Seeking Alpha

Papadino's  Instablog

Send Message
MBA from University of Florida BA in Economics from University of Florida Licensed Florida Realtor
My blog:
Force Placed Insurance
View Papadino's Instablogs on:
  • Negative Equity

    Another informative article from google Real Estate.  This article can be read in full at Negative Equity.

    Negative Equity

    Negative Equity is when the value of a property used to secure a loan is less than the outstanding balance on the loan.  In real estate, the term Negative Equity is synonymous with the being “underwater” or “upside-down” on a mortgage.  In today’s real estate market, many homeowners now have Negative Equity on their home, and this has contributed to the myriad of Mortgage Delinquencies

    Negative Equity: Economic Impact

    During the US real estate boom, Negative Equity was not an issue.  Positive Equity (or just plain Equity) was literally built overnight, and this had a strong “wealth effect” with the US public.  Homeowners began to tap the equity that was built in their homes, and these homeowners began to spend this money on home improvement, cars, business investments, etc.  This, along with a ”full employment” rate, contributed to a strong economic environment, which was conducive to the robust economic growth that the US experienced during that period. 

    Negative Equity has a negative wealth effect.  Just as positive equity contributed to US economic growth during the real estate boom, Negative Equity and the negative wealth effect are contributing to current US economic trouble.  In order to get a better understanding of which states’ homeowners have the largest amounts of Negative Equity, refer to the chart below: 

    The below data and graphs used to display the US Negative Equity are from CoreLogicgoogle Real Estate:

    Negative Equity

    As you can see from the graph above, the states that tend to have the highest priced real estate also have the largest amounts of homeowner Negative Equity.  This makes sense, as the percentage decline in real estate prices affects higher priced property with larger, absolute amounts of Negative Equity. 

    Negative Equity Distribution

    Looking at Negative Equity in absolute dollars is one way of analyzing Negative Equity in the US.  Another, more informative way to gage Negative Equity is to examine it as a percentage of the property value.  Below is a graph that looks that Negative Equity in terms of percentage:

    Negative Equity 1

    Negative Equity 2

    As seen above, the average Negative Equity for a homeowner in Nevada is almost 50%.  That is staggering and certainly must affect the homeowner’s psychology.  The Negative Equity and negative wealth effect cannot be denied and will continue to contribute to the US real estate market’s current and future Shadow Inventory levels.  This, along with the currently dismal US unemployment numbers, is one of the main reasons why the real estate market will take years to recover. 

    Negative Equity and Default Rates

    A homeowner that has a large amount of Negative Equity on his or her property must be disenfranchized.  If a homeowner is ”underwater” on his or her mortgage to the tune of 50%, it is understandable that the homeowner would consider defaulting on his loan or getting out of the mortgage in one way, shape, or form (either through voluntary/involuntary Foreclosure, short sale, auction, sale, etc.).  Below is another graph from CoreLogic that analyzes default rates relative to Negative Equity (through a Loan to Value ratio):

    Negative Equity 3

    Logically, the higher the Negative Equity, the higher the chance of a default. 

    Negative Equity: Conclusion

    US Homeowner Negative Equity rates are overwhelming.  If home prices continue their decline, these already alarming US Negative Equity rates will worsen drastically.  As analyzed above, the higher theNegative Equity, the higher the chance of a default.  This scenario does not bode well for the US real estate market.

    Homeowners that have large amounts of Negative Equity on their home are faced with one of two decisions:

    1. Stick it out, continue making payments, and home that their home increases in value
    2. Default on the mortgage in one way, shape, or form

    Both choices for homeowners that have Negative Equity do not bode well for the US economy or the US real estate market.  

    Tags: Real Estate
    Jun 17 11:46 AM | Link | Comment!
  • Cap Rates
    For two great articles on capitalization rates (cap rates), please check out:

    Both articles do a great job of explaining what cap rates are, how they work, and how they can be used in real estate valuations.  Both capitalization rate articles are location at google Real Estate.

    Cap Rate
    Tags: real estate
    Jun 08 4:06 PM | Link | Comment!
  • BNY Force Placed Insurance Lawsuit

    Force Placed Insurance BNY

    Force Placed Insurance 2

    BNY Force Placed Insurance Lawsuit

    Forced Placed Insurance News:  On May 26, 2011, the Knights of Columbus filed a “complaint” versus the Bank of New York Mellon.  The complaint was filed in the Supreme Court of the State of New York. 

    The Knights of Columbus’ complaint was 29 pages, and it seeks an accounting of two trusts that hold mortgage loans.  These loans are serviced by Bank of America, and BNY is listed as the Trustee in which the Knights of Columbus corporation is invested in.  The attorney for the Knights of Columbus, Peter N. Tsapatsaris, makes several references to about the Force Placed Insurance Scam that Bank of America’s servicing wing has taken part in…

    Force Placed Insurance Fraud Allegations

    Below is an excerpt concerning force placed insurance within the 29 page document:

    “74. A November 10, 2010 article in AMERICAN BANKER describes the Master Servicer’s practice of using an affiliate to force-place insurance at inflated rates on homeowners struggling to make payments, with investors like Plaintiff ultimately bearing the cost:

    Nominally purchased to protect the owners of mortgage-backed securities, such “force-placed” insurance can be 10 times as costly as regular policies, raising struggling homeowners’ debt loads, pushing them toward foreclosure — and worsening the loss to investors on each defaulted loan. Evidence of abuses and self-dealing in the force-placed insurance industry suggests that there may be far larger problems in how servicers are handling distressed loans than the sloppy document recording that has been the recent focus of industry woes.

    Behind banks’ servicing insurance practices lie conflicts of interest that align servicers and their insurer partners against borrowers and investors. Bank of America Corp. owns a force-placed insurance subsidiary, and most other major servicers receive commissions or reinsurance fees on the very same policies they purchase on investors’ and borrowers’ behalf. “There’s no arm’s-length transaction here, and that creates all sorts of incentives for the servicer toforce-place excessive insurance and overcharge consumers for policies that provide minimal benefit,” said Diane Thompson, of counsel for the National Consumer Law Center. “Servicers and insurers have turned this into a gravy train.”

    Foreclosure defense and legal aid attorneys say force-placed insurance is found on most of the severely delinquent loans in this country. If so, the cost to investors may well be in the billions of dollars. With little regulatory oversight or even private investor awareness, force-placed insurance has helped make drawn-out foreclosures lucrative for servicers — far more so, in some cases, than helping a borrower return to performing status. As the intermediary between borrower and investor, servicers appear to be benefitingthemselves at the expense of both.

    75. As the AMERICAN BANKER article asserts, force-placed insurance at inflated rates damages Plaintiff and other investors in the Trusts in two ways. First, force-placingexorbitant insurance premiums on a struggling borrower makes the borrower less likely to recover from the default and make payments on the loan in the future. Second, if the borrower fails to pay the exorbitant premium, as most of them do, then the Master Servicer collects those payments from the proceeds of a foreclosure before passing theremaining funds through to the Trust. By thus reducing the amount paid to each Trustfrom the foreclosure sale, the Master Servicer has effectively charged its exorbitant premiums to the Trust.

    76. Further, well-respected analyst Laurie Goodman notes that “by extending time to foreclosure, Bank of America/Countrywide are not only able to obtain hefty late fees(which payment is at the top of the waterfall at liquidation; paid before investors recovera single dime), but they are also profiting though their Balboa subsidiary.” AMHERST MORTGAGE INSIGHT, May 20, 2010, at 23.77. Charges for unnecessary insurance coverage at inflated rates increases the losses to investors associated with defaulted loans while benefiting the Master Servicer and itsaffiliates.

    78. Without an accounting, the Trusts’ beneficiaries have no means of determining whether each Trust has been charged for these unnecessary or marked-up force-placedinsurance premiums and/or whether such charges are likely to be incurred in the future.”

    For the entire complaint, please check out Knights of Columbus v. Bank of New York Mellon, 651442-2011, New York State Supreme Court.

    Force Placed Insurance Conclusion

    This is just another window into Force Placed Insurance fraud that is going on in the U.S. real estate market.  Everyone knows what is going on, who the players are, who is benefitting, and how much money it is costing the American public…directly and indirectly.  

    Jun 06 11:58 PM | Link | 1 Comment
Full index of posts »
Latest Followers

Latest Comments

Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.