Now this makes sense… /sarcasm


Good Deeds Punished: State-Run Mortgage Lender Forecloses on Californians Current on Their Loans

A report prepared for the California Senate Rules Committee
October 24, 2011

California Senate Office of Oversight and Outcomes

Executive Summary

Despite the housing slump, the California Housing Finance Agency is taking an unusually strict line with borrowers who are trying to avoid severe losses by renting out their residences, in some cases foreclosing even though the borrowers are willing and able to continue paying. The practice not only puts borrowers in a bind – it costs the agency money.

Battered by the real estate downturn, the California Housing Finance Agency, known as the state’s affordable housing bank, recently shifted its focus from making low-interest home loans to reducing foreclosures in
the overall market.

“Preventing foreclosures will not only benefit the families directly impacted, it will help stabilize neighborhoods, communities and the entire California economy,” according to the state agency’s latest annual report. Yet CalHFA is forcing some of its own borrowers into foreclosure – even though they stay current on their mortgage payments. The agency is trapping others in homes that they have outgrown.

These borrowers want to rent out their CalHFA-financed homes because of a change in life circumstances, such as getting married or having children. In a normal real estate market, they would have sold their houses or condos and paid off their mortgages. Selling now means severe losses. Instead, they hope to lease out their residences until the housing market begins to recover.

But unlike state housing finance agencies in most other states, CalHFA is hewing to a strict policy of allowing rentals only if the borrower is facing an unforeseen economic hardship such as the loss of a job.

It has foreclosed on at least 21 borrowers who were violating its requirement that a borrower occupy the home for the life of the mortgage.

That number may just be the start. Another 49 borrowers who rented out their residences are delinquent, likely headed for foreclosure. Still more, 186, are renting out their CalHFA-financed homes without permission.

CalHFA is telling these borrowers they must return to their homes, pay off their loans in full, seek a waiver or face foreclosure.

Much of this activity has occurred within the past year. So far in 2011, the agency has sent out 218 “acceleration” letters, notifying borrowers that they are in technical default and must take action or face foreclosure.

As the housing crisis continues, these numbers will keep growing.

The agency says it doesn’t know how many borrowers were denied permission to rent and as a result remained in homes they no longer consider suitable or moved back in to avoid foreclosure.

Nor does it seem to have a firm grasp on the size of the problem. Between May and October 2011, the agency provided the Senate Office of Oversight and Outcomes three widely varying sets of statistics of borrowers who were denied permission to rent or renting without its approval.

The state of affairs at CalHFA should not be confused with the larger foreclosure crisis among private lenders, in terms of the number of people affected or the causes. But the relatively small number of borrowers squeezed by CalHFA’s policy find themselves in a unusual situation not seen in the private sector: They are willing and able to live up to their commitments, only to be told that their mortgage payments will no longer be accepted.

Among those who have run afoul of CalHFA’s policy is Marcia Wold. The Mountain View school teacher bought a condo in Sunnyvale with a CalHFA loan. She loved living in a quiet place with a pool a few steps
from her door, so happy to have her own washer and dryer that she actually looked forward to doing laundry. But after marrying a man with a young son from a previous marriage, she concluded they could not live in her 724-square-feet place. She moved into the house that her husband co-owns with his parents.

Even after she rented out her condo, she was losing $1,000 each month.

Still, she was determined to meet her obligation to keep paying her note until she could sell or refinance. Somehow, CalHFA found out she was renting and foreclosed.

Wold cried the weekend before the foreclosure sale.

“They took away a part of me, because I worked so hard for it,” she said.

“This represented that I had made it. And they took that away from me.”

CalHFA also denied Wold’s request to forego reporting the technical default to credit reporting agencies. Her credit rating has dropped from a stellar 802 to 679, complicating the couple’s hopes to refinance the Los Gatos house where they now live.

Other borrowers told our office that they are remaining in or returning to properties they have outgrown to avoid foreclosure.

“I think it’s a horrible program,” Dan, an active duty member of the Navy, said in an interview. Dan is headed for foreclosure because he rented out his 820-square-foot condo at a loss after getting married and having a child. “It’s almost like predatory lending. You expect something like that from Countrywide, but not from (an entity) with the name California in the title.”

Not only does the policy disrupt the lives of the borrowers – it costs CalHFA money. Each foreclosure, on average, translates into $38,000 in uninsured losses for the agency. Now that two CalHFA insurance funds
have been wiped out by foreclosures, each new default costs more than $50,000 in uninsured losses.

CalHFA officials say they must adhere to the policy because of an opinion from the bond counsel for many of its issuances. The bond counsel interpreted a section of the Internal Revenue Code as prohibiting renting.
It advised CalHFA that federal law requires a borrower whose loans come from tax-exempt bonds to remain in the residence for the life of the mortgage. Most other states surveyed by our office, facing the same wave of rental requests from distressed homeowners, interpret the IRS code differently.

They say that it’s enough for borrowers to live in the property for a reasonable time. Only two states – Nevada and Georgia – maintain policies of foreclosing on borrowers who rent but are current on their payments. A Georgia official said his agency has not had to resort to that type of foreclosure for several years.

The IRS limits the number of loans that don’t comply with the owneroccupancy requirement to 5 percent. CalHFA officials believe that exceeding the cap could threaten the tax-exempt status of the bonds that have traditionally funded their single-family loan program.

Yet, even if the agency granted a waiver to every property now being leased without permission, the total would add up to only 1.68 percent of its loans – well below the IRS limit.

Officials for other state housing agencies say that another reason they don’t foreclose is to avoid financial losses. They also point out that foreclosing on borrowers who are in a bind because of the upside down market runs counter to their mission.

“We’re not going to be foreclosing on homes if they’re making their mortgage payments in this market,” said Lisa DeBrock, homeownership program manager for the Washington state Housing Finance

Minnesota is one of the states that take a more forgiving approach. Years ago, the state decided not to foreclose on borrowers who moved out and rented because of a change in life circumstances.

As a Minnesota Housing official told our office, “Life happens down the road.”

Full report below…



Good Deeds Punished: State-Run Mortgage Lender Forecloses on Californians Current on Their Loans