Sep042013

Richmond, CA, bailing out HELOC abusers for profit

I recently wrote about Richmond, CA, moving to seize mortgages through eminent domain. If this plan were to succeed, it would break the banks. Other municipalities would almost certainly follow suit, and the losses would devastate the banking system, probably requiring the nationalization of our major banks (something we should have done in 2008). In military terms, this puts the banks on death ground. They must fight this battle and win, or they will die. Since this is so important to the banks, expect to see every manner of attack and defense brought to bear.

In response to the recent request of Richmond, CA, to sell a large number of mortgages at prices significantly below book value on the loans, the banks are firing back. They employed a consultant to look up the details on each individual loan they’ve requested to buy.

Richmond is offering to buy both current and delinquent loans. To defend against the charge that irresponsible homeowners who used their homes as A.T.M.’s are being helped at the expense of investors, the first pool of 626 loans does not include any homes with large second mortgages, said Steven M. Gluckstern, the chairman of Mortgage Resolution Partners.

The consultant for the bank is alleging these loans aren’t what’s been stated by City of Richmond or the company behind the city, Mortgage Resolution Partners. It’s wise to consider the veracity of these allegations, particularly given the urgency the banks have to win this dispute.

Richmond’s eminent domain plan is a ploy for profit, critics say

The majority of the loans in question are either not underwater or not delinquent, opponents contend. A supporter of the Richmond plan denies that assertion.

By E. Scott Reckard — August 30, 2013, 6:09 p.m.

In a new legal challenge, financial industry opponents of the city of Richmond’s plan to seize underwater home loans call the gambit a disguised attempt to profit at the expense of everyday investors.

I don’t think it’s even disguised. It’s clearly an attempt to profit by forcing the write down of underwater loans. In any write-down, some party loses while another benefits. In this case, investors in the mortgage bonds lose, and the loanowners and the people putting together the deal win.

Richmond is threatening to use eminent domain to remove troubled loans from mortgage bonds in order to write down the principal for homeowners. The novel plan, promoted by San Francisco investment firm Mortgage Resolution Partners, seeks to stop another wave of foreclosures in the working-class Northern California city.

There will be no wave of foreclosures. The banks will can-kick and allow squatting until prices reach the outstanding balances of these loans. Even then, the foreclosures will be metered out to prevent a crash.

The plan has drawn fierce opposition from the financial industry, which has banded together in a lawsuit challenging the city’s authority. In a new filing late Thursday, the plaintiffs accused the city and Mortgage Resolution Partners of cherry-picking the most valuable loans and forcing their sale at less than market value — so the firm can make a profit.

Of course that’s what their doing. They may justify it by helping a few loanowners, but this has always been about profit.

The effect will be to rob owners of mortgage securities across the country, the opponents contend, including everyday investors whose retirement savings are managed by some of the biggest bond funds in the nation.

MRP is renting local government power to take money out of the pockets of savers and retirees across the U.S. and line their own pockets,” said a statement from attorney John Ertman of Ropes & Gray, the lead counsel for the banks and bond house seeking to shut down the program before it takes hold and spreads to other cities.

As I stated before, there are winners and losers in this battle. The big winners are Mortgage Resolution Partners and the loanowners who obtain direct financing benefit, and the politicians who are buying a few votes. The big losers are investors in mortgage backed-securities.

An MRP official sharply disputed the assertions, and said the mortgage-bond investors could themselves step in and help finance the program — and share in the profits at the end, if any.

LOL! Or these bond investors could wait for house prices to rebound and keep all the profits for themselves per their original investment terms.

“Why don’t they sit down and negotiate with the city and come to a deal that works for everybody?” said MRP Chief Strategy Officer John Vlahoplus. …

They don’t sit down and negotiate a deal because it’s not in their best interest to do so. They will recover more and make more if they can-kick and wait for prices to rebound before foreclosing.

Opponents of the eminent domain seizures contend that Richmond and its partner firm have mischaracterized the first 624 loans the city has targeted. The majority of the loans in question are either not underwater — meaning owners owe more than the homes are worth — or not delinquent.

About 31% of the targeted loans do not exceed the current value of the home, and so are not at elevated risk of default, according to the filing. About 10% of the borrowers have at least 20% equity in the homes, according to a loan-by-loan analysis performed by Phillip R. Burnaman II, an investment banker hired by the plaintiffs as an expert on mortgage securities.

Of the borrowers who are underwater, 43% are current on their loan payments, the plaintiffs argue. In all, 68% of the borrowers have not fallen behind, and an additional 5% are only one payment behind, according to the filing.

Why would they try to condemn a loan that isn’t underwater? There’s no benefit there.

Is it possible the city of Richmond selected these loans to favor friends and political supporters? If I were the mayor’s friend and they were handing out free money, I would certainly be calling her up and asking if she can get me loan relief. Wouldn’t you?

Further, more than half the borrowers ran up their loan balances during the housing boom by refinancing, allowing them to turn inflated home equities into cash. The loans total $53 million more than the original purchase prices of the homes, according to the filing.

Mortgage Resolution Partners stated they weren’t picking any loans backed by large seconds to avoid bailing out HELOC abusers, but apparently, they were not concerned if they refinanced their first mortgages to get their HELOC booty. If true, they are bailing out the worst offenders of the housing bubble.

Vlahoplus, of Mortgage Resolution Partners, disputed the analysis, saying he’s confident that all of the 624 borrowers are indeed underwater. The city’s appraisals of the properties, he said, were handled by a firm whose work has been highly rated by securities trade groups.

About two-thirds of the borrowers have indeed stayed current on their loans, he said. But helping them now — before they default — is the best way to make sure they stay current on the loans and thereby limit further damage to Richmond’s battered neighborhoods.

The intent here is to help the neighbors,” he said.

LOL! Their altruism is admirable, right? I think the intent here is to make a large amount of money on the backs of MBS investors. If they have to help a few loanowners to do it, I doubt they care one way or another.

The filings were made by attorneys for Wells Fargo Bank and Deutsche Bank, which act as trustees overseeing the pools of loans and provide customer service on them — collecting bills, paying investors in the mortgage pools and handling delinquencies and foreclosures.

These services should have the best data, but they may not be willing to tell the whole truth about it.

The banks say they were directed to file the suit by huge bond-investment firms that own the mortgage-backed securities.

These firms — Pacific Investment Management Co. in Newport Beach, BlackRock Inc. of New York and DoubleLine Capital of Los Angeles — say the money comes from pension funds and 401(k) accounts, meaning ordinary workers would be the losers if cities profit at their expense.

Making money at the expense of workers and retirees is the American Way, isn’t it?

I still believe the plan from the City of Richmond has no chance. The banks will spend unlimited amounts to prevent this from succeeding. It’s a bit like lawsuits against big tobacco. Their entire business depends on winning, so they will spend whatever they have to in order to win.

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360 RADCLIFFE Ct Laguna Beach, CA 92651

$650,000 …….. Asking Price
$742,000 ………. Purchase Price
11/24/2009 ………. Purchase Date

($92,000) ………. Gross Gain (Loss)
($52,000) ………… Commissions and Costs at 8%
============================================
($144,000) ………. Net Gain (Loss)
============================================
-12.4% ………. Gross Percent Change
-19.4% ………. Net Percent Change
-3.4% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$650,000 …….. Asking Price
$130,000 ………… 20% Down Conventional
4.47% …………. Mortgage Interest Rate
30 ……………… Number of Years
$520,000 …….. Mortgage
$128,681 ………. Income Requirement

$2,626 ………… Monthly Mortgage Payment
$563 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$135 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$3,324 ………. Monthly Cash Outlays

($544) ………. Tax Savings
($689) ………. Principal Amortization
$215 ………….. Opportunity Cost of Down Payment
$183 ………….. Maintenance and Replacement Reserves
============================================
$2,489 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$8,000 ………… Furnishing and Move-In Costs at 1% + $1,500
$8,000 ………… Closing Costs at 1% + $1,500
$5,200 ………… Interest Points at 1%
$130,000 ………… Down Payment
============================================
$151,200 ………. Total Cash Costs
$38,100 ………. Emergency Cash Reserves
============================================
$189,300 ………. Total Savings Needed
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