After four months of gains, home prices flattened in October. Worse yet, industry insiders think that they’ll soon start to fall.

Prices have risen more than 3% since May, according to S&P/Case-Shiller.

But most forecasts predict price declines in 2010, with possible losses ranging from anywhere from 3% on up. Fiserv Lending Solutions, a financial analytics firm, forecasts that prices will fall in all but 39 of the 381 markets it covers, with an average drop of 11.3%.

“We’ve seen recent price stabilization because of low mortgage interest rates and the impact of the first-time homebuyers tax credit,” said Pat Newport of IHS Global Research. “But there are really good reasons to think prices will now start going down.”

There are three main reasons for the reversal: a coming flood of foreclosures, rising interest rates and the eventual end of the tax credits.

For Gus Faucher, the director of macroeconomics for Moody’s Economy.com, the huge number of foreclosures that remain in the pipeline is the big problem.

Moody’s upped its estimate of defaults recently because of shortcomings of the government-led mortgage modification programs. Trial workouts are not being made permanent and completed modifications are re-defaulting at high rates.

“There are going to be fewer [successful] modifications than we thought,” said Faucher.

Even so, he added, much of the price decline has already occurred and Moody’s forecast is for only another 8% drop. The worst-hit markets will be the ones suffering the most foreclosures, places like Arizona, California, Florida and Nevada.

Resetting option ARMs (adjustable rate mortgages) will also aggravate the foreclosure problem. These mortgages allow borrowers to pick their own payments, which can be so low they don’t even cover the interest. Balances swell.

For many of the more than 350,000 option-ARM borrowers, it’s time to pay the piper. Their loans will change into fully amortizing mortgages that will carry much higher monthly payments. A very large percentage of these homeowners will default, according to Shari Olefson, author of “Foreclosure Nation: Mortgaging the American Dream.”

“We’ve still only seen the tip of the foreclosure iceberg,” she said.

She also predicts more strategic defaults, people deliberately walking away from even fixed-rate mortgages as the value of their homes dips well below the amount they owe.

Olefson’s forecast is for price declines of 5% to 15%, depending on the area, with a national median price drop of about 10% for 2010.

Also affecting prices will be higher interest rates. Some analysts, according to Newport, think rates for a 30-year mortgage will pass 6% next year as the government curtails housing market support.

The Federal Reserve has helped keep rates low through purchases of mortgage-backed securities. But that program is winding down and will end in March.

“The government is throwing everything at the market but the kitchen sink,” said Peter Schiff, president of Euro pacific Capital. “It can’t prop up housing markets forever.”

Schiff is among the bigger bears. Though he gave no specific prediction, he thinks prices — already down 29% from the peak — are only halfway to the bottom.

As a tool for supporting housing markets and prices, the tax credit for homebuyers is a two-edged sword. It reduces taxes dollar-for-dollar by up to $8,000 for new homebuyers and $6,500 for buyers who already own a home and should support home prices. But it ends at the end of April.

Many buyers will push their deals forward to get in before the deadline and then demand for homes could sink afterward.

One of the few bulls out there is NAR, whose chief economist, Lawrence Yun, is counting on the tax credit to provide temporary support for housing markets until the economy recovers enough to start fueling sales. He predicts price improvement in 2010 of more than 3%.

“The headwind we face is rising mortgage interest rates,” Yun said, “but the compensating factors will be the homebuyers tax credit in the first half of the year and increased job creation in the second half.”

NEW YORK (CNNMoney.com)

Hocking the house for quick cash is a lot harder than it used to be, and it’s causing headaches for homeowners, banks and the economy.

During the housing boom, millions of people borrowed against the value of their homes to remodel kitchens, finish basements, pay off credit cards, buy TVs or cars, and finance educations. Banks encouraged the borrowing, touting in ads how easy it is to unlock the cash in their homes to “live richly” and “seize your someday.”

Now, the days of tapping your house for easy money have gone the way of soaring home prices. A quarter of all homeowners are ineligible for home equity loans because they owe more on their mortgage than what the house is worth. Those who have equity in their homes are finding banks far more stingy. Many with home-equity loans are seeing their credit limits reduced dramatically.

The sharp pullback is dragging on the economy, household budgets and banks’ books. And it’s another sign that the consumer spending binge that powered the economy through most of the decade is unlikely to return anytime soon.

At the peak of the housing boom in 2006, banks made $430 billion in home equity loans and lines of credit, according to the trade publication Inside Mortgage Finance. From 2002 to 2006, such lending was equal to 2.8 percent of the nation’s economic activity, according to a study by finance professors Atif Mian and Amir Sufi of the University of Chicago.

For the first nine months of 2009, only $40 billion in new home equity loans were made. The impact on the economy: close to zero.

“The home as ATM is yesterday,” says Keith Gumbinger, vice president of HSH Associates Financial Publishers, which publishes consumer loan information.

Millions of homeowners borrowed from the house to improve their standard of living. Now, unable to count on rising home values to absorb more borrowing, indebted homeowners are feeling anything but wealthy.

Holly Scribner, 34, and her husband took out a $20,000 home equity loan in mid-2007 — just as the housing market began its swoon. They used the money to replace sinks and faucets, paint, buy a snow blower and make other improvements to their home in Nashua, N.H.

The $200 monthly payment was easy until property taxes jumped $200 a month, the basement flooded (causing $20,000 in damage) and the family ran into other financial difficulties as the recession took hold. Their home’s value fell from $279,000 to $180,000. They could no longer afford to make payments on either their first $200,000 mortgage or the home equity loan.

Scribner, who is a stay-at-home mom with three children, avoided foreclosure by striking a deal with the first mortgage lender, HSBC, which agreed to modify their loan and reduce payments from $1,900 a month to $1,100 a month. The home equity lender, Ditech, refused to negotiate. Scribner’s husband, Scott, works at an auto loan financing company but is looking for a second job to supplement the family’s income.

The family is still having trouble making regular payments on the home-equity loan. The latest was for $100 in November.

“It was a huge mess. I ruined my credit,” Holly Scribner says. “We did everything right, we thought, and we ended up in a bad situation.”

It’s a mess for the banking industry, too.

Home equity lending gained popularity after 1986, the year Congress eliminated the tax deduction for interest on credit card debt but preserved deductions on interest for home equity loans and lines of credit. Homeowners realized it was easier or cheaper to tap their home equity for cash than to use money taken from savings accounts, mutual funds or personal loans to fund home improvements.

Banks made plenty of money issuing these loans. Home equity borrowers pay many of the costs associated with buying a home. They also may have to pay annual membership fees, account maintenance fees and transaction fees each time a credit line is tapped.

In 1990, the overall outstanding balance on home equity loans was $215 billion. In 2007, it peaked at $1.13 trillion. For the first nine months of 2009, it’s at $1.05 trillion, the Federal Reserve said. Today, there are more than 20 million outstanding home equity loans and lines of credit, according to First American CoreLogic.

But delinquencies are rising, hitting record highs in the second quarter. About 4 percent of home equity loans were delinquent, and nearly 2 percent of credit lines were 30 days or more overdue, according to the most recent data available from the American Bankers Association.

A rise in home-equity defaults can be particularly painful for a bank. That’s because the primary mortgage lender is first in line to get repaid after the home is sold through foreclosure. Often, the home-equity lender is left with little or nothing.

Banks are applying the brakes.

Bank of America, for example made about $10.4 billion in home equity loans in the first nine months of the year — down 70 percent from the same period last year, spokesman Rick Simon says. The also started sending letters freezing or cutting lines of credit last year, and will disqualify borrowers in areas where home prices are declining.

“This was just solid risk management,” he says.

Jeffrey Yellin is in the middle of remodeling his kitchen, dining room, living room and garage at his home in Oak Park, Calif. He planned to pay for the project with his $200,000 home equity line of credit, which he took out in January 2007 when his house was valued at $750,000.

In October, his lender, Wells Fargo, sent a letter informing him that his credit line was being cut to $110,000 because his home’s value had fallen by $168,000, according to the bank.

He is suing the bank, alleging it used unfair standards to justify its reduction, incorrectly assessed the property value, failed to inform customers promptly and used an appeals process that is “oppressive.” Jay Edelson, a lawyer in Chicago who is representing Yellin, says homeowners are increasingly challenging such letters in court. He says he’s received 500 calls from upset borrowers.

Wells Fargo declined to comment on Yellin’s lawsuit but said it reviews of customers’ home equity lines of credit to make sure that account limits are in line with the borrowers’ ability to repay and the value of their homes.

“We do sometimes change our decisions when the customer provides sufficient additional information,” Wells Fargo spokeswoman Mary Berg said in a statement e-mailed to The Associated Press.

Work has stopped at the Yellin’s home. The backyard, used as a staging area for the remodeling job, is packed with materials and equipment.

“Now, I’ve got a backyard that looks like ‘Sanford and Son’ almost,” he says.

ADRIAN SAINZ

AP Real Estate Writer

It’s not the first time an apartment has been anointed the smallest in Manhattan in some category, but this one might really be it. Two people and two cats live in this 175-square-foot studio on 110th Street, which the Post labels the smallest legal apartment in the city. Zaarath and Christopher Prokop, both accountants, bought the pad — roughly the width of a subway car, plus a three-foot-wide bathroom — three months ago for $150,000, or about $857 per square foot. (Monthly maintenance: just over $700.) They make it work by filling their home with…practically nothing at all: a queen-size bed, a flat-screen TV, a leather storage bench, and a shelf/wine rack. They don’t cook, so they use their kitchen cabinets for clothes instead of food. They jog to work in running gear and pick up their officewear at various dry cleaners along the way. When the couple pays off the mortgage in two years, they plan to remodel the space with a Murphy bed and larger windows. Easiest way to make a shoebox feel like a townhouse!

· Cozy-crazy couple makes tight all right in the city’s tiniest studio [NYP]

by Sara Curbed.com

Bank Offers Assistance through Home Affordable, Other Home Retention Programs

CALABASAS, Calif., Dec. 7 /PRNewswire/ — Bank of America has provided mortgage relief through concluded and trial modifications to more than 600,000 homeowners since January 2008.

“At Bank of America, we remain focused on providing long-term solutions to help distressed customers sustain homeownership,” said Jack Schakett, credit loss mitigation strategies executive of Bank of America Home Loans. “Through the government’s Home Affordable Modification Program (HAMP) and our own programs, we are moving aggressively to assist as many homeowners as possible.”

The Treasury Department’s most recent Making Home Affordable Program Servicer Performance Report, reflecting activity through October, indicated that Bank of America was responsible for about one in five HAMP trial modifications – leading the industry with the highest number of trial modifications and offers extended. As of the end of November, Bank of America Home Loans had increased to more than 160,000 customers active in a HAMP trial modification.

“As we focus on assisting our customers to successfully convert to permanent modifications, we are making extensive efforts – through phone, mail and face-to-face contact — to help our customers know exactly what documentation is required and the risks of not responding by the government’s program deadlines,” said Schakett.

Bank of America will continue to work with borrowers who cannot meet the requirements for a HAMP modification using its own modification programs, short-term relief or other foreclosure prevention tools that may address their individual situations. Through its established homeownership retention programs, Bank of America has concluded non-HAMP loan modifications for more than 450,000 customers since January 2008, including about 225,000 modifications so far this year.

Bank of America is also the industry leader in the Home Affordable Refinance Program (HARP), the second key component of the Making Home Affordable initiative. Since becoming the first major lender to originate HARP loans last spring, more than 100,000 Bank of America customers who are current on their mortgage payments have benefitted from enhanced loan-to-value ratios or streamlined processes of the HARP program.

In total, through HARP and other programs, Bank of America has provided $215 billion to refinance existing mortgages, helping 949,000 customers save money on their mortgages so far this year.

Emphasis on Improving the Customer Experience

Bank of America has taken major steps to reach eligible homeowners and improve the level of service they receive, including:

• Expansion of default management staffing to 13,000.
• Reassignment of hundreds of mortgage loan officers to serve as case workers to assist customers in the conversion from trial to permanent modifications.
• Launch of a home loans assistance Web site in September to provide customers easy online access to gain answers to their questions about the loan modification process: http://homeloans.bankofamerica.com/homeloanhelp.
• Implementation of a door-to-door campaign to reach borrowers who have not responded to trial modification offers or provided necessary documentation.
• Participation in more than 200 community outreach events in 30 states.
• Sponsorship of the Alliance for Stabilizing Our Communities, the first national multicultural outreach and home retention collaboration with the National Council of La Raza, National Urban League and National Coalition for Asian Pacific American Community Development.
• Piloting the company’s first Customer Assistance Center in Brea, Calif., that provides face-to-face counseling on mortgage and home equity loans, credit card accounts and personal loans.

Bank of America

Bank of America is one of the world’s largest financial institutions, serving individual consumers, small- and middle-market businesses and large corporations with a full range of banking, investing, asset management and other financial and risk management products and services. The company provides unmatched convenience in the United States, serving approximately 53 million consumer and small business relationships with 6,000 retail banking offices, more than 18,000 ATMs and award-winning online banking with more than 29 million active users. Bank of America is among the world’s leading wealth management companies and is a global leader in corporate and investment banking and trading across a broad range of asset classes serving corporations, governments, institutions and individuals around the world. Bank of America offers industry-leading support to more than 4 million small business owners through a suite of innovative, easy-to-use online products and services. The company serves clients in more than 150 countries. Bank of America Corporation stock (NYSE: BAC) is a component of the Dow Jones Industrial Average and is listed on the New York Stock Exchange.

www.bankofamerica.com

SOURCE Bank of America

Housing and mortgage groups were unusually active last week on Capitol Hill, pushing hard for a better tax credit to spur home purchases.

In coordinated lobbying efforts, homebuilders, Realtors, bankers and mortgage companies focused on the Senate, where final details of a nine hundred billion dollar economic stimulus package were being hammered out all week.

Four trade groups sent a joint letter to the Senate Finance Committee, which has responsibility for all tax-related aspects of the stimulus, applauding the committee’s decision to make the existing seven thousand five hundred dollar tax credit nonrepayable as the House Ways and Means Committee voted to do the prior week.

But the amended credit could be improved even more, the groups said, if the Senate makes several additional changes.

Tops on the list: Extend the eligibility period for using the credit from the current deadline of June thirtieth through the end of December.

“If the stimulus bill is signed sometime in February, as anticipated,“ said the groups, “only about four months will remain for the credit to have a meaningful impact. The spring, summer and early fall months are historically the most active seasons for home purchases. Allowing the credit to expire June thirtieth could undermine” the ability of the credit to stimulate potentially hundreds of thousands of sales this year .

The four trade groups, the National Association of Realtors, the National Association of Homebuilders, the Independent Bankers of America and the Mortgage Bankers Association, asked the Senate to take two more steps: expand eligibility to ALL buyers of homes this year — not simply first time purchasers- and authorize a mechanism whereby the seven thousand five hundred dollar credit could be made available as downpayment cash at settlement.

Eliminating the first time buyer restriction would be a huge change. Under the current tax code and the House Democratic stimulus package, only taxpayers who have not owned a home during the previous three years are eligible for the credit. Opening that up to all purchasers -whether moveup buyers, downsizers or first timers would stimulate sales far more — perhaps half a million additional sales — according to some estimates.

Though the four trade groups joined to push for an improved tax credit, they don’t necessarily agree on all aspects of the plan. For example, the National Association of Homebuilders continues to lobby Congress and the Obama administration for a ten percent credit up to twenty-two thousand dollars available to all 2009 purchasers.

Kenneth R. Harney

NEW YORK (CNNMoney.com) — President-elect Barack Obama launched his campaign Monday for a massive package of tax cuts and spending proposals aimed at reviving an economy mired in recession.

Obama met with congressional leaders from both parties. He is also planning to deliver a major speech on the economy on Thursday, a senior Democratic official told CNN.

“The reason I’m here today is that we are going to present our latest ideas to Congress,” Obama said. “We expect them to begin this week on this process.”

The president-elect will propose roughly $300 billion in tax cuts for individuals and businesses. He has not publicly put a price tag on his overall stimulus plan, though his advisers have said they expect it to fall between $675 billion and $775 billion, 40% of which would be in tax cuts.

According to an Obama spokesman, several tax breaks are under serious consideration.

Middle-class tax cut: Obama would offer a tax cut equal to $500 a year for individuals and $1,000 for couples. The credit would work essentially as a payroll tax credit, meaning the money could be delivered fairly quickly. Companies could simply reduce the tax they withhold from employees’ paychecks.

The tax credit is likely to be offered only to those below a certain income level, but the Obama team hasn’t specified where the cut-off point would be. The credit also would be refundable, meaning that even tax filers without any tax liability — typically very low-income workers — would receive one.

The credit is similar to one Obama proposed during the campaign.

“What’s required for the economy right now [is] to put more money into the pockets of ordinary Americans who are more insecure about their jobs, who are continuing to see rising costs in an area like health care, who are struggling to make ends meet,” he said Monday.

Business break for losses: Obama is considering a tax break for businesses that book losses in 2008 and 2009.

The stimulus plan may extend what’s called the net-operating loss carryback to five years, up from two years currently. The provision lets companies apply their losses to past and future tax bills so that they can get money back on taxes they’ve already paid or would otherwise have to pay.

Job creation: Obama would establish a new credit for businesses that either create jobs in the United States or avoid layoffs.

Small business write-off: Obama would increase the amount of expenses small businesses can write off to $250,000 in 2009 and 2010, up from $125,000 currently.

While political observers believe the now-added emphasis on business tax cuts as a major part of a stimulus package is one way the Obama team hopes to attract Republican support, that’s not how the Obama camp sees it.

“We’re working with Congress to develop a tax-cut package based on a simple principle – what will have the biggest and most immediate impact on creating private sector jobs and strengthening the middle class. We’re guided by what works, not by any ideology or special interests,” an Obama spokesperson told CNNMoney.com in an e-mail.

Obama on Monday said it’s “very important to have a balanced recovery and reinvestment package.”

In his weekly radio and video address on Saturday, Obama offered a broad stroke sketch his proposal, which he called the American Recovery and Reinvestment Plan. In addition to a tax cut for workers, he said he would propose to:

• double renewable energy production and make public buildings more energy efficient;
• rebuild crumbling roads, bridges and schools;
• computerize the health care system;
• and modernize classrooms, labs and libraries.

“Economists from across the political spectrum agree that if we don’t act swiftly and boldly, we could see a much deeper economic downturn,” Obama said. “That’s why we need an American Recovery and Reinvestment Plan that not only creates jobs in the short-term but spurs economic growth and competitiveness in the long-term.”

The main goal of his plan: to create 3 million new jobs. Most would come from the private sector, he said.

As Obama prepares to take office on Jan. 20, the country faces a series of severe economic and political challenges.

Nearly 2 million jobs were lost in the first 11 months of 2008 – the final government reading on the employment picture will be released on Friday – and the economy has stagnated. Investors suffered the worst year in stocks since the Great Depression, and foreclosures are rising while housing values are declining at record paces.

Virtually every state is facing a budget shortfall, forcing many to make plans to cut back on critical services and raise taxes.

To that end, Obama’s advisers and lawmakers have said they expect his legislation to provide increased aid to states to pay for Medicaid, as well as a boost to unemployment benefits.

Many economists have called for stimulus spending to approach or even exceed $1 trillion if the government expects to successfully beat back one of the deepest downturns in more than two generations.

Some Democrats and Republicans have already raised red flags about the scope of Obama’s proposals and the prospect of a rushed attempt to pass the legislation, which would be the most expensive spending bill in U.S. history.

The congressional timeline for the stimulus plan is not clear, nor has Obama provided an official blueprint to Congress.

“The urgency of this, everyone knows about,” said Senate Majority Leader Harry Reid, D-Nev., said on NBC’s “Meet the Press” on Sunday. “But I’m not going to have some false deadline [on it], whether it’s February 1 or whatever it is. I want to make sure that all senators have some input in what goes on here and that we do it as quickly as we can.”

A sharp debate is likely over several crucial questions. Will the proposed measures in fact boost the economy? What’s the right balance between seeding short-term stimulus versus funding long-term projects? Will money intended to yield long-term dividends for the economy as a whole end up merely serving politically motivated agendas or pet projects?

Obama attempted to assuage some of those concerns on Saturday when he called for “vigorous oversight and strict accountability for achieving results.” He stressed that his plan is not an attempt to “throw money” at the economy’s problems.

“I am optimistic that if we come together to seek solutions that advance not the interests of any party, or the agenda of any one group, but the aspirations of all Americans, then we will meet the challenges of our time just as previous generations have met the challenges of theirs,” Obama said.

A new measure to provide extra help for homeowners struggling to pay mortgages after losing their jobs comes into force today.

The measure, announced last year, was introduced by the Government to stem the rising number of repossessions.

The waiting period to qualify for the means-tested benefit has been reduced from 39 to 13 weeks from today – a move brought forward from April.

Others will qualify for help making interest payments after the terms to qualify for such assistance were changed.

More people will now be eligible to receive Support for Mortgage Interest (SMI) after mortgages of up to £200,000 were included, double the previous limit and £30,000 higher than the previously planned increase.

Work and pensions secretary James Purnell told Sky News:”It comes as part of a raft of measures aimed at helping people stay in their homes.

“If there are two earners in the household and one of them loses their job, being able to renegotiate your payments down for two years, you can get through this difficult period.”

Gordon Brown on Sunday promised to help people who face losing their homes in the recession, and conceded the downturn could last two years.

The SMI scheme provides mortgage relief to those who are already receiving a means tested benefit, such as income support, pension credit or income-based jobseekers allowance.

The Council of Mortgage Lenders (CML) estimates that the number of repossessions will soar to 75,000 next year as rising unemployment leaves growing numbers unable to meet interest payments.

A second scheme is being finalised to allow householders to defer a proportion of their mortgage interest payments for up to two years.

NEW YORK (CNNMoney.com) — Home prices posted another record decline in October, falling 18% compared with a year earlier, according to a closely watched report released Tuesday.

The 20-city S&P Case-Shiller index has posted losses for a staggering 27 months in a row. In October, 14 of the 20 cities set fresh price decline records.

“The bear market continues; home prices are back to their March 2004 levels,” says David Blitzer, Chairman of the Index Committee at Standard & Poor’s.

Sunbelt cities suffered the most, but most of the country is watching home values fall. Home prices in Phoenix, Las Vegas and San Francisco all fell more than 30% on a year-over-year basis. Miami, Los Angeles and San Diego recorded year-over-year declines of 29%, 28% and 27%, respectively.

“As of October 2008, the 20-City Composite is down 23.4%,” said Blitzer. “In October, we also saw three new markets enter the ‘double-digit’ club.”

Atlanta, Seattle and Portland each reported annual rates of decline of about 10%.

“While not yet experiencing as severe a contraction as in the Sunbelt, it seems the Pacific Northwest and Mid-Atlantic South is not immune to the overall demise in the housing market,” Blitzer added.

Many of the factors affecting home prices turned strongly negative this fall, according to Blitzer.

“October was really the first month to feel the full brunt of the credit crunch,” he said. “Up until the Lehman Brothers [bankruptcy filing on September 15], everyone felt relatively optimistic.”

Plus, in many of the free-falling cities the majority of real estate sales consist of distressed properties such as foreclosed homes and short sales. These houses tend to sell at a steep discount to the rest of the market, and when they account for a large proportion of all sales, they can exaggerate the depth of price declines.

Of course, foreclosures continue to be a big problem as well. In October alone, nearly 85,000 people lost their homes to foreclosure, adding vacant inventory to an already overburdened market.

Home sellers should not expect prices to improve any time soon, according to Pat Newport, a real estate analyst for IHS Global Insight.

“I expect it’s going to get quite a bit worse over the next couple of months,” he said. “Existing home sales reports have really been bad.”

Home sales fell 8.6% in November, much more than expected, to an annualized rate of 4.49 million units according to the National Association of Realtors.

And although interest rates are currently extremely low - the 30-year fixed-rate averaged 5.14% during the week of December 24, according to mortgage giant Freddie Mac (FRE, Fortune 500) - that’s doing more to help people refinancing existing mortgages than it is to help new home buyers.

“Buyers still have to have a 20% down payment,” said Newport, “and, in this environment, it can be hard to meet that criteria.”

The latest Case-Shiller numbers provide more ammunition to Washington policy makers who want to do more to fix the housing mess, according to Jaret Seiberg, an analyst with the Stanford Group, the policy research firm.

“These data just add to the tremendous pressure on the president-elect and the Democrats to stimulate housing,” he said. “That means more lucrative tax incentives and broad foreclosure prevention. All of this will likely be in the stimulus plan that Congress adopts in January.”

Nicholas Retsinas, Director of Harvard University’s Joint Center for Housing Studies, agrees. “Housing problems are at the core of our economic problems,” he said, “yet, of the government interventions made during 2008, few were focused on housing.”

With a new administration and Congress in place next month, he expects to see a renewed interest in stabilizing the housing market.

In California and throughout the country a substantial number of people have found themselves saddled with adjustable rate mortgages that have reset to interest rates significantly higher than at loan origination. In many cases the borrowers cannot afford the new payment amounts. Also, in many cases, the borrowers really didn’t know what they were getting into.

It is a common, and not altogether inappropriate, reaction to such situations to think or say, “Too bad. You shouldn’t have signed something if you didn’t understand it.” But what if the borrower claimed that the documents are forged? Well, you’d think that would be an easy claim to refute, especially if the signatures were notarized.

But the forgery claim might not be as easy to dismiss as it appears. This is because forgery can occur even when the signature on the document is authentic. A recent opinion in the case of The People v. Paul Stephen Martinez (California Fourth Appellate District, Division Two) is instructive in this regard.

Defendant Martinez had offered to help Ruth Michiel when she ran into financial difficulty. She feared that two houses that she owned might go into foreclosure. At Martinez’s direction, Ms. Michiel signed a number of documents. Later, she discovered that a trust deed in the amount of $25,000 and secured by one of the properties had been recorded in favor of Martinez. The trust deed bore her signature. At trial, Ms. Michiel did not deny signing the trust deed, but she denied doing so knowingly.

Among other things, Mr. Martinez was found guilty of forgery. The decision was appealed. His defense against the forgery charge was that “there was no evidence that her signature was not genuine and no evidence that he used any affirmative misrepresentations … to procure her genuine signature.” The court disagreed with his claim regarding misrepresentation. Testimony had showed that he provided her “with a number of documents to sign to try and help [her] with [her] financial problems.” But, more importantly, the court held “he could be convicted of for gery even in the absence of any such affirmative representations.” [my emphasis]

The court referred to an earlier (1967) case, People v. Parker, where defendents had been found guilty of forgery even without any misrepresentation. The defendents in that case had been sellers of aluminum siding. The documents that they gave buyers to sign included a trust deed on the property. The defendents had not misrepresented the trust deeds; they simply included them, without disclosure, in the documents to be signed. That court said, “The crime of forgery is committed when a defendant, by fraud or trickery, causes another to execute a deed of trust or other document where the signer is unaware, be reason of such trickery, that he is executing a document of that nature.”

In fact, there are a number of other California decisions that would tend to support the ruling in People v. Martinez.

We haven’t heard anything about similar forgery claims in sub-prime mortgage situations. But, in light of the ruling in People v. Martinez, it would be no surprise to learn that such charges are being filed against some lenders.

by Bob Hunt

Here’s some potentially good news for investors from the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac.

James Lockhart, who runs the agency, says there’s been some “re-thinking” underway on the controversial limits on the numbers of rental properties investors can own if they’re seeking new financing.

Both Fannie Mae and Freddie Mac have imposed a four-unit limit, reversing their previous investor maximum of ten units.

The rationale for the change, according to the agencies, was their belief that investors who own higher numbers of rental condos and houses pose a greater risk of default, foreclosure and loss for the companies.

The restriction effectively shut out many small investors from Fannie’s and Freddie’s standard programs — and pushed them into much higher-cost financing from so-called “hard money” lenders.

In a letter to Charles McMillan, president of the National Association of Realtors, Lockhart said, “While no final decisions have been made, I can share with you the fact that the issue of raising the selling guide ceiling on investors loans is under active consideration at one of the (corporations), and reflects an appreciation of the role for investors in the housing recovery.”

Realty Times obtained a copy of Lockhart’s letter to McMillan, which was intended to respond to issues raised at the Realtors’ annual convention in Orlando in November, where Lockhart spoke to two sessions. Lockhart did not disclose which company may soften its rule, but when one changes its standards, the other typically follows suit.

Lockhart addressed another issue of concern to investors and other buyers of condo units: The negative impacts of growing numbers of foreclosed units and bank-owned REO in condo projects.

Under current rules, Fannie and Freddie generally avoid loans in condominium developments where less than 51 percent of the units are owner-occupied. The problem is that both companies define REO and foreclosed units as non-owner-occupied, even though they are temporarily vacant and not owned by investors.

Lockhart said in his letter that “at least one” of the two corporations — either Fannie or Freddie — “is considering a clarification of the 51 percent (rule) that would exclude REO units from being counted as investor units … in the owner-occupancy ratio.”

Lockhart offered no timetables for either of these key potential policy improvements, but investors may well see one or both changes within weeks.

At the very least, it’s good news that the top executive regulating Fannie and Freddie recognizes the significant roles investors can play in helping the industry dig out of the current mortgage mess.