Just in time for Halloween, I want to tell you something scary that’s no ghost story. Over the last few weeks, I’ve laid the groundwork for today’s topic – Fannie Mae – and their sinister plan to change the world!
OK, maybe that’s a little dramatic and overstated – you tell me.
Two weeks ago, I told you that everything depends on the appraisal and how low appraisals can cause a sale to be cancelled. Low appraisals are also keeping market values lower and stagnant (although we’ve seen a 13.5% increase in value in the last year in Las Vegas.)
Last week, I referenced a report that showed that nationally, we could be back to our record home values (set at the height of the market in 2005) by 2015. The logical question is, “If appraisals are keeping prices lower, how will we reach record values in a little over two years?”
Some folks think that Fannie Mae is taking the bull by the horns and forcibly changing the market. What exactly is Fannie Mae? Click HERE for the detailed answer.
The short answer is Fannie Mae buys (or securitizes) the mortgage you take out from a bank, so the bank has more money to lend to more homebuyers. The loans are underwritten within the guidelines set by Fannie, to ensure the loans are viable. There is another entity called Freddie Mac, which has the same focus and responsibilities.
They are both called GSEs (Government Sponsored Enterprises) and they’re chartered by Congress.
According to Fannie Mae, one of their main functions in today’s market is to help distressed homeowners, through their website, KnowYourOptions.com. The solution that many homeowners choose is a short sale, which is the best way out of a bad situation.
If the homeowner chooses to ignore all means of assistance, they’re going to lose their home to foreclosure (a lousy alternative with harsher consequences.) Does that knock Fannie out of the game? Nope. Now the home becomes part of Fannie’s arm called Homepath.com, which sells Fannie Mae foreclosed homes.
At face value, everything looks great, right? Not according to accounts from Realtors all across the country. Homeowners trying to short sale their Fannie Mae homes are in greater jeopardy of foreclosure now more than ever.
For homeowners trying to short sale their home with a loan owned by Fannie Mae, once they have an offer, Fannie sends an appraiser out to validate the value of the home. What is becoming an increasing trend, is that Fannie is requiring a purchase price for anywhere from 15 to 25% above market value. Why? To increase home values across the country and a bigger profit for Fannie Mae.
While that’s good for values, it’s bad for the short seller. Normally, lenders will lower their requested value if the buyer supplies an appraisal supporting a lower value. This only applies to buyers getting financing for their purchase, not cash buyers.
Yet Fannie has been refusing to lower their requested “net” – even with substantiated lower values. Is this bad for Fannie? Quite the contrary. If the home doesn’t sell as a short sale, they foreclose – and then it becomes a Homepath.com home.
With Homepath, Fannie Mae offers their own financing AND there’s no appraisal for their mortgages. That means no matter what the home is priced at, the buyer will not be protected by a lower-priced appraisal. It’s a win for Fannie and a losing proposition for the home seller (who got foreclosed on) and the buyer (who is overpaying for the home.)
The only winners are Fannie Mae and the neighbors whose home values increase.
In Arizona, this practice is so rampant that the local NBC affiliate did an exposé on exactly what’s happening, click HERE to watch.
How aggressive is Fannie being with their price increases? Here’s a current example: I sold a home in Summerlin as a short sale that closed on 12/30/11 for $94 a square foot. The homes in this subdivision have since sold per square foot for $99, $100, $92, $94, $112 and $131.
Two weeks ago, Fannie Mae listed the home next door as a Homepath.com home for $160/sf. The difference between the two homes – a slightly smaller floor plan and a swimming pool. Now let’s change dollar per square foot to sales price.
My buyer bought their 2,542 square foot home for $240,000, without a pool – click HERE to view. The Homepath home is 2,448 square feet with a pool for $390,500 – click HERE to view. If this home closes at list price, my client next door will have a net increase in value of $166,720 – in just 12 months. That’s a 69% increase in value.
So who lost big time? The former owners who got foreclosed on. They had the home listed as a short sale for $215,000, which was $88/square foot (obviously too low based on the neighborhood comps.)
What’s the moral of the story? If you’re going to short sale your home and Fannie Mae is the investor holding your loan, pick your short sale listing agent carefully. You need someone who is aware of what’s happening and is prepared to fight to get your short sale approved for market value. Let Fannie raise the prices on someone else’s home, not yours.
Have a great week!