Assessing HAMP a year later

H A M P—Home Affordable Loan Modification Program was discussed in detail yesterday. If you missed it, it would be valuable to read it before you read today's blog.

First, let’s analyze what has been accomplished under the program. The program was projected to reach over 4 million homeowners with much needed help to sustain home ownership. The end of the year report indicates that fewer than 100,000 have, in fact, been granted permanent (5 year permanent) mortgage modifications since the program was implemented in March, 2009. For those 100,000 or so, they see it as a success (even if they do feel 20 years older because of the process). I feel pretty sure that the other 3,900,000 would consider it a failure. The horror stories of run-arounds, and lost paperwork and so on and so forth defies explanation and even the most mild-mannered person can be pushed too far.

Why Has HAMP failed?

The simple reasons are that it was created without a clear understanding of how the bank world works (the role of the guarantor behind the loan) and some other critical components were just overlooked.

Capacity—The dilluge of consumers instantaneously seeking help totally overwhelmed servicing shops who were already stretched past capacity because of defaults. Without funding for the hiring and training for substantial increases in staff to handle the flood of requests for help, the plan was doomed to be as ineffective as history has shown it to be. Individual lenders have sent PR teams across the country to talk about the way they handle modifications, but I am talking about a massive, organized, on-going effort to train the staff within the lender shops what was expected from the government and how the program was to be implemented. For a simple look at the capacity issue—I have folks tell me all the time, “You should be offering this and you should be doing that and why aren’t you answering questions online from individual borrowers?” I look at them like they’re crazy. HOM is a small company with 3 employees and the company’s income is generated almost exclusively from speaker fees. You want production equilvalent to a large company but you are not offering any funding or staffing just creating more jobs. The NEED for something does not translate into the CAPACITY to provide it without resources which include funding and personnel. HAMP did not adequately address the capacity to get the job done.

Resources—The expectation that only HUD approved housing agencies or similar non-profits should be the ONLY endorsed sources for help totally belies the fact that the program was designed for borrowers with mortgage balances up to $725,000 and non-profits primarily restrict their services to folks who earn less than middle income. Hence, no provision for a referral to anyone if you are not at the lowest end of the income spectrum. Worse, a condemnation (by our President no less) of any organization which offers help for a fee (to middle and upper income borrowers who are looking for such help). This major oversight means there were no guidelines, training, or criteria established for this needed service and YES, some vultures stepped in to fill the gap. California now has some pretty strong anti-vulture legislation which pushed most of the loan modification businesses there out of business, and not a day too soon for many of borrowers who have found that un-trained and un-regulated help can lead to a diastrous outcome.

Non-Profit Push Back

I understand that I am inviting non-profits to yell at me but before you start yelling to defend your position as the only people who care—What is your current back log? How many more people could you see? Is your staff already maxed out? Have all of your counselors received substantial modification and foreclosure law education in your state? Do you offer a sliding scale so any homeowner, any income level has access to your services? What is your success rate with completed modifications? Are borrowers re-defaulting within a few months? If the answer to any of those questions is yes, this indicate you are already serving your maximum capacity (and I am informed enough to know that most are). Stop arguing that help should ONLY be available to those whom you serve and embrace the idea that all borrowers, all income levels deserve to have representation to help them with the crazy world of banking. Businesses which have trained staff, operated ethically, with sufficient government regulations and appropriate bonds in place could go a long way to easing the foreclosure problem which continues to plague this county and will for the next several years. The time has come for the creation of Foreclosure Intervention Services—For Hire, as respectable businesses, listed in the phone book right next to non-profits as a resource for struggling borrowers. Repeat after me—Prohibition did not stop folks from getting alcohol—it just made the bootleg market prosper. When are we going to learn? Where there is a need—a provider will emerge.

Program Lacked Basic Understanding of the Bank World

It was a VOLUNTARY program. Lenders were not required to participate. In fact, they could NOT be forced to participate. It is not possible to force someone to alter the terms of a contractual agreement AFTER the fact. It doesn’t matter that the entity trying to compel cooperation was the US government. Mortgages are legally binding contracts. Lenders already had not only the contract with the borrower, but contracts with the investor, the guarantor, the hedge fund, and so on. The performance of one contract impacted several other contracts and therefore made it nearly impossible to make a significant change to the original contract (the mortgage) because of the cascading impact on all the other contracts which had grown out of the securitization of the underlying contract. Formulating a plan without a clearcut understanding of the securitization process was a major misstep in trying to implement HAMP.

Motivation Insufficient

Beyond the securitization problem, the issue of sufficient motivation to modify made the challenge almost insurmountable. While many would argue that the lenders were paid for their cooperation, that argument fails to address what they would receive by NOT cooperating. Now lenders are going to be mad when I state emphatically that they receive MORE to foreclose than they do to modify. How could that be you ask. Lenders lose money DURING the default process: they must pay the investor as agreed, incur expenses associated with the servicing of the loan, work to avoid having a lien placed against the property for failure to pay homeowners’ association dues, cover the cost of insurance to avoid an uninsured loss, etc, etc. All of these are out-of-pocket expenses—UNTIL a foreclosure is completed. Then, on ALL insured loans, which is MOST of them, the lender recoups many of the expenses which they have put out and collect the amount of the insurance on the loan. It is true that they will seldom get back the missed payments (that remains a loss to them) but the other expenses are usually reimbursable expenses. If you’ve wondered why it seems that the lender is not really trying to work with you, simply consider they need the process to be over, so a claim can be filed.

HAFA—A New Program announced on November 30, 2009 will be addressed next week.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

Your Real Estate Advisor: Avoiding Loan Sharks

Happy Valentine's Day, readers!!
Today, we bring you:

Avoiding Loan Sharks

Twenty five or thirty years ago, we called them loan sharks. Everyone knew exactly who “they” were and what practices were being described. Loan sharks have not only survived, but thrived because they serve a need. Then, as now, there were a substantial number of consumers who needed money for the everyday necessities, who could not qualify for a loan with reasonable terms from one of the traditional prime lenders. These prime lenders did not make loans to people unless they had unblemished credit, stable and substantial employment and a savings account. It was frequently stated (and frequently true) that you couldn’t qualify for a loan unless you didn’t need the money.

That was then and this is now. Now we have email, internet, and predatory lenders. The name is so fancy that most people don’t realize it’s the modern name for an old practice: loan sharking. The approach today is ultra modern, offering the ultimate in direct marketing and customer service. For an added touch, many add the spectra of religion, either by their name or the off-quoted “God wants us to prosper.” They conveniently drop the rest of that verse which states, “As our souls prosper.” We can sometimes identify who the modern day “loan sharks” are, but unfortunately, many times we cannot. Many of them have on business suits or business dresses. They all have business cards. Many of them have very nice offices. In a modern twist, the company name will sometimes be a subsidiary of a prime lender whose name you recognize and know has been in business for a long time. An increasingly large number of prime lenders have created sub-prime lending affiliates who participate in modern loan sharking a.k.a. predatory lending. They are very savvy business entities. They have attorneys and lobbyists; they contribute lots of money to political campaigns. They have survived and thrived at the expense of consumers who did not understand the loan terms they agreed to, frequently did not realize they stood to lose their home.

There are the direct victims; they took out the loan. At the least their finances are now more stretched than before; at the worst, they lose their house to foreclosure. There are thousands of these victims in any state. A much larger group of people are the indirect victims; they just happen to live in a neighborhood with increased foreclosure rates and resulting vacant houses. These indirect victims are left to deal with rate, roaches, and higher incidences of vandalism and violence. Most homeowners have experienced increased costs in their homeowner’s policies because of losses incurred by the insurance companies.

Increased numbers of foreclosures directly translate into lower property values for home in the immediate vicinity. Equity is eroding while frustration increases when homes stay on the market for extended periods of time.

Buyer BEWARE!
“We’re really in this thing together”

Copyright © 2009, HOM, LLC. All Rights Reserved.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

From the Desk of..."REALTOR at the Crossroads"

You’re a

REALTOR at the Crossroads

This is not a time for ‘dabbling’ in real estate. If you’re not a BIG DOG or prepared to become one, you really must stay on the porch. If you’re a little ‘soft around the edges’ and cry at scary movies, now would be a good time to non-renew your license.

Challenging Times

We are hard pressed to remember a time which has been harder for the housing market, and consequently, for real estate professionals in the past 25-30 years. If you are still trying to decide whether or not to renew your license, then read on. I have been warning that we were headed for just this situation since 2002. Mostly, I have been laughed at for my trouble or asked “Are you serious?” I was serious and correct. Everybody else is adequately covering the challenges now that we are actually in the midst of them. I have chosen always to understand my environment and figure a way to become at peace with it. So, let’s fast forward to the best of times.

Best of Times

This is the best of times to seize the opportunities being presented by today’s challenging real estate market. If you have lived a few years past, say, 30, you know that inherent in all difficulties lies the potential for new opportunities. This really is the best of times to take stock of both your personal and professional lives and decide—AGAIN—what you want to become when you grow up. While traditional real estate sales, for the average REALTOR, have become difficult at best, YOU are not average. You decided to read this article hoping to find insight and perhaps direction since you recognize you are at a crossroads.

Today’s Reality

No matter what city or state you happen to call home the challenges facing real estate professionals today are remarkably similar. There are more properties available for sale, a somewhat (or perhaps extreme) smaller pool of traditional buyers, tighter guidelines for financing, more REOS and a multiplicity of factors pushing property values down. Did I describe your market pretty accurately? There are exceptions, of course, but your market is likely described above. Today’s reality. Your success depends very little on what is going on in your market. Instead, your success is tied to how you respond to the market and whether or not you position yourself to be one of the agents who not only survives---but thrives—during this turbulent market. A concentrated, committed, full-time effort will almost guarantee success.

Specialization in Expanding Fields

The successful real estate professional two years from now will be able to look back and tell you with clarity exactly when they stood at the crossroads and made a choice which took their career to a new level. Specialization in one of those areas which are expanding because of the downturn will allow you to become one of those future success stories.

What Might a Career Shift Look Like?

• REO sales person—representing lenders/servicers by selling bank owned property. ( I am a former Fannie-Mae Broker specialist.) Can you imagine the volume of listings I would have now if I still represented them?
• Trash-out Specialist—handling all the details needed to trash-out and prep homes which have been foreclosed
• Locksmith—again—working for lenders to re-key when properties are vacated prior to foreclosure and again after the sheriff’s sale for placement on the open market as an REO
• Reverse Mortgage Specialist—working for a company which sells reverse mortgages to seniors who have equity in their homes as a way to avoid foreclosure/enhance their lives
• Foreclosure Intervention Specialist—(FIS)–starting a business as a consultant to offer foreclosure intervention counseling/representation, especially in upper end markets/areas
• Investor—in rental property you expect to hold for the duration of this down economy
• Property Manager—for single or multi-family—WARNING—not a simple as saying you can.
• Short Sale Specialist—again-not as simple as saying you can. Agents who have learned to be proficient at the strategies for successfully completing a short sale will be in demand. You would have more business than you could handle—IF YOU KNEW the secrets to successful short sales.
• Default Counselor—not the same as a foreclosure intervention specialist at all. You would most likely work for a non-profit agency doing counseling or you might start your own firm
• Real Estate Attorney–who decides to represent consumers who are struggling with their mortgage payments. You would also receive referrals from REALTORS, default counselors, and foreclosure intervention specialist when legal help was needed—WHICH IS CONTINUALLY.
• Lawn Care Company—not very glamorous---but definitely a business with a strong demand. As more foreclosures occur lenders are increasingly under the gun to keep properties which they own maintained. They’d rather pay you than the city.
• Show Home Franchisee Owner—finding qualified tenants for upper end properties while they remain listed. It’s a different class of property management. Great income—thriving in some markets.
• Property Valuation—using professional BPO forms ( such as the Fannie Mae BPO long form) and skills which include making adjustments for individual components of the property. Your most likely employer: lenders and servicers. Additionally, I believe consumers would be willing to pay for fairly accurate assessment of their property’s current resale value in order to help with their difficult choices in this climate. (I’m sorry guys, the traditional BPO or CMA is not thorough enough for today’s market.)

Dare to Re-Define Yourself

Trust me, time is on your side. The current wave will be rolling for the next 5-7 years or more. Get ready for the next ‘stage’ of your real estate career. Since I entered real estate in 1993, I have gone from buyer’s agent for entry level homes to listing agent to Fannie Mae Broker-Specialist to becoming a national trainer on foreclosure issues. Life is about ‘stages.’ Get un-stuck, buckle up and hang on!!.

You’re a REALTOR at a crossroads; which path meshes with your skills and interests?

Observations From the Desk of Mildred Wilkins,
President and Founder of Home Ownership Matters, LLC.

© Copyright 2008, Home Ownership Matters, LLC. All rights reserved.
(FIS) is a registered trademark of Home Ownership Matters, LLC.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

Community Service Announcement: Modification Warnings

Community Service Announcement: Modification Warnings

There is a lot of positive which can be said of getting your loan modified and the mortgage payment changed to one which is more affordable. But you would be wise to consider some new twists which may mean it is not as great a bargain as you thought.

Temporary or Permanent Change

Back in the olden days—just a few months ago—loan modifications were made by lenders for distressed borrowers who had demonstrated the ability to resume payments and sustain them as permanent changes to the existing mortgage. The modification was processed as a PERMANENT change in the loan terms so the borrower could rest assured that the new loan was, in fact, one which could work for them. Many of the new modifications are only TEMPORARY. The trial period may be as short as 3 months or as long as six months. This is being used as a new test period to see whether or not you are able to sustain the payment. The problem is that there is no ironclad guarantee that the ‘modified’ loan payment will remain in place after that introductory period.

Life Happens

What happens if your loan is transferred to another servicer during your trial period? Worse yet, suppose your financial institution is sold or otherwise acquired by someone else? In either case, you would be holding an unenforceable, short-term agreement with a party different than the one you actually have to deal with concerning payments. You would be wise to consult with an attorney about the terms of ANY modification being proposed by your lender or to have an attorney to help you with structuring a modification which is practical given your current situation and the value of the property.

Temptation Could be too Strong …

Under the current administration’s plan to encourage lenders to modify as many loans as possible, lenders/servicers are being paid a fee to process those modifications. Substantial fees. They are paid based on whether or not they get the modification completed. They are paid whether it is an agreement which works for you or not. They are paid whether or not you have received what is called “net tangible benefit” (did it do you any good?).

We would hate to think that a bank might process modifications in order to receive payment even when they were aware that the payment amount was not sustainable for the borrower, but remember these are the same institutions which processed loans for some folks who clearly were not in a position to make those payments either. I’m just saying....

Has the modification been recorded?

One might argue that there is no point in recording a short term agreement and you could see their point. But maybe the reason for processing short term or temporary modifications was to avoid recording them in the first place. If there is NO RECORD officially—as in your local city’s Recorder’s Office—of the newly created Modified loan then the only record which exists is the OLD, unaffordable loan. IF your loan is transferred or sold, then the OLD loan is the current loan which is the ONLY loan that exists. Surely you can see where I am going with this.

Recommendation: If your loan has been modified and you want to keep that payment then it MUST be recorded.

HINT: Insist that your modification agreement contain a provision for the loan to be recorded promptly after agreement is finalized by your and your lender/servicer. Otherwise, you could be in for some heartburn.


Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

Reflections on the Home Affordable Loan Modification Program

The Obama Administration announced the H A M P program with great fanfare on March 4, 2009. It was a bold step to address the foreclosure problem which was clearly swirling out of control. $75 Billion committed to reducing loan payments. Projected to help more than 4 million homeowners.

It Began With a Premise

Foreclosures in the country were occurring at break neck speed and something had to be done. The plan was conceived based on the premise that homeowners would pay their mortgages—IF they could. Despite being upside-down, borrowers are committed to retaining their home. Warren Buffet has been quoted as saying “Commentary on the current housing crises often ignores the crucial fact that most foreclosures do not occur because a house is worth less than it’s mortgage (upside down). Rather, foreclosure takes place because borrowers can’t pay the monthly payment they agreed to pay.” It is a premise with which I agree and an honorable premise on which to craft a resolution.

A Look At the Program

H A M P or Home Affordable Loan Modification Program was launched with the specific and ambitious goal of making sure that millions of Americans would have the opportunity to remain in their homes even though market dynamics and other factors beyond their control meant the value of the property had declined AND they were struggling with payments but they wanted to keep their home. The goals were clear, the mandate receiving strong support. It seemed a good thing—for all the right reasons.

Reduction in Payment

To address the ‘ability to pay’ the H A M P plan provided guidelines for getting those payments under control. Conservative banking guidelines for many years had shown that mortgage payments at no more than 31% of a borrower’s income usually prove to be sustainable so that OLD underwriting guideline was used as a benchmark for what should be the new goal to help us get out of this mess.

To accomplish this, lenders and their servicing partners were provided with guidelines to make this happen:

a. First, Reduce the payment amount so that it was no more than 31% of the borrower’s monthly income

b. Reduce the interest rate to as low as 2% as a way to get the payment down farther

c. Extend the term of the loan—up to 40 years—further reducing the monthly payment

d. If the payment amount was still more than 31% of the borrower’s monthly income, THEN funds from the H A M P fund would be used to pay whatever was needed to get the payment down to 31% of monthly income

Adjusting the principle balance was not an option addressed by this plan even though it was a logical step (in the opinion of this writer) and had been the objective of the ‘cram down’ component of the bankruptcy reform legislation defeated late in 2008.

Criteria for Participation

H A M P was created as an option for owner-occupied properties with outstanding balances of $729,750 or less. The homeowner was required to demonstrate a hardship caused by a factor or factors beyond their control. It applied to loans originated prior to January 1, 2009. Modified payments were set up for 3 months, as a test to see if the borrower could afford the new payment.

If they made that threshold, then the loan modification became permanent (for 5 years, so let’s say, semi-permanent).

Investors or speculators were exempted from participations. So if you had bought into the hype that building a piece of America was the way to financial security, you were on your own. Consequently, it was expected by a number of observers that the number of foreclosures in this segment would rise dramatically, and RISE they have.

Incentives

In order to facilitate this voluntary program, the H A M P initiative provided for financial inducement to all parties to participate. Servicers (and/or the lenders whom they represented) were to receive $1,000 for each completed modification. The plan called for an additional $1,000 for each year the modification remained in place with a cap after 3 years. The borrower could get $1,000 off their principal balance for each year, up to five years.

“Net Present Value” Test

In order to determine which loans should be modified, lenders/servicers were to conduct a ‘net present value’ test. The test was supposed to compare the expected cash flow which would be generated under the program (with a modified, performing loan) as compared with the expected cash flow if the loan were not modified (and continued non-performing if the borrower were already in default). Let’s see, some $ paid, versus $0 paid. Not a hard test really. Seems like a no-brainer to me.

Good intentions for a worthy cause. So how did it go wrong. Why have consumers across the country been yelling fowl by the hundreds of thousands? Why has the Administration acknowledged that the program has not reached nearly the scope that they projected? We’ll provide those assessments in tomorrow’s blog. Don’t miss it.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

Q&A: Affordable Housing

What is “Affordable Housing”?

Q. With so many people losing their homes to foreclosure and the loud discussions about whether or not they should be ‘rescued’ being raised all over the country by folks from all walks of life, perhaps we need to try to figure out what makes a house affordable.  Is ‘affordable’ a term which means a certain price point?  Is affordable different in different parts of the country?  How can person know if a house is affordable? It is all so confusing.

A.  Oh what a difference a few bank closings and a little recession make. Back in the olden days, say 2007, even then the term was elusive, referring to an elusive, unidentified house that the average middle class American could afford. Now we can’t even figure out who is a middle class American much less what is or is not affordable. All our bench marks have shifted. The value of a home today changes almost as frequently as you need to change sheets. Nonetheless, we need to get a handle on this whole affordable thing.

Let’s take the first question: Is affordable a term which means a certain price point?

It is more helpful to look at a home as being affordable in relationship to your overall income rather than a certain dollar amount. All houses are affordable to SOMEBODY. But maybe not affordable to you. Back in the very conservative, distant past, lenders used the guideline for loan approval as 28% of your gross monthly income (amount you earned before taxes) to be allocated for housing expenses. More than that and you could easily fall on hard times if your income shifted a bit. 

Our current crisis was caused in large part by a shift in practice which allowed many homebuyers to commit as much as 50% or more of their income to their housing payment. If you had a healthy savings account, property values remained stable, the creek didn’t rise and your dog didn’t die, then you MIGHT have been okay. But life happens. Your money got ‘funny’ (that’s what Aunt Carolyn calls it when it doesn’t stretch as much as it used to), property values started going down like elevators (every day) and interest rate resets have taken their toll. Now not only can many folk not afford the home where they currently live, they are unsure what is “affordable” for them. Hopefully, this guideline will help you decide. Very simply, if you make enough in 1 week to pay for your housing that should leave you with a comfortable amount to manage the other expenses of your life.

Conservative, traditional lenders have found that as long as the consumer’s total long term debt is no more than 36% of their total gross income then there is enough wiggle room to afford other items which constitute a “reasonable” lifestyle. This rule has proven over the years to help people to have medical coverage, some degree of entertainment as well as build a small savings account.  Rarely would such a consumer end up in default on their mortgage unless there was a total loss of income.  

This then would represent an affordable house payment. Each individual has a unique affordable housing expense amount which would determine what is affordable for this family. I strongly believe it is important to keep home prices as low as possible, to offer a wide range of homes at different price points so that more consumers are able to comfortably afford to own a house and spend less than the  50%+ that many families currently spend to have a roof over their heads. What I have just described is “an affordable house payment” which is the goal for all us.  

The American Dream has almost universally been described as the desire to own a home. Politicians, housing professionals and the general public are encouraged to take a fresh look at our current concept of what achieving that dream means. Are we being successful if we provide the dream to people who can acquire but not retain the home for more than a few years? Are we achieving  our goal if many of the people we get into new homes are paying so much for that home after interest increases and a full tax assessment that 50%-60% of their income is required for basic housing expenses leaving precious little for any of the other necessities of life? Are we really providing affordable housing or housing which appears to be affordable at the beginning because of creative financing ploys which reduce the initial payments by hundreds of dollars per month deluding consumers into believing it is “affordable”? Why are foreclosure rates so high in the FHA arena with many first time buyers? Are the down payment assistance programs leading to more people being home owners (retaining a home for several years) or just  a revolving door of more people who build/buy but are back in the rental market within a couple of years? 

It is time to raise the difficult questions and look for some honest answers in trying to shape what will be done to improve our housing market. It is important to offer “affordable” housing to help stabilize our communities, to allow more consumers to enjoy both the emotional and financial benefits of home ownership. It is a dream worth working toward and saving to achieve. It should be more than a fleeting illusion which disappears and leaves in its wake a disillusioned, frustrated consumer who barely comprehends that the beautiful home and future they envisioned was doomed from the beginning.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

Your Real Estate Advisor: Buyer Beware

Buyer Beware!
Be Careful—Don’t Borrow Trouble

1. Regular Banks and Credit Unions are your safest bet to avoid predatory lending practices. Federal regulations prohibit them from charging excessive fees, etc.
2. Choose reputable lenders, established in your city or state. Reputation is a powerful deterrent to unscrupulous practices.
3. If you have decided to use a mortgage broker, do so with care. Be sure you know how much you are borrowing to pay the broker fees, points, and closing costs, and/or other junk fees.
4. Insist that you get a “Good Faith Estimate” of all the costs associated with the loan within 3 days. It’s the law! Do you understand all the costs? Are they reasonable?
5. Remember: all real estate transactions that require a loan (purchase) will result in a lien being placed against your home.
6. Comparison shop at least two or three lenders. Use the “Good Faith Estimate” to determine who is really offering you the best deal. Rate is not the best way to tell. What are the actual costs of the loan? What are you paying in up-front prepaid finance charges? Is there a prepayment penalty?
7. Avoid single premium insurance. It is seldom a good idea.
8. Beware if the loan includes “yield spread premium.” This is actually an additional payment to the broker for getting you to accept a high cost loan.
9. Our economy is fragile. Fixed rate payments which include taxes and insurance will offer you the most stability in your housing budget. Be extremely cautious in considering a variable rate or a 2-1 buydown product. You are only delaying higher payments.
10. Review all the documents before you go the actual closing. Ask questions until you understand what you are signing.
11. Consider having an attorney (cost is very reasonable) to review your closing documents and/or attend closing with you for any real estate transaction: purchases, building, second mortgages, lines of equity, or refinancing.
12. Lastly, study the Disclosures section of the HOM website (www.homeownershipmatters.com), to help understand what the documents you sign at closing actually mean, and what rights you surrender when you sign them.

Copyright © 2009, HOM, LLC. All Rights Reserved.
“Your Real Estate Advisor” the column, by Mildred Wilkins

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

Q&A: Smoke & Mirrors

Q. I am extremely frustrated trying to getting my lender to work with me on getting a modification of my loan. I have already received notice that they have started foreclosure but I have also received a couple of letters which says they are willing to work with me on trying to keep my home. The problem is that the letters I have received do not have a name so I don’t know who to speak to. Every time I call I get a different person who gives me different instructions on what I need to do. Why don’t they provide a name so I can talk to the same individual and get something worked out?

A. The problem you are experiencing is a common one. It is amazing that lenders/servicers who claim to be doing everything they can to work with borrowers can’t provide a name for a contact or REAL numbers so you are not going through a series of numbers and extensions which frequently lead you nowhere. Most folks would assume if you got an unsigned letter that the sender was not serious about having you reach them.

Lenders and Servicers are under a great deal of pressure:

a. Pressure from the GUARANTOR who will ultimately absorb any loss via an insurance claim after an acquisition (foreclosure or deed-in-lieu)

b. Pressure from the government (whether or not they received TARP funds) to try to avoid foreclosures

c. Pressure from any investor who has purchased the underlying mortgage to collect and forward payments on a monthly basis, in a timely manner (or cover them themselves)

d. Pressure created by the INHERENT CONFLICT because the lender/bank needs to look out for their own best interest which is NOT best served by a lengthy loan workout and the guarantor whose BEST interest is not served by an acquisition. Essentially, the lender and their servicing partner have the responsibility for looking out for the guarantor which conflicts with their personal best interest. It’s kind of like a kid who has to appear to be compliant with a parent’s instructions since blatant defiance is totally unacceptable. S-o-o-o-o, you get surface compliance but lack of depth and sincerity. So consumers get telephone numbers which deadend nowhere and letters which say reach out and call me, but fail to say who sent them.

SMOKE & MIRRORS

There is the strong possibility that the failure to make it easy be in touch and get clarity for a workout could be a smokescreen. IF there is a foreclosure, the lender/bank closes the file and submits a claim for the amount of the shortage. End of their pain.

The behavior of SOME borrowers has become the anticipated response from all borrowers. As a consequence, practices at the servicer centers tend to demonstrate, by and large, an expectation that the home is going to foreclosure so why should they waste time and effort on genuine workout attempts.

If they work at doing a workout there is the aggravation of trying to work with a defaulted borrower who might not be totally committed to the process and either does not understand or for other reasons does not provide all the materials requested or does not do so in a timely fashion. Dragging the pre-foreclosure period out for months WHILE THE INVESTOR IS DEMANDING MONTHLY PAYMENTS can be a drag on the lender’s bottom line.

Consumers play into this mentality by not doing ALL that they can do to comply but the larger responsibility falls on the lender/servicer as the LEADER and PACESETTER for a workout to be completed. The lender/servicers could start by having a person’s name in the signature box of a letter saying call me, I can help.

IS THAT TOO MUCH TO ASK?

Copyright © 2009, Home Ownership Matters, LLC. All Rights Reserved.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

WORD: Loan Sharking

And the WORD for Today is:

Loan Sharking—no longer a common expression even though the practice is alive and well. Loan sharking means to loan someone money at a rate or on loan terms which clearly takes advantage of the borrower. Many states had statutes in place which set a cap on how much could be charged by unscrupulous lenders as far back as twenty-thirty years ago. Many consumers began using their credit unions as well as traditional lenders and loan sharking declined. Then cam the 90’s and the hey day for mortgage brokers and sub-prime lending. The availability of loan via the internet expanded access to loans by borrowers who were credit challenged. Limited regulations and almost total lack of oversight regarding the day to day practices of mortgage brokers ushered in the return of loan sharking. Predatory Lending is the new name for a practice which has been around for centuries. *Borrowers Beware!

See this post, "Buyer Beware", this post for the definition of "predatory lending", and this post for more information on "Avoiding Loan Sharks".

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

You can find more helpful definitions of WORDS like these in Your Real Estate Advisor which can be purchased at www.DovePublishingHouse.com.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

WORD: Title Policy

And the WORD for Today is:

Title Policy – common types of title policies are “mortgagee policies,” which protect lenders, and “owner policies,” which protect buyers. Most lending institutions won’t loan you money to buy a house or other property unless you purchase a mortgagee policy. This policy will repay the balance of your mortgage if a claim against your property voids your title. Mortgagee policies remain in effect until the loan is repaid. Most lenders will require you to buy a new mortgagee title policy if you refinance your home. When the new loan pays off the existing loan, the old mortgagee policy expires. You are entitled to a premium discount on a new mortgagee policy if you refinance within seven years. Owner policies insure property owners against the specific kinds of claims listed in the policy. When you buy a house and purchase a mortgagee policy, a title company will automatically issue an owners policy—for a set premium—unless you specifically reject it in writing. An owner policy remains in effect as long as you or your heirs own the property or are liable for any title warranties made when you sell the property. You should keep your owner policy, even if you transfer your title or sell the property.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

You can find more helpful definitions of WORDS like these in Your Real Estate Advisor which can be purchased at www.DovePublishingHouse.com.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

WORD: Cash-for-Keys

The WORD for Today is: Cash-for-Keys:

Cash-for-Keys is a common practice utilized by representatives of lenders or guarantors who are attempting to facilitate the vacating of a recently foreclosed property. A sum of money ($500-$1000 is common) may be offered to the former owner of the home or a tenant who has not left the property by the date of the sheriff’s sale. They will usually be asked to sign an agreement to leave the home totally empty, state a specific date and is binding only if signed by both parties.

Has become a common practice in the foreclosure business where a REALTOR or other representative of the servicer who is processing a home which has been lost through foreclosure will offer to pay the consumer (still residing in the house) an amount of cash to vacate and turn over the keys after cleaning out the house. There are occasions when cash-for-keys may be offered to a tenant who is the occupant. This practice generally benefits the lender or servicer by helping them to gain possession faster than they would by utilizing a forceful eviction as well as the financial benefit of having the consumer agree to leave the property clear of all personal belongings and debris. The consumer benefits by having an additional sum of money to help them with expenses needed to move or pay a deposit on their next residence. A consumer might expect between $500.00 to $1000.00 depending on their circumstances, the part of the country where the home is located and the particulars of this specific file. There is no automatic. They will usually be asked to sign an agreement to leave the home totally empty, state a specific date and amount being offered. Such an agreement is not binding unless it is written and signed by the lender or the representative-agent-who is operating on their behalf. It is always in your best interest as a consumer to get such an offer in writing.

© Copyright 2008, Home Ownership Matters, LLC. All Rights Reserved.

You can find more helpful definitions of WORDS like these in Your Real Estate Advisor which can be purchased at www.DovePublishingHouse.com.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

Word: Orphan Houses

Today’s word is “orphan houses”, a new concept and a direct consequence of the dramatic increase in foreclosures across the country. There are numerous ones in your town and we hope your home doesn’t become one.

What’s an “orphan house” anyway? Unfortunately, it is a home which has been lost as a consequence of foreclosure or was voluntarily relinquished by the homeowner via a deed-in-lieu in order to avoid foreclosure. As if that were not bad enough, the insurer has neglected to transfer the title into their name which can cause major problems for the former owner down the road. 

As long as the title remains in the borrower's name, then any and all liability fall upon that borrower—who remains the owner of record. Thus the name “orphan house”, you lost it, and they have chosen not to legally claim it.

Now why would they do that? Obviously you are smart enough to know that when financial institutions do (or fail to do) something it usually is associated with saving them money. The catch this time is liability.  Whomever owns the property (has the title legally recorded in their name) bears the risk or liability for anything which occurs at or on the property.  If there is a fire and the vacant house burns, the insurer does not have a risk, it is NOT in their name. If the local municipality mows the 4 feet high grass and processes a bill for that address, it will have the former borrower name attached to it. (No new deed has been recorded). The homeowner’s association may continue billing in the name of the former borrower (that would be you) and those bills can be attached to the property as liens. 

As a practical matter, if there has been a foreclosure there is a clear date when the ownership rights in the property ended. That is very murky when you mailed off paperwork to process a deed-in-lieu. Lenders are very willing lately to let you walk, complete the simple form and leave the property (within some guidelines of course). I am simply telling you that they are covered, YOU, however, are not.

How do you avoid an “orphan house” in your future? The best advice is to seek legal counsel about the aftermath of a foreclosure or deed-in-lieu. A competent attorney should be able to help you work through the details so you don’t end up with an unpleasant surprise down the road.

Yes, it is definitely worth the legal fee you will incur to avoid possible financial risk down the road.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

You can find more helpful definitions of WORDS like these in Your Real Estate Advisor which can be purchased at www.DovePublishingHouse.com.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

From the Desk of: REO Landmines

Let’s start with the basics: REO (real estate owned) refers to real estate which is owned by entities such as lenders, servicers or corporations. There are several ways property becomes REO but most often it is through default of the borrower who is either foreclosed upon or voluntarily relinquishes the property through deed-in-lieu. Corporations also become entitled if they acquired the home as part of an employee relocation package buyout.

Whatever mechanism resulted in the acquisition, a piece of real estate is now owned by an entity who needs to sell it. A special division, either called the REO or disposition division, is usually charged with the task of turning REO properties into liquid assets. As the foreclosure problem worsens the percentage of homes on the local market for sale which are, in fact, REO’s has increased. Strategies for dealing with the holders of these properties are somewhat different than purchasing from a private citizen. Those differences can be looked at as potential landmines if you are not familiar with the process.

Landmine # 1. Most REO properties are sold using a standardized contract which will be used throughout the nation. (for instance, HUD, Fannie Mae, VA). The language and terms in these contracts will supersede anything you write in your local purchase agreement, therefore, it is critical that you understand all the language in their standard contract.

Landmine # 2. Most REO properties are sold “as is”. While entities must allow for an independent inspection if one is allowed by state law, there is no requirement that any repairs be made as a result of the inspection.

Landmine # 3. Buyer are frequently charged a per day fee for delays in closing caused by their side of the transaction. Whether caused by the borrower, their lender or the realtor does not matter. It is not uncommon for the delay fee to be $100.00 per day.

Landmine # 4. Transfer of title will usually be granted with a special warranty deed or a Sheriff’s deed. Both provide a MARKETABLE title; not a CLEAR title. It is common for liens to remain attached.

Landmine # 5. When submitting an offer on an REO property, you buy the whole “kit and kaboodle.” What’s in the “kaboodle.”

Copyright 2007, Home Ownership Matters, LLC. All Rights Reserved.

(As always, if you have any questions, comments or feedback, we welcome and appreciate them. Just e-mail Heather at homeownershipmatters@gmail.com. Thanks for reading, and come back soon to see what else we've posted!)

Q&A: Flood Insurance

Q. We closed on a house more than two months ago and just received a letter from the lender telling us we have to have flood insurance on the property. Shouldn’t the title company have done a survey and determined whether or not flood insurance was needed BEFORE they allowed us to close? How can they force us to take on this extra expense now?

A. It would be highly unlikely that a title company would close without a survey which stipulated whether or not the property was in a flood zone, therefore requiring flood insurance. The closing also should have included a “flood insurance certification” which would have declared that all parties were aware that no flood insurance was required.

However, mistakes do happen occasionally. It might have been missed or it might reflect a change in the flood map or very likely it means there was a situation where part of the neighborhood is in a flood zone and part of it is not. Your home might have ‘appeared’ to be exempt from the flood insurance requirement when, in fact, it was required.

Commitment to Cooperate

In the event there had been a recent change in the flood zone maps (or they just plain made a mistake) which means the property must be covered with flood insurance you no doubt signed a document at closing which states you would cooperate with all parties (Lender, title company or REALTORS®) if they needed you to help them with correcting forms, etc from closing.

Compliance Disclosure

Almost all closings also include a document which states you specifically agree to add flood coverage IF it becomes a requirement AFTER you have closed. Lenders have the right to have the collateral protected from risks such as floods and therefore the stipulation that flood insurance can be added , when deemed necessary.

I’m afraid you must continue the coverage. Flood insurance is pretty expensive and I know that can cut a good sized hole in your budget when you were not expecting it. But the real beneficiaries—You and Your Family.

Better to have it and not need it, then to need it and not have it.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

Q: What designation will lenders look for when applying for REO's and BPO's?

A: Until 2 years ago there was NO designation available, primarily they looked for experience. Within the past two years the Five Star conference, associated with dsnews (default servicing news) has been offering a certification program which is the national , elite certification for folks trained by the default industry—to serve the default industry.

The (FIS) Foreclosure Intervention Specialist certification is less well known (been around for 3 years) but is certainly excellent additonal training if you are interested in going after foreclosure related business.

I think the combination of BOTH would make you very well prepared to handle REO/BPO work if you are trying to break into that business. That is one of the few areas of real estate which has an abundance of activity right now and will continue to do so for the next 5-10 years.

Since the instructor worked for Fannie Mae as a Broker-specialist, I strongly urge you to take the FIS training and the Five Star training.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

Q&A: Appraisal Disappointment

Q. I want to re-finance my house and the appraisal came back significantly lower than I had expected. My broker says I can’t refinance now because of the low appraisal. How can I get another appraisal from another bank?

A: Sometimes when you answer literally the question which has been asked, you miss providing the information the person is really seeking. I will try to address both what you asked and what I think you are trying to get to.

Can you get an appraisal from another bank? The simple answer is “yes, you can.” By applying for a re-finance at another institution they will require you to pay another appraisal fee and they will also order an appraisal.

I am going to go out on a limb and assume that you mean by “the appraisal came in low” that it came back for less than the amount you had hoped for in order to cover expenses and make it worthwhile for you.

If your real goal is to find out what the value of your home is, there are several recommendations I would make which could accomplish that:

1. Find an independent appraiser and pay for an appraisal of the home, on your own—without an order from a bank
2. Select one or two competent, experienced real estate agents in your area and request a Complimentary CMA (Comparative Market Analysis) or BPO (Broker Price Opinion). Agents are usually happy to do this since they hope you will give them a listing later or at least a referral to someone else
3. Check the tax records on your home to see what valuation is used by the local Tax Assessor

Our current financial crisis was caused, in large part, by inflated appraisals; many of those were associated with re-finances. Lenders across the country are now being ultra-conservative and you are not likely to find anyone who is willing to refinance unless you have equity in the home which can be clearly demonstrated with an appraisal. Marginal values are not going to cut it.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

Q&A: Foreclosure Workout "Trickeration"

Q: I was behind on my mortgage and did all the right things, contacted my lender, gave them all the information they requested and cooperated with arrangements for a workout. When they finally set an amount for a repayment plan not only was the monthly payment 1½ times my regular payment but they also required an initial payment of $3,000 (I am behind by 8K). Why would they demand I agree to an arrangement that obviously my current income cannot support? This makes no sense to me.

A: The sad answer is that it is what my urban friend in Indianapolis calls “trickeration”. Trickeration is a nasty little concept where I appear, on the surface to, to being looking out for your best interests, working with you with you in a spirit of mutual respect and cooperation, while in reality I am “tricking’ you into some kind of agreement or arrangement which not only totally benefits me but I get you to agree so you can’t later say I didn’t work with you. Nor can you say it was my fault because you agreed.

Lenders/Servicers will be angry at this answer, it is nonetheless the truth. Many of the workouts which they propose and/or implement either:

1. were not based on the financial reality of the borrower at the time they were implemented, or
2. the lender/servicer demonstrated a lack of good faith and was not genuinely committed to a sustainable workout, or
3. frequently there is a deliberate attempt to set the borrower up to fail in the workout SO THE LENDER CAN THEN MOVE FORWARD WITH FORECLOSURE. Unsustainable workouts are frequently just another step in the ritual leading up to foreclosure, and/or
4. may simply be a smokescreen so the lender can assure the mortgage insurer (the ultimate risk holder) that, YES, we do have a workout in place on this loan. YES, we did our best to avoid foreclosure. Too bad you, the sucker, can’t keep up with the arrangement which you were forced to agree to.

Workouts which do not have a snowball’s chance are common practice. There is no point of you signing one IF you recognize that it is not feasible. Recommendation: try to speak with a supervisor about the terms being proposed. You will be better prepared to argue for a REALISTIC workout if you have done your homework, know what loss mitigation options are available and then cooperate fully and sincerely to reach a sustainable solution to your delinquency. Best of luck.

© Copyright Home Ownership Matters, LLC, 2009 “Answer Book in a Foreclosure Climate” by Mildred Wilkins.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have. We appreciate all feedback and comments, and especially your questions!)

Myth #5

Myth #5: There should be no ethical concern if you inform the co-op agent at the time the lender approves a short sale that there isn’t enough money there to pay the percentage of commission which your brokerage firm advertised.

Reality: If you have advertised a co-op fee to promote the sale of a home, then you should be prepared to pay whatever you advertise. If you do not do so, you are begging to be taken before the Ethics committee.

Reason: You have promised to abide by the NAR ethical standards, one of which states you will deal fairly with your fellow agents. Is it fair to promise me (through your advertising) $4,700.00 if I bring a ready, willing and able buyer for your listing and then tell me at the last minute you made a little mistake and I will only be getting $3,200? While the lender is controlling what commission they will ALLOW on the short sale, they do NOT control what you advertise, what is to be paid to my brokerage firm, nor what your client agreed to pay for the service of having their home listed and sold. I understand the short sale game; that does not change the fact that I am legally and ethically entitled to receive the amount of commission you advertised. As a buyer’s agent my relationship is with you and your brokerage firm. I am not a party to, nor do I care what contractual concerns or restrains are involved, on the listing side of the transaction. It would be extremely helpful if real estate boards got some clarity about WHY lenders can control the amount of commission paid from proceeds and then made the necessary accommodations to address the new reality. Changes to commission policy, mls guidelines for advertising, data input sheets, and training for practitioners are sorely and urgently needed to address this matter.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

(Please e-mail Heather at homeownershipmatters@gmail.com with any questions, comments, or concerns you might have. We appreciate all feedback, comments, and especially your questions. Don't be shy!)

WORD: Appraisal

And the WORD for Today is:

Appraisal – is a document which is used to give an estimate of a property’s fair market value based on its condition. An appraisal is usually requested by the lender as part of the loan process and one purpose is to determine if the value of the house is at least as much as the loan being requested. Since the house will be the security for the loan, it is reasonable for the lender to need this assurance. Lenders also use the appraisal to determine the loan-to-value ratio, which will let them tell you how much of a down payment is needed. The consumer pays for the loan and is entitled to see a copy. The appraisal is seldom provided to consumers; instead consumers will be given a disclosure at closing which tells them how they can get a copy by mailing in a request at a later date. They will only be able to do so for a limited period of time and seldom do consumers discover that they need the appraisal until AFTER the time frame to make the request has expired. YOU SHOULD KNOW THAT YOU ARE ENTITLED TO HAVE A COPY PRIOR TO CLOSING. THE APPRAISAL HAS BEEN COMPLETED BEFORE CLOSING, YOU PAID FOR IT AND IT IS IN YOUR BEST INTEREST TO GET A COPY AT OR BEFORE THE CLOSING.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

You can find more helpful definitions of WORDS like these in Your Real Estate Advisor which can be purchased at www.DovePublishingHouse.com.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

Fast Fact: Modification of Loans

FACT: A modification of your loan is possible for all loan types. However, that possibility can be complicated by:

1. Whether or not you still reside in the home
2. The lender has sold the loan into a loan pool
3. The insurer/investor is willing to allow a modification

To modify a loan means that the old loan is permanently changed and new loan terms exist. It can be a powerful option for a borrower who is in default. The things which can be altered or modified on a loan include:

1. The interest rate being charged (usually lowered by the modification)
2. The term (or length of the loan) (can be reset for another 30 years)
3. The principal balance (can be lowered if the value of the property has decreased)

Either one of these can be modified or a combination of them. The goal is to create a NEW loan which is reasonable and sustainable based on the borrower’s current circumstances including income and the current value of the real estate.

New legislation is slated to allow bankruptcy courts to force lenders to agree to a reduction in the outstanding balance (the so-called cram-down) when a borrower can demonstrate that the value of the home is less than the mortgage payoff.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)