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Isle foreclosures increase after declining for 18 months – Honolulu Star

A declining trend of fewer real estate foreclosures in Hawaii has snapped after an 18-month run. 
Data released by the state Judiciary this week show that the number of lawsuits filed against property owners statewide increased in the past three months compared with the same respective months last year. 
Part of the increase was expected because of abnormally low counts of new cases in May and June 2014 that appeared to be triggered by a change in state foreclosure law last year. But numbers also were higher for July. 
July’s count was 195 new cases, up from 160 cases in the same month last year. In June there were 164 cases, up from 122, and May’s tally was 187 cases, up from 80. 
Marvin Dang, a local foreclosure attorney, said case volume in the last three months appears roughly in line with case volume for most of this year. So in his view, the upticks year-over-year for May, June and July are likely more a result of unusually low volume last year. 
“I think that the number of foreclosures we’re experiencing is fairly steady,” he said. 
The change in state foreclosure law last year was made through Act 37. The act, enacted in May 2014, prohibited attorneys from filing a foreclosure lawsuit without submitting a separate written document in which they affirm that they have communicated with a representative of the lender pursuing foreclosure and have confirmed the accuracy of allegations, supporting affidavits and notarizations. 
Though some law firms already had been doing what Act 37 mandated, others had to adjust their procedures and hold off on filing new cases. 
A new state law created earlier this year, Act 62, established regulations on mortgage servicers that sometimes handle foreclosures, but it was not expected to have a significant impact on the volume of new foreclosure cases. 
For the first seven months of this year, the number of new foreclosure cases remains down from last year. There were 1,194 cases through July, down 7 percent from 1,282 cases in the same period last year. 
Hawaii’s economy would suggest that fewer people should be in danger of foreclosure given that personal income is rising, unemployment is falling and home values are appreciating. Still, homeowners can encounter foreclosure for many reasons, including divorce, poor financial management and health problems leading to job loss. 
Dang said a recent shake-up in the law business locally could skew foreclosure case volume in the next few months by producing more year-over-year increases. The shake-up involves a large foreclosure law firm, Bellevue, Wash.-based RCO Legal, winding down its Hawaii affiliate office. The move is leading other law firms to take over cases from RCO Hawaii LLLC that had yet to be filed in court, as well as cases that may have to be refiled in some instances. 
New Hawaii foreclosure cases filed in state court, including the year-over-year percentage change:










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Assembly candidate defends bankruptcy, home foreclosure

Voters overwhelmingly rejected businessman Dave Westlake in his 2010 bid to become the GOP nominee for the U.S. Senate, opting for Ron Johnson instead

Now Westlake is back, running for a much smaller office but with substantially more baggage.

Since 2010, Westlake has filed for bankruptcy, had his home foreclosed on and seen his printing business go under.

HIs bankruptcy filing showed Westlake had more than $600,000 in debts but less than $25,000 in assets in 2011. His debts were discharged without Westlake having to pay back most of his creditors.

Westlake is one of four GOP candidates vying in a special primary election Tuesday to represent the 99th Assembly District in conservative Waukesha County. No Democrat is on the ballot.

Some consider Westlake a front-runner for the seat previously held by Rep. Chris Kapenga (R-Delafield), who recently moved up to the Senate. Westlake touts a number of endorsements from conservative groups and individuals, including former U.S. Rep. Mark Neumann.

Asked about his financial troubles, Westlake — who describes himself as an “eternal optimist” — responded with an email blaming his problems on a 2010 lawsuit by a former business partner.  

“I’ve been open about my bankruptcy, which resulted in us losing our home,” said Westlake, who now lives in Hartland. “They were incidents brought about by a junk lawsuit that was dismissed with prejudice at trial.

“Unfortunately, the fact that I had to defend myself from a frivolous lawsuit exhausted my family’s resources.”

Actually, Westlake makes no mention of his financial troubles on his resume or bio. 

Records show Westlake was sued in August 2010 by his business partner in High IQ LLC, the Watertown printing services company that Westlake had run. Westlake had met the partner, Fawaad Khan, at the University of Chicago, where Westlake got an MBA.

Khan accused Westlake of mismanaging the company, draining the company’s resources while depriving Khan of his cut of profits and of access to the books. Westlake denied the allegations.

Just three months after the suit was filed — and before much had happened in the case – Wells Fargo went to court seeking the foreclosure on the $223,000 mortgage for Westlake’s Watertown home. The judge ruled in favor of the lender, and the property was sold at a sheriff’s sale in 2011 for $186,150.

While that was going on, Westlake and his wife filed for Chapter 7 bankruptcy. Their debts were discharged in 2012.  

Shortly thereafter, a Jefferson County judge granted a motion by Khan to dismiss his suit against Westlake because “the issues in this case were primarily resolved by bankruptcy proceedings.” Filings say the case was on hold while his bankruptcy was going on.

The court never found the suit frivolous. In fact, Westlake never made such a claim in court. 

High IQ has since been dissolved.

Westlake said in an email that these problems have brought his family together and that his startup businesses are going well. He said he believes he has a “unique perspective” that would help him create jobs and protect small businesses.

“My optimism for the future is better than ever,” Westlake said.

Especially if he wins on Tuesday. 

About Daniel Bice

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Daniel Bice is a Watchdog columnist covering Wisconsin government and politics. His “No Quarter” column has won a National Headliner Award for best local interest column.


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Brad Angelo Lanes survives foreclosure, will reopen

PENDLETON – Brad Angelo Lanes, a 24-lane bowling establishment on South Transit Road owned by the Lockport professional bowler and his wife, will start rolling again Sept. 8, after a lawsuit and a business deal saved the facility from the foreclosure that caused it to shut down this summer.

Sean J. MacKenzie, attorney for Brad and Michelle Angelo, said he was able to walk down some legal avenues, which resulted in saving the business.

It’s a great relief for Michelle Angelo, who is busy making plans for the grand reopening.

“I’m pretty excited about it, absolutely,” she said. “It’s been a long summer and a lot of legal matters that we had to address.”

Fall leagues are being recruited for evenings, with moonlight bowling Friday and Saturday nights, and plans for occasional live music and karaoke. Michelle said people have started to book parties, including Christmas parties. She also has bought all new bowling pins and refurbished the lane-oiling machine.

MacKenzie said he took advantage of the fact that the company the Angelos formed to operate the former South Transit Lanes was not the same one that held the real estate.

The latter, called Ry Bowl, was the defendant in a foreclosure action brought by Sam R. Sears, the Florida-based mortgage holder.

After a court ordered that the property be auctioned off, Sears ended up with it when no one bid in the May 6 auction.

However, MacKenzie, of the law firm Magavern Magavern Grimm, said he was able to have the foreclosure order rescinded after he filed suit against Sears on behalf of MDB Sports, the company that operated the bowling center.

The new suit alleged that the Angelos had been improperly locked out of the building after the auction, with personal property still inside.

MDB had a lease with Sears, and MacKenzie contended the lease wasn’t terminated by the foreclosure against Ry Bowl, since MDB, even though it also is owned by the Angelos, was not a party to the foreclosure.

“They observed corporate formalities in distinguishing between the two,” MacKenzie said.

The actions resulted in a general settlement in which Sears sold the real estate to a third party, and the Angelos’ MDB Sports went back into business.

Sears’ attorney, John J. Ottaviano, said, “Our job was to get my client his money. We did. They’re back in business. Everyone’s happy.”

MacKenzie wouldn’t reveal the name of the third party until the transaction formally closes, but he said the buyer uses the new corporate name of Willeighlou LLC and paid $285,000 for the real estate.

That’s less than the $452,000 Sears said in court filings that the Angelos owed him on the delinquent mortgage.

MacKenzie said the new buyer will lease the building to MDB Sports and will pay off the roughly $105,000 in delinquent property taxes Ry Bowl also owed on the property.

“Deposits have been made and the contracts have been signed,” MacKenzie said.

Michelle Angelo said Lockport-area bowlers tend to be loyal to one of the two local bowling centers, Allie Brandt Bowling Lanes or the South Transit facility.

“I didn’t want to let down the community,” she said.

Michelle acknowledged that league bowling participation has “plummeted,” but all operators still try to cater to those regulars.

“Everything’s running smoothly right now, so I’m happy to say that,” she said.


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How to survive losing your job, in 12 steps

Job loss can be among the most devastating life events both emotionally and financially, and it’s something nearly 1,500 Chicago-area workers are dealing with from just three recent corporate layoffs.

Emotional turmoil aside, a pink slip should be a call to action — to get your money life in order, including spending, saving, paying bills, health insurance and creditors, financial experts say.

In recent weeks, 700 workers at Kraft corporate headquarters in Northfield were let go, in addition to 500 from Motorola Mobility in Chicago and 270 from Walgreens Boots Alliance in Chicago. Farther downstate, Caterpillar has announced 475 job cuts, 300 coming from the Peoria area.

What to do if a layoff seems imminent

Some laid-off workers have savings, while others live paycheck-to-paycheck. And advice changes depending on whether you’re single or a sole breadwinner and therefore responsible for all the household income versus being part of a dual-earner household, where the pressure might not be as immediately intense.

“If you have no one to balance the load, you’ll have to look at your difficult options sooner,” said Sally Herigstad, a certified public accountant who was part of a 250-person job cutting and went on to write the book “Help! I Can’t Pay my Bills.”

Here are 12 crucial steps to take soon after your employer shows you the door.

Make a plan. Creating a budget to detail your income and expenses is not sexy advice, but it not only gives you a foundation for action but can relieve the stress of not knowing what your money picture looks like.

“As painful as it may be, now is the time to do it,” said Francine Duke, a fee-only certified financial planner at Aqua Financial Planning with offices in downtown Chicago and the northern suburbs. “It gives people a comfort factor because at least they have some kind of plan.”

lRelated Layoffs could spell more trouble for Illinois
BusinessLayoffs could spell more trouble for IllinoisSee all related

Start with the income side, and list your inflows of cash, including severance and unemployment payments. What savings and investments could you tap if necessary? What are your sources of borrowing? Include a potential loan from family, home equity lines of credit and credit cards, although high-interest cards should be among the last resorts.

Then list your expenses. What are the fixed expenses that won’t change in the short term, like mortgage or rent and car payment? What are your variable expenses that you have immediate control over and are often discretionary, like dining out and a gym membership?

Decide what a bare-bones baseline budget would look like.

“It has no fun in it. It has no clothing, no going to the theater,” Herigstad said. “This is a ‘how can we possibly get by’ budget. … It’s amazing how little you can get by on, and it’s comforting.”

When it comes to layoffs, dont drag it out

When it comes to layoffs, don’t drag it out Alexia Elejalde-Ruiz Layoffs are never pleasant, but do mass staff reductions deal a particularly painful blow to employee morale? Layoffs are never pleasant, but do mass staff reductions deal a particularly painful blow to employee morale? ( Alexia Elejalde-Ruiz ) –>

Liz Digani, a certified financial planner with UBS Wealth Management in Chicago who works with high net worth clients, said making good choices during a crisis is key.

“Take your time and make really thoughtful decisions,” Digani said. “There are some things that are more pressing than others.”

Prioritize your four pillars. As you map out a strategy to deal with the short-term impact of a job loss, maintain your four financial pillars: Food, shelter, utilities and transportation.

“You pay for the goods and services you can’t live without,” Herigstad said.

This is not a time to worry about what to do with your company 401(k) retirement plan. Leave the money in your former employer’s plan while you address more urgent tasks. “My advice on a 401(k) would be to evaluate all your options and take your time,” Digani said. “The near-term, critical issue is coming up with a game plan for cash flow.”

Medical bills can slide, and although credit card companies might scream loudest for their money, they can wait. Although paying the minimums on the cards is far preferable to not paying at all.

Attack spending. A job loss is a crisis with the earnings side of the household ledger, but in the short term, you have more control over the spending side.

Look at three months worth of credit or debit card bills and ruthlessly cut optional recurring expenses. You might find it was an exercise long overdue. Keenly eye the difference between needs and wants.

“There’s a good feeling to getting back to the bare minimum,” Herigstad said. “It gives you a chance to reprioritize and start from scratch. It’s cleansing.”

In the near term, dining out, fancy hair salons, pay TV channels and subscriptions of all types might have to go.

Quit saving. If it’s clear you’ll encounter a cash crunch, temporarily stop all saving, to college savings plans and individual retirement accounts, for example.

Protect your medical records from identity theft

Protect your medical records from identity theft Gregory Karp Identity theft to many people is not a big deal because it has become synonymous with the minor hassle of dealing with a stolen credit card number. You get another card, and you’re not out any money. And it happens so often, we’ve become numb to data-breach headlines. Identity theft to many people is not a big deal because it has become synonymous with the minor hassle of dealing with a stolen credit card number. You get another card, and you’re not out any money. And it happens so often, we’ve become numb to data-breach headlines. ( Gregory Karp ) –>

Stop paying extra. If you were paying extra on your mortgage, car loan and credit cards, take those payments down to the minimums. Preserving cash is the short-term priority. If your spouse is working, reduce the tax withholding that would otherwise lead to a tax refund. You need that money now, not next April.

Use savings. If you have cash squirreled away or investments outside a retirement plan, use it. “If you have an emergency fund, this is an emergency. This is what you saved it for,” Herigstad said.

Maintain health insurance. You can continue your existing health insurance under COBRA for 18 months, but that can be expensive. Determine whether you can get a cheaper private insurance policy, which can be more affordable since Obamacare. “It’s worth checking into, shopping around,” Duke said. For example, a healthy single person might search for a bare-bones high-deductible policy that covers emergency situations to cover them in the short term.

“That’s one of the top-most priorities that people should look at, whether they have the proper health coverage,” Digani said. In the case of a dual-earning household, the spouse still working might be able to pick up lost health coverage.

Inquire about other benefits. Determine whether your former employer will allow you to keep your group policies for long-term care insurance and life insurance. However, if you’re single and nobody depends on your income, life insurance may be unnecessary, especially at a time with so many competing priorities.

Contact creditors. List your creditors and contact them immediately.

“Be honest and realistic when explaining your situation, and ask if there are any ways they may be able to offer temporary relief,” said Bruce McClary, spokesman for the National Foundation for Credit Counseling. “Most creditors are in a better position to help when you are proactive, reaching out before payments are missed and things get worse.”

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NC Supreme Court take new look at case from housing crisis

— North Carolina’s crippled housing market was limping along when Shawn Pendergraft decided he’d take over a foreclosed Raleigh home in 2011. He backed up a moving van, unpacked his belongings and changed the locks.

But he never paid for the $800,000 house, instead filing a bogus document with the Wake County register of deeds staking an ownership claim he had no legal right to make.

Pendergraft, 43, was convicted of a felony for obtaining property by false pretenses and sentenced to more than five years in prison. On Wednesday, his lawyer will ask the state Supreme Court to throw out his conviction.

Pendergraft’s squatting scheme was part of a wave of hundreds of frivolous property claims at a time registrars were already dealing with a flood of foreclosures amid the Great Recession’s housing market collapse. Flimflam artists were occupying foreclosed homes in Virginia, Georgia, New Jersey, California and elsewhere across the country.

In North Carolina’s most populous county, more than 200 of the bad filings were filed in 2011, said J. David Granberry, Mecklenburg County’s register of deeds. Many were written in confusing pseudo-legal jargon, some making outlandish claims about being exempt from U.S. law.

“Lump ‘em together in the wacky document category and we still get a lot of them,” Granberry said. “They don’t really mean anything. They have a lot of jibber-jabber and some quotes from statutes.”

But since this spring there’s been a sharp drop in fake deeds transferring ownership, such as Pendergraft used, through the misguided application of the actual legal concept of adverse possession, Granberry said.

Granberry thinks that may be the result of fewer zombie foreclosure properties. Those are homes vacated by buyers who went bust and moved away, but which have stayed empty and inviting targets.

Pendergraft worked at a Raleigh university and had only minor traffic violations on his criminal record when in 2010 he read on the Internet that it was possible to collect empty houses by claiming adverse possession, according to his lawyer, Michael Spivey of Rocky Mount. Adverse possession allows long-time occupants to take over ownership of a property if its previous owner abandons it or legal ownership can’t be determined.

Pendergraft “concluded that he could acquire real property by adverse possession without paying for it,” Spivey wrote in court filings.

Within weeks, Attorney General Roy Cooper got a court order in 2011 to stop four phony land trusts and the individuals behind them, including Pendergraft, from filing bogus ownership deeds claiming someone else’s property.

“Pretending that you can own a home just by filing phony paperwork filled with gibberish is an insult to honest homeowners and a fraud on the whole system,” Cooper said at the time.

In 2012, a judge ordered Pendergraft to pay civil penalties of $45,000 for unfair or deceptive commercial practices. He has not paid, Cooper spokeswoman Noelle Talley said.

The Supreme Court is being asked to decide whether Pendergraft’s original criminal indictment was faulty and his conviction should be erased. The indictment didn’t detail why Pendergraft’s claim of owning the property would have caused someone to give up ownership, Spivey said.

“A person might move into a house under a good faith but mistaken belief about their right to possession or ownership. A homeless person might move into a house just to have somewhere to stay until forced to move on. Or, as Mr. Pendergraft testified he did, a person might intentionally trespass and take possession of the house to establish possession,” Spivey wrote. “While any of these trespasses might be wrongful, they are not representations calculated and intended to deceive the owner and cause them to convey ownership of the house.”

Pendergraft is projected to be released from prison in 13 months.


Emery Dalesio can be reached at

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The Impact of HAMP on Loss Mitigation Norms

loss-mitigationBy George FitzGerald

The Home Affordable Modification Program (HAMP), as established by the Department of the Treasury, which was previously scheduled to expire on December 31, 2015, has been extended through the end of 2016. This continuation will allow homeowners who may be struggling with their mortgage payments on loans owned by Fannie Mae or Freddie Mac, or serviced by a participating mortgage company, to seek relief through a HAMP loan modification.

While this extension is good news for families that are in a difficult financial situation between now and the end of next year, HAMP is unlikely to be extended beyond 2016, according to FHFA Director Mel Watt. HAMP loan modification options were never intended to be permanent, and will eventually be phased out. However, this doesn’t mean that homeowners who find that they can’t make their mortgage loan payments will have no other options but to default on their loan.

The Evolution of Loss Mitigation Norms

Prior to 2009, when HAMP was first introduced, mortgage companies had no standardized framework for offering struggling homeowners a loan modification to help reduce their monthly payment. There was no mechanism by which servicers and investors could agree to modify the terms of a mortgage loan; there was no precedent for reducing the principal or interest rate, or for extending the term of the loan; and there was no process for tracking and accounting for changes like these over time.

HAMP has laid the foundation for loss mitigation in the mortgage industry that will far outlast its extension to December 2016.

As a result, with occasional exceptions, the mortgage industry typically followed the well-worn path of sending repeated late payment notices, adding on late fees, and eventually foreclosing on properties when homeowners couldn’t make their payments. However, with the introduction of HAMP, the industry was given other options to work with, and shifted its focus from foreclosure to keeping homeowners in their homes if at all possible.

HAMP has laid the foundation for loss mitigation in the mortgage industry that will far outlast its extension to December 2016. It has enabled the industry to evolve its loss mitigation norms by helping to define a process that uses income to drive to a specific debt-to-income level, and it is likely that modifications beyond HAMP will continue to occur on this basis.

Foreclosure Avoidance Now the Standard

Today, foreclosure volumes continue to recede, but it is unlikely that the nation will ever see zero delinquencies. However, the concept of the HAMP modification has laid the foundation for the development of future modification programs, whether developed by financial institutions themselves or by the government. Either way, the industry will continue to be dedicated to exhausting all loss mitigation options in an effort to avoid foreclosure. It is not just a worthy goal, but it has become a standard, permanent part of the servicing process across the nation.

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Sale ordered for Wells Fargo site

A well-known downtown building is headed for a sheriff’s sale, after a recent order by an Allen County Superior Court judge put the property into foreclosure and issued a $20 million judgment.

The building, 111 E. Wayne Street, is known as the Wells Fargo Indiana Center.

It houses the downtown branch of Wells Fargo Bank, as well as other offices including the Fort Wayne office of the international law firm Faegre Baker Daniels.

According to court documents, the building was owned by Indiana Office 1031 LLC, and a number of individuals identified only by “Indiana Office” and a last name, and the LLC.

A search of court and government records indicated Indiana Office 1031 LLC is connected to Inland Continental Property Management Co. of Oak Brook, Illinois, handled through Inland Real Estate Exchange Corp.

A 1031 real estate exchange is an investment allowed by the IRS to defer payment of capital gains taxes.

According to the IRS website, a person can avoid paying capital gains taxes on the sale of an investment property if they invest the money in a similar property.

Indiana Office 1031 has owned the building since 2005, buying it for $20.85 million, according to court documents.

In March, U.S. Bank National Association sued Indiana Office 1031, seeking the foreclosure of the mortgage on the property.

Indiana Office 1031 told the trustee of the building that it would not be able to continue meeting its financial obligations with regards to the building and was insolvent.

The company didn’t put up too much of a fight via documents in the case, filing an answer to the foreclosure that explained nothing, offering only that it was “without sufficient knowledge to admit or deny the allegations” to all 32 paragraphs in the foreclosure suit.

On Aug. 7, Allen Superior Court Judge Nancy Boyer ordered the foreclosure with a $20.5 million judgment.

Boyer ordered the property to be sold at a sheriff’s sale, with the proceeds going, first, for the costs of the sheriff’s sale; second, to any real estate taxes that might be due; third, to the trustee of the building; and finally, if there is any left over, to be deposited with the court.

A writ for sheriff’s sale was issued by the court Tuesday.

Michael Lewinski, a partner at the law firm Ice Miller, which represented the bank, said the sale has been scheduled for Nov. 17.

Boyer’s recent judgment will have no practical effect on the building’s tenants, and they will have their same rights and obligations to the landlord they have under their current lease, Lewinski said in an email Friday afternoon.

Attempts to reach officials with Inland Continental Property Management and Inland Real Estate Exchange Corp. were unsuccessful Friday afternoon.

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Las Vegas noted for cash sales, in-foreclosure home sales – Las Vegas Review

The Las Vegas Valley ranked highly on two measures of nontraditional home sales.

A Thursday report from California research firm RealtyTrac found that the valley stood out for its share of cash sales, and for its proportion of in-foreclosure closings.

In July, 32.6 percent of local home sales were cash sales, which typically indicate investor activity. That share ranked No. 14 in the nation. The top 10 markets for cash sales were all in Florida, with the Sebastian market on top at 54.6 percent.

The U.S. rate was 22.6 percent.

Las Vegas was the only West Coast market in the top 20. Regional markets including Denver and San Jose, Calif., have blown past pre-recession pricing peaks, which has hurt investment returns.

The local market also ranked No. 8 for in-foreclosure sales. The data showed 12.3 percent of valley closings in July were on homes that were in some stage of default. That was compared to a national average of 6.4 percent.

Salisbury, N.C., ranked No. 1, at 23.6 percent.

Contact Jennifer Robison at Find @_JRobison on Twitter.

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Foreclosure rates in Sac region decrease

Foreclosure rates in Sacramento region — including Yolo County — decreased for the month of June over the same period last year, according to newly released data from CoreLogic.

The CoreLogic data reveals that the rate of Sacramento area foreclosures among outstanding mortgage loans was 0.49 percent for June 2015, a decrease of 0.12 percentage points compared with June 2014 when the rate was 0.61 percent.

Foreclosure activity in the region was lower than the national foreclosure rate, which was 1.28 percent for June 2015.

Also the mortgage delinquency rate across the region was also down.

According to CoreLogic data for June 2015, 1.73 percent of mortgage loans were 90 days or more delinquent compared with 2.28 percent for the same period last year, representing a decrease of 0.55 percentage points.

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The U.S. foreclosure crisis was not just a subprime event

Foreclosure: The sign for a foreclosed house for sale sits at the property in Denver, Colorado March 4, 2009. The Obama administration on Wednesday launched a $75 billion foreclosure relief plan, as new data showed one in five U.S. homeowners with mortgages owe more than their house is worth. The mortgage plan, part of a $275 billion housing stimulus program announced last month, enables struggling homeowners to modify loans even if they are under water.  REUTERS/Rick Wilking (UNITED STATES) - RTXCCXK

While the U.S. foreclosure crisis began with subprime mortgages, it became a much broader phenomenon. Photo by Rick Wilking/REUTERS

For 29 years now, Paul Solman’s reports on the NewsHour have been trying to make sense of economic news and research for a general audience. Since 2007, our Making Sen$e page has striven to do the same, turning to leading academics and thinkers in the fields of business and economics to help explain what’s interesting and relevant about their work. That includes reports and interviews with economists affiliated with the esteemed National Bureau of Economic Research.

Making Sense/NBER logo

Founded in 1920, NBER is a private nonprofit research organization devoted to objective study of the American economy in all its dazzling diversity, combining data with rigorous analysis to describe and explain the material world in which we live long before data analytics became fashionable. “Why Some Women Try to Have It All: New Research on Like Mother Like Daughter” and “Why Does the First Child Get the Gold? An Economics Answer” have been among our most popular posts on Making Sen$e, both of them largely based on NBER research. We thought our readership might benefit from a closer relationship.

Each month, the NBER Digest summarizes several recent NBER working papers. These papers have not been peer-reviewed, but are circulated by their authors for comment and discussion. With the NBER’s blessing, Making Sen$e is pleased to begin featuring these summaries regularly on our page.

The following summary was written by the NBER and doesn’t necessarily reflect the views of Making Sen$e. We will tell you, however, what the takeway is: The U.S. foreclosure crisis, so commonly referred to subprime mortgage crisis, was not in fact, just a subprime event. While it began that way, it became a much broader phenomenon and mainly included prime mortgages. The findings suggest that effective regulation cannot just focus on restricting risky subprime contracts.

Many studies of the housing market collapse of the last decade, and the associated sharp rise in defaults and foreclosures, focus on the role of the subprime mortgage sector. Yet subprime loans comprise a relatively small share of the U.S. housing market, usually about 15 percent and never more than 21 percent. Many studies also focus on the period leading up to 2008, even though most foreclosures occurred subsequently. In A New Look at the U.S. Foreclosure Crisis: Panel Data Evidence of Prime and Subprime Borrowers from 1997 to 2012 (NBER Working Paper No. 21261), Fernando Ferreira and Joseph Gyourko provide new facts about the foreclosure crisis and investigate various explanations of why homeowners lost their homes during the housing bust. They employ microdata that track outcomes well past the beginning of the crisis and cover all types of house purchase financing — prime and subprime mortgages, Federal Housing Administration (FHA)/Veterans Administration (VA)-insured loans, loans from small or infrequent lenders, and all-cash buyers. Their data contain information on over 33 million unique ownership sequences in just over 19 million distinct owner-occupied housing units from 1997– to 2012.

The researchers find that the crisis was not solely, or even primarily, a subprime sector event. It began that way, but quickly expanded into a much broader phenomenon dominated by prime borrowers’ loss of homes. There were only seven quarters, all concentrated at the beginning of the housing market bust, when more homes were lost by subprime than by prime borrowers. In this period 39,094 more subprime than prime borrowers lost their homes. This small difference was reversed by the beginning of 2009. Between 2009 and 2012, 656,003 more prime than subprime borrowers lost their homes. Twice as many prime borrowers as subprime borrowers lost their homes over the full sample period.

The researchers find that the crisis was not solely, or even primarily, a subprime sector event. It began that way, but quickly expanded into a much broader phenomenon dominated by prime borrowers' loss of homes.  Courtesy of NBER.

The researchers find that the crisis was not solely, or even primarily, a subprime sector event. It began that way, but quickly expanded into a much broader phenomenon dominated by prime borrowers’ loss of homes. Courtesy of NBER.

The authors suggest that one reason for this pattern is that the number of prime borrowers dwarfs that of subprime borrowers and the other borrower/owner categories they consider. The prime borrower share averages around 60 percent and did not decline during the housing boom. Although the subprime borrower share nearly doubled during the boom, it peaked at just over 20 percent of the market. Subprime’s increasing share came at the expense of the FHA/VA-insured sector, not the prime sector.

The authors’ key empirical finding is that negative equity conditions can explain virtually all of the difference in foreclosure and short sale outcomes of prime borrowers compared to all cash owners. Negative equity also accounts for approximately two-thirds of the variation in subprime borrower distress. Both are true on average, over time, and across metropolitan areas.

None of the other ‘usual suspects’ raised by previous research or public commentators — housing quality, race and gender demographics, buyer income, and speculator status — were found to have had a major impact. Certain loan-related attributes such as initial loan-to-value (LTV), whether a refinancing occurred or a second mortgage was taken on, and loan cohort origination quarter did have some independent influence, but much weaker than that of current LTV.

The authors’ findings imply that large numbers of prime borrowers who did not start out with extremely high LTVs still lost their homes to foreclosure. They conclude that the economic cycle was more important than initial buyer, housing and mortgage conditions in explaining the foreclosure crisis. These findings suggest that effective regulation is not just a matter of restricting certain exotic subprime contracts associated with extremely high default rates.

— Les Picker, National Bureau of Economic Research

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