New Foreclosure Fraud Scam

Foreclosure Fraud Scam PSA


Don't fall prey to scam artists to promise to "save" your home from foreclosure. The answer they promise will be worse than the disease. If you are having a problem, call your lender or talk to a bankruptcy attorney.

Hat tip: Tanta at Calculated Risk

Mortgage Servicers Gouge Debtors

A report in today's New York Times, Dubious Fees Hit Borrowers in Foreclosures, shows how mortgage servicers can profit from the foreclosure process to the detriment of not only the borrower, but the economy as a whole.

Because there is little oversight of foreclosure practices and the fees that are charged, bankruptcy specialists fear that some consumers may be losing their homes unnecessarily or that mortgage servicers, who collect loan payments, are profiting from foreclosures.

Bankruptcy specialists say lenders and loan servicers often do not comply with even the most basic legal requirements, like correctly computing the amount a borrower owes on a foreclosed loan or providing proof of holding the mortgage note in question.

Here are some of the examples from the story:

In one example, [Katherine M. Porter, associate professor of law at the University of Iowa] found that a lender had filed a claim stating that the borrower owed more than $1 million. But after the loan history was scrutinized, the balance turned out to be $60,000. And a judge in Louisiana is considering an award for sanctions against Wells Fargo in a case in which the bank assessed improper fees and charges that added more than $24,000 to a borrower’s loan.

...

On Oct. 9, the Chapter 13 trustee in Pittsburgh asked the court to sanction Countrywide, the nation’s largest loan servicer, saying that the company had lost or destroyed more than $500,000 in checks paid by homeowners in foreclosure from December 2005 to April 2007.

The trustee, Ronda J. Winnecour, said in court filings that she was concerned that even as Countrywide misplaced or destroyed the checks, it levied charges on the borrowers, including late fees and legal costs.

...

Loan servicing is extremely lucrative. Servicers, which collect payments from borrowers and pass them on to investors who own the loans, generally receive a percentage of income from a loan, often 0.25 percent on a prime mortgage and 0.50 percent on a subprime loan. Servicers typically generate profit margins of about 20 percent.

Now that big lenders are originating fewer mortgages, servicing revenues make up a greater percentage of earnings. Because servicers typically keep late fees and certain other charges assessed on delinquent or defaulted loans, “a borrower’s default can present a servicer with an opportunity for additional profit,” Ms. Porter said.

The amounts can be significant. Late fees accounted for 11.5 percent of servicing revenues in 2006 at Ocwen Financial, a big servicing company. At Countrywide, $285 million came from late fees last year, up 20 percent from 2005. Late fees accounted for 7.5 percent of Countrywide’s servicing revenue last year.

But these are not the only charges borrowers face. Others include $145 in something called “demand fees,” $137 in overnight delivery fees, fax fees of $50 and payoff statement charges of $60. Property inspection fees can be levied every month or so, and fees can be imposed every two months to cover assessments of a home’s worth.

...

Jeffrey M. Norton, a lawyer who represents the Trevinos, said that although MERS pays a flat rate of $400 or $500 to its lawyers during a foreclosure, the legal fees that it demands from borrowers are three or four times that.

...

Based on the study, mortgage creditors in the 1,733 cases put in claims for almost $6 million more than the loan debts listed by borrowers in the bankruptcy filings. The discrepancies are too big, Ms. Porter said, to be simple record-keeping errors.

Michael L. Jones, a homeowner going through a Chapter 13 bankruptcy in Louisiana, experienced such a discrepancy with Wells Fargo Home Mortgage. After being told that he owed $231,463.97 on his mortgage, he disputed the amount and ultimately sued Wells Fargo.

In April, Elizabeth W. Magner, a federal bankruptcy judge in Louisiana, ruled that Wells Fargo overcharged Mr. Jones by $24,450.65, or 12 percent more than what the court said he actually owed. The court attributed some of that to arithmetic errors but found that Wells Fargo had improperly added charges, including $6,741.67 in commissions to the sheriff’s office that were not owed, almost $13,000 in additional interest and fees for 16 unnecessary inspections of the borrowers’ property in the 29 months the case was pending.

“Incredibly, Wells Fargo also argues that it was debtor’s burden to verify that its accounting was correct,” the judge wrote, “even though Wells Fargo failed to disclose the details of that accounting until it was sued.”

And to think that this is probably just the tip of the iceberg. Examples like these show why regulation of the mortgage industry is sorely needed.

Tanta, at Calculated Risk, has her own take on the article -- including her questioning of some of the assertions made in the article.

Predatory Lending PSA

Relief Bill for Homeowners Passes House

Relief Bill for Homeowners Advance

WASHINGTON (AP) -- Financial relief for homeowners facing foreclosure or in bankruptcy advanced in the House Thursday when the House approved legislation to help financially strapped homeowners.

The bill, passed by a 386-to-27 vote, would give a tax break to homeowners who have mortgage debt forgiven as part of a foreclosure or renegotiation of a loan. No taxes would be owed on the value of any debt forgiven or written off. Currently such debt forgiveness is taxable income.

While the measure is anticipated to reduce taxes of some strapped homeowners by $650 million, the cost to the government would be offset in part by limiting a tax break available on the sale of second homes.

...

The House vote was the latest congressional reaction to a mortgage crisis touched off this spring by a blowup in high-priced home loans for risky borrowers, throwing a pall over the economy. Foreclosures are at record highs and late payments are spiking. Lenders have been forced out of business and investors have taken huge financial hits.

An estimated 2 million to 2.5 million adjustable-rate mortgages - worth some $600 billion - will jump from low initial "teaser" rates to higher rates this year and next. Steep prepayment penalties have made it difficult for some to get out of their mortgages, and some overstretched homeowners can't afford to refinance or sell their homes.

To help offset the $650 million in tax revenue, the legislation makes it harder to get breaks on capital gains taxes for the sale of second homes. The White House supports the measure but wants mortgage relief to be in effect three years, not permanent as approved in the House. Bush also is opposed to limiting tax breaks on the sale of second homes.

The Mortgage Bankers Association expressed strong support for the bipartisan tax-relief bill but fiercely criticized another measure, opposed by Republicans on a House Judiciary subcommittee that narrowly approved passing it to the full committee.

That measure, which faces a contentious future in Congress, would revise the bankruptcy code to aid homeowners facing default and foreclosure. If enacted, it would further trim profits at hard-hit mortgage lenders.

The bill would allow judges to order mortgage lenders to ease terms for homeowners in bankruptcy proceedings. Currently, mortgage lenders can foreclose against a homeowner in default 90 days after a bankruptcy filing.

Mortgage lenders would be "terrified" of getting wrapped up in bankruptcy proceedings, said Brian Gardner, a research analyst with investment firm Keefe, Bruyette & Woods.

The MBA said in a statement: "Lenders will have no choice but to move to foreclosure right away to ensure that they are not covered by the onerous provisions of this bill. In the longer term, investors and speculators who overpaid for homes at the height of the housing bubble will have an incentive to file for bankruptcy, walk away from the loan and property, and reap an undeserved windfall."

The tax-relief bill is H.R. 3648.

The bankruptcy-related bill is H.R. 3609.

In response to the MBA, so the MBA should reap a windfall for engaging in what they knew -- or, at least, should have known -- was an overheated market (that they helped create)? Secondly, if you are in bankruptcy, where is the "windfall?" After all, isn't that a risk that lenders take when they make loans?

Mortgage Delinquencies Rising in Oklahoma

I got this from The Big Picture. I can't read the stories behind it (Barry gives the links) because they are behind subscription firewalls. Hey, I can't afford everything.


I can tell from the maps, however, that the Oklahoma City and Tulsa metropolitan areas are both getting hard hit. The area near Ft. Smith, Arkansas is getting even harder hit. I don't know what is causing that.

What is interesting is that this is happening at a time when the oil industry is starting to make a comeback in Woodward, Oklahoma (near the Oklahoma panhandle). But while there are several large oil companies in the Oklahoma City and Tulsa area (Devon, Chesapeake, Anadarko, Phillips, Williams), it is surprising that we have not seen the rush to hire new people.

The delinquencies are probably due to the closing of Firestone, Dayton and other industrial manufacturing plants locally. I reported on that earlier here and here.

72 Year Old Woman May Have To Live In Car

Elizabeth Warren relayed this story today in The Uninvited Witness:

How did this woman (let's call her Mrs. Norman--not her real name) end up in bankruptcy? She had lost her husband 18 years ago, and she had moved to another state [to] care for her older sisters who had now passed on. She had a small house and was managing the mortgage and her other expenses just fine when she got a call from the nicest lady at the bank about three years ago. The bank lady explained that Mrs. Norman was "in the wrong mortgage" because it was fixed rate and "interest was low." She said she could "switch" Mrs. Norman to a lower cost mortgage. The bank lady promised to call her when interest rates went back up and switch her back to the fixed rate mortgage. But, said Mrs. Norman, "she never called." Now Mrs. Norman's mortgage payments have shot up, and she is about to lose her home. So she filed for bankruptcy.

Of course, bankruptcy won't be able to do much for her. She can't make her mortgage payments and she can't refinance, so she will lose her home. She thinks that soon she will be living in her car. But she was will be required to get approved credit counseling before she can get a discharge.

At today's hearings, the credit industry representative trumpeted that the new credit counseling provisions were a sign of how well the bankruptcy bill is working. It will undoubtedly be a big help when Mrs. Norman's credit counselor explains how she can improve her financial management from the front seat of her 19 year old automobile.

This sounds a lot like the stories I heard today at the Ask-A-Lawyer program. Will any good come out of these stories? How long will middle class people accept such outcomes? Will they recognize who was responsible for this travesty?

The New Faces of Foreclosure

I just got back from a day at court. After court was over, I went to see another attorney about some work he needed done. He had just returned from a seminar where a local judge recounted how many foreclosures that are starting to take place locally. The real shocking news was that about half of the foreclosures were homes owned by attorneys. Apparently the market is worse than I previously thought.

Now, the judge's account is merely anecdotal, but the fact that she is noticing a significant number of attorneys who are losing their homes in foreclosure is, to me, substantial.

Based on what I am generally hearing at the courthouse, and from this lawyer in particular, incomes are down for attorneys. After the change in the bankruptcy law, mine sure is. I went from doing 3 or 4 consumer bankruptcies a week to 4 all of last year. Because of the nature of the law practice, it is not so easy to "retool" your practice if your area of concentration or specialty is curtailed due to legislation. I am not the only attorney to face a fractured market. Oklahoma severely restricted worker's compensation. (I don't really practice this area, but my understanding is that they eliminated all compensation for "soft tissue" injuries.) Oklahoma also has limits on punitive and exemplary damages. I have previously written on the attempted restriction on medical malpractice lawsuits.

The net result of all these "reforms" is that it has led to lower incomes for attorneys. So it is no wonder that attorneys are feeling the same crunch as the rest of middle America. In some ways, I'll admit that there may be some good in it. Lawyers are still the educated class. They will be able to articulate why the conservative attempts to limit access to the courts is a bad idea.

In the past, lawyers argued for more access to the courts because "jaw-jaw" is better than "war-war." That is to say: it is better that people be able to fight out their differences in the courtroom than riot on the streets with weapons and violence. Less access to the courts mean less avenues for responsible and peaceful resolutions of real or perceived injustices.

I have actually considered (and am still considering) getting out of the practice of law completely. But getting out of the law practice is not so easy. Once on a case, it can be a tar baby to get out of. (On a side note, although I touch on racial issues in this post, I am not using "tar baby" in the sense of a racial epithet. I would use another term -- if I could think of one -- but I cannot find any references to other terms that have the same meaning.)

Yesterday, Barry Ritholtz of the Big Picture blog published a series of colored maps on the risk of foreclosures around the country. He got the maps from a site called Neighboroo. Based on this map, the far west side of Oklahoma City is at the least risk for foreclosures, while the rest of the metropolitan area are at a greater risk.

Based on what I know about Oklahoma City, it appears there is some correlation to African-American areas having a greater risk of foreclosures than other areas. There has been some hints in the past that African-Americans have been steered into more risky loans than other racial groups, so this could be an indication of it as well.

I have more of a tendency to believe that it has a greater correlation to poorer and less-educated populations being taken advantage of rather than on a strictly racial basis. But I think that because African-Americans have less economic power as a group that it shows up as a racial correlation.

Here is a page that explains the terms "Collateral Risk" and "Foreclosure Rate."

A Sad Foreclosure Story from Florida

(I've edited this a little for spelling.)

Bankruptcy and foreclosure

------------------------------------------------------

What is the name of your state? FL

I’m from FL.

I’ve read a lot of the posts here and respect the advice of the forum. I have a couple of questions about Chapter 13. I make over 50K, so I think Chapter 7 is out. I had a real estate deal gone bad. I bought a house and construction was slowed down because of the hurricanes so I had to buy another in the mean time, when it came time to close my wife didn’t want to move, so we tried to rent or sell it. A year later no luck. Now the bank is going to foreclose on it, and to top it all off my mortgage payment on my primary now went up $500 and month because they didn’t calculate the taxes correctly. They used the value of the land only to get me to qualify for the payment knowing that they wouldn’t hear about it until a year or more later. There is also no way I will ever be able to sell my primary no because with the taxes and insurance having gone up so much, and the properly values have gone down ( my neighbors house is better and they had to sell it for 150K less than I paid) I will never get close to what I owe. I’ve had some good real estate deals in the past, and was able to cover my mortgage for year, but have put everything I had into it. I do have some unsecured debt, but could pay all of it if I had to. Can I get out of my primary, and what happens to the primary if you are behind and want out, or stay? With my investment house, I don’t know [whether] to let it go into foreclosure. I can’t catch up with the payment and I’m concerned about get a judgment that I will have to pay for the rest of my life, because that will never sell for what I paid for it, and at a foreclosure sale that will never get ½ of what I own. I’m really ready to go back to renting until the market stabilizes, but who will rent to me if I have a foreclosure and a bankruptcy? Thanks.

It is cases like this that show the new means test is hurting unfortunate debtors. This would have been an easy Chapter 7 (liquidation bankruptcy) under the old law. Besides, a lot of the overvaluation of property in Florida is based on mania and fraud (which are, in many cases, tied together).

What are we going to do with an entire generation stuck in the same predicament? What a mess. Our country is so going in the wrong direction.

Update on House Hunting in OKC

I talked with a foreclosure attorney yesterday while I was at the bankruptcy court here in Oklahoma City. He told me that just one law firm was referred 600 cases for foreclosure just last month alone. It is expected that these houses will come on the market in April or May.

I don't think that spells a "market bubble" so much as a depression of prices due to the economy going downhill. Realtors are not quite sure how it will affect the market here. But the most likely result is that prices (which are already cheap by national standards) will probably fall even further. Not by California or Florida levels, mind you, but probably some as all of the foreclosed properties come on the market.

Of course, the good news for me is that I received three (3) calls for bankruptcy services yesterday alone. I haven't had three calls in a day for bankruptcy services since before the law changed. One thing about the law practice: it's feast or famine. We bankruptcy attorneys have been suffering from a famine for over a year. I think we are due for a correction. The main reason why people have not filed in the last year is because the price doubled, when you add in the extra attorney fees (up 50%), increased court costs (up 50%), costs of credit counseling (not required under the previous law) and other assorted "paperwork" costs that didn't exist under the old law. I think you are now starting to see the debt problems bubble to the service.

The math just doesn't lie. We have had a lack of internalized costs to society (i.e. health care costs) coupled with overconsumption (i.e. people buying stuff they don't need, with money they don't have, to impress people they don't know) that has put the country in a position of having too much debt floating around. The old saying "you can't get blood out of a turnip" is still true. That excessive debt will have to be resolved somehow. Restricting access to the bankruptcy courts will not cause those debts to be paid back, they will just result in more suffering and stress for the middle and lower classes whose wages have not kept up with those costs.

No one in congess that I am aware of have been talking about regulating interest rates and fees on credit cards. The credit card companies (who were most instrumental in lobbying for the change in the bankruptcy law) have been raising interest rates and fees (and increasing profits) to excessive levels -- even though their costs of borrowing have not gone up. They have also instituted "Universal Default" clauses which punishes someone who ends up being late on any bill, even if they are never late on their credit card payments. What we are seeing is excessive greed by those who already have more than they need.

Our values are out of whack. We are overdue for some kind of correction in our values as well as our markets.

Real Estate Fraud Rising in the U.S.

From the article:

Real estate fraud has now firmly emerged on the FBI's radar as the country's fastest-growing white collar crime - all, in essence, polite forms of bank robbery. Industry losses ran to at least $606 million last year, it says. And the Treasury Department's suspicious-activity reports are up 35 percent this year. The Internal Revenue Service's criminal case numbers in mortgage fraud have been doubling every two years through the first half of this decade.

What is not stated is the rip-off of the American consumer as the inflated home appraisals push market values up beyond what is warranted -- and above what middle class Americans can afford. That does not even mention how many American consumers will be forced into bankruptcy because they, in their longing to buy a home, will have their dreams dashed on the rocks of the bankruptcy court because of exorbitant greed.

When homes are sold, the appraisal is based on camparable sales of other homes, or "comps" as they are known in the real estate industry. As inflated appraisals get factored into the market, other homes are expected to sell for similar prices.

Again, from the article:

In over 80 percent of the cases, scammers are helped by an insider, the FBI says. One of them was Jerome Mayne, a former loan officer who spent time in prison before becoming a motivational speaker in Eden Prairie, Minn. "The buyer they sent me was completely full of holes, fake everything, and I knew darn well that these guys were slippery enough to try to pull it off," says Mr. Mayne. A bottle of expensive booze and $500 cash helped grease the wheels, he admits.

Unraveling such gangs takes time and expertise, which has become the focus of law enforcement and industry professionals across the country. Working in their favor, at least, are solid paper trails.

"Usually when we complete an investigation, we end up with a spectrum of actors, from closing attorneys to brokers to appraisers, organizers, recruiters, and straw buyers," says Ms. Nelan. "It's fairly sophisticated, and it takes a lot of people to do it."

One of the toughest things for prosecutors is sorting out who's guilty. One group of recent perpetrators turned out to be clueless senior citizens in Alabama, who OK'd ploys to inflate their income in order to "invest" in real estate, says Linda Finley, a civil attorney who prosecutes such fraud cases in Atlanta. "It's gotten to the point where it's really hard to figure out who the actual victims are."

Another factor is the late-night TV ads and "motivational speakers" that touted how people became "overnight millionaires" buying and selling homes. I read somewhere that many of these motivational speakers were simply teaching people how to commit real estate fraud.

For more education on real estate fraud you can also go to the Flipping Frenzy website.

Top forms of Mortgage Lending Fraud

From the NATIONAL ASSOCIATION OF CONSUMER ADVOCATES:

If you are buying or refinancing a house, watch out for the "Dirty Dozen" tricks by finance companies.

The link is a Word document.

No Worries...

From Calculated Risk:

Dr. Christine Chmura, president and chief economist at Chmura Economics & Analytics, says the economic pessimists aren't looking at the complete picture. She writes in the Richmond Times-Dispatch: Consumer debt high, but there's more to the story.
"...the Fed reports that household debt service payment (interest and principal) of homeowner mortgages relative to disposable personal income was 11.6 percent in the second quarter of 2007, the highest ratio on record since the data were first calculated in 1980.

Combining mortgage debt, consumer debt and other financial obligations -- auto leases, rental payments, homeowners insurance, property-tax payments gives the broadest view of debt for households.

Once again the Fed reports that this debt-service ratio for households is the highest on record: 14.4 percent of disposable personal income.

Couple this information about consumer debt with a significant slowdown in home-price acceleration, and pessimists point toward a soon-to-occur recession."
But Chmura says:
"[The pessimists] haven't looked at the complete picture.

A full balance sheet reflects assets as well as liabilities. As of the third quarter of 2006, household assets were at a record $67.058 trillion. Rising values in real estate and equities contributed to the increase.

More important, net worth hit a record $54.063 trillion during the same quarter.

So ... when the bills roll in over the next month, just remind yourself that the consumer engine that fueled an expansion still has the ability to support more spending and keep the economy robust."
Never mind that Chmura mixes flows with stocks, more importantly she could have written this piece in mid-1990 - just as the early '90s recession started.

Poster Tanta's response.

Elizabeth Warren on the Housing Crisis

On top of the link above, check out the article referenced in the New York Times(subscription required).

Is Whitney Houston Heading for Bankruptcy?

I guess it's not just the poor and middle classes that have problems with money management....

Mortgage debt increasing for people seeking bankruptcy

In a new report in the New York Times (subscription required), credit counselors are finding that mortgage debt is becoming more common in people seeking bankruptcy.

From the article:

“Mortgage debt is coming out as much more significant than we expected,” Ms. Keating said. “Pull this all together with the other unsecured debt people have, and this is really problematic.” The foundation, she added, will intensify its attention to mortgage counseling over the next year, partly in anticipation of more demand from consumers whose home loans are growing more burdensome.

The foundation has been surveying its members to gauge the effects of a federal bankruptcy law signed last year, which, among other things, eliminated some benefits of personal bankruptcy filing.

New Real Estate Ads in OKC

Last night, while driving home, I heard a radio advertisement for local real estate. The ad said something about "you may have heard about a housing bubble in other parts of the country" and sought to assure listeners that "real estate prices in Oklahoma City have grown at a steady and measured pace." The ad also pointed to the fact that interest rates are still historically low and that "now is a great time to buy."

Compare this to news coming out of Key West, Florida (from Mish's site, see links on the side of page) from poster FreeThinkerKW:

As longtime readers of this board know, I live in Key West where Real Estate tripled, quadrupled, and quintupled in the past 6 to 7 years. I alerted this board to the most unprecedented "happening" in Key West in my 16 years down here which took place yesterday, Saturday: an attempt to sell 22 homes at auction in a stalled real estate market.

Last week in Key West, only 1 home sold. The week before, 2 homes sold. The week before that either 2 or 3 homes sold.

Mind you that we now have 1400 to 1600 homes on the market, depending on the source of your information. Know too that there are approximately 300 to 600 homes being sold by owner which are not even listed in the MLS.

If we sold 2 homes a week in Key West, this inventory would last, oh, about 14 to 19 years at this rate. And as you will read, the asking prices of these homes are so out of reach for most people that the sellers must now face either foreclosure or drop their prices even more rapidly than they have already dropped.

I am about to lay the results on you from yesterday's auction. I am hoping you will be able to read the entire article without the Key West Citizen truncating it. If you cannot read the entire article, let me know, I'll send it to Mish, and then he can post it on his blog.

I can hardly wait. What I wouldn't give to be a bankruptcy attorney in Key West right now.

Anyway, Mish's Friend goes on to post:

Furthermore, I know someone mentioned in this article. I will not divulge his name as I don't want someone to google a reference to this auction and then they see my post come up alluding to his pain with his name prominently displayed. I don't want to add to his embarrassment and dismay. But I will say this: his remarks to the paper are not what he is telling me personally.

This builder is so underwater with unsold homes that he recently put his own luxury home on the market. He also has 7 brand new homes up on Stock Island, the next island up from us. Those homes, when first completed, were on the market for $550,000 to $700,000. They are on the market now for $400,000 to $500,000 with no lookers whatsoever. He might get lookers at $250,000. And he might actually get some buyers in the sub-$200,000 range, IMHO.

Mish posted a link to the article (free registration required). But he posted a significant amount so that you probably get a pretty good picture of what happened.

So, I wonder how long it will take to reach Oklahoma?

More on this chart at the Of Two Minds Blog today

The "reversion to the mean" is going to hurt. Badly.

Of course, most of this pain is going to be felt on the coasts, where the Of Two Minds blog hails from. I live in a 1700 square foot house with almost an acre of land. I am thinking that my house would probably sell for $85,000, tops. That is like $50/sf. It is possible I am undervaluing it -- but not too much. In the nicest parts of Oklahoma City, prices go up to $80/sf. Compare my house to what you would find in California or Florida now. Look at these charts from the View from Silicon Valley blog (near San Francisco, CA). Look at the price per square foot. Condos are selling for about $450/sf and houses are selling for close to $500/sf. That is ten times what you would pay for a house here (or 6x what you would pay in the best areas of Oklahoma City).

Are incomes there six times ours here in Oklahoma? (Wait! Don't answer that!) I guess it's possible. Charles Smith of the Of Two Minds blog told me that an average waitress at a restaurant in Silicon Valley makes what an average attorney makes here in Oklahoma City. No wonder he needs to sell so many of his books.

For more good charts on the housing bubble, see this.

Top 10 Foreclosure Cities

I am a little surprised by the inclusion of Dallas and Ft. Worth, TX. Neither of these is considered to be a real "bubble market" (and they are not too far from here). I am wondering if it has more to do with people buying homes for themselves when they could not afford it, or if it was due to a high number of borrowers that bought a house using "exotic" loans such as ARMs and I/O.

News from a Foreclosure Attorney

I spoke with an attorney in town today whose firm does a lot of foreclosures in the Oklahoma City area. I asked him if he was seeing an uptick in foreclosures recently. He said there was a small increase in foreclosures, but he expects things to really pick up next year. It is not due as much to the California and Florida bubbles -- although that will contribute some due to the reduction in opportunities for *1031 investments -- but rather due to local market and employment conditions. Both General Motors and the Dayton tire plant (as well as a couple other major employers in the Oklahoma City area) have closed or are closing their doors. As a result, some 5000+ high-wage workers have been or will be laid off and their severance pay is expected to start running out some time next spring.

He told me that he is already also seeing a noticeable increase in the availability of HUD homes that have already been through foreclosure.

He seems to think that I would be wise to wait another year before buying a house in the Oklahoma City area as he expects house prices to drop between 10-20% in the next year.

What that means is that my previous post indicating that OKC home prices seem pretty stable was based on incomplete information.

_____________________________

*Internal Revenue Code Section 1031 is a tool for deferring capital gains tax on commercial/investment transactions. This Section allows taxpayers to exchange real or personal property for new "like-kind" property, while deferring recognition of any capital gains. Section 1031 creates the ability for sellers to defer capital gains on investment property by placing the sale proceeds with a "Qualified Intermediary" for up to 180 days until the closing of the purchase of the replacement property.

You learn something new every day.

How do bankers make money on subprime?

The poster "Tanta" over at the Calculated Risk blog (see sidebar for link) gives an explanation on how mortgage lenders make on subprime loans:

1. Charge big upfront origination fees.

2. Charge big late fees. The most profitable subprime borrower is the one who is always 30 days behind (the "rolling 30").

3. Put borrowers into subprime even though they could qualify for prime credit. (This is called "predatory lending.")

4. Charge very high interest rates.

5. Keep your maximum LTV at 80% or less. That way, you will at least break even on a foreclosure.

It should be said that Tanta is considered to be a resident expert over at one of the most respected (and visited) macroeconomic blogs out there. The problem with contemporary loans, she says, is that the lenders have forgotten about Rule #5.

***Update***

A poster at Calculated Risk's blog asked how lenders "expect to make money on high foreclosure loans. "

Poster "mort_fin" posted a response (I have edited it for grammar and clarity):

"The math is as follows:

Charge 2 points upfront, then charge a 300 bp spread. Insist on a 5 year prepayment penalty. How much foreclosure will that cover?

Assume that you lose 40% for each loan that goes bad (that's worse than average, which is in the 30's).

Assume that loans that go bad do so, on average, 2 years after origination.

You've made 800 bp in the first 2 years (200 upfront, and 300 a year for 2 years). If 30% of the loans go bad, you make (300 a year for 3 years on 1/2) another 450. That totals 1250 basis points. Foreclosures cost you 30% (loans gone bad) x 40% (loss per loan) or 1200 basis points. With a 30% foreclosure rate you're 50 bp ahead - plus a few of those loans will continue to pay the high spread after year 5 - pure gravy. You can have pretty stiff foreclosure rates and still make a buck -- especially if you can keep your loss per loan down around 30% instead of up around 40%."

In other words, why should lenders care about the customer/consumer if they make money even on bad loans? The whole system sounds predatory to me.