Happy Medium

Posted by kevin on October 21, 2014 under Foreclosure Blog | Comments are off for this article

A recent WSJ article indicated that Fannie and Freddie on one side and the major mortgage lenders on the other side are close to an agreement to lower standards to provide mortgages to borrowers with weak credit. The article meanders through many issues- downpayment reduction, mortgage buybacks, fraud, foreclosure, opening credit markets for low income borrowers.

Pre-2008, lending standards were so loose that you could get a mortgage if you had a pulse. Why? A variety of reasons but one reason was that mortgage originators and securitizers were dumping their loans on investors so they had little risk and made lots of money in fees and in selling mortgage backed securities. Of course, as the number of defaults increased, the house of cards collapsed and with it the US economy. We are still mopping up the mess with foreclosures continuing.

Now, the President is pushing the banks to make loans if not to anyone with a pulse, then to people with less than decent credit ratings. Pre-2008, these were called subprime loans. Ed DeMarco, the head of the FHFA which oversees Fannie and Freddie, resisted this and also principal reduction on mods (not good). Now, Mel Watt is in charge of FHFA and supposedly pushing President’s agenda. The problem is how far to you push opening credit- too little and you do not get the economic benefit of an expanded housing market; too much and you get the same problems that you had in 2008.

On the other side you have the banks. They are looking for a safe harbor to make questionable loans. HAMP 1 is based on PITI (principal, interest, taxes, insurance and association fees) of 31% of gross income. HAMP II takes us, for the most part, up to 42%. Would not be surprised if banks are looking for some safe harbor in the 45% range.

My experience in handling foreclosure cases for borrowers over the last 5 years is that 45% is on the road to disaster. When you factor in that taxes rise (especially in States like NJ) 45% can grow to 50% in no time. Is that where we want to be?

US action against Standard & Poors

Posted by kevin on February 11, 2013 under Foreclosure Blog | Comments are off for this article

Last week, the Justice Department filed a civil suit against Standard & Poors for its contribution to the mortgage meltdown. Why did it take almost 5 years?

S&P rates securities based presumably on risk. A high S&P rating (AAA) could mean the difference between selling a security and not selling it. This concept was not lost on the purveyors of mortgage backed securities. It was essential that S&P (and the other raters) deem their higher tranches to be AAA so that insurance companies and pension would buy. As was stated in a recent blog, S&P provided the gift wrapping for the sponsors of securitized trusts.

The problem, however, as brought out by many commentators (and now the feds), was the S&P was taking a bunch of subprime loans none of which could be rated AAA, bundling them together and somehow the bundle was rated AAA. How could you turn chicken feathers into chicken salad?

S&P, in its own defense, is saying that the government is trying to blame them because they did not predict the housing bubble. Well, not really. What the feds are saying is that S&P really did very little analysis before that gave their stamp of approval on questionable securities. Why? Because S&P got paid a lot of money. Moreover, when it started to become evident that there were problems, S&P was pretty slow on the uptick in downgrading these questionable securities.

We can only hope that the feds do not make a quick and cheap settlement so that it could get a headline in the WSJ. The truth should come out. A may lead to a better method of evaluating securities