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Real Estate Market Commentary - March 2011
by Peter L. Zachary, MAI, MRICS

On March 12, 2011, there was a front page article in the Business Day section of the New York Times entitled "U.S. Inquiry on Military Family Foreclosures." The article stated:

"The Justice Department is investigating allegations that a mortgage subsidiary of Morgan Stanley foreclosed on almost two dozen military families from 2006 to 2008 in violation of a longstanding law aimed at preventing such action. A department spokeswoman confirmed on Friday that the Morgan Stanley unit, Saxon Mortgage Services is one of several mortgage and lending companies being investigated by its civil rights division. The inquiry is focused on possible violations of a federal law that bars lenders from foreclosing on active duty service members without a court hearing. The investigation came to light in a document that Saxon's lawyers filed on Tuesday in federal court in Grand Rapids, Mich., during a trial to assess damages against Saxon and two co-defendants after a federal judge ruled late last year that they had illegally seized and sold the home of Sgt. James B. Hurley, a Michigan National Guard member who lost his home while he was serving in Iraq in 2005. That case was ultimately settled on Thursday."

"According to people present in the courtroom, the discussions of Saxon filing indicated that as many as 23 military foreclosures were under scrutiny in the Justice Department investigation. Under the civil relief act, a judge must hold a hearing at which the service member is represented before granting a lender the right to foreclose on the service member's home, even in the states where a court order is not required for civilian foreclosures. As early as 2005, advocates for military families were complaining that banks and other lenders were frequently violating the law. Mr. Lake of Morgan Stanley said: "We are very pleased to have settled this matter with Sergeant Hurley. As we have said previously, Saxon is always willing to make reasonable accommodations to amicably resolve a matter, especially for our service men and women." On March 8, 2011, there was a front page article in the Business Day section of the New York Times entitled "Foreclosure Deal Near, State Officials Say". It stated:

"A broad agreement could be struck within two months to overhaul how millions of foreclosures are handled by the nation's biggest banks and to expand the use of home loan modifications, according to Tom Miller, the attorney general of Iowa. All 50 state attorneys general's along with federal regulators, have been stepping up pressure on the mortgage servicers over their foreclosure lapses in recent days and presented them with an outline of a settlement late last week. But when Mr. Miller made his comments at a press conference here on Monday, it was the first time officials have said when an agreement might come. "I'm hoping we can wrap it up in a couple of months," he said. "That's a hope, but we're going to move as fast as we can." There have been reports on a broad settlement with the banks was imminent, but Mr. Miller played down that prospect, citing thorny issues like the question of just which homeowners should benefit from the proceeds of any settlement. The attorneys general and federal government agencies are pressing for a financial settlement that could total of $20 billion. When asked about these estimates, Mr. Miller and three other attorneys general declined to comment on Monday."

"While the attorneys general and the newly created Consumer Financial Protection Bureau support such a fund for homeowner relief, there has been growing criticism of the government's existing program to modify mortgages, known as the Home Affordable Modification Program. Last week, Republicans in the House pushed to kill the program, which has helped far fewer homeowners than promised. A fund with at least $20 billion would represent a sharp expansion of modification efforts for the more than four million Americans facing the loss of their homes. Many more Americans have mortgage loans that exceed the value of their homes because of falling house prices, and critics warn that if an aid program is too generous, it could encourage borrowers to walk away from their homes. Mr. Miller said the attorneys general were "very concerned of people taking advantage" of any program intended to help people facing the loss of their homes. What is more, determining exactly who to help will be a "hot point" as various government regulators and the attorneys general try to reach a settlement with the banks, according to Roy Cooper, the attorney general for North Carolina. "We don't want to stop foreclosures on homes that should be foreclosed," Mr. Cooper added, a tacit acknowledgement that too broad a modification effort could cause the housing market to grind to a halt, and delay any broad recovery in home prices for several years."

"As expensive as a settlement could be for the big banks, industry lobbyists in Washington privately say that they are eager to put the issue behind them, especially given the public relations fallout from a protracted fight with the government. And though the banks have said that the number of actual victims of foreclosure abuses is small, it is likely that any settlement will force them to acknowledge broader problems with their procedures. Under the blueprint presented last week, banks would be prohibited from starting foreclosure proceedings while a borrower was actively trying to lower the interest rate or ease other terms of the home loan. Any borrower who successfully made three payments in a trial loan modification would be given a permanent modification. Where a modification was denied, it would be automatically reviewed by an ombudsman or independent review panel. In addition, banks would have to reward their employees for pursuing modifications over foreclosures, while late fees would be curtailed."

On the next day, March 9, 2011, the Business Day section of the New York Times had an article entitled "Bank Chief Rejects Idea of Reducing Home Loans". It stated: "Showing resistance for the first time against government pressure to write off tens of billions worth of mortgage debt, Bank of America executives said on Tuesday that the idea was unworkable and warned that it would be unfair to borrowers who had managed to stay current on their loans. "There's a core problem that if you start to help certain people and don't help the other people, it's going to be very hard to explain the difference," said Brian T. Moynihan, the chief executive of Bank of America. "Our duty is to have a fair modification process." All 50 state attorneys general , as well as a host of federal agencies, are pushing for a settlement over investigations into foreclosure abuses by major mortgage servicers that could cost the industry $20 billion or more. Much of that money would be earmarked to reduce principal owed by homeowners facing foreclosure. But picking up just who to help is among the thorniest questions facing government regulators, as well as the banks themselves. Even the most outspoken, attorney general on the issue, Tom Miller of Iowa, acknowledged on Monday that too generous a program might encourage homeowners to walk away from properties where the value of the loan exceeded how much the underlying property was worth."

"Indeed, industry experts' estimate that nearly a trillion dollars worth of mortgage debt is "underwater," a result of house prices having fallen since the original loans were made. Federal officials hope a settlement with the services will help individual borrowers and provide a cushion for the weak housing market. Officials of Bank of America, the nation's biggest mortgage servicer, argue that any effort to help troubled borrowers should not penalize borrowers who are underwater but have managed to make their monthly payments. "There may be as much as $1 trillion worth of mortgages that are underwater," said Terry Laughlin, the Bank of America executive whose unit, Legacy Asset Servicing, handles mortgages that are delinquent or in default. "What do you do for those borrowers that have a job but have negative equity and have paid on time and honored their obligations?" "This is an unsolvable question," he said. "It's a very slippery slope." Writing down billions of principal now could actually retard the recovery by encouraging borrowers to default, they argue. "It's not that we don't want to help troubled borrowers," Mr. Laughlin said. "It's a moral hazard issue.""

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