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NeighborWorks reports: Homeowners seeking counseling are 60 percent more likely to avoid foreclosure

Fraud and the Secondary Markets Today’s issue is fraud. Fraud affects the secondary markets in two very important ways: O The existence of fraud is a valid reason to require a seller to repurchase a mortgage. This is commonly known as a “buyback.” O The higher the prevalence of fraud within mortgages originated, the higher the risk of default of these mortgages, and thus, the lower the value of the commodities created and sold in the secondary markets. In other words, the more fraud in our industry, the higher rates will go.

JANUARY 2010 O

MISSOURI MORTGAGE PROFESSIONAL MAGAZINE

O www.NationalMortgageProfessional.com

“Here is the problem, if we don’t all band together to fight this fraud, we will be paying a long term price in terms of tighter guidelines and higher rates in the secondary markets.”

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The decline of the housing market was precipitated by many factors. Certainly one was the tightening of loose underwriting guidelines, which shut out many who wanted to qualify for loans. This continues today with Fannie Mae the latest to raise minimum scores and lower maximum debt-to-income (DTI) ratios. High default rates, due to declining property values and poor credit quality of borrowers, also contributed to wider

spreads between Treasury rates and mortgage rates. The “spread” is the difference between the rate on the 10-year Treasury and a par mortgage rate. This wider spread was entirely due to the increased risk of default for mortgages as opposed to Treasuries. As I mentioned in a previous article, the government has combated this increase by purchasing mortgages, which has created artificial demand. But the government purchase program must end sometime—most likely in the first quarter of next year. If default rates have not improved by the time the Fed exits the market, the spreads will return in the form of higher rates. I, for one, expected fraud levels to decline as underwriting standards tightened. During the real estate boom, the most prevalent forms of fraud included falsifying 1003s with regard to the income on stated loans (we even called them “liar loans”) and claiming that investment properties were going to be occupied by the purchasers. But with tighter standards and with stated loans going away, shouldn’t the incidence of fraud decline greatly? That is logical. But there are several factors working against this logic right now: O Increased enforcement efforts by the government is causing more fraud to be uncovered than ever. This does not mean that fraud is increasing, but our continued on page 19

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NeighborWorks America, the administrator of the National Foreclosure Mitigation Counseling (NFMC) Program, has announced that NFMC clients who receive foreclosure counseling are 1.6 times more likely to avoid losing their homes to foreclosure than homeowners who do not receive foreclosure counseling, according to recent findings. As a result of NFMC Program funding, families who sought and received foreclosure counseling were provided much needed information, assistance and guidance to address their risk of foreclosure, which helped them find a solution to foreclosure. The report, which analyzed NFMC Program activity during the first year of the program (Jan. 1-Dec. 31, 2008), also found that NFMC Program clients were more likely to receive a loan modification than homeowners who did not receive counseling, and NFMC Program clients who received loan modifications lowered their mortgage payments significantly more than homeowners who received loan modifications without NFMC Program counseling. NFMC Program clients, with the help of their counselors, secured loan mods that lowered their monthly mortgage payments $454 more than the clients who received modifications without foreclosure counseling, which results in an average annual savings of $5,448. “The findings announced today demonstrate the real impact foreclosure counseling can have for families facing foreclosure,” said Ken Wade, chief executive officer of NeighborWorks America. “Thanks to the hard work of non-profit, HUD-approved housing counseling agencies around the country, and the expertise of their certified counselors, families are less likely to lose their homes to foreclosure and receive substantially better mortgage modifications, significantly reducing the likelihood of falling behind again on their mortgage.” While the report analyzes the program data through Dec. 31, 2008, to date, more than 750,000 families have received foreclosure counseling as a result of NFMC Program funding. The NFMC Program was created by Congress to address the nationwide foreclosure crisis by dramatically increasing the availability of housing counseling for families at risk of foreclosure. The $180 million program was authorized through the FY 2008 Consolidated Appropriations Bill, which named NeighborWorks as its administrator. An additional $180 million was appropriated to this effort on

July 30, 2008 through the Housing and Economic Recovery Act of 2008, and the Omnibus Appropriations Act of 2009 appropriated another $50 million to the program on March 11, 2009. For more information, visit www.nw.org.

Obama Administration kicks off modification conversion drive The U.S. Department of the Treasury and the U.S. Department of Housing and Urban Development (HUD) have launched a nationwide campaign to help borrowers who are currently in the trial phase of their modified mortgages under the Obama Administration’s Home Affordable Modification Program (HAMP) convert to permanent modifications. More than 650,000 borrowers have been helped thus far. The modification program is part of the Administration’s broader commitment to stabilize housing markets and to provide relief to struggling homeowners, and is a primary focus of financial stability efforts moving forward. Roughly 375,000 of the borrowers who have begun trial modifications since the start of the program are scheduled to convert to permanent modifications by the end of the year. Through the efforts of the campaign, the Treasury and HUD will implement new outreach tools and borrower resources to help convert as many trial modifications as possible to permanent ones. “We are encouraged by the pace at which trial modifications are now being made to provide immediate savings to struggling homeowners,” said the Chief of Treasury’s Homeownership Preservation Office (HPO) Phyllis Caldwell. “We now must refocus our efforts on the conversion phase to ensure that borrowers and servicers know what their responsibilities are in converting trial modifications to permanent ones.” “Encouraging borrowers to move through the process of converting trial modifications to permanent modifications remains a top priority for HUD,” said HUD Assistant Secretary for Housing and Federal Housing Administration (FHA) Commissioner David Stevens. “As a part of our continuing efforts to improve the execution of the HAMP program, HUD is committed to working with servicers, borrowers, housing counselors and others dedicated to homeownership preservation to improve the transition of distressed homeowners into affordable and sustainable mortgages.” The Obama Administration is now working to ensure that eligible borrowers have the information and the assiscontinued on page 23

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