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Since 2008, when foreclosures finally got the nation’s attention, congress and the administration has been trying everything they can think of to keep the economy off its inevitable course.  So every few months we get another program:  TARP, Cash-For-Clunkers, HAFA, etc.  Not only are none of these programs working, they seem to be making the problem worse, and like all government programs are easy targets for fraud.

It gets even more frightening when you can’t tell if the fraud is intentional.  Case in point is HAMP, the Home Affordable Modification Program.  The evidence is pretty clear that one way or another, most loan mods fail.  So along comes the government (again) with another program trying to revive a dead animal.  Is it intended to assist borrowers, or abuse them?

“What people entering the HAMP modification process don’t understand, until they are out on the street, is that it wasn’t designed to limit foreclosures; it was intended to expedite them”  (Geroge W. Mantor, RISMedia 8/17/2010).

Sound incredible?  Check out these two links:

(1)  More And Better Predatory Loan Servicing Fraud.

(2)  Are Loan Modifications Causing Foreclosures?

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• Treasury Admits HAMP Was a Banker ‘Bust Out’ [Mike the Mad Biologist] (scienceblogs.com)
• TARP And HAMP Are Not Working (realestateradiousa.com)

As early as last October, there were reports of fraud schemes and suspicious claims as the tax credit was set to expire and was being considered for extension (see DSNews 10/20/09).   That’s not so surprising, I guess.

What’s shocking is the recent report that prison inmates were able “to apply for and receive $9.1 million in homebuyer tax credits” (see DSNews 6/24/10).  This article refers to a Treasury audit report that further shows that 241 inmates serving life sentences received a combined $1.7 million in tax credits.

This sort of begs the question: what kind of income tax liability can you earn serving a life sentence behind bars?  Is there even any point in a federal tax credit?

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The same Treasury audit also indicates that $17.6 million in claims were allowed for homes purchased before the tax credit program.  It gets better, though, with the reports of post-refund claims resulting in investigation, $785 million, or post-refund claims resulting in denial, $438 million.  The IRS seems to be catching a whole lot more fraud than they miss, but still . . .

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• Homebuyer tax credit audit shows fraud in the millions of dollars (agentgenius.com)
• Prisoners Cash In On the Homebuyer Tax Credit (hsh.com)
• Inmates, IRS Employers Among Those Found to Abuse Homebuyer Tax Credit (blogs.forbes.com)

Ethical and legal arguments aside, it’s always been our opinion that the most practical solution to this issue is for lenders to reduce principal loan amounts.  If you can make payments on a $350K loan but the home is only worth $200K, then does it make sense for your lender to reduce your principal to match the fair market value of your home?  Yes, and here’s why:

1. If you don’t have a “hardship,” you only have two options: take your lumps or walk away.  You don’t qualify for a loan modification or a short sale.
2. You likely chose your home for the lifestyle it offered, rather than as an investment.  You would be content to stay if you didn’t feel like the value was a total loss.
3. Lenders (and their investors) prefer performing loans to non-performing loans, and it’s well-documented how costly walk-away defaults are for lenders.
4. Governments like performing loans, too, but their solutions aren’t working.

A principal reduction modification could even be an equity-share agreement.  The borrower agrees to share any equity growth with the lender at the time of sale.   It’s a no-lose proposition.  Sound improbable?  Well, it’s already happening.

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A close friend very recently received such an offer.  It came in an overnight express package directly from the lender, a major bank, with a no-strings offer to reduce the principal loan balance by a substantial amount.  After a lot of “must be a scam” follow-up, it turned out to be legit. Now the loan balance is lower than, or near market value.  The borrower can consider new options: stay and make improvements, or even sell without a loss.

The property in question had lost over 35% value since purchase, and was worth considerably less than the loan balance.  The payments were much higher than comparable rent.  Numerous attempts at loan modification failed because there was no hardship.  The borrower could still easily afford the payments, and loved the house, but was seriously considering walking away.  Seemed like a sound business decision.  Nonetheless, they continued to stick it out.  After about a year, a new lender acquired the loan, and almost immediately they offered the principal reduction.

Some suggest that there is no such thing as “doing the right thing.” Compared to what?  Nevertheless, my friend was rewarded for being faithful and credible.  Everybody wins.  No legal consequences, no ethical dilemma, lifestyle intact, the loan doesn’t default and the bank doesn’t have to dig the occupants out.

There are some prerequisites to qualify for this offer.   I can’t verify this, but from what I understand you have to be current with your payments and it applies only for purchase money, not cash-out refi’s.

This is definitely more the exception than the rule, at least so far, but I expect we’ll see more of this.  There is hope for those you who are hanging in there, and there is still some good old-fashioned common sense afoot in the land of “I, me-me, mine.”

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• If You Find Yourself in Trouble with Your Mortgage (homeloans.org)

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According to RealtyTrac, “California posted the second highest percentage, with foreclosure sales accounting for 51 percent of all sales there in the first quarter — up slightly from 50 percent in the previous quarter but down from 70 percent of all sales in the first quarter of 2009.”  Wow!  Over half of all sales were foreclosures, and that’s an improvement from the previous year.  The highest percentages were in the San Joaquin Valley, San Bernardino and Riverside areas.  Santa Clara County was relatively low by comparison.

So, are foreclosures on the decline in California? Hardly.  According to the LA Times “banks foreclosed on almost 200,000 homes in California last year, and this year’s toll is expected to be even higher”.

Sometimes the news is confusing, which is to be expected because the media seems to be generally confused.  It’s easy to misunderstand the facts.  On one hand, foreclosure activity was down in May, but bank repossessions hit a record high (CNBC, June 10).  What . . . foreclosures down, repossessions up?  Aren’t foreclosures and repos the same thing?  It depends on how the terms are used.

“Foreclosure activity” generally refers to the beginning of the process, and “bank repossessions” refers to homes that have already been foreclosed, or REO (see our earlier post).

Why did the percentage of foreclosure sales decline since a year ago?  It’s not because there were fewer foreclosed properties, it’s because fewer of them were for sale.  Doesn’t make sense, does it?   If there are more bank-owned properties, there should more of them for sale.  But according to Rick Sharga, senior VP of RealtyTrac:  “they’re managing inventory to prevent a free fall in home prices.”  See our earlier post: The Shadow Inventory.

We still have a long way to go.

Related Articles

• “[RealtyTrac] 1Q 2010/US Foreclosure Sales Report – Sales At 27% Discount” and related posts (matrix.millersamuel.com)
• CNBC: US Foreclosures Fall, Bank Repossessions Hit Record High
• LA Times: A Foreclosure Fix

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Most residents I’ve spoken with that oppose the stadium initiative, Measure J, express concern about new taxes, traffic impact and new debt, but the more they learn about the facts, the more convinced they become, as I am that this is truly a no-lose proposition.

Measure J will involve no new city taxes or use of general fund money.  The traffic plan is brilliant.  The positive impact on the local economy is practically limitless: new job opportunities, increased local business revenues, increased property values, etc.

Get the facts for yourself: http://www.santaclarastadiumfacts.com/

Economic stimulus?  Just look at the area of San Francisco surrounding AT&T Park.  In just 10 years since the ballpark opened, the China Basin neighborhood has grown from a barren corner of the bay to one of the most densely productive areas of the City.

This about more than just football; this is about being one of the most significant cities in the country. It’s a singular economic opportunity in the midst of a recession. It’s about jobs, revenues and property values . . . and we only get one shot at it for all time.

Join Santa Clarans For Economic Progress and Vote Yes on Measure J.

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