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Reverse Mortgage: What the AARP Suit Means for You

Lita Epstein — 2011-03-14T17:02:00 00:00

Seniors who took reverse mortgages are being pushed into foreclosure by HUD, according to a lawsuit filed by the AARP. Are all seniors who took a reverse mortgage at risk? No, only those who decided to put only one spouse on the reverse mortgage.

Why would a couple decide to leave a spouse off the reverse mortgage? Peter Bell, president of CEO of the National Reverse Mortgage Loan Association, explained that there are two common reasons a spouse is left off a reverse mortgage deal:

1. One spouse is 62 and the other is younger than 62. In order to qualify for a reverse mortgage the younger spouse would have to quit-claim the deed over to the older spouse. All parties to a reverse mortgage must be 62 or older.
One spouse is considerably older than the other spouse. For example one spouse is 78 and the younger spouse is 68. To get the most cash out of the house the couple decides to quit claim the deed over to the older spouse.

When a couple does this, the younger spouse will have no rights to the house when the older spouse dies unless they decide to pay off the existing reverse mortgage in full. HUD made the rules for payoff more difficult in 2008 as part of an administrative change, Peter Bell said.

While a non-related third party can buy the home at market value after the person whose name on reverse mortgage and deed dies, a person related to the deceased homeowner must pay the full amount of reverse mortgage balance even if the house isn't worth that much. This change took place before the dramatic drop in house prices.

Since a reverse mortgage accrues interest from the day you take the loan until the day the owner or owners die, if a family member wants to take possession of the house, they must pay any balance due on the loan. Many reverse mortgages today were made during the boom years and more are owed on these mortgages than the house is actually worth.

As AARP claims in their case, "HUD reversed its policy so that surviving spouses (even if they

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are not on the loan) must pay the full loan balance to keep the home, regardless of the home's value. So if the home loses equity and the survivor cannot repay the full loan amount when their spouse dies, they face eviction from their home."

Bell believes that "those related to the deceased borrower should have the same rights as a third party who wants to buy the house at market price." He believes when the administrative change was made in 2008, it was made before the full extent of the housing crisis was known. He added, "HUD needs to revisit this decision."

He doesn't think there are a large percentage of people impacted by this ruling, since most reverse mortgages do include both spouses on the mortgage. But he said no one really knows the statistics of how many couples decide to put just one spouse on the deed.

Linda Sands, who is a loan specialist with Luxury Mortgage, said "most reverse mortgage specialists do discourage taking a loan with only one spouse on the mortgage and the deed" for exactly this reason. She said people considering a reverse mortgage must see a third party counselor and the counselors "do a good job" of reviewing the risks of taking a reverse mortgage, especially if one spouse will not be on a loan.

In the case filed in the Federal District Court for the District of Columbia by the AARP Foundation, there was a third situation bought to light. One senior losing her home had married the owner of the home after he had already taken a reverse mortgage.

Bell explained that even if one spouse is not initially on a reverse mortgage, if there is enough equity in the home one can refinance a reverse mortgage to protect both spouses. With the current drop in real estate prices, there may not be enough equity in a home so it's a risk you shouldn't plan to take.

If you have taken a reverse mortgage with only one spouse on the mortgage and the deed, make arrangements to talk with your reverse mortgage loan officer or with a HUD reverse mortgage counselor to see what your options are.

Lita Epstein has written more than 25 books including Working After Retirement for Dummies.

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Renting as a Way to Strengthen Your Credit Report

Lita Epstein — 2011-03-08T09:44:00 00:00

Your dream is to buy a house, but all you can afford to do now is rent. You're wondering if renting can actually help you attain your goal of owning your first home. The answer is a definite yes, if you use the time you rent to build up your credit report and improve your finances so you can qualify for the best mortgage rates.

Paying your rent on time every month certainly helps to prove to a mortgage banker that you will pay your bills on time, especially your mortgage. In today's market that's a big step forward.

You also can use your time as a renter to improve your chances of getting an even better deal by taking a number of key steps while you're renting:

Step 1: Repair Your Credit Report, if Necessary

Get a copy your credit report from each of the three credit reporting agencies, Equifax, Experian and TransUnion. Review all three reports and check for any errors, such as accounts that are not yours, late payments that are not accurate, credit limits that are not right or anything else that may be shown in error.

At the end of the report you'll get a page that allows you to report any errors. Follow the instructions for correcting any errors with each of the credit reporting agencies. Once the credit reporting agency has corrected the errors, it will send you a corrected report. Check it to be sure all the information is now correct. If not, repeat the process. This can be frustrating and take a few tries, but it will be worth it in the end if it improves your credit score and helps you get a better mortgage deal.

Fixing errors on your credit report can take months to do, so start work on it right away. The sooner you repair your credit report, the faster your credit score will start improving.

Step 2: Pay Down Debt Using a Round Robin Approach

If the primary reason you want to pay down debt is to improve your credit score, the best way to do that is with what's called a round robin approach. With this strategy, you start by paying down all your debt to about 30 percent of the credit limit on each of your credit cards. That will help improve your credit score. Then work on getting down to 20 percent of your credit limits and finally down to 10 percent of all your credit limits.

When all your cards have a balance that is about 10 percent of their credit limits, you will likely see your credit score jump dramatically. You can expect to see a jump between 30 and 70 points when you reach this goal. If you've had a history of late payments and now are paying all your cards on time, that alone could increase your credit score by 40 points.

Step 3: Start Saving Your Down Payment

As soon as you have enough cash to work with after starting to pay down your debt, begin saving for the down payment on your new home. While you can set a goal of just 3.5% of the mortgage value to get an FHA loan, you will get a lower interest rate and avoid mortgage insurance costs if you're able to save for a 20 percent down payment. On a $150,000 home, that would be $30,000 plus about $5,000 to $7,000 for closing costs.

If you don't want to wait, you can go ahead when you have enough saved for a 3.5% down payment on an FHA loan and plan to refinance into a less costly loan several years down the road. As house prices recover, you may find that the value of your house increases enough to help you reach your goal of a 20 percent down mortgage, which will give you access to the best interest rates. In that scenario, you also won't have to pay mortgage insurance premiums.

When you do start paying the mortgage each month, remember most of the money goes toward interest in the early years of a mortgage. If you can afford to put an extra $50 or $100 toward principal each month, that will help you build equity faster and get you closer to buying your dream home.

You may not be able to afford that dream home right now, but with interest rates low and houses more affordable in many areas, you can get a head start by paying down the mortgage on a smaller place first. Hopefully as the housing market recovers, you will see your equity grow. Add to that the money you pay toward the principal balance of your current mortgage and you may be able to afford your dream home five to ten years down the road.

The key is to use this time while you're renting to concentrate on getting your credit report in tip-top shape. That way, when you're ready to jump in to the housing market, you'll have access to the best rates possible.

Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Improving Your Credit Score.

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Fixing Your Credit After a Bankruptcy to Apply for a Mortgage

Lita Epstein — 2011-03-04T08:45:00 00:00

When I first started working with Charlie (not his real name) in 2005, his bankruptcy had just been discharged, meaning his remaining debt was cleared. His credit score was 526, and he didn't think he had a chance to even get a credit card.

Charlie's bankruptcy filing was needed after a difficult divorce and a medical emergency. In fact, a a majority of people who seek bankruptcy protection do so after a medical emergency, difficult divorce, job loss; or some combination of the three.

It didn't take long for him to realize that his financial life was not over. Within a couple of months, he'd gotten more than a dozen credit card and other loan offers. After the discharge of a Chapter 7 bankruptcy, you're considered an even better risk than someone who still has a mountain of debt because you can't file for bankruptcy for at least eight years. In reality, you can get a credit card immediately after your bankruptcy discharge.

Many people think, That's exactly what got me into trouble in the first place, so I'm going to avoid plastic in my life forever. That's a huge mistake if you want to buy a house. You need to rebuild your credit score, and the best way to do that is to show that you can manage credit wisely. A credit card history that shows you can pay your bills on-time every month is one of the best ways to rebuild that history.With my help, Charlie's credit score was back to 646 in about 2½ years, which is enough to qualify for an FHA and VA loan even in today's rough mortgage marketplace. When we checked his score in January 2011 it was back up to 727; now he can qualify for some of the best interest rates.

The key is to work on three pieces of the puzzle at the same time immediately after the bankruptcy: Clean up your credit report, begin rebuilding a positive credit history and start saving. Now that you don't have credit bills to pay any more, start putting as much of that money aside as you can to save toward the downpayment on your next home. The more money you can put down, the better you will look to a mortgage banker.

Fix Your Credit Report

The last thing you probably want to do after a bankruptcy is to review your credit report and see all the damage that you did. Get over it. The quicker you clean up that report, the faster you will be able to improve your credit score. You can get a credit report for free from each of the credit reporting agencies at AnnualCreditReport.com. By federal law you are entitled to one free report each year.

When you get that report, review it and note any errors you see on the report. For example, you may find accounts that are not yours or lenders who reported late payments that are not accurate. The credit reporting agency will send you instructions about how to make corrections. Follow those instructions carefully and make your corrections. Send any proof you have that the account reported is incorrect. The credit reporting agencies tend to believe your creditors rather than you, so the more proof you can send the better.

In addition to making corrections, also inform the credit reporting agency of your bankruptcy and note any accounts on that report that were discharged by the bankruptcy. The credit report agency will then note the bankruptcy, and that will start the clock for the debt to be removed from your credit history. Most negative credit accounts can stay on your report for seven years from the last date of activity. A Chapter 7 bankruptcy stays on your credit report for ten years.

But as a negative mark ages on your credit report its impact on your credit score becomes less and less significant, which is why you can rebuild your credit score even before the bankruptcy drops off.

You may find that you have to go through the correction process several times. Each time the credit reporting agency fixes a report, they will send you a corrected copy. Check it again for any errors and report any remaining errors until your credit report is accurate and all your discharged accounts are noted.

Rebuild Your Credit History

While you're working with the credit reporting agencies to clean up your credit report, you should also be working on rebuilding your credit history by opening one or two credit accounts to begin positive reporting on your credit report. Each time you pay a bill on time that will be a positive mark and will help to minimize the negative marks.

You'll likely have to start with a secured credit card. These cards usually require an annual fee and charge higher interest rates. While they're not the best deal out there, they may be your only choice right after a bankruptcy. After about six to 12 months of using a secured credit card on time, you should be able to get an unsecured card with better terms.

You also may be able to get a retail credit card. Don't go overboard with getting new credit now that you can. Stick to one or two credit accounts to show you can use credit wisely and pay it on time.

Monitor Your Credit Score

As you're rebuilding your credit score, you may want to monitor your progress. If your score continues to go up, you're on the right track. But if you find that your score goes down in any quarter, think about your credit activities. Did you charge a large item? Did you open a new account? That way you'll learn what does positively and negatively impact your credit score so you can be sure you have the best score before applying for that mortgage in the future.

Six months before applying for a mortgage, don't take on any new debt and risk ruining all the work you did to rebuild your credit score. Keep your credit accounts active but your balances low to get the best credit score.

Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Personal Bankruptcy and The Complete Idiot's Guide to Improving Your Credit Score.

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Cheap Mortgage Rates: Don't Miss Out

Lita Epstein — 2011-02-15T17:30:00 00:00

With cheap mortgage rates topping 5 percent for the first time since April 2010, it's time to start getting serious if you're thinking of buying a home. While rates are still historically low, as the government begins to make decisions about what to do with Fannie Mae and Freddie Mac, you can be certain of one thing -- mortgage interest rates will go up.

Mortgage rates hit what will likely be their low in October 2010, when the average rate was just 4.2 percent. This week average mortgage rates are at 5.2 percent -- a full percentage point higher. What will that mean for a $200,000 mortgage? Your mortgage principal and interest payment will be about $110 per month higher today than it would have been if you bought the house in October, when mortgage rates were 1 percent lower.

You may think you're just not ready to buy because house prices are still falling in your area. That's true for most areas of the country, but you need to ask yourself, is it better to risk that your house may fall a bit in price than to risk mortgages jumping too high for you to be able to afford to buy at all?
Those who took advantage of the 4.2 percent interest rates will save about $40,000 in interest costs over the life of a 30-year mortgage than someone who buys at today's 5.2 percent rate. During that 30 year period the home price will definitely increase from what they bought the house f

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or in October 2010. Even if the price falls a bit more in 2011, long term they will likely see a profit in their home plus save all that money that would have gone to interest payments had they waited just four months.

Even if you missed out on that savings, we're still looking at mortgage rates that are historically cheap. So don't let the recent rise keep you out of the housing market if your dream is to own a home.

You may wonder how high rates can go. Many people forget that just about two and a half years ago 30-year mortgage rates were 6.48 percent in August 2008. That's 1.2 percent higher than today and that's when Fannie and Freddie were actively buying mortgages. What happens when they slow their purchases and you have to depend on the private mortgage marketplace? Right now about 90 percent of mortgages are being bought by Fannie, Freddie or by the government through FHA or the VA.

The highest 30-year mortgage rate we've seen in the 2000s was 8.52 percent in May 2000. Could that happen again? Possibly, especially when the government cuts back on guaranteeing mortgages. The private mortgage market will prevail and all experts agree without a government guarantee 30-year mortgages can be a risky business. You may wonder how high rates can go. The historical high of 17.60 percent was in February 1982.

Some people are already choosing adjustable rate mortgages (ARMs) as fixed-rate mortgage rates rise. If you're a sophisticated money manager that could be a good choice for you, but remember many of the people who ended up in foreclosure did so when their ARM payment made their monthly mortgage payment unaffordable. So be sure you understand the full implications of any ARM before choosing that option.

If you are thinking of buying a home, do so now before interest rates make your dream unaffordable.

Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Improving Your Credit Score and The 250 Questions Everyone Should Ask About Buying Foreclosures.

These AOL Real Estate guides can help, no matter whether you choose to buy or sell:

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Homebuyer Tax Credit Bills Coming Due in 2011

Lita Epstein — 2011-02-15T13:41:00 00:00

Filed under: News

If you took advantage of the first time homebuyer tax credit in 2008, it's time to start repaying this interest -ree loan when you file your 2010 tax return by April 2011. But, if you used the homebuyer tax credits in 2009 or 2010, you won't ever have to repay the money unless you sell or otherwise dispose of your home during the first 36 months you own that home.

That's right: Only first-time homebuyers who used the tax credit in 2008 have to start repaying their tax credits. You'll have to repay the money over a 15-year payment when you file your tax returns starting with your 2010 return and continuing until 2024.

How do you figure out how much to pay? It's a rather simple formula: Divide the amount of the tax credit you claimed by 15 and add that amount to your tax bill. For example, if you claimed a $7,500 tax credit divide that by 15 and you get $500. That's how much you'll need to pay each year. You'll need to file Form 5405, "First-Time Homebuyer Credit and Repayment of the Credit," each year you repay the money.

You may be wondering if there is any way to get around this repayment. There are some exceptions to the rules. You may not have to repay the full credit if:

o. If you transfer your home as part of a divorce settlement, your former spouse who keeps the

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home is responsible for making the rest of the repayments and you are not responsible for making any remaining repayments.
o. If your home is destroyed, condemned or disposed of under threat of condemnation and you purchase a replacement home within two years, you continue to repay the credit in installments each year.
o. If you lose your home in a foreclosure sale, you repay the credit only up to the amount of the gain.
o. If you die, no further repayments are due. If you claimed the credit on a joint return, your surviving spouse pays only his or her half of the remaining credit repayment amount.
o. If you sell your main home to an unrelated person or entity, you repay the credit only up to the amount of gain, if any, on the sale.

If you got the homebuyer tax credit and sell your home, you may need to repay it even if you claimed the tax credit in 2009 and 2010. If you claimed the credit in 2009 or 2010, you're only on the hook for possible repayment if the home you purchased stops being your primary residence or main home during the first 36 months that you own that home. Your home stops being your main home when:

o. You sell the home.
o. You transfer the home to a spouse or former spouse in a divorce settlement.
o. Your home is destroyed, condemned or disposed of under threat of condemnation and you do not purchase or rebuild a replacement home within two years.
o. You convert the entire home to a rental or business property.
o. You converted the home to a vacation or second home.
o. You no longer live in the home for the greater number of nights in a year.
o. You lose your home in foreclosure.
o. You die.

There are certain exceptions, but generally, if the home is no longer your main home. you must repay the entire remaining part of the credit on your next tax return. The IRS calls this "acceleration of recapture."

If you took advantage of the homebuyer tax credit in 2008, 2009 or 2010, you can expect a letter from the IRS explaining your obligations. Remember to discuss your tax options with your tax adviser before your file your taxes in 2011.

Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Improving Your Credit Score and The Complete Idiot's Guide to Personal Bankruptcy.

These AOL Real Estate guides can help, no matter whether you choose to buy or sell:

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Million-Dollar Home Defaults: Just What the Doctor Ordered

Lita Epstein — 2011-02-04T15:23:00 00:00

Filed under: News,Economy,Financing,Foreclosures

When Junaid Nazeer's wife, Neelofur, lost her job as a pathologist for a private medical lab her income plummeted from $400,000 to just about one-fifth of that. Now Neelofur is working through a fellowship to be a pathologist in a hospital environment. In November 2010, six months after she lost her job, the Chicago couple realized they could no longer afford the mortgage payments and made the decision to strategically default on their mortgage. They had been draining their savings to try to keep up.

"We were putting money into something which was not going to get us anywhere," Junaid Nazeer said. The Nazeers' house about 25 miles north of Chicago had dropped in value from about $1.4 million when they had it built two years ago to about $850,000 today. "We tried to work with Bank of America, but they would not consider a principal reduction. While our conscious did not permit us to default on a loan, people we knew convinced us this was a business decision."

Today the Nazeers are clients of You Walk Away, which is helping them through the process of strategic default. They are part of a growing crowd of people who paid more than $1 million for their homes and now deciding to walk away. "Our clients include celebrities, pro hockey players and pro-ball players," says You Walk Away CEO Jon Maddux.

Maddux finds that high-end clients typically wait longer for default notices and "the process moves at a much slower pace." Banks don't want to pay the "higher taxes, maintenance and upkeep to

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take back more expensive homes," he added. So people who default with a higher-priced home typically can live in their homes without paying mortgages for a longer time period.

Based on experiences of others the Nazeers know, they expect to be in their home for at least 18 more months. By then his wife will have finished her internship. They will move sooner than that if his wife gets her next job in another location. They are waiting for her to find a job before moving. Nazeer is a project manager and can base himself anywhere in the country. He travels when needed to job sites or works remotely.

RealtyTrac has found the number of defaults on million dollar plus homes has jumped dramatically in the past few years. In 2007 just 16,748 homeowners with homes worth over $1 million had received some type of foreclosure notice. By 2009, that number had jumped to 73,272. In 2010, the number will likely be about the same as 2009. By October 2010, the total was already 57,459. In 2007, high-end defaults represented only 1.21 percent of all defaults. But by the end of 2009 that number doubled to 2.53 percent. That's still a small percentage of the total defaults in 2009 of 3,170,915.

CBS reported that one in seven homeowners with loans over $1 million are facing foreclosure, while the number among homeowners with lower priced homes is one in 12. Maddux was not surprised to hear that number and expects the turnaround to take even longer at the top. He lives in the Nashville area where he says Realtors have told him there is currently a 20-year supply of high-end homes on the market.

Maddux thinks the high end market took longer to show problems because people had more in savings to pay the bills before defaulting. He says, "reality is just now setting in that their personal salary setbacks are permanent." Most are having to take jobs at much lower salaries than they had before.

Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Personal Bankruptcy and The Complete Idiot's Guide to Improving Your Credit Score.

For more on mortgages and related topics see these AOL Real Estate guides:

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Boosting a Bad Credit Score to Buy a House

Lita Epstein — 2011-01-28T14:24:00 00:00

Heather and her husband got caught up in the neverending downward spiral of taking payday loans to pay off payday loans. Each time they got a paycheck they had to use the check to pay off the interest on those loans and then didn't have enough to pay their utility and other bills. Finally, they realized they were in over their heads and filed for Chapter 13 bankruptcy in 2008.

They're nearing the end of the bankruptcy, which will be completed by December, and wanted to buy a house. "We wanted to do what we needed to do to improve our credit score so we could buy a house," Heather said. They worked with specialists at Flagship Financial to improve their credit history and boost their score, so they could buy that house.

When they started working on their credit score in June 2010, Heather's was 575 and her husband's was 590. They were advised to take several steps to improve that score which needed to be at least 640 before they could get an FHA loan. The most important thing was to develop a budget. "If you don't have a budget then you're going to fail," Heather said.

They were also told they needed to get a secured credit card so they could show a credit history of paying their bills on time. At first they made the mistake of paying the bill even before the credit card statement was out. But, Heather explained that didn't help because a zero balance was reported to the credit reporting agency. So they changed tactics and now keep about a 30 percent balance on that card each month and pay if off when they get bill. They don't allow the final bill to be reported to the credit agency to be more than 30 percent of their available credit, so they will make a payment before the statement closes if the bill will show a higher balance.

They also made sure to pay bills on time, such as the electric bill, phone bill and cable bill, so they have a long history of on-time payments. In January 2011, Heather's credit score jumped to 660 and her husband's to 700. They now have the credit scores they need and will be closing on a house by the end of January.

Heather and her husband made some very common credit mistakes. Getting caught up in pay day loans was the biggest, but that led to not having the money to pay other bills on time. You must be able to show that you pay your bills on-time for at least 12 months without any late payments to get a mortgage today, Eric Kandell of Flagship Financial explained. That includes something as low as a $15 AT&T bill. One missed payment in the past 12 months will kill your application for a mortgage.

Here are some other credit mistakes you must avoid to maintain a good credit score and get a mortgage:

o.Don't apply for any new credit cards in the six months before applying for a mortgage. Each time you apply for a credit card it reduces your credit score by 10 to 20 points and it can take six months to get those points back.

o.Don't co-sign on a loan for anyone, even a child, in the six months before applying for a mortgage. If you do co-sign and that person misses a payment, the missed payment will show up on your credit report. So if you have co-signed for a loan in the past be sure the payments are being made on time.

o.Don't close any credit cards. Closing a credit card will reduce the amount of credit you have available and increase your credit utilization ratio. To get the best credit scores your credit utilization ratio should be between 10 percent and 20 percent. So if you have $10,000 worth of credit, $2,000 would be a 20 percent utilization ratio (2000/10,000). If you have two credit cards, each with a $5,000 line to get that $10,000 worth of credit and you cancel one card, you'll have only $5,000 available credit and your credit utilization ratio would jump up to 40 percent. Your credit score would drop dramatically and you probably would not be able to get a mortgage.

o.Debt settlement can kill your chance of getting a mortgage for years. Don't believe anyone who tells you debt settlement will help improve your financial situation so you can get a mortgage.

o.Don't buy a new car before buying a house. If you're planning to buy a house, do that purchase first. Many people can't qualify for a mortgage with a new car payment. Their debt levels are too high, so get the house first.

o.Don't shop for credit just before applying for a loan. Yes you want to find the best interest rate, but each time you shop for credit the creditor checks your credit score. Do your research but avoid having your credit score pulled until you're ready to apply.

o.Don't sign up for a 10 percent discount that requires you to open a new store credit card. The store will check your credit and that inquiry will lower your credit score.

o.Don't buy everything with cash. You need to show to lenders that you can pay your bills on time. People who buy everything with cash don't have a credit history that can be used to build a good credit score.One of the biggest mistakes people made during the recent downturn was to work with someone to try to get a home loan modification. To get help they had to stop paying the mortgage and now their credit is ruined. Unfortunately if you're in that boat there isn't much help for you out there. You will need to wait several years to rebuild your credit score, but it can be done by paying your bills on time and reducing your debt.

Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Personal Bankruptcy and The Complete Idiot's Guide to Improving Your Credit Score.

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Fannie Mae, Freddie Mac Stick Taxpayers With Legal Bill

Lita Epstein — 2011-01-25T17:14:00 00:00

Filed under: News,Economy

Since the government took over Fannie Mae and Freddie Mac, taxpayers have been on the hook for $410.7 million in legal expenses, according to Rep. Randy Neugebauer (R-TX), chairman of the oversight subcommittee. Of those expenses $162.4 million have been spent defending the two entities and their former executives for securities-related lawsuits and indemnification. These numbers were provided to Neugebauer by the Federal Housing Finance Agency, after he requested a report on legal fees.

Now that Neugebauer runs the oversight subcommittee he plans to investigate further. He thinks a lot of questions need to be answered, such as "Are the conservators looking out for the taxpayers? Do they have the right tools and structure to do so?"

Neugebauer told AOL Real Estate he also plans to investigate whether other activities occurring within Fannie Mae and Freddie Mac "diminish the taxpayers' potential recovery and minimize capital infusion. This drain on the American taxpayer must be plugged as quickly as possible.
The Administration's report on what to do with Fannie and Freddie is expected in early February and the decisions about what to do with the mortgage giants will likely be made later this year by the Congress.

The current legal problem stem from accounting problems at both mortgage giants. Freddie's problems came to light in 2003 when it had to restate income from 2000 to 2002, which had been understated by $5 billion. Fannie first reported its problems in 2004 when it reported it had overstated its income by $6.3 billion.

The Office of Federal Housing Enterprise and Oversight sued three former executives of Fannie Mae: Franklin D. Raines, former CEO; Timothy Howard, former CFO; and Leanne Spencer, former controller. The office did settle with these executives, who returned $31.4 million in compensation, but then lawsuits were filed by investors who lost money when the accounting problems were reported.

Now the taxpayers are footing the bill to defend these executives, as well as defend the two mortgage giants. That's because the employment contracts protect executives when sued defending such lawsuits. Some question whether the government should continue paying the bills since the executives breached their duty of loyalty to the company and its stockholders. But, so far, the FHFA has taken the position that following applicable state and federal law in paying these fees.

The bulk of these fees are going toward toward defending a lawsuit centered on accounting improprieties at Fannie

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Mae in 2004. This shareholder class action suit was brought by the Ohio Public Employees Retirement System and the State Teachers Retirement System of Ohio. A trial date has not been set and depositions still need to be taken, so the legal fees will continue to mount unless the government works out some type of settlement to end the suit. Either way the taxpayers will likely pay out millions more in either legal fees or settlement costs.

Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies.

For more on real estate brokers and related topics see these AOL Real Estate guides:

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'Mortgage Fraud Factory' Whirs Down With 10 Arrests

Lita Epstein — 2011-01-24T14:14:00 00:00

Filed under: News,Financing,Foreclosures

Federal authorities called Crisp & Cole Real Estate a "full-service mortgage fraud factory" at a press conference on Friday when the 56-count indictment was unsealed. Indeed, people will spend years recovering from the financial damage caused by Crisp & Cole Real Estate, whose owners were arrested Thursday on charges of fraud, money-laundering and conspiracy.

The indictment alleges conspiracy to commit bank, mail and wire fraud and to launder money from about 2004 to roughly 2007.

Charges vary for each of the ten people named including principals David Crisp (pictured left) and Carl Cole. Also arrested on Thursday were former employees Jayson Costa, Julie Farmer, Sneha Mohammadi, Mike Munoz, Robinson Nguyen and Jeriel Salinas. Cole's son Caleb Cole and Crisp's wife, Jennifer, were also indicted.

"Many people in Bakersfield [California] have lost their home as a result of this fraud, and many of them will spend years trying to repair the damage that has been done to their credit, as well as their personal lives," FBI assistant special agent Manuel Alvarez said in a press conference on Friday.

The case started when the FBI raided 13 sites related to Crisp & Cole in September 2007. The firm allegedly helped falsify documents for mortgage loan applications. Houses were bought and

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sold at inflated prices, sometimes multiple times over just a few weeks, according to the indictment. The scheme involved straw buyers and borrowers who lied about income, jobs and intended use of the property. In some cases loans defaulted immediately. In other cases payments were made just long enough for the property to be flipped again.

Prosecutors estimate these crimes cost the mortgage industry $20 million, but other real estate professionals in the area think the number is closer to $39.5 million. Property appraiser Gary Crabtree told the Bakersfield Californian, "I feel bad for the people in North Country Meadows who bought on a rent to own basis only to lose the house." He added that "innocent homebuyers who purchased properties based on these inflated valuations" were also victims. "People vastly overpaid for their homes, and then lost tremendous equity after those fraudulent buys were foreclosed on."

Five Crisp & Cole employees already pleaded guilty, with the most recent plea deal announced in July 2010 when Christopher Stovall admitted that from July 2005 to August 2006 he and others at Crisp & Cole and Tower Lending (mortgage broker affiliated with Crisp & Cole) defrauded mortgage lenders including Long Beach Mortgage Company, Kirkwood Financial Corporation, Wells Fargo Home Mortgage, SunTrust Mortgage and Fremont Investment and Loan. He admitted they had submitted materially false and fraudulent statements in mortgage loan applications and related documents to get loans for straw buyers and others purchasing real estate. Four others who accepted plea deals include Kevin and Leslie Sluga, Megan Balod and Jerald Teixeira.

Sentencing for those who accepted plea deals has not been set. The sentencing had been delayed until April so the judge could factor in their cooperation in the investigation. Sentencing could be delayed again depending on the resolution of these latest indictments. Under federal sentencing guideline the penalty can be as high as 30 years in prison and a $1 million fine for some conspiracy charges. The maximum is 10 years and a $500,000 fine for money laundering.

Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Personal Bankruptcy and The Complete Idiot's Guide to Improving Your Credit Score.

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Communities Fight Back After Banks Walk Away

Lita Epstein — 2011-01-20T13:57:00 00:00

Filed under: News,Economy,Foreclosures

People aren't the only ones walking away from underwater mortgages. Banks are walking away, too. Communities are fighting back to regain control of their neighborhoods. Some by forcing banks to terminate mortgages. Others by purchasing the homes abandoned by banks, fixing them up then renting or selling them.

A recent study done by the General Accounting Office found that banks charged off 46,000 properties between January 2008 and March 2010 with 60 percent of these charge-offs happening before even filing for a foreclosure. Then the banks just abandon the properties. These numbers are probably low. So what are communities doing to take back control of these abandoned properties?

The San Bernardino Economic Development Authority found an innovative way to get control. They have partnered with the Inland Empire Concerned African-American churches to begin purchasing foreclosed homes. A spokesperson for the authority said, "In a city with a population of approximately 200,000, it has been estimated there are at least 5,000 vacant foreclosed homes," but she thinks its "probably much higher than that."

The church group is a group of pastors in San Bernardino, Calif., that has a lot of past experience managing construction projects. It's one of at least a dozen groups working the with

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city's Community Housing Development Organization to fix up and make homes livable. When the renovation is done they rent or sell the property to someone who needs a home.

In Florida, the Association Law Group is helping homeowners associations take back control of abandoned homes by forcing the banks to put up or shut up. They use a tactic called the Mortgage Terminator to get banks to foreclose on the property or step out of the way by clearing the title to the property. Then the homeowners association forecloses based on a lien for past HOA fees, fixes up the property and sells or rents it.

Ben Solomon's first successful case using the Mortgage Terminator involved a property financed by Citibank. The association that was involved (which is located in South Florida) foreclosed on the property for past-due HOA fees in 2007, after two years of nonpayment of fees. Citibank never acted, and the mortgage that it held prevented the association from selling the property.

Fees continued to build until the association filed the first "mortgage terminator" case in 2010. In the summer, the court confirmed this strategy, wiped out the mortgage lien and gave the association clear title to be able to sell the property and recoup its lost fees. Since that case he's won cases against Wells Fargo and Deutsche bank. He's got about dozen more winding their way through the courts.

Solomon said there are about 110,000 foreclosure cases pending in Miami Dade County. Of those cases, Peter Ranch of the RealtyStore said there are only 3,855 bank-owned properties listed for sale and another 10,526 not actively listed. That means in Miami Dade County alone there are almost 100,000 homes whose fate is yet unknown.

Solomon says, "The banks are in no rush to foreclose and take title because that means they then must pay the HOA or condo fees." He explained that by Florida law, banks only have to pay a maximum of 12 months or 1 percent of the mortgage in back-due fees when they take possession in a foreclosure, but after they take possession they are then responsible for all fees. For units sitting vacant for two years or more, it's cheaper for the bank not to take title. So instead, banks have been dragging their feet and not taking title on property long after the owners, who were investors in most cases, abandoned the property.

Fannie Mae is trying to increase the use of short sales and get some of the properties back into the hands of home buyers by developing a Short Sale Assistance Desk with the help of Multiple Listing Services. Right now that project is in its infancy and only operating in several regions, Janis Smith from Fannie Mae said. When it's fully operational it will help real estate professionals with "post-offer short sale issues that relate to servicer responsiveness, the existence of a second lien, or issues involving mortgage insurance."

According the the fact sheet from Fannie Mae the Short Sale Assistance Desk will "serve as a backstop to empower real estate professionals in those cases where the normal approval channel has bogged down, and where Fannie Mae's intervention may serve as a catalyst for progress towards a resolution."

Adam Kruse, a Realtor at Hermann London in St. Louis told AOL Real Estate that "we have had banks just walk away from properties and leave them sitting rotting for over a year at a time." He just went to a meeting about this new Fannie Mae program and he's hoping it will help to get short sales moving. He said right now Realtors are "steering buyers away from short sales" because it's so difficult to get them closed.

Maybe now that communities, Realtors and lawyers are finding ways to get banks to act or get out of the way, we'll start seeing some real progress toward recovery in the housing market.

Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Personal Bankruptcy and The Complete Idiot's Guide to Improving Your Credit Score.

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Why Canada Doesn't Have a Foreclosure Problem

Lita Epstein — 2011-01-18T11:40:00 00:00

Filed under: Design,News,Financing,Foreclosures

Why are Canada's homeowners less likely to face foreclosure? Fewer than 1 percent of Canadian mortgages are in arrears, compared to the 2.9 million homeowners that received foreclosure notices in the U.S. in 2010.

You might think it's because there are a lot fewer Canadians, and you'd be right on that score. Canada's population is just 34.3 million, while the U.S. population now exceeds 307 million. But foreclosure rates are as high as 20 percent in the hardest hit states, so population alone does not explain the difference.

Canada avoided the housing bubble that both the U.S. and the U.K. faced. That's thanks to the more conservative banking practices in Canada. Canada has stricter underwriting standards, and the banks must set aside more money toward potential losses if the market takes a downward turn. Also, Canada has no secondary market for mortgages, like Fannie Mae and Freddie Mac, which means banks can't sell off their risky mortgages, so they don't make them in the first place.

Not only are the banks more conservative about lending, but private mortgage insurers have more control over mortgage approval. Any Canadian who puts less than 20 percent down on the house must pay the full cost of mortgage insurance upfront; and the mortgage insurance company has the authority to approve or reject the property appraisal. This gives banks and buyers a strong incentive to get realistic property appraisals.

When people apply for a mortgage in Canada, there are some significant differences to the type of mortgage they'll get. Most Canadian mortgages are for 25 years, and the interest rate readjusts to the current interest rate every five years. This encourages Canadians to pay off their mortgage faster. There are also substantial prepayment penalties that discourage refinancing, especially to tap equity.

Another big difference is that Canadians don't get a tax deduction for mortgage interest, so they don't have an incentive to keep paying on a mortgage. The U.S. tax incentive for mortgages may soon be reduced as part of the deficit reduction efforts to be considered in this Congress.

If you have a mortgage in Canada, you can't just walk away. Canada has full recourse on mortgages, which means you must pay off the mortgage even if the bank forecloses on your home. If the bank forecloses and the house is

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worth less than the mortgage, the bank can sue for a deficiency judgment. The bank can then attach a lien to other assets and garnish future wages. Some states in the U.S. are full-recourse states, but others, such as California, are not.

Canada does not encourage homeownership for low-income households. Instead the Canadian government provides public funding for low-income rental housing. So you won't find subprime lending in Canada.

In reality the Canadian system is not that different than the home financing rules that used to be in place before the speculative housing market that led to the U.S. housing bubble. Prior to the boom years, banks required information to prove income and held to strict income standards. Banks also held appraisers to higher scrutiny. That's what Canadian banks continued to do, while the U.S. and U.K. lowered their underwriting standards.

Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Personal Bankruptcy and The Complete Idiot's Guide to Improving Your Credit Score.

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Another Great Depression for Housing?

Lita Epstein — 2011-01-12T16:48:00 00:00

Filed under: News,Buying,Economy,Financing

Fred Stevens, a policeman in Ohio, saw his house value drop from a peak of $103,000 when he refinanced in 2006 to a current low of less than $40,000. "I could have walked away, but wanted to do the right thing." November 2010 housing prices declined more in the current market than during the Great Depression, according to Zillow.

Whether prices have surpassed the price drop or not, individuals are certainly feeling the pain.

Stevens has been trying for the last two years to work out a short sale agreement with the help of American Homeowner Preservation (AHP), but the bank won't agree to the terms. Stevens faced financial difficulties following a divorce, loss of parent and other medical issues.

The bank did agree to a short sale of $43,000 less $8,950 for repairs plus other closing costs and back taxes or a net price of just $28,883, but it refuses to agree to a key part of AHP's program, according to Jorge Newbery, Director of AHP. AHP finds an investor to buy the home and signs a lease with option to buy with the homeowner.

In Stevens's case the bank will not sign a waiver to allow the Ohio policeman to stay in his home. Newbery says the bank will actually net less money than the $28,883 because it will now face additional charges to evict Stevens plus once Stevens is out the bank will have to pay to secure the property and still likely face theft and vandalism.

The home went to a sheriff's auction on Friday, January 7 and there were no takers. So the bank got the home. A confirmation hearing is scheduled within two weeks and Stevens could be evicted within five weeks. AHP is still

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working with Stevens and hoping to save his home with legal help. There are some legal questions regarding chain of title that could enable AHP to negotiate a settlement and help Stevens keep his home of 14 years where he lives with his two daughters and granddaughter.

Do other experts agree that the housing crisis has reached Great Depression proportions? For economist Robert Shiller, it's old news. He said that would happen back in 2008, but others think the housing markets are too different to make an apples to apples comparison.

While Shiller thinks we're experiencing a downturn as bad as the Great Depression, Brian Coester, CEO of the Coester Appraisal Group, says it's not an easy comparison. "The government didn't start keeping track of home values until the 1950s, so it's hard to say whether or not depreciation is similar." His estimate is that home prices were in the average range of $8,000 to $11,000 (he can't be sure).

Coester also points out that home financing was much different in the 1920s and 1930s. People had mortgages for just four or five years. Only adjustable interest rates were available and most mortgages were interest only with a balloon payment. The 30-year fixed-rate mortgage was not available during the Great Depression. That was created by the Federal Housing Administration after the Depression.

One solution that was available to fill all the vacant homes after the Great Depression may not be used today. The vacant homes were given to troops returning from World War II in order to help stabilize the housing market. Instead banks are refusing to work with creative programs like AHP's to try to keep homes occupied even by civil servants who serve the public like Fred Stevens.

Jonathan Miller, an analyst for the MRIS/RBI thinks the numbers for the real estate market this year show "artificial highs" and "artificial lows," primarily because of the ups and downs of the market in 2009 and 2010 caused by the tax credits. People were pushed to purchase homes to meet the tax credit deadlines earlier than they might have done so. So prices started to jump up as the demand increased and then drop again as the demand slacked off. He thinks we'll see a more normal pattern in 2011 without the artificial stimulus of tax credits.

He insists "there is no national housing market" and thinks any attempt to correlate today's market with that of the Great Depression can't be done. Real estate is local. Some markets, like the metro DC market, are going up, while others are still falling.

Lita Epstein has written more than 25 books including The 250 Questions Everyone Should Ask About Buying Foreclosures and The Complete Idiot's Guide to Personal Bankruptcy.

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Credit Scores for Home Buyers in 2011

Lita Epstein — 2011-01-07T07:54:00 00:00

Filed under: Credit

Consumer lending is still tight, and your credit score will still be a major factor in 2011 if you want to get the best mortgage interest rates. Even if you don't have a top score, you may still be able to get a government-backed loan, such as an FHA, VA or USDA, at a decent rate.

To get the best rate on the market, you'll need to have a FICO credit score of at least 760. But if your credit score is between 700 and 759, your interest rate will be just 0.2 percent higher. That means your mortgage payment on a $200,000 loan will be about $20 more per month. You'll pay about $10,000 more over the life of the loan on a 30-year fixed-rate mortgage at about 5.06 percent. The lowest interest rate for top scorers is 4.86 percent this week.

If your credit score is between 680 and 699, you can still probably find a bank that will consider you for a mortgage, but you may be able to find a better rate by applying for an FHA, VA or USDA loan. Your best best is to work with an independent mortgage broker who is not tied to a particular bank; that way the broker can find you the bank that will offer you the best deal depending on your credit score.
If your credit score is as low as 620, you may still be able to find a lender that will offer you a government-backed loan, but you'll have to do some searching. Most banks will only offer an FHA, VA or USDA loan to people with credit scores of at least 640, but some smaller banks will consider applications at 620.

Even though FHA's official rule is that you can qualify for a 3.5 percent down mortgage with a credit score as low as 580, banks are not offering mortgages to people with credit scores that low. If your credit score is below 620 you'll need to work on increasing your score first, as well as save more cash. If you're able to put down more than 20 percent, you may be able to find a bank that will offer you a mortgage.

So what should you do to improve your credit before applying for a mortgage?

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Step 1: Check your credit report.

Your first step should be to get your credit reports from all three credit bureaus (Equifax, Experian and Transunion). You can order them for free at the government-run website Annual Credit Report.com. This is the only website that offers free credit reports with no strings. (Other sites might offer you a free credit report but require you to sign up for monthly services.)

Step 2: Challenge any errors on your report.

When you get your report, if you see any errors follow the instructions sent with the report for correcting errors. The credit reporting agency has 60 days to respond to you and will send a corrected report. If it's still not correct, be persistent and send another letter disputing the report. You may find you need to dispute reports several times before they are correct, but it's worth the effort to improve your score.

Step 3: Reduce credit card debt.

If you're carrying large balances on your credit cards, pay them down. To get the best credit score you need a credit utilization ratio of 10 percent to 20 percent. You can calculate the ratio by dividing your total outstanding debt by your total available credit. For example if you have $2,000 of total debt on two credits cards that each has a $5,000 credit limit, your credit ratio would be 20 percent (2,000/10,000).

Step 4: Monitor your credit score.

While you're working through the process of correcting your credit reports and paying down your debt, you can check what's happening to your score for free at CreditKarma.com.

Step 5: Order your credit scores.

Once your report is accurate, you've paid down your debt and you think you're ready to apply for a mortgage, order your credit scores at myFICO.com. That way you will see what your potential lenders see. if your score is over 640, most banks will approve a VA or FHA loan. If it's below 640, you'll need the help of a specialized broker. If your score is over 680 you'll be able to consider both government-backed loans and private loans. Look at the numbers and see which one makes the most financial sense given your situation.

If your scores are too low, you may want to see if a parent or other family member will sign as nonoccupant co-signer. If you do plan to work with a co-signer, be sure to inform the broker that up front so he can steer you to the lenders that will approve a loan with a co-signer.

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Why MERS Is Center of Foreclosure Mess

Lita Epstein — 2011-01-06T12:59:00 00:00

Filed under: News,Buying,Economy,Financing

News stories placing the Mortgage Electronic Registration Systems (MERS) at the center of the foreclosure storm make MERS the villain in this financial crises. While it's true MERS does enable foreclosures, the problem is a lot bigger than the electronic mess at MERS.

Courts in some states are refusing to foreclose on homes because of the lack of paperwork to prove who actually holds title to the property.

For example, as early as June 2009 the Missouri Court of Appeals ruled that MERS lacked the authority to assign a mortgage from one servicer to another. Since the transfer has no force, the court ruled, the owner of loan could not pursue the delinquent borrower. Thousands of more cases involving MERS and its rights are making their way through the courts.

So what is MERS? MERS is a huge electronic database that tracks more than 60 percent of the residential mortgages in the U.S.

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with a registry of 67 million mortgages on file. Its staff consists of just 45 people in Reston, Va. Yet the company is listed in local land records as the mortgage holder of these 67 million mortgages.

How do 45 people manage millions of foreclosures?

They don't. In trying to come up with a solution, MERS authorized 22,000 mortgage servicers, debt collectors and foreclosure law firms to identify themselves in cases filed with the courts as "vice president" or "assistant secretary" of MERS. But what gave MERS the right to do that and will it stand up in the courts? In many states, banks are finding out that it won't. That's one of the key reasons behind the foreclosure moratoriums.

You may wonder how we got into such a mess in the first place. Banks wanted to find some way to quickly transfer the ownership of mortgages from one investor to another in order to more easily sell the mortgages. They packaged these mortgages into securities. As these securities changed hands, MERS was supposed to serve as the electronic database for who owns what.

MERS was designed in the 1990s with the idea that it would maintain a vault for keeping original documents, but that idea was quickly scrapped and MERS left the responsibility of guarding the original mortgage (or deed of trust) and the promissory note (or IOU) with the originating lender. As the housing bubble burst, many of these originating lenders went bust as well, and the original paperwork was lost.

Next, mortgage bankers decided they could cut more corners and simplify record keeping by making MERS the "nominee" for the mortgage holder in local land records. That way when mortgages changed hands, the new owner just had to record the change in MERS's electronic database and not record the change in county records. That saved billions of dollars, but left homeowners in the position where they may not be able to find out who really holds their loan.

MERS allows investors to withhold their names from being displayed in the database. There are also some questions about whether all the transfers of each property is accurate. One real estate expert told the Washington Post, "Nobody at MERS is responsible for due diligence, to go back and question whether the information they're getting is accurate. It's just like a computer program. If you're going to put garbage in, you're going to get garbage out."

Not only are consumers hurt by this electronic maze, but counties have lost billions in property transfer fees. Lawsuits have been filed in 17 states alleging that banks cheated counties out of billions of dollars.

Rep. Marcy Kaptur, an Ohio Democrat, introduced a bill in the last Congress that would prohibit Fannie Mae and Freddie Mac from using MERS. That bill failed to get any traction in the 111th Congress. As more information becomes known about this electronic maze, this type of legislation may gain traction in the next Congress. If it succeeds, it would kill MERS.

Lita Epstein has written more than 25 books including The 250 Questions You Should Ask to Avoid Foreclosures and The Complete Idiot's Guide to Personal Bankruptcy.

For more on mortgages and related topics see these AOL Real Estate guides:

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Elizabeth Warren to Tighten Mortgage Regs

Lita Epstein — 2011-01-05T12:01:00 00:00

Filed under: News,Buying,Economy,Financing

Elizabeth Warren has a big job on her hands, but so far the Obama-appointed leader of the team charged with setting up the new Consumer Financial Protection Bureau (CFPB) seems up to the task. In a major early step, Warren convinced state and federal regulators to sign a memorandum of understanding (MOU) to agree to work together to protect consumers.

If it seems odd to need a formal agreement for various regulators to cooperate, then this moment may signal a shift away from the bad old days of the financial industry's relationship with governmental bureaucracy.

In the mortgage area, the big change will be supervision of non-depository, in other words non-bank, mortgage lenders and servicers. "This agreement allows us to bring thousands of financial service providers out of the shadows and to begin the process of ensuring that all lenders comply with the same basic rules," Warren, who is special advisor to the Secretary of the Treasury, said in a statement announcing the MOU.

The team working to set up the Consumer Financial Protection Bureau (CFPB), led by Warren, who will likely

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become the head of that bureau, signed the MOU with the Conference of State Bank Supervisors (CSBS) to lay out the rules for cooperation and coordination on consumer financial products and services, which includes mortgage lenders and servicers, private student lenders and payday lenders.

Thomas Gronstal, Chairman of the CSBS, said this is a "step toward a more cooperative system of supervision, which will benefit consumers and financial services providers alike."

The new rules developed under the MOU will take effect in July 2011. The rules will be developed under the consumer financial protection regime established by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The regulators seek to strike a constructive balance between federal and state regulation of firms.

Not only consumers who shop for a mortgage will see benefits from this MOU. Protections will also be spelled out for families seeking to finance their child's education or to provide some protection for people who take out payday loans that in some states have interest rates as high as 300 percent or more.

When the CFPB finally opens its doors, it will be the first federal agency with the sole job of looking out for consumers as they work within the financial system. State and federal regulators will work together to review businesses' practices and ensure that firms that provide consumer financial products, such as mortgages, are following the law.

How much protection you get will vary state by state. While everyone can count on the federal regulations set up in the financial reform legislation, some states have more stringent laws. You can find out more about your own state laws by visiting your state's consumer website.

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Strategic Default Gaining in Popularity

Lita Epstein — 2010-12-27T08:00:00 00:00

Filed under: News,Economy

The growing popularity of strategic default can't be denied. Forty-eight percent of homeowners surveyed say they would consider a strategic default -- also known as walking away -- if their home were underwater, in the latest research done for RealtyTrac and Trulia. That's up from 41 percent in May. Yet the banks still seem to be in denial that a strategic default wave may be building.
Strategic default is when a borrower makes the strategic decision to stop paying his mortgage. Since it takes 1½ to 2 years to foreclose on a home in most states, the borrowers then use the cash that would have gone toward paying their mortgage to pay off other debts and improve their own financial position.

Rick Sharga, senior vice president of RealtyTrac, says there's $300 billion worth of adjustable mortgages expected to reset in the next 12 to 15 months. That will increase monthly mortgage payments by $1,000 on homes already underwater by 30 percent to 50 percent. He thinks its "tough to make an economic decision to stay in that situation."

"Some families, who like their neighborhood and their kids are in a stable school environment, will likely stay in their homes, even if the mortgage payment goes up, if they can afford it," Sharga explains. There's another group of people, mostly young couples, "who don't have an emotional attachment to the location." For them it's more an investment decision about keeping a roof over their heads. They will ask themselves whether they can live more cheaply in a rental, since they don't expect their home to regain enough in value in the next 10 to 20 years.

"We're a more mobile society," Sharga says. "People just don't have the same emotional ties to their home as in the past." He also thinks there is a "visceral anger toward lending institutions," which is driving some of this movement toward strategic default. People watched as the banks got their bailouts, but they're not willing to share in the loses of the general public by offering principal reduction. Interestingly, men (57 percent) are more likely than women (40 percent) to consider strategic default as an option for dealing with negative equity, the survey found.

Jon Maddux, one of the founders of You Walk Away, has seen a 45 percent increase in the number of people signing up for his service in 2010 over 2009. He expects 2011 to be even bigger year for his company. The web traffic to his website has jumped 20 percent in December 2010 versus December 2009.

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Sharga thinks the banks may still be living In some state of denial. He thinks there is "wishful thinking in the banking community" that strategic default won't grow in popularity. He believes the only way to stem the tide is for the banks to consider principal reduction programs to give an incentive to underwater borrowers to stay in their homes.

The banks must face the "harsh reality that there is about $1 trillion sitting on their books" in property that has lost value. Sharga explained that $1 trillion number comes from an executive of JP Morgan Chase who testified before Congress that it would cost the banks between $900 billion and $1 trillion to "right size" the market values of the mortgages on the books.

He thinks banks should consider modifying the loans of underwater borrowers so that the payments are based on the home's current market value. Any difference should be set up as a balloon payment that can be partially earned out as the homeowner continues to make on time payments. That way both the borrower and lender share in potential losses in the future. That gives the borrower an incentive to stay in the home and pay the mortgage on time.

Another inventive incentive is being promoted by the Loan Value Group called the Responsible Homeowner Reward. Right now only a few banks have signed on to the program, but Frank Pallotta, executive vice president and managing partner of the Loan Value Group (LVG), says more and more lending institutions are showing interest. LVG has commitments in excess of $1 billion of face value of mortgages with rewards ranging in size from 10 percent of the unpaid balance to as much as 30 percent. LVG signs nondisclosure agreements with the banks that do sign on to the program, so he could not divulge which banks are currently working with him.

The way the reward program works is that if your home is underwater LVG works with the borrower to get details about the current value and the borrower's current financial situation. Using this information it then works with the bank to come up with a reward specific to the borrower's situation. The reward is then set aside in an account that the borrower can earn as he makes on time payments over a two to five year period depending on the terms. Then the reward sits in a reserve account and is given to the homeowner when he pays off the mortgage, sells the home or refinances the home. After the borrower earns his reward, he can lose it if he becomes delinquent more than once in any 12 month period. This gives the homeowner an incentive to pay on time even if underwater.

Pallotta thinks that "if the banks decide to do nothing they do it at their own peril." He said by their "doing nothing it is a proactive decision" to enable strategic default. He sees a "lack of connection between the servicer and the borrower." His company works to improve the communications between the two and come up with a win/win solution for both.

Will banks begin to consider principal reduction for underwater borrowers to stem the tide of strategic default? No one knows that answer for sure, but there are good solutions for the banks to consider and companies out there ready to help them. Yet while the Obama administration supports principal reduction as an option for struggling borrowers, the regulator for Fannie Mae and Freddie Mac does not, according to recent reports.

Lita Epstein has written more than 25 books including The 250 Questions You Should Ask to Avoid Foreclosure and The Complete Idiot's Guide to Improving Your Credit Score.

For more insight on mortgages and refinancing see these AOL Real Estate guides:

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Mortgage Modifications Get Some Real Help

Lita Epstein — 2010-12-22T16:39:00 00:00

Filed under: News,Refinancing

Since California passed its new law mandating how lawyers can be paid for helping with mortgage modifications, Californians are finding it difficult to get assistance.

Charles Martin used his 19 months of fighting for a mortgage modification for his own home in California to learn the ropes and now helps others, not only in California, make their way through the maze of obstacles put up by the banks.

Martin started working on his mortgage modification in June 2009. He learned a lot along the way and made a lot of good contacts with key people not only in his bank, but in other banks as he tried to help others. He thought the more he "paid it forward" by helping others, he may finally get a successful mortgage modification himself.
As an experienced sales person, Martin believes strongly in the theory of VITO, getting to the very important top officer. Today he has contacts with Executive Response Units at the three largest loan servicers, Bank of America, Chase and Citigroup. He's not a lawyer, but does help people as a consultant to successfully navigate the mortgage modification maze.

What he does for people is to help assess their financial situation and determine if they really could qualify for a mortgage modification. If they do, he works with them to get to the right people at their bank. Sometimes he'll make the call, other times he empowers people to do it themselves.

He's found the key "sweet spot" for qualification is the housing ratio. This ratio determines whether or not

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you earn enough to get a mortgage modification. It also looks at whether you earn too much to qualify. You can calculate your housing ratio by totaling your mortgage payment, any second mortgage payment, any homeowner's association fees, monthly insurance costs and monthly taxes then divide that by your monthly gross pay. If your ratio falls between 40 percent and 49 percent, you are in the sweet spot and have a good chance to get a loan modification.

If your income is higher and you fall below 40 percent, you have less of a chance of getting a mortgage modification because you earn too much and if its higher than 49 percent you likely don't earn enough to qualify for a mortgage modification. There are always exceptions to this rule, but he finds he has the most success helping people who fall in the "sweet spot." You can ask him for help by emailing him at vendorcloud@gmail.com.

Another key program now available nationwide is FreeMortgageFix.com, which is a software program that helps you fill out the paperwork for a modification. Attorney David Galanter developed this free website that walks you through a do it yourself home mortgage modification process. He calls it the "Turbo Tax for loan modification." As you enter the data, pop-ups help you fix any errors as you fill out the paperwork. For those who don't want to do it yourself, he's developing a nationwide network of attorneys and others that can help you through the process.

Abraham (Avi) Borenstein, an attorney for 30 years that founded a firm based in New York and New Jersey, said the key to any modification application is "persistence and patience." The system as currently designed does not "effectuate modification. Banks view it better to foreclose than to modify."

He thinks the winds could be changing as courts around the country take a closer look at banks' foreclosure practices. For example, he cited the ruling by the Chief Justice of the New Jersey Supreme Court, Stuart Rabner when he told six lenders that they must answer to him in court or have their foreclosure actions suspended. Rabner wrote in that decision that the court "has become increasingly concerned about the accuracy and reliability of documents submitted to the Office of Foreclosure." After this hearing he could appoint a special master to deal with foreclosure cases from these six banks including Wells Fargo, JP Morgan Chase and Citibank.

Florida's Supreme Court mandated mediation before foreclosure, but Florida attorney Charles Castellon said that order is being handled differently county by county. Some counties are truly reaching out to borrowers to let them know about the mediation, but others bury it in a slew of paperwork sent to borrowers.

He's found that the temporary mortgage modifications offered borrowers usually do not work out. He recommends to his clients that they not accept any type of temporary mortgage modification, but instead work toward a permanent mortgage modification. He's found that he gets the best terms when he gets the court to order mediation during a foreclosure action. At that time he has the attention of the courts and the legal staff of the bank and he finds he can get a better modification deal.

Castellon thinks of the current mortgage modification process done outside the court system as a "Kafkaesque nether world of dealing with lenders losing paperwork." He's seen very few successes with the HAMP modification process.

If you've been trying to get a mortgage modification and continue to find frustration in the "Kafkaesque world" of modification, stop trying to go it alone. You need the help of a third party, whether it's an attorney like Borenstein or Castellon, or an advocate such as Charles Martin. You can also get help for free from a HUD housing counselor. The key is not to give up in frustration if you want to save your home.

Lita Epstein has written more than 25 books including The 250 Questions You Should Ask to Avoid Foreclosure and The Complete Idiot's Guide to Personal Bankruptcy.

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How MERS Enables Banks to Foreclose

Lita Epstein — 2010-12-20T13:21:00 00:00

Filed under: News,Foreclosures

You may never have heard of the Mortgage Electronic Registration Systems (MERS), but it's the culprit that enabled many of the "robo-signers" to perpetuate their foreclosure fraud. L. Randall Wray provides an excellent overview of the fraud in a three part series for the Huffington Post.

Banks not only created MERS, but depended on this electronic record keeping to deny homeowner's even a chance to modify their mortgages. Servicers, which are primarily the big banks, knew they had the cards stacked against homeowners so they didn't have to play ball with Obama's home modification program.

MERS was created by the banks because they did not want to go through all the paperwork of recording a mortgage at a county office each time the mortgage was bought and sold. Only the original sale was recorded at the county office. All subsequent sales and purchases of mortgages were only recorded electronically by MERS. MERS did not even require banks to actually record transactions.

"The record keeping is so sloppy that banks have no idea who owns what and who owes whom what," Wray writes in his series. There are no public records for homeowners to search to find out who owns their mortgage. The record is "whatever the servicer says it is. Judges are only very slowly realizing that what the servicers claim is pure bunk," Wray explains.

What does this mean for a homeowner? Wray found in his study that:

--Checks are being sent to the wrong servicers;
--Servicers credit the wrong accounts;
--Servicers claim delinquencies on homeowners who never missed a payment;
--Servicers piled late fees and delinquencies on the wrong borrowers;
--Sheriffs were sent to break down the doors of the wrong addresses;
--Belongings were thrown out on the street in front of homes where there was no mortgage at all.

Homeowners are not the only ones hurt by MERS. Investors who bought securities also feel the pain of this fraud as

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they lose money on these securities that were originally rated AAA by the credit rating agencies. Investors thought these risky structured mortgage products were as safe as treasuries, only to find out later they were junk that no one can understand.

Wray said that MERS told servicers not to endorse notes over to its trustees. In many instances these original notes were destroyed. Instead MERS shows paperwork is lost and the courts are allowing foreclosures on properties without the original note. Servicers can't demonstrate clear title without the note, instead they depend on this electronic recording keeping to prove the notes were lost. Judges are finally catching on to the fraud and refusing to foreclose on properties without the paperwork to prove who owns the title.

Banks could have avoided this entire mess with the courts if they had just worked out modifications with homeowners who wanted to stay in their homes. But they were emboldened by the power they thought they had created with MERS.

If you search your property online and can't find out who currently holds your mortgage, you're likely a victim of this MERS fraud. Check with an attorney to see if you can save your home by questioning whether or not the bank or attorney trying to foreclose on your home actually has the paperwork to prove they have the title to your home.

Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Personal Bankruptcy and The 250 Questions You Should Ask to Avoid Foreclosure.

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Owners of Disney-Built Homes Not Celebrating

Lita Epstein — 2010-12-17T16:43:00 00:00

Filed under: News,Foreclosures

Homeowners are no longer celebrating in Celebration, Fla., the idyllic town built by the Walt Disney Company starting in 1994, where house prices have dropped 38.8 percent or more since 2006. Foreclosures also are up in Celebration, near the Magic Kingdom though there is only one single family bank-owned propery and 11 multi-family bank owned properties in Celebration in the multiple listing service, according to Celebration's in-town Realtor, Kathleen Carlson, owner of Imagination Realty.

Talk about Mickey Mouse real estate.

Carlson could not confirm the total number of Celebration properties in some stage of the foreclosure process, nor confirm the numbers for the shadow inventory of Celebration homes already foreclosed and not yet on the market. Based on data from Legalprise in West Palm Beach, Fla., one in every 20 residents have received a notice of lis pendens, which initiates a foreclosure action. That translates to 180 properties out of the 3,600 homes, condos and villas in Celebration.

She states the high rate of delinquencies are often due to the challenging job market and the fact that people may have "taken out equity loans on their homes in the good times." As single-family home prices jumped to a median high of $667,900 in 2006 many people in Celebration may have taken out thousands of dollars to invest in other real estate, make other major purchases or put their children through college. Not much different then what went on all over the United States. Today that median price is $408,400.

The problem for many of the homeowners today, not only those in Celebration, is that they owe far more on their

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homes than they can afford. Home prices have dropped so significantly that they can't sell without coming up with cash or getting the banks to agree to a short sale.

The lowest-price unit currently on the market in Celebration is a 2-bedroom, 2-bath condominium priced at $95,000. That's down from the $209,000 paid for the property in 2008. The property is currently in foreclosure; the price is listed as a bank-approved short sale.

The highest-priced home on the market in Celebration is a single-family home for $3,900,000. The home was purchased for $1,400,000 in 2003 and currently has a tax-appraised value of $1,421,600. The most recent sale nearby was its next door neighbor, for $2.3 million. That owner may still be suffering from the pixie-dust days of the past, not realistically looking at today's drop in price.

Yet Carlson hears from people everyday who call her because they can now afford Celebration. She fondly calls them the "woulda, coulda, shoulda club." Many of these people looked at Celebration in 2007 and 2008, but couldn't afford to buy. Today, with the steep drop in prices, Celebration has become much more affordable.

Sales show there is a slight up tick in the number of home sales. In 2006 123 single family homes sold with a median price of $667,900. Through December 17, 2010, 131 homes have sold with a median price of $408,400.

Condos and villas have not fared as well. In 2006 131 units sold for a median price of $408,400; and to date in 2010 only 70 have sold with a median price of just $149,500 for a 61 percent drop in value. Carlson cites the delinquency rate for a lot of this drop.

As delinquencies in the condos jump above 15 percent, people have a hard time getting financing for a deal, she explains. More of the delinquencies in Celebration are in the condos and villas than in the single family homes. So if you have the cash, you can get a great deal on the condos. But don't count too much on the Disney magic: Delinquencies are high, so condo fees are going up.

Lita Epstein has written more than 25 books including The 250 Questions Everyone Should Ask About Buying Foreclosures and The Complete Idiot's Guide to Improving Your Credit Score.

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Credit Card Hurting Your Mortgage Chances?

Lita Epstein — 2010-12-15T15:04:00 00:00

Filed under: News,Financing,Refinancing

Your credit cards may be hindering your chances of getting a mortgage. Over the past two years, banks have cut back people's credit limits on their credit cards. Now, people are finding that their credit scores have dropped because of these bank actions. Even though they pay their card on time every month, their credit scores may have dropped 50 to 100 points.

Why are credit scores getting slammed? A key component of your credit score is credit card utilization. You can calculate your utilization by totaling all outstanding charges and then dividing that number by the total of your credit limits. For example, if you have $5,000 in outstanding charges on two credit cards with a credit limit of $5,000 on each card for a total of $10,000, then your credit card utilization is 50 percent ($5,000/$10,000 = .50).

If you're like most people you probably had much higher credit limits prior to 2008 when credit was flowing freely. You may have had a credit limit of $10,000 or $15,000 per card rather than the current limit of $5,000. In that case your credit utilization ratio would have been 25 percent ($5,000/$20,000 = .25) or 17 percent ($5,000/$30,000 = .17).
Ideally, to get the best credit score, your credit card utilization should be between 10 percent and 20 percent. So if you're regularly running a higher percentage, you need to cut that usage at least until you close a new mortgage. This is true whether you're buying a home or looking to refinance.

You can check your credit score for free at Credit Karma.com. If it's lower than 720, you should work on improving that score before trying to apply for a purchase or refinance mortgage.

If you're someone that pays his credit card in full each month, you can quickly

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improve your credit card utilization by paying your bill before the card closes each month. That way the balance reported to the credit reporting agencies will be zero, which will improve your overall credit card utilization ratio and should quickly improve your credit score.

You can also call your credit card companies and see if they will consider increasing your credit limits. While this was just about an automatic no in the past couple of years, reports are that credit card companies are offering new credit to people who pay their bills on time. It's worth a call, even if you don't need the additional credit. By having a higher credit limit, you can improve your credit utilization ratio.

If your utilization is high because you're carrying a balance month to month, you can still improve your score by making your payment prior to the closing date on the account. The balance reported to the credit card reporting agency will be lower and your credit utilization will gradually drop. The faster you can pay down that debt, the faster your credit score will improve so you can take advantage of the historically low mortgage rates.

Some people may advise you to close accounts in order to improve your credit score. Usually, that is a big mistake. When you close an account you loose that approved credit limit. So suppose you had three cards with a total of $10,000 available credit and you closed a card with a $3,000 credit limit. Your available credit would then only be $7,000 and your credit utilization ratio could jump dramatically. For example, suppose you carried $2,000 in debt on your credit cards. That would be a 20 percent ($2,000/$10,000=.20) credit utilization ratio. If you closed a card with a $3,000 credit limit, your credit utilization ratio would jump to 29% ($2,000/$7.000 = .29) and your credit score would tumble.

Your utilization may not be the only thing holding down your credit score. If you have past due bills, even if it's a small medical bill, that too can lower your score 50 to 100 points. So clean up any negatives on your credit report. You can check your report for each of the credit reporting agencies once a year for free at Annual Credit Report.com. Make sure there are no errors on the report and correct any you see.

As you work on improving your credit score, watch the trend of the improvements at CreditKarma.com. When your score is above 720, you then have a much better chance of getting good mortgage offers.

Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Improving Your Credit Score and The Complete Idiot's Guide to Personal Bankruptcy.

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