Tag Archives: US foreclosures

The New U.S. Foreclosure Nightmare

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What a difference a couple of weeks can make. Two weeks ago, a judge in the U.S. was going through a large number of foreclosure applications. But he noticed something strange: All the applications were executed, and sworn out, by the same person. At that point, he started to ask questions about the validity of the affidavits, and things unraveled in a hurry – nation-wide.

With tens of thousands of foreclosures every month, it turns out that lenders were robo-signing these affidavits. That is, they were just mass signing them, but there wasn’t any of the work done to verify that the lender actually had the right to foreclose, and had the right to the title of the property. Some people were signing legal documents on over a thousand foreclosure applications in a day! Just think about that: They were filing applications to foreclose without even being sure they had the mortgage loan, and certainly without the backup documentation to prove it!

In Canada, mortgages are made by a lender, and held by the lender. So if your mortgage was made by the bank of George that is where the mortgage is held. So if there is a foreclosure, it’s a no-brainer to prove that the bank of George is the lender. But in the U.S., mortgages are administered by third-party servicers who collect the payments, send demand letters, etc. The actual mortgage is sliced and diced, re-packaged, and sold on Wall Street. So a piece of your mortgage is held by an investor in Saudi Arabia, some by a pension fund in Toronto, and another piece by a bank in England. Just imagine that nightmare to prove who the actual mortgage holder is!

Many politicians want all foreclosures stopped. That’s just insane, of course, because it rewards people who aren’t paying their mortgages. But what is happening is that the Attorney Generals in almost every state are now launching investigations and the heat is squarely on lenders who are scrambling like mad, cancelling foreclosures, starting from scratch in others, and giving up on many others.

A few years ago, foreclosures had a bad rap, and pretty much nobody, except high-risk speculators, wanted to buy them. Now, with the majority of all listings being foreclosures, they were hot and selling. After all, it was one way to get a really good deal on a home. People are already being burned badly because of their greed and lack of knowledge. Weekend seminars on how to get rich buying foreclosures charge $3,000 to $10,000, and are a total rip off. Lots of people go to the courthouse steps where foreclosures are first auctioned off, they bid pretty blindly, and discover that they don’t have clear title, and often, that the city, or tax department, has a big lien on the house.

Now, it would be a huge gamble to buy any foreclosed property in the U.S., because the risk is huge. You’ve bought it, but who is to say that the bank had a right to sell it to you in the first place? Yes, there have been sales which have been reversed, where there is proof the lender never had a right to foreclose in the first place.

It is a legal nightmare, and mark my words: The ripples from this will last for a decade.

A Few Scary Stories from the U.S.

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After a week in Kansas, I wanted to share a couple of U.S. stories from the world of finance and credit. They’re certainly insights that make you think or just shake your head:

You knew this day had to come: Atlantic City is the #2 gambling destination after Las Vegas in the US. Within ten hours of Atlantic City, there are more than 100 million people to draw from, and that’s a pretty huge market. While it’s possible to get cash advances from credit and debit cards in every casino on the planet, Atlantic City has gone one big step further. Gaming laws have now been amended to actually allow people to use their credit cards right at the blackjack and craps tables for a cash advance! Yes, you heard that correctly. Just sit down at the blackjack table and pull out your credit card. So far, only the Trump Taj Mahal has implemented it. But you know it’s only a matter of time before every casino in Atlantic City, and then Vegas, will roll this out, just to keep up.

JP Morgan Chase, one of the big six credit card issuers who control two-thirds of all credit cards, just announced doing away with a bunch of affinity cards. Those are cards for a specific retailer, where the merchant receives a kick-back. Gone are the Avon card and Starbucks. And if you’re a basketball fan, they also couldn’t get enough interest in the credit cards for the Detroit Pistons and Orlando Magic. Gee, you think the world can do without a few more credit cards??

On television, there’s more and more happy talk about the U.S. economy. While that may be true, in some areas, the foundation of people feeling more secure about their finances is always the value and equity in their homes. And that isn’t getting much better in many of the so-called “bubble states, where there are still over 3 million foreclosures expected this year alone.
But the no-service Bank of America is now seeing the light, and are prepared to do principal reductions of up to 30% on people under water. That is, they’re actually now prepared to help, after writing off billions of dollars in foreclosures. Principal reductions means they will actually cut the balance that people owe on a home that may be worth half of their mortgage. It’ll apply only to sub prime mortgages with insane interest rates, but it’s a start to actually help people and give them concrete hope. They finally figured out that they didn’t need to lose tens of billions of dollars kicking families out of their homes, and then take a massive bath on trying to sell literally millions of empty houses. This is going to be less than half as expensive for the bank in the long run. Too little too late for a ton of families but better late than never…

A Small Town with a Big Mortgage Mess

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Merced, California is a small town of about 80,000 people that most people have never heard of, about 140 miles SE of San Francisco that was recently profiled in Fortune Magazine.

In February this year, the unemployment rate already reached 20%. A TV reporter recently stood in front of a new subdivision at the edge of town, right on a brand new four-lane highway, and waited for 15 minutes before anybody came along at all.

In 2002-2004, mostly San Francisco speculators drove home prices up over 50% in Merced. By 2005, the sleepy small town had a median house price of $382,000. In March of 2009, that was down to $105,500. Let me say that again: The price went from $382,000 to $105,500 – that’s less than a third in four plus years!

Back in 2004 and 2005, nobody asked, questioned, or seemed to care who was going to keep buying homes at these skyrocketing prices. Or even stopped to think who could ever afford to rent them! The population hadn’t grown – it was purely speculators who were buying these houses.

But it was more like gambling, instead of investing, because these investors were never going to move into these homes. They were only looking for the quick flip and profit, mostly with an interest only mortgage just to tread water. While the price wave kept going up, these investors/speculators or gamblers were looking for the next victim in a perfectly legal ponzy scheme.

At the peak of the market, the income needed to finance one of these average priced homes would have been $120,000. Two minutes of checking would have found that the town had always had unemployment issues, and the average income in town was $35,000.

There was no chance 90% of people in town should have gotten a mortgage, and no chance anyone was ever going to pay off one of these homes. For 90% of the population, even a 40-year mortgage was never going to be affordable.
The average resident with a $35,000 income could afford a $1,000 mortgage payment. That’s 35% of their income, and that’s the typical formula. But the average home was going to be $2,100 a month just for interest payments! Who could afford that? Someone whose entire net income was going to go to interest only payments and who NEVER paid property tax, gas, never bought groceries, clothes, car insurance or had anything else to pay, because this average home was going to cost them their entire net paycheck.

What a surprise to investors and all those mortgage lenders this didn’t work out! Yes, that was sarcastic but it just shows that for a number of years, the banks didn’t care about proof of income or that nobody was going to be able to pay these payments. And no buyers seemed to care either, and they’re just as responsible for the mortgage mess.
These so-called X subdivisions are the furthest out of town. It’s the last developments at the edge of town because land was cheap there. They will be the last to recover in prices, and it’s where the most foreclosures are. Economists might be talking about a recovery soon, but I doubt it. Logic says the housing market has to stabilize and right now, the foreclosure rate is still going up and there are over 1.6 million homes that lenders haven’t even put on the market. I would say don’t hold your breath.