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Fannie Mae Homepath Loan-- Utterly Ridiculous "Zero Down" Option

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April 22, 2010 05:34 AM

arizona mortgage I'm sure many of you are aware of the Fannie Mae Homepath Loan.

Basically, it is a loan where a borrower can buy a home for zero down-- using a Fannie Mae loan-- if the home is bank-owned, and owned by Fannie Mae. You can find available properties at www.homepath.com.

I hate this loan for a number of reasons-- because, from the get-go, I thought it was a consumer rip-off-- but I'm sure other mortgage brokers have written about the fact that the closing costs are so substantial that the "no down payment" option is utterly ridiculous.

But I want to talk about something different. How Fannie Mae is screwing themselves, the economy, and every single one of us with the Homepath loan.

I recently took on a client who wanted a Fannie Mae Homepath loan.

I tried to encourage the client to use FHA, even though it would be ten times the work for me, because I felt the Homepath loan was a lousy option for my client. I've never done subprime loans, and this reeks of subprime to me. It's covered up with lots of perfume, but it still reeks.

No luck. As it turned out, the house was owned by Fannie Mae, so they insisted on taking Homepath loans only.

Now why would Fannie do that?

Because Homepath loans do not require an appraisal. This home has some missing roof tiles, and an appraiser would find those.

So Fannie Mae, the seller, doesn't want Fannie Mae, the buyer, to know the roof has problems. Maybe major problems, maybe minor.

So Fannie Mae is screwing the new lender with an over-inflated value... But guess what?!? Fannie Mae is the new lender!

What the heck is going on here?

That's not all. The closing costs are so prohibitive, that my borrower decided to cancel the contract. So Fannie Mae counters: They offer to give him $7000 in closing costs (about 5%) and they move the price of the home up slightly to make up for the difference.

So Fannie Mae over-inflates the value of the house-with-a-bad-roof, so that the guy can get approved with...Fannie Mae!

Am I losing my mind here?!?! Fannie Mae is messing with the borrowers, messing with their own profits, messing with home values, and thus messing with EVERY SINGLE ONE OF US.

I don't care if you sit on the left or the right side of the aisle, this has got to stop.

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Louis Snitkin

Halstead Property - Manhattan, NY

"Results That Will Move You"

You are so "right on" that it's scary. To paraphrase an old saying,"They who ignore the past are doomed to repeat it." The push to keep homes "affordable" and keep the American Dream delusion will put us even deeper into the pit than we are now.

Apr 22, 2010 03:54 AM

Robert Rauf

HomeBridge Financial Services (NJ) - Toms River, NJ

Michael, When we first had the option to do these loans I thought it would be great.. until I looked into the details... It is a VERY expensive option for buyers, Costs too much, and the rate is too high. and in my area there werent that many homes to choose from any way. all around not a good deal for the buyer.

Apr 22, 2010 03:55 AM

Donne Knudsen

Los Angeles & Ventura Counties in CA - Simi Valley, CA

CalState Realty Services

Michael - When this program first rolled out, I too had the same reservations as Rob above did with one exception. I saw this as a great opportunity for the first time investor to get that first rental with only 10% down. This was the group that I initially promoted this program to.

However, when the HomePath properties around here (SoCA) started offering the 3.5% seller credits, I saw this as an opportunity for my buyers to use that concession to buy down the higher o/o rate down to a more attractive rate.

I had to find the silver lining in this dark cloud, Michael. My market is saturated with these properties and I had to adapt to find a way to make this program work for my buyers who were asking me about how they could buy these properties. I could no longer avoid this product and I had to find a way to make it work for my buyers.

Now, having said that, the challenge that many of my buyers faced when trying to buy these properties is that they were up against all-cash investors and 99% of the time, they lost out to this buyer. The few times my buyers actually did get their offers accepted, they ended up canceling the escrow anyway.

The primary reason these escrows fell out were because of sub-par property conditions. Even though this program doesn't require an appraisal, my clients always got their own inspections that ended up disclosing so many severe property flaws and defects. After their inspections, every one of my buyers who was actually in escrow to purchase one of these properties decided that the property required too much work.

Unfortunately, none of these LA's will even consider any other type of financing for these properties and therein lies the biggest problem with these properties - they do not benefit the o/o buyer. They are specifically designed to appeal to the investor who doesn't care about most property defects and can get these properties below market value, which many of these properties are going for.

Apr 22, 2010 05:58 AM

SEO Expert: Michael George

Phoenix, AZ

Real Estate and Law Firm SEO

I understand Donne. I wasn't condemning loan officers for using the program! And you are absolutely correct: The investor option is what originally turned me onto it. But... I just haven't had any luck drawing investors with this loan.

As far as the seller concessions... Maybe it's just the lenders I use, but every one of them has a max yield spread of about 3%.

So I take a 3.5% hit to the rate on the zero down loan. Now I have to charge the borrower a .5 point buydown and I haven't even charged a dime yet.

Since these are inexpensive homes (at least in AZ), I have to make 2% to make it worth my while. So now the borrower has 2.5% in points, plus fixed loan costs... They end up paying MORE than an FHA loan.

At least with AZ lenders. Are you able to adjust the rate so that the closing costs on the front end don't exceed what an FHA down payment is? That was my problem with the whole thing.

I wish I could find some investors though!

Apr 22, 2010 06:21 AM

Tammy Lankford,

Lane Realty Eatonton, GA Lake Sinclair, Milledgeville, 706-485-9668 - Eatonton, GA

Broker GA Lake Sinclair/Eatonton/Milledgeville

I'm not going to "call any one out" here, so no name dropping of which lender this is... but...

I'm currently working with first time buyers making an offer on a bank owned property. At first they were pre-approved for one amount and then when the bank countered at a higher amount the bank (without my client's concent- "reworked" the numbers to approve them for an amount $7,000. greater and now the lender has told them they can "roll closing costs into the loan" and approved them for even a greater amount.

I agree it reeks and so does what is happening to my buyers and I've warned them, but they don't seem to be hearing me.

Apr 22, 2010 08:55 AM

Lane Bailey

Century 21 Results Realty - Suwanee, GA

Realtor & Car Guy

They are simply hoping that some of the properties "stick" and are off their hands.

Apr 22, 2010 03:35 PM

John Hersey

Berkshire Hathaway HomeServices Homesale Realty - York, PA

e-PRO Realtor

Michael, I agree! Things are a mess and it doesn't matter anymore who started all of this nonsense but it needs to be taken care of.

Apr 27, 2010 12:31 AM

Teri Deane

RE/MAX 100 - Columbia, MD

Realtor, ABR, CRS, SFR - The Deane Team

In my market the HomePath homes are almost always real "bow-wows." Any REO property worth having gets snapped up by the all cash investors. It's very hard for a lower income buyer who just wants a halfway decent home to compete with the investors unless they do the 203K renovation - which are a nightmare for the lenders (not many around here do these loans).

Jun 05, 2010 03:07 AM

Donne Knudsen

Los Angeles & Ventura Counties in CA - Simi Valley, CA

CalState Realty Services

Michael - I actually have another buyer considering one of these properties. He's one of my dpa buyers so we've been able to get the ltv down to a respectable level so that he's not getting hit with a bunch of outrageous adjustments.

However, the problem still exists that even though HomePath lenders don't require an appraisal, my dpa agencies do their own inspections and will often find property issues that require repair and Fannie Mae simply refuses to do any repairs.

Until they start improving the condition of some of these properties or are willing to start accepting FHA 203k offers, they are simply not going to get rid of some of these properties. Like Teri says, "Any REO property worth having gets snapped up by the all cash investors" and the rest are going to languish on the market unless Fannie Mae makes some changes to their HomePath program.

Jun 08, 2010 07:45 AM

Anonymous

Tom

I'm trying to buy a homepath home now. I'm an all cash buyer, offering over the asking price, closing quick and I'm not asking for any contingencies other than your final walk through inspection(make sure the winter doesn't freeze everything. My buyers broker told me that it's probably a 50% chance I don 't get the property because they are favoring owner occupieds. The last two prospective buyers fell through due to financing. If they extend this program past the 10/31 deadline, I'm not going to get this home because they are offering the agent a cash bonus if they find a owner-occupied. This is pure insanity. This is doing nothing to fix this housing market. They have no incentive to move these properties because the tax payer is footing all the bills. This all doesn't make any economic sense. I'm really ticked off about this decrimination against non owner occupied investors.

Ps I have no plans to flip this property. I just want as a vacation property for my grandchildren.

Oct 29, 2011 06:38 AM

#11

Inna Ivchenko

Barcode Properties - Encino, CA

Realtor® • Green • GRI • HAFA • PSC Calabasas CA

I just Received A terrible call from My lender That she cannot do home pass loan. We already remove all contingencies. Buyer is frustrated. If I cannot find someone who will fund the loan quick he is losing her deposit. If the lender doesn't know how to fund this kind of loans why he would promise it?!

Feb 25, 2013 05:29 AM