How “high finance” from Wall St. lead to the run up in real estate prices

Real Estate prices began a wild ride beginning in 2001 until this year. Many thought it wasbecause of supply and demand. I disagree. The prices went wild because mortgagebrokers and Wall St.found a way to increase the buying power of a monthly payment through increasingly exotic (another way of saying crazy)  and nonsensical loans. The below chart explains themonthly cost for a $100,000 loan based on four different types of loans: fixedrate, ARM (adjustable rate mortgage); interest only and, my favorite. the payoption arm. (A pay option arm begins at a low initial interest rate – 1.5% -which is effective for less than 2 months. Thereafter, the interest rate on the loan fluctuates but usually increases to a variable interest rate of 7% or higher. The catch is that your payment stays the same as if the interest on the loan is still 1.5% but it is not. Since you are being charged 7.% interest but you are only paying interest at the rate of 1.5% each month the interest not paid by you is added to the principal balance of the loan. This is commonly known as negative amortization. These loans cap the negative amortization at no more than 15%-25% of the original principal loan amount.)    

 

 

 

Fixed

ARM

Interest Only

Pay Option

Interest Rate

6.00

4.5

4.5

1.50- Teaser Rate

Term

30 year

30 year

30 year

30 year

Monthly Payment *

$600

$600

$600

$600

Loan Amount  

$100,000

$118,000

$159,000

$480,000

 

The effect of each new loan twist was to increase the principal amount for the same payment amount.

 

The use of the exotic loans also assured that anyone who obtained one would be back shortly to refinance because when the loan adjusted, the homeowner could not afford the new payment. In selling these loans, there was no requirement that the homeowner be shown to be able to afford the increased payment that would inevitably flow from these types of loans. The mortgage brokers could come back every two years and sell the homeowner a new loan, and make fees all over again, to save the homeowner from the true cost of the loan the homeowner was previously sold.

 

* rounded up to $600 for illustration purposes. For instance the actual amount due for a $100,000 loan at 6% is $599.55.  

 

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The Credit Crisis Continues

I previously wrote about the anatomy of the mortgage business that was allowed to soar without pesky regulations in the first decade of this new century. The securitization system expanded with ever increasing exotic mortgages but it was also used for car financing and credit card financing. The “ripple effects” of the downfall of the securitization system are more accurately described as a slow flood that is affecting all who participated. The flood is moving slowly but is relentless. The government announced it will loan 85 billion to save AIG because it is unsure how its downfall may affect the world financial system. If the government does not know but its fears are correct, then the question is how long will the government be able to place 85 billion sandbags to hold back the flood?

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New Maryland Laws affecting foreclosures, foreclosure frauds, mortgage fraud and prohibiting terms

On April 3, 2008, Governor O’Malley signed three new laws as emergency legislation. As emergency legislation, the bills take effect immediately. The bills were HB 360, 361 and 365. Highlights of the bills are:

FORECLOSURES

For the first time in nearly 200 years the foreclosure laws have been changed to provide greater protections for homeowners.

    Personal service is now required. Under the old law the lender only had to show they mailed notice – not that the     homeowner actually received notice.

    The timing of foreclosures which previously could be done in as little as 15 days has now been expanded to a
    minimum of 45 days after notice to the homeowner and then only if the loan is in default at least 90 days.

FORECLOSURE RESCUE FRAUD

    When first enacted in 2005, this law provided exemptions for various licensed people. The new law now
    removes the exemptions previously available for title insurers, title companies and lenders. These exemptions
    were being used to evade and avoid the law. The changes is very good news for those who are victims of these
    crimes.

MORTGAGE TERMS

    This law prohibits prepayment penalties for certain loans

 

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Saving Families’ Homes who have been victims of Foreclosure Scams

The new year has started off right for consumers. The firm was successful in obtaining a stay of a foreclosure proceeding pending the home of a homeowner who lost the title to their home through a foreclosure scam. The stay was granted by the Circuit Court for Prince George’s County, Maryland.

For those who don’t know how a foreclosure scam works, it works in one of two ways. Both ways start the same way – a con man contacts the homeowner in distress offering to either help the homeowner pay off the default on their mortgage or arranging a refinancing for the homeowner. The con usually includes a story that they work with someone who likes to help people.

If they are going to catch up the payments, the con man explains that they will catch up the past due amounts and all they expect is that the homeowner will continue to make the payments along with an extra amount each month to pay back the con man for the money paid out to catch up the homeowner’s mortgage.  In exchange for helping out the homeowner, the con man asks the homeowner to sign various papers. Buried among the papers is a deed to the homeowner’s home.  Once the con man takes the deed they normally try to evict the homeowner shortly after the transaction through a landlord tenant case.

If they are going to arrange a refinancing, the con man arranges for a person, who agrees to act as purchaser,  to obtain a new loan or loans against the homeowner’s property. This person is commonly referred to as a “straw purchaser”. The straw purchaser most likely has no ability to actually pay any loan back but the straw purchaser does it because he or she is promised a fee of between $5,000 to $10,000. 

The homeowner is told that they need to sign various papers to complete the refinancing. If the homeowner notices a deed in the documents, the con man explains that the transfer is only temporary to allow the homeowner time to clean up their credit. Normally the amount of loans taken out against the home far exceeds what the homeowner owed. The extra money is paid out to the con man and his or her boss. The homeowner is left with a house in the name of a straw buyer and mortgages that exceed the value of the property. The straw purchaser then defaults on the mortgages and the homeowner’s home is once again headed for a foreclosure proceeding.

 

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Status of Metro Money Store case February 6, 2008

An amended complaint has been filed in this case. The complaint adds some new defendants. It also deletes Sussex Title, which has filed for bankruptcy.

Additionally, a motion for class certification has also been filed.

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New Forelcosure Laws on the way for Marylanders

The Maryland Senate held hearing this past Tuesday, February 5, 2008 on a new law that will change the foreclosure process for the better. I was allowed to testify in favor of the bill.

The new foreclosure bill will prevent any lender from attempting to foreclose until a loan is at least 90 days late and then the lender will have to provide a minimum 45 day Notice of Intent to Foreclose to the homeowner before any sale could proceed.  Under current  law,  there is no minimum default time and a sale may be held in as little as 15 days.

Further, the new law will require personal service of a foreclosure proceeding. The current system does not require any service – only that notices are mailed – it does not matter whether the person actually gets the notice.

The improvements are considerable and will provide homeowners both notice and time to address a foreclosure.

It is my belief that the foreclosure rescue scam crisis has been created by the deficiencies of the existing foreclosure system.

I urge everyone to contact their State Senator and tell the to vote in favor of Senate Bills 216, 217 and 218!

At the same time a new bill was introduced in the Maryland House of Delegates – the Richard Atta Poku Right to Appeal Bill. This bill may not help my client Mr. Atta Poku but may help homeowners in the future. Sue Hecht from Frederick is a co-sponsor of the bill.

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More on Metro Money from Editorial Page at the Washington Post

Read this editorial at the Washington Post:

http://www.washingtonpost.com/wp-dyn/content/article/2007/09/30/AR2007093001215.html

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