Originator Digest: October 2011

While 70 percent* of Americans see homeownership as part of achieving the American dream, the homeownership rate has taken a 10 year decline** that hasn’t been seen since the Great Depression.  While some steps have been taken to assist underwater homeowners to refinance, ***  A fast transition back into homeownership is good for the economy, consumer confidence, the housing market and indeed...the banks.

Some actions can be taken that require no congressional approval.  We, the signers of this petition, ask that the administration to work through the executive branch to implement the following:

• Have the FHFA change Fannie and Freddie's guidelines regarding how long a consumer waits to be eligible for a new mortgage after a short sale to no waiting period if there were no late mortgage payments prior to the short sale and 1 year if there were.
• Have HUD amend FHA's requirement to wait 3 years after a short sale where the consumer had late payments in the 12 months preceding the short sale. It should be amended to a 1 year.
• Have HUD clarify their guidelines regarding buying a short sale where the consumer didn't have late mortgage payments prior to the short sale.
• Have the FHFA, pressure PMI companies to waive their right to deficiency judgment in the event of a short sale.
• Impose a 5 year moratorium on deficiency judgments on first mortgages.

Thank you for your consideration.

Sources:

*http://info.trulia.com/index.php?s=43&item=131 **http://www.mortgageorb.com/e107_plugins/content/content.php?content.9913 ***http://iloanhomemortgage.com/uncategorized/fannie-mae-and-freddie-make-mac-move-to-no-loan-to-value-limit-loans-on-harp/

The Federal Housing Finance Agency, with Fannie Mae and Freddie Mac, has announced a series of changes to the Home Affordable Refinance Program (HARP). This program was designed to be able to help people who were in a position of negative equity. Now, it someone is upside down on their home, there will be no limit to how far upside down they are in order to qualify for these loans. This program will continue to be available to borrowers with loans sold to the Fannie Mae or Freddie Mac on or before May 31, 2009 with current loan-to-value (LTV) ratios above 80 percent.

Here’s a summary of the most significant changes to the HARP program:

• Eliminating certain risk-based fees for borrowers who refinance into shorter-term mortgages and lowering fees for other borrowers;

• Removing the current 125 percent LTV ceiling for fixed-rate mortgages backed by Fannie Mae and Freddie Mac;

• Waiving certain representations and warranties that lenders commit to in making loans owned or guaranteed by Fannie Mae and Freddie Mac;

• Eliminating the need for a new property appraisal where there is a reliable A VM (automated valuation model) estimate provided by the Enterprises; and

• Extending the end date for HARP until Dec. 31, 2013 for loans originally sold to the Enterprises on or before May 31, 2009.

This change, coupled with serious talk of the Fed doing more quantitative easing involving purchasing mortgage backed securities, could be mean BIG opportunities for people who, while well qualified as borrowers, have been locked out of being able to get today’s more favorable interest rates. To find out if a loan is owned by Fannie Mae or Freddie Mac, first find the property’s standardized address by going to the United States Postal Service website, click on “lookup a zip code,” and find the properties “standardized address.” Then, enter that address into these lookups to see if there’s a match:

Does Fannie Mae Own My Loan?

Does Freddie Mac Own My Loan?

FHFA Harp Changes.pdf

A prospective home buyer or investor might have a clear idea of what he or she wants in the property they'll buy but the current market brings complexities that make setting up search criteria for this purchase a little more complicated. The difference between bank-owned, short sales and person-to-person transactions bring unique elements to this search process that cannot be dealt with by search criteria alone but that's where preparation and planning should begin. There are different negotiating tactics, condition of properties and buyer timelines that must be taken into consideration with each of these types of transactions and they all have a bearing on search criteria for a home buyer.

Let's use an example where someone is pre-approved for a FHA loan and the target purchase price should be around $180,000. Let's assume that they want to be in their new home at least within 8 months of starting the process and want to buy in Saint Paul, MN (although these principles apply to most markets). How might this buyer benefit from 3 sets of search criteria? 

Person-to-Person Sale Search:

In a person-to-person sale, there is no element of the transaction on the seller's side that requires approval from a bank. The seller is free to negotiate solely on the basis of their own interest. I recommend setting up a search labeled "person to person," enter your search criteria and be sure to exclude Bank Owned and Short Sale transactions so you know that these are less likely to have the property characteristics and negotiation differences that those transaction types would. Then, I'd investigate the local market data to find what the percentage of the original list price sellers are getting in that area. In this scenario it would be 91.1% (see chart below). If the seller is getting 8.9% less than asking price then you want to make sure that your search criteria is setup for 108.9% of the price you're pre-qualified for. In this scenario that would be a little over $196,000. Skipping this step could cause a buyer to miss out on the property they're really looking for.

Bank Owned Sale Search: With your "bank owned" search, you want to make the same computation. In this case it would be 10.6 percent less than asking price and 110.6% of the pre-approved amount in this scenario would be a top end search criteria of a little over $199,000. When viewing the results of these search criteria, you want to keep a few things in mind.

The properties in the results are more likely to have physical deficiencies due to being abandoned by their previous owner. This can not only add to the costs of owning that home but present complications with financing. In this scenario, many of the properties showing up in the search might have problems that would lead to FHA work orders. Sometimes, even the presence of FHA work orders can kill a transaction as the bank/seller might refuse to do anything about it and won't allow the buyer to cure the issue either. In this case, the transaction will fall apart. Additionally, depending on the city the property is in, these physical deficiencies can lead to code compliance issues which can present obstacles to being able to occupy the property or even have the title conveyed to the buyer.

Another feature of bank-owed transaction is that typically the contract used is the contract chosen by the bank and it is heavily favored towards their interests. Often times, it's easier to lose earnest money and many have clauses for monetary penalties for delayed closings. Lastly, these transactions statistically close more quickly than any other type. This means that a buyer's financing must be well organized and ready to go (not that it shouldn't be anyway).

These won't be on all bank-owned properties and I'm not suggesting that a buyer necessarily exclude them but when looking at a list of properties through a separate "bank owned search", it's nice to know when one is looking at them what one can expect should they proceed.

Short Sale Search:

Short sales are unique because it's the only situation where the seller doesn't have a true profit motive. Sellers in this situation are not allowed to make money so they are often inclined to take the first semi-reasonable offer with a buyer who looks likely to close. This can translate to very good deals for a buyer and that plays out statistically where we find in this scenario that sellers selling short are taking 83.4% of their original asking price. This would mean that we'd take 116.6% of the pre-approved amount and set this search at nearly $210,000. That's a striking difference from a person-to-person or bank owned sale and can open up some excellent housing possibilities for a buyer who might otherwise have limited their search.

There are two concerns to be aware of with these purchases though. One is that there are sometimes physical deficiencies in these transactions that can be hard to cure if they're significant since the seller is likely to be cash strapped. Nonetheless, these are typically easier to deal with in a short sale transaction than a bank owned transaction. The other, and most important one, is timeline. In this scenario, if the buyer wants to be in their new home within 8 months and want to consider buying a short sale, they'll likely need to submit their purchase agreement within 40 days of starting their search since these transactions take the longest to get done (see chart below). The seller's bank has to approve the transaction and that creates considerable delays. If this buyer has gotten 3 or 4 months into the home searching process with no luck, it might be wise to stop considering short sales as it would likely be unreasonable to get that process done in time to meet the buyer's deadline.

What you need it a Home Searching Tool:

Different people will have different opinions about this but mine is that it can be tedious for both a buyer and their Realtor to establish these 3 separate searches and make the ongoing tweaks, adjustments and refinements that arise as a buyer narrows down what he or she wants. For that reason, a secure and buyer-driven search tool which allows the buyer to setup multiple searches and modify them as needed. The tool would have to be rich in options available to the buyer as far as crafting search criteria is concerned. Beyond the basics it would have to include the ability to require a search for short sales at the exclusion of bank-owned and person-to-person sales and any other combination thereof. I usually recommend the Home Buyer's Scouting Report as it meets this need along with many other. I'm sure there are others that do this but I haven't run into them as of yet.

Conclusion:

Today's market requires a buyer to look at their home search in three dimensions. This can help them find properties they otherwise might not find, avoid transaction inconveniences that otherwise might come up at inopportune times and it can also assist them in managing their home buying timeline. With the assistance of a Realtor in understanding all of the differences in transaction types, the best way to do this is to leverage powerful home searching tools to keep the search process organized and in context.

Chart 1

Chart 2

I have a lot of people call me to get pre-qualified to purchase a home using FHA financing after a short sale.  Early on, not a lot of these scenarios panned out but these days, more and more of them do.  When they don’t, the number one reason is because they took bad advice from a party to their short sale transaction.  That advice?  “Mr. and Mrs. Short Seller, you need to be late on your mortgage to qualify for a short sale.”

This is often false and has devastating consequences.  In many cases, proving imminent danger of default is all that is needed.  Imminent danger of default is defined this way, “a borrower is considered to be in imminent danger of default when he or she is likely to default on his or her mortgage payments within the next twelve months.”  Before we get into the consequences of misinformation, let’s review the facts:

1.      Fannie Mae does not require a mortgage to be late in order to qualify for a short sale.

2.      Freddie Mac does not require a mortgage to be late in order to qualify for a short sale.

3.      FHA does require a mortgage to be late in order to qualify for a short sale (stupid).

4.      VA uses the “imminent danger of default” rule on modifications but there hasn’t been a clear Circular regarding its use with short sales, . . . yet (and it doesn’t say they need to be delinquent either).

5.      PMI providers do not universally require a mortgage to be late in order to qualify for a short sale - some do and some don’t (the trend is leaning towards more not doing it in the future and most of their policies are published on the web).

There is risk in getting this advice wrong both for real estate professionals and home seller’s alike.  For seller’s, should they go into default solely for the sake of getting a short approved, they will forfeit their chance to be eligible for buying a home after a short sale using FHA financing for 3 years.  They will also undermine their chances of getting a shorter pre-foreclosure waiting period with Fannie Mae financing if they want to use the extenuating circumstances argument.  In short, it knocks them out of home ownership for 2 but more likely 3 years.

If a seller doesn’t know that they’re giving these opportunities up when they make late payments and should later find out that it may not have been necessary, the person who gave the wrong advice might want to refer to this whole paragraph as the “provable damages” section of this post.  Unless the person giving such advice was an informed attorney or the loan servicer, any other might as well be practicing law without a license.

Loan servicers get this wrong quite frequently too although somehow they get kind of a pass on this one.  The bottom line is that they need to adhere to the servicing agreements between them and the owner and insurer of the loan.  Say for instance your call a loan servicer, . . we’ll call them P.J Chevy Morgan and they are servicing a loan that’s owned by Fannie Mae that doesn’t have mortgage insurance and they say that the loan must be late in order to get approved for a short sale, the solution is simple.  Kindly inform them that they aren’t servicing their loan in accordance with the wishes of the owner of the loan and they should review their contract and quit making ignorant statements.  And, in the meantime, continue processing the short sale under the assumption of imminent danger of default.  If evidence of their mistake is provided (links above), they will proceed.  A lot of these people working for servicers are truly surprised to learn that they’re wrong and are accommodating after the fact.

There are two lessons here.  Home sellers doing a short sale should do the extra research on the owner and insurer of their loan and look into their policies on “imminent danger of default” vs. true default and real estate professionals should be wary of giving advice on these matters and would do best to carefully and concisely relay communication (with a paper trail) from other parties to the transaction rather than make suggestions.  Indeed many real estate professionals are requiring the retention of outside counsel to handle all short sale negotiations and this just may be the wisest course.

Useful links:

●        Does Fannie Mae Own My Loan?

●        DoesFreddie Mac OwnMyLoan?