Boomer’s Blog

The trend heading into the holidays seems to be one of growing unemployment and a rising tide of homeowners drowning in mortgage debt.

An Ironic wist on a Familiar Story
The U.S. Bureau of Labor Statistics’ October report finds that unemployment last month soared to a 14-year high of 6.5 percent, as 240,000 jobs were slashed. Yet the Orange County Register’s Mortgage Insider, Matthew Padilla has made an interesting observation. He sifted through the data to report that in September,  352,200 workers were making a living in the mortgage business — that’s up from 349,300 in August.

Negative Equity Plagues Homeowners
But the recent real estate statistics that really capture the real estate investor’s eye come from  First American CoreLogic: 2.1 million mortgages are within 5 percentage points of being in a negative-equity position and 7.5 million mortgaged properties are carrying more mortgage debt than they’re worth. That means that nearly 20 percent of properties with mortgages have plunged into the powerful waves the economic undertow.

Rising Percentage of Underwater Mortgages in the States
See how the mortgages currently in negative equity break down among the states listed below (Note: percentages have been rounded off and the states are listed in descending order starting with the highest reported rate of negative equity.):

1. Nevada: 48%
2. Michigan: 39%
3. Arizona: 29%
4. Florida: 29%
5. California:  27%
6. Georgia: 23%
7. Ohio: 22%
8. Colorado: 18%
9. Arkansas: 16%
10. New Hampshire: 17%
11. Texas: 17%
12. Virginia: 16%
13. Tennessee: 15%
14. Kansas: 15%
15. Iowa: 15%
16. Alaska: 14%
17. Wisconsin: 14%
18. Nebraska: 13%
19. Kentucky: 13%
20. Missouri: 13%
21. Minnesota: 12%
22. Maryland: 12%
23. Rhode Island: 12%
24. Louisiana: 11%
25. Idaho: 11%
26. Utah: 11%
27. Oklahoma: 10%
28. South Carolina: 10%
29. Indiana: 10%
30. North Carolina: 10%
31. Illinois: 10%
32. Delaware: 10%
33. Washington D.C.: 10%
34. Massachusetts: 10%
35. New Jersey: 9%
36. New Mexico: 8%
37. Washington: 8 %
38. Oregon: 8%
39. Alabama: 7%
40. Connecticut: 7%
41. Montana: 7%
42. Pennsylvania: 6%
43. Hawaii:  6%
44. New York:  4%

Source: First American CoreLogic

Notes: Data were unavailable for Maine, Mississippi, North Dakota, South Dakota, Vermont, West Virginia and Wyoming. These data are based on 42 million properties that had a first or second mortgage, accounting for at least  80 percent of U.S. mortgages.

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Bank of America scooped up some great bargains when it acquired Countrywide’s assets… or did it?

BofA has agreed with 11 state Attorneys General (AG) to pay $8.5 billion to modify troubled mortgages it acquired as part of its July purchase of Countrywide.

Under the agreement, Countrywide customers may benefit from an automatic freeze or reduction in interest rates, an extension of loan terms, conversion to fixed term loans, or principal reduction. Eligible borrowers who participate will not be charged late fees, loan modification fees, foreclosure fees, or pre-payment penalties.

Terms of the Deal
As a result of today’s settlement, BofA will spend $150 million nationwide to assist homeowners who have already lost their homes. The company also will spend up to $70 million to homeowners who, despite the loan modification program, are ultimately unable to keep their homes. The settlement also requires that eligible Countrywide borrowers who have suffered foreclosure or who are unable to afford their homes even under a modified loan arrangement will be offered soft landing payments to ease re-location to another home.

The deal will enable eligible subprime and pay-option mortgage borrowers to avoid foreclosure by obtaining a modified and affordable loan. The loans covered by the settlement are among the riskiest and most default-prone  loans, which are blamed for triggering the foreclosure epidemic that now imperils Wall Street and international financial markets.

BofA says foreclosure sales will not be initiated or advanced for borrowers likely to qualify for the modifications through the program, which is expected to launch Dec. 1.

Settlement Could Rattle Investors
Analysts are saying that this settlement with state AGs is likely to damper investor enthusiasm for BofA, though the deal could help an estimated 400,000 struggling homeowners to keep their houses.  (Note: The Washington Post reports that BofA only holds only 12 percent of the 400,000 loans under discussion here.)

Attorneys General Wage War on Foreclosure
AGs in California and Illinois led the negotiations for the states that tackled Countrywide Financial Corp., Countrywide Home Loans and Full Spectrum Lending in their efforts.

California Scores the Biggest Piece of Relief
California AG Edmund (Jerry) Brown says $3.5 billion of the settlement will aid California borrowers and that the Countrywide settlement will likely become the largest predatory lending settlement in history, dwarfing the nationwide $484 million settlement with Household Finance Corporation in 2002, under which California received approximately $91 million. (Access Frequently Asked Questions about the Calif. Settlement agreement here:  and the text of the complaint here.)

Calif.  Attorney General Brown’s efforts are ongoing to separately slam former Chairman Angelo Mozilo or former Countrywide Home Loans President and COO David Sambol. (Click here for details.)

Michigan Scores Big One for Countrywide’s Borrowers
According to Michigan AG Mike Cox, Countrywide to pay nearly $10 million, to help more than 10,000 struggling Michigan homeowners. Under the terms of the settlement, Countrywide will:

• Refinance as many as 9,700 mortgages in Michigan, giving families an opportunity to keep their homes, and saving them approximately $129 million as a result of more favorable terms.
• Pay more than $9.8 million to assist Michigan homeowners who lost their homes to foreclosure. These funds will also be used for borrower education programs and neighborhood rehabilitation efforts.
• Pay relocation assistance payments to certain homeowners who go into foreclosure after the date of this settlement, costing Countrywide up to $70,000,000 nationally.
• Stop selling subprime and option ARM loans in Michigan for two years, and impose new limits on the sale of low or no-documentation loans.
• Cap the amount a broker can earn to 4 percent of the amount borrowed.
• Stop an automatic foreclosure process until certain details regarding the mortgage holder’s situation have been verified.
• Report quarterly to the Attorney General on the status of its troubled mortgages and what is doing to keep them from going into foreclosure.
• Maintain a specified number of staff focused on helping troubled homeowners avoid foreclosure proceedings.

More State Settlement Details
Follow links provided below to specific state information regarding the settlement agreement reached today between AGs and BofA as a result of Countrywide’s subprime lending habits.

• Arizona: More than 13,000 Arizonans are expected to qualify for the loan modification program that will provide them up to $245 million in permanent relief, says State AG Terry Goddard.
• Connecticut: About 4,500 people in Connecticut may be affected by the settlement. Here, because Countrywide engaged in criminal behavior rates on mortgage payments to could be dropped as low as 2.6 percent with no program-participating homeowner paying more than 34 percent of income on mortgage payments, State AG Richard Blumenthal says. Also, BofA has agreed to cap mortgage amounts at no more than 95-percent of the actual value of the home.
• Florida: State AG Bill McCollum says the settlement requires BofA to pay $21 and modify home loans with an estimated 52,000 of the 73,000 subprime loans Countrywide issued in the state.
• Illinois: Approximately 10,750 Illinois borrowers are expected to receive loan adjustments, representing nearly $185 million in modifications, according to state AG Lisa Madigan.
• Iowa: Here, the settlement will require mortgage loan modifications for more than 1,100 Iowans, state AG Tom Miller says. Potential economic relief to be paid for Iowa borrowers is estimated at $11 million.
• North Carolina: The agreement by State AG Roy Cooper is expected to provide $71 million in reduced mortgage payments to more than 5,000 North Carolina borrowers
• Ohio: More than 8,000 Ohioans will receive loan modifications, says state AG Nancy Rogers. Relief to borrowers here alone is estimated to be about $97 million. Depending on the type of loan, Rogers says that nearly half of Countrywide’s subprime loans in the state are delinquent.
• Texas: Bank of America estimates that up to 30,000 Texas homeowners will qualify for the loan modification program. State AG Greg Abbott predicts that Texans will get a $350 million slice of the settlement pie.
• Washington: State AG Rob McKenna Monday announced a landmark settlement brokered by   Washington and other states requiring sub-prime lender Countrywide Financial Corp. to provide loan modifications for up to 395,000 borrowers nationwide. As a result, nearly 10,000 Washington homeowners will receive about $200 million in payment relief.

In addition to the 11 state AGs making settlement announcements today, about 8,000 borrowers in Virginia, 7,000 in Maryland and 800 in the District of Columbia could benefit, according to a Washington Post report. Those who qualify for participation in the program have subprime mortgages that are either close to or in some stage of default. More states are likely to join the settlement.

Long-term mortgage Interest rates rose this week to their highest levels since March, likely triggered by rising inflation, high gas prices, and dwindling consumer confidence. At the same time, home values are shrinking in every region of the United States. Can we call this a recession yet?

Mortgage Rates Take a Hike
Currently, the national average interest rate for 30-year, fixed-rate mortgages is up to 6.08 percent this week, up from 5.98 percent last week, This time last year, mortgage financing company Freddie Mac says it was 6.42 percent.

Shouldn’t this be moving the market? Not necessarily, says Freddie. As mortgage rates rise, home values continue to fall. More folks likely will be watching this selling season than the World Series.

Q1 Home Values Fizzle in Most States, All Regions
The value of U.S. homes fell 10.4 percent in the first quarter, says Freddie Mac, marking fueling the most dramatic annual dive since 1971. In the past year, Freddie’s Conventional Mortgage Home Price Index averaged 4.4 percent, the most remarkable decline in 39 years.

Freddie Mac data show that 46 states reported price drops in Q1, and 29 states measured drops over the same period last year. Only Montana, North Dakota, South Carolina and Wyoming reported price gains, however moderate, for Q1.

According to Freddie Mac’s numbers, based on the Conventional Mortgage Home Price Index Classic Series, no region in the U.S. is totally immune to the price drops that sometimes look like economic chronic wasting disease. But depending on your real estate investment strategy, there are some bright spots if you look at the big picture. Again, the real estate markets that didn’t pump-up the real estate bubble, look much more stable these days.

Regional Housing Trends
Here are are some regional housing value numbers crunched in Freddie Mac’s latest report:

West South Central Division

• Includes: Arkansas, Louisiana, Oklahoma and Texas;
• Current values reported for Q1: down 0.5 percent (-1.9 percent, annualized);
• Over the past year: home values rose 1.6 percent;
• Over the past five years, home values climbed 26.8 percent.

Middle Atlantic Division

• Includes: New Jersey, New York and Pennsylvania;
• Current values reported for Q1: down 1.1 percent (-4.1 percent, annualized);
• Over the past year: home values dropped 0.2 percent;
• Over the past five years: home values climbed 44.3 percent.

East South Central Division

• Includes: Alabama, Kentucky, Mississippi and Tennessee
• Current values reported for Q1: down 1.1 percent (-4.3 percent, annualized);
• Over the past year: home values increased 0.3 percent;
• Over the past five years: home values climbed 26.6 percent.

East North Central Division

• Includes: Illinois, Indiana, Michigan, Ohio and Wisconsin
• Current values reported for Q1: dropped 1.5 percent (-5.9 percent, annualized);
• Over the past year: home values dropped 3.8 percent;
• Over the past five years: home values climbed 9.2 percent.

Mountain Division

• Includes: Arizona, Colorado, Idaho, Montana, New Mexico, Nevada, Utah and Wyoming;
• Current values reported for Q1: dropped 1.5 percent (-5.9 percent, annualized);
• Over the past year: home values dropped 3.3 percent;
• Over the past five years: home values climbed 44.0 percent.

West North Central Division

• Includes: Iowa, Kansas, Minnesota, Missouri, North Dakota, Nebraska and South Dakota
• Current values reported for Q1: dropped 2.2 percent (-8.6 percent, annualized);
• Over the past year: home values dropped 2.3 percent;
• Over the past five years: home values climbed 16.3 percent.

South Atlantic Division

• Includes: Washington D.C., Delaware, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia and West Virginia
• Current values reported for Q1: dropped 2.6 percent (-10.1 percent, annualized);
• Over the past year: home values dropped 4.4 percent;
• Over the past five years: home values climbed 37.8 percent.

New England Division

• Includes: Connecticut, Massachusetts, Maine, New Hampshire, Rhode Island and Vermont;
• Current values reported for Q1: dropped 2.9 percent (-11.0 percent, annualized);
• Over the past year: home values dropped 4.0 percent;
• Over the past five years: home values climbed 22.2 percent.

Pacific Division

• Includes: Alaska, California, Hawaii, Oregon and Washington
• Current values reported for Q1: dropped 6.9 percent (-24.8 percent, annualized);
• Over the past year: home values dropped 12.4 percent;
• Over the past five years: home values climbed 40.1 percent.

An escalating trend of state legislatures regulating real estate investors who work as foreclosure consultants to help homeowners stave off foreclosure is taking many in our industry by storm.

Distressed Properties and Investors
In attempts to protect desperate homeowners, lawmakers 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 playing field .

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 changes in state laws.

States Collecting Fines and Penalties
Last year, the National Conference of State Legislatures (NCSL) reported that 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.

This year, more states have either considered or passed new laws geared to protect the interests of distressed homeowners and  penalize real estate investors who fail to comply with the law. These laws impose greater regulation on investors than some of the earlier legislation enacted in other states.

Lawmakers in Oregon and Washington have expanded their regulatory scopes by passing comprehensive laws that regulate lending practices and place restrictions on  property transaction as well as the contract between  investors (or real estate agents) and the sellers.

More Regulation Ahead
According to the National Association of Responsible Home Rebuilders and Investors (NARHRI), a Washington D.C.-based lobbying group for residential real estate investors, recent scrutiny of the industry by lawmakers and other policymakers is setting the stage for broader regulation in the future.

Because many states have assembled task forces to scrutinize business practices surrounding foreclosure and predatory lending, NARHRI predicts that ongoing legislative efforts will continue to target real estate investors by increasing restrictions on foreclosure consultants and their multifaceted business practices – especially with regards to equity-based and lease-back to owner transactions.

Look for ongoing coverage of this important trend here. Has increased regulation affected your business? Are you interested in seeing more posts like this one? Please drop us a line and tell us what you think.