Mr. Smith Gets A Home
by Robert Franco
http://blog.sourceoftitle.com/
Let's take a walk through a fictional home purchase scenario and see if we can spot all the problems with the process. Mr. Smith, our fictional buyer, wants a to buy his first home so he calls Ricky, the Realtor. Ricky shows Mr. Smith a few homes until he finds one he wants to make an offer on. The listing price is $150,000. Mr. Smith then calls his local bank and is told that he will need at least 3% down, or $4,500, which Mr. Smith doesn't have. Ricky explains to Mr. Smith that he can still buy the home, but he needs to call Max, the mortgage broker.
Max, tells him that he can get him approved, but the 30-year fixed rate will be higher. "But, don't worry," explains Max. "Your payment won't go up because we will get you a variable rate." Because Mr. Smith doesn't have enough money for closing costs, Max and Ricky devise a plan to allow Mr. Smith to borrow more money than the actual purchase price.
Ricky talks Sam, the seller, into increasing the purchase price to $155,000 and paying up to $5,000 of Mr. Smith's closing costs. "But, don't worry Sam," explains Ricky. "We will still base your commission on the $150,000 so it won't really cost you anything."
Max calls his friend Andy, the appraiser, and tells him that they need the appraisal to come back at $170,000. That way, Mr. Smith will have some equity in the home and the down-payment can be avoided by running it through as a refinance. How does that work? Max and Ricky get Sam and Mr. Smith to back-date a phony land contract. Now instead of a purchase, this transaction has been miraculously transformed into a refinance of a land contract.
Tammy, the title agent, gets ready for the closing. She notices the land contract was never recorded, but doesn't say anything to the lender. At the closing, the interest rate and Mr. Smith's payment are a little higher than he expected. Fortunately, Max is there to help explain that. "I know it's a little higher than you expected Mr. Smith, but that is because you are buying this house with no money down and we couldn't verify enough income for the program we wanted to put you in." Rather than verify Mr. Smith's actual income, which was insufficient, Max put him in a stated-income program. "But, don't worry about it - you make your payments on-time for a year and we will refinance you into a lower fixed-rate mortgage."
"But, what about the prepayment penalty?" Asked Mr. Smith. The loan has a three year prepayment penalty. "Yes, but it's only 1%. It will be worth paying for the savings we are going to get you," says Max.
Then Mr. Smith notices another "funny" fee on the settlement statement. A "yield spread premium" of $2,325 to the broker marked as "POC" on the HUD-1. "The little 'l' after the amount indicates that the lender is paying that fee. You aren't paying it, so you don't have to worry about it." Nobody explains to Mr. Smith that the lender is willing to pay Max more than $2,000 because he sold Mr. Smith a loan with a higher rate than he could have gotten. This, of course, is in addition to the 1% Max had already charged him.
By this time, Mr. Smith is thinking he may be in over his head. Who is supposed to be looking out for his best interest? His Realtor, his mortgage broker, the title agent? Nope. Mr. Smith is realizing that he is unrepresented.
Tammy, in an effort to get Mr. Smith to close the loan, explains to him that because of the land contract, this is technically a refinance. "In a refinance transaction, you have a three day rescission period to think about the terms. And, if you don't like any of them, you can cancel the loan." But, nobody mentions to him that if he cancels the transaction he may be in breach of the sales contract. "You can even have your attorney review the documents during the next three days if you like," says Tammy.
Mr. Smith reluctantly signs and Ricky, Max and Tammy all cross their fingers and hope that the loan doesn't rescind so they can get their checks in three days. Ricky will get $9,000, Max will get about $4,000, and Tammy will make about $1,000 and has the potential of getting more business from Ricky and Max, who are impressed that she was able to convince Mr. Smith to close.
Fast forward one year... Mr. Smith's loan adjusts upward by 2% and his payment went from $1,031.22 to $1,247.17. Unfortunately, he cannot refinance into a lower fixed rate because he wasn't able to make all of his payments on-time and he still cannot verify enough income to qualify for a traditional mortgage.
Now that Mr. Smith's payments are even higher, he will be seeing an attorney about bankruptcy and foreclosure. Like millions of other homeowners who thought that their Realtor, mortgage broker, and title agent were looking out for them, Mr. Smith has learned a lesson the hard way. And, that is how Mr. Smith gets... and loses... his home.
Tuesday, October 30, 2007
Thursday, September 20, 2007
Scary!
This chart, outlining mortgage resets, clearly shows that losses on homes will peak in the second half of 2008.
According to BofA’s estimates, approximately $515 billion of ARMs are scheduled to reset in ’07, followed by approximately $680 billion in ’08. Furthermore, of these ARMs, we estimate that subprime loans consist of $400 billion (78%) in ’07 and $500 billion (73%) in ’08.
Recently released data from Fannie Mae (FNM) confirms our view that ARM resets will lead to higher rates of credit deterioration, particularly for 2/28 subprime ARMs. ... Of the subprime ARMs that reset in 2006, 76% of borrowers were able to successfully pay off their loan (either through refinancing or selling their home). However, of the borrowers that did not pay off their loan 50% went bad (delinquent, in foreclosure or REO). According to FNM, subprime ARM borrowers facing resets in ’06 on average faced a 250 bps (2.5 percentage points) contract rate increase. Meanwhile, though the data is only as of March ’07, of all the subprime ARMs scheduled to reset in ‘07, already 18% have gone bad (delinquent, in foreclosure or REO) or 29% of loans that have not been paid off. As a larger number of loans will hit the reset throughout the rest of the year and ’08, and due to less favorable market conditions (higher rates, tightened underwriting standards, already stretched borrowers, and home price stagnation) the delinquency ratio will only increase from the 1Q07 level.
Tuesday, August 28, 2007
Subprime Borrower Refi Options
Bank of America's RMBS Desk has a research note out (not publically available) that attempts to estimate the realistic refinance options, if any, for outstanding subprime ARMs that are facing reset in the immediate future.
The analysis looks at both credit standards and current interest rates on alternative loans, and concludes that refinancing into a new subprime loan or, for those borrowers whose credit profile has improved since loan origination, a new Alt-A loan, is essentially not an option. The interest rates on new subprime and Alt-A, given the current environment, are simply too high to offer any improvement in the monthly payment.
Therefore, the report concludes that FHA and Fannie Mae's "Expanded Approval" program (EA, its existing program for "near prime") are the only realistic options, given pricing structures. BoA estimates that approximately 18% of outstanding subprime ARM borrowers could qualify for an FHA refi (on both credit guidelines and rate reduction), and approximately 36% could qualify for Fannie Mae's EA. (That's best understood as 36% qualifying for either FHA or EA, not a total of 54%.) The larger bucket of loans qualifying for EA is mostly a matter of the larger GSE maximum loan amount compared to the FHA maximum, as well as a slice of the highest-credit class for which EA, at least in theory, offers 100% financing in contrast to FHA's 97% maximum.
Still, BoA's analysis is assuming an effective interest rate (including FHA or private mortgage insurance premiums) of around 8.50% for FHA and 8.50%-9.50% for the EA loans. In other words, the refi rate for these borrowers, at best, is enough to keep them at pre-reset payment levels. It isn't enough to bail out anyone who cannot carry the pre-reset payment.
It is always possible to change the eligibility and qualifying rules on either FHA or EA so that more borrowers can be accommodated, and there are certainly demands out there, especially for FHA, to do this. How, exactly, we will price the risk so that these borrowers are in the money is, as far as I can tell, the unmentioned part that probably matters.
Posted by CalculatedRisk Blog
The analysis looks at both credit standards and current interest rates on alternative loans, and concludes that refinancing into a new subprime loan or, for those borrowers whose credit profile has improved since loan origination, a new Alt-A loan, is essentially not an option. The interest rates on new subprime and Alt-A, given the current environment, are simply too high to offer any improvement in the monthly payment.
Therefore, the report concludes that FHA and Fannie Mae's "Expanded Approval" program (EA, its existing program for "near prime") are the only realistic options, given pricing structures. BoA estimates that approximately 18% of outstanding subprime ARM borrowers could qualify for an FHA refi (on both credit guidelines and rate reduction), and approximately 36% could qualify for Fannie Mae's EA. (That's best understood as 36% qualifying for either FHA or EA, not a total of 54%.) The larger bucket of loans qualifying for EA is mostly a matter of the larger GSE maximum loan amount compared to the FHA maximum, as well as a slice of the highest-credit class for which EA, at least in theory, offers 100% financing in contrast to FHA's 97% maximum.
Still, BoA's analysis is assuming an effective interest rate (including FHA or private mortgage insurance premiums) of around 8.50% for FHA and 8.50%-9.50% for the EA loans. In other words, the refi rate for these borrowers, at best, is enough to keep them at pre-reset payment levels. It isn't enough to bail out anyone who cannot carry the pre-reset payment.
It is always possible to change the eligibility and qualifying rules on either FHA or EA so that more borrowers can be accommodated, and there are certainly demands out there, especially for FHA, to do this. How, exactly, we will price the risk so that these borrowers are in the money is, as far as I can tell, the unmentioned part that probably matters.
Posted by CalculatedRisk Blog
Wednesday, August 22, 2007
Fed Wire Numbers and Good Funds
Recently there’s been significant discussion in the title business about “Good Funds.”
When we are waiting for funds to show up in our trust account, Lenders routinely offer to provide the Fed Wire Number as proof that the funds were delivered. We’re glad to write them down, but we won’t accept anything less than a wire receipt confirmation from our bank as proof of receipt. Here’s why:
A Fed Wire Number means the funds were sent, but it doesn’t mean that it was sent to you. There was an eye-opening article in today’s Philadelphia Inquirer:
“They say Greene met two men behind bars, and the three conjured up a plan to steal millions in wire transfers from Cendant Mortgage Corp., the Mount Laurel-based company now called PHH Mortgage.
With the help of an insider at the company, who has not been identified, they had computer codes changed on 15 Cendant wire transfers - worth about $2 million.
The money was bound for a Florida title company to close real-estate deals in the fall of 2003. Instead, prosecutors said, the money was redirected to two bank accounts held by the men Greene met in prison - Michael Umali and Dan Hutchinson Jr.”
Obviously, there were Fed Wire Numbers for these transactions, but the funds never arrived at the proper destination. Wire Numbers DO NOT equal delivery.
Be careful out there.
When we are waiting for funds to show up in our trust account, Lenders routinely offer to provide the Fed Wire Number as proof that the funds were delivered. We’re glad to write them down, but we won’t accept anything less than a wire receipt confirmation from our bank as proof of receipt. Here’s why:
A Fed Wire Number means the funds were sent, but it doesn’t mean that it was sent to you. There was an eye-opening article in today’s Philadelphia Inquirer:
“They say Greene met two men behind bars, and the three conjured up a plan to steal millions in wire transfers from Cendant Mortgage Corp., the Mount Laurel-based company now called PHH Mortgage.
With the help of an insider at the company, who has not been identified, they had computer codes changed on 15 Cendant wire transfers - worth about $2 million.
The money was bound for a Florida title company to close real-estate deals in the fall of 2003. Instead, prosecutors said, the money was redirected to two bank accounts held by the men Greene met in prison - Michael Umali and Dan Hutchinson Jr.”
Obviously, there were Fed Wire Numbers for these transactions, but the funds never arrived at the proper destination. Wire Numbers DO NOT equal delivery.
Be careful out there.
Wednesday, August 8, 2007
Near-Term Home Sales to Hold in Modest Range
WASHINGTON, August 08, 2007 - The housing market will probably hold close to present levels in the months ahead, according to the latest forecast by the National Association of Realtors®.
Lawrence Yun, NAR senior economist, said he isn’t looking for any notable changes in sales activity. “Existing-home sales should be relatively stable over the next few months, holding in a modest range, with some pent-up demand growing from buyers who’ve been on the sidelines,” he said. “Mortgage disruptions will hold back sales over the short term, but long-term fundamentals are favorable. A modest upturn is projected for existing-home sales toward the end of the year, with broader improvement to include the new-home market by the middle of 2008.”
Existing-home sales are forecast at 6.04 million in 2007 and 6.38 million next year, below the 6.48 million recorded in 2006. New-home sales are expected to total 852,000 this year and 848,000 in 2008, down from 1.05 million in 2006. Housing starts, including multifamily units, are likely to total 1.43 million in 2007 and 1.40 million next year, below the 1.80 million units started in 2006.
“With the population growing, the demand for homes isn’t going away – it’s just being delayed,” Yun said. “More buyers, and cutbacks in new construction, will eventually draw down the inventory levels and support future price appreciation, but general gains will be modest next year. Serious buyers today have a long-term view of housing as an investment – speculators have left the market.”
Existing-home prices should ease by 1.2 percent to a median of $219,300 in 2007 before rising 2.0 percent next year to $223,600. The median new-home price will probably fall 2.3 percent to $240,800 in 2007, and then rise 2.3 percent next year to $246,300.
The 30-year fixed-rate mortgage is forecast to average 6.7 percent in the fourth quarter and then ease to the 6.5 percent range next year.
Growth in the U.S. gross domestic product (GDP) is projected to be 1.9 percent this year, down from a 2.9 percent growth rate in 2006; GDP is expected to grow 2.8 percent next year.
The unemployment rate is estimated to average 4.6 percent this year, unchanged from 2006. Inflation, as measured by the Consumer Price Index, is likely to be 2.7 percent this year, down from 3.2 percent in 2006. Inflation-adjusted disposable personal income should rise 3.1 percent in 2007, the same as last year.
The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing more than 1.3 million members involved in all aspects of the residential and commercial real estate industries.
# # #
Lawrence Yun, NAR senior economist, said he isn’t looking for any notable changes in sales activity. “Existing-home sales should be relatively stable over the next few months, holding in a modest range, with some pent-up demand growing from buyers who’ve been on the sidelines,” he said. “Mortgage disruptions will hold back sales over the short term, but long-term fundamentals are favorable. A modest upturn is projected for existing-home sales toward the end of the year, with broader improvement to include the new-home market by the middle of 2008.”
Existing-home sales are forecast at 6.04 million in 2007 and 6.38 million next year, below the 6.48 million recorded in 2006. New-home sales are expected to total 852,000 this year and 848,000 in 2008, down from 1.05 million in 2006. Housing starts, including multifamily units, are likely to total 1.43 million in 2007 and 1.40 million next year, below the 1.80 million units started in 2006.
“With the population growing, the demand for homes isn’t going away – it’s just being delayed,” Yun said. “More buyers, and cutbacks in new construction, will eventually draw down the inventory levels and support future price appreciation, but general gains will be modest next year. Serious buyers today have a long-term view of housing as an investment – speculators have left the market.”
Existing-home prices should ease by 1.2 percent to a median of $219,300 in 2007 before rising 2.0 percent next year to $223,600. The median new-home price will probably fall 2.3 percent to $240,800 in 2007, and then rise 2.3 percent next year to $246,300.
The 30-year fixed-rate mortgage is forecast to average 6.7 percent in the fourth quarter and then ease to the 6.5 percent range next year.
Growth in the U.S. gross domestic product (GDP) is projected to be 1.9 percent this year, down from a 2.9 percent growth rate in 2006; GDP is expected to grow 2.8 percent next year.
The unemployment rate is estimated to average 4.6 percent this year, unchanged from 2006. Inflation, as measured by the Consumer Price Index, is likely to be 2.7 percent this year, down from 3.2 percent in 2006. Inflation-adjusted disposable personal income should rise 3.1 percent in 2007, the same as last year.
The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing more than 1.3 million members involved in all aspects of the residential and commercial real estate industries.
# # #
Tuesday, August 7, 2007
Clinton Proposes Lender Rules, Prepayment Penalty Ban
Democratic presidential candidate Hillary Clinton proposed new requirements for lenders and an end to prepayment penalties for home mortgages as part of a plan to combat a growing number of defaults in the U.S.
``We need to act now with smart, practical solutions,'' Clinton said today during a campaign stop in Derry, New Hampshire. ``We need to put an end to fly-by-night mortgage brokers peddling loans to unqualified applicants based on inflated appraisals.''
The number of mortgages entering foreclosure in the U.S. reached a record in the first quarter as defaults spread from ``subprime'' borrowers with bad credit to people with reliable records. Clinton, a New York senator, spoke a day after American Home Mortgage Investment Corp. filed for bankruptcy, becoming the second-biggest residential lender in the U.S. to do so this year.
Clinton, 59, said she will introduce legislation in September that would ban penalties for people who pay off their mortgages ahead of time and require federal registration of mortgage brokers and greater disclosure of their fees. She would also set up a $1 billion fund for state programs that help borrowers avoid foreclosure and urge Fannie Mae and Freddie Mac, which operate under a federal charter, to do more on the issue.
Thursday, August 2, 2007
Moody’s To Revise Alt-A RMBS Rating Methodology
From Housing wire.com
Moody’s Investors Service said late yesterday that it will revise its ratings criteria for Alt-A RMBS, reflecting what it called “collateral weaknesses that have surfaced in Alt-A pools securitized in 2006.” To put this into perspective: similar revisions in the ratings criteria for subprime securities — which many critics say came too late in the cycle — forced massive downgrades of subprime RMBS, driving some pretty significant losses for investors.
Per the press release:
These changes, which are effective August 1, 2007, address the poor performance of subprime-like loans, low and no equity loans, and low and no documentation loans present in certain Alt-A transactions. In aggregate, our increase in loss estimates is projected to range from an increase of 10% for stronger Alt-A pools to an increase of more than 100% for weaker Alt-A pools. For example, our loss projection for a strong Alt-A pool may increase from 0.50% to 0.55%, whereas our loss projection for a weak Alt-A pool may increase from 1.5% to 3.00%.
It’s interesting to note that Moody’s is referring to Alt-A loans as “subprime-like,” a characterization many Alt-A lenders including IndyMac Bank have contested. But it appears Moody’s has its reasons:
“Actual performance of weaker Alt-A loans has in many cases been comparable to stronger subprime performance, signaling that underwriting standards were likely closer to subprime guidelines,” says Moody’s Senior Credit Officer, Marjan Riggi. “Absent strong compensating factors, we will model these loans as subprime loans.”
Those are pretty strong words, and the fact that Moody’s will now look to model at least some Alt-A loans as if they were subprime suggests that a good number of Alt-A downgrades may be just over the horizon.
Moody’s Investors Service said late yesterday that it will revise its ratings criteria for Alt-A RMBS, reflecting what it called “collateral weaknesses that have surfaced in Alt-A pools securitized in 2006.” To put this into perspective: similar revisions in the ratings criteria for subprime securities — which many critics say came too late in the cycle — forced massive downgrades of subprime RMBS, driving some pretty significant losses for investors.
Per the press release:
These changes, which are effective August 1, 2007, address the poor performance of subprime-like loans, low and no equity loans, and low and no documentation loans present in certain Alt-A transactions. In aggregate, our increase in loss estimates is projected to range from an increase of 10% for stronger Alt-A pools to an increase of more than 100% for weaker Alt-A pools. For example, our loss projection for a strong Alt-A pool may increase from 0.50% to 0.55%, whereas our loss projection for a weak Alt-A pool may increase from 1.5% to 3.00%.
It’s interesting to note that Moody’s is referring to Alt-A loans as “subprime-like,” a characterization many Alt-A lenders including IndyMac Bank have contested. But it appears Moody’s has its reasons:
“Actual performance of weaker Alt-A loans has in many cases been comparable to stronger subprime performance, signaling that underwriting standards were likely closer to subprime guidelines,” says Moody’s Senior Credit Officer, Marjan Riggi. “Absent strong compensating factors, we will model these loans as subprime loans.”
Those are pretty strong words, and the fact that Moody’s will now look to model at least some Alt-A loans as if they were subprime suggests that a good number of Alt-A downgrades may be just over the horizon.
Friday, July 6, 2007
Bad Pennies and Title Agents
Bad Title Agents are like bad pennies - they keep coming back.
If you’ve been in the title business long enough, you’ve heard the story: A Title Agent bends the rules, overcharges clients, skims money, or participates in fraud (multiple choice, pick all that apply). Their underwriter discovers a problem, scratches the surface and decides that they want no more of the relationship. The relationship is cancelled.
Game over for the agent? Not even. No charges are filed, no licenses are revoked, and the bad penny Agent stays in business. In many cases, it doesn’t even slow them down.
The Agent may only lose one of several underwriters. Underwriters talk, but they don’t always share. Concerned about litigation, they leave their peers to their own discovery. There’s no clearing house of agent information and no one is keeping score. The other underwriters may not even suspect there’s a problem with the agent.
Occasionally another underwriter comes rushing in, knowing of the problem, but deliberately overlooking it. The bad penny still has a license and a book of business. If you have the tolerance for risk, why not, there’s money to be made.
And there are underwriters who just don’t want to know – don’t ask, don’t tell. If you don’t go looking for it, you can’t find it. The premiums keep flowing.
The details don’t really matter, the result is the same - an entire industry starts to look sleazy.
The title industry needs to weed out the bad pennies and do it now. There’s been talk about standards (Source of Title, Title-opoly), but standards are empty words unless someone enforces them. There are those in the industry who have problems with following the rules, let alone moving to the higher plane of standards. Let’s clean that up first.
Agents and those who care about industry need to take a stand:
Support those who support the industry. Let the underwriters know that looking the other way isn’t acceptable anymore. The bad pennies hurt the consumer and hurt the industry. If your underwriter doesn’t seem interested, vote with your feet – find an underwriter who is interested in protecting the industry.
Lobby legislators and regulators personally and through our professional organizations to:
End the Secrets. Allow the underwriters to share information about cancellations for cause without fear of litigation.
Get the Bad Pennies out of our Business. Revoke the licenses of those involved in misdeeds. Forever.
Keep them out of Real Estate. Change or modify the governing laws so that those found guilty of misdeeds cannot practice law, or hold licenses for mortgage, real estate or appraisal. Otherwise, like cockroaches, they will scurry to a dark corner of the industry and continue business as usual.
Prosecute. Insist that those that violate the law be turned over to the authorities and prosecuted to the fullest extent of the law.
We need to clean up the industry and do it now before someone else comes in and decides to clean it up for us. We won’t like it.
From:http://clearingtitle.wordpress.com/
If you’ve been in the title business long enough, you’ve heard the story: A Title Agent bends the rules, overcharges clients, skims money, or participates in fraud (multiple choice, pick all that apply). Their underwriter discovers a problem, scratches the surface and decides that they want no more of the relationship. The relationship is cancelled.
Game over for the agent? Not even. No charges are filed, no licenses are revoked, and the bad penny Agent stays in business. In many cases, it doesn’t even slow them down.
The Agent may only lose one of several underwriters. Underwriters talk, but they don’t always share. Concerned about litigation, they leave their peers to their own discovery. There’s no clearing house of agent information and no one is keeping score. The other underwriters may not even suspect there’s a problem with the agent.
Occasionally another underwriter comes rushing in, knowing of the problem, but deliberately overlooking it. The bad penny still has a license and a book of business. If you have the tolerance for risk, why not, there’s money to be made.
And there are underwriters who just don’t want to know – don’t ask, don’t tell. If you don’t go looking for it, you can’t find it. The premiums keep flowing.
The details don’t really matter, the result is the same - an entire industry starts to look sleazy.
The title industry needs to weed out the bad pennies and do it now. There’s been talk about standards (Source of Title, Title-opoly), but standards are empty words unless someone enforces them. There are those in the industry who have problems with following the rules, let alone moving to the higher plane of standards. Let’s clean that up first.
Agents and those who care about industry need to take a stand:
Support those who support the industry. Let the underwriters know that looking the other way isn’t acceptable anymore. The bad pennies hurt the consumer and hurt the industry. If your underwriter doesn’t seem interested, vote with your feet – find an underwriter who is interested in protecting the industry.
Lobby legislators and regulators personally and through our professional organizations to:
End the Secrets. Allow the underwriters to share information about cancellations for cause without fear of litigation.
Get the Bad Pennies out of our Business. Revoke the licenses of those involved in misdeeds. Forever.
Keep them out of Real Estate. Change or modify the governing laws so that those found guilty of misdeeds cannot practice law, or hold licenses for mortgage, real estate or appraisal. Otherwise, like cockroaches, they will scurry to a dark corner of the industry and continue business as usual.
Prosecute. Insist that those that violate the law be turned over to the authorities and prosecuted to the fullest extent of the law.
We need to clean up the industry and do it now before someone else comes in and decides to clean it up for us. We won’t like it.
From:http://clearingtitle.wordpress.com/
Friday, June 29, 2007
S&P, Moody's Hide Rising Risk on $200 Billion of Mortgage Bonds
June 29 (Bloomberg) -- Standard & Poor's, Moody's Investors Service and Fitch Ratings are masking burgeoning losses in the market for subprime mortgage bonds by failing to cut the credit ratings on about $200 billion of securities backed by home loans.
The highest default rates on home loans in a decade have reduced prices of some bonds backed by mortgages to people with poor or limited credit by more than 50 cents on the dollar and forced New York-based Bear Stearns Cos. to offer $3.2 billion to bail out a money-losing hedge fund. Almost 65 percent of the bonds in indexes that track subprime mortgage debt don't meet the ratings criteria in place when they were sold, according to data compiled by Bloomberg.
That may just be the beginning. Downgrades by S&P, Moody's and Fitch would force hundreds of investors to sell holdings, roiling the $800 billion market for securities backed by subprime mortgages and $1 trillion of collateralized debt obligations, the fastest growing part of the financial markets.
``You'll see massive losses from banks, insurance companies and pension managers,'' said Joshua Rosner, a managing director at investment research firm Graham Fisher & Co. in New York and co-author of a study last month that said S&P, Moody's and Fitch understate the risks of subprime mortgage bonds. ``The longer they wait, the worse it's going to be.''
Loss Estimates
Rosner estimates that collateralized debt obligations, which have packaged thousands of bonds and derivatives into new securities, will lose $125 billion. Institutional Risk Analytics, a Hawthorne, California-based company that writes computer programs for the four biggest accounting firms, says 25 percent of the face value of CDOs is in jeopardy, or $250 billion.
Losses may rival the savings and loan crisis of the 1980s and 1990s. The Resolution Trust Corp., formed by the U.S. government to resolve the thrift crisis, sold $452 billion of assets at a cost to taxpayers of about $140 billion.
The current debacle threatens the growth of asset-backed bonds, securities that use consumer, commercial and other loans and receivables as collateral. That market, which includes mortgage securities, has doubled to about $10 trillion since 2000, according to the Securities Industry Financial Markets Association, a New York-based trade group.
Executives at New York-based S&P, Moody's and Fitch say they are waiting until foreclosure sales show that the collateral backing the bonds has declined enough to create losses before lowering ratings on some of the $6.65 trillion in outstanding mortgage-backed debt.
`Knee-Jerk Responses'
Homeowners may be delinquent on mortgage payments for at least three months before foreclosure proceedings begin, and the process can be delayed if a borrower files for bankruptcy or fights eviction. Even when lenders repossess a home, the value of the mortgage isn't written down until the house is sold. Bondholders only see a loss if the price of a house is lower than the loan used as collateral for debt securities.
``We're taking action as we see it,'' said Brian Clarkson, Moody's global head of the structured products in New York. ``We're not doing knee-jerk responses.''
Ratings companies are postponing the inevitable and are dumping securities as defaults by subprime borrowers increase, investors say.
Lehman Brothers Holdings Inc., the biggest underwriter of mortgage bonds, sold $2.43 billion of Structured Asset Investment Loan Trust bonds a year ago. An $18 million portion of the bonds rated BBB- fell to 43 cents on the dollar from 98 cents in January, according to prices compiled by New York-based Merrill Lynch & Co.
Increased Delinquencies
More than 15 percent of the mortgages in the securities are at least 60 days delinquent and another 8 percent are in foreclosure, according to the bond trustee. Moody's and S&P say they are considering downgrading the debt.
A total of 11 percent of the loan collateral for all subprime mortgage bonds had payments at least 90 days late, were in foreclosure or had the underlying property seized, according to a June 1 report by Friedman, Billings, Ramsey Group Inc., a securities firm in Arlington, Virginia. In May 2005, that amount was 5.4 percent.
The increase in delinquencies means CDO investors, who sometimes use borrowed money to magnify their bets, may be holding securities that are riskier than their ratings indicate, said Bill Gross, chief investment officer at Pacific Investment Management Co., based in Newport Beach, California.
``The Petri dish turns from a benign experiment in financial engineering to a destructive virus,'' Gross, who oversees the world's biggest bond fund, said this week in a commentary on the firm's Web site. The companies gave the mortgage bonds investment-grade ratings, duped by the ``six-inch hooker heels'' of collateral that can't be trusted, he said.
No Disclosure
CDOs aren't required to disclose the contents of their holdings to the U.S. Securities and Exchange Commission and most can change them after the bonds are sold.
Losses reflect the decline of the U.S. housing market, where the national median home sale price is poised for its first annual drop since the Great Depression, according to the National Association of Realtors.
Investors are responding by retreating from all sorts of riskier assets, threatening to reduce credit. Companies canceled at least $3 billion of bond sales worldwide in the past two weeks. U.S. Treasury notes snapped a six-week losing streak last week, pushing yields down from the highest in five years, as investors sought the haven of government bonds.
The subprime meltdown is sending shock waves through the capital markets in part because mortgage bonds are the world's biggest debt market, according to the Securities Industry Financial Markets Association.
Thousands of Investors
Thousands of investors own mortgage bonds, ranging from fund managers such as Pimco, a unit of Munich-based Allianz SE, to the California Public Employees' Retirement System, the biggest U.S. public pension fund, and foreign banks like Fortis SA in Brussels.
CDOs are created by taking bonds, loans and other securities, pooling them together and chopping them into new securities with ratings ranging from the safest AAA to ones so risky they have no rankings. Investors snapped up $500 million of the securities globally last year because they typically yield more than bonds with the same credit ratings. Sales of CDOs have risen five-fold since 2001, according to JPMorgan Chase & Co.
One reason for the higher yields on some CDOs is that subprime-related debt made up about 45 percent of the collateral backing the $375 billion of CDOs sold in the U.S. in 2006, data compiled by Moody's and New York-based Morgan Stanley show.
Drexel Creation
Credit Suisse Group, based in Zurich, created a $1 billion CDO called Class V Funding III Ltd. in February by combining the A rated portions of 91 other CDOs that invest in debt backed by consumer obligations.
The biggest portion, or $859.2 million of bonds, is rated AAA and pays interest as low as 5.70 percent. The smallest piece, or $2.5 million, is ranked BBB and has a coupon of 10.61 percent, according to a May 22 report produced by the trustee for the CDO.
At the time of the report, AAA rated corporate bonds had an average yield of 5.45 percent, while BBB debt yielded 6.03 percent, according to Merrill Lynch index data.
Demand for CDOs, first used in 1987 by bankers at now- defunct Drexel Burnham Lambert Inc., is drying up as mortgage bond losses spread. Planned sales of CDOs that rely on high- rated asset-backed debt dropped to $3 billion this month from $20 billion in May, according to analysts at JPMorgan, the third-largest U.S. bank.
First Year Rankings
``A lot of these should be downgraded sooner rather than later,'' said Jeff Given at John Hancock Advisors LLC in Boston, who oversees $3.5 billion of mortgage bonds. The ratings companies may be embarrassed to downgrade the bonds, he said. ``It's easier to say two years from now that you were wrong on a rating than it is to say you were wrong five months after you rated it.''
Fitch is ``deliberate'' in its actions, John Bonfiglio, the firm's head of U.S. structured finance ratings, said in an interview in his New York office. Fitch is a unit of Paris-based Fimalac AS. ``I would not say we were slow.''
The ratings companies point out they have downgraded bonds less than a year after they were sold, the first time that has ever happened. S&P has lowered a total of 15 subprime bonds sold in 2005, or 0.31 percent of the total, and 32 sold in 2006, or 0.68 percent.
``People are surprised there haven't been more downgrades,'' Claire Robinson, a managing director at Moody's, said during an investor conference sponsored by the firm in New York on June 5. ``What they don't understand about the rating process is that we don't change our ratings on speculation about what's going to happen.''
Bear Stearns Jolt
Accurate rankings for mortgage bonds and CDOs become even more important because the securities rarely trade, so investors can't immediately value their holdings when market conditions change. Instead, they often rely on sales of similar securities or computer models that use ratings and past performance of the underlying collateral to come up with a value.
CDO investors were jolted this month by the losses in the Bear Stearns hedge funds.
The funds, called High-Grade Structured Credit Strategies Fund and High-Grade Structured Credit Strategies Enhanced Leverage Fund, had borrowed $10 billion from securities firms and banks to make bets on CDOs, mortgage bonds and other securities. As the values of the holdings declined, creditors seized some of the collateral pledged for the loans and sold them through auctions.
Fire Sale
A concern was that a forced sale would slash prices on CDOs, providing new, lower benchmarks that investors would have to use to value their holdings, resulting in billions of dollars of losses.
``We remain nervous about the end of the week, when many leveraged investors in the CDO markets will have to mark down their positions,'' debt strategists at Barclays Capital in New York said in a June 28 report. ``The worry is that this will be large enough to trigger margin calls which, in turn, will cause other liquidations and so on.''
Merrill Lynch threatened to take and sell $850 million of bonds held as collateral for loans it had made to the funds. Lehman, JPMorgan and Cantor Fitzgerald LP, all based in New York, also pulled out.
Bear Stearns avoided an even worse fallout by offering to provide one of the funds with loans. The original $3.2 billion provision was reduced to $1.6 billion after the firm sold securities and lenders took some of the collateral.
UBS, Queen's Walk
Other hedge funds are closing down or reporting losses because of subprime losses. Zurich-based UBS AG shuttered a hedge fund unit that saddled the biggest money manager for wealthy investors with 150 million Swiss francs ($122 million) of first-quarter losses.
Queen's Walk Investment Ltd., a London-based fund, reported a loss of 67.7 million euros ($91.2 million) last week for the year ended March 31. Cambridge Place Investment Management LLP, another London money manager, said yesterday that it will close Caliber Global Investment Ltd., a fund that had $908 million of assets in March.
A sweeping downgrade of bonds would lead to sales of assets by investors, banks and pension funds who operate under rules that would cause them to adjust their portfolios to reflect the new ratings. S&P, Moody's and Fitch have restricted their ratings changes on BBB- rated mortgage bonds to 1.3 percent of those outstanding, according to Credit Suisse analyst Rod Dubitsky in New York. About 80 percent of the remainder will eventually have their ratings reduced, he said.
Abandoned Criteria
``We're talking about massive, massive downgrades here,'' Dubitsky, the No. 2 asset-backed real estate debt analyst in last year's Institutional Investor magazine poll of researchers, said in a telephone interview.
S&P abandoned seven-year-old criteria for determining a bond's protection against default in February.
Under the old guidelines, S&P said a bond's ``credit support'' must be twice the rolling 90-day average of the sum of value of mortgages delinquent by three months or in foreclosure plus real estate that has been seized by the lender.
Credit support for a bond is determined by looking at the number of lower-rated securities that would have to go bust before it suffered losses, the dollar amount of mortgages available to pay back the interest and the annualized interest the mortgages generate in excess of what needs to be paid to bondholders.
The measure was one of four tests used by S&P, said Chris Atkins, a spokesman for the company, a unit of New York-based McGraw-Hill Cos. A failure to meet the credit support standard wouldn't have automatically resulted in a downgrade, he said.
$200 Billion
Of the 300 bonds in ABX indexes, the benchmarks for the subprime mortgage debt market, 190 fail to meet the credit support standard, according to data released in May by trustees responsible for funneling interest payments to debt investors.
Most of those, representing about $200 billion, are rated below AAA. Some contain so many defaulted loans that the credit support is outweighed by potential losses. Fifty of the 60 A rated bonds fail the criteria, as do 22 of the 60 AA rated bonds and three of the 60 AAA bonds.
All but five of 120 securities in BBB or BBB- rated portions of the mortgage-backed securities would have failed S&P's criteria, according to data compiled by Bloomberg.
None have been downgraded, though S&P and Moody's have parts of three pools of securities linked to the index under review for a downgrade. Fitch has downgraded parts of three mortgage pools tied to the ABX and put four on watch for downgrade.
`Warrant Our Attention'
``Don't misunderstand me: I'm not saying these others are performing great,'' Robert Pollsen, a director in S&P's residential mortgage surveillance in New York, said in an interview last month. ``And they certainly might warrant our attention several months from now, which obviously we're going to do.''
Some investors say the ratings companies are waiting too long before downgrading the mortgage bonds and the CDOs that contain them. They noted that S&P and Moody's maintained their investment-grade ranking on Enron Corp. until days before the Houston-based energy trader filed for bankruptcy.
``That's like saying these trees are just fine as there's a forest fire on the other side of the hill,'' said James Melcher, president of money-management firm Balestra Capital Ltd. in New York, who runs a $105 million hedge fund.
The highest default rates on home loans in a decade have reduced prices of some bonds backed by mortgages to people with poor or limited credit by more than 50 cents on the dollar and forced New York-based Bear Stearns Cos. to offer $3.2 billion to bail out a money-losing hedge fund. Almost 65 percent of the bonds in indexes that track subprime mortgage debt don't meet the ratings criteria in place when they were sold, according to data compiled by Bloomberg.
That may just be the beginning. Downgrades by S&P, Moody's and Fitch would force hundreds of investors to sell holdings, roiling the $800 billion market for securities backed by subprime mortgages and $1 trillion of collateralized debt obligations, the fastest growing part of the financial markets.
``You'll see massive losses from banks, insurance companies and pension managers,'' said Joshua Rosner, a managing director at investment research firm Graham Fisher & Co. in New York and co-author of a study last month that said S&P, Moody's and Fitch understate the risks of subprime mortgage bonds. ``The longer they wait, the worse it's going to be.''
Loss Estimates
Rosner estimates that collateralized debt obligations, which have packaged thousands of bonds and derivatives into new securities, will lose $125 billion. Institutional Risk Analytics, a Hawthorne, California-based company that writes computer programs for the four biggest accounting firms, says 25 percent of the face value of CDOs is in jeopardy, or $250 billion.
Losses may rival the savings and loan crisis of the 1980s and 1990s. The Resolution Trust Corp., formed by the U.S. government to resolve the thrift crisis, sold $452 billion of assets at a cost to taxpayers of about $140 billion.
The current debacle threatens the growth of asset-backed bonds, securities that use consumer, commercial and other loans and receivables as collateral. That market, which includes mortgage securities, has doubled to about $10 trillion since 2000, according to the Securities Industry Financial Markets Association, a New York-based trade group.
Executives at New York-based S&P, Moody's and Fitch say they are waiting until foreclosure sales show that the collateral backing the bonds has declined enough to create losses before lowering ratings on some of the $6.65 trillion in outstanding mortgage-backed debt.
`Knee-Jerk Responses'
Homeowners may be delinquent on mortgage payments for at least three months before foreclosure proceedings begin, and the process can be delayed if a borrower files for bankruptcy or fights eviction. Even when lenders repossess a home, the value of the mortgage isn't written down until the house is sold. Bondholders only see a loss if the price of a house is lower than the loan used as collateral for debt securities.
``We're taking action as we see it,'' said Brian Clarkson, Moody's global head of the structured products in New York. ``We're not doing knee-jerk responses.''
Ratings companies are postponing the inevitable and are dumping securities as defaults by subprime borrowers increase, investors say.
Lehman Brothers Holdings Inc., the biggest underwriter of mortgage bonds, sold $2.43 billion of Structured Asset Investment Loan Trust bonds a year ago. An $18 million portion of the bonds rated BBB- fell to 43 cents on the dollar from 98 cents in January, according to prices compiled by New York-based Merrill Lynch & Co.
Increased Delinquencies
More than 15 percent of the mortgages in the securities are at least 60 days delinquent and another 8 percent are in foreclosure, according to the bond trustee. Moody's and S&P say they are considering downgrading the debt.
A total of 11 percent of the loan collateral for all subprime mortgage bonds had payments at least 90 days late, were in foreclosure or had the underlying property seized, according to a June 1 report by Friedman, Billings, Ramsey Group Inc., a securities firm in Arlington, Virginia. In May 2005, that amount was 5.4 percent.
The increase in delinquencies means CDO investors, who sometimes use borrowed money to magnify their bets, may be holding securities that are riskier than their ratings indicate, said Bill Gross, chief investment officer at Pacific Investment Management Co., based in Newport Beach, California.
``The Petri dish turns from a benign experiment in financial engineering to a destructive virus,'' Gross, who oversees the world's biggest bond fund, said this week in a commentary on the firm's Web site. The companies gave the mortgage bonds investment-grade ratings, duped by the ``six-inch hooker heels'' of collateral that can't be trusted, he said.
No Disclosure
CDOs aren't required to disclose the contents of their holdings to the U.S. Securities and Exchange Commission and most can change them after the bonds are sold.
Losses reflect the decline of the U.S. housing market, where the national median home sale price is poised for its first annual drop since the Great Depression, according to the National Association of Realtors.
Investors are responding by retreating from all sorts of riskier assets, threatening to reduce credit. Companies canceled at least $3 billion of bond sales worldwide in the past two weeks. U.S. Treasury notes snapped a six-week losing streak last week, pushing yields down from the highest in five years, as investors sought the haven of government bonds.
The subprime meltdown is sending shock waves through the capital markets in part because mortgage bonds are the world's biggest debt market, according to the Securities Industry Financial Markets Association.
Thousands of Investors
Thousands of investors own mortgage bonds, ranging from fund managers such as Pimco, a unit of Munich-based Allianz SE, to the California Public Employees' Retirement System, the biggest U.S. public pension fund, and foreign banks like Fortis SA in Brussels.
CDOs are created by taking bonds, loans and other securities, pooling them together and chopping them into new securities with ratings ranging from the safest AAA to ones so risky they have no rankings. Investors snapped up $500 million of the securities globally last year because they typically yield more than bonds with the same credit ratings. Sales of CDOs have risen five-fold since 2001, according to JPMorgan Chase & Co.
One reason for the higher yields on some CDOs is that subprime-related debt made up about 45 percent of the collateral backing the $375 billion of CDOs sold in the U.S. in 2006, data compiled by Moody's and New York-based Morgan Stanley show.
Drexel Creation
Credit Suisse Group, based in Zurich, created a $1 billion CDO called Class V Funding III Ltd. in February by combining the A rated portions of 91 other CDOs that invest in debt backed by consumer obligations.
The biggest portion, or $859.2 million of bonds, is rated AAA and pays interest as low as 5.70 percent. The smallest piece, or $2.5 million, is ranked BBB and has a coupon of 10.61 percent, according to a May 22 report produced by the trustee for the CDO.
At the time of the report, AAA rated corporate bonds had an average yield of 5.45 percent, while BBB debt yielded 6.03 percent, according to Merrill Lynch index data.
Demand for CDOs, first used in 1987 by bankers at now- defunct Drexel Burnham Lambert Inc., is drying up as mortgage bond losses spread. Planned sales of CDOs that rely on high- rated asset-backed debt dropped to $3 billion this month from $20 billion in May, according to analysts at JPMorgan, the third-largest U.S. bank.
First Year Rankings
``A lot of these should be downgraded sooner rather than later,'' said Jeff Given at John Hancock Advisors LLC in Boston, who oversees $3.5 billion of mortgage bonds. The ratings companies may be embarrassed to downgrade the bonds, he said. ``It's easier to say two years from now that you were wrong on a rating than it is to say you were wrong five months after you rated it.''
Fitch is ``deliberate'' in its actions, John Bonfiglio, the firm's head of U.S. structured finance ratings, said in an interview in his New York office. Fitch is a unit of Paris-based Fimalac AS. ``I would not say we were slow.''
The ratings companies point out they have downgraded bonds less than a year after they were sold, the first time that has ever happened. S&P has lowered a total of 15 subprime bonds sold in 2005, or 0.31 percent of the total, and 32 sold in 2006, or 0.68 percent.
``People are surprised there haven't been more downgrades,'' Claire Robinson, a managing director at Moody's, said during an investor conference sponsored by the firm in New York on June 5. ``What they don't understand about the rating process is that we don't change our ratings on speculation about what's going to happen.''
Bear Stearns Jolt
Accurate rankings for mortgage bonds and CDOs become even more important because the securities rarely trade, so investors can't immediately value their holdings when market conditions change. Instead, they often rely on sales of similar securities or computer models that use ratings and past performance of the underlying collateral to come up with a value.
CDO investors were jolted this month by the losses in the Bear Stearns hedge funds.
The funds, called High-Grade Structured Credit Strategies Fund and High-Grade Structured Credit Strategies Enhanced Leverage Fund, had borrowed $10 billion from securities firms and banks to make bets on CDOs, mortgage bonds and other securities. As the values of the holdings declined, creditors seized some of the collateral pledged for the loans and sold them through auctions.
Fire Sale
A concern was that a forced sale would slash prices on CDOs, providing new, lower benchmarks that investors would have to use to value their holdings, resulting in billions of dollars of losses.
``We remain nervous about the end of the week, when many leveraged investors in the CDO markets will have to mark down their positions,'' debt strategists at Barclays Capital in New York said in a June 28 report. ``The worry is that this will be large enough to trigger margin calls which, in turn, will cause other liquidations and so on.''
Merrill Lynch threatened to take and sell $850 million of bonds held as collateral for loans it had made to the funds. Lehman, JPMorgan and Cantor Fitzgerald LP, all based in New York, also pulled out.
Bear Stearns avoided an even worse fallout by offering to provide one of the funds with loans. The original $3.2 billion provision was reduced to $1.6 billion after the firm sold securities and lenders took some of the collateral.
UBS, Queen's Walk
Other hedge funds are closing down or reporting losses because of subprime losses. Zurich-based UBS AG shuttered a hedge fund unit that saddled the biggest money manager for wealthy investors with 150 million Swiss francs ($122 million) of first-quarter losses.
Queen's Walk Investment Ltd., a London-based fund, reported a loss of 67.7 million euros ($91.2 million) last week for the year ended March 31. Cambridge Place Investment Management LLP, another London money manager, said yesterday that it will close Caliber Global Investment Ltd., a fund that had $908 million of assets in March.
A sweeping downgrade of bonds would lead to sales of assets by investors, banks and pension funds who operate under rules that would cause them to adjust their portfolios to reflect the new ratings. S&P, Moody's and Fitch have restricted their ratings changes on BBB- rated mortgage bonds to 1.3 percent of those outstanding, according to Credit Suisse analyst Rod Dubitsky in New York. About 80 percent of the remainder will eventually have their ratings reduced, he said.
Abandoned Criteria
``We're talking about massive, massive downgrades here,'' Dubitsky, the No. 2 asset-backed real estate debt analyst in last year's Institutional Investor magazine poll of researchers, said in a telephone interview.
S&P abandoned seven-year-old criteria for determining a bond's protection against default in February.
Under the old guidelines, S&P said a bond's ``credit support'' must be twice the rolling 90-day average of the sum of value of mortgages delinquent by three months or in foreclosure plus real estate that has been seized by the lender.
Credit support for a bond is determined by looking at the number of lower-rated securities that would have to go bust before it suffered losses, the dollar amount of mortgages available to pay back the interest and the annualized interest the mortgages generate in excess of what needs to be paid to bondholders.
The measure was one of four tests used by S&P, said Chris Atkins, a spokesman for the company, a unit of New York-based McGraw-Hill Cos. A failure to meet the credit support standard wouldn't have automatically resulted in a downgrade, he said.
$200 Billion
Of the 300 bonds in ABX indexes, the benchmarks for the subprime mortgage debt market, 190 fail to meet the credit support standard, according to data released in May by trustees responsible for funneling interest payments to debt investors.
Most of those, representing about $200 billion, are rated below AAA. Some contain so many defaulted loans that the credit support is outweighed by potential losses. Fifty of the 60 A rated bonds fail the criteria, as do 22 of the 60 AA rated bonds and three of the 60 AAA bonds.
All but five of 120 securities in BBB or BBB- rated portions of the mortgage-backed securities would have failed S&P's criteria, according to data compiled by Bloomberg.
None have been downgraded, though S&P and Moody's have parts of three pools of securities linked to the index under review for a downgrade. Fitch has downgraded parts of three mortgage pools tied to the ABX and put four on watch for downgrade.
`Warrant Our Attention'
``Don't misunderstand me: I'm not saying these others are performing great,'' Robert Pollsen, a director in S&P's residential mortgage surveillance in New York, said in an interview last month. ``And they certainly might warrant our attention several months from now, which obviously we're going to do.''
Some investors say the ratings companies are waiting too long before downgrading the mortgage bonds and the CDOs that contain them. They noted that S&P and Moody's maintained their investment-grade ranking on Enron Corp. until days before the Houston-based energy trader filed for bankruptcy.
``That's like saying these trees are just fine as there's a forest fire on the other side of the hill,'' said James Melcher, president of money-management firm Balestra Capital Ltd. in New York, who runs a $105 million hedge fund.
Monday, June 25, 2007
From the WSJ Online Journal
REAL TIME
By JASON FRY
When Public Records Are Too Public
Open Records Are an Established Tradition,But Does Internet Access Call for a Change?
June 25, 2007
The Web wasn't created to appeal to our sense of voyeurism. It just feels that way sometimes.
I'm not talking about dirty pictures, but the ability the Web's given all of us to snoop on our friends, colleagues and neighbors, from Googling the new guy in the next cube to finding out what the people next door paid for their house to seeing which neighbors have given money to which candidates and parties.
Such behavior runs the gamut from generally acceptable nosiness (we're a nation of self-Googlers, after all) to mildly gauche (in New York City discussing what apartments cost is practically a sport) to creepy (keep your nose out of my politics). As with all questions about Internet privacy and personal information, there are generational differences at work -- if you came of age blogging and being Googled, someone seeing you gave $100 to MoveOn.org might not be the biggest deal. (I wrote about different generations' attitudes toward personal information online earlier this month.)
But then there's another set of personal details that have made their way online, and these documents are much more worrisome. Property deeds, marriage and divorce records, court files, motor-vehicle information and tax documents are increasingly being digitized, and contain a wealth of information that few of us would want online: Social Security numbers, birth dates, maiden names and images of our signatures. Local governments have rushed to put those documents online for a decade or so, often without scrubbing them of such information. And that's made them potentially fertile ground for busybodies, stalkers and identity thieves.
Betty "BJ" Ostergren, a 58-year-old from outside Richmond, Va., has made it her mission to alert people to the dangers of public records online. Ms. Ostergren is feisty bordering on ferocious: Her tactics include mailing letters to people alerting them that their personal information is online and posting copies of public documents (or links to them) displaying the personal information of circuit-court clerks and other politicians, including former House Majority Leader Tom DeLay and Florida Gov. Jeb Bush. (See her Web site, the Virginia Watchdog, here; this Washington Post profile of her is also a good read.)
Long a local activist, Ms. Ostergren began her crusade in the summer of 2002, when a title examiner called to tell her that public records from her home county of Hanover would be put online within a few weeks. Ms. Ostergren says she objected to the fact that her signature would be online -- not to mention other people's Social Security numbers. She confronted her county's circuit-court clerk and began a telephone campaign.
"People were livid," she says, adding with satisfaction: "Our records in this county did not go online." Since then, her campaign has grown to include the entire U.S. -- Ms. Ostergren moves easily from a discussion of Franklin County, Ohio's decision to remove images of mortgage records to what she sees as Florida's lack of progress and Maricopa County, Ariz.'s troubles.
An important note: The records being put online are public, and available – sensitive information and all -- to anyone who goes down to the courthouse or county seat. And many of them have already been compiled and digitized by data warehouses, who often make them available to marketers and real-estate professionals. Open records are a longstanding American tradition; so too is a hold-your-nose acceptance that commercial entities will try to make a profit by exploiting that openness.
But at the same time, it's too simplistic to say that just because records are available by going to a government building and talking to a clerk, we shouldn't worry that they're now available through some Web sleuthing. Sometimes a difference of degree is so significant that it may as well be a difference of kind: Foes of the recording industry rightly note that people have always stolen music by taping it for their friends, but it's risible to compare the potential effect of running off some cassette copies of an album to that of making a digital copy of that album available for the taking online.
Similarly, it takes a pretty determined busybody or thief to visit the courthouse, and the law has acknowledged this, noting the "practical obscurity" of such records. The Web may not change the status of public records, but it means the end of practical obscurity, enabling drive-by voyeurism for the bored or petty – or identity thieves in the cybercafes of, say, Nigeria or Romania.
How did Social Security numbers and other sensitive information wind up online? Blame a collision between our enthusiasm for technology and our failure to appreciate its consequences. In the last decade, states and local governments rushed to put documents online, eager to appear progressive and make government more efficient. But the momentum of that effort got ahead of our ability to sort out what might happen. In particular, we underestimated the borderline-spooky power of search to find needles in technological haystacks.
Now, the job is to clean up the mess. And there does seem to be progress: Counties are working to redact sensitive information from online records, and courts and government agencies are doing a better job keeping personal information off the Web in the first place.
Mark Monacelli is president of the Property Rights Industry Association, a trade group that's working toward developing national standards for accessing public property records, and the recorder for St. Louis County, Minn. Mr. Monacelli says PRIA has "worked very hard with lenders and [mortgage] settlement officers to not put Social Security numbers on mortgages." He adds that "we try, to the best of our ability, to create awareness of the issue and work with counties to be aware of who's looking at your information."
At the same time, Mr. Monacelli notes that there are reasons to put information about property records online. Quick access to such information offers a slew of economic benefits. Mr. Monacelli says that when he purchased his first home, the process from looking across the lender's desk to getting the title took about 90 days – an unacceptably glacial pace now. Technology has allowed us to obtain a new mortgage or refinance very quickly; without that speed, he argues, the recent real-estate boom wouldn't have existed. "Where would this economy be without it?" he asks.
There are other standards for handling personal information, of course. This Associated Press story documents Sweden's recent clampdown on ratsit.se, a site which offered financial details for free from the country's national tax authority. If you wanted to know how much your colleague made or if your neighbor was in debt, you could. That may seem amazing to Americans, but such openness is long-established in Swedish society. Discussing his site, Ratsit's CEO told the AP's Louise Nordstrom that "a lot of people use it to negotiate their pay."
As in the U.S., it wasn't that Sweden was suddenly making documents that had been private public. Rather, it's that Ratsit did away with practical obscurity. Now, information is still available via the site, but it's no longer free: Ten requests a week cost $21. And anyone whose finances are viewed will be notified by mail and told who asked. (That new standard seems to go further than Americans might like: Imagine the chilling effects of such notification on investigative journalism or community activism.)
So what should we do?
"To me, if people want to see the records, let them go down to the courthouse -- that way you have to put forth some effort," Ms. Ostergren says, adding "I think there are too many people we have a responsibility to protect."
Robert Gellman, a Washington, D.C.-based privacy and information-policy consultant, thinks the digital era calls for states to reassess what records should be public, and what level of access should be allowed. But he defends the U.S.'s tradition of openness as a way of keeping the system honest.
"Property-tax records are available to other people for a good reason," he says, noting that if you see your house is assessed for more than your neighbor's -- or a similar house across town -- you can appeal. On the other hand, access to driver-license information is now largely limited to law-enforcement agencies and insurance companies -- the legacy of the 1989 murder of actress Rebecca Schaeffer, whose killer obtained her personal information through the Department of Motor Vehicles.
"There should be discussions about these things, and there's no absolute right or wrong answer here," Mr. Gellman says.
Mark McCreary, a lawyer with Philadelphia's Fox Rothschild LLP who specializes in Internet law, expects a long, slow grind as sensitive information is redacted from old documents and standards emerge for keeping such information off new documents – and are adopted by local governments.
"The solution is for all the counties to do it, for all the states to do it," Mr. McCreary says, adding that "you can't take a system in place for more than 100 years and expect it to be fixed overnight."
The fix won't be simple -- it will require agreement about what personal information should and shouldn't be available, which may or may not be the same as what should and shouldn't be available online. Perhaps sensitive information will be redacted online but available in person, or perhaps sensitive information will be restricted in all forms. Those standards ought to emerge side by side with a hard look at what personal information credit-reporting agencies and marketers have access to, and what they're allowed to do with it, and efforts to make identity theft harder – and easier to recover from. And there is no technological fix for identity theft – while our fears center on distant hackers stealing our identities, those with access to our trash or our homes will always be a much bigger threat.
Popular conceptions of the Web have been shaped by science-fiction visions of the Net as a virtual-reality analogue of the world, with humanity's wealth of information organized into a gleaming cyber-city of data. But what those visions elided was all the hard work of bringing that into existence. Imagine, instead, virtual acres of rubble, with shining towers emerging from mounds of information scattered all over the place without regard to how it should be organized, labeled or kept secure. Order will emerge, but don't expect it any time soon – and don't expect the process to be painless.
By JASON FRY
When Public Records Are Too Public
Open Records Are an Established Tradition,But Does Internet Access Call for a Change?
June 25, 2007
The Web wasn't created to appeal to our sense of voyeurism. It just feels that way sometimes.
I'm not talking about dirty pictures, but the ability the Web's given all of us to snoop on our friends, colleagues and neighbors, from Googling the new guy in the next cube to finding out what the people next door paid for their house to seeing which neighbors have given money to which candidates and parties.
Such behavior runs the gamut from generally acceptable nosiness (we're a nation of self-Googlers, after all) to mildly gauche (in New York City discussing what apartments cost is practically a sport) to creepy (keep your nose out of my politics). As with all questions about Internet privacy and personal information, there are generational differences at work -- if you came of age blogging and being Googled, someone seeing you gave $100 to MoveOn.org might not be the biggest deal. (I wrote about different generations' attitudes toward personal information online earlier this month.)
But then there's another set of personal details that have made their way online, and these documents are much more worrisome. Property deeds, marriage and divorce records, court files, motor-vehicle information and tax documents are increasingly being digitized, and contain a wealth of information that few of us would want online: Social Security numbers, birth dates, maiden names and images of our signatures. Local governments have rushed to put those documents online for a decade or so, often without scrubbing them of such information. And that's made them potentially fertile ground for busybodies, stalkers and identity thieves.
Betty "BJ" Ostergren, a 58-year-old from outside Richmond, Va., has made it her mission to alert people to the dangers of public records online. Ms. Ostergren is feisty bordering on ferocious: Her tactics include mailing letters to people alerting them that their personal information is online and posting copies of public documents (or links to them) displaying the personal information of circuit-court clerks and other politicians, including former House Majority Leader Tom DeLay and Florida Gov. Jeb Bush. (See her Web site, the Virginia Watchdog, here; this Washington Post profile of her is also a good read.)
Long a local activist, Ms. Ostergren began her crusade in the summer of 2002, when a title examiner called to tell her that public records from her home county of Hanover would be put online within a few weeks. Ms. Ostergren says she objected to the fact that her signature would be online -- not to mention other people's Social Security numbers. She confronted her county's circuit-court clerk and began a telephone campaign.
"People were livid," she says, adding with satisfaction: "Our records in this county did not go online." Since then, her campaign has grown to include the entire U.S. -- Ms. Ostergren moves easily from a discussion of Franklin County, Ohio's decision to remove images of mortgage records to what she sees as Florida's lack of progress and Maricopa County, Ariz.'s troubles.
An important note: The records being put online are public, and available – sensitive information and all -- to anyone who goes down to the courthouse or county seat. And many of them have already been compiled and digitized by data warehouses, who often make them available to marketers and real-estate professionals. Open records are a longstanding American tradition; so too is a hold-your-nose acceptance that commercial entities will try to make a profit by exploiting that openness.
But at the same time, it's too simplistic to say that just because records are available by going to a government building and talking to a clerk, we shouldn't worry that they're now available through some Web sleuthing. Sometimes a difference of degree is so significant that it may as well be a difference of kind: Foes of the recording industry rightly note that people have always stolen music by taping it for their friends, but it's risible to compare the potential effect of running off some cassette copies of an album to that of making a digital copy of that album available for the taking online.
Similarly, it takes a pretty determined busybody or thief to visit the courthouse, and the law has acknowledged this, noting the "practical obscurity" of such records. The Web may not change the status of public records, but it means the end of practical obscurity, enabling drive-by voyeurism for the bored or petty – or identity thieves in the cybercafes of, say, Nigeria or Romania.
How did Social Security numbers and other sensitive information wind up online? Blame a collision between our enthusiasm for technology and our failure to appreciate its consequences. In the last decade, states and local governments rushed to put documents online, eager to appear progressive and make government more efficient. But the momentum of that effort got ahead of our ability to sort out what might happen. In particular, we underestimated the borderline-spooky power of search to find needles in technological haystacks.
Now, the job is to clean up the mess. And there does seem to be progress: Counties are working to redact sensitive information from online records, and courts and government agencies are doing a better job keeping personal information off the Web in the first place.
Mark Monacelli is president of the Property Rights Industry Association, a trade group that's working toward developing national standards for accessing public property records, and the recorder for St. Louis County, Minn. Mr. Monacelli says PRIA has "worked very hard with lenders and [mortgage] settlement officers to not put Social Security numbers on mortgages." He adds that "we try, to the best of our ability, to create awareness of the issue and work with counties to be aware of who's looking at your information."
At the same time, Mr. Monacelli notes that there are reasons to put information about property records online. Quick access to such information offers a slew of economic benefits. Mr. Monacelli says that when he purchased his first home, the process from looking across the lender's desk to getting the title took about 90 days – an unacceptably glacial pace now. Technology has allowed us to obtain a new mortgage or refinance very quickly; without that speed, he argues, the recent real-estate boom wouldn't have existed. "Where would this economy be without it?" he asks.
There are other standards for handling personal information, of course. This Associated Press story documents Sweden's recent clampdown on ratsit.se, a site which offered financial details for free from the country's national tax authority. If you wanted to know how much your colleague made or if your neighbor was in debt, you could. That may seem amazing to Americans, but such openness is long-established in Swedish society. Discussing his site, Ratsit's CEO told the AP's Louise Nordstrom that "a lot of people use it to negotiate their pay."
As in the U.S., it wasn't that Sweden was suddenly making documents that had been private public. Rather, it's that Ratsit did away with practical obscurity. Now, information is still available via the site, but it's no longer free: Ten requests a week cost $21. And anyone whose finances are viewed will be notified by mail and told who asked. (That new standard seems to go further than Americans might like: Imagine the chilling effects of such notification on investigative journalism or community activism.)
So what should we do?
"To me, if people want to see the records, let them go down to the courthouse -- that way you have to put forth some effort," Ms. Ostergren says, adding "I think there are too many people we have a responsibility to protect."
Robert Gellman, a Washington, D.C.-based privacy and information-policy consultant, thinks the digital era calls for states to reassess what records should be public, and what level of access should be allowed. But he defends the U.S.'s tradition of openness as a way of keeping the system honest.
"Property-tax records are available to other people for a good reason," he says, noting that if you see your house is assessed for more than your neighbor's -- or a similar house across town -- you can appeal. On the other hand, access to driver-license information is now largely limited to law-enforcement agencies and insurance companies -- the legacy of the 1989 murder of actress Rebecca Schaeffer, whose killer obtained her personal information through the Department of Motor Vehicles.
"There should be discussions about these things, and there's no absolute right or wrong answer here," Mr. Gellman says.
Mark McCreary, a lawyer with Philadelphia's Fox Rothschild LLP who specializes in Internet law, expects a long, slow grind as sensitive information is redacted from old documents and standards emerge for keeping such information off new documents – and are adopted by local governments.
"The solution is for all the counties to do it, for all the states to do it," Mr. McCreary says, adding that "you can't take a system in place for more than 100 years and expect it to be fixed overnight."
The fix won't be simple -- it will require agreement about what personal information should and shouldn't be available, which may or may not be the same as what should and shouldn't be available online. Perhaps sensitive information will be redacted online but available in person, or perhaps sensitive information will be restricted in all forms. Those standards ought to emerge side by side with a hard look at what personal information credit-reporting agencies and marketers have access to, and what they're allowed to do with it, and efforts to make identity theft harder – and easier to recover from. And there is no technological fix for identity theft – while our fears center on distant hackers stealing our identities, those with access to our trash or our homes will always be a much bigger threat.
Popular conceptions of the Web have been shaped by science-fiction visions of the Net as a virtual-reality analogue of the world, with humanity's wealth of information organized into a gleaming cyber-city of data. But what those visions elided was all the hard work of bringing that into existence. Imagine, instead, virtual acres of rubble, with shining towers emerging from mounds of information scattered all over the place without regard to how it should be organized, labeled or kept secure. Order will emerge, but don't expect it any time soon – and don't expect the process to be painless.
Wednesday, June 20, 2007
National Settlement Services Summit
October Research Corp. kicked off the National Settlement Services Summit at the Marriott at Key Center in Cleveland with keynote speaker Harley Rouda Jr., CEO and managing partner of Real Living, offering the following:
“We have done a phenomenal job of screwing up our industry and creating bad headlines. We constantly devalue what we do day in and day out. It’s time to change our way of doing business.”
To that end, Rouda outlined 10 points of change for the industry as a whole to consider:
1. Start with the person in the mirror. Start with yourself and your firm that you’re going to take ethics and integrity in our profession to a higher level.
2. Know your fiduciary responsibilities. One of our greatest opportunities to connect with our customers is to talk about how we are like doctors and attorneys and other respected professions in that we have a higher duty and obligation to our customers.
3. Stop looking the other way. We all know what’s been going on in our industry. It is our job to stop looking the other way, to get involved and to help clean up our industry.
4. Look for red flags and report them.
5. Step out of the gray area.
6. Honesty — even if it is brutal honesty — to confront other members of our industry.
7. Transparency of information. Consumers still think it’s a great mystery in what we do. There’s got to be a way to make the transaction more transparent.
8. Push for industry change even if it hurts your bottom line. You cannot wait for the government. We are the police on the street.
9. Welcome government regulation. We don’t need more regulation, we need more accountability.
10. Take the long-term view. Think about implications beyond just the short-term. That view will cause us to make poor ethical decisions.
“We have done a phenomenal job of screwing up our industry and creating bad headlines. We constantly devalue what we do day in and day out. It’s time to change our way of doing business.”
To that end, Rouda outlined 10 points of change for the industry as a whole to consider:
1. Start with the person in the mirror. Start with yourself and your firm that you’re going to take ethics and integrity in our profession to a higher level.
2. Know your fiduciary responsibilities. One of our greatest opportunities to connect with our customers is to talk about how we are like doctors and attorneys and other respected professions in that we have a higher duty and obligation to our customers.
3. Stop looking the other way. We all know what’s been going on in our industry. It is our job to stop looking the other way, to get involved and to help clean up our industry.
4. Look for red flags and report them.
5. Step out of the gray area.
6. Honesty — even if it is brutal honesty — to confront other members of our industry.
7. Transparency of information. Consumers still think it’s a great mystery in what we do. There’s got to be a way to make the transaction more transparent.
8. Push for industry change even if it hurts your bottom line. You cannot wait for the government. We are the police on the street.
9. Welcome government regulation. We don’t need more regulation, we need more accountability.
10. Take the long-term view. Think about implications beyond just the short-term. That view will cause us to make poor ethical decisions.
WSJ: Bear Stearns Funds Face Shutdown
From the Calculated Risk Blog
More from the WSJ: Two Big Funds At Bear Stearns Face Shutdown
Two big hedge funds at Bear Stearns Cos. moved toward the brink of closing down ... as a bailout plan ... fell apart ...
The funds, which once controlled more than $20 billion in a combination of investor and lender money ... had invested heavily in various securities backed by subprime loans ......
the funds had effectively paid down $2.25 billion of their $9 billion in outstanding credit. The first two lenders to exit their positions, Goldman Sachs Group Inc. and Bank of America Corp., agreed to unwind complicated transactions with Bear without dumping lots of bonds on the broader market. ...
By unwinding those loans in an orderly manner, rather than through a series of fire-sale auctions, Bear's fund managers ... could help stave off painful ripple effects in the broader market for mortgage-backed securities and related instruments. ...
Merrill, on the other hand ... opted to revive a planned auction for hundreds of millions of dollars worth of collateral from the Bear funds.
More from the WSJ: Two Big Funds At Bear Stearns Face Shutdown
Two big hedge funds at Bear Stearns Cos. moved toward the brink of closing down ... as a bailout plan ... fell apart ...
The funds, which once controlled more than $20 billion in a combination of investor and lender money ... had invested heavily in various securities backed by subprime loans ......
the funds had effectively paid down $2.25 billion of their $9 billion in outstanding credit. The first two lenders to exit their positions, Goldman Sachs Group Inc. and Bank of America Corp., agreed to unwind complicated transactions with Bear without dumping lots of bonds on the broader market. ...
By unwinding those loans in an orderly manner, rather than through a series of fire-sale auctions, Bear's fund managers ... could help stave off painful ripple effects in the broader market for mortgage-backed securities and related instruments. ...
Merrill, on the other hand ... opted to revive a planned auction for hundreds of millions of dollars worth of collateral from the Bear funds.
Thursday, June 14, 2007
Downsizing the Good
by Robert Franco Downsizing The Good
When an industry comes off a high, like the one we have experienced the past decade in the title industry, it is only natural to experience some downsizing. What bothers is me "how" some companies decide to downsize.
In the frenzy to hire more and more people, many companies neglected training, seemingly all together. I remember when I started, my clients were all very knowledgeable. Sure, you got the occasional new person on the phone that wasn't quite up to speed yet, but they were being trained and we knew that they would get there.
As time went on, it became apparent that training was something that just stopped; some caught on, most just didn't. We found ourselves trying very hard to explain simple concepts to clients' employees who didn't think it mattered.
One of my clients has downsized and one of the good guys has been let go. He was one of the few remaining who understood title, he understood the complexities of a thorough search and he appreciated our work. I was quite surprised.
I am afraid that in this slowing market, the title industry is going to downsize the good right out of the business. Decisions on who must go are probably being made based on factors such as cost and ideology, rather than knowledge and expertise. Those who have been around a while and have developed good title skills are probably making more money than the new hires who haven't realized "why" we do this job. That also means that they understand the importance of a thorough title search, marketable title, and curing defects. Those qualities don't fit in well with the new "master plan" of thin-title plants, outsourcing to India, current owner searches, indemnification, and insuring over known-defects.
What will this mean for the future of the title industry? When we experience the next boom, there won't be any "real" title people left to handle it. There won't be anyone there to train the new people of next round of "hire everyone." Of course next time, I'm guessing those higher-ups who make the decisions are banking on complete automation... instant title commitments that won't require anyone who really understands title. Fortunately for them, there won't be anyone around who cares enough when the instant products fail to do anything about it. The machine will be in high-gear producing fundamentally flawed title policies and when a claims arise there will be "rubber stamp" department to issue an indemnity to get the next deal closed.
Fortunately for me, this will create a demand for good title attorneys to sue title companies on behalf of homeowners who hold imperfect title. I'll be out of law school by then... and I'll have a lot of student loans to repay.
Of course, its not too late. Someone may understand that we need to keep the best and downsize the rest. The industry should take this time, while things are slow, to train and educate those who have slipped through the cracks. They need to start thinking about the next generation of title professionals who will be dealing with the problems that the refi-boom has created. There are a lot of title problems out there from short-searches, thin-title plants, and inexperienced abstractors, just waiting to be discovered. They may lie dormant until the next wave of business hits the industry, but they will surface. If we downsize the good out of the title industry, who will take care of them?
And, one last thought: if you are one of the "good guys" that has been around a while, and you know "why" what we do is so important to the industry, how safe if your job? What are your company's priorities for the future and how are they planning to downsize?
Robert A. FrancoSOURCE OF TITLErfranco@sourceoftitle.com
When an industry comes off a high, like the one we have experienced the past decade in the title industry, it is only natural to experience some downsizing. What bothers is me "how" some companies decide to downsize.
In the frenzy to hire more and more people, many companies neglected training, seemingly all together. I remember when I started, my clients were all very knowledgeable. Sure, you got the occasional new person on the phone that wasn't quite up to speed yet, but they were being trained and we knew that they would get there.
As time went on, it became apparent that training was something that just stopped; some caught on, most just didn't. We found ourselves trying very hard to explain simple concepts to clients' employees who didn't think it mattered.
One of my clients has downsized and one of the good guys has been let go. He was one of the few remaining who understood title, he understood the complexities of a thorough search and he appreciated our work. I was quite surprised.
I am afraid that in this slowing market, the title industry is going to downsize the good right out of the business. Decisions on who must go are probably being made based on factors such as cost and ideology, rather than knowledge and expertise. Those who have been around a while and have developed good title skills are probably making more money than the new hires who haven't realized "why" we do this job. That also means that they understand the importance of a thorough title search, marketable title, and curing defects. Those qualities don't fit in well with the new "master plan" of thin-title plants, outsourcing to India, current owner searches, indemnification, and insuring over known-defects.
What will this mean for the future of the title industry? When we experience the next boom, there won't be any "real" title people left to handle it. There won't be anyone there to train the new people of next round of "hire everyone." Of course next time, I'm guessing those higher-ups who make the decisions are banking on complete automation... instant title commitments that won't require anyone who really understands title. Fortunately for them, there won't be anyone around who cares enough when the instant products fail to do anything about it. The machine will be in high-gear producing fundamentally flawed title policies and when a claims arise there will be "rubber stamp" department to issue an indemnity to get the next deal closed.
Fortunately for me, this will create a demand for good title attorneys to sue title companies on behalf of homeowners who hold imperfect title. I'll be out of law school by then... and I'll have a lot of student loans to repay.
Of course, its not too late. Someone may understand that we need to keep the best and downsize the rest. The industry should take this time, while things are slow, to train and educate those who have slipped through the cracks. They need to start thinking about the next generation of title professionals who will be dealing with the problems that the refi-boom has created. There are a lot of title problems out there from short-searches, thin-title plants, and inexperienced abstractors, just waiting to be discovered. They may lie dormant until the next wave of business hits the industry, but they will surface. If we downsize the good out of the title industry, who will take care of them?
And, one last thought: if you are one of the "good guys" that has been around a while, and you know "why" what we do is so important to the industry, how safe if your job? What are your company's priorities for the future and how are they planning to downsize?
Robert A. FrancoSOURCE OF TITLErfranco@sourceoftitle.com
Tuesday, June 12, 2007
Borrower Counseling: Where the Rubber Meets the Road
I thought we might look at some details in this piece in the New York Times by our dependable Vikas Bajaj, "Effort to Advise on Risky Loans Runs Into Snag." As usual, Bajaj pulls together enough information to allow us to get past the spin, without actually crossing the line into editorializing. But hey! I'm a blogger. About editorializing I have no scruples.
I strongly encourage you to read the whole thing. A few choice bits:
Now, the state is retooling the program to include all of Cook County, which encompasses Chicago and many of its suburbs. Under the proposal, first-time home buyers and borrowers who are refinancing would be referred to counseling only if they selected certain loans like adjustable-rate mortgages that reset in five years or less, or loans that initially require only interest payments. A state agency is drafting the rules, which must be approved by a committee of lawmakers.Even as that process plays out, the Illinois General Assembly is considering legislation that would enshrine the new counseling rules in law. In addition, the bill would require mortgage brokers to act in their clients’ best interest and bar state-regulated lenders from making loans without verifying borrowers’ income with tax returns, paycheck stubs or other documents.
Interesting, is it not? Illinois is taking the position that certain kinds of mortgage transactions are so risky--so, shall we say, likely to be "non-economic" for the borrower--that the fact that the borrower elected to apply for such a loan is a presumption that counseling is appropriate. Someone needs to alert the hedge funds.
Furthermore, Illinois is connecting the dots between the fiduciary duty of the broker and the terms of the loan. The implication is that a stated income loan is simply not sufficiently in any borrower's best interest such that it is presumptively a failure of fiduciary duty to originate one. I haven't seen the text of the Illinois statute and I'm prepared to be as disappointed as I usually am once this stuff gets out of committee, but let me say good on Illinois for having advanced the ball this far. I'm rather hoping ISDA is taking notes.
And while we're on the subject of brokers earning their fees by providing services to borrowers:
A report compiled by an advocacy group, Housing Action Illinois, shows that the majority of borrowers who were about take on adjustable-rate mortgages believed that they had fixed-rate loans. More than two-thirds of the borrowers were spending more than 60 percent of their take-home pay on housing expenses. And 75 percent of the borrowers were refinancing existing debts; the rest were buying a home.
If I'm reading this correctly, these folks have already talked to a mortgage broker and they're still this confused. Do I believe this data? With all my heart and all my soul and all the decades I've spent trying to explain how ARMs work to people with bachelor's degrees in financial fields. Of course an advocacy group might have an interest in portraying these borrowers as more ignorant than they are. Did anyone else see this little survey that Lending Tree published recently?
81% of on-line consumers who are paying a mortgage or are planning on buying a home in the next 12 months say they understand how an ARM works. (See q31.)
−Young Singles are the least likely to understand how an ARM works.
On-line consumers are not as informed about their ARM as they first indicated. When asked what they know about their ARM, the majority did not know the interest rate cap, the adjustment schedule, the index their ARM was tied to, or the interest rate ceiling. (See q46.)
Most on-line consumers (91%) with an ARM are aware that their rate will adjust. (See q41.)
In what was quite possibly a sample of savvier-than-usual borrowers, you could still find 9% who are not aware that their ARM will adjust. You can also get a bunch of people to say "yes" to the question "Do you understand ARMs?" But if you ask them any trick questions involving, you know, how ARMs work, the majority has no idea. The usual justification of collecting an origination fee from a borrower involves at least some implicit claim that part of the effort of originating a loan is explaining it to the borrower.
Back to the Times:
The president of the Illinois Association of Mortgage Brokers, Bill McNamee, said the nonprofit agencies’ analysis could not be trusted because they have an incentive to play up problems — they receive $300 for each counseling session, which is paid for by brokers and lenders. “They are going to want to justify their existence so they can continue to collect their fees,” he said.
Delicious. Irony, with a touch of vermouth. My favorite cocktail.
But don't think those brokers are just anti-education:
John West, a mortgage broker, said the government should emphasize first-time home buyer classes and a more rigorous financial education curriculum in public schools. “People want government to safeguard them,” Mr. West said. “But I don’t want to be turning my head and seeing the government saying, ‘We think you should make another decision.’ ”
You know, one of these days, someone is going to explain to Mr. West the connection between public schools and the government. It won't be me, though; I can see a losing battle coming.
Not that the local regulator comes off sounding that much brighter:
Dean Martinez, secretary of the state’s Department of Financial and Professional Regulation, says that the uproar is missing the point and suggests that the term “counseling” may be the problem. He views the sessions as akin to state driving tests. They are there to make sure borrowers fully comprehend what they are doing, not to watch over their every action.
“Mario Andretti has to take a driver’s license test,” Mr. Martinez said, “even though he is one of the best drivers in the world. No one disputes that.”
Well, forgive me for having thought that the point of a driver's license test was to make sure you know how to drive, not to make sure you understand why the hell anyone would want to drive in the first place. What a terrible analogy. The issue is not that Mario Andretti has to have a driver's license; the issue is that not even Mario is allowed to drive an Indy 500 race car on the suburban streets at 150 mph, whether he is considered "capable" or not.
Mr. Martinez is letting himself fall into the trap here. The state of Illinois appears to be on the verge of declaring certain loan types to be so dangerous that anyone offering to get one is going to have to prove to the party who is going to have to pay the eventual bar tab--and that'll be the states, the counties, and the townships, not the NAMB--that it is "informed consent." And the very fact that we don't seem to be able to find many people who can pass the quiz at the end of class ought to be telling us that there's something markedly wrong with these loan products. Any good teacher will tell you that it isn't always the students' fault or the teachers' fault; sometimes it's the material.
Possibly you do not understand your mortgage loan because you keep trying to tell yourself that it benefits you somewhere. Free yourself of that a prior problem, and the pieces might fall into place for you.
Posted by Tanta on the calculatedrisk.blogspot.com
I strongly encourage you to read the whole thing. A few choice bits:
Now, the state is retooling the program to include all of Cook County, which encompasses Chicago and many of its suburbs. Under the proposal, first-time home buyers and borrowers who are refinancing would be referred to counseling only if they selected certain loans like adjustable-rate mortgages that reset in five years or less, or loans that initially require only interest payments. A state agency is drafting the rules, which must be approved by a committee of lawmakers.Even as that process plays out, the Illinois General Assembly is considering legislation that would enshrine the new counseling rules in law. In addition, the bill would require mortgage brokers to act in their clients’ best interest and bar state-regulated lenders from making loans without verifying borrowers’ income with tax returns, paycheck stubs or other documents.
Interesting, is it not? Illinois is taking the position that certain kinds of mortgage transactions are so risky--so, shall we say, likely to be "non-economic" for the borrower--that the fact that the borrower elected to apply for such a loan is a presumption that counseling is appropriate. Someone needs to alert the hedge funds.
Furthermore, Illinois is connecting the dots between the fiduciary duty of the broker and the terms of the loan. The implication is that a stated income loan is simply not sufficiently in any borrower's best interest such that it is presumptively a failure of fiduciary duty to originate one. I haven't seen the text of the Illinois statute and I'm prepared to be as disappointed as I usually am once this stuff gets out of committee, but let me say good on Illinois for having advanced the ball this far. I'm rather hoping ISDA is taking notes.
And while we're on the subject of brokers earning their fees by providing services to borrowers:
A report compiled by an advocacy group, Housing Action Illinois, shows that the majority of borrowers who were about take on adjustable-rate mortgages believed that they had fixed-rate loans. More than two-thirds of the borrowers were spending more than 60 percent of their take-home pay on housing expenses. And 75 percent of the borrowers were refinancing existing debts; the rest were buying a home.
If I'm reading this correctly, these folks have already talked to a mortgage broker and they're still this confused. Do I believe this data? With all my heart and all my soul and all the decades I've spent trying to explain how ARMs work to people with bachelor's degrees in financial fields. Of course an advocacy group might have an interest in portraying these borrowers as more ignorant than they are. Did anyone else see this little survey that Lending Tree published recently?
81% of on-line consumers who are paying a mortgage or are planning on buying a home in the next 12 months say they understand how an ARM works. (See q31.)
−Young Singles are the least likely to understand how an ARM works.
On-line consumers are not as informed about their ARM as they first indicated. When asked what they know about their ARM, the majority did not know the interest rate cap, the adjustment schedule, the index their ARM was tied to, or the interest rate ceiling. (See q46.)
Most on-line consumers (91%) with an ARM are aware that their rate will adjust. (See q41.)
In what was quite possibly a sample of savvier-than-usual borrowers, you could still find 9% who are not aware that their ARM will adjust. You can also get a bunch of people to say "yes" to the question "Do you understand ARMs?" But if you ask them any trick questions involving, you know, how ARMs work, the majority has no idea. The usual justification of collecting an origination fee from a borrower involves at least some implicit claim that part of the effort of originating a loan is explaining it to the borrower.
Back to the Times:
The president of the Illinois Association of Mortgage Brokers, Bill McNamee, said the nonprofit agencies’ analysis could not be trusted because they have an incentive to play up problems — they receive $300 for each counseling session, which is paid for by brokers and lenders. “They are going to want to justify their existence so they can continue to collect their fees,” he said.
Delicious. Irony, with a touch of vermouth. My favorite cocktail.
But don't think those brokers are just anti-education:
John West, a mortgage broker, said the government should emphasize first-time home buyer classes and a more rigorous financial education curriculum in public schools. “People want government to safeguard them,” Mr. West said. “But I don’t want to be turning my head and seeing the government saying, ‘We think you should make another decision.’ ”
You know, one of these days, someone is going to explain to Mr. West the connection between public schools and the government. It won't be me, though; I can see a losing battle coming.
Not that the local regulator comes off sounding that much brighter:
Dean Martinez, secretary of the state’s Department of Financial and Professional Regulation, says that the uproar is missing the point and suggests that the term “counseling” may be the problem. He views the sessions as akin to state driving tests. They are there to make sure borrowers fully comprehend what they are doing, not to watch over their every action.
“Mario Andretti has to take a driver’s license test,” Mr. Martinez said, “even though he is one of the best drivers in the world. No one disputes that.”
Well, forgive me for having thought that the point of a driver's license test was to make sure you know how to drive, not to make sure you understand why the hell anyone would want to drive in the first place. What a terrible analogy. The issue is not that Mario Andretti has to have a driver's license; the issue is that not even Mario is allowed to drive an Indy 500 race car on the suburban streets at 150 mph, whether he is considered "capable" or not.
Mr. Martinez is letting himself fall into the trap here. The state of Illinois appears to be on the verge of declaring certain loan types to be so dangerous that anyone offering to get one is going to have to prove to the party who is going to have to pay the eventual bar tab--and that'll be the states, the counties, and the townships, not the NAMB--that it is "informed consent." And the very fact that we don't seem to be able to find many people who can pass the quiz at the end of class ought to be telling us that there's something markedly wrong with these loan products. Any good teacher will tell you that it isn't always the students' fault or the teachers' fault; sometimes it's the material.
Possibly you do not understand your mortgage loan because you keep trying to tell yourself that it benefits you somewhere. Free yourself of that a prior problem, and the pieces might fall into place for you.
Posted by Tanta on the calculatedrisk.blogspot.com
Sunday, June 10, 2007
What is lender pay title insurance?
Sunday, June 10, 2007
The most likely form of lender pay title insurance is lien protection only - with or without an underlying title search. It offers no protection for the consumer.
It's a very dangerous prospect for the real property business and the idea can only thrive in the absence of true recognition of what title insurers really do.
The traditional, honest, respectable, quality driven title insurer performs a thorough search of title, examines the data and makes corrections to the underlying issues BEFORE issuing a title policy. Traditional, honest, respectable, quality driven title insurers operate independently of Realtor and mortgage lender ownership or oversight and thus do not suffer from conflicts of interest.
Traditional title insurers guard the quality of land records, thus maintaining a stable, marketable inventory of real property for mortgage or sale. It's this function of title insurance which has become thoroughly misunderstood and forgotten and will no longer exist IF ignorance reigns supreme and so called lender pay title insurance is adopted as the new norm.
The title industry lost it's way after RESPA was altered to allow affiliated business relationships. This form of legalized kickbacks through profit sharing laid fertile ground and cover to those who bastardized the intentions of the new RESPA rules while at the same time encouraged a whole host of disreputable business practices wherein title charges to consumers continued to increase to cover gifts and kickbacks and sham profit sharing programs.
Consumers lost not only a competitive marketplace for fees and service, they lost the independent oversight of a quality title insurer motivated to protect the underlying transaction.
We have made much progress in these last few months shining the light of truth on the bad practices. Regulators and lawmakers are doing good work.
I am very concerned that the prospect of lender pay title insurance has been raised in the agenda and hope that regulators and lawmakers will understand that the concept is not grounded in principles which will protect the consumer. Rather, the products like Radian and TitleSmart, are children of the bastardization process that followed the RESPA reform of the 80s.
Remember, lenders will never absorb additional costs. It's economic law. The consumer will pay for whatever product comes with the mortgage, one way or another.
Lenders will be motivated to protect their interests only, not the consumers, so look for only a minimal lien protection, just enough to make the loans meet FNMA/FHLMC saleability standards. Those FNMA/FHLMC standards are likely to be ignorant of the underlying risk of losing the corrective forces in the title examination phase in which traditional, quality title insurers find and fix problems and so you must also expect over time, accumulation of title clouds and problems which WILL surface eventually and affect marketability of the underlying real estate.
Consumers, as layman, can't be expected to fully understand the issue and therefore depend on regulators and lawmakers to guard their interests at this time. Mortgage lenders, Realtors, and the title insurance industry at large have shown themselves collectively to be unable or unwilling to police themselves and work for the benefit of the consumer. Until we have order restored in the real property business and replace bad actors with responsible leadership, we must rely on lawmakers and regulators to make careful, thoughtful decisions with regard to systemic change.
Please, please, lay aside plans and considerations for a lender pay title insurance product which in the long run will cause much harm. Traditional title insurance as a product is not broken. It's the delivery system that needs fixing. The most favored course of correction will be found in competition - free from conflicts of interest mired in affliliated business and bundled services.
Independent providers not beholden to a single or few sources of referrals are your best chance of fair pricing with qualitiy of service. Release traditional title insurers from the legalized yoke and expection of affiliations and you will free a resource to the consumer. You will do more to restore order by clearly outlawing revenue sharing of any kind. Independent providers will then focus their attention on the true decisionmaker, the consumer, and fight for their business. Technology, product and pricing will naturally benefit the decisionmaker. YOU can decide who the ultimate decisionmaker will be - Realtors, lenders or consumers. I for one believe we are safer having the consumer in the decisionmaking role. Afterall, it's the consumer's home and money at risk. Let's give them back their power and stop this revenue sharing melee once and for all.
Posted by Diane Cipa, The Closing Specialists®
The most likely form of lender pay title insurance is lien protection only - with or without an underlying title search. It offers no protection for the consumer.
It's a very dangerous prospect for the real property business and the idea can only thrive in the absence of true recognition of what title insurers really do.
The traditional, honest, respectable, quality driven title insurer performs a thorough search of title, examines the data and makes corrections to the underlying issues BEFORE issuing a title policy. Traditional, honest, respectable, quality driven title insurers operate independently of Realtor and mortgage lender ownership or oversight and thus do not suffer from conflicts of interest.
Traditional title insurers guard the quality of land records, thus maintaining a stable, marketable inventory of real property for mortgage or sale. It's this function of title insurance which has become thoroughly misunderstood and forgotten and will no longer exist IF ignorance reigns supreme and so called lender pay title insurance is adopted as the new norm.
The title industry lost it's way after RESPA was altered to allow affiliated business relationships. This form of legalized kickbacks through profit sharing laid fertile ground and cover to those who bastardized the intentions of the new RESPA rules while at the same time encouraged a whole host of disreputable business practices wherein title charges to consumers continued to increase to cover gifts and kickbacks and sham profit sharing programs.
Consumers lost not only a competitive marketplace for fees and service, they lost the independent oversight of a quality title insurer motivated to protect the underlying transaction.
We have made much progress in these last few months shining the light of truth on the bad practices. Regulators and lawmakers are doing good work.
I am very concerned that the prospect of lender pay title insurance has been raised in the agenda and hope that regulators and lawmakers will understand that the concept is not grounded in principles which will protect the consumer. Rather, the products like Radian and TitleSmart, are children of the bastardization process that followed the RESPA reform of the 80s.
Remember, lenders will never absorb additional costs. It's economic law. The consumer will pay for whatever product comes with the mortgage, one way or another.
Lenders will be motivated to protect their interests only, not the consumers, so look for only a minimal lien protection, just enough to make the loans meet FNMA/FHLMC saleability standards. Those FNMA/FHLMC standards are likely to be ignorant of the underlying risk of losing the corrective forces in the title examination phase in which traditional, quality title insurers find and fix problems and so you must also expect over time, accumulation of title clouds and problems which WILL surface eventually and affect marketability of the underlying real estate.
Consumers, as layman, can't be expected to fully understand the issue and therefore depend on regulators and lawmakers to guard their interests at this time. Mortgage lenders, Realtors, and the title insurance industry at large have shown themselves collectively to be unable or unwilling to police themselves and work for the benefit of the consumer. Until we have order restored in the real property business and replace bad actors with responsible leadership, we must rely on lawmakers and regulators to make careful, thoughtful decisions with regard to systemic change.
Please, please, lay aside plans and considerations for a lender pay title insurance product which in the long run will cause much harm. Traditional title insurance as a product is not broken. It's the delivery system that needs fixing. The most favored course of correction will be found in competition - free from conflicts of interest mired in affliliated business and bundled services.
Independent providers not beholden to a single or few sources of referrals are your best chance of fair pricing with qualitiy of service. Release traditional title insurers from the legalized yoke and expection of affiliations and you will free a resource to the consumer. You will do more to restore order by clearly outlawing revenue sharing of any kind. Independent providers will then focus their attention on the true decisionmaker, the consumer, and fight for their business. Technology, product and pricing will naturally benefit the decisionmaker. YOU can decide who the ultimate decisionmaker will be - Realtors, lenders or consumers. I for one believe we are safer having the consumer in the decisionmaking role. Afterall, it's the consumer's home and money at risk. Let's give them back their power and stop this revenue sharing melee once and for all.
Posted by Diane Cipa, The Closing Specialists®
Friday, June 8, 2007
Mortgage rates on the rise.
The bond market meltdown continues ...
There's no rest for the weary in bond-land this morning. Treasuries continue to get whacked, with the long bond off 22/32 at last count. 10-year T-Notes were recently yielding 5.18%, up about 5 basis points from yesterday. Obviously, what we're seeing is wave after wave of forced selling -- the kind of liquidation you don't see very often, but when you do, it can get ugly.
I looked back at the last several years of trading in long bonds and found three similar selling squalls --the first began in November 2001, when a big run-up (sparked by the government's plan to abandon 30-year bond sales) was followed by an even more powerful sell-off. Then we had the big run-up in the spring of 2003, spurred by deflation fears, followed by an even more powerful sell-off. Finally, in early 2004, we had a sharp plunge on the belief the economy was finally regaining its footing.
The magnitude of those declines, price-wise, from high to low? Roughly 12%, 16.6%, and 12.7%. We also had a sharp rise in bond prices, followed by a plunge, in 1998 during the time of the Long-Term Capital Management scare. That decline, peak to trough, was about 7%.
How do things look this time around? Well, from the most recent peak in early May, we're only down about 6% in price. In other words, there could be more ugliness ahead -- though we are closing in on what I'd call pretty solid technical support in the low-to-mid 105s.
posted by Mike Larson at 7:50 AM
There's no rest for the weary in bond-land this morning. Treasuries continue to get whacked, with the long bond off 22/32 at last count. 10-year T-Notes were recently yielding 5.18%, up about 5 basis points from yesterday. Obviously, what we're seeing is wave after wave of forced selling -- the kind of liquidation you don't see very often, but when you do, it can get ugly.
I looked back at the last several years of trading in long bonds and found three similar selling squalls --the first began in November 2001, when a big run-up (sparked by the government's plan to abandon 30-year bond sales) was followed by an even more powerful sell-off. Then we had the big run-up in the spring of 2003, spurred by deflation fears, followed by an even more powerful sell-off. Finally, in early 2004, we had a sharp plunge on the belief the economy was finally regaining its footing.
The magnitude of those declines, price-wise, from high to low? Roughly 12%, 16.6%, and 12.7%. We also had a sharp rise in bond prices, followed by a plunge, in 1998 during the time of the Long-Term Capital Management scare. That decline, peak to trough, was about 7%.
How do things look this time around? Well, from the most recent peak in early May, we're only down about 6% in price. In other words, there could be more ugliness ahead -- though we are closing in on what I'd call pretty solid technical support in the low-to-mid 105s.
posted by Mike Larson at 7:50 AM
Thursday, June 7, 2007
Section Eight
Section Eight
by Robert Franco
We all know Section 8 as the anti-kickback provision of RESPA. However, Section 8 is more commonly known as a military discharge for being mentally unfit for service. I think that is more than a little bit ironic, since Section 8 of RESPA is an absolutely insane provision after the exceptions for Affiliated Business Arrangements (AfBAs).
Section 8, in its current form, merely prohibits small agents from competing with AfBAs. If an AfBA can effectively share fees with a non-title partner, what sense does it make to prohibit an independent title agent from doing the same thing? Section 8 recognized that allowing such behavior to occur would cause the consumer to pay increased fees that would be used by the title agent to "buy business" from referrers. That danger seems even more likely when there is an AfBA.
When an affiliated business arrangement is created, they have to maintain a separate company which adds to the overhead of the operation. If a non-affiliated entity were allowed to effectively do the same thing, pay referral fees, they could do it without the added cost of maintaining a separate entity and, therefore, could do it without raising costs to the consumer - at least easier than could an AfBA.
If the argument is that competition keeps the fees in check for AfBAs, wouldn't the same theory prevent non-affiliated businesses from over-charging their consumers to pay referral fees? Competition is actually more likely to prevent the non-affiliated business from gouging their customers because the referrer is not tied to the non-affiliate. It would be easy for the referrer to go to another provider willing to pay the kick-back that would charge the consumer less. However, with the AfBA, the referrer has an investment in the new entity to protect. They have more control over the fees charged and they could just as easily increase the consumers fees to create a larger split of the profits. Because they are the main source of business for the AfBA, there is little threat of competition to protect the consumers from unnecessarily inflated fees.
Call it whatever you want... referral fees, fee-splitting, profit sharing... its all effectively the same thing - A BAD IDEA. It seems that the original drafters of RESPA realized this, which is why they included Section 8. I don't understand the logic that its okay to share fees if we make the referrer and the provider MORE beholden to each other by requiring them to enter a more official business partnership. In my opinion, that makes matters even worse.
Maybe I'm crazy (pun intended), but the AfBA exception to Section 8 creates an uneven playing field, deters real competition, and threatens the future of small agents. How can any of that be good for consumers? But then again, it wasn't the consumers that lobbied for the changes.
Banks, mortgage companies, and Realtors wanted to get their hands on some of the title fees generated from the orders that they were referring. Section 8 prevented that, so the answer was to create the AfBA and get HUD to except them from the anti-kickback provision. In their lobbying efforts, they convinced everyone that consumers were demanding "one-stop shopping" and that more companies (AfBAs) meant more competition. I just can't believe that anyone
bought into that line of bull*!#*. Perhaps I'm not the crazy one ofter all.
Robert A. Franco
SOURCE OF TITLErfranco@sourceoftitle.com
by Robert Franco
We all know Section 8 as the anti-kickback provision of RESPA. However, Section 8 is more commonly known as a military discharge for being mentally unfit for service. I think that is more than a little bit ironic, since Section 8 of RESPA is an absolutely insane provision after the exceptions for Affiliated Business Arrangements (AfBAs).
Section 8, in its current form, merely prohibits small agents from competing with AfBAs. If an AfBA can effectively share fees with a non-title partner, what sense does it make to prohibit an independent title agent from doing the same thing? Section 8 recognized that allowing such behavior to occur would cause the consumer to pay increased fees that would be used by the title agent to "buy business" from referrers. That danger seems even more likely when there is an AfBA.
When an affiliated business arrangement is created, they have to maintain a separate company which adds to the overhead of the operation. If a non-affiliated entity were allowed to effectively do the same thing, pay referral fees, they could do it without the added cost of maintaining a separate entity and, therefore, could do it without raising costs to the consumer - at least easier than could an AfBA.
If the argument is that competition keeps the fees in check for AfBAs, wouldn't the same theory prevent non-affiliated businesses from over-charging their consumers to pay referral fees? Competition is actually more likely to prevent the non-affiliated business from gouging their customers because the referrer is not tied to the non-affiliate. It would be easy for the referrer to go to another provider willing to pay the kick-back that would charge the consumer less. However, with the AfBA, the referrer has an investment in the new entity to protect. They have more control over the fees charged and they could just as easily increase the consumers fees to create a larger split of the profits. Because they are the main source of business for the AfBA, there is little threat of competition to protect the consumers from unnecessarily inflated fees.
Call it whatever you want... referral fees, fee-splitting, profit sharing... its all effectively the same thing - A BAD IDEA. It seems that the original drafters of RESPA realized this, which is why they included Section 8. I don't understand the logic that its okay to share fees if we make the referrer and the provider MORE beholden to each other by requiring them to enter a more official business partnership. In my opinion, that makes matters even worse.
Maybe I'm crazy (pun intended), but the AfBA exception to Section 8 creates an uneven playing field, deters real competition, and threatens the future of small agents. How can any of that be good for consumers? But then again, it wasn't the consumers that lobbied for the changes.
Banks, mortgage companies, and Realtors wanted to get their hands on some of the title fees generated from the orders that they were referring. Section 8 prevented that, so the answer was to create the AfBA and get HUD to except them from the anti-kickback provision. In their lobbying efforts, they convinced everyone that consumers were demanding "one-stop shopping" and that more companies (AfBAs) meant more competition. I just can't believe that anyone
bought into that line of bull*!#*. Perhaps I'm not the crazy one ofter all.
Robert A. Franco
SOURCE OF TITLErfranco@sourceoftitle.com
Wednesday, June 6, 2007
The Subprime Mortgage "Crisis" Will Fix Itself
"Legislators presiding over the subprime crisis hearings should look in the mirror and pose a few hard questions before assigning all blame to 'predatory' lenders and mortgage brokers."
By Steve Berger
Hardly a day goes by without someone's proposing how to make the bad situation in subprime mortgage lending even worse. Legislators at all levels of government are contending for ownership of the most destructive idea.
Finalists in this legislative race to the bottom include punitively stiff lending standards, foreclosure holidays and taxpayer-financed bailouts. I would like to propose a far simpler, fairer and effective course of action: let free people sort it out for themselves.
Let contractual arrangements remain in force, let good lenders prosper and bad ones suffer (similarly with borrowers) and let the taxpayers' pockets go unpicked. Legislative interference with market processes is likely only to prolong and deepen the downturn.
Legislators presiding over the subprime crisis hearings should look in the mirror and pose a few hard questions before assigning all blame to "predatory" lenders and mortgage brokers. Would we be talking about a "crisis" today if the Federal Reserve had not embarked on unprecedented monetary and credit expansion, in the process inflating a housing bubble of epic proportions similar to the late '90s Internet bubble? Isn't the entire housing edifice built on shaky foundations since Freddie and Fannie enjoy a protected lending status with all sorts of moral hazard implications? Wasn't it former Federal Reserve Chairman Greenspan who not long ago urged borrowers to shift to variable rate debt, most of which is now resetting at a perilously higher level? Is entrusting a solution to Washington putting a fox in charge of the chicken coop?
Regardless of where blame resides, the legislative options being considered are bad economics and ethically flawed. A bailout is nothing less than a wealth transfer to those who made ill-advised credit decisions from creditworthy, fiscally responsible taxpayers. A bailout postpones hard choices into the future and props up faulty credit. Individuals facing default or delinquency have less reason to curb spending habits or make other sacrifices. Lenders have less incentive at the margin to tighten credit standards if a bailout is imminent. Bailout logic is perverse, especially in light of growing evidence that a not-insignificant number of subprime defaults involve so-called "liar's loans", i.e., loans to borrowers who falsified information about their financial condition and income. Bailing out such borrowers is akin to rewarding them with a one-way free option on rising home prices.
Foreclosure holidays are equally flawed. Such laws in one fell swoop eviscerate contractual agreements and contravene the impairment of contracts clause of our Constitution. Unfortunately, that constitutional protection has been stripped of its teeth for generations.
Putting aside these legal quibbles, foreclosure holidays will lead to more foreclosures. Borrowers on the verge of delinquency will be less motivated to exercise fiscal discipline if they know that foreclosure rights are honored more in the breach than the observance. Lenders, less secure about their ability to take hold of collateral, will be less willing to lend, narrowing the refinancing options available for stretched borrowers. Ergo, foreclosure holidays will lead to more delinquencies and foreclosures just as banking holidays in the 1930s led to more bank runs.
What about adopting regulations that provide for uniform disclosure, loan-to-value ratios, rate caps, or otherwise stiffen lending standards? How can one cavil against such seemingly logical attempts to enhance disclosure and level the playing field? The problem with regulation is that it is impossible ex ante to determine whether its costs outweigh benefits. How can one abstractly agree on the right lending rate or disclosure standard? Any regulatory solution is one imposed from above by parties far removed from pricing risk on a day- to- day basis.
A regulatory solution is a one size fits all mentality that consequently stifles the free market's innovation and creativity and in the process restricts competition by raising entry costs. Friedrich Hayek, 1974 Nobel Laureate in Economics, referred to this as the "pretense of knowledge" syndrome infecting central planners. More order and fairness comes out of the spontaneous interaction of thousands of voluntary free market transactions.
We are not asserting that the market is perfect; as long as men aren't angels, perfection is not the measuring rod. However, the market at least is based on the voluntary, consensual decisions of thousands of individuals rather than on the arbitrary dictates of politicians. Mistakes ex post are surely and quickly redressed. While painful, it is normal that businesses and individuals make errors, that unsound investments are liquidated, that new covenants for lending are set by the interplay of supply and demand.
In their rush to do something, legislators ignore that the market is a dynamic, ever-adjusting process. Credit agencies are reviewing their standards, shareholders are voting with their pocketbooks, new sources of capital are trying to provide liquidity on revised terms, mortgage insurers are recalibrating premiums and required documentation, etc.
One's ardent support of the free-market process does not mean that one is an apologist for big corporations or turns a blind idea to subprime lending fraud or malfeasance. If anything, big corporations often have a far-too-cozy relationship with Washington. Grandiose pronouncements about a public/private partnership are often thinly disguised means to create regulatory barriers of entry for smaller competitors. The free-market system can only thrive if private property rights are honored and enforced. If loan contracts were entered into via force or fraud, the court system is the appropriate forum for redress and restitution.
In short, legislators at all levels should resist the urge to meddle. Doing nothing requires discipline and intellectual honesty and will hasten the recovery.
Editor's Note: Steve Berger is an investment manager based in Boston, Massachusetts.
By Steve Berger
Hardly a day goes by without someone's proposing how to make the bad situation in subprime mortgage lending even worse. Legislators at all levels of government are contending for ownership of the most destructive idea.
Finalists in this legislative race to the bottom include punitively stiff lending standards, foreclosure holidays and taxpayer-financed bailouts. I would like to propose a far simpler, fairer and effective course of action: let free people sort it out for themselves.
Let contractual arrangements remain in force, let good lenders prosper and bad ones suffer (similarly with borrowers) and let the taxpayers' pockets go unpicked. Legislative interference with market processes is likely only to prolong and deepen the downturn.
Legislators presiding over the subprime crisis hearings should look in the mirror and pose a few hard questions before assigning all blame to "predatory" lenders and mortgage brokers. Would we be talking about a "crisis" today if the Federal Reserve had not embarked on unprecedented monetary and credit expansion, in the process inflating a housing bubble of epic proportions similar to the late '90s Internet bubble? Isn't the entire housing edifice built on shaky foundations since Freddie and Fannie enjoy a protected lending status with all sorts of moral hazard implications? Wasn't it former Federal Reserve Chairman Greenspan who not long ago urged borrowers to shift to variable rate debt, most of which is now resetting at a perilously higher level? Is entrusting a solution to Washington putting a fox in charge of the chicken coop?
Regardless of where blame resides, the legislative options being considered are bad economics and ethically flawed. A bailout is nothing less than a wealth transfer to those who made ill-advised credit decisions from creditworthy, fiscally responsible taxpayers. A bailout postpones hard choices into the future and props up faulty credit. Individuals facing default or delinquency have less reason to curb spending habits or make other sacrifices. Lenders have less incentive at the margin to tighten credit standards if a bailout is imminent. Bailout logic is perverse, especially in light of growing evidence that a not-insignificant number of subprime defaults involve so-called "liar's loans", i.e., loans to borrowers who falsified information about their financial condition and income. Bailing out such borrowers is akin to rewarding them with a one-way free option on rising home prices.
Foreclosure holidays are equally flawed. Such laws in one fell swoop eviscerate contractual agreements and contravene the impairment of contracts clause of our Constitution. Unfortunately, that constitutional protection has been stripped of its teeth for generations.
Putting aside these legal quibbles, foreclosure holidays will lead to more foreclosures. Borrowers on the verge of delinquency will be less motivated to exercise fiscal discipline if they know that foreclosure rights are honored more in the breach than the observance. Lenders, less secure about their ability to take hold of collateral, will be less willing to lend, narrowing the refinancing options available for stretched borrowers. Ergo, foreclosure holidays will lead to more delinquencies and foreclosures just as banking holidays in the 1930s led to more bank runs.
What about adopting regulations that provide for uniform disclosure, loan-to-value ratios, rate caps, or otherwise stiffen lending standards? How can one cavil against such seemingly logical attempts to enhance disclosure and level the playing field? The problem with regulation is that it is impossible ex ante to determine whether its costs outweigh benefits. How can one abstractly agree on the right lending rate or disclosure standard? Any regulatory solution is one imposed from above by parties far removed from pricing risk on a day- to- day basis.
A regulatory solution is a one size fits all mentality that consequently stifles the free market's innovation and creativity and in the process restricts competition by raising entry costs. Friedrich Hayek, 1974 Nobel Laureate in Economics, referred to this as the "pretense of knowledge" syndrome infecting central planners. More order and fairness comes out of the spontaneous interaction of thousands of voluntary free market transactions.
We are not asserting that the market is perfect; as long as men aren't angels, perfection is not the measuring rod. However, the market at least is based on the voluntary, consensual decisions of thousands of individuals rather than on the arbitrary dictates of politicians. Mistakes ex post are surely and quickly redressed. While painful, it is normal that businesses and individuals make errors, that unsound investments are liquidated, that new covenants for lending are set by the interplay of supply and demand.
In their rush to do something, legislators ignore that the market is a dynamic, ever-adjusting process. Credit agencies are reviewing their standards, shareholders are voting with their pocketbooks, new sources of capital are trying to provide liquidity on revised terms, mortgage insurers are recalibrating premiums and required documentation, etc.
One's ardent support of the free-market process does not mean that one is an apologist for big corporations or turns a blind idea to subprime lending fraud or malfeasance. If anything, big corporations often have a far-too-cozy relationship with Washington. Grandiose pronouncements about a public/private partnership are often thinly disguised means to create regulatory barriers of entry for smaller competitors. The free-market system can only thrive if private property rights are honored and enforced. If loan contracts were entered into via force or fraud, the court system is the appropriate forum for redress and restitution.
In short, legislators at all levels should resist the urge to meddle. Doing nothing requires discipline and intellectual honesty and will hasten the recovery.
Editor's Note: Steve Berger is an investment manager based in Boston, Massachusetts.
Tuesday, June 5, 2007
Bernanke: Subprime fallout hurts housing demand
Tighter standards, bad news keep some from borrowing
Tighter standards in subprime lending -- along with bad publicity that may keep eligible borrowers from applying for loans -- will continue to restrain demand for housing, Federal Reserve Chairman Ben Bernanke told international bankers Tuesday.
Speaking via satellite to bankers and policy makers attending the International Monetary Conference in Cape Town, South Africa, Bernanke said it's unlikely that troubles in subprime mortgage lending will "seriously spill over to the broader economy or the financial system."
Bernanke said that while a leveling-off of sales late last year hinted at a possible stabilization of housing demand, more recent readings indicate demand weakened further over the first four months of the year.
"As you know, the downturn in the housing market has been sharp," Bernanke said. "From their peaks in mid-2005, sales of existing homes have declined more than 10 percent, and sales of new homes have fallen by 30 percent."
Home prices "decelerated sharply" last year, Bernanke said, after appreciating at a rate of 9 percent from 2000 to 2005. Prices continue to be "quite soft" so far this year, although outright price declines have been concentrated in markets that showed large increases in earlier years.
Single-family housing starts are down by one-third since early 2006, knocking 1 percentage point from growth in gross domestic product over the past four quarters. Despite the drop in home building, the inventory of unsold new homes has risen to more than seven months of sales, well above the average for the past decade, Bernanke said.
The adjustment in the housing sector is still ongoing, "and the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected," Bernanke said.
Decelerating house prices, higher interest rates and slower economic growth have contributed to an increased rate of delinquency among subprime borrowers, Bernanke said.
The rate of serious delinquencies for subprime mortgages with adjustable interest rates -- mortgages in the foreclosure process or with payments 90 or more days overdue -- has risen to about 12 percent, roughly double the recent low seen in mid-2005
The problems are showing up almost entirely among borrowers with adjustable-rate mortgages, with delinquency rates for fixed-rate subprime mortgages remaining generally stable.
As a result, investors who fund mortgage lenders are scrutinizing subprime loans more carefully, and lenders have tightened up their underwriting standards, Bernanke said.
"Tighter lending standards in the subprime mortgage market -- together with the possibility that the well-publicized problems in this market may dissuade potentially eligible borrowers from applying -- will serve to restrain housing demand, although the magnitude of these effects is difficult to quantify," Bernanke said.
Subprime and near-prime mortgage originations rose sharply in 2004 and 2005 and likely accounted for a large share of the increase in the number of home sales over that period. But originations of subprime purchase mortgages appear to have peaked in late 2005 and declined substantially since then, Bernanke said.
That means some of the impact problems in subprime lending have had on housing demand has probably already been felt, Bernanke said. Key indicators such as the gross issuance of new subprime and near-prime mortgage-backed securities suggest that the supply of subprime mortgage credit has been reduced, but "has by no means evaporated."
Nevertheless, "the tightening of terms and standards now in train may well lead to some further contraction in nonprime originations in the period ahead," Bernanke said. "We are also likely to see further increases in delinquencies and foreclosures this year and next as many subprime adjustable-rate loans face interest-rate resets."
Bernanke said that eventually, fundamentals like growth in incomes and relatively low mortgage rates should prop up demand for housing.
But the problems in the subprime sector are "causing real distress for many homeowners," and the Federal Reserve and other regulators are encouraging lenders to work with borrowers who may be having trouble making their mortgage payments.
Bernanke outlined four approaches being considered by regulators to prevent a repeat of the problems the lending industry is currently struggling with. Regulators can bolster required disclosures by lenders, beef up rules to prohibit abusive or deceptive practices, implement principles-based guidance with supervisory oversight, and launch less-formal efforts to work with industry participants to promote best practices, he said.
Regulators and lawmakers "must walk a fine line" in drafting new rules, Bernanke said. "We have an obligation to prevent fraud and abusive lending; at the same time, we must tread carefully so as not to suppress responsible lending or eliminate refinancing opportunities for subprime borrowers."
Bernanke made similar warnings last month after coming under fire from lawmakers who complained regulators haven't done enough to stop the most abusive lending practices.
One area that needs to be addressed is the patchwork nature of enforcement authority in subprime lending, Bernanke said. Rules issued by the Federal Reserve Board under the Home Ownership Equity Protection Act apply to all lenders, he said, but are enforced by the Federal Trade Commission, state regulators, or one of the five federal regulators of depository institutions, depending on the lender.
Tighter standards in subprime lending -- along with bad publicity that may keep eligible borrowers from applying for loans -- will continue to restrain demand for housing, Federal Reserve Chairman Ben Bernanke told international bankers Tuesday.
Speaking via satellite to bankers and policy makers attending the International Monetary Conference in Cape Town, South Africa, Bernanke said it's unlikely that troubles in subprime mortgage lending will "seriously spill over to the broader economy or the financial system."
Bernanke said that while a leveling-off of sales late last year hinted at a possible stabilization of housing demand, more recent readings indicate demand weakened further over the first four months of the year.
"As you know, the downturn in the housing market has been sharp," Bernanke said. "From their peaks in mid-2005, sales of existing homes have declined more than 10 percent, and sales of new homes have fallen by 30 percent."
Home prices "decelerated sharply" last year, Bernanke said, after appreciating at a rate of 9 percent from 2000 to 2005. Prices continue to be "quite soft" so far this year, although outright price declines have been concentrated in markets that showed large increases in earlier years.
Single-family housing starts are down by one-third since early 2006, knocking 1 percentage point from growth in gross domestic product over the past four quarters. Despite the drop in home building, the inventory of unsold new homes has risen to more than seven months of sales, well above the average for the past decade, Bernanke said.
The adjustment in the housing sector is still ongoing, "and the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected," Bernanke said.
Decelerating house prices, higher interest rates and slower economic growth have contributed to an increased rate of delinquency among subprime borrowers, Bernanke said.
The rate of serious delinquencies for subprime mortgages with adjustable interest rates -- mortgages in the foreclosure process or with payments 90 or more days overdue -- has risen to about 12 percent, roughly double the recent low seen in mid-2005
The problems are showing up almost entirely among borrowers with adjustable-rate mortgages, with delinquency rates for fixed-rate subprime mortgages remaining generally stable.
As a result, investors who fund mortgage lenders are scrutinizing subprime loans more carefully, and lenders have tightened up their underwriting standards, Bernanke said.
"Tighter lending standards in the subprime mortgage market -- together with the possibility that the well-publicized problems in this market may dissuade potentially eligible borrowers from applying -- will serve to restrain housing demand, although the magnitude of these effects is difficult to quantify," Bernanke said.
Subprime and near-prime mortgage originations rose sharply in 2004 and 2005 and likely accounted for a large share of the increase in the number of home sales over that period. But originations of subprime purchase mortgages appear to have peaked in late 2005 and declined substantially since then, Bernanke said.
That means some of the impact problems in subprime lending have had on housing demand has probably already been felt, Bernanke said. Key indicators such as the gross issuance of new subprime and near-prime mortgage-backed securities suggest that the supply of subprime mortgage credit has been reduced, but "has by no means evaporated."
Nevertheless, "the tightening of terms and standards now in train may well lead to some further contraction in nonprime originations in the period ahead," Bernanke said. "We are also likely to see further increases in delinquencies and foreclosures this year and next as many subprime adjustable-rate loans face interest-rate resets."
Bernanke said that eventually, fundamentals like growth in incomes and relatively low mortgage rates should prop up demand for housing.
But the problems in the subprime sector are "causing real distress for many homeowners," and the Federal Reserve and other regulators are encouraging lenders to work with borrowers who may be having trouble making their mortgage payments.
Bernanke outlined four approaches being considered by regulators to prevent a repeat of the problems the lending industry is currently struggling with. Regulators can bolster required disclosures by lenders, beef up rules to prohibit abusive or deceptive practices, implement principles-based guidance with supervisory oversight, and launch less-formal efforts to work with industry participants to promote best practices, he said.
Regulators and lawmakers "must walk a fine line" in drafting new rules, Bernanke said. "We have an obligation to prevent fraud and abusive lending; at the same time, we must tread carefully so as not to suppress responsible lending or eliminate refinancing opportunities for subprime borrowers."
Bernanke made similar warnings last month after coming under fire from lawmakers who complained regulators haven't done enough to stop the most abusive lending practices.
One area that needs to be addressed is the patchwork nature of enforcement authority in subprime lending, Bernanke said. Rules issued by the Federal Reserve Board under the Home Ownership Equity Protection Act apply to all lenders, he said, but are enforced by the Federal Trade Commission, state regulators, or one of the five federal regulators of depository institutions, depending on the lender.
Monday, April 30, 2007
News from our Parent Company.
Michael B. Skalka Named President of Stewart Title Guaranty Co.
Michael B. Skalka has been elected president of Stewart Title Guaranty Co., the primary underwriter of Stewart Information Services Corp. (NYSE-STC). He will continue as chairman of Stewart's international group, where he has served since 2005.
HOUSTON--(BUSINESS WIRE)--Michael B. Skalka has been elected president of Stewart Title Guaranty Co., the primary underwriter of Stewart Information Services Corp. (NYSE:STC). He will continue as chairman of Stewart’s international group, where he has served since 2005.
Reporting to Skalka will be all Stewart subsidiary underwriting companies, including Stewart Title Insurance Company of Oregon, National Land Title Insurance Co., Arkansas Title Insurance Co., Stewart Title Guaranty de México, the European underwriter Stewart Title Ltd. and Stewart Title Insurance Co. (STIC), the New York underwriter.
Malcolm S. Morris has been elected chairman and chief executive officer of Stewart Title Guaranty Co. and Stewart Morris, Jr. has been elected to the new position of senior chairman.
Skalka joined Stewart in 1988 as founding president of STIC. He also founded Stewart’s United Kingdom underwriter in the early 1990s. He was named STIC chairman in 1993 as well as general counsel of Stewart Title Guaranty Co.
“Mike Skalka has demonstrated outstanding performance from 1993 to 2006 as general counsel and chief legal officer of Stewart Title Guaranty Co. and since 2005 as chairman of our international operations,” said Malcolm S. Morris.
“Mike is a proven leader in our organization demonstrating effective management and proven underwriting skills,” said Stewart Morris Jr. “We are pleased to have the caliber of such an individual as Mike assume the leadership role overseeing the operations of our family of underwriting companies.”
Skalka has 30 years’ experience in the title insurance and real estate industries and served as president of the New York State Land Title Association. Skalka received his B.A. degree from C.W. Post College of Long Island University and his J.D. from Chicago-Kent College of Law.
“I am honored to be given this opportunity, especially as the first person outside of the family to serve as president of Stewart Title Guaranty Co., since the first stock certificate was issued to William Carloss Morris in 1908,” said Skalka. “The trust, support and faith that the Morris family and Stewart management has shown me all these years has been outstanding and greatly appreciated.”
Michael B. Skalka has been elected president of Stewart Title Guaranty Co., the primary underwriter of Stewart Information Services Corp. (NYSE-STC). He will continue as chairman of Stewart's international group, where he has served since 2005.
HOUSTON--(BUSINESS WIRE)--Michael B. Skalka has been elected president of Stewart Title Guaranty Co., the primary underwriter of Stewart Information Services Corp. (NYSE:STC). He will continue as chairman of Stewart’s international group, where he has served since 2005.
Reporting to Skalka will be all Stewart subsidiary underwriting companies, including Stewart Title Insurance Company of Oregon, National Land Title Insurance Co., Arkansas Title Insurance Co., Stewart Title Guaranty de México, the European underwriter Stewart Title Ltd. and Stewart Title Insurance Co. (STIC), the New York underwriter.
Malcolm S. Morris has been elected chairman and chief executive officer of Stewart Title Guaranty Co. and Stewart Morris, Jr. has been elected to the new position of senior chairman.
Skalka joined Stewart in 1988 as founding president of STIC. He also founded Stewart’s United Kingdom underwriter in the early 1990s. He was named STIC chairman in 1993 as well as general counsel of Stewart Title Guaranty Co.
“Mike Skalka has demonstrated outstanding performance from 1993 to 2006 as general counsel and chief legal officer of Stewart Title Guaranty Co. and since 2005 as chairman of our international operations,” said Malcolm S. Morris.
“Mike is a proven leader in our organization demonstrating effective management and proven underwriting skills,” said Stewart Morris Jr. “We are pleased to have the caliber of such an individual as Mike assume the leadership role overseeing the operations of our family of underwriting companies.”
Skalka has 30 years’ experience in the title insurance and real estate industries and served as president of the New York State Land Title Association. Skalka received his B.A. degree from C.W. Post College of Long Island University and his J.D. from Chicago-Kent College of Law.
“I am honored to be given this opportunity, especially as the first person outside of the family to serve as president of Stewart Title Guaranty Co., since the first stock certificate was issued to William Carloss Morris in 1908,” said Skalka. “The trust, support and faith that the Morris family and Stewart management has shown me all these years has been outstanding and greatly appreciated.”
Friday, April 27, 2007
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