The broken mortgage promise

October 13, 2010

Rory Fanning, an activist with the Chicago Anti-Eviction Campaign who is also a former sales manager for one of the largest mortgage banks in Chicago, explains what activists need to know about the roots of the foreclosure epidemic.

EVERY DAY, about 100 people in the Chicago area get a foreclosure notice. That means some 3,000 Chicago families are threatened with being put out of their homes every month.

In order to understand the cause of these frightening statistics, let's return to the height of the real estate boom in 2006, and recreate a typical mortgage application:

A neatly dressed mortgage broker is welcomed into the home of a would-be borrower. After offering a glass of water and engaging in chitchat, the broker sits down, opens a briefcase and places 40 pages of fine print on the kitchen table, and says, "I know this seems like a lot of paperwork, but many of these documents are redundant. The most important paper here is the Good Faith Estimate, which breaks down the rate, bank fees and terms of the mortgage. We'll address the GFE after we get the rest of this paperwork out of the way."

The broker summarizes each page in one or two sentences. "This one assures the bank you are who you say you are, and that all the information you provide is accurate. Please sign here. This acknowledges that the bank will technically own your home until the mortgage is paid in full. Please sign here. This page suggests that you shop around for the best interest rate. Please sign here.

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"This one explains mortgage insurance. Mortgage insurance is required on all homes with less than 20 percent equity. Because you only have a 5 percent down payment, you will need mortgage insurance on this loan. The good news is that mortgage insurance is tax deductible. And at an 8 percent appreciation rate, which is currently the average rate of home appreciation here in Chicago, you should be able to drop the MI in two-and-a-half years.

"Call me, and for a small fee ($300), we'll reappraise the property and get it dropped. Please sign here...Finally, we've arrived at the GFE or Good Faith Estimate--this document breaks down the fees, rate and terms of the mortgage."

With gentle confidence, the broker says, "I know the rate is a bit high; that's because your credit could be better, and you have a small down payment. In addition, your debt-to-income ratio, or the amount of your pre-tax income versus the total amount of debt on your credit report, is high.

"It's not as scary as it looks. If you make your payments on time, which I know you will, your credit will rebound, and I'll refinance you into a more manageable rate. We don't charge any bank fees on our refinances.

"The important thing is, you'll soon be a homeowner! Real estate is one of the safest investments in the world. Why? Because everyone needs a home. In the meantime, you can begin building equity and taking advantage of government tax deductions on the interest and mortgage insurance you'll be paying. You should start expecting sizeable refund checks each tax season."

The reader should note that the interest on a mortgage is paid before the principal is ever significantly reduced. At least 80 percent of a borrowers' payment during the first 10 years of a 30-year mortgage is steered toward the interest on the loan. This sad and daunting fact was usually avoided at the application.

Finally, the broker collects: the borrower's bank statements, to prove a few months of liquid reserves (should the borrower lose a job); a month's worth of consecutive pay stubs; two years of tax returns; a telephone number to confirm the homeowner's insurance; and a $400 check for the appraisal and application fee. The hardest part before the broker receives a commission check is over.

FOR THE borrower concerned with high monthly mortgage payments, the most important sentence uttered during the application was, "We'll refinance you once your credit improves." The best rate in 2006 was offered if the borrower could show a credit score of roughly 700 and a loan to value of 90 percent.

With this target in mind, many borrowers struggled to live frugally and make mortgage payments on time, so they could quickly improve their credit and refinance into the better rate promised by their broker.

Fast-forward two years. The rules of the game have changed. Credit requirements for the best rates leap to 760; equity conditions soar to 75 percent of the value of the home; the debt-to-income ratio; which was once 50 percent in 2006, is now 30 percent; appreciation rates plummet, and many homes are worth less than what is owed; interest rates on existing loans have increased by two percentage points, because many of the mortgages were written with two-year or five-year adjustable rates--thousands of dollars are tacked onto monthly housing payments.

The promises of a future refinance have been broken. Borrowers are now victims of the false assurances made by even the most well-intentioned broker. Homeowners across the nation now must deal with higher monthly payments, mortgages that exceed the value of the home, and the greatest threat of foreclosure and eviction in American history.

For homeowners who are not delinquent on their mortgage payments and think they are escaping the housing crisis, it's important to note: a home is only worth what the last two, comparably sized homes within a two-mile radius sold for--and every home in Chicago is within two miles of a comparably sized foreclosure.

That means all the homes in Chicago have lost equity. Not one homeowner is unaffected by the foreclosure crisis.

The average foreclosure hearing in front of a judge is less than two minutes. Is the aforementioned considered before borrowers are sent to the street? If not, we need to start ensuring that it is! Let us not forget--we can never forget--the banks were bailed out by the very homeowners they are now not refinancing.

BANKS WERE processing mortgages at record rates before the crash. Organizing, selling and transferring the pre-crash glut of mortgages required advanced banking technology. MERS, or Mortgage Electronic Registration Systems, is an electronic mortgage processing system developed in the late 1990s. In large number, the hard copies of signed mortgages were scanned into the MERS database.

MERS enabled the efficient selling and transfer of mortgages, which was a priority for major lending institutions before the 2008 crash. The banks knew they were holding ticking time bombs. The goal was to sell bundled loans and get them off the books before they exploded.

Banks often bought insurance, or credit default swaps, as a hedge against the loans they knew were toxic. They even bought insurance on mortgages they didn't own. When this happens, it's no longer a hedge; it's insider gambling. These firms had to file exemptions to state gaming laws to make the transactions legal.

For the lender, the most important document signed at a mortgage closing is the note. A mortgage is only valid if the mortgagee can prove property ownership with the note. In the process of scanning, selling and funneling these documents through the hands of up to eight different lending institutions, large numbers of notes were lost.

When a bank can't find a note, it can't foreclose on the home--at least that is what judges in California, Massachusetts, Florida and Ohio said when they dismissed foreclosure cases because the bank couldn't provide a hard copy of the note.

In spite of the popular belief, the state has discouraged banks from refinancing homes. The government has insured defaults up to 90 percent of the original loan amount. In other words, if a borrower defaults on a mortgage, the state will pay nearly the entire loan back for the borrower; however, the borrower doesn't get to keep the home. So not only does a bank get its money back, it can also resell the foreclosed home for a profit. There is little to no incentive for banks to refinance homes right now.

Let us expose the false promises that began at the mortgage application. Let no bank foreclose without providing a hard copy of the note. If foreclosures proceed, beat the sheriff to the door. In an act of nonviolent civil disobedience, obstruct these criminal banking practices and expose the state's complicity in this mess.

It's time to fight back. Housing is a right!

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