The $1 billion lawsuit filed last week against First Magnus’ executives is filled with wild and outlandish allegations, former First Magnus Vice Chairman Thomas Sullivan Jr. said.

During an hour-long meeting Thursday at First Magnus’ former headquarters — which is now leased to StoneWater Mortgage, a company started and run by former First Magnus executives — Sullivan denied any wrongdoing and said no one saw the company’s collapse coming.

But he declined to answer a number of questions about First Magnus’ operations, saying they will be answered in court. Questions were also e-mailed to former First Magnus executive Karl Young, who had not responded late Friday.

“If (former Federal Reserve chairman) Alan Greenspan has gone on record to say that nobody knew this was happening, how could a small company in Tucson, Arizona, know more than Alan Greenspan?” Sullivan said. “The only reason that we went out of business is that the secondary market collapsed.”

The 200-page suit says First Magnus executives knew the company was a sinking ship, possibly as early as 2005, and looted it for hundreds of millions of dollars in the form of bonuses and stock redemptions. First Magnus’ officers and directors based these bonuses and redemptions on false revenues, the suit alleges, because the company did not place funds in reserve to cover defaulting loans it generated.

First Magnus executives then founded StoneWater Mortgage, relying on computer software and technology that belonged to First Magnus, the suit claims.

“Having failed to adequately reserve or account for contingencies, the directors and officers devised an exit strategy for themselves — make as many loans as possible with other people’s money and cash-out before the house of cards comes tumbling down,” the suit says.

Sullivan declined to answer questions about reserves or when First Magnus’ officers and directors knew the company was heading for bankruptcy, saying those questions will be answered in court.

But he said the software StoneWater is using to generate loans — he is an investor in StoneWater — is unique because it was designed for a “centralized” office, whereas First Magnus’ software was designed for “decentralized” offices.

“Separate software. Separate companies,” he said. “Developed on its own. The only similarity is that it’s mortgage software.”

Risky business

The majority of the loans First Magnus created were Alt-A quality, meaning they were riskier than prime loans made to borrowers with excellent credit but not as risky as subprime loans made to borrowers with poor credit or insufficient resources to pay back the loans.

Between January 2005 and its bankruptcy filing, First Magnus sold more than $70 billion in loans to investors, the complaint says.

Those purchase agreements came with indemnities, meaning First Magnus would repurchase the loans if they became delinquent.

But the suit claims First Magnus officials never set aside reserve funds for the more than $70 billion in loans, and it carried only $400,000 to back up the roughly $2 billion in loans it had for sale at any given time.

Alt-A loans may not be safe as prime loans, but Sullivan said not generating them during the housing boom would have been akin to a company like Wal-Mart choosing not to sell its hottest product.

“The Alt-A product became the overwhelming choice of borrowers, consumers and builders,” Sullivan said.

First Magnus’ sudden closure and bankruptcy in 2007 left 5,500 people nationwide and in Tucson without jobs and about $13 million in nationwide wage claims.

Claims of corporate looting

The suit accuses First Magnus of fueling the financial crisis, which Sullivan called “absurd.”

While that is an eye-catching claim, University of Arizona law professor Jean Braucher said the real question is whether First Magnus’ officers and directors engaged in corporate looting.

“To some extent this idea that they were a big player in causing the financial crisis isn’t really essential to the lawsuit,” Braucher said. “If they can prove all these transfers happened while they were insolvent, the rest of it doesn’t really matter. I think there are a lot of allegations that they engaged in lending practices that weren’t prudent and misrepresented, sort of, the degree of risk in these transactions.

“But what is different in this case is not only did they do that, but that when this business was collapsing they (allegedly) took all of these assets out for these insiders in a very deliberate way over time.”

Sullivan would not respond to the allegation the company transferred money while insolvent.

Dan Schecter, a professor with Loyola Law School in Los Angeles, said one potential defense First Magnus executives might pursue is that they were unaware of the consequences of their business decisions, which were made in good faith.
That argument, Schecter said, would go something along the lines of “we were simply exercising our business judgment. We were just doing our normal job. This is customary behavior.”

The case will almost certainly be heard before a bankruptcy judge, but there is a possibility that it could end up before a jury. That’s very unlikely, but “the threat of a jury simply increases the settlement value of the case,” Schecter said.

Jamie R. Welton, the attorney representing the trustees, said it is his preference the case stay before a bankruptcy judge.

The Sullivan redemption

Key to the suit are questions about a $55 million stock redemption to Thomas Sullivan Sr., one of First Magnus’ founders, in August 2006.

The redemption “decimated” First Magnus’ “working capital and left it with woefully inadequate reserves necessary” to handle its obligations for defaulting loans, the suit says.

The younger Sullivan would not talk about stock redemption or bonuses.
To address the shortage in capital, First Magnus’ parent company set up a revolving line of credit that grew to $60 million between the parent company and First Magnus. The suit alleges the directors and officers used this line of credit to move funds back and forth between the two entities, keeping First Magnus going while ultimately moving funds out of the company as bankruptcy drew near.

For example, on June 30, 2007, just weeks before the bankruptcy filing, First Magnus made a $24.8 million payment to its parent company, the suit says.
“One of the things that really bothered me is that they are the directors and officers” of both companies, Welton said. “They have up to $60 million First Magnus can draw on. Instead of paying the employees in full before they file for bankruptcy, they pay themselves.”

The younger Sullivan said the company would answer all allegations in court. First Magnus’ officers were from Tucson, were invested in the community and wouldn’t have done anything to hurt the town where they lived and worked, he said.

Credits: Arizona Daily Star

Mortgage rates, which were around 5% in the beginning of the year, are now taking a hike on up to the mid-5’s. The interest rates over the past week, while home prices and home sales took a drop.

So this is how it’s looking right now.

• 15 year fixed rate = 4.93%, it was the same last week
• 30 year fixed rate = 5.41%, it was 5.34% last week
• 30 year jumbo fixed rate = 6.87%, it was 6.92% last week. A welcomed drop
• 1 year ARM rate = 5.58%, it was 5.47% last week
• 5/1 ARM = 5.4%, it was 5.37% last week.

The mortgage rate will most likely remain in the 5’s because of the money that’s given to the Treasury. When money’s given to the Treasurys, interest rates fall and keep mortgage rates low. We won’t see a rise in the mortgage rates until our economy recovers and stabilizes itself substantially.

Only a month ago, the sales of new construction homes fell 10% and the average sales price of those homes dropped 15%. Take advantage of this opportunity to create a long term, profitable investment and search for Tucson real estate investments now.

Nosediving home values and low mortgage rates pushed homebuying levels higher in December. The index for pending home sales measures the number of sales contracts signed each month. It rose 6.3% in December (87.7), after a drop of 4% in November (82.5).

Uncertainty with the housing market still causes fear with buyers and sellers, even with the affordability improving with real estate. To create the foundation for the national real estate market, we require a housing market recovery and an economic recovery, and to make that happen we need a significant housing stimulus for qualified borrowers.

Foreclosure property sales were a big factor in the index’s improvement. Foreclosures and short sales are now more than 30% of all US home sales. What a significant percentage! That must mean that the deals are surely out there.

The low mortgage rates, the average rate being at 5.29% in December, pushed housing affordability to record levels. Buying a home now is the most affordable it has ever been since 1970. Home prices have also dropped as the number of foreclosures rose in each local market.

But there’s one big problem. There’s an excess of homes on the market, and there’s not enough buying going on. There are large groups of people that want to buy, but because they don’t have great credit, they’re refused by the banks. The banks are refusing too many, while they finance too little.

There are great deals out in the Tucson real estate market today, but you might have to work a bit to get financed. But with the savings you can make today buying, that amount of work put in the beginning is well worth it.

When it comes to shopping for new mortgages, it’s a different ball game today. There have been numerous changes over the past few years when we’re talking about mortgage borrowing.

Subprime loans, which is partially responsible for the housing boom, are no longer available. And mortgages that didn’t require borrowers to show proof of income, those are also no longer available.

And if you’re looking into the traditional mortgage, there are 3 things for you to consider: Paying for points, your downpayment, and locking in rates.

Paying for points

Borrowers can pay points; a one time, up front fee that will drop your interest rate on your mortgage. One point is 1% of the mortgage value.

Before when you paid a point,  you were looking at a quarter point drop on your interest rate, but today, you can expect half to a full point drop on your interest rate. That is phenomonal.

So if you paid 1 point on a $200,000 mortgage ($2,000), you might see your 6% interest rate drop to 5%. And that means your monthly mortgage payment would be $126 lower each month. In 3 year’s time, your investment of paying a point up front will be returned back to you.

You shouldn’t pay for points if you’re planning to refinance or sell within a few years, since paying for points is a long term financial strategy.

Your downpayment

Before the real estate bubble popped, homebuyers were putting down more than the required 20% downpayment. Is that a good idea now? Not really, and here’s why. High downpayments can disappear in real estate markets that are declining.

You might think that putting down more will give you a stable home equity cushion, but that’s no longer so. In times like these, it’s best to protect yourself by sticking with 20%.

Locking in the mortgage rate

Many borrowers choose not to lock in rates when they’re falling, because they assume that the rates will only go lower. But the interest rates can go both ways; they drop slow, but they rise fast.

When you see interest rate numbers that work for your financial situation, it’s best to lock it in. Better to have it now, than never. You don’t want to lose sleep over it, so play it safe.

Remember to keep these 3 factors in mind when you’re looking at refinancing or acquiring a new home loan.

When it comes to Tucson short sales, here is the truth, simple and plain, cut and dry. You can find yourself a marvelous Tucson home, in all price ranges, because ALL types of homes have been affected by the terrible economy. You can look on the market today, and there are plenty of short sales available on the Tucson MLS. You can get yourself a steal ($200,000 less than what it was 2-3 years ago), but it comes with a price. Nothing good comes easy, and when it comes to short sales, you have to put in your time and hold onto the last strands of your patience. Since our economy is this way today, if you’ve got the time and the perseverance, you can come out as the victor when the economy goes back up. Saving $200,000 in exchange for up to 6 months of time, it makes great sense if you’re in a position to complete that transaction.

Short sales weren’t too popular during the boom so you might not know what it is. A short sale is when a bank agrees to discount the loan balance for a seller who owes more on his mortgage than the home is worth at the moment. On the market today, nationwide, almost 14% of homeowners are underwater, owing more than their home is worth. Sad, surely it is, but life isn’t fair. It’s time to take advantage of what’s before you! The process of closing is just a bit more sticky since now you have to get your offer approved with the seller, the seller’s agent, and the property’s bank (mortgage carrier).

Short sales don’t have to be fixer uppers like foreclosures. You most likely won’t deal with the nightmares that you may hear about with run down properties that need a lot of attention and repair. It’s most likely that the homeowners living in these properties are current with their payments, and now that the mortgage is worth more than the property, they just want a way out.

I have 7 tips that you need to follow when dealing with Tucson Short Sales. Click to read the 7 tips >>> Read the rest of this entry »

The economy and the credit crunch has made it hard for prospective homeowners to get a loan, and the ones who have only small amounts for down payments have it even harder. But it’s not impossible  to acquire a low down-payment loan. The Federal Housing Administration is offering a 3.5% down payment loan option for qualified buyers.

When you get an FHA loan, you come very little out of pocket, so for those who have steady jobs and a desire to own a home, you might be in luck!

Income is the main factor in determing who qualifies for the loan. Loan recipients are to spend no more than 31% of their gross income on mortgage payments. Lenders will also look at your credit history, although your credit score doesn’t determine your mortgage rate. FHA borrowers get the same interest rate that any conforming borrower with a good credit score would get.

As an FHA borrower, you’ll also be charged an insurance premium, to cover any possible future defaults. You might pay an up-front fee of 1.5 to 2.5%, and pay 0.5% annually of the loan amount. There’s also a limit to the amount that can be borrowed, and in most cities, it’s $271,500.

If you’re looking into FHA loans and need assistance, leave a comment below with your questions or concerns.

The council has voted, and with a vote of 6-1 (despite the opposition from the community), the widening of Grant road has been green lit. The $166 million dollar project will start in 2013 and will last for 5 years, making the 4 lane artery running east and west 6 lanes wide.

We’re going to see businesses and homes lose parts of their land, and we’re going to see rents rise. Businesses will lose, homeowners will lose, but the traffic will be reduced, new businesses will spring up. But we’re talking about something that’s going to start 4 years later. There are positives and negatives in this whole ordeal. Tucson is a growing city so I am on the fence with this issue.

What are your thoughts on widening Grant Road?

861,664 families have lost their homes to foreclosure in 2008, and 3.1 million foreclosure filings were issed also. So one out of 54 households have received a notice. Quite overwhelming.

The foreclosure prevention programs implemented so far have been a band-aid on a large, open gash… Decembers foreclosure filings were 17% above the number in November, and 41% above the year before.

A big problem with the number of foreclosures that are available is that the banks have not gotten to putting them up on the MLS’s yet, and if it’s not on the MLS, agents don’t know about it. Banks have to put a move on with uploading their properties onto the MLS so that investors and homebuyers can take advantage of the opportunities. It’s unknown the reason why the listings are not on the MLS. Banks might be overwhelmed with their own problems, but it also could be that they’re hesitant of putting them up because they’ll take huge losses when it comes to the actual home values.

And foreclosures are closely tied with home values. Foreclosures rise as prices fall, and nationally, home values have fallen more than 21% since their peak. In many areas around the nation, the decline has been much worse than 21%. As long as home prices fall, foreclosures will likely continue.

In the past 5 and a half years, last week (the first full week of January 2009) had the largest number of loans being refinanced due to the record low mortgage rate. The low mortgage rates, unfortunately, have not spurred home purchases though. But hey, it all has to start somewhere!

The highest index number of home purchases and refinances was 1358.2, on the week of July 11, 2003, and last week it was 1324.8, a 15.8% increase from the week before. The refinance share of the applications is quite substantial; it jumped up to 85.3% from 79.8% the week before. The highest jump the Mortgage Bankers Association has seen since 1990.

And you do remember what caused the drop in the mortgage rates, right? The Fed initiated a plan to buy back $500 Billion dollars worth of loans from Fannie, Freddie, and Ginnie, and also $100 Billion of their debt.

Feel no rush, folks. It’s likely that the interest rates will remain low for the next few months since the Fed is committed to buying mortgage backed securities to keep borrowing costs low. After the next few months though… There is no telling, so locking these low rates in the meantime is the smart move.

Thanks to the low rates, our nationally depressed real estate market has seen a glimmer of hope. Home purchases and refinances will move lots of money around, and little by little, move the market in a positive direction.

If you’re interested and have questions about refinancing your Tucson, AZ home, email me or leave a comment below.

Fannie Mae and Freddie Mac have extended a moratorium, launched on December 15, 2008, on foreclosure suspensions for another three weeks, so mortgage servicers will work on postponing any foreclosures or eviction proceedings until the 31st of this month.

The two mortgage giants have projected that homeowners would avoid bank repossession and eventually qualify for mortgage modifications. The companies don’t have an exact number of how many borrowers that they’ll assist.

The extension on the moratorium should give servicers more time to help at-risk homeowners enroll in the companies’ Streamlined Modifications Program.

The program is aiming to help borrowers who are 90 days or more late on their payments, who own and live in their primary residences, and who have not filed for bankruptcy to reduce mortgage payments to no more than 38% of their income.

This moratorium does not only apply to owners of single family homes, but also multiple family houses that are occupied with renters. It helps cut down the number of foreclosures and it will assist renters to remain in their residences. This makes sense because before if an owner went through foreclosure, their renters got evicted immediately, late on payments or not.

The new policy for renters set by Fannie Mae is the National REO Rental Policy, which allows renters to stay in their homes as long as they have reasonable leases and keep up with their payments.

The extended time period of 3 weeks will give Fannie and Freddie more time to fully enable the new REO rental policy and assure at-risk homeowners with the help that they need.

The more information that the companies explain to the troubled homeowners, the more likely foreclosures and evictions will be prevented.