By Jim Puzzanghera, Los Angeles Times

August 1, 2012

WASHINGTON — A key federal regulator has rejected a push by the Obama administration to reduce the mortgage debt of millions of distressed homeowners. It's a setback for the White House, which wants to reduce foreclosures to help the economic recovery.

Edward DeMarco, acting director of the Federal Housing Finance Agency, said Tuesday that allowing up to 2.6 million borrowers who owe more than their houses are worth to have their mortgage principal reduced would end up costing taxpayers money and could encourage additional defaults.

Fannie Mae and Freddie Mac, the housing finance giants seized by the government in 2008, own or back about 60% of the nation's mortgages. And although many banks are reducing mortgage principal for some delinquent borrowers, they are prohibited from taking that step with Fannie and Freddie loans.

"We continue to share with everyone in government the goal of providing good opportunities to assist troubled borrowers, while protecting taxpayers," DeMarco told reporters Tuesday in announcing his decision after months of review. "The choices we've had to make are hard, but they need to be made."

But critics countered that a lengthy new analysis used by DeMarco to justify that decision showed that a large-scale principal reduction program actually would benefit taxpayers while helping reduce foreclosures.

"I think he's trying to cook the books," said Rep. Zoe Lofgren(D-San Jose), who has led an effort by California's House Democrats to get DeMarco to approve principal reductions for Fannie and Freddie.

Lofgren said DeMarco's refusal to allow principal reductions is unpatriotic and called for President Obama to replace him.

DeMarco released the findings after the administration had asked him to reconsider his opposition to principal reductions in light of new Treasury Department financial incentives to offset some of the costs.

But DeMarco said that even with the new incentives, the potential reductions in foreclosures did not outweigh the risk to taxpayers, who are on the hook for about $142 billion in the rescue of Fannie and Freddie, which are now owned by the government after they nearly went bankrupt. In many of the models the agency ran, the cost of the incentives — part of the $700-billion bailout fund — offset much, if not all, of the potential gains Fannie and Freddie would see from mortgages kept out of foreclosure.

DeMarco said he hoped that the 33 pages of analysis of potential principal reductions on the finances of Fannie and Freddie — and taxpayers, more broadly — would show that the agency is trying to do its job to protect the government's investment in the companies. But the analysis only flared the debate as critics pointed to the agency's own figures to show that Fannie and Freddie, as well as taxpayers, would come out ahead in some scenarios if the companies were allowed to participate in the administration's principal reduction program.

In one case, Fannie and Freddie would see a net savings of $3.6 billion in a program that would result in principal reductions for about 497,000 underwater homeowners. Even when taking into account the $2.7 billion in government incentives, taxpayers would come out nearly $1 billion ahead, the analysis showed.

"It is incomprehensible that Mr. DeMarco would reject the chance to save up to a billion dollars in taxpayer funds while helping nearly half a million homeowners stay in their homes," said Rep. Elijah Cummings (D-Md.).

Treasury Secretary Timothy F. Geithner said that DeMarco used "selective numbers" in justifying his decision and asked him to reconsider.

"Five years into the housing crisis, millions of homeowners are still struggling to stay in their homes and the legacy of the crisis continues to weigh on the market," Geithner wrote to DeMarco on Tuesday. "You have the power to help more struggling homeowners and help heal the remaining damage from the housing crisis."

DeMarco said that the scenario that showed a $3.6-billion benefit to Fannie and Freddie assumed that all 497,000 homeowners eligible for the reductions would receive them, which was unrealistic.

Excluding homeowners who had not made a mortgage payment for a year or more, the benefit to Fannie and Freddie would be reduced to $1.9 billion. After subtracting the cost to taxpayers of more than $1.7 billion in Treasury subsidies for principal reductions, the net benefit would be only about $100 million.

And that figure did not account for the potential that some underwater homeowners who are making their payments might decide to stop so they could get the size of their loan reduced.

The FHFA analysis said that it would take just 3,000 to 19,000 such borrowers to offset any potential positives to the bottom line of Fannie and Freddie from principal reductions in the 19 different scenarios modeled.

DeMarco said it was his job to consider not just the effect on Fannie and Freddie of a principal reduction program, but the additional costs to taxpayers of the Treasury subsidies.

Several leading congressional Republicans supported his decision.

"The administration put incredible political pressure on Director DeMarco, and he deserves praise for standing up for the best interests of the American people," said House Financial Services Committee Chairman Spencer Bachus (R-Ala.).

With the housing market showing signs of improvement in recent months and the foreclosure crisis easing in California and across the country, there is less pressure on the agency to allow Fannie and Freddie to participate in the administration's principal reduction program, housing experts said.

"The case is less compelling than it was six months or a year ago," said Stuart Gabriel, director of UCLA's Ziman Center for Real Estate. Still, principal reductions would be a big help in hard-hit areas such as Riverside and San Bernardino counties, he said.

Richard Green, director of the USC Lusk Center for Real Estate, said that DeMarco's decision meant that, "for the places that really are in the most trouble, recovery's going to take a lot longer."

So far, Fannie and Freddie have been allowed to participate only in small-scale principal reduction programs in California and other foreclosure-riddled states.

DeMarco said those programs were not a risk to taxpayers because the companies received full compensation for the principal forgiven and the small size and screening procedures made it unlikely borrowers would try to intentionally default to get their loan reduced.

Fannie and Freddie have other foreclosure prevention programs and have helped about 2.3 million homeowners through those initiatives, which include reduced monthly payments.

jim.puzzanghera@latimes.com

By Alejandro Lazo, Los Angeles Times

July 24, 2012

California's foreclosure crisis appears to be ebbing as fewer home loans enter default and its once-troubled housing market heads into recovery.

The latest evidence of improvement came Monday when real estate firm DataQuick reported that the number of California homes entering the foreclosure process slipped to the lowest level since mid-2007. The number of homes lost to foreclosure plummeted.

Many economists believe the worst of the foreclosure mess is over, although the number of bank-owned homes will remain significant for a long time.

DataQuick reported that 54,615 notices of default were filed on California homes and condominiums in the second quarter, a 2.9% decline from the first quarter and a 3.6% drop from the same period last year. Default notices are the public filings used to initiate foreclosures.

The relatively slight decline could mean that there are fewer homes in trouble, DataQuick President John Walsh said. Or, viewed less optimistically, the easing could indicate that "we're just seeing distress get processed at a slower pace," he said.

Whether that slow pace will continue remains to be seen, although many economists now say a second wave of foreclosures is unlikely.

"The housing market has bottomed, but there is still a lot of inventory," said Kenneth Rosen, an economist with UC Berkeley's Haas School of Business. "The worst numbers are certainly over, but that doesn't mean there still isn't a lot to work through."

Foreclosures began slowing more than a year ago after several states and federal authorities launched investigations into foreclosure improprieties. In California, investigators targeted the runaround that troubled borrowers often get when trying to get a loan modification.

With increased scrutiny of lenders in the Golden State, including recent legislation dubbed the Homeowner Bill of Rights, some experts expect that banks will increasingly look for other ways to deal with their inventories of troubled properties. That should help keep foreclosures in check, they said.

At the same time, fewer borrowers are falling behind on their mortgages. The percentage of California borrowers who were at least 120 days behind on their mortgages was 2.9% at the end of the second quarter, down from 4% a year earlier, according to Equifax andMoody's Analytics.

"We have been eating away at that big pile of bad loans, and now we are at the far end of things," said Christopher Thornberg, a principal at Beacon Economics and one of the first to call the housing crash. "Obviously, there is no big second wave."

Another factor sure to improve the foreclosure picture: Employers are hiring again in the Golden State. Although the national economy remains weak, California's job market appears to be picking up. California employers added 38,300 net jobs in June, with gains in most industries, including construction and professional services.

Paul Herrera, government affairs director for the Inland Valleys Assn. of Realtors, said the change in the Inland Empire, still one of the most troubled markets in the country, was palpable.

"We haven't seen any new wave of foreclosures," Herrera said. "You drive around these streets, and it's not like what it was four years ago, where there were dead lawns sprinkled around every block."

Notices of default were clustered in California's most affordable neighborhoods, DataQuick said. In the state's largest counties, mortgages were most likely to go into default in Tulare, San Joaquin and Sacramento counties and were least likely in San Francisco, Marin and San Mateo counties.

The number of trustee deeds, which are the public documents filed when a foreclosure is completed, fell to 21,851 in the second quarter, down 27.8% from the first quarter and off 48.5% from the same period last year.

alejandro.lazo@latimes.com

By Alejandro Lazo, Los Angeles Times

July 14, 2012

A plan to seize and restructure troubled mortgages using eminent domain in San Bernardino County is under assault by investor groups, which call it unconstitutional and potentially costly to homeowners.

The cities of Ontario and Fontana, in partnership with the county, are exploring using private funds to acquire mortgages that are "underwater," where the homes wouldn't sell for enough money to pay off the loans. Under the Homeownership Protection Program, the loans acquired by government authority would be restructured, lowering the amount owed, with the intent of helping the owner keep the home.

Seizing mortgages in this way would result in losses for public pension plans, 401(k) plans and individual investors who bought the individual loans as part of a packaged group of securities, said Timothy W. Cameron, managing director of the Securities Industry and Financial Markets Assn.'s asset management group.

Cameron was one of several investor representatives who traveled to San Bernardino from as far as New York and Washington to speak Friday in opposition to the idea at the first meeting of a so-called Joint Powers Authority. That authority was created by the county and cities last month to explore the eminent domain plan, proposed to the county by a San Francisco firm named Mortgage Resolution Partners.

"When loans are taken from securitized pools, the losses will be borne by the pension plans and individual citizens who are invested in the securities," Cameron said. "We need mortgage investors and lenders to come back to these fragile markets — but this plan will force both groups to avoid them."

Paul Herrera, government affairs director of the Inland Valleys Assn. of Realtors, said that the process of exploring the eminent domain plan had not been transparent and could lead to higher borrowing costs for potential buyers in the midst of a tentative housing recovery.

"We're here because entire communities could be caught in the blast radius of this eminent domain detonation," he said. "It stands to make every purchase more expensive and every home just a little further out of reach of average citizens."

Leland Chan, general counsel for the California Bankers Assn., told members of the authority that the plan to take over only loans that were performing, and therefore making still making money for existing investors, was a practice of "cherry picking" the best loans so the plan's investors could profit.

"This raises an important legal question: Does this eminent domain scheme even advance a public purpose?'" Chan said. "The main effect seems to be to transfer ownership of performing loans from one private party to another."

Steven Gluckstern, chairman of Mortgage Resolution Partners, said the plan would principally benefit homeowners and not investors or his firm. But because the plan relies on private capital, it needs to be profitable for people willing to invest money in it, he said.

"It serves principally to benefit homeowners," Gluckstern said in a telephone interview after the meeting. He added that the plan would benefit the community because homeowners freed from troubled mortgages would be able to spend money locally and pay taxes.

Mortgage Resolution Partners would earn a flat fee of $4,500 for each mortgage restructured. The firm has employed investment banks Evercore Partners and Westwood Capital to raise money for the initiative from private investors to fund the plan.

Cornell Law Professor Robert C. Hockett, who advised Mortgage Resolution Partners on the design of the proposal, has argued that the initiative should pass muster in courts because they have had a long tradition of upholding cities' eminent domain powers as long as the valuation methods used to acquire properties are sound.

Hockett has said that using eminent domain to seize underwater mortgages that have been securitized makes sense because often those mortgages can't be sold at market value for legal reasons. Often, those loans must be sold at face value — a higher price — because of the contracts governing them, he previously told The Times.

alejandro.lazo@latimes.com

By Alejandro Lazo, Los Angeles Times

July 6, 2012, 5:00 a.m.

A plan by San Bernardino County to seize mortgages and restructure them for underwater homeowners using eminent domain is perhaps the most aggressive example of how local governments are seeking new ways to combat foreclosure.

The cities of Ontario and Fontana are partnering with the county to create a Homeownership Protection Program that would use private funds to acquire underwater mortgages from investors. The county and the two cities have created a joint authority to explore and possibly enact the plan, and the first public meeting of that authority will be held next week.

David Wert, a spokesman for the county, said the program is worth exploring because it could offer a solution to one of the region's most entrenched problems: the vast number of loans that are stuck underwater, with more money owed than the property is worth. If the program were to go countywide, it could benefit 20,000 to 30,000 homeowners, he said.

"The only thing we are doing at this point is conducting a conversation," Wert said. "But the reason the county is interested in talking about this is because this is a proposal that could — if everything checks out — address the problem on a fairly large scale."

Although still in its initial stages, the aggressive proposal has attracted controversy. A number of banking, financial and business groups oppose it, contending that seizing mortgages would raise constitutional issues and could increase lending costs in those cities.

The California Mortgage Bankers Assn., the American Bankers Assn. and the American Securitziation Forum, along with several other financial groups, sent a letter of opposition to the county and the two cities.

"We believe that the contemplated use of eminent domain raises very serious legal and constitutional issues," the letter read. "It would also be immensely destructive to U.S. mortgage markets by undermining the sanctity of the contractual relationship between a borrower and creditor, and similarly undermining existing securitization transactions."

Dustin Hobbs, a spokesman for the California Mortgage Bankers Assn., said the program also could hurt the local housing market.

"It could be devastating," Hobbs said. "If investors are unsure as to the disposition of mortgages in San Bernardino County and in Fontana and Ontario, it could really curtail lending in the area, and if not curtail, certainly increase costs for new loans."

San Bernardino County's plan is the latest of several measures by local governments to fight foreclosures and the problems often associated with resulting neglect: crime and blight.

Chicago passed an ordinance last year that requires banks and other financial institutions to maintain vacant properties that have been foreclosed upon.

Oakland has instituted a blight program that would require banks to register, inspect and maintain homes that are in foreclosure. Cleveland has been using a land bank program to tear down foreclosed homes.

Legal experts said the San Bernardino County proposal was one of the first initiatives to try to strike at the problem before a home is in the foreclosure process.

At this point in the planning, only homeowners who are current on their mortgage payments would be allowed to participate in the program, which would target mortgages that have been securitized and sold to private investors. That would exclude loans owned or backed by mortgage titans Fannie Mae and Freddie Mac. The acquired loans would be restructured, lowering the amount owed, with the intent of helping the owner keep the home.

The plan was first proposed to the county by a San Francisco firm named Mortgage Resolution Partners. The firm has employed investment banks Evercore Partners and Westwood Capital to raise money for the initiative from private investors.

Kurt Eggert, a professor of law at Chapman University, said a sticking point could be whether the investors are able to make a profit on the transactions. He said he liked that the plan, unlike efforts elsewhere, was an attempt to get ahead of the problem.

"The alternatives too often are just cities cleaning up afterward, and getting stuck with the mess, and getting stuck with the foreclosures and the abandoned buildings," he said. "It is good to see cities trying to do something proactive."

Cornell Law Professor Robert C. Hockett advised Mortgage Resolution Partners on the design of the proposal. The initiative should pass muster in courts because they have had a long tradition of upholding cities' eminent domain powers as long as the valuation methods used to acquire properties are sound, Hockett said.

It particularly makes sense to use eminent domain to seize underwater mortgages that have been securitized, he said, because often those mortgages can't be sold at market value for legal reasons. Often, those loans must be sold at face value — a higher price — because of the contracts governing them, he said.

"The fact they can't be marketed is the reason we are using eminent domain," Hockett said. "This is actually a pro-market solution."

alejandro.lazo@latimes.com

By Marc Lifsher and Alejandro Lazo, Los Angeles Times

May 19, 2012

SACRAMENTO — Efforts to ease California's foreclosure woes, among the worst in the nation, are running into roadblocks at the state Capitol.

A rare legislative conference committee called to rescue a pair of stalled foreclosure-prevention bills is bogged down in marathon sessions. Meanwhile, Gov. Jerry Brown is pushing to use some of California's share of the $25-billion national mortgage settlement to plug holes in the state's budget, dismaying housing activists.

Since the start of the real estate bust, foreclosures have been a persistent drag on the state's homeowners and economy. Experts see reducing foreclosures as key to getting the housing market back on track.

How to do that remains a matter of intense debate. State Atty. Gen.Kamala D. Harrisand advocacy groups have called for tougher reforms and more help for borrowers, while the banking lobby contends that lawmakers shouldn't intervene with what appears to be a market recovery.

The conflict over the foreclosure bills is a classic David and Goliath political struggle, said Derek Cressman, western states director for Common Cause, a government watchdog group.

"The underlying reality is that the banks and the mortgage brokers have the wherewithal to make significant campaign contributions," he said. "That puts the thumb on the scale."

The committee, with three members from the state Senate and three from the Assembly, started taking testimony last week from dozens of witnesses, beginning with Harris, chief proponent of an initiative she's dubbed the Homeowner Bill of Rights.

Harris wants new laws to lock in some of the reforms she and other attorneys general secured from five mega-banks as part of a national legal settlement in February. Taking into account credits designed to encourage the banks to make payments to homeowners, California's share of the settlement could climb to as high as $18 billion.

"This bill of rights is simply about common sense reform and about bringing transparency for an otherwise confusing and daunting system," Harris said.

Banks, loan servicers and allies in the real estate industry, who defeated similar legislation in the last two years, fear that Harris' proposals go too far when the housing market is on a modest upswing.

Fewer California homeowners are falling behind on their mortgages, and foreclosures, though still high, are at their lowest levels since 2008, according to industry surveys released this week. Nearly 354,000 California mortgages are delinquent, according to the Mortgage Bankers Assn.

Although the California Bankers Assn. stressed that it supports "meaningful consumer protections," it's cautioning that new legislation must avoid doing "long-term damage to the marketplace" that would make it harder for borrowers to get low-cost mortgages.

Large banks are pushing back against a Harris proposal to give homeowners the right to sue when not all required steps in foreclosure actions are taken. They also oppose a requirement that they delay foreclosures when borrowers have asked for a loan modification to lower their monthly payments.

Banks are a powerful lobby in Sacramento. They made nearly $500,000 in campaign contributions to legislators during the 2009-10 session, according to Maplight.org, a nonpartisan group that tracks political money.

The banks' complaints gained weight this week when the federal government's chief home-loan regulator warned committee members that some of Harris' proposals are too broad and could lead to more homeowner lawsuits.

Bank opposition isn't Harris' only problem. She also faces an attempt by Brown to take $410 million that California received as part of the national settlement. Harris has said she would spend the money on housing counseling and legal services for low- and moderate-income people.

Brown wants to use the cash to trim a $16-billion deficit in his proposed 2012-13 fiscal year budget. He would backfill existing housing fraud prevention and anti-discrimination programs, whose funding would otherwise be cut, and make interest payments on housing-project bonds.

Harris' office has argued that housing counselors and legal services would help ensure borrowers facing foreclosure would benefit from the mortgage settlement. Those groups have said demand for their services has surged.

Housing advocates have been closely watching how California will spend the $410 million it received from the banks given Harris' profile in the talks, that it was the largest cash payment to a state and the sheer size of California's mortgage market. Before Brown announced he wanted to use the funds for other purposes, the affordable housing group Enterprise Community Partners had found that only 27 states were putting all of their settlement money toward housing initiatives.

"We appreciate that the governor is grappling with huge deficits and major financial challenges," said Jeff Schaffer, vice president for the group. But "we find it problematic if those resources are going to be diverted."

In a statement, executives of three major providers of legal services — Public Counsel Chief Executive Hernán Vera, Legal Aid Foundation of Los Angeles Executive Director Silvia Argueta and Bet Tzedek President Sandy Samuels — argued that Brown should rethink taking the funds.

"People at risk of foreclosure need help today, and that's what housing counselors and legal services are in the best position to do," they wrote. "Spending millions just to fill a budget deficit isn't going to help homeowners to stay in their homes."

Legislative leaders said they're unlikely to prevent Brown from taking the settlement money, given all the cuts to education, health and welfare programs that they're trying to stave off. "It's a priority, but I don't know at this point" if it can be saved, said Senate President Pro Tem Darrell Steinberg (D-Sacramento).

Still, Steinberg predicted that the squabble over funding won't stop efforts to find a compromise.

Getting bills out of the conference committee and approved by the two houses of the Legislature could hinge on the vote of one key lawmaker, Sen. Ron Calderon (D-Montebello). Calderon has earned a reputation for being a conservative pro-business Democrat. A no vote by Calderon — combined with likely no votes from the two Republican members of the conference committee — would doom the two foreclosure bills, AB 278 and SB 900.

"The biggest problem right now is we're still trying to figure out what the authors' intentions are and accomplish the goal of the legislation without any unintended consequences," Calderon said. "My goal is to put a product on the floor that everybody can vote for, or at least the majority."

Consumer advocates said they're pleased that the conferees are thoroughly vetting the proposals.

"Hopefully, it will lead to some compromise that will produce a strong bill sometime in the next two weeks," said Paul Leonard, California director of the Center for Responsible Lending. "The issue is less about the critique from the banks and more about what legislators are willing to do."

Lifsher reported from Sacramento and Lazo reported from Los Angeles.

marc.lifsher@latimes.com

alejandro.lazo@latimes.com

By E. Scott Reckard

May 9, 2012

It's not quite a check in the mail, but certain distressed mortgage borrowers at Bank of America Corp. will be happy they opened the letter anyhow.

The Charlotte, N.C., lender said Tuesday it has begun contacting about 200,000 customers who have fallen behind on home loans and owe more than their current home values. It is notifying them that they may qualify to have their loan balances reduced as much as $100,000 as part of a $25-billion, 49-state settlement over foreclosure abuses.

Borrowers must provide certain information in order to qualify. Only loans owned by Bank of America will qualify. Those owned or backed by government-controlled mortgage buyers Fannie Mae and Freddie Mac, or backed by theFederal Housing Administration, are ineligible.

The offers, to be mailed out gradually through the end of the third quarter, represent the second phase of the loan forgiveness program at BofA. The bank said it previously mailed 5,000 letters to homeowners who already had a loan modification bid under review.

The settlement requires Bank of America, Wells Fargo & Co.,JPMorgan Chase & Co., Citigroup Inc. and Ally Financial Inc. to reduce principal for some borrowers. But Bank of America is offering the most by far, about $11.8 billion in write-downs that it said would reduce the typical borrower payment 30%.

The bank did not break out how it would distribute the offers, except to say that more of them would go to states where Countrywide Financial Corp., the high-risk lender it acquired in 2008, had done the most business.

"The heaviest concentrations are California and Florida, as you might expect," BofA spokesman Rick Simon said.

scott.reckard@latimes.com

By E. Scott Reckard, Los Angeles Times

May 9, 2012

A newly streamlined government plan to reward homeowners who diligently pay their underwater mortgages is proving a bonanza for banks, which by one estimate may pocket $12 billion in extra revenue by refinancing loans.

The revisions to the Obama administration's 3-year-old Home Affordable Refinance Program have yielded mixed results for homeowners, analysts and mortgage professionals say.

Some responsible homeowners are indeed getting lower-interest loans despite owing far more than their homes are worth. But others have loans that don't qualify, or must jump through hoops the plan was supposed to eliminate, such as on-site appraisals and extensive paperwork.

What's more, critics say, homeowners who get new loans are being stuck with higher rates than necessary, often half a percentage point or more. That's because banks are refinancing only their own borrowers, instead of competing against one another, which would drive rates down.

"The banks should charge lower than the market interest rate because the new version of the program means less work and less risk for them. Instead, they are charging more," said Amherst Securities analyst Laurie Goodman, who titled a recent report on the program "And the Winner Is ... the Largest Banks."

The program is a key part of President Obama's efforts to bolster the ravaged housing market. Administration officials including Housing and Urban Development Secretary Shaun Donovan are pressuring Congress to pass a law enabling the program to be used to help more homeowners.

"There's a real urgency here because interest rates today are at the lowest level they have ever been," Donovan testified Tuesday before the Senate Banking Committee. "But as the economy continues to improve, the expectations are this window of record low interest rates may not last for a long time."

In response, Sens. Robert Menendez (D-N.J.) and Barbara Boxer (D-Calif.) said Tuesday that they would introduce legislation this week to extend streamlined refinancing to all underwater Fannie and Freddie borrowers and eliminate appraisal and upfront fees for homeowners using the program to obtain new loans.

The Home Affordable Refinance Program is less controversial than relief plans for delinquent borrowers. Few have objected to its goal of helping homeowners who pay their loans on time but can't refinance at today's record low rates because their home values have plummeted.

To qualify, borrowers must owe more than 80% of the current home value. They can't have missed a payment for the last six months and are allowed to have been late by 30 days only once in the last year.

As this year began, nearly 1 million loans had been replaced using the program, but only 1 in 10 had balances higher than 105% of the home value. The changes, phased in during the first quarter, aim to encourage refinances no matter how far underwater the loan is.

The program is for loans owned or backed by Fannie Mae and Freddie Mac, the government-supported mortgage buyers that handle 60% of U.S. home loans. It works by having mortgage customer-service providers, which are mainly arms of banks, refinance borrowers into new loans that are sold to Fannie or Freddie.

Because Fannie and Freddie already are stuck with the losses if the existing loans go bad, the thinking goes, substituting lower-interest new mortgages actually reduces everyone's risk. The homeowners have hundreds of dollars more each month, which makes them less likely to default — a boon to their local housing markets and a lift for the economy when they spend their extra cash.

The problem, Goodman said, is that the streamlined program minimizes processing costs for the existing loan servicers but not for competitors, who must collect nearly as much information about borrowers as though they were writing new loans.

The program also exempts existing servicers from having to reimburse Fannie and Freddie for losses on certain flawed mortgages — a multibillion-dollar problem these last few years for the big banks — while requiring competitors to bear that same risk.

President Obama envisioned a different scenario when he announced the revised program last fall.

"These changes are going to encourage other lenders to compete for that business by offering better terms and rates," he said. "And eligible homeowners are going to be able to shop around for the best rates and the best terms."

That wasn't the experience of Johnny James, who bought a Gardena condominium with a 20% down payment during the housing bubble and now owes $414,000 on a home Fannie Mae says is worth $266,000.

James and his wife, Yolanda Hatcher, have full-time jobs with Los Angeles County and excellent credit ratings. Since they hadn't missed payments on their Fannie Mae loan, they thought they were good candidates for a lower-interest refi.

But their servicer, Seterus Inc., said it was just a bill collector, not a lender. Their original lender,JPMorgan Chase & Co., said it would refinance only loans it is currently servicing. Wells Fargo & Co. said the same, and online mortgage specialist Quicken Loans said the condo was too far underwater to refinance.

"There's not a lot of help out there for folks like us," James said.

The couple turned to mortgage broker Jeff Lazerson, who said he submitted applications to eight lenders and found only one that would refinance them. The pending deal, which would cut their rate to 4.63% from 6.25%, was made after they fully documented their income and assets and paid for an on-site appraisal.

"This program has been billed as a worry-free way for responsible people to get a break on rates even if they're way underwater," said Lazerson, president of Mortgage Grader in Laguna Niguel. "From where I sit, it's a disaster."

James Parrott, senior advisor on housing at the White House's National Economic Council, said that even in its imperfect current version, the program would aid many of the half million or so borrowers who have applied to refinance since the latest revisions were made.

"Those people get dropped from 6% or 7% loans to somewhere around 4%," he said. "They will have hundreds of dollars more for themselves every month and thousands of dollars a year."

While proponents say the program makes winners out of all hands, it is not without detractors.

Alexandria, Va., banking consultant Bert Ely said easy-qualifier loans "are what got us into this mess in the first place" and that waiving legal liabilities for banks could result in another round of mortgage headaches in 2013 and beyond.

"What the government is sanctioning is kicking the can down the road, again," he said.

Like other administration plans to bolster housing, the voluntary Home Affordable Refinance Program had underperformed until recently. Lenders rarely refinanced loans bigger than 105% of the home's value even though they were permitted to go to 125%.

But that changed as the new rules loosened restrictions and did away with the 125% cap. Applications for these refinances rocketed from less than 5% of the mortgage market in December "to close to 25% and rising," Nomura Securities analyst Brian Foran wrote in a recent report.

The loans are more profitable as well. In the past, Foran said, lenders typically made 2% of the loan amount when selling a loan to Fannie or Freddie, so a $350,000 loan might yield $7,000 in revenue.

Because the banks are charging higher than market interest rates for loans made under the program, the mortgages are more valuable to investors and sell for more. The banks are typically making an extra 2% of the loan amount, Foran said — another $7,000 on the $350,000 loan, money that drops to the bottom line.

By Foran's calculations, writing more loans at higher profit could yield $12 billion in additional revenue for lenders.

All the big banks showed unexpected jumps in their first-quarter mortgage profits, in large part because of the revised government program, said Keefe, Bruyette & Woods research director Frederick Cannon.

"Interesting that [the program] would be so good for banks," he said.

scott.reckard@latimes.com

By Kenneth R. Harney

April 29, 2012

WASHINGTON — If you're one of the estimated 11 million homeowners burdened with an underwater mortgage, a new federal policy change could be good news: Starting in June, when you want to do a short sale to shed your mortgage and avoid foreclosure, you may not have to wait for months to hear back from your bank when you submit an offer from a potential purchaser.

Instead, if your loan is owned or securitized by either of the dominant conventional mortgage market players — Fannie Mae or Freddie Mac — you can expect a response within 30 business days, with a final decision taking no more than 60 days. If you don't hear back during the first 30 days, the bank will be required to send you weekly updates telling you precisely where the holdups are and when they are likely to be resolved. None of this is typical of short-sale procedures today. Banks and loan servicers that don't comply will face monetary and other penalties.

The mandatory timelines, which real estate and mortgage industry experts say should help speed up what traditionally has been a glacial process, are being imposed by the Federal Housing Finance Agency, the regulatory overseer of Fannie and Freddie in conservatorship. Short sales, in which the lender or loan servicer agrees to accept less than the full amount owed by the borrower, represent an important alternative to foreclosure.

Although short sales can be complex and messy, and can take anywhere from several months to more than a year to complete, they are turning into a mainstay of the real estate market. According to a report from the foreclosure data firm RealtyTrac, short sales jumped 33% in January compared with the same month the year before. In 12 states — including California, Arizona, Colorado, Florida, New York and New Jersey — there were more short sales recorded during January than sales of foreclosed properties.

This trend is welcome, regulators say, but the time required to complete short sales is still far too long. The 30-day and 60-day mandates address just one of the key points of delay in the process, but regulators promise a series of additional steps during the coming months designed to speed transactions. They include clearer guidelines on borrower eligibility, property valuations, compensation for lenders holding second liens and mortgage insurance issues. All of these are points of friction that can delay short sales for weeks or months.

Realty agents who specialize in short sales say setting mandatory timelines is a step in the right direction but won't solve all the problems. The new rules and promises of more "are great if they really happen," said broker Erik Berry of Erik Berry & Associates in Sacramento. Short sales that his firm handles take an average of "about six months" from start to finish on Fannie-Freddie loans. But FHA transactions, which will not be affected by the new regulations, average much longer, and sometimes drag on for a year.

Berry also is skeptical that banks and servicers will be able to reform their staffing practices quickly enough to meet the compressed timelines — even if penalties are imposed. In some cases, he said, banks switch personnel and negotiators five or six times over the course of a short sale.

"You're dealing with one person one day and they say, 'Don't worry, everything's fine,' then suddenly they're gone and you never hear from them again," Berry said, leaving the deal stalled for weeks.

Matt Battiata, whose Battiata Real Estate Group in Del Mar, Calif., handles hundreds of short sales a year, said a reliable, 60-day decision deadline for responses to offers will be helpful — 30 days better than the 90-day average he now sees from banks — but the whole process will still take longer than traditional sales. For clients seeking to do short sales today, Battiata estimates five to six months from offer to closing.

Some of the complications inherent in short sales are beyond the control of regulators or banks, he pointed out. For instance, buyers put in offers to purchase but then change their minds, forcing the sellers and brokers to come up with replacement offers and the bank to reset the clock to analyze the new package.

The take-away for potential short sellers: Be aware of the new moves afoot to streamline the process, but don't expect miracles.

kenharney@earthlink.net

Distributed by Washington Post Writers Group.

By David Lazarus

May 7, 2012, 9:35 p.m.

This is a story of persistence.

In the case of Miriam Ramirez, it's the story of trying to obtain a much-needed loan modification from Bank of America.

In BofA's case, it's the story of giving a mortgage customer the runaround for two years.

Loan modifications have been an increasingly nettlesome issue as millions of homeowners struggle to make mortgage payments during the economic slump. The Obama administration has called upon banks to be more diligent in assisting customers prior to foreclosing on properties.

But despite a $25-billion settlement last month over mortgage abuses, banks have dragged their feet on lowering people's interest rates or forgiving a portion of money owed.

"They're just plodding along," said Kathleen Day, a spokeswoman for the Center for Responsible Lending. "You could say things are a little better now, but they're not as good as they should be."

Ramirez, 40, owns a two-bedroom home not far from the USC campus. Her mortgage payments were running close to $2,300 a month, which was not an easy sum for her and her husband to come up with month after month.

Ramirez works as a housekeeper. Her husband's a truck driver. Some months, they had to forgo medical and dental treatments for themselves and their kids so they could keep paying their loan on time.

Despite the financial hardship, they never missed a payment.

In 2009, Ramirez's employer, TV producer and director David J. Eagle, read about the Making Home Affordable program, an initiative from the Obama administration aimed at lowering people's monthly mortgage costs. "It looked to me like Miriam could qualify," he told me.

Eagle gathered all the necessary documents and helped Ramirez fill out the application forms. Things went downhill from there.

"Bank of America put us through the ringer," Eagle recalled. "They kept misplacing documents and requiring us to submit the same materials. This went on for months and months."

Finally Ramirez was given a trial loan mod that lowered her monthly payments to about $1,500. Then, in May 2010, she received confirmation of a permanent modification that required a monthly payment of nearly $2,000 — not as affordable as $1,500, but better than the original $2,300.

Throughout this process, Ramirez continued making all her payments on time. She'd make them early, typically a week or two before they were due. And that's where the real problem began.

According to BofA's records, Ramirez made her May 2010 payment April 26. She submitted the $1,500 amount, as per her trial loan mod.

What happened next shows how easily a simple process can break down. BofA applied the check to Ramirez's loan balance but didn't acknowledge it as the first payment under the now-finalized loan modification.

Instead, it sent a notice to Ramirez a few weeks later saying she was late on her May payment.

I won't go into the gory details of Ramirez's and Eagle's subsequent correspondence with the bank. Suffice it to say that BofA simply couldn't get its story straight.

Sometimes it would say the snafu had been dealt with and all was well. Sometimes it would say that a payment was still lacking. Sometimes it blamed the situation on Ramirez. Sometimes it blamed it onFannie Mae.

Eagle offered to pay the $500 difference between the $1,500 Ramirez had submitted and the $2,000 of the final loan mod. But BofA continued to insist that things were more complicated than that, and that Ramirez needed to pay the full $2,000 for May.

Eagle, acting on Ramirez's behalf, sought answers from various levels of BofA service reps, and got nowhere. He even wrote to the head of the bank, Brian Moynihan, seeking help in untangling the mess. Nothing worked.

So Eagle and Ramirez came knocking on my door.

"From an accounting perspective, this whole thing was handled correctly," a BofA spokeswoman, Jumana Bauwens, told me. "From a customer-service perspective, it could have been handled better."

The long and short of it: The Treasury Department requires that when a loan mod becomes finalized under the Making Home Affordable program, all mortgage payments must be made within the month that they're due.

Ramirez's early payment for May in April 2010 thus couldn't be counted as a regular payment. BofA, thinking Ramirez had simply handed over some extra cash, paid down her balance but left her May bill unpaid.

And for some reason that no one can explain, the bank was unable to pinpoint the problem or articulate it to Ramirez and Eagle. Instead, it merely kept insisting that the problem was Ramirez's.

"It's not the level of service we would like customers to have," Bauwens admitted. "For that, we apologize."

To make amends, she said BofA will go back and credit Ramirez's account with a full payment having been made as of May 2010 and all subsequent months.

Bauwens also said the bank will attempt to clean up Ramirez's credit record, which, not surprisingly, took a pounding throughout this entire mess.

Mistakes happen. But a responsible business doesn't let things slide for months and even years. It steps up and tries to solve the problem.

BofA didn't do that. And there's no telling how many other loan mods may be out there that have experienced similar misunderstandings and miscommunications.

Is it expensive to have actual human beings review case files? Yes. But this is how banks can avoid the "robo-signing" fiasco that ended up costing them billions in settlement dollars.

And for a bank like BofA, which reported $1.4 billion in profit last year, it probably wouldn't hurt to provide a little more of the human touch when it comes to dealing with customers.

I mean, two years of runaround? That's no way to run a financial institution.

David Lazarus' column runs Tuesdays and Fridays. He also can be seen daily on KTLA-TV Channel 5. Send your tips or feedback to david.lazarus@latimes.com.

By Alejandro Lazo, Los Angeles Times

May 8, 2012

As California pushes to get more homeowners into a $2-billion foreclosure prevention program, some Fannie Maeand Freddie Mac borrowers may see their mortgages shrunk through principal reduction.

State officials are making a significant change to the Keep Your Home California program. They are dropping a requirement that banks match taxpayers funds when homeowners receive mortgage reductions through the program.

The initiative, which uses federal funds from the 2008 Wall Street bailout to help borrowers at risk of foreclosure, has faced lackluster participation and lender resistance since it was rolled out last year. By eliminating the requirement that banks provide matching funds, state officials hope to make it easier for homeowners to get principal reductions.

The participation by Fannie Mae and Freddie Mac, confirmed Monday, could provide a major boost to Keep Your Home California.

Fannie Mae and Freddie Mac own about 62% of outstanding mortgages in the Golden State, according to the state attorney general's office. But since the program was unveiled last year, neither has elected to participate in principal reduction because of concerns about additional costs to taxpayers.

Only a small number of California homeowners — 8,500 to 9,000 — would be able to get mortgage write-downs with the current level of funds available. But given the previous opposition to these types of modifications by the two mortgage giants, housing advocates who want to make principal reduction more widespread hailed their involvement.

"Having Fannie and Freddie participate in the state Keep Your Home principal reduction program would be a really important step forward," said Paul Leonard, California director of the Center for Responsible Lending. "Fannie and Freddie are at some level the market leaders; they represent a large share of all existing mortgages."

The two mortgage giants were seized by the federal government in 2008 as they bordered on bankruptcy, and taxpayers have provided $188 billion to keep them afloat.

Edward J. DeMarco, head of the federal agency that oversees Fannie and Freddie, has argued that principal reduction would not be in the best interest of taxpayers and that other types of loan modifications are more effective.

But pressure has mounted on DeMarco to alter his position. In a recent letter to DeMarco, congressional Democrats cited Fannie Mae documents that they say showed a 2009 pilot program by Fannie would have cost only $1.7 million to implement but could have provided more than $410 million worth of benefits. They decried the scuttling of that program as ideological in nature.

Fannie and Freddie last year made it their policy to participate in state-run principal reduction programs such as Keep Your Home California as long as they or the mortgage companies that work for them don't have to contribute funds.

Banks and other financial institutions have been reluctant to participate in widespread principal reductions. Lenders argue that such reductions aren't worth the cost and would create a "moral hazard" by rewarding delinquent borrowers.

As part of a historic $25-billion mortgage settlement reached this year, the nation's five largest banks agreed to reduce the principal on some of the loans they own.

Since then Fannie and Freddie have been a major focus of housing advocates who argue that shrinking the mortgages of underwater borrowers would boost the housing market by giving homeowners a clear incentive to keep paying off their loans. They also say that principal reduction would reduce foreclosures by lowering the monthly payments for underwater homeowners and giving them hope they would one day have more equity in their homes.

"In places that are deeply underwater, ultimately those loans where you are not reducing principal, they are going to fail anyway," said Richard Green of USC's Lusk Center for Real Estate. "So you are putting off the day of reckoning."

The state will allocate the federal money, resulting in help for fewer California borrowers than the 25,135 that was originally proposed. The $2-billion program is run by the California Housing Finance Agency, with $790 million available for principal reductions.

Financial institutions will be required to make other modifications to loans such as reducing the interest rate or changing the terms of the loans.

The changes to the program will roll out in early June, officials with the California agency said. The agency will increase to $100,000 from $50,000 the amount of aid borrowers can receive.

Spokespeople for the nation's three largest banks — Wells Fargo & Co., Bank of America Corp. andJPMorgan Chase & Co. — said they were evaluating the changes. BofA has been the only major servicer participating in the principal reduction component of the program.

alejandro.lazo@latimes.com

Gale Holland, Los Angeles Times

April 13, 2012

Dirma Rodriguez had five minutes to gather her things and vacate the West Adams house she and her severely disabled daughter had lived in for more than 25 years.

As a property manager changed the locks, Rodriguez fluttered back and forth from the yard — where a pile of stuff lay by the kitchen stove — to her car, where her daughter, Ingrid Ortiz, sat screaming and crying.

How Rodriguez and Ortiz ended up in this predicament is a long, messy story that resounds with a misery all too common in this age of foreclosure.

Rodriguez took out a loan to retrofit her house for her special-needs daughter. After she fell behind on her payments, the Bank of America lowered her monthly obligation, but then sold the house at a foreclosure auction last September. The new owner, a house flipper from El Segundo called West Ridge Rentals, moved to evict the family.

I came upon Rodriguez's story through Occupy Fights Foreclosure, the latest offshoot of the 99% movement. Occupy interceded to stop her eviction March 26, and it just may have saved her home for good. Bank of America said last week it is considering a loan modification that would return the home to Rodriguez and her family.

But how did it come to this? Bank of America took a $45-billion bailout from taxpayers when it got into financial trouble. Why couldn't the bank have shown Rodriguez — a widow whose life was already a trial — the same courtesy when she got squeezed?

"I would pray to God the executives from Bank of America would come over here and see what I have to deal with," Rodriguez said through a Spanish-speaking Occupier last week.

Ortiz, now 27, has cerebral palsy and does not speak. Her vision is poor, and she can walk with leg braces, but she generally finds it easier to slide around the house on her knees. She often cries and wails loudly.

The stucco house on South Rimpau Boulevard, which Rodriguez keeps immaculate, is custom-conditioned for Ortiz, with gleaming floor tiles to ease her movements and a wheelchair ramp. In the summer, Rodriguez spreads a blanket on the lawn so Ingrid can enjoy the sun and gaze at the dozens of unblemished rose bushes her mother planted in honor of her quinceañera.

Given the circumstances, it's hard to picture Rodriguez spending her loan money on a cruise. Or finding another place where Ortiz could live comfortably.

"I built all this house so she could have a castle," Rodriguez said through a translator last week. Two portraits of a smiling Ortiz in a white quinceañera dress with rosebud trim hung nearby. "This is the only world she knows," her mother said.

Bank of America inherited Rodriguez's loan from Countrywide. After her payment jumped, and she fell behind, the bank placed her in a trial loan modification. She made her payments faithfully for 13 months and was awaiting a permanent modification package when the bank sold her home out from under her, she says.

How and why this came to pass is in dispute. Rodriguez says the bank began returning her payments, then put her into foreclosure without notice. Bank of America spokesman Rick Simon said she received ample notification, and the foreclosure was aboveboard.

Getting at the truth is complicated by "advocates" that Rodriguez brought in to try to save her home. One of them, G & G Financial of Los Angeles, earned a grade of "F" from the Better Business Bureau for allegedly charging homeowners advance fees to work on loan modifications, which is illegal in California. A man who answered the phone at G & G hung up on me when I tried to ask about Rodriguez's case.

Another company, Golden Global Investments of Van Nuys, said through an employee that it helped Rodriguez fight eviction. But West Ridge lawyer Alan Dettelbach says no one was in court for Rodriguez when the eviction proceeding was heard.

Bank of America's assertion that the foreclosure was proper might be more persuasive if it and four other banks hadn't just signed a $25-billion settlement with the federal government and state attorneys general over shoddy, and possibly illegal, foreclosure practices. Or if it had established more of a record of helping longtime homeowners hang on to their properties.

Bank of America was the only lender that joined a 2009, $1.1-million city pilot program to help homeowners in the North San Fernando Valley obtain loan modifications. But as of February, the bank could find no "eligible borrowers," city staff reported to the City Council.

Really? REALLY? There's not a single Bank of America borrower in North Hollywood or Sun Valley deserving of a break?

Rodriguez owed $457,000 on the house; West Ridge picked it up for $300,100. You might wonder why Bank of America found it smarter to sell at a loss than to work out reasonable terms with Rodriguez, who made mortgage payments for more than 20 years without incident.

Basically, the bulk of the loss falls not on Bank of America, the loan servicer, but on the loan's owner — in Rodriguez's case, Freddie Mac.

Dettelbach, the attorney, said West Ridge is willing to walk away if the bank repays its money plus costs. Simon, the spokesman, said the bank has to be certain Rodriguez can afford the payments before they agree to a modification.

"We are certainly sympathetic to the situation involving her daughter and the renovations that have been done to the home," Simon said in an email.

"I don't want a free house. I just want to make my payments," Rodriguez said.

gale.holland@latimes.com

By E. Scott Reckard, Los Angeles Times

April 12, 2012

A $7.6-billion federal program to help homeowners avert foreclosure set too few goals for the 18 participating states and didn't do enough to make sure the nation's biggest banks were on board, according to a government audit.

The audit criticized the Treasury Department for rolling out the Hardest Hit Fund with no advance notice in February 2010, then leaving the states to implement it on their own. The report by a special inspector general pointed out that it took seven months before the government met with the states, banks and mortgage giants Freddie Mac and Fannie Mae to make sure everyone was participating in the program.

The 76-page audit will be released Thursday by the special inspector general for the federal Troubled Asset Relief Program, or TARP, best known for bailing out the nation's banks after the financial crisis.

"The TARP money went out to banks within days, but here you only have 30,000 homeowners helped after more than two years," Christy Romero, the special inspector general for TARP, said in an interview.

Romero said the lack of any measurable goals for the program creates the appearance that the Treasury Department is trying to avoid accountability to "Congress and taxpayers who funded TARP." Even though the states deliver the Hardest Hit Fund money, Romero added, "it's not a state program — it's a federal program with Treasury as its overseer."

The Treasury Department acknowledged in a written response that Hardest Hit started slowly, but it said each state had to build systems to run and monitor its programs "from scratch." It said the programs were gaining traction and would continue to help homeowners well into the future.

Hardest Hit was designed to provide cash so states with high unemployment and depressed housing markets could devise their own programs in five relief categories, including making mortgage payments for unemployed homeowners and writing down principal on troubled loans.

As of Jan. 1, only 3% of the $7.6 billion available nationally had been distributed. Keep Your Home California, the Golden State's version of the program, had distributed less than 2% of its nearly $2-billion slice of the funds, a Times review of the program revealed last month.

The audit said the program's single goal was "to help prevent foreclosures and preserve homeownership." The Treasury Department was blamed for not setting specific goals for the states to achieve.

In its response, the Treasury Department said that setting numerical goals for distribution of funds and homeowners to be helped — "a one-size-fits-all approach" — would violate the aim of the program. It said states need more flexibility to devise and adapt their own approaches to healing troubled housing markets.

The funds are kept at the Treasury until the states identify uses for them, and then they flow through special nonprofit agencies, not state coffers.

The Times review of state filings showed a wide range of funds distributed, with Oregon having disbursed 16% of its available money as of Dec. 31, the most of any state, and New Jersey in last place, with 0.1% out the door.

The review also found that California had not mailed notices of the assistance program to people applying for unemployment insurance. The state Employment Development Department included a notice about the program in a mailing made after the report was published.

California's 2% put the Golden State in the middle of the pack and ahead of neighboring Arizona and Nevada, which had doled out 0.4% and 1.8% of their allocated Hardest Hit money, respectively.

Michael Trailor, director of the Arizona Department of Housing, said in an earlier interview that the three states, where home prices have declined far more than in most of the country, spent considerable time and effort at the beginning of the program on a collaborative effort that went nowhere.

California, Nevada and Arizona developed a joint program to use Hardest Hit funds to match any principal reduction by a lender. If a bank would write down a loan by $50,000, the program would use federal funds to reduce it another $50,000.

Of the large banks providing mortgage customer service, only Bank of America agreed to use the program, and nonprofit mortgage counselors told The Times that BofA rarely approved principal reduction.

Fannie Mae and Freddie Mac, which own or back 60% of the nation's mortgages, and their regulator, the Federal Housing Finance Agency, also declined to participate. They cited the "moral hazard" of tempting borrowers to default in order to have their loan balances cut, Trailor said.

He and officials at the California Housing Finance Agency said they have switched their emphasis to helping borrowers catch up on mortgage payments after a temporary job loss and paying loans for those out of work.

The audit said 95% of the Hardest Hit Fund help provided to homeowners so far has been unemployment assistance or payment of past-due amounts — the only assistance that Fannie and Freddie directed the banks and other mortgage servicers to participate in.

Because the states have little bargaining power with national financial firms, the Treasury "should have been, and still should be, the driving force" in getting Fannie, Freddie and the banks onboard, the report said.

It quoted an unidentified housing official as saying the $1 billion provided to Florida "has been a nice carrot to use with servicers in Florida, but there is no stick with the carrot to force servicers to participate."

The Treasury Department said it can't compel participation in Hardest Hit programs but had "actively and consistently engaged" with the banks, Fannie and Freddie "from the earliest stages of the program, encouraging support and addressing impediments to participation."

scott.reckard@latimes.com

By Michael Hiltzik

February 14, 2012, 7:29 p.m.

You can love or you can hate the recent $25-billion federal-state mortgage foreclosure settlement, but there's no getting around one simple fact: There's a huge, gaping hole right in the middle of it.

The hole is that if your home loan has been bought from your lender by Fannie Mae or Freddie Mac, you're not eligible for the mortgage relief encompassed by the deal.

Since Fannie and Freddie control well more than half of all outstanding mortgages, this shortcoming looks to be what engineers would call "non-trivial."

This is curious, because the settlement, announced last week, had a sizable head of steam behind it. It was endorsed by the Obama administration, including the departments of Justice and Housing and Urban Development, and 49 of the 50 state attorneys general. By my count, the latter group breaks down as 24 Republicans and 25 Democrats; you can't get more bipartisan than that, unless you cut one Democrat in half and cede a piece to Team GOP.

What gives?

The answer is that the participation of Fannie and Freddie has been blocked by a career civil servant named Edward J. DeMarco.

As acting director of the Federal Housing Finance Agency,DeMarco is the chief regulator and conservator of Fannie and Freddie, which were chartered by the federal government to buy up mortgages, thus encouraging lenders to make home loans.

He has very firm ideas about a key element of the settlement, which would cut the principal balance for some homeowners who owe more on their loans than their homes are worth: He dislikes this sort of write-down so much that he's forbidden Fannie and Freddie to do it. (Experts refer to the homeowners' distance beneath the waves as their "negative equity" and the write-down of loan balances as "principal forgiveness.")

DeMarco contends that forgiveness saddles lenders with bigger losses on restructured loans than any other form of relief except foreclosure, and therefore he'd be violating federal law if he gave Fannie and Freddie the green light. In a nutshell, that's why Fannie and Freddie aren't in the national foreclosure settlement.

But what about DeMarco's argument that principal forgiveness is the biggest loser among restructuring alternatives? The truth is that it doesn't seem to hold even a nutshell's worth of water. In fact, his own agency's analysis, which he provided last month to Rep. Elijah E. Cummings (D-Md.) and other Democrats on the House Committee on Oversight and Government Reform, contradicts it. And independent analyses, including one from the Federal Reserve Bank of New York, blow it to smithereens.

Let's look at the record.

If you're trying to keep financially strapped underwater homeowners out of foreclosure, there are really only three ways to do it. All are aimed at reducing the homeowner's monthly payment:

•You can cut the interest rate on the loan.

•You can defer payments on part of the principal owed, often by tacking the unpaid obligation to the end of the loan or reamortizing it over a longer period; this is known as principal forbearance.

•Or you can write down all or part of the excess principal to bring the balance closer in line with the home's value (forgiveness).

Interest rate cuts alone don't do much — cutting the rate to 4% from 5% on a balance of $100,000 saves a borrower about $60 a month. Principal modifications can be more effective, especially when combined with an interest-rate cut.

But the Holy Grail in restructurings is to prevent homeowners from re-defaulting after a modification, and the record shows that forgiveness is much better than any other option in achieving that.

The reason should be obvious. The most important factor in a borrower's likelihood of default is the loan's negative equity. Put simply, if you think you're so deeply underwater that you won't have equity in your home by the time you're ready to sell it, or ever, then default looks more rational the more your ability to pay comes under strain.

The closer you are to breaking even or going positive, the more you'll fight to keep the house. Forbearance doesn't get you any closer to that point (you still owe the original principal, one way or another), but forgiveness does.

Real-world experience supports these assumptions. In an August 2010 study, the New York Fed calculated that a principal write-down of a mortgage with 18% negative equity would cut the probability of re-default 40% within a year of the modification. That's four times as effective as any other restructuring format, even when the alternatives produce the same reduction in the monthly payment.

DeMarco acknowledges that forgiveness reduces re-default rates more than forbearance; he just doesn't believe that the difference is enough to make forgiveness worthwhile. But the New York Fed analysis says he's wrong — the net present value of the restructured mortgage, which takes into account losses from defaults and foreclosures as well as the lower balance being paid by the borrower, is much higher than that of alternative restructurings, not to mention no restructurings at all.

All this makes DeMarco's adamantine opposition to principal forgiveness mysterious. In November, he told Cummings' subcommittee that he didn't think the law permitted him "to use taxpayer money for a general program of principal forgiveness."

But a "general program" is not what Fannie and Freddie are being asked for. Housing reformers want them to consider forgiveness as "one of several tools" to extricate the country from the mortgage overhang, in the words of Wade Henderson, chief executive of the Leadership Committee on Civil and Human Rights, a Washington group that will be meeting with DeMarco next week.

DeMarco's agency says that doing no modifications at all on the $300 billion of the Fannie and Freddie loan portfolio that is at least 15% underwater would cost taxpayers $102 billion through foreclosures. In other words, the taxpayer is already on the hook for that much. Offering forgiveness to borrowers, however, assuming that the offers are limited to loans that would have enhanced net present value as a result, would cut that loss by at least $28 billion — and the recovery would be nearly $400 million greater through forgiveness rather than forbearance. (The agency's calculations were based on reducing the balances so that no loan was more than 15% underwater.)

So how does forgiveness entail the use of taxpayers' money? The truth is, forgiveness reduces the taxpayers' bill.

Cummings, in a letter to DeMarco last week, hinted that he thought DeMarco's position was ideological. Yet it's hard to put one's finger on DeMarco's ideology, and indeed the Washington establishment has never known quite what to make of him.

In 2010, after he issued 64 subpoenas to Wall Street banks and other financial firms for information about the mortgage securities, many of them very smelly, that turned up on Fannie's and Freddie's books, DeMarco became a darling of progressives and a bane of conservatives. Sen. Richard Shelby (R-Ala.) and former Sen. Christopher J. Dodd (D-Conn.), the ranking member and chairman of the Senate Banking Committee, both called for his head in a letter to President Obama.

His cause was taken up promptly by Democrats in the House, who asked that, even if Obama were to replace DeMarco, he make sure that DeMarco's campaign "will continue to be pursued vigorously."

Now the shoe is on the other foot, and rather than lionize DeMarco as a "bank scourge" (pace theHuffington Post, circa August 2010), it's liberals who are calling for his head.

The real problem is that DeMarco can't easily be dislodged. He's "acting" head of the Federal Housing Finance Agency because he can't be forced to leave until a replacement is nominated by Obama and confirmed by the Senate. The last attempt to do so failed when Obama's candidate, former North Carolina Banking Commissioner James A. Smith, was threatened with a filibuster by none other than Sen. Shelby, who complained that he would be a "tool" of the White House. Smith, as it happens, has just been appointed as independent monitor of the new foreclosure settlement agreement.

Solving the housing crisis is going to require that a lot of moving parts in government and the private sector work together. When one agency can keep the most important cogs, Fannie and Freddie, from moving in sync with the rest of the pieces, what are the chances of moving the machine forward?

Michael Hiltzik's column appears Sundays and Wednesdays. Reach him at mhiltzik@latimes.com, read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow@latimeshiltzik on Twitter.

By Matt Stevens, Los Angeles Times

February 10, 2012

Hundreds of thousands of California homeowners stand to benefit directly from a landmark $25-billion settlement that federal officials, state attorneys general and the nation's five largest mortgage servicers agreed to on Thursday.

California Atty. Gen. Kamala D. Harris said that residents could receive as much as $18 billion in assistance from the settlement. The Times answers some basic questions about what homeowners should expect next.

Who gets money from this settlement?

Only homeowners who borrowed money from one of the big five servicers — Bank of America Corp.,JPMorgan Chase & Co., Wells Fargo Co., Citigroup Inc. and Ally Financial Inc. — are covered. Loans owned by the government-sponsored Fannie Mae and Freddie Mac are not covered. Federal and state officials are attempting to get nine more large mortgage servicers to sign on to Thursday's settlement, which could bring in an additional $5 billion.

How do I verify that I qualify?

Borrowers will eventually receive letters from their mortgage servicers. In the meantime, homeowners can access information from each of the banks online, or call these numbers:

Ally/GMAC: 800-766-4622

Bank of America: 877-488-7814

Citigroup: 866-272-4749

JPMorgan Chase: 866-372-6901

Wells Fargo: 800-288-3212

How long will it take to get help?

The settlement will be submitted to a federal judge in the next few weeks for approval. Within days of that approval, servicers will have to put the money into a special trust fund. There will be incentives for servicers to help homeowners quickly — within the first 12 months of the agreement — but they technically have up to three years to distribute the funds.

I still own my home, but I'm in trouble. What kind of aid will I receive?

Many "underwater" homeowners in California, who owe more than their houses are worth, can expect to get principal write-downs. Many will be allowed to execute short sales and sell their homes for less than the amounts they owe. Others will be receiving restitution for paperwork and other problems suffered during the foreclosure process. Borrowers in these situations should expect to be contacted directly by their mortgage servicers.

My house has already been foreclosed. Do I benefit?

Yes. About $1.5 billion will be distributed directly to Californians whose homes were foreclosed from 2008 through 2011. Officials estimated that the average payout would be $1,500 to $2,000. A settlement administrator will send claim forms to eligible people.

If I do get money from this settlement, do I need to pay taxes on it?

It's unclear. The Internal Revenue Service declined to comment on Thursday.

My region was hit hard by the housing crisis. Do I get priority?

A series of incentives built into the deal will help channel aid to distressed areas, such as Stockton, first. The terms of the deal call for those hardest-hit areas to receive relief within the first year of the settlement. The counties of Los Angeles, Riverside, San Bernardino, Sacramento and Stanislaus are expected to receive the most aid.

Why don't I get more money?

Officials said they wanted to get some money to homeowners quickly before more people lose their homes. Ongoing litigation would have meant more time and bigger risk, with no guarantee of additional reward.

matthew.stevens@latimes.com

Times staff writers Jim Puzzanghera and Alejandro Lazo contributed to this report.

By Alejandro Lazo, Los Angeles Times

February 9, 2012, 1:25 a.m.

A nationwide plan to help nearly 2 million homeowners hit by the mortgage meltdown and improper foreclosure practices could be announced as early as Thursday under a multi-state settlement hammered out by states' attorneys general and the nation's major lenders.

The proposed $25-billion deal would be the largest since the $206-billion settlement with the tobacco industry in 1998. Much of the bank settlement is expected to go to people who are having trouble paying their mortgages or have lost their homes to foreclosure.

As many as 1 million homeowners could receive mortgage aid through the proposed deal, according to the Department of Housing and Urban Development.

About $17 billion is expected to go toward direct relief to borrowers, a big chunk of that being principal reductions, or the write-downs of mortgage debt, as well as other kinds of loan modifications or assistance. About $3 billion would go toward helping borrowers refinance into new, lower-cost loans.

An additional $5 billion would go toward a reserve account for state and federal programs and to individual homeowners harmed by bank practices. Negotiators have said that about 750,000 people could receive checks for about $1,500 to $2,000.

Two crucial holdouts to the deal, California and New York, were close to signing the agreement Wednesday night, although important stumbling blocks remained, according to people with knowledge of the negotiations.

The agreement could be postponed again, given the complicated nature of the settlement and the many parties involved, said these people, who wished to remain anonymous because they weren't authorized to speak publicly.

Government officials were making arrangements late into the evening for a flurry of announcements Thursday. A planned briefing by federal officials for reporters late Wednesday night was canceled amid last-minute negotiations, showing how much the situation was in flux.

The massive effort, more than a year in the making, is the most recent government attempt to boost the limping housing market and help people whose homes lost significant value in the housing crash.

But even such a sizable settlement pales against the scope of the housing problem. According toFederal Reserve Chairman Ben S. Bernanke, for instance, U.S. homeowners owe about $700 billion more than their homes are worth.

Monday was the deadline for individual states to either reject or accept a deal, though several key states, including California and New York, did not sign on then.

The settlement negotiations follow revelations in 2010 that the nation's largest banks allegedly had foreclosed on borrowers using improper and potentially illegal means.

The Obama administration has been pushing hard for a settlement among the state attorneys general and the nation's five largest mortgage servicers — Bank of America Corp., JPMorgan Chase & Co.,Wells Fargo & Co., Citigroup Inc. and Ally Financial Inc. — and certain federal agencies.

Negotiators with the office of California's attorney general have spent much of the week in round-the-clock negotiations with major mortgage servicers. California's assent is key because it would increase the size of the settlement to $25 billion from $19 billion without the state.

One big hurdle has been California's concern that the deal would release the large servicers from legal action, including violations of state laws, for issues that had not been thoroughly investigated, including securities probes related to losses sustained by the California Public Employees' Retirement System, the nation's largest public pension fund.

California Atty. Gen. Kamala D. Harris left the settlement talks in September, saying banks weren't providing enough money for California homeowners and were asking for too much legal forgiveness. After California stepped away, the release from legal claims for the servicers was broadened to include issues related to the origination of mortgages. Harris wants to retain the ability to get restitution for such claims, particularly regarding predatory lending.

Language over the degree of the release from legal claims remained a big issue of contention for California on Wednesday night, a person familiar with the negotiations said.

In New York, the settlement has been complicated by state Atty. Gen. Eric Schneiderman's recent lawsuit against three of the banks in the discussions — Bank of America, Wells Fargo and Chase — alleging that their use of an electronic database has resulted in widespread deception and fraudulent foreclosure practices, according to a person familiar with the matter.

Schneiderman, who has been one of the most vocal critics of the talks, has said that a multi-state foreclosure settlement could shut down his own investigations into mortgage misdeeds of Wall Street leading up to the financial crisis.

alejandro.lazo@latimes.com

By Alejandro Lazo, Los Angeles Times

January 29, 2012

Foreclosure commonly represents the end of a struggle. A borrower can't pay a mortgage, loses a home and moves on.

But Karen Mena, a 38-year-old county worker, never gave up. Mena fought even after her San Bernardino home was no longer hers. And she won the three-bedroom house back — at least for now.

The ordeal isn't over yet. The eviction was stopped and Bank of America canceled the foreclosure because of the possibility that the loan would be modified to make it more affordable.

But Mena continues to negotiate with the bank over loan terms. She could still lose the house where she built a life and raised two sons.

"I have had the home since I was 21," she said. "It is my primary residence. My son goes to school in the neighborhood and has an after-school program nearby."

Even getting as far as she has is notable, experts said, because it is difficult to get a foreclosure rescinded. That is particularly the case in states such as California, where the foreclosure process is streamlined and largely unfolds outside of court.

Some consumer attorneys say foreclosure reversals like Mena's could become more common as they learn to better exploit foreclosure errors.

"We are making some headway, even in California, though it has been slow," said Walter Hackett, an attorney who represents Inland Empire homeowners. "As attorneys become more savvy about the realities of mortgage lending, they are starting to file more meaningful lawsuits."

In 1996, when Mena and her husband bought their house, the region's last real estate bust was just beginning to recede.

"It was good," Mena said. "You could still afford to buy a house, there was work and I was young."

Her husband, who declined to be interviewed for this article, worked as a licensed contractor, slathering buckets of paint on walls for homeowners looking to spruce up their properties. Mena worked for Riverside County managing the medical cases of handicapped children.

In 2002, they brought a second son home to the tree-lined street not far from the San Bernardino National Forest.

As home values surged and the region's real estate bubble inflated, the family's starter home became a source of income as well as an investment tool.

The pair refinanced their property several times to pay off vehicles, consolidate bills and complete home repairs and upgrades, Mena said. They also used some of that money to launch a contracting company. The last time the home was refinanced, the mortgage remained in her name alone.

"You kind of take a gamble, like, 'Hey let's just do this, let's be self-employed, let's have our own business,'" Mena said. "Then all of a sudden it came to a screeching halt."

The van, spray guns and other newly purchased tools sat idle as construction work in Southern California dried up. By 2008 the two-income household was relying on one income, and the couple was forced to draw on a line of credit to pay the mortgage.

When that final means of survival was tapped out in August 2008, Mena pleaded her case to Bank of America. The bank put Mena on a temporary payment plan that allowed her to pay half of her mortgage note.

In early 2009, Mena was demoted in a cost-cutting measure by her employer. She faced some unexpected expenses in February 2009 and missed a mortgage payment, breaching the terms of her agreement with Bank of America.

The bank told her she could no longer make partial payments, according to letters of financial hardship she wrote applying for mortgage assistance. She tried to make full payments when she could, Mena said, but quickly began falling behind.

"We were still hoping it would work itself out, not only as a family, individually, but as a country, that this will fix itself, and then it didn't," Mena said. "Nothing was working."

President Obama, who took office in January 2009, unveiled plans that spring to help as many as 4 million borrowers such as Mena through its foreclosure assistance plan, the Home Affordable Modification Program. The plan would reduce monthly payments by lowering borrowers' interest rates, extending the length of time on some mortgages and deferring portions of some mortgage debts to the end of the life of the loans.

The program has fallen well short of its goals, and last year the Republican-controlled House of Representatives voted to end it, arguing that the program is a waste of money and gives homeowners false hope. The measure didn't go beyond the House, but the Obama administration has taken steps to improve the performance of banks participating in the program. Last year it withheld financial incentives from some of them, including Bank of America.

Separately, federal regulators have ordered banks to improve their mortgage servicing and foreclosure practices after widespread revelations in 2010 that banks improperly repossessed the homes of delinquent borrowers through a system rife with errors and misconduct. The nation's state attorneys general remain locked in settlement talks that would, according to people familiar with the negotiations not authorized to speak publicly, overhaul the way mortgages are serviced and homes are foreclosed on in the U.S.

Mena submitted her first application through the Home Affordable Modification Program in June 2009 and then again in July after she was told her paperwork was never received. A frustrating process ensued: She would fax financial documents to the bank and wait for weeks or months for word back, only to be told to send the information again because the papers were incomplete, missing or outdated. Mena kept some of her correspondence with Bank of America, a journal of letdowns and false hopes.

"To Whom It May Concern," she scrawled informally in pen on one set of papers faxed to Bank of America in January 2010. "I am resending these documents because I was informed yesterday … that they were not received even though I was informed to the contrary on 10/02/09."

In August 2010, the bank began formal foreclosure proceedings against Mena. She reapplied for a loan modification. Her home was scheduled for sale at auction Dec. 6, 2010. The bank asked her for more documents.

She was caught in the gears of the bank's dual-track process, where a lender continues to foreclose on a home even as it works with a borrower on modifying the home's mortgage — akin to lining up the mortician as the patient checks into the hospital.

"I couldn't tell you the amount of times I talked to Bank of America and they told me, 'We are not going to foreclose on you,'" Mena said, sitting for an interview at her dining room table. "'Don't worry about the notices, don't worry.'"

The bank agreed to postpone the auction, and Mena faxed in two more pieces of paperwork. She waited, and received a letter dated Dec. 14, 2010, telling her that "within 30 days, you will hear from us about your eligibility for a loan modification."

With that letter, at least according to the guidelines of Obama's program, no foreclosure can occur until a decision on the loan modification is made. Fannie Mae, the government-owned investor behind Bank of America's loan, sets its own guidelines for such modifications. The foreclosure process moved forward, Mena's home went to auction and the property reverted to Fannie Mae.

A Coldwell Banker agent carrying a Fannie Mae form letter appeared on Mena's front step two days after Christmas and informed Mena that her home was no longer hers.

"Fannie Mae has engaged a real estate agent to manage this property, and as an occupant of this property, to make you aware of some options that may be available," the letter read.

The options were to rent the home or receive a cash payment to leave voluntarily — "cash for keys," in industry parlance. But those choices did not still well with Mena, who believed she had a right to stay. She refused to take any cash and declined any rental agreements, but her stand was beginning to take a toll.

"I was missing hours of work trying to figure out what to do, and at that point in time everything seemed to be crumbling," she said. "It was a feeling of just being lost."

In the new year, a letter from Bank of America arrived and changed everything.

"We are pleased to tell you that you are approved to enter into a trial period plan under the Home Affordable Modification Program," it read. Mena had been accepted into the program that she had spent more than 18 months pursuing, but she had been tossed a lifeline by the bank too late.

She faced a choice: Start making the trial payments or save her money in case she was evicted. Mena decided to begin making the payments, telling herself, "Let's see what happens. This validates everything I have been trying to do."

Still, Fannie Mae pressed on, taking Mena to court to get her out of the house. Mena replied with her own lawsuit, written with the help of a paralegal because she did not have enough money for an attorney.

The lawsuit makes a series of arguments accusing Bank of America and Fannie Mae of deception as well as questioning their authority to foreclose. A key contention is that she was accepted into a trial loan modification program even after she was foreclosed on.

But before that lawsuit could be resolved, Fannie Mae won the eviction case. She appealed and lost.

The next day, a Friday she had off, Mena spent the morning in shock, driving around the neighborhood considering potential rental properties, then looking through the piles of things in her garage and closets wondering where it would all go. That was when a Bank of America attorney, new to the case, called Mena.

The eviction never happened and BofA repurchased the loan from Fannie Mae, but the negotiations with the bank stretched on.

Last October, Mena got the call she had been waiting for: The foreclosure had formally been retracted.

She went home that night, pushed aside the huge stack of documents that sat on her dining room table and served herself a meal. That night she got her first good night of sleep in months. "It felt like it was home again," Mena said. "That feeling had been stripped from me."

Mena said her determination was fed by anger at the lender she felt had led her astray. "The principle of how Bank of America went about doing the foreclosure was wrong," she said.

Representatives of Bank of America declined to comment in detail on Mena's situation, citing litigation and privacy concerns, but confirmed that she was foreclosed on while she was working with the bank on a modification.

Bank of America issued a statement that "we regret and apologize that this foreclosure was completed while we were working with Ms. Mena toward a mortgage modification. We took timely action and necessary steps to rectify the unfortunate situation, including reversing the foreclosure sale. As a result, Ms. Mena remained in her home throughout the process."

"We are awaiting Ms. Mena's decision on the modification terms we extended to her, which we believe will provide an affordable payment solution and the opportunity for her to sustain homeownership."

Mena and the bank are still tussling over the terms of a loan modification. She received one offer from the bank but rejected it because, she said, it was not one offered through the Obama program and its terms weren't affordable.

She is not sure when the matter will be settled. Her case remains open. She has no attorney, but for now she is still at home.

alejandro.lazo@latimes.com

By Alejandro Lazo, Los Angeles Times

January 25, 2012

Fewer California borrowers entered foreclosure during the final three months of the year, according to new data. But the holiday respite, coming after a sharp summer increase in new defaults, may not last.

The number of California homes entering foreclosure in the fourth quarter fell 11.9% from the same period in 2010 to the second-lowest level over the last four years, said DataQuick, a real estate information firm in San Diego. A total of 61,517 notices of default, which are filed to initiate foreclosures, were recorded on California properties during the fourth quarter. That was a 13.7% drop from the third quarter of 2011.

Some economists say California and other states will probably see an increase in foreclosure actions as banks deal more aggressively with seriously delinquent mortgages. That increase probably will push home prices lower.

"There is just a lot of volatility in the data right now because there are seasonal factors that are affecting the foreclosure numbers," said Celia Chen, a housing economist withMoody'sAnalytics. "I think we are heading upward, but it is not going to be a solid trend up."

Default notice filings fell sharply in December, particularly those involving loans from Bank of America and Bank of New York Mellon, and helped drag down the overall quarterly numbers. Average daily filings on behalf of Bank of New York Mellon dropped 75% from November to December; filings on behalf of Bank of America dropped 50%, Wells Fargo 20% and JPMorgan Chase 13%, DataQuick said Tuesday.

The number of homes taken back through the foreclosure process also fell, by 11.8% from a year earlier to 31,260. The majority of the loans entering the foreclosure process in the fourth quarter were made in 2005 to 2007, when poor lending practices by major institutions were rampant.

Californian homeowners were a median nine months behind on their payments when they received a notice of default from their lender. Among the state's largest counties, mortgages in San Francisco, Marin and San Mateo counties were the least likely to go into foreclosure. Homes were most likely to enter the foreclosure process in Sacramento, San Joaquin and Stanislaus counties, according to DataQuick.

In Southern California, the number of default notices filed on properties fell 10.2% from a year earlier, and the number of homes taken back by banks fell 11%.

Stuart Gabriel, director of UCLA's Ziman Center for Real Estate, found reason for optimism in the figures.

"At this point in the cycle, there is little reticence by large financial institutions to put properties into the foreclosure process," he said. "The housing cycle is showing signs of turning."

Many foreclosures were delayed in 2011 as banks worked through issues surrounding mortgage servicing and foreclosure. Settlement negotiations among attorneys general, federal agencies and the mortgage industry over foreclosure and mortgage servicing abuses dragged on through most of last year.

Analysts attributed the delays to the uncertainty over the outcome of those talks. If a deal is struck among the parties and new foreclosure processes by banks are put in place, some analysts say the foreclosure machinery could ramp up again.

Those negotiations continue to inch forward but could still fall apart. State attorneys general have received drafts of the deal with the banks, a $25-billion settlement that would overhaul foreclosure and mortgage servicing practices, according to two people familiar with the negotiations who aren't authorized to speak publicly.

A key component to any strong deal would be California's participation. State Atty. Gen.Kamala D. Harris, who must make that decision for the Golden State, has not said whether she will sign on. Harris walked away from talks with the banks last year, saying they were asking for too much release from liability, but since then certain provisions have been added to the deal with the aim of getting her back to the table.

On Tuesday, the Center for Responsible Lending gave the proposed $25-billion deal a tentative thumbs up, calling it "an important step forward in addressing foreclosure abuses." The nonpartisan advocacy group noted that the deal would "provide an important template for ways banks can use principal reduction to reduce unnecessary foreclosures and put the country back on a path to economic recovery."

Principal reduction is the writing down of mortgage debt so that homes that are "underwater," when the mortgage balance exceeds the value of the home, become more attractive and affordable for troubled homeowners to stay in. The settlement would include a principal reduction element that could write down the mortgage debt of certain homeowners by an average of $20,000, according to a person familiar with the deal.

But several other consumer groups and some lawmakers remain leery of the possible deal, saying it lets lenders off the hook too easily.

alejandro.lazo@latimes.com

By Kenneth R. Harney

January 15, 2012

Though its demise drew little attention because of the partisan year-end brawl over the payroll tax cut extension in Congress, a key mortgage financing benefit disappeared at the end of December: the ability of large numbers of home buyers and owners to write off the premiums they pay for mortgage insurance.

The loss of that tax deduction — plus mandatory new fees imposed by Congress on all new conventional and FHA loans — could effectively increase the costs of homeownership this year.

The expiration of mortgage insurance deductibility will hit many low-down-payment conventional loans originated since 2007, plus virtually all new mortgages closed this year whose down payment is less than 20%. Though industry experts do not have precise numbers, their estimates range into the millions for existing owners and new buyers potentially touched by the deductibility termination. Borrowers using guaranteed veterans (VA) and rural housing loans, whose down payments can drop to zero, also are affected.

The change in the law took effect Jan. 1 along with the expiration of 58 other tax code benefits that Congress failed to renew, such as credits for home energy improvements, credits for builders of energy-efficient houses and deductions for state and local sales tax payments. They were all components of what would have been an annual "tax extenders" bill authorizing continuation of relatively noncontroversial expiring benefits for another year or more. Congress could still reauthorize all or some of the write-offs retroactively this year, but the political atmosphere on Capitol Hill raises doubts about the timing of that scenario.

The mortgage insurance premium deduction dates to legislation enacted in 2006. It allows buyers and refinancers who use either private mortgage insurance or federal insurance or guarantees, and who itemize on their federal tax returns, to write off their premiums. Borrowers who are single or married and filing jointly with adjusted gross incomes of $100,000 or less can write off 100% of their annual mortgage insurance premiums. Married homeowners filing singly can write off 50% of premiums. Borrowers with incomes above $100,000 may qualify for partial deductions on a sliding scale.

In many cases, the post-tax savings for these borrowers are significant. New buyers with an income around $100,000 and a mortgage of $200,000 would save between $600 and $1,000 a year, depending on their credit score and loan-to-value ratio, according to MGIC, one of the largest private mortgage insurers in the country. For households with lower incomes, the effect would be less, depending on their marginal federal tax brackets.

David Stevens, who served as Federal Housing Administration commissioner and is now chief executive of the Mortgage Bankers Assn., says the loss of deductibility of mortgage insurance hits a segment of consumers — middle-income and first-time buyers — "where affordability is especially important."

But mortgage insurance was not the only housing-related casualty of the pre-Christmas skirmishing. As part of the temporary extension of the payroll tax cut, negotiators tacked an unusual provision that raises fees on most conventional mortgages — those originated for sale to or guarantee by Fannie Mae and Freddie Mac.

Starting in April, Fannie and Freddie will impose a surtax on the guarantee fees they charge private lenders equal to one-tenth of 1%. Lenders are virtually certain to pass those fees to consumers in the form of a higher note rate or loan charges upfront. Industry estimates suggest that the surtax could add an eighth of a percentage point to rates and raise costs to borrowers over the life of the loan by more than $4,000 on a $200,000 mortgage.

Unlike standard guarantee fees, which are used by Fannie and Freddie to defray loan-default expenses, the new funds will be sent directly to the Treasury to help pay for the $36-billion cost of the temporary payroll tax cut. FHA loans also will be hit with a fee increase by the payroll bill, raising the annual premiums the FHA charges new borrowers by one-tenth of a point.

At a time when the Federal Reserve is warning that there can be no broad economic improvement until housing recovers, it may strike the public as odd policy to raise costs for home buyers and refinancers to fund unrelated, temporary tax relief. But that's not the way they saw it on Capitol Hill in the rush to holiday recess.

Bottom line: The mortgage insurance deductibility problem may disappear if mortgage insurance gets included in an election-year "extender" package. But the fee hikes on most new mortgages are here for the foreseeable future, so factor them into your housing budget.

kenharney@earthlink.net

Distributed by Washington Post Writers Group.

By E. Scott Reckard, Los Angeles Times

January 12, 2012

California and other states are likely to see an enormous wave of long-delayed foreclosure action in the coming year as banks deal more aggressively with 3.5 million seriously delinquent mortgages.

And experts said that dealing with the foreclosure process, from issuing notices of default to selling repossessed homes, is likely to push housing prices lower this year before the real estate market has a chance to recover.

A report from RealtyTrac, an Irvine data firm, said about 1.9 million U.S. homes were hit with default notices, foreclosures and other actions last year. That is down from 2.9 million in 2010. Seriously delinquent loans are defined as being four months in arrears.

"There were strong signs in the second half of 2011 that lenders are finally beginning to push through some of the delayed foreclosures in select local markets," said Brandon Moore, chief executive of RealtyTrac. "We expect that trend to continue this year."

The real estate market was in "full delay mode" last year on foreclosures as banks worked to correct legal problems with procedures in many states, Moore said.

In California, 3.2% of homes logged at least one foreclosure filing last year, down from 4.1% a year earlier. But regional differences continued: 2.7% received notices in Los Angeles County and 2.5% in Orange County, compared with nearly 5% in San Bernardino County and 5.3% in Riverside County.

California saw a second-half surge in initial notices of default — the first warnings that a bank is preparing to seize properties with delinquent mortgages, said RealtyTrac spokesman Daren Blomquist.

Though many more foreclosures are expected this year, the number still will be below the peak of 2010, Blomquist said.

Connie Der Torossian, co-president of the Orange County Home Ownership Preservation Cooperative, a nonprofit housing counseling agency, said the distressed homeowners she helps are getting loan modifications or sales dates from banks far faster than in the past. The days of troubled borrowers spending two years in foreclosure limbo are at an end, she said.

"We're not seeing people have to wait six or seven months to get an answer," she said. "It's more like six or seven weeks."

Worried that the foreclosure flood could further undermine the housing markets, the Federal Reserve urged Congress recently to do more for troubled homeowners.

Some Fed officials have been advocating reducing the loan principal more often for underwater borrowers, those whose homes are worth less than their mortgages. The central bank also has been urging mortgage giants Fannie Mae and Freddie Mac, kept alive by three years of taxpayer bailouts, to unload their backlogs of foreclosed properties in bulk discount sales to investors who would then rent out the properties.

That process, which Fannie and Freddie officials said is under study, could help stabilize the housing markets. However, in the short term it would increase taxpayers' tab for propping up the government-sponsored housing finance firms, which already has reached about $150 billion.

Central bankers have tried to resuscitate the economy by keeping interest rates at record low levels. Celia Chen, a housing economist at Moody's Analytics, said the Fed is now taking additional steps because the economy remains fragile and could tip back into recession.

However, Chen believes housing is "poised for better days" after the backlog of foreclosures is cleared away. She said housing is now undervalued, with prices compared to incomes well below the average over the last 20 to 30 years.

RealtyTrac reported a dip in foreclosure filings in December, but Chen said that appeared to be only a holiday hiatus by banks. She projected that home prices will trend slightly lower as the distress sales take place but will bottom out this year in California and the rest of the nation.

After that, Chen said, the improving economy could put the housing recovery in "full swing," driving prices up nationally more than 5% in 2013 and 7% in 2014.

California home prices probably will track the national trend and hit bottom during the middle of this year, she said. However, prices will probably recover at a slower pace than much of the country because housing and unemployment problems run so deep in the Golden State.

The state's difficulties were reflected in RealtyTrac's report, which showed California with the third-highest incidence of foreclosure filings in 2011, behind only Nevada and Arizona.

However, analysts also said they expect housing in California to stabilize more quickly than in many states. The reason: a speedy foreclosure process that normally takes place without court action and is one of the most streamlined in the nation.

RealtyTrac said the average foreclosure took 352 days last year in California, down from a peak of 363 in 2010. By contrast, the foreclosure timeline was 806 days in Florida and 1,019 days in New York, both of which require extensive court review of foreclosures.

scott.reckard@latimes.com