Freddie Mac Moves to Contain Subprime Fallout

Facing shaken financial markets over growing subprime lender bankruptcies and warnings, big bank (HSBC, New Century) reports of record subprime losses and Congressional hearings into predatory subprime lending, government-backed mortgage buyer/lender Freddie Mac announced Tuesday that effective Sept. 1, it would no longer buy subprime mortgages with excessive payment resets or high default probability. Freddie Mac will now require stricter salary documentation and repayment capability proof, and will only buy teaser rate loans where borrowers qualify for the higher reset rate. The firm is developing alternative subprime loans with longer fixed-rate terms, and is also encouraging prime loan practices by setting up escrow accounts for borrowers tax and insurance payments. The ABX index tracking BBB- subprime mortgage-backed bonds has risen 250% since November, to 1,400 basis points.

Proposed escrow legislation worries banks

State-chartered banks are worried that proposed legislation requiring them to pay interest on escrow accounts would unfairly change Alaska's mortgage marketplace, while the legislator who crafted the bill said it would give millions back to Alaska homeowners.

House Bill 33, by Rep. Jay Ramras, a Fairbanks Republican, would require "covered institutions" to pay interest on reserve or escrow accounts created to pay property taxes, insurance and other payments related to mortgage loans.

However only four banks in the state would have to implement the conditions of the bill, because the state cannot regulate the 12 credit unions or the five federally chartered banks with Alaska branches.

That leaves Mt. McKinley Bank and Denali State Bank, based in Fairbanks; Northrim Bank of Anchorage; and First Bank, based in Ketchikan.

Banks, civil rights groups and community members should lobby ...

A number of individuals, businesses, and organizations have had their bank accounts closed due to so-called "suspicious account-related activity." The suspicion causes the compliance department to recommend account closure.

This is not happening only to Arab Americans and American Muslims. A few weeks ago, I was at a meeting in Washington that centered on the issue of charities in the U.S. A non -Arab/non-Muslim resident attorney who attended the meeting spoke of his Saudi clients and shared a story about his bank experience. He said that he receives wired funds to his escrow account from Saudi Arabia for his legal fees. His bank sent him a notice stating that it intends to close his escrow account. He found out that the funds from Saudi Arabia were the reason. The cost-benefit analysis of the bank showed that closure of the red-flagged account was the bank's best bet.

Tenants still have rights while landlord goes into foreclosure

In general, a lease entered into before the mortgage is in place is ordinarily not affected by foreclosure.

But a lease entered into after the mortgage was in place is terminated by the foreclosure the moment the landlord's interest in the property expires - typically, six months from the date the property is sold.

This six-month period is known as the redemption period the time in which the landlord may buy back his interest in the property.

Does the tenant have a right to continue occupying the premises after the property is sold?

Fortunately, tenants may continue to reside in the premises after the sale.

They must continue to pay rent.

Because the purchaser does not obtain title to the property until the end of the redemption period, the tenant should pay rent to the landlord, not the purchaser.

Escrow payments are often waste of money

Most people keep up well enough with their monthly bills. So why do so many homeowners allow mortgage lenders to pay their real estate tax and insurance bills for them?

That is the proposition at the core of mortgage escrow services, in which lenders collect money on the borrower's behalf as part of the monthly mortgage payment, then use those funds to pay the borrower's real estate taxes and homeowner's insurance, usually twice a year.

Government-insured loans such as those backed by the Federal Housing Administration or the Veterans Administration mandate escrow accounts for borrowers, mostly because they eliminate the risk that a borrower will default on taxes or fail to insure the house.

Borrowers with less than 20 percent equity in their homes must also use escrow accounts, except in California, where the threshold is 10 percent