voiceofsandiego.org: Opinion... Quick, Everyone -- Into the Foreclosure Sanctuary!

Wednesday, July 30, 2008 | City Attorney Mike Aguirre has filed a lawsuit against Bank of America and its new subsidiary Countrywide. The central complaint of the suit appears to be that Countrywide engaged in fraudulent practices by putting people into high-risk mortgages and that Countrywide, as Aguirre put it in a press statement, "originated loans with little or no regard for the borrowers’ financial ability to afford the loans or to sustain homeownership." The suit is intended to prevent Countrywide (now Bank of America) from initiating foreclosure on any homeowner who has a high-risk mortgage and who actually occupies the home.

"If Aguirre wants to put a halt to foreclosures without changing loan balances, he won't help many people. And if he hopes to force reductions in loan principals, he could cripple the mortgage market..."

The lawsuit may be well-intentioned, but it's unlikely to help San Diego and there's a fairly good chance that it will make things worse.

It's true that many borrowers were defrauded by members of the mortgage industry. The mortgage industry participants involved should be thoroughly smacked around by the long arm of the law.

But the suit seems much more sweeping than that. It attempts to stop Bank of America from foreclosing on any owner occupier -- fraud victim or not -- with a high risk loan. ("High risk" here is my shorthand for low-down payment, "teaser-rate" loans that trade low initial payments for higher payments down the road). And Aguirre stated that he "would like to see San Diego become a foreclosure sanctuary." The suit seems less intended to protect fraud victims than to stop San Diego foreclosures outright.

There's a big difference between those two goals.

It's true that many borrowers were defrauded. But a lot more borrowers weren't defrauded. Most of the borrowers who have defaulted or will default on their mortgages are in that situation because they willingly took on high risk loans in order to buy homes that they couldn't really afford with the intent of profiting from home-price appreciation.

This type of behavior was absolutely rampant during the boom. To cite just one representative statistic, an incredible 67 percent of San Diego mortgages issued throughout most of 2006 had teaser rates.

Rather than being pressured or defrauded into taking on high-risk loans, most boom-time borrowers eagerly snapped them up. Perhaps Countrywide had, as Aguirre put it, "little or no regard for the borrowers’ financial ability to afford the loans or to sustain homeownership." But neither did the borrowers themselves.

Whether these borrowers acknowledged it or not, they were taking a big gamble on the housing market. When that gamble didn't pay off, they bailed out.

A sizable subset of this group, incidentally, lied about their incomes so that they could purchase more expensive homes than the lenders would have allowed.

Do all these people really get to be in the sanctuary too?

According to the lawsuit and Aguirre's statements, the answer is yes. People who took unwise risks and even those who themselves defrauded Countrywide are now being protected, at someone else's expense, from the consequences of their own actions. Chalk up another bailout attempt.

Whether you consider it a bailout or not, it's not clear how this suit will help those who deserve it.

Let's review some background.

It's important to understand that foreclosures are not causing the housing downturn. The downturn is the result of the massive speculative bubble by which home prices rose far beyond the levels that could be supported by local incomes. Now the bubble has burst and prices are falling back toward reality.

Foreclosures are an effect of this process, not its cause. Most people who default on their mortgages do so because they are "upside-down" meaning that the home loan amounts, which are based on bubble-era pricing, are greater than the values of the homes themselves. Borrowers in this situation often have little incentive to keep paying a loan that's worth more than the home itself when they could rent an equivalent home for less than they are paying on their loans. So, they stop paying the mortgage.

In this type of situation, preventing a lender from foreclosing doesn't actually help the borrower, who'd still be better off dumping his or her oversized mortgage.

The only way to actually help the borrower in such a case is to reduce the loan balance so that the borrower is no longer upside down. But that ushers in a whole new set of problems. True, it would help some people at first. But then everyone else, seeing that they could get their loan balances reduced if they stopped paying their mortgages, would want in, too.

The potential chain reaction of mass defaults could cause the entire mortgage market to seize up. This would almost certainly render the housing situation worse, not better.

If Aguirre wants to put a halt to foreclosures without changing loan balances, he won't help many people. And if he hopes to force reductions in loan principals, he could cripple the mortgage market and substantially worsen San Diego's housing crash.

The lawsuit carries another potential consequence. No matter who wins this round, lenders may start to feel that they will no longer be allowed to foreclose on homes in San Diego. As a result, they may be reluctant to issue future home loans here without protecting themselves through higher rates. The lawsuit could potentially make it substantially more difficult or expensive for a borrower to get a mortgage in San Diego.

Such futility and unintended consequences are to be expected when politicians try to fight the symptoms rather than the disease.

Here at voiceofsandiego.org we've been warning for years that the boom-era frenzy of risky mortgage lending -- still well underway when we started writing about it -- would have dire consequences. If the lenders were to be taken on, that was the time to do it.

But the risks were studiously ignored back when the good times appeared to be rolling. Now the damage is done. The money's already been borrowed and home prices have been driven into the stratosphere. All that can be done now is to allow the damage to heal.

Home prices have to come back down to levels that are supported by incomes. The bad loans must be purged from the system. That's the only fix at this point. This process will not be pleasant, but it will be vital to restoring the long-term health of San Diego's housing and mortgage markets.

Like all the other bailout attempts we've seen, Aguirre's lawsuit seems intended to short-circuit this crucial return to normalcy. And like other bailouts, it is likely to do more harm than good.

Rich Toscano hosts the "Nerd's Eye View" on voiceofsandiego.org. He is a financial advisor with Pacific Capital Associates*; he also writes about San Diego real estate at Piggington's Econo-Almanac. Contact him at rtoscano@pcasd.com.

Many good points you have there, hope you have a pocket-protector to keep your shirt from holes poked in your shirt. However, it seems the ‘Foreclosure Sanctuary’ is the best tool we have, right now, to keep people in their homes? That is, at least until the people who CAN lower the principle of those loans or CAN raise the incomes of those people holding the loans stop being so GREEDY. I believe you will find that average net incomes, for those making less than $250,000 a year, have decreased some 500 dollasr a year, every year, for the last seven years. Anyway – what else do you feel we can do RIGHT NOW that would be better than ‘Foreclosure Sanctuary’?

Posted by Gregory | reply to this comment
July 29, 2008 5:34 pm

Investigative journalist Benjamin Dover discusses mortgage fraud, and how to legally avoid foreclosure on KUSI. link It will force lenders to talk with homeowners. The Navy just stopped the preditory payday loans for sailors. link This is the same legal fraud protection for homeowners. It is positive, will help the the City's General Fund, plus help neighborhoods. Fighting fraud and corruption is good. There_is limited protection, not_all qualify for_intervention. a. The loan is an_ARM with an introductory period of three years_or_less; b. The loan has an introductory or teaser rate for the initial period that is at least 3 percent lower than the fully indexed rate; c. The borrower has a debt-to-income ratio that would have exceeded 50% if the lender's underwriters had measured the debt due under the the fully indexed rate; and d. The loan-to-value ratio is 100% or the loan carries a substantial prepayment penalty.

Posted by La Playa Heritage | reply to this comment
July 29, 2008 6:06 pm

It would be better to let those underwater WALK AWAY from their poor INVESTMENT choices. Let someone who was wise and waited for the bust to purchase their home. Don't wise people deserve a home too? An affordable home? Wasn't it just a few years ago that people were whining that home prices were too high and not affordable (the same ones buying homes with stupid loans). They wanted the government to do something about it. Now people want the opposite? If you were too greedy or unwise and bought a house you can not AFFORD, simply walk away and let someone who was more patient than you buy their home.

Posted by to greg | reply to this comment
July 30, 2008 4:57 am

While your point re deceptive borrowers may be correct in some cases, and while I agree that greedy people who got caught up in this trying to 'flip' real estate for a quick profit deserve no help or bail-out, any lender who made a loan to anyone based on non-existent income deserves to be punished. All the tools a lender needs to verify income are readily available to any lender, so failure to verify income is an obvious lack of due diligence in their lending practices, and the purpose of that is, guess what, to make loans that shouldn't have been made in the first place. This amounts to nothing less than lender conspiracy with the lying borrower. I think what Aguirre is attempting to do is a legit attempt to keep people in their homes and is also a generally correct attempt to punish the right people, predatory lenders.

Posted by Jaxonb | reply to this comment
July 30, 2008 6:16 am

Should Aguirre succeed in actually stopping foreclosures, the unintended consequences will be terrifying. Real Estate loans are very inexpensive compared to virtually any other readily available loan. The reason for that is realiable collateral that can be foreclosed upon relatively quickly and inexpensively. Anything that makes foreclosure more difficult, expensive, and time consuming will ultimately cause cause financing to be more expensive and less available. The vast majority of homeowners are paying their loans as agreed. It would be be awful for everyone seeking a loan to be faced with higher rates or lower availabilty. Lenders certainly engaged in terrible underwriting. They would be better off negotiating with many current borrowers rather than foreclosing. It is hard for me to imagine that courts and legislatures can improve on the judgement of the lenders.

Posted by Norman Hamlin | reply to this comment
July 30, 2008 8:48 am

CAVEAT EMPTOR CAVEAT VENDITOR! But what should be done? Obtain the name of every loan officer and home buyer that committed a mortgage fraud crime, and punish them all with fines and jail. Let the invisible fist of the market do its mysterious and painful thing to correct ridiculously high housing prices. The politicians are myopic. CAVEAT EMPTOR CAVEAT VENDITOR!

Posted by Skip | reply to this comment
July 30, 2008 9:25 am

Jaxonb. Read Rich's link about peopel lying about their income... Up to 60% of people lied about their income by inflating it by 59% or more. These people do not deserve to be kept in their homes. They are liars and committed fraud. Why should Aguirre protect people who committed fraud in a way that, as Rich points out, may end up hurting the rest of us? If your only answer is that predatory lenders should be punished...well, take a look at bank stocks. The lenders who made these loans, and their shareholders, are being punished with huge losses and write-downs. Let the foreclosures happen and let housing proces continue to drop... that will be good for those of us who would like to buy a house in the near future, especially those of us who previously looked to be priced out of SD.

Posted by El Cajonian | reply to this comment
July 30, 2008 9:45 am

I am a Homeowner in San Diego and have been since 1998. When I first bought my home I struggled to make the (then) High Payments, but somehow I managed and after 10 years what seemed like the stratosphere then is now reasonable. The jest of the story is any bailout really angers me because what about all of us who did not try to cheat the system and make money? Who just kept making their payments are you going to lower my loan balance or is just the greedy one's the one's who get a bailout? That just does not pass the smell test - Does it? It is not fair to us who played fair - I say NO BAILOUT for People who clearly bought with a huge profit in the End as a reason to take a risk. Just what is a risk anyway?

Posted by Donald Reno | reply to this comment
July 30, 2008 10:43 am

Let's see. Banks are taking a beating due to their lax lending laws while Aguirre is suing them to assume more liabilities. Borrowers are foreclosing and taking a beating due to their greed. Everyone is suffering except members of the National Association of Realtors (NAR). They're still making their 3-4% commission, cherry picking foreclosed homes and reselling them, and blaming the housing mess on the banks. Last time I looked, it wasn't the bank selling me an over priced home...it was a Realtor telling me that home prices are increasing and now is the time to buy. Granted not all Realtors are bad (like Jim the Realtor), but Aguirre should go after the NAR and Realtors that did not look out for their buyer's best interest (like Jenae). They are the ones that created this mess.

Posted by Ron | reply to this comment
July 30, 2008 11:22 am

Before you think that it is someone greedy holding those mortgages that are going to foreclosure, realize that it is your pension that holds them!! Your pension effectively loaned the money for the mortgage. So your pension through the Mortgage Backed Security loaned $500K to an individual who now wants to be shielded from having to pay it back. What this will do is cause mortgages in this area to have a very high down payment. The interest rate spread and down payment is all about managing risk. If the mortgage holders have to contend with losing additional money due to a foreclosure haven, they will just up the required down payment or avoid the market completely. Who can pony up a 30% to 40% down around here?

Posted by ucodegen | reply to this comment
July 30, 2008 4:54 pm

The comment to the effect that lenders are not getting punished, is not correct. Remember the banks going bankrupt? See ml-implode.com for more info. The lenders are getting punished, the pension plans are getting punished. The MBS paper is trading at nearly 20 cents on the dollar (see Merrill Lynch). They loaned out $500k and are only getting $100K back. And by they, I also mean your retirement funds and pension funds that loaned out money to get returns so that people can afford to retire.

Posted by ucodegen | reply to this comment
July 30, 2008 5:05 pm

You wish may soon be granted Poster #3. This may be a perfect time for all those homeowner who are living pay check to pay check (some 70% of our citizens) to pack-up the truck and move to greener pastures. Silly water conservations policy; some 20% of San Diego already living in poverty and the Mayor seems to think that water rate increases will do the job of Water conservation for him? The poor are already using as little water as they can - Mr Mayor. Moreover, another water rate hike will do little more than increase the stresses already felt by some 64% of people living in San Diego who make less than $47,000 a year. I hope all those people do walk away, just as you suggested; It could their best move - long term.

Posted by Gregory | reply to this comment
July 30, 2008 6:01 pm

The statement that borrowers willingly took on high rish loans to buy homes is misleading. MOST of the loans going south are from refinancing, not from purchasing. People purchase a particular property only once, but due to ever better offers they "refied" numerous times & each time pulled a little (or a lot) of fictitious equity out. These peolpe shouldn't be rescued in any way, they've already been given more money than can be justified.

Posted by Bryan Lee | reply to this comment
July 31, 2008 9:29 am

And when home prices drop below 1995 levels, and when all those ‘fools’ as you seem to be calling (that 70% of people living paycheck to paycheck) leave our fair city, and as earned wage incomes continue to decrease and tax revenues continue to disappear; I hope you will be happy as San Diego turns onto a ghost town worse than at any time sense the 1950s.

Posted by Gregory | reply to this comment
August 1, 2008 10:37 am

Most of these "high-risk" borrowers that took on "high-risk" loans hardly put down any equity in the first place. So what are they really losing in foreclosure? Nothing. And if they had equity at one time and subsequently re-fied themselves into foreclosure through a sketchy loan, again, I have no sympathy. Here's my solution. Keep the foreclosures moving as scheduled, but force the lenders to pay every borrower $5,000 cash (or maybe some set percentage of the loan balance, say 1%-2% with a ceiling) in order to help them move out and put down a deposit on a rental. Bang. Problem solved. Borrowers get to move into new housing without undue financial stress and the lenders get to foreclose and market the properties without undue friction. Why should we cry over borrowers who hardly risked any equity in the first place?

Posted by Dave | reply to this comment
August 1, 2008 1:28 pm

It is obvious that there is plenty of blame to share for both lenders and borrowers. The banks lent to unqualified people and borrowers took loans that they obviously could not afford. The real issue here is that our city attorney is again grand-standing for the headlines. Aguirre has no business in this arena.

Posted by SMF | reply to this comment
August 2, 2008 6:06 am

I have lived in San Diego for 59 Years since I was born and it will not turn into a ghost town Gregory! San Diego has always been a sought after Place to live because of the Climate and the Ocean. Again let the Market straighten it's self out. Those who lose their homes should never have refinanced and pulled out their equity thinking they would be rich because of the Rising values and could sell if they got in a bind. San Diego Real-estate has always fluctuated up and down over the 59 years I have lived here (I was born here) Any bailout for Risky investment choices should not be permitted, do you reward your children when they make mistakes? I think not. What about the buyers who did not refinance their homes do they get Rewarded also? Or do just bad choices get Rewarded?

Posted by Donald Reno | reply to this comment
August 2, 2008 9:14 am

I do not believe you understand the extreme danger our faced by our local and national economy. Sense 2000 (perhaps earlier) average earned wage incomes have been decreasing at a rate of about $500 dollars a year. Sense 2000 we have seen a basic tripling of Food, Energy, Insurance, and housing costs. To overcome these wage/cost disparities as they were re-presented in 2001 ‘a short term problem’ Greenspan, and the all the mainstream economist marching behind him, suggested that ‘they should make-up for shortfalls in earned wage income by taking the equity out their homes.’ The average American worker, seeing that he should get over the 911 attacks and ‘get out there and shop’ because the ‘terrorist what you to stop shopping,’ was more than happy to follow the advice of the FED and suggestions of our ‘conservative’ leaders. The Credit Expansion Economy has reached its limits, the majority of the private citizens, as well as our City, State, and Nations have reached or will very soon reach the limits of their ability to make the required credit maintenance payments.

Posted by Gregory | reply to this comment
August 2, 2008 9:40 am

As these limits and space of the Credit Expansion Economy have been reached, it does not only stop growing (realistically) but implodes - due to the disparity of real earned wage incomes and actual Costs of Living. Than why does it seem like the economy is still growing? Simple, because of the interest value created by and attached to all the debt. In 2006 we paid some 260 billion dollar in interest change just on our national debt, I believe you will find that debt growth and the interest paid upon that debt are considered as positive contributors to our GDP. (You should find that is was not a positive in the formula for GNP) If some 50% of our ‘economic growth’ is created (for generation implies and creation of something real) by the interest charged against already existing debt – you have a constantly increasing level of interest as well as growth to the amount of the principle. Therefore, you have what shows up as GDP as economic growth – yet is simply reflective of the applies interest rates charged against debt at all levels.

Posted by Gregory | reply to this comment
August 2, 2008 9:50 am

Anyway, what I am trying to say is that it appears that things will be very bad, very soon. Many people who believe themselves to be ‘safe’ and ‘secure’ may soon find themselves in a very ‘unsafe’ and ‘unsecure’ economic state. I hope that I am wrong about all these, but I am not counting on that hope. I had someone ask me in 2000, what would be a good investment – I told him Buy Gold and Silver. Last year the same young man asked me the same question – asked me if he should continue to buy Gold and Silver; I told him only if you can eat it and can through it hard enough to protect yourself.

Posted by Gregory | reply to this comment
August 2, 2008 10:01 am

I doubt this has anythign to do with lenders or borrowers, but is an attempt to keep houses occupied and prices from falling as fast... As prices fall, so falls the city revenue.

Posted by GH | reply to this comment
August 2, 2008 8:04 pm

You know, it is really not even your faults that you continue to support our local representation of the Global Credit Economy…, after all, you are told to support it by every ‘professional’ economist, Politician of every color, and the Big Business and Corporations…. Those who (through their incessant advertisements) tell you to borrow more and more and well beyond your means…. Those how tell you that you deserve to access the ballooning values of your homes - simply so you may take on the attribute of what you buy and gain a ‘value’ that you can display on your ever more public front stage. As if the value of a person and the worth of a person is somehow reflected in what they buy; in the stead of the personal mantel of ethnic and integrity that we wear in every day life, or in the truth we hold in our private hearts - as being true for all mankind.

Posted by Gregory | reply to this comment
August 3, 2008 11:13 am

Dave, I think you’re wrong. Unless you consider some 70% of the people in San Diego who are living paycheck to paycheck to be "High Risk Borrowers." Or, perhaps it is the case that you consider only that small about 8% of people living in San Diego who could afford an average priced home (in the first quarter of 2007)‘NOT high Risk Borrows’ and the close to 92 % who could not afford an average prices home to be “High Risk Borrows.”

Posted by Gregory | reply to this comment
August 3, 2008 7:18 pm

Gregory, if home prices in San Diego return to 1990s levels, then god bless us one and all, people living paycheck to paycheck will be able to afford to buy a house. That's the point. Fiscal irresponsibility by politicians and stagnant wages are seperate issues. The fool in the market is the sucker left holding the bag, taking a loss, regardless of class or income level. Thats how it works. Reasonable home prices will only help attract people to San Diego. Total unproductive debt in the U.S. is 26 Trillion dollars (government debt, consumer debt, mortgage debt). Actual inflation since 1970 is 6% annually. Inflation and debt are probably the primary causes of the economic problems you mentioned. Reasonable home prices do not cause economic problems.

Posted by Skip | reply to this comment
August 4, 2008 7:59 am

San Diego does not have the water nor the infrastructure to support that 'growth'. Did you read - "Second biggest jump in prices in nearly three decades as gas prices climb." Earned wage incomes dropping, cost of living going up hand over fist. People can try to attach all the positive spin you want, let see who is correct this time next year, shall we? Trend appears to mark an equalizing of global Labor markets; GINI index is getting worse and worse (in the United States) every year. Home prices are falling – food and water and power are still going-up and that 3% who controls some 87% of our Nation’s wealth – that is the only group whose membership it shrinking. I do not really what to debate mortgages and credit markets with people who seem to be suffering from selection bias. Have a nice day...

Posted by Gregory | reply to this comment
August 4, 2008 11:35 am

Gregory, few people would disagree with your diagnosis of the diseased financial state of San Diego and the nation. Credit kills. Your prognosis that San Diego will become a ghost town and that the nations economy will collapse is hysterical, and even ludicrous. You might be correct. But fundamental structural changes to banking and money creation, debt reduction, and relatively sound economic policies can evolve without calamity. That is basically what the people debating you think, and that is the bone of contention. It is a reasonable "bias". But what does that have to do with the foreclosure sanctuary? Whether calmaity is imminent or not, the Aguirre plan is dumb, as Toscano explained.

Posted by Skip | reply to this comment
August 6, 2008 10:25 am

El Cajonian: I don't disagree that housing costs in SD need to be adjusted downward, but think a minute about how fraudulent lending practices contributed so much to driving them upward. Just because you'd like prices to drop so you can afford a home doesn't change or invalidate the point of my argument, and nor does it mitigate the conspiratorial guilt of predatory lenders. Anyone who ever bought a home prior to this round of thievery knows full well that you can't get away with falsifying your income on a mortgage loan application IF the lender actually checks out your claims. If the job they are getting paid to do instead is to make the loan whether the applicant qualifies or not, that is called, guess what, predatory lending. If you think the people behind these practices have already been punished, I think you're not really paying attention.

Posted by jaxonb | reply to this comment
August 6, 2008 10:25 am

"It is a reasonable "bias"." No bias is reasonable unless one believes opinion is of more worth than objective research and data. We few economist who actually dared to speak-out publicly and conferences ‘years ago’ as well as may other forums were continuously the victims of scorn and ridicule launch by the 'mainstream economists' who claimed our economy was in no danger. Now we are seeing many of those same 'mainstream economists' trying to claim that they warned the public ‘years ago.’ How sad is that?

Posted by Gregory | reply to this comment
August 8, 2008 10:01 am

My home was about to foreclose and due to the caos caused by the mess of "what did i get myself into. I finally figured out the real reason why this has happened to me and maybe what is happening to everyone all over loosing their homes. My story if interested can be told but I am at work and have little time, thats my problem when it came to trying to figure out where i went wrong well it took me a whole year to realize that I was a victim of faulsified documents and because I read them before never thought I would have to read them again once I signed well I found that the reason why my loan kept on getting turned over to a new loanservicer so that I would loose track of what i had signed and later found that the informationcontained

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October 7, 2008 12:12 pm

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Posted by muthu | reply to this comment
January 19, 2009 3:44 am

Quick, Everyone -- Into the Foreclosure Sanctuary!

By Rich Toscano