Category Archives: Foreclosure

General interest entries

The Housing Crisis is Like Hurricane Katrina

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There were four back-to-back panel sessions on the topic of Foreclosures at Real Estate Connect this morning. Here are some sound bites and quotes.

There are 25,000 homes per MONTH in California that are going back to the lender.  This is going to create a glut of housing inventory for many months into the forseeable future.  The percentage of loan modifications that are re-defaulting and going into foreclosure is high.  Estimates are 40% or higher.

In Cali, the very low end price range REO homes are now selling to long term investors who are are able to put a renter in that house and make their cash flow goals. 

There are an estimated 400,000 people living in their homes for free in California right now.  Lenders are stalling the foreclosure process because there simply is not enough people working in the loss mitigation departments to process all the paperwork.

There is a huge problem nationwide with listing agents who are taking short sale listings and have no clue on how to help the homeowner navigate through the short sale process.

Quote: “This [the housing crisis] is like Hurricane Katrina.”

Question to the panelists: How can consumers who are facing foreclosure help themselves?
Answer from Frances Flynn Thorsen, “Stay away from Realtors.” 

Jillayne here. That answer brought forth many laughs and suprised blurts of shock.  I personally think this took quite a lot of moxie to say in a room filled with Realtors. The point Frances was trying to make was that not all homeowners who are in default want to sell their home!  When real estate agents stick with only a single mindset that selling is the ONLY option, they are doing a grave disservice to their clients.  Frances said it is imperative that agents connect homeowners with either Acorn or NACA or some other HUD-approved Housing Counseling Agency that can effectively negotiate with the lender, and to make sure the homeowner receives legal counsel from attorneys who specialize in consumer protection law, which is something they can find at NACA. 

There are very few loan modifications being granted if the homeowner is seriously underwater. The example given was $2,000 in monthly income and $11,000 in monthly debts.  No loan mod for that consumer because the chances of re-defaulting are way too high.  This homeowner may be better served through the foreclosure process.

The loan modifications that are granted are often done by lowering the interest rate on the note to say, 3% for a fixed period of time such as three years, but with NO principal reduction. 

Jillayne again.  I say this practice may lead to a build up of shadow inventory that could end up hitting the market in 2011 and further drawing out the housing recession into 2012.

Short sales in Florida are a complete waste of time.  Buyers in Florida are looking at sellers with equity or REOs ONLY.  Banks are only now starting to dump their REOs by lowering the prices in order to get them off their boooks.

Florida should WISH FOR another Florida bank failure because then the other banks will become extremely nervous about the bank regulators poking around and will begin to get real with dropping the prices on REOs in order to clear out their inventory, especially the closer we get to the end of a quarter.

“Real estate agents have a moral and fiduciary duty to our clients.  We have a duty to try and maintain values.  We should be encouraging sellers to help hold the value by offering to “buy down” the interest rate instead of lowering the sales price.”

Jillayne here again.  That quote came from LJ Jennings, a real estate broker/owner.  I’m not so sure that holding prices artificially high could pass a fiduciary test.  This may NOT be in the client’s best interest.

VERY interesting insight from a data analyst. She said some companies would rather stick with data that their analysts have been using INSTEAD OF showing NEW data to their end users….because then their existing analysts would be proven wrong and the company doesn’t want to deal with that. 

Take aways:

  • Banks will begin to “throttle out” their inventory quarter to quarter,
  • A lot more big pools of scratch and dent (loans with problems) loans will start to be sold off in bulk to investors
  • Lenders will slow down the default process for due diligence and accounting reasons
  • In the second have of 2008, 100 billion (correction: dollars) in loans will reset.  If ONLY 13% default, this is a huge number of homes that will impact inventory levels for the years to follow.
  • Hundreds of thousands of Alt A loans will reset in 2009.
  • Foreclosure relief bill is a little too late.  Our problem right now is that lenders are afraid to lend on a declining asset and buyers are afraid to buy.  The bill does more to shore up confidence in Fannie and Freddie than anything else.
  • There ARE options for a homeowner in default who does not want to sell.
  • Foreclosure is only a temporary part of a person’s life.  Life goes on.
  • Loan modifications and short sales are being done faster through banks that have a history of predatory lending (this is a concept I’ve been teaching for 8 years now.)

I have an entire set of notes from the attorney who spoke on the liability issues agents face when listing REO homes. I’ll have to do a separate blog article on that for you. 

The First in a Series of Fannie and Freddie Bailouts

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The rumors floated on Friday regarding Fannie and Freddie turned out to be true.  This first bailout proposal, released a few hours ago, has three parts.  I say “first” because there is no way that this is going to be enough to save what’s headed our way nor will this be the only time the government will need to “bailout” F&F.

The U.S. Treasury plans to seek approval for a temporary increase in the line of credit granted to Fannie Mae and Freddie Mac. They will also seek authority to buy equity in either company, and the Federal Reserve voted to allow the New York Fed to loan F&F money, if needed, giving F&F access to the Federal Reserve’s discount window.

The Wall Street Journal says the U.S. Treasury and The Federal Reserve are doing this mainly to boost confidence in F&F, not necessarily because any of this is needed, which to me seems to be a flat out lie.

The weekend move means that Fed Chairman Ben Bernanke, who has been steadily accumulating authority as the U.S. grapples with the financial crisis, will have even more power. The Treasury envisions the Fed working with the mortgage giants’ regulator to help prevent situations that could be a risk for the entire financial system. The move builds on Treasury’s broader goal of remaking financial regulation to give the Fed broader influence over financial-market stability.

I’m not sure if we’re suppose to be happy or scared at the thought of Ben Bernanke accumulating more power.  Maybe what’s really going on is some preemptive planning due to known or unknown possibilities that tomorrow’s auction of Freddie Mac debt doesn’t go well.

The Sunday move was designed in part to head off fears about Monday’s auction of Freddie Mac notes. While small, the planned sale had assumed an outsized importance as a test of investor confidence. Freddie should be able to find buyers for its three- and six-month notes, market analysts said. But there is a chance that some financial institutions and investors may demand higher-then-usual yields.

Similar Freddie and Fannie notes that are currently outstanding yield around 2.5%. If weak demand for Freddie’s auction leads to sharply higher yields on the new notes, that could trigger a selloff across a wide range of debt issued by the companies, some analysts said. But most said such a scenario is unlikely.

I’ve been glued to the web, the radio, and my phone since Friday evening reading, listening, and talking about this with friends and colleagues. If the federal government choses to provide (the implied) government backing for bondholders, then the United States increases our national debt by 5 trillion dollars which would have a profoundly negative impact on the value of the dollar and potentially bankrupting the U. S. economy. If the federal government chooses to do nothing and F&F are forced to mark their portfolio closer to market value and sell off assets to accumulate capital, then the true value of what’s in the bag becomes known. The secret will be out and now nobody will be interested in buying our Residential Mortgage Backed Securities, the market will know the true value of the loans currently being held by banks all over the U.S., mortgage lending slows way down, interest rates go way up, and the housing market goes cliff diving.

It seems to me that with this first bailout proposal (I am preparing for more bailouts as should you) everything is just going to be delayed as long as possible, taking us down further into a deeper recession step-by-step.

This bailout proposal is not enough. We have only just begun to see foreclosures rise. We still have the rest of 2008 to get through, when another round of pay option ARMS originated in 2006 begins to adjust, and through 2009 when the ARMs originated in 2007 adjust. Defaults and foreclosures are far from over.

There was a guy who predicted the demise of Fannie and Freddie back in 2006.  His proposal is that we nationalize Fannie and Freddie, quit pretending that they’re a private company, and restructure the debt, thereby forcing the bondholders to take a haircut.

Sniglet asks an interesting question (comment 123): “So what happens to the shareholders? Do any of these plans ensure that there is no dilution of equity if any form of bail-out were to occur? If the GSE shareholders aren’t protected then we could see a complete abandonment of the financial system by investors. Who will want to buy shares in financial firms if the government isn’t going to ensure their investments remain safe?”

From everything I’ve read over the weekend, the government likely will not protect shareholder equity.  Whether or not they should is up for debate.

What do Governor Gregoire's actions mean for local Countrywide employees and short selling homeowners?

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Is Governor Gregoire just a little too late in regards to Countrywide’s lending tactics? Aren’t we merely days away from the Bank of America takeover?

As I drove back to the office today after teaching yet another short sale class, I heard the news on KIRO 710 AM that Governor Gregoire is seeking to pull Countrywide’s lending license because of an investigation that uncovered predatory lending practices aimed at minorities.  WA State will fine Countrywide 1 million dollars for discriminatory lending practices and attempt to collect an additional 5 million for back assessments due.

From Governor Gregoire’s website:

DFI is required to examine every home-lender licensed in the state of Washington. The agency conducted its fair lending examination of Countrywide last year. At that time, DFI looked at roughly 600 individual loan files and uncovered evidence that Countrywide engaged in discriminatory lending that targeted Washington’s minority communities. The agency also found significant underreporting of loans during its investigation.

“The allegation that Countrywide preyed on minority borrowers is extremely troubling to me,

Distressed Property Law

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There has been a lot of confusion, anger and fear surrounding the new Distressed Property Law. I’m not going to jump on the bandwagon and do a critical analysis of the law, tearing apart each section.  The WA Assoc of Realtors has put their educational seminar online for free here for all of us.  Instead of all the ranting and raving taking place on other blogs attacking this law, feel free to pause and re-live these foreclosure rescue scam case studies from  2004, 2005, 2006  and 2007 which may help us better understand the reasons why we have this new law.

At the height of the bubble run up in 2005, there were hundreds of people attending foreclosure auctions, planning on making millions in real estate, usually after attending a get-rich-quick seminar.  Even today, the get-rich-quick hucksters are still luring in the same type of person who thinks there’s a magic diet pill that will help you lose those last ten pounds, and who thinks there’s still a way to make six figures with no experience, or in the case of this company, $2,000 per hour.

Readers on this blog and elsewhere have been highly critical of our state lawmakers for being reactionary and passing laws only after they would have done any good.  In this case, our legislature has tried to be pro-active and place boundaries around “distressed property transactions.

Keeping the Keys to Your Home

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I love reading the comments over on the CR blog. They’re great entertainment when I need a break from trying to dig my way out from deep inside the new WA State Distressed Property Law class I’m writing. Tonight, as I was reading the comments from this post on Fannie Mae lifting the “declining markets” rule, I found a link to this website (hat tip w.)

Keepingthekeys.com is providing hope (for a fee) for homeowners who wish to use legal options to stay in their home as long as possible, or to prevent foreclosure altogether.

We’ve all read, and some RCG commenters have complained loudly, about loan servicing companies being slow to approve short sales, modify loans, or engage in any kind of foreclosure workout with homeowners. Well, perhaps the threat of predatory lending and violations of state and federal law at loan origination will bring loan servicers to their knees.

The legal team at Keepingthekeys.com seems to be focused mainly in California, where the current count of 1000 foreclosures per day seems to ensure a model for business growth for the next decade.

So what can homeowners do who are located in Washington State and want legal help? Sometimes homeowners in financial distress just want an attorney to take a look at their documents.  Taking this simple step is better than full blown homeowner denial, and legal help can often be more affordable than the homeowner might think.  I’ve been on the look out for Seattle area law firms offering affordable legal counsel for homeowners facing foreclosure.  Now I’ve found one and I bet you’ll never guess which firm decided to extend a hand to this market.  Thanks, Craig and Marc.

Now, what to do about all those homeowners who committed stated income fraud at application in 2007.  Hmmm.  Perhaps there’s a reason why foreclosure rates continue to climb.  Maybe it’s not just “denial” or “loan servicing” backlogs.  

Homeowners in Foreclosure Should Hire an Attorney

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When I teach the Short Sale class, I say many times during the class that homeowners selling short and homeowners in default should always be directed more than one time to seek legal counsel. Sometimes homeowners in financial distress don’t hear you the first time. Just handing them the agency pamphlet isn’t enough. Attorneys can help homeowners in ways that real estate agents cannot. They will know more about their state’s deed of trust laws and any state-specific anti-predatory lending laws as well as federal residential mortgage lending laws than an average real estate agent, and attorneys will have access to recent case law.

justiceStuck with a bad loan, a Staten Island family fights back
Staten Island Advance

David and Karen Shearon were like many other Staten Islanders stuck with bad loans, collapsing financially under the weight of a crushing mortgage less than a year after buying their first home.

But unlike thousands of others who have entered foreclosure as part of the fallout from the subprime lending crisis — homeowners often embarrassed by their situation and unable to afford legal representation — the Shearons fought back.

A judge recently ruled that the owners of this Westport Lane townhouse in New Springville home were victims of predatory lending.They argued through their attorney that brokers aggressively marketed them a high-cost loan and then pressured them to go through with the closing when they could have qualified for a traditional fixed-rate mortgage.

In what is likely to be a precedent-setting decision in New York, state Supreme Court Justice Joseph J. Maltese agreed with the Shearons, recently telling the bank that it could not foreclose on the couple’s New Springville townhouse and that it may have to pay them damages for their troubles and void the $355,000 mortgage on their Westport Lane home…

Judge Maltese determined the original lender violated banking law by failing to check the Shearons’ income and ability to pay the high-cost loan. He said the lender crossed the line again when it financed the home above the $335,000 sale price, using an additional $19,145 to pay the costs and fees associated with securing the high-cost loan. The Shearons’ $5,000 deposit, meanwhile, was never deducted from the ultimate $355,000 in financing.

“This ultimately left Shearon with negative equity in the property,” the judge wrote.

“The mortgage loans may be unenforceable and the homeowner may be entitled to reimbursement of all prior mortgage loan payments, the fees for obtaining the loans and attorney fees,” Maltese added.

At a hearing Feb. 28, the judge is expected to decide whether the mortgage should be voided and damages granted to the Shearons.

Read the entire story here.

I keep reading comments about how there are not enough regulators to adequately oversee state and federal lending laws. With the mortgage lending meltdown continuing into this election year, we are already seeing more proposed state and federal laws.

Question: Would the threat of having the mortgage voided in the courtroom be a more effective way of bringing some rapid order into the mortgage industry?

An Early Holiday Present

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Yesterday, The Mortgage Foregiveness Act of 2007 was passed effectively getting rid of the question, “will I be taxed on a short sale?”

Prior to this action, the forgiven mortgage debt due to foreclosure, short sale, or deed in lieu of foreclosure was potentially taxable to the borrower. As agents we always have had to warn our clients in short sale positions about the potential of receiving a 1099 from the shorted mortgage lender, thus triggering a potential tax.  In one situation I’m involved in, the potential deficiency is 1 million and the tax hit would have been devastating.

Now however, those owners in that situation, at least until 2009, are having their taxes waived, too (at least up to 35%).  For those in this situation, this is really great news and likely the best holiday present they could hope for.

On their behalf, thank you congress [photopress:applause.jpg,thumb,alignright]

Foreclosure or Buyer Remorse?

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Well, I promised I’d report in if I saw anything really good sitting around with no offers, or signs of foreclosure woes, on “the Eastside”.

As to good properties sitting around with no offers…not!  I showed a few properties on Sunday, turned around and one went STI two hours later.  Of course, very close to Microsoft.  A few others left over there, but doubt they will last.  Even then, those were not of the quality I would recommend.  The best of day was a For Sale by Owner and not in the MLS at all.  Interesting day.  Literally only 5 to show from Juanita to Issaquah in the price range.

But today, I was shocked!!  An agent asked me, “What does this mean ‘commission may be modified by lender'”? I said, “WHERE?”  They said Kirkland.  I said, Oh No!

Then I took a closer look.  Who the heck bought that piece of crap at that price last year?! What lender did 100% funding in there?  Don’t they know there was a huge suit against the builder for basically irresolvable drainage problems?

That’s not a foreclosure.  That’s someone who walked into the bank and said, “Here!  You can HAVE it BACK!

Now don’t ask me where it is.  I can’t point fingers, but I promised to tell you if I saw “a short sale on the Eastside”, so here’s the first one I’m seeing.  Based on the purchase date, there’s no way this should be selling for less today.  But it will.  Someone overpaid for it back then, never should have bought in there with the problems, and some lender wasn’t paying attention.  Some Buyer Agent as well.  Buyer Agents should have stripes so we can “strip them of their stripes” when they are responsible for someone buying a distressed property, for too much money, with zero down.

When you didn’t spend a dime on it, no downpayment, stacked closing costs, your credit was already crap which is why it was subprime…why not just walk away if you decide you don’t want it?

That wasn’t a foreclosure…it was a RETURN! No need to ask for their money back.  They had not a penny invested in the first place.  Don’t like it…walk away and bring the key to the lender.

That one was easy to figure out.  But let’s keep our eyes open, because even though there seems to be a frenzy with three offers on one unit in that condo conversion up in Bothell on Sunday, it is definitely time to proceed with extreme caution.  Make sure the value is there, before you buy.