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Lender Liability at the FHA?
Lender liability is a tricky legal question. Above my grade. The case
law is pretty clear that when a lender uses unscrupulous or illegal
methods to get a borrower to sign a piece of paper the lender loses his
rights. There is a grey area in this where the lender may also lose
their rights to repayment if a fiduciary relationship can be established
between borrower and lender. In this later example the lender has a
responsibility or an Obligation to not do things that conflict with the
best interests of the borrower.
The conditions for establishing this fiduciary status are as follows:
In Waddell v. Dewey
County Bank, the court attempted to define the elements of a fiduciary
relationship between lender and borrower as follows: 1) the borrower must have faith, trust and confidence in the bank; 2) the borrower must be in a position of inequality, dependence, weakness or lack of knowledge; and 3) the bank must exercise dominion, control or influence over the borrower's affairs.
HUD announced a new program today to assist struggling homeowners. They
are going to lend up to $50,000 to families in trouble. These are bridge
loans so that the owners can continue to service the existing debt and
pay property taxes. The individual loans will be made at a zero interest
rate. $1 billion of these loans will be made.
My question is, does the FHA have a fiduciary responsibility to the
borrowers, and if so is this billion-dollar loan program just a way to
print more money and kick the can down the road?
On #1. The lender is the US Government. One would assume the
borrower has faith and trust that they are not being led down a debt
hole for political purposes.
On #2. Each borrower will have a different profile. However two condition to get the $50K:
Be at least three months delinquent in their payments.
Be
at risk of foreclosure and have experienced a substantial reduction in
income due to involuntary unemployment, underemployment, or a medical
condition.
Do these two mandatory conditions meet the lenders description as
“weakness”? Yes is my answer. You have to be up against it to qualify.
By definition one is in a weak position. Same for “dependence”. Without
these loans many of the people would be foreclosed on.
On #3. There are many strings attached to these loans. The
restrictions include that the proceeds must be used to pay existing
installment debt. No second homes. Limitations on indebtedness.
Reporting requirements. There is no question but that FHA has dominion
and control of the borrowers affairs.
Case closed.
The new FHA loans are not collectable. They would not stand up in court.
The FHA is well aware of that fact. They have no intention of
collecting on these “loans”. Some additional terms of the bridge loans
to nowhere:
zero percent interest, non-recourse, subordinate loan.
So they get no return on the money, but they also make it non-recourse and they subordinate
it to any existing first or second liens on an obviously underwater
property? If it is non-recourse you can just walk away. They won’t even
call you. They can take the house but the first liens come first so the
FHA gets the big goose egg. This is not a loan. It is a gift.
60% of all mortgages are owed back to Uncle Sam. On paper this means
that at least $6b of mortgages on the government’s books will be
artificially kept alive for another 24 months as a result of this. After
two years all of them will just go poof overnight and the taxpayers
will have a bigger pill to swallow. In this case FHA will be taking back
bad paper and in exchange it will keep a portion of its loan book
current. The conflict of interest is obvious to me
By definition a loan should have a source of repayment that is
predictable and adequate collateral. These new loans by FHA do not meet
those standards. This program will cover only 20,000 borrowers. A
billion dollars is meaningless when the problem is measured in
trillions. It is a “nothing” policy. It is another show pony. While
there may be 20k folks in the country who will end up voting for the
Dems as a result of this, I am certain that another few hundred thousand
will line up to vote against them just because the bailout mentality
will not stop.
In the worst days of mortgage lending back in 2006 some terrible loans
were made. But not one of them was made that was non-recourse and
subordinated. The FHA just announced it will be making the very worst
loans in history. Something to celebrate for the boys over at HUD.
»
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Well at least now we know how far they think they can kick the can - two years.
This is even worse than communism, in which you're at least supposed to work.
Somebody has to pay for this somehow. Remember this on election day.
I don't think anyone here will buy into the notion that this is NOT being done for political purposes! It's vote-buying, pure and simple.
Yesterdays state union employee sop, now this. Everybody's looting the treasury before the roof falls in.
OS - Once our soldiers refuse to fire on their countrymen, proving loyalty to the constitution and not this regime, can real change begin. Hope we get change soon.
The first American Revolution was brought to you by colonial aristocrats and merchants. The second American revolution was brought to you by Southerners who resented federal interference. The third revolution will be brought to you by every pissed off American which includes almost everyone. Let the free fight begin.
Nice work as usual Bruce.
We shall know desperation's at it's peak when they start mailing debit cards with $50,000 balances to half the households in America, to only be used to pay down (1) mortgage debt first and (2) credit card debt second.
Ironically by the time they get to this point, it will be too late. Just as ironic, if they had started out doing this from the start, they might have kicked the can far enough down the road to pull every one's ass out of the fire.
How ironic. Who's sorry now?
Hey, CD. I was just trying to figure out how to graph this debacle and came across this item. Ritholtz sent a link in his last newsletter:
http://www.visual-literacy.org/periodic_table/periodic_table.html#
It's a real jewel. Just hover over each of the "elements" for an example graph.
Now I'm just overwhelmed with charting/graphing choices!
Very very nice. And it looks like there plenty of room to grow and expand considering the stories behind each "element" has the potential for additional entries.
Thanks. I've saved that little gem.
This must be among the dumbest moves any government has ever taken.
Compare it to student loans which are bankrupt proof.
Take this money and pay off the student loans in full and then it is FU.
Get a lender write off and repop at 4.25% then keep on rolling.
It actually is dumb but I suspect not for the reasons you are implying, there was a time when it would have been considered brilliant as in buying votes. But I think (or would like to think) that voters have wised up and are on to this little game and in this case it will just cement (as in cementing the annulus) the resolve of those opposed to an out of control government.
It is a way of hiding/delaying losses. They are giving away OUR money. Makes no sense. Obama is just terrible .
*dupe*
Wealth transfer.
That's the only plan there is or ever was. Of course it makes sense. It's what Obama promised and what he's worked toward his entire political life. Furthermore he's been open and up front about it since day one.
Somehow all the solutions come down to artificially propping up over-leveraged asset prices and preserving the precious tushes of those that made fortunes inflating them...
The monetary system and the financial sector are both broken technologies. They are essential organs of any social body but have become cancerous...
These 'organs of group decision' are inclined to metastasis. It's a problem that's plagued us since we left our hunter-gatherer existence.
Decision Technologies: Currencies and the Social Contract
http://culturalengineer.blogspot.com/2010/07/decision-technologies-currencies-and.html
Credit Creation and the Building of Sustainable Economic Ecologies
http://culturalengineer.blogspot.com/2010/02/credit-creation-and-buildin...
Not only does this kick the can down the road a bit farther, but it also is a way to print money. Of course, the newly created money goes to the banks. I'm feeling Queasy, oh so Queasy...
The desperation is <almost> comical. The trouble is that these will only be for 20,000 people - a statistical blip. But it will destroy confidence in the people that (1) are paying their mortgage on time; and (2) the people that apply and don't get in. All of these programs slowly tear at the social fabric.
None of it makes any sense. I wish we could just get to the reset button already.
Agree, and in the end, these people will likely default anyway.
Which just makes the interim payments a wasted effort for them.
Of course, it's really just a round-about way to get $1 billion to the banks. The recipients won't actually be getting anything. Their balance sheet stays the same.
Banks +1
Taxpayers -1
Taxpayers -10
I am not versed in the law governing governmental loans, but I suspect that government agencies like the FHA enjoy immunity from liability for the "void-for-undue influence" scenario described above. Since the banks in this case would likely cast themselves as third-party beneficiaries, they wouldn't likely have any liability either.
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