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Keeping track of the foreclosure mess is becoming almost a full time job. New developments surface almost daily and the implications widen with each analysis of the sloppy (and potentially fraudulent) paperwork that has spawned foreclosure challenges nationwide, triggered calls for foreclosure moratoria, launched multiple investigations, and raised question not just about the legitimacy of many foreclosure actions but about the credibility and viability of the paperless mortgage system that has evolved over the past several years.

This issue will almost certainly continue to generate breaking news, but here are the major developments we tracked over the past two weeks:

· New York state courts are now requiring attorneys for foreclosing lenders to affirm “under penalties of perjury” that they have reviewed all the documents they are submitting and to certify that the documents “are complete and accurate in all relevant respects.” The affirmation requirement applies to new foreclosure actions and to the approximately 80,000 foreclosures now pending in the New York courts.

“We feel we have an obligation to make sure the attorneys do their due diligence and come to us with credible papers, because the consequences [of wrongful disclosures] are so great,” Chief Judge Jonathan Lippman told the New York Law Journal, explaining the court’s response to widespread reports that “robo-signing” employees have signed off on thousands of foreclosure documents they did not review. “I think this makes clear to everybody the court system’s absolute commitment that we are not going to allow anything to interfere with the integrity of the court process,” Judge Lippman added.

· Fidelity National Financial, the nation’s largest title insurance company, is now requiring lenders to certify that their foreclosure documents are accurate and their foreclosure procedures proper as a condition of providing title insurance on foreclosure sales. Other title insurers are expected to follow suit. According to recent press reports, executives representing lenders, title companies and financial industry regulators have been meeting to craft acceptable language for these lender warranties. “Everyone sort of sees the same risks, and that’s the good part,” Kurt Pfotenhauer, chief executive of the American Land Title Association (ALTA) told reporters. “You just have to craft a solution that’s acceptable to all parties, and we’re making progress.” The foreclosure errors aren’t likely to produce title claims, Pfotenhauer said, because it was the banks, not the title companies that made the mistakes. “But to get to that conclusion, we will have to engage in some relatively expensive litigation.” The lender warranty language industry executives are trying to develop is designed to avoid that result. “If we can agree to it in advance,” Pfotenhauer told American Banker, “litigation costs go down for everybody and the markets start moving more quickly.”

· Bank of America, which was the first lender to announce that it was suspending foreclosures nationwide, also became the first to announce plans to resume those actions. Bank officials said they intend to submit approximately 100,000 “revised” affidavits in 23 states where courts oversee foreclosure actions, while continuing to review documentation in the remaining states, where judicial oversight is not required. (GMAC has also indicated plan to end its foreclosure suspension, but has not specified how many foreclosure actions will be resumed.)

“This is an important first step in debunking speculation that the mortgage market is severely flawed,” a B of A spokesman told reporters. All told, the bank expects delays in fewer than 30,000 foreclosure actions nationwide, even though a review identified errors in 10 to 25 of the first several hundred files examined. Most of those errors were “relatively minor,” bank officials said.

Meanwhile, attorneys representing New Jersey borrowers have filed a class action suit against B of A and two of its subsidiaries, accusing them of an “undisciplined rush to seize homes [through] pervasive and willful disregard of knowledge, facts and statutes.”

· Investigations of the foreclosure mess are sprouting and spreading. Attorneys general in 49 states have launched a joint investigation, with the assistance of federal bank regulators, to determine exactly what lenders and servicers did or didn’t do, and what laws, if any, they violated. At a minimum, industry observers say, institutions will be required to pay fines, revamp their foreclosure procedures, and probably ramp up their efforts to offer modifications and other assistance to consumers facing foreclosure. In the worst case for the industry, analysts say, some institutions and individuals may face criminal as well as civil charges. Ohio Attorney General Richard Condray has already sued one lender (Ally Financial) for criminal fraud. “The most important thing that lenders need to recognize is the seriousness of the situation,” he told the Washington Post. “They can’t pretend this is a fourth-grade student not quite filling in the oval on a test. This is fraud.”

At the federal level, the multi-agency Financial Fraud Enforcement Task Force, created last year to target white collar financial crimes related to the subprime fiasco, is also now investigating foreclosure problems. The Federal Reserve and other federal bank regulators hare conducting their own investigation, looking “intensively” at the foreclosure procedures and internal controls of the institutions they regulate. “We take violations of proper procedures seriously,” Fed Chairman Ben Bernanke told industry executives attending a housing finance conference.

Separately, the Department of Housing and Urban Development (HUD) is reviewing procedures used in foreclosures involving loans insured by the Federal Housing Administration (FHA). HUD Secretary Shaun Donovan announced recently that the HUD investigation, still ongoing, has not identified any “structural” or “systemic” problems that would require the imposition of the nationwide foreclosure moratorium consumer advocates are demanding.

· The Obama Administration is thus far resisting pressure for an across-the-board foreclosure moratorium. While blasting financial institutions for playing fast-and-loose with foreclosure documentation requirements, and promising strict actions against any found to have violated regulations or laws, Administration officials have echoed the concerns of banking industry executives that a blanket moratorium would further damage the struggling housing market. For similar reasons, Congressional leaders appear to be tiptoeing around the foreclosure issue, scheduling multiple hearings (after the upcoming elections), but stopping short of demanding a moratorium.

· Although a government-imposed moratorium now seems unlikely, the foreclosure boulder continues to gain momentum, rolling down what appears to be a very steep hill. Industry executives insist that the documentation problems are technical and don’t affect the bottom line – the owners on which lender area foreclosing failed to make their loan payments. But critics, including many property law specialists, say these “technical problems” represent the foundation on which the nation’s private property infrastructure rests. For that reason, several analysts have pointed out, simply revising flawed documents and declaring the problems uncovered “technical” won’t make the problems disappear. “Not every judge is going to allow a do-over,” Daily Finance columnist Abigail Field noted in a recent article about Bank of America’s decision to resume its foreclosures. Is the bank “just hoping that courts and investors won’t insist on looking more closely?” she asked. “Does it really think that at this stage people will simply take a bank at its word about everything?”

BAD TRANSFER

While much of the financial world is focusing on the ongoing and escalating battle over foreclosures (see related item), housing industry and homeowner trade groups are squaring off more quietly over another issue – a Federal Housing Finance Administration (FHFA) proposal that would prohibit Fannie Mae, Freddie Mac and the Federal Home Loan Banks from purchasing loans encumbered by covenants requiring the payment of a transfer fee to private entities (usually developers) every time a property is sold. The National Association of Realtors (NAR) and the American Land Title Association (NALTA), among other industry trade groups, support the FHFA proposal, arguing that the transfer fee covenants, which have become l common, unjustifiably enrich developers at the expense of homeowners, while providing no public benefits in return.

“These fees provide no service or benefit to homeowners and raise the costs of homeownership,” the ALTA said in a recent press statement. “They are simply designed to generate additional revenue for investors at the expense of consumers.”

The covenants, which typically run for up to 99 years, are “a stealthy way to milk real estate transactions for money without necessarily adding anything of value [in return], the NAR agrees. The association has spearheaded a national campaign that has persuaded 18 states thus far to abolish or restrict the fees.

The FHFA’s notice of the proposed guidance largely echoes the industry concerns. In addition to increasing housing costs, the FHFA says, the fees may:

  • Limit or cloud property transfers, undermining the stability and efficiency of the secondary market.
  • Create potential risks for lenders, title insurers and secondary market participants, through hidden liens and title defects.
  • Reduce the “transparency” of real estate transactions, because the fees “are often not disclosed by sellers and are difficult to discover through customary title searches.”
  • Impose “last-minute, dramatic, non-financeable out-of-pocket costs” on home buyers, creating “confusion and uncertainty” and complicating the transactions.

The covenants also ‘appear to run counter to the important mission of [Fannie Mae and Freddie Mac] to increase liquidity, affordability and stability in the nation’s housing finance system,” Edward DeMarco, the FHFA’s acting director, said in a recent press statement, adding, “Encumbering housing transactions with fees that may not be properly disclosed may impede the marketability and the valuation of properties and adversely affect the liquidity of securities backed by mortgages on those properties.”

Proponents of the fees contend that they are beneficial “when used to fund projects that enhance community investments,” DeMarco observed. But the FHFA is concerned that, more often than not, “the fees fund private streams of income for select market participants and do not benefit homeowners. Even if the fees are dedicated to homeowners associations,” he stated, “they are not proportional or related to the purposes for which the fees were to be collected.” In any event, DeMarco concluded, “the risks and uncertainties for the housing market that come with the use of private transfer fee covenants do not appear to be counterbalanced by sufficient positive effects.”

The Community Associations Institute (CAI), which represents condominiums and the common interest ownership communities, agrees that transfer fees charged by private development companies merit “regulatory scrutiny.” But the association wants the FHFA to distinguish between those fees and the fees that homeowner associations have used “for decades to help fund their reserve accounts or community improvement projects.” The FHFA proposal, which would ban all transfer fees, would be “catastrophic” for many of these communities, the CAI contends.

The public comment on the FHFA proposal closed earlier this month; the agency is expected to publish its final rule early next year.

GREENER GRASSES

Anemic home sale numbers notwithstanding, there is some demand for residential property; it just seems to be coming primarily from foreign buyers. “I have never seen such a high concentration of foreign nationals acquiring real estate,” Peter Zalewski, founder of a real estate consulting and brokerage firm, told the Associated Press. Zalewski estimates that close to 80 percent of condo purchases in downtown Miami involve foreign buyers, a trend he described as “unprecedented.”

A report by the National Association of Realtors (NAR) confirmed that trend. According to the NAR, 28 percent of the brokers responding to a recent survey said they had worked with at least 1 international client in the past year, with 18 percent reporting at least 1 completed sale. In the 2009 survey, 23 percent reported dealings with international clients, resulting in sales for 12 percent of them.

Industry analysts say depressed home prices and stock market volatility are persuading many foreign investors that real estate for now represents the better option. The weak U.S. dollar increases the appeal.

Although foreign buyers alone (which represent only about 7 percent of the total) can’t revitalize the nation’s housing market, industry analysts agree, the trend is helping to stabilize some particularly hard-hit markets, such as Miami, Los Angeles, and San Francisco.

“It’s a positive in a sea of negatives,” one real estate consultant told AP.

OVERDRAFT “OVERREACH”

Financial industry regulators, who have been accused in the past of racing to the bottom (toward the least restrictive regulations), appear to have reversed direction. The Federal Deposit Insurance Corporation (FDIC) has proposed new guidance for overdraft programs that goes well beyond the rules THE Federal Reserve Board (Fed) implemented earlier this year. The Fed rules generally require banks and credit unions to obtain “opt in” consent from customers before charging them for overdraft protection. But the Fed rules apply only to overdrafts triggered by ATM withdrawals or one-time debit transactions; the FDIC’s proposed guidance would require institutions with automated systems to provide an explicit “opt-out” opportunity for checking accounts and Automated Clearing House (ACH) transfers and to monitor those programs, offering customers who incur more than 6 overdrafts in a 12-month period less costly alternatives to overdraft protection, or eliminating the coverage for them entirely.

Banking industry executives, who haven’t exactly cheered the Fed’s overdraft rules, are furious about the FDIC proposal, which they say is overly restrictive, burdensome, would be costly to implement and would create a competitive disadvantage for smaller banks, because it would apply only to institutions supervised by the FDIC.

“The FDIC should avoid issuing any independent guidelines that would create a bifurcated regulatory framework for overdraft services,” Cary Whaley, vice president of payments and technology policy for the Independent Community Bankers of America, said in a comment letter submitted to the agency.

An FDIC spokesman told American Banker that agency staff members are analyzing the comments and will issue final guidance after the review is completed. But the goal underlying the proposal will not change, the spokesman emphasized, noting, “The FDIC remains committed to ensuring that banks monitor their overdraft programs to protect consumers from excessive fees as well as protect their own reputations as stewards of customer trust.”

HOME OWNERSHIP FLAME BLAZING OR FLICKERING?

The National Association of Realtors (NAR) is confident that the desire for homeownership remains as strong as ever, despite the body blows the housing market has absorbed from the subprime implosion, a prolonged recession and the continuing foreclosure crisis. As evidence that Americans have not given up their dream of homeownership, industry executives cite the NAR’s most recent Housing Opportunity Pulse Survey, which found that nearly 80 percent of respondents still view a home purchase as a solid financial decision, unaltered by the much-publicized decline in home sales and home values. Of the 1,209 urban and suburban adults responding to this year’s survey, more than two-thirds (68 percent) agreed that this is a good time to buy a home, while 39 percent described buying a home as “one of their highest priorities.” Only 21 percent said home ownership is not a priority at all.

Other analysts see more cause for concern. While the home ownership dream may still beat strongly in American hearts, they suggest, the pulse is noticeably weaker in the hearts of younger Americans. These analysts are particularly concerned about members of Generation Y – the approximately 85 million people born between 1981 and 1999, who will drive housing market trends for the next two or three decades, but whose employment prospects and life views have been battered severely by this recession.

“With a 30 percent unemployment rate and an average $23,000 post-college debt, they’re not saving for a down payment, and their parents, struggling to recover their own retirement savings, can’t help,” John McIlwain, senior resident fellow at the Urban Land Institute (ULI), said during a recent ULI housing forum.

Other panelists echoed his concern. Having witnessed the struggles of family members and friends, trapped by falling home prices and rising unemployment, they noted, Gen Y is far less likely than previous generations to view home ownership as an automatic and essential wealth-builder. The likely result, McIlwain predicted: Less home buying and “unprecedented” rental activity over the next decade.