The Housing bubble bust - a good example

[red-beard]

From today's Wallstreet Journal, an illustration of the housing mess!

Would You Pay $103,000 for This Arizona Fixer-Upper?

That Was Ms. Halterman's Mortgage on It; 'Unfit for Human Occupancy,' City Says


By MICHAEL M. PHILLIPS

AVONDALE, Ariz. -- The little blue house rests on a few pieces of wood and concrete block. The exterior walls, ravaged by dry rot, bend to the touch. At some point, someone jabbed a kitchen knife into the siding. The condemnation notice stapled to the wall says: "Unfit for human occupancy."

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Michael Phillips/The Wall Street Journal See photos of Ms. Halterman's former house.






The story of the two-bedroom, one-bath shack on West Hopi Street, is the story of this year's financial panic, told in 576 square feet. It helps explain how a series of bad decisions can add up to the worst financial crisis since the Great Depression.

Less than two years ago, Integrity Funding LLC, a local lender, gave a $103,000 mortgage to the owner, Marvene Halterman, an unemployed woman with a long list of creditors and, by her own account, a long history of drug and alcohol abuse. By the time the house went into foreclosure in August, Integrity had sold that loan to Wells Fargo & Co., which had sold it to a U.S. unit of HSBC Holdings PLC, which had packaged it with thousands of other risky mortgages and sold it in pieces to scores of investors.

Today, those investors will be lucky to get $15,000 back. That's only because the neighbors bought the house a few days ago, just to tear it down.

At the center of the saga is the 61-year-old Ms. Halterman, who has chaotic blond-gray hair, a smoky voice and an open manner both gruff and sweet. She grew up here, working at times as a farm hand, secretary, long-haul truck driver and nurse's aide.

In time, the container of vodka-and-grapefruit she long carried in her purse got the better of her. "Hard liquor was my downfall," she says.








Ms. Halterman says she had her last drink on Jan. 3, 1996. These days, her beverage of choice is Pepsi.

She collects junk. Her yard at the West Hopi house was waist-high in clothes, tires, laundry baskets and broken furniture. In June, the city issued a citation for what the enforcement officer described as "an exorbitant amount of rubbish/debris/trash."

Ms. Halterman also collects people. At one time, she says, 23 people were living in the tiny house or various ramshackle outbuildings.
Her circle includes grandchildren, an old friend who lost her own home to foreclosure, a Chihuahua, and the one-year-old child of a woman Ms. Halterman's former foster-daughter met in jail.

In the mail recently, she noticed a newsletter sent by a state agency with an article titled "Raising Children of Incarcerated Parents, Part I."
"I need to read that one," she said aloud to herself.

She keeps the children in line with cuddles and mock threats. "You better put that shirt on, or that cop will come and take you to jail," she tells one. Another, whose father is in prison, was born with a heart problem related to his mother's drug use, Ms. Halterman says. She patiently nursed him to health.

"It took me forever to get him past 15 lbs.," she recalls.
Ms. Halterman hasn't had a job for about 13 years, she says. She receives about $3,000 a month from welfare programs, food stamps and disability payments related to a back injury.
"I may not have everything I want, but I have everything I need," she says.

Four decades ago, when she bought the West Hopi Street house for $3,500, Avondale was a small town built around cotton farms. From 2000 to 2005, the heart of the housing boom, it doubled in size to 70,000 residents.

Today, one in nine Avondale houses is in foreclosure or close to it.
Her lender, Integrity, was one of a flurry of small mortgage firms that sprang up nationwide during the boom, using loans from big banks to generate mortgages to resell to larger financial institutions. Whereas traditional mortgage lenders profit by collecting borrowers' monthly payments, Integrity made its money on fees and commissions.

The company was owned by Barry Rybicki, 37, a former loan officer who started it in 2003. Of the boom years, he says: "If you had a pulse, you were getting a loan."
Marvene Halterman




When an Integrity telemarketer called Ms. Halterman in 2006, she was cash-strapped, owing $36,605 on a home-equity loan. The firm helped her get a $75,500 credit line from another lender.

Ms. Halterman used it to pay off her pickup, among other things. But soon she was struggling again.

In early 2007, she asked Integrity for help, Mr. Rybicki's records show. This time, Integrity itself provided a $103,000, 30-year mortgage. It had an adjustable rate that started at 9.25% and was capped at 15.25%, according to loan documents. It was one of 197 loans Integrity originated last year, totaling almost $47 million.

For a $350 fee, an appraiser hired by Integrity, Michael T. Asher, valued the house at $132,000. Mr. Asher says although he didn't personally believe the house was worth that much, he followed standard procedures and found like-sized homes nearby that had sold in that price range in 2006.

"I can't appraise it for the future," Mr. Asher says. "I appraise it for that day." T.J. Heagy, a real-estate agent later hired to sell the property, says he can find only one comparable house that sold nearby in 2007, for $63,000.

At closing, on Feb. 26, 2007, Integrity collected $6,153 in underwriting, broker, loan-origination, document, application, processing, funding and flood-certification fees, mortgage documents show. A few days later, Integrity transferred the loan to Wells Fargo, earning $3,090 more, Mr. Rybicki says.

Kevin Waetke, of Wells Fargo Home & Consumer Finance Group, said in a written statement that "it appears that the appraisal ... confirms that the property values were fully supported at the time the loan closed."

Mr. Rybicki says neither he nor his loan officer ever saw the blue house. When shown a picture last month, he said: "Wow."
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Michael Phillips/WSJ The rear of Ms. Halterman's home, in a photo taken by a city code-enforcement officer around the time the eviction was served.






"When you have 50 employees, as much as you are responsible for holding their hands, you just can't," Mr. Rybicki says.

After the fees and her other debts were paid, Ms. Halterman walked away from closing with $11,090.33. Ms. Halterman says she spent it on new flooring, a fence, minor repairs and food. "No steak or lobster," she says, "hamburger and chicken."

Soon the money was gone. Within a few months she grew worried the rickety house wasn't safe for children. She moved to a rental nearby. Her son Leslie Merritt took up residence at West Hopi Street and assumed responsibility for the $881 monthly payments.

When Wells Fargo sold Ms. Halterman's loan to London-based HSBC, it got bundled with 4,050 other mortgages and used as collateral for a security issued in July 2007. More than 85% of the mortgages were, like Ms. Halterman's, "subprime" loans to borrowers with blemished credit, according to Tom Atteberry of First Pacific Advisors LLC, a Los Angeles investment-management company.

Credit-ratings firms Standard & Poor's and Moody's Investors Service gave the new security their top "triple-A" ratings, which suggested investors were extremely likely to get their money back plus interest. S&P declined to explain its assessment. A Moody's spokesman didn't respond to requests for comment.

Thus was Ms. Halterman's diminutive blue house tossed into the immense sea of mortgage-backed securities that would eventually imperil the U.S. financial system. Some $4.1 trillion in American mortgages were put into securities such as these between 2005 and 2006, including $1.6 trillion in subprime or other high-risk home loans, according to Inside Mortgage Finance, a trade publication.

Among other investors, the Teachers' Retirement System of Oklahoma bought $500,000 of the new security, according to chief investment officer Bill Puckett. Also buying in was bond-giant Pacific Investment Management Co., which declined to comment.

Soon, Ms. Halterman's son, Mr. Merritt, says he stopped paying the mortgage. He had slipped back into his methamphetamine addiction. "I lost interest in pretty much everything except my habit and the girl I was seeing," he says. Mr. Merritt is now in prison for trafficking in stolen copper pipe.

[red-beard]

Continued

In January, Ms. Halterman stepped back in and made the last mortgage payment. Foreclosure began in May. September brought eviction.
Ms. Halterman says she wishes she had never taken out the first home-equity loan. "I felt like I needed it," she says. "In retrospect, I needed my a -- kicked."

Other loans backing the HSBC-issued security were souring, as well. As of November, 25% were foreclosed, in the foreclosure process or at least a month delinquent, Mr. Atteberry says. HSBC declined to comment.

Mr. Rybicki gave up his mortgage-banking license in September. He now works for a venture-capital firm.
"The banks have part of the blame," Mr. Rybicki says of the housing bubble. "I think we have part of the blame. We were part of the system. So does the consumer."

Wells Fargo, which serviced the West Hopi Street loan, boarded up the house and hauled away the debris. And this past Monday, the property sold for $18,000 to Daniel and Delia Arce, who live next door in a tidy brick rambler. After expenses, investors in the mortgage-backed security will probably divide up no more than $15,000 in proceeds.

A few weeks ago, Mr. Arce asked Mike Summers, a city code-enforcement officer, whether a permit was required to raze the blue house.
"Yes," Mr. Summers replied, "but all you need is the big, bad wolf to come out and huff and puff."

—Liz Rappaport contributed to this article.

Write to Michael M. Phillips at michael.phillips@wsj.com

[Britwrench]

Looks like the neighbors get the best deal out of this saga of stupidity.

[djmcmath]

Amazing, but not all that surprising. I see similar examples around here, though they're generally going for triple that in the DC area.

Want to know the funny part? I've put in three offers on DC-area dumps, houses that I think have enough structural potential, location potential, etc. to be worth _something_. On the first, the bank futzed around for 3 months before finally admitting that the winning offer was $60K more than ours (which was only $5K less than list), and in cash. The other two have been completely ignored by the respective banks. One of the banks wouldn't even answer their phones.

It's almost like they don't want to sell, or as if they hope that if they hold on to these smelly trash heaps, they'll eventually be worth something. Bizarre.

Dan

[Aurel]

Home ownership is simply not for everyone. Beyond the income to pay a mortgage, it takes skills to maintain a house, increase its value by tasteful improvements, respect the house, etc...The right to own a house should be a privilege, like driving. I am all for a home ownership licence, with testing of financial and handyman abilities...

[RANDY P]

This is really a story of fraud. If that thing was 576 sq. feet at the time of funding that would've never passed guidelines nor would have it passed guidelines with that plywood on the side.

I'll be willing to bet lots of money this is an appraisal fraud issue. The appraiser added more footage to the residence to change the comps. he added bedrooms and simply mis-represented the footage the property on his floor plan skectches.

Industry standard (especially at Wells Fargo) is 750 Sq. feet.

Bank will never know the difference unless they get their own appraisal done.

[RANDY P]

PS- Wells Fargo is under a lot of fire for not having any records of their Mortgagees. They got into it with the Bankruptcy court recenty.

These lenders are starting to show that they don't even have accurate records, let alone provide proof of a legitimate mortgage - invalidating the Foreclosure in the process.

I about cried when Lehman Brothers / Aurora Loan Servicing died. If Wells goes under I'm popping a bottle of Champagne.

http://www.nytimes.com/2008/12/28/business/28gret.html

WITH home prices in free fall and mortgage delinquencies mounting, pressure to modify troubled loans is ratcheting up.

But lawyers who represent candidates for modifications say the programs are hobbled by the complexity of securitization pools that hold the loans, as well as uncertainty about who actually owns the notes underlying the mortgages.

Problems often emerge because these notes — which are written promises to repay the full amount of a mortgage — weren’t recorded properly when they were bundled by Wall Street into pools or were subsequently transferred to other holders.

How can a loan be modified, these lawyers ask, if the lender cannot prove that it actually owns the note? More and more judges are asking the same thing about lenders trying to foreclose on borrowers.

And here is another hurdle: Most loan servicers — the folks responsible for handling all the paperwork surrounding monthly mortgage payments — aren’t set up to handle all of the details involved in a modification.

Loan servicing operations are intended to receive borrowers’ payments; producing loan histories and verifying that payments were received or junk fees were not applied is considerably more labor intensive. This cuts into profits.

“These servicers are not staffed up and they don’t have a chance in the world to do the stuff they are supposed to do,” said April Charney, a consumer lawyer at Jacksonville Legal Aid. Many servicers continue to stonewall troubled borrowers who ask for a history of their loan payments and fees, she said.

“This is your biggest, hugest expense — your home — and when you ask for a life-of-loan history your servicer tells you to get lost,” she said. “And when you ask for a list of charges in the loan history that’s not going to happen.”

So even if loan modifications were to rise rapidly, it is unclear that borrowers can trust what lenders tell them about what they owe.

Consider a federal bankruptcy court case in Colorado. It involves two borrowers who got into trouble on their loan but agreed, under a bankruptcy plan, to make revised mortgage payments to get back on track.

The lender in the case is Wells Fargo, and last Monday the judge overseeing the matter took a tough stance on the bank’s recordkeeping and billing practices.

In June 2004, Brandon M. Burrier and Denon A. Burrier received a $183,126 loan for a property in Arvada, Colo. The note was later transferred to Wells Fargo, court filings show.

The Burriers fell behind on their loan and in February 2007, they filed a Chapter 13 bankruptcy, agreeing to pay $12,000 that Wells Fargo said they owed. Chapter 13 bankruptcies allow debtors to retain their property and work out a repayment plan based on their income and the level of their indebtedness.

The Burriers’ payment plan was confirmed by the bankruptcy court in August 2007; last December, a second plan requiring higher payments was approved by the court.

Two months later, Wells Fargo told the court that the Burriers had failed to make four of their payments and that it should be allowed to begin foreclosure proceedings.

The Burriers denied that they had missed payments, but in April, to keep their home, they agreed to make double payments to cover the ones Wells Fargo claimed they had missed.

If the borrowers could prove that the mortgage checks were submitted, Wells Fargo said, their account would be credited and they would no longer have to make up the payments. The proof required by Wells Fargo and approved by the court was “valid, accurate and true copies” of the front and back of the checks the borrowers sent in.

Last August, the parties were back in court, with Wells Fargo stating that the borrowers had failed to comply with the deal. Ms. Burrier testified that she had asked her local bank repeatedly for proof of the payments made to Wells Fargo, but had had no luck. The payments to Wells Fargo were processed electronically, she learned, and that meant it did not return the checks to her bank.

The borrowers did produce bank statements showing that the checks Wells said were missing were actually cashed by “WFHM,” an entity that they assumed was Wells Fargo Home Mortgage.

But Tara E. Gaschler, the lawyer representing the borrowers, said that Wells Fargo continued to maintain that it hadn’t received the money

The bank flew in an expert to testify that all checks received by Wells Fargo from borrowers in Chapter 13 cases were processed by hand, Ms. Gaschler said. “Even when presented with bank statements, they told the court there must be some mistake,” she added.

Finally, Wells Fargo demanded that the Burriers provide the routing number of the account at Wells Fargo that their money went into. If they could not, the bank said, they would have to keep making extra payments.

But Sidney B. Brooks, the judge overseeing the case, was clearly dismayed by the bank’s performance.

In his opinion, he fumed that Wells Fargo had asked the borrowers for canceled checks as proof of payment, even though such checks were often not available. Wells Fargo’s request for canceled checks was especially troubling, the judge said, given that the bank was a proponent of the 2003 law that allowed banks to stop returning canceled checks to customers.

The only institution that could have the original checks is Wells Fargo, he concluded.

“The payments have, evidently, been lost in a black hole of the creditor’s organization or through accounting mismanagement,” the judge wrote. “This is a major lender/mortgage loan servicer where the left hand does not know what the right hand is doing — the collection department does not know what the check processing and accounting departments are doing.”

Because this is not the first time the judge has encountered problems in Wells Fargo’s operations, he is considering sanctions on the bank.

“This dispute might portend a widespread abuse of collection practices or creditor overreaching,” he wrote, “demanding of debtors what it, the creditor itself, is unable to provide: accurate and reliable record keeping and billing practices.”

A spokesman for Wells Fargo said: “We are currently reviewing the court’s opinion to determine whether or not an appeal is appropriate. The Burrier case is quite factually specific, and we disagree with the court’s conclusions. We are confident that our payment processing practices are accurate and sound.”

Ms. Gaschler says that this kind of dispute is becoming more common in her practice and that borrowers wind up losing too often.

“A lot of times clients don’t keep canceled checks or maybe their bank account was closed and they can’t go and get the proof,” she said. “The bank gets that extra money for as long as the debtor can keep it up and when they can’t they are pushed out of their homes.”

While judges are starting to see how flawed loan servicers’ systems can be, those rushing to modify loans may not be as aware of the problems.

In the interests of fairness, modification programs should require life-of-loan histories from servicers and a justification of each entry. New loans, especially ones backed by taxpayers, are no place to bury dubious fees or extra borrower payments to cover those that were allegedly, but not actually, missed.

[grudk]

At the peak, crap like that was going for 500K plus in CA. Easy. No doubt that plenty of it was fraud.

[Porsche-O-Phile]

I personally looked at a house that was only marginally better than that in Burbank in I think 2003. Asking price was $600k, so I know you're not kidding.

Appraisal rules need to be seriously rewritten, if they haven't been already - in order to prevent stuff like this in the future.

[911Rob]

Round and round we go..... I remember the last housing boom, I would buy a house and put cash in my pocket. (Calgary 1988-1992). Everyone will get all upset about this today and tomorrow it'll all happen again. My wife and I were shocked when the bank offered us a $500,000 line of credit on our home without even seeing it; just sign right here......

btw; I took it
(the LOC that is)

[competentone]

A nice article showing a real life example of the situation.

I've posted this link before, but this "comic strip" explains the situation plainly (language alert -- but probably pretty accurate of the language used by the people in the real life equivalent positions):

http://www.suburbanhousehunters.com/about/mortgage-crisis/

[Jandrews]

How does one get access to see bank owned properties for sale?

JA

[GDSOB]

Originally Posted by Jandrews

How does one get access to see bank owned properties for sale?
JA

I've bought them several ways. The best way is if you have an ongoing relationship with a local bank. If you are one of their better borrowers, and have done rehabs before, they may actually call you first to see if you are interested. The key is having a personal relationship with an officer at a LOCAL bank. They typically only want to deal with experienced, well funded investors/rehabbers.

One of our agents actually maintains, sometimes rehabs, and markets all the REO properties for a local credit union. ALL of their sales are through MLS listings.

Forget about contacting any of the big banks directly to buy their REO properties. Most are contracted with realtors for at least a BPR (broker price opinion) early in the foreclosure process.

The best way is the MLS. Work with an realtor specializing in REO properties and you will learn alot about the process. Keep in mind that the agents who do the bank owned work constantly have to deal with the latest Carelton Sheets graduates looking for something for nothing. Don't be one of those guys.

[grudk]

Originally Posted by Jandrews

How does one get access to see bank owned properties for sale?

JA

Propertyshark.com

[GDSOB]

Originally Posted by grudk

Propertyshark.com

Looks like just auditor data to me. Couldn't access the foreclosure tab. They only had info for 3 towns in my entire state.

[Porsche-O-Phile]

You want REOs, not foreclosures. There are a lot of potential pitfalls in buying foreclosed properties as foreclosure sales (auctions) and you can get your ass handed to you pretty easily if you don't know what you're doing.

I'm sticking to REOs.

[grudk]

Originally Posted by GDSOB

Looks like just auditor data to me. Couldn't access the foreclosure tab. They only had info for 3 towns in my entire state.

Plenty of info for CA... perhaps not all states