The mortgage crisis issues can make your head spin, especially if you are in the real estate business like I am as a Realtor® and you feel a certain responsibility to understand the issues, figure out the best solutions and figure out the ‘next steps.’ The social real estate network I belong to is called Active Rain and some of us decided it was time to throw the issues out there, get all the best comments, opinions, facts we could, and get ourselves on the path to being a part of the solution in our jobs. There are two posts generating healthy and spirited debate. The first one was a response to the Governor of California’s proposal for relief for the subprime issues affecting that state. The author, Lenn Harley, is a Maryland Broker. The second is from a Florida Broker, Bryant Tutas, and he takes the perspective that the system allowed people to get homes on the ‘easy,’ it’s called ‘easy in, easy out.’ What’s good about these posts is not just the posts but the comments. Let’s face it, real estate in Cleveland is not real estate in California, Maryland, Florida or Arizona, on many levels. We have our own issues and our own economic situations. But my brain increasingly tells me that these issues can’t be about ‘them’ or ‘us,’ because on some level, what happens Nationally or globally does affect us now. It’s the 21st Century and no community operates in a vacuum anymore. I mean, Alan Greenspan would hold his briefcase a certain way, it would get splashed all over the air waves and the stock market would act accordingly. It’s a strange world we live in now but so be it.
I took it upon myself to try to figure out how our NE Ohio mortgage issues fit in, how the many National responses proposed are going to help us - or not. One thing I chose to do was to talk with Lou Tisler of the Neighborhood Housing Services of Greater Cleveland (NHSGC). This wonderful non-profit is in the thick of the issues here and Lou has graciously allowed me to pick his brain and give all of you the wisdom of his opinions from the trenches. Here are Lou’s answers to a few of the questions, and Lou, thank you very much.
Is there value to the idea of a temporary freeze on ARM resets for mortgage holders? “Freezing resets are a start in the right direction. ” For homeowners who did not qualify for the “fully indexed fixed rate, the freeze allows them time to look to other loan products before falling behind in their mortgage.”
I agree with Lou on this. But the caveat is, home owners then have to become pro active in coming up with a solution. If it’s a three year moratorium, get your butts to a financial counselor (call me if you need one) and find out immediately what you need to do to qualify for that fixed loan — you will have three years to repair your credit, save money, whatever it is going to take to make this happen. Otherwise, as Lou says, “the freeze will only prolong the inevitable, should the freeze be temporary.” I say, regardless of how you got into the crisis with your loan, you have to be part of the solution and not hide and hope the crisis goes away.
I asked Lou about a permanent freeze, which would basically kill ARM products.
“….though we advocate for all our home owners to enter into a fixed rate product, [ARMS] have helped many realize the American dream of home ownership…..” Lou advocates for a “….test of suitability and affordability….then sometimes an ARM is an answer, definitely not the best answer, but one that could work….”
This issue is big across the Country. So many people have ARMS that are resetting and set to reset, that foreclosure rates are still not tapering off. The problem is two fold, and I will let Lou talk about the second part, but I have to add…..MOST mortgage lenders, when reputable, will clearly tell us what our rates could be (a range) at the end of the ARM period. It is our responsibility to not gloss over this. And hope that things will work out in three or seven or 15 years. We have to take responsibility for our financial futures.
What about the fraud that has affected home ownership and real estate in all it’s permutations?
The fraud that has permeated throughout the Industry in bait and switch loan docs, over-appraised homes, flipping etc, has sullied the Industry to the point of suspicion of ALL in the Industry….it is past time that National and state bodies of the brokerage industries clean up their own messes….while not one to support over-regulation by the Government, these agencies of brokers and bankers have shown a lack of control of their members…..” so it is “….now time that the government step in and provide a consumer safety net….that is not to say that everyone who wants to be a homeowner has some ‘right’ to be one, now, next week or even next year, but their vulnerability should not be preyed upon to the benefit of some shareholder….”
My last question for this post: what is good for Cleveland in all of this? Lou points to local solutions, like his non-profit group NHSGC. I have to agree, since we are not Arizona with astounding growth to the area; we are not Southern California with high median incomes and housing prices to blow your mind. He points to the Cleveland Housing Network, Legal Aid, ESOP. I can add that there are mortgage brokers who are volunteering to help you, pro bono, act as a middle man between you and your current lenders. I know there is a counseling department at the HHMS ‘leg’ of my Company. And I know that most of the CDC’s that work within each of our 30 something Cleveland neighborhoods will direct you to places if you call them.
I will close with Lou Tisler’s most important point:
As hard as we work on the back end of this crisis (which is extremely important), the most effective tool to prevent foreclosures is on the front end in the form of education. So as National policy moves to support counseling and education; as the State of Ohio puts forth funding, education is the most leveraged foreclosure prevention tool….”
Peace Out - 3C
13 responses so far ↓
1 Elaine Reese // Nov 25, 2007 at 11:52 am
Excellent article, as always. I agree that any bail-out programs are merely band-aids unless the homeowners change their attitudes toward saving money, reducing credit card debt, and generally living within their means. If they don’t, they’re apt to still be in the same trouble 3 years from now.
2 Mitchell Hall // Nov 25, 2007 at 6:33 pm
Hi Carole, Excellent article. You touched on many topics. Homeownership is a financial responsibility. IMHO local governments should have programs to help moderate and low income with homownership and offer affordable housing through private and government programs but not just bail people out who are irresponsible financially. I had an ARM for many years and it worked out great. Interest rates were very high back in 89. I took a risk with a low introductory rate. I was aware of the risk. It went up but then interest rates came down. I don’t think products should become illegal because some people made financial mistakes.
3 Carole Cohen // Nov 25, 2007 at 9:07 pm
Thanks Mitchell I agree that ARMS or any other reasonable product does not need to be replaced. I’m so leaning towards local measures not National ones. The Feds don’t ever seem to be able to handle things anyway and a ‘broad brush’ solution doesn’t address every market. Thanks for stopping by to comment!
4 Carole Cohen // Nov 25, 2007 at 9:08 pm
Elaine I agree and that’s why I just featured a post that Ed wrote about behavior. I still ask though, how do we change? What amount of pain or reason is going to be the carrot that causes change to happen?
5 Kristal Kraft // Nov 26, 2007 at 1:59 pm
Carole ~ Great article! I have to agree with what Lou said on the front end education is so important. We have found in Colorado the people who obtained bond financing were required to go to a home buying class. These folks are NOT the ones losing their homes due to ARMS.
There must be something to it!
kk
6 Carole Cohen // Nov 26, 2007 at 3:28 pm
Kristal I agree. Maybe a mandatory seminar for zero down or ARM clients would be a good start. I know the City of Cleve used to require it for those getting first time home buyer loans and I know the City of Lakewood does it for the applicants to their FTHB program. Thanks for some proof that it works.
7 moni // Nov 26, 2007 at 10:26 pm
We have the same requirement in NH for our low down 1st home buyer programs…education and counseling up front. I’m not sure it really helps but it can’t hurt thats for sure.
8 Lewis Sage // Jan 11, 2008 at 12:59 pm
I just encountered this site and want to begin by thanking Carole and her correspondents for all the expertise and hard work.
It seems to me that “the ARM issue” is really a tangle of related problems that we as a society would like to solve simultaneously. First, there is the immediate, practical problem of foreclosure as it affects homeowners on the one hand and mortgage holders - or securitized debt holders - on the other. Second, there is the problem of coming up with a solution that is fair to both borrowers and lenders. Third, there is the problem of devising a solution that is reasonably efficient. Fourth, there is the question of how lending rules might be changed so that these same problems do not recur.
Freezing ARM rates at their initial levels is, I agree, useful if and only if the freeze is temporary and the time is used to negotiate a mutually acceptable solution. To be both fair and efficient, the terms of that solution must be superior to foreclosure for borrowers and lenders alike. Ideally, the gains from the agreement - as opposed to foreclosure - should be divided between the parties in inverse proportion to their understanding of the terms of the original mortgage contract. That would mean that equally financially savvy borrowers and lenders would divide the re-contracting gain 50-50, but that the lion’s share of those gains would go to a naive borrower. I am not _repeat, not_ a lawyer, but as I read it, the literature on contract law points to several doctrines that relate to this issue. First, a court may set aside a contract whose terms are “unconscionable”, meaning that they are so skewed in favor of one of the parties that the other party could not possibly have understood them at the time of signing. According to this doctrine, the disadvantaged signatory must either have been misled (defrauded), or must have been incapable of understanding the terms of the contract. In either case, the contract could be voided. Dividing the gains from re-contracting in the way I suggest would address the problem of naif v. sophisticate.
[At this point, I realize that I haven't even begun to deal with the question of who is best equipped to bear the risks associated with mortgage loans or with the problem of how regulations might be altered for the future... and I also realize that I don't know whether anyone is interested in what I might think on those topics. So I'll end here.]
9 Carole Cohen // Jan 11, 2008 at 5:45 pm
Lewis I thank you so much for taking the time to comment and (at least for me) bring up some potential solutions/issues that we have not directly addressed in this way.
I do agree automatically with your statements about the terms of a loan being so skewed that there is no other conclusion but to assume fraud of some sort.
My question is, at this time, are our laws set up so that this can occur (negating a mortgage loan contract)?
It is very true that the solution is not ‘one size fits all.’
I hope we can get some opinions and comments from those with much more knowledge than I.
I will be reading this again and probably have more to say, thank you again !
10 Lou // Jan 12, 2008 at 4:49 am
I am not a lawyer, nor do I play one on TV, so if there is an ESQ out there, please correct me if I’m wrong. The act of re-winding the contract (undoing) is something that many agencies across the state attempt (and at times succeed) in doing, especially if they can prove that the loan is predatory (since there are laws on the book).
When declaring the contract null/void/etc, I believe, that both side need to return the “consideration” to the other party. Seeing that this declaration usually does not happen right after signing the contact, much time has elapsed and the homeowner has been given proceeds that have either purchase a home or refinanced a home. If the contract is null/void/etc then the homeowner needs to return these proceeds. On paper, a seemingly easy thing to do. In reality, without showing/proving the fraudulent aspect of perhaps appraised value, or even with the market in a lull and housing prices being depressed, recapturing the full funds needed to make the process complete seems optimistic at best (which doesn’t broach the subject of tightening of credit and therefore where does the homeowner go to finance/refinance the contract that was determined flawed).
So, I believe that if proven predatory, there is statutory remedy, but I think that the laws/rules/assumptions/implications are still skewered away from the homeowner.
It is my opinion that any tools that are available should be used to achieve, preserve and sustain the American dream of homeownership, while also weighing in that fraud on either side (homeowner or broker/lender/appraiser/servicer), including no-doc/low-doc falsification, should be fully pursued for the betterment of the homeowner, the community, the maket and the real estate industry.
This morning my ramblings may be clear as mud; I think we are out of Diet Pepsi (my version of early morning coffee).
11 Carole Cohen // Jan 12, 2008 at 8:37 am
Thank you Lou, so apparently there HAS already been this type of solution satisfactorily utilized. I personally don’t understand why an automatically inflated appraised value is not called for as a litmus test…this seems to be the issue in the bubble market situations too. I was very pleased to see the latest from The City and Mayor Jackson on the suit against 21 lenders, more chance to see case law at work, wonder how it will turn out!
Lou you helped a lot thanks, even if you had to have Sprite instead
12 Lewis Sage // Jan 24, 2008 at 10:54 am
Lou and Carole: you’re certainly right. Applying the theoretically appealing doctrine of the unconscionable contract is really cumbersome, particularly if it must be done on a case-by-case basis. It makes me wonder whether some sort of class action would reduce the transactions costs to make that option truly efficient. The doctrine of voiding fraudulent contracts is, as I understand it, a separate option. If one party has materially misrepresented the facts, then the other party is agreeing to something that does not exist. Thus, if you sign an employment contract with me because I tell you that you will have the use of a company car and I later deny you the use of the car, pointing out that there is no such stipulation in the document, then my original offer might be considered to be fraudulent. On the other hand, if the contract specifies that you must use the company car and that I can charge you whatever I please for its use, then the contract is unconscionable; but if I did not misrepresent the terms of the contract it is not fraudulent. Either situation is grounds for voiding the contract, as I understand it.
[Enough pedantry... and I'm still not a JD.]
To continue my thoughts from a couple of weeks ago, I thought I’d tackle the question of what regulations might serve to make the sub-prime market less volatile. Economists refer to the origins of the current situation as the “principal agency problem” which means that the motives of one of the parties to a transaction are different from those for whom (s)he is a proxy. In this case, many lay blame on the mortgage broker - whose income depended on a fee rather than on the performance of the borrower - and on the financial intermediaries who bundled (securitized) mortgages and then passed them on. It seems to me that one way to improve the behavior of these intermediaries would be to require them to purchase insurance against which the owner of a Moody’s rated mortgage security could claim if the default rate of the underlying loans exceeded the rate implied by that agency’s rating of the security. Premiums for this insurance would be experience rated, meaning that frequent claims would increase the premiums. This would give the intermediary an incentive to make sure that the security’s rating was appropriate. Alternatively, rating agencies might be required to carry such insurance. Both arrangements put the cost of insuring the accuracy of the process on those with the expertise to determine the quality of the mortgages most cheaply.
13 Carole Cohen // Jan 24, 2008 at 5:00 pm
Would be good to have some mortgage guys or bankers weigh in…..to a layman in finances like myself (I sell homes but do not finance them!) it certainly sounds plausible.
Has this ever been brought up before?
Thanks for the thought provoking ideas Lewis.
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