Tag Archives: subprime lenders

Mortgage Industry Shocked as Massachusetts Court Orders Halt to Foreclosures

The case of Commonwealth of Massachusetts v. Fremont Loan and Fremont General Corporation is sending shock waves throughout the mortgage industry.

In what is apparently the first case of its kind, a Massachusetts court has ordered the California-based subprime lender Fremont Investment and Loan to halt all foreclosures in the state to give officials time to review each mortgage to determine whether the loan is “structurally unfair” under the state’s lending laws.

Fremont had been ordered by the Federal Deposit Insurance Corporation last March to cease and desist from making subprime loans.  The FDIC determined that the Fremont had been operating without adequate subprime mortgage loan underwriting criteria, and that it was marketing and extending subprime mortgage loans in a way that substantially increased the likelihood of borrower default or other loss to the bank.

The Massachusetts lawsuit was filed in October 2007 by Attorney General Martha Coakley, alleging that Fremont had engaged in predatory and unfair lending when it made home loans to individuals who could not afford them. Coakley called on the court to order Fremont not to proceed with any foreclosures until her office had time to review the fairness of each mortgage.

In his 29-page decision, Suffolk County Judge Ralph D. Gants agreed with Coakley that a large share of Fremont’s mortgage loans could potentially be considered “structurally unfair” under the state’s lending laws and issued a 90 day preliminary injunction against any foreclosures by Fremont.

Under the terms of the injunction, Fremont must provide the Attorney General’s Office with at least a 30-day notice of all foreclosures it intends to initiate for the approximately 2,200 loans that Fremont still owns and services, and allow the Attorney General an opportunity to object to the foreclosure going forward. If Fremont has issued a loan that is considered “presumptively unfair,” and the borrower occupies the property as his or her principal dwelling, the Attorney General has 45-days to object to the foreclosure.

The judge ruled that a loan is “presumptively unfair” if  (1) The loan is an adjustable rate mortgage with an introductory period of three years or less; (2) The loan has an introductory or “teaser” interest rate that is at least three percent lower than the fully-indexed rate (the relevant index at the time of origination plus the margin specified in the mortgage note); (3) The borrower has a debt-to-income ratio (the ratio between the borrower’s monthly debt payments, including the monthly mortgage payment, and the borrower’s monthly income) that would have exceeded 50% if Fremont had measured the debt, not by the debt due under the teaser rate, but by the debt due under the fully-indexed rate; and (4) Fremont extended 100% financing or the loan has a substantial prepayment penalty or penalty that lasts beyond the introductory period.

The court found that it was unfair under Massachusetts law for Fremont to make loans where Fremont reasonably expected borrowers to default on the loans after the initial introductory interest rates adjusted. In some instances, the court noted, Fremont also offered these same borrowers 100% financing, gravely increasing the risk of default if they were unable to obtain refinancing if the market value of their homes declined. The borrowers’ risk of default was further heightened by Fremont’s substantial prepayment penalties that required borrowers to immediately obtain refinancing after their introductory rates ended.

The judge acknowledged that “the fact that Fremont’s loans bearing these four characteristics were not generally recognized to be unfair at the time these loans originated is not irrelevant to this case” and said that he “will certainly take that factor into account in determining what preliminary injunctive remedy is appropriate to address the unfairness.”

The judge further stated that “this Court emphasizes that borrowers who have received presumptively unfair loans from Fremont should not interpret this preliminary injunction to mean that they have been released from their obligation to repay these loans. They have not been given any such release. The spirit of this decision is simply that Fremont, having helped borrowers get into this mess, now must take reasonable steps to help them get out of it.”

Attorney General Coakley praised the judge’s decision and said that the injunction would allow some borrowers to renegotiate their loans; and if they cannot afford their home, it gives them time to find alternative housing.

“This decision shows again that in many cases, irresponsible and unlawful lending practices caused this foreclosure crisis,” Coakley said. “We intend to hold accountable those who allegedly engage in unlawful lending conduct.”

The mortgage industry obviously does not share Coakley’s view.  The case is now on appeal before the Massachusetts Appeals Court and both the American Financial Services Association and the Mortgage Bankers Association are among those who have filed briefs asking the higher court to overturn the injunction, calling it a “breathtaking usurpation of the legislative role.”

 

Billions Poised to be Invested in Distressed Real Estate — But Small Buyers, Beware!

The New York Times reports today that major investors, fueled by domestic and foreign investment groups, wealthy individuals, endowments and pension funds, are prepared to spend billions of dollars buying distressed debt and real estate. 

These investors – often called “vultures” although the Times calls them “market opportunists” – believe that “some people have thrown the good out with the bad, and that the prices of some investments have simply fallen too far.”

For example, the Times reports that one Wall Street specialist in so-called distressed debt “recently spent at least $450 million for assets of Thornburg Mortgage, the battered mortgage servicing company. Others are buying beaten-down corporate bonds and looking at car and credit card loans.” 

“They are buying up mortgages of hard-pressed homeowners, the bank loans of cash-short businesses, and companies that seem to be hurtling toward bankruptcy,” said the Times, “And they are trying to buy them all on the cheap.”

A former executive of the Countrywide Financial Corporation, one of the mortgage giants that fostered subprime lending, recently helped start a company to buy mortgages.

In addition, the Blackstone Group “just raised $10.9 billion from investors to scoop up real estate.”

GlobeSt reports that “According to a company statement, this fund was the largest real estate opportunity fund ever raised.”

Blackstone senior managing director and New York City-based co-head of Blackstone’s real estate group, Jonathan Gray, stated that  “we believe there should be attractive investment opportunities for this capital given the market dislocation that exists today.”

We agree that the current distressed real estate market offers tremendous opportunities. 

The time is right for active, intelligent investors to take advantage of the multi-billion dollar distressed real estate market.  The real estate market is brimming with profit opportunities for those with leverage and expertise

But this is not an easy market for individual, smaller investors to penetrate.

The truth is that most smaller investors do not have the leverage and expertise to succeed in this volatile and extremely competetive market.

In fact, the effort that the smaller, part-time investor in foreclosures and distressed real estate would need to spend identifying properties, haggling with lenders and distressed owners, attending auctions and establishing financing is equivalent to a full-time job — and even then, success is far from likely.

Most smaller investors in this market will get caught up in the buying frenzy, spending too much time and money on so-called coaching and how-to courses from self-proclaimed foreclosure gurus, and then spending too much on property that will continue to fall in value and fail to provide an adequate income stream.

Great real estate deals do exist across the country. But to be successful, investors will need a high level of sophistication in identifying properties, acquiring them and developing the right exit strategy for each asset.

Smaller buyers, beware!

UPDATE:

For the lastest on the real estate vulture fund being formed by disgraced ex-Governor of New York Eliot Spitzer, click here.

U.S. Court Rips Subprime Lender as “Ticking Time Bomb” — Faults New Century Executives and Big Four Auditor

The Final Report in the federal bankruptcy proceedings involving subprime mortgage lender New Century Financial Corp. was made public today by the United States Bankruptcy Court for the District of Delaware.

You can read the Final Report here.

Following an investigation that began in June 2007, the 550-page report reviews the accounting and financial reporting practices, loan origination operations, audit committee and internal audit department, and system of internal controls of New Century, once the second-largest originator of subprime home loans in the U.S.

According to the report, the now bankrupt mortgage lender used improper accounting practices while making risky loans, creating “a ticking time bomb” that led to the company’s collapse.

The New York Times has called the report “the most comprehensive and damning document that has been released about the failings of a mortgage business.”

The report states:

“New Century had a brazen obsession with increasing loan originations, without due regard to the risks associated with that business strategy.”

“The increasingly risky nature of New Century’s loan originations created a ticking time bomb that detonated in 2007.”

“Senior management turned a blind eye to the increasing risks of New Century’s loan originations and did not take appropriate steps to manage those risks.”

In one example cited in the report, New Century understated by more than 1000 percent the amount of money it needed to have on reserve to buy back bad loans. As a result, it reported a profit of $63.5 million in the third quarter of 2006, when it should have reported a loss.

New Century also failed to include the interest that it was obligated to pay to investors whenever it was forced to buy back bad loans.

In addition, the report concluded that New Century’s accounting firm, KPMG LLC, one of the Big Four accounting firms, actively enabled New Century’s improper accounting practices. 

Court-appointed examiner Michael J. Missal observed that “As an independent auditor [KPMG is] supposed to look very skeptically at any client, and here they became advocates for the client and in fact even suggested some improper accounting treatment that ultimately started New Century down the road it’s taken.”

The improper accounting also led to higher bonuses for New Century executives.

New Century once billed itself as “A New Shade of the Blue Chip.”

Creditors of New Century now say they are owed $35 billion.

The former subprime lending giant’s stock peaked at nearly $65.95 in late 2004 — on Wednesday it was trading at a penny.

You can read New Century’s Chapter 11 Bankruptcy filings here.

New Century is being sued by hundreds of investors and remains the target of a federal criminal investigation.