Times are tough in the US. As the economy spins out of control, people are losing jobs. As unemployment peaks, people are faltering on mortgage payments. Hence, foreclosures have become common. As homeowners are set to lose properties there is a sense of desperation to cling on to homes – a tricky situation that has spawned fraud. These fraudsters are promising a life out of the misery. They are assuring people of mortgage modification, of course, in exchange for a fee.

Now a father-daughter duo has been sentenced to imprisonment in a fraud case. Forty eight year old Clifford McCall of Maryland and Chandra Jones have been sentenced to prison for a wire fraud. They had promised to help homeowners in modifying mortgage. They had also assured to repair damaged credit.

The IRS-Criminal Investigation has initiated a case against the offenders. In fact the agency has joined hands with the community to weed out corrupt practices from the economy.

The plea agreement of McCall specified that McCall was a senior official of Burroughs & Smythe Financial Services. He is also the director of Fordham & Fordham Investment Group, which is a consulting firm for foreclosures. These companies advised distressed homeowners about how to retain homes in times of trouble.

In 2004, however, McCall started duping the homeowners. They had sufficient equity in their homes but were finding it difficult to make mortgage payments because of job loss. Hence, foreclosure of their homes was imminent. Their credit was also damaged. McCall advised these homeowners to put the title of their homes in third party purchasers’ names. Metropolitan Money Store also assured that it would improve the credit ratings of the homeowners, and help them get more favorable mortgage. The title of homes would be eventually returned to them.

The homeowners got the assurance that the equity drawn out from their homes would go towards paying the mortgage. Money would also be spent on homes and the credit would be repaired. It may be noted that the third party purchasers were paid.

Now the fraudsters prepared loan applications and gave them to the lenders. The fraudsters in this way obtained hugely inflated loans on the properties. The conspirators, therefore, duped people by promising loans to the home owners which they never received. Money was ploughed into escrow accounts. In this way McCall obtained at least $2,462,107.85 for personal use. The fraudsters continued the practice till 2007.

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There is the possibility that a controversial practice of Fannie Mae and Freddie Mac could nip loan applications in the bud. Very few know about it.
Suppose one has a credit score of 800 and good equity on the property that he or she wants to refinance taking advantage of the prevailing low interest rates. Apparently it seems that it should be smooth sailing all the way. But the bank apologizes as the automated underwriting system of Fannie Mae will not accept because there is a disputed account otherwise known as ‘tradeline.’

The applicant then goes on to explain that the dispute related to say a medical bill or charge of credit card was valid and that subsequently the account was closed. At that time the creditor had given the assurance that the dispute mark would be removed but in reality did not do so. But such explanations will not melt the loan officer and the application becomes invalid.
The crux of the issue is that unless loans start flowing foreclosures will not stop.

The consumers are guaranteed under the Fair Credit Reporting Act the right to dispute wrong information on any of their accounts in the credit files. When a consumer challenges the information a note has to be made on this file. So long as this note remains most credit scoring methods will not be affected by this dispute. But by raising an objection Fannie Mae, functioning under the observation of the federal government, denies granting loans only because the consumers had enforced legal rights.

Amy Bonitatibus of Fannie Mae agreed that the computerized underwriting system was being used by nearly all the lenders who are having business dealings with Fannie Mae. Consequently those applications with disputed marking were turned back. She reiterated that her firm does “not prohibit delivery of a loan … where the borrower has disputed information” on the credit report. By manual underwriting she explained, “Our policy requires the lender to determine and document whether or not the disputed information is accurate and underwrite the borrower’s credit accordingly.”

According to some the banks refuse the loans and use a flimsy excuse to pass on the blame to Fannie Mae and Freddie Mac.

One individual brought to notice that applications for purchasing a condo was turned down by a national lender despite the bank acknowledging “all of the accounts have a zero balance, are in good standing, and show no other derogatory information.” But hours spent on the phone talking to creditors and credit agencies proved to be totally futile.

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Yomalis Hilario and Johnny Montero are two of the many borrowers at risk from foreclosure searching for mortgage relief. They bought a house in Paramus in 2006 for $468,000. But soon they found it difficult to continue paying $3,700 per month on two mortgages carrying heavy interest.

Hilario contacted the servicer asking for a more reasonable rate and they brought it down from 8.25% to 7.125% on one mortgage. The second mortgage was brought down from 12% to 7%. But since they lost their jobs the couple failed to manage even these reduced payments. Consequently the house was foreclosed and sold in an auction.

The incident shows that in the present scenario loan modification is not the answer to the current phase of the problem. The Obama government has been laying stress on loan modification but the critics contend that the method is too long drawn and complicated to be effective. In many cases the modification does not work because the borrowers are overburdened with debts and their incomes are disproportionately low.

It is now clear that more borrowers are failing to manage even modified loans. The figures of the second quarter this year are alarming according to Mortgage Bankers Association with one out of eight borrowers in some stage of foreclosure.

The rescue measures started by the Obama government focused mainly on those borrowers who had contracted wrong type of loans but today the problem is that of unemployment. During the boom period the owners borrowed being confident that the value of property could never fall. The money from these loans they used for other purposes. No down payments were made and when the rates began to set all hell broke loose. The borrowers could now not even manage to sell their homes and be free because the worth of the house became lower than the loan amount. The lenders are greatly to blame for this situation and the regulators for allowing it to happen.

Recently there is a growing group of failing borrowers who have lost their jobs – this being the prime reason for their failure. Pundits now opine that unemployment is the prime and bigger cause for triggering the second wave of foreclosures. Even with changes in the mortgage amount the borrowers are failing to keep current.

The legal representative of Hilario and Montero argues that that the homeowners should first check if the mortgages transgress the Truth in Lending Act. If so then the loans would become null and void.

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The staggering number of foreclosures has led to a virtual paralysis of the judicial system. Florida is one of the worst affected areas and the courts here are choked with foreclosure cases. This prompted Miami University’s Michael Froomkin to craft The Foreclosure Defense Program. It helps to engage young attorneys with the backlog of foreclosure cases. Over 50,000 filings have been posted only in Miami-Dade alone.

Many of the borrowers do not know where legal help is available. This assistance somewhat reduces the pain and lessens the expenses even if it cannot completely do away with foreclosure. Froomkin said, “Potentially, one of the most significant [defenses] is that the lender, because so many home loans were securitized during the housing boom, often doesn’t even know who owns the mortgage anymore.” One of the biggest tools being recently used is challenging the very right of the plaintiff to initiate the foreclosure process.

The senior lawyer of Legal Services of Greater Miami, Carolina Lombardi, is in charge of instructing some of the fledgling lawyers of Miami University. She said that the defendants in these foreclosure cases also should have attorneys to protect them from unjust escrow demands. He said, “Homeowners who have lawyers are usually prevailing in those cases.” But she observes that unless the borrowers are below the federally stipulated federal line of poverty ($22,000 for a family comprising of four members) they are not eligible for free legal assistance that her agency and others like her provide. This is a big hurdle for many of the foreclosure defendants who are not technically impoverished but due to unemployment and other related matters are at risk of losing their homes and cannot afford to hire a lawyer.

Another big hurdle is the foreclosure law. One young lawyer who has jumped into the fray to help indigent litigants, Yolanda Paschal, said, “It’s a labor-intensive area of practice. It involves a ton of paperwork.”

The pay offered to attorneys taking up foreclosure cases is relatively low said Melanca Clark of Brennan Center. She suggests that Congress and the legislators of the state should offer incentives to those defending the defendants. It should be at par with what the plaintiffs offer their representatives. Only then will the playing field be level. For instance there is the unfair practice of not allowing winning defendants in foreclosure cases to collect attorney fees. The restrictions on federal funding for legal services should be immediately removed. Structural reforms are badly needed.

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Florida courts are drowning in foreclosure cases causing a massive backlog. A task force was set up to recommend suggestions for improving the system and adding more speed to it.

The most attention is likely to be given to compulsory mediation for residential foreclosures. It is being implemented in three judicial courts in Florida. By mandatory mediation conditions the lenders have to meet the borrowers to try and thrash out matters before the judge will entertain the case. In the three circuits where mediation is compulsory the plan has met with 76% success. It has a led to a good number of settlements. Till 12th October out of 1,401 cases, settlements have been reached in 1.072 instances. Ned Pope the director of the programme named CHAMP said “It’s been one of the most successful models.”

According to the mediation programme the borrowers are expected to disclose details of their finances before sitting down to meet the authorized representative of the lender and also another neutral person involved in this mediation. The fee of $750 for this mediation has to be paid by the lender.

Pope said each month the number of foreclosure cases has been growing. It spiked from 261 in May to 1,300 last June. It was over 2,200 in August. The mediators at the centre are responsible for contacting the borrower. But if the underwater borrowers walk away from the property this becomes difficult.

Many of the banks are not happy with this compulsory mediation said Barb Godin of Regions Bank. She said, “It’s rather sad that someone thinks we need this in the industry.” In Florida Regions Bank has on its portfolio $5.5 billion tied up in mortgages. It initiated a programme to assist defaulting borrowers in 2007 October. The plan was operated by 10 persons aiming to help clients in the 16 States where the bank functions. Today it has a staff of 60 running the programme. Godin said that they have assisted 5,356 borrowers in Florida.

Region Bank in Florida is facing defaults on 3.3% of its mortgages in this region. It is 17% across the states. The mortgages it has modified have a default rate of 12%.

Most of the mortgages in Florida are not for primary houses but for secondary ones. As such these are not eligible for compulsory mediation.

Ed Wilburn of Great Florida Bank opined that many lenders have been shy to proceed with loan modification because “it’s a losing proposition.” But lately the lenders are waking up to the advantages of engaging staff and money to help prevent foreclosures and have the houses occupied.

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Appalling health care lapses have been one of the main causes behind increasing foreclosures. Without jobs and suffering from ill health the people hardly had funds in the pocket to be current with a defective health care system.

The health care debate goes on and one giving rise to the conviction that the system needs basic shakeup. It is necessary to shift from a fee-for-service infrastructure to one that is oriented towards better caring and not concerned merely with the hassles of procedures. Health care has to shift from being employer based that has been responsible for eroding its intrinsic value year after year. The new system has to be more transparent in which the ordinary American can see the result of choices made.

So far the approach taken by Sen. Ron Wyden (Democrat/Oregon) seems to be the best. This approach was first inserted in a bill together with Robert F. Bennett (Republican/Utah). It has been since then watered down to an amendment with the latest bills. It suggests combining a choice together with universal coverage.

By it people would be able to continue with their current plans. But if they did not find it satisfactory they could take from the employer the dollars that the latter spends for it, add extra if required and shop around for better options on an exchange under regulatory supervision. Those without insurance would be offered subsidies to shop at these exchanges.

All would benefit. The people would have alternatives and the thriving exchanges would give rewards to the providers and insurers who proved their efficiency, creativity and innovative skills.

But unless a legislative miracle takes place the Wyden linen of approach would not become a reality – it was to all effects killed by the Committee in the previous week. The business section together with the union groups lobbied frantically against it. They do not want to give up their control over the benefit packages of the employees and the members. In principle many politicians support the Wyden approach but in practice they do the opposite. Their fear is that if they initiate radical reforms to the system the voters would revolt.

Thus Americans should be prepared to get reform in the health insurance sector but not in health care. It means the current system would be adjusted and expanded but it would not be basically changed. The ordinary people would be left with a couple of bad choices.

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Today the FHA (Federal Housing Agency) has a pivotal role to play in pulling up the economy from foreclosure blues. Following the housing crash there were wide ranging views as to whether ownership should be made easy or more difficult. Worried lenders who had burnt their fingers now want 20% down payment before they will talk about mortgage loans. But considering the financial scenario very few buyers have that much ready cash to spare. The net outcome has been drying up of private lending.

Into this gap the government has stepped in arranging for loans with down payments of only 3.5%. Other incentives are also being offered by the government as its main target is to bring stability to the market. Realtors in many foreclosure ridden areas are saying that each of their clients is taking the help of FHA in trying to buy a house.

Bonnie Malone of Prudential American of Las Vegas said, “They’re counting their pennies, scraping up that 3.5 percent. Mostly they’re buying foreclosed homes from banks, although I had one client who bought from a guy that was dying. It’s turning around the market.”

Undoubtedly the efforts of the government have succeeded in avoiding a full blown economic crisis but today there is a growing worry that favours might have been doled out too generously. Many of these loans that had been insured 2007 and 2008 are now becoming delinquent. The loans are doing very badly. There are 410,916 defaulting among the FHA mortgage holders – a spike of 76% from what it was one year ago when the numbers of defaults were 232,864.

The agency has been over reaching its capacity to accommodate too many. At the moment the rate calculates to billion dollars per day. 7.77% of the lot is in default – an increase from 5.6% from one year ago.

Barney Frank (Democrat/Massachusetts) the chairperson of House Financial Services Committee speaking at an interview said, “I don’t think it’s a bad thing that the bad loans occurred. It was an effort to keep prices from falling too fast. That’s a policy.” But despite this congratulatory attitude the defaulting loans are a strain on the capital reserve funds of the agency that has dropped behind the compulsory minimum of 2%.

The Inspector General of HUD Kenneth Donahue said that the falling reserves are “flashing a red light” signaling that all is not well and matters are grim. HUD supervises the activities of FHA.

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Las Vegas commercial foreclosure front is showing signs of pessimism laced with optimism for the long term Its commercial real estate market has been hit by the recent economic travails but increasing foreclosures and sharp fall in prices will provide opportunity to many to quickly recover than in other regions. Panelists were speaking about this to representatives of the commercial real estate group.

None of those in the panel who had spoken on 17th September to the National Association of Industrial and Office Properties (South Nevada chapter) had expressed their optimism about a swift recovery. They had bemoaned the languishing of commercial real estate causing the lenders to be shy of lending money for commercial ventures. Recovery is heavily dependent on creating of jobs – the latter being the drive behind the demand for commercial areas. But with the unemployment rate being more than 13% it appears that the health of the economy will not improve for many years to come.
The optimism is based on the falling value of commercial properties. This has whetted the appetite of investors to strike at the right moment. An official from the Nevada State Bank said that very soon the bank would be putting in the market a good number of troubled properties in the market during the fourth quarter.

John Wright of National Valuation Consultants said that the fall of values in the commercial real estate in Las Vegas has been staggering. Other cities have suffered but none so badly as Las Vegas where in some instances the value has dropped by nearly 70%. He said, “When you look at market declines, places like Las Vegas — the trajectory could be more sharply upward in this market when it comes back,” Wright said. “There are going to be good deals to be had. When that happens, the growth will come back.”

Patricia Nooney of CB Richard Ellis said the valley which had witnessed “ a great ride upward” is now seeing action in the opposite direction with the same intensity. However with the country continuing to see increase in unemployment the mood of pessimism continues to persist. Nooney feels that the situation will not return to the levels of 2007 and 2008 till 2013.
By rule of thumb the vacancy rates in business space will not reach its height until 2010. Rents will not start to climb up till 2011. The tight fisted attitude of consumers has been affecting retail sales. This will not change till the end of 2011.

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Foreclosures have transformed Lake Las Vegas resort from a symbol of prosperity into an emblem of recession. Beyond the suburban spread there lay an artificial lake in the desert flanked by a village with an Italian touch – representing everything that taste and money could buy. But the overflowing milk of prosperity has suddenly curdled.

In 2008 Transcontinental Corporation that was developing the property lost it to foreclosure after failing to repay loans amounting to $540 millions. The new owners filed Chapter 11 bankruptcy in the summer of 2008. One of its main hotels – Ritz Carlton LLC too filed bankruptcy to ward off foreclosure and since then has been sold. One of the prime golf courses has been left abandoned.
There are practically now new constructions of residential houses although the project is far from being completed. Like an epidemic, foreclosures have spread causing value of houses to tumble. The glittering aquamarine lake that was thought of as the jewel in this region suddenly developed an ominous leak causing engineers to hastily repair it to prevent sudden draining of it.
The residents are all trying to sell their units one after another. In May this year about 10% of the houses in the region were in the foreclosure category – either bank repossessed or in short sales. It meant that the values of the houses were so low that the loan amount was far greater according to the findings of Applied Analysis that deals in real estate research. About 80% of the houses that were listed lay vacant and unoccupied.

Ed Santacruz – formerly a mortgage broker and fortune hunter said, “I thought it was a no-lose situation. It ruined me.” His hotel-condo lapsed into foreclosure. He had plans of renting out the unit to tourists but there were not enough candidates so as to meet the mortgage expenses. He added, “That’s where I messed up, I believed enough in the product and in Las Vegas.”
It is not difficult to find the reasons for the problems of Lake Las Vegas. The community was planned to be a resort as well as a residential centre. It leaned heavily on buyers of second home and tourists for its success. But when the economy began to falter it too began to choke and stumble. Brian Gordon of Applied Analysis said, “There was a point and time when the higher end of the market had been less impacted. But as the recession has run longer and deeper than initially expected …”

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Michigan is struggling caught between the double pincers of unemployment and foreclosures. It has the highest unemployment rate from 2006. The predictions are that in June it will spike to 15.2% and keep on going up before finally taking an about turn. The state has never quite recovered after the 2001 recession.
The collapse of the auto industry has had an indirect effect on other sectors. Michael Van Fossen of Lansing once had an income of $50,000 per annum with additional benefits as a surveyor of land. He is now browsing through job advertisements for opening in other sectors as well as finishing his degree in business administration. There was a time when there was hectic activity while subdivisions were being built. Fossen could not handle all the work rolling in. But in just one year he got laid off from two surveying jobs. His wife looks after a modest business dealing with grooming of pets but with the economy being tight the people are not much concerned about sprucing up their house pets. Although their two small children are covered by Medicaid the couple is not covered. In November his employment comes to a close.

To fight the battle against unemployment the administration in Michigan is actively following the policy of giving encouragement to industries dealing with “green” technology. The state boasts of a highly skilled working group. Generous tax breaks are being offered together with other incentives.
The plans have met with partial success. Johnson Controls-Saft Advanced Power Solutions has opened a plant for assembling batteries in western part of Michigan. General Electric has come forward to invest $100 billion for the development of software and manufacturing of units connected with renewable energy like gas operated turbines and the like.

Michigan is also focusing on diversifying its economy from manufacturing to promoting tourism and giving attention to its agricultural products, health schemes, printing and innovations in pharmacology.

But any return to prosperity will not happen overnight – it will take time.

Over 450,000 jobs in the manufacturing sector have been lost from the middle of 2000. The hardest hit was the automobile production units. By the end of 2010 General Motors will shut down five of its plants in Michigan. The auto suppliers are in grave trouble. By the end of the 2010 jobs connected with the auto industry will drop to less than 100,000 – this despite the fact that Michigan has been chosen for the production of next set of sub-compact cars of General Motors.

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