Special offer

Solution: Let's Revive Assumable Loans

By
Managing Real Estate Broker with San Diego Previews Real Estate CA BRE# 01101958

There are very profound fears that our credit markets are crumbling, and that life as we have known it may be in for serious change.

Now, as never before, we as real estate professionals need to help create solutions for our clients and bring sense to the market wherever and whenever we can.  We need to know not only available mortgage programs (and savvy mortgage pros), but also become familiar with creative financing and alternative ways of selling real estate.

One thing lenders could do immediately is to allow existing loans to become assumable.

Many agents are unfamiliar with assumable loans, and might wonder how they work.

Let's use a simple example: Home Seller has an outstanding mortgage balance of $150,000 and is willing to accept a $195,000 sales price. Home Buyer pays $45,000 plus closing fees and assumes the existing financing. Seller exits the transaction with that amount, less closing costs. Future mortgage payments are now made by Home Buyer to the loan servicer.

In some cases, lenders (and sometimes the Seller) might offer secondary financing to help with the difference between asking and sales price--as long as the buyers had a cash stake in the deal. This could be done via a simple second, an all-inclusive trust deed or wrap-around mortgage.

I can't help but wonder why mortgage lenders don't revive the assumable loan, help kick start the real estate market, and save at least a portion of their own and investors' portfolios in the process? Their investors would surely rather have their loans paid off by another borrower, rather than suffer near-certain loss in a foreclosure sale.

In many cases, sellers have no equity. Why not allow them to offer their mortgage debt (or renegotiated debt) as assumable financing for potential buyers? Lenders might be relieved to have mortgage payments brought current--and might even require the new buyer to deposit two or three month's payments with them as insurance against future default.

By allowing assumable financing, lenders would fare much better vis-à-vis short sales and foreclosures--and more homeowners would be able to save their credit and exit their homes with dignity. Most lenders now force homeowners to be in default with their mortgage before they will even consider a short sale or modification of terms.

It just makes sense to get the mortgage debt seamlessly transferred before it ever goes default.

And with the strangled liquidity in financial markets, it makes more sense than ever to transfer debt rather than forcing buyers to secure new financing--which may or may not be available.

Roberta Murphy
San Diego Previews Real Estate - Carlsbad, CA
Carlsbad Real Estate and Homes

Ah Lynda,

Our knowledge will be invaluable in the months/years ahead.

Perhaps lenders should modify existing loan terms--if needed--for the new buyer.  (Mortgage)Investors might welcome the absence of foreclosure costs and the immediate insertion of a new borrower and cash flow.

Sep 29, 2008 01:26 PM
Roberta Murphy
San Diego Previews Real Estate - Carlsbad, CA
Carlsbad Real Estate and Homes

Jeff:

The value gap must be a consideration and will be an additional variable.  But it is one the market will demand.  Lenders should go ahead, adjust the value, and allow the loan to be assumed (perhaps with pre-payments).  On the other hand, if the equity gap is large, sellers might consider carrying a second.

Sep 29, 2008 01:32 PM
Joanne Foxxe
Kapalua Realty - Lahaina, HI
CRS, GRI, SRES, e-PRO

I think the lenders need to modify existing loan terms and rates for existing home owners. those interest only loans that JUMPED up when refi'd into full amortized or a new interest only are still truoble, even for folks that can afford the payments.  people with equity still could use relief!!!!

Assumables would still be a benefit to those folks that cannot qualify- we do need imagination.

Sep 29, 2008 02:02 PM
Roberta Murphy
San Diego Previews Real Estate - Carlsbad, CA
Carlsbad Real Estate and Homes

Joanne: It would be great if lenders would modify loan terms for those one the brink; it would also be helpful for all if they would allow loans (even if modified) to be assumed by motivated buyers.  There will be many whose credit has been ruined by the mortgage fiasco--but who are still able to pay for a home under predictable terms.

Sep 29, 2008 02:18 PM
Debbie Small
Long & Foster Realtors - Martinsburg, WV
REALTOR

I like your creative thinking. Like others have already said, it might work for some but so many are too upside down.

Sep 29, 2008 03:11 PM
Randy L. Prothero
eXp Realty - Hollister, MO
Missouri REALTOR, (808) 384-5645

I do a large percentage of my business in assumable loans. (VA)

Sep 29, 2008 03:16 PM
Lynda Eisenmann
Preferred Home Brokers - Brea, CA
Broker Associate ,CRS,GRI,SRES, Brea,CA, Orange Co

Hi again,

Roberta, I'm completely in agreement with you as to lenders modifying existing loans making them more workable to buyers. After all is someone is credit worthy, isn't that the biggest issue here? Seems like in the long-run it would preserve more of the lenders assets.

Congrats on your feature!

Sep 29, 2008 03:40 PM
Roberta Murphy
San Diego Previews Real Estate - Carlsbad, CA
Carlsbad Real Estate and Homes

Debbie: That is where banks must be proactive and work hand-in-hand with their borrowers to keep their investments alive.

Sep 29, 2008 03:41 PM
Roberta Murphy
San Diego Previews Real Estate - Carlsbad, CA
Carlsbad Real Estate and Homes

Randy: Congratulations! Bet you never thought you'd hear a Southern California broker congratulating you on your niche!

Sep 29, 2008 03:43 PM
Eric Bouler
Gardner Realtors, Licensed in La. - New Orleans, LA
Listening to your Needs

I assumed my loan, it was a VA loan in 1975. I would guess it is not popular since less money can be made on these from the lenders. More money has to be had by the buyer. The buyer has to be very qualified. I paid $100 to close so no one made a lot of money there.  

I would also think a lender really does not want the loan to go full term. 

Sep 29, 2008 03:56 PM
Gena Riede
Riede Real Estate, Lic. 01310792 - Sacramento, CA
Real Estate Broker - Sacramento CA Real Estate (916) 417-2699

Roberta, that's such a great idea and one that will work for some. What was old is new again. That is a very positive solution that could certainly be used for some. Love to hear the positive and good solutions!

Definitely worth the feature!

Sep 29, 2008 04:02 PM
Roberta Murphy
San Diego Previews Real Estate - Carlsbad, CA
Carlsbad Real Estate and Homes

Eric: Congratulations on your buy--that could be paid in full by now.  But at least the lender received the money--paid in full.  Many investors would give anything to be in that position today.

Sep 29, 2008 04:15 PM
Roberta Murphy
San Diego Previews Real Estate - Carlsbad, CA
Carlsbad Real Estate and Homes

Gena: Never thought I'd see the day that assumable loans would ever be mentioned again in California real estate!  Lenders need to get to work on this one.

Sep 29, 2008 04:17 PM
Renée Donohue~Home Photography
Savvy Home Pix - Allegan, MI
Western Michigan Real Estate Photographer

With lease options and OWC's going into foreclosure many times, those types of financing are getting a bad name.  I would say there may be a very good need for this in the near future (if not now!)

Sep 30, 2008 12:48 AM
Roberta Murphy
San Diego Previews Real Estate - Carlsbad, CA
Carlsbad Real Estate and Homes

Renee: I agree these exit strategies have been abused in the past, but they might help get us over the hump until the  markets stabilize and credit scores are repaired.

Sep 30, 2008 02:05 AM
Anonymous
Anonymous

Great post Roberta! To every problem there is a workable solution.

Sep 30, 2008 07:56 AM
#18
Bob & Carolin Benjamin
Benjamin Realty LLC - Gold Canyon, AZ
East Phoenix Arizona Homes

Exactly , some of the loans might not be the best. But if assumable, they would get someone into a home. And that is what we need now -- getting more people into these homes. All the best.

Sep 30, 2008 12:29 PM
Roberta Murphy
San Diego Previews Real Estate - Carlsbad, CA
Carlsbad Real Estate and Homes

Bob and Carolin: I have a bunch of buyers who RIGHT NOW would buy properties with assumable loans. This is the height of absurdity when banks won't even consider this alternative!

Sep 30, 2008 01:28 PM
ASHEVILLE REALTY REFERRAL RESOURCE 828-776-0779
REAL ESTATE REFERRAL NETWORK - Asheville, NC
CONTACT janeAnne365@gmail.com

Roberta~

This post gives me a hopeful feeling. It is a creative idea and one I 'd love to see "happen"...(is this a case of reverse "karma" ??) ..anyway...tell me..how do-able is this?

Oct 01, 2008 06:19 AM
Roberta Murphy
San Diego Previews Real Estate - Carlsbad, CA
Carlsbad Real Estate and Homes

JaneAnne: I think we as real estate professionals need to approach lenders (or perhaps our legislators) with this solution.  Should we get the ball rolling?

Oct 01, 2008 06:46 AM