Boomer’s Blog

Broad bipartisan dissention in Congress over Wall Street’s $700 billion bailout package sent markets reeling today while Federal investigators expanded their probe into potential criminal cases against firms and bankers accused of contributing to the Wall Street’s collapse.

Confidence Wanes on Both Sides of the Aisle, Wall Street
If passed in its current form, the massive bailout proposal would essentially have nationalized much of the nation’s outstanding mortgage debt.

Soon after the U.S. Congress voted 228-205 to defeat Treasury Secretary Henry Paulson’s bailout plan, Wall Street’s freefall escalated dramatically. Today the market plunged 778 points in the largest daily point-drop in U.S. history. According to CNN, this represents $1.2 trillion in paper losses.

Fed Probe Intensifies: Spotlight on Fannie and Freddie
Meanwhile, news broke that Federal prosecutors have subpoenaed government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, directing them to cough up documents dating back to January 2007. The Washington Post reports that Federal prosecutors with the Southern District of New York and SEC officials declined to specify what information they are seeking.

A Second Look at the Books
Bloomberg was among the first to report that examination of Fannie and Freddie’s books was underway well before the Fed seized them Sept. 7, and ousted leadership. So far, investigators have found that both government sponsored enterprises (GSEs) used accounting methods that ‘’obscured the ‘low quality’’’ of capital reserves.

Widespread Investigation Continues
Last week, Bloomberg reported that the FBI also is investigating the failure of Lehman Brothers, insurer AIG and about others in connection with the implosion of the subprime mortgage market. An anonymous FBI source told Bloomberg that these companies are among 26 companies that currently are under review for possible accounting misstatements.

Report Finds SEC Failed in Investment Bank Supervision
Last week, in a report of SEC’s supervision of investment banks, inspector general David Kotz said that the SEC had identified “numerous, potential red flags prior to Bear Stearns’ collapse . . . but did not take action to limit these risk factors.” J.P. Morgan Chase bought Bear Stearns last March after initial emergency funding to keep it operating failed.

Chairman of SEC since 2005, Christopher Cox attributes the Bear Stearns’ March collapse to  ‘‘a crisis of confidence’’ that proved to be more lethal than its capital and liquid challenges.

Cox believes that the SEC is not to blame, and that the program was flawed from the beginning because the SEC lacked the legislative authority to force large investment banks such as Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns to report their capital, maintain liquidity or submit to leverage requirements.

SEC Lacked Regulatory Teeth
The SEC’s oversight program for these investment banks, the Consolidated Supervised Entities, was created in 2004 to allow global investment bank conglomerates without a supervisor to be in compliance with the law by voluntarily submitting to regulation. But, Cox says, the SEC lacked specific legal authority to act as the regulator of investment in these cases.

At this point however, the findings have lost some punch because the five largest investment banks have been absorbed by commercial banks, converted into bank-holding companies or filed for bankruptcy protection.

From here on out, it looks like the bulk of the SEC’s oversight duties will shift to the auspices of the Federal Reserve. Still, it’s a great read for the Monday morning quarterback or anyone still wondering who shot J.R.

The heat is on the Fed to hold companies responsible for the mortgage crisis at the foundation of Wall Street’s meltdown, which clearly is extending across the Continent. Financial companies worldwide are reporting in excess of  $500 billion in losses and writedowns, also linked to the U.S. mortgage market’s collapse.

The European Connection
U.S. investment banks clearly basked in the shade with SEC serving as their umbrella regulator. And why not?  It enabled them to avoid regulation of their fast-growing European operations in the European Union.

Barron’s is reporting that the European banking sector also has taken a lot of hard hits lately, but today was among the worst in recent history. Here are some highlights from that report:

• U.K. mortgage lender Bradford and Bingley was nationalized over the weekend due to failure.Iceland’s Glitnir Bank was taken into “temporary” state ownership after encountering insurmountable funding challenges.
• Germany’s commercial property lender, Hypo Real Estate Holdings, became the latest to seek government help. Like IKB that failed last year, Hypo is attributing many of its problems to its exposure to the U.S. mortgage crisis. Hypo has received 35 billion Euros in credit guarantees to stem the bleeding through its funding shortfall. Hypo, like IKB, had significant U.S. subprime exposure and was forced to take substantial write-downs earlier this year.
• Fortis was partially nationalized over the weekend, and each of the two involved governments acquired 49 percent of Fortis’ native banking subsidiaries for 11.2 billion Euros in capital. Barron’s says that many of Fortis’s woes stem from its acquisition of ABN Amro’s Dutch consumer-banking division. Post-acquisition, Fortis was undercapitalized, and eventually succumbed to liquidity problems.

The Devil in the Details: Learn More with these Links

• See key Congressional Vote Data;
• Check out the full Text of the Bailout Plan Congress Defeated Today (Kindly posted in full by Calculated Risk, one of my favorite Blogs.)
• Read About the SEC’s Wall Street Fumbles in the “Final Report of the Advisory Committee on Improvements to Financial Reporting to the U.S. Securities and Exchange Commission.”)

We’re living through truly historic times folks. Stay tuned for more reports. Please, drop me a line and let me know what you think about these developments.

On news of the Fed’s seizure of Wachovia and subsequent sale to Citigroup, and as the U.S. House of Representatives rejected Treasury Secretary Henry Paulson’s Wall Street bailout plan today, panic spread throughout the financial markets and the news media and financial shares plunged 16 percent – the largest percentage drop since Sept. 17, 2001.

Upon its sale to Citigroup, Wachovia lost more than 70 percent of its remaining value after last week’s beating. Under the terms of the deal, Citigroup will pay $1 a share, or about $2.2 billion, for Wachovia’s banking operations. Citigroup pledges to assume the first $42 billion of losses from Wachovia’s worst mortgages and give FDIC $12 billion in preferred stock and incentives, and FDIC has agreed to absorb losses above that level.

More Deals as Wall Street Reels
Also today, the Guardian reports that Morgan Stanley sold a stake to Japan’s Mitsubishi Financial for $9 billion and the bankrupt but not forgotten, Lehman Brothers sold its Neuberger Berman asset management unit for $2.15 billion.
Shares in heavyweight contenders Bank of America, JPMorgan Chase and Citigroup dropped more than 10 percent today as panic dominated the markets. Even investment bank powerhouses cum bank holding companies Goldman Sachs and Morgan Stanley, plummeted more than 12 percent, the New York Times reports.
Who’s Next?
Regional banks took even harder hits, sucker-punched by Congress’s defeat of Treasury Secretary Henry Paulson’s bailout plan and Wall Street’s terror-stricken, freefalling fists. Investors struggled to call which bank might be the next to fail without legislative and public consensus on a bailout plan.

Lenders Crushed
National City Corporation plunged 63 percent, Downey Financial fell 48 percent and Sovereign Bancorp, dropped 36 percent as subprime mortgage-exposed lenders were pummeled. Many were stumbling in the wake of the Fed’s seizure of monolithic Seattle-based thrift Washington Mutual, and the subsequent sale of its banking unit to JPMorgan Chase late last week.

Analysts say that all this activity is putting a mighty squeeze on credit markets and are triggering spikes in bank-to-bank lending rates. Many are wondering who will be left to weather the storm when Congress returns to the drawing board later this week.

Out of  Lifelines
Banks are confronting the enemy borne of the mortgage-lending crisis that has prompted Goldman Sachs and Morgan Stanley to rein in their risky and virtually unregulated business models, and so far forced the low-ball sales of Bear Stearns and Merrill Lynch and brought the bankruptcies of Lehman and WaMu.

The breathless reconfiguration of Wall Street in the two weeks since Lehman’s collapse has sparked a firestorm of mergers among commercial banks. The few remaining banks with the resources are making the killer deals now that’ll ultimately serve their books when investor confidence returns, like Mighty Mouse, to save the day.

Too Big to Fail? Or too Big to Exist?
At that point, we’ll be looking at Wall Street’s anti-bellum landscape, where Bank of America, JPMorgan and Citigroup have 30 percent or more of the entire industry’s deposits. “Too big to fail” will take on entirely new proportions.

Data that could foreshadow lower prices in the U.S. housing markets and even greater mortgage losses was used by JPMorgan to discuss with investors the buyout of Washington Mutual’s banking operation Thursday. As it circulates, these data are fueling even greater concerns about mortgage-related assets held by rival banks left standing amid the ongoing turmoil on Wall Street. But are those data accurate?

Overall, JPMorgan seems to find that much of what was known about the problems that plagued WaMu  turned out to be much worse than originally thought. If true, these findings could have a widespread impact on housing futures by obscuring the light at the end of the tunnel in terms of finding the market’s bottom.

These nuggets are among the highlights used in JPMorgan’s conference call with investors:

• JPMorgan finds that it may be necessary to immediately write down as much as $30 billion in WaMu’s assets because the thrift’s mortgage holdings now appear to be more extensive than previously thought. JPMorgan bases this figure on revelation that cumulative losses on WaMu’s $51 billion option adjustable-rate mortgage (ARM) portfolio will reach or exceed 20 percent – nearly twice what analysts predicted.
• Under the deal,JPMorgan also assumes cumulative losses of at least 20 percent on WaMu’s home equity credit lines and home equity loans. Again, JPMorgan’s data project these losses to be roughly twice as bad as the analysts’ predictions.
• Based on current economic conditions, and how severe the recession becomes, JPMorgan finds the possible impact of a “severe recession” on home prices to include potential peak-to-trough drops of 37 percent in national housing prices, with a 58-percent fall in California and a 64 percent decline in Florida.
• Also in JPMorgan’s worst-case  projections should the U.S. hit a severe recession, is the prospect that national unemployment rates could surge to 8 percent and estimated life losses for the WaMu deal (from Dec. 31, 2007) could reach $54 billion.

To access JPMorgan’s presentation documents for Thursday’s conference call with investors, follow this link.

The Housing Futures Game
Though it may be tempting to suspect that these numbers could reflect an attempt by JPMorgan to leverage its position in the WaMu deal, its worst-case forecast for national home futures appears to be in-line with other data sources.

Case-Shiller futures are predicting a 33 percent decline peak-to-trough, while Goldman Sachs’ forecast stops at 27 percent, and Lehman called it at 32 percent, according to Calculated Risk, a blog providing some of the most insightful coverage the meltdown’s impact on U.S. housing markets I’ve seen.

Where Are we Now?
The National Association of Realtors (NAR) this week attributed scarce mortgage availability for grim existing home sales data. August sales dropped 4.3 percent to a seasonally adjusted annual rate of 5.50 million units from 5.75 million units reported in July. That’s 12.8 percent below the 6.31 million-unit pace set in August 2006.

New Home Sales Stats Slide
This week the U.S. Census Bureau and the Department of Housing and Urban Development  (HUD) released some equally sobering new home sales statistics in their report on new home sales.

Sales of new one-family houses in August 2008 were at a seasonally adjusted annual rate of 460,000. This is 11.5 percent below the revised July rate of 520,000 and is 34.5 percent below the August 2007 estimate of 702,000.

The median sales price of new houses sold in August 2008 was $221,900; the average sales price was $263,900. The seasonally adjusted estimate of new houses for sale at the end of August was 408,000. This represents a supply of 10.9 months at the current sales rate.

For more numbers crunching and analysis on the national housing market, check out this great post on Wall Street Journal online.

What Does this Mean to REI?
Clearly, watching the prices fall will help real estate entrepreneurs to cherry-pick the most promising markets and properties. But the desolate tone we’re getting from the news reports is largely based on the powerful bank’s loss of unbridled freedom and free-flowing capital.

While the tremors from Wall Street’s quake are likely to rattle the economy, they ultimately will set the stage for a housing market rebound. I know this is true because I was working the markets through the last recession, the real estate market runs in predictable cycles and because history always repeats itself.

My $.02
It seems obvious to me that while those who are loosing money on the banking debacle are searching for the housing market’s bottom, savvy real estate investors are gearing up to cash in on the inevitable recovery. Remember friends, patience in this business, and in life,  is a virtue.

After the Fed closed the curtain late Thursday on the biggest bank failure in U.S. history, JPMorgan Chase moved to acquire Washington Mutual’s  extensive branch network and distressed assets and will pay the FDIC $1.9 billion for the privilege.

The Fed’s bold move came as lawmakers stalled on Treasury Secretary Henry Paulson’s  $700 billion bailout fund designed to help ailing banks.

At the time it was seized, WaMu had nearly $200 billion in deposits and more than $300 billion in assets. As we reported here last week, WaMu put itself on the auction block after its credit rating evaporated and its stock price tumbled. At that time, WaMu hired former investment bank Goldman Sachs to broker its sale but found no buyers. (See my post “Train Wreck on Wall Street: Week in Review” for details.)

Since Sept. 15, WaMu’s customers have rushed to yank nearly $17 billion in deposits, prompting the Federal Office of Thrift Supervision to deem WaMu “unsound.” This year, WaMu’s stock plummeted 86 percent as losses on mortgage-backed securities and loans have ravaged the economy with wildfire-like voracity.

Under the terms of the deal, JPMorgan Chase will acquire all the banking operations of WaMu, including $307 billion in assets and $188 billion in deposits.

Resolution Trust Redux
To put the massive scale of the WaMu failure in context, CNN Money reports that its assets were equal to about two-thirds of the combined book value assets of all 747 failed thrifts that were liquidated by the Resolution Trust Corp. - the entity the government created to mop up after the notorious Savings and Loan Crisis that crisis from 1989 through 1995.

When Bear Stearns hit the pavement in March, the Fed brokered a deal for JPMorgan Chase to buy the bank for $2.3 billion. Today, the SEC’s Inspector General released a report on the Bear Stearns collapse that finds the SEC failed to oversee the investment bank and ensure its compliance, and that it ignored many red flags.

In response to the report, Bloomberg reports that SEC Chairman Christopher Cox pointed out that compliance wasn’t required by legislation. New York-based  Morgan Stanley, Goldman Sachs, Lehman Brothers, Merrill Lynch and Bear Stearns all voluntarily reported their capital and liquidity positions to the SEC.

Because WaMu’s holding company was detached from its massive network of banking branches and deposits when JPMorgan bought the assets, the Federal Deposit Insurance Corp. may be able to duck the tab for the collapse, Bloomberg reports.

FDIC Dodges the Bullet
The FDIC’s well is running low, drained by a dozen other failures so far this year. Fortunately, WaMu’s corporate structure allowed FDIC to seize only the bank, leaving liabilities, including senior and subordinated debt and equity to WaMu’s holding company, which lies beyond the agency’s scope.
According to FDIC, its deposit insurance fund fell 14 percent to $45.2 billion in the Q2. IndyMac’s July failure alone ran up a tab estimated at $8.9 billion.

The New York Times reports that IndyMac  was roughly one-tenth the size of WaMu. Analysts guess that a failure of Washington Mutual would have cost the fund in excess $30 billion.

In the wake of all this activity FDIC also has announced that it will consider raising bank insurance premiums in October.

Shifty Assets
Though the FDIC may emerge from this particular abyss relatively unscathed, investors are hurting. WaMu’s shareholders and bondholders will absorb the debt JPMorgan didn’t buy. WaMu had $30 billion in shareholder’s equity on June 30, which would be wiped out by the writedown, leaving some losses for bondholders.

JPMorgan has said it would write down $31 billion of the acquired assets, without reporting a loss because the transferred assets exceeded liabilities by the same amount.

Investors Feel the Hammer
WaMu’s bondholders are likely to lose most of their money as a result of the bank’s awesome failure, according to CreditSights Inc: The deal structure excludes bondholders at WaMu’s holding company and bank levels from the major assets and liabilities of the operating bank. (Check out this Bloomberg article for details.)
Private equity firm TPG Capital, owner of more than 13 percent of WaMu, lost $1.35 billion when the Fed seized WaMu and quickly sold it to JPMorgan Chase, Bloomberg reports.  Unfortunately for many investors, this firm is not alone.

Washington Mutual was forced to raise capital after more than $3 billion of home- mortgage writedowns and loan losses earlier this year. In April, TPG led the charge as investors –hoping to save WaMu and make a profit– snapped up WaMu shares at a 33 percent discount on the then going price of $8.75/per share. Bloomberg reports that other investors at the time include Capital Group Cos., Brandes Investment Partners LP and Hotchkis and Wiley Capital Management LLC, according to a regulatory filing.

WaMu was sued earlier this year by investors who said the company committed securities fraud by over-inflating home appraisals while also inflating prices. Meanwhile, analysts predict that lawsuits against WaMu will remain at the FDIC or the thrift’s holding company (See Money Magazine article: “ WaMu Accused of Appraisal Fraud” for additional information.)

While we wait for Congress to determine the fate of Treasury Secretary Hank Paulson’s Wall Street recovery plan, lots of ears perked today when reports broke that global investing powerhouse Warren Buffett is poised to pump $10 billion into Goldman Sachs’ new commercial bank’s coffers. But what did it take to inspire such confidence?

Goldman and Morgan’s New Footprints
Ravaged by Wall Street’s meltdown but still standing, Goldman Sachs and rival Morgan Stanley emerged from the abyss earlier this week as reinvented bank holding companies. Abandoning their high-risk broker model isn’t their only directive. As the New York Times reports, they’re also raising capital to bulk-up their finances for what’s likely to be a long, hard winter full of pot holes on Wall Street.
As commercial banks with more transparency and greater disclosure requirements, Goldman and Morgan will enjoy higher capital reserves with fewer risks. This could require quite a cultural adjustment for these renowned masters of bold risks and creative debt load management.

By morphing into bank holding companies, the firms are capitulating to tighter regulations and will be forced to submit to intensified supervision by several government agencies, in addition to the SEC.

Inspiring Confidence or Scavengers?
With the U.S.  Federal Reserve serving as Goldman and Morgan’s chief regulator, they’ll be in a better position to access government funds and inspire confidence in U.S. and International markets. It didn’t take long after the shift for the heavy hitters to respond.

Earlier this week, Morgan picked up more than $8 billion from Japanese bank Mitsubishi in exchange for a stake of up to 20 percent. It also has been reported that Japanese bank Sumitomo Mitsui Finanacial Group is considering a $2.5  billion investment in Goldman.

News came late today that Buffett plans to snap up and initial $5 billion holding through his Berkshire Hathaway investment vehicle, and the option to buyp to another $5 billion’s worth at $115 per share over the next five years.

Beyond Buffett, Goldman is aiming to raise $2.5 billion via a public shares offering which also sparked a healthy response during after-hours trading. Business Week reports that Goldman’s stock offering, for 40.65 million shares at $123 each, garnered twice the amount that the firm anticipated from the move.

Goldman: Is it a Finishing School or Coup de Grace for Global Finance?
Buffett’s cash advance likely isn’t the only thing Goldman has going for it. The New York Times calls Goldman a “finishing school” from which other companies and governments, have been known to “pluck their own top leaders.” Of course, this article was originally written last year, when “finishing school” may have had a different meaning than it seems to have today.

Among Goldman’s Stellar Alumni:

• U.S. Treasury Secretary Henry Paulson,
• Citigroup Chairman and former U.S. Treasury Secretary Robert. Rubin,
• Bank of Italy Governor Mario Draghi,
• New Jersey Governor Jon Corzine,
• White House Chief of Staff Josh Bolten, and
• New Merrill Lynch Chairman John Thain reportedly left his post as Goldman’s president to join the effort to “save the New York Stock Exchange.”

Everything Appears to Be Subject to Change
According to Bloomberg, Goldman currently ranks fourth in assets. The top three are Citigroup, Bank of America and JPMorgan Chase, while Morgan takes fifth place. But who knows what next week will bring? I’ll say for the record that when a “fire sale” of such immense proportions is your ticket to inspiring “confidence” in your investors … you’ve got some serious work to do.

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Reported incidents of mortgage fraud in the U.S. spiked 42 percent in Q1 over last year according to a report released this week by Mortgage Asset Research Institute (MARI). In April, The FBI released a mortgage fraud report of its own that casts a broader glance at the fall-out and how it breaks down from the law-enforcement perspective.

Focus on Mortgage-Industry Reported Data
MARI’s report compiles data submitted by its army of mortgage industry clients regarding Q1-originated loans that have since been classified as fraudulent. MARI pulls its data from its Mortgage Industry Data Exchange (MIDEX) database, which aggregates reported incidents of fraud and verified misrepresentations submitted by its 600-plus mortgage industry subscribers involved in an estimated 80 percent of U.S.-originated wholesale mortgages.

With the mission of advancing the mortgage industry’s new crusade against mortgage fraud, MARI analyzes these data and will regularly report on the national composition of and emerging trends in residential mortgage fraud.

States under MARI’s Q1 spotlight are hardly surprising for anyone who has been following the markets hardest hit by the foreclosure epidemic. But it is interesting to see how MARI and the FBI each  approach the data, break down the numbers, define fraud and report on troublesome trends in the types of fraud that are most frequently reported.

States Topping the MARI’s Mortgage Fraud Charts

• Florida: In MARI’s report, Florida takes first place with 24 percent of all domestic properties showing material misrepresentation reported and verified on loans that originated during Q1. Last year, MARI’s ranking placed Florida in the top spot for 2007.

• California: The Golden State takes the red ribbon in Q1 mortgage fraud rankings, up from a fourth-place ranking in 2007.

Three-way Tie for Third Place

• Illinois, up from the eighth-place spot in 2007;
• Maryland, a state that missed MARI’s 2007 Top 10 List; and
• Michigan, maintained its third-place ranking from 2007.

MARI’s Most Common Fraud Types and Trends
For all states, the top fraud incident type cited in MARI’s report was in “General Application Misrepresentation” followed closely by misrepresentations related to “Income” and “Employment.” According to the report, MARI continues to see growth in identity-based types of fraud in loan transactions.

Fraud Definitions and Enforcement Challenges
A report issued earlier this year by the FBI “2007 Mortgage Fraud Report” – a great read with some unsettling photos and an array of disturbing and highly detailed data. Here, the FBI defines mortgage fraud a little differently than MARI, and ranks its Top 10 Mortgage Fraud states based on a broader base of data than MARI’s report. According to the Fed, mortgage fraud falls into two general categories: Fraud for housing and fraud for profit.

• Fraud for Housing: This entails misrepresentations by the applicant who is purchasing a primary residence. This scheme usually involves a single loan. Although applicants may embellish income and conceal debt, the FBI recognizes that their intent is to repay the loan.
• Fraud for Profit: As far as the FBI is concerned, this tends to involve multiple loans and elaborate schemes to generate illicit proceeds from property sales. According to the FBI, this form of fraud that is of greatest concern to law enforcement and the mortgage industry. Gross misrepresentations concerning appraisals and loan documents are common in fraud-for profit schemes and players often are paid off for participating.

According to the FBI’s report, which culls data from the FBI, HUD-OIG, FinCEN, MARI, Fannie Mae, RealtyTrac, Interthinx, and Radian Guaranty, the comprehensive 2007 mortgage fraud state rankings are as follows:

FBI’s 2007 Top 10 Mortgage Fraud States:

1. Florida,
2. Georgia,
3. Michigan,
4. California,
5. Illinois,
6. Ohio,
7. Texas,
8. New York,
9. Colorado, and
10. Minnesota.

More States Hit by Mortgage Fraud
The FBI says that other states significantly affected by mortgage fraud in 2007 include Arizona, Maryland, Utah, Nevada, Missouri, Indiana, Tennessee, Virginia, New Jersey, and Connecticut.

Government Fraud Investigations Widespread and Challenging
As far as the FBI is concerned, mortgage fraud reporting is up, sparking greater demand for investigations and straining their capacity in several field offices.

FBI mortgage fraud investigations at the end of FY 2007 totaled 1,204, a 47-percent increase from FY 2006 and a 176-percent increase from FY 2003. In addition, 56 percent of pending FBI mortgage fraud investigations in FY 2007 were associated with dollar greater than $1 million.

FBI Reports Top 10 Cities for Mortgage Fraud Investigation
Field divisions that ranked in the top 10 for pending investigations during FY 2007 include:

1. Los Angeles,
2. Chicago,
3. Detroit,
4. Dallas,
5. Atlanta,
6. Miami,
7. Denver,
8. Houston,
9. Cleveland, and
10. Salt Lake City.

There’s More than Catchy Marketing Behind FBI’s Plan of Fraud Attack
Remember the photo ops from “Operation Malicious Mortgage” a few month’s back, as real estate entrepreneurs and others were shown in handcuffs? The FBI currently reports that to be effective, the fight against mortgage fraud requires the cooperation of law enforcement and industry entities. Yet the report also points out that no single regulatory agency is charged with monitoring this epidemic, even though many government entities are charged with simultaneously investigating the problem.

No doubt these communications lapses, variations in state laws, shrinking tax bases and law enforcement budgets are posing even more challenges to officials fighting this widespread and complex “crime wave.”

The Enforcers
The FBI, Department of Housing and Urban Development-Office of Inspector General (HUD-OIG), Internal Revenue Service, Postal Inspection Service, and state and local agencies all are investigating mortgage fraud, but coordination of fraud investigation efforts is a daunting, highly-technical and costly endeavor.

The Industry that Eats its Own
The Fed’s report also cites a Financial Crimes Enforcement Network (FinCEN) report that finds the mortgage fraud perpetrators tend to be working in finance-related occupations. Profiles for investigation include accountants, mortgage brokers, and lenders as the most common suspects associated with the crime.

Government Agencies Poise for Cooperation, Data Sharing
In response to the growing law enforcement burden, The FBI is working with the Department of Justice (DOJ)-Mortgage Fraud Working Group on a number of mortgage-fraud related issues, including the creation and finalization of standard loss valuation criteria associated with mortgage fraud violations, and assisting the banking industry with the construction of a centralized repository of mortgage-related documentation.

The FBI also has conducted a Mortgage Fraud Summit to address the most severe mortgage fraud problems nationally and to strategize a plan of attack, including the use of undercover agents for “sting operations.”

Currently the FBI reports that it has formed mortgage fraud working groups or task forces in 32 field divisions, including Anchorage, Albuquerque, Atlanta, Buffalo, Charlotte, Chicago, Cincinnati, Cleveland, Detroit, Dallas, Denver, El Paso, Honolulu, Houston, Indianapolis, Jackson, Kansas City, Louisville, Memphis, Miami, Minneapolis, Milwaukee, Portland, Pittsburgh, Philadelphia, Phoenix, Sacramento, San Diego, San Francisco, Salt Lake City, Tampa, and Washington, DC.

Let the Real Estate Entrepreneur Beware
Who knows how all this will play out in our little corner of the Real Estate Universe. But a lot of the reports I’ve been reading indicate that scrutiny on real estate investors who work as flippers, in short sales and pre-foreclosures is likely to grow as lenders and law enforcement entities alike search for bad guys and scapegoats to blame for housing market’s woes.

This is in part due to some bad apples casting an unfair stigma on honest and ethical investors. But in my opinion, it also is because we are easy targets as independent business owner/operators. In many cases, independent entrepreneurs lack the resources and protections that lenders, mortgage brokers and even property appraisers have as integral parts of the established — and broken — system.

Staying on top of the laws in your markets is more important now than it has ever before been in our industry. I’ve been covering developments in this blog in May and in this month’s “REI Alert: Foreclosure-Consulting, Equity-Stripping Tackled in 11 New State Laws“ post.

Although I can’t give you legal advice, I can give you tools. And I’ll  continue to provide you with the latest developments that could affect your business. This info may not be glamorous. In fact, it’s usually as dry as the Palm Desert. But staying informed is a great way to avoid hassles — and unexpected, heartburn-inducing legal fees down the line.

This quick post is to let you know about a great couple of articles from Forbes regarding the politics and particulars surrounding the costs of home insurance in the top 10 most disaster-prone states in the U.S.

The biggest surprise for me here is that, due to government subsidies, it appears that some coastal properties in Florida are less expensive to insure than inland properties. Does anyone out there know if this is true?

In reading these articles, I also was interested to learn that, in states with lots of coastal area such as Maryland, thoughts about global warming play a role in bottom-line property insurance costs.

Are there any irregularities in your markets that have surprised you when it comes to insurance? If so, let us know about it.

Here is Forbes’ list of top 10 states for high home insurance prices along with their average annual insurance premiums:

1. Texas: $1,372,
2. Louisiana: $1,144,
3. Oklahoma: $1,030,
4. District of Columbia: $963,
5. Mississippi: $939,
6. Florida: $929,
7. California: $895,
8. Rhode Island: $849,
9. Alabama: $847, and
10. Kansas: $836.

In this year’s state legislative sessions, lawmakers targeted “foreclosure rescue scams” and “equity stripping schemes” for scrutiny, attempting to protect unwitting distressed homeowners from signing away what little they may have left.

In the past two years, lawmakers in about half of the United States have mandated consumer protections and fines for investors who violate the law. In many instances, these ongoing attempts to restrict real estate investors’ business practices are redefining the distressed property arena.

With a growing number of real estate entrepreneurs using the Internet and other electronic resources to invest in markets outside of their home states, those who are using short sale, pre-foreclosure, and similar types of transaction strategies to invest in distressed properties should be vigilant in monitoring these and other changes in state laws.

Foreclosure Rescues May Be Subject to Fines and Stiff Penalties
Last year, the National Conference of State Legislatures (NCSL) reported that more a dozen states had taken steps to actively regulate foreclosure transactions. These states include California, Colorado, Georgia, Illinois, Indiana, Maryland, Minnesota, Missouri, Nevada, New Hampshire, New York and Rhode Island.

Arizona also weighed in on the issue early on in 2007, and the governor signed SB 1616, better known as the “Mortgage Rescue Fraud Protection Act.”

More Regulation Around the Bend
Because many states have assembled governmental task forces to scrutinize business practices surrounding foreclosure and predatory lending, a Washington D.C.-based lobbying group, the National Association of Responsible Home Rebuilders and Investors (NARHRI), predicts that ongoing legislative efforts will continue to mount as the foreclosure epidemic continues to take its toll on homeowners, markets and tax bases throughout the nation.

According to NARHRI, by increasing restrictions on foreclosure consultants and their multifaceted business practices – especially with regards to equity-based and lease-back to owner transactions –lawmakers are grasping for a hold on situations that in many communities, seem to have spun out of control.

State Legislatures Tackle Foreclosure Rescues, Equity Stripping
This year, more states have passed similar laws geared to protect the interests of distressed homeowners and fine real estate investors who fail to comply with the law. These new laws sometimes impose greater regulation on investors than some of the earlier legislation enacted in other states.

Summaries and Links to new State Laws
This year, nearly a dozen more states entered the fray with foreclosure rescue consumer protection legislation. (This number includes the District of Columbia’s Act A17-0205, which prohibits equity striping and appears to be awaiting congressional approval.)

As I reported on this Blog in May: “Lawmakers Target Real Estate Investors for Regulation,” lawmakers and governors in Oregon and Washington moved quickly to regulate lending practices, restrict property transactions and scrutinize contracts between investors and sellers. These and eight other new laws are summarized and linked below:

• Florida:
  HB 643, now Chapter 79 in Florida law, requires foreclosure counselors to provide a cancellation provision in written agreement and mandates that a title transfer must be included in a separate contract. This legislation takes effect Oct. 1.
• Hawaii:
  HB 2326, now Act 137, ralso known as the “Mortgage Rescue Fraud Prevention Act,” requires mortgage foreclosure counselors to provide specific information and disclosures to distressed property owners. It also regulates “foreclosure rescue” business practices.
• Idaho:
  SB 1431, now Chapter 192 in Idaho law, requires that all contracts be in writing when they residential houses in the foreclosure process. It provides consumers with a five-day right of rescission. It also requires that a warning regarding foreclosure rescue scams is included in foreclosure notification papers and in all written contracts.
• Iowa:
  HF 2653, now law, regulates mortgage foreclosure consultant contracts and mortgage foreclosure reconveyance transactions. This law forbids foreclosure rescue companies from charging up-front fees.
• Maine:
  LD 2189, now Chapter 596 in Maine law, has several key-provisions to regulate business practices and transactions aiming to protect homeowners from equity stripping.
• Maryland:
  HB 361 (Chapter 6) and SB 218 (Chapter 5), Provides for the contents of a foreclosure consulting contract; prohibits foreclosure counselors from arranging or participating in a “foreclosure rescue” transaction and specifies acceptable conditions for commissions. It also specifies that foreclosure counselors must be licensed real estate brokers who are directed to provide homeowners with research on the value of their homes.
• Nebraska:
  Among other things, LB 123, also known as the “Nebraska Foreclosure Protection Act,” regulates foreclosure consulting contracts, generally requiring enhanced disclosure for homeowners and other consumer protections. The law also establishes prohibited actions for foreclosure consultants, contracts and transactions. Meanwhile, LB 851 provides for foreclosure deeds of trust.
• Oregon:
  Here, the legislature convened a special session to consider HB 3630, before it was promptly signed by the governor and became Chapter 19 of Oregon state law. This legislation defines duties and restrictions on foreclosure consultants. It establishes requirements regarding foreclosure counseling transactions, contracts and imposes stiff fines and penalties – including jail time, for violators.
• Virginia:
  HB 408, now Chapter 485 in Virginia law, provides that entities who participate in or who service foreclosure rescues for profit with the intent to defraud consumers, are in violation of the Virginia Consumer Protection Act and subject to its prescribed penalties.
• Washington:
  HB 2791, now Chapter 279 in Washington law, requires foreclosure rescue companies to provide a written contract that gives the original homeowner five days to get out of the deal. The legislation also provides that if the entity that takes possession of the house sells it, 82 percent of the equity must be returned to the original owner.

What’s New in your Real Estate Business?

Is any legislation affecting the way you do business in your state? If so, please drop me a line and tell me about it so that we’re all better informed.

If you would like to see more original REI news stories like this one, sign up my “What’s Working & What’s New” monthly and special reports and you’ll be among the first to learn about timely special reports like these, cutting-edge Webinars and other developments in the world of Real Estate Investing.

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Freddie Mac’s New State Foreclosure Time Lines and More!

To give distressed homeowners more time to scramble for cash in fast foreclosure states, Freddie Mac has spiked foreclosure time lines in 21 States and made several other tweaks to some of its increasingly more common procedures. In light of recent foreclosure news, these changes represent a much-needed policy shift, including some solid incentives to get the loan servicers rolling on short and pre-foreclosure sale deals.

According to a July press release from RealtyTrac, the year-over-year foreclosure increase of more than 50 percent indicates we have not yet reached the top of this cycle and bank repossessions are growing more quickly than default notices or auction notices.

In a better late-than-never response to soggy markets, pressure from lawmakers and its own financial woes, Freddie announced yesterday that, effective today, it’s standardizing its foreclosure referral time line requirements to require loan servicers to initiate foreclosure on all mortgages, including second mortgages, home improvement loans and previously modified mortgages by 150 days from the due date of last paid Installment (DDLPI), (DDLPI occurs on the 120th day of delinquency).

Before the change, Freddie required loan servicers to initiate foreclosure on second mortgages, home improvement loans and previously modified mortgages by the 90th day of delinquency and all other Mortgages by the 120th day of delinquency.

Two States Force Freddie to Tweak Foreclosure Time Tables

In June, Freddie issued a bulletin announcing an exention to its Maryland foreclosure time line by 55 days to conform to a new Maryland law requiring a 45-day notice of intent to foreclose.

At the same time, Freddie announced it would raise its Massachusetts foreclosure time line by 60 days to comply with a new Massachusetts law requiring a 90-day notice of right to cure default on all mortgages referred to foreclosure.

What Does this Mean for REI?

There are significant other changes and implications that could stand to benefit real estate investors down the line as the sluggish system takes greater steps to slow the bleeding, such as removing servicer incentives for fast foreclosures and doubling the booty on the following:

• Compensation for repayment plans from $250 to $500,
• Loan modification compensation from $400 to $800.
• Short sales or pre-foreclosure sales-related compensation from $1,100 to $2,200.

If the latter doesn’t speed up their short sale responsiveness, I don’t know what will!

I probably don’t need to tell you that this is great news for troubled homeowners and investors in pre-foreclosure and short sale markets. There’s a lot more nitty gritty to yesterday’s bulletin from Freddie, which makes more sense than the press release, if you’re interested in the rest of the details.

Foreclosure Data Smackdown

Because I couldn’t easily access to all this info elsewhere online, I’ve decided to devote the bulk of this post to crunching some data to light up the big picture for REI.

Below is Freddie Mac’s foreclosure time line information listed by state. Each state name is followed by: number of days from DDLPI to foreclosure sale/ number of days from initiation of foreclosure to foreclosure sale.

Just for kicks, I’ve marked with an “*” and underlined states affected by Freddie’s recent timeline extension and included RealtyTrac’s July “Top Ten Foreclosure State” data in, of course, red text. States that fall under Freddie’s changes and RealtyTrac’s list are cross-referenced in green for reasons totally related to innuendo and symbolism. Enjoy!

1. *Alabama: 300/150,
2. *Alaska: 300/150,
3. *Arizona: 300/150 (One in 201 homes in foreclosure),
4. *Arkansas: 300/150,
5. *California: 300/150 (One in 192 homes in foreclosure),
6. Colorado: 315/165 (One in 429 homes in foreclosure),
7. Connecticut: 370/220,
8. Delaware: 400/250,
9. Florida: 320/170 (One in 211 homes in foreclosure),
10. *Georgia: 300/150 (One in 444 homes in foreclosure),
11. *Hawaii: 300/150,
12. Idaho: 340/190,
13. Illinois: 425/275,
14. Indiana: 415/265 (One in 568 homes in foreclosure),
15. Iowa: 465/315,
16. Kansas: 330/180,
17. Kentucky: 415/265,
18. Louisiana: 370/220,
19. Maine:505/355,
20. *Maryland: 300/150,
21. Massachusetts: 345/195,
22. *Michigan: 300/150 (One in 375 homes in foreclosure),
23. *Minnesota: 300/150,
24. *Mississippi: 300/150,
25. *Missouri: 300/150,
26. Montana: 355/205,
27. Nebraska: 305/155,
28. Nevada: 305/155 (One in 122 homes in foreclosure),
29. *New Hampshire: 300/150,
30. New Jersey: 450/300,
31. New Mexico:400/250,
32. New York: 430/280,
33. *North Carolina: 300/150,
34. North Dakota: 340/190,
35. Ohio: 415/265 (One in 382 homes in foreclosure),
36. Oklahoma: 400/250,
37. Oregon:330/180,
38. Pennsylvania: 450/300,
39. *Rhode Island: 300/150,
40. South Carolina: 365/215,
41. South Dakota: 355/205,
42. *Tennessee: 300/150,
43. *Texas: 300/150,
44. Utah: 315/16 (One in 600 homes in foreclosure),
45. Vermont:510/360,
46. *Virginia: 300/150,
47. Washington: 310/160,
48. *Washington D.C.: 300/150,
49. *West Virginia: 300/150,
50. Wisconsin:460/310,
51. *Wyoming: 300/150.

What’s Your Time Line for REI Success?

I hope that posts such as these help you to build the wealth and retirement accounts I know you’re working so hard to accrue. Sign up my “What’s Working & What’s New” monthly and special reports and you’ll be among the first to learn about timely special reports like these, cutting-edge Webinars and other developments in our world- the world of Real Estate Investing.

Joining the community at GaryBoomershine.com is easy: just use the yellow fields at the right side of my GaryBoomershine.com home page or on the right side of the Boomer’s Blog main page. Like always, I pledge to never share your contact info with anyone or inundate you with useless messages.

Last week, I posted a Blog that examined a report titled “Who is Next?” written by seasoned Ladenburg Thalmann Banking Analyst Richard Bove. In his report, not to be confused with a classic rock album of a similar name, Bove identified several financial institutions that he considers to be in the “danger zone,” or seriously at risk of failure.

Making a List … Checking it Twice
In light of breaking developments and in the spirit of freedom of speech, I’ll repeat which Institutions made the cut on Bove’s now-infamous list: Downey Financial, Corus Bankshares, Doral Financial, FirstFed Financial, Oriental Financial and BankUnited Financial. Bove even adds Washington Mutual to the mix when he divides non-performing assets by reserves and adds common equity.

Now, he’s being sued. And I wish I could find a stable link to the report so you could view it in its entirety online. I had two such links, but it seems that they’re no longer active. Is this a coincidence? What do you think?

Goliath’s Legal Team Takes on the Numbers Cruncher
Bloomberg reports that BankAtlantic, a unit of BFC Financial Corp., has filed a lawsuit against Ladenburg Thalmann that alleges defamation and negligence in connection with Bove’s report. When the complaint was filed in Florida state court, Fort Lauderdale-based BankAtlantic prices spiked as much as 31 percent. Not a bad rebound considering that their prices plunged 25 percent last Monday when news of Bove’s report hit the wires.

Perhaps BankAtlantic’s complaint would be better vented in appointment with Dr. Phil. This suit comes on the heels of an April North Carolina appeals court ruling that found analysts couldn’t be sued for expressing opinions. As the TV shrink likely would say: “Ahhh, BankAtlantic, how does that make you feel? Is this working for you?” (Does anyone out there know if Dr. Phil actually has any medical training?)

But seriously, this is bad news for consumers. Think about it: For better or for worse, without the analysts, what resources do we have on which to base our banking decisions? Astrology? IChing? Craps? Could it possibly be it be any less accurate that the cryptic Magic Eight Ball answers we’re we’re getting from our financial system’s leaders?

SEC Takes an Aggressive-Passive Approach to Short Sales Regulation
Last week, it was widely reported that U.S. securities regulators issued an emergency rule to restrict the increasingly popular practice of short selling among 19 major financial institutions including:

• Fannie Mae,
• Freddie Mac,
• Lehman Brothers,
• Goldman Sachs,
• Merrill Lynch,
• Morgan Stanley,
• JPMorgan Chase and
• Citigroup.

Promptly upon the release of Bove’s viral report, Wall Street cried like a teething baby and the rule stuck. For a few days.

Short Sales OK Sans Nudity
In this context, short selling is a legal practice that allows investors to borrow shares they may consider to have an inflated price so that they can profit when the price drops. A naked short sale however, is when an investor sells stock before it has even been borrowed. Such practices, the SEC says, can endanger the markets. WIth these types of short sales, companies can loose control over their shares.. At that point, they’re at the mercy of anyone who has the mustard to exploit their vulnerability.

According to Reuters, the emergency rule is a strategy to tackle short-sale based market manipulation, which analysts, companies and lawmakers have blamed for free-falling financial stock prices.

A few days following the announcement of the emergency rule, the Securities and Exchange Commission (SEC) gave in to Wall Street’s sobbing and assured that a strong dose of relief would be delivered to help, as Reuters puts it, “maintain order and liquidity in the markets.” In other words, market makers affected by the emergency rule would not be required to pre-borrow shares before shorting the stocks. That effort however, went far to appease Wall Street and the markets. Now if there were only something that could be done to stabilize oil and gas prices.

Next Post: Are Your Deposits Earthquake Proof?
Combine stories like this with images of traffic stalled around IndyMac branches last week with motorists gawking at the at the long lines of desperate folks trying to salvage their deposits is enough to cause worry — even among decaf drinkers. This is a great time to take stock of what protections your deposits may (or may not) have in today’s “shaky” banking landscape. In my next post, you’ll get the scoop — from a Californian’s earthquake-proof perspective. Please stay tuned. You won’t want to miss it.

Stay on top of the REI Curve
I hope these posts help you to protect the wealth and retirement accounts I know you’ve worked so hard to achieve. Sign up my “What’s Working & What’s New” monthly and special reports and you’ll be among the first to learn about timely special reports like these, cutting-edge webinars and other developments in our world- the world of Real Estate Investing. Joining the community at GaryBoomershine.com is easy: just use the yellow fields at the right side of my GaryBoomershine.com home page or on the right side of the Boomer’s Blog’s main page. Like always, I pledge to never share your contact info with anyone or inundate you with useless messages.