Equity Is Altering Spending Habits and View of Debt

By Sandra Fleishman
The Washington Post

WASHINGTON — Consumer advocates around the country are begging states for new laws to help fight a rising tide of complaints about foreclosure "rescue" scams, but homeowners can do a lot to protect themselves.

The Boston-based National Consumer Law Center, which this week issued a comprehensive report on "the rampant theft of Americans' homes and equity" by con artists who promise to save houses from foreclosure, offers advice on how to avoid getting snared.

Prevention is the best medicine, they say, primarily because if a homeowner falls into a scam's clutches, it will take considerable money and time, a good lawyer and sometimes help from state regulators or prosecutors to undo the damage.

While fraud and forgery may be involved, and other unfair-trade or deceptive-practices laws may have been violated, state enforcement agencies often do not have the resources to help "or don't think they have the authority," said Elizabeth Renuart, a co-author of the report. In most states, she said, "they don't have the ability to save the house even if you prosecute. That's a civil issue."

The first advice is to ignore the posters offering foreclosure help that have been slapped up on telephone poles, in median strips and at bus stops in many working-class neighborhoods, says the report.

Ignore fliers dropped off on front porches or stuffed in mailboxes. Particularly ignore hand-written notes suggesting the "help" is coming from someone you know or who has your interests in mind.

"These kinds of signs crowd the streets in Virginia, Maryland, Florida" and other states where rescue scams are exploding, co-author Steve Tripoli said at a news conference in Washington in late May. "If the street signs don't get you, the fliers will."

They're also turning up in Western Washington. "We hear a lot of stories from people who are getting lots of things in the mail, getting things dropped off on their doorstep," said Erin Rearden, a housing counselor for the nonprofit Fremont Public Association, which aids homeowners in danger of foreclosure.

Common scam types


Phantom help:

The "rescuer charges outrageous fees, either for light-duty phone calls and paperwork the homeowner could easily have done or for a promise of robust representation for the homeowner that never materializes." The homeowner ends up without enough help to save the house and with little or no time to stop the foreclosure.

Bailout:

This includes various schemes where homeowners surrender the title to the house thinking that they will be able to remain as renters and buy the house back. Sometimes homeowners are told they have to give up the title so someone with better credit can get a new loan to stop the foreclosure. But the terms of the deal are so onerous that the homeowner can't buy back the house and the "rescuers" get all or most of the equity.

Bait and switch: Homeowners don't realize that they're signing away ownership. They often think they're signing documents for a new loan to make the mortgage current. These cases often involve fraud and forged documents. And in many cases, the original homeowners are frequently left holding the mortgage on a home they no longer own.

Source: National Consumer Law Center

Rearden says the offers seem to be increasing. And they usually sound too good to be true — a tip-off to professional housing counselors that the offers aren't legit. But some owners facing the loss of their home take the bait anyway because "they're so in despair that they'll take anything they think is going to help them," Rearden said.

Seattle Times reporter Elizabeth Rhodes contributed to this article

It seems like yesterday. But it’s only been a little over five years since we were going through the same drill that is playing out today -- bemoaning the excesses of an asset bubble and hunkering down for the inevitable post-bubble shakeout. Five years ago, it was the equity bubble. Today, it’s the property bubble. These are not isolated events. As night follows day, one bubble has spawned the next. And we have the Federal Reserve to thank for this grand continuum and the cumulative toll it is taking on the US economy. Sadly, as America lurches from bubble to bubble, the endgame is looking all the more treacherous.

The debate has an eerie sense of déjà vu. Today, there are those who dispute the very existence of a US property bubble. Similarly, five years ago, there were many who argued that US equities were not over-valued -- that, in fact, they were fairly valued on the basis of the powerful earnings potential of a high-productivity growth New Economy. Today, we hear tales of a “fundamentally-driven” housing boom -- supported by increased homeownership, immigration, low unemployment, and, of course, low interest rates. And there are those who repeatedly caution against characterizing property as a broad asset class -- especially in the context of fragmented real estate markets that are always distinguished by their “local” idiosyncrasies.

This is rubbish -- five years ago and, again, today. In March 2000, not all stocks had risen to dot-com excesses. But enough of them did to take the overall S&P 500 index down by 49% in the bubble carnage that followed over the next two and a half years. Today, nationwide US house-price inflation is at a 25-year high in real terms. That doesn’t mean every home in the country has hit bubble-like valuations. But in the first quarter of 2005, double-digit house-price inflation was evident in 23 states plus the District of Columbia. In 25 of the top 100 metropolitan areas, the rate of home price appreciation was at least 20%. Investors -- not owners -- are currently accounting for 11.5% of newly-originated conventional mortgage loans; that’s up from a 2% low in late 1995. And mortgage financing has shifted dramatically in recent years into exotic and risky floating rate obligations such as interest-only and negative-amortization loans; moreover, as Tom Lawler of Fannie Mae notes, this shift into floating-rate borrowing cannot be explained by the factors that traditionally drive such trends -- the level of mortgage rates and yield curve spreads. Something else must at work.

That something else is a bubble. Residential property has become the asset of choice for investors in a low-return world awash in liquidity. As The Economist has long stressed, this property bubble is global in scope -- by their reckoning, “the biggest financial bubble in history” (see the Special Report in their 18 June 2005 issue, “The Global Housing Boom”). The worldwide scope of this asset bubble makes it tempting to dismiss America’s problem as part of a broader, more powerful trend. Again, I would argue this is nonsense. The US is very much in control of its own destiny insofar as coping with the excesses in asset markets. In that important respect, America’s equity and property bubbles have one key ingredient in common: The principal blame for both bubbles, in my view, lies with the Federal Reserve.

Unlike most other major central banks, the Greenspan Fed has long maintained that asset markets are not within the purview of its policy mandate. The Bank of England, the Reserve Bank of Australia, and, belatedly, the Bank of Japan all believe differently. Ottmar Issing of the European Central Bank has argued that asset markets pose one of the greatest challenges for modern-day monetary policy -- that central banks must now weigh “the risks associated with asset-price inflation and subsequent deflation (see Issing’s 18 February 2004 editorial feature in the Wall Street Journal, “Money and Credit”). America’s Federal Reserve sees it differently. But it wasn’t always that way. Long ago, when America’s Asset Economy was in its infancy, Alan Greenspan worried about “irrational exuberance.” But he quickly changed his mind and went on to champion the equity culture spawned by the New Economy. In my view, that was a policy blunder of monumental proportions.

The rest is history -- and a sad history at that. By electing to condone the greatest equity bubble since the late 1920s, the Fed has been snared in a low real interest rate trap -- in effect, locking itself in to a serial bubble-blowing strategy. To counter post-equity bubble aftershocks, the Fed slashed its policy rate by 550 basis points to 1% -- vowing that it had learned the tough lessons of Japan (see the now-seminal research report by the Fed’s research staff, “Preventing Deflation: Lessons From Japan's Experience in the 1990s” by Alan Ahearne; Joseph Gagnon; Jane Haltmaier; Steve Kamin, et. al., June 2002). And then in the face of a full-blown deflation scare -- a classic and predictable symptom of a post-bubble shakeout -- the Fed maintained an uber-accomodative policy stance that is still in place today. It pushed the real federal funds rate into negative territory for three years (2002-04) before finally taking it up to the zero threshold, where it remains today.

Bubble after bubble has since percolated to the surface during this period of extraordinary monetary accommodation -- especially in a multitude of fixed income products (i.e., Treasuries, investment-grade corporates, high-yield bonds, emerging market debt, and a host of credit instruments). With overnight money basically free in real terms, the “carry trade” was a no-brainer -- investors and speculators alike could pocket the spread anywhere on the yield curve. This created an artificial demand for fixed income securities that was quick to take on bubble-like implications of its own.

Out of this same mania, the property bubble was borne. Behavioral economics tells us the American consumer should have been decimated once the equity bubble popped in 2000 -- the pain of loss should have been far greater than the ecstasy of gain. But US households never skipped a beat. House price inflation took over where the equity bubble left off, and the Fed’s post-bubble rescue plan facilitated the greatest bonanza of them all -- a massive wave of home mortgage refinancing that became a powerful supplement for an income-short US consumer. The home became the cash machine -- the manna from heaven that drew its sustenance from rock-bottom interest rates. And it became contagious -- as most bubbles do. The more consumers succeeded in extracting purchasing power from their assets, the greater the demand for the asset. Once borne out of a legitimate effort at post-bubble life-style defense, the asset-based consumption mindset took on a life of its own. Like the carry trade in fixed income, this phenomenon created an artificial demand for the underlying asset. We now call it a property bubble.

Dangers cumulate as one bubble follows another. That’s because debt invariably enters the equation. And that has certainly been the case in recent years. Not only does the outstanding volume of household sector indebtedness now stand at a record of nearly 90% of GDP, but this ratio has soared by 20 percentage points over the past five years (2000-04) -- equal to the rise that took place over the preceding 15 years (1985-99). Moreover, household sector debt-service burdens are at historic highs when scaled by disposable personal income -- truly astonishing in a climate of rock-bottom interest rates. That means it wouldn’t take much of a back-up in rates to put a real squeeze on the over-extended American consumer. Moreover, given the low “teaser” rates that have lured increasingly large numbers of homeowners into floating rate mortgages in recent years -- the ARM share of newly originated mortgage loans recently hit 40% -- there are new risks to this debt binge; it is quite conceivable that “automatic resets” will push mortgage interest payments up sharply in the not-so-distant future, even if market interest rates don’t budge. (Note: The increasingly popular option ARMs -- basically negative amortization loans -- are especially vulnerable to payment shock; see the 20 June 2005 Fitch Ratings report, “Option ARM Risks and Criteria”). Here as well, history screams out the warning that has gone unheeded -- debt bubbles and asset bubbles go hand in hand.

The exit strategy has always been the most problematic aspect of this scenario. Not only is that true of overly-indebted borrowers, but it’s also true of central banks. The Fed prides itself in having learned the lessons of Japan. But, in fact, the game-plan is woefully incomplete. Yes, the US central bank learned that it pays to move quickly once a bubble bursts. But then what? Unfortunately, there was nothing further to learn from the Bank of Japan other than it’s very tough to wean a post-bubble, deflation-prone economy from low nominal interest rates. Some 16 years after the Japanese bubble popped, the BOJ is still stuck with its policy rate at zero. Five years after the US equity bubble popped and the Fed is not a whole lot better off, with its policy rate still hovering around zero in real terms. As bubble follows bubble, the consequences of normalizing interest rates become more and more severe -- not just for the US but also for a US-centric world that now believes the American consumer is “too big to fail.” The resulting moral hazard dilemma only reinforces the belief that low interest rates are here to stay. In the meantime, asset and debt bubbles keep feeding on themselves.

This is a sad and depressing tale -- especially for the world’s unquestioned economic leader. Alas, bubbles and imbalances are one and the same. Even Alan Greenspan has finally admitted that the property-based equity extraction of an asset economy pushes income-based saving rates lower and lower -- thereby reducing national saving and resulting in an ever-wider current account deficit (see his 4 February 2005 speech, “Current Account”). One of the great mysteries of asset bubbles is what causes them to pop. Yale professor Robert Shiller has long argued that asset bubbles invariably implode under their own weight (see Irrational Exuberance, Princeton University Press, first edition, 2000). Another possibility in the current climate is the inevitability of a US current account adjustment -- a rebalancing that entails mounting pressure on the dollar and US real interest rates. Such an outcome could very well put the US on a collision course with ever-expanding asset bubbles. We all hope for the benign endgame. But the bigger the bubble and its associated imbalances, the less likely that becomes.

Don’t kid yourself. America’s property bubble didn’t just appear out of thin air. It is traceable directly to the equity bubble of the Roaring 1990s -- and to a central bank that remains steeped in denial. The real lesson of Japan is that there may well be no easy way out.

http://www.morganstanley.com/GEFdata/digests/20050624-fri.html#anchor0

Mon Jun 13, 7:53 PM ET

MINNEAPOLIS -- City governments inevitably endure some of the costs associated with home foreclosures, but exactly how much has been anyone's guess, until now.

According to a new study entitled "Collateral Damage: The Municipal Impact of Today's Mortgage Foreclosure Boom," the foreclosure of a single-family home, especially one that leaves the home vacant and unsecured, may, in some cases, generate direct municipal costs on cash-strapped public agencies in excess of $30,000 per property.

In addition, area homeowners, business owners and landlords stand to lose if a rash of foreclosures brings down property prices, accelerating the decline of an entire neighborhood.

The report was conducted by William Apgar, senior scholar, and Mark Duda, research fellow, at the Joint Center for Housing Studies at Harvard University, and it was funded by Minneapolis-based Homeownership Preservation Foundation (www.hpfonline.org).

"Foreclosures are on the rise across the country -- especially foreclosures of higher-risk nonprime mortgages," observed Apgar. "Although non-prime lending has enabled millions to become homeowners, higher-risk lending has also sparked substantial increases in foreclosures."

For example, the report notes that serious delinquencies and foreclosures for nonprime loans can easily be ten times higher than for prime loans. In Chicago alone, the total number of nonprime foreclosures has increased from less than 500 in 1996 to nearly 3,000 in 2003.

"Left unchecked, the nationwide municipal cost of foreclosures could easily top the $1 billion mark," concluded Apgar, "Money that is annually being diverted from meeting other pressing urban needs."

The study focused on the costs of foreclosures to Chicago, which is in the second year of a major campaign to prevent and reduce home foreclosures.

Costs associated with a typical foreclosure will vary from case to case, depending on the severity of the foreclosure scenario. Typical costs include: loss of tax revenue, increased policing, increased fire department activity (due to arson and/or vandalism), demolition costs, building inspections, legal expenses, costs associated with managing the foreclosure process, and increased demand for social services programs.

"Foreclosures impose costs not only on borrowers and lenders," noted Apgar, "but the foreclosure process and city efforts to minimize the blighting influence of foreclosures on vulnerable neighborhoods may involve more than a dozen municipal agencies and twice as many specific municipal activities."

"The foreclosure of a home also can have a dramatic affect on a neighborhood," Duda said.

For example, the study presents estimates of the adverse impact of a foreclosure on the residents of a block in the Auburn/Gresham neighborhood, located southwest of downtown Chicago.

After a foreclosed home was demolished, the study estimated some 13 homeowners, whose properties were located within 150 feet of the newly vacant lot, collectively lost some $220,000 in property values as a result of that failed loan.

"Nor is the blight of a foreclosure limited just to property owners," Apgar added.

"Vacant and boarded-up homes reduce the willingness of customers to shop at nearby stores and limits the ability of nearby employers to attract qualified employees. The effect of foreclosure further extends to other neighborhood-based entities such as houses of worship, parks and recreation community centers," he said.

The study concludes municipalities must take decisive, proactive steps to help reduce foreclosures, as they and their citizens are forced to bear a substantial portion of the costs. The study urges that government, mortgage industry and community leaders work together to:

Support grassroots efforts to help homeowners facing foreclosure; Reduce the incidence of poorly underwritten and/or fraudulent loans made in distressed neighborhoods; and Encourage industry participants to pay their fair share of the foreclosure-related costs. The study was funded by the Homeownership Preservation Foundation, which assists homeowners nationwide in overcoming obstacles that could threaten their ability to retain ownership of their homes. The study is the latest research that has emerged from Chicago's Homeownership Preservation Initiative (HOPI), a partnership between the city of Chicago, Neighborhood Housing Services of Chicago, the Federal Reserve Bank of Chicago and mortgage industry leaders.

In 2003, Chicago Mayor Richard M. Daley addressed the U.S. Conference of Mayors to focus national attention on foreclosures and the devastating effects they have on families, communities and cities. Since then, Chicago has become a national model for helping homeowners at risk of foreclosure.

"Foreclosures weaken neighborhood markets and negatively impact homeowners, lenders, neighbors and municipalities," said Chicago Mayor Richard M. Daley. "This new study reiterates the high costs that foreclosures impose on cities. We must focus our efforts on foreclosure prevention through partnerships with lenders and nonprofits."

Saturday, June 4, 2005

Consumer advocates around the country are begging states for new laws to help fight a rising tide of complaints about foreclosure "rescue" scams, but there is a lot that homeowners can do to protect themselves.

The National Consumer Law Center, which this week issued a comprehensive report on "the rampant theft of Americans' homes and equity" by con artists who promise to save houses from foreclosure, offers a lot of advice on how to avoid getting snared.

Prevention is the best medicine, they say. That is because if a homeowner does fall into a scamster's clutches, it will take considerable money and time, a good lawyer and sometimes help from state regulators or prosecutors to undo the damage.

While fraud and forgery may be involved, and other unfair trade or deceptive practices laws may have been violated, state enforcement agencies often do not have the resources to help "or don't think they have the authority," said Elizabeth Renuart, a co-author of the report. And, in most states, she said, "they don't have the ability to save the house even if you prosecute. That's a civil issue."

The first advice is to ignore the posters offering foreclosure help that have been slapped up on telephone poles, in median strips and at bus stops in many working-class neighborhoods, says the report.

Ignore fliers dropped off on front porches or stuffed in mailboxes. Particularly ignore hand-written notes suggesting the "help" is coming from someone you know or who has your interests in mind.

"These kinds of signs crowd the streets in Virginia, Maryland, Florida" and other states where rescue scams are exploding, co-author Steve Tripoli said at a news conference Thursday. "If the street signs don't get you, the fliers will."

Hand-written fliers, he said, "are more dangerous, because they are more likely to instill a sense of familiarity or trust."

Also ignore suggestions that "time is not on your side," he said. "The con artist is going to go out of their way to rush you" into making a decision, and again gains trust by saying "we've been in the same dilemma."

Renuart said the promises are typically empty: "These are felonies. This is grand theft of your house."

The center's report says foreclosure scams are "rampant," particularly in hot housing markets such as Washington's where houses can be worth much more than desperate homeowners realize and where scam artists can essentially "buy" a property by paying off the amount that is overdue on a loan.

While the rescue "specialist" may promise to rent the house to the homeowner, with the opportunity for the family to buy it back later, the rescuer typically sets the price higher than the financially strapped homeowners can ever afford. Then he moves to evict them when they fall short on monthly "rent" payments. Many times the underlying mortgage is not paid off, so homeowners not only are evicted but also still owe for the original loan amount.

"They get the houses for pennies on the dollar," Tripoli said.

Tripoli said homeowners in financial trouble should "do the exact opposite of what these scam artists say to do."

"They tell you, 'do not talk to an attorney or to a lender.' But if you're caught in a foreclosure, you need to talk to your lender -- to ask, 'What can we do about restructuring payments or refinancing?,' " Tripoli said.

Homeowners then need "to clearly understand what the rules are on foreclosure in your state. And you need to know the timetable for where you are in the process."

For example, a homeowner should check to see if a letter from a lender is a deficiency notice, which says the homeowner is behind in payments to the lender and can still "cure" the deficiency by paying it off, Tripoli said. That is opposed to a letter that announces a sale date, which means the homeowner is also subject to a variety of fees beyond the amount in arrears.

In hot markets, there can be time before the sale not only to work out a new repayment schedule with the lender, what is called a loss-mitigation plan, but even to sell on the open market and make a profit after paying off the delinquency and interest due and the lender's fees for advertising and lawyers, said Marla Webb, a senior adviser to foreclosure.com, an online foreclosure listing service.

Consumer groups note that selling the house may be the only option for some, because minorities and the elderly have often been targeted for predatory loans with high fees and terms and for multiple refinances that drained their equity. Although they may not want to move, selling on the open market will save them from their supposed rescuers, say consumer advocates.

Homeowners who have gotten taken by rescue scams can try to find a consumer lawyer to represent them in actions before enforcement agencies, in hearings on subsequent evictions by the rescuer or an investor, or in lawsuits alleging fraud or deception.

But knowledgeable lawyers are few, and homeowners in distress often cannot afford them, say consumer groups. And the cases are so complicated that it takes more time than many lawyers want to spend, say consumer groups.

Tripoli recommends retaining a lawyer through the National Association of Consumer Advocates ( http://www.naca.net/ ), which lists consumer lawyers by state. Those who cannot afford a lawyer can try contacting the local Legal Services Corp. office, he said.

But Ira Rheingold, executive director of NACA, said, "The fact is that there are not a ton of attorneys who do these cases. I could name the two in the Washington area who do this kind of thing."

AARP's Legal Counsel for the Elderly office in the District works with residents who are over 50, but its staff is also limited.

The center's report describes two AARP cases alleging fraud or misrepresentation against District homeowners. AARP lawyers represented the estate of Hattie Mae Smith in a case that took four years to resolve, alleging that Bethesda businessman Rodney Byrd and his Creative Investment Co. violated D.C. consumer protection laws. D.C. Superior Court Judge Joan Zeldon in July 2004 awarded $415,000 in damages to the Smith estate after finding that Byrd "had no intention of helping Smith save her home."

AARP is also working with Hogan & Hartson to represent six older homeowners who are alleging that five D.C. and Maryland residents deceived them into signing away their homes for a fraction of their value. That case, filed in September, is in its deposition phase.

Other possibilities for help include local consumer protection offices, such as the Montgomery County Division of Consumer Affairs. But division chief Eric Friedman said his office is just starting to hear complaints and is working on "getting up to speed" on a tough Maryland law cracking down on scam artists that took effect May 26.

Maryland's new law is considered the toughest among five states with protective laws. The District and Virginia do not have any similar protections.

If a homeowner believes "that there's criminal activity involved, you can go to your local prosecutor," Tripoli said. "That can put a chill on the activity and maybe buy you some time."

But the report notes that state enforcement agencies may not be able to help save the home. And "while most state criminal prosecutors possess a few tools to fight these scams today, they may lack the resources to tackle the scammers and hold them responsible," the report said.

The Maryland law makes scam activity a misdemeanor, subject to three years in jail. To encourage lawyers to take on cases and to discourage scams, it gives those alleging violations the right to file suit privately and to sue for triple damages and legal fees.

It requires that all promises of help be put into written contracts, that any transaction involving transfer of a title be done through a standard settlement form, and that the original homeowner, who has signed a contract to rent and try to buy back later, gets 82 percent of the net proceeds in any subsequent resale of a property within 18 months. The law also helps those facing foreclosure, by giving them more time to figure out what has happened to them.

The National Consumer Law Center report argues that even the Maryland law is not tough enough, and recommends that states ban the activity or regulate more tightly. When a foreclosure rescuer or a partner "buys" a house and the consumer has an option to buy back or lease back, the law should require an accurate assessment of the homeowner's ability to repay, says the report. "Otherwise, these deals are doomed to fail from the outset and the loss of the home is a foregone conclusion."

Wanda Walker, a Fort Washington woman who spoke at the news conference Thursday about losing her home last year, said she still cannot believe what happened. "I'm angry and very disgusted," she said. The lawyer for the man she blames denies that his client is at fault.

Walker said she fell behind on her home payments by about $10,900 after buying an SUV. She said she responded to a flier from RCB Group LLC offering to save her five-bedroom house. "I filled out the loan application and [Robert C. Brown] was to loan me the money and work out the mitigation," she said.

Walker contends that Brown never contacted her original lender and that he then told her, the same week that her ex-husband, a Prince George's County police officer, died in a car accident, that she had signed a quit-claim deed transferring ownership of her five-bedroom duplex. She has argued unsuccessfully in Prince George's County courts that she does not remember signing a quit-claim deed and never intended to sell her house. She has alleged that her signature was copied from the one paper she did sign.

Walker also contends that she never got the money listed as having been paid to her on a quit-claim deed filed with the county clerk's office. "He has the amount of consideration of $157,290 . . . and I haven't been paid that nor has my mortgage company," Walker said.

Brown's lawyer, Ronald M. Miller, said this week that he was "hesitant to answer questions because the matter is still in litigation."

"This was not a predatory lending situation," he said. Brown "does debt counseling and rearranging of debt to avoid foreclosure," Miller said. He "made an arrangement with [Walker]" in which RCB "bought [the house]" using his own money and "money from an investor as well to help prevent the foreclosure."

Miller added that Walker "is the wrong alleged victim to be arguing this after having a jury trial and losing, and filing an appeal and having dropped her appeal."

Walker said she dropped the appeal of her eviction because she could not afford to post a $250,000 bond.

Ralph Sapia, Walker's lawyer, said he is trying to appeal a recent Circuit Court ruling against Walker. But he acknowledges that his client and her two children are facing an uphill battle.

Walker, a federal employee, said she cannot believe that she has lost the first house she ever bought, and to someone who won her trust "by saying he used to be a police officer and that he knew my ex-husband."

She added: "This is a lesson learned. I can't say I can't trust anybody no more, but you have to be very, very careful who you trust, who you confide in."

http://www.washingtonpost.com/wp-dyn/content/article/2005/06/03/AR2005060300724_pf.html