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(Inman News) In an acknowledged bid for publicity to deter future crimes, the FBI today announced it had charged 406 people involved in 144 unrelated mortgage fraud cases since March 1 as part of an effort dubbed “Operation Malicious Mortgage.”

The FBI said most of the cases involved lending fraud, foreclosure rescue scams or mortgage-related bankruptcy schemes, causing about $1 billion in losses. Five dozen people were arrested in 15 judicial districts on Wednesday alone.

Banks and other financial institutions filed 52,868 suspicious activity reports involving suspected mortgage fraud in 2007, an increase of 42 percent over the year before, the Financial Crimes Enforcement Network reported in April (see story).

The industry-financed Mortgage Asset Research Institute (MARI) says it may be three to five years before many instances of fraud and misrepresentation in loans made in 2007 are discovered. Many adjustable-rate mortgage (ARM) loans will be refinanced, “potentially blocking discovery of some of these issues,” MARI concluded (see story).

FBI Director Robert Mueller said today that the bureau obtained 321 mortgage fraud indictments and 260 convictions in 2007. The bureau has increased the number of agents devoted to mortgage fraud investigations from 120 in 2007 to 180, he said.

Asked whether the 1,400 mortgage fraud cases the FBI currently has open represents only a fraction of the problem, Mueller said it was a “substantial number of investigations,” and, from his perspective, “not a small number.”

But he acknowledged that the bureau has “always had to prioritize” resources, “particularly in the wake of (the) Sept. 11″ attacks, after which the FBI diverted many agents from white-collar crime investigations into counter-terrorism efforts.

Mueller acknowledged that one reason several months of statistics on mortgage fraud arrests were released at today’s press conference was “the deterrent factor,” and the desire to let criminals know “we will follow up (on suspicious activity reports), we will investigate, and justice will be done.”

The FBI identified builder-bailouts, seller assistance, short sales, foreclosure rescue and identity theft exploiting home equity lines of credit as among the most prevalent mortgage fraud schemes in 2007 (see story).

In an unrelated action, the U.S. Attorney’s Office for the Eastern District of New York announced indictments of two senior managers of two failed Bear Stearns hedge funds. Ralph Cioffi and Matthew Tannin were charged with conspiracy, securities fraud and wire fraud in connection with alleged misrepresentations made to investors before the funds collapsed in the summer of 2007 at a $1.4 billion loss. Attorneys for the men maintain they are innocent.

Mueller said the bureau continues an investigation of 19 companies involved in the origination and securitization of subprime mortgage loans for possible accounting fraud, insider trading, and the failure to disclose the valuations of securitized loans and derivatives.

The new jumbo loans that were supposed to get the real estate market moving haven’t done the trick. A congressional hearing on Thursday examines why.

NEW YORK (CNNMoney.com) — When the housing crisis hit last summer, it became very hard for borrowers to land the jumbo loans they needed to buy homes in high-priced areas, like California and New York.

So as part of the Economic Stimulus Act, Congress tried to get funds for jumbo loans flowing again by temporarily raising the dollar limits for mortgages that Fannie Mae and Freddie Mac can buy. The two government-sponsored entities (GSE) had previously only been permitted to buy so-called conforming loans of up to $417,000 and then resell them on the secondary market.

The new limits raised that conforming loan cap to as much as $729,750 in some high-priced metro areas through Dec. 31, in order to make home loans more readily available to help stabilize falling markets.

But the move hasn’t juiced the market, and so the House Financial Services Committee is holding a hearing Thursday to examine why.

“The liquidity crisis in mortgages has given added impetus to expanding the conforming loan limit in high-cost areas. As the correction took hold last fall and winter, jumbo and other non-conforming lending all but ground to a halt in many markets,” said Thomas Lund, executive vice president for Fannie Mae in his testimony.

Higher prices persist

Despite the increased caps, these new “conforming jumbo” loans – between $417,000 and $729,750 – are still more expensive than the conforming loans below $417,000.

For months after the conforming jumbos were introduced, interest rates for them ranged between a point and a point and a half higher than on regular conforming loans. That made jumbo loans much more expensive; for a $600,000 mortgage, a borrower paid an extra $400 to $600 a month.

In the past, the spread between jumbo and conforming loans was much smaller, a quarter point or so.

“[The raised caps] produced less activity than I thought they would,” said Rep. Barney Frank, D-Mass., in opening remarks at the hearing.

“Beneficial effects have be slow to materialize,” added Spencer Bachus, R-Ala., ranking member on the committee.

The problem: The investors who buy mortgages on the secondary market still consider these new conforming jumbo loans riskier than the original conforming loans, and put a higher risk premium on them.

“The ultimate investor was not comfortable with the prices of the new jumbos,” said Rob McDonald, director with the global business advisory firm FTI Consulting. “The secondary market participants needed to accept the prices Fannie and Freddie were offering.”

That reluctance comes despite the fact that buyers who use jumbo mortgages tend to be better credit risks and often put more money down, McDonald said.

Part of the problem is simply that fear is contagious.

“If there’s a credit squeeze, despite the higher credit profiles of jumbo loans, there’s hesitancy on the part of mortgage backed securities buyers,” he said. “This gets to the correlation between subprime secondary mortgage markets and conforming secondary markets.”

A different kind of security

Indeed, Fannie and Freddie don’t actually package conforming jumbos for sale to investors in the same way they treat sub-$417,000 conforming loans. They are not what’s called “TBA-eligible.” These are “to-be-announced” transactions where the purchase price is settled at some future date.

The Securities Industry and Financial Markets Association decided in February to exclude jumbo conforming loans from TBA-eligible pools. But the TBA market is well established and understood by investors, according to Jay Brinkman, an economist with the Mortgage Bankers Association.

“Buyers of securities feel very secure about this market,” he said. “They’re accustomed to the pricing and they know how the securities perform.”

The exclusion of conforming jumbos from that market makes them a somewhat unknown security. “No one is sure what their performance will be, so no one is sure how to price them,” said Keith Gumbinger of HSH Associates, a publisher of mortgage market information.

The Mortgage Bankers Association argued that the new conforming jumbos should be issued as TBA products, but there was resistance to this. Others were hesitant to introduce any new element that might harm the conforming loan market.

“They said, ‘The conforming market is the only one really functioning. Don’t mess it up by adding jumbos to it,’” said Brinkman. Indeed, jumbos perform differently for investors than conforming loans.

Jumbo borrowers are more likely to pay off their loans early, which cuts off the revenue stream of their interest payments for investors, while those with $100,000 mortgages tend to keep making the same monthly payment year after year.

If jumbos were packaged with these in the same mortgage-backed securities, investors would require higher interest rates to purchase them. Borrowers of conforming loans would have to pony up the increased interest, in effect subsidizing more affluent, jumbo loan borrowers.

There are other risk factors that makes investors wary. Jumbos are, by definition, less diverse geographically; they’re only available in about 70 metro areas – many of the most challenging markets in the nation.

“Look at the markets where these are offered,” said Gumbinger. “It’s where home prices are falling. An investor will say, ‘I’ll buy them but I have to get more yield out of them.’”

In early May, Fannie changed in the way these loans are handled; instead of packaging them for sale on the open market, they are keeping them in their portfolios. Fannie can set the price itself and is doing so as if the loans were TBA-eligible.

And weekly mortgage application statistics show that the pipeline for the loans has opened up during the last couple of weeks.

In
March 2007, 12.1% of all mortgage loans requests were for jumbos. A year later, only 4.4% were. During the past couple of weeks, jumbos have accounted for 5.8% of all applications.

According to Freddie Mac Vice President Patricia Cook, interest rates for conforming jumbos are now a full point below regular jumbos and only two-tenths of a percentage point higher than conforming loans.

Gumbinger confirms that spreads between conforming and jumbo conforming have narrowed down to below half a point, good news for home buyers in high-priced areas.

Meanwhile, however, interest rates for non-conforming jumbo loans have not improved much, according to Gene Choi, president of Commodore Mortgage Group. “In that market, the pricing is still much higher,” he said.

“In January, I had a guy buying a $1.4 million home in New Jersey whose loan was going to be in the upper sevens, 7.875% or so,” said Choi. “He was very surprised.”

By Les Christie, CNNMoney.com staff writer Updated: May 23, 2008: 3:09 PM EDT

INFLATION SCARING INVESTORS

(NY POST) June 1, 2008 — Just as the US economy is beginning to digest the effects of the credit crunch and economic slowdown, a third demon, possibly more crippling, is rearing its head – inflation.

The US Treasury market shuddered lower last week, sending yields on 10-year notes to their highest point this year – briefly at 4.13 percent – as investors moved their cash to more inflation-safe options.

The steep drop-off in bond prices – the price moves in the opposite direction to yield – sped up as Dallas Fed President Richard Fisher said that the Federal Reserve could reverse course and tighten US rates sooner, not later, if the inflation expectations started to worsen, according to Market News International.

The move by the 10-year note, together with the signals that the Fed could raise rates, is likely to push up mortgage rates and that could extend the nationwide housing slump.

“We are entering into a new regime of higher inflation opposite the dis-inflationary period we saw over the last 20-plus years,” said Jim Caron, Morgan Stanley head of US interest-rate strategy.

The broker’s economists have pegged 5.5 percent as the upside risk for inflation this summer. That’s quite a jump from the current annualized 4.2 percent year-on-year CPI.

Rapidly rising prices for food and gasoline have pinched consumer spending over the past two quarters.

The movement of the 10-year note was enough last week to spur fears of 1970s-style high inflation, when the Fed had to crank the key fed funds rate up to 13.5 percent in May 1974 to fight back inflation and 20 percent in 1980 and 1981. It stands now at 2.0 percent.

Caron predicted “the next asset bubble will be inflation protection assets.”

Treasuries Cracking! Rates Rising! 

(MoneyandMarkets.com – Mike Larson) Over the last several weeks, I’ve been steadily ratcheting up my warnings on the interest rate front. On April 25, I noted that the “Bond King” Bill Gross believed Treasuries were overvalued — and that he was aiming to profit from a decline in bond prices (and corresponding rise in yields). My message for you…

“Gross is betting on the same thing I’ve been warning you about for some time — that bond prices will fall and interest rates will rise. The market’s recent action suggests that’s just what we’re going to see.”

Then several days later, on May 9, I got even more explicit. I warned you right here that “The bond market is on the brink.” Specifically, I said …

“Bonds are right on the brink of a significant technical breakdown. An uptrend in long bond futures prices that dates back all the way to last June recently gave way, and now, bonds are testing their 200-day moving average.

“If this area of support fails, I think we could see a quick, nasty fall of as much as five points. Yields on the benchmark 10-year Treasury Notes could spike sharply.”

This week, the breakdown I’ve been talking about has gotten underway. If you haven’t already acted to protect yourself, you can’t afford to wait any longer!

The charts tell the story — bonds are in big trouble

I’m a fundamental analyst at heart. But I also pay a lot of attention to the “technical’s” — what the charts show. Look at this chart below of the long bond futures and a few things should jump right out at you …

First, we cracked through a multi-month uptrend in mid-April. That’s labeled “Break #1″ on the chart.

Then, we sliced through the 200-day moving average. That’s labeled “Break #2.”

Now, it looks to me like we have NO significant support until the 110 area. So we could drop that far in a virtual straight line. If we do, that means bond futures could potentially shed 12 full points from their January high — a big move for bonds!

The fundamental reasons behind this move should be very familiar to you by now. But to quickly recap …

Rates are way too low given the current level of inflation.

The Federal Reserve has slashed short-term rates to the bone in an effort to save the financial system. But in the process, it has unleashed a mammoth wave of commodity inflation.

Meanwhile, inflation and economic growth remain strong outside of the U.S. That is pressuring interest rates higher — and bond prices lower — worldwide.

What falling bond prices mean to you!

Many people think about bonds in terms of their interest rates, or yields, rather than prices. So let’s shift to that side of the ledger.

Yields on the benchmark 10-year Treasury Note have already risen from a low of 3.31% in mid-March to around 4.12% now. If I’m right about where bond prices are headed, 10-year yields could shoot all the way up to the 4.5%-4.75% range.

That’s important for a couple of reasons …

1) Long-term mortgage rates aren’t directly controlled by the Fed.

Bond market traders and investors determine where they go. When investors are confident about the outlook for credit quality and inflation, they buy mortgage and Treasury bonds. That drives rates down. When investors are worried about rising credit losses and rising inflation, they sell. That drives rates up — or at least prevents them from falling much.

Just consider: The Fed has slashed the federal funds rate by 3.25 percentage points since last summer. But the average rate on a 30-year fixed mortgage is hovering right around 6.08%, according to Freddie Mac. That’s down only slightly from the 6.3% area at the beginning of last September, when the rate cutting campaign began.

Now, bond investors are turning into aggressive sellers. So I’m expecting rates on 30-year fixed mortgages to start RISING. In fact, I wouldn’t be surprised to see them head into the 6.5%-6.75% area over the next couple of months. That’s exactly what borrowers who are trying to refinance — and shoppers who are trying to buy homes — DON’T want to hear. But it is what it is.

2) The Fed usually follows the bond market.

The Fed rate cuts haven’t done much for people who are hunting for 30-year fixed mortgages. But they have brought down the cost of certain loans, such as home equity lines of credit. That’s because these loans feature rates that adjust to the prime rate, and the prime rate follows the federal funds rate in lock step.

The Fed cuts have also driven down the London Interbank Offered Rate, or LIBOR. That, in turn, has reduced the magnitude of the rate and payment increases that certain subprime and prime Adjustable Rate Mortgage (ARM) holders have had to cope with.

But here’s the thing: The Fed pays attention to market signals. If bond prices start falling fast, Fed policymakers will interpret that as a sign that fixed-income investors are losing confidence in the Fed’s inflation-fighting resolve. And they’ll react — first by trying to “jawbone” the market and second, by actually raising short-term rates.

Don’t believe me? Look at how many Fed speakers have paraded in front of various podiums to re-iterate the Fed’s inflation-fighting mantra. Dallas Fed president Richard Fisher was only the latest, saying yesterday in San Francisco:

“If inflationary developments and, more important, inflation expectations continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later.”

The Fed clearly won’t be cutting short-term rates again when it meets on June 24 and 25. But the more important question investors should be pondering is “When will the Fed start HIKING rates?” I think it could be sooner than the market expects.

Hopefully, you’ve been heeding my warnings and moving money out of long-term bonds. I can’t stress enough how when bond prices start to fall, and interest rates start to move, they tend to do so with gusto. Protect yourself!

What You Need to Know to Get a Mortgage

(New York Times) Getting a mortgage used to be as easy as choosing the right color paint for a new home. Don’t have stellar credit? No problem. No verified income? Step right over here. High debt-to-income ratio? Sign on the dotted line anyway.

“Two years ago, we had a meeting where a mortgage broker said, ‘If you have pulse, I can get you a mortgage.’ ” said Klara Madlin, the president of the Manhattan Association of Realtors and owner of Klara Madlin Real Estate. “And I thought, ‘We’re in trouble.’ ”

Most people have heard about foreclosures’ becoming more common because borrowers cannot pay the escalating rates on their mortgages. But what about those looking to get a mortgage now, either as a first-time buyer or someone hoping to sell a place and move on? What challenges face them?

Many.

“There is a new prudence in mortgage lending,” said Keith Gumbinger, a vice president of HSH Associates, a mortgage research company in Pompton Plains, N.J. Mortgage lenders, he said, are “interested in traditional mortgage buyers who will document their income and assets and don’t have sizable debts relative to their income.”

Potential buyers can no longer waltz in with 5 percent or even 10 percent down. Most banks are asking for 15 to 20 percent, or even more.

“As I like to say, 80 is the new 90,” said Melissa Cohn, the president of the Manhattan Mortgage Company, referring to the maximum amount lenders will now finance. And if you have any financial issues that lenders might see posing a risk, “it’s much harder to get an exception.”

Mortgage lenders willing to hand out a loan with competitive rates are taking a much closer look at several factors:

CREDIT SCORES A borrower’s credit score — also known as the FICO score, which was created by the Fair Isaac Corporation in the mid-1990s — is a chief determinant of eligibility for loans. Most applicants now need a score no lower than 660, and in some cases lenders are not willing to go below 720.

DEBT-TO-INCOME RATIO This is the percentage of a borrower’s income that goes toward paying debt. Lenders calculate it two ways. There is the front-end ratio, which includes housing costs like the mortgage principal and interest, mortgage insurance premium, if applicable, and property taxes. The back-end ratio includes any other debts like car or student loans, credit cards and alimony. Mortgage companies used to take applicants with debt-to-income ratios as high as 55 percent, brokers say; now the maximum is in the mid-40s. By the way, a borrower’s credit card limit counts as actual debt, regardless of whether the card is even used.

DOCUMENTING INCOME Most lenders are no longer willing to settle for stated income, without document verification, preferring instead that applicants provide all the necessary paperwork to prove income. So-called no-doc loans — often used by seasonal or self-employed workers who have a harder time proving their income — have also been called “liar loans,” because some borrowers have been known to exaggerate their earnings.

LIQUIDITY Banks require that borrowers have a certain amount of money readily available — equal to 3 months to 36 months of payments, depending on the lender, according to Ms. Cohn — to cover mortgage and insurance.

Before, these stipulations were not as onerous. “You were allowed to have multiple layers of risk, and still get a mortgage,” Mr. Gumbinger said, referring to what lenders consider as negatives, like low down payments or credit scores. “Now you might be allowed one risk.”

Val Kleyman, a self-employed lawyer from Staten Island, knows this firsthand. He bought a two-bedroom town house three years ago; his wife then had their first child and wanted to move on to a bigger place in the same borough. He had put down 20 percent on the town house and made payments on his adjustable-rate mortgage diligently on the first of each month.

Mr. Kleyman would seem to be the perfect customer for another mortgage from his same lender.

“I called the bank, saying I wanted a mortgage for a bigger house,” he said. “They said: ‘That’s very nice. You always pay on time, but we can’t give you a mortgage.’ ”

Actually, the bank would give him a mortgage, but only with a 25 percent down payment. As he had with the town house, Mr. Kleyman wanted to give his lender a stated income — with no supporting documentation — rather than a verifiable income.

He plans to hold onto his first house and rent it out, and that would count as debt against him. He is also self-employed.

In the past, Mr. Kleyman found that getting a mortgage with a stated income was not an obstacle; he might have had to pay a slightly higher premium, but that didn’t bother him. He could afford to pay 20 percent down, but an extra 5 percent is a stumbling block.

Mr. Kleyman has looked at other lenders, and some of them want as much as 30 percent down. Now he will either have to bring in his father or another relative as a co-borrower or scrape up the extra cash for the down payment.

While it’s hard enough for people wanting to buy existing homes to come up with the extra down payment, new-home buyers have their own set of problems.

Ms. Cohn of Manhattan Mortgages says that about a quarter of her clients put down deposits on new construction a while back, before the homes were completed. Now that they have been, some would-be buyers are being required to put down an extra 10 percent. “They got preapproved for 90 percent,” she said, “but half those banks don’t exist anymore, and even if they do, the preapprovals have elapsed.”

One client in Manhattan signed a contract for a $6.5 million apartment, but when the time came to close, he could not find the additional down payment that the bank required. “He had to trade down for a smaller apartment, and bought one for $3.5 million,” Ms. Cohn said.

Alexandra Nicholson, a communications manager, had a similarly challenging experience as a new-home buyer. Ms. Nicholson thought she was all set last year when she signed a contract for a condominium in a building under construction in the Washington area.

She was promised an 80-15-5 loan, meaning she would get a main mortgage of 80 percent of the home’s purchase price and a piggyback loan for 15 percent at a slightly higher interest rate, then make a 5 percent down payment herself. With none of the industry’s risk factors and fully employed, she would have been a shoo-in until recently.

In April, her mortgage broker suddenly informed her that he could give her the mortgage only if the condominium had 51 percent or more occupancy.

“I called six lenders in two days,” Ms. Nicholson said. “No one would finance me.”

So she pulled out of that deal and is now looking for another place. But in the meantime, her 80-15-5 mortgage deal disappeared, and now no one is willing to resurrect it. She can still put 5 percent down, but will be required to buy mortgage insurance, which will cost an extra $100 to $140 a month.

“I’m not sure what to do anymore,” Ms. Nicholson said. “Every time I turn around, the rules have changed, making it harder for me to get a place.”

Ms. Nicholson, fortunately, did not lose her deposit, because the builder never cashed the deposit check. Some have not been so lucky, however.

“It depends upon the individual contract you sign with the builder,” Mr. Gumbinger said. Besides amassing a more sizable down payment, buyers need to make sure their finances are in order.

“People can’t push the envelope like they could in the past,” said Allyson Bernard, an owner and broker with Real Estate Professionals of Connecticut. “You have to show much more documentation and financial history. Things that could slide 12 months ago aren’t sliding anymore.”

Foreign buyers with no credit history in this country are finding it particularly tough to get mortgages, Ms. Bernard said.

“Some people come from a country where there is corruption and graft, so they’re distrustful of banks,” she said. “They have to find a bank they’re comfortable with, open a checking account and start running their income and bills through a bank. They need to show a pattern over two, three, four months.”

Sometimes the mortgage hinges on issues completely out of a buyer’s hands. Ms. Madlin recalls a young couple who were preapproved for a mortgage, but at the last minute were turned down anyway. Even though the appraisal matched the selling price, she said, “the bank thought the price was going to drop in the next six months.”

Those looking to sell one place and move into another are finding that lenders are much more reluctant to hand out bridge loans, according to Ms. Madlin, who says that banks are telling potential buyers to sell their first property before trying to buy another.

Ms. Bernard advises people to plan ahead. “They can’t wake up one day and say they’re going to buy a house,” she said. “They need to sit down with a Realtor and know what to do. If there’s something on your credit report, it can take a long time to clean up.”

Also, “leave no stone unturned,” Mr. Gumbinger added, when looking for a suitable mortgage. Buyers will need to look at options they may not have thought of before, like mortgages for military veterans or from credit unions or labor unions; such organizations may have good rates and can help guide buyers through the loan process.

There are also state and federal programs; for example, New York has the State of New York Mortgage Agency to assist low- and moderate-income buyers.

The Federal Housing Administration, which does not make loans directly but insures loans made by private lenders to home buyers, has seen an increase in the number of loans it has insured over the last few years. The F.H.A.-secured mortgages are available at many banks and usually require no more than 3 percent down, at competitive rates, to anyone with a fairly good credit history and debt-to-income ratio of no more than 43 percent, including the mortgage.

To help stimulate the economy, Congress passed a bill, effective in March, which, among other things, raised the ceiling on the loans that the Federal Housing Administration can give through the end of this year. The maximum loan is now 125 percent of the median sales price for the area, ranging from a maximum of $729,750 to a low of $271,050 depending on the location. (Previously, the agency’s limits were a low of $201,160 and a high of $362,790.) Congress is considering bills that would permanently raise the loan limits.

According to an agency spokesman, more people are opting for F.H.A. loans. In the last two fiscal years, the agency insured about 425,000 loans. It projects that in the 2008 fiscal year, the number will be 1.6 million.

While buyers may bemoan the greater difficulty in getting a loan, most real estate brokers and mortgage brokers agree that the current situation is no surprise.

“There was such greed by the lenders to have their bottom-line balance sheet show a profit, that they gave out programs to people they probably shouldn’t have,” said Mark Grossman, the president of the Mountain Mortgage Corporation, which based in Union, N.J. “They didn’t care about the homeowner.”

“But it’s all cyclical,” he added. “When it’s too much one way, everyone goes overboard the other way. I’ve been in this business since 1972 and eventually in a number of years, everyone will forget what happened and we’ll see the same syndrome.”

Villains in the Mortgage Mess? Start at Wall Street. Keep Going.

(Washington Post) Yes, the executives at Countrywide Financial Corp. planned a top-dollar shindig at a ski resort earlier this year, just after the bank’s multibillion dollar losses on subprime mortgages required a shotgun marriage to Bank of America. (A Wall Street Journal story forced them to cancel the party.) And sure, Bear Stearns chief executive James E. Cayne was off playing golf last summer as two of his investment bank’s hedge funds collapsed under gargantuan subprime losses. (He’s been dumped.)

But so far, the current mortgage meltdown hasn’t featured the crasser displays of the 1980s savings and loan fiasco, when executives partied hearty — one banker famously dressed up as a king and served lion meat to his guests — as they created a mortgage industry mess that cost taxpayers more than $500 billion.

As a reporter for this newspaper, I covered the savings and loan debacle in depth and later wrote a book about it. Watching the current crisis unfold, I see much of the same behavior that led to the “S & L Hell” of two decades ago. Indeed, some of the fixes for the last problem led directly to this one. Once again, too many people had access to other people’s money with too little oversight. Once again, the White House, Congress and federal bank regulators failed to police the financial services industry because they mistook deregulation for a system without any reasonable rules. And now as then, our saga is chock-a-block with people and institutions deserving special mention in the Subprime Hall of Slime.

But make no mistake: Today’s crisis dwarfs the S&L fiasco. The eventual cost to taxpayers of this scandal is likely to make yesteryear’s culprits look like pikers.

The short version of how we got here: Lenders, fat with money made cheap by the federal government, aggressively coaxed millions of borrowers to take out unaffordable mortgages. They lent this money without assessing whether borrowers could repay it. They assumed, in fact, that most wouldn’t be able to and would have to refinance into new, equally unaffordable loans. This process would produce an endless cycle of fees for the lenders — but only if home prices rose, fairy-tale-like, forever.

On what planet would that be an acceptable business plan?

Here’s a longer version of how this happened, with a nod of recognition to the many actors who made it possible.

First and foremost: Wall Street. In the 1990s, after the S&L blowout — and bailout — an innovation called securitization took hold on Wall Street to spread risk among many investments and investors. The idea was to insulate mortgage lenders from the ravages of sharp interest-rate spikes that could catch them holding low-interest mortgages even as depositors demanded high-interest returns on savings — the very thing that had sparked the savings and loan industry’s turmoil.

By the end of the millennium, securitization in the housing market was a huge, well-greased mass production line. Mortgage finance giants Fannie Mae and Freddie Mac — companies chartered by Congress to finance home lending — bought home loans from banks, then bundled hundreds of them together to secure a bond, called a mortgage-backed security. Wall Street investment bankers bought the securities, which then traded freely in the bond market. For a fee, Fannie and Freddie guaranteed the mortgages behind every security against default, so they required lenders to assess each borrower’s ability to repay a loan — a prudent practice known as underwriting.

Fannie and Freddie’s underwriting rules are the gold standard by which lenders evaluate the creditworthiness of “prime” borrowers, people whose strong credit histories make them a low risk and therefore eligible for the lowest borrowing charges.

Fannie and Freddie competed fiercely with each other to create these bonds at the best price, paying less and less for the loans they bought from banks. Securitization became so efficient that it shaved profits in the prime market paper-thin. In response, by 2000, a market had sprouted to lend to “subprime,” or higher-risk, borrowers, who could be charged more for loans. Many of these individuals had been denied access to credit for decades because of their skin color or the neighborhoods they lived in — a process known as redlining for the magic-marker boundaries lenders drew on maps to show which areas were off limits. (Subprime didn’t turn out to be a boon to minority home ownership, however; many minority families have ended up as the biggest victims in this mortgage mess.)

Wall Street firms were also eyeing the subprime market. They began buying and bundling subprime mortgages into “private-label” mortgage-backed securities. But Wall Street didn’t guarantee the loans it bought, so it had no financial stake in assessing borrowers’ creditworthiness. Which meant that lenders didn’t have to care, either.

Wall Street investment banks soon became crazy for loans to people with impaired credit, who could be charged more for a mortgage because of the higher chance of default. Absent any rules, including any preventing lenders from mislabeling borrowers a high risk, subprime lending standards slipped, and mortgage signings on a car hood in the driveway became a not uncommon sight.

Banks and mortgage lenders. They hardly needed persuading to get on the bandwagon. Lenders had just gone through wildly profitable 2003, when falling interest rates ignited a boom in refinancing — and refinancing fees — among prime borrowers. Wondering how to keep it going, lenders realized that they could expand it into the subprime market by qualifying borrowers with loans carrying a low teaser rate — in the 8 to 9 percent range for a subprime loan — then refinance them into another loan before unaffordable higher interest rates in the double digits kicked in. And if they could steer unsuspecting prime borrowers into subprime loans, they could even inflate the subprime market itself. So lenders paid mortgage brokers a kickback for steering borrowers into higher-priced loans.

Lenders also slashed downpayment requirements from 10 percent to 5 percent and even to zero. They quoted monthly payment figures that didn’t include taxes and insurance to dupe borrowers into believing that their payments would be lower if they refinanced. If lenders didn’t evaluate borrowers’ credit at all, they could deem them a higher risk and charge more. Brokers and bank officers often didn’t bother to tell borrowers that providing income and job verification would lower the loan’s cost considerably. In fact, a majority of subprime customers — 61 percent in 2006, by one count — could have qualified for less expensive conventional loans.

To those who say that these folks knew what they were getting into, ask yourselves this: Would six of every 10 people knowingly pay more for a product than they had to?

In 2005 and 2006, the height of the market, most subprime loans had high prepayment penalties and deceptively low teaser rates. Borrowers were told that, before the rate increased, they could refinance into another loan, again with a teaser rate that would adjust after two or three years. Lenders made sure that the new loan would be bigger so that it could cover the fees they paid themselves, including thousands of dollars in prepayment penalty fees that borrowers weren’t aware of but had to pay before they could retire the first loan and get a new one. Eventually, the new loan would be financed by another, even bigger loan, which could be approved only if the borrower’s house kept appreciating, which everyone assumed would happen.

The private-label, subprime bond market grew from $18 billion in 1995 to nearly $500 billion in 2005. Wall Street sold subprime everywhere: to public and private pension funds, foreign governments and financial conglomerates, even fishing villages in the Arctic Circle.

Then the unthinkable happened: In 2006, home appreciation slowed. That slowed refinancings, which revealed that much of the appreciation had been caused by the breathless refinancings in the first place. As the higher double-digit rates that lenders must have known borrowers couldn’t afford kick in, delinquencies, defaults and foreclosures are exploding. Credit Suisse predicts 6.5 million foreclosures over the next five years.

Here are the other culprits to finger in this sordid tale.

The White House. A few sounded the alarm early on. In 2000, during the final months of the Clinton administration, Treasury official Gary Gensler, while commending banks for making more prime loans to people and communities that had been underserved, noted that subprime lending had also expanded, with some troubling accompanying trends, including a worrying increase in foreclosures.

Eight months later, George W. Bush became president. The new administration paid no attention to the developing crisis. On the contrary. In 2001, the Department of Housing and Urban Development barred class-action suits on complaints about kickbacks that brokers receive to steer borrowers into pricier loans. At the same time, Bush, heralding the subprime market for opening doors to home ownership, said that it didn’t need more rules. (He should have talked to his dad, who, as vice president under Ronald Reagan, saw the same mistake being made during the S&L scandal.)

The maestro. In 1994, Congress gave the Federal Reserve Board authority to write the rules for all mortgage lenders. In the past 14 years, the Fed has done next to nothing. Its most comprehensive attempt to impose order came five months ago, when it proposed a new set of rules so anemic that on some issues, such as prepayment penalties, they are worse than the status quo.

In recent months, dozens of news reporters and bloggers have blamed former Fed chairman Alan Greenspan for the mortgage mess, saying that he made money too cheap by keeping interest rates too low for too long from 2003 to 2004. “Those who argue that you can incrementally increase interest rates to defuse bubbles ought to try it sometime,” Greenspan said recently. He has a point.

But what he does deserve blame for — big, big blame — is failing to exercise his power as rule-maker for the mortgage industry. Subprime lending could have continued, but with a few safety rules, such as “Don’t cheat people.” During a go-go free-for-all, Greenspan could have been the adult at the party.

Reckless speculators, with special mention for Angelo R. Mozilo. No lender better epitomizes bad behavior than Mozilo, the always tan and dapper chief executive of Countrywide. He continued to sell abusive subprime loans last year, even as the market unraveled. The Justice Department recently launched an investigation into his company’s lending practices. Under public pressure, Mozilo agreed earlier this year to forgo at least $37.5 million in severance pay triggered when the company agreed to be sold to Bank of America. Still, he left with a pension and retirement package worth tens of millions.

Congress. Why, with all this outrageous behavior under its nose, did the Senate last month overwhelmingly approve billions of dollars in tax breaks to industry but offer little to folks facing foreclosure? The answer: money. The financial services and real estate industries are far and away the largest federal campaign donors, giving more than $247 million in the 2007-08 cycle alone. Between 1999 and the end of 2006, as the subprime mess festered, the mortgage industry and its trade groups spent $187 million lobbying Congress, effectively blocking any efforts to ban abusive practices at the national level.

Fannie and Freddie. For the most part, they didn’t buy the most abusive subprime mortgages from lenders because the loans didn’t meet their standards. But they did buy private-label subprime bonds for their own investment portfolios to boost profits. From 2004 through 2006, these congressionally chartered companies bought a third of the $1.6 trillion in private-label bonds that Wall Street firms issued. This helped legitimize the market, giving pension funds and foreign governments additional (albeit false) comfort that these securities were safe.

Bush regulators have also allowed Fannie and Freddie to count these securities toward federally set goals for encouraging mortgage lending to low-income borrowers. As it turns out, the increase in home ownership, especially among minorities, that Bush has repeatedly touted as one of his presidency’s main goals has been a bust: Yale economics professor Robert J. Shiller points out that foreclosures have pushed the national home ownership rate back to nearly the 67.5 percent it was when Bush took office, and it’s likely to fall further. Minority families, which received a disproportionate share of subprime loans, will bear the brunt.

The enablers. The story would be incomplete without special mention of the credit-rating agencies, especially Standard & Poor’s, Moody’s and, to a lesser extent, Fitch. The firms, which had a conflict of interest because they were paid by the same folks who were issuing the securities, okayed subprime deals without sufficiently kicking the tires to make sure they held at least a little air. Wall Street didn’t guarantee the mortgages it bought against default, so buyers of private-label mortgage-backed securities bought private insurance, which insurers sold based on the credit-rating agencies’ stamp of approval.

Clearly, some of the so-called credit crunch we now find ourselves in isn’t a crunch at all but a return to sobriety. It means that money’s not so cheap and won’t be available at all for reality-defying investments, at least until this debacle fades from memory.

Meanwhile, the Bush administration, which has repeatedly balked at the idea of any government help for borrowers facing foreclosure, has let the Fed underwrite a $30 billion bailout of Bear Stearns and extend an open-ended line of credit to the other investment banks that created the subprime bubble. Among the collateral it said it would accept are . . . private-label mortgage-backed securities.

Yes, we taxpayers now own this stuff.

Homeowners pay more with mortgage brokers, study says

(Mercury News) A study of closing costs says that mortgage brokers charge more than lenders and African-American and Latino communities often pay more, the U.S. Department of Housing and Urban Development reported Friday.

The study, created by the department’s Urban Institute, said that those borrowers using a mortgage broker paid $300 to $425 more on average than those using direct lenders. Banks, thrifts, and credit unions offer the lowest costs, followed by large mortgage banks.

African-American families pay an average of $415 and Latino borrowers pay $365 more in total loan origination fees than non-minorities.

HUD spokesman Brian Sullivan said that while the agency was “disturbed ” by the racial and ethnic disparities in closing costs, “It tells us what everyone already knows,” he said. “Consumers operate in a fog and are being taken to the bank.”

Opponents disagreed with some of the findings.

“I doubt that it’s hogwash entirely, but there are some fundamental errors of fact,” said Pete Ogilvie, president of the California Association of Mortgage Brokers, who works in Santa Cruz. “We have studies showing that consumers pay less with mortgage brokers. And licensed mortgage brokers have a fiduciary duty to their clients in California.”

Ogilvie said he couldn’t immediately produce the studies that show consumers pay less than mortgage brokers.

Dustin Hobbs, spokesman for the California Mortgage Bankers Association said that the study’s relevance was debatable because of its seven-year-old data.

He also said he had problems with the concrete conclusions drawn from U.S. Census data. “There are so many more factors based on the borrower profile rather than a census tract,” Hobbs said.

Sullivan said that the statistics, which uses data from a national sample of 7,560 FHA-insured, 30-year fixed-rate home purchase loans closed in May and June of 2001, still show patterns that are relevant today. “The landscape is not any different today when it comes to how they price their products,” he said.

The complexity in loan documents could be alleviated with a few concise pages, HUD said. That’s why the department is promoting legislation for a “Good Faith Estimate,” three-page sheet of paper that clearly outlines the highlights of each loan in layman’s terms, Sullivan said.

The study also said that consumers with “no-cost loans,” where loan fees are rolled into the loan as a higher interest rate instead of closing costs, ended up saving an average of $1,200. Because the loans are based on interest rates, most would-be homeowners are savvy enough to know the lower the rate, the better the price.

“Loan originators know this and they can’t hide these costs,” Sullivan said. “Consumers just shop for the best interest rate and lenders are more likely to give the very, very best offer.”

Other findings included:

- Borrowers in African-American neighborhoods pay on average an additional $120 for title services and those in Latino areas pay an additional $110, compared to non-minority neighborhoods.

- Borrowers from neighborhoods where all adults have a college degree pay $200 less than those from neighborhoods where no one attends college.

“The neighborhood you live in determines how much you pay as much as anything else,” said Kevin Stein, associate director of the California Reinvestment Coalition, a group of nonprofits that advocates access to financial institutions for communities of color. “And unfortunately there’s too much discretion in the loan process to intentionally or unintentionally discriminate.”

US Bank Regulator Calls For OTS Regulation of Mortgage Market

A top U.S. banking regulator Thursday proposed that his agency oversee all aspects of the U.S. mortgage market in order to prevent future housing debacles.

John Reich, director of the Office of Thrift Supervision, said the woeful and sometimes predatory lending of the last few years suggests the need for “consistent regulation” of the mortgage industry. The OTS, which oversees savings and loan institutions, would be best suited for that role, he said.

“The OTS has the most extensive expertise of any regulatory agency in the oversight and supervision of mortgage banking operations,” Reich said in a speech to the New Jersey League of Community Bankers in Southampton, Bermuda.

Reich’s proposal to expand OTS authority is a direct shot at the U.S. Treasury Department and Secretary Henry Paulson, who earlier this year proposed doing away with OTS and the thrift charter as part of a broad blueprint for overhauling U.S. financial markets. The OTS has been sharply critical of the Paulson plan, and earlier this week Reich told reporters he planned a campaign to defend the agency beginning with Thursday’s speech.

The current financial crisis, Reich said, might have been averted if loosely- regulated mortgage brokers and lenders had been held to the same standards as federally-regulated banks. Instead, many of the biggest players in the subprime mortgage market were subject to inconsistent state regulation.

“We must establish a level playing field with the same rules for all competitors in the home mortgage sector, so standards do not fall to the lowest common denominator,” Reich said.

To address these concerns, he proposed a partnership between state and federal regulators to set and enforce minimum mortgage funds standards with the goal of uniform nationwide regulation of all lenders and brokers. Reich said he envisions a regime similar to that for state-chartered banks, which are jointly regulated by the Federal Deposit Insurance Corp. and state-banking regulators.

“I think it has become clear that we need federal oversight to ensure that mortgage banks and brokers compete by the same set of standards as insured depository institutions,” Reich said.

All mortgage originators, he continued, should comply with “basic credit principles, such as a reasonable assessment of the borrowers’ ability to repay.”

-By Michael R. Crittenden, Dow Jones Newswires; michael.crittenden@dowjones.com

Company ordered to pay $1.2M for mortgage scam

(Tribune) A Maricopa County Superior Court judge has ruled that a Chandler-based enterprise called Virtual Realty Funding Co. and its owner, Kenneth D. Perkins, violated state consumer-fraud and banking laws and ordered them to pay $1.2 million in restitution and civil penalties, according to Attorney General Terry Goddard.

In 2005 the attorney general’s office filed a consumer protection lawsuit against VRF after receiving consumer complaints. The company advertised that it could help homeowners who were behind in their mortgage payments avoid losing their homes. In fact, the transactions offered by VRF were structured so that homeowners would transfer title to VRF or sell the home to a business associate of the company, Goddard said.

“This case represents the worst in our community,” he said. “This company took advantage of homeowners desperate to save their homes from foreclosure and deceived them into turning over their homes.”

According to court documents, although neither VRF nor Perkins were licensed by the state’s Department of Financial Institutions as mortgage brokers or bankers, VRF loaned money to more than 60 homeowners facing foreclosure or in need of money. VRF designed its loans, which it called reverse sales, to evade laws protecting mortgage borrowers by structuring them as an outright sale of the property by the borrower, who then rented back the home with an option to repurchase it, Goddard said.

The reverse-sale agreements required homeowners to rent back their homes from VRF for a monthly amount equal to the monthly mortgage payment plus an additional charge. In the case of one homeowner, the monthly mortgage payment was $613 and the additional charge was $157, making a monthly rental payment of $770, Goddard said.

In return for “helping” the homeowners keep their homes, VRF agreed to transfer title back to the homeowner through a warranty deed if the homeowner met specific conditions. Conditions included the payment of all rent on time and payment to VRF for bringing the mortgage current, unspecified escrow fees and a “funding fee,” which was at times as high as $9,000. If homeowners were late on a rental payment or unable to repay the loan and funding fee within two years, they could lose their homes and any equity in them.

In the order issued by Judge Edward Burke, Perkins and VRF were prohibited from making any mortgage loan unless licensed as a mortgage broker or banker by the Arizona Department of Financial Institutions. Also they were forbidden from participating in reverse sales or similar transactions involving residential real estate.

The court ordered Perkins to pay $620,000 in civil penalties and $611,950 in restitution. James A. Buscher, the Tucson agent for VFR, was ordered to pay $10,000 in civil penalties.

The investigation of VFR was conducted by the Department of Financial Institutions, the Department of Real Estate and the Attorney General’s office.