Foreclosures decline in California in 2010

California’s housing market was among the first to falter and may now be among the first to recover.  While foreclosures climbed 2% nationally, California saw a 14% drop. But California’s high unemployment rate and resetting loans mean the fall in foreclosure activity could be brief.

By Alejandro Lazo
Los Angeles Times

January 13, 2011

Fewer Californians grappled with foreclosure last year, bucking a national trend and giving homeowners fresh hope that the state’s housing market could be on the mend.

The 14% drop in foreclosure activity contrasted with a 2% rise nationally, according to data tracking firm RealtyTrac. Analysts noted that California’s housing market was among the first to falter and may now be among the first to recover. Home prices here hit bottom in April 2009, and have gradually risen since then.

“There are a lot of risks out there, but I think the trend is improvement — not dramatic, but substantial,” said Kenneth Rosen, a professor at UC Berkeley‘s Haas School of Business.

But Rosen and other observers caution that the state’s high unemployment rate of 12.4% and weak demand for housing are still a concern.

Another potential trouble spot: A large number of adjustable-rate mortgages are scheduled to reset to higher rates in coming months, said Rick Sharga, senior vice president with RealtyTrac. That could lead to another uptick in foreclosures if the borrowers cannot make the higher payments, or decide that they are throwing good money after bad.

“You have the three-headed monster of high unemployment, a weak economy and problem loans,” said Sharga, who thinks that California foreclosures in 2011 could surpass last year, and possibly the peak year of 2009.

The crisis certainly isn’t over for Guy Vernikovsky. He is facing foreclosure on his home in Torrance after trying multiple times to modify his loans, asking for lower interest rates from his bank, he said.

Vernikovsky, 32, said he lost his job installing energy-efficient light fixtures in 2008 but tried his best to keep up on his two mortgages, even burying himself deeply in credit card debt. He said he moved home with his parents in Northern California, found a new job and would now be able to make his mortgage payments if he could get reduced interest rates on his two loans.

“I applied two or three different times and they would not modify my loans,” Vernikovsky said. “I wasn’t looking to turn a fast buck on a real estate market that was hot at the time. I was really looking to own that home for the next 20 to 30 years.”

More than half a million California homes were involved in some stage of foreclosure last year, including notices of default as well as bank repossessions, according to numbers to be released by RealtyTrac on Thursday. Among those filings, 173,175 represented homes retaken by lenders, a 13% drop from a year ago.

Nationwide, a record 2.9 million homes were in foreclosure, up 2% from 2009.

Sharga said the national numbers would have been much higher were it not for several major banks’ slowing foreclosures dramatically late last year amid scrutiny from lawmakers, regulators and law enforcement officials over their foreclosure practices, including allegations that paperwork was not properly processed.

“There were delays over the last two months, or 2 1/2 months, and that just skewed the numbers wildly,” he said.

Sharga estimated that an additional quarter-million filings in the U.S. probably would have been logged if it were not for the delays brought about by the foreclosure fracas.

Several major banks, including Bank of America, Ally Financial Inc. and JPMorgan Chase & Co., suspended foreclosures late last year in states where a court order is required to take back a home. Bank of America went as far as to declare a national freeze as it reviewed its process, though it lifted that policy in November.

Analysts credited the Bank of America action for depressing foreclosure sales across the Golden State in November and a subsequent sharp increase last month.

How quickly banks will return to foreclosing in the new year remains the wild card in the equation.

Homeowners who have lost their properties to foreclosure are making gains challenging the foreclosure system through the legal process. Last week, the highest court in Massachusetts agreed with a lower-court ruling that two home foreclosures were invalid, and found that lenders Wells Fargo Bank and US Bank had failed to prove they owned the mortgages.

The case was significant because it was the first time that a state supreme court had ruled on the issue of chain of title. A spokeswoman for California Atty. Gen. Kamala D. Harris said such lawsuits might be brought in the Golden State, where foreclosures remain largely outside the court system.

“We have now officially begun the litigation phase of the foreclosure crisis,” Sean O’Toole, chief executive of data provider ForeclosureRadar, recently wrote on his blog. “Attorneys will likely be the biggest winners in the foreclosure business for 2011.”

About 4% of all homes in California were at some stage of foreclosure last year, RealtyTrac said. That acts as a drag on the housing market overall, as the availability of low-priced bank repossessions lowers the value of competing properties.

Christopher Thornberg, principal of Beacon Economics, said that high rates of default among borrowers in California are likely to push up foreclosures, but so far the state’s fairly efficient foreclosure system and active housing market have been able to absorb these properties.

“They get snapped up pretty quickly,” Thornberg said. “We are not ending up with swaths of empty homes the way that was being predicted.”

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Another Brokers Worst Nightmare: Home Warranty Company Kickbacks May Violate RESPA

On Nov. 23, HUD General Counsel Helen Kanovsky announced HUD’s response to public comments regarding HUD’s interpretive rule directed to home warranty companies (HWC) and real estate brokers and agents. HUD’s response reiterates the Department’s unequivocal position that when HWC’s pay real estate brokers or agents for work performed on behalf of the HWC, and such work is directed toward a particular buyer or seller, then the payment is an illegal kickback for a referral in direct violation of RESPA. (RESPA News RESPA Archives, Posted On: 11/29/2010)

RESPA experts agree that HUD’s interpretive rule, intended to apply to HWC’s, could apply as well to others in the real estate, mortgage and settlement services industries.

HUD’s interpretation of Section 8 as it applies to HWC’s and the Realtor community is defined as the following:

A payment by an HWC for marketing services performed by real estate brokers or agents on behalf of the HWC that are directed to particular homebuyers or sellers is an illegal kickback for a referral under Section 8.
So what does all this mean to us? It seems to us that if you really want to avoid litigation or worse, you should just assume that referral fees based on orders in escrow are going to be risky. Just ask yourself, is a referral fee now, worth the possible headache and financial pain of a legal action later?

Is TransactionPoint a Broker’s Worst Nightmare: Part II

We just learned that Terry Tucker, an executive with Keller Williams Realty in Danville, CA sent an email to potential vendors alerting that the vendors would need to pay or their services may not be used. His office is transitioning to TransactionPoint and the only vendors that will be named as preferred providers are those vendors that agree to pay a fee for orders placed through TransactionPoint.

He writes, “Please be aware that our agents will be highly motivated to order within Transaction Point, as the only other option would be for them to pay for it out of their own pockets.”

Despite numerous calls to Mr. Tucker we haven’t received a call back. Please read the entire email here.

At a time when many federal agencies and every state attorney general are looking into the misconduct of companies in their foreclosure processes, we want to ask if the action by Keller Williams Realty described in Mr. Tucker’s e-mail would be permissible under RESPA. We wonder what HUD would think of this program if implemented at Mr. Tucker’s office?

In PART III, our next post, we’ll examine HUD’s latest ruling on illegal kickbacks under RESPA from Home Warranty Companies to real estate brokers or agents.

We are grateful for your insights and suggestions.

HUD Sends a Message to Brokerages

HUD decided it was time to put out an interpretive ruling to clarify the situation. In other words, HUD asked, what is legal in regards to referral fees paid to brokerages for Home Warranty business? As it turns out the answer is very little.

We all know that the paying of referral fees with the flimsiest of justification has been going on not just with Home Warranty, but with all settlement services for a long time. It has become one of the dirty little secrets of our industry that periodically pops up and gives a public black eye to all involved. Sadly it is usually the brokerage which is perceived to be violating the public trust more than the services paying the referral fees. Not a good thing for any brokerage’s public image.

So what should we take from this? Those that want to walk the tight rope of what is legal and what is not for accepting referral fees from Home Warranty companies should read HUD’s new interpretive rule on this subject here: http://www.hud.gov/offices/hsg/rmra/res/homewar625.pdf

While you could talk to your Home Warranty representative to pick the path that is legal, but experience tells us that most of the time the advice you get is more directed to securing your business rather than observing RESPA. It sure seems that if you want to avoid a lawsuit, the safest course is to assume that referral fees based on the number of orders is going to be risky.

I think HUD is sending a message to the real estate community that is telling us that Home Warranty referral income is going to be looked at a lot more carefully in the future. I believe that the smart course is to assume that what goes for one settlement service will be applied to all settlement services.

Perhaps it is time to just pick your settlement service providers based on the quality of the products and the service you receive. Leave the minimal income along with the inherent legal problems that comes with it on the table.

WHO IS CUTTING A FAT HOG?

Forbes Magazine reported back in a November 2006 cover story that First American Title was selling more than $5.8 billion dollars a year for title insurance in a story called, “America’s Richest Insurance Racket”  Read the full story here: http://www.forbes.com/forbes/2006/1113/148.html

Reporter Scott Woolley extensively interviewed Parker Kennedy, head of First American.  Forbes noted that thanks to computerized record-keeping, the cost of searching for a home’s ownership records online has fallen to as low as $25. The average cost for claims on title insurance policies was running approximately $74 per policy. Although Forbes concluded that everyone should agree that this is a pretty lucrative business, and title companies are fat and thriving, First American’s Parker Kennedy claimed that “Nobody is cutting a fat hog,” whatever that means.

So why is this relevant to the off shoring of jobs?  According to Forbes, Kennedy attributes his profit margins to several things including the efforts his company has made to deploy technology and move jobs offshore.  Forbes noted that in 5 years, First American closed 48 out of 50 offices in California replacing people and paper with databases and offshore data entry clerks.

Kennedy says, “In the old days, if you wanted to double your business you had to double your people. Now you can double your business and increase your staff maybe 10%.”

The Forbes article suggests that off shoring of jobs has been part of First American’s long term business strategy aimed at adding to the huge profit margins they enjoy.

Given these kinds of profits, do you think it is really necessary for them to continue their policy of sending jobs offshore?

We’d love to hear your thoughts.

Why is Bank of America Suing First American for Half a Billion Dollars?

Did you know that Bank of America filed a complaint against First American Title Insurance Company for alleged failure to pay claims related to their quasi-title insurance products?

Hey that’s their language not mine! You can read it here: http://www.scribd.com/doc/28508474/Bank-of-America-v-First-American

BoA is saying that the title insurance provided by First American for title defects, undisclosed home liens, vesting claims and errors in the legal description of homes has caused harm to the tune of $500 million dollars!

Although Bank of America is probably First American’s largest client, as of February, First American denied more than 2,200 BoA claims, and hasn’t responded to more than 2,300 additional claims. Wow!

If these allegations are correct, isn’t it surprising that First American would treat one of their biggest customers in this manner?

Here’s a quick summary of the lawsuit issues (which can be found on page 11 of the lawsuit in the above link):

  • Wrong Lien Position: For example, a loan where BoA intended to have the 2nd lien on a property but in fact has the 4th lien because two intervening liens were not disclosed by the borrower during the application process and were not listed as secured liens in the borrower’s credit report.
  • Missing Signatures: The mortgage wasn’t signed by all owners of the property, or those required to sign the mortgage — like an owner’s spouse.
  • Wrong Legal Description: The legal description in the mortgage doesn’t match the last deed of record which conveys the property to the owner(s).

How could First American have let so many mistakes happen?

I don’t know about you, but I’d sure like to know how much of this work might have been sent off shore to India.

In my opinion working with local service providers always come out on top.

Here’s another take away for me: Only do business with folks you trust who know the market.

What’s your opinion?  We’d like to know.

We Have Mail

Thanks everyone for your recent comments.  I wanted to share the wonderful insights from our readers:

Jim: Start a petition! I’ll sign it and pledge no more business to First American – boycott!

Larry: They need to ship the land over there too.

Sal: Hello!? I raised this issue two years ago! I even sent it to FOX news and local channel 7. First American copied Ocwen Corporation. Ocwen has all of the BPO and REO operations in India. I’m sure that there must be others too.

Amelia: What can I do to help?

Belen: It’s not the first time a US company sent business elsewhere. They have been doing it for years; why is it a surprise now? The US has lots of red tape and the cost of doing business is high; not to mention workers compensation cases and other policies involved, including sexual harassment.  Employees do not want to work more than they have to and most people are not willing to go the extra mile for their employers, so what can they do? They go where people want to work and are willing to go the extra mile for half of the wages.