Judgment Call: Appraisals Weigh Down Housing Sales

Here's a great article from THe Wall Street Journal, By S. MITRA KALITA And CARRICK MOLLENKAMP.

http://online.wsj.com/article_email/SB10001424053111904006104576500170808091148-lMyQjAxMTAxMDEwMjExNDIyWj.html?mod=wsj_share_email_bot#printMode


A couple of observations from me:

I am concerned about Appraisal Management Companies using the cheapest appraiser, not the BEST appraiser.

I am concerned about AMC's using appraisers from outside the local market who are not familiar with the area, usually because they are the cheapest.

I understand that enough forclosures in a concentrated area can become "the market" but one isolated sale should not kill a deal. This gets back to the appraiser being an expert in the market they are appraising.



William Maxwell is an expert in finance. He's a professor at Southern Methodist University's business school, has co-authored a book on high-yield debt and spent years calculating values of financial markets.

Yet there's one valuation he can't understand: the appraisal of his Dallas home.

In August 2010, Mr. Maxwell's home was appraised at $790,000 as part of a mortgage refinancing. Yet this past spring, when he tried to sell the four-bedroom home for $756,500, the appraisal commissioned by the buyer's lender, Bank of America Corp., came up with a value of $730,000. Mr. Maxwell said the appraisal killed the sale.

WSJ's Nick Timiraos reports many analysts believe low appraisals are one factor weighing on the housing market and recovery of the sector.

Weak appraisals are "driving down the real-estate market," Mr. Maxwell says. Saying the appraisal process "borders on buffoonery," he's appealing his home's valuation to the Texas regulator.

One of the conclusions from the housing bust: The appraisal system was broken. One of the conclusions some have drawn from the struggling recovery since then: The appraisal system is still broken, but in a different way.

There is little doubt that home values have depreciated sharply in recent years for the most basic of economic reasons: excess supply of homes on the market and weak demand. But some realtors, home-sellers and economists believe low-ball appraisals also are undermining a housing recovery.

Appraisals are supposed to be unbiased assessments of a property's value. The housing bubble that burst a few years ago was inflated, in part, by overly generous appraisals. Now, lenders are pressuring appraisers to come in with lower estimates, some real-estate professionals say. Banks also are using less-experienced appraisers, who often don't appreciate factors that make a home worth more, they say. And valuations are being heavily influenced by distressed sales priced at a discount to the rest of the market.

Lenders are "instructing appraisers to be a little conservative, and that responsibility on the one hand is seen as credit tightening and, on the other, as exacerbating the housing problem," says Columbia Business School economist Chris Mayer. A research paper last year titled "How Much Is That Home Really Worth?" by economist Leonard Nakamura at the Philadelphia Federal Reserve also cited a downward bias in appraisals.

This 7,000-square-foot house on four acres in Orlando, Fla., was appraised by the builder for $1.2 million in 2008.

It went under contract for $650,000.

But another appraisal valued it at just $380,000.

Disputes over valuations are rising. The National Association of Realtors said that 16% of realtors surveyed reported a cancellation in June of this year, and chief economist Lawrence Yun blamed the unusually large number on low appraisals. In June of 2010, only 9% of those surveyed reported a cancellation.

A survey by the group earlier this year found that 10%-12% of members had a contract canceled last year as a result of a low appraisal; 10%-13% had a contract delayed; and 16%-20% reported that the sales price was negotiated lower due to a low appraisal.

Not everyone agrees the appraisal system is broken. The Mortgage Bankers Association, an industry trade group, concedes that appraisals are conservative but says they need to be, partly to protect the banks from future problems with investors who buy mortgages. "There's an extra note of caution," said Steve O'Connor, a senior vice president at the association.

And some appraisers say homeowners are just having trouble facing reality. "It's the market. It's not the changes" in the appraisal process, says Charles MacPhee, a partner with Buttler Appraisals LLC.

Mr. MacPhee's company performed an appraisal in Decatur, Ga., last year that drew ire. John and Michelle Pennie were about to give up on selling their house last spring when an offer came in—just in time to qualify for the 2010 federal tax credit.

The two sides agreed on a sale price of $365,000, with the Pennies paying $8,000 in closing costs. "We were ecstatic," Mr. Pennie says.

But the appraisal put the home's worth at $327,000. And the deal ultimately collapsed. "Understandably in a declining market, you're going to have declining appraisals," Mr. Pennie says. "But when you have two parties who agree on a price, to then have an appraiser come in and make it $40,000 below…how do you ever get out of a falling market?"

For decades, appraising a home was both an art and a science, executed primarily by independent professionals who were experts on their local markets. Designed to protect both the borrower and lender, appraisals were based largely on selling prices of comparable homes. But appraisers also combed through property records and interviewed brokers, buyers, sellers—and even other appraisers. Banks selected the appraiser and often had influence over the outcome. Home buyers paid the fee.

In the aftermath of the housing bust, then-New York State Attorney General Andrew Cuomo sought to reform the appraisal industry by convincing Fannie Mae and Freddie Mac to bar loan officers, mortgage brokers or real-estate agents from any role in selecting appraisers. Besides combating inflated and sometimes fraudulent appraisals, the goal was to eliminate pressure on appraisers to provide estimates that match the contract price, which would increase chances that the mortgage loan would get approved. The sweeping Dodd-Frank financial-overhaul law that went into effect in 2010 went one step further to bolster appraiser independence by regulating both the industry and the fees they are paid.

Rather than hire appraisers whose work is known to them, banks now outsource their selection to appraisal-management companies, which are often units of other banks and financial companies. These appraisal-management companies take a sizable cut of the fee, leaving the appraisers under pressure to work faster and cheaper.

The result has been that appraisers with less experience or who are unfamiliar with a community—but who work cheap—are getting assignments while more experienced appraisers are going out business. That, say critics, is producing appraisals that are less accurate.
"We've lost the best quality appraisers," said Leslie Sellers, the immediate past president of the Appraisal Institute, a trade group. "The people doing it are the ones who have cut overhead to bone, are working out of basements and many of them are not properly educated." The Institute estimates there are currently under 90,000 certified appraisers, down from nearly 100,000 in 2007.

In Mr. Maxwell's case, he says that the appraiser, Jim Applegate, works in Plano, a suburb 20 miles from Dallas, and was unfamiliar with Mr. Maxwell's Dallas neighborhood of Lakewood, an affluent community near a picturesque lake. Mr. Maxwell also claims that Mr. Applegate improperly used less desirable homes as comparables, or "comps," to arrive at a value. In a June 17 formal letter of complaint with the Texas Appraiser Licensing and Certification Board, which regulates the industry, Mr. Maxwell said that Mr. Applegate had used a home near an elementary school that encounters a lot of traffic. Mr. Maxwell's home, by comparison, sits on a quiet, quarter-acre lot.

Calls to Mr. Applegate were returned by a Bank of America spokeswoman, who declined to comment on Mr. Maxwell's situation. She did say the lender has received feedback from customers asking it to reevaluate "geographic competency in our appraisal reports." She said efforts are being made to find appraisers who generally work within 15 miles of a property; if no appraiser is available, the company assigns alternate appraisers with local experience.

Others complain that appraisers are using foreclosures and other distress sales as comps when coming up with estimates. Because foreclosures tend to sell at big discounts from the actual value, some argue that shouldn't be used.

At least four states—Illinois, Nevada, Missouri and Maryland—have considered legislation that would bar appraisers from using distress sales when drawing estimates.

Some economists disagree. They argue that foreclosures account for such a large share of housing sales that it's perfectly acceptable to use them as comps, or to use them but adjust pricing accordingly. "A third of transactions are previously foreclosed homes. In some markets, it's close to 50%," said Columbia's Mr. Mayer. "It would be one thing if you're talking about throwing out a small number of transactions."

Another complaint is that appraisers are increasingly relying on automated valuation models, or AVMs, computer programs that extrapolate home values based on reams of property data, and public and privately compiled databases. The industry began automating in the mid-1990s, but it wasn't until a few years ago that AVMs took hold in a big way.

AVMs are most reliable when there are a larger number of typical transactions to observe. But during the housing slump, typical transactions have been scarce while distressed sales have been abundant.

One of the biggest complaints is that appraisers, in their haste, are overlooking or missing important elements that could add substantial value to a home.

Erin Wanner, a sales executive with Stirling Sotheby's International Realty in Orlando, Fla., says one of her deals fell through when an appraisal came in 40% lower than expected. The property, a custom-built lakefront, 7,000-square-foot home on four acres was appraised by the builder in 2008 at $1.2 million. Ms. Wanner's clients went under contract on the property for $650,000 in a short sale—one in which the bank agrees to receive less than the amount owed on the mortgage. The appraisal came in at $380,000.

"When I first heard it, I thought it was a joke," Ms. Wanner says. She noticed that a guest house on the property and total lot size—as well as the number of fireplaces and its heated pool—weren't included in the valuation, which would have sharply boosted the appraised value. She also thinks the appraiser wasn't familiar enough with the community and may have used comparisons with less affluent houses nearby, such as homes situated on ponds versus lakes.

Ms. Wanner says appraisers today seem less knowledgeable. "Real estate is a neighborhood business," she said. "One neighborhood can be hit, another can be flourishing." She said the new laws prevent lenders and agents from contracting the appraiser directly, which has been especially frustrating. "Once we get the report, it states that individual's opinion of value, and that's that."

Write to S. Mitra Kalita at mitra.kalita@wsj.com and Carrick Mollenkamp at carrick.mollenkamp@wsj.com

Borrowers, Are you confused? Help is on the way.

In their never ending quest to “simplify” the confusion surrounding the borrowing of money, the Fed has released their Final Rule for Risk Based Pricing Notices, as well as Adverse Action Notices.

More paper work filled with CYA, legal terminology that winds up baffling people more than giving them any clarity. Let’s take a peek….

Risk Based Pricing Notices are required under the Fair Credit Reporting Act (FCRA), and now, because of provisions in the Dodd-Frank Act, they must include language that relates to credit scores IF those scores were used to determine the interest rate (and resultant APR) given the customer. Also, the language can’t simply be “the lower your credit score, the higher rate you will pay”. That would be too easy. You see…lower credit scores have statistically proven to have higher defaults (more risk), so charging those clients more makes sense. But in the world we live in, the government wants to inundate the customer with mumbo jumbo, and insists on a form that gives the following information:


The credit score used in making the credit decision;

The range of possible credit scores under the model used to generate the credit score;
All of the key factors that adversely affected the credit score. Note that the risk-based pricing notice generally may not list more than four key factors. However, if one of the key factors is the number of inquiries made with respect to the consumer report, up to five key factors may be used.

The date on which the credit score was created; and The name of the consumer reporting agency or other person that provided the credit score. Further, if there is more than one borrower, each receives their own, personalized disclosure.

Adverse Action Notices are basically Rejection Letters. They used to say things like “your file was turned down because your credit/income/assets/appraisal does not fit the guidelines under which we approve borrowers”. Now, when credit scores are a reason for denial the language is slightly more confusing but essentially the same 5 things stated above for Risk Based Pricing. But, the really good news is that they added up to 5 different, new forms to tell the consumer where they can inquire about the score in their “consumer report” (the new term that replaces the old “credit report”).

Who gets paid for this stuff? More paper work, more muddied explanations, all to protect the consumer? Or to protect the jobs of the bureaucrats and law makers? Am I alone in thinking that often the efforts to protect wind up frustrating instead?

Simply stated, if your credit is bad because you made late payments, you can be turned down or your may be approved and be forced to pay a higher rate. Now, if your credit score is bad because of errors in the credit report, you should be directed on how to fix it. But that’s a topic for a different day.

I'm sure it will add another 5 disclosures to your application package.

Top 10 Cities that escaped the recession

Here's a good article about Augusta, GA being one of the top 10 least affected markets in the economic downturn.

Business has been good. Call me if you are looking to purchase or refinance a home.

https://news.fidelity.com/news/article.jhtml?guid=/FidelityNewsPage/pages/cities-that-escaped-recession-intro&topic=economy&ccsource=email

Americans See Debt Threat as They Reject ‘Scare Tactics’ on Higher Taxes

Here's a great article from Bloomberg News.

I would like to know your opinion on the massive debt our government is racking up. Personally, I am concerned about the effects this will have on our already stuggling economy.

http://www.bloomberg.com/news/2011-06-24/americans-see-debt-threat-reject-tax-scare-.html

Post your comments below.

Beware of ARM loans.

Here is a good article from CNN Money. I know the low teaser rate seems appealing for an adjustable rate mortgage but beware.


http://money.cnn.com/2011/06/02/real_estate/ARM_adjustable_rate_mortgage_tips.moneymag/index.htm


Call me if you want to discuss this in person.

New Initial Loan Application Disclosure Article.

Here's a great article from Mortgage News Daily regarding the new disclosures.


http://www.mortgagenewsdaily.com/channels/community/213289.aspx

Does it make sense to pay off your mortgage?

Interesting pros and cons of paying off your mortgage.


http://www.gobankingrates.com/mortgage-rates/does-it-make-sense-to-pay-off-your-mortgage/

For Retirees, A New Mortgage Presents Challenges.

Good article about the reality of obtaining a mortgage in today's market.

http://www.cleveland.com/business/index.ssf/2011/05/for_retirees_a_new_mortgage_pr.html

If you are well prepared, mortgage loans are not hard to obtain. You will be asked more questions, and you will need to be preparded to document income and non-payroll related deposts, but with interest rates being so low, it will be worth the effort.

Vacation-home market faces long road to recovery

Here's an article from USA Today regarding second homes.

http://www.usatoday.com/money/economy/housing/2011-05-08-cnbc-vacation-homes_n.htm

The buyers' market for vacation homes is likely to continue for years, with activity largely limited to buyers with enough cash to circumvent a tighter, post-recession lending environment.

Thirty-six percent of all vacation-home buyers in 2010 did not use a mortgage — versus 29 percent the year before — while more than half of them financed less that 70 percent of the purchase price, according to the National Association of Realtors.

Of those who bought a second home as a rental investment, 59 percent paid cash.

"Mortgage lending in the past three years has been pretty rough, with much higher underwriting standards," says Paul Bishop, NAR's vice president for research. "People drawn into the market at this point are buyers with substantial cash, or people not dealing with a mortgage. If your credit is strong and you put down a sizeable down payment, lenders are more interested."

Vacation homes remain the hardest-hit sector of the U.S. real estate market. Sales fell 1.8 percent to 543,000 in 2010, according to the NAR's 2011 Investment and Vacation Home Buyers Survey. The median price was $150,000 in 2010, down 11.2 percent from $169,000 in 2009.

"Vacation homes are one of the truest forms of discretionary purchases," says Bishop. "No one needs one."

"Anywhere you look, you are going to find prices we haven't seen since 2001," says Michael Sanders, a Sarasota, Fla. broker active in second-home sales. He say that's largely because of foreclosures and short sales of homes for less than what's owed on them.

The market decline has slowed but it was fast and furious at its worst. By 2008, sales of second homes and investment properties at resorts were down to half of their 2006 highs, when a better economy and easy credit turned over 1.7 million units.

"That was the peak of a very robust market," says Bishop. "After the tech-stock bust, there was a desire on the part of many people for another way to invest. As we saw, many people took equity out of their primary residences and bought another."
For years, anyone affluent enough to cover the monthly costs was rewarded by the eventual sale of that unit, adds Ralf Garrison, owner of The Advisory Group, a Denver-based resort consulting firm. "That model is broken. Anyone who bought a vacation home in 2007-2008 is not very happy about it."

Now, as with other parts of the housing market, negative equity and foreclosures are common. Foreclosure or trustee sales in 2010 amounted to 11 percent of vacation home sales.

Bargain hunters also appear to be selective. Sales and prices are up at least in the high single digits over 2009 at such well-known resort areas as Hilton Head, Palm Beach, Cape Cod and Palm Springs, according to brokers there. Ditto for Lake Tahoe, Napa Valley, Scottsdale, Oahu, Pebble Beach and the Pocono Mountains.
Today's buyers are also different than the past, when many bought a second home as an investment.

More than eight in ten buyers of vacation homes plan to use their property for vacations or family retreats. Three in ten expect to convert their vacation home to a principal residence in the future.

In many other areas, any rebound is still down the road.

"In some areas of the country - California, Arizona Nevada, Florida - there was unrealistic growth based on cheap money and little risk," says Garrison. "
Now, the depressed second-home market threatens the very health of some U.S. resorts, where real estate and construction provide the main lynchpins to the local economy.

In Colorado ski country, the Vail area employed 31,000 people in 2008. By the third quarter of 2010, employment was down 20 percent, with construction jobs down 46 percent.

"If you lose construction, you lose the locals," Garrison said. "It's a fragile economy, with an imbalance that's particularly acute in those areas that have all their eggs in the one basket of real estate and tourism."

After his $200-million residence hotel project in Telluride, Colo. ended up in bankruptcy, Alain Longatte, a veteran resort developer and founder of Scottsdale-based Resort Advisory Group International, is now concentrating his efforts in Brazil and Uruguay.

Langatte said. ""Since year end 2008 development for destination resorts has come to a screeching halt in this country. The money dried up. There are lots of very good projects in the U.S. at standstill. I suspect it will remain nonexistent for the foreseeable future."

Don't tap 401(k) to pay off mortgage

Q. How can we take money out of 401(k), pay off our mortgage and not pay taxes on it all if we do it all at the same time? Can any of it be deferred? The amount we'd want to take out is $105,000.

Unless you're in danger of losing your house, you generally shouldn't take money out of a 401(k) and use it to pay off a home loan.

Why? Because your money is growing inside your 401(k) at a faster rate than you're paying out for your loan. Also, your mortgage interest may be deductible if you itemize on your federal income tax return.

If you've recently refinanced, you're probably paying less than 5 percent for your mortgage. (I just refinanced to a 15-year at 3.75 percent.)

If you itemize, your net interest rate is somewhere around 3.5 to 4 percent. That's basically like free money, and over time you'll do a lot better by keeping the cash inside your 401(k).

In addition, if you're under 59 1/2, you'll not only pay taxes, but you'll also pay a 10 percent penalty on your withdrawal.

So the real question is why would you want to take out that much money to pay off your mortgage? And if you did, that much of a withdrawal from your 401(k) would probably put you in a higher tax bracket, causing you to pay even more federal income taxes on the amount you take out.

The only way to get tax-free cash is to borrow from your 401(k). But, again, I don't recommend it. If you lose your job, you'll have to replace all the cash within 60 days, plus you'll be losing out on any return your retirement cash would generate inside your 401(k).

The risks are extremely high that you could be caught short and wind up losing your home if you couldn't come up with enough cash.

My suggestion is to keep your 401(k) money where it is and focus on finding additional ways to save in your budget to throw more cash at your mortgage.

3 Steps to a More Productive Day

I define productivity as "doing what I said I was going to do in the time frame I said I was going to do it". Your definition may be a little different but the end result is the same for you to feel your day was productive.

Here are the 3 steps I feel are necessary for me to be productive:

1. Start with a "To Do" list and identify the highest priorities. Next, tackle the most difficult items first. Ever read the book "Eat That Frog"? http://www.amazon.com/That-Frog-Great-Ways-Procrastinating/dp/1583762027/ref=sr_1_1?s=books&ie=UTF8&qid=1304864287&sr=1-1
The tendency is to take care of the easy ones first but I have found it is best to work from toughest to easiest. Give it a try!

2. Time Block. Turn off your phones,, exit out of your email, and put a "Do Not Disturb" sign on your door if you need to. I try to target 30 minute increments several times a day, then I reward myself by setting a goal. For example, I may say, I am going to devote 30 minutes to this project and when I finish I will go to lunch. Sounds simple enough, but how many times have you said I will go to lunch first and tackle the task when I get back, only to have an interruption come up and your day ends without completing the task you set as a high priority at the beginning of the day?

3. Minimize office Chit Chat. Sure, it's fun to discuss the latest episode of American Idol, but leave that to after hours if you want to have a more productive day.

I hope these steps help you take on your day in a more productive manner!

Some signs of life in housing, credit drought goes on

The housing market in the Augusta, GA area remains relatively strong in comparison to other parts of the country, but it's not necessisarily an easy process. Here’s an interesting article from Reuters regarding the effects of the tightening of credit. It’s not impossible to obtain a mortgage these days, but expect the process to be detailed. You may feel as if you have been through an IRS audit or head-to-toe medical exam.

http://www.reuters.com/article/2011/04/25/us-usa-housing-market-idUSTRE73O0YF20110425

By Nick Carey
CHICAGO Mon Apr 25, 2011


(Reuters) - Like an increasing number of well-heeled Americans, the Hodgsons decided it was time to buy a new home, even if most of the U.S. housing market remains in the dumps.

After years in an apartment building, "we were just tired of sharing space with other people," says Cari Hodgson, 32. "It was time to have space of our own."

She and her commodities trader husband sold the condo and recently bought a $1.2 million, five-bedroom home in Chicago's north side, sealing the deal with the kind of big down-payment that is heating up the high-end of the U.S. property market.

Cari, a part-time nurse, declined to say how much of their own money the couple put into the house. But she did say the mortgage was less than a so-called jumbo loan, which are bigger than most U.S. mortgages and currently start at $730,000.

That means the Hodgsons put down at least 40 percent of the house's value, a chunk far out of reach for most Americans.

"We were told by a number of people that it was very difficult to qualify for a jumbo loan," Cari Hodgson said. "So we didn't even try to get one."

Four years after U.S. housing prices began to nose-dive, eventually triggering a global financial crisis, signs of life are appearing at the top and the bottom ends of the market.

By contrast, a sustained recovery remains far off for the vast middle ground of the U.S. housing sector.

Affluent Americans are feeling more secure as the impact of the recession fades and the stock market racks up big gains.

"People who have decent income are saying, maybe I can trade up, buy a better property," said Bill Hardin, director of the real estate program at Florida International University.

"Some people are even saying, I'm willing to take a loss on the property I'm selling now to get something I couldn't buy during the housing peak."

Sales of homes worth over $1 million, which account for about 1.5 percent of total U.S. sales, have risen in most states so far in 2011.

Realtors, brokers and others in the housing industry report the first bidding wars for expensive homes since the crash.

"There is a surge of confidence among high-end buyers and we're unfortunately short on inventory," said Pamela Liebman, chief executive of New York property firm The Corcoran Group.

Her firm saw a doubling in the sale of luxury co-ops, worth more than $10 million, in the first three months of 2011.

At the bottom end, homes are also on the move as investors pay cash for foreclosed properties to rent them out.

It's a different story in the middle of the market.

Properties worth between $100,000 and $500,000 make up more than 60 percent of U.S. housing. Sales in that category in March were down across every region of America from the same month a year earlier, when tax breaks were propping up demand.

Foreclosures and short sales -- whereby struggling homeowners sell their homes for below what they owe, with the consent of their lenders -- are still a big drag. Credit remains tight and middle-income families are more pessimistic than their wealthier compatriots about the economy.

So this year's Spring selling season, when buyers typically start to look for a home after winter, has mostly been a dud.

Access to credit is cited as a broad problem. While the rich can simply put more money down, for most would-be buyers the need for more 'skin in the game' is a deal-breaker.

Realtors and brokers complain that the credit drought is as extreme as the flood of loose lending
of the boom years.

"The pendulum has swung from too far to the left to too far to the right," Corcoran's Liebman said. "We need to find some balance in lending."

"IT'S HARD TO BE POSITIVE"

On a recent sunny Sunday afternoon, in Leawood, near Kansas City, realtor Ted DeVore patiently waited inside an elegant ranch home priced at $344,900, eager to point out the lush backyard, new roof, remodeled kitchen and updated bathrooms.

But most of the visitors to the open house were curious neighbors, not would-be buyers.
Middle-income Americans in Middle America are not yet ready to get back into the market. Homes that do sell in the Kansas City area are often going for between 20 percent to 30 percent below the listed price.

"There are so many people questioning things right now, asking themselves, am I going to have my job in six months?" DeVore said, affable but seemingly resigned to a slow Spring. "The indicators are very mixed for the whole economy and the real estate market very closely follows the overall economy."

"It's hard to be positive," he added.

FICO Improves Way to Predict Strategic Mortgage Defaults

Interesting article in National Mortgage News regarding prediticing strategic mortgage defaults.


http://www.nationalmortgagenews.com/dailybriefing/2010_332/fico-improves-way-1024457-1.html

FICO launched an analytic advance that substantially improves lenders’ ability to identify borrowers at risk of strategic default on mortgages.
The analytics provider is now consulting with mortgage lenders to offer custom analytic solutions for their mortgage portfolios. This would allow these originators to take preventative action and limit the costly effect of strategic defaults.
A strategic default is when a borrower who has the capacity to make mortgage payments chooses to default, usually because the property value is less than the mortgage’s outstanding principal.
Lenders have traditionally utilized the degree of home price depreciation to predict strategic defaults. However, new FICO Labs research showed that borrowers whose homes have lost the most value are only two times as likely to default as those whose houses have lost the least value. By using custom analytic models, FICO Labs researchers have shown the ability to identify borrowers who are over 100 times more probable to strategically default versus others.
Additionally, FICO Labs researchers have also found that strategic defaulters as a group are usually more savvy managers of their credit compared with the general population, with higher FICO scores, lower revolving balances, fewer instances of exceeding limits on their credit cards and lower retail credit card usage. This means that strategic defaulters have shown a different type of credit behavior versus distressed consumers who miss payments.
“Mortgage payment patterns have shifted, and some borrowers are intentionally defaulting on their mortgages because they believe it is in their best financial interest, and because they believe the consequences will be minimal,” said Dr. Andrew Jennings, chief analytics officer at FICO and head of FICO Labs.
“Before mortgage servicers can work effectively with potential strategic defaulters, they must first be able to identify them. Our new research shows it is possible for servicers to find those at greatest risk of strategic default, both to prevent losses and to prevent borrowers from making a decision that will damage their credit future.”
Experts said that the persisting mortgage sector weakness is driving more strategic defaults. Studies from the University of Chicago Booth School of Business showed that in September 2010, 35% of mortgage defaults were strategic, increasing from 26% in March 2009.
Meanwhile, CoreLogic's March 2011 study showed that the number of residential mortgages with negative equity totaled 11.1 million in 4Q10, or 23.1% of all residential mortgages in the U.S., rising from 22.5% in 3Q10.
The FICO Labs team built strategic default analytics that test the ability to rank-order both current and delinquent borrowers in terms of their likelihood of strategically defaulting on their mortgage. These custom models separated borrowers into high versus low strategic default risk bands. Among current borrowers (i.e., those not delinquent on any loans):
The riskiest borrowers are 110 times more likely to strategically default versus the least risky borrowers. The riskiest 20% of borrowers comprised 67% of those who later committed a strategic default. In short, FICO said that a servicer could reach two-thirds of those who would commit strategic default by focusing on just 20% of its borrowers.
“The ability to spot likely strategic defaulters before delinquency enables servicers to intervene early,” Jennings said. “Strategic defaults are bad for lenders and investors, they’re bad for the homeowners who elect to default, and they’re bad for neighborhoods and cities. Preventing them is in the interests of everyone involved.”

By Structured Finance News Staff

Mortgage rule could hurt borrowers: FHA's Ryan

By Corbett B. Daly

http://www.reuters.com/article/2011/04/13/us-usa-housing-mortgages-idUSTRE73C7NC20110413

WASHINGTON Wed Apr 13, 2011 5:46pm EDT

WASHINGTON (Reuters) - A proposed rule requiring a minimum 20 percent down payment on mortgages that lenders could then sell to investors without keeping some of the risk on their books might prevent some potential borrowers from getting a loan, a top U.S. housing official said.

While the rule "is designed to create a class of loans that have a lower likelihood of default, in its proposed definition it has the potential to exclude a number of buyers," Acting Federal Housing Administration Commissioner Bob Ryan said in prepared testimony.

Ryan is to deliver his remarks Thursday to a House Financial Services Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises. They were posted on the panel's website on Wednesday.

The Federal Deposit Insurance Corp and the Federal Reserve a few weeks ago endorsed the "qualified residential mortgage" proposal that is intended to restore lending discipline and define the safest form of mortgages that can be completely resold to other investors.

Loans backed by mortgage finance giants Fannie Mae and Freddie Mac and the Federal Housing Administration are exempt from the rule. Together they back almost nine in 10 new mortgages.

Last year's rewrite of the rules of Wall Street requires firms that package loans into securities -- a practice known as securitization -- to keep at least 5 percent of the credit risk on their books.

The provision is meant to force securitizers to have "skin in the game," so they don't churn out poorly underwritten loans and then pass along the risk to investors, as happened during the 2007-2009 financial crisis.

Mortgages that meet strict underwriting standards, known as qualified residential mortgages or QRMs, are exempt from the risk requirement.

"Given the exigencies of strong underwriting for healthy, sustainable mortgages, we must be mindful of the trade-off presented by the current definition of QRM between improvement in loan quality and affordability and accessibility for prospective homebuyers," said Ryan.

He said down payment requirements alone are not the best predictors of whether loans will perform. The combination of credit scores and down payments is a better predictor of loan performance, he said.

The agencies are currently accepting comments on the proposed rule. A final rule is expected later this year.

Fed unveils proposal on mortgage standards

Good article by Dave Clarke of Reuters but I am going to add my comentary about a few points, directed more at the Federal Reserve, not Dave Clarke. These people at the Fed are truly clueless.

"Lenders would be required to make sure prospective borrowers have the ability to repay their mortgages before giving them a loan". Really? Do they think we want to make loans "knowing" the borrowers can't make the payment? Those loans are long gone and so are the lenders that made irresponsible loans.

"lenders could be sued by the borrower if they do not take the proper steps to check a borrowers ability to repay the loan." Anyone who has applied for a mortgage in the past year has NO DOUBT they have been thoroughly checked out, including their DNA.

"is intended to tighten lending standards and combat home lending abuses that contributed to the 2007-2009 financial crisis." If it gets any tighter, be prepared to pay cash for your dream home. Not really, but it seems that way.

Enjoy!

http://www.reuters.com/article/2011/04/19/us-financial-regulation-mortgage-idUSTRE73I49F20110419

WASHINGTON Tue Apr 19, 2011 11:27am EDT

WASHINGTON (Reuters) - Lenders would be required to make sure prospective borrowers have the ability to repay their mortgages before giving them a loan, under a proposal released by the Federal Reserve on Tuesday.

The rule, which is required by the Dodd-Frank financial reform law, is intended to tighten lending standards and combat home lending abuses that contributed to the 2007-2009 financial crisis.

The rule would establish minimum underwriting standards for most mortgages and lenders could be sued by the borrower if they do not take the proper steps to check a borrowers ability to repay the loan.

The law does provide protections from this type of liability if a loan meets the specific standards that are part of a "qualified mortgage."

In its proposal, the Fed is seeking comment on two possible ways of defining a qualified mortgage.

Under the first scenario the loan could not include interest-only payments, a balloon payment and regular payments could not result in the principle of the loan increasing.

Under the alternative, the loan would have to meet all the standards laid out under the first option and meet additional requirements such as having the lender verify a borrower's employment status and debt obligations.

The proposal lays out a general standard for complying with the rule, including verifying a borrowers income, their employment and the amount of debt they have.

Mortgage originators who serve rural and underserved areas would be allowed to give out loans with balloon payments.

"This option is meant to preserve access to credit for consumers located in rural or underserved areas where creditors may originate balloon loans to hedge against interest rate risk for loans held in portfolio," the Fed said in a statement.

The Fed is seeking comments on the proposal through July 22.

The final rule will be implemented by the Consumer Financial Protection Bureau, which opens its doors on July 21.

Credit and Credit Scores

Here's a great article written by one of my co-workers, John Marcus. John is a 28 year veteran of the mortgage industry and a Sr. Loan Officer with First Bank Mortgage.

Credit and Credit Scores

What is a Credit Score? It is a three digit number between 400 and 900 where the higher the number is, the better your score or “grade”. Virtually all lenders now use scores to make lending decisions.

Unfortunately, your credit score will be different depending on what type of lender you seek. For example, if you go a car dealer, a credit card company, or a mortgage lender, each may receive a different score for you when they “pull” your credit.

To make it simple, just know that the score we mortgage lenders pull will be about 20 points lower than the score you get from most other sources (including the Credit Bureaus!).Many consumers think their credit score has dropped when we qualify them but, in fact, this issue is the only difference.

If you’re sure your credit is good or great and you just want to make it better, a few simple concepts are all you need to know:

•Paying Off Debts will raise your score (the most obvious of all)
•Obtaining or Keeping at least two Credit Cards is critical.
•Keeping the balance(s) on credit cards very low will raise your score
•Keeping credit cards active is important. (Use them at least once every 6 months)
•Do not use Finance Companies. If their name ends with “Finance” avoid them.
•Avoid Department Store Credit Cards if possible.
•Follow up with anyone that claims you owe them money. Keep records. Knowing you are right is not good enough, you need to be able to prove it.

Let’s devote the rest of this article to those whose credit is not good and want to improve to be able to buy a home:

Simply put: “paying off old “bad” debts will not raise your credit score, it will just keep it from going down in the future. Good management of current “good” debts will raise your credit score.”

Let’s start with some terminology:

•Credit Bureaus—these are the companies that store your credit history. There are three: Equifax, Transunion, and Experian
•try to recover the debt.
•Judgment—the lender has gone to court and the court rules against you. The court then reports to the Credit Bureaus.
•Garnishment—the local court has ordered your employer to withhold money from your paycheck to recover the debt.
•Lien—the court issues an order than ties up any real property you have from being sold transferred or borrowed against.
•Chapter 13 Bankruptcy—the court tells all creditors to stop contacting you, interest charges stop, and you pay the balance owed in regular installments over a period of time (years)
•Chapter 7 Bankruptcy—the court wipes out all previous debt except for federal debt (student loans, etc) and you start fresh.
•Chapter 11 Bankruptcy—a business bankruptcy
•Public Records—all the above court-related delinquent credit that is written on a separate section of your credit report and are generally more serious.
•Past Due Account—for our purposes here an account that is behind but that can be brought current.
•Collection Account—an account that has been placed on your credit report by collection agency and is permanently bad until it is paid.
•Charge Off—An account where the lender reporting to the credit bureaus has stopped trying to collect.
•Over 30—at least 31 days past the due date without proper payment
•Over 60—at least 61 days past the due date without proper payment
•Over 90—at least 91 days past the due date without proper payment
•Voluntary Repossession—a vehicle it returned to the lender and the person obligated on the loan signs paperwork
•Involuntary Repossession—a vehicle is taken by the lender and no paperwork is signed
•VA loan—a loan program available to active duty military or prior military requires zero down payment
•FHA loan—a loan program that is available to all consumers in most situations and requires only 3.5% down payment.
•Conventional loan—loan programs other than FHA and VA that requires minimum 5% down.
•Debt Ratio—a percentage of your proposed total debt versus your gross income. Reflects your ability to make the mortgage payment
So, let’s get to main question—what credit score does one need to get a mortgage loan?

•VA is minimum 620
•FHA is minimum 640
•Conventional is minimum 680, unless you put 20% down, then minimum 620.

These requirements are the same for most lenders across the industry. Some lenders require even higher scores. Be prepared for a very difficult, if not impossible, loan process if you are promised a loan and your score is below those stated above.

Having a credit score high enough allows you to proceed to the next step. It does not mean your loan will be approved. For example, In the case of a prior bankruptcy or foreclosure, you must not only have a credit score as stated above, but also must meet other requirements such as mandatory waiting periods. Also, your debt ratio is critical.

How can I raise my credit score and how long will it take?

Clearing up old, derogatory credit issues will not raise your credit score, it will just keep it from going down in the future. Good management of current, good debt is how you raise your score.

More specifically, you need at least one to two major credit cards. If you have other regular loans

Good debts are those accounts where on time payments going forward will report positive payment history to the credit bureaus. Examples are credit cards, car loans, mortgages, etc. If you get more than 30 days behind on a good debt, your score will decrease, however, the lender will usually allow you to catch up and as you pay on time again month after month, your score will increase. In most cases, your score will increase some just for bringing it current. If you get far enough behind, though, the lender will eventually change your status to a bad debt.

Bad debts are Collection Accounts, Charge-Offs, Judgments, Liens, or Foreclosures

When the lender on a good debt that has become delinquent reaches the point where they no longer want to keep your account, they will usually “sell” the debt to a collection agency resulting in a “collection account”. Once a debt becomes bad, the lender will generally not allow you to “catch up” and resume normal status. They will then insist you deal with the collection agency only. At this point the debt is derogatory permanently and will have a bad effect on your credit score. If it is paid soon after, it should stop having a negative impact. If it remains unpaid, the negative impact will fade slowly over time.

Largely unseen these days are “charge-offs”. This is where the lender just gives up trying to collect the debt. Collection agencies have become so prevalent that if the lender no longer wants to pursue collection they can just sell it to a collection agency, so there is no reason for the lender to give up completely.

Collection accounts or Charge-offs can also result from accounts that were never good credit references to begin with such as medical bills. They don’t appear on the credit report unless they are delinquent. This will usually result in only one derogatory reference.

Judgments and Liens are entered in a different place on the credit report called “public records”. They generally “hit” your score a little harder. Because they involve a creditor/taxing authority and the county record-keeping department, clearing them involves twice as much work. Unlike collection Accounts and Charge-offs, loan approval almost always requires resolving/paying these items. .

Regardless of whether a bad debt has been paid, once the date of last activity fades into the past (1 to 2 years) the debt does not affect your score nearly as much. Get ready for this—paying a collection account that is several years old will lower your credit score temporarily because the date of last activity has now become current and it is a bad debt! At least once it’s done, you should never have to deal with it again. So, you may actually want to defer paying old items until you’ve accomplished getting your home, then deal with them

After 7 years (10 for public records), debts are supposed be deemed old and drop off your report.

The problem is old bad debts left unresolved can come back to bite you. One collection agency may tire of trying to collect or realize the date of last activity is nearing seven years and “sell” the debt to another collection agency. They, in turn, create a new entry on your credit report and attempt to make an “old” debt appear “new”. It a trick, but it is very difficult to fight. For this reason, paying old bad debts is usually better than trying wait until seven years.

State laws exist that declare debts older than a certain age “uncollectable” so lenders are supposed to stop pursuing them. Once again, the problem is fighting the collection agencies is extremely difficult, if not impossible.

Now that we’ve covered how to clean up the issues from the past, let’s talk about creating new, good credit. The fastest, easiest way is called a “secured” credit card. You give the lender the requested small amount of money, say, three hundred dollars. They put it in a savings account with a freeze on it and issue you a Mastercard of Visa for the same amount. If you default, they keep your money. Because there is no risk the lenders will usually give this card to anyone. It’s the perfect way to rebuild credit.

Installment accounts such as car loans, etc, will build your credit, but more slowly.

Stay away from finance companies, if possible. If the name of the institution has the word finance at the end, they are a finance company, have higher interest rates and can actually make your credit score lower that dealing with banks. Department stores, likewise, will not help your credit sore as much as Mastercard, Visa, Discover, etc.

Also, American Express, has two types of cards—one that requires you to pay in full every month and one that allows you to run a balance like most cards. The first one will not improve your credit score, the second will.

Another way we’ve seen credit improve is by having a relative or spouse add you to their card as an authorized user. This makes the entire history of that card apply to your credit.

Now that we’ve examined credit at it relates to obtaining a mortgage, let do a quick review.


•Credit scores between from 620 and up are generally needed to get a mortgage loan, depending on the loan program.
•“Cleaning up” derogatory credit is important to keep your score from being lowered going forward. (With the possible exception of small, older accounts)
•Creating new, positive credit is the key to raising your credit score.
•Learn the terms listed above to be educated and protect your credit score in the future.

New Mortgage Regulations Could Bruise Housing Market

New regulations limiting mortgage brokers' compensation go into effect on April 1, and they might prove to be appropriate for an April Fools' Day. Though aimed at unscrupulous mortgage brokers, it seems the regulations will instead hit the nation's struggling housing market.

The Federal Reserve Board says that its regulatory goal is to "protect mortgage borrowers from unfair, abusive, or deceptive lending practices that can arise from loan originator compensation practices." The basic idea is to prevent loan officers from steering borrowers into riskier types of loans or a higher-than-average interest rate to make a higher commission."


http://www.dailyfinance.com/story/real-estate/new-mortgage-regulations-could-hurt-housing/19888351/

Taxes & Your Home: Deducting Private Mortgage Insurance (PMI)

Sticking with the theme, here's an article by Miranda Marquit.

One of the tax deductions that many homeowners have been happy to take since 2007 has been the deduction for the premiums paid for Private Mortgage Insurance (PMI). The tax deduction was slated to expire at the end of 2010, but the tax package passed by Congress last December extended it through 2011. That means that you still have this year to claim PMI payments as a deduction on Schedule A of your Form 1040. (Yes, you have to itemize to take this deduction.)

What is PMI?
Private Mortgage Insurance is designed to protect lenders in the event that you default. You pay mortgage insurance premiums in order to help the lender recoup losses if you stop making payments. Most lenders require borrowers to purchase PMI if you don’t make a 20% down payment on the home.

PMI payments change each year, accounting for a percentage of the outstanding balance. The annual premium is usually 0.5% to 0.75% of the remaining balance. So, if you have a remaining balance of $150,000 on your home, your annual premium would be between $750 and $1,125 a year. That amount is usually divided by 12 and added to your monthly mortgage payment. When you reach the point where you have 20% equity in your home, you no longer have to keep making PMI payments.

Taking the PMI Tax Deduction
If you have been paying premiums, they are deductible on Schedule A when you itemize instead of taking the standard deduction. In order for your home to qualify, though, it has to have been bought after January 1, 2007. The PMI deduction only applies to mortgages made in the year 2007 and after. The mortgage also must be secured by your home.

If you are paying PMI on a mortgage not used for your home purchase, it must have been taken to “substantially improve” your home – so some home equity loans are eligible. The PMI deduction can also be used on one second home in addition to your primary residence.

Realize, though, that there are income limits to taking the PMI deduction. There are no dollar limits on the deductible amount, but if your adjusted gross income reaches a certain level, you cannot take the deduction. For every $1,000 of your adjusted gross income above $100,000, you have to reduce your deduction by 10%. Once your adjusted gross income reaches $109,000, you are no longer eligible for the deduction. This is another deduction aimed at helping middle class homeowners.

So, if you paid PMI in 2010, you can deduct it on your tax return this year, if you itemize. Additionally, what you pay in tax year 2011 can be deducted on next year’s tax return. However, after the end of 2011, you will no longer be able to deduct your PMI payments – unless the deduction is extended again. Be sure to consult with a tax professional before taking any credit or deduction on your tax return. You want to make sure that you are eligible for any tax breaks that you take.


Here's a direct link to the story.

http://blog.lendingtree.com/blog/2011/03/22/pmi-deductio/

Will your home or mortgage hurt you at tax time?

http://blog.hsh.com/index.php/2011/03/will-your-home-or-mortgage-hurt-you-at-tax-time/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+hsh+%28blog.hsh.com%29&utm_content=Twitter


Most of us know that a portion of the interest paid on a mortgage is tax deductable — it’s one of this country’s shining examples of pro-homeownership policies.

But can or should every homeowner deduct their mortgage interest at tax time?

What if you sold your home last year, how does that sale affect your 2010 taxes?


How does a loan modification, foreclosure or refinance impact your upcoming tax bill?

HSH.com has put together an article that answers 10 common questions as they relate to homeowners during tax season. Time is running out to file your taxes, so be sure you’re aware of how your home and mortgage factor into what you owe by April 18.

Let’s take a look at some common 2010 tax questions and answers:

1. How much of my mortgage payment is tax deductible?

On a Schedule A, you can deduct the following:

•Interest on debt used to buy, build or improve your primary or second home (called acquisition debt), as long as mortgages totaled $1 million or less ($500,000 if single or married filing separately).
•Mortgage insurance (or funding fees for government loans) for loans taken after 2006 as long as your adjusted gross income does not exceed $109,000 for a married couple (half that for singles and those married filing separately).
•Property taxes on first and second homes. Starting in 2010, however, you must itemize your deductions to get this tax break.

2. I sold my home this year. Will I owe capital gains tax?

As long as the property was your principal residence for at least two of the last five years, you can exclude $250,000 of your profit ($500,000 for married couples) from your taxable income. If you profited less than the $250,000/$500,000 threshold, no extra form is required. You can do this as often as every two years.

For those with profits that cannot be excluded, you’ll report your gain on a Schedule D, Capital Gains and Losses. There are special rules for vacation homes. You may be able to exclude some or all of your gain.

3. I bought or refinanced a home this year. Are my closing costs tax deductible?

You can claim a deduction for real estate taxes you paid as part of your mortgage closing costs. The same goes for prepaid interest. It will be included on the 1098 form your lender sends you. What about points? The IRS has a flowchart that you can use to see when points are and are not deductible. In general, you must have paid points to build, buy or improve your primary residence in order to deduct the entire amount in the year they were paid. Otherwise they may still be deducted but on a prorated basis.

4. Does a mortgage modification affect my taxes?

If you modify your mortgage, one consequence might be that you pay so much less interest that you will save more by choosing the standard deduction rather than itemizing. Don’t just assume that itemizing is always best because you did it in the past.


5. Does a mortgage foreclosure affect my taxes?

The Mortgage Forgiveness Debt Relief Act of 2007 generally allows you to exclude income from the discharge of debt on your primary residence. However, this law does not cover investment properties and vacation homes, nor does it apply to forgiven home equity loans. You could end up paying income tax on this canceled debt. In addition, states’ rules for the treatment of forgiven mortgage debt vary, so check with a tax professional.

Be sure to read all “10 critical questions for homeowners at tax time.” (This article was written by HSH.com’s Gina Pogol.)

"Point Banks" will not be allowed with new Fed Rule.

A mortgage industry proposal to create "point banks" that loan officers can tap to grant price concessions to borrowers will not be allowed by Federal Reserve Board staff. The days of the loan officer paying for a closing cost item at the closing tabel to save a deal are over.

The Fed's loan officer compensation rule does not allow loan officers to lower their commission to cover a concession – which led to an industry proposal to take 10 basis points from every loan transaction, put that cash in a "point bank" or use overages to offer borrowers a better deal.

The Federal Reserve staff concluded that overages are tied to the terms and conditions of the loans, which would violate its new compensation rule, which goes into effect April 1.


Taking 10 bps from every loan transaction amounts to spending the loan officer's previously earned compensation. That would violate the rule because the LO is bearing the cost of the price concession, according to Fed senior attorney Paul Mondor. "We have yet to hear a variation on the theme of point banks that we think really can succeed under this rule," Mondor said during Thursday's Fed webinar on LO comp.

This interpretation also makes it difficult for managers to penalize LOs for mistakes and errors. The Fed has ruled that mortgage companies cannot dock a loan officer's compensation if they incorrectly calculate closing costs and exceed the tolerances of the RESPA good faith estimate.

If RESPA "forces you" to lower the closing costs to the consumer – that's a pricing concession to the consumer, Mondor said. "A loan officer or originator cannot be made to bear that cost," he added.

FHA concessions on seller concessions?

Here's an interesting article regarding FHA seller concessions from Inman News.

http://lowes.inman.com/inmaninf/lowes/news/138306

There's some good news brewing at the U.S. Housing and Urban Development Department that could save thousands of home sales in the months ahead. The final details aren't fully nailed down and a formal announcement is still more than a month away, but I can tell you about a broad outline taking shape that isn't likely to change.

It's all about seller concessions.

Last year the Federal Housing Administration announced that it intends to slash maximum seller contributions from 6 percent to 3 percent for purchasers using FHA-insured mortgages. Seller concessions or contributions are essential lubricants that make large numbers of FHA-financed home sales flow smoothly to closing. They make otherwise unaffordable deals doable.

Say you're negotiating on a house and the seller absolutely insists on getting a price of $150,000. Perhaps the buyer has struggled to come up with down-payment money and won't have the additional cash resources to pay for the settlement and loan origination expenses, which average about 4 to 5 percent in your area.

Under long-standing FHA rules, your seller is allowed to contribute money from the sale proceeds to help with your closing costs. A 6 percent contributions cap -- the current rule -- allows your seller to put as much as $9,000 into the pot, which would be more than enough to handle your closing costs and prepaids.

But a 3 percent ceiling -- the one HUD proposed last year -- would reduce that to $4,500, leaving you short and endangering the entire deal. A 3 percent cap would also make FHA's standard the same as what's typical in the conventional loan market, where both Fannie Mae and Freddie Mac permit nothing beyond that limit.

After hearing complaints from builders, REALTORS® and lenders, HUD is now planning to adopt a more nuanced approach. A formal notice is expected sometime in April, with the changes taking effect this summer.

The core of the policy revision: flexibility. Rather than an across-the-board 3 percent ceiling on all FHA mortgages, the new policy would permit higher seller contributions -- probably between 4 and 5 percent -- on smaller loan balances. Meanwhile, the 3 percent cap would be mandatory on all loan amounts above some yet-to-be-specified limit.

Alternatively, a dollar ceiling on all seller concessions might be available, such as a maximum of $6,000. On the smallest-balance mortgages, the dollar total permitted might even hit 6 percent. Loans on newly constructed houses, where abuses have been reported when builders use concessions to support artificially high sale prices, could have special restrictions.

Whatever the final version turns out to be, the net result should be much better for home sellers, buyers and real estate professionals than last year's threatened 3 percent cap for everybody. This would especially be the case in hundreds of local real estate markets where FHA is the main support for first-time and moderate-income home purchasers.

For example, in the seven Southeast states where Memphis-based Crye-Leike REALTORS® is a major player, FHA loans are used by 50 percent of all purchasers, according to Steve A. Brown, executive vice president. The key attractions, he said, are FHA's low down payments, relatively generous credit requirements and the 6 percent seller concessions limit.

"FHA is what's keeping us alive," Brown told me in an interview. "If they do a 3 percent across-the-board limit, that would knock out a lot of our sales. But if they go with some graduated deal tied into lower-priced homes, then we should be alright."
The average home price in the Memphis area is about $115,000; the average starter home is $85,000, according to Brown. He figures that a 4.5 percent cap on seller concessions would cover closing costs in most transactions, but a 3 percent limit would be a disaster.

"This economy is pretty darn fragile," he said. "People haven't had a raise in three years, prices keep going up on gas and food, plus you've got all those fixed fees" -- attorney costs, title insurance, loan origination and underwriting, among others -- "and none of them has gone down."

In the Minneapolis-St. Paul area, the situation is similar: FHA loans account for 35 percent to 45 percent of all transactions, according to John Anderson, broker at Twin Oaks Realty. The average home price is $163,000 -- somewhat lower for FHA transactions -- and settlement costs average about 4.5 percent.

"Ninety percent of our buyers are asking sellers to pay closing costs and prepaids," said Anderson. "This is a tight economy, and you can't turn to parents and grandparents any more for gift money because they're worried about their own" pension fund shortfalls and depleted savings accounts.

Many brokers agree with FHA that 6 percent contributions may be excessive in higher-end transactions; they top out above $43,000 in the most expensive housing markets. Brokers also concede that there have been abuses and games played in the past that have increased FHA's insurance fund losses.

An example: Say a prospective buyer wants a house that's listed for $100,000. The seller agrees to make a maximum $6,000 contribution to the closing costs but insists that the final selling price be adjusted up to $106,000.

But now the house has to appraise at $106,000, or FHA will be insuring a loan with an artificially inflated price with little or no borrower equity -- making it a prime candidate for future default and insurance claims. FHA says it holds appraisers and lenders responsible for sniffing out such frauds, but officials acknowledge they can't catch them all.

Will a tightened seller concessions policy put a better damper on such abuses? I have no doubt that a mandatory 3 percent cap for all higher-balance mortgages and loans on some new construction would limit the damage in dollar terms.

A graduated system for average-sized and low-balance loans might limit risks as well, while still allowing most home sales to get to closing. A set dollar limit for concessions -- say it's $6,000, hypothetically -- might also provide a flexible way to lower risk while still allowing the lowest-balance loans to enjoy seller contributions up to 6 percent.

In the meantime, the good news is that the widely feared, draconian 3 percent limit appears to be off the table. Something more flexible is coming that might just balance FHA's legitimate needs to safeguard its insurance fund while accommodating home sellers' and buyers' legitimate needs for affordable housing with agreeable financing terms.

Ken Harney writes an award-winning, nationally syndicated column, "The Nation's Housing," and is the author of two books on real estate and mortgage finance.

How do you repair credit after a bankruptcy?

Think about these 5 tips for credit repair after bankruptcy.


One may try to sit back and do nothing about an after bankruptcy credit repair since the argument is always that the bankruptcy remains on one’s file anyhow for 10 years. What’s the point then of doing an after bankruptcy credit repair?

Bankruptcy is a word which no person desires to have to experience in a personal way in their own mature lives. For those people who do declare themselves bankrupt, they generally do it since they had run out of other choices. Someone’s reasons for having to declare themselves bankrupt may differ significantly, from losing a career to having medical issues to simply running up too much debts without being able to pay it down.

One of the things that the one who has announced bankruptcy normally wonders is just how much this course of action can have a poor impact on their long term credit rating.

After all, your credit rating is one of the most important things that decides the kind of financial loans or charge cards that you may be eligible for.

If you want help with credit repair after a bankruptcy, listed below are 5 suggestions that will help you repair your credit more quickly:

1. A bankruptcy can remain on your FICO report for a long time:

Needless to say that declaring bankruptcy may cause your credit score to instantly fall. And, it can stay on your credit history for 10 years.

2. You need to really be more creditworthy after your bankruptcy compared to what you had been before:

If you think about this, you are really more creditworthy just after your own bankruptcy release than you were in advance: in the end, you now have the monkey (your debt) off your back and you have more means compared to what you had before to repay what you owe.

3. After the discharge, each financial debt you borrowed from needs to return to 0 dollars on your credit history:

After your discharge, you’ve the right (confirmed by government law) to have the total amount of each debt that’s been released to show as $0 on your credit history. In fact, you possess the right to claim any cards that still present your old account balances.

4. You could in some instances maintain credit cards after bankruptcy:

The truth is, it is possible to retain one or more of your old (pre-bankruptcy) charge cards after your discharge. To do so, you’ll want to “reaffirm” the balance with them and start a new agreement. Many collectors will agree to get this done simply because they prefer to not need to have the loss.

5. You can purchase a home just after bankruptcy:

You can buy a house after announcing bankruptcy. Inside of 1.5 to 2 years after your release, a lot of people consistently can easily be eligible for a financial loan with similar loan terms as they could have if they hadn’t filed.

What’s vital at this stage is your earnings, your advance payment, and just how consistently you paid your mortgage (or rent) previously.

How Did the Employment Report Impact Mortgage Rates?

Below is an interest rate related article for Mortgage News Daily.

http://www.mortgagenewsdaily.com/consumer_rates/201584.aspx

BY ADAM QUINONES

It was a volatile week for mortgage rates.

Monday and Tuesday saw rates near their best levels in nearly a month. Consumer borrowing costs then got beat up on Wednesday and Thursday, so much that we had to up the "Best Execution" 30-year fixed mortgage rate to 5.000%. That's where we last left you, just ahead of today's high risk event: The Employment Situation Report

CURRENT MARKET: The "Best Execution" conventional 30 year fixed mortgage rate has fallen BACK to 4.875%. For those looking to buy down their rate to 4.75%, this quote carries higher closing costs. The upfront cost of permanently buying down your rate to 4.75% is not worth it to many applicants. We would generally only advise the permanent floatdown if you plan to hold your new mortgage for longer than the next 10 years. Ask your loan officer to run a breakeven analysis on any origination points they might require to cover permanent float down fees. On FHA/VA 30 year fixed "Best Execution" is still 4.75%. 15 year fixed conventional loans are best priced between 4.125% and 4.25%, but 4.25% is more efficient in terms of the floatdown breakeven cost. Five year ARMS are best priced at 3.625%.

If the note rate line is moving up, the closing costs associated with that rate quote are rising. In December, closing costs rose rapidly. Mortgage rates did improve from those levels, but then moved sideways for 7-weeks. And then the range broke following the January Employment Situation Report and consumer rate quotes rose back to their December highs. As you can tell, borrowing costs have steadily improved since then but moved sharply higher this week before correcting today. This leaves home loan rate quotes just above one-month lows. Again.

OUR GUIDANCE LAST FRIDAY: The bond market is still in limbo in terms of an extension of the recent rally. Approach floating from a defensive posture, especially after Best Execution improved to 4.875% this week because it's going to take a sustained rally in the bond market before Best Execution reaches 4.75%. That means current market is likely as good as it gets for at least the next week. If you don't have more than a week to float your loan, you should be locking very soon. As you can see in the chart above, it's been almost a month since rates were this aggressive. And we wouldn't be surprised one bit if the market pushes back against the recent mortgage rates rally next week. Profit taking is a naturally occurring event whenever interest rates move lower.

NEW GUIDANCE: Phew! We dodged a bullet today. The conventional 30-year fixed Best Execution note rate has fallen to 4.875%. Consumer borrowing costs have almost recovered fulLy from the mid-week hiccup we experienced on Wednesday and Thursday. There is still work to done, but after reprices for the better were awarded today by lenders, we're just above one-month lows. BEYOND THAT...same exact guidance as last Friday!

READ MORE: LOAN PRICING STALLED

"Best Execution" is the most efficient combination of note rate offered and points paid at closing. This note rate is determined based on the time it takes to recover the points you paid at closing (discount) vs. the monthly savings of permanently buying down your mortgage rate by 0.125%. When deciding on whether or not to pay points, the borrower must have an idea of how long they intend to keep their mortgage. For more info, ask you originator to explain the findings of their "breakeven analysis" on your permanent rate buydown costs.

Important Mortgage Rate Disclaimer: The "Best Execution" loan pricing quotes shared above are generally seen as the more aggressive side of the primary mortgage market. Loan originators will only be able to offer these rates on conforming loan amounts to very well-qualified borrowers who have a middle FICO score over 740 and enough equity in their home to qualify for a refinance or a large enough savings to cover their down payment and closing costs. If the terms of your loan trigger any risk-based loan level pricing adjustments (LLPAs), your rate quote will be higher. If you do not fall into the "perfect borrower" category, make sure you ask your loan originator for an explanation of the characteristics that make your loan more expensive. "No point" loan doesn't mean "no cost" loan. The best 30 year fixed conventional/FHA/VA mortgage rates still include closing costs such as: third party fees + title charges + transfer and recording. Don't forget the intense fiscal frisking that comes along with the underwriting process.

Special report: Flipping, flopping and booming mortgage fraud

In you want an understanding of why documentation and verification of information is so difficult on mortgage loans, this article provides some insight.



http://www.reuters.com/article/2010/08/17/us-housing-usa-fraud-idUSTRE67G1S620100817?pageNumber=1

(Reuters) - The house on the 53rd block of South Wood Street in Chicago's Back of the Yards doesn't look like a $355,000 home. There is no front door and most of the windows are boarded up. Public records show it sold in foreclosure for $25,500 in January 2009, then resold for $355,000 in October. In between, a $110,000 mortgage was taken out on the home, supposedly for renovations. This June, the property went back into foreclosure.

To Emilio Carrasquillo, head of the local office of non-profit lender Neighborhood Housing Services of Chicago (NHS), the numbers don't add up. He believes this is a case of mortgage fraud.

It may not make the blood boil like murder or rape, but mortgage fraud is a crime that cost an estimated $14 billion in 2009 and could be hampering an already fragile recovery in the housing market. The FBI has been fighting back, assembling its largest ever team to fight it. They have their work cut out for them, though, as a tsunami of foreclosures is making classic scams easier and spawning new ones to boot.

"There's no way any property in this neighborhood should sell for that kind of money," said Carrasquillo, standing outside the house on Wood Street in this poor, predominantly black area of Chicago's South Side. "Even if it was in great condition."

Carrasquillo has identified a number of properties in Back of the Yards that sold for between
$5,000 and $30,000 last year and then came back on the market for up to $385,000. He said property prices are being artificially inflated, allowing fraudsters to walk away with vast profits and making it harder for honest local people to buy a home.

Mortgage fraud takes many forms, but a well-organized scam frequently involves a limited liability company (LLC) or a "straw buyer." In this scheme, fraudsters use a fake identity or that of someone else who allows them to use their credit status in return for a fee. The seller pockets the money the buyer borrows from a lender to pay for the home. The buyer never makes a mortgage payment and the property goes into foreclosure.

In other words, the money simply disappears, leaving the lender with a large loss. Since the U.S. government is now backing much of the mortgage market in the absence of private investors, that means "taxpayers are ultimately on the hook for fraud," said Ann Fulmer, vice president of business relations at fraud-prevention company Interthinx.

Back of the Yards was hit by fraud during the housing boom and Carrasquillo says the glut of foreclosures is now making it easier for scammers to pick up properties for a song and flip them for phenomenal profits.

Drug dealers and gang members have taken over abandoned houses, many adorned with spray-painted gang signs. Prior to touring the area, Carrasquillo attached two magnetic signs touting the NHS logos on his minivan's doors to show he is not a police officer. He said he also prefers touring in the morning, as drug dealers and "gangbangers" tend not to be early risers.
"These properties are just going to sit there, boarded up, broken into and a magnet for crime," he said. "And that makes our job of trying to stabilize this neighborhood so much harder."

CRACKDOWN NETS MORE REPORTS OF FRAUD

The U.S. Federal Bureau of Investigation said in a report released on June 17 that suspicious activity reports (SARs) related to mortgage fraud rose 5 percent in 2009 to around 67,200, up from 63,700 the year before. The number had tripled from 22,000 in 2005 and the number of SARs for the first three months of 2010 hit nearly 38,000.

"We don't see the number declining while foreclosures remain so high," said Sharon Ormsby, section chief of the FBI's financial crimes section.

Robb Adkins, executive director of the Financial Fraud Enforcement Task Force, is known as U.S. President Barack Obama's financial fraud czar. He describes mortgage fraud as "pervasive" and fears it is exacerbating the nation's real estate woes. "That, in turn, could act as an anchor on the economic recovery," he said.

For the housing market to recover, potential homeowners need confidence in home prices and investors need confidence to get back into the secondary mortgage market, Adkins explained.
Since the subprime meltdown, a wide variety of scams have come to the fore. They include big cases like that of Lee Farkas, the former head of now bankrupt mortgage lender Taylor, Bean & Whitaker Mortgage Corp, charged in June with fraud that led to billions of dollars of losses. The scheme involved the misappropriation of funds from multiple sources, including a lending facility that had received funding from Deutsche Bank and BNP Paribas.

That appears to be the scam of choice. On July 22, for instance, seven defendants were indicted in Chicago in a $35 million mortgage fraud scheme involving 120 properties from 2004 to 2008 using straw buyers. Of the half dozen properties listed in the indictment, two were in Back of the Yards.

In the mid-2000s, the availability of easy money, poor due diligence by lenders and low- or no-documentation loans, acted as a magnet for fraudsters, who used identity theft and other scams to bag large sums of cash.

"During the boom it was almost like people in the real estate market could do no wrong," said Ohio Attorney General Richard Cordray. "As ever more money rushed in, it attracted a lot of people who engaged in shady behavior."

Instead of leaving them without a market, the crash has instead provided fraudsters with a glut of foreclosures, stricken borrowers and desperate lenders to take advantage of.

"There were plenty of opportunities for fraud on the way up and there are plenty on the way down," said Clifford Rossi, a former chief credit officer at Citigroup and now a teaching fellow at the University of Maryland in College Park.

Alongside familiar scams like property flipping, the crash has added new terms to the lexicon: short sale fraud, builder bailouts and flopping. Rescue scams targeting struggling homeowners with false promises of help are also on the rise.

If some of the mechanisms are new, a lot of the fraudsters are not: in many cases, they turn out to be mortgage brokers, appraisers, real estate agents or loan officers. "Because they're insiders, they see exactly what's happening and they're able to stay one step ahead of the game," said Todd Lackner, a fraud investigator in San Diego. "They're the same people who were committing fraud during the boom and they were never caught or prosecuted."

BACK TO THE YARDS

Just a stone's throw from downtown Chicago, Back of the Yards is the setting for Upton Sinclair's classic 1906 novel "The Jungle," a tale of grueling hardship and worker exploitation at the city's stockyards. The book includes an act of mortgage fraud against an unsuspecting Lithuanian family.

"Mortgage fraud is nothing new," said Christopher Wagner, co-managing attorney of the Ohio Attorney General's Cincinnati office. "It's been around for a long time."

Saul Alinsky, considered the founder of modern community organizing, started out in Back of the Yards in the 1930s. Decades later, a young community organizer named Obama got his start near here.

The neighborhood has always been poor, but south of the old railway tracks at W 49th St, the housing crisis' legacy of empty lots and boarded-up homes is evident on every block. There are few stores and services available -- in four separate visits for this story, no police vehicles were sighted.

"This is what we refer to as a 'resource desert,'" Carrasquillo said. "When no one pays attention to an area like this, it makes it easier to get away with fraud."

Marni Scott, executive vice president for credit at Troy, Michigan-based lender Flagstar Bancorp, says there are virtually no untainted sales in the area. "There are no cases of Mr and Mr Jones selling to Mr and Mrs Smith."

"We see cases of mortgage fraud around the country," she added. "But there's nothing out there that could match the mass-production, assembly-line fraud that's going on here."

In 2008 Flagstar instituted a rule whereby any loan applications here and in parts of Atlanta -- another fraud hot spot -- must be approved by Scott and the lender's chief appraiser. In a Webex presentation, Scott rattles through a number of properties snapped up for pennies on the dollar in 2009 and then sold for around $360,000.

She provides an underwriter's-eye-view of one property, on the 51st block of South Marshfield Avenue, sold in foreclosure in July 2009 for $33,000. In January of this year Flagstar received a loan application to buy the house for $355,000.

The property appraisal -- compiled by an appraiser who Scott believes never visited the area -- showed four nearby comparable properties of around the same age (100 plus years) sold recently for around $360,000. The trick to this kind of scheme is engineering the sale of the first few fraudulently overvalued properties to get "comps" -- comparable values -- to fool appraisers and underwriters alike.

"Miraculously, all of these properties were all within a very narrow price range," Scott said with weary sarcasm. "This is a perfect appraisal for an underwriter. If you are an underwriter sitting in Kansas or California it all looks fairly straightforward so you can just hit the button and approve it."

Using a $5 product called LoanIQ from U.S. title insurer First American Financial Corp called LoanIQ, Flagstar determined the application itself was fraudulent and there was a foreclosure rate in the area of nearly 60 percent. What is more, property prices here spiked 84 percent last year after 44 percent and 26 percent declines in 2008 and 2007.

"No neighborhood should look like this," said Scott, who declined the application.

Last April, however, another lender approved a loan application for $335,000 on the same property from the same people.

FORECLOSURE MAGNET

Reports this year from Interthinx, CoreLogic Inc and the Mortgage Asset Research Institute (MARI) -- which all provide fraud prevention tools for lenders -- show foreclosure hotspots Florida, California, Arizona and Nevada are also big mortgage fraud markets.

MARI said in its April report that reported mortgage fraud and misrepresentation rose 7 percent in 2009, adding fraud "continues to be a pervasive issue, growing and escalating in complexity."

Denise James, director of real estate solutions at LexisNexis Risk Solutions and one of the author's reports, said reported fraud will continue to rise throughout 2010.

In its first-quarter report, Interthinx said its Mortgage Fraud Risk Index rose 4 percent to 151, the first time it had passed 150 since 2004. A figure of 100 on the index would indicate virtually no risk of fraud.

According to various estimates, the 30310 ZIP code in Atlanta is one of the worst in the country. An analysis of that ZIP prepared for Reuters by Interthinx showed a fraud index of 414, making it the eighth worst ZIP code in the country. Back of the Yards -- ZIP code 60609 -- had an index of 309.

"In some neighborhoods in Atlanta there hasn't been a clean transaction in 10 years," interthinx's Fulmer said.

In 2005 local residents here formed the 30310 Fraud Task Force. Members sniff out potential signs of fraud -- such as repeated property flipped -- and report them directly to the FBI and local authorities. Information from the task force led to the arrest of a 12-member mortgage fraud ring on September 15, 2008 -- better known in the annals of the financial crisis as the day Lehman Brothers filed for Chapter 11 bankruptcy protection.

Brent Brewer, a civil engineer and task force member, said the arrests had a noticeable impact on fraud in the area. "It made a statement that if you come here to commit fraud there's a good chance you'll get caught," he said.

But Brewer harbors no illusions the fraudsters are gone. "There's no way they can catch everyone who's involved in fraud. But if you're dumb, greedy or desperate, you're going to get caught."

FBI GETTING INTERESTED

Law enforcement has come a long way in combating mortgage fraud, though officials freely admit that's not saying much.

Ben Wagner, U.S. attorney for the eastern district of California, said as mortgages are regulated at the state and local level, for years there was little federal interference. Prior to the recent boom, he said, fraud simply "was not identified as a huge problem."

"There has been a little bit of a learning curve," Wagner said. "This was not something federal prosecutors had much familiarity with. Now we're getting pretty good at it."

Half of Wagner's 50 or so criminal prosecutors focus on white-collar crime including fraud. Two new prosecutors will be dedicated solely to mortgage fraud.

Now mortgage fraud is a known quantity, Wagner said all U.S. prosecutors tackling it are linked by Internet groups. The May edition of the bi-monthly "United States Attorneys' Bulletin" (published by the Executive Office for United States Attorneys) was devoted entirely to mortgage fraud.

The FBI has more than 350 out of its 13,000 agents devoted to mortgage fraud. There are also now 67 regular mortgage fraud working groups and 23 task forces at the federal, state and local level. "This is the broadest coalition of law enforcement ever brought together to fight fraud," Adkins said. He admitted, however that limited resources to fight fraud still pose a challenge.

In June U.S. authorities said 1,215 people had been charged in a joint crackdown on mortgage fraud. Many of the charges were for crimes committed years ago.

Latour "LT" Lafferty, the head of the white-collar crimes practice at law firm Fowler White Boggs in Tampa, Florida, said fraud in the boom was so pervasive that many crimes will go undetected and unprosecuted. "Everyone had their hands in the cookie jar during the boom," he said. "Lenders, brokers, Realtors, homeowners ... everyone."

OLD DOG, NEW TRICKS

A new mortgage scam born out of the housing crisis is short sale fraud. Short sales are a way for stricken homeowners to get out of their homes, whereby in agreement with their lender they sell their home for less than they paid for it and are forgiven the remainder.

But they have also proven a tempting target for fraudsters, usually involving the Realtor in the deal. Lackner, the fraud investigator in San Diego, described a typical scheme: "Let's say you have a property up for short sale that you know as a Realtor you can get $350,000 for," he said. "But you arrange a low-ball appraisal of $200,000 and have someone make an offer of that amount."

"The Realtor says to the bank this is the best offer you're going to get, take it or leave it," he added. "Then they turn around and flip it immediately for $350,000. In cases like this, the lender is probably already stuck with a lot of foreclosed properties and doesn't want more. So they go for it."

Where the process of fraudulent appraisals overvaluing a property for sale is "flipping," deliberately undervaluing them has become known as "flopping."

Bob Hertzog, a designated real estate broker at Summit Home Consultants in Scottsdale, Arizona, says he gets emails from unknown firms offering to act as a "third-party negotiator" between the seller and the bank with what turns out to be a grossly undervalued bid.

Hertzog has tried tracing some of the LLCs, but describes a chain of front companies leading nowhere.

"The problem is it is so cheap and easy to set up an LLC online that sometimes they are set up for just one transaction," Flagstar's Scott said. "And if they're set up using fake information or a stolen identity, it's very hard to trace who's behind them."

Many web sites boast they can help you form an LLC online for under $50.

Another common target for fraud is the reverse mortgage. Designed for seniors to release equity from a property, according to financial fraud czar Adkins, they have been used to commit a "particularly egregious type of fraud."

Fraudsters commonly forge their victims' signatures and, without their knowledge or consent, divert funds to themselves. The scam is worst in Florida, a magnet for American retirees.

"Unfortunately it is often not until the death of the victim that their heirs realize that all of the equity has been stripped out of the property by fraudsters," Adkins said.

But Arthur Prieston, chairman of the Prieston Group, which sells mortgage fraud insurance and has launched a patented system to rate lenders on the quality of their loans, said most mortgage fraud he comes across consists of ordinary people fudging figures to get a loan. "The vast majority of the fraud we see is where people intend to occupy a property, but can't qualify for a loan," he said. "They'll do anything to get that loan approved."

He added this is achieved with the active collusion of Realtors, brokers and lenders looking to make a sale and keep the market moving. Before his firm issues fraud insurance it reviews a lender's loans and between 20 percent and the 30 percent of the loans reviewed so far have had "red flags."

The problem with assessing the extent of the damage caused by mortgage fraud is that it's not just the dollar amount of the fraud itself. It also hits property values, property taxes and often causes crime to rise.

"Most people interpret white collar crime as a victimless crime, where the bank pays the price and no one else," said Andrew Carswell, associate professor of housing and consumer economics, University of Georgia. "This is a mistaken perception ... neighborhoods and homeowners pay the price."

UNCOVERING THE SCAMS

Companies like Interthinx, CoreLogic and DataVerify all have data-driven fraud prevention tools for lenders. Interthinx's program, for instance, identifies some 300 "red flags" including a buyer's identity and recent sales in a neighborhood, while CoreLogic uses pattern recognition technology. CoreLogic also aims to bring a short sale fraud product to the market soon.

Interthinx's Fulmer said regardless of the source, on average solid fraud prevention tools can be had for as little as $10 to $15 per loan. "The tools out there enable us to see what's going on out there right now in real time," she said.

Apart from fraud insurance, Prieston Group's new credit rating system for lenders should have
enough data within the next year to start providing valid ratings.

Prieston said the firm's insurance product is growing at more than 100 percent per month, while CoreLogic's Tim Grace said the firm's fraud prevention tool business was booming.

Many lenders are also sharing more information about bad loans, though LexisNexis' James said it is not nearly enough. "If lenders don't start to share more information then fraudsters will continue to go from bank to bank to bank until they're caught," she said.

The University of Maryland's Rossi said what the industry needs is a "central data warehouse" to combat fraud. "There has been a failure of collective data warehousing across the industry," he said.

Mortgage Bankers Association (MBA) spokesman John Mechem said members have no plans for a central database, but added "we view our role as being to facilitate and encourage information sharing in the industry."

The U.S. Patriot Act of 2001 allows lenders a safe harbor to share information, but does not mandate it. "We always encourage more information sharing," said Steve Hudak, a press officer at the U.S. Treasury Department's Financial Crimes Enforcement Network, or FinCen. "As of now, however, this is an entirely voluntary process."

But Rossi said the government should step in. "The Federal government is probably going to have to take the initiative because I don't see the industry doing this one on its own," he said. "I am personally not a fan of big government, but we need more information sharing."

Ultimately, the expectation is lenders will be forced either to improve due diligence, or face being pushed out of business as investors burned by sloppy underwriting during the boom urge them to adopt fraud prevention tools.

"Investor scrutiny is going to be higher than it ever has been," Rossi said. "The days of a small amount of due diligence are gone."

Many investors are also investigating their losses and forcing lenders to repurchase bad loans. This is resulting in "thousands of repurchases a month," according to Prieston.

"When it comes to small lenders with only a few million dollars of loans, ten repurchases will absolutely put some of them out of business," he said.

The government now guarantees more than 90 percent of the mortgage market and forms almost the entire secondary mortgage market, as private investors have not returned. The FHA, Fannie Mae and Freddie Mac are thus seen as playing an instrumental role in pushing improved due diligence to clean up the government's multi-trillion dollar portfolio.

FHA commissioner David Stevens was appointed in July 2009. Since then the FHA has shut down 1,100 lenders, after decades in which the government closed an average of 30 lenders annually. He says most lenders he deals with are of a "very high quality," but that "there are still lenders that either don't have controls in place or are proactively engaging in practices that pose a risk to the FHA."

Stevens does not expect to shut down lenders at the same rate as the past year, but added "the number will be much higher than the historical average."

CoreLogic's Grace said most large lenders have the tools in place to combat mortgage fraud, but admitted he was concerned about some smaller lenders. "The next shakeout of weak lenders will take place over the next 12 to 24 months," he said.

The MBA's Mechem said the U.S. mortgage market must be cleaned up if it is ever to return to
normal. "The one thing private investors need to get back into the secondary market is confidence," he said. "And investors won't risk buying mortgages if they don't have confidence in the quality of the loans. Restoring that confidence is going to play a pivotal role in restoring the markets."

In the meantime, mortgage fraud is expected to cause more problems in areas like Back of the Yards in Chicago.

Three doors down from the boarded-up, foreclosed property that has aroused Carrasquillo's suspicions, father-of-three Oti Cardoso says he and his neighbors try to cut the grass at the abandoned properties on his block and to keep thieves out. But he has heard most empty houses end up occupied by gang members.

"I want my children to be safe, I don't want drug dealers here," he said. "I have tried to find the owner of these houses so I can work with them to help keep their homes clean."
"If they only knew what was happening here," he added, "I'm sure they would want to do what was right."

By Nick Carey
(Additional reporting by Al Yoon, editing by Claudia Parsons and Jim Impoco.)