Sep. 1, 2012: Mortgage jobs open house; mortgage fraud report; what has happened with that supposed massive shadow inventory?

Sep. 1, 2012: Mortgage jobs open house; mortgage fraud report; what has happened with that supposed massive shadow inventory? Rob Chrisman

As long as mankind has been around, so has fraud – just of varying degrees. Expense reimbursements (“Who was really at the dinner?”), rental car insurance (“Yes, I’m covered by my regular plan.”), fur quality (“Yes, Trog make coat from mink.”). While fraud in the financial services sector declined year-over-year from April through June, mortgage fraud increased, according to the latest report from Experian. Good lenders are definitely on guard for it, but the public sees quotes like, “Over the course of the last year, we have seen mortgages continue to be targeted at a high rate,” said Nick Mothershaw, director of identity and fraud services at Experian. Thirty-nine out of every 10,000 mortgage applications were fraudulent during the April to June period, up from 32 out of 10,000 in the same period last year, according to Experian. (As a comparison, per Experian, mortgage fraud far outpaced savings account fraud, which increased from 6 out of 10,000 to 13 out of 10,000 over the year.)

The report indicates that mortgage fraud stems from more people trying to misrepresent their personal, employment and credit information on applications to get properties out of their reach: 24% of all attempted mortgage fraud cases were the result of individuals misrepresenting their credit by hiding certain information. Lying about employment histories accounted for 21%. And the “intended use of property” is also a leading candidate.

On the job front, Stearns Lending, Inc. is holding a job-related open house. Stearns is the nations’ 5th largest privately held mortgage lending institution, and is rapidly expanding its Fulfillment Operations at its headquarters in Santa Ana, CA. Stearns is holding an Open House on Wednesday the 5th from (get this) 8AM-7PM at the Costa Mesa Marriott. (Stearns is looking, however, for remote underwriters across the nation.) Stearns is hiring underwriters, funders, wholesale AE’s, RESPA specialists, doc drawers, and managers. For more information go to http://stearnscareers.com/open-house/, where you can also see Stearns’ credentials (such as funding $21 billion in the last three years).

In the press, and among some housing analysts, a constant concern is the “shadow inventory” and how this seemingly huge number of houses makes its way through the system. “Excess” supply appears to not be an issue in many areas – in fact in the West the supply of homes for sale is markedly down. Wassup with that? What happened to the title wave of supply that everyone was expecting? It appears to be being soaked up by demand, modifications, or other measures.

A while back American Banker’s Kate Berry reported that 6 out of 10 homeowners who received a loan modification stopped paying their mortgage again after 18 months, but there may be a modest silver lining buried in the high recidivism rates. “A study by TransUnion has found that borrowers who received a mortgage modification performed materially better on new auto loans and credit cards than those who did not receive any help, an indication that some consumers who fall far behind on monthly bills are able to regain their financial footing. ‘Once consumers have gone through a serious delinquency, there is still an opportunity to lend to them down the road,’ says Charlie Wise, TransUnion’s director of research and consulting. ‘We’re going to see more and more consumers that had a loan modification and the mere presence of a modification, regardless of whether the borrower continues to pay, would indicate better performance’ in paying other debts. Researchers examined data on five million mortgages including 600,000 borrowers who received a modification between January 2008 and July 2011. The study found that borrowers who had previously gone delinquent only on their mortgages — but not other loans — were better credit risks than borrowers who went delinquent on other loans as well as their mortgages. Still, high recidivism rate are a concern since most of the borrowers will re-default within 18 months and are likely to end up in foreclosure. The study also found that nearly 42% of borrowers who received a loan modification stopped making payments within a year.” Thank you Kate!

Kate also wrote a story a while back about Wells Fargo’s stab at a down-payment assistance program. In general, DAP’s give money to prospective borrowers who otherwise could not afford to buy homes. Wells’ NeighborhoodLift program requires that participants attend financial education classes before receiving grants. Jon R. Campbell, Wells Fargo’s director of social responsibility, said, “This is not a giveaway program. You have to qualify and prove you have the ability to repay – there’s nothing easy about that part.” Many remember HUD banning certain seller-funded down-payment assistance programs after the FHA found widespread fraud. Loans from such programs went into foreclosure at three times the rate of loans made to borrowers who supply their own down payments. Kate’s article said, “But Campbell says he is not worried about history repeating itself with Wells Fargo’s new program. ‘We believe these are sustainable homeowners. We’re really worried about the stabilization of neighborhoods, because a huge supply of REO [property] with nobody living in the homes causes extreme problems.’ Borrowers are required to attend eight hours of financial education classes through affiliates of the non-profit NeighborWorks America. Wells funds the grants to people whose incomes are 120% or less than the median income in their area, but the actual decisions of which borrowers qualify for the grants are made by NeighborWorks, not Wells.”

And then there is the subject of principal reductions. A while back I received this note: “I left the mortgage industry about a year ago, and your commentary reinforces my decision on an almost daily basis.  Instead, I have done some business consulting and have been trying to buy a home to update and flip.  Obviously, my target market to purchase is foreclosed homes in decent neighborhoods that have good bones.  Not to sound altruistic, but my hope is to help housing values increase by doing this. Of course I would like to make money at the same time, but I am having a helluva time trying to bid on anything. The Agencies and HUD have a mandatory period in which ONLY owner-occupant buyers can bid on recently foreclosed properties.  After that, investors can bid on the property. Most half way decent homes are snatched up prior to the waiting period being over.  I’m not sure if this is a good thing (a true upswing in housing interest) or if investors are simply lying about their intent and purchasing these homes as “owner occupied” and they turn around and rent them or flip them. Contrary to what this sounds like, this is not sour grapes.”

The letter went on. “I think it is short sighted of the Agencies and HUD to give owner occupants first right of refusal.  If investors had the same opportunity to purchase these homes, property values would increase on a greater scale…especially in the first time homebuyer market.  Just because 100% financing has gone away doesn’t mean the first time homebuyer demographic is now flush with cash to make a down payment, pay closing costs and do property renovations. Yes, there is the FHA 203K, but there are very few people willing to live in a home while it is being renovated.  Let the investors buy these neglected properties, update the kitchen, bath, flooring, appliances, etc. and resell them at a higher price point.  Before too long, those higher property values would become the norm, and not the exception.  People would regain lost equity and short sales would drop….especially the “strategic defaults”. Everyone wants the HGTV ‘after’ house, not the ‘before’ shack that is stuck in a time warp.  Give us ‘flippers’ an even playing field and we can help get the housing values on a steady upswing, create jobs and reduce neighborhood blight.  Ironically, I am not a republican or democrat….just a guy who sees a way to make the housing market better without some sort of giant government bailout or ‘principal reduction’ plan that we would all end up paying for anyway.”

Of course, if you’re a bank, in order to minimize foreclosure-related losses you must find a way to move REO inventory more quickly at the highest possible price. Auctions seem to be the way to go (HUD having done a few, for example) since lenders and servicers can achieve both of these goals by creating demand with them. While the housing market may still be in a slump, there are interested buyers, including qualified owner-occupants and investors who want to purchase residential real estate at competitive prices.  Attracting these buyers “en masse” enables institutional owners of REO to move inventory more quickly. And we’ve seen venture capital firms come in and buy thousands of houses in one swoop. Some folks complain about this, while others view it as a necessary evil in taking care of excess supply.

From an individual point of view, if you’re earning (basically) 0% on your savings, and don’t mind the management, and have enough cash, why not buy a non-owner in a depressed area? Cash-on-cash returns seem to be in the 5-10% range. One can, of course, do this on the proverbial courthouse steps, or one can keep their ears open for an auction.

To achieve the highest possible return rates, lenders and servicers must choose an auction company with an established track record and the ability to implement a full spectrum of auction formats. I am not going to present a complete list here, or any kind of list, of auction firms. But from a seller’s perspective, the right auction firm can maximize returns by selectively deploying the most appropriate auction format for a lender’s particular asset mix.  For example, where there is a high geographical concentration of REO properties, a ballroom auction with an online component is an effective auction method.  Alternatively, when REO properties are geographically dispersed, online auctions should include a real-time “Bid Now” option to encourage bidders to submit bids for acceptance prior to the actual auction sale.

Or course, no one knows how to market properties better than a local real estate professional. Love ‘em or hate ‘em, they bring added visibility to your property listing and assist with open house events for prospective buyers, and auction houses often engage local experts in the sales process.

A farmer stopped by the local mechanics shop to have his truck fixed. They couldn’t do it while he waited, so he said he didn’t live far and would just walk home. On the way home he stopped at the hardware store and bought a bucket and a gallon of paint. He then stopped by the feed store and picked up a couple of chickens and a goose. However, struggling with everything outside the store he now had a problem – how to carry his entire purchases home. While he was scratching his head he was approached by a little old lady who told him she was lost. She asked, “Can you tell me how to get to1603 Mockingbird Lane?” The farmer said, “Well, as a matter of fact, my farm is very close to that house I would walk you there but I can’t carry this lot.” The old lady suggested, “Why don’t you put the can of paint in the bucket. Carry the bucket in one hand, put a chicken under each arm and carry the goose in your other hand?” “Why thank you very much,” he said and proceeded to walk the old girl to 1603 Mockingbird Lane. On the way he said, “Let’s take my short cut and go down this alley. We’ll be there in no time.” The little old lady looked him over cautiously then said, “I am a lonely widow without a husband to defend me – how do I know that when we get in the alley you won’t hold me up against the wall, pull up my skirt, and have your way with me?” The farmer said, “Holy smokes lady! I’m carrying a bucket, a gallon of paint, two chickens, and a goose. How in the world could I possibly hold you up against the wall and do that?” The old lady replied, “Set the goose down, cover him with the bucket, put the paint on top of the bucket, and I’ll hold the chickens.”   If you’re interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com. The current blog discusses the new CFPB Rule combining TILA & RESPA disclosures. If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.

Rob

(Check out http://www.mortgagenewsdaily.com/channels/pipelinepress/default.aspx or www.TheBasisPoint.com/category/daily-basis. For archived commentaries, go to www.robchrisman.com. Copyright 2012 Chrisman LLC.  All rights reserved. Occasional paid notices do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)