In California and throughout the country a substantial number of people have found themselves saddled with adjustable rate mortgages that have reset to interest rates significantly higher than at loan origination. In many cases the borrowers cannot afford the new payment amounts. Also, in many cases, the borrowers really didn’t know what they were getting into.

It is a common, and not altogether inappropriate, reaction to such situations to think or say, “Too bad. You shouldn’t have signed something if you didn’t understand it.” But what if the borrower claimed that the documents are forged? Well, you’d think that would be an easy claim to refute, especially if the signatures were notarized.

But the forgery claim might not be as easy to dismiss as it appears. This is because forgery can occur even when the signature on the document is authentic. A recent opinion in the case of The People v. Paul Stephen Martinez (California Fourth Appellate District, Division Two) is instructive in this regard.

Defendant Martinez had offered to help Ruth Michiel when she ran into financial difficulty. She feared that two houses that she owned might go into foreclosure. At Martinez’s direction, Ms. Michiel signed a number of documents. Later, she discovered that a trust deed in the amount of $25,000 and secured by one of the properties had been recorded in favor of Martinez. The trust deed bore her signature. At trial, Ms. Michiel did not deny signing the trust deed, but she denied doing so knowingly.

Among other things, Mr. Martinez was found guilty of forgery. The decision was appealed. His defense against the forgery charge was that “there was no evidence that her signature was not genuine and no evidence that he used any affirmative misrepresentations … to procure her genuine signature.” The court disagreed with his claim regarding misrepresentation. Testimony had showed that he provided her “with a number of documents to sign to try and help [her] with [her] financial problems.” But, more importantly, the court held “he could be convicted of for gery even in the absence of any such affirmative representations.” [my emphasis]

The court referred to an earlier (1967) case, People v. Parker, where defendents had been found guilty of forgery even without any misrepresentation. The defendents in that case had been sellers of aluminum siding. The documents that they gave buyers to sign included a trust deed on the property. The defendents had not misrepresented the trust deeds; they simply included them, without disclosure, in the documents to be signed. That court said, “The crime of forgery is committed when a defendant, by fraud or trickery, causes another to execute a deed of trust or other document where the signer is unaware, be reason of such trickery, that he is executing a document of that nature.”

In fact, there are a number of other California decisions that would tend to support the ruling in People v. Martinez.

We haven’t heard anything about similar forgery claims in sub-prime mortgage situations. But, in light of the ruling in People v. Martinez, it would be no surprise to learn that such charges are being filed against some lenders.

by Bob Hunt

Here’s some potentially good news for investors from the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac.

James Lockhart, who runs the agency, says there’s been some “re-thinking” underway on the controversial limits on the numbers of rental properties investors can own if they’re seeking new financing.

Both Fannie Mae and Freddie Mac have imposed a four-unit limit, reversing their previous investor maximum of ten units.

The rationale for the change, according to the agencies, was their belief that investors who own higher numbers of rental condos and houses pose a greater risk of default, foreclosure and loss for the companies.

The restriction effectively shut out many small investors from Fannie’s and Freddie’s standard programs — and pushed them into much higher-cost financing from so-called “hard money” lenders.

In a letter to Charles McMillan, president of the National Association of Realtors, Lockhart said, “While no final decisions have been made, I can share with you the fact that the issue of raising the selling guide ceiling on investors loans is under active consideration at one of the (corporations), and reflects an appreciation of the role for investors in the housing recovery.”

Realty Times obtained a copy of Lockhart’s letter to McMillan, which was intended to respond to issues raised at the Realtors’ annual convention in Orlando in November, where Lockhart spoke to two sessions. Lockhart did not disclose which company may soften its rule, but when one changes its standards, the other typically follows suit.

Lockhart addressed another issue of concern to investors and other buyers of condo units: The negative impacts of growing numbers of foreclosed units and bank-owned REO in condo projects.

Under current rules, Fannie and Freddie generally avoid loans in condominium developments where less than 51 percent of the units are owner-occupied. The problem is that both companies define REO and foreclosed units as non-owner-occupied, even though they are temporarily vacant and not owned by investors.

Lockhart said in his letter that “at least one” of the two corporations — either Fannie or Freddie — “is considering a clarification of the 51 percent (rule) that would exclude REO units from being counted as investor units … in the owner-occupancy ratio.”

Lockhart offered no timetables for either of these key potential policy improvements, but investors may well see one or both changes within weeks.

At the very least, it’s good news that the top executive regulating Fannie and Freddie recognizes the significant roles investors can play in helping the industry dig out of the current mortgage mess.

Private mortgage insurance helped save families from foreclosures this year, claims Genworth Financial. The company recently released its Foreclosure Prevention Scorecard that touts that more than 11,000 homeowners were helped in the last 12 months.

The top 10 states where a form of a “workout” — (repayment plan) or loan modification — to avoid foreclosure occurred were Texas, Florida, Georgia, Ohio, Pennsylvania, Michigan, North Carolina, Illinois, New York, and Indiana.

“Foreclosure doesn’t benefit anybody. As a mortgage insurer, we’re trying to do our best to work with the borrower and keep that person in the home as well as work with the mortgage servicer and the investor so that all parties win,” says Alan Goldberg, Vice President Homeowner Assistance Program at Genworth Financial Mortgage Insurance.

Some borrowers believe that private mortgage insurance doesn’t benefit them, but the company’s Scorecard shows differently.

Chris Antonello, Senior Vice President of Marketing, Genworth Financial Mortgage Insurance discussed the Scorecard with me. It revealed that workouts increased 56 percent over the same period last year. Nationally, homeowners were helped mostly by repayment plans and loan modifications. Repayment plans accounted for 50 percent of all workouts, and loan modifications 32 percent. Antonello says that, nationally, 89 percent of homes were rescued. “Basically nine out of 10 homeowners that we deal with are able to stay in their home. The balance are people who either have to go through a short sale or deed in lieu — they do leave the home but it’s only 11 percent,” says Antonello.

“We’re also trying to highlight that a significant amount of these borrowers have monthly payments of under $1,000 which is important because people who need the help are getting it,” says Antonello. The scorecard shows that 53 percent of those helped have monthly payments under $1,000.

Goldberg says Homeowner Assistance Program works directly with the mortgage servicers and the borrowers when there is a problem. “If the mortgage servicer hasn’t put the borrower on a workout by the fourth month of delinquency, we start contacting the borrowers — and we have a whole campaign where we send them written material and a calling campaign to let them know that workout assistance is available and that we can help them avoid foreclosure.”

Goldberg’s team seeks to create a repayment plan that works for all or a loan modification.

“If borrowers cannot afford the house, then we help them to sell the house and still avoid foreclosure,” says Goldberg. He adds, “If they’re upside down, we would reduce the payoff on the loan, effectively paying the claim, so the difference between what the home sold for and what the payoff was, would be up to the amount of the loss assuming it didn’t exceed the amount of the coverage that we had.”

“It’s very important that we reach out to people who are struggling to let them know that mortgage insurance does provide this benefit. As they’re going through hard times, the more people we can save and keep in their homes the better and at the same time as they make new decisions they should consider mortgage insurance,” says Antonello.

For those who are looking for either a new loan or to buy a home, Antonello says he hopes the same mistakes aren’t repeated. “Part of what drove the problem was that it was en vogue to avoid private mortgage insurance. Instead a lot of people did piggyback loans — the 80-10-10 or 80-20 — so they were highly leveraged and now, when they’re running into a situation, they don’t have somebody like [Genworth and Homeowners Assistance] trying to help them,” says Antonello.

Antonello says, “One of the things with private mortgage assistance is that it not only gets you into the home sooner but it keeps you in the home and it’s less risky than other alternatives that are out there and we provide this service so that, if you do run into a problem, our Homeowner Assistance Program comes at no-added cost — it’s free protection — it’s already built into the premium that the borrower pays.”

Modifying the mortgage terms of delinquent homeowners is one of the most debated concepts in Washington right now.

FDIC chairwoman Sheila Bair wants massive, across the board modifications — slashing hundreds of thousands of borrowers’ interest rates and monthly payments NOW — long before they fall into foreclosure.

House Financial Services committee chairman, Barney Frank, is threatening mortgage lenders with tough new regulations if they don’t modify customers’ loan terms quickly enough to keep them out of foreclosure.

Even the Bush administration has jumped on the bandwagon, calling for widespread loan fixes, even offering $800 cash incentives when loan servicers do so.

But here’s a politically sensitive question: How well do modifications really work?

Rob Dubitsky, a top researcher for Credit Suisse Group, says they’re not as effective as you might think.

In a study of reports from 19 major mortgage servicers, Dubitsky found that one third of all borrowers who received modifications fell back into serious delinquency within eight months, according to the American Banker trade publication.

For borrowers who received what Dubitsky called “traditional” medications to their mortgages — rate cuts or reworking of terms that added late fees and back payments onto borrowers’ principal balances — fully 44 percent RE-defaulted within eight months.

They either had to be given new and easier loan terms … or they simply went to foreclosure.

Only outright reductions of loan balances — something most lenders are reluctant to do – reduced the re-default rate significantly. But even then, Dubitsky found nearly one in every four borrowers later fell behind on payments.

None of this is a big surprise to long-time professionals in the default mitigation business. Joe Smith, president and CEO of Default Mitigation Management of Newport, Kentucky, says wholesale modifications — as advocated by FDIC’s Bair – are likely to lead to higher rates of later re-defaults and foreclosures.

Smith’s firm advocates more hands-on, individualized techniques to cure delinquencies, often involving counseling. Mass modifications without individualized underwriting and personal finance counseling, he says, “just pushes the problem down the road.”

But don’t hold your breath waiting for anybody in Washington — and certainly not the incoming Obama administration or Congress — to throttle back on their mass modification programs anytime soon.

And don’t expect them to do what’s politically much tougher: Ask banks to bite the bullet up front — write down principal balances early on so they don’t have to RE-modify vast numbers of mortgages – maybe over and over again — to keep owners out of foreclosure.

Steps to Foreclosure

Foreclosure is the act of claiming the title or forcing the sale of real property in order to satisfy a defaulted mortgage loan. If you are falling helplessly behind on mortgage payments, avoiding foreclosure should be a top priority. It is important that you are aware of the mandatory steps that your lender must take before foreclosure can occur so that you can adequately prepare yourself for alternatives to foreclosure. This guide discusses those steps to foreclosure.

Notice of default

If you miss a mortgage payment, your mortgage lender will likely send you a letter reminding you that a payment was due. This letter may take a more serious tone than what other collections notices might take. Known as a notice of default, this letter will let you know how much you are behind, and what to do to restore your mortgage loan to a current status. If you receive a notice of delinquency, this is the same letter and should be treated with the same level of urgency.

Anytime you have difficulty making your mortgage payment, contact your lender to discuss it with them. It is important that they know that you are making arrangements to get caught up. A good faith effort on your part can frequently delay foreclosure proceedings and extra month or more depending upon your lender. Once you receive a notice of default, now is the time to take corrective action. If you know that you will not be able to afford the home, consider prepping the home for sale immediately. Selling a home may take longer than you have time. In addition, many buyers will hold out or demand greater discounts if they know the home is in foreclosure. Putting it on the market now will generally give you more options.

If you feel that you can afford the home but just need some help to get caught up, contact your lender to request assistance. A workout arrangement can frequently allow you to restore the loan to current status. Forbearance is a common remedy that can delay or temporarily reduce payments so that you can reestablish current payment status.

Notice of Acceleration

A notice of acceleration is required under most states’ laws to give you the opportunity to satisfy the loan balance in full to prevent foreclosure. Once you reach this stage, it may be too late to seek workout arrangements or other means for restoring the loan. This is official notice that the lender wants to terminate the mortgage loan. They are announcing that they intend to take ownership of your home unless you can pay the entire loan balance in full. This is a 30-day warning that you must pay the debt in full. In other words, you can bet that lender has committed to foreclosure by this point. If you make it to this point, you should take any steps to speed up the sale of the home, including price reductions. You may or may not receive a summons advising you of a court action taken by the lender to proceed with foreclosure as this is not required in all states. You commonly will receive no such summons if the foreclosure is based on a deed of trust.

If you have received a notice of acceleration and do not have a realistic opportunity to sell the home, you should take immediate action. If you think you can afford the regular payments on a permanent basis, it is probably worth the effort to make another plea to your lender for a workout. Be prepared to prove that you can reasonably afford to keep the home.

Notice of Sale

Your lender is required to send you a notice of sale once a time and date of the intended sale of your property is established. Once a notice of sale has been delivered, you only have up until that point to remedy the situation. The sale date is the date that you will no longer have any legal claim to that property. If you are able to sell the home on your own, you must close with the buyer before the foreclosure sale date. If you wish to file bankruptcy to prevent foreclosure, you must do so prior to the sale date. Once a sale has been announced, most lenders will no longer consider alternatives to foreclosure other than a sale that you initiate with a buyer. If you are able to find a buyer on your own, you must either convince the buyer to close prior to the sale date, or you must convince the lender to postpone the sale until after the closing date that your buyer requests. Otherwise, foreclosure can occur.

One last ditch effort that you can take is to offer the lender the deed in lieu of foreclosure. Although technically a foreclosure, the credit impact could be slightly less damaging since you are voluntarily giving up claim to the property. This really is a last resort since you are giving up your biggest investment.

Public Auction

If the property is sold at auction as a foreclosed property, your financial obligations may still not be over. Many foreclosed properties are bought by real estate speculators that pay substantially less than the property is worth. If the sale price is less than the loan balance, you may still receive notices after the sale alerting you to a deficiency that is still owed. Even though you lost the home, you could still owe money once auction fees and attorney fees are added to the remaining loan balance.

Remember the two rules to foreclosure:

1. Never wait and allow a lender to foreclose on your home.
2. Never wait and allow a lender to foreclose on your home!

You have other options that can allow you to avoid foreclosure if you act soon enough.

NEW YORK (CNNMoney.com) — A plan announced today by Bank of America will be the most aggressive foreclosure prevention effort ever undertaken by a U.S. bank.

The program, scheduled to start in December, will be open to distressed borrowers who signed up with Countrywide Financial between January 1, 2004 and December 31, 2007. Countrywide was acquired by Bank of America (BAC, Fortune 500) in July.

It came in a legal settlement that the company entered into with the attorney general offices of 11 states, who had sued Countrywide over predatory lending practices, but the company stated that borrowers in all 50 states will be eligible to participate in the program.

“The Countrywide settlement is a watershed moment for loan modification programs,” said Mark Pearce, North Carolina’s Deputy Commissioner of Banks and a member of the State Foreclosure Prevention Working Group. “This is, by far, the best [program ever], even better than the FDIC program with IndyMac Bank.”

As part of the initiative, Bank of America will cut monthly housing payments, including mortgage, property taxes and insurance, to no more than 34% of gross income. The move is expected to help keep as many as 400,000 troubled borrowers in their homes.

The program targets holders of subprime adjustable rate mortgage (ARMs), subprime fixed rate loans and option ARMs, but prime and Alt-A borrowers, who did not document their income, will be eligible as well.

No other foreclosure prevention effort has aimed to keep borrowers’ house payments so low.

“[The program's] affordability is far better than any other program out there,” said Rick Simon, spokesman for Bank of America.

By contrast, the much heralded foreclosure-prevention initiative announced in August by the FDIC for customers of IndyMac Bank, the subprime lender that the agency took over in July, said it will keep borrower payments to no more than 38% of gross income.

“This is the biggest mandatory modification of loans in U.S. history,” said Jerry Brown, attorney general of California, the state with the largest number of borrowers who may benefit from the settlement. “Of course, we never saw such a big rip-off by any other company either.”

According to Simon, the Countrywide program will proactively screen all of its borrowers for eligibility, and then contact them directly to offer loan workouts. No prepayment penalties or modification fees will apply. But the program can’t help every Countrywide borrower. Some, because of illness, divorce, job loss and the like, simply won’t be able to afford any reasonable mortgage payment.

Simon added that Bank of America is training personnel and putting systems into place that it hopes will enable staff to deal with a large number of mortgages all at once.

The new program comes with a price tag of $8.4 billion, but Simon says that it will cost much less than foreclosing on homes en masse.

As the credit crisis continues, more and more lenders and mortgage servicers are coming to grips with the fact that preventing a foreclosure is usually cheaper than going through the repossession process and then reselling the property in a declining market.

Depending on each borrower’s circumstances, Bank of America might freeze or lower a loan’s interest rate or even cut the principal loan balance. The bank said it will also participate in the government’s Hope for Homeowners program, a provision of the housing rescue bill which went into effect Oct. 1 and makes FHA-insured loans available for delinquent borrowers.

The announcement of the program came on the heels of Friday’s approval of the $700 billion Wall Street bailout, a measure which has been criticized for failing to address the foreclosure crisis head on.

The hope is that other lenders and servicers will follow Countrywide’s lead.

“Now that we’ve gotten this with Countrywide, I would expect that we’ll be talking with other major servicers to implement similar programs in the near future,” said North Carolina Deputy Commissioner of Banks Mark Pearce, who worked on this settlement.

But he and other members of the the State Foreclosure Prevention Working Group have been pushing other lenders to do something this drastic for months, without much luck.

“So far, they have failed to show the leadership required to get it done,” said Pearce. “I hope, having the market leader do this will spur the other servicers to greater action.”

Not wanting to be involved in financing “buy and bail” home purchases, the Federal Housing Administration will no longer count rental income when home buyers choose to vacate, rather than sell, their principal residence.

Home buyers seeking to rent out their existing home and buy another with an FHA-backed mortgage must now demonstrate they have sufficient income to pay both mortgages. The FHA won’t allow lenders to count rental income for the home being vacated unless borrowers have a 25 percent equity stake or can prove they are relocating for employment and obtain a one-year lease on the home being vacated.

The new rules are intended to prevent the practice known as “buy and bail,” where the buyer purchases a more affordable dwelling with the intention to cease making payments on the previous mortgage, FHA said in a letter spelling out the new guidance for lenders.

Because FHA will insure principal residences only, and not income properties, the property being vacated by definition could not have an FHA-insured mortgage. But if the property ended up in foreclosure, it might have an impact on the value of nearby homes with FHA-guaranteed mortgages, the administration said in justifying its actions.

The new rules took effect Sept. 19, and are temporary pending a determination whether a permanent rule change is needed. The rules apply only to a principal residence being vacated in favor of another principal residence, and not to existing rental properties disclosed on the loan application and confirmed by tax returns, FHA said.

The federal government will not pay the ousted chief executives of mortgage finance companies Fannie Mae and Freddie Mac up to $24 million in exit packages.

The Federal Housing Finance Agency notified former Fannie Mae CEO Daniel Mudd and former Freddie Mac CEO Richard Syron that such “golden parachute” payments will not be paid. The housing agency, which took control over the companies this month, made the announcement on Sunday.

“It would have been unconscionable to award these inflated salaries, particularly when the leadership of Fannie and Freddie can hardly be given good grades,” Sen. Charles Schumer, D-N.Y., said in a statement.

Mudd had been due to receive up to $8.4 million in compensation, while Syron was due to receive up to $15.5 million, according to calculations by David Schmidt, a senior consultant at executive compensation consulting firm James F. Reda & Associates.

Stepping into a mortgage is not always the easiest thing in life to commit to. Cost, value, your position in life, and many other factors all weigh in on whether or not you should make the jump. The following are some things you should be looking at to determine whether or not you are really ready to buy a home.

• You plan to move from the area within the next few years. During the last boom, you could buy and sell in six months to a year in many markets and recoup your buying and selling costs and still have enough cash left over to buy again.That’s no longer the case in a growing number of markets where home prices are inching up, flat or falling.It’s also easier, logistically, to move out of a rental home than a home you own and must sell.
• You are inflexible. Buying is better suited for you when your life is on a steady course. If you are still in your globe-trotting youth and out to see the world, unless you want to also manage house swapping or renting, buy when you’ve settled down.
• You expect a job change or income reduction. Similarly, if you plan to earn enough money to return to college, become a Hollywood celebrity or join the Las Vegas poker circuit, home ownership probably isn’t for you. You can, however, opt to co-own, buy well within your means, say a tiny condo in an affordable community, or use some other affordable home-buying strategy.
• Buying will cost far more than renting. Again, do the math. Some high cost housing markets have gotten so expensive renting makes sense based solely on the mortgage vs. rent difference.

It’s a good time to buy when your finances, planning, goals and lifestyle mesh with the financial responsibilities required for homeownership.

Associated Press

WASHINGTON – The White House said Monday that the giant federal takeover of troubled mortgage giants Fannie Mae and Freddie Mac might have been prevented if Congress had acted on its recommendations for changing the system.

“It is exactly the kind of event we warned about and tried to prevent over the years,” White House press secretary Dana Perino said. “Remember that we have highlighted the systemic risk posed by Fannie Mae and Freddie Mac because of the very large role they play in housing markets and because of their business practices.”

She said that the White House has asked Congress “for years” to establish a strong independent regulator to oversee the institutions.

Perino also highlighted that the takeover will allow time for Congress and the next administration to determine the appropriate future role for the companies. She said their primary mission should be to increase the availibility and affordability of home mortgages.

“Whatever eventual longtime solution is decided for Fannie Mae and Freddie Mac,” Perino said, “it is crucial that there are reforms so they do not pose similar risks to our economy or the financial system again.”

President Bush said he is pleased with the action and believes “it will stabilize the markets.”

“I wouldn’t call it a bailout,” he said in an interview conducted Sunday with Fox News Channel’s Fox & Friends show, and set to air Tuesday. “I’d call it a stabilization.”

Perino said the nation’s “economy will not return to strong job growth until the housing correction is behind us.”

Perino was pressed repeatedly about how Bush — a fiscal conservative — could champion such a historic government takeover and intervention in markets.

“This is not action that we wanted to take. It’s action that we needed to take,” she replied.

Analysts were split on how much the takeover could eventually cost taxpayers although they all agreed the upfront costs will be substantial, possibly hitting $100 billion as the Treasury is called upon to bolster the capital cushions at both institutions. Perino said the administration is moving “to make sure that the taxpayers would be paid back first.”

“The goal is to prevent additional risk to the taxpayers,” she said.