Julie Staradumsky CREN

October 14, 2010

With the foreclosure process grinding to a halt, reports of the banks' paperwork problems keep worsening. Banks and mortgage servicing firms sometimes can't prove who owns the title to the property in foreclosure.

And that threatens to make a bad situation worse.

To understand this latest issue, picture yourself facing foreclosure. You are running out of time ... and options. Finally, you say to your bank: "Show me the note."

That simple request is tying banks in knots.

Gary Klein is a lawyer representing people fighting foreclosure. He says that in many cases, banks cannot, in fact, show them the note. And that, he says, is a big problem.

"The fundamental issue is that no one really knows who owns hundreds of thousands of mortgages that have been made in the last decade, and really no one really knows who has the right to foreclose," Klein says.

Sometimes banks have no record of the original loan. Or, there are faulty records of which investor owns the loan. And that's not all.

I've heard that at certain points they found it too costly to even store all the notes, and a lot of them just got shredded.

- Alan White, a law professor at Valparaiso University

"The issue, as these cases start to shake out, is not always whether the paper is public, the issue is whether the paperwork exists at all," Klein says.

How could this be? The answer is a problem of both complexity and volume.

Many of the mortgages generated in the past decade were bundled, then sold in the form of securities. As many as half of mortgages were bought and sold at least four times before reaching their final investors. The chain of ownership became hard to follow.

Every time that ownership changed, there should have been a record of that transfer. Not just digital forms, but actual 20th-century-style paper that physically traveled to each investor. But in the rush to process millions of new mortgages, the papers often didn't make it.

Alan White, a law professor at Valparaiso University, says the industry began cutting corners.

"They devised various shortcuts with the assurance of some high-powered lawyers that these shortcuts were fully, legally equivalent to doing it the old-fashioned way. But nobody really knew for sure whether they were the full legal equivalent or not. And now we're going to find out," White says.

White says to "show you the note," banks or their loan servicing operations might have to do some forensic digging. Some of the paper might exist at a warehouse somewhere. Some might exist in the MERS, the industry's mortgage electronic registration system. But some might not exist at all.

"And I've heard that at certain points they found it too costly to even store all the notes, and a lot of them just got shredded," White says.

The lack of a note may mean some owners can avoid foreclosure - although that's not exactly clear.

The real new issue here is what this might mean for the banking industry.

Investors in mortgage securities - which in many cases have lost all or most of their value - might turn to banks to cover their losses.

My concern is, is maybe this is the tip of the iceberg and there were other shortcuts taken that we don't completely understand.

- Paul Miller, managing director of financial services, FBR Capital Markets

Chris Katopis, executive director of the Association of Mortgage Investors, says investors are protected by agreements that say if there's any defect with the contract, the banks will buy back those securities.

"What we're hoping for is banks to step up and do what they're legally accountable to do under these agreements, and be responsible," he says.

Paul Miller, managing director of financial services at investment firm FBR Capital Markets, says banks "will probably be held most responsible if there is a problem."

He says the evidence so far does not indicate that the problem will hold up most foreclosures. But no one knows yet for sure.

"My concern is, is maybe this is the tip of the iceberg and there were other shortcuts taken that we don't completely understand," Miller says.

And if that is the case, Miller says, these paperwork issues could amount to a huge economic problem

Yield Spread Premiums Make Endangered Loan-Fee Species List by Broderick Perkins

Newly-approved federal regulations target a mortgage brokerage and origination practice that experts say contributed heavily to the mortgage meltdown and ultimately the greatest recession since the Great Depression.

Effective April 1, 2011, the Federal Reserve will prohibit loan originators and mortgage brokers from receiving compensation based on a borrower's interest rate or other loan terms.

That will save consumers thousands of dollars on a mortgage.

In the past, brokers and originators were compensated, in part, for steering borrowers to more expensive mortgages. The more costly the mortgage, the higher the so-called "yield spread premium" (YSP) payment.

Loan originators and brokers argued YSPs were legitimate payments for their services, compensation earned in the open market and not loan costs. They also said YSPs helped consumers avoid additional closing costs. In a relatively few cases they did.

Pushing the argument, the profession fought to keep the fees off closing statements until closing day, much to the chagrin of hundreds of thousands of unsuspecting borrowers, faced with the close-of-escrow dilemma of paying the exorbitant fees or losing the deal.

Consumer advocates, and ultimately federal regulators, begged to differ, saying YSPs paid by the borrowers came with additional compensation from the lender in what amounted to kickbacks. After years of wrangling, advocates won the argument.

Under the old rules

Recently, the Center for Responsible Lending (CRL), in "Eliminating Systematic Charges on Home Loans" said YSPs often targeted minority and lower income households and were tacked onto 75 percent of all subprime loans made by mortgage brokers.

Mortgages made by brokers cost Americans nearly $20 billion more than comparable home loans made directly by the lender, as borrowers were socked with both the YSP and the higher interest rate, which often unnecessarily pushed the total loan cost up by $3,000.

Sixty percent of those who paid the YSP and the accompanying higher interest rate attached to the subprime mortgage could have qualified for a cheaper, prime loan, CRL reported.

As long ago as 2004, during the onset of predatory lending, YSPs and other exorbitant loan costs that eventually put the market in a tailspin, CRL estimated the higher interest rate attached to YSP-burdened mortgages was costing 600,000 families $2.9 billion each year.

CRL also found in the 2004 study, "Yield Spread Premiums: A Powerful Incentive for Equity Theft":

• The average amount of a YSP was about $1,850 per loan, the largest part of a broker's compensation. Broker's earned an average $1,046 more on loans with YSPs than on loans without the fee.

• Loans that included YSPs cost borrowers an additional $800 to $3,000 more than loans without YSPs.

• There was no legal requirement to inform borrowers about the connection between the YSP and the interest charged on a loan.

Under the new rules

More than a half decade later, mortgage consumers are finally getting their due -- to some extent. While those who suffered the extra costs may not benefit from the new regulations, the new rules are designed to prevent future gouging.

The Federal Reserve says :

• In addition to forbidding compensation based on the loan's interest rate or other terms, the law allows compensation based on a fixed percentage of the loan amount.

• Brokers and officers also cannot receive payments directly from a consumer, if they also receive compensation from the lender or another person.

• Brokers and offers are forbidden from "steering" a consumer to a lender offering less favorable terms in order to increase the compensation.

• To prevent steering, brokers must present consumers with all types of loans in which the consumer expresses an interest, say a fixed rate loan (FRM), adjustable rate mortgage (ARM), or a reverse mortgage.

• Loan options presented to consumers must include the lowest interest rate for which the consumer qualifies; the lowest points and origination fees, and the lowest rate for which the consumer qualifies for a loan with no risky features, such as a prepayment penalty, negative amortization, or a balloon payment in the first seven years.

Consumers can expect even greater protections against YSPs under the newly signed Restoring American Financial Stability (RAFS) Act of 2010.

Heavily laden with stiffer mortgage protections the act establishes the watchdog Consumer Financial Protection Bureau and, among other provisions, it:

• Prohibits unfair lending, including YSPsand other financial incentives that encourage lenders to steer borrowers to more costly loans. It also prohibits pre-payment penalties that trapped so many borrowers in unaffordable loans.

• Establishes penalties for irresponsible lenders and brokers who don't comply with new standards. Lenders and brokers can be held accountable by consumers for as much as three-years of interest payments and damages plus attorney's fees. The law also protects borrowers against foreclosure for violations of these standards.

• Expands consumer protections for high-cost mortgages by lowering the interest rate level and points and fee triggers that define high cost loans. Lenders must disclose the maximum a consumer could pay on an ARM and disclose in detail how payments can vary based on interest rate changes.

by The Associated Press

text size A A A October 14, 2010

Rates on 30-year mortgages fell this week to 4.19 percent, the lowest level in decades. They were pushed down by lower Treasury bond yields.

Investors are buying up Treasury bonds in anticipation of a move by the Federal Reserve designed to lower mortgage rates and yields on corporate debt.

As a result, the average rate for 30-year fixed loans dropped to the lowest level on records dating back to 1971, mortgage buyer Freddie Mac said Thursday. It's down from 4.27 percent the previous week. The last time rates were this low was in the early 1950s.

The average rate on 15-year fixed loans fell to 3.62 percent, the lowest on records dating back to 1991, Freddie Mac said.

A New Low For Rates

Weekly rates, in percent, for fixed 30-year mortgages

Source: Freddie Mac

Credit: NPR

Rates have fallen since spring as investors shifted money into the safety of Treasury bonds. That demand lowers their yields, which mortgage rates tend to track. The 30-year rate was 5.08 percent at the beginning of April. The 15-year rate was 4.39 percent.

Low rates haven't helped the struggling housing market, which recorded its worst summer in more than a decade. But they have led to a surge in refinancing.

And rates could fall even further in the coming week.

The Federal Reserve is leaning toward buying more Treasury bonds to drive down loan rates and boost the economy, according to minutes of closed-door deliberations released Tuesday. Economists predict Fed officials will approve a bond purchase program at their Nov. 2-3 meeting.

Two Fed officials in recent remarks have suggested the new purchases shouldn't exceed $500 billion. That would be smaller than a $1.7 trillion program launched during the recession.

The program would likely push mortgage rates down - possibly lower than 4.0 percent on the 30-year fixed loan.

Some analysts say rates are more likely to hover above 4.0 percent, without breaking that threshold.

"A lot of the impact that you would expect from this program is already priced into the market," said Mike Larson, real estate and interest rate analyst at Weiss Research. "If there's any risk, it's that what the Fed announces turns out to be a disappointment in some way. You might see rates go up a little bit."

To calculate average mortgage rates, Freddie Mac collects rates from lenders around the country on Monday through Wednesday of each week. Rates often fluctuate significantly, even within a given day.

Rates on five-year adjustable-rate mortgages averaged 3.47 percent, the same as the previous week. Rates on one-year adjustable-rate mortgages rose to an average of 3.43 percent from 3.4 percent.

The rates do not include add-on fees known as points. One point is equal to 1 percent of the total loan amount. The nationwide fee for loans in Freddie Mac's survey averaged 0.8 a point for 30-year and 1-year mortgages. It averaged 0.7 of a point for 15-year and 0.6 of a point for 5-year mortgages.

New Buyer and Selling Agent Incentive on HomePath® Homes

Fannie Mae is offering buyers up to 3.5% in closing cost assistance and a $1,500 bonus for selling agents on HomePath properties through December 31, 2010.

Buyers and selling agents must meet the following qualifications to be eligible for the incentive:

• HomePath property sale must close on or before December 31, 2010 and close within 60 days of offer acceptance
• Only owner occupants purchasing a HomePath property as their primary residence will receive up to 3.5% in closing cost assistance
• Only selling agents representing owner occupants purchasing a HomePath property as their primary residence will receive a $1,500 bonus. To be eligible for the agent's bonus, the initial offer must be submitted on or after September 23, close within 60 days of offer acceptance and close on or before December 31, 2010. No bonus will be given for investor purchases.
• Buyers and selling agents must request incentive upon submission of initial offer in order to be eligible.

Note: Offers submitted after November 15, 2010 may be difficult to close by incentive deadline of December 31, 2010.

Terms & Conditions:

• The 3.5% seller contribution is to be used towards closing costs, including a home warranty, if desired and available.
• Retail and public entities are eligible for the incentive however pool and auction sales, and sales to investors are not eligible.
• Fannie Mae reserves the right to remove any property from promotion or end the promotion at any time. Any dispute over the payment of a bonus shall be resolved by Fannie Mae in its sole discretion.
• Buyers should consult their lenders for guidance on financing. Lenders and mortgage products may impose their own limitations on the use of the 3.5% incentive. For example, the lender may consider the incentive a Seller Contribution and limit the amount to 3.0%. In those instances, the remaining 0.5% will no longer be available to the buyer.

Fannie Mae's innovative First Look period contributes to neighborhood stabilization by encouraging home ownership. During this period, owner occupants, public entities, and their partners can submit offers and purchase properties without competition from investor offers.

The First Look period is typically the first 15 days a property is listed on HomePath.com. Properties within the First Look period now include a countdown clock on the property details page, which displays the number of days remaining for owner occupants and public entities to submit offers.

If the property remains available for sale after the expiration of the First Look period, investor offers may be submitted and will be considered along with all other offers.

Ask a Fannie Mae listing broker for more details.

If you are concerned that the First Look marketing period is not being handled appropriately on a particular property, please contact the Fannie Mae Resource Center immediately at 1-800-732-6643.

Need help financing your new home?

Many state and local housing authorities offer financing programs that can assist you with the purchase of your new home. These public funds programs can provide down payment assistance, counseling, and more for those who qualify.

Currently many local housing authorities and non-profit groups are offering HUD's Neighborhood Stabilization Program funds through special financing programs for homebuyers. For more information about the NSP programs available in your area, please click here.

Fannie Mae is committed to meeting the mortgage and housing needs of communities across the country, therefore buyers using public funds are very important to us. Fannie Mae supports buyers using public funds in many ways, including the following:

• The earnest money requirement for individuals using public funds is only $500. Fannie Mae waives the earnest money requirement for public entities using public funds to purchase a Fannie Mae owned property
• Once an offer using NSP funds is accepted, Buyers have the opportunity to renegotiate their offer after receiving an NSP required Uniform Residential Appraisal value for the property.
• The standard closing period for a public funds offer is 45 days, which allows the time it may take to fulfill the NSP requirements for funding.
• During the initial listing and marketing period of a Fannie Mae owned property, Fannie Mae will only consider offers from Buyers using public funds, and Owner Occupants. This period is known as the ‘First Look' marketing period. The ‘First Look' period shelters these buyers from competition from investor offers during this time