HOW DID WE GET INTO THIS SITUATION??

As with many government programs, it started with good intentions.  In 1977 Congress passed the Housing and Community Development Act of 1977 better known as the Community Reinvestment Act (CRA) to reduce discriminatory lending practices in low to moderate income neighborhoods and increase lending to minorities. There have been several modifications to the original act over the years.

Among these modifications were provisions that allowed Fannie Mae and Freddie Mac to securitize mortgages and sell them to investors. These securities were insured or guaranteed by these entities. Lenders would originate loans and sell them to Fannie and Freddie who in turn would bundle them into securities and sell them to investors all over the world. This created a ready market for the mortgage backed securities and encouraged lenders to make more loans. If the asset underlying these loans remained strong, then the security would also be strong.

Some have charged that the regulations forced lenders to make loans to people who would not have, under previous credit standards, qualified for the loans they were getting. Many lenders created new types of loans, primarily negative amortizing adjustable rate loans as well as loans of up to 100% of the value of the home. Many did not require any proof of income for the borrower. All of this was done to increase lending among low to moderate income borrowers and in many cases to meet CRA requirements.

As the supply of money increased, due to relaxed underwriting standards, more people were able to purchase homes. When there are more people with more money chasing a limited supply of homes, prices will rise. Some of the people who purchased homes in the early stages of this boom were able to sell their homes for 20-50% more than they paid for them in a short time, often in 3-6 months. Many took the equity and repeated the process. Some refinanced and remodeled the home, bought cars and TVs or used the money for their children’s education.

Eventually the bubble burst and people were not able to turn the homes over as quickly as they had just a few months before. Now people had mortgages of 100% or more of the value of the home and also were faced with a mortgage payment that was going to increase. Many of these borrowers had initial interest rates as low as 1% and now were facing rates of 5-8%. A loan of $150,000 at 1% had a payment of $482 a month. Now when the interest rate adjustedborrowers were faced with a payment of $805 a month or more. Many could not afford this new payment and had to sell their home.

Now we were in a reverse situation from what we had been in before. The supply of homes on the market increased and prices started falling. Many borrowers walked away from their homes and the lenders foreclosed. As prices fell on these homes that the borrowers could no longer afford, other homes in the neighborhood also fell in value and equity evaporated. Many people tried to keep up with their payments but after seeing the value of their home fall 50% or more in some cases, they made the decision, often called a strategic default, just to stop paying the mortgage. Sadly the ones hit hardest are the ones that the law was created to help.

So now our real estate market is dominated with short sales, homes selling for less than is owed to the lender, and foreclosed properties, called REOs for Real Estate Owned. Only time will cure the problem but meantime now is a great time to purchase a home for your own use or as an investment. Interest rates are at all-time lows for both personal residence and investment properties.

How Much Should I Offer On A Home That I Like??

Some People think they should offer 10 -15% less than the asking price. Others think that the list price is the right price and sometimes you need to offer more than the asking price, especially if you want the seller to pay some or all of the closing costs. So how do you determine the price that will get you the home you want at a fair price? Your Realtor© and lender can help you figure that out

1:  Speak to a lender.  It is critical to speak to a lender to explore your financing options. There are several loan programs, FHA, VA, Conventional, as well as special programs offered by FNMA for their foreclosures. There may also be special programs available in your area for first time home buyers.

If you qualify for a purchase of $250,000 it does not make sense to look at $400,000 homes. By being preapproved by a major lender, your offer will be given more serious consideration and you will be able to close the sale more quickly.

If you do not have a relationship with a lender your Realtor© will be able to refer you to one or more lenders that they have worked with.

2: Review the comparable sales:  Your Realtor© will help you by providing a report on homes that have sold in the same area. You must take into consideration the condition of the home as well as the size of the home and lot. If it is a condo the best comps will be in the same project.

Ideally, you will compare homes that are recent sales (6 months) and are similar properties. If you are interested in a 3 bedroom 2 bath home that has 1500 square feet it does not make sense to compare that home with a much larger or smaller home with more or less features. An appraiser will do the same thing to determine the fair market value of the property.

3: What is the marketing time of the home and the comparables? If the home has been on the market for a long time, the seller may be more anxious to sell the home at a reduced price. It is important that your Realtor© let you know of price adjustments that have been made on the home you are interested in. If it had been on the market at a price above what the market could support and now has been reduced to true market conditions, making a lower offer may not work in your favor.

If homes in this area are sold in a short time at close to the listing price you may want to consider making an offer at or above the asking price. Properly priced homes in desirable areas sell very quickly, sometimes in as little as one day. If you like a particular home and the area do not delay viewing it and preparing an offer. It may not be there in 1 or 2 days.

4.  What is the activity in the area?  If homes in the area you are interested in have been on the market for long periods of time this will work in your favor as a buyer. It is important to know how many homes have had price reductions, has the home been in and out of escrow, what is the average marketing time for the comparables.

The higher these numbers, the stronger of a buyer’s market it is, and the more bargaining power buyers likely have.   .

5. What concessions are you asking for? If you are asking the seller to pay some or all of your closing costs, you may need to adjust your offer to cover these costs. The amount and type of closing costs may be limited by your lender so make sure that your Realtor© checks with them when preparing the offer.

 

Ultimately it comes down to how much you like the home. If the home is perfect for your family do not let it slip by because you want to get a great deal. Remember that a home is a place that you raise your family and have friends over. When you find one that meets your needs move quickly to secure that home.

I can help you with your real estate needs.

Short Sales… Good Bad or Ugly Part 4

What is the good part of short sales? Well for everyone’s loss there is a potential for someone to gain. In the case of a short sale many people are able to buy a home for half of the price that it sold for a few years ago. These lower prices coupled with extremely low-interest rates offer a great opportunity for homeowners and investors alike.

In the first part of this century people were buying homes and reselling them a few months later and making great profits. This craze started with astute investors and later the regular home buyers got caught up in the frenzy. Many people realized that this could not go on forever and sold towards the peak in 2006-2007.

However there were still many people who still thought that the market would recover and prices would rise again. Lenders came out with loan programs that had starting interest rates as low as 1% which only added fuel to the fire. Buyers had no intention of living in their homes for many years they just thought they could sell it in a few months and make thousands of dollars.

This did not happen and when prices started to fall and loans started to adjust the homeowners panicked. When interest rates jumped 3-5% the homeowners could not make the payment and flooded the market with homes for sale. This drove prices down and we are in the situation we are in today.

This is a golden opportunity to buy. The low prices and low-interest rates make homeownership much easier than it has been in the past. Long term investors have a chance to buy homes and rent them out with a positive cash flow with smaller down payments. The key to buying now is to hold on to the home for 5 to 10 years. Do not anticipate immediate appreciation. It will still take several years for the housing market to recover but prices will eventually rise.

Find a Realtor that you trust and find the home that makes sense for you. I like to say that some people buy a home and others a house. A home is where you live and raise your family, it is a long-term investment that adds to your financial stability. You don’t have to worry about the rent increasing or if you can paint the walls or hang a picture; it is yours. A house is an investment and is looked at differently than a home. The considerations are strictly  financial without any emotions attached.

Now is the time to speak with a qualified lender and find a Realtor that you trust. Don’t miss out on these lower rates and prices.

Short Sales… Good Bad or Ugly Part 3

If the loan modification does not work, either it is unacceptable to you, you did not qualify for the modification or you cannot make the payments, you still have some options. If you are in default on your loan or at risk of being in default on the loan you may qualify for a Home Affordable Foreclosure Alternative program (HAFA) short sale.

A short sale requires the lender to agree to accept a payoff that is less than the outstanding balance of the loan. Most loans will qualify for the HAFA program and the property owner is relieved of the obligation to repay the deficiency. The other advantage is that the lender determines, prior to receiving an offer, what is the minimum that they will accept to satisfy the loan. Prior to HAFA an offer was presented to the lender and they would determine if the offer was sufficient or if they required a higher amount. The time frame for this old process could take several months. Using HAFA the bank has 10 days to respond to the offer greatly speeding up the sales process. Using the old method buyers often made several offers on properties because they had no idea if the lender would approve the offer or reject it. HAFA provides a greater sense of confidence tha the offer will be accepted and close in a timely manner.

The process for a HAFA short sales is clearly defined for FNMA, FHLMC and other investors. Although it is not required, it is recommended that the property owner utilizes the services of a HAFA certified Realtor. These Realtors are trained in the proper procedures and can speed up the process. The property owner does not have to have the property listed with the Realtor to start the process.

The documentation that was used for the HAMP loan modification process will be used in the HAFA process so there will not be duplication of paperwork. Some information may be needed to be updated such as paystubs or bank statements but the majority of the paperwork will be in the possession of the lender.

A Request for Approval of Short Sale (RASS) needs to be completed and sent to the lender. The lender will then either approve or provide a minimum sales price or net proceeds to the lender. Once this is completed the property can be listed with a real estate broker.

The major advantage of using HAFA is that the time frame is drastically reduced and the buyer has confidence that the offer will be accepted and the seller can make plans to move in a timely manner. In many cases the lender will even provide the seller with funds to assist in the move.

Short Sales… Good Bad or Ugly Part 2

If you have decided to weather the storm and stay in your home congratulations. If you simply cannot make the payments because of interest rate increases, a decrease in your family’s income or other unexpected event there are still some options available to you.  The first you should explore is a loan modification. Fannie Mae (FNMA) offers a Home Affordability Modification Plan (HAMP). Programs similar to this are offered by many lenders.

In order to qualify for a loan modification, you will have to contact your lender and provide them with a reason to modify your loan. Has there been a change in your financial situation? Have you increased the size of your family?  Are you currently in default (delinquent on your payments) or in risk of going into default ? According to the HAMP website, https://www.hmpadmin.com/portal/programs/hamp.html , you may qualify for a loan modification. Not all loans are FNMA qualified but the majority of loans are.

In order to be eligible for this modification there are some requirements:

1) You must be delinquent on your mortgage or face imminent risk of default
2) Your property is occupied as your primary residence-not a rental 
3)Your mortgage was originated on or before Jan. 1, 2009 and unpaid principal balance must be no greater than $729,750 for one-unit properties.

If you meet these requirements then you may be eligible for a modification that will lower your total mortgage expense to 31% of your pre tax income. This is achieved in the following manner:

First, reduce the interest rate to as low as 2%,

Next, if necessary, extend the loan term to 40 years,

Finally, if necessary, forbear (defer) a portion of the principal until the loan is paid off and waive interest on the deferred amount.

You will have to provide your lender evidence of the hardship, copies of your tax returns and recent paystubs as well as a detailed budget. This information will be reviewed by the lender to determine if a hardship exists and you are either currently in default or at risk of going into default. This process may take several of weeks.

If the lender determines that there is a hardship, you will be offered a trial modification and if you successfully complete the trial period, the modification will become permanent. If you fail to make the payments under this trial plan, you will not be eligible for another modification attempt and may need to consider a short sale, deed in lieu of foreclosure or foreclosure.

Many Realtors can assist you during the modification process at no cost to you. If the modification does not work it would be only fair to ask them to list your home for sale and help you through the short sale process.

There are plans to assist you if the short sale is the alternative that is best for you. That is a topic for another day

Short Sales… Good Bad or Ugly

For the last several years the real estate market has been hit with falling prices resulting in homeowners owing more on their homes than they are worth. To make matters worse the recession has resulted in high unemployment rates making it difficult, at the least, for many people to continue making their mortgage payments. What caused this is not the subject of this article but an interesting topic for discussion at another time.

There are four options for homeowners at this time.

1. Weather the storm and continue making your payments. If the home works for you and your family this may be the best option. More than likely over the next 5 to 10 years the value will return and meantime you have a place to call home.
2. Request a loan modification from your lender. If your total housing expense (mortgage payment, insurance, property taxes and HOA dues) is more than 31% of your gross income you may qualify for a loan modification.
3. Short sell the home. This involves selling your home and negotiating with your lender(s) so they will take a payoff that is lower than what you owe. There are several government sponsored programs that may make this process easier and faster than just a few months ago.This procedure is approximately 50% of the market at any given time.
4. Foreclosure or Deed in Lieu of Foreclosure. This should be used as a last resort if the loan modification and short sale have failed. Both of these steps involve turning the property over to the lender and walking away from your home. Some lenders have a “cash for keys” program that will pay you to leave the home in good condition.

We will discuss loan modifications, short sales, deeds in lieu and foreclosures in a future article