Various Updates on the Weakening Housing and Mortgage Markets

Yesterday, there was widespread commentary on the 8.4% fall in existing home sales in March. Some other factoids have gone comparatively underreported.

From Nouriel Roubini’s RGE Monitor:

[T]he Case-Shiller home price indices for February showing continued fall in home prices. The 10-city index fell 1.5% y-o-y; this is the lowest level since October 1993. The 20-city index fell 1.0%; this is the lowest level in the six-year history of this measure.

From the Nattering Naybob:

Standard & Poor’s said it may lower ratings on bonds from 11 different securitizations of home loans made last year, more than doubling the number of its warnings on bonds of so-called Alt A mortgages.

Almost 437,500 foreclosure filings were reported in Q107, a jump of 35 % Yoy. 50% of the foreclosure activity charted in Q1 was from subprime loans and 50% from Alt-A & Prime. Vs Q4 – Q1 foreclosures +27%.

“It’s not just low-end homes that are going into foreclosure,” RealtyTrac commented. “We’re seeing a rising percentage of foreclosures with an estimated market value of more than $750,000.”

More than $6 trillion of mortgage bonds are outstanding, dwarfing the amount of U.S. government debt by about 50%. About 66% of mortgages get turned into bonds, up from 40% in 1990…

Some of the lowest-rated portions of those securities now trade at 63 cents on the dollar. That’s a 37% loss to the greedy bond holders who rather than the banks that sold the loans, will be taking the bath.

A Bloomberg story, “Subprime `Liar Loans’ Fuel Bust With $1 Billion Fraud,” by comparison, sheds more heat than light. With estimates of expected subprime losses ranging from $120 billion to $200 billion, the claim that $1 billion of that total may be due to fraud isn’t material. But it is in the interest of the mortgage brokers and other originators to play up that aspect of the story, even though Bloomberg indicated that some of the brokers may have been responsible for misrepresentations of borrower income. (We also suspect in the end the dollar amount of fraud will be much higher).

From Bloomberg:

Cheating on mortgage applications is so widespread and so seldom punished that it’s fueling an increase in foreclosures that will prolong the housing slump, said Robert W. Russell, counsel to the director of the Office of Thrift Supervision, which oversees savings and loans.

Borrowers and brokers commit fraud when they exaggerate the applicant’s income, qualifying the borrower for a home he otherwise couldn’t afford. Such fraud robbed lenders of an estimated $1 billion last year, according to data collected by the Washington- based Mortgage Bankers Association and the Federal Bureau of Investigation.

“Misstatements about employment and income are being made every day,” Russell said. “The brokers are just putting down on paper what the underwriters would require. There are borrowers providing false information as well.”

Loans that require little or no documentation of income soared to $276 billion, or 46 percent, of all subprime mortgages last year from $30 billion in 2001, according to estimates from New York- based analysts at Credit Suisse Group. Homebuyers with those loans defaulted at a 12.6 percent rate in February, compared with 1.5 percent of fully documented prime mortgages, said San Francisco- based First American LoanPerformance, a mortgage consulting group.

A 2006 study cited by the Mortgage Asset Research Institute showed that almost 60 percent of stated income loans were exaggerated by at least 50 percent.

`Liar Loans’

“Everyone calls these loans `liar loans’ because we know these people were lying,” said Jim Croft, a spokesman at the Reston, Virginia-based Mortgage Asset Research Institute.

Nancy Olland’s application for a mortgage said she made $6,900 a month. She needed that much income to qualify for her loan. The 48-year-old mental health therapist from Cleveland Heights, Ohio, actually makes $3,286, based on her pay stub.

She said she wasn’t asked to document her income. She signed the mortgage without reviewing it and discovered the discrepancy months later.

“I don’t know where the information came from,” Olland said. “I didn’t give it to my mortgage broker. Was it literally fabricated out of thin air?”

New Century Financial Corp., the second-largest U.S. subprime lender last year, was Olland’s lender.

Laura Oberhelman, a spokeswoman at Irvine, California-based New Century, said in an e-mail that the company only approves loan applications “that evidence a borrower’s ability to repay the loan.” To stem fraud, she said New Century used electronic and manual systems “designed to detect red flags like inflated appraisal values, unusual multiple borrower activity or rapid loan turnover.”

New Century filed for bankruptcy on April 2.

Red Flags

As part of a pending class-action lawsuit in State of Minnesota District Court alleging Ameriquest Mortgage Corp. charged borrowers extra fees, former account executive Mark Bomchill, who worked in the Plymouth, Minnesota, branch office, said it was “a common and open practice at Ameriquest for account executives to forge or alter borrower information or loan documents.”

“I saw account executives openly engage in conduct such as altering borrowers’ W-2 forms or pay stubs, photocopying borrower signatures and copying them onto other, unsigned documents and similar conduct,” Bomchill said in a sworn statement.

“It wasn’t really done behind closed doors,” Bomchill said in an interview.

Ameriquest spokesman Chris Orlando said the Irvine, California-based company, which once was the biggest subprime lender, has “zero tolerance for fraud” and works hard to find it and prevent it.

Fraud Complaints

“When we discover an employee involved in fraudulent activity, we take decisive action up to terminating employment and pursuing criminal action,” Orlando said.

Mortgage fraud complaints more than doubled in the U.S. from 2003 to 2006, according to the Financial Crimes Enforcement Network, a division of the U.S. Treasury Department. Suspicious activity reports pertaining to mortgage fraud increased 14-fold from 1997 to 2005, according to the organization.

There is a pattern of “exaggerated or fabricated income information associated with subprime loans,” the Vienna, Virginia- based enforcement network said in a report in November.

The difficulty in calculating mortgage fraud is only one-third of lenders are required to report suspicious behavior, said Mortgage Bankers Association spokesman John Mechem.

The FBI targets what it calls “fraud for profit,” which is related to conspirators who lie to get multiple mortgages and have no intention of repaying them, said Special Agent Stephen Kodak in Washington.

Ten Arrested

Ten men were charged today in Brooklyn, New York, in a “fraud for profit” scheme that the FBI said used false identities to defraud more than a dozen mortgage lenders. The FBI said the homes the conspirators bought typically appreciated by about $100,000.

Individuals lying about their income to buy a house they intend to live in, or “fraud for housing,” occurs more often but accounts for less money lost, Kodak said. The FBI generally does not go after “fraud for housing,” he said.

Yet many “fraud for housing” schemes end up as “fraud for profit” conspiracies, said David McLaughlin, head prosecutor for the Georgia attorney general.

“Even the most benign-looking fraud can have far-reaching consequences,” McLaughlin said. “Those properties will fall into foreclosure and there’s a risk when you have a fraud scenario and the person is in so far over their heads, those are the prime targets for fraud-for-profit criminals to prey on.”

McLaughlin said his priority is “fraud for profit” cases, though he would like to prosecute homebuyers who lie on their mortgage applications….