Sunday, February 22, 2009

Congratulations on your 500% LTV mortgage!


Welcome to Detroit Mortgage Meltdown. I'll acknowledge that the mortgage meltdown/foreclosure crisis has been going on for some time now both nationwide and in the Detroit area, and that this blog is a bit late to the party. In particular, my neighborhood Indian Village in the city of Detroit experienced a lot of mortgage fraud from 2005 to 2007, which it is now recovering from. Here is a story about one particular sale in the neighborhood from just last year, in case you thought that tightening lending standards had eliminated the problem. I originally wrote this a few months ago for our neighborhood newsletter.


The Home

2415 Seminole has been empty for some time. In 2006, the home went through a mortgage fraud scheme in which someone purchased the home for $170,000 and flipped it to a second buyer four months later for $400,000 with a $380,000 mortgage from Wells Fargo. This second buyer (most likely a straw buyer) never moved in and promptly foreclosed eight months after the purchase.

Since then, neighbors have closely watched the home. A couple of windows were boarded up after break-ins. The home was dark at night, power had been turned off long ago. With only a few exceptions, the lenders maintaining foreclosed homes in the area do not turn power on or make any serious attempt to make the homes looked lived in to prevent burglaries or scrapping.

Like many homes in this historic district, this 4000 square foot early 20th century home has hardwood floors, trim, and details such as original stair rails. It also has galvanized steel plumbing, which oddly enough is an asset considering that copper plumbing would be at greater risk for theft in a home left vacant for several years. In 2007, the neighborhood association installed a battery-powered security device as part of a larger effort to protect the vacant homes in the district.

During this time, the house was listed on realtor.com and other realty websites. I happened to check on these dates and recorded the prices:

• May 15, 2007 - $192,900
• August 21, 2007 - $162,900
• January 14, 2008 - (not listed)
• February 23, 2008 - $74,900

It looked like the lender wasn't going to recover much from their $380,000 mortgage.

One late evening in April of 2008, with the help of the security device, some neighbors were alerted to the sight of a thief dragging a claw foot tub out the front door of the house. He had apparently dragged this heavy cast iron tub down from the second floor by himself. The neighbors chased him away and moved the tub back inside the house.

A New Sale

Things began to look up in May of 2008. Lights were turned on! The home had been sold, and workers showed up at the home and began to work on wiring and cleaning things up. Good times.

But by July, activity had come to a halt again, and the grass in the yard grew high. No one had moved into the home.

More recently, I decided to look up the sale deed information for the home on the Wayne County Register of Deeds site. Here are the recent deeds:

• 4/23/08 - 208235439 - $32,000 Sale from Wells Fargo to "NRC Construction"
• 4/29/08 - 208187950 - $198,000 Sale from "T T Financial Services" to an Ibrahim Elmallah of Dearborn
• 4/29/08 - 208187952 - $168,300 Mortgage taken out by Ibrahim Elmallah from Taylor Bean Whitaker Mortgage Corp of Ocala, Florida, and handled by Lighthouse Title Agency, 48967 Jefferson, Chesterfield, MI.

So, here we have a house purchased from the bank for $32,000, then sold to another party only six days later for $198,000, six times the price!

The mortgage for the 2nd sale is $168,300, 80% of the sale price, which on the surface would appear to be a typical 20% downpayment mortgage. Or, a Loan-To-Value (LTV) ratio of 80%. Given the current mortgage meltdown nationwide, banks have tightened lending standards over the last year. So in many cases, depending on your credit score, income and debts, an 80% LTV mortgage may be the highest you can obtain. The lower the LTV, the less risky the loan is for the lender.

But if we consider the real value of the home to be $32,000, since that was the price the bank took for the home 6 days prior, then the true LTV for this mortgage would be $168,300 / $32,000 = 526% LTV! We'll round it off and call it a 500% LTV mortgage.

Now, it may be that the $32,000 sale price was a bit lower than true market value, that's hard to say. After hanging onto an REO (foreclosed) property for 18 months, a bank may be ready to dump it quickly at whatever price it can get, especially for a cash offer. So the true LTV for the new loan might be "only" 300% or 400%.

(Also note that Wells Fargo took a hefty loss here on the previous $380,000 mortgage, making only $32,000 back. When you subtract realtor fees, property taxes and maintenance costs over 18 months, it's probably a roughly 100% loss (or loss severity) for Wells. Mortgage fraud tends to do that.)

What Will Happen Next?

Not surprisingly, the track record is not so good for mortgages on homes which are quickly "flipped" (resold) at a huge markup like 2415 Seminole was. Looking through my neighborhood records for 2005-2007, I found 6 homes that were similarly flipped within 6 months for at least double the price. All 6 of them foreclosed with 15 months.

Add in the fact that the grass is a foot high and no one has moved into the home, and it doesn't look good for this mortgage. But perhaps I shouldn't pre-judge. What do you think will happen with this house? Will it foreclose? Or am I being too pessimistic? I set up a poll in the left column, you may cast your vote.

The Appraisal

You may have figured out that my main point here is that the lender Taylor Bean Whitaker Mortgage Corp should have never provided this $168,300 loan. If they hadn't, this likely upcoming foreclosure and continuing blight on the neighborhood would have been avoided. For the lender to underwrite this loan, there must have been an appraisal supporting the $198,000 sale price.

To be fair, it's quite possible that both the lender/underwriter and the appraiser did not have a record of the $32,000 April 23 sale only 6 days prior, so they may not have known about this quick flip with the huge price markup. A sale deed usually takes considerably longer than 6 days to show up in the county deed records, and indeed, in this case the April 23 sale deed wasn't recorded by the county register of deeds until several weeks later on June 16. There were major problems a couple of years ago at the Wayne County Register of Deeds with sale deeds taking several months to be recorded , which facilitated all sorts of shenanigans, but this has improved recently.

And an appraiser's job is not easy in this neighborhood, you can't just rely on comparables and square footage. True market values can range from $100 per square foot for exquisite homes in excellent condition to $10 and under for fixer-uppers with optional plumbing.

But there is one piece of information that blows the $198,000 appraisal out of the water -- the listing price history! Recall the realtor.com listing prices that I mentioned above, steadily decreasing from the high $100's down to $74,900. This history from websites like realtor.com may not be available to those who haven't been writing down prices like I have, but there is a basic history kept in the Multiple Listing Services (MLS) used by realtors. Here is the history from one MLS system:

2415 Seminole:
Listed 5-24-07 for $162,900
Re-listed 7-25-07 for $95,000
Re-listed 1-31-08 for $31,500
Sold for $32,000 for Cash through a non-MLS participant agent on 5-6-08.

I believe this system only keeps the history of re-listings, and not every single price drop, such as the $74,900 that I happened to write down (see last month's article). But the bottom line is that if this property was on the market for a few months at $31,500, it is not worth $198,000!

The Mortgage

Looking at the mortgage documents (which are also available from the register of deeds), I see that along the bottom of each page it reads "MICHIGAN--Single Family--Fannie Mae/Freddie Mac UNIFORM INSTRUMENT Form 3023". I take this tagline to mean that this mortgage is a Fannie/Freddie conforming loan, which means that the mortgage would be immediately sold to Fannie Mae or Freddie Mac.

Also of interest in the mortgage is Uniform Covenant #6 which states "Borrower shall occupy, establish, and use the Property as Borrower's principal residence within 60 days after the execution of this Security Instrument". As of today, more than 180 days after the mortgage was executed, there is still no one living in the home, so the borrower would appear to be in violation of this covenant.


A kitten among a litter hiding in some insulation in the backyard of 2415 Seminole, fall 2008

Inexcusable

A couple of years ago, as I was just learning about mortgage fraud in this neighborhood, I would have considered the lender to be a "victim" of this fraud. Now, in 2008, after the implosion of hundreds of mortgage lenders, I can't imagine that the remaining lenders aren't watching out for this sort of thing. If someone at the lender isn't directly in on the fraud, there is probably at least a willful glossing over of problems in order to keep loan volume up, which is made easier by reselling the loan to another party, in this case Fannie Mae/Freddie Mac. In some cases, a looting mentality may set in. Now that Fannie and Freddie have been bailed out by the U.S. government, the losses from the foreclosure of this loan would ultimately be paid by you, the U.S. taxpayer.

Whatever may have happened behind the scenes, it was inexcusable for the lender, Taylor Bean Whitaker Mortgage Corp, to underwrite this loan without verifying the appraisal by doing a basic check of the house's listing history. Same for Fannie Mae/Freddie Mac. Our neighborhood is now stuck with another home which will probably foreclose in the next few months and remain vacant into next year.

There were over twenty Early Payment Default (EPD) quickie foreclosures in our neighborhood in 2006-2007 which were the result of inflated appraisal/straw buyer mortgage fraud schemes similar to this one. This is the only one we've seen so far in 2008, but we're sick and tired of these types of "flips", and any similar transactions are going to be under a microscope from now on, and will be posted here on this blog. We'll contact the authorities, and we will also contact Fannie Mae/Freddie Mac to alert them regarding any loans which may violate their guidelines, so that they might push them back to the originating lender, who then has to eat the loss instead of the taxpayer. Better safe than sorry.

Lastly, on a positive note I should mention that sales of these foreclosed homes have finally jumped up in the last few months, with real homeowners moving into several of these homes. This is good news for the neighborhood, but not necessarily good news for the lenders (and the rest of the U.S. financial system infected by these toxic mortgage securities), as the purchase prices are much, much lower (as in 70-90% lower) than the original inflated values on the foreclosed fraudulent mortgages. Prices have not fallen nearly this far for the "normal" non-foreclosed home sales in the neighborhood.

Anyway, we are happy to welcome our new neighbors, many of whom are getting great deals on their homes.

2 comments:

Doug said...

FYI, there is additional discussion of this mortgage over on the implode-o-meter forums:

http://forum.ml-implode.com/viewtopic.php?t=97195

Kerry Adams Kerry said...

Prior to the time of closeout for Detroit dispossession, you need to verify that you have resolved to pay for your approaching property. Else, it would be not all that keen.