New Countrywide Suit Tries To Foreclose Foreclosures
By
Andrew Jeffery
Jul 24, 2008 9:00 am
But housing market's recovery depends on them.
San Diego City Attorney Mike Aguirre, who has a penchant for punitive lawsuits that rarely result in much more than a media frenzy, is accusing Countrywide of defrauding thousands of San Diego homeowners. A lawsuit has already been brought at the state level by California Attorney General Jerry Brown, as well as in several other states, including Washington and Illinois.
San Diego's suit takes aim at Countrywide’s alleged practice of coercing borrowers into risky adjustable rate mortgages (ARMs). Aguirre hopes to make San Diego a “foreclosure sanctuary” by preventing foreclosure proceedings on any property secured by a subprime ARM where the borrower owes more than the home is worth. (For more on what the glut of upside-down homeowners means for the future of the housing market, please read Finding the Bottom in Housing.)
The litigious City Attorney isn’t satisfied with just taking aim at Countrywide (and, by extension, Bank of America). Aguirre said he’s planning similar suits against Washington Mutual (WM), Wells Fargo (WFC) and Wachovia (WB).
While Aguirre’s heart may be in the right place, foreclosure moratoriums aren’t part of the road to recovery for the housing market. Opportunistic mortgage market participants are buying delinquent mortgages on the cheap, forgiving some part of the debt and giving borrowers a fresh start. Government intervention in this process will simply scare off lenders, since they'll have limited recourse if the loan goes sour.
At best, such suits will simply drive up the cost of new mortgages. At worst, they'll bring the recovery process to a standstill.
Foreclosures are nasty, painful and tragic. They are, however, a necessary part of the mortgage process, enabling lenders to recoup losses on bad loans.
Mandating an end to foreclosures is like telling the IRS it can’t go after tax evaders or preventing cops from chasing down burglars. This is not to say victims of foreclosures are criminals or necessarily deserve to be thrown out on the street, but living in a law-abiding society means that contracts must be enforced.
The moment we waive one group’s obligation to honor their collective word, the floodgates are open.
This certainly isn't the last lawsuit we’ll see following the collapse of the mortgage market. In fact, it’s just the tip of the iceberg. A couple years from now, when Option ARMs begin to reset, class action lawsuits will bear down on lenders like a rumbling avalanche rolling down a steep slope.
Banks would be wise to get long some lawyers.
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2008-07-24 10:13:35
FHA 235 on steroids
You have actually come closer than most in your description of the mortgage crisis except for sympathy for the virally fleeced. Who are they? Give you an example.
My daughter's husband got transferred to LA in the fall of 2006, she about to deliver our 2nd grand daughter and both employed with Fortune 100 companies. In fact my son-in-law was armed with a 500k, 5yr, 0% loan as a relocation incentive. After the baby was born in November of course they wanted to get out of temporary housing into a home. I begged, pleaded, almost threatened them to rent for 6 months and get the lay of the land and see what "values" were going to do to no avail. In January of 2007 they had themselves a contract on a 2250 sq ft home in Simi Valley for $655,000, long story short, a glitch happened in the contract and a greedy seller queered the deal. In the interim they found a patio home in the same area (Wood Branch), 1250 sq ft for $2200 per month. Although their zeal to "buy" was still there so was some evidence that a serious housing melt down could be on the horizon, they are still renters but now at $2000 per month. THey could have been in a long line of homeowners that did everything right, but devistated by circumstance not of their making. They sought no "funny money mortgage" intended to put 10% down and were over qualified for the amount of loan they wanted. However, at last report that house has never sold and the "old catankerous couple" have lowered the price to 475k, and still can't sell. If you consider a 10% cost to market their "loss" would currently be over 200K and going lower. This could have been a case example of what I call the virally infected, those whose only device was a desire to experience the American dream. Now, it's just a matter of time before some lawyer finds a group of these to sue for damages. Damages you say? Someone has to be held accountable for the false inflation in housing and with the fudiciary responsibility lenders to account to depositers that they make loans to people that can actually pay money back, you get where I'm going.
Why FHA 235? Search history and find out in the 60's LBJ thought everyone should be able to own a home so they devised the 235 program $100 down mortgages (most builders advanced that). Do some research and other than funding limitations on the agency there could have been a similar event that is occuring today. I remember reading some years latter where in California they actually went in and had to bulldoze entire subdivisons (that's one way to create demand destruction).
Fast foward all these years latter and find all lending institutions participating in what essentially was a 235 program (making loans to those unable to repay) and you have the makings for a housing depression. The end is not near. In a normal housing "bubble" when the burst comes prices go down and the inventory is absorbed by new home owners able to afford housing at the new price. In this new age of lending to anyone that can sign an application in some cases (absolute fraud) they will never be able to reenter the market to buy that inventory. Kind of like a dog chasing his tail in a hole that keeps getting deeper and deeper with each turn.
My daughter's husband got transferred to LA in the fall of 2006, she about to deliver our 2nd grand daughter and both employed with Fortune 100 companies. In fact my son-in-law was armed with a 500k, 5yr, 0% loan as a relocation incentive. After the baby was born in November of course they wanted to get out of temporary housing into a home. I begged, pleaded, almost threatened them to rent for 6 months and get the lay of the land and see what "values" were going to do to no avail. In January of 2007 they had themselves a contract on a 2250 sq ft home in Simi Valley for $655,000, long story short, a glitch happened in the contract and a greedy seller queered the deal. In the interim they found a patio home in the same area (Wood Branch), 1250 sq ft for $2200 per month. Although their zeal to "buy" was still there so was some evidence that a serious housing melt down could be on the horizon, they are still renters but now at $2000 per month. THey could have been in a long line of homeowners that did everything right, but devistated by circumstance not of their making. They sought no "funny money mortgage" intended to put 10% down and were over qualified for the amount of loan they wanted. However, at last report that house has never sold and the "old catankerous couple" have lowered the price to 475k, and still can't sell. If you consider a 10% cost to market their "loss" would currently be over 200K and going lower. This could have been a case example of what I call the virally infected, those whose only device was a desire to experience the American dream. Now, it's just a matter of time before some lawyer finds a group of these to sue for damages. Damages you say? Someone has to be held accountable for the false inflation in housing and with the fudiciary responsibility lenders to account to depositers that they make loans to people that can actually pay money back, you get where I'm going.
Why FHA 235? Search history and find out in the 60's LBJ thought everyone should be able to own a home so they devised the 235 program $100 down mortgages (most builders advanced that). Do some research and other than funding limitations on the agency there could have been a similar event that is occuring today. I remember reading some years latter where in California they actually went in and had to bulldoze entire subdivisons (that's one way to create demand destruction).
Fast foward all these years latter and find all lending institutions participating in what essentially was a 235 program (making loans to those unable to repay) and you have the makings for a housing depression. The end is not near. In a normal housing "bubble" when the burst comes prices go down and the inventory is absorbed by new home owners able to afford housing at the new price. In this new age of lending to anyone that can sign an application in some cases (absolute fraud) they will never be able to reenter the market to buy that inventory. Kind of like a dog chasing his tail in a hole that keeps getting deeper and deeper with each turn.
2008-07-25 03:40:21
FHA 235 on steroids
E,
FHA 235 (unfortunately before my time!!) sounds like affordable housing at any cost, which is one of the reasons we are where we are. The truly sad thing, to me, is that that type of program is great for a certain type of borrower with good credit but not a ton of cash earning capabilities. These are often responsible families who are trying to play by the rules and make good financial decisions, moving up the old social ladder.
Unfortunately you have the program administered by the government -- say no more say no more say no more, in the words of Monty Python -- and it gets all messed up.
I worked in the mortgage business during the most vicious booming cycles and saw the worst of the worst. The loans that came across my desk were worse than anyone would believe happened on a large scale. Thankfully by the time I ended up seeing one of these things it was too far along in the process to stop (so I'm not wracked with guilt like mortgage brokers and appraisers should be), but as a result i saw an incredibly broad spectrum of pure garbage. Not worth the PDF it was printed on. Interestingly, and not without a touch of irony, the two firms who bought the worst of the worst no longer exist.
While the fraud was rampant, misinformation the norm and profits for the market obsene, it does take two to tango.
At some point, the persuit of the American Dream swallowed the Dream itself. The desire to be a homeowner, the feeling of entitlement became so great, we collectively forgot what a huge financial responsibility it is.
Just because the process is littered with brokers and appraisers who don't actually work for the borrower, there isn't any reason you and I should be absolved from making poor financial decisions.
Each of us is free to choose whether to buy a house or not. We must make that financial decision on our own. With risk comes reward, and buying a home is certainly not a riskless transaction. If the paperwork smells fishy, don't go near it.
Once someone takes the plunge, on some level, they must be responsible for their own actions. It's not like someone put a gun to their head and said they had to buy a house (well, Countrywide was notorious for delaying mortgage closings until moving day, then jacking up the rate, forcing the borrowe to sign or live out of the back of a truck until he could find another loan), renting is a perfectly viable option.
Regulators should be there to protect the integrity of the data we have so we can make informed decisions.
Appreciate the feedback!
Andrew
FHA 235 (unfortunately before my time!!) sounds like affordable housing at any cost, which is one of the reasons we are where we are. The truly sad thing, to me, is that that type of program is great for a certain type of borrower with good credit but not a ton of cash earning capabilities. These are often responsible families who are trying to play by the rules and make good financial decisions, moving up the old social ladder.
Unfortunately you have the program administered by the government -- say no more say no more say no more, in the words of Monty Python -- and it gets all messed up.
I worked in the mortgage business during the most vicious booming cycles and saw the worst of the worst. The loans that came across my desk were worse than anyone would believe happened on a large scale. Thankfully by the time I ended up seeing one of these things it was too far along in the process to stop (so I'm not wracked with guilt like mortgage brokers and appraisers should be), but as a result i saw an incredibly broad spectrum of pure garbage. Not worth the PDF it was printed on. Interestingly, and not without a touch of irony, the two firms who bought the worst of the worst no longer exist.
While the fraud was rampant, misinformation the norm and profits for the market obsene, it does take two to tango.
At some point, the persuit of the American Dream swallowed the Dream itself. The desire to be a homeowner, the feeling of entitlement became so great, we collectively forgot what a huge financial responsibility it is.
Just because the process is littered with brokers and appraisers who don't actually work for the borrower, there isn't any reason you and I should be absolved from making poor financial decisions.
Each of us is free to choose whether to buy a house or not. We must make that financial decision on our own. With risk comes reward, and buying a home is certainly not a riskless transaction. If the paperwork smells fishy, don't go near it.
Once someone takes the plunge, on some level, they must be responsible for their own actions. It's not like someone put a gun to their head and said they had to buy a house (well, Countrywide was notorious for delaying mortgage closings until moving day, then jacking up the rate, forcing the borrowe to sign or live out of the back of a truck until he could find another loan), renting is a perfectly viable option.
Regulators should be there to protect the integrity of the data we have so we can make informed decisions.
Appreciate the feedback!
Andrew
2008-07-25 14:21:51
If the government wants to help perhaps they should make home owners who are upside down extremely low rate loans similar to Student loans. For example if I owe 250,000 on a house that is now worth 185,000 The government could make a loan for the difference with a 2% loan rate. The 185,000 could be continued with the current lender at a fixed market rate. The 2% loan should follow the home owner even if he sells the home. This would allow the market to still be liquid but it would put the responsibilty where it belongs with the people who borrowed in order to buy the home in the first place.
I know the government isn't a bottomless pit of money but I believe this plan would provide the quickest recovery and in the end the government would recoup some of the money they are going to lose anyway.
I know the government isn't a bottomless pit of money but I believe this plan would provide the quickest recovery and in the end the government would recoup some of the money they are going to lose anyway.
2008-07-27 01:07:02
Brad, I like the way you think. The "gap" loan would follow the borrower and that would include speculators and "flippers" who never intended to live in the homes they bought. The 2% level is right at the Fed's own cost of money, but that would burden the transaction enough to make it a true loan. With Treasurie's run-away printing press, the repayment would result in a loss, but the government would only have themselves to blame. It also does a good job of slowing the rate of foreclosures, now and as the current crop of ARMs reset each year, the residents will have a mechanism to address the increase in interest charges, or to use the "gap loan" to buy down the overburden, and carry on life in their home with only a slightly pinched budget.
2008-07-27 01:19:38
Brad, I have always thought of ammunition as an investment, an investment in semiprecious metals. Brass cases, lead bullets, copper jackets, mercury fulminate, and nickel plating, all brought to the portfolio of Colt Investments. Whether you load a clip or a cylinder, your investments will always give a lot of bang for the buck.
2008-07-28 02:34:17
Walt- I assume you are talking about my thread in the Gold investment section. I was just giving the Gold boys a hard time I know precious metals are known to hold their value but I can't help but wondering just who do they think they will be trading gold with as civilization collapses! I heard Warren Buffet speak on this once before and I wish I could remember his quote because it was priceless.
Anyway It's always good to hear from a fellow investor in the ultimate hedge fund Colt!
Now on the more serious subject of the banking crises. I just found out that my bank First national Bank of Arizona went down on friday. I was quite disturbed as I have met the President and he seemed like a solid individual he was the kind of guy people liked to work for. The occasion I had for meeting him was he had a party at his son's Condo when the Big golf tournament was here in Scottsdale a year ago. His Bank had a private tent and we had a blast even though the golf was rained out.
Anyway I wish I could bounce my plan off someone that was involved in the Senate plan because I really think they are going about it the wrong way. Not that Senators are known for their Fiscal responsibility but I know if we could get a real numbers guy to look at this as opposed to what they are proposing on the hill he would probably side with me! Warren Buffet where are you we need your help!!! Im not asking for your money just your clout take my idea to monger get something that works and go T BOONE pickens on the airways!!!! Imagine if Warren claimed to have a solution and was willing to back it up you can bet the president and congress would listen.
Anyway It's always good to hear from a fellow investor in the ultimate hedge fund Colt!
Now on the more serious subject of the banking crises. I just found out that my bank First national Bank of Arizona went down on friday. I was quite disturbed as I have met the President and he seemed like a solid individual he was the kind of guy people liked to work for. The occasion I had for meeting him was he had a party at his son's Condo when the Big golf tournament was here in Scottsdale a year ago. His Bank had a private tent and we had a blast even though the golf was rained out.
Anyway I wish I could bounce my plan off someone that was involved in the Senate plan because I really think they are going about it the wrong way. Not that Senators are known for their Fiscal responsibility but I know if we could get a real numbers guy to look at this as opposed to what they are proposing on the hill he would probably side with me! Warren Buffet where are you we need your help!!! Im not asking for your money just your clout take my idea to monger get something that works and go T BOONE pickens on the airways!!!! Imagine if Warren claimed to have a solution and was willing to back it up you can bet the president and congress would listen.
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