Consumers trying to understand the bailout of Fannie Mae and Freddie Mac involving billions of dollars are confused. Even those with a minimum amount of knowledge about the matter know that the dollars have come from the pockets of the tax payers. But why this happened continues to remain a mystery.

Nicole Middendorf of Strategic Financial is an expert in finances. He has called this lack of knowledge on the part of most Americans as “financial illiteracy.” This was one of the main reasons for the foreclosure crisis. He said, “The two big camps that are at fault are the consumer — for not being educated or understanding what they’re doing to themselves financially and also the mortgage companies for loaning out money and selling products to borrowers who really couldn’t afford homes.”

The granting of sub-prime mortgages like peanuts has led to the financial collapse and the housing crisis that is continuing. According to the Mortgage Bankers Association one tenth of all the house owners were defaulting during the second quarter of 2008 – it being a record figure since the last 39 years that the association has been keeping track of figures.

To understand the present one needs to peep back into the start of Fannie Mae and Freddie Mac. After the Great Depression of the 30’s when the banks began to recover, President Roosevelt was keen to see house ownership increase but there were very few banks granting loans to potential buyers. To rectify this shortcoming the Roosevelt administration created Fannie Mae in 1938 to guarantee mortgages made by private banks.

After three decades the government freed Fannie Mae from its control and made the company private. It now became similar to any other bank but instead of directly offering mortgage loans to the public it began to generate income by buying mortgages from other private banks.

In the late 60’s the economy went on a growing spree as incomes increased causing ownership of houses also to skyrocket. To prevent Fannie Mae from becoming unmanageably big the government created another firm along similar lines – Freddie Mac.

Till 7th September 2008 both Fannie Mae and Freddie Mac continued to be private entities. In September Henry Paulson, the Treasury Secretary announced plans of the government to seize the firms. $200 billion was infused into the firms by the Treasury. In return the government took over 80% controls of both the companies.

It meant that since both owned over $5 trillion in mortgages nearly half of these would never be repaid. Thus in reality both are bankrupt. But even small talk and rumours about their demise could cause a panic at home and abroad.

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At the core of the Great Recession is the foreclosure crisis. The usual line of thinking is to blame the banks for giving the nod to risky loans and for the borrowers who overreached themselves and started living in houses they could ill afford from the very beginning. An article in Vanity Fair refers to such homeowners are “infantile”. Financial experts have criticized them for living in ritzy houses with swimming pools and three-car garages. Even a Treasury secretary does not hesitate to have a swipe at such home owners for contracting mortgages well beyond their means.

A survey conducted by St. Petersburg Times notes that in Hillsborough County there are thousands of foreclosures. Here individual borrowers are being too much blamed for this mayhem. The reality is that those speculating in real estate and revenue-strapped local government are as much responsible for this crisis – the crumbling of the real estate market.

Investors together with flippers are responsible for nearly half the foreclosures in Hillsborough that have been posted during 2007 to 2009. Their dealing led to the massive inflation of prices of residential houses and this laid the foundation for the crash that was to follow. They were helped in every possible way at each step by the local officials.

The commissioners of Hillsborough permitted jumbo housing plans in the rural regions while overlooking impact fees from the developers. Leaders in Tampa gave the green signal to development of country clubs in distant New Tampa, closing their eyes to the obvious dangers of over construction.

In the over built real estate markets of Arizona, California and Nevada the investors purchased houses for the sole purpose of speculating – never lived in it even for a single night. But when the prices swooped down they could no longer afford to cling on to these.

Benjamin and Elizabeth Padilla purchased a four bed roomed dream in rural Hillsborough paying $200,000 for it. They are continuing to live and are current on their mortgage dues. But they are surrounded by empty units – mostly purchased by the speculating investors. The worth of their own house has rocketed down to $119,000. To make matters worse crime in the locality has increased. In her late fifties Elizabeth said, “We can’t do anything to get out of here. If we sell, we have to come up with the difference between what we bought and what it’s worth now, and we can’t afford that. We’re stuck.”

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The recession, triggered by the foreclosure crisis has hit the Afro-Americans worst. Unprecedented unemployment has totally erased the wealth of an entire generation of the Black middle-class.

The vigorous job market during the 90’s had made life somewhat easy for thousands and thousands of Afro-Americans who had moved up to join the ranks of the middle class.
Barbara Mitchell was one of these. She got employed in a customer related job with a telecommunications firms. For a good number of years she prospered on a comfortable salary that peaked to $51,000. But when her firm was shut down she had to take up another lower paying job in Wisconsin. Ultimately she could not fit into the changed circumstances and opted for retirement apprehending job termination.

Mitchell was under the impression that she had the requisites to obtain another similar customer related position but at the age of 57 and after a year of floundering about she found herself without any job, any medical insurance and practically no retirement funds for her twilight years. All that she could do is to pray for a part time job but she has realized that the recession would never take her back to the position she held only few years ago.
The harsh reality is that the recession is hitting the Afro-Americans more than others. The unemployment figures of this section of the population speak for themselves. The total unemployment is poised to touch 10%. Amongst the Afro-Americans it is 15.5%. In Illinois it is 18.6% during the third quarter according to Economic Policy Institute. For the teenagers among the Blacks the rate was 40.8% during September.

Employment rate among the minorities have always been high but the recession has increased this gap because of unemployment primarily in the manufacturing and auto group. This unemployment has joined up with predatory lending that was most prominent in black dominated localities. This lead to staggering increases in foreclosures that sent the real estate market reeling downwards. It can be read as a silent depression for the Afro-Americans.

Jean Pogge of ShoreBank that caters to the minority groups in many cities said, “The untold story is that between unemployment, a significant drop in property values, the wave of foreclosures and a lack of credit, there is a whole generation of African-American wealth that is disappearing. The traditional way Americans have acquired wealth and gotten into the middle class is through buying a home and building equity in that home. And a lot of that has been wiped out by the recession.”

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There are indications that home sales are picking up together with prices but the foreclosure numbers continue to march apace. Rick Sharga of RealtyTrac that tracks foreclosures was interviewed by Barbara Kiviat of Times regarding the future of residential foreclosures.

Taking an analogy from baseball Sharga opined that right now the foreclosure situation in the country is in the middle of 6th inning. It will not peak till 2010 and will not be down to normal till 2013. Already 2.3 million houses in the last one year are in some stage of foreclosure – it being equal to that of the previous year. 7 million families are defaulting or in foreclosure. There is no doubt that trouble is fast brewing.
Under normal circumstances most of the defaulting house owners find some way to cure the loans. But currently the numbers are far from promising. Over 50% of the houses that are entering foreclosure end up being repossessed by the lenders. However a good number are still managing to skip foreclosure either by modification of loans or short sales.

Foreclosure activity has gone up six times since what it was four years previously. The system is not geared to tackle such huge numbers. There are also other complications. The servicers are causing delay. They are seeing to it that the borrowers do not qualify or HAMP (Home Affordable Modification Program). The servicers gain more from foreclosure whereas neither the lenders nor investors apart from borrowers gain from it.

The federally sponsored and financed programme of HAMP has met with initial success. The target of trial modifications has been met with. It is good news. But the programme is not ready to meet the onrush of the next rush of foreclosures that is poised to break. The programme is failing where prevention of foreclosure is concerned.

The current wave of foreclosures is being triggered by unemployment. Without a steady income it is not possible for borrowers to be current on their mortgages and neither do they qualify for relief measures. Inevitably the borrowers succumb to foreclosure. Secondly whole swaths of ARM loans are ready to set. This will kick off more foreclosures. Most the borrowers will become underwater with the value of the property being less than the loan value. The only way these can be saved will be if cuts are made in the principal – something the lenders are not willing to do.

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The auction of foreclosed units appeared to present an even grimmer scenario than initially noted. In Wayne County 9,000 REOs were put up for auction recently. 80% of these failed to attract any bidder although the minimum bid was allowed to be $500.

It is nothing new that Detroit and Cleveland are cursed for some time with foreclosures. But the incident at the Detroit auction has been an eye opener to the intensity of the problem.

The auction was far from smooth. Speculators from out of the town plucked the cream properties like the ones located in Boston-Edison region. The locals were not allowed to register for these bids. This has led to a scandal.

It is one of the important reasons why local communities are clamouring for land banks. It is a public venture that permits a community to acquire without any hassle foreclosed properties lying vacant and abandoned. These they clean and put into use. This move puts a stop to out of the state speculators from playing around while the local officials remain helpless bystanders.

But the process of getting a land bank in place can be a lengthy and complicated process. Flint and Michigan have given the lead in the movement termed ‘Shrinking Cities’. The abandoned localities of the city are cordoned off and the land is permitted to go back to Mother Nature. The idea is great if the communities can achieve it. But for this the local authorities need the land bank or some other toll by which they can exercise control over the empty foreclosed houses as well as land. If not a situation like the Detroit auction will take place when outsiders with funds and expertise will outbid any member of the locality – whether groups of individual investors who are sincere about bringing back the health of the region by rebuilding it. But the speculators are only interested in real estate games.

Joseph Schilling, an urban planning expert from Virginia Tech said, “We do a pretty good job in this country of recycling cans and plastic bottles. But we do an awful job of recycling and reusing vacant properties.”

It is imperative for the national housing policy to be more aggressive towards disallowing outside speculation and encouraging local involvement. If this is not done supported by financial involvement the situation will continue not only to slide but to blow up again into a full crisis. It is a moot question as to why the administration is still tardy about making such moves.

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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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When the foreclosure crisis made its debut experts in personal finance put pressure on the homeowners to open communications with their lender if they defaulted. The house owners were made to believe that the lenders would do their best to skirt foreclosure. But now the experts are not sure and singing a different tune.

The borrowers who have gone through a maze of formalities to try and modify their loans are not sure that this line of thinking was correct. Jason of San Diego was one of them. He bemoaned to ConsumerAffairs.com, “I have gone through the modification process but have been denied, although no clear explanation was provided. I have been seeking assistance and guidance from quite a few bank representatives and have only received rude, misguided information.”

In 2008 hundreds of complaints have been received by ConsumerAffairs.com. The general complaint was that those who had opted for loan modification and adhered to all the instructions found that their papers disappeared into a black hole. Maria of Sussex (New Jersey) said, “I faxed papers repeated times and was told that I need to fax more or that they never received them so they can start a modification. I made payments and they never credited my account. Now they calls in October 2009 and they tell me that they stopped the modification because I never faxed out the papers. Is this a joke?”

The story is a repeat everywhere irrespective of who the servicer is. Consumers start walking down the road hopeful of modification but they come up against a blank wall of inefficiency combined with total indifference erected at the end by the mortgage firm. Another sufferer is Regina of Whitefish Bay (Wisconsin). She said, “We sent all information requested by certified mail. As the others have described, we have had to make contact. They do not respond. The usual answer is ‘Whoever told you that is wrong.’ I actually have a tape of one of their agents stating ‘I can’t be responsible for what someone else told you.’ Should not they be required to respond in writing? Is this not a government funded program?”

In March 2009 the Treasury under the Obama government started a loan modification programme to give incentives to the servicers so that they modify the loans in trouble so as to prevent foreclosure. But the speed was so slow and frustrating that it has not had any noticeable impact. Foreclosures are continuing apace as before.

Some reports are suggesting that despite the incentives the servicers gain more from foreclosures than from modification. Servicers, unlike lenders do not have money at stake in the mortgage loans.

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The US is in the grip of a deep recession. As unemployment reaches its zenith, people are faltering on mortgage payments. Hence, foreclosures are common. Now there is a demand for low-end foreclosed properties in St. Paul. In August, there were a total of 1,811 vacant spaces in the area. This means a decline of 12 per cent vacant homes from the corresponding period of last year. It may be noted that in August 2008 there were 2,047 vacant spaces.

The empty properties are both residential and commercial spaces. The decrease in their numbers is a reflection of the real estate scenario. This was revealed by director of the Department of Safety and Inspections, Bob Kessler. The demand for homes has received a boost because of several factors. First, the price of foreclosed homes has seen a decline making it attractive for ordinary buyers. Second, the government has announced a federal tax credit for those who buy homes for the first time.

The number of foreclosures has decreased because the lenders are delaying legal proceedings. As Kessler observes the buildings are being struck off the list in greater numbers than they are being added. Also home owners are willing to palm off the properties at very low rates – as low as $15,000 to $20,000. Hence, buyers are grabbing the properties, revamping them and again selling them off, thereby making a small margin.

One such renovated property has been put on display by an investor. This house at Lawson Avenue will be viewed by buyers. The St. Paul Area Association of Realtors and Wells Fargo have organized the tour for the home buyers of the region. The tours are important because there are many vacant properties in the region. Even three years ago, there were 900 vacant buildings in the area. A building is usually labeled as vacant if it is unoccupied and meets any of the seven criteria like being not safe.

It’s not possible for anyone to know how many vacant buildings are there in the city. Registration is not compulsory and done only under certain circumstances. However, real estate developers want to believe that their numbers are fewer than before. Whatever be the case, experts say, that the real estate scenario will not improve until and unless, more jobs are created. Unless people have the purchasing power and are able to make the mortgage payments, foreclosures will continue to plague the American market.

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Mortgage servicers have always worked as collection agents – this being their business and as such they are ill equipped to handle en masse modification of mortgages. This was the view of Patrick Madigan the assistant attorney general of Iowa. Speaking at an interview he said, “The mortgage industry has responded to this crisis with a series of half steps based on a notion that a turnaround in the housing market was just around the corner.”

The mortgage modification plan introduced by the Treasury stipulates that three parties have to take part in it – the firm that owns the loan, the company that services it and the house owner. All shares a portion of over $20 billion that the federal government has calculated would have to be spent to contain foreclosures. The Treasury wanted to involve as many servicers as can be possible but the GAO noted that the department was not monitoring the process as much as it should.

GAO noted in its July report that there were “significant gaps in its oversight structure.” The firms were under staffed in overseeing the work of the office and it’s monitoring of the modifications. By July, 8 months had passed since the programme was underway but many posts remained vacant.

The government has taken “readiness reviews” of a mere 7 out of a total of 27 servicers. There are no further plans for further reviews. That too the reviews consisted of discussions only with the senior officials. The information gleaned was not later checked. GAO said, “Treasury cannot identify, assess and address risks associated with servicers that lack the capacity to fulfill all program requirements.”

The Treasury however was quick to reply that it was speeding up reviewing procedures and trying to rectify the defects that have been identified. Seth Wheeler of the Treasury said, “Clearly, we’re not there yet. Clearly there’s still inconsistent application of the program, even though we have made progress.”

Many firms have been identified and mentioned by the judges and or regulators for having indulged in erroneous activities with their clients. One of them is Ocwen Financial Corporation, based in Florida that deals with the servicing of over 300,000 mortgages across the country. It will be receiving over $200 million from TARP funds.

Nationwide law suit has been filed against Ocwen. One of the plaintiffs is Brad Rhoton. He said, “Ocwen has screwed up my finances so bad you can’t believe it. It’s been the most maddening process you can imagine.”

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