Tax Credit Creates "First Time Fraudsters" - WSJ

When it comes to greed, the real estate market appears to be the breeding ground for schemes. The so-called sub-prime mortgage debacle leads to the recession. To help pick-up the real estate market, the government (read "we taxpayers") provide an incentive in the form of a tax credit for first time homebuyers.

Just as the mortgage schemers found the weaknesses in the mortgage financing system, so too have others found weaknesses in the tax credit.

The WSJ writes,

It's hard not to laugh when viewing the results of the federal first-time home-buyer tax credit. The credit, worth up to $8,000 for the purchase of a home, has only been available since April of last year. Yet news of the latest taxpayer-funded mortgage scam has traveled fast. The Treasury's inspector general for tax administration, J. Russell George, recently told Congress that at least 19,000 filers hadn't purchased a home when they claimed the credit. For another 74,000 filers, claiming a total of $500 million in credits, evidence suggests that they weren't first-time buyers.

As a "refundable" tax credit, it guarantees the claimants will get cash back even if they paid no taxes. A lack of documentation requirements also makes this program a slow pitch in the middle of the strike zone for scammers. The Internal Revenue Service and the Justice Department are pursuing more than 100 criminal investi-gations related to the credit, and the IRS is reportedly trying to audit almost every-one who claims it this year.

And so it goes in America. Read the full column, First Time Fraudsters.

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Brooklyn Judge Takes on the Big Bad Lenders

The New York Times reports today on Judge Arthur M. Schack who has taken the time to review mortgage foreclosure complaints and discovered that many of them are plain wrong.
He

"fashions himself a judicial Don Quixote, tilting at the phalanxes of bankers, fore- closure facilitators and lawyers who file motions by the bale. While national debate focuses on bank bailouts and federal aid for homeowners that has been slow in coming, the hard reckonings of the foreclosure crisis are being made in courts like his, and Justice Schack’s sympathies are clear.

"He has tossed out 46 of the 102 foreclosure motions that have come before him in the last two years."

I understand the judge's pique at sloppily presented papers, but I think he overeaches a bit when he puts the blame solely on lenders who made sub-prime loans. Don't borrowers who pocketed tens of thousands of dollars in cash-out refinances deserve part of the blame for gambling with their residence?

Read the full article, A ‘Little Judge’ Who Rejects Foreclosures, Brooklyn Style

What do you think?

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or if you have questions about what you see here,
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It's "no money down" that got us into this mess

Professor Stan Liebowitz, a professor of economics and director of the Center for the Analysis of Property Rights and Innovation in the management school at the University of Texas, Dallas, looks at the root cause of the mortgage foreclosure crisis and comes away with a new take on the subject.

[T]he single most important factor is whether the homeowner has negative equity in a house -- that is, the balance of the mortgage is greater than the value of the house. This means that most government policies being discussed to remedy woes in the housing market are misdirected.

Liebowitz believes the statistics puts the lie to the belief that it was sub-prime lending that got us into the foreclosure pickle we are in now. It's not resetting of interest rates, either.

The analysis indicates that, by far, the most important factor related to foreclosures is the extent to which the homeowner now has or ever had positive equity in a home.

News reports over the past year of "jingle mail" where the homeowner mails the keys to the lender and walks away from his home and mortgage are on-line. These mortgages are usually of the 100% kind because the homeowner had no equity in the property, i.e., it's nothing more than a "rental" in the mind of the borrower. Let's face it--would you toss away something in which you had invested hard cash?

A person's home is supposed to be his castle, something we protect when the need arises, not a flop-house room we walk away from when the urge hits us.

Read the full article New Evidence on the Foreclosure Crisis.

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A Plea - Don't Allow Mortgage Cramdown

One of the proposals before Congress is to allow Bankruptcy Court judges to "cram down" first mortgages on residential real estate. Some believe this is good for the nation, others do not.

Today's Wall Street Journal features an op-ed by Todd J. Zywicki, "Don't Let Judges Tear Up Mortgage Contracts." Allowing a cram down "would be a profound mistake," he writes.

• Mortgage modification provides a windfall for some homeowners but "the ripple effects could further roil America's consumer credit markets."
• "In the first place, mortgage costs will rise."
• "Allowing mortgage modification in bankruptcy also could unleash a torrent of bankruptcies." "A surge in new bankruptcy filings, brought about by a judge's power to modify mortgages, could destabilize the market for all other types of consumer credit."

"There are other problems. A bankruptcy judge's power to reset interest rates and strip down principal to the value of the property sets up a dynamic that will fail to help many needy homeowners, and also reward bankruptcy abuse.

"Consider that the pending legislation requires the judge to set the interest rate at the prime rate plus "a reasonable premium for risk." Question: What is a reasonable risk premium for an already risky sub-prime borrower who has filed for bankruptcy and is getting the equivalent of a new loan with nothing down?"

We would have to agree that Mr. Zywicki's thoughts make sense. Are we willing to throw more homeowners into bankruptcy in order to test the waters of a mortgage cram down?

Read the full article here.

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NY Times Six: Errors on the Path to the Financial Crisis

Alan S. Blinder, a professor of economics and public affairs at Princeton and former vice chairman of the Federal Reserve points to what he calls the Six Errors that have brought us to the question-- "WHAT’S a nice economy like ours doing in a place like this?"

As the country descends into what is likely to be its worst postwar recession, Americans are distressed, bewildered and asking serious questions: Didn’t we learn how to avoid such catastrophes decades ago? Has American-style capitalism failed us so badly that it needs a radical overhaul?

Blinder believes those six errors to be: wild derivatives, sky-high leverage, the subprime surge, fiddling on foreclosures, letting Lehman go under, and mismanagement of TARP.

It didn't have to happen, he believes, but it did and he explains why.

Read more here.

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Fannie Mae in Bigger Trouble than Imagined?

The New York Times reports today on Airing the Depth of Troubles at Fannie Mae.

• The hole at Fannie Mae may be even deeper than feared.

• a number of analysts fear that Fannie Mae’s vast holdings of risky home mortgages, some of which they say are designated as safer loans, are deteriorating rapidly along with the housing market.

• Of particular concern is how Fannie Mae accounts for subprime mortgages and so-called Alt-A home loans, which are technically a rung above subprime. Some critics say that Fannie Mae defines these loans loosely, which could expose the company to new, gaping losses.

• In a recent statement, Fannie Mae said it classified loans as subprime if they had been originated by lenders specializing in subprime mortgages or by subprime divisions of large lenders. Amy Bonitatibus, a spokeswoman for the company, declined to comment on Monday on whether its nonsubprime categories contained subprime loans, saying only that “we believe that credit scores alone do not provide sufficient information to determine whether a loan should be classified as subprime.”

There's a lot about Fannie Mae and its sister, Freddie Mac, that will continue to be revealed in the days, weeks and months ahead. Some of it will not be pleasant.

Stephen M. Flatow

Vested Title Inc., 648 Newark Avenue, P.O. Box 6453, Jersey City, NJ 07306.
Tel 201-656-9220. Fax 201-656-4506. E-mail vti@vested.com

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From the Wall Street Journal - Sheila Blair's Mortgage Miracle

Our settlement department was busy a few years ago closing what are now called sub-prime mortgage loans. They varied from "interest only" loans to those featuring locked-low payments with interested adjusting to LIBOR ever few months and the possibility of negative amortization up to 125% of the original principal balance of the loan. If you have a problem understanding that sentence, join the borrowers who lined up to cash in on the their so-called equity. These folks were in over their head the moment they walked away with the leftover cash from their refinance.

Now comes the FDIC with a plan "to prevent an estimated 1.5 million foreclosures by the end of 2009. She plans to accomplish this feat by modifying more than two million loans at what she estimates would be a taxpayer cost of $24 billion. This may be wonderful politics, but the real-world evidence suggests it will be far more difficult and expensive."

For more details on the plan and its likelihood of success read the Wall Street Journal article Sheila Blair's Mortgage Miracle

Stephen M. Flatow

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