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AARP sues Wells Fargo, Fannie Mae over reverse mortgage foreclosure

AARP’s legal battle against wrongful reverse mortgage foreclosures has shifted from government regulators to lenders.

The AARP Foundation Litigation unit filed a class action lawsuit yesterday against Wells Fargo Bank and the Federal National Mortgage Association (Fannie Mae), charging that they failed to allow surviving spouses and heirs of reverse mortgage borrowers to purchase the property for the appraised value after loans came due — typically after the borrower’s death.

AARP’s litigators won an earlier round on reverse loan foreclosures in April, when the U.S. Department of Housing and Urban Development (HUD) reversed itself on a rule that was forcing spouses borrowers into foreclosure.

At the heart of the dispute is what happens to the most popular type of reverse mortgage, the Home Equity Conversion Mortgage (HECM), which is regulated and insured by HUD passes on to a spouse or an heir. The HECM is designed so that borrowers can never owe more than the value of their homes, even though the loan balances rise over time. The intent was to assure elderly borrowers that HECMs were safe.

AARP’s litigation against HUD sought foreclosure relief for spouses of deceased reverse mortgage borrowers. It charged that HUD illegally implemented two important rule changes in 2008. The first stated that the non-recourse provision would apply only when properties are sold. That meant that if the spouse dies, the surviving non-signing spouse would have to repay the full outstanding HECM balance, even if the home’s value had dropped.

HUD also changed a rule stating that a borrower could sell a secured property for 95 percent to 100 percent of its appraised value. The new rule stated that only “arm’s-length transactions” would be allowed under that range of prices. That effectively meant that a non-signing surviving spouse could retire a HECM only by repaying the full loan balance, but that a third-party buyer could purchase the property for as little as 95 percent of appraised market value.

The first AARP lawsuit alleged that, as a result of the rule, many spouses or heirs who want to purchase the property have been unable to do so because they cannot obtain financing that exceeds the current value of the property. The lawsuit argued that the rule violates other HUD rules and existing contracts between reverse mortgage borrowers and lenders, and that it negates a key purpose for which borrowers had been paying insurance premiums.

Trading up in a down housing market

There’s no getting around it: In much of the country, this is a terrible time to unload your home.

Roughly 11 million mortgages are now “underwater” and over a million properties are in foreclosure proceedings. Even after all the carnage, home prices in 20 U.S. cities just dropped by the most in 18 months.

Yeesh. It’s enough to bring to mind that classic quip of gallows humor: It’s always darkest before it’s pitch black.

But even if it’s not the perfect time to shop your home, sometimes life intervenes. A new child enters the world, or a toddler becomes a teen. Homeowners with growing families often have no choice but to trade up to something bigger and better, because the walls are starting to feel like they’re closing in.

And so begins the complicated kabuki dance, of selling one home and buying another. Because there’s so much at stake, with large sums of money on both sides of the equation, it can be a highly stressful moment. Kind of like those movie scenes where sweaty bomb-defusers are trying to figure out which wire to cut: One false move, and you could blow up your finances for good.

That’s what terrified Claire Benson-Mandl. This year, the healthcare consultant in Vancouver, Canada, traded up from a townhouse to a freestanding home with an extra suite and a roomy private yard. She did it so her family, which includes a 3-year-old daughter, would have space to grow. But the home juggling didn’t come without some sleepless nights.

“It was horrific, just terrible,” remembers the 40-year-old. “I’m sure the anxiety took a toll on my lifespan. There were times when I was considering crawling to friends, family, even Facebook associates, wondering how I was going to come up with the money to bridge the gap.”

Luxury real estate: How to snag a deal on a foreclosure or short sale

Opportunities to buy foreclosed — or soon-to-be foreclosed — luxury homes are on the rise. But watch out for the pitfalls that could sour what seems like a sweet deal.

“We’re certainly seeing more of those properties coming to market and more of those properties foreclosed on,” says Rick Sharga, senior vice president of RealtyTrac Inc., publisher of the largest database of foreclosure and bank-owned property records.

Foreclosures of homes valued at more than $1 million increased by 90 percent between 2007 and 2010, a RealtyTrac analysis found. Banks had been reluctant to foreclose on higher-end properties due to the limited number of potential buyers, but Sharga says he expects more higher-end foreclosures in the future.

“There are bargains to be had,” Sharga says. But “unless you’re absolutely in love with the property,” hold off until you know you’re getting a great deal, he notes. Foreclosures sold at prices an average 27 percent below non-foreclosed property in the first quarter of 2011, he says.

James Reid, a businessman from Anchorage, Alaska, was looking to pick up a house in the Seattle area to avoid staying in hotels on his regular trips there. He and his wife found a property on Puget Sound that had sold for $1 million-plus and was on its way to foreclosure. While the price to get the two-bedroom, two-bathroom waterfront home was discounted in a short sale to about $750,000, Reid said he made a cash offer of $650,000.

“We were reluctant to purchase a short sale home because of the horror stories we’ve heard about closing, negotiations, time,” he said. The Reids were also building a vacation home and didn’t want any more hassles.

They learned that while the seller might be okay with their offer, it was still up to the mortgage holder to agree to the price, since a short sale is an agreement to accept less money than is owed to avoid the more cumbersome and lengthy foreclosure process. The first mortgage holder agreed. But a second mortgage holder that did not. After a lot of negotiating, the deal was sweetened to $730,000 and closed in about three months, Reid said.

Wells Fargo exit underscores trouble in reverse mortgage industry

The country’s largest reverse mortgage lender is exiting the business, saying the loans have become too risky in the current climate of falling home values.

Wells Fargo & Co. said last week it will stop originating new reverse mortgage loans at the end of June, expressing concern about rising loan defaults and the threat of foreclosures foreclosures among seniors. The bank — which accounts for 26 percent of the market — will continue to service 125,000 existing loans it has already written. Wells Fargo’s decision follows Bank of America’s exit from the market in February.

Reverse mortgage foreclosures have grown rapidly over the past two years. While borrowers aren’t required to make monthly mortgage payments, they can end up with a loan in default if they fall behind on their property taxes and insurance payments.

Reverse mortgages are available only to homeowners over age 62. They allow seniors who need cash to tap home equity while staying in their homes. Unlike an equity line of credit, repayment of a reverse mortgage typically isn’t due until the homeowner sells the property or dies.

But falling home values in the aftermath of the 2008 financial meltdown and real estate collapse have created new concerns about reverse mortgages.

The rising number of non-performing loans has raised concerns about the ugly prospect of seniors losing their homes, and also about the risk of losses for the Federal Housing Administration Insurance Fund, which insures the loans. A report last year by the U.S. Department of Housing and Urban Development’s (HUD) Office of Inspector General estimated that the fund’s liability from potential foreclosures could cause a $1.47 billion loss. The fund collects hefty fees from HECM loans to finance its insurance — two percent of the home value, plus 1.25 percent of the ongoing balance. The latter fee was increased last year from 0.5 percent.

Wells Fargo worried about its inability to assess borrowers’ ability to keep up with insurance and tax payments, according to Franklin Codel, Wells Fargo executive vice president and head of national consumer lending. Under the Home Equity Conversion Mortgage (HECM) program — which is administered by HUD — lenders can’t turn away home owners over age 62 who have sufficient home equity, even if they have limited assets or income.

Homeowners, don’t be fooled by this foreclosure scam

Looming foreclosure can be one of the scariest times for any family down on its luck. So, it stands to reason that crooks would design scams to target that vulnerability and try to squeeze whatever money these people who can’t pay their bills can scrape up.

The state of California has issued a warning about a scam that involves getting these vulnerable homeowners to pay fees up front with the idea of winning a lawsuit that will get them their homes free and clear. The cost to participate in this heavily marketed scam is $5,000.

The scam is particular elaborate since a federal ban went into effect earlier this year against requiring up-front payments to those offering mortgage relief. Rules being what they are, there is an exception to it — for lawyers. While the terms are a bit more specific than that, it opened the door to people supposedly working on behalf of lawyers to still preying on those whose homes are being foreclosed.

“Those who continue to prey on and victimize vulnerable homeowners have not given up,” the warning by Wayne S. Bell, chief counsel of the California Department of Real Estate, says. “They just change their tactics and modify their sales pitches to keep taking advantage of those who are desperate to save their homes. And some of the frauds seeking to rip off desperate homeowners are trying to use the lawyer exemption above to collect advance fees for mortgage assistance relief litigation.”

Those running the scam are making claims across the country, using the web as their vehicle in many instance, to try to sell these folks on the idea they will not only not lose their home to the bank, they’ll win full ownership.

The scammers try to convince their targets that they will be participating in a “mass joinder” or class-action lawsuit. Here are a few of the claims being made that were highlighted by California officials:

• If you join in the suit, you can remain in your home and stop paying your mortgage.
• When the lawsuit is filed, your obligation to the bank ends.
• Lawyers are “turning the tables on lenders and getting cash settlements for homeowners”.

AARP lawsuit: Reverse mortgages cause foreclosures

Reverse mortgage ads often portray contented silver-haired couples enjoying the comfort of home, confident that their decision to tap home equity will bring lifelong financial security.

But the AARP Foundation painted a different picture when it filed a lawsuit this week challenging federal rules said to be forcing borrowers into foreclosure.

At issue is declining home values in the wake of the housing crash — and lending rules affecting married couples where only one spouse signs the loan documents.

The U.S. Department of Housing and Urban Development (HUD) administers the most popular type of reverse mortgage, the Home Equity Conversion Mortgages (HECM). For years, HUD and lender marketing materials have described HECM as non-recourse loans, in which borrowers could never owe more than the value of their homes, even though the loan balances rise over time. The intent was to assure elderly borrowers that HECMs were safe.

But AARP charges that HUD illegally implemented two important rule changes in 2008. The first stated that the non-recourse provision would apply only when properties are sold. That means that a surviving non-signing spouse would have to re-pay the full outstanding HECM balance, even if the home’s value had dropped.

Second, HUD changed a rule stating that a borrower could sell a secured property for 95 percent to 100 percent of its appraised value. The new rule stated that only “arm’s length transactions” would be allowed under that range of prices. That effectively meant that a non-signing surviving spouse could retire a HECM only by repaying the full loan balance, but that a third party buyer could purchase the property for as little as 95 percent of appraised market value.

“For years, there was never any question that you couldn’t owe any more than your home value,” said Jean Constantine-Davis, senior AARP Foundation Litigation attorney. “The HUD handbook on HECMs, and countless industry publications all said so. The idea was that you want people to feel secure in their homes.”

Home market isn’t on rebound yet

Are we there yet? Is the U.S. home market on the upswing?

As Alan Greenspan would say, “there are shoots,” although a true spring in housing is still hampered by a chilly economic climate throughout most of the country.

One positive sign came from new mortgage applications, which jumped to the highest level in three months last week, according to the Mortgage Bankers Association.

As Congress and state attorneys general wrangle with a number of reforms to seed a housing rescue, most of the country is not out of the woods. Yale Economist Robert Shiller warned recently that housing prices could “slip another 15 to 25 percent”.

Foreclosures and defaults are continuing unabated. Most of the news concerning housing is still frosty. The S&P Case-Shiller Index (for the fourth quarter of last year), showed prices in 19 out of 20 markets surveyed down for December over November. Washington, D.C. was the only major market that rose.

Cities gob-smacked by the bust — Las Vegas, Miami, Phoenix and Tampa — all hit new lows in December. Even markets that weren’t inflated as much in the bubble saw new lows (Atlanta, Charlotte, Seattle and Portland, Oregon).

Although the percentage of distressed sales is still alarmingly high at more than one-third of all sales, according to CoreLogic, they are down from their peak in January of 2009.

Real estate: First-time homebuyer basics

Dennis Lee, 26, is a model first-time homebuyer. Recently married, he and his wife, Dana, have financially secure jobs as a youth minister and accountant, respectively. They have good credit scores, and have been studying property price graphs and charts in their local San Francisco Bay Area for months.

With enough cash for a 20 percent down payment, and ample time to look, you would think Lee would be excited to take advantage of a probable bottoming of the market in 2011. Not exactly. “It’s a little overwhelming,” he says.

Cheaper prices and low interest rates make now a good time to invest in bricks-and-mortar, but with all the talk of tightened credit and foreclosures, knowing where, when and how to buy can be tricky.

Where and when to buy First, the bad news: “The process is more expensive, there are more hoops to jump through, and not as many good properties out there,” says Justin McHood, of mortgagecommentator.com.

Now, the good: real estate search engine Zillow.com’s estimated median valuation of a home in the U.S. was $175,200 in the fourth quarter of 2010. Home values in Zillow.com’s index have fallen 27 percent from their peak in June 2006.

The same report shows the housing market varies wildly by city. New York and San Francisco home values fell an average of five percent year-on year. On the flip, Detroit and Miami-Fort Lauderdale still posted home value declines of more than 15 percent.

So while it is notoriously difficult to pinpoint the bottom of a market, analyze the home price data for your area. It’s the best way to make an informed assessment of any potential upside.

First-time buyers forgo starter homes: survey

Looking to cash-in on rock-bottom home prices, first-time buyers are thumbing their noses at traditional “starter homes,” setting their sights on move-in-ready real estate, according to a new survey from Coldwell Banker Real Estate.

Of the 300 buyers surveyed, 87 percent said finding a move-in-ready property was important to them.

“My observation was how exciting it is for first-time home buyers to be able to buy a home that they didn’t expect to live, instead of having to compromise,” says Diann Patton, a consumer real estate specialist with Coldwell Banker Real Estate. “Right now, all the stars are in alignment for buyers. We’ve got interest rates below 5 percent, we’ve got pricing down. Some markets have a great amount of inventory still.”

Among the survey’s other findings:

• 67 percent said they were able to buy a home sooner than expected, thanks to the dismal state of the housing market
• 50 percent said they purchased a home in a more desirable neighborhood
• 40 percent said they got more square-footage than they would have hoped

There is good news for those with the means to invest and who are looking to capitalize on areas of the country still experiencing rock-bottom pricing. According to the most recent data, foreclosures jumped 12 percent in January, representing 78,133 properties across the U.S. The report from RealtyTrac also showed one in every 497 houses received a foreclosure filing last month. Foreclosure hot zones include California, Florida, Michigan, Arizona and Illinois. The five embattled states represent more than half of all foreclosure filings, with California accounting for more 25 percent alone.

“We’ve seen the percentage of first-time buyers move up and down in pretty close parallel to the percentage of distressed home sales,” says Walter Molony, public affairs specialist with the National Association of Realtors. “What that has told us is first-time buyers have gravitated to discounted prices of foreclosures and short sales that are typically being sold at a discount of 10 to 15 percent relative to traditional homes in the same area.”

A solution to the mortgage mess?

If you thought the U.S. foreclosure crisis was ebbing, think again. Every passing week brings with it new tales of mortgage loan defaults, and allegations of foreclosure malfeasance on the part of some banks.

Mortgage loan defaults are actually on the rise once more, which begs the question: is there are better way to structure their financing?

Two mortgage researchers think they have a better solution. Professors Brent Ambrose from the Institute of Real Estate Studies at Penn State University and Richard Buttimer from the University of North Carolina at Charlotte propose a new type of mortgage which would automatically reset your balance and monthly payments based on your home’s current market value.

Simply put, if you bought a property at $300,000 in 2006 and four years later its estimated worth is $250,000, your monthly payments would adjust to the new price. Conversely, if your property value goes up again, so would the amount you owe, up until the original scheduled balance.

This structure would help both the borrower and the lenders avoid defaults and minimize their losses. The researchers contend that, unlike today’s mortgage arrangements, the new system would encourage the owner to keep their property with the expectation of a higher market valuation down the road.

“The threat of foreclosure is not sufficient to prevent widespread default when house prices fall significantly,” they write in the paper. “Our new mortgage automatically resets the principle balance at various dates to the minimum of the originally scheduled balance or the value of the house, reducing the borrower’s incentive to default if the house value declines.”

Ambrose argues that the current loan modification plans put forward by the U.S. Treasury, Federal Reserve and FDIC are doomed because of their narrow focus on payment-to-income ratios.