assistant district attorney would love.

The men who sold one of Ms. Dickinson’s houses filled out a deed in 2002 claiming that she was dead.

“Exhibit A: This is Ms. Dickinson and she’s alive,” Mr. Sanders said. “I figured that was a good place for a prosecutor to start.”

Ms. Dickinson, 53, is blind, and her father, a transit worker, had scrimped and purchased several homes in hopes of giving her a lifelong income stream. According to a lawsuit in State Supreme Court, two men used the forged deed to obtain a mortgage. Then they sold the house to an accomplice — or straw buyer — and refinanced it, taking $570,000 in equity, court papers say.

Ms. Dickinson spent years fighting to regain legal title, eventually taking her case to Richard Farrell, one of the few prosecutors in the Brooklyn district attorney’s office who handles mortgage fraud.

“He gave me his card and said what was done to me was wrong,” said Ms. Dickinson, whose curls cascade around large black sunglasses.

Mr. Farrell has called witnesses and searched records, and he has located a suspect. But a year later, no grand jury has been called or indictments brought.

“It’s in my hopper,” Mr. Farrell said.

Mr. Farrell, chief of the new mortgage fraud unit, said the Brooklyn district attorney’s office has brought 50 cases since 2000 and has obtained 45 pleas and convictions, or five per year in a county of 2.4 million people.

In Queens, the district attorney, Richard A. Brown, said in a recent interview that his office obtains 35 to 45 mortgage fraud indictments annually, although often of individual suspects rather than larger operators.

The district attorneys speak of their frustration in tracking the more sophisticated operators.

“I’m simply emphasizing how difficult these cases are,” Mr. Farrell said. “Each case tends to take in excess of a year.”

Federal and state prosecutors have made more progress. Benton J. Campbell, the United States attorney for the Eastern District of New York, formed a mortgage fraud squad a year ago and recently obtained a conviction of the owner of Olympia Mortgage for defrauding Fannie Mae, the federal mortgage giant, on hundreds of mortgages. The Southern District office, too, has gained several convictions of high-volume swindlers.

Mr. Donovan, on Staten Island, is the only New York City district attorney who says his county has no mortgage fraud problem, although his county ranks near the top in foreclosures per capita statewide. “We don’t see many complaints,” said Mr. White, his spokesman.

But lawyers with Staten Island Legal Services and State Senator Diane J. Savino, who represents parts of Brooklyn and Staten Island, say they get many reports of fraud and have walked some cases over to Mr. Donovan’s office. “We’ve gotten very little response,” Ms. Savino said.

Linda and Wesley Bryce can attest to Staten Island’s fraud problems. They own a small, $169,000 home on the borough’s working-class north shore. Mr. Bryce, 71, worked in a pigments factory; Ms. Bryce, 55, worked as a chemical technician. Then she injured her spine, and their granddaughter, who is in their care, needed surgery, and in 2006 they fell behind on their mortgage payments.

The bank filed notice and a day later two “rescue” specialists from a mortgage broker in Queens knocked on the Bryces’ door. Temporarily share the mortgage with us, the men said, and we’ll give you $10,000 of the refinance proceeds and put your home on solid footing.

The Bryces, who are quick to say they lack financial sophistication, agreed. According to a lawsuit in State Supreme Court, the so-called rescuers transferred the deed to a straw buyer. A year later, they told the Bryces that they would have to pay $324,000 to get their house back, or start paying rent of $3,000 per month. When the Bryces protested, the rescue firm filed a petition to evict them.

“It was all done in a couple of hours,” Ms. Bryce recalled, resting her chin on her cane, in an interview in their lawyer’s office.

The Bryces called Mr. Donovan, and a detective tried to help them. Mr. Donovan’s top deputy said his office investigated but dropped the case after discovering that federal prosecutors had obtained an indictment of one of the mortgage brokers in an unrelated case.

An associate of the broker, however, continues to claim ownership of the Bryces’ home; a state judge has intervened but the Bryces still face eviction.

“There is this mentality that the victims are complicit if they sign papers they don’t understand,” said Margaret Becker of Staten Island Legal Services. “But who would ever knowingly sell their home for $10,000? Of course it’s fraud.”

And then there is Dr. Janet Mitchell, 58, the daughter of a butler and a maid who became chief of perinatology at Harlem Hospital Center and a national advocate for black pregnant women with H.I.V.

In 1992, she purchased a handsome and affordable brownstone in Fort Greene, Brooklyn. Then early-onset dementia struck. Dr. Mitchell stopped paying her bills in 2005, leading lenders to foreclose. Soon afterward, she walked into a mortgage company, according to a lawsuit filed by her niece.

A mortgage specialist persuaded her to sign a handwritten transfer with no lawyer present and paid off her $210,000 in loans. Then he refinanced her house, taking $1.7 million in cash. The doctor now lives, penniless, with her sister in Colorado.

South Brooklyn Legal Services gave the files to the Brooklyn district attorney’s office. The prosecutors have not yet brought a case.

“We are constantly trying to get them to pursue this case,” Ms. Attie said. “These are the most defenseless of all.” 

During a visit to the mental asylum, a visitor (a unemployed mortgage broker) asked the Director, “How do you determine whether or not a patient should be institutionalized?”
“Well,” said the Director, “we fill up a bathtub, then we offer a teaspoon, a teacup and a bucket to the patient and ask him or her to empty the bathtub.”
“Oh, I understand,” said the broker. “A normal person would use the bucket because it's bigger than the spoon or the teacup.”
“No.” said the Director. “A normal person would pull the plug. Do you want a bed near the window?”

The former Treasury secretary, Henry Paulson, is writing a book about his role in the Bush administration during the economic crisis. Oddly, the book starts on Chapter 11.

Mortgage brokers are supposed to be impartial advocates who search out the best possible deal for prospective homeowners seeking a loan. The mortgage crisis has revealed a different truth. Too many brokers were far more interested in earning fat fees for steering their clients to ruinously priced loans that the borrowers could never hope to repay. 

The numbers are startling. According to a 2008 analysis by the Center for Responsible Lending, subprime borrowers who went through brokers actually fared worse than those who went directly to lenders. Borrowers who used brokers coughed up additional interest payments ranging from $17,000 to $43,000 for every $100,000 they borrowed.

Lenders were, of course, complicit, happily issuing high-priced loans to people with little or no hope of repaying them. But it was often the brokers who steered borrowers away from affordable loans and toward the high-priced loans in the first place.

Many brokers do legitimate work that helps homebuyers sort through competing loan proposals and make good choices. In those cases, the fees they get from lenders — typically 1 percent or 2 percent of the loan amount — are fully justified. But many others, attracted by obscene profits associated with the subprime lending binge, did not act in a fair and ethical manner. Congress is finally seeking ways to rein in these brokers.

The first step must be to outlaw the kickbacks that lenders pay brokers for steering clients into costlier loans. At the height of the boom, brokers typically worked from rate sheets provided by lenders. These sheets showed not just the prevailing mortgage rates but the reward that brokers could reap for bleeding unsuspecting borrowers. To earn the maximum reward, brokers would entice borrowers into adjustable-rate loans with prepayment penalties — discouraging borrowers from refinancing with more affordable loans and assuring the original lender a handsome fee if the borrower refinanced.

The most clearly unethical form of payment is the so-called yield-spread premium. Brokers can claim this premium by steering a borrower whose credit history qualifies him or her for say, a 7 percent loan, into a more expensive loan at a higher rate. Predatory? Yes. And perfectly acceptable under existing lending laws. A House bill introduced by Representative Barney Frank, a Democrat of Massachusetts, would rightly make yield-spread premiums illegal.

In addition to Mr. Frank’s bill, Congress also will be asked to consider a bill introduced in the House by Representative Keith Ellison and in the Senate by Senator Amy Klobuchar, both Democrats of Minnesota.

Based on a forward-looking Minnesota law, the bill would outlaw collusion between lenders and brokers and would impose a fiduciary responsibility on brokers and other mortgage originators, requiring them to find the most beneficial deal.

The brokers and other mortgage originators will fight these and other measures tooth in nail. But there can be no real reform as long as mortgage brokers can be offered kickbacks and other incentives to steer often naïve borrowers into loans that put them at risk the moment they sign the papers.

To try and build support for the new budget bill, the Secretary of the Treasury will meet with small businesses. Like General Electric, AIG and General Motors.

How ‘bout this market? Yesterday rates moved higher, and prices lower, after Factory Orders increased 1.8% in February, following a downwardly revised 3.5% drop in January, and six consecutive monthly decreases. So why wouldn’t rates come down? US stock markets continued their rally, and in fact most overseas stock markets improved. (Japan’s was helped by Toyota’s stock rallying after a bank agreed to help finance US car sales.) Oh and don't forget the hundreds of thousands in lost jobs. And it would appear that there is a change in mood about the economy: in spite of the continued bad news, investors appear to feel that the worst is behind us. Just tell that to some Detroit or Sacramento home owner! Maybe investors are just tired of sitting on piles of cash…

Getting a mortgage is hard enough in this market. Trying to get cash out through a mortgage refinancing may be even more difficult. That has been the case even for borrowers with good credit. Banks are understandably leery about lending money on an asset that, in most areas, is losing value, especially as it is far from clear when the real estate market will bottom out.

Studies have also shown that borrowers who need to take cash out of their homes when they refinance have higher default rates than those who do not.

“Cash out” refinancings — in which an old loan is replaced with one that has a higher principal amount, and the difference is taken out in cash — were popular during the recent real estate boom. Back then, borrowers often used the extra money to finance home improvements, pay off credit card debt or take vacations.

Mortgage executives say that borrowers are less likely these days to seek cash-out refinance transactions to cover nonessential items. But many people who want to take advantage of the current low mortgage rates, which are in the 5 percent range, may want to extract some cash to cover things like college tuition.

There are others, too, who may need to do a cash-out refinancing to cover outstanding debt from a home-equity line of credit, because they may not have other financing sources available. Many people had taken out lines of credit as a buffer against unexpected expenses. Those borrowers might be better off doing a conventional refinancing (if one qualifies)(without taking out any cash), and then making the line of credit a “subordinating” debt. 

Some banks have just stopped doing cash-out refis. Those that continue to make such loans, will often lend up to only 60 percent of the home’s value, while others place a cap of $100,000 on the amount of cash a borrower can extract from the home. As recently as last year, the limit was $250,000.

Homeowners who do find a lender willing to offer a cash-out refinance should be prepared to pay a higher interest rate than they would pay if seeking a conventional refinance loan. Those with good credit — and credit scores of at least 720 — can expect to pay an additional three-fourths of a percentage point for a cash-out refinance. Those same borrowers, though, may also find loans of up to 80 percent of the home’s value, but they should expect to add yet another quarter of a percentage point to the interest rate.

Borrowers with lower credit scores face much worse conditions if they want a cash-out refinance. Lenders commonly add another 2.5 percentage points to the mortgage interest rate for those who have credit scores of 660, for instance, leaving such borrowers with as much as a 7.5 percent interest rate on a 30-year fixed-rate mortgage if they wish to take cash out.

There is one situation, mortgage experts say, in which borrowers won’t face higher rates or additional fees, and that is in a so-called limited cash-out, when a small amount of cash is taken out in order to cover the closing costs for a conventional refinance.