Nearly everyday someone calls me or emails me for mortgage advice on their current loan. They are either upside down in value or late on their payments and they want to know their options.
I am sure many of you get these same calls. I want to be as helpful as possible so I listen to their challenges and offer them the best advice I can.
There has been a tremendous amount of news lately about more Government-led proposals to try and stop some of the 2.25 million foreclosures that are estimated to happen in 2009.
Some of these proposals call for interest rates in the 3-4% range. Some call for loan modifications to make it so your payment is no more than 31-38% of your gross income. And there are more. However, none of these have been approved yet.
Here are examples of some questions I get asked and the answers I give based on what is available today.
Q: MY HOME IS $70,000 UPSIDE DOWN IN VALUE. I HAVE A FIXED RATE MORTGAGE AT 6.500%. I AM CURRENT ON THE PAYMENTS. CAN I REFINANCE IT?
A: No. Currently there are no realistic programs that allow borrowers who are upside down, and have never been late, and are in fixed rate mortgages, to refinance their home. (I will discuss Hope for Homeownership shortly)
Q: MY HOME IS $120,000 UPSIDE DOWN IN VALUE. I HAVE AN ADJUSTABLE RATE MORTGAGE AT 5.500%. I AM CURRENT ON THE PAYMENTS. IT'S GOING TO ADJUST NEXT MONTH TO 6.500%. I CANT AFFORD THIS NEW PAYMENT. CAN I REFINANCE MY HOME?
A: Maybe. Call your lender directly. Many banks today will modify your current mortgage into a fixed rate mortgage if you have an ARM that is going to adjust, raise your payment, and create financial hardship.
You want to take a close look at your loan however. Rates have come way down of late. In many cases today, your adjustable rate mortgage may actually be adjusting downward, making your payment less today. Call your lender and ask how the pending adjustment will affect you.
Q: MY HOME IS $60,000 UPSIDE DOWN IN VALUE. I HAVE AN ADJUSTABLE RATE MORTGAGE THAT RESETS IN EIGHT MONTHS. I AM CURRENT ON MY PAYMENTS. EVEN THOUGH ITS EIGHT MONTHS AWAY, I AM AFRAID OF MY ADJUSTABLE RATE MORTGAGE AND WANT A FIXED RATE. CAN I CHANGE IT?
A: Maybe. Call your lender directly. Some banks today will modify your loan into a fixed rate mortgage, at current rates, from an ARM. However, if you are current and are not in any risk today, the chance of this happening is not very good.
Q: I HAVE AN OPTION ARM. I WANT OUT OF IT ASAP. CAN I CHANGE IT?
A: Probably. Most of the large lenders who specialized in this product realize it wasnt the smartest loan in the world. Even if you are upside down in value, many will work with you to get out of it.
Call your lender to see what fixed rate options are available to you. Keep in mind, when you are paying 1%-2% interest for your loan today, and you ask them for a fixed rate, based on today's rates 5%-6%, this will likely result in your monthly payment going up substantially.
Q: MY HOME IS $90,000 UPSIDE DOWN IN VALUE. I OWE $300,000. IT'S WORTH $210,000. I AM CURRENT ON MY PAYMENTS OR A FEW PAYMENTS LATE. I WANT A PROGRAM THAT LETS ME REFINANCE THE HOME FOR ITS CURRENT VALUE OF $210,000 AND FORGIVES THE OTHER $90,000 THAT I OWE. WHAT CAN I DO?
A: There are currently more than 12 million homes in the U.S. that are upside down in value or very close to being upside down. You are not alone. There is an FHA program called Hope for Homeownership that does allow for this. However, there are very few cases of anyone being able to successfully negotiate this. The lender has to agree to forgive the $90,000. The response to this program has been weak. Not many are willing to do this. You can call your lender and try. I wouldn't plan on it happening however. You will want to ask them about any other options they are offering.
Q: I BOUGHT FOUR INVESTMENT PROPERTIES IN THE LAST FEW YEARS. THEY ARE ALL UPSIDE DOWN. I NEED HELP. I CANT AFFORD THE PAYMENTS ANYMORE. WHAT CAN I DO?
A: Call your lender ASAP. Ask for the "loss mitigation" department. Although many banks won't negotiation with investors, some will. If you can prove financial hardship, you may be eligible for some form of note modification. Be honest with them about your financial situation. You may be surprised by their willingness to help.
Q: MY HOME IS UPSIDE DOWN IN VALUE OR I HAVE A LITTLE EQUITY. I AM LATE ON MY PAYMENTS. I DON'T WANT TO LOSE MY HOME. WHAT SHOULD I DO?
A: Call your lender ASAP. Ask for the "loss mitigation" department. Communication is the key. As soon as you are late, call them and begin discussing what options they offer. Be honest about your current financial situation.
There are many note modification programs that are available if you can prove hardship.
Some of these programs include:
a repayment plan of your late payments at a later date
a promissory note for the late payments at the end of your Note
an interest rate adjustment that allows for a more affordable payment
a longer loan term
in very rare cases, possibly some forgiveness of principal
Q: WHAT ABOUT THE $700 BILLION BAILOUT PLAN AND THE GOVERNMENT? HOW DOES THAT HELP ME?
A: Someday it may. Right now it doesn't. The Government wants to stop foreclosures. So far, the $700 billion has been used to help the banks get more money to loan, not to save your home.
In order to help you in your troubled mortgage, the Government needs to get control of individual mortgages, like yours, so they can then reduce your principal and refinance you into a program like Hope for Homeownership.
The challenge is that nearly 75% of all mortgage debt is securitized in Bonds. The Government is looking into ways to buy these loans from Bond holders. However, these Bond holders are not going to give them away. They will want to be paid at a price they can live with. Until this is resolved, and the Government actually has individual loans, your options are limited to those offered by your lender.
SOME OTHER NOTES...
Many homeowners make the mistake of waiting until it is too late to ask for help.
If you have any questions about your mortgage and options, don't call your mortgage broker or real estate agent. Call your lender.
The Government and the Banks want to curb foreclosures. It's of dire importance to our economy. Programs and your options are changing rapidly. Even if you called a few months ago and they had nothing for you, if your situation has deteriorated, call again.
Although banks don't want to take your home in foreclosure, they will. It's important that you remain in communication with them regularly if your mortgage is troubled and your goal is to save your home.
My team recently developed this Guide for our buyer's who are buying bank-owned properties for the first-time. I thought I would share with you as well. I hope it helps.
THE BUYER'S GUIDE TO BUYING A BANK OWNED OR FORECLOSURE PROPERTY
In today's Real Estate market, in my city, nearly 80% of the home sales are bank-owned foreclosure properties commonly referred to as Real Estate Owned (REO) properties.
Buying an REO property is very different from closing on a traditional buyer/seller transaction. The process is much more cumbersome and several entities are involved in the REO transaction.
This can create more time and challenges for each of these entities to perform their function.
REO homebuyers can get frustrated during the process. Since the REO phenomenon started, customer service scores in title, escrow, banking and real estate have plummeted.
Together with my team, we have developed this short, simplified guide to help you better understand the REO transaction process. While this guide will not change the way the transaction occurs, it may help avoid surprises.
Buying an REO is a great way to save money and get a fantastic deal. Just be prepared.
What is an REO or bank-owned property?
A property acquired in foreclosure and now owned by the bank that foreclosed on the property.
How did this property become an REO?
The last owner of this home was not able the mortgage payments. The mortgage note holder seized the property and evicted the owner. In some cases, the bank attempted to auction the property and pay off the existing liens and mortgages. If that was not successful, the bank was then deeded the property by the Trustee. It is now an REO property.
How do banks sell REO properties?
The banks are not in the real estate holding business so they must sell these homes. Because most foreclosed properties are not successful at auction, REO properties have flooded the market.
In any market, if there is an OVERSUPPLY the market will depreciate. Because of the depreciated market, the banks are going to take a substantial loss on the property. They have independent, professional real estate agents that assist them is marketing and selling their REO inventory. The banks also assign asset managers who work closely with these agents.
How do banks price their REO properties?
When a bank takes over a property, they conduct their own due diligence to get an accurate depiction of the homes worth. They put forth a team of people to assess the current market value of the property through Real Estate Broker Price Opinions (BPO) and in some cases full property appraisals.
Based on these findings, they typically price the home within 10% of the current market value. Of course, there are always rare exceptions. Banks are in business to make money. If they cannot make money, they need to minimize their losses. Banks are looking for a certain "net amount" on each particular property. This "net amount" is based on their research of the current market value minus costs associated with the property. They have priced the home sell quickly but as close to market price as possible.
Many buyers make the mistake of thinking the bank is desperate to get rid of the property. They believe they can submit a low-ball offer and expect to get an acceptance or at least a counter-offer. Think again! Low-ball offers (below 10% of list price) are not typically taken seriously. They may be a waste of your time. Worse yet, you may be perceived as an illegitimate buyer. Banks own many homes in the same area, so this could adversely affect future offers you make on other properties owned by the same bank or listed with the same agents.
Be reasonable. Do your research with your agent and determine what the home is really worth. Make your offer according to value, not to list price.
How do I find an REO property?
There are thousands of REO properties in our market. There is only one way to effectively research them all in a timely manner...hire a professional real estate agent. The seller, upon the successful completion of the transaction, typically pays for the buyer's agent commission. This will cost you nothing, but may save you thousands.
Are REO properties damaged?
Some are. Many are not. It is important to inspect the home yourself before making an offer. Once you have viewed the property, consult with your lender about the damage the home has, if any.
It is equally important to have a professional home inspector inspect the property before you commit to purchasing it. Your real estate professional will refer you to a top quality home inspector. When the inspection is completed, your lender will likely need to review a copy of it.
Many loan programs will require repairs to be completed before you close escrow. If you do not have the money to do this and the selling bank is not willing to make these repairs, you may need to find another home.
What does "As-Is" mean?
Nearly every bank-owned property today is sold "as is." You will have to sign a waiver that states you are willing to accept the home like this.
If a bank is marketing their home "as is", there is a possibility that the home needs repair and they are not willing to make them. Have your Real Estate Professional give you a thorough run down on what "as is" means to you during a transaction and once you have closed on the property. In addition, consult with your lender before making an offer on an "as is" home. Not all loan programs will allow you to buy a home that needs substantial repairs.
I am ready to buy an REO property, what do I need to do to get pre-qualified?
If you make an offer on a bank-owned property, they may require you to be pre-qualified with a home loan consultant from their own bank. They do this for two reasons; assurances and opportunities.
They want assurances that you are truly qualified to make an offer. While you may be pre-qualified by another lender, they will want to review your credit, income and asset scenario in their own systems. It is not negotiable in most cases and the banks will not consider your offer without a pre-qualification letter from their own institution. You are not required to use this bank for your new mortgage loan; you just need to be pre-qualified through them. If this is unacceptable to you, you may want to reconsider making offers on bank-owned properties.
Second, they want to create a business relationship opportunity with you. Banks are in the business of making money. Do not let this discourage you. This is truly in your best interest. Many times, the Home Loan Consultants from these banks have been authorized to offer discounts and other incentives if you proceed with a loan from their bank.
In many cases, the bank is taking heavy losses on the property. If they can recapture the mortgage loan, at least it is not a complete loss. This creates an opportunity to parlay the great deal you got on the home with a great deal on your mortgage as well.
I am pre-qualified and ready to make an offer. What is next?
Your offer is submitted to the listing agent. The listing agent may have to submit to the Asset Manager, who works for the bank, and this is where the negotiation happens. It may take a few days for a response. Be patient. Do not bother writing in a short deadline for the seller to respond. They may not pay attention to it.
The bank will likely respond in the first 48 hours. Some banks take 3 - 5 business days. Once again, be patient. This is not your regular seller.
You will not get a response over the weekend or holidays. All offers submitted over the weekend will be presented the following business day.
As a rule of thumb, REO listing agents will tell you if you make an offer and do not hear back within five business days, the offer has been rejected. Do not wait around for the rejection or the counter. It may never come. Come back with a better offer or find another property.
What does "bring my highest and best offer" mean?
If the bank gets multiple offers, they may go back to all of the potential buyers and ask for each buyer's highest and best offer. This means come back with your best offer, as the bank will choose one at this point. In many cases, the bank will not return counter-offers after they have requested this.
If you are presented with this opportunity, it means you are in the running. You now have one more opportunity to increase the price or better the terms of your offer. You can choose to do nothing at this point but it may not get you anywhere.
I made a list price offer but they didn't respond, what gives?
Many REO properties, especially those listed below market value receive multiple offers. Some houses sell far above list price. The bank is like any other seller in the market. They can choose not to accept your offer if one comes in they think is better than yours is. If you offer list price and ask for your closing costs to be paid and another buyer offers list price and doesn't seek closing costs, the other buyer's offer is stronger.
How long will it take to complete my transaction and move into my property?
Traditionally, buyer and seller contracts are 30 days. However, this is not a traditional buyer/seller transaction. In today's REO property market, many buyers feel more comfortable with 45-day closings. Many banks have late fees of $100 or more per day past the contracted close of escrow date. These fees add up quickly so it is important to understand what problems can arise that may make you late.
What can make me late?
Aside from the regular loan process, which definitely takes longer in today's stricter lending environment, there are many challenges unique to REO properties.
When the previous owner of your new home was foreclosed on and the bank took possession, a "Trustee's Deed" was issued in the bank's name. If this process is not executed properly, it may cause delays when the county is trying to record the deed into your name. There is little that you can do about this except wait until it is corrected.
If a Home Owner's Association (HOA) manages the community, your title company will request an HOA demand on the property. This demand will ensure that the bank pays any association fees and fines at close of escrow. If they are not paid at closing, they will transfer with the property into your name and will then be your responsibility. This can take a lot of time and be complicated but is necessary that it is done and done correctly. For more details, ask your escrow officer.
For the most part, if the close of escrow is delayed by problems that are out of your control, the bank should not penalize you. Just be sure to do your part in a timely manner, and you should be ok.
I am in escrow and we discovered a bunch of repairs that need to be made to the home...what do I do now?
Many people that have lost their homes to foreclosure have been struggling financially. This usually means the home has not been kept properly and is in need of repairs and general maintenance. Other homeowners, once they know they are losing their home, damage the property on purpose.
When buying an REO property, you must be prepared to do some repairs. Banks may not agree to make these repairs. They may not pay for these repairs. This may require out-of-pocket expense for you.
They may be willing to help with some, but do not plan on it. Know what you are buying before you make your offer and be prepared to spend some money for repairs before you move in.
In most contracts, you can back out of the purchase if you find problems with the property or in loan qualifying in a certain time period. This is called the due diligence period. Make sure you know how long this due diligence period is when entering into a contract. Complete all inspections within that period so you can make an informed decision on whether or not to proceed with the purchase. It is important to respect these deadlines because they are strictly enforced.
Some repairs will be obvious when you visit the property. Others may be identified during the property inspection and the appraisal process. The inspector will identify repairs issues and may be able to give you a written estimate of the cost to repair the property. In some cases, an appraiser may also call for repairs to the property to bring it up to livable or safe condition.
Identify these issues quickly so you know what you are facing and have the opportunity to cancel if necessary. Again, this will help protect your deposit money.
Reconsider buying a bank-owned property if you barely have enough money for the down payment and closing costs unless you have arranged for repairs with the seller.
I have signed my loan docs and I am still waiting for my keys. What is taking so long?
Just like you executed many documents at your loan signing, the seller has a stack of closing documents to sign as well. Remember, the seller of your home is a bank or some other financial institution. It may take the representative who is authorized to sign off on these documents days or even weeks to get around to it. Your trusted and skilled escrow officer will make sure to stay on this for you.
So, there you have it. Complicated? Yes. Frustrating? Sometimes. Time-consuming? Quite often.
At the end of the day, hopefully, you are getting a new home for you and/or your family at a much-discounted deal so it will all be worth it.
The best tip we can give you is to remain positive and be patient. Expect the challenges. There will very likely be some. Together with your professional real estate agent and experienced escrow officer, we will all do our very best to get you through it successfully.
This week the Congress passed the controversial $700 billion Bailout Bill. This Bill comes with blame and finger-pointing.
Democrats blaming Republicans for deregulation. Republicans blaming Democrats for failing to reel in Fannie Mae and Freddie Mac. Our nation blaming Wall Street.
So who is really to blame?
Mortgage Lenders. Lenders who made exotic loans to people who shouldn't have gotten them.
Real estate agents. Agents who sold houses to people who should have been looking at cheaper homes where they didn't need an interest only loan, adjustable rate mortgage, or to "state" their income to qualify.
Congress. Democrats and Republicans. Aside from a few warnings from select members on each side of the aisle that fell on deaf ears, neither side saw this coming.
Wall Street. Based on historical data that told them that real estate never depreciates nationally, they created some of the most exotic loan products we have ever seen. Remember 100% stated-income option ARM's with 1.00% start rates?
Fannie Mae and Freddie Mac. For buying these exotic products in the name of shareholder profit.
Credit rating agencies. They gave investment-grade ratings to subprime loans. These high ratings encouraged the flow of investor funds into these securities, helping finance the housing boom.
The Government of the 1990's. The government pressured Fannie and Freddie to lower credit restrictions to create homeownership opportunity for lower income families and minorities, who were getting bilked by subprime lenders. The shareholders loved it as they sought more profit.
Is there any need to go on?? I am sure you can add a few more.
There will be a post-disaster Congressional Committee that will hold weeks of hearings someday. This will culminate in a nice, glossy, table-top, "What Went Wrong?" 800-page report that you can buy on Amazon for $29.95. Pre-order now for $24.95.
Today, we are being asked to pay a very big price for these mistakes. A $700 billion bailout bill that has been promised to save the economy....for now. There is anger. Many people don't understand how we got here. Many more don't understand why we need to do this.
Let me try and explain. These toxic mortgages, in combination with foreclosure losses, have driven many lenders and financial institutions out of business. For most that remain, their capital has been dramatically reduced.
Investors who provide capital have had their confidence shattered by these events and this has limited capital further.
This has created a situation where it is very difficult to get credit. There is a decrease in money to lend. This means credit is limited. Most Americans, rightfully or wrong, run their lives, their businesses, and their households on credit.
We could have done nothing. No bailout. We could have let the market sort itself and let all of the broke banks and institutions collapse.
What would have happened then?
People with debt would have had most of it forgiven. Those with savings would lose a big portion of it.
You would get title to your home for almost nothing and your debts would probably be written off. You would probably only lose your home if you didn't stay up on your property taxes.
The banks and financial institutions would drop dead. Currently there are over 100 banks on the FDIC watch list of institutions that could fail soon.
Small businesses that run on credit, which is most, would fail. Millions would go unemployed with nowhere to go and the economy would fail with the promise of returning someday.
The U.S. Government, with 11 trillion in debt, would likely collapse. We could start over.
One of my closest friends owns an air conditioning company with a staff of about 40. Some of whom have been with him since day one. 15 years.
They do large jobs for big companies. The average cost of a job is about $25,000 and they bill out $35,000 for this work. A profit of $10,000 per job. Nice little business.
However, these clients take, on average, 60 - 120 days to pay. Sometimes he is owed $500,000 or more at any one time. He has a credit line that allows him to make his payroll, pay his employees health care, his rent, utilities, etc. while he waits for his money.
Last week, he was told by his bank of 15 years that his credit line would be frozen at the end of October. He didn't do anything wrong. His business still thrives and is successful. He has never missed a single payment with the bank and is one of their very best customers.
The bank just couldn't keep offering it. He now has 30 days to find a new credit line, which is next to impossible today, or he will be out of business and his 40 loyal staffers out of work.
This is not an isolated tale. This is the norm. His is one business and there are 100,000's, if not millions, just like it. This is what Congress was faced with.
So, the bill passed. The "Emergency Economic Stabilization Act of 2008."
BOTTOM LINE: If you are late on your mortgage, in arrears, or struggling to make your mortgage payment on time each month, your loan is likely considered "toxic."
If your bank thinks your loan is toxic, they can now sell this loan to the Government, get it off their books, and turn it into cash for their other lending trade like credit lines for business.
This will free up capital that they can now lend to borrowers and businesses that need it, can pay it back, and get the economy flowing again.
The Government can then allow for you to refinance into the Hope for Homeowners program that started on October 1, 2008, they can work out your loan, or they can foreclosure on you and sell your home to the highest bidder to pay back taxpayers.
The lender can also have your loan insured by the Government to protect it from further deterioration. In that case, you will have to continue to workout your toxic mortgage with the bank you have now.
Let's break it down. Say you bought your home for $300,000 and you borrowed $300,000. Today, the home is worth $250,000.
You are behind on your mortgage, or you have missed a few payments in the past year. Maybe you have a few recent late payments or you pay late fees each and every month.
If any of these apply to you, your bank probably considers your loan "toxic."
Based on the Bailout Plan, your bank can now sell this toxic loan to the Government or get it insured. The bank will likely get somewhere between 20 - 70 cents on the dollar for it, depending on how bad your situation.
Let's say the bank get 50 cents on the dollar for your home. They sell your loan to the Government for $150,000. This gets the bank the cash they need for survival and to make good loans.
It's now easier for the Government to work with you to stay in the home. If they have to foreclose on it, they actually have a chance at profitability for taxpayers when they sell it to the next guy.
Some argue that the Bill makes it better for the Government not to work with you to stay in your home. It's much more profitable for them to kick you out, sell the asset as soon as possible, and limit taxpayer losses. In addition, the Note they are buying may not allow for any changes. This will be interesting to watch.
This Bill is certainly not guaranteed to work. Most experts agree this will not change the economy overnight.
However, many believe it's the first step in a very long road for recovery.
Here are some of the Bill's highlights:
Section 101. Purchases of Troubled Assets.
Establishes a Troubled Asset Relief Program ("TARP") to purchase troubled assets from financial institutions.
Section 102. Insurance of Troubled Assets.
Establishes a program to guarantee troubled assets of financial institutions.
Section 104. Financial Stability Oversight Board.
Establishes the Financial Stability Oversight Board to review and make recommendations regarding the exercise of authority under this Act and to protect taxpayers.
Section 105. Reports.
Tranche Reports: For every $50 billion in assets purchased, a detailed description of all transactions, a description of the pricing mechanisms used, and justifications for the financial terms of such transactions is required.
Section 106. Rights; Management; Sale of Troubled Assets; Revenues and Sale Proceeds.
Requires profits from the sale of troubled assets to be used to pay down the national debt.
Section 107. Contracting Procedures.
Allows the FDIC to be selected as an asset manager for residential mortgage loans and mortgage-backed securities.
Section 109. Foreclosure Mitigation Efforts.
For mortgages and mortgage-backed securities acquired, there must be a plan to mitigate foreclosures and to encourage servicers of mortgages to modify loans through Hope for Homeowners and other programs.
Allows use of loan guarantees and credit enhancement to avoid foreclosures.
Requires coordination with other federal entities that hold troubled assets in order to identify opportunities to modify loans, considering net present value to the taxpayer.
Section 110. Assistance to Homeowners.
Requires federal entities that hold mortgages and mortgage-backed securities, including the Federal Housing Finance Agency, the FDIC, and the Federal Reserve to develop plans to minimize foreclosures.
Requires federal entities to work with servicers to encourage loan modifications, considering net present value to the taxpayer.
Section 111. Executive Compensation and Corporate Governance.
Provides that Treasury will promulgate executive compensation rules governing financial institutions that sell it troubled assets.
Section 112. Coordination With Foreign Authorities and Central Banks.
Requires the Secretary to coordinate with foreign authorities and central banks to establish programs similar to this one.
Section 113. Minimization of Long-Term Costs and Maximization of Benefits for Taxpayers.
In order to cover losses and administrative costs, as well as to allow taxpayers to share in equity appreciation, requires that the Treasury receive non-voting warrants from participating financial institutions.
Section 114. Market Transparency.
48-hour Reporting Requirement: The Secretary is required, within 2 business days of exercising authority under this Act, to publicly disclose the details of any transaction. There will likely be a website that reports all of the transactions.
Section 115. Graduated Authorization to Purchase.
Authorizes the full $700 billion.
Allows to immediately use up to $250 billion.
Upon a Presidential certification of need, may access an additional $100 billion.
The final $350 billion may be accessed if the President transmits a written report to Congress requesting such authority.
Section 116. Oversight and Audits.
Requires ongoing oversight of the activities and performance, and to report every 60 days to Congress.
Section 117. Study and Report on Margin Authority.
Directs the Comptroller General to conduct a study and report back to Congress on the role in which leverage and sudden deleveraging of financial institutions was a factor behind the current financial crisis. (this is what you will pre-order on Amazon)
Section 120. Termination of Authority.
Provides that the authorities to purchase and guarantee assets terminate on December 31, 2009. Can be extended for an additional year upon certification of need to Congress.
Section 122. Increase in the Statutory Limit on the Public Debt.
Raises the debt ceiling from $10 trillion to $11.3 trillion.
Section 124. Hope for Homeowners Amendments.
Strengthens the Hope for Homeowners program to increase eligibility and improve the tools available to prevent foreclosures.
Section 125. Congressional Oversight Panel.
Establishes a Congressional Oversight Panel to review the state of the financial markets, the regulatory system, and the use of authority under TARP. The panel is required to report to Congress every 30 days and to submit a special report on regulatory reform prior to January 20, 2009. The panel will consist of 5 outside experts appointed by the House and Senate Minority and Majority leadership.
Section 131. Exchange Stabilization Fund Reimbursement.
Protects the Exchange Stabilization Fund from incurring any losses due to the temporary money market mutual fund guarantee by requiring the program created in this Act to reimburse the Fund. Prohibits any future use of the Fund for any guarantee program for the money market mutual fund industry.
Section 134. Recoupment.
Requires that in 5 years, the President submit to the Congress a proposal that recoups from the financial industry any projected losses to the taxpayer.
Section 136. Temporary Increase in Deposit and Share Insurance Coverage.
Raises the FDIC and the National Credit Union Share Insurance Fund deposit insurance limits from $100,000 per account to $250,000 until December 31, 2009.
Section 302. Special Rules for Tax Treatment of Executive Compensation of Employers Participating in the Troubled Assets Relief Program.
Applies limits on executive compensation and golden parachutes for certain executives of employers who participate in the auction program.
Section 303. Extension of Exclusion of Income From Discharge of Qualified Principal Residence Indebtedness.
Extends current law tax forgiveness on the cancellation of mortgage debt.
Today, the Senate passed a bill many are calling the "Housing Rescue" Bill. The main purpose of this legislation is to attempt to help 400,000 homeowners avoid foreclosure while preventing the collapse of troubled mortgage companies Fannie Mae and Freddie Mac.
Within this legislation there are two components that have the potential to seriously affect your real estate business...and very soon.
The first is positive. The bill includes a tax refund for first-time home buyers worth up to 10% of a home's purchase price but no more than $7,500.
Although the refund would be reduced gradually for single filers with adjusted gross incomes above $75,000 and for joint filers with adjusted gross incomes over $150,000, this is a very nice incentive for those looking to buy a home for the very first time.
Now the bad news. This legislation bans non-profit down-payment assistance programs for FHA loans.
This means Nehemiah and AmeriDream will soon be unavailable. My understanding is this ban goes into effect on October 1, 2008.
To make matters more challenging, the minimum down payment required on an FHA loan will now increase from 3% to 3.5%.
Over 300,000 people have used Nehemiah in the last decade. Nearly one in every three FHA loans today uses some form of down payment assistance. These will soon disappear. This has the potential to dramatically affect first-time homebuyers and lower income borrowers.
Some are predicting another 10-20% decline in real estate sales and further depreciation as a result of this change.
If you have buyers who need 100% financing, and you plan on the seller gifting the 3% down payment through a down payment assistance program like Nehemiah, you will likely lose this option very soon.
There is no word yet on when the last day to apply for Nehemiah will be.
Regardless, you want to call these buyers ASAP (like tomorrow) and tell them their time is limited.
After October 1, 2008, they will be required to put 3.5% of their own money down or that from a family member, close friend or employer.
The last time FHA banned down payment assistance programs, Nehemiah and the others sued and won. There is very little optimism that will occur this time.
There will still be some limited options of going 100% like VA or the your local State Bond Program.
I am shocked at the posts today on Active Rain. A major shock wave was sent through our industry with the potential to dramatically hurt us all, yet all I see today are the "same old, same old" posts.
Buried in today's overwhelming Senate passing of the Housing Bill was language that will end private down payment assistance programs like Nehemiah and AmeriDream.
Based on the lack of anger and protest coming from here, I will have to assume that not everyone's business is so reliant on FHA today.
This year, at least 50% of my business has been FHA and at least 75% of these loans came with some portion of the down payment being gifted by the seller through a down payment assistance program.
If the House votes for this bill as well, and its certainly not guaranteed they won't, that will be THE END of 100% financing for nearly all of our clients.
"We are extremely disappointed and astonished by the full Senate's decision to ban privately-funded down payment assistance programs through the passage of its Housing Bill. This decision turns a blind eye to the overwhelming success of these programs and their role in helping hundreds of thousands of working families become homeowners," said the CEO of Nehemiah.
100,000's of families take advantage of these programs. Without the availability of this program, the opportunity for home ownership will disappear for many more families. First-time homebuyers and minorities will be most seriously affected. One-third of all FHA loans today have some form of down payment assistance.
According to HUD, borrowers who take advantage of down payment assistance programs are 3 times more likely to go into default than regular loans.
Backed by President Bush, HUD has been trying for over a year now to end these programs, and victory could be near.
A congressman from Texas was quoted last week, before today's vote, as saying, "You'll have enormous pressure from the Realtor and builder communities to not touch this thing."
If you use the silence from Active Rain as an example, apparently not.
There is a lot wrong with the Housing Bill but the worse part was this part of legislation.
If we don't speak up, as an industry, before this Bill hits the floor of the House, we will all likely see, yet another, dramatic decline in business.
UPDATE 7/23/2008: The House passed the Bill today. My understanding is the last day for down payment assistance programs will be September 30, 2008.
"$5 per gallon?? Are you freakin' kidding me, man?"
These words were uttered today by my soon-to-be 16-year-old daughter as she contemplated the price that her driver's license will cost her later this summer.
She is appalled yet she has never filled up a car in her life. She is astounded yet it won't even be her money that fills up that birthday car each week.
President Bush has called on Congress to lift a 27-year old moratorium on drilling off the U.S. coasts and Alaska to reduce dependence on foreign imports and to try and offset sky-high energy prices.
Senator McCain has joined in and is now being called a "flip-flopper" as a result.
Let's move the politics aside. Let's also move the environment aside as well.
For the moment, let's not worry about the birds, the fish and other wildlife. Let's assume, as far fetched as it is, that there will not be a single human error made during this production and not one bird, or fish, or other wildlife will be killed.
Let's also assume, only for the sake of this post, that Al Gore is a nut and that not one thing bad will happen to affect our planet as a result of this drilling.
Let's be selfish for the sake of this post. Let's only worry about ourselves. Gas prices are killing your real estate business and hurting you and me financially.
Off-shore drilling is an interesting debate that too few are paying attention to. It directly hits you where it counts most. The good old, worn-out pocket book.
Some will argue that we won't see the effects for three to five years. Let's assume they are wrong. Gas prices may drop immediately. Competition the size of the U.S. will put fear into the foreigners.
Everyone agrees we won't start seeing this oil hit the pumps for around three years but the competition will shudder the day we announce it. Prices will drop much sooner. Maybe immediately. Let's just make that assumption for this post.
Bush says the oil we will get from lifting this ban matches 10 years of U.S. consumption. If we lift the moratorium in Alaska we can get another 5 years or so. McCain is opposed to including Alaska.
So, we can get another 10-15 years if we do this. Sounds awesome, right??
At what expense? Let's say we do announce it tomorrow. We are drilling away.
Let's make the far-fetched assumption that gas prices go all the way down to $2 per gallon by next Thursday. What happens then? America starts buying SUVs again and stops worrying about consumption. Yee-haw!! We are back!
RING, RING, RING. "Cadillac Barry? You know that Escalade I cancelled last week? Get me the bigger size, baby!!! Third-row seats AND room for my golf bag.....on a rush!"
GM then renounces the shutting of those SUV and truck factories. Others do the same. The mass production now planned for hybrid, electric and hydrogen-powered cars, which are now very possible, become not as important or urgent.
Who the heck wants a Hydro when you can get Hummer??
Most Americans, like we have proven for the last 20 years or so, don't worry too much about consumption. We have ignored the warnings.
We all read the boring articles in the last 20 years. Foreign dependence. Too much demand, too little supply. Artificially low pricing. Blah, blah, blah. Who cares? That doesn't affect me today.
"Cadillac Barry?? OK, I'll hold. I know how busy you are. (Muzak version of "Stairway to Heaven" inserted here..............................................)"
"Barry, my man! I want it in that great off-white color, Champagne something or in black. No red!!! Red is not a great Escalade color. Make sure it has the big tires and the bad-azz shiny rims I see when my kids are watching MTV! Those are sweet."
So we remove the moratorium and when these 30 billion or so barrels between Alaska and the continental shelf run out in the next 10-15 years we will be back where we are today, only worse. We won't have as many options. We played our last card.
I drive an SUV. It currently costs me $120 per week in gas. I wish I could sell it tomorrow. I would be lucky if someone gave me 10 cents on the dollar for it. If this keeps up I may just donate it to charity, if they will have it.
I would love to save this weekly gas money and not see my car depreciate faster than a condo in Miami. My initial reaction to this news was drill it!! It's there. We aren't using it. We need it today. It can save us. Drill away!!!
However, then I look at my daughter. I am buying my first born her first car next month for her 16th birthday and to reward her for getting straight A's as a freshman. It was a challenge I made her on her 15th birthday and she did it.
When I look at her and her younger 10-year-old sister, I am concerned for their future and the possibility of $10 a gallon or $20.
We need to bite the bullet now and change our ways. Like Tiger Woods' year-ending knee surgery, it will hurt now but we will be much better off in the end.
I don't know anything about energy production or its future. I just know what I read and I know a little about history.
In 1942, with far less technology than today, President Franklin D. Roosevelt called for 185,000 planes and 120,000 tanks to be built in 2 years so we could hurry into a war that Americans did not want to enter but were forced to. We met his demand and eventually became the world's superpower.
There are around 16 million new cars sold in the U.S. each year.
If President Bush had Roosevelt's vision, and less loyalty to the oil business, in my opinion, he would demand that the auto industry build 16 million new hybrids, electric or hydrogen-based cars in the next two years and he would ask Congress to subsidize this production.
He would then demand that gas stations and other businesses equip themselves to meet the challenges of these new energy platforms as well.
As Governor Schwarzenegger said today, ""California's coastline is an international treasure. I do not support lifting this moratorium on new oil drilling off our coast. We are in this situation because of our dependence on traditional petroleum-based oil. The direction our nation needs to go in is toward greater innovation in new technologies and new fuel choices for consumers."
I agree with The Terminator. How a man from Thal, Austria can have more vision for American than a man from Crawford, Texas is beyond me. I hate being political but be it McCain or Obama, let's all be thankful this period of history is nearly behind us.
"Cadillac Barry?? Let's cancel again. What do you have in a hybrid? Nothing. OK, call me when GM gets their act together........ What's that? No, we aren't hiring at my bank."
Jeff Belonger honored me by asking me to write this week's Mortgage Pro Week In Review.
This assignment takes me back to Mr. Hamilton's 10th grade English class.
Mr. Hamilton, was in his mid 60's, with thinning, long, gray-peppered hair. He had black horn-rimmed Ernie Douglas eye-glasses.
Mr. Hamilton wore a "uniform" every day. Crisp white shirt, firmly starched, sleeves rolled. Black tie loosely knotted. Black slacks flared and flooded. White socks that peaked when he walked. Black worn shoes.
He was a disheveled hyper genius. He would run all over the room flailing his arms to make his point, and he loved creative writing. He was my favorite educator of all my scholastic years. I learned so much from him.
He wasn't my favorite teacher growing up. He will never compare with the beautiful, stunning, green-eyed, wavy auburn-haired Mrs. Gunderson.
Mrs. Gunderson was my fifth-grade homeroom teacher. She wore short, red mini-skirts, low-cut white knit sweaters that were too tight, and lofty outfit-matching heels, at the same precise moment in time that I was starting to pay attention to girls.
I can't tell you one thing I learned from Mrs. Gunderson in fifth grade.
Wait she did me one thing. Mrs. Gunderson taught me and many other boys that year that the deadly prospect of "coodies" from girls was nowhere near as horrific as how warm they could make you feel inside.
She was the coodie-killer. I would never fear them again.
Mr. Hamilton loved giving creative writing assignments. He taught us that a great writer could make the most boring subjects interesting. To make this point he gave us an assignment to write 200 words about the alphabet.
Not the history of the alphabet, but rather the story of "A," "B," "C," and so on...through "Z."
As each student read their prose, Mr. Hamilton's point was made clear. Even the alphabet could be made interesting through the pen of a great storyteller.
I think about Mr. Hamilton every time I read a great mortgage post on ActiveRain.
Can there be a subject more boring than mortgages? Seriously. ARM's, rates, the Fed, Bernanke, Margins, Indexes, Fannie, Freddie, VA, FHA.
That is why I am exciting to be asked to write this week's review of the best, most compelling mortgage postings. It's only my opinion and you may be surprised by some of my selections.
On behalf of the memory of Mr. Hamilton, all of these mortgage storytellers get an "A" for the week.
Mortgage Pro Week in Review -- 05/12/08 through 05/18/08
Prayer Request for Me and My Family Don Draughn is asking for your prayers as he moves his family and his business to a new state to be with his elderly, ailing parents in their time of need. I am not a deeply religious person. I have always felt my spiritually from within. However, I have tremendous respect for others and their faith. Don, I admire your courage and commitment to family and I hope it all works out for you. You can count on my prayers!!
Six Steps Originators Can Take To Thrive on Active Rain Without Writing A Blog Post Brian Brady gives you great marketing tips that are so incredibly easy to implement you will wish he didn't share them with the other 11,000 loan originators on ActiveRain. Brian needs to get out of the crazy business, where his talents are truly wasted, and start a Mortgage Coaching company Brian, sign me up at the discounted friend's rate of $499 for the first live seminar in San Diego.
The Home Ownership Roundtable will Save You From That ARM Loan! Darren Orshoff is crazy....crazy like a chicken!! You have to see this to believe it. Desperate times call for desperate measures. Active Rain goes American Idol with a crazy chicken dance and original lyrics. Check out Darren's daughter in the background. Darren didn't even realize she was there. I hope this works, Darren. That song will be in my head all week. "Call, Don't be a Chicken!! Cluck! Cluck!!"
So you think you are a smart shopper? Jason Sardi has immense talent as a writer. He skillfully challenges the first question every lender is asked on the very first call from a borrower, "what's the rate today?" Experienced lenders, like Jason, understand this question makes the borrower feel smart but the answer is a test to truly show how bright your lender actually is.
Will Do Mortgage Loans For Food (Yes, This Is Me) Melissa Breeland proves that a picture says 1,000 words. This picture, from seven years ago, reminds us all to "think outside the box" when it comes to marketing.
Finding Balance and My Motivation Tom Elder keeps it simple, sweet and very sincere. I remember the day I made the same decision as you Tom. Family over four hours of sleep. It's a much better life.
The Wedding Ring Question Justin Williams poses an interesting, thought-provoking question. I have been in real estate since 1994 and, obviously, have noticed all of the sexy pictures that agents and loan officers have on their cards and ads, but I never looked at the wedding rings. Let's face it. Sex, like in all sales industries, sells in real estate too.
Obama May Have A New Middle Name_Infanticide Bill Burress is asking you to join his crusade as he tries to destroy "The Monster" Barack Obama's campaign for President. In a "member's only" post, Bill attacks the Senator for his stance on a woman's right-to-choose as well as his middle name, Hussein. One of the best things about being asked to write Week in Review is you get a chance to read nearly every single blog written that week. I have been here a year and had no idea there were political rants that have nothing to with real estate on AR. Although I don't agree with all of Bill's political views, my only challenge with it is that he when he posts politically he does so "member's only." If you are going to blog politically on a real estate network, why not share these spirited discussions with the public? And if you can't share with the public, for whatever reason, in my opinion, the post belongs on a political network, not a real estate network. This post makes my list because, even though I disagree with it's content about the Supreme Court's 35-year interpretation of the 14th Amendment and its protection of a woman's right to choose, I firmly believe in freedom of speech, as protected by the First Amendment. Bill, you can put me down as one of those "irrational people" contemplating a vote for that "monster," also known as the United States Senator from Illinois. For me, it's about the economy, health care, the housing market, and the war on terror. McCain and Obama will both get a long hard serious look from me on these four issues before I decide. And I am not afraid to say it in a public post.
Has The American Dream Been Poisoned? Janet Guilbault and I are in the mutual admiration society. What makes AR so great for me is that real estate pros get a chance to blow off some creative steam and show our writing skills. And Janet may be the best here. Who else could turn renting her daughter's home into a thought-provoking blog about the end of the dream of homeownership? Janet should really take a month off, travel somewhere off-the-beaten-path, deep in the jungles of South America, and crank out a novel. I would want to read the first print and there are about 90,000 other Rainers who would do the same.
An Open Letter to the Consumer - Show me a little respect Jeff Belonger reminds us of the importance of the timing of the good faith estimate. Jeff is so good at what he does, 40% of my business is FHA today but I would want him to do my own FHA loan. Jeff stays focused in a business where it's nearly impossible to do so. FHA, FHA, FHA, FHA. The program is like 100 years old. Until four months ago, no one wanted it. It comes with mortgage insurance even with 20% down. The loan limits were like $15,000. $25,000 in Los Angeles. Yet, Jeff stayed with it. And guess what? Today we live in an FHA world, he makes it interesting, and we all need to read Jeff each week to teach us what we need to know.
Just How Sleazy Was the Subprime Market? Karen George gives a strongly-worded, opinionated view of the sleazy, subprime market. Look at the picture of ad closely. Ironically it looks like an old-time horror movie poster. Reading this post gave me a sickening feeling in the deepest pit of my stomach. How is the world did we let this happen? It was so obviously destined for failure. I am embarrassed that I ever sold these products. Is there a Lender's Anonymous we can go to and get cleansed??
Anatomy of a foreclosure Barbara S. Duncan is not a lender. However she writes about a young man seeking a loan in Arkansas. Unfortunately, this story should be unique but its not. In fact, it's a common story that could be written be nearly every agent on Active Rain. After you are done reading Barbara, read Rey below and what we face today will all make sense.
Welcome to a Full Doc World Rey Gallegos teaches us how to cope in this new strange world of long ago where loan originators, processors and underwriters really have to work hard to make a loan fly. It takes a very strong, knowledgeable loan originator to succeed in today's lending climate. I work with him everyday and Rey has that strength.
Thanks for the opportunity to do Week in Review, Jeff!!
The next members for the Mortgage Pro Week in Review :
1. Matthew J Blum 05/19/2008 through 05/25/2008
2. Brian Brady 05/26/2008 through 06/01/2008
3. Joey Aszterbaum 06/02/2008 through 06/08/2008
Mortgage blogs by loan officersHere is a list of Loan Officers. If you are not listed, please email Jeff Belonger to be added. This way the person doing the Mortgage Pro week in review can try and find most mortgage related posts in one section. ActiveRain is growing rapidly and it is difficult to keep up.... If you think you have been ignored, you have not. This is open to all!!!
All About Mortgages/Mortgage NetworkingHere is a group that many loan officers post their mortgage related blogs in. A good place to learn more about the type of programs, new industry news, and sometimes some inside tips. Don't hesitate to join.
MORTGAGE PRO Week in Review A repository for the Mortgage Week in Review. Please don't hesitate in joining this group. And any volunteers for the mortgage week in review, please e-mail Jeff Belonger at jbelonger@ihmci.com
About a month ago, I wrote about the frustrations some agents were feeling. They couldn't understand why it was taking so long to get their short sale offers accepted.
I received many emails thanking me. Many wrote the same thing, "Aaron, now if you could tell us how to get our offers on bank-owned foreclosure accepted, we would really be grateful!!
Here you go......
During the housing boom, thousands of people stayed on the sidelines as the Las Vegas and national housing market skyrocketed.
With home prices doubling and even tripling in some areas, some of these people ended up getting priced out of the market. Many feared they would never be able to afford a house every again. They were wrong. Their day has come.
Today, Las Vegas leads the nation in foreclosures. Home values are down nearly 30% from its peak. Prices are at their lowest levels in the last seven to eight years. And banks are the sellers of most of our inventory. This is the same in many cities.
Those who stayed on the sidelines during the last boom, as well as many investors, are hungry to make deals. Many more foreclosures are expected to flood the market in the coming months. This is creating a new, smaller, buying boom.
However, there is a tremendous difference between buying a home from an individual and buying a home from a bank. Failing to recognize these differences will likely result in a substantial waste of your time and your client's time. It is not uncommon today to spend tens, if not hundreds, of wasted hours with each other because your clients don't understand the difference.
I know agents who have now spent weeks and months with clients in a futile effort and no sale to show for it.
Let's try and end some of this today.
I spoke with Leslie Carver, an agent at Prudential Americana, and one of the top REO agents in Las Vegas today, about this very subject. An REO agent is one that specializes in representing bank-owned properties. There are not many REO agents in our market. Certainly not as many as you would expect. There are a ton of reasons why....experience being the biggest, but that's a topic for another time.
Leslie is a terrific, well-respected agent, who handles listings for many of the top banks in the country. Leslie and I have had transactions together in the past and Leslie has spoken to groups on this subject.
According to Leslie, the number one thing you need to understand today about making an offer on a bank-owned listing is you will likely only get one chance at it.
"Buyers need to present their highest and best offer," says Leslie. "In cases where we get multiple offers, it's a one-shot deal. The bank will take the best offer and probably not counter any of the others. Put your best foot forward and don't plan on a counter offer. It's probably not coming."
Another challenge today is buyers making low-ball offers 20% or more below list price.
On average, local experts say, bank-owned properties are selling within 10-15% of list price. Anything lower than that, if the property hasn't been listed longer than six months, is probably a waste of time.
The bank and their listing agent have done a lot of research before listing the property for sale. In many cases, the bank has received at least two BPO's (broker price opinion) and at least one actual appraisal before determining the list price.
I spoke with an asset manager who said, "We are not desperate like so many want to believe. We price our properties based on a lot of research in the local market and we expect to sell them at market value."
They list it to sell and, in most cases, the listing agent and asset manager at the bank are tied down to this price. The asset manager then has limited authority to go a bit lower if necessary.
Anything substantially lower than this price usually exceeds the asset manager's limited authority so the offer has to go back to bank management for approval. According to most experts, that's not very likely. Many asset managers simply reject it and don't even bother passing it on.
If a house doesn't sell over a certain period of time, the bank will usually lower it as much as $10,000-$25,000 at a time.
The best deals you can get are those that have been on the market the longest. Although there are many great deals sooner, Banks are most negotiable once the property has been on the market 90 to 120 days on the market.
The chances of you "stealing one" by offering 40 percent below the bank's asking price is remote at best.
According to Leslie, and others, buyers should forget the list price in determining their offer. Your offer should be based on the true value of the home. "Some people are afraid to make an offer over list," says Leslie. "In nearly every multiple offer situation today, the accepted offer is over list."
Buyers should get with their agents, make their own determination of the property's value, and make their discounted offer based on that figure.
For example, let's say you see a bank-owned property you like, it's been listed four weeks, and it's listed at $250,000.
You get with your agent and you believe the home is really worth $285,000.
You have to understand that the bank and their agent have done their research as well. Likely much more than you. They have priced it at $250,000 to move it quickly.
You want a 20% discount so you make your offer off the list price of $250,000 and not the $285,000. You are probably wasting everyone's time by making an offer of $200,000. $228,000, which is 20% off from the $285,000, has a chance. Probably not a great chance but certainly worth a shot....if that's your highest and best offer.
"Your offer has to be reasonable," says Leslie. "In many cases today, the banks are getting multiple offers. Don't let list price be the main factor. We have already listed it low. The low-balls won't even be considered."
Leslie says most REO agents today submit all offers immediately. However, the banks tell the agents it can take up to five days for a response. This can, and often does, result in multiple offers.
Some banks will not even review an offer until it's been on the market at least five days.
And while you are making your offer or waiting for it to be accepted, email is the preferred method of communication with the very busy REO agent.
"The banks and their asset management teams are automated today. We rarely speak on the phone with each other," says Leslie. "There are only a handful of REO agents in Las Vegas today and we are all automated too. Everything is online. Some agents are having a tough time making the transition but email is the absolute best means of communication in the REO world today."
The next biggest challenge today on making an offer on a bank-owned property is to know the offer rules of the property you are trying to buy.
Leslie says offers that come in where the listing information has been ignored are not likely to be accepted. If you want your offer to be taken seriously, read the listing carefully, and follow the directions.
For example, if the listing says you need an "approval letter from ABC Bank," and you send one in from XYZ Bank, the offer will probably not even be considered.
Keep in mind, the seller is a bank. They understand the lending challenges today. They don't want to waste any time as time could mean further depreciation and costs. Your offer needs to come in from a respected lender whose bank they recognize. Quite often they want you to be approved by their own institution.
If the listing asks for "proof of funds on all cash offers" and your offer doesn't come with the proof attached, plan on rejection.
"The banks are so automated that if an offer comes in without a mandatory offer condition, the bank's advanced system may reject it automatically without review from the asset manager," Leslie says.
Know your property as well, Leslie advises. The bank hasn't been in the property. However, when there is something wrong with it, they usually know about it through the listing agent.
So let's say you make an offer on the property, yet you don't address the challenges. This makes your offer very weak and will likely result in it being rejected or not even considered.
For example, you are buying the home and you are doing an FHA loan. FHA requires that the home be marketable, sound, secure, and safe.
Some of the items FHA will require to be fixed are broken windows, rooms without flooring, faulty plumbing, broken entry and exit doors, missing A/C units, etc.
So, you love the home but it has a few broken windows and there is no flooring in the master bedroom.
You meet with your lender and you decide an FHA loan is best for you. You don't tell the lender about the window and floor. Then, you make an offer, yet you don't address the windows and flooring in your offer.
The REO listing agent is usually a very experienced agent who works with banks. They know their lending guidelines. They know FHA. They know these fixes will cost money and they have usually prepared the seller to make these changes for you.
Let's say, they have estimated the cost to fix these items at $2500.
They know you can't close your FHA loan without fixing these items, yet you make no mention of them in your offer.
Another offer comes in right behind yours. This buyer is also doing an FHA loan.
He makes an offer at the same price as yours but his offer mentions the repairs. The offer calls for the repairs to be done prior to close. His lender has even written the repairs into the pre-approval letter.
This offer is actually much stronger than yours. The seller knows you have done your research and your lender knows what he is getting into. The seller has the confidence in the buyer that he knows the property, has done his research, and has his lender on-board. Confidence means contract.
You need to know what you are buying and what it will take to close your loan before you make your offer. If not, the listing agent will likely see right through it and probably reject your offer without counter.
As opposed to individuals selling their homes, banks are exempt from real property disclosures because they have never lived in the home. You will want to pay for and order your own inspection report, even before making your offer, and be prepared to walk if the damage is too extensive.
Be patient. Banks may accumulate multiple offers before responding and will never answer an offer over the weekend. Plan on five business days from the day you make your offer. If you don't hear anything by then, it's probably been rejected. Email the listing agent to confirm this.
Be careful. Many people today write an FHA offer with a 30-day close. A week later, they get the offer accepted with a $100 per day late fee, yet they are too afraid to counter the close date.
You have now given your lender 21 days to close an FHA loan. The bank knows you have very little chance of pulling that off today and now are going to get a little extra money out of you.
For a multitude of reasons, many of which I have written about in previous newsletters, this may not be enough time today.
This can be a very costly decision. When the bank accepts your financial terms, and imposes a late penalty, if you are doing an FHA loan, it's important to get the 30 days from the full execution of the sale contract, not the original date of the offer. The banks understand these timelines and will very likely grant you this window.
If you don't negotiate it upfront, plan on paying it. Once they have agreed to your offer, there will likely be very little negotiation on late fees, no matter what the reason.
I have pre-qualified buyers that have made 30+ offers and have had none accepted. This is a monumental waste of your time and theirs. Your time is valuable and it costs you money.
The opportunity to help buyers who sat on sidelines last time is tremendous. However, their time is valuable too and many feel as if they have already waited years. The longer it takes you to deliver them a home, the more likely they will find another agent who can.
If you want your offers on bank-owned properties to be seriously considered, follow these three rules:
•· Make your highest and best offer based on market value, not list price.
•· Make a complete offer by following the seller's rules as written on the property's MLS listing.
•· Know your property, the repairs it will require, how they affect your financing, and address them with your lender and in the offer.
And then be patient. In no time, you will be a new homeowner.
The business has changed. We should all learn the tricks and trades of the new world. Knowing how to make real, time-saving offers on bank-owned properties needs to be lesson #1.
As we all know, the U.S. is in the midst of a credit crunch. Financing has become more restrictive in all areas of the housing market. The luxury market is no different.
Here is what you can expect today when financing your luxury home:
For sales prices $1,250,000 to $2,500,000 plan on at least 20% - 25% down, having good credit, and be willing to fully disclose your personal and business income and assets. The lower your credit score goes, the higher the down payment required. If you have to go with a stated income loan, plan on 25% - 30% down.
For sales prices $2,500,001 to $3,750,000 plan on at least 30% - 35% down, having very good credit, and be willing to fully disclose your income and assets. If you have to go with a stated income loan, plan on 40% - 50% down.
For sales prices over $3,750,000, plan on 40% to 50% down, regardless of your income and asset documentation.
Be very cautious when picking a lender in the high-end today. You wouldn't trust a financial advisor to handle a large investment portfolio that only had experience with small portfolios.
If you were picking a financial advisor today, you would likely ask for references and you would interview at least two to see who best understood your needs and who made you feel most confident.
The same is true in high-end residential lending.
You want an experienced high-end lender at a bank with a special banking division that understands and can visualize the financial, big-picture complexities of the luxury-home buyer and deals with these types of transactions daily.
One advantage we have in the luxury market is that experienced lenders in the high-end usually do not follow the same rigid guidelines of their lower-priced counterparts.
Because these loans will probably not be sold in the secondary market and will be held in the bank's investment portfolio, these lenders tend to review the overall portrait of the loan, and the financial strength of the client, before making a decision on financing.
Unlike the past, don't just assume you have to go with a stated income loan because you are self-employed. Lenders in the high-end market are skilled at going over your finances, in detail, with you.
Often they will consider your business tax returns, cash-flow reports, and other investments, as well as your personal returns, to help them make an informed decision. You may be surprised what you actually qualify for.
Although the lending markets have changed, there is still money readily available for quality, high-income, high net-worth borrowers buying luxury homes.
It feels like nearly every deal we do today in my market involves an FHA buyer buying a bank-owned property. Although buying activity is great, this is a buyer/seller combination with its complexities.
Spurred on by government-backing, during the credit crunch, and one of the only low-down payment options today, the FHA loan has experienced explosive growth in recent months.
At the local branch of the retail bank, where I work, nearly 40% of all of the loans today are FHA. Company-wide they are predicting 50% FHA loans very soon.
However, like all loans, there are potential land mines in the FHA loan that threaten your purchase deals. You may have deals current in escrow where your buyer is going FHA that are currently in jeopardy and you don't even realize it.
Here are the top five challenges you face with FHA loans:
CHALLENGE #1: The Property Flip
For those that haven't run into this yet, you probably will very soon.
When processing an FHA loan, we have to perform a title search to see how long the owner of the subject property has owned the house.
If the owner has owned the house for less than 90 days, it's considered a "flip."
The 90-day window ends from the day the seller signs a new contract. If your contract is signed before the seller has owned the property 90 days, the file has to go to HUD for an exception. FHA will only make an exception if the property is a Bank-owned REO.
To make matters even more challenges, if it's a Bank-owned REO property, and you seek the exception, the bank has to either be State or Federally chartered for the exception to be granted. Not all banks are.
REO properties owned by Fannie Mae and Freddie Mac are exempt as well. If the bank-owned property is not State or Federally chartered the home cannot be sold to an FHA buyer before 90 days.
We are seeing a ton of buying activity in foreclosed homes. Some tell me its 80% of all resale purchases today in our market. In many of these transactions today, FHA buyers are purchasing an REO.
The bank foreclosed on the previous owner, has taken possession of the property and is the new owner.
The bank then turns around and puts it on the market with a real estate agent, and, fortunately for them, gets an accepted offer within 90 days of taking possession.
This then requires the buyer's lender to send the file for FHA for a flipped-property exception.
FHA is taking as many as 10-15 business days to approve the exceptions in our market. You can imagine what those 10-15 business days can do to your close of escrow date.
The Solution
When making the offer, have your trusted home loan consultant look up the subject property on the County website, or get with your title rep, and identify which bank owns it, how long, and if they are State or Federally chartered.
If they owned it for less than 90 days, prepare the buyer to get their conditions into the lender as soon as possible so your lender can submit the loan to FHA as soon as possible.
Also, you may want to ask for a 45-day escrow from the bank, on FHA loans, so you don't have to stress about getting an extension at a later date.
If the bank is not State or Federally chartered or has some other exemption, and they haven't owned it at least 90 days, you may want to consider financing other than FHA.
CHALLENGE #2: The Appraisal
With prices in decline and values dropping all over, its hard to comprehend you could have appraisal challenges today. However, it can happen on FHA loans where the buyer is requesting the seller to participate in Nehemiah's down payment assistance program.
It is FHA's pet peeve, and one of the reasons for the costly law suit they eventually lost, but buyers are making offers over list price to cover their down payment for the down payment assistance programs like Nehemiah.
This can mean an inflated offer that the home's value does not support. The listing agent and the seller certainly did a fair amount of research before listing the home and now your offer may be above appraised value. Banks will only loan on the lesser of purchase price or appraised value.
We are seeing appraisals coming in under purchase price because of this and sellers and buyers then having to renegotiate or cancel their deal.
The Solution
Be very careful. Know your property's true value before making your offer. There is a lot of sales activity lately. Pull comparable sales, preferably in the neighborhood, to make sure the sales price of your offer will be supported by the appraisal.
CHALLENGE #3: The Repairs
In most cases, FHA will not allow withholds for repairs (they do have a special program that sometimes allows for this but that's a newsletter for another time). They will also not allow a buyer to get cash-back at closing for repairs.
Often, we will see an addendum that states the seller will pay up to $2000 for a "flooring allowance" or an "appliance allowance."
It is very challenging to credit this to the buyer on an FHA loan.
If the property is in poor condition, repairs have to be done prior to closing. Examples are broken windows, broken doors, "green" pools, missing air conditioners, exposed electrical wires, power not turned on, holes in walls, etc. Essentially anything that affects health, safety and habitability of the home.
The Solution
Don't request a credit for repairs. You can request the seller pay for more in closing costs, provided it doesn't exceed 6%. The seller can participate in the Nehemiah down payment assistance program (3%) and they can still pay up to another 6% towards closing costs on FHA loans.
You can also consider asking for the sales price to be reduced in place of the credit.
If you want the repairs made prior to closing or they are required to be made before closing and you aren't sure what exactly needs to be repaired, simply wait for the appraiser to be finished with the appraisal and then get with the seller. The appraiser will detail these repairs for you in his report.
If you are aware of some of the obvious items that need to be repaired, before the appraisal, you can request the seller take care of it.
If the seller is unwilling to make obvious repairs that are required to be made for an FHA loan, then you may want to reconsider your interest in this home or make the repairs yourself, prior to close, assuming the seller gives you permission.
Making the repairs yourself, prior to close, is often a challenge. Sellers, especially banks, don't usually like the liability of letting you or your workers into the home while they are responsible from an insurance perspective.
CHALLENGE #4: The Broker Transaction Fee
Many real estate companies today charge a Broker Fee or Broker Doc Prep fee. This is usually a $200 - $500 fee that helps the real estate company cover some of their hard expenses.
Usually, the buyer pays this at closing. However, on an FHA loan, this is not commonly permitted.
The Solution
FHA will allow the buyer to pay this on an FHA loan, provided that it is disclosed on the signed Buyer/Broker Agreement prior to going to contract. Yet another reason to get a signed Buyer/Broker Agreement.
CHALLENGE #5: The Non-Titled Spouse
It happens all of the time. For one reason or another, we do a loan for a married couple and one of them decides not to be on the loan. On an FHA loan, the lender is still required to pull a credit report for the spouse that is not going to be on the loan.
Even though the non-titled spouse's credit cannot be considered in the credit-decision process, nearly all debt incurred after marriage, will have to be included with the borrower's debt. This can certainly affect debt-to-income ratios.
Installment debt incurred prior to the marriage by the non-titling spouse doesn't necessarily have to be included in the borrower's debt. However all revolving debt, regardless of when the non-titling spouse incurred the debt, has to be included.
The Solution
Your trusted home loan consultant needs to address this prior to issuing the approval letter. You don't want to spend hours driving your clients around looking at homes to ultimately discover that the loan can't be done because of the non-titled spouse's debts.
Also, you will want to structure the contract correctly. You want to know who will be on the contract and who will not, so your lender is not scrambling around at the end of the transaction getting addendums signed adding or removing a spouse.
The FHA loan is back and more popular than ever and is the first choice for many borrowers today. But like all loans, they have their own unique sets of guidelines. Knowing these five challenges will save you and your clients and lot of time and "11th hour" aggravation.
Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.
Posted by 
;)
;)
