Mortgage Settlement: What To Do With the Money?
Eventually, the attorneys general of the states got their settlement from the big banks–at least $25 billion. That’s a lot, of course, but it will be spread out over all involved states and may take forms other than direct cash infusions.
The big question is what to do with the money? Should it go, as housing advocates had assumed, to help struggling homeowners facing foreclosure? Or, should it go, as strapped state officials are maintaining almost unanimously, straight into general fund coffers to make up for some of the terrible cuts about every state has had to make?
What About California?
Taking into account credits designed to encourage the banks to make payments to homeowners, California’s share of the settlement could climb to as high as $18 billion, by far the the biggest cut of the money when all is said and done. How eerily predictable-California’s recalcitrant budget deficit, created largely by the downturn or rather avalanche of falling home prices and thus property tax revenues–has recently been discovered to be $16 million… How fortunate…at least in the eyes of Jerry Brown who is vociferously insisting that the bulk of the funds should go to the State of California.
Who Should Get The California Money?
Although at first glance it may seem that, of course, homeowners should get the money, both points of view have strong arguments in their favor.
The pro for the homeowners getting the money is that, simply put, homeowners are for the most part the victims in all this. Yes, many homeowners knew in their hearts they couldn’t make the payments and, yes, some lied to get stated income loans. Each loan could perhaps be justified as the lenders were using all sorts of rationalizations to persuade any reluctant homeowners to purchase. Home values will go up. In a year or two you can refi and lower the payment. These are just two common refrains.
On the macro level, though, homeowners who unfortunately bought or refied their homes during that crazy 5-year window from 2002 to 2007 are almost all underwater no matter how scrupulously they kept their finances. That is not their fault.
At this point, some 345,000 mortgages are delinquent in California with even more homeowners underwater but still valiantly making their payments. Should these people be given some kind of help from the settlement money? Principal reduction, perhaps, or maybe lower their interest rates? Or, should some just have their debts wiped off the books?
PRO: The State of CA
At the moment several foreclosure-prevention bills are bogged down in the state legislature. At the very least argues Kamala Harris, the CA Attorney General who fought so hard to get the settlment, homeowners need a Bill of Rights and banks in California must be more efficiently regulated. So she and her allies are pushing hard to solidify the reforms promised by the mega-banks so this housing debacle does not happen again. On the other side, predictably, are those very mega-banks which do not want to be so regulated along with those who, to be fair, are fearful that the tiny improvements that California housing is making could be stunted at birth.
So, a rare legislative conference committee has been called to reconcile the two sides if possible. Meanwhile, Gov. Jerry Brown is pushing to use some of California’s share of the $25-billion national mortgage settlement to plug holes in the state’s budget. Actually, he has a good case and he’s aiming high; he wants a big share of the money.
A major portion of the budget woes came directly from losses when expected revenues failed to materialize. That revenue is primarily property tax revenue, going down every year since the great recession began, and income tax revenue, which also is failing primarily due to unemployment, especially in the construction and housing sectors. After years of cuts, the budget is already down to the bone. We all know that education and social services have been eviscerated. How can we cut more? The state relies on property tax to serve the needs of all its citizens. Without that money, many of our most needy, primarily children, the disabled, the unemployed and the old, will suffer horribly.
Too, it must be remembered why the attorneys general were going after the banks in the first place. That is a complicated story, but boils down to a failure to pay transfer taxes as required by real estate law. The states lost massive sums of tax revenue because the banks were churning the titles to properties, slicing and dicing them into mortgage-backed securities electronically and not paying the transfer tax and recording required every time a property changes ownership.
Solution: Most Likely Scenario
Both sides have good arguments in this debate over that giant pile of money. Since this is the case, the most likely scenario will be a compromise between the two sides.
Kamala Harris is right: we need a Homeowners Bill of Rights, and the banks, like it or not and they don’t, need good, strong regulations to control them. These two items are bare minimums. As for giving the money to individual homeowners, if it does happen, the amounts will be small because the numbers involved are so large. Better to allocate some money to homeowners’ advocacy and education groups.
The bulk of the money, though, should go directly to the those who most need it–the citizens of this state who lost out on tax revenues due to machinations of the big banks. That is to say, the money should go to pay down the deficit and get California back on track for the first time in over 10 years.
Just when we think it’s getting better, the news comes out that we are in for a double-dip in housing prices. Last year in 2010 things were starting to look up in many municipalities as sales were brisk and housing prices were even starting to inch up again. This year, though, the situation has turned from hopeful to grim. Now it appears that the price increases of last year were mainly due to the home buyers’ housing credit extended by the U.S. Congress to buoy the market. Buoy it they did, but now we’re in for a let-down. In September of 2010 as the last of the home buyer credit buyers closed on their properties, housing started to slide. Of course, it’s natural for sales of homes to slide after Halloween and throughout the winter, especially in cold-weather states, but this year’s slide began earlier and lasted longer.
Compounding the problem was the “robo-signing” scandal which halted foreclosures for several months last fall. Regular sales and short sales continued to pile up as inventory on a stagnant market, then the banks resumed their foreclosures. Foreclosures hit at perhaps a more rapid rate as banks rushed to close out their books at the end of the year. Now, at the end of February, here in Southern California we have not only a huge inventory, but I would even characterize it as a glut of properties clogging up the market.
Another issue adding to the misery is the difficulty borrowers are having obtaining financing. After the bailout, as we all know, banks, instead of spreading the wealth around as was intended, instead simply stopped lending. Belatedly realizing their folly during the bubble years, banks, always ponderously slow and bureaucratic, finally reacted–by clamping down on lending! Too late, banks. It has been estimated that half the population now has bad credit due to the recession in one form another, either a short sale, foreclosure, bankruptcy, late payments on credit cards or, at a minimum, too much debt. Lenders now will not lend to these people
For an analysis of what the near future holds for lending, check out my Pasadena Short Sale Blog. Hint: it’s another downer.
All of these factors have played a part in the current housing glut and consequent stasis. The inevitable result will be–yet lower prices as banks, short sellers and those who must sell for one reason or another, all compete with one another for the few buyers out there. Already this year, analysts have indicated that the scant 2.25% gain in L.A. housing last year has been wiped out. Some experts are predicting that we are in for another dip of approximately 15%. I am not in the prognostication business, but I can say that it’s not looking good.
Already from 2006-2008 many cities in five states, California, Nevada, Arizona and Florida and Michigan, according to Federal Housing Finance Agency data, have lost significant value in housing. Starting with Stockton, which lost 75% of its housing value in those two years, the dreadful list continues with Modesto at negative 73%, Vallejo negative 64%, Salinas at negative 60%. These are horrible numbers. Imagine losing 75% of the value of your home in just two years through no fault of your own!
The roll of California cities continues with Riverside-San Berdo-Ontario tied with Bakersfield at negative 47%, Fresno at negative 45%, Sacramento area at 44%, Oxnard-Thousand Oaks at 41%, Santa-Barbara-Santa Maria-Goleta tied with Santa Rosa at negative 40%. The l ist goes on-Oakland area -38%, Santa Ana-Anaheim-Irvine -36%,LA-Long Beach-Glendale -32, San Luis Obispo-Paso Robles -29% and even Santa Cruz-Watsonville lost 29% in two years.
That just us. Of course, Vegas lost 54% of its value in those years and is still hemorrhaging. Reno-Sparks lost 41%; Phoenix-Mesa-Glendale was down 31% and is still falling. Then, like California only worse because it has a less diversified economy, is Florida which was and still is a disaster zone. Cape Coral-Fort Myers lost 60% of its value, followed by Naples-Marco Island at 54% negative, Ft. Lauderdale -45%, West Palm Beach-Boca Raton down 45% and on and on.
That was the story three years ago. Much as we would like to say it’s getting better, really, it’s not over yet.
Return of the Robo-Signers
As indicated in the previous post, foreclosures in judicial states, which all have to be approved by a judge, are starting to run into rough waters as homeowners, frustrated beyond belief at the lack of help from the banks, are increasingly turning to litigation.
One sign of trouble was the “robo-signing” disclosures which began in Florida and quickly spread to a temporary nationwide moratorium on foreclosures. Concerned banks did a quick self-investigation, and, not surprisingly, hastily determined that while a few “robo-signers” had fraudulently approved foreclosures, that all others were good to go. Foreclosures then resumed.
But, wait. Just last week, Ally Financial suspended 250 foreclosures in Maryland because they had been processed by a robo-signer who had been rubber-stamping as many as 10,000 mortgages per month. Even though Ally expects to eventually refile the foreclosures, the legal challenges will slow the process — which could conceivably give some homeowners the chance to avoid foreclosure.
Show Me The Deed: Real Estate Law Is Still The Law
Not so fast, big banks. Traditional real estate law, which as far as I know is still the law of the land, requires that banks have to to produce physical deeds to show that they own the properties they are seizing. Electronic blips need not apply. If the recent Massachusetts Supreme Court ruling, insisting the banks produce the physical deeds, spreads nationwide, banks are in for a rough ride. Because most mortgages over the past decade were sold to multiple owners on the global marketplace, it is no longer clear who is the rightful owner of the loan. How inconvenient that some judges turn out to be sticklers for the actual law!
“The vast majority of these loans have been diced and sliced and sold to multiple owners in investment tranches, which are likely to be owned by people who don’t even live in this country, so if courts rule that the banks have to get the real owners’ signatures to foreclose, the banks are stuck,” said one industry commentator. “That becomes very surreal, since you’re talking about millions of loans where you don’t know who the owner is.”
Surreal for the banks, that is, but highly convenient for the millions of upside down homeowners now stuck in mortgage hell and foreclosure limbo.
Jerry Brown’s Win For California v. Wells Fargo
Because California does not require the same judicial review as other states, courts here have typically rubber-stamped foreclosures. But the wide-ranging questions about the foreclosure process are having an effect even here.
Last month, Jerry Brown — in one of his final acts as attorney general before becoming the state governor — inked a settlement with Wells Fargo to provide $2 billion in loan modifications to homeowners who were struggling to pay off adjustable-rate loans, as well as $32 million in restitution to borrowers who have already lost their homes.
“Customers were offered adjustable-rate loans with payments that mushroomed to amounts that ultimately thousands of borrowers could not afford,” Brown said. “Recognizing the harm caused by these loans, Wells Fargo accepted responsibility and entered into this settlement with my office.”
So far, foreclosures in California, which do not need a judge’s approval, are proceeding apace. It is extremely encouraging, though, that in the judicial states the law is starting to be applied. The faster that spreads the better for all of us. The California judiciary and the legal profession in general are eagerly eying developments. Beleaguered homeowners, too, until now dependent mainly upon the banks’ good will to avoid foreclosure, may finally have found in our long-established law the very tools they need to keep their homes.
Louis XIV of France, styled the Sun King, famously opined, “Apres moi, le deluge.” After me, the flood. He was right, of course, for his excesses so infuriated the people that his successor was guillotined and his monarchy overthrown in the French Revolution.
SoCal Plunge In Foreclosure Filings
Something similar seems to be brewing in Southern California and maybe even nationwide as lenders ratchet up their foreclosure filings after the “robo-signing” lull. Though foreclosures dropped dramatically in SoCal this fall, so, too, did all home sales. The reasons seem to be many: the end of the home buyer tax credit, stubbornly high unemployment and the generally still-moribund economy. In fact, sales are down a full 16% from November of 2009. This at the same time foreclosure filings fell 14% from the previous November after a 22% decline in October for a two-month total 36% decline. Nationwide, the filings fell 21%.
December is traditionally a slow month in real estate as consumers focus on retail buying, parties and holiday travel plans. Typically, though, also in December smart investors are out there snapping up last-minute bargains of the now-extremely motivated sellers still on the market. Competition is almost always much less, to put it mildly, and sellers are determined to close out their books for year’s end. This year seems to be different as even investors are holding back.
That may be because the huge drop in foreclosure filings this fall has ominous repercussions for home prices in the new year. With the foreclosure freeze over, informed observers now expect to see the banks ratchet up their foreclosures with a vengeance, restarting filings begun in October and November and barreling ahead with new ones in January. Executives from RealtyTrac, a real estate data collection firm, speculate that the housing recovery could be set back three months, if not more, as the foreclosures pile up. In fact, we can expect ” an avalanche” of foreclosures shortly.
SoCal Home Prices
The most immediate effect of an avalanche of foreclosed properties on the market will be to further depress prices in Southern California which had started a slight upward movement. Los Angeles County home prices had dropped 1.2% over November 2009 to a median of $325,000. Riverside and San Bernardino Counties, the hardest hit by the bursting of the real estate bubble, lost 2.5% and 5.0% respectively to medians of $195,000 and $152,000. But, that is a huge improvement over the 30% and 40% drops of previous years. Other SoCal counties actually gained in value. Orange County eked out a .6% improvement for a $435,000 median home price. San Diego topped the charts with a 3.1% improvement over last year to a median of $335,000 with Ventura County just behind at 2.7% uptick to a median of $375,000.
Future: More Underwater Homes
These hard-earned gains will soon be lost as the promised avalanche of foreclosures hits the market. Perhaps sales will pick up as buyers and investors are lured back into the game. But, bargain-hunting fun aside, another price drop for already distressed homeowners will plunge yet more homeowners underwater. That, in turn, spirals down into more foreclosures and more equity loss in future.
Like Louis XIV, banks see this as well as anyone, yet still refuse to modify loans in any serious way. Like Louis, they see, but, obviously, don’t give a damn as long as they get their bonuses. Short-term is the only term.
These days it’s a bit confusing because home values have slipped considerably in many places. The key, though, is how much would it cost to replace your home if it were severely damaged or if it were burned to the ground? Obviously, that value doesn’t refer to the purchase price because that included the land which in 99.9% of disasters is still there. The question involves the price of construction in your area.
Home values may have dropped. Has the price of home construction dipped, too?
The Insurance Information Institute recommends the following:
- It’s a good idea to insure your home for the cost of rebuilding it. Check your homeowners’ policy to see the maximum amount your insurance company would pay if it had to be rebuilt.
- Find out what it would cost to rebuild your home. Your insurance agent can calculate rebuilding costs for you or you can hire an appraiser (call me at 626-641-0346 for references). Make sure your insurance agent knows about all improvements you’ve made, such as a deck or larger kitchen.
- Make sure the value of your policy is keeping up with increases in local building costs. Many policies include an inflation guard… if yours doesn’t, consider purchasing one.
- Find out if you have a “replacement cost” policy for your house. If you own an older home, you may have a “modified replacement cost” policy.
- For the contents of your home – find out whether you have “replacement cost” or “actual cash value” insurance.
- Check the limits on certain personal possessions, such as jewelry. Consider buying an “endorsement” to insure valuables separately.
Insurance is one of these intangible products that we pay for and hope we never use. Make sure if you do need it, you have the coverage that you need.
Sales in Southern California counties are slowing. While this is normal for this time of year as most of the population is occupied with holiday preparations and parties, the amount of real estate inventory continues to grow. The rise in inventory will, in turn, lead to a further decline in home values as home sellers, including banks, attempt to price their properties competitively.
This is the latest real estate info for Southern California counties. Compare to one month ago here. Time on the market is lengthening and prices are dropping–again…