Tanking Of Subprime Mortgage Market A Good Thing For Some On Wall Street

On Tuesday, I put up a post regarding possible legal complications that are arising from Wall Street hedge funds that may impact the ability of financially strapped homeowners with subprime mortgages to negotiate with many mortgage holders the modification of the terms of their troubled mortgages (see Legal Complications Arise In Modifying Troubled Subprime Loans).

While, admittedly, I don't have a clue as to how the Wall Street trading strategies involving the subprime mortgage market work, I am reading that there are Wall Street hedge fund investors that have made "indirect bets against the financial health of struggling homeowners" and that stand to make (additional?) fortunes if the subprime market keeps tanking and financially strapped homeowners "default and get thrown out of their homes." Apparently, these investors are now starting to bellyache at the fact that measures are being taken to stabilize this market, with the intent on keeping these financially strapped homeowners from losing their homes (exactly what some of these hedge funds don't want).

In any event, for those who want a better prospective as to what is going on with these hedge funds in the subprime mortgage market context, see The Sure Bet Turns Bad (Funds Howl As Bear Stearns Buys Mortgages) (reported in The Wall Street Journal Online).

For commentary about the millions of dollars that are reportedly flowing into the campaign coffers of presidential candidates from Wall Street hedge funds, and the questioning of whether there is any connection between this reported flow of cash and the desire of these hedge funds to see a continuation of the tanking of the subprime mortgage market, see The Dangers of Democratic Hedging (Not About Iraq) (The Huffington Post).

Go here for links to other blogs on this story. MortgageServicingIssuesAlpha

Reports Of Hedge Fund Threats Against Loan Servicers Making Loan Modifications Outrage Lawmakers

In Washington, D.C., Politico reports:

• Barney Frank is not happy with hedge funds. Specifically, he and other top House Democrats are “outraged” that some hedge funds are telling mortgage service companies not to modify distressed mortgages with the help of the government program Frank helped craft.

• The New York Times reports that at least two hedge funds told servicers they might take action against them if the servicers participated in the government program to help homeowners avoid foreclosure. The program, which became law in July, just took effect at the beginning of October.

• Frank (D-Mass.) and four other Democratic members of his Financial Services Committee wrote an angry letter to the CEOs of the hedge fund companies named in the article, Braddock Financial Corporation and Greenwich Financial Services. The lawmakers wrote that they “strongly urge” the companies to reverse their position on the modification issue and informed each CEO that they’re scheduling a Nov. 12 hearing at which both will be asked to testify.

For more, see Frank threatens financial industry, calls hearing.

See also:

• House Financial Services Committee press release: Lawmakers Demand Hedge Funds Drop Opposition to Foreclosure Prevention,
• Letter to Braddock Financial Corporation,
• Letter to Greenwich Financial Services,
• Letter to Managed Funds Association. MortgageServicingIssuesAlpha

Hedge Fund Entrance Into Mortgage Servicing Business Alarms Both Consumers & Investors

(originally posted 10-12-07)
An article by The Associated Press reports:

• Hedge funds and private equity investors are gaining a foothold in the business of mortgage loan servicing as some of the country's biggest mortgage lenders crash into bankruptcy. Their arrival on the scene has alarmed consumers and investors alike. Over the last few months several failed mortgage lenders -- including ResMae Mortgage Co., Aegis Mortgage Corp., and New Century Financial Corp. -- have sold their loan-servicing businesses to hedge funds or private-equity firms.

[...]

• Their acquisition of loan-servicing rights, as a result, has inflamed the anxieties of many homeowners who have reported loan-servicing disruptions recently. "From a consumer perspective, it's an improvement to have these loans in a mainstream bank," said John Taylor, chief executive of the National Community Reinvestment Coalition, a collection of community groups. "It's not an improvement for them to end up in the hands of Wall Street. There isn't the conversation or the accountability." When it comes to consumer-protection regulations, Taylor said, "Wall Street has a moat around it."

For more, see Hedge Funds Enter Mortgage Arena. questionable mortgage servicing practices tactics yak MortgageServicingIssuesAlpha

Financial Powerhouses Flood Online Tax Lien Auctions With Bids From Tens & Hundreds Of Thousands Of Shell Companies, Driving Away Bona Fide Bidders; Anti-Competitive Practice? Will Somebody Please Call The Antitrust Feds???

In Fort Lauderdale, Florida, the South Florida Sun Sentinel reports:

• Tax lien auctions are a little-known but juicy Florida financial market worth up to $1 billion a year. And, the Sun Sentinel has found, banks, hedge funds and other financial powerhouses have hit upon a way to game the system, squeeze out the little guy and gobble up most of the good deals.
  
  "I don't think it's fair; it's rigged," said Linda Kliston, of Plantation, a small-scale investor who, like many others in South Florida, finds she can no longer realistically compete.(1)
  
  Big banks are widely blamed for sending America's real estate market and economy into a tailspin beginning in 2007, and then receiving billions of dollars in government bailout loans. Now, some of these same financial heavyweights have found another way to turn the system, and Floridians who can't pay their taxes in time, into a profit center.

***

• A bank CD might pay 0.26% interest a year these days. Florida tax liens guarantee a return nearly 20 times higher, and can generate annual returns of as much as 18%.
  
  For decades, these liens were part of some families' or individuals' investment portfolios, with the proceeds used to help fund retirements, vacations, kids' college tuition and other personal expenses.
  
  Then events coincided to rewrite the script. Uncertainly bred by the Great Recession made the financial returns on liens look extremely attractive to institutional investors, including banks that provide millions of dollars in credit to hedge funds seeking to buy liens. About the same time, tax collectors in Florida started selling the liens online.
  
  Those online auctions have come to be dominated by large financial institutions, which have dramatically increased their odds of winning by forming thousands, even hundreds of thousands, of proxy or shell companies to flood the auction, giving them a huge edge in tie bids where the winner is chosen by lottery.
  
  The gambit is legal under Florida law, but some question whether it's fair. The silly or preposterous names often given the dummy companies — "Yay for Tax Liens," "Pork Chop Sandwiches" and "Spiderman Corp." among them — strongly suggest their creators know there's something absurd about the whole process.
  
  "The majority of the smaller bidders are getting squeezed out or dropping out because they cannot effectively compete," complained Miami real estate agent Murry Diamond, 60, a longtime participant in South Florida tax auctions.
  
  "I'm one of the people they're driving out," Diamond said.

***

• First, under Florida law, all liens are guaranteed to yield at least a 5 percent return to the buyer over the lifetime of the loan. That's even if the bidder won the lien by agreeing to accept only a quarter of 1 percent, the minimum bid allowed under state rules.
  
  Second, in online auctions, tie bids are broken by a random number generator, a computerized equivalent of how winning numbers are picked in the Florida Lottery.
  
  The result: big investors now all agree to accept the theoretical minimum return, and swamp the system with simultaneous bids to increase their chances at being picked.
  
  At first, firms created thousands of shell companies by applying for and receiving taxpayer ID numbers from the Internal Revenue Service. Then tens of thousands.
  
  Then came what Miami-Dade Tax Collector Fernando Casamayor calls the "nuclear arms race of bidder numbers."
  
  In Broward County the total of bidders went from 20,351 in 2010 to more than 1.1 million the following year.
  
  In Palm Beach County, the count zoomed from 64,877 to 2 million.
  
  In last year's property lien auction, Broward topped 2 million bidders. Five investment funds alone accounted for more than 1.4 million of them.
  
  Since the winning bid is now usually chosen at random, the process is akin to tossing the bouquet at a wedding with one bridesmaid having hundreds of thousands of proxies on hand to help her grab it.

***

• In implementing their strategy for dominating Florida's tax lien market, institutional investors had an unwitting accomplice: the Internal Revenue Service.
  
  In the online bidding process, Florida counties require that each participant furnish a taxpayer identification number, which is considered adequate proof by local tax collectors that a business exists.
  
  The IRS issues those numbers at no cost. It's a closely guarded secret as to how certain firms were able to apply for and obtain tens and hundreds of thousands of ID numbers.
  
  Some in the industry devised an automated method to deluge the IRS with requests.
  
  "They identified a process that streamlined a common industry practice," said New York tax lien broker Tom McOsker, president of BloxTrade.
  
  Asked how his company created more than 200,000 sub bidders, each with its own IRS number, LienBase partner Joshua Schrager said: "We just work hard and work long hours."
  
  Shocked by the sheer volume of companies registering, Summerford said the Florida Tax Collectors Association questioned IRS officials about the firms' legitimacy, but got no response.
  
  "They were more concerned about simply running out of the numbers," he said.(2)
  
  The IRS's South Florida office declined to answer questions submitted by the Sun Sentinel about the process. On its web site, however, the government agency warns that taxpayer ID numbers "are issued for the purpose of tax administration and are not intended for participation in any other activities (e.g., tax lien auction or sales, lotteries, etc.)."

***

• Last year, Miami-Dade County began requiring $5,000 refundable deposits from all individual bidders before the public sale began. At prior auctions, a deposit was demanded only from the parent company.
  
  Now, a firm with 450,000 dummy subsidiaries would have to plunk down $2.2 billion.
  
  Not surprisingly, Miami-Dade experienced a dramatic reduction in the number of bidders participating: from 1.7 million to about 64,400.
  
  "Is it fair? I don't know. If you have more money, you have more opportunities to register more bidders," said Casamayor, the county tax collector. "But it's as fair as we could have done it."
  
  Because of the change in IRS policy, even tax ID numbers have become a commodity to be bought and sold. According to Palm Beach County Tax Collector Anne Gannon, companies with a lot of the numbers are known to rent them to other would-be bidders.

For the story, see Sun Sentinel Investigation: Tax lien sharks use shell companies to squeeze out locals.

For a story follow-up, see Broward leaders order review of tax lien auction rules (Action follows Sun Sentinel's finding that system is stacked in favor of banks, hedge funds).

(1) According to the story, Kliston's husband and fellow investor, attorney Todd Kliston, feels that the local tax lien auctions have become unfair playing fields where a single bidder now can raise 200,000 paddles at once. In 2011, the Florida Tax Collectors Association has reportedly urged its members to take action to restore "integrity and fairness" to the system.

The Klistons are reportedly unsure if they will be participating. Over two decades, they reportedly invested in tax liens to save extra funds, helping to put their daughter through college. But now the odds have become very long, perhaps impossibly so, the story states.

"As far as we're concerned, it's illegitimate. It's not an auction anymore," Linda Kliston reportedly said.

(2) It may be that the Florida Tax Collectors Association (or any other interested party, for that matter) should contact the Antitrust Division of the U.S. Department of Justice and file a complaint. The practices described in the story sure sound like a pattern of collusive schemes among a few, big-money tax lien investors that appears to be eliminating bona fide competition at tax lien auctions.

NYC Housing Advocates Challenge HUD Practice Of Peddling Delinquent FHA-Insured Mortgages To Hedge Funds, Private Equity Outfits; Claim Recently-Filed Lawsuit Will Expose Historic Racism In Housing Policy, Putting Black Homeowners At Greater Foreclosure Risk

In New York City, The New York Times reports:

• For years, the federal government avoided insuring mortgages in black neighborhoods, a practice known as redlining that exacerbated racial divides throughout America’s cities.
  
  Redlining has long been outlawed, but in New York City, the federal government is again disproportionately hurting black homeowners, according to a federal lawsuit filed by a nonprofit that represents low-income New Yorkers. This time, the suit says, the government is fueling racial disparities not through its lending policies but in how it handles foreclosures.
  
  Since the financial crisis pushed thousands of homeowners in New York and across the country into foreclosure, the federal Department of Housing and Urban Development has been selling insured delinquent mortgages to private investors, typically hedge funds and private equity funds, which then collect monthly payments.
  
  The investors, according to the lawsuit filed against the housing agency and a large private equity firm, Lone Star Funds, provide fewer protections to homeowners who fall behind on their mortgage payments than the federal government does, leading to higher rates of foreclosure.
  
  Most of the mortgages being sold to these investors are in predominantly black neighborhoods like in southeast Queens and the Canarsie section of Brooklyn. From 2012 to 2014, more than 61 percent of the government-backed mortgages sold to investors were in predominantly black neighborhoods, according to the lawsuit.
  
  Meanwhile, only about one-third of federally insured mortgages over all were issued in those same neighborhoods.
  
  Lawyers for the homeowners who filed the lawsuit say the concentration of the sales is putting black homeowners at greater risk of foreclosure and threatening to undermine decades of progress toward increasing homeownership in these neighborhoods.
  
  ***
  The lawsuit, filed [last week] by MFY Legal Services(1) and the law firm Emery Celli Brinckerhoff & Abady in United States District Court in Brooklyn, is the latest tussle over how the government turned to Wall Street to help sort through the wreckage of the 2008 financial crisis. The mortgage sales are part of an effort by HUD to reduce the burden on its insurance fund that backstops home loans to lower-income borrowers who have gone into default.
  
  “This lawsuit exposes that the historic racism that has kept our communities segregated, that has blocked African-Americans from sustainable homeownership, and that increases the racial wealth gap in this country is still alive and well,” said Elizabeth Lynch, a supervising attorney at MFY Legal Services.
  
  ***
  The battle over the mortgage sales has exposed a conundrum that the housing agency faces over its Federal Housing Administration mortgage program, which started in the 1930s. By selling the mortgages to the highest bidder — in this case private equity firms — the agency can bolster its insurance fund that had been eroded by the flood of foreclosures in the immediate aftermath of the housing crisis. The more flush the insurance fund, the more mortgages to lower-income borrowers the department can backstop.
  
  But housing advocates say that the agency is contradicting its mission by selling mortgages to investors that they say are pushing homeowners closer to foreclosure with loan modifications that offer little relief.
  
  In some cases, the modifications can leave borrowers in even more financial distress. For example, according to the lawsuit, the terms of one typical offer of relief from Lone Star’s servicing arm require a large balloon payment five years after the modification that can, lawyers say, significantly increase a homeowner’s mortgage costs.
  
  Another feature of that same offer allows borrowers to pay only interest on their loans, leaving them with a large unpaid balance.
  
  Ultimately, advocates worry that investment firms will be able to take possession of more houses across New York City, one of the nation’s hottest real estate markets, where virtually every neighborhood is rapidly changing through gentrification.

For more, see Sale of Federal Mortgages to Investors Puts Greater Burden on Blacks, Suit Says.

-------------------------

(1) MFY Legal Services is a non-profit, public interest law firm that, among other things, provides direct civil legal assistance for residents of New York City who are low-income, disenfranchised or have disabilities.

Legal Complications Arise In Modifying Troubled Subprime Loans

Possible legal complications are arising on Wall Street that may impact the ability of financially strapped homeowners with subprime mortgage to negotiate with some mortgage holders to modify or otherwise alter the terms of their troubled mortgages. The New York Post reports:

• "A big hedge fund on one whopper of a winning streak is picking a bitter fight with Bear Stearns over whether renegotiating loans for homeowners struggling with subprime mortgages is fair play. Paulson & Co., an $11 billion hedge fund, has written regulators over concerns that Bear and other investment banks may be engaged "in market manipulation" when the banks' mortgage-issuance units modify loans so that homeowners can avoid foreclosure. The Madison Avenue-based Paulson is ready to do major battle."

Paulson & Co. has made "a multibillion-dollar bet on the decline of the subprime mortgage market, using [sophisticated, Wall Street] trading strategies." Apparently, Paulson & Co. is concerned that the help being sought by and given to homeowners stuck with onerous subprime mortgages in order to avoid foreclosure may cause Paulson's "multibillion dollar bet" to go sour. For more, see Hedge Fund Bear-ish On Subprime Relief.

For a comment on the concerns of hedge funds regarding the assistance being offered to homeowners facing foreclosure who are stuck with subprime mortgage loans, see The Dangers of Democratic Hedging (Not About Iraq), (by Robert Weissman in The Huffington Post). According to Weissman, "The hedge funds have invested in various derivative instruments that pay off when borrowers default and get thrown out of their homes."

Go here for other related posts on mortgage servicing issues. MortgageServicingIssuesAlpha

More On The Connection Between Loan Workouts & Buyers Of Discounted Mortgages

Five recent media reports have addressed the move of investors towards purchasing discounted mortgages with the view of seeking a loan restructuring with a financially strapped homeowner.

A story by The Associated Press reports:

• Guess who holds your mortgage now? It's your friendly neighborhood hedge fund. Dozens of hedge funds, private equity groups and other investors have plunged into the beaten-down mortgage market in recent months, buying tens of thousands of distressed loans and foreclosed properties around the country.

***

• "We're much easier to deal with than a bank," said Jacob Benaroya, managing partner of New Jersey-based Biltmore Capital Group, a hedge fund that's buying up to $100 million in mortgage debt per year. "We've bought (the loan) at enough of a discount that we can make special arrangements with the borrower."

For more, see Hedge funds investing in delinquent mortgages (Many claim that they can alter terms of loans much easier than banks) (If link expires, try here).

The New York Times reports:

• [U]nder [a] new initiative, called the Housing Assistance and Recovery Program, or HARP, the [Federal] Home Loan Bank [of New York] lent $6 million to Magyar Bank, based in New Brunswick, N.J. The First Baptist Church of Lincoln Gardens, in Somerset, N.J., which provides counseling services through its First Baptist Community Development Corporation, identifies homeowners who are in danger of foreclosure, then negotiates with the lender to buy out the loan.

• Using proceeds from the Federal Home Loan Bank, Magyar Bank puts up 70 percent of the remaining balance. HARP representatives expect that lenders who hold the distressed mortgages will write off much of the remaining 30 percent, rather than incur a foreclosure.

For more, see Struggling, but Staying in a Home.

For three other stories, see:

• The New York Times: An Investment Firm That Prospered From Past Crises Turns to Mortgages (Reports that Merrill Lynch unloaded $31 billion of mortgage-tied paper for 22 cents on the dollar to an investor group),

• Bloomberg News: Discounted Mortgage Notes Can Stop Foreclosures (Buying defaulted mortgages at a discount, the mortgage investor encourages and enables owners to stay in their properties and avoid foreclosure. His company buys the loans, not the homes, then employs a "work- out, not kick-out'' approach in working with homeowners),

• Bloomberg News: Recovery From Worst Housing Slump Since 1930s Comes With Angel (Reportedly, one individual investor buys bad mortgages a dozen at a time for a fraction of their face value from lenders. He then goes door to door to negotiate lower payments for homeowners or pay them to move so he can sell the house).

Delinquent Debt-Buying Vultures Sighted Circling Around Yankee Stadium In Search Of Next Big Meal

In The Bronx, New York, Bloomberg reports:

• Hedge funds specializing in distressed debt are buying municipal bonds backed by parking lots and garages at the new Yankee Stadium, which face a payment default as soon as next year, according to two people familiar with the purchases.

***

• “This facility seems meaningfully impaired, but there are some potential fixes,” said Laurence Gottlieb, chief executive officer of Fundamental Advisors LP, a private-equity firm in New York that buys municipal debt. “Costs can be reduced and it could be repositioned for commuter parking.”

***

• Bronx Parking Development Co. issued the bonds through New York City’s Industrial Development Agency to build three garages, renovate two others and refurbish six lots near the 50,287-seat stadium.

***

• The garages generated $2.4 million in April, 28 percent less than assumed, according to a May 25 report available to bondholders. They hold 9,266 spaces and the average occupancy has been 43 percent since the Yankees’ home season began March 31, according to bond filings. Self-parking on game days costs $35, an increase of $12 over last year.(1)
• The facility will not have sufficient operating revenue to make an interest payment on April 1, 2012, based on current projections, according to Steven Polivy, an attorney at Akerman Senterfitt LLP in New York, which represents Bronx Parking. That payment would need to be made out of the debt service reserve fund, he said.

***

• “The Yankees continue to draw consistently strong attendance,” Morgan Stanley executive director Pete Block said in a March 18 report. The Yankees attracted 1.4 million fans to home games this season through June 9, up 16 percent from 1.2 million in the same period last year, according to the Sports Network news service. The Yankees led all Major League Baseball teams in attendance last year at 3.77 million, according to ESPN.

For more, see Hedge Funds Target Yankee Stadium Parking-Garage Muni Bonds Near Default.

(1) With the No. 4 train (East Side) and the B and D trains (West Side) continuing to make stops (after all these years) at East 161st Street and River Avenue, and the MTA Metro-North Railroad's Hudson Line stopping at the Yankees' E. 153rd Street Station, who the hell wants to get clipped for $35 in self-parking.

Further, I'm sure it doesn't help the bondholders much that the Yankees, on their own website, promote the use of mass transit in traveling to and from The Stadium "without having to deal with the hassles of parking, tolls and traffic" and give the general public this advice:

• Remember: Mass Transit is the best way to get to Yankee Stadium!

More On Wall Street Hedge Funds Holding Bets On The Tanking Of Subprime Market

The possible crossfire that many subprime mortgage borrowers in trouble may find themselves in is the subject of a recent article by The Associated Press and is making its way around numerous media outlets around the country. The crossfire is between the big Wall Street hedge funds who bet that the subprime mortgage market would go south (and who are against any form of loan modifications because they only get to "cash their bets" when the market goes south), and the Wall Street mortgage-backed securities packagers, who are beginning to modify the troubled loans in their securitizations to help stabilize the subprime market and help keep borrowers in their homes. For the story, see Dispute among Wall Street titans could affect foreclosures.

Go here for other posts on the tug-of-war among the Wall Street giants. MortgageServicingIssuesAlpha

Report: HUD Sales Of Delinquent FHA Mortgages Yields Big Payoffs For Sleazy Loan Servicers & Easy Profits For Private Equity Investors While Hastening The Boot For Struggling Homeowners

From a recent press release from the National Consumer Law Center:

• The U.S. Department of Housing and Urban Development’s (HUD’s) program for selling defaulted Federal Housing Administration (FHA) loans is the largest auctioning off of government-insured home mortgage loans in the nation’s history, yet the big winners are the large mortgage servicers who flout HUD rules while homeowners often unnecessarily lose their homes.
  
  To date, under the Distressed Asset Stability Program (DASP), HUD has sold over 105,000 FHA-insured home loans valued at $17 billion, primarily to private equity companies and hedge funds that bought the loans at big discounts.
  
  “HUD’s own data show that selling FHA mortgages through its Distressed Asset Stability Program does not help struggling homeowners and their communities in the long term,” said National Consumer Law Center attorney Geoff Walsh and author of Opportunity Denied: How HUD’s Note Sale Program Deprives Homeowners of the Basic Benefits of Their Government-Insured Loans.
  
  “HUD excludes homeowners from the loan sale process by not even notifying them before the sales. As a result of the sales, a homeowner loses valuable protections from foreclosure, protections that are available only when the loan is FHA-insured.
  
  Through DASP sales, HUD pays off the mortgage servicers who routinely flout the agency’s own rules, and then sells the loans at fire-sale prices to private speculators who reap profits while doing little to help vulnerable homeowners remain in their homes.”
  

For more, see Report: HUD’s Sales of FHA-Defaulted Mortgage Loans Benefit the Big Mortgage Servicers and Hedge Funds While Homeowners Lose.

Full report, charts and tables (including the 10 largest buyers of DASP note sales), and web only materials are available at: http://bit.ly/1WTd5sW

Feds Slam 400+ In "Operation Malicious Mortgage" National Takedown Of Alleged Mortgage Fraud Scams; Losses Estimated At $1B+

CBS News and The Associated Press reports:

• More than 400 real estate industry players have been indicted since March - including dozens over the last two days - in a Justice Department crackdown on incidents of mortgage fraud nationwide that stem from the country's housing crisis. The FBI put the losses to homeowners and other borrowers who were victims in the schemes at over $1 billion.

***

• Sixty people were arrested Wednesday as part of the three-month sting, dubbed "Operation Malicious Mortgage," [...]. People arrested include buyers, sellers and others across the wide-ranging mortgage industry. The take down focused primarily on lending fraud, foreclosure rescue scams and mortgage-related bankruptcy schemes. [...] Officials have identified 10 "mortgage fraud hotspots" nationwide in California, Colorado, Texas, Minnesota, Michigan, Illinois, Ohio, New York, Georgia and Florida.

For more, see FBI Cracks Down On Mortgage Fraud (400 Real Estate Industry Players Indicted; Victims Lost More Than $1 Billion In Various Schemes).

See also, FBI Press Release: More Than 400 Defendants Charged for Roles in Mortgage FraudSchemes as Part of Operation "Malicious Mortgage" (Two Senior Managers of Failed Bear Stearns Hedge Funds IndictedToday in Separate Mortgage-Related Securities Fraud Case).

For a sampling of local stories throughout the country involving Operation "Malicious Mortgage", see:

• Arizona (Phoenix and Tucson): 36 Arizonans Swept Up In Mortgage Fraud Arrests;
• California (Sacramento): National mortgage-fraud crackdown nets five from Sacramento;
• California (San Francisco Bay Area): 13 locals charged in mortgage fraud sweep;
• California (San Diego): More than 400 indicted in nationwide crackdown (Six from San Diego real estate firm among 400+ real estate insiders swept up in nationwide crackdown);
• Florida (South Florida): Mortgage fraud initiative nets 102 arrests;
• Florida (Fort Myers): SW Florida real estate agent indicted; or go here to read the four-count indictment against SamirCabrera;
• Georgia (Atlanta): Feds indict seven in metro Atlanta mortgage fraud ring;
• Hawaii (Honolulu): Mortgage scammers caught in federal sweep ("Operation Malicious Mortgage" led to hundreds of arrests across the nation -- including several indictments in Hawaii, with more to come.);
• Illinois (Chicago): 67 from Chicago area charged in U.S. mortgage fraud probe;
• Indiana: 2 women face federal mortgage charges;
• Maryland (Greenbelt): Prince George's Woman Arrested in 'Massive' Mortgage Fraud;
• Maryland (Greenbelt): Businessman Indicted On Mortgage Fraud Charges (I-Team Investigation Uncovered Lewis's Alleged Scheme);
• Michigan (Detroit and Flint): Massive Mortgage Fraud Case Hits Home;
• Mississippi (Jackson): 11 nabbed for mortgage fraud;
• Nevada (Las Vegas): 8 Las Vegas Residents Indicted on Mortgage Fraud;
• New York (NYC): 2 former Bear Stearns execs indicted, arrested and also Q&A: Inside the Bear Stearns Indictments (two former hedge fund managers indicted on charges that they concealed problems that eventually led to the collapse of the funds.);
• Pennsylvania (Eastern PA): 4 from eastern Pa. are part of US crackdown on alleged mortage fraud;
• Texas (Dallas-Fort Worth): Eight arrested, three others indicted in North Texas mortgage fraud; or go here to read the indictment (4.97 MB);
• Texas (Houston): Mortgage fraud scheme lands 6 in jail;
• Utah (Salt Lake City): Two Utahns accused in mortgage fraud schemes;
• Washington State (Seattle): 6 from Seattle-area indicted in crackdown on mortgage fraud.

Go here for links to other local stories around the country on Operation Malicious Mortgage.

Hedge Fund Sues Countrywide Over $8.4B Bank Of America Loan Modification Settlement Of Predatory Lending Charges With State AGs

In New York City, Bloomberg News reports:

• Countrywide Financial Corp., the home lender acquired by Bank of America Corp., was sued by Greenwich Financial Services Fund over claims an agreement to reduce payments on mortgages by $8.4 billion would hurt investors.

• The hedge fund claims investors will be harmed by Bank of America’s settlement, reached on behalf of Countrywide, with 15 state attorneys general. The value of trusts that bought 400,000 mortgages will decline under the deal, the fund said.

• In the proposed class action, or group lawsuit, the Greenwich, Connecticut-based fund demands a declaration that “Countrywide must purchase at par every mortgage loan that it sold to any of the 374 securitization trusts,” David Grais, a lawyer for the fund said today in an e-mailed statement. Grais said Countrywide could owe the trusts $80 billion.

For more, see Countrywide Sued by Fund Over $8.4 Billion Loan Deal.

See also:

1) The Wall Street Journal: Mortgage-Bond Holders Get Voice (Greenwich Financial's William Frey Challenges Loan Servicers Like BofA) (subscription may be required; if no subscription, try here, then click link for story):

• [T]he new lawsuit, filed in New York state court, doesn't take issue with the actual settlement but focuses instead on who should bear the costs. Noting that the attorneys general accused Countrywide of "widespread predatory lending," the lawsuit alleges that Countrywide plans "to pass most or all" of the cost of the settlement to investors.

2) The American Lawyer (at Law.com): Class Action Demands Countrywide Repay Hedge Funds for Losses.

3) Summons & Complaint: Greenwich Financial Services Distressed Mortgage Fund 3, LLC v. Countrywide Financial Corporation. MortgageServicingIssuesAlpha

Financially Distressed Homeowners Get No Favors From HUD, Which Is Unloading Its Non-Performing Home Loans Out From Under Borrowers At Steep Discounts To Hedge Fund Investors Seeking 'Foreclose & Flip' Opportunities

The following highlights (see 11 things we learned investigating how the government sells mortgages to investors) have been lifted from a recent investigative report from The Center For Public Integrity, a nonprofit organization that does investigations and analyses of public service, government accountability, and ethics related issues:

• 1. Over 98,000 “bad” mortgages have been sold to investors through a government program since 2010.
  
  2. The Department of Housing and Urban Development (HUD) sells mortgages to investors at a steep discount — at times as little as 41 percent of the mortgages’ collective value.
  
  3. Homeowners typically aren’t informed when their mortgages are sold. This prevents them from advocating for better terms, which they’re entitled to under Federal Housing Administration protection.
  
  4. Wall Street investors pay only two-thirds* of the full mortgage value when they buy mortgages from the government (*median price).
  
  5. Homeowners aren’t so lucky: they must pay about 124 percent* of the property value to keep their homes (*median price).
  
  6. HUD sells the mortgages in bundles as large as 5,944 loans. HUD designed the program to include nonprofits and community organizations, but the size of the bundles means large, institutional investors have a leg up in blind auctions. Currently only 2 percent of sold mortgages go to nonprofits.
  
  7. HUD’s mortgage sales program is meant to help distressed homeowners avoid foreclosure. But rather than offering better terms to borrowers, the new owners of these homes often flip them for a profit, advocates say.
  
  8. Only 16.9 percent of the mortgages HUD sold to investors between 2010 and 2013 have avoided foreclosure.
  
  9. Of those 16.9 percent, less than a third are performing, and over 10 percent have either sold through a third-party sale or been handed over through a deed-in-lieu, still resulting in a homeowner without a home.
  
  10. Even if a home isn’t foreclosed, there’s a high chance that the homeowner will lose their house anyway. According a Center for Public Integrity analysis of address data, Bayview Loan Servicing, LLC, took ownership of 1,319 properties. Other beneficiaries: JP Morgan Chase: 841 properties. Bank of America: 639.
  
  11. Many homeowners say they were still involved in renegotiating their loans while their mortgages were sold to investors. HUD’s own rules state the lender can only turn the loan over to HUD for sale once all efforts to keep homeowners in their home are exhausted.

For the full investigative report, see Hedge funds get cheap homes, homeowners get the boot.

More On Hedge Fund Suit Against Countrywide Over $8.4B Bank Of America Loan Modification Settlement

For those interested in reviewing the lawsuit filed in this matter, see:

• New York State Supreme Court (New York County) - Index # 650474-2008: Greenwich Financial Services Distressed Mortgage Fund 3, LLC v. Countrywide Financial Corporation.

Go here for links to Exhibits A through G of the above lawsuit (be sure to type in the letters you see in the picture, then click submit - you'll be taken directly to the links):

• Exhibits A & B - representative examples of the pooling & servicing agreements involved;
• Exhibits C & D - lawsuits against Countrywide filed by California & Illinois;
• Exhibit E - Multistate Settlement Term Sheet regarding the settlement of the accusations of the Attorneys General against Countrywide;
• Exhibit F & G - copies of the California and Illinois judgments.

For some of the media reports on this story, see:

• The Wall Street Journal: Mortgage-Bond Holders Get Voice (Greenwich Financial's William Frey Challenges Loan Servicers Like BofA) (subscription may be required; if no subscription, try here, then click link for story),
• The American Lawyer (at Law.com): Class Action Demands Countrywide Repay Hedge Funds for Losses,
• Bloomberg News: Countrywide Sued by Fund Over $8.4 Billion Loan Deal.

Bailed-Out Banksters Nix Giving Homeowners Foreclosure Assistance; Prefer Directing Sneaky Efforts, Loot To More Profitable Tax Lien Investing Instead

In Pima County, Arizona, the Arizona Daily Star reports:

• Banks that took bailout money were supposed to use part of the taxpayer-provided cash infusion to help customers avoid foreclosure, but instead, many of them are buying up struggling homeowners' tax debt.



• The tax liens earn banks up to 16 percent interest, and if homeowners don't repay their debt within three years the banks can foreclose on their homes. Since the bailout in 2008, major banks have bought nearly 6,000 tax liens in Pima County that total at least $15.8 million.

***

• Many banks dabbled in delinquent tax liens before the bailout, but they have ramped up their purchases many-fold since the housing market collapse and bailout money became available.



• In the two years before the bailout, banks bought about $3.9 million in tax liens at Pima County's annual tax auction. At the last two auctions they bought $10.3 million. Additionally, they bought $4.1 million in liens outside the auction since the bailout.

***

• Trusts and limited liability corporations owned by three banks - JPMorgan Chase, Bank of America and BankAtlantic Bancorp - have been the most active in buying tax-lien certificates in Pima County since the bailouts. Together they bought nearly $11 million of tax-lien certificates in the three years since the bailout.



• In addition, Wells Fargo and US Bank set up private trusts for clients - likely institutional clients such as hedge funds - to buy another $5 million in tax liens here since 2009.



• BankAtlantic, Bank of America and JPMorgan Chase would not comment for this story. Wells Fargo and US Bank said they bought the liens through a trust set up with money from a third party - so they didn't actually buy the liens, don't own them, didn't make the investment decisions to purchase them and don't profit from them.



• They do, however, get a fee for managing the trust, which allows their clients to securitize and sell the tax liens to other investors, similar to how banks securitized and sold mortgages during the housing boom.

***

• Bank purchases of tax liens have ramped up quietly. Other bidders know banks are involved but don't know exactly who they all are, said Bill Schumacher, who has bought nearly $1 million in tax liens in Pima County since 2009.



• Most of the liens are purchased through trusts or LLCs that have to be traced through paperwork to banks. Bidders at the auction don't identify who they represent. Schumacher suspects banks really don't want people to know they are buying tax liens. If customer knew they were buying up tax liens after they took bailout money, banks could suffer a public relations hit, he said.

***

• Because of the secrecy surrounding bank purchases, bank liens may exceed the nearly $16 million the Star has verified as coming from banks - either from direct purchases or trusts set up for clients.

For more, see Bailed-out banks snap up tax liens (Banks were bailed out by taxpayers, but instead of helping homeowners avoid foreclosure, banks have instead bought up tax liens, sometimes on the same street where they foreclosed on homes).

National Real Estate Investor That Uses Predatory 'Contract For Deed' Business Model To Flip Dilapidated, Formerly Foreclosed 'Money Pits' Onto Unwitting Homebuyers Now Faces Add'l Scrutiny By Peddling Its Crappy Contracts To Receive Installment Payments Onto Unsuspecting Investors

From a recent story in The New York Times:

• [L]ed by Charles A. Vose III, Harbour [Portfolio Advisors] once owned more than 7,000 homes in over a dozen states, but more recently it has been selling off the contracts for deeds it signed with borrowers over the last six years.
  
  Harbour’s business practices were featured prominently in a front-page article in The New York Times last year. Subsequently, the federal Consumer Financial Protection Bureau began an investigation into the firm’s use of contracts for deeds to sell formerly foreclosed homes “as is.”
  
  ***
  Those familiar with Harbour’s activities say it now owns fewer than 1,000 homes, having sold most of its homes and contracts to a wide array of investors, including hedge funds, small investment firms, mom-and-pop investors and even one Bitcoin entrepreneur from Canada, Haseeb Awan, who referred to his small investment in contracts for deeds as “gambling money.”
  
  Harbour has used Incenter, a service provider to mortgage lenders and an affiliate of the Blackstone Group, to assist with the sales.
  
  Cincinnati is not the only city struggling to follow the daisy chain of property title ownership. The firm bought homes from the government mortgage finance firm Fannie Mae in other cities, too.
  
  Robert A. Cutler, who runs Hamilton Green Crest, a small investment fund in Westport, Conn., says he now regrets buying a contract for deed from Harbour.
  
  In May 2016, Mr. Cutler bought a contract in Atlanta for a home Harbour sold on an installment plan for $41,000. Mr. Cutler and his firm are included in a lawsuit filed earlier this year by the Atlanta Legal Aid Society, contending that Harbour had targeted African-American communities to sell contracts for deeds on homes at inflated prices. (Ms. Hletko said there was “no basis for that deplorable allegation” in the lawsuit.)
  
  “We thought we had done enough due diligence on this, but obviously we were wrong,” said Mr. Cutler, a corporate lawyer who added he had little prior experience with contracts for deeds. “We had no idea they were pushing properties on people with oppressive terms.”
  
  Legal Aid lawyers say that the woman living in the home, Anita Jordan, 39, was confused as to whom to make payments to when she received a letter last September from Mr. Cutler’s firm saying it had officially acquired the contract she signed with Harbour in August 2012. Mr. Cutler, who paid Harbour $16,000 for the contract, said he now believed he was misled by Harbour and an independent broker peddling the contract.
  
  [A Harbour attorney] said that buyers of Harbour contracts were “sophisticated real estate investors who are fully informed about the properties and transactions.”
  
  A representative for Incenter declined to comment.
  
  Nicholas Press of Clark Partners in San Diego, a small residential investment firm that is the current owner of [another] contract in Cincinnati, said he was looking to reverse the deal.
  
  Mr. Press, who bought a half-dozen contracts in March, said he faulted Park Street Group, a firm in Michigan, which sold him the contracts, for not being upfront with the looming problems facing Harbour in Cincinnati and elsewhere.
  
  “I want my money back,” Mr. Press said. “I think Harbour is doing damage to low-income borrowers.”
  
  Mr. Press said he made numerous requests to Park Street to complete the necessary paperwork to record the deed of sale and transfer of the contract.
  
  David Prentice, who co-founded Park Street and also operates under the name DMP Holdings, said he was merely serving as middleman between Harbour and buyers — taking temporary title to contracts and homes before reselling them. He said he was no longer selling Harbour contracts or homes.

For more, see How a Home Bargain Became a ‘Pain in the Butt,’ and Worse. land contract for deed rent-to-own

HUD To Begin Unloading Delinquent Mortgages In Smaller Bundles To Make It Easier For Cities, Non-Profit Groups To Help Homeowners Stay In Their Homes?

In New York City, The Associated Press reports:

• New York City is taking a novel approach to addressing enduring pockets of the home-foreclosure crisis by buying long-unpaid mortgages, with plans to help owners stay in their homes if possible or use the properties as affordable housing if not, officials say.
  
  It’s among the first cities to pursue buying such loans directly from the federal Department of Housing and Urban Development, officials say. Housing advocates and some lawmakers have pressed HUD to make it easier for cities and nonprofit groups, as opposed to investors, to buy troubled mortgages.
  
  New York announced the $13 million program []. So far, the program involves just 24 properties, containing a total of 41 homes and apartments. Officials say the cost includes millions in reserve for repairs that may not be required, and they cast the program as an experiment they hope to expand.
  
  ***
  The money is coming from the City Council, a loan from investment bank Goldman Sachs, and settlements various banks have made with state Attorney General Eric Schneiderman over lending practices. Schneiderman, a Democrat, said the program is keeping delinquent mortgages from being auctioned to entities “whose goal is to profit off other people’s losses.”
  
  Nationwide, HUD has sold about 100,000 soured mortgages at discounts in the last several years, often to private equity firms and hedge funds.
  
  Housing advocates complain the firms have been too eager to foreclose on borrowers; the firms counter that many of the homes are abandoned. HUD has said the sales can give borrowers a last chance to save their homes, but the agency also has made some changes. Among them: extending a foreclosure moratorium from six months to a year after a sale, and offering some mortgages in smaller batches, since nonprofits often can’t afford bigger chunks.

For more, see To fight foreclosure, NYC buying mortgages.

Loan Servicers' Contractual Obligations Create Opportunity For Buyers Of Mortgage-Backed Junk Paper

Barron's reports:

• YOU KNOW THOSE TOXIC SUBPRIME-MORTGAGE-BACKED securities that priced at par just a year ago, but now are quoted at pennies on the dollar? Well, a few hedge funds are buying them, in anticipation of a sweet payoff. Seriously.

• "Mention subprime mortgages, and the connotation is so negative that just the sound of them makes people cringe," says Steve Persky, chief executive officer at investment-advisory firm Dalton Investments. "That's the hallmark of a great distressed opportunity."

• OK. Getting real, Persky doesn't expect to see much principal, if any. But subprime and Alt-A asset-backed securities, or ABS, do pay interest. And even when a homeowner stops paying, the mortgage-servicer has to step in and pay interest and principal to a trust until the home is sold in foreclosure. The trust pays the bondholders.

• The timeline is the key. Persky's strategy is to buy the ABS at 4 to 4½ cents on the dollar and break even in about a year. A typical foreclosure takes as long as 18 months. "It will pay interest significantly longer than the price [of the distressed debt] indicates," he says.

For more, see Junk Mortgages for Just Cents -- and Just a Year (Opportunities in subprime-mortgage-backed securities). (Might require subscription; if no subscription, try here - then click link for story, then "Refresh" web page if necessary). MortgageServicingIssuesAlpha

Predatory Land Contract/Contract For Deed Rackets Used By Private Equity Outfits To Peddle Dilapidated Foreclosed Money Pits To Unsophisticated Low-Income Homebuyers w/ Crappy Credit Now On Consumer Feds' Radar

The New York Times reports:

• A revival in seller-financed home sales aimed at people who cannot qualify for a mortgage has started to attract scrutiny from the nation’s top consumer watchdog.
  
  The Consumer Financial Protection Bureau recently assigned two enforcement lawyers to investigate the prevalence of seller-financed home transactions and determine whether the terms of some deals may violate federal truth in lending laws, said two people with direct knowledge of the matter but who were not authorized to speak publicly at the request of federal officials.
  
  The regulator’s interest in seller financing was prompted by discussions between members of the commission staff and one of its advisory boards, the people said. The advisory board began raising questions about seller-financed home transactions in the wake of reports on the subject, including a front-page article in The New York Times on abuses in a marketplace that targets lower-income buyers.
  
  Such contracts proliferated in recent years as banks retrenched from lending to low-income families and private investment firms like hedge funds stepped in to fill the void.
  
  Sam Gilford, a consumer bureau spokesman, confirmed that staff members had conversations with members of the consumer advisory board about seller financing, specifically a type of arrangement called a contract for deed or a land contract.
  
  “We want all consumers to be treated fairly, and we monitor the marketplace to stay apprised of emerging developments in consumer finance,” Mr. Gilford said in an emailed statement. “As part of that work, staff from our research, markets and regulations division have had conversations with members of our consumer advisory board about land contracts.” He declined to comment on whether the agency had assigned two enforcement lawyers.
  
  A contract for deed is a long-term, high-interest installment financing deal.
  
  Actual ownership, or title to a home, passes to the buyer from the seller only after the last payment is made. The contracts, which can run for as long as 40 years, have become widespread in the Midwest and the South, where there are a large number of homes that sell for less than $100,000.
  
  In the wake of the financial crisis, contracts for deed and other seller-financing arrangements have had a resurgence. The foreclosure crisis created a bountiful supply of cheap, often dilapidated, homes for investors to buy and left millions of people with damaged credit histories. Thousands of the homes that are now being sold to borrowers under contracts for deeds were ones that had been foreclosed on by Fannie Mae, one of two mortgage finance firms bailed out by the federal government.
  
  The Consumer Financial Protection Bureau may or may not look to bring any enforcement actions over contracts for deeds and it is only in the early stages of researching the financing model.
  
  The regulator, now nearly five years old, has been seeking to flex its muscles of late. Last week, the Consumer Financial Protection Bureau announced a new rule that would prohibit many financial companies from requiring customers to resolve disputes through mandatory arbitration. The agency is also said to be preparing a new set of regulations for payday loans — high-interest, short-term loans aimed at the same people as those who often enter contracts for deeds.
  
  Contracts for deeds and other seller financing transactions have been around for decades, often used by family members or friends to sell properties to one another. But the arrangements have had a history of being predatory and the terms have often benefited the seller at the expense of the buyer.
  
  Legal aid lawyers in 13 states say that the contracts are being aimed at black and Hispanic homebuyers, according to a national survey undertaken by the National Consumer Law Center. The center has begun to survey housing lawyers in states where these contracts are most commonly used, in part to help determine the effect of new institutional players in the market.
  
  Statistics on the number of homes sold through contracts for deeds are hard to come by because not every state requires contracts to be recorded with the county. It is also not uncommon for borrowers to walk away from homes without contesting a seller’s eviction proceeding in court.
  
  Often issues with homes that are sold through contracts for deeds emerge only once local municipalities bring cases against the sellers. Even then, the sellers sometimes do not show up to court and the code violations on their homes pile up.
  
  Heather K. Way, a professor of law at the University of Texas, said: “This segment of the homeownership market cries out for greater federal oversight. It’s a toxic mix out there of sellers looking to make a quick and easy buck on the shoulders of vulnerable, unsophisticated buyers.” She added, “Unlike bank-financed sales, with seller financing there is typically no outside third party involved in the sale.”
  
  Homes sold through a contract for deed often are put on the market “as is,” meaning buyers must spend a significant portion of their disposable incomes on repairs and renovations. When they do not — or cannot — problems result.
  
  Municipal officials across the United States have complained that out-of-state investors selling properties with a contract for deed often tend to do little maintenance on properties and fall behind on paying property taxes or water bills.
  
  “They do not take care of the code violations with these properties, which is why they are trying to pass them off to other people,” said Jill Steele, city attorney for Battle Creek, Mich.
  
  Ms. Steele said Battle Creek has had a number of code violation issues with Harbour Portfolio Advisors, a firm out of Dallas that is one of the larger national players in the contract for deed business.
  
  Harbour Portfolio bought more than 6,700 single-family homes following the financial crisis of 2008, most of them from Fannie Mae through bulk sales. In recent months, Harbour has sold more than 600 homes with existing contracts for deeds in place to other investment firms and individual investors.
  
  The Consumer Financial Protection Bureau is trying to determine how many other firms are selling homes nationally with a contract for deed already in place or are renting out homes with an option to buy, said the people with direct knowledge of the matter.
  
  Still, there are some in the housing market who think that contracts for deeds and seller-financing plans can help people with no credit get back on the housing ladder.
  
  Odell Barnes, a longtime buyer and seller of foreclosed homes who operates out of Gilbert, S.C., chafed at the idea of government regulation in the industry and emphasized that seller financing contracts were a way to make homeownership accessible to anyone.
  
  “Our government thinks all poor people are stupid,” Mr. Barnes said.

Source: ‘Contract for Deed’ Lending Gets Federal Scrutiny.

NBC Today Show On Miami's Foreclosure District

NBC's Today Show ran a piece last Friday featuring a section of Miami, Florida that, with reportedly 23,000 condos currently on the market and another 25,000 new units slated to come on the market in the short term, is referred to by area real estate agents as Miami's "foreclosure district." From condo owners desperate to unload their units, to others going into foreclosure, to developers demanding refunds of prepaid commissions from real estate agents on deals where the condo buyer has backed out of his/her purchase contract, this niche of the market sounds like a horror show with the worst yet to come. The one positive point in the story was that, with units selling at steep discounts coupled with the highly inflated value of the euro, some European investors are coming over and making buys at prices that reportedly amount to buying at 50 cents on the dollar. To watch the piece, see Miami Monopoly (regrettably preceded by a 15-30 second TV commercial).

For related stories, see Reuters News service:

• Banks taking back Miami homes at high rate: broker ("Private equity and hedge funds from Canada, Europe, the Middle East and Asia -- buoyed by their own strong currencies in relation to the U.S. dollar -- are showing interest in bulk purchases of south Florida apartments"),
• Miami condos are "for sale" for foreign buyers ("Realtors, analysts and buyers say the strength of the Canadian dollar, the euro and other foreign currencies, on top of a falling real estate market, is making the United States an enticing place for foreigners looking to buy property").

For an earlier post on the trouble facing Miami's real estate market, see 191 Condo Projects Make Miami-Based Bank's "No Mortgage" Blacklist.

Go here for other posts related to the Miami condo market problem.