The two largest holders of real estate owned property (REO) in the country, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), are biting their nails as their REO inventory grows while the real estate market shows all the signs of softening. After amassing over 191,000 REOs nationally in the first quarter of this year (more than double last year’s reclaimed REOs combined), Fannie and Freddie are buckling under their bloated inventories and threatening to crack-down on lollygagging lenders and servicers.

Fannie and Freddie’s newly initiated foreclosures have risen steadily over the second quarter of 2010 to more than 150,000 nationally in July, a 60% increase from April. In addition to a climbing national foreclosure rate, an estimated four million delinquent loans are sitting in limbo as shadow inventory yet to be foreclosed, many of which will eventually be absorbed into Fannie and Freddie’s REO inventory. [For more information on the shadow inventory, see the March 2010 first tuesday article, Where have all the REOs gone?]

These staggering numbers of REOs sitting in Fannie and Freddie’s storeroom have absorbed extraordinary amounts of maintenance expenses. Of the $13 billion worth of REOs added to the national inventory in the second quarter of this year, Fannie and Freddie have paid-out an estimated $487 million to cover utility bills, pay property taxes and hire real estate agents and contractors to rehabilitate the homes to maintaining property values. [For more information on Fannie and Freddie’s troubled balance sheets, see the August 2010 first tuesday article, Freddie and Fannie need more help, before disappearing.]

Surprisingly, Fannie and Freddie are in no hurry to sell the spate of homes they are sitting on. Since they either own or have guaranteed the majority of the market’s REO inventory, Fannie and Freddie have to be careful of their influence over home prices. If Fannie and Freddie cut home prices for marketing their REOs to compete with REO-holding, private-label mortgage-backed bonds  (MBBs) or release too many of the REO properties all at once, they could adversely influence current market values across the board. This could potentially contribute to a double-dip downturn in the real estate market, which already appears to be underway.

One way for Fannie and Freddie to continue to hold on to their assets without continuing to hemorrhage money is through a lease-and-hold approach. By renting foreclosed properties while the market finds its equilibrium, Fannie and Freddie can keep houses out of the REO rental market and, at the same time, cover some of the maintenance costs on the rent they receive from foreclosed properties. Thus, this would save millions of dollars that can be used to fund new programs to further promote the stabilization of the real estate market.

As they continue to grow weary under the weight of their REO inventory, and as they are poised to accumulate even more foreclosures in the coming years, Fannie and Freddie are becoming increasingly impatient with lenders who take too long to reclaim vacant homes. Thus far, only idle threats to charge fines to procrastinating lenders have been made, but Fannie and Freddie’s frustration is palpable.

first tuesday take: Funding maintenance costs for vacant REOs is the least of Fannie and Freddie’s worries – a pittance in the grand scheme of resolving their insolvency. What is $500 million of maintenance costs compared to the inevitable landslide ofshadow inventory foreclosures set to be incorporated into Fannie and Freddie’s already distended REO inventory?

Renting out a few foreclosures may mitigate some of Fannie and Freddie’s current fiscal injuries, but their losses will only be compounded exponentially since these lenders must eventually sell their REO inventories and report their losses. Non-government lenders delay reporting their losses to protect their fragile balance sheets by taking advantage of the Federal government’s extend-and-pretend mortgage modification programs, such as the Home Affordable Modification Program (HAMP). [For more information on the floundering HAMP program, see the July 2010 first tuesday article, HAMP is losing participants.]

Given that Fannie Mae and Freddie Mac are under government conservatorship (read: full ownership), the federal government should be developing programs that impose strict regulations in order to put an end to the interminable delays perpetrated by lenders in clearing out delinquencies — the same parties that ultimately caused the real estate fall-out through their intense desire for a lack of regulation.

The results of forcing lenders who whine about everything, as do spoiled, untrained brats, to report their losses in a timely manner may initially be uncomfortable for everyone to hear, but at least getting their accounting right will paint an accurate picture of where the economy, and thus where the real estate market, is really going. Maybe then the organic recovery can finally begin.

Re: “Reluctant Realtors: Fannie, Freddie” from the Wall Street Journal

Copyright © 2010 by first tuesday Realty Publications, Inc.

Reprinted from first tuesday Journal Online — P.O. Box 20069, Riverside, CA 92516

For the original article, please click here.

Notice of Defaults (NODs) recorded in August 2010 throughout California totaled 31,120. That is:

• a 17% increase from July 2010 (26,671); and
• a 16% decrease from August 2009 (37,061).

Notice of Trustee’s Sales (NOTS) recorded in August 2010 totaled 30,726, marking:

• a 3% increase from July 2010 (29,920); and
• a 10% decrease from August 2009 (34,224).

first tuesday take: The total number of NODs for July and August (57,791) remains alarmingly high compared to the manageable numbers posted in the stable period of the late 1990s, a time we can look forward to no earlier than 2014. [For more information regarding quarterly NODs and NOTS, see the July 2010 first tuesday market chart,NODs and Trustee’s Deeds: Grim signs of real estate’s present condition.]

NOD recording volume is at the moment trending higher, but lower than the abysmal number of NODs recorded in 2009 (around 120,000 quarterly). However, loan delinquencies indicate the trend for recorded NODs will turn further upward and do so significantly. In reality, NODs must increase for the next 12 months or more to clear out the delinquencies that are continuing to rise.

The government has launched yet another foreclosure prevention program to address underwater homeowners, called a “Short-Refi,” the “short” standing for loan balance reduction — generally called a “cramdown” or “strip-away”. It is based solely on voluntary lender reduction of principal balances for homeowners who are current on their payments. The intended goal was to keep owners in their homes and houses out of the real estate owned REO inventory.

In practice, no lender reduces a loan balance if the owner is faithfully making payments. Decidedly, the refi program leaves the delinquent masses of California homeowners with little promise outside of foreclosure. [For more information regarding the Short Refi program, see the September 2010 first tuesday article, FHA 'Short-Refi' Program debt relief for underwater homeowners.]

Defaulting homeowners will find diminishing voluntary respite from lenders until bankruptcy judges are given back their authority to reduce principal loan balances. The availability of judicially-ordered cramdowns will encourage lenders to immediately cure their negative equity problems themselves. Until then, lenders will continue delaying foreclosure and leaving thousands of Californians burdened by underwater properties and insolvent.

Agents and brokers need to continue advising homeowners about their most financially prudent housing option: whether it be a refinance if the homeowner has an equity or a strategic default in a negative equity situation. [For more information regarding strategic default and refinancing, see the July 2010 first tuesday article, Owners add cash instead of cashing out and the September 2010 first tuesday article, The LTV tipping point: when negative equity owners are most likely to strategically default.]

Re: “California Foreclosures” from Foreclosure Radar

Copyright © 2010 by first tuesday Realty Publications, Inc.

Reprinted from first tuesday Journal Online — P.O. Box 20069, Riverside, CA 92516

For the original article, click here.

The newly-created Consumer Financial Protection Bureau is scheduled to begin functioning in 2011. The Consumer Financial Protection Bureau is now responsible for regulating and enforcing consumer protection laws as the new authority on activities currently monitored by the Federal Trade Commission (FTC), the Department of Housing and Urban Development (HUD) and the Federal Reserve (the Fed).

The shift in responsibility will bring some key benefits to the practice of real estate. The law requires the bureau to reevaluate rules on appraisals and replace the industry-protested Home Valuation Code of Conduct (HVCC) which Fannie Mae and Freddie Mac imposed in 2009. Appraisal management companies will also come under new regulations, hopefully eliminating the alleged practice of assigning inexperienced appraisers to unfamiliar locations (which is only complained about when the appraiser does not hit the number the agent needs) or using less than all fundamentals in the trilogy of cost, comps and income approaches to setting home values (which will keep the appraisal valuations conservatively low).

A national hotline system will allow borrowers to report any unfair practices and lodge complaints about deceptive lenders. The bureau will also take over HUD’s duties in controlling the Real Estate Settlement Procedures Act (RESPA) and protect buyers and sellers from unlawful fees from lenders, title companies, agents and builders.

The bureau is also expected to rewrite national home purchase disclosures, such as theGood Faith Estimate (GFE) and Truth-in-Lending Act (TILA) disclosure, possibly unifying them into a single package. [See first tuesday Forms 204 and 221]

Rules will also be set into place requiring lenders to more stringently verify their applicants’ ability to repay the loans they apply for.

first tuesday take: Most everyone will welcome a change to the sticky appraisal process currently policed by Fannie and Freddie, but dictated by each individual lender as they seek an appraisal. Brokers and lenders alike have complained that homes are being devalued because of the use of short sales and foreclosures as comparables, again only when the number is not hit by the appraiser. Electronic appraisals have proven an ineffective substitute to on-site evaluations. [For additional commentary on the contentious Fannie Mae appraisal standards, see the July 2010 first tuesday article,Alterations to Fannie Mae’s appraisal selection standards.]

Creation of a consumer protection bureau is 30 years overdue from a government that’s long been batting for the lender’s team with little regard for the buyer and seller, an effort based on spurious lender propaganda that homebuyers cannot be lumped into one description and then treated as mathematical illiterates who need a nanny in Washington. Reform giving homeowners watchdog support when they acquire a mortgage will shift responsibility for entering into prudent, manageable agreements to industry professionals, the gatekeepers to the real estate market — the individuals most likely to implement this new, responsible reform.

Re: “What the new consumer protection bureau will do for home buyers” from the New York Times

Copyright © 2010 by first tuesday Realty Publications, Inc.

Reprinted from first tuesday Journal Online — P.O. Box 20069, Riverside, CA 92516

For the original article, please click here.

When Jose Palomo lost his job doing concrete maintenance for the city of Riverside, he said his mortgage lender told him there was no way he could save his house from foreclosure, especially since his father, who lived with him, also was laid off the assembly line at Fleetwood, an RV company that went bankrupt.

“Without any kind of income they said there was nothing we could do,” said Palomo.

But recently Palomo heard he was approved for a forbearance program from CitiMortgage that will allow him to lower his monthly mortgage payment from $1,130 to $600 for three months. He expects to make the lower payment with his unemployment benefits and contributions from his family while he hunts for a permanent job.

In the current national economic crisis, unemployment has replaced mortgages that readjust to higher interest rates as the primary cause of home foreclosures. As a result, mortgage assistance programs are being offered to help people like Palomo through the rough patches of unemployment.

It is taking an exceptionally long time for people to replace lost jobs, which means they more often run out of savings and other resources and need assistance.

“Long-term unemployment is far more prevalent in this recession than in previous recessions,” said Greg McBride, senior analyst with Bankrate.com, an online consumer finance service. “Now nearly half the unemployed have been out of work six months or longer.”

In recognition of the impact of unemployment on foreclosures, the Obama administration since Aug. 1 has required lenders who participate in its Making Home Affordable program to offer at least three months of special assistance to unemployed borrowers, during which the borrowers do not have to make any mortgage payments or only minimal payments while they job hunt. The assistance can be extended as long as the loan servicer decides.

Under the federal mortgage assistance program, the monthly mortgage payment that the borrower is required to make can be no more than 31 percent of his or her current pre-tax income, which can include unemployment benefits, and during the period of assistance the borrower’s home is protected from foreclosure.

When the homeowner finds employment and the forbearance ends, the lender is required to evaluate the homeowner for a permanent mortgage modification that is affordable based on a new level of income. The portion of the mortgage that the lender did not collect during the forbearance is still owed by the borrower and might be added to the mortgage balance or repaid a little each month in addition to the regular mortgage payment.

Also the California Housing Finance Agency is creating its own Keep Your Home forbearance program that is expected to dovetail with the federal assistance. Borrowers who exhaust the federal program’s temporary assistance without finding employment could then apply for more help from the state program if their lender participates in it.

Unemployed homeowners could also apply for help directly to the California program, which will be funded with $540 million from the U.S Treasury and is expected to assist up to 42,000 homeowners over about two years.

Details of the California mortgage forbearance program, such as who will be eligible and for how much assistance, were being redrafted early last week. The California Housing Finance Agency’s original plan was to give each mortgage assistance recipient $1,500 a month or half the monthly mortgage payment, whichever was less.

But state officials said they decided to redesign and broaden California’s program to be more generous when they recently learned they would be getting significantly more money than they had expected from TARP funds. California is receiving more money from the Treasury’s Hardest Hit program than any other state because of its large population and high unemployment.

OFFERING HELP

Linn Warren, a manager of the state unemployment mortgage assistance program scheduled to go into effect Nov. 1, said the state will spend the federal funds to pay a portion of an unemployed borrower’s monthly mortgage obligation.

Also, he said California may require the lender to forbear the rest of the monthly mortgage for the duration of the assistance, which he expects will last three to six months. As with the federal program, lenders could later recoup their money over the remaining life of the mortgage.

In addition, the U.S. Department of Housing and Urban Development plans soon to announce an Emergency Homeowner Loan Program to assist struggling unemployed homeowners that is expected to target communities that do not benefit from the Hardest Hit program. Administered by a variety of state and nonprofit entities, it will provide loans of up to $50,000 to help borrowers pay their home mortgage, insurance and property taxes.

Nobody expects that these new government programs will enable all who lose their jobs to save their homes. Melinda Opperman, vice president of community outreach for Springboard, a Riverside-based consumer credit and foreclosure counseling agency, said many clients already are finding they are ineligible for the Making Home Affordable forbearance program because applicants can’t be more than three months behind on their mortgage payments.

“For the program to work we have to get people involved in it early,” Opperman said.

She recommends that homeowners who lose their jobs call a foreclosure counselor to get help linking up with a forbearance program as soon as they miss their first mortgage payment.

TRAINING NEEDED

She said it is vital for unemployed homeowners to contact their loan servicer or a federally approved counselor to identify an unemployment assistance program that is compatible with their mortgage. For instance, not all lenders who participate in the Making Home Affordable forbearance program will also participate in the California program. Also, Fannie Mae and Freddie Mac have their own forbearance programs, and lenders have other forbearance programs they can offer borrowers who fail to qualify for a government sponsored program.

Jesse Limon, a foreclosure counselor with the Fair Housing Council of Riverside County, said he believes more attention and money should be spent on training the unemployed for new jobs while they are getting temporary mortgage assistance.

“I really think the issue of unemployment needs to be addressed and not just money given as a way of postponing foreclosure,” Limon said.

Palomo, 22, who met Limon at a foreclosure workshop in Riverside and got his help to apply for a forbearance, said he is grateful for the reprieve but still worries about losing the house on Mintern Street that he shares with his parents and teenage brothers.

He said he wants to keep the house, even though its value has fallen from $150,000 to about $58,000 since he bought it in 2006.

Palomo, a high school graduate, said although he has found only temporary work during a year of job hunting, he hopes the next three months will be more fruitful.

Waiting for a response to his applications for good-paying city maintenance jobs in Tustin and Corona, he said, “I’m crossing my fingers.”

Reach Leslie Berkman at 951-368-9423 or lberkman@PE.com

For the original article, please click here.

The majority of home sales in Orange County are of the short sale variety. Of the 6,268 pending sales in Orange County, 3,639 of them are short sales — 58% of all pending sales.

The astronomical proportion of short sales (58%) to foreclosures (8%) and equity sellers (34%) for pending sales is at least partly to blame for the excruciatingly protracted delays in short sale closings. However, brokers and agents in the trenches will be the first to point out that lenders are quite simply dragging their feet when it comes to processing short sales.

Short sales can be extremely complex, particularly when multiple lenders, attorneys and creditors are involved. Multiple prospective buyers all vying for the lowest price can also prolong the sale as the lender takes each offer into account for approval. Even in circumstances where a qualified buyer has made an acceptable offer, they are still stuck waiting while the bank dithers over accepting anything less than a full payoff — which is not going to happen in the current housing market and for years to come.

A vast number of underwater homeowners in Orange County have opted to do short sales. Considering the reluctance of most lenders to take a loss, short sale sellers will have to wait at least six months before their sale finally closes, if it closes at all.

first tuesday take: The short sale is another device forged in the furnace of government rhetoric to encourage moralistic and irrational homeowners to avoid foreclosure. Lenders and the government expect homeowners to do everything they can to ensure the lenders get paid — even if it still means defaulting to get a short sale discussion underway and taking a substantial ding to their credit. [For more information on the credit score impact of short sales and foreclosures, see the June, 2010 first tuesday article, The FICO Score Delusion.]

Yes, homeowners opting for the short sale may preserve a minute percentage of their credit score by avoiding the full force of the many months’ worth of delinquent payments leading up to foreclosure, but it is difficult to see any other motivation for riding the runaway train all the way to the bitter end.

Many homeowners are encouraged to negotiate a short sale with their lender due to the benefit of being able to live rent-free in excess of 12 months. However, completing the foreclosure process shifts the issue of insolvency from the homeowner’s balance sheet to the lender’s. As fearful of insolvency as lenders are in this financial crisis, they will continue to defer foreclosure as long as negotiations for alternatives are taking place.

However, for the homeowner considering a short sale who has an LTV of 125% or more, a strategic default is the answer. A homeowner does himself no favor in delaying this approach to attain personal financial solvency, which is strictly a business decision, due to an unfounded fear of moral turpitude that somehow only homeowners should possess. [For more information on strategic defaults, see the April first tuesday article, Sink or swim: whether to strategically default on a home loan and Fannie Mae, our government and strategic defaults.]

Re: “Broker: Short sale gridlock is dizzying” from the Orange County Register

Copyright © 2010 by first tuesday Realty Publications, Inc.

Reprinted from first tuesday Journal Online — P.O. Box 20069, Riverside, CA 92516

For the original article, please click here.

A second quarter 2010 data report by Zillow.com claims there is a noteworthy decrease in the national percentage of underwater homeowners. Currently, 21.5% of homes are underwater — down from 23.3% in the first quarter of 2010 and 23% from the previous year.

The data service attributes the decreasing percentage of underwater homeowners to rising prices triggered by state and federal tax credits, along with an increase in the number of foreclosures.

first tuesday take: The so-called “drop” in the number of underwater homes this quarter is dangerously misleading. A more in-depth analysis of the calculation process used to obtain these numbers reveals that the home valuation index in this case is almost certainly based on the median prices of all homes in a designated area.

Median numbers tell us nothing. Because there is an increase of high-tier property sales at ever lower prices, these high-tier transactions are creating the illusion of increased prices across the board. The median price rises when the weight of these larger sales tips the scale upwards.

The median number sits in the dead center of the actual recorded data and reflects a phantom price that cannot be assigned to any single home. Because the percentages cited by Zillow.com are based on median numbers, the decrease in underwater homeowners they reflect is most likely inaccurate.

It is vital for agents and brokers to carefully research the statistics they use to form their opinions of the market which they disseminate to clients. Many media resources rely heavily on these irrelevant median price data points to push whatever policy or opinion they see fit.

All sources have a bias one way or another, but finding accurate information that reflects the unique characteristics of the local market will provide for the most relevant, educated analysis (as all informed agents will know, real estate is local).

Avoid median numbers; they only serve to cloud statistics and arrive at shaky conclusions. California agents should keep in mind local geography and diversity set this market apart from the national forecast. Similarly, California’s uniquely large disparity between high- and low-tier properties is completely glossed over by the reductionist median figure. It would be more prudent to study trends in local neighborhoods, compare different price tiers and evaluate similar homes over the past couple years to discover whether or not data reports are useful. [For more information regarding median price figures, see the May 2010 first tuesday article, Looking through the window towards recover: a real estate paradigm shift — Part II.]

Agents and brokers should know that a myriad of underwater homeowners still remain in their homes and continue fecklessly paying down their mortgages. There is still a great need for real estate professionals to share their expertise with those who are unfamiliar with their options in this situation. [For more information on the strategic default options available to a negative equity homeowner, see the March 2010 first tuesday article,The underwater homeowner, his future and his agent: a balance sheet reality check Part I and Part II.]

Re: “Fewer U.S. homeowners underwater as Calif. home prices rise” from Bloomberg

Copyright © 2010 by first tuesday Realty Publications, Inc.

Reprinted from first tuesday Journal Online — P.O. Box 20069, Riverside, CA 92516

For the original article, please click here.

After reporting a net loss of $4.7 billion in the second quarter of 2010, Freddie Mac asked the U.S. Treasury to pitch in another $1.8 billion, bringing the total bill for Freddie Mac’s government relief to $63.1 billion since September 2008. Fannie Mae also asked for a recent addition of $1.5 billion, bringing the combined total tab for both entities to $148 billion since they were socialized two years ago.

Along with the request for additional government aid, Fannie Mae vows to continually toughen its underwriting standards in order to maintain its focus on encouraging sustainable homeownership over the long term (and its own existence for its stockholders and stakeholder executives).

Freddie Mac’s credit losses are at $5 billion, slightly lower than past quarters due to improved home prices and a slower increase in loan defaults. However, low interest rates caused a $3.8 billion loss on derivatives and the company experienced an error in backlog accounting for delinquent loans that cost it another $900 million.

Recent national statistics show continued stabilization of home prices and lower delinquency rates, which are encouraging, but are irrelevant to California. Bad loans (read: rollover/option adjustable rate mortgages (ARMs)) made during the Millennium Boom continue to eat at the prospect of any viability for the mortgage giants.

Fannie Mae reports the volume of nonperforming loans is still 22% greater than last year. The company has reserved 27 cents for every dollar in nonperforming assets. Likewise, Freddie Mac has seen a36% increase in nonperforming loans since 2009 and has reserved 32 cents for every dollar in nonperforming loans. In the event that foreseeable price declines occur, the companies will run into a serious roadblock due to non-existent cash reserves.

Both government-sponsored enterprises (GSEs) have doubled their inventory of real estate owned (REO) homes to a combined 191,000 properties – up from 97,000 last year.

With their fate no longer open to reasonable debate, the administration will tackle the future of Fannie and Freddie in the early months of 2011.

first tuesday take: The continual monthly bailout of Freddie Mac and Fannie Mae with unimaginable sums of money from the government is disturbing to taxpayers, but encouraged by Russia and China, the holders of huge portions of their bonds, since those countries do not want to suffer losses on their mortgage-related holdings. If they did, they would consider those losses financial warfare and retaliate.

For the homebuyer and the multiple listing service (MLS) market, support of the government as the lender of last resort must continue until the home prices in California stabilize for at least a two-year period and insolvent homeownership due to negative equities no longer exists. This means loan balance cramdowns or massive strategical defaults, and the sooner the medicine is taken by the lenders, the more quickly the MLS market place will recover for agents and homeowners.

Until then, the mortgage-backed bond market will not be attractive for anyone other than the Federal Reserve investment and treasury guarantees, implicit or actual.  [For more information on the future of Fannie Mae, see the February 2010 first tuesday article, The fate of our Fannie and Freddie]

These GSEs will eventually be dismantled and the government guarantees will be differently directed to keep the mortgage market viable until Wall Street gets its collective act together and fully returns to the mortgage-backed bond market. Wall Street was most adept at floating these bonds in the past, and they went way beyond the limits of government guarantees in the risky mortgages they were able to fund, package and resell to bond investors around the world.

This Wall Street Bankers are destined to do again — they only need some time to find their comfort zone. They figured out how to sell government-guaranteed mortgage-backed bonds without a hitch in early 2010 after the Feds quit purchasing all of the mortgage-backed bonds for over a year at the height of the financial liquidity crisis.

Thus both Freddie and Fannie will eventually be unnecessary since the private sector has demonstrated they can supply all the mortgage money homebuyers and apartment buyers need to do deals. Watch for a quiet fade into the past as their disappearance is exploited only by pundits and political types.

Re: “Freddie Mac seeks more aid amid loss” from the Wall Street Journal

Re: “Fannie Mae narrows loss, but asks for more aid” from CNNMoney.com

Copyright © 2010 by first tuesday Realty Publications, Inc.

Reprinted from first tuesday Journal Online — P.O. Box 20069, Riverside, CA 92516

For the original article. please click here.

Lenders are targeting underwater homeowners in a campaign to attract those interested in bypassing foreclosures and short sales and simply deeding over the title of their property to the lender. Bank of America is offering cash incentives that range from $3,000 to $15,000, as well as a promise to not pursue the homeowner for any deficiency for what is owed on the mortgage and what the lender obtains from the property sale.

Called a deed-in-lieu-of-foreclosure (deed-in-lieu), lenders are interested in these transactions primarily because they are cheaper and less time consuming than other foreclosure options. In contrast, the foreclosure process can take over a year, allowing the homeowner to stay in the property for free during that time. A deed-in-lieu is designed to allow the lender to sell the property much faster than any other foreclosure option. With 30-year fixed rate home mortgage rates below 5%, the lender will most likely be able to sell the property this summer or fall.  Lenders find the deed-in-lieu appealing since most already have a huge backlog of underwater homes, called theshadow inventory, that still have not been put through the foreclosure process. With the deed-in-lieu, the whole process could take as little as 30 to 45 days.

Homeowners find this option attractive since it takes all the work out of their hands. They will not have to deal with real estate agents or haggle with buyers, nor will they have the enormous financial responsibility of an underwater property literally looming over their heads. The cash incentives do not hurt either.

Since Bank of America sent out over 10,000 deed-in-lieu solicitations to underwater homeowners, the lender’s volume of completed transactions is breaking company records.

first tuesday take: Bank of America is holding seminars state wide (it is believed) on their short sale and deed-in-lieu programs.  We have no idea what they are presenting at this point since Bank of America will not release this information to the public. Only a select few agents and brokers were given special invitations to the seminars.  Anyone attending who believes transparency is better than a blackout, please let us know what you learned about their program so we can pass it on – as we are not invited, nor able to get the information from Bank of America itself.  We never use the names of our sources.

However, the lender is advertising that a deed-in-lieu does not hit a homeowner’s credit score as hard as a bankruptcy or foreclosure, which is true. However, it does leave quite a mark. FICO treats both deeds-in-lieu and short sales as “not paid as agreed” accounts, which causes the same hit to the homeowner’s credit score under the FICO scoring model [For more information on FICO fallacy, see the June 2010 first tuesday article: The FICO score delusion].           .

While it may seem the deed-in-lieu option are finally giving homeowners an escape from their underwater homes, lenders are essentially offering homeowners 1%-10% of their property’s value (the $3,000-$15,000 cash incentives), a huge hit to their credit score and homelessness. While a strategic default may hurt the homeowner’s credit more so than a deed-in-lieu, a strategic default allows for the homeowner to continue residing rent-free in their property for a year or more during the foreclosure process. If the homeowner only saves the money he would be spending on rent or mortgage, then he can save far more money than the $3,000-$15,000 Bank of America is offering.

After spending a year or more living rent-free, one can use those savings to put a 20% downpayment on a replacement home. If the home is purchased two years after the foreclosure, Fannie Mae or the Federal Housing Administration (FHA) will insure a mortgage without concern for the nature of the prior default. It is our nation’s housing policy to keep homeowners as homeowners.  [For more information regarding homeowner’s rights with their underwater homes, see the November 2009 first tuesday article California Homeowners: Exercising your right to default].

Re: Deeds-in-lieu gain favor with lenders as alternative to foreclosure in the Los Angeles Times

Copyright © 2010 by first tuesday Realty Publications, Inc.

Reprinted from First Tuesday, P.O. Box 20069, Riverside, CA. 92516

For the original article, click here.

The administration implemented the $75 billion Home Affordable Modification Program (HAMP) to lower a homeowner’s monthly mortgage payment by reducing their interest rates to as low as 2% for five years and extending the loan terms for up to 40 years. To sweeten the deal, the participating mortgage companies receive tax incentives.

For lenders, participation is voluntary; however it may be in the lender’s best interest to adjust the loan if it will keep the homeowner from defaulting. Approximately 340,000 (of 1.24 million) homeowners have received permanent loan modifications nationally and are making their mortgage payments on time. It is estimated that homeowners who were enrolled in the program save about $514 a month. Since HAMP began in March 2009, 1.24 million homeowners have enrolled to receive a part of the $75 billion. However, almost a third have dropped out — 155,000 of those left the program in the last month alone. A major reason for these drop outs was the initial pressure from the administration for the banks to sign up homeowners without requiring proof of income.

When the banks later requested verification, many of the troubled homeowners dropped out or were disqualified. The U.S. Treasury now requires banks to collect two recent pay stubs at the start of the process. Also, the homeowner must hand over their most recent tax returns to lenders. This does not change the number of homeowners disqualified, but only disqualifies them much earlier in the process.

The HAMP qualifications require:

• the homeowner to spend more than 31% of his income on monthly housing costs;
• the post-modification loan-to-value (LTV) ratio to be equal to or greater than 80% or less than 80% with a monthly housing expense-to-income ratio that is not less than 20%, based on verified income;
• the homeowner to already be delinquent or in imminent danger of becoming delinquent due to:
  • a major reduction in household income;
  • a significant increase in household expenses; or
  • another type of hardship that makes the payments unaffordable;
• the homeowner to document income and expenses and provide evidence of
  • hardship; or
  • a major adverse change in financial situation;
• the homeowner to sign:
  • a loan modification agreement;
  • hardship letter; and
  • other documents.

A homeowner is still eligible for HAMP if he:

• is in bankruptcy; or
• has his mortgage in foreclosure. The foreclosure will be stayed during the loan modification process.

HAMP requires the property securing the loan being modified to be:

• one of the following:
  • a detached home;
  • a duplex;
  • a triplex;
  • a four-unit residential property;
  • a condominium;
  • a cooperative; or
  • a manufactured housing unit.
• occupied by the owner (documentation may be required); and
• subjected to a value test to determine if the loan modification makes sense.

In order to qualify for HAMP modifications, an existing mortgage must have:

• been originated before January 1, 2009; and
• an unpaid balance of equal to or less than $729,720 if the property is detached or a condominium.
  • Freddie Mac requires higher limits for multiple-unit properties, which are:
    • $934,200 for two units;
    • $1,129,259 for three units; and
    • 1,403,400 for four units.

If the homeowner qualifies, the mortgage modification will include a(n):

• reduction of the borrower’s housing costs to 31% of his income;
• interest rate cut to as low as 2% and the loan term could be extended to 40 years;
• deferment of the loan balance:
  • If a portion of the loan is deferred, no interest will be charged on the deferred amount. However, a balloon payment will be due when the borrower pays off or refinances the loan or sells the home;
• reduction of the loan balance, unless the loan is owned or secured by Fannie Mae or Freddie Mac;
• unpaid interest, property taxes, insurance premiums, and other costs paid by the lender on the borrower’s behalf added to the balance of the loan (subject to state law);
• a new loan with a five-year fixed interest rate, and the rate could increase up to 1% annually (subject to a cap of the market interest rate on the day the loan was modified).

Even if a homeowner qualifies for the program and his mortgage is modified, he may still find it difficult to pay his modified mortgage while trying to cover his other debts. Two-thirds of the homeowners with permanent modifications under HAMP will most likely default again within the next year, according to studies on default rates for modifications during 2009.

However, the administration claims that approximately half of those disqualified homeowners are still getting help, many in the form of other loan modifications from the lender.

first tuesday take: HAMP will help very few people by lowering their mortgage payments, but it does not help negative-equity homeowners with a reduction in their principal balance — the real problem weighing families down and making them insolvent.

Most Californians who purchased or refinanced their homes during the housing market boom are now negative equity owners — they owe far more on their mortgages than their properties’ fair market values (FMV). These homeowners have little ability to dig themselves out of the financial black hole in which the Great Recession has put them.

HAMP does not help homeowners become solvent, but as desired by the lenders it merely extends the loan with no change in the loan balance or the negative equity condition of the home. Disregard for the need to cramdown the loan balance to the property’s value will not ease the long term burden of the homeowner.

Thus, we face the rational alternative of more strategic defaults in California. [For more information regarding negative equity owners, please see the April 2010 first tuesday article, The underwater homeowner, his future and his agent: a balance sheet reality check – Part II.]

Re: “Borrowers exit troubled Obama mortgage program” from Associated Press

Re: “Can you get an Obama loan modification” from Fox Business

Copyright © 2010 by first tuesday Realty Publications, Inc.

Reprinted from First Tuesday, P.O. Box 20069, Riverside, CA. 92516

For the original article, click here.

Lenders are making it more difficult for veterans to obtain Department of Veterans Affairs (VA) loans. Previously, veterans with no downpayment or low credit scores were typically able to get VA loans – in a large part because the Department of Veterans Affairs insures a quarter of the loan amount.

However, while all the major lenders are still willing to offer VA loans without a downpayment, Bank of America, Citigroup and JPMorgan Chase will now only offer VA loans to veterans with credit scores above 610. The cutoff for Wells Fargo is 600.

Veterans are also being turned away from the VA Streamline Refinance program as those policies have also become stricter. The refinance program allowed veterans to rollover VA loans with little paperwork and no appraisal – until recently.

VA lenders now require an appraisal of the property when refinancing. If the home’s new appraised value is less than the loan amount, it is highly unlikely that the application will be approved.

As long as a veteran has completed 24 months of continuous active military duty (and is not dishonorably discharged), he may apply for a VA loan. Once the veteran qualifies, he can presently borrow at rates of 4.75% on a 30-year fixed rate mortgage (FRM). The nationwide average for all FRMs is around 4.70%.

first tuesday take: VA loans are designed to reward the men and women who served our country in the military. These new regulations might be logical if veterans were notorious for defaulting on loans or typically had much lower credit scores than the average borrower. However, that is not true.

VA loans generally have a lower default rate than regular mortgage loans, 2.6% versus 3.4% respectively. VA borrowers have an average credit score of 700, while all borrowers have an average credit score of 750.

The 50-point credit score difference is probably not the reason lenders are cracking down on VA loans. VA lenders have little risk of financial loss, as our government guarantees 25% of these loans. It is more likely the lenders do not want to service these loans, since the lender’s failure to properly manage these loans will adversely affects the lender servicing them, as well it should.

This is an example of government regulators allowing lenders (whom they now feed and always will) to tighten their belts at exactly the wrong time, which is going to keep this recovery flat, jobless and deflationary – all unacceptable results.

A veteran with a high enough credit score need to be advised by his agent negotiating the purchase of a home to simply get pre-approved and apply for a conventional loan. VA loans, once originated, place more restrictions on veterans than conventional loans, but then chaotic CalVet loans are far worse for vets as they are high-cost ARMs with patently unacceptable restrictions on ownership. [For more information on why the CalVet loan program should be abolished, see the first tuesday Recommended Legislation.]

Re: VA Loans Get Harder from the New York Times

Copyright © 2010 by first tuesday Realty Publications, Inc.

Reprinted from First Tuesday, P.O. Box 20069, Riverside, CA 92516

For the original article, please click here.