Month: September 2011

HUD Cuts To Devastate Mortgage Counseling Agencies Across Nation, By Ben Hallman, IWATCHNEWS.ORG

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Housing counselors at Western Tennessee Legal Services were plenty busy, even before one of the region’s largest employers, a Goodyear tire factory in tiny Union City, shut its doors in July.

The plant closing, which put nearly 2,000 employees out of work in a rural part of the state, meant more work for counselors like Emma Covington. Covington said she already takes 18 to 20 calls a day and meets in person with people who need counseling on foreclosures and other housing issues.

Now, like many of its clients, the legal nonprofit will have to make do with less.

Earlier this year, Congress defunded the $88 million grant program administered by the U.S. Department of Housing and Urban Development that helped support more than 7,500 housing counselors across the country, including those at Western Tennessee. Funds run out Sept. 30.

The cuts come at a terrible time, say counseling advocates.

In the second quarter of 2011, more than 3.4 million home mortgages nationwide were 90 or more days delinquent or in the foreclosure process. More than one in five mortgage borrowers owe more on their mortgages than their homes are worth, according to government data.

The counseling money may not be coming back. The House Appropriations Committee recently approved a budget for 2012 that also doesn’t include any HUD housing counseling dollars. A group of senators is trying to restore funding, but even if successful, it is unlikely that funds will reach counselors before next spring, at the earliest.

The looming gap in funding and continued uncertainty about the program’s future means layoffs and reduced hours for counselors at nonprofits across the country at a time when demand for their services is greater than ever.

“These are rough times for our clients and our staff,” said Steven Xanthopoulos, the executive director at Western Tennessee Legal Services. “We are faced with some hard decisions.”

Western Tennessee may lay off as many as four employees when its $1.2 million HUD grant runs out at the end of this month, Xanthopoulos said. Many more counselors could lose their jobs at the 25 rural legal aid groups throughout Appalachia and the Mississippi River delta that the nonprofit supports with its share of the grant money, he said.

The National Council of La Raza supports 50 housing counseling agencies that helped 65,000 families last year with about $1.2 million from HUD. Thirty of those agencies will close their doors if Congress does not restore the HUD housing counseling funding, said Graciela Aponte, a legislative analyst.

“We are in the middle of foreclosure crisis,” Aponte said. “This is devastating for our families.”

HUD grants also support one of the nation’s biggest housing counseling training programs. NeighborWorks America used a $3 million HUD grant to fund 1,200 housing counseling training scholarships to its mobile nonprofit training university last year. When the HUD money goes away, so will those scholarships, a spokesman said.

The program – whose cost is modest, by Washington standards – is being suspended at least in part because HUD is a full year behind distributing the grant money to housing groups.

“HUD has been slow to distribute the money and Congress zeroed in on that,” said Candace Mason, senior director of housing and national grants at the National Foundation for Credit Counseling.

In recent testimony , a HUD official said that the agency has a plan to reduce the distribution timeframe to 180 days.

Some have questioned the effectiveness of the programs but the Government Accountability Office cited several studies that show counseling helps struggling homeowners avoid foreclosure and prevent them from lapsing back into default – especially if the counseling occurs early in the foreclosure process.

One study cited by the GAO found that clients who received counseling were 1.7 times as likely to be removed from the foreclosure process by their mortgage servicer as borrowers who did not. Clients who got loan modifications paid an average of $267 a month less than they would have otherwise, according to the study.

Counseling advocates say there appears to be general antipathy toward HUD, an oft-criticized federal agency, from some members of Congress related to the agencies past failings.

Congress also hasn’t yet provided $45 million mandated by the Dodd-Frank financial regulation law for HUD to set up a new Office of Housing Counseling, which will set counseling standards and dole out grants to agencies.

Here, too, HUD has been slow to act. According to the GAO, a working group at HUD is “in the process of developing a plan” for how to organize that new office, but is unable to say when it will submit it.

HUD already has an office that seems to have a similar function: the Office of Single-Family Housing. HUD officials say the primary change needed to create the new office is the reassignment of staffers who work on housing counseling activities, but also have other responsibilities.

Staffers at the House committees responsible for the funding did not comment for this story.

Foreclosure prevention made up the single-biggest slice of any housing counselor’s workload in 2009 and 2010, according to HUD, with nearly half of all queries coming from homeowners in trouble. What makes the HUD grants so valuable, housing counselors say, is that the money can be spent to help people resolve a variety of housing woes, in addition to foreclosure.

For example, the Federal Housing Administration requires seniors who want a Home Equity Conversion, or reverse mortgage to first receive counseling. Since 2005, more than 486,000 seniors received one of those loans, about 3.6 percent of all counseling activity, according to HUD. 

Many of these seniors, especially in rural areas, have nowhere else to turn, said Covington, the Tennessee housing counselor. “People can’t afford to travel to our office much less to Memphis and Nashville,” she said.

Homes on the Hill, a Columbus, Ohio, counseling service, is already operating on a razor-thin margin in terms of both budget and staffing, said executive director Stephen Torsell. Counselors have

had their hours cut and clients have faced long waits for an appointment – several weeks in many cases.

The nonprofit receives HUD money through La Raza. The annual grant is quite small—about $75,000 per year—but like other housing nonprofits, Homes on the Hill uses the HUD money to solicit matching funds from private donors.

There is still a chance that Congress will at least partially fund the housing counseling program for 2012. A Senate subcommittee recently signed off on $60 million in funding for 2012, but whether the funding makes it into law is uncertain

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No End in Sight: Mortgage Loans Harder in High-Foreclosure Areas by Brian O’Connell, Mainstreet.com

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NEW YORK (MainStreet) — Here’s another bitter pill for homeowners to swallow: If you live in an area with a high foreclosure rate, the chances of someone getting a loan to buy your house significantly decreases.

The news comes from the Federal Reserve’s latestreport, in which it concluded that mortgage lending was dramatically lower in communities and neighborhoods where foreclosures were surging, using data from the Neighborhood Stabilization Program (NSP) and from the Home Mortgage Disclosure Act (HMDA).

“Home-purchase lending in highly distressed census tracts identified by the Neighborhood Stabilization Program was 75% lower in 2010 than it had been in these same tracts in 2005,” the report said. “This decline was notably larger than that experienced in other tracts, and appears to primarily reflect a much sharper decrease in lending to higher-income borrowers in the highly distressed neighborhoods.”

The Fed uses the term “highly distressed” in place of the word “foreclosure”, but the message is clear: Banks and mortgage lenders are taking a big step back from lending to buyers who want a home in a high-foreclosure neighborhood.

It’s the same deal for borrowers who want to actually live in a home and buyers who want to purchase the property as aninvestment, as neither party seems to be having much luck in getting a home loan in a highly distressed neighborhood, according to the Fed. The lack of credit extended to investors could really hurt neighborhoods crippled by foreclosures.

“In the current period of high foreclosures and elevated levels of short sales, investor activity helps reduce the overhang of unsold and foreclosed properties,” the Federal Reserve says.

Overall, the Fed reports that 76% fewer mortgage loans were granted to “non-owner occupant” buyers in 2010, compared to 2005.

The Fed’s report reveals some other trends in the mortgage market:

  • Mortgage originations declined from just under 9 million loans to fewer than 8 million loans between 2009 and 2010. Most significant was the decline in the number of refinance loans despite historically low baseline mortgage interest rates throughout the year.  Home-purchase loans also declined, but less so than the decline in refinance lending.
  • While loans originated under the Federal Housing Administration (FHA) mortgage insurance program and the Department of Veterans Affairs‘ (VA) loan guarantee program continue to account for a historically large proportion of loans, such lending fell more than did other types of lending.
  • In the absence of home equity problems and underwriting changes, roughly 2.3 million first-lien owner-occupant refinance loans would have been made during 2010 on top of the 4.5 million such loans that were actually originated.
  • A sharp drop in home-purchase lending activity occurred in the middle of 2010, right alongside the June closing deadline (although the deadline was retroactively extended to September). The ending of this program during 2010 may help explain the decline in the incidence of home-purchase lending to lower-income borrowers between the first and second halves of the year.

All in all, the report offers a pretty bleak – but even-handed and thorough – review of today’s home-purchase market.

Read more about the continuing effects of the housing crisis at MainStreet’s Foreclosure topic page.

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U.S. Housing Market Shows Economic Divide, by Michelle Conlin , The Associated Press

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In the United States, it’s starting to feel as if there are two housing markets: one for the rich and one for everyone else.

Consider foreclosure-ravaged Detroit. In the historic Green Acres district, a haven for hipsters, a pristine, three-bedroom brick Tudor recently sold for $6,000 — about what a buyer would have paid during the Great Depression.

Yet just 24 kilometres away, in the posh suburban enclave of Birmingham, bidding wars are back. Multimillion-dollar mansions are selling quickly. Sales this August were up 21 per cent from the previous year. The country club has ended its stealth discounts on new memberships. And Main Street’s retail storefronts are full.

“We’re getting more showings, more offers and more sales,” says Ronni Keating, a real estate agent with Sotheby’s International.

Think of this housing market as bipolar. In the luxury sector, the recession is a memory and sales and prices are rising. But everywhere else, the market is moving sideways or getting worse.

In the housing market inhabited by most Americans, prices have fallen 30 per cent or more since the peak in 2007. That’s a steeper decline than during the Depression. Some people have had their homes on the market for a year without a single offer.

Almost a quarter of American homeowners owe more on their houses than they’re worth. Another quarter have less than 20 per cent equity. About half of homeowners couldn’t get a mortgage if they applied today, says Paul Dales, senior U.S. economist for Capital Economics.

Then there is the other housing market, occupied by 1.5 per cent of the U.S. population, according to Zillow.com. The one with outdoor kitchens and in-home spas; with his-and-her boudoirs and closets the size of starter houses. The one that is not local but global, with international buyers bidding in all cash. And where the gyrations of the stock market are cause for conversation, not cutting expenses.

In this land of luxury properties, the Great Recession seems over. Prices of $1-million-plus properties have risen 0.7 per cent since February, according to Zillow. Prices of houses under $1 million have fallen more than 1.5 per cent.

Normally, these two segments of the housing market rise and fall together.

“Luxury is the best-performing segment of the housing market right now,” says Zillow.com chief economist Stan Humphries.

After every recession since Second World War, housing has led the economic recovery, until now. The renewed vitality in the comparatively small market for luxury homes is not enough to power a full-blown recovery. This bifurcation in the market is yet another reason Michelle Meyer, the chief economist at Bank of America Merrill Lynch, says her housing outlook is “increasingly downbeat.”

The phenomenon is not limited to real estate. You can see the same split in other gauges of the economy. Sales at Saks versus Walmart. Pay on Wall Street versus Main Street. Corporate profits versus family balance sheets.

The divide is also making credit a perk of the rich. Mortgage rates are the lowest in decades, but what good are cheap rates if you can’t get a mortgage? The banks aren’t granting credit to anyone “who even has a smudge on their application,” says Jonathan Miller, founder of real estate consulting firm Miller Samuel. Applications for new mortgages are at 10-year lows.

Across the country, prices on high-end homes fell after the subprime crash in the fall of 2008. The price on the $25 million mansion became $20 million, then $15 million. Such “bargains” are pushing more luxury buyers to commit to more deals.

There are other factors, too. In Detroit, a recovering auto industry is helping propel high-end sales. All those car executives who have helped turn around the American auto industry used to rent. Now they are using their performance bonuses to buy homes.

Wall Street’s recovery has brought back the market for mansions in the Hamptons, on Long Island, where the number of closings has returned to the 2007 level, and for luxury co-ops in New York City. Because of social-network riches in Silicon Valley, twice as many homes have sold for $5 million or more this year as last.

But in the other housing market, an apartment tower built in 2007 in San Jose, Calif., recently converted to all-rental. The building had not sold a single unit. In Miami, a city that exemplifies the foreclosure epidemic, idled cranes dot the skyline. Unemployment shot up again this summer from 12 per cent to 14 per cent, a level not seen since the energy crisis in 1973. There are so many two-bedroom condos in gated communities with golf courses, private pools and rustic jogging paths that you can pick one up for $25,000, 66 per cent off the price five years ago. But luxury condos priced at $1 million or more are selling as rapidly as they did during the boom.

“In the 20 years that I have been in South Florida real estate, I have never seen a greater divide between those who have and those who have not,” says Peter Zalewski, founder of the real estate firm Condo Vultures.

One big factor in the divide is foreign cash, at least in the world of property. For international buyers, U.S. real estate is the new undervalued asset, and they are big buyers of luxury properties. International clients bought $82 billion worth of U.S. residential real estate last year, up from $66 billion in 2009. In states like Florida, international buyers account for a third of purchases, up from 10 per cent in 2007.

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U.S. To Have Tough Time in Suits Against 17 Banks Over Mortgage Bonds, by Jim Puzzanghera, Los Angeles Times

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Federal regulators allege the banks misled Fannie Mae and Freddie Mac over the safety of the bonds. But analysts say the two mortgage giants should have known that the loans behind the bonds were toxic.

Reporting from Washington—

The government’s latest attempt to hold large banks accountable for helping trigger the Great Recession could fall as flat as earlier efforts to punish Wall Street villains and compensate taxpayers for bailing out the financial industry.

Federal regulators, in landmark lawsuits this month, alleged that 17 large banks misled Fannie Mae and Freddie Mac on the safety and soundness of $200 billion worth of mortgage-backed securities sold to the two housing finance giants, sending them to the brink of bankruptcy and forcing the government to seize them.

Targets of other federal lawsuits and investigations have deflected such claims by arguing, for example, that the collapse of the housing market and job losses from the recession caused the loss in the value of mortgage-backed securities.

The big banks, though, might have a more powerful defense: Fannie Mae and Freddie Mac were no novices at investment decisions.

The two companies were major players in the subprime housing boom through the mortgage-backed securities market they helped create, and they should have known better than anyone that many of the loans behind those securities were toxic, some analysts and legal experts said.

“I can’t think of two more sophisticated clients who were in a better position to do the due diligence on these investments,” said Andrew Stoltmann, a Chicago investors’ lawyer specializing in securities lawsuits. “For them to claim they were misled in some form or fashion, I think, is an extremely difficult legal argument to make.”

But the Federal Housing Finance Agency, which has been running Fannie Mae and Freddie Mac since the government seized them in 2008, argued that banks can’t misrepresent the quality of their products no matter how savvy the investor.

“Under the securities laws at issue here, it does not matter how ‘big’ or ‘sophisticated’ a security purchaser is. The seller has a legal responsibility to accurately represent the characteristics of the loans backing the securities being sold,” the FHFA said.

The sophistication of Fannie and Freddie is expected to be the centerpiece of the banks’ aggressive defense. Analysts still expect the suits to be settled to avoid lengthy court battles, but they said the weakness of the case meant that financial firms would have to pay far less money than Fannie and Freddie lost on the securities.

Stoltmann predicted that a settlement would bring in only several hundred million dollars on total losses estimated so far at about $30 billion.

In the 17 suits, the FHFA alleged that it was given misleading data.

For example, in the suit against General Electric Co. over two securities sold in 2005 by its former mortgage banking subsidiary, the FHFA said Freddie Mac was told that at least 90% of the loans in those securities were for owner-occupied homes.

The real figure was slightly less than 80%, which significantly increased the likelihood of losses on the combined $549 million in securities, the suit said.

GE said it “plans to vigorously contest these claims.” The company said it had made all its scheduled payments to date and had paid down the principal to about $66 million.

The federal agency also has taken on some of the titans of the financial industry, including Goldman Sachs & Co., Bank of America Corp. and JPMorgan Chase & Co., to try to recoup some of the losses on the securities. That would help offset the $145 billion that taxpayers now are owed in the Fannie and Freddie bailouts.

The suits represent one of the most forceful government legal actions against the banking industry nearly four years after the start of a severe recession and financial crisis brought on in part by the crash of the housing market.

The FHFA had been negotiating separately with the banks to recover losses from mortgage-backed securities purchased by Fannie and Freddie, but decided to get more aggressive.

“Over the last couple of years, they’ve been doing sort of hand-to-hand combat with each of the banks,” said Michael Bar, a University of Michigan law professor who was assistant Treasury secretary for financial institutions in 2009-10. “The suits are an attempt to consolidate those fights over individual loans.”

Bar thinks the government has a legitimate case.

“The banks will say, ‘You got what you paid for,'” he said. “And the investors will say, ‘No we didn’t. We thought we were getting bad loans and we got horrible loans.'”

Edward Mills, a financial policy analyst with FBR Capital Markets, said the FHFA has a fiduciary responsibility to try to limit the losses by Fannie and Freddie. But the independent regulatory agency also probably felt political pressure to ensure that banks be held accountable for their actions leading up to the financial crisis, he said.

“There’s still a feeling out there that most of these entities got away without a real penalty, so there’s still a desire from the American people to show that someone had to pay,” Mills said.

Although the suits cover $200 billion in mortgage-backed securities, the actual losses that Fannie and Freddie incurred are much less. For example, the FHFA sued UBS Americas Inc. separately in July seeking to recover at least $900 million in losses on $4.5 billion in securities.

The faulty mortgage-backed securities contributed to combined losses of about $30 billion by Fannie and Freddie, but a final figure is likely to change as the real estate market struggles to work its way through a growing number of foreclosures.

Some experts worry that the uncertainty created by the lawsuits makes it more difficult for the housing market to recover, which adds to the pressure on the FHFA and the banks to settle.

The government case also could be weakened by an ongoing Securities and Exchange Commission investigation into whether Fannie and Freddie did to their own investors what they’re accusing the banks of doing — not properly disclosing the risks of their investments.

Banks are expected to make that point as well. But both sides have strong motives to settle the cases and move on, said Peter Wallison, a housing finance expert at the American Enterprise Institute for Public Policy Research.

“Within any institution there are people who send emails and say crazy things, and the more these things are litigated, the more they get exposed,” Wallison said.

Because of flaws in its case and political pressures, the FHFA also will be motivated to settle, Wallison said.

“There will be a settlement because the settlement addresses the political issue … that the government is going to get its pound of flesh from the banks,” he said.

jim.puzzanghera@latimes.com

U.S. may require more mortgage insurance Obama, FHFA outline possible help for underwater borrowers, by Ronald D. Orol, MarketWatch

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WASHINGTON (MarketWatch) — The regulator for Fannie Mae and Freddie Mac on Monday said the agency may force more borrowers to obtain private mortgage insurance as he also laid out further details about ideas he is considering to expand an Obama administration mortgage refinance program.

At issue is the extent to which Freddie and Fannie require private mortgage insurance for loans the firms guarantee. The two companies, which were seized by the government during the height of the financial crisis, typically require borrowers to obtain some form of private mortgage insurance if they make downpayments that are less than 20% of the value of the home they are buying.

For example, a borrower that makes a $10,000 downpayment — 5% down on a $200,000 home — must currently obtain mortgage insurance, while a borrower who puts $40,000 down on the same house doesn’t.

Federal Housing Finance Agency acting chief Edward DeMarco said in a speech at the American Mortgage Conference in Raleigh, N.C. that the agency will be considering a number of alternatives, such as hiking private mortgage insurance,to limit costs to taxpayers from Fannie and Freddie. Already the two firms have cost taxpayers some $130 billion.

DeMarco’s comments come as President Barack Obama discussed limiting costs to taxpayers from Fannie and Freddie as part of a broader deficit reduction plan released Monday. In his plan, Obama reiterated the government’s goal of gradually hiking the fees that Fannie and Freddie charge for guaranteeing home loans sold to investors. Obama said that this fee hike will help reimburse taxpayers for their assistance. The goal is also to drive investors to once again buy private-label residential mortgage-backed securities.

In his speech, DeMarco said the guarantee fee hike “will not happen immediately but should be expected in 2012, with some prior announcement.”

In addition, DeMarco discussed ways the agency could expand an expand an existing program that seeks to refinance mortgages. Obama also outlined the White House effort in this area as part of his deficit reduction proposal, following up on comments he made on Sept. 8 as part of a broader speech on the economy and jobs. Read about Obama’s deficit reduction plan

At issue is the White House’s Home Affordable Refinance Program, or HARP, which seeks to provide refinancing options to millions of underwater borrowers who have no equity in their homes as long as their mortgage is backed by Fannie and Freddie. The program has only helped roughly 838,000 borrowers as of June 30, with millions more underwater.

DeMarco said the agency is considering a number of options to encourage more borrower and lender participation, including the possibility of limiting or eliminating risk fees that Fannie and Freddie charge on HARP refinancings.

These fees are also known as “loan level price adjustments” and have been charged to offset losses Fannie and Freddie accumulate in cases when HARP loans go into default. The fees are typically passed on to borrowers in the form of slightly higher interest rates on their loans.

“Loan level price adjustments, representations and warranties… and portability of mortgage insurance coverage are among the matters being considered,” he said.

By saying the agency is consider “representation and warranties,” DeMarco indicated that the agency could seek to try and encourage more lender participation in HARP by offering to indemnify or limit banks’ “reps and warranties” risk when it comes to loans refinanced in the program.

Also known as put-back risk, in this context, is the possibility that the loan originator will have to repurchase the loan from Fannie and Freddie because the underwriting violated the two mortgage giants’ guidelines.

Observers contend that this kind of “put-back” relief would encourage lenders to invest in more underwater refinancings but critics argue that it also have the potential to pile up losses on Fannie and Freddie and taxpayers.

DeMarco also said the agency is looking at whether they can allow the borrower refinancing their loan to keep the same private mortgage insurance they had before the re-fi. Currently, the borrower must obtain new private mortgage insurance when they refinance the loan, at an additional cost.

DeMarco said the agency is also considering allowing for even more heavily underwater borrowers, those not currently eligible for the program, to participate. As it stands now, HARP only allows borrowers to refinance at current low interest rates into a mortgage that is at most 25% more than their home’s current value. The FHFA said Sept. 9 that it was considering such a move. However, DeMarco said there were several challenges with such an expansion and that the outcome of this review is “uncertain.” Read about how a quarter of U.S. mortgages could get help

A J.P. Morgan report Monday predicted the FHFA’s first focus to expand HARP will be to assist this class of super-underwater borrowers.

“Given this focus on high [loan-to-value] borrowers, we believe the first wave of changes will include lifting the 125 LTV limit,” the report said.

 

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What’s Behind the U.S. Suing Big Banks Over Mortgage-Backed Securities?, By Robert Blonk, ESQ., LLM., William H. Byrnes, ESQ.

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More bank stock declines and less lending could be in store as financial institutions face another massive round of lawsuits. The Federal Housing Finance Agency sued 17 banks on Sept. 2, alleging that the financial institutions committed securities violations in the lead-up to the recent financial crisis.

The lawsuit concerns sales by the institutions to Fannie Mae and Freddie Mac of almost $200 million in residential private-label mortgage-backed securities that later collapsed. The lawsuit also names some of the banks’ officers and unaffiliated lead underwriters. 

In addition to the securities violations, the lawsuits allege that the banks made negligent misrepresentations and failed to do adequate due-diligence and follow standard underwriting procedures when offering the mortgage-backed securities.

The complaints were filed in both federal and state courts (New York and Connecticut) against 17 banks, including major financial institutions like Bank of America, Barclays, Citigroup, Countrywide, Credit Suisse, Deutsche Bank, General Electric, Goldman Sachs, HSBC, JPMorgan Chase, Merrill Lynch, Morgan Stanley and others. The lawsuit is substantially similar to the suit filed against UBS Americas earlier this year.

Fannie Mae and Freddie Mac were placed into conservatorship in 2008, right after the subprime mortgage crisis made public waves. Under the conservatorship, the FHFA has control over the government-sponsored enterprises and has the power to bring lawsuits on their behalf, as it did in this case.

The feds waited to file the lawsuit until the stock market was closing for the Labor Day weekend Sept. 2. But the timing didn’t prevent a run on bank stocks as rumors about the suit led to significant declines in bank stock prior to the release. This latest litigation comes on the heels of the 50-state robosigner foreclosure investigation which by itself could cost banks almost $200 billion.

Some in Washington say not bringing the suit would have been akin to giving the banks another bailout. U.S. Rep. Brad Miller, D-NC, praised the FHFA for bringing the suit, saying that “[n]ot pursuing those claims would be an indirect subsidy for an industry that has gotten too many subsidies already. The American people should expect their government not to give the biggest banks a backdoor bailout.”

But other commentators say the government’s timing of the lawsuit couldn’t be worse. It will hit the banks’ bottom lines when they can least afford it. And with interest rates likely to stay at record lows for the next two years and the Federal Reserve running out of options for stimulating bank lending, the cost may further stagnate the slow economic recovery. It’s hard to imagine how the lawsuit could be anything other than a weight on the already fragile economy.

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Court rulings complicate evictions for lenders in Oregon, by Brent Hunsberger, The Oregonian

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Another Oregon woman successfully halted a post-foreclosure eviction after a judge in Hood River found the bank could not prove it held title to the home.

Sara Michelotti’s victory over Wells Fargo late last week carries no weight in other Oregon courts, attorneys say. But it illustrates a growing problem for banks  — if the loans’s ownership history isn’t recorded properly, foreclosed homeowners might be able to fight even an eviction. 

“There’s this real uncertainty from county to county about what that eviction process is going to look like for the lender,” said Brian Cox, a real estate attorney in Eugene who represented Wells Fargo. 

Michelotti’s case revolved around a subprime mortgage lender, Option One Mortgage Corp., that went out of business during the housing crisis. Circuit Court Judge Paul Crowley ruled that it was not clear when or how Option One transferred Michelotti’s mortgage to American Home Mortgage Servicing Inc., which foreclosed on her home and later sold it to Wells Fargo. 

Since the loan’s ownership was not properly recorded in Hood River County records, as required by Oregon law, Crowley ruled that Wells Fargo could not prove it had valid title to the property to evict. Crowley presides over courts in Hood River, Gilliam, Sherman, Wasco and Wheeler counties. 

In June, a Columbia County judge blocked U.S. Bank’s eviction of Martha Flynn after finding the loan’s ownership history wasn’t properly recorded. But unlike Flynn’s case, Michelotti’s loan did not involve the Mortgage Electronic Registration Systems – a lightening rod for lawsuits over whether lenders properly foreclosed n homeowners. 

“A lot of people get lost in ‘Oh it’s all MERS,'” said Michelotti’s attorney, Thomas Cutler of Harris Berne Christensen in Lake Oswego. “The problem runs broader than that.” 

Crowley also rejected the bank’s argument that if Michelotti had paid her mortgage, the eviction would never have occurred. 

“(Wells Fargo)’s counter argument to the effect that ‘if (Michelotti) had paid the mortgage we wouldn’t be here’ does not prevail at this junction because the question remains: are the right we here?'” Crowley wrote. 

H&R Block Inc. sold Option One in 2008 to Wilbur Ross & Co., a distressed-asset investor, who merged it with American Home Mortgage Investment Corp. 

But Crowley said he found no evidence of when the merger took place or why Option One’s name continued to be used on loan documents. 

Cox said Wells Fargo had not yet decided how to respond to the ruling.

 
 

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Owners Escape Tax Debt By Rebuying Foreclosed Homes, by Christine MacDonald/ The Detroit News

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Detroit —Landlord Jeffrey Cusimano didn’t pay property taxes on seven of his east-side rentals for three years, owing the city of Detroit more than $131,800.

Typically, that would mean losing the properties. But Cusimano not only got to keep them — his debt, including interest, fees and unpaid water bills, was virtually wiped free.

Cusimano and a growing number of Detroit property owners are using a little-known loophole to erase tax debt by letting their properties go into foreclosure and then buying them back a month later at the Wayne County Treasurer‘s auction for pennies on the dollar.

It’s legal. But that doesn’t mean it’s fair, said homeowner Marilynn Alexander, who lives on Fairmount next door to one of Cusimano’s rentals. The landlord owed $26,200 in taxes and other fees on the bungalow, but bought it back in October for $1,051.

“He shouldn’t be able to get away with that,” said Alexander, a 57-year-old laundry worker who said she scrapes together every year her $1,500 in property taxes at the house where she’s lived for 20 years. “That’s not a fair break to anybody else out here.”

Critics described it as a growing problem as the foreclosure crisis deepens. A record number of properties — nearly 14,300 — are expected to be auctioned this fall, and officials predict more owners will try to buy back their properties.

The News identified about 200 of nearly 3,700 Detroit properties sold at auction last year that appeared to be bought back by owners, some under the names of relatives or different companies and many for $500. The total in taxes and other debts wiped away was about $1.8 million.

“I don’t think it’s OK; it’s just how things are,” said Cusimano, who argues Detroit taxes are so unfairly high he was forced to buy back the foreclosed properties.

At the September auction, the properties’ prices are the debt that’s owed. But in October, the county treasurer sells off whatever is left at a $500 opening bid. That’s where most of the sales happen, including owners buying back their properties.

There’s an effort in Lansing to ban the practice, but others defend it.

Many of those defenders are struggling homeowners, said Ted Phillips, who runs a legal advocacy nonprofit agency. He helped about 140 families buy their houses back last year and expects to “easily” double that in October.

“It’s absolutely better to have folks in their homes,” said Phillips, executive director of the United Community Housing Coalition.

“The system is just so broken. This is a little bit of a way to correct the broken system. Not a great way, but a way.”

But he agreed that others who can afford to pay the taxes are exploiting the loophole and should be stopped.

Besides Cusimano, well-known land speculator Michael Kelly bought back three properties last fall through a company he is affiliated with to erase a $37,595 debt. The News profiled the Grosse Pointe Woods investor who, through the tax sale, gained control of more Detroit properties than any other private landowner as of earlier this year.

Cusimano, who owns about 80 rentals, makes no apologies and blamed Detroit for failing to reduce his assessments on homes whose values have crashed. He said he’s got small bungalows with $4,000-a-year tax bills, which he argues sometimes is more than the house is worth.

“The taxes are ridiculous,” Cusimano said. “I don’t even pay that for my house in Clinton Township.”

Huge debts wiped clean

The savings can be striking.

One owner bought back her storefront on West Seven Mile last year for $15,000, eliminating nearly $37,000 in debt. Another owed $23,100 on two buildings and a parking lot on Conant, but bought each back for the minimum $500.

And Cusimano got his seven rentals back for $4,051, erasing nearly $128,000 in property taxes and other government liens.

Cusimano, a landlord in the city for two decades, said the method wasn’t his first choice. He said he tried to appeal his high taxes without success. He admits he’s taking advantage of the loophole, but said he must to survive the tough economic times.

“You just have to go with how the system goes,” said Cusimano. “I have been learning that in the last few years.”

Owners often buy back their properties using the same name under which they lost them. And there’s generally a low risk of getting outbid because of the glut of vacant land. Last fall, at least 6,847 parcels in Detroit went into the city’s inventory after they didn’t sell at auction.

Landlord Allen Shifman justified his buys, saying “every house is going to the highest bidder.” He owed $35,300 on three properties owned by one business in which he has an interest, but bought them back under another affiliated business for $3,500.

Shifman described them as “garbage properties” even though the city puts the three houses’ market value between $20,000 and $60,000. He said many of the city’s landlords are struggling.

“It didn’t work out that well for me,” Shifman said of repurchasing the properties. “I didn’t get anything for my money.

“The taxes are more than it’s worth. The houses don’t have any value at all. If the properties were worth the value of the houses, people would pay the taxes.”

Detroit’s tax rates — 65 mills for homeowners and 83 mills on other property owners — are the highest in the state, according to a recent Citizens Research Council of Michigan report. The average statewide rate is 31 mills for homeowners and 48 mills for other property owners.

Dan Lijana, a spokesman for Mayor Dave Bing, said the city has been reducing residential assessments “in the double-digit range” over the last four years, but that “distressed sales,” such as the sales from the county auction, can’t be a factor.

Cusimano’s neighbors on Fairmount, a street in northeast Detroit with mostly maintained aluminum-sided bungalows, argued they are paying taxes and were angered when told of the loophole.

“OK, he gets to buy his back and my mother has to struggle?” said Tekena Crutcher, who lives with her mom. “The city is the way it is because of people like him not paying his taxes.”

Alexander said she’s suffering from throat cancer, but pays her taxes.

“It’s disappointing to know that the system is set up like that and things like this are allowed to happen,” she said.

Lijana said City Hall is looking at the city’s tax structure and the auction loophole.

“We are working to make the City of Detroit run more like a business,” Lijana said in an email. “This is an example of a challenge that we are looking to address both from a fiscal perspective and as a land use policy.”

Legislation aimed to stop it

Wayne County Chief Deputy Treasurer David Szymanski, whose office runs the auction, said it’s frustrating to see people ditch tax obligations, but the law allows for it.

“There is no restriction in the law about who can or cannot bid at auction,” Szymanski said. “It’s such a tough issue.”

“It’s clearly in the best interest to keep people in their homes. But it’s a very bitter pill for the people next door.”

Mah-Lon Grant, 62, and Gloria Grant, 57, said they would be homeless and their house likely gutted if Phillips’ nonprofit group hadn’t helped them buy it back.

Their debt only was about $5,500, but it was overwhelming.

The couple got behind on their taxes after losing their landscaping business when Mah-Lon Grant went to prison in 2005 for five years on felony firearm and assault charges, according to state records. He said the situation got out of control while he was defending himself as he collected a debt from an associate.

“If we had to do it ourselves, I don’t think we would have been able to do it,” Mah-Lon Grant said. “There’s no way we could catch up.”

“We are barely surviving.”

The couple was able to buy the house, where they’ve lived for 34 years, back at auction for $500. They live there with their 22-year-old son and 15-month-old great-granddaughter.

He said his family is different from other property owners using the loophole.

“They are doing it for profit,” Grant said. “We are doing it for survival.”

State Sen. Tupac Hunter, D-Detroit, has introduced legislation to ban buyers who owe back taxes.

He said he’s looking to retool it to make sure nonprofits can buy properties on behalf of families, such as the Grants.

But Hunter said he wants to stop “land speculation and the scavenging currently going on in Wayne County’s tax foreclosure auctions.”

“My intent is to make it more difficult for land speculators to game the system,” Hunter wrote in an email.

Szymanski said his office opposes Hunter’s bill because it’s too restrictive, but is brainstorming ways to prevent owners who can pay their taxes from buying back properties.

“We want to help people in need, not make people rich,” Szymanski said.

But Shifman and others who oppose limits on who can buy at auction said it will only hurt taxpayers further.

All the revenue raised at the auction goes back to the city, schools and library.

“I don’t know what the county is going to do without all those proceeds,” Shifman said. “You will eliminate a lot of buyers.”

cmacdonald@detnews.com

(313) 222-2396

From The Detroit News: http://detnews.com/article/20110907/METRO01/109070383/Owners-escape-tax-debt-by-rebuying-foreclosed-homes#ixzz1XJMP2BOJ

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