Upside-Down Refinancing Program Changes

So, it sounds like government is stepping in with a program that will allow upside down homeowners to refinance their mortgage. This should, at least in theory, help some struggling homeowners in Arizona. You see, they can now refinance their interest payment to today's historically low rate, even if they are WAY upside down, and lower their payment.

Read the Arizona Republic article discussing the program changes here.

So, what does it really mean? I have to agree with my colleague Kevin Kaufman (quoted in the article), in saying that I am skeptical that it will actually help. Based on what I see in my day to day practice, loan modifications are a gateway drug to short sales and foreclosures. This is why I personally believe that this program change (while full of good intentions, and helpful to some homeowners in the long run), will result in more short sales and more foreclosures.

First a word about why modifications don't work from the lender's point of view. Brent White's theory is that they don't work, because the lenders don't want them to. If they were easy -  who wouldn't want one? And yet, statistically as many as 80% of upside down home owners will never do anything about their situation. Why? Because it's not easy to enter into a modification.

The other point I question is the whole competition for these loans:

"Some lenders, frankly, just refuse to refinance," he [Obama] said Monday. "So, these changes are going to encourage other lenders to compete for that business by offering better terms and rates, and eligible homeowners are going to be able to shop around."

So ... let me get this straight - servicers are going to trip over each to service an upside down loan, that is already showing signs of trouble, with a seller who is documenting hardship, and that is much more likely to fall apart and require additional loss mitigation work? I know, I know ... the loss is the investors, theirs is the program, they probably guarantee that the mitigation work will be paid for, but STILL - this isn't the servicers primary business - I strongly doubt that they will be aggressively competing for it! What they REALLY want is financially strong, paying customers.

Second a word on why modifications don't work from a seller's point of view. Because they are a TEMPORARY relief. The biggest burden facing an upside down homeowner is the large payment. Second biggest is the large negative principal. Once they have trouble making the payment, the logic goes "Why NOT just deal with the whole thing and get it over with?" This is what I mean by loan modifications being the gateway drug to short sales and foreclosures. Once the homeowner gets their head out of the sand, and starts to move in the direction of actually doing something about their situation, they are very likely to go all the way with a permanent solution that will hurt more now, but be better for their long term financial standing. Modification is the logical first step - "What if I get good terms?" But, once the terms of modification, and the long term implications become known ... the homeowner has less of a barrier to keep going all the way, and disposing of the upside down house permanently, and moving on for good.

So, yes, I think this is a needed change, but I also think that it will mean a lot more short sales and foreclosures. And I don't mean that as a bad thing, necessarily.

Is my loan owned by Fannie Mae or Freddie Mac?

Most borrowers don't know who owns their loan, only who services it. And yet, knowing the investor on your loan can have many ramifications for you (short sale, modification, foreclosure, etc). So, here is a quick post giving you a way to find out who your investor is. It only takes seconds - click below:

Is my loan owned by Fannie Mae?
Is my loan owned by Freddie Mac?

Note - the only thing these websites can tell you is "Yes, we own it" or "No, we don't" - and if they don't, they can't tell you anything beyond that. So, if neither Freddie or Fannie own your loan, it can be an FHA owned loan, it can be a portfolio loan (owned by the bank themselves), or it can be any number of private investors. To find THAT out, you may have to call your servicer and ask them.

Are short sales getting easier?

These two articles sure seem to indicate that that's the case!

Article 1 (Realtor Magazine)
Article 2 (MarketWatch)

An interesting bit mentioned in there is the new program by Chase, where they incentivize the Seller to the tune of $3,000 - $35,000 as part of their Short Sale Acceleration Program, to encourage them to do a short sale vs. just walking away and foreclosing. Sounds too good to be true? It's real: We recently had a client who received a $25,000 incentive from Chase AND a $3,000 HAFA incentive when they short sold their primary residence. Yes, they were VERY happy. The criteria here, is that this is only applicable to Chase portfolio loans (meaning, owned by Chase, and not Fannie, Freddie, etc). As I mentioned before - banks want to see more short sales, and less foreclosures, and they are willing to put their money where their mouth is!

In my next post, I will discuss how to find out if your loan is owned by Fannie or Freddie, since this question comes up all the time. 

Short Sales - Back to Basics

I taught in Bakersfield, California back in June of this year. Their market is actually VERY similar to Phoenix, and short sales are quite prevalent. As a follow up to my training, I got asked to write an article for their industry publication - the Bakersfield Realtor Magazine. The topic was up to me (so long as it was related to short sales, of course ...) So, I considered a number of topics in my head, but in the end, the exercise that intrigued me the most was to write an article about the basics of a short sale, rather than about a specific aspect of a short sale transaction. You can see the result of my efforts here. Hope you like it!

Free Financial Recovery Classes from Neighborhood Housing Services of Phoenix

Neighborhood Housing Services of Phoenix has received a grant from the Nina Mason Pulliam Charitable Trust to develop and present Financial Recovery classes to assist Maricopa County residents with recovering from foreclosure, short sale, bankruptcy, and overall financial issues, anyone may attend this class free of charge.

The next workshop is on 10/29/2011 from 9:00 AM – 5:00 PM, breakfast and lunch will be provided.

I am partial to this program because I developed the curriculum and will be presenting it. Each attendee receives a 39 page workbook and has the opportunity throughout the class to ask questions and participate in the discussion.

If you know a homeowner who is struggling and needs some answers, or has already lost their home and looking to get back on track, please share this link with them: http://www.nhsphoenix.org/financial_recovery.html

Financial recovery topics to be covered include:

• Avoiding Fraudulent Foreclosure Rescue Operations
• Budgeting for Survival
• Credit Ramifications in a Mortgage Crisis
• Potential Legal Ramifications in a Mortgage Crisis
• Surviving Debt
• Rebuilding and Correcting your Credit

In the class I focus a lot on the credit report, we will review sample credit reports and study common errors often overlooked by consumers. There are a lot of example case studies we will discuss to give the material a real world feel, I am a firm believer that theory is not relevant for someone trying to get their financial life back together. My focus is on solutions to best prepare the class to move forward toward recovery.

The remaining dates for the class are:

10/29/2011 9:00 AM – 5:00 PM
12/10/2011 9:00 AM – 5:00 PM
1/21/2012 9:00 AM – 5:00 PM
3/3/2012 9:00 AM – 5:00 PM
5/12/2012 9:00 AM – 5:00 PM

The class is held near downtown at Neighborhood Housing Services of Phoenix, which is located at 1405 E. McDowell, Suite 100, Phoenix, AZ 85006.

It is an eight hour course, but it goes by fast, there is a lot of information I need to share. Some of the sub-topics we discuss are:

• Dealing with creditors and collection agencies
• Rights and protections for consumers
• Employment issues stemming from credit
• Protecting yourself from credit abuses
• How long will the credit be impacted
• What to do now in order to buy a house again the soonest
• Step-by-step course of action to correcting your credit report

Can The Bank Take My Car, My Other House, Everything???

One question we field over and over again is, if the bank takes back my home and there is money still owed, can the bank take my car, my other house, the swing set in the backyard, anything or everything? To oversimplify, it is not that simple.

In very basic terms, at the time of a foreclosure (or more common in Arizona, a Trustee Sale), the house is lost. And, the bank will have either sold the house right then at the public auction, or it will take the house back for resale at a later date. The final sale of the property will set the total amount of what the bank did not recover for you (the borrower). Now, that does not necessarily mean that the bank is entitled to that full amount. In fact, the bank cannot "fire sell" the property. Instead, the bank is entitled to the difference between the loan amount and the fair market value of the property.

By way of example. If I borrowed $400,000 to buy a house and it was foreclosed upon by the bank. If at the time of losing the house, it was worth $200,000, but the bank "fire sells" the house for $100,000, it does not follow that I owe the full $300,000. Instead, the bank is only entitled to $200,000 as the bank should have sold the property for fair value.

Now that said, on to the larger question, at the time of the sale itself, can the bank immediately come after me for the debt owed and attach or lien all of my possessions? No - not immediately. The bank, after the foreclosure, then has to file a lawsuit against you, for the amount forgiven. The bank has to then prove that it is owed the money at issue (ie, did not do a "fire sale") and win that case. AFTER the bank wins the case, it can start collections on the amount owed.

This is not an absolute as there are situations when the bank could, if inclined, try to tie-up assets as part of that lawsuit, but, that is rarely done as it requires the bank to post a large up-front bond and is incredibly cost prohibitive to the bank.

So, long and short of it, while the bank someday may be able to come after certain assets, they have to go through the entire process first. That is not to say that you will not owe the bank money and/or that they will not perfect the right to pursue other assets, it is just not an overnight event.

The sunset of REO's, and the move toward short sales.

Below is an excerpt from our friends over at the Cromford Report, which talks about the Phoenix housing market trending away from foreclosures, and toward short sales. Moreover, I recently heard from a friend who attended the largest REO conference in the nation, that ALL the big players are positioning themselves to do more short sales, and fewer foreclosures in 2012 and beyond.

Why? Because short sales are generally better for everyone involved. As I've been preaching since 2006 - win-win-win-win.

From Cromford Report October 2011 Housing Update:

REOs are losing market share very quickly now. Fewer trustee sales are taking place. There were 2,689 residential trustee sales in Maricopa County during September 2011, 44% fewer than the 4,808 of September 2010. In addition a larger percentage of these auctions are now won by third parties (42% in September 2011 versus 20% a year ago). So the quantity of homes reverting to the beneficiary is dropping extremely fast. Only 1,280 single family homes went back to the lenders in Maricopa County in September 2011. This is the lowest total since November 2007. It is also 61% lower than the 3,289 that they received in September 2010. They are selling far more than this number through ARMLS each month and so the lenders' inventory is being rapidly depleted.

It is a clear sign of the strength and dominance of negative sentiment that this remarkable turn round is mostly overlooked. At the same time, a completely irrelevant increase in foreclosures between July and August (due entirely to August having 23 trustee sale days instead of July's 20) managed to make headlines in the local papers. When bad news is amplified like this and good news is ignored we know sentiment has swung too far.

For the housing doom fans who like foreclosures, September 2011 was a pretty dismal month. There were a total of 4,544 new notices issued in Maricopa County of which 4,335 were residential. This is 39% lower than September 2010. This new number is actually slightly higher than April through July 2011, but 15% lower than last month and lower than every month prior to April until we get all the way back to December 2007. The downward trend has slowed but remains in place. The bigger news is that there were only 2,840 trustee sales of all property types. This is 44% down from September 2010. This is also the lowest number since March 2008 (except for November 2010 when Bank of America completely halted its trustee sales). Foreclosures are clearly well past their peak and the short sale is looking likely to overtake the foreclosure in the coming months as the primary mechanism to resolve homeowners' financial distress.