Options for Homeowners Facing Foreclosure

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This is Part Two of a series of articles on the foreclosure process.
This article does not constitute legal advice.
Foreclosure laws vary from state to state.

Homeowners in financial distress should always hire legal counsel. Call your local state bar association for a referral.  Reduced or free legal aid may be available in some states. Ask for a referral from the state bar association or through a LOCAL HUD-Approved Housing Counseling Agency.

For homeowners who are facing financial hardship, denial is a warm, safe comfortable place to stay, where tough decisions can’t hurt and the decision-making process is put off one day at a time.  There is FREE help available from your local state non-profit agencies.

Local, HUD-Approved Housing Counseling Agecies received 1.5 million dollars from Washington State when Gov. Gregoire signed SB 6272. State agencies are already whining that they are “overwhelmed”. Hmmm. How much of that 1.5 million dollars was spent hiring and training competent counselors and how much went into executive salaries, high paid consultants and task force meetings?  There are plenty of out-of-work mortgage production people who are (at this point) probably willing to work at non-profit agencies. Put them to work.  Perhaps I am in denial as to the extent of the problem at our state agencies. If so, agencies: please enlighten me and RCG readers.  If the problems are with the banks and their ability to handle the calls, that doesn’t mean we throw more money at the state agencies.  In part five of this series, I will ponder about massive government intervention. For now, we’re left dealing with the problems at hand.

If you are a homeowner reading this article, that means you’re starting to come out of denial.  Maybe a friend or relative forwarded this to you.  Welcome to raincityguide.com  How are you? Don’t say “fine” through tears or clenched teeth.  Not so good, right?  Okay then. Is your financial distress temporary or long term?  THIS is perhaps the most important question you’ll need to answer. This is going to require that you get real with where you are in life.  Long term, permanent financial distress situations are going open up options that might be different for a homeowner who has a short term financial distress problem.  Let’s try to break things down even more.  Long Term: You’ve been laid off and have been unable to find work at your former pay level for along time and you have third party confirmation that the chances of being able to reach that pay level again are very low. Short Term: You’ve been laid off and have been unable to find work at your former pay level but your prospects are good or you’ve recently been re-hired at a similar pay level.

Reinstatement
If you are payment or two behind, which may happen with temporary financial distress, your lender will be thrilled beyond your wildest expectations to accept the total amount owed in a lump sum.  Reinstatement often happens simultaneously with a forbearance agreement.

Forbearance Agreement
Your lender agrees to reduce or suspend your payments for a short period of time.  These two options are good for people whose financial distress situations are temporary.

Repayment Plan
Your lender helps you get “caught up” by allowing you to take missed payments and tack them on to your existing payment each month until you are caught up.

If your financial distress is long term and will permanently affect your ability to continue making your payments:

Consider Selling
With home values going down, if you do have some equity remaining in your home, you may be better off selling NOW rather than waiting until next year when scads of REOs (already foreclosed-upon homes that the lenders must dispose of) will continue to hit the market, driving inventory up and home values down.  If you owe more on your home than what the home can be sold for in today’s market, you have probably already heard of the term Short Sales.  In this case, the lender is asked to reduce the pricipal balance and allow the loan to be paid off in order to facilitate a sale.  Most lenders are not radically motivated to approve short sales unless foreclosure is imminent.  This author does not recommend that you stop making your mortgage payment in order to force the bank to approve your short sale. All homeowners in financial distress should have an attorney holding their hand the entire time.  If you have assets, you do not qualify for a short sale. Short sales are reserved for homeowners with NO MONEY and you will be asked to provide proof that you have no money.  If you have money, this is a different kind of transaction. It’s called “Making Your Downpayment in Arrears” and you’ll be asked to bring that money at closing.  Don’t ask anyone to help you hide your assets. Doing so may constitute mortgage fraud which is now a class B felony in Washington State. I could go on and on about short sales. If you need more education in this area, we’ve covered the topic in these RCG articles:

Short Sales
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Question From Today’s Short Sale Class
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Should You Buy a Short Sale Property?
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Is a Short Sale a Bargain?
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Why Do Banks Take So Long to Approve a Short Sale?

Maybe you would prefer not to sell. Consider taking on a tenant or moving out into more affordable living quarters and renting out your home.

Refinancing is a tough road for homeowners in financial distress. On the one hand, they have been hit by some kind of financial hardship and this typically affects their credit score, which means lender’s rates and fees will be higher.  In addition, tightening underwriting guidelines is something banks do in order to help stop the rising tide of foreclosures. People who hold mortgage loans today might not be able to re-qualify for that same loan if they had to requalify under today’s guidelines.  Income and assets must be fully documented. Find a licensed, local mortgage lender with FHA-approval to see if you might qualify for an FHA loan.  For people who made the conscious decision to state their income higher than reality are out of luck, unless they can prove that they were coached to do so by their lender.  Consult a local attorney for further guidance.  Since refinancing might only be yesterday’s dream for some, Loan Modifications are all the rage in my spam bin. We’ll cover Loan Mods in Part Three.

While doing research for this blog post, I stumbled upon even more money that went from our state government’s rainy day fund, into a state fund to help low to moderate income Washington State homeowners in foreclosure refinance into new loans through the Wash State Housing Finance Commission.  Read more here. I sent an inquiry asking the WSHFC how many WA State Homeowners have been helped this far by this new law and they said, emphasis mine:

Dear Ms. Schlicke:

Thank you for your interest in the Smart Homeownership Choices Program. To date, we have not made a loan to a prospective applicant.  The good news is that when we have talked to the delinquent homebuyers, it seems they have not been able to make contact with their lenders to discuss foreclosure options.  So, we have been able to facilitate getting them to the right person for loan modifications, etc.  There have also been homeowners who have not been pleased with the fact that the assistance is in the form of a loan and not a grant.  They believe the government should be giving them the money to save their home. While we cannot respond positively to these folks, we do send them to one of our homeownership counseling partners to help them with other options that   might be available.

If you know someone who might benefit from the program, please feel free to give them my contact information.

Sincerely,
Dee Taylor
Director, Homeownership Division
Washington State Housing Finance Commission
1000 Second Avenue, Suite 2700
Seattle, WA 98104-1046
(206) 287-4414

Part one: Foreclosure; Losing the American Dream
Part two: Options for Homeowners Facing Foreclosure
Part three: Loan Modifications
Part four: Government Intervention in Foreclosure
Part five: Foreclosure; Letting Go and Rebuilding

Is a "short sale" a bargain?

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Actual info from recently closed short sales:

1) The owner bought it in September of 2005.  They did so many cashout refinances since time of purchase, that I can’t see what the downpayment was at time of purchase.  They tried to sell it for 30% more than they paid for it exactly two years after they bought it (likely due to a 2 year pre-payment penalty) just a month or so into the weak market of late 2007. They moved out and rented it in December of 07.  Then, while it was tenant occupied, they relisted it for sale in February for $50,000 less than their original attempt of 30% more than they paid for it.  They dropped the price an additional $50,000 two weeks later.  They dropped the price an additional $50,000 three weeks after that.  They dropped the price an additional $50,000 five weeks later.  They dropped the price an additional $50,000 three weeks later and dropped another $50,000 five weeks after that.

So $300,000 in price reductions from 30% more than they paid to an asking price that was 13% less than they paid.  BUT then it bid UP to 7% less than they paid for it 2.5 years before.  It either bid up, OR since by this time it was a short sale, the bank may have held out for $50,000 more than the original offer.  At any rate it closed at 7% less than the owners paid for it at 1.12 X assessed value, BUT that was the highest price ever paid in the neighborhood.  The original asking price was 1.5 times assessed value.

The escrow period was 128 days from the time the seller accepted the offer until it closed.

The kicker? A couple of days after this one closed, the neighbor listed their home at 1.08 times assessed value and $50,000 less than the short sale closed at, and it still hasn’t sold.  So the short sale was not necessarily a good buy.  It might have been if it had closed at or less than the final asking price.  But when it closed for $50,000 more than the final asking price it moved from bargain to not a bargain during negotiations and escrow.

Warning: Sometimes seeing $300,000 in price reductions and “short sale” or “foreclosure” at the end, causes buyers to bid UP a property to where it is no longer a bargain.  While I chose this example at random and worked through the history while doing the post and not in advance, it turned out the way many do.  Buyers bid it up or don’t hold their ground when the bank responds to the offer, and 128 days later…not a bargain.

Let’s do another one:

2) Bought in the summer of 2006 with 100% financing for 1.3 times the 2008 assessed value and for double the price the previous owner paid for it in 2004.  Clue.  This person overpaid for it in 2006 and it had the magic words “granite counters”.  Yesterday someone said to me they were going to buy a granite countertop and stick it out on the grass of a vacant lot and sell it for half a million dollars 🙂

Looks like the person who bought it barely (if ever) lived in it, as it was listed for rent within 3 months of closing in 2006.  Apparently someone in 2006 thought paying double what the previous owner paid in 2004 was “an investment”. After renting it out for a year, the owner tried to sell it in the summer of 2007 (before the market turned) for 11% to 12% more than he paid for it.  No takers and it was re-rented.  They dropped the price $15,000 after 125 days on market.  Three months later…still no takers.

They rented it out again and five months later listed it for 20% less than they paid for it.  (Interesting that they listed it for 12% more than they paid for it and then 20% less than they paid for it, without trying anything in between. An agent (not the agent who had it listed and not the same office) bought it immediately as soon as it was listed for 20% less than the current owners paid for it. The short sale escrow lasted 75 days and it closed at the full asking price of 20% less than the owner paid for it in 2006.  The sold price from the short sale was 1.03 times assessed value.

The kicker? The agent who bought it at the bargain price now has it on market for sale or for rent.  Rent price is $1.58 per square foot. Sale price is 1.17 times assessed value.  Would have been a nicer story if the person who got it for 1.03 times assessed value was going to live in it.  Insider gets the bargain and flips it back out on market for a decent price, but not such a bargain.  At least they’re not asking 1.5 times assessed value, but if a nice young family bought it for the bargain price of 1.03 times assessed value, I would have been happier.

I think I’ll go see it this weekend with one of my clients who is in that price range.  Maybe it will sell for less than 1.10 times assessed value.  Not a screaming deal, but worth taking a peek at it.

Moral of the story? Don’t go to an agent and say “I want to buy a foreclosure property” or “I want to buy a short sale”.  We always shake our heads when people do that.  Instead look at properties you like that are in your price range, and if one of them is a bargain, we’ll know it.  Sometimes it’s the foreclosure or short sale, sometimes it isn’t.

I know of another home that was listed for $1.3 million, sold at foreclosure for $800,000 and went back on market at $1.1 million.  No one’s buying it.  So the question remains on this one and the second example above, was it a bargain?  We won’t know until the people who got the bargain and immediately relisted the homes for sale at a higher price, get an offer that sticks.  What we do know is the bargain on those two gets less every day, since both properties are vacant and the owner is paying the carrying costs.

Leave the gun; take the cannoli

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My friend Geno reminded me today that some are in the “leave the gun; take the cannoli” stage of the real estate market.  It also reminded me of the stark differences between 2008 and the last time I participated in this same kind of market, which was in 1990 and 1991.

I remember leaving the gun and taking the cannoli in Yardley, PA. when I was working for one of my two favorite brokers, Frank Mancuso, also one of my two favorite Franks.  I was working with a nice young family, relocating to Yardley from somewhere else, trying to find a good value in a turning market like this one.  We “targeted” a house where the owner had been relocated by his company too.  We truly held a gun to the head of the “relocation company” during initial negotiations, and then picked the carcass clean at time of inspection in a second round of negotiations.

The similarities?  Only those who really wanted to sell, or HAD TO sell, were selling.  The deepest discounts being the vacant houses where the owner had already moved on, and there was no chance the owner would be coming back.

The differences?  The reasons why people “had to” sell.  Tim’s story yesterday reminded me of when Buddy Ryan was canned by the Eagles in 1991 and everyone in the office was wondering who would be selling his house.  Needing to sell your house in a bad market, especially when the vultures perceive that you NEED to sell it, can be an awful place to be.  Still when the sellers are highly paid people or relocation companies, no one’s wasting any tears.  It’s when the carcass to be picked looks like the family depicted below, that you take pause.

Truth is, people trust professionals to NOT let them, or encourage them to do, what will hurt them. So when you take out the gun and put it to someone’s head so that you can leave with the cannoli…at least look them in the eye when you’re doing it.  Maybe talking someone into doing a short sale is like pulling the plug on someone that was just about to be saved.  Think about that before telling people a short sale is their only or best choice.

The only difference between buying a short sale and buying a foreclosure is whose head is at the end of the gun, and whose cannoli will taste better in your mouth after all’s said and done.

Sunday Night Stats on Monday Morning

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The Dow’s holding its own so far today. “Hanging in the eights”; as I like to say. I don’t see the day coming yet when my week doesn’t start without checking the Dow when I wake up on Monday morning.

Last night I looked at the homes that sold in Redmond in August for the means of financing.  Where once I saw two loans as in 80/20 and 100% financing, I now see two loans as in conforming and jumbo.  One loan at exactly $417,000 and another for the difference.  I saw a couple of FHA loans in the mix and a couple of cash sales, but by and large the purchases had significant downpayments.  $20,000,000 worth of purchases had $13,000,000 worth of debt.  So 35% down overall.

Looking at who got a good buy and who didn’t, the new bogey appears to be 1.09 times assessed value, by and large.  The fabulous buys went for under assessed value, mostly in the high end near a million dollars.  The assessed values I am using are still the ones that 2008 taxes are based on, so be careful there.  The new ones for 2009 taxes should not produce this multiple.  Up to 1.17 times assessed value is pretty safe, depending on condition of the property, with 1.09 times assessed value being fairly doable and the better sold scenario.

Some of the best buys were those that listed low and sold quickly.  Some of the worst buys were listed high, and while the buyer got the property substantially less than asking price, the net result was still too high.  Remember to double check the multiple of assessed value against the main floor footprint calculation keep apples to apples as to style of home.

I’m not seeing any short sale closings in the mix.  Most are still stuck in pending.  The “decent” buys were popular homes dropping from 1.22 and 1.17 times assessed value to about 1.13 times assessed value.  Those were newer two story homes built in the mid 90s.

The waiting game is playing out where new construction is competing with resale by the same builder in the same community.  It will be very interesting to see what the builders are going to do about that as we head into Winter.  Look for some screaming “offers” from builders…BUT check that against the prices of same model resale before being lured by builder offerings.

Still hard to find a good house at a good price in this market, the best values still going quickly.  For those who see something that “looks good” out the gate, but need a method to quickly evaluate if it is a good buy, asking price divided by assessed value is still a good rule of thumb.  The closer it is to assessed value, the less time you will have to think about it.

Losers in this market are those who take too long to “think about it” and don’t have a good valuation tool.  Some of the worst buys were people who bought houses at substantially less than asking price, but still over market value.  Don’t fool yourself into thinking you “saved $50,000” just because you paid under asking price.

Mostly these are some tips for people who are buying in today’s market.  But sellers can take note as well.  After you come up with your list price, divide it by the assessed value used for 2008 NOT 2009 assessments, and see where that leaves you.  If you have a view  property, the multiples will be higher.  Buy if you don’t, and the calculation comes up at 1.5 times assessed value…think again.

Some stats on sold in September homes without basements:

Redmond – median price per square foot $233 in 08 vs. $284 in 07 prices down 18% volume up 25% from 43 to 54.  Median price down from just under $700,000 to just under $600,000 plus more home for the money as to total square footage.

Bellevue – MPPSF $332 in 08 vs. $318 in 07 prices up 5% volume unchanged at 37/38. Median price up from $685,000 to $739,750. (lots of very pricey homes in that mix vs. Redmond and Kirkland)

Kirkland – MPPSF $268 in 08 vs. $286 in 07 prices down 6% volume down 25% from 32 to 24.  Median price up from $526,500 to $570,000.

King County – MPPSF $193 in 08 vs. $223 in 07 prices down 13% volume down 10% from 788 to 704.  Median price down from $449,975 to $382,884

Asking Prices of unsold homes on market today:

Redmond $260 asking vs. $233 sold; 6.5 months of supply.

Bellevue $311 asking vs. $332 sold; 8 months of supply.

Kirkland $284 asking vs. $268 sold; over 12 months of supply.

King County $210 asking vs. $193 sold; just over 8 month supply.

When you consider prices and volume, you see that the deep dip in price sold in Redmond (down 18%) is giving them an increased volume of sales, up by 25%, and a shorter timeframe on existing inventory at 6.5 months in Redmond vs. 12 months plus in Kirkland.

Volume up 25% in Redmond proves that when buyer’s perceive real value, they buy. Buyers with money for downpayments do exist, but they are very, very value conscious. Bellevue stats are a bit screwy, but Kirkland and King County as a whole show that when prices are down slightly the volume is down a lot.  When prices are down moderately, the volume is up somewhat.

So buyers appear to be “happy” at 18% down in price, OK with 13% down in price and not so happy about only 6% down in price.  Remember, I removed basement square footage to evaluate pure living square footage, and never buy without looking at 2008 assessed value.

Stats not compiled, verified or posted by NWMLS (Required disclosure)

Goodbye Yellow Brick Road

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The yellow brick road heading into the Emerald City, has finally lost its shine and turned to stone this past week. If the combined dreariness of fall in the Northwest, Wamu’s funeral, and the Seahawks SLOOOOW start wasn’t enough for us to ask for Lexapro during our next doctor’s visit, the latest batch of bad news certainly is.

No sooner than the venture capitalists sound alarms bells and implore startup CEOs to save cash, slash costs, & stay alive, two of Seattle’s Real Estate 2.0 giants, Redfin & Zillow announce workforce reductions.

Zillow announced at 25% cut on Friday, while Redfin announced that it had laid off 20% of its employees last Monday. Granted, it wasn’t like things were much better in the Real Estate 1.0 world. My NWMLS database’s member table has about 3,000 fewer records than a back up from last year did. But it’s another sign that everybody expects a long & cold winter ahead.

If you were one of the few that got axed, I wish you luck finding your future life, beyond the yellow brick road.

My First House: Then and Now

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“Cautious Buyer” asks this question on my post the other day when I referenced that my first house had a rate of 11% during the comments:

“Do you think a young couple with similar jobs could buy the same place in Tacoma today? How about 1 year ago today?”

Then

My first house was a rambler in northeast Tacoma.  It’s a 3 bedroom with 1 bathroom and a galley kitchen. 

At barely 1000 square feet, it suited my boyfriend and I just fine.  We liked the 7,500 yard with fruit trees and two car garage with RV parking.  We purchased the home in the summer of 1988 for about $68,000 using minimum down FHA at 11%. 

  • 3% down = $2,040
  • Estimated mortgage payment (PITI) @ 11% = $765

At the time, we were both 21 years old.  I worked at in the title insurance industry as a “home equity title rep” and my boyfriend was a bagger/meat room cleaner for a large grocery store.   Our combined income at that time was about $34,000.

  • 34,000 /12 months = 2,833 monthly gross incomes x 28% = $793.  (We were barely below the recommend “front ratio”).  
  • 2,833 x 43% = 1218 less our mortgage payment of 765 = $453 for maximum allowed monthly debt.  

I didn’t have a company car yet and so I’m sure we were pretty close to using the maximum allowance when we qualified for this mortgage.  Plus, I began receiving offers for credit cards at 18 years old.  I think I was the first girl in school to get a Nordstroms card (I haven’t had a Nordie’s card in YEARS.   I was young and naive when it came to credit.  I managed to pay our bills on time but did learn the hard way…I digress).

Now

Current guestimated value of my first house is around $220,000.  I verified this with ARDELL and it happens to be fairly close to what Zillow is zestimating as well (Zillow is a little higher).   This is assuming it has been updated along with the rest of the neighborhood.

  • 220,000 x 3% down payment = $6,600.  Assuming the seller is paying closing costs.
  • Base loan amount = $213,400 plus upfront mortgage insurance @ 1.75% = $217,134.
  • Interest rate of FHA 30 yr @ 6.500% (apr 7.191% per Friday’s rates) = $1,372.44.  Plus monthly mortgage insurance of 0.55% = 97.81.  2008 taxes = $2525/12 = $210.43.   Total payment (incl. estimated $40 per month home owners insurance) = $1,720.68.

I estimate incomes for both jobs at $67,000.  (I have close sources in both the title and grocery industries).

  • 67,000 /12 = $5,583 gross monthly income.  The total proposed payment of 1,720.68 divided by the monthly gross income = 31%.   This is an acceptable front ratio with FHA. 
  • $5583 x 43% = $2400.69.   2400 less the proposed payment of 1720 =  $680 of allowed monthly debt for FHA in order to stay within a 43% total debt ratio.

It’s been twenty years since I bought my first house.   The house has tripled in value while the incomes for our jobs have pretty much doubled.  I commuted 27 miles one way each day (not even factoring when I made calls on accounts, which at that time my territory was banks and credit unions in King County)…I was thankful once I was promoted to a real “title rep” and had a company car to clunk the miles onto instead of my personal one.  

The answer to your question, Cautious Buyer, is:  YES.  Someone could buy that home today with the same jobs that we had when we purchased it.  Last year’s value?  Since it’s in NE Tacoma, I would say that it hasn’t experienced the same degree of “appreciation” as the Seattle/Bellevue markets did.   According to Zillow, the home is worth 0.9% more now than a year ago and 0.4% less in the last 30 days…so we’re splitting hairs.  

What I wonder is how many first time home buyers would be willing to commute like I did or to buy a true starter home? 

Our agent for our first home did select our loan officer.  As I mentioned, we were 21 and were totally green.  Even though I had worked for a title company for a few years, it’s completely different to actually go through the process.  With our subsequent home purchases, we selected our loan officer first and then the home.

By the way, we did sell that house one year later.  There was a bit of a housing panic (at least I had one at the time) and we sold it for $90,000.  The proceeds was the down payment on our next home located in Federal Way’s “Affordable Street of Dreams“.  Yes, that’s how the new plat was marketed.  Affordable dreams (our “affordable dream” was $125k for 1500 square feet in 1990).   We were able to move just a little closer to family and jobs (and continued to do so with the next home we purchased together).   This photo is from our second home in Madrona Meadows.   We lived in my grandparent-in-laws (we were married at this point) basement for a few months until this home was finished since our first home sold in days with back up offers.

Foreclosure; Losing the American dream

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This is Part One of a series of articles on the foreclosure process.
This article does not constitute legal advice.
Foreclosure laws vary from state to state.

Homeowners in financial distress should always hire legal counsel. Call your local state bar association for a referral.  Reduced or free legal aid may be available in some states. Ask for a referral from the state bar association or through a LOCAL HUD-Approved Housing Counseling Agency.

Most mortgage loans are not mortgages. Instead, lenders shifted to using a deed of trust type of document in many states. With a mortgage document, a lender would have to use the judicial system for foreclosure which was time consuming and expensive.  With a deed of trust, the lender can take back the asset in a much shorter period of time although that’s arguable in today’s rising foreclosure climate.  Each state will have their own Deed of Trust Act.  Within each state’s Act, there will be a specific timeline that must be followed by the lender.  Moe at LoanSafe provides a basic timeline here.  First the homeowner misses a payment. Late charges are assessed and the lender may begin an effort to contact the homeowner to determine what’s going on. A “notice of default” letter is mailed informing the homeowners that if they do not catch up, the trustee sale will be scheduled.  At this point, the lender hires an attorney to file the public records documents, publish the required notices in local newspapers, and prepares for the auction.  Depending on state law, the homeowner will have a specific number of days before the sale date to bring the loan current and pay all late payments, including interest and penalties, attorneys fees, and trustee fees. After the date of the trustee sale, the homeowner will have a state-specified number of days to vacate the property. A sheriff is usually asked to help with eviction, if needed.

Washington State enacted the Distressed Property Law in June of 2008 which means, among other things, that the homebuyer of a home in foreclosure as well as the Realtors owe the the homeowner the highest duty of good faith and loyalty; fiduciary duties to the homeowner (one-to-four family residence, owner occupied.) Read more about the DPL here.

Securitized lending helped fuel the real estate and mortgage bubble because banks and lenders could package up loans and sell them as pools of Residential Mortgage Backed Securities (RMBS) thereby freeing up more mortgage money to loan.  Before securitized lending, banks would hold the mortgage loans on their books as part of their assets.  A mortgage payment arriving in the mail each month at a bank is considered an asset.  A delinquent loan is considered a non-performing asset. A foreclosed home is considered owned-real estate or Real Estate Owned (REO.) 

At trustee sales during the bubble run-up, there were many get-rich-quick believers with notebooks and cashiers checks bidding on homes that looked like a possible quick flip-for-profit on paper.  The lender was able to score the principal amount of the remaining loan balance plus all the other expenses, the high bidder went away happy, and the homeowner re-entered the housing market as a renter.  Today’s trustee sales are remarkably different.  In most cases, there are no bidders and the home is deeded back to the bank.  REO portfolios at banks are starting to hit the market. An institutional owner is far less emotional about the sales price and far more goal oriented about reducing the price in order to dispose of the asset.  BEFORE the trustee sale, there are options that homeowners weigh.  Repayment plans, forebearance, loan modifications, and short sales are some of the options we’ll discuss in part two.

Many homeowners have reported frustration in working with their loan servicing department towards a workable solution that will allow them to stay in their home.  We will discuss options to avoid foreclosure in part two.  Before we do that, we must first revisit Federal Accounting Standards Board Rule 140 from this article called “Predators are Still Safe”:

many loan servicing agreements prohibit the Servicer from modifying loan agreements entirely, or limit such modifications to no more than 5-10% of a total pool. Further, loan modification may run afoul of FASB rule #140, (2), which says that if a bank alters the terms of a loan it has pooled, it cannot keep the loan off its books. It must repurchase the loan, return it to the books, set aside a reserve for losses, and actively manage it.

The industry asked for and got it.  FASB Rule 140 will be delayed until after Nov 15, 2009, and the murky, opaque waters that make up credit crisis continue to pool around the banks that don’t want to tell us just how many bad loans they’re holding.  Will the TARP plan help banks? Will the involuntary capital injections help banks and anyone seeking credit? Will homeowners get help? It’s hard to say because the only way we can see what banks are holding is when the regulators take over.   What we do know is that homeowners are reporting that it’s becoming excruciatingly difficult to work with their loan servicing department. 

When the industry jumped into subprime lending, we underpriced risk.  We also underpriced the true cost of “servicing” a loan. I’m surprised we’re not reading about meltdowns in the servicing sector. I’m sure those folks are working 80-hour weeks and get yelled at all day long by Realtors.  In the future, we should expect tougher state or federal laws governing mortgage loan servicing (Kary Krismer’s short sale requests must be responded to within 24 hours, phone messages must be returned, and so forth) which will translate into higher bank fees and higher interest rates in the future. Or perhaps now.

Author’s note: Part one of this series was designed to be incredibly basic. So basic as to prompt a reader looking for more detailed help to seek legal counsel.  An attorney licensed in your state is the best person to help you understand the deed of trust act in your state, and all your possible options.

Part one: Foreclosure; Losing the American Dream
Part two: Options for Homeowners Facing Foreclosure
Part three: Loan Modifications
Part four: Government Intervention in Foreclosure
Part five: Foreclosure; Letting Go and Rebuilding

FHA Update: The "It Girl" of Mortgage

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This morning I’ve been trying to update articles I’ve written on FHA in an attempt to have the information be accurate during this day and age of the ever-changing-loan-guidelines.  Please don’t rely 100% on information you find about mortgages on the web.  Programs and products are simply changing too often to keep up and information is becoming quickly outdated.  

This month, FHA loans have seen a few changes, many with the passage of HR 3221.   Let’s see if I can get us all caught up in one post. 🙂

Effective for FHA case numbers issued October 1, 2008 and later:

  • FHA mortgage insurance increase.  First FHA mortgage insurance was going to have risked based pricing, then HR 3221 came along and put a moratorium in effect until September 30, 2009.   Until then, for a FHA purchase 30 year fixed mortgage, upfront mortgage insurance has increased to 1.75% and monthly mortgage insurance is 0.55% for loan amounts over 95% LTV and 0.50% for borrowers putting more than 5% down on their home. 
  • Down payment assistance programs.  Seller funded down payment assistance programs are currently not allowed.  However there is a bill in Congress (HR 6694) that if passed, would allow DPAs once again but only to borrowers within certain credit scores.   Home Buyers can still obtain a gift or loan from family members as long as it meets underwriting guidelines.
  • Rental income credit when buying a new home and renting the existing residence.  This actually became effective in mid September.   When converting a primary residence to a rental home, the rental income can only be used for qualifying if:(1) the borrower is relocating or (2) the new rental meets at least 25% equity (to be determined by an appraisal < 6 months old or the existing mortgage balance is 75% of the original sales price).   Both mortgage payments are factored for qualifying purposes.  HUD (and Fannie/Freddie) have cracked down on this due to home buyers purchasing a new (less expensive) home and “walking away” from their McMansion mortgage payment.

Effective January 1, 2009:

  • Minimum down payment increases to 3.5%.  Home Buyers have until the end of the year to purchase under the 3% down payment requirement.   Sellers can pay actual closing costs once the buyer meets the minimum down payment requirement (which can be gifted or loaned by a family member).
  • FHA Jumbo loan limits to change.   HUD is in the process of reevaluating median home prices and will announce new loan limits before the end of the year.  With the passage of HR 3221, the maximum loan amount for FHA Jumbo was reduced to 115% of the median home price (currently, the $567,500 limit is based on 125% of the median home price).   Should HUD determine that our home values are unchanged, then the new limit would be reduced to around $522,100.   However, many areas have not had their values reevaluated by HUD in many years…so for now, we really don’t know what the new “FHA jumbo” loan limit will be.

A few more reminders about FHA insured mortgages…

  • Not all lenders are approved to originate FHA loans.  Check HUDs site to verifyif the mortgage company you work for is approved.   One clue I’ve noticed by LO’s who are trying to “fake it” is that they’re charging more than a 1% origination fee.   This is not allowed.
  • FHA does not have income limitations or geographic requirements.
  • FHA is not limited to first time home buyers.
  • FHA is not just for lower credit scores.

Sellers, you are reducing your exposure to more buyers if you are not considering those approved with FHA financing…especially with the higher loan limits.   A $700,000 sales price with 20% down is pretty close to the current limit.  Anything shy of 20% down would probably lean towards FHA jumbo.

Want more reasons to consider FHA financing?  Here’s how conventional compares:

  • Tighter guidelines.  And if you think DU 7.0’s been tough…wait until you get a load of version 7.1 which goes into effect in mid-December.
  • Risk based pricing on credit scores below 740. (FHA has risk based pricing starting at 620 and below).
  • More expensive private mortgage insurance for loans over 80% loan to value.

It’s easy to see why FHA has become very popular…you could say FHA is the “It Girl” of Mortgage.

Employers can provide affordable housing

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I once represented a community of “affordable housing” sponsored by an employer.  For what it’s worth, I’d like to tell you how it functioned.

Once upon a time there was a University that was situated in the midst of a community of Million Dollar Plus homes.  At some point in the history of the University, they began having great difficulty getting Professors to come to teach at the University, because the Professors could not afford to live anywhere nearby.  What to do, what to do!?!

The University purchased a parcel of land and hired a developer to build a housing development of large, 2,500 sf homes.  These homes were attached at one party wall.  Two homes then a break two homes then a break, a whole community of what I call “twins” and most people call “duplexes”.  Large two story homes without basements that attached at the two car garage and were “mirror images” of one another.

The University maintained ownership of the land.  Unlike a “condo complex” where the owners of the houses jointly own the land, the land continued to be owned by the University to reduce the cost of housing for the professors.

The increase in value of the homes was controlled by a governing document and the increase in cost of the homes could only go up by the same % that the University used to increase salaries of the Professors.  The cost of the homes, which were purchased and not rented, was maintained at an “affordable” level and only Professors could buy them.  The gain at time of sale was controlled, but also went to the homeowner and not to the University.

The University received the original purchase price of the homes to offset cost of construction and sold them “at cost” not including the land value, since the buyers bought the houses and not the land.  There were a few problems in the ongoing complex of Professors…but not many. 

This is but one example that I have personally had first hand experience with, so I assume there are others.  When a single employer has thousands of employees, providing a means of good, affordable housing, could help keep salary costs down while giving their employees a place to live close to where they work.  Better productivity, less commute time, people tend to work longer hours because it is convenient to stop into the office and catch up on some work.

What do you think?  Too Utopian for a quiet Friday morning?

Eastside – A look at "affordable" housing

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I need to take a look at “affordable housing” issues after a meeting I had this week on the subject, and in preparation for a meeting I have next week on the subject.  I’m primarily looking at Kirkland and comparing Kirkland to places people would move to from there.

While that is not the purpose of this post, this post will also give you some insight as to why there are “Bubble Blogs”.  Many of the young people who want to raise a family without moving to Tennessee, are impacted by the same factors I am raising in this post.  There was a time when I could (and did) tell them to buy condos and use the appreciation for downpayment on a home.  No longer the case in the near distant future.  Where are home prices going?  Well strip out exotic financing, including FHA 60% backend, and look at realistic financing, and you will immediately know what the “bubbleheads” already knew.  Prices have to come down considerably before a young family needing 3 bedrooms and 1,500 square feet can afford to live here.

Median incomes in the last census back in 2000 were $60,000 per household and $73,000 per family in Kirkland, but only 23% of households had children under 18 living with them.  The Powers That Be take this to mean they need more affordable housing for 1 and 2 person households, since that represents over 75% of the residents. I disagree. It is my contention that young people in condos move out of Kirkland once they have a child, because affordable homes for families are more prevalent elsewhere.  To me that means we need more housing for young people with children, otherwise you get overweighted in young professionals, wealthy empty nesters and “affordable housing” for lower earning singles.  That doesn’t diversify the base, and expand the number of households with children under 18 living in the household, up from 23%.

Rather than up the 2000 census incomes, I’m going to call median income $65,000 for a family, as in we want to attract that which we do not have.  Also, that number looks like the King County median and more appropriate for this study.  I’m going to use 4X annual income plus 20% down as the barometer for housing price and minimum 3 bedrooms and 1,500 sf. 

$65,000 times 4 equals a loan amount of $260,000 which is $325,000 with 20% down.  This is why the presidential candidates are incorrect when they say we have to get home values back UP.  They need to recognize that home values accelerated to the point were only Exotic Loans would make them attainable.  So a wish to shore up property values is like a wish for Exotic Loans to make a comeback.

Let’s do an FHA 31/43 ratio double check on that.  31% of Gross Monthly Income of $65,000 is a monthly payment of $1,680.  Lets back off $300 of that for taxes and insurance and call that payment 1,380 for principal and interest.  That gives us a loan amount of $230,000 plus 20% down is about $290,000.  So affordable housing for a family earning $65,000 would be priced at $290,000 to $325,000.

Now let’s look at property with at least 3 bedrooms and $1,500 square feet.  For this purpose I am using the Tax Records vs. the MLS. as I am looking for what exists vs. what is for sale or sold.  In the system I am using, the assessments for 2009 taxes are not in place, so I am using 1.17 times the assessment used for 2008 tax purposes.  That means we are looking for property in the County records assessed between $245,000 and $280,000 with 3 bedrooms and a minimum of 1,500 sf.

Kirkland 98033 comes up with 39 properties, many of which appear to be apartments at the same address.

Kirkland 98034 has 54 all centered in the same vicinity.

Bothell 98011 has 35

Kenmore has 64

Bellevue has 31

Redmond 98052 has 25

Duvall has 53

Monroe has 113

Bothell in Snohomish County vs. King has 76

Mill Creek has 34

Issaquah has 27

Sammamish has 20

Renton has over 1,000

Auburn has over 1,000

Kent has over 1,000

I don’t know how many over 1,000, because there is a pre-set max on the search function.  But you can readily see where a family making $65,000 a year working in Bellevue, Redmond or Kirkland  needs to go to get just 3 bedrooms and 1,500 sf of living space.  I didn’t put any bath requirments or lot size requirements or even separate condos out.  Just 3 bedrooms and 1,500 sf and look what your money doesn’t get you.

Seattle has over 1,000 of which

16 are in 98115

28 are in 98103

9 are in 98117

Shoreline has 170

So when you look at Joe Sixpack and his story, and wonder how he got in over his head, remember that very few homes or even condos exist for a family making $65,000 a year within a reasonable distance to where they are curently renting and working.  So before you blame Joe for his demise, take into consideration that he really didn’t have options available in the marketplace that would have made for a more conservative decision by his family.  This not based on “what is for sale” but “what exists”.

Areas that have housing that fits the $65,000 income, also have lower median incomes.

If the Powers That Be representing Affordable Housing concerns only target 1 and 2 person households, because that is the constituency, then they are doing nothing to solve the REAL problem of “Affordable Housing”.  We need more affordable households for 3 or more persons to impact the issue of “Affordable Housing.

If Kirkland only added 20 to 25 of these, they would be increasing affordable housing from 84 to 104 or 109, which would be a increasing affordable housing by 25%!  Adding more one and two bedroom units, or increasing the affordability of small one and two bedroom units, continues to force young families out of the demographic.

I was told “but the whole REGION has primarily 1 and 2 bedroom households” so that is why we are targeting that demographic.  I said look for WHY the region is primarily 1 and 2 bedroom households…and fix that why.

I need to look at a few more things in preparation for my meeting, if you don’t mind tagging along with me for a few more minutes.  I’m raising the assessed value to $280,000 -$375,000, which is like raising the sale price from $325,000 – $440,000 and I’m adding built since 1990 to see how the cities are progressing toward adding affordable housing.  It is my contention that Redmond via newer 3 bedroom townhomes is outpacing Kirkland.  I need to test my perception.

Kirkland 98033 – 104 (several of these are owned buy builders and developers.  Not sure what to make of that)

Kirkland 98034 – 53

Redmond 98052 – 147 (it is true that a lot of that is Rivertrail, which is where my perception comes from to some extent.  I need to research how that much land close to Downtown Redmond was available to build Rivertrail.  Wait a sec…no I don’t…it’s in a flood zone.

Belleuve – 194 (94 in 98005 – 67 in 98006 – 17 in 98008 – 15 in 98007 -3 in 98004

Seattle 98115 – 44

Seattle 98103 – 84

Seattle 98117 – 58

Shoreline – 219

Lynnwood – over 1,000

Bothell Snohomish – 588

Bothell King – 186

Issaquah – 669

Duvall – 428

Sammamish – 342

Kenmore – 173

Woodinville – 161

It’s about land values.  Thinking out of the box, if everyone on a 22,000 to 33,000 square foot lot was allowed to keep their house and shortplat off a couple of 5,000 sf parcels and put up two 1,700 square foot homes…

Thank you for letting me think out loud.  Your thoughts appreciated.

P.S. for Jillayne 🙂

Edmonds – 35 for the first group assessed at $245,000 to $280,000,  322 in the 2nd group built since 1990 and assessed at $280,000 to $375,000.  hmmm am I missing something by not looking under $245,000 assessed values with no age range?  23 in Edmonds,  Kirkland 62, 98052 – 120, Bellevue 43, Shoreline 68, Kenmore 51, Bothell King – 47, Duvall 27, Bothell Snohomish 37