Underwater Homeowners Can Get Relief, But New Program Has Some Drawbacks

Although there are still some snares and drawbacks for participants, one of the federal government’s most important financial relief efforts for underwater homeowners started operation on Nov. 1.

It’s a new short-sale program that targets the walking wounded among borrowers emerging from the housing downturn: owners who owe far more on their mortgages than their current home value but have stuck it out for years, resisted the temptation to strategically default and never fell seriously behind on their monthly payments.

Industry estimates put the number of underwater owners across the country at just under 11 million, representing 22 percent of all homes with a mortgage. Of these, approximately 4.6 million have loans that are owned or securitized by Fannie Mae or Freddie Mac. Eighty percent of these Fannie-Freddie borrowers, in turn, are current on their mortgage payments and meet the baseline eligibility test for the new short-sale effort.

  (Image credit: Getty Images via @daylife)

Here’s how the program works.

Traditionally, short sales — where the lender agrees to accept less than the full amount owed and the house is sold to a new purchaser at a discounted price — are associated with extended periods of delinquency by the original owner. The new Fannie-Freddie program, designed by the companies’ overseer, the Federal Housing Finance Agency, breaks with tradition by allowing short sales for owners who are current on their payments but are encountering a hardship that could force them into default.

Say you are deeply underwater on your mortgage and recently lost your job or had your work hours reduced. Under the new program, you can contact your mortgage servicer and ask to participate in a Fannie-Freddie short sale for non-delinquent borrowers.You’ll need to find a qualified buyer for the house, typically with the help of a real estate broker or agent knowledgeable about short sales who will list the property and obtain an offer and communicate the details and documentation to the servicer. If the proposed short-sale package is acceptable, the deal would then proceed to closing weeks (or months) later.

Eligible hardships under the new program run the gamut: job loss or reduction in income; divorce or separation; death of a borrower or another wage earner who helps pay the mortgage; serious illness or disability; employment transfer of 50 miles or greater; natural or man-made disaster; a sudden increase in housing expenses beyond the borrower’s control; a business failure; and a you-name-it category called “other,” meaning a serious financial issue that isn’t one of the above.

Borrowers who take part in the new program can expect to rid themselves of the money-devouring albatross their mortgage has become without going through the nightmares of foreclosure or bankruptcy and to get a chance to start anew, better equipped to deal with the financial hardship that caused them to sell their house.

What about the snares in the program? There are several that participants need to consider.

●Credit score impacts. Although officials at the Federal Housing Finance Agency are working on possible solutions with the credit industry, at the moment it appears that borrowers who use the new program may be hit with significant penalties on their FICO credit scores: 150 points or more. This is because under current credit-industry practices, short sales are lumped in with foreclosures. According to Laura Arce, a senior policy analyst at the agency, the government is in discussions with the credit industry to institute “a special comment code” that would treat participants more fairly on FICO scores.

●Promissory notes and other “contributions.” In states were lenders can seek repayment of a loan balance owed following a short sale, Fannie and Freddie expect borrowers who have assets to either make upfront cash contributions covering some of the balance or sign a promissory note. This would be in exchange for official “waivers” of the debt for credit reporting purposes, potentially causing less damage to a seller’s credit score for the sellers.

●Second-lien hurdles. The program sets a $6,000 limit on what holders of second liens — banks that have extended equity lines of credit or second mortgages on underwater properties — can collect out of the new short sales. Some banks, however, don’t consider this a sufficient amount and may threaten to torpedo sales if they can’t somehow extract more.

By Ken Harney

Ken Harney’s e-mail address is kenharney@earthlink.net.

Taken from: http://www.washingtonpost.com/realestate/underwater-homeowners-can-get-relief-but-new-program-has-some-drawbacks/2012/11/08/66cc85e2-277c-11e2-9972-71bf64ea091c_story.html

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Why Is It So Hard to Get a Mortgage?

It is a common question among U.S. consumers who were denied a home loan or who have been required to provide lenders with everything but a blood sample in order to qualify for a loan. The housing market is beginning to show signs of recovery, but why isn't the mortgage market starting to bounce back as well?

The answer lies within lending regulations, which have become much more stringent in recent years. Lenders are fearful of loan buy-backs (meaning they have to essentially 'buy back' any loan defaults) and thus has resulted in strict lending requirements for borrowers. Of course, Fannie Mae, Freddie Mac and the Federal Housing Finance Agency have their own standards, but lenders and loan originators abide by their own restricted set of qualifications in order to reduce the chance of having to buy back delinquent mortgages.

Getting A Mortgage Today  (Photo credit: Eastern Bergen County Board of REALTORS)

In the Presidential debate on October 3, Republican nominee Mitt Romney brought up the qualified mortgage provision of the Dodd-Frank bill, which essentially forces lenders to pay stiff penalties if a borrower defaults on the loan and the lender failed to provide 'sufficient evidence' that the borrower had the ability to repay it. In theory, this seems like a reasonable regulation, but the issue at-hand is that the definition of a "qualified mortgage" has yet to be determined (delayed until January 2013). Because of the loose and incomplete definition, lenders are hesitant to lend to borrowers and investors are reluctant to invest, creating tight lending conditions and hampering a robust housing market recovery.

To go one step further, regulators are also finalizing the definition of Qualified Residential Mortgage (QRM) which applies to all securitized loans and deals with the exception to the 5 percent risk retention requirement in Dodd-Frank. To clarify, lenders would need to retain up to 5 percent of the originated loan balance for loans that do not qualify as a QRM and consequently would increase rates for consumers to cover the costs. Loans that meet the QRM criteria would be considered exempt from risk retention. The criteria are still yet to be finalized by the six federal financial institution regulators.

Regulations pertaining to the housing and lending industries are a necessity, but so are clearly defined standards and requirements. For a healthy housing market and a vibrant mortgage industry, we need regulations to resolve disputes between loan originators and regulators, encourage compliance for borrowers and lenders and provide stability to allow for secondary market investment.

By Doug Lebda, Chairman, Chief Executive Officer, Founder, LendingTree.com

Taken from: http://www.huffingtonpost.com/doug-lebda/why-is-it-so-hard-to-get-_1_b_1954218.html

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Home-Grown Investors Can’t Fight Bulk-Buying of Distressed Homes

Matthew Rhodes slapped sawdust from his hands and stepped around a ladder propped toward the spot that held a working electric garage door opener in the good times.

Once a gem of Sagamore Hill, the home Rhodes was working in bore the classic signs of foreclosure.

Rose bushes were dying. Garbage was stuffed in a washer and dryer. Walls were water-soaked, crumbling from below.

“It was disgusting,” Rhodes said, as he led an impromptu tour of the Corona home that moonlighting workers from a local framing company were redoing for an owner-occupied sale.

For Rhodes, the work was pivotal.

“I’m here to learn a trade,” he said, saying job opportunities have been slim to none since his tour of duty in Iraq as a tank gunner ended last September.

“We’re all chipping in money or sweat equity to try to make a go of it” flipping houses, he said. “It’s been hard with the economy. Any little bit of extra cash helps.”

The scenario has been playing out across the Inland Empire, and now may be threatened by the initiative of the Federal Housing Finance Agency to bulk-sell nearly 500 Fannie Mae-owned foreclosed homes in the Los Angeles and Inland areas to yet-undisclosed institutional investors.

(Photo credit: Casey Serin)

Real estate officials fear the pilot program will spur long-term rental scenarios, bring property values down, hurt the transactional economy and take out home-grown investment companies.

“It could be a market game-changer,” said Aaron Norris, vice president of The Norris Group, a real estate investment company in Riverside that lends money to home-grown investors who buy distressed property to fix up and re-sell to consumers.

“Local investors who live in the market can’t compete against a hedge fund,” Norris said, because bulk-buyers get the properties at a lower rate. Its fix-up costs are less, and so is the incentive to hold it or rent it at a competitive rate.

This could have the unintended consequence of devaluing, rather than stabilizing, a neighborhood. It’s also coming at a time inventory is thin, and Inland home prices are beginning to stabilize.

A growing number of real estate professionals and lawmakers agree.

“This proposal is moving forward at a rapid pace, and it must be stopped to preserve home values in our county and across the state,” Riverside County Supervisor John Tavaglione said in a statement.

Next Tuesday, the Riverside County Board of Supervisors will consider a resolution to support passage of a federal bill, H.R. 5823, by U.S. Rep. Gary Miller, R-Diamond Bar, to stop Fannie Mae’s plans to bundle foreclosed properties in California for sale to institutional investors.

The Federal Housing Finance Agency did not return a call Friday seeking comment. Earlier in the week, it was accused by the California Association of Realtors of being “secretive” about the bulk-buy plan, and of withholding the names of bidders.

The agency, in response, said an announcement will soon be made.

“We don’t think the government or the banks need to do bulk sales,” Norris said. “We’d be better served if inventory continued to work its way through well-established bank-owned and short-sale channels. That would allow local contractors, Realtors, appraisers, investors, mortgage professionals and surrounding service sectors stay employed.”

Mike Novak-Smith, a leading Inland-area agent for the sale of distressed property, said he’s already seeing competition stiffen to “pooled-sale” bidders armed with cash who are buying 30 to 40 properties at a time. The courthouse steps, hedge fund buyers, are getting 10 to 15 a day.

“Last year, I closed 200 houses,” he said. “This year, I’ll probably do 125; I’ve already cut 50 percent of my staff.”

Ted Doecker, broker/owner of REMAX Results of Moreno Valley, where Novak-Smith keeps an office, said sales numbers have fallen, and he pins it on inventory being sopped up by the added pool of Wall Street buyers.

“Hedge funds are coming in to buy at a discounted price,” Doecker said, pricing local investors out of the market and potentially turning the homes into “buy-and-hold” commodities or long-term rentals.

“When you do bulk buys, you cut out real estate agents, title companies, escrow companies and a whole range of others who would otherwise be employed,” Novak-Smith said. Small fix-it companies can be squeezed out because many bulk-purchasers have their own renovation teams.

Steve Manos, president of Inland Valleys Association of Realtors, said the Inland area wants to be opted out of the federal bulk-buy pilot program, fearing many more troubled mortgage overseers will head this way.

CitiMortgage weeks ago sold $158 million in mortgages to Carrington Capital Management and Carrington Mortgage Services to set up a “Home Rental Program” to test a pilot deed-for-lease program with 500 homes that are underwater in six states, including hard-hit areas of California.

Bank of America announced a similar pilot program for 2,500 borrowers in California, Arizona, Nevada and New York.

“Local investors won’t be able to compete if the bulk-buy floodgates open,” Norris said.

“We’ll be dealing with a contrived market, not the typical free market of real estate ” Novak-Smith added. “You’ve got government controlling the ebb and flow of foreclosures in the real estate market; that’s making it tough in the real estate business to make a living.

“It makes it tough for many people to buy a home.”

Inland Empire economist John Husing said there’s already been a dramatic shift in the homebuyer demographic.

When the recession was declared in 2007, Husing said 13 percent of all San Bernardino County home sales went to investors. In June, the investment pool was 31.5 percent. The Riverside County percentages rose from 21 percent up to 38 percent over that same period of time, Husing said.

“A hedge fund controlling thousands of properties can change the market on a dime,” Norris said, and cause an immediate fluctuation in price. “What happens if a decision is made to liquidate all the properties at one time?”

Bulk-sale investment has been tried before in the Inland Empire, and performed miserably, Husing said, recalling an era in the 1990s when the U.S. Housing and Urban Development agency dealt with wide-scale foreclosure in the last recession with bulk sales to investors.

Years later, Husing studied the impact when single-family rentals were injected en masse into those neighborhoods. Three things happened: Calls for police service rose, property values dropped, or lagged behind other neighborhoods, and classroom turnover accelerated.

“We said, ‘Stop. Let us buy houses at something below market, so we have some margin to fix them up, and sell them to owner-occupants,’” Husing said. “But it was already too late. The cities of Moreno Valley and San Bernardino got clobbered.”

San Bernardino wound up with the lowest-priced housing among all the areas, he said. “I believe the bankruptcy situation they’re dealing with today is not totally unrelated to this.”

Roughly 69 percent of all homes in San Bernardino are currently underwater, Husing said.

As Jim Previti, owner of Frontier Enterprises, stood in one San Bernardino home Friday that was lost to foreclosure, he said local investors are hoping to hold their ground to conduct business in a free marketplace.

“We’re the ones who toughed it out,” he said.

Previti, the son of a builder who built 20,000 homes in California over 30 years, in 2002 founded Frontier homes and landed on the Top 100 Builders list within two years. In 2004, Frontier Homes was posting revenues of more than $300 million from the delivery of 800 homes.

Yet, Previti began to see signs the market was coming unglued and took precautionary steps: “We had 4,000 lots on the books, and 400 houses under construction,” and set pricing to liquidate inventory against what the market would bear. “It was like catching a falling knife every day,” he said. “We managed to get through tough times with a modicum of grace.”

It was the decision to invest in vacant and bank-owned properties that did it, he said.

Since 2009, Frontier Enterprises with its staff of 50 has turned 1,500 properties into homes owners occupy and brought in about $500 million in sales. “We don’t ever rent.”

The reason is simple, he said.

“It was a Wall Street scheme that did all the sub-prime lending that got us into this mess.”

©2012 The Press-Enterprise (Riverside, Calif.)

Visit The Press-Enterprise (Riverside, Calif.) at www.PE.com

Distributed by MCT Information Services

Source: Debra Gruszecki The Press-Enterprise, Riverside, Calif. (MCT)

Taken from: http://www.loansafe.org/home-grown-investors-cant-fight-bulk-buying-of-distressed-homes

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