Foreclosures for sale: Big supply, low prices

NEW YORK (CNNMoney) — There’s a three-year inventory of homes in foreclosure for sale, and that’s devastating home prices.

Las Vegas has so many foreclosures that 53% of all the homes sold in Nevada are in some stage of foreclosure, according to a report from RealtyTrac, the online marketer of foreclosed properties.

Foreclosures represent 45% of sales in California and Arizona, and 28% of all existing home sales during the first three months of 2011.

“This is very bad for the economy,” said Rick Sharga, a spokesman for RealtyTrac.

What’s more, the homes are selling at steep discounts, especially so-called REOs, bank-owned homes that have been taken in foreclosure procedures.

The average REO cost on average about 35% less than comparable properties, according to RealtyTrac.

But in some areas, the discounts were ever greater: In New York State, the discount for REOs was 53% during the first quarter. And it was nearly 50% in Illinois, Ohio, and Wisconsin.

10 dirt cheap housingmarkets

Also weighing on market prices are “short sales,” homes where the selling price is less than what is owed by the borrowers. These sales sold at an average 9% discount.

Including both REOs and short sales, Ohio had the biggest discount of any state, at 41%.

There were 158,000 deals involving distressed properties nationwide during the first quarter, less than half the nearly 350,000 during the same period two years earlier.

With the slowed sales pace, it will take three years to burn through the inventory of 1.9 million distressed properties, according to Sharga.

“Even if you look at REOs alone, it will take 24 months to clear them and that’s without any new foreclosures at all coming into the system,” said Sharga.

Mortgages, foreclosures top agenda at BofA meeting

Foreclosures and home-mortgage modifications took center stage at Bank of America annual meeting last week.

Outside the headquarters of the nation’s largest bank, protesters held signs and gave testimonials about their own foreclosure experiences.

At the meeting, which was held inside the bank’s new 32-story building adjacent to its headquarters, shareholders confronted CEO Brian Moynihan about mortgage woes in their communities.

The Rev. Clyde Ellis, a pastor from Virginia, said Bank of America should take responsibility for its role in the foreclosure crisis.

“Come to Prince William County and I will show you disaster,” Ellis said.

Losses and litigation related to foreclosures and poorly written mortgages have haunted Bank of America for several quarters. In its latest quarter, the bank’s income dropped 39 percent on higher costs related to mortgages and legal expenses.

At the end of the first quarter, the bank had $2 billion of foreclosed properties on its book, and its customers were late by 90 days or more on $24 billion of its total loans, which included commercial and residential properties.

Moynihan tried to separate the rest of the bank’s business from its mortgage woes. He described the company as being made up of two stories, with the mortgage business on one side and all its other business units on the other.

“The power of the franchise is held back by the mortgage challenges we face,” he said.

The bank’s stock is one of the worst performers of the S&P 500 index this year. Recently, the stock slid after the Federal Reserve rejected the bank’s capital plan and its request for a dividend increase.

BofA was the only bank among the country’s four largest that didn’t pass a stress test from the Fed. The central bank examined the 19 largest banks in the country to see if they were strong enough to withstand another economic downturn. BofA will submit a revised plan later this year.

Moynihan said the bank will pay dividends once it resolves more of its mortgage issues and submits a plan that is acceptable to regulators.

Some shareholders want the bank to scrutinize itself more closely. Michael Garland, who was representing several large public pension funds at the meeting, said he had written to BofA’s audit committee asking that it conduct an independent review of mortgages and foreclosures to show they conform with the laws.

Garland said that audit committees of other banks responded soon after he sent them a similar letter in January.

He said was disappointed that there had been no response from BofA’s audit committee until just five days before the annual meeting.

The plan didn’t get enough votes to pass on Wednesday.

“If this is your response to shareholders with a $1.3 billion stake in the company, I can only imagine how you treat your residential-mortgage customers,” said Garland, who was also representing the New York City Comptroller’s Office, which oversees the public pension funds of New York.

Source: By Pallavi Gogoi, Associated Press

Banks Rush to Revamp Foreclosure Rules

The rush is on for banks to meet a mid-June deadline in offering up plans on how they plan to meet a set of guidelines by U.S. regulators to clean up their foreclosure procedures. The banks will have another 60 days after that deadline to implement the changes.

As part of the rules set by U.S. regulators, 14 financial institutions will be required to provide a single point of contact to borrowers trying to modify a loan or in the foreclosure process as well as set “appropriate deadlines” for deciding whether borrowers can get a loan workout. Regulators are also requiring banks to ensure their staffing levels are on par to handle the flood of foreclosures and loan modifications.

Several banks have already taken steps to implement the changes.

For example, J.P. Morgan says it’s developing a software program to make it easier for employees and borrowers to track loan modification requests. It also has started providing borrowers with a “relationship manager” to help navigate the loan modification or foreclosure process.

Citigroup, which already provides a single point of contact, says in the next few months it’ll debut a “concierge” system that will provide a small team of employees to guide delinquent borrowers and home owners at risk of default.

Banks are also making efforts to speed up their loan modifications, after customers have complained of long delays from banks in responding to requests. For example, Los Angeles Neighborhood Housing Services says it takes an average of 141 days for its borrowers to get an answer on an initial loan modification request. Wells Fargo was found to have the fastest turnaround: Initial reviews averaged 79 days. But the bank says now 60 percent of its borrowers receive a decision five days after the company receives the request.

Banks are also increasing their staffing. J.P. Morgan has announced it’ll add up to 3,000 new home-lending jobs, and Bank of America plans to hire about 3,000 employees to focus on its troubled mortgages.

New Incentives From Fannie, Freddie

Banks and mortgage servicers also must meet new guidelines from Fannie Mae and Freddie Mac, announced this week, that aim for more loan modifications and prevent foreclosures from taking too long.

Mortgage servicers will be required to approach borrowers earlier, making contact frequently after just one missed payment.

The GSEs are also offering incentives: They’ll pay $1,600 in incentives depending on how quickly servicers complete a loan workout. They also will impose a $500 compensatory fee on servicers who do not complete loan modification applications within six months after the loan goes delinquent. The changes will go into effect in the second quarter.

Source: “Banks Rush to Improve Foreclosure Practices,” The Wall Street Journal (April 29, 2011)

BofA opens office for foreclosure alternatives

Bank of America announced Wednesday it had opened an office in Seattle to allow distressed homeowners whose mortgages it services to meet face to face with specialists and consider alternatives to foreclosure.

Meetings are by appointment only, available from 9 a.m. to 6 p.m. weekdays and 9 a.m. to 1 p.m. on Saturdays. Bank of America customers can call the office at (206) 358-4338 to make an appointment.

The bank is also holding outreach events from 9 a.m. to 6:30 p.m. May 19-21 at the Meydenbauer Convention Center in Bellevue and the Spokane Convention Center. To register, go to www.bankofamerica.com/outreachevent or call toll-free (855) 201-7426.

Banks Get Failing Grade in Foreclosure Handling

Banks continue to receive backlash for their handling of a flood of foreclosures across the country. A new report released this week by federal regulators finds that banks failed to do a good job in handling foreclosures and sometimes evicted home owners when they clearly should not have.

The problems were “significant and pervasive” and added up to “a pattern of misconduct and negligence,” according to the Federal Reserve. The Fed says it soon plans to announce monetary penalties against mortgage servicers.

The report revealed several cases “in which foreclosures should not have proceeded due to an intervening event or condition,” such as families in bankruptcy or home owners who were eligible for a loan modification or even in the process of doing a loan modification.

The report also noted that banks had inadequate and poorly-trained staffs and improperly submitted paperwork to the courts.

In response to the report, several mortgage servicers signed a consent agreement this week, agreeing to changes that include new oversight procedures of foreclosures and reimbursing home owners who were wrongly foreclosed upon. One of the servicers signing the agreement, JPMorgan Chase, says it would add up to 3,000 employees to meet the new regulatory procedures.

“The banks are going to have to do substantial work, bear substantial expense, to fix the problem,” says John Walsh, the acting comptroller of the currency.

About two million households are in foreclosure, and several million home owners have already lost their home to foreclosure.

More Penalties Coming

The banks still face punishment and settlement talks with other agencies. The state attorneys general are conducting their own probe into shoddy foreclosure procedures and working with the Obama administration to overhaul the foreclosure process to prevent future abuses.

Source: “Report Criticizes Banks for Handling of Mortgages,” The New York Times (April 14, 2011)

Lawsuit reveals how a middleman is blocking mortgage modifications for homeowners

Pamela Jeter, of Atlanta, Ga., has been trying to get a mortgage modification for more than two years. She seems like an ideal candidate. She has shown she can stay current with a reduction in her monthly mortgage payments. Everybody would seem to win. Even the investors who ultimately own her loan think she should be able to get one. So, why is Jeter facing foreclosure?

A bank that she didn’t even know is involved with her loan has thrown up a roadblock to modifications. At least tens of thousands of other homeowners have shared a similar plight. Jeter’s case is a window into a broken system where even though the actual investors, when asked, say they want to allow modifications, the bank that acts as their representative has refused to allow them.

Two big banks act as middlemen between the homeowners like Jeter who make payments and the mortgage-backed securities investors who ultimately receive them. The banks’ jobs were supposed to be relatively hands-off, devoted more than anything to processing homeowner payments. When the housing bubble burst, they faced new demands.

One of those middleman roles is well-known to homeowners: the mortgage servicer, responsible for collecting homeowner payments and evaluating requests for a modification.

But it’s another middleman that’s proved the real barrier for Jeter: the trustee, who is supposed to be the investors’ representative, making sure the servicer is maximizing investors’ returns and distributing checks to them. HSBC is the trustee for the pool of loans of which Jeter’s is a part — and it’s refused to approve any modifications for loans like hers, saying the contracts around the mortgages simply don’t allow it.

The good news for Jeter is that, in what seems an unprecedented step, her servicer OneWest has taken HSBC to court to allow modifications. It filed suit in June of last year.

But in a sign of just how convoluted the mortgage world has become, OneWest is also pushing to foreclose on her. A recent sale date was avoided only after her lawyer threatened to sue. (One day after ProPublica published this story in March, OneWest postponed foreclosure, saying that it wouldn’t attempt to seize Jeter’s home again for at least two months.)

Bundled loan syndrome

Jeter’s loan was typical of the boom years. To help pay for improvements on her home in 2007, she’d refinanced into an interest-only adjustable-rate loan. That loan was bundled with thousands of others by a Wall Street bank and sold off to investors, such as pension funds, hedge funds and banks.

That’s where the trouble started. In Jeter’s loan pool and nine others, the contracts laying out the servicers’ responsibilities and powers contradict each other. OneWest’s lawsuit seeks to sort out that contradiction.

One document, a private contract between the servicer and the Wall Street bank that bundled the loans, explicitly forbids servicers from modifying loans in the pools in a way that would reduce homeowner payments. But other contracts — that investors could see — explicitly allow such modifications.

It’s become a familiar problem during the foreclosure crisis, dealing with the aftermath of the banks’ corner-cutting and sloppy paperwork of the housing boom.

No one appears to have tried to sort out this mess until 2009, when OneWest requested that HSBC, the trustee, allow modifications. The administration had just launched the Home Affordable Modification Program (HAMP), which pays servicers and investors subsidies to encourage affordable modifications. Under the program, modifications occur only when they will likely bring a better return to investors than foreclosure.

But HSBC refused to authorize any modifications, saying the contracts prohibit them. It’s obligated to act in investors’ interest, and it feared getting sued by those who didn’t want to cut homeowners’ payments. The dispute dragged on for months. Ultimately, HSBC offered to allow modifications only if OneWest accepted the risk of getting sued by investors, but OneWest wouldn’t.

OneWest was in an increasingly difficult situation, it says in its suit. It faced potential suits from investors if it modified loans, and if it didn’t, homeowners in the pool might sue.

In late June 2010, with HSBC still not budging, OneWest filed suit, asking a federal judge to decide whether modifications should or should not be allowed.

Eligible but not allowed

The case suggests that when investors themselves are asked, they will approve modifications. HSBC polled the investors in the 10 pools after the suit was filed. A large majority favored allowing modifications. Based on those results, HSBC said in a court filing in January that it did not oppose OneWest’s request for a judge to intervene and that if the judge declared modifications were allowed, that would be fine with them.

In the meantime, 3,000 homeowners like Jeter whose mortgages are caught up in the dispute have been unable to get any reduction in payments. When OneWest filed its suit, it said at least 800 of the loans seemed eligible for an affordable government-sponsored modification but couldn’t actually be modified because of HSBC’s stance. Those homeowners “are facing the possibility of losing their homes through potentially avoidable foreclosures every day,” it said.

It’s not clear how many of those homeowners have since been foreclosed on. OneWest said in a statement that it had no choice in pursuing foreclosure: It’s “contractually obligated to continue servicing loans in accordance with the terms of the underlying securitization documents.”

Foreclosure crisis

The suit is remarkable not only because it seems unique — close observers said they hadn’t seen another example of a servicer going to court against a trustee — but also because it lays bare a relationship that is usually a mystery to homeowners and investors in securitized mortgages.

It’s often hard for homeowners to tell if a servicer is correctly citing an investor restriction when denying a modification. Servicers have cited investor restrictions when denying modifications for at least 30,000 homeowners, about 2 percent of the 1.9 million total homeowners who’ve been denied, according to a ProPublica analysis of Treasury Department data. A Treasury spokeswoman said auditors examining such denials had found they were almost always legitimate. That’s not an experience shared by homeowner advocates.

In a number of cases, said Jeff Gentes, an attorney at the Connecticut Fair Housing Center, servicer employees have told his clients that there was an investor restriction, when a little bit of digging showed that’s not true. We reported on this problem last year.

Changes not pursued

In the cases when there actually is a restriction in the documents, the servicer is supposed to at least try to get permission. The HAMP rules require the servicer to send a letter to the trustee requesting that modifications be allowed.

In cases where there’s a clear contractual bar to modifications, the servicer and trustee could take the initiative to change the contracts by having the investors vote on it or, if voting isn’t required, amend the contract themselves.

But in general, said Gentes, the housing attorney, servicers are slow to investigate and eliminate bars to modification. Servicers are paid a low, flat rate per loan and are motivated to keep costs down. “The costs of removing an investor restriction are often borne by the servicers, and so extensive amendment rules often mean that servicers won’t pursue it.”

Trustees, who get paid even lower fees, are no different, said Bill Frey of Greenwich Financial Services, which specializes in mortgage-backed securities. “They’re very, very prone to inaction.”

Both, as middlemen, don’t bear the loss when a home is foreclosed on.

Source: By Paul Kiel, ProPublica.com (April 17, 2011)

Foreclosed? The tax man may want his cut

Did you lose your house to foreclosure this year? Did your lender forgive some of your mortgage debt because the house sold for less than it the mortgage balance?

If so, you could be facing a big tax hit.

It is IRS policy to tax forgiven debt you are personally responsible for as if it is income. Say, for example, your credit card company settled a $10,000 debt for 50 cents on the dollar. You’d have a debt forgiveness of $5,000, which the IRS would count just like your wages.

The same policy held true for most mortgage debt until 2007, when Congress passed the Mortgage Forgiveness Debt Relief Act. That ended the liability for many homeowners — but not all.

In general, if you lose your home to foreclosure or short sale, where you sell your home for less than you owe, the IRS won’t add insult to injury by counting the difference as income, at least until 2012, when the act expires.

There are four major exceptions to the rule:

1. You did a cash-out refinance and splurged.

Many homeowners took cash out when they refinanced their homes and used the extra dough to pay for new cars, boats, vacations or other spending.

Say you did that and then got into trouble, losing the house through a foreclosure or short sale. Even if your lender waived the remaining debt, the IRS will treat as income the portion of the forgiven debt that you took out as cash and spent.

Only the funds used to actually improve your home won’t be taxed (plus the costs of refinancing the loan). Yes, even if you spent the money on paying off your student loans or credit cards.

The IRS’ reasoning is that only the money spent on home improvement actually added to your home’s value. And that, presumably, diminished the difference between what you owed on your mortgage and the value of your home when it was foreclosed.

Beware: Some lenders made refinancing offers contingent on homeowners paying off credit card debt, according to Kent Anderson, a Eugene, Ore.-based attorney and tax expert. If you took one of those deals, the refinance money will be reported to the IRS and you will owe taxes on it.

2. You have a home-equity line of credit.

The same rules that apply to refinancings also apply to home-equity loans: The IRS will only forgive the tax liability if the loan money was spent on home improvements. And, tax experts advise, be prepared to show receipts to prove it.

3. You lost your vacation home or investment property.

So the market tanked and you lost your vacation home. Unfortunately, if you didn’t use it as your primary residence for at least two of the previous five years, you’re going to pay the tax man.

More common, however, may be the case of investment properties gone sour. During the housing boom, buying homes for investment purposes soared, accounting for 28% of all sales during 2005, according to the National Association of Realtors. (Vacation homes made up 12%.) And many of these purchases were made with little down payment.

When the bust hit, second home prices cratered. The median price for investment properties fell nearly in half to $94,000 by 2010, according to NAR. For vacation homes, the median price paid dropped 26% to $150,000.

If an investor bought a property in 2005 at the median price and sold it in 2010, she could have run up almost $90,000 in forgiven debt. If she’s in the 25% tax bracket, that would add more than $22,000 to her tax liability. Ouch!

4. You owned a multi-million-dollar home.

It may be hard for Americans struggling in this weak economy to sympathize with anyone wealthy enough, at one time, to afford a multi-million-dollar home, but owners losing one could be on the hook for a huge tax bill.

Only the first $2 million in forgiven debt will be voided under the relief act; all the overage is taxable as income.

So, say, for example, you’re ex-ballpayer and self-styled stock-picker Lenny Dykstra and paid $18.5 million to Wayne Gretzky for a mansion in Thousand Oaks, Calif. When you defaulted on the loan in 2009 and the house was auctioned in 2010 for $10.5 million, you could be on the hook for $6.5 million of the $8.5 million in forgiven debt.

Other ways out

The good news? Even if you fall under any of these four scenarios, you may have a way out, according to Anderson. “If the taxpayer was insolvent at the time of the foreclosure, the forgiven debt can be excluded for tax purposes,” he said. “It can also be discharged in a bankruptcy and approved by court order.”

People like Dykstra could elude taxes because California is a “non-recourse” state. Lenders there accept homes as the collateral for the debt and when a bank forecloses, the loan is regarded as paid in full. Since there’s no debt to forgive there’s no taxable income.

It’s not always that simple, though. Many homeowners in California and other non-recourse states have refinanced their mortgages and refis are, as a rule, recourse loans, according to attorney Bill Purdy in Santa Cruz,. “A refi destroys your non-recourse status,” he said. If a big debt is forgiven, borrowers may owe taxes.

Purdy also explained that banks often file 1099 forms with the IRS that mistakenly list debt forgiveness when there was none.

“People need to regard the 1099s with suspicion,” he said. “I’ve had clients in here who have been making payments to the IRS when they had non-recourse loans.”

As long as the Mortgage Forgiveness Debt Relief Act stays in effect, only borrowers for the most expensive properties in foreclosure will have to worry. After that, though, it may pay for any homeowner in foreclosure to be very aware of their tax exposure — and plan accordingly.

Source: By Les Christie, CNNMoney (April 15, 2011)