What’s Next for Fannie, Freddie?
What’s to become of Fannie Mae and Freddie Mac, which are bleeding red ink as home owner defaults continue to increase?
The rising losses will force the government to decide whether to keep putting money into the firms to keep them operating or divide them into smaller businesses and remove government support.
Daniel Mudd, a former Marine, was Fannie Mae’s CEO before the government fired him and put James Lockhart, director of the Federal Housing Finance Agency, in charge. He likened the situation to the U.S. invasion of Iran. “The troops got to Falluja in a couple of weeks and seized the radio towers, but there was no plan to run the country once the shooting stopped,” he said.
Under the Obama plan, Fannie and Freddie are expected to refinance as many as 5 million underwater mortgages.
Fannie’s government-appointed CEO, Herbert Allison, said: “It’s not about maximizing returns on equity or profits. It’s really about being of use to the country during this very difficult period.”
Source: The Wall Street Journal, James R. Hagerty and Damian Paletta (02/27/2009)
Second-Home Buyers Are Looking at Foreclosures
Falling prices, especially in areas plagued by foreclosures, are enticing thousands to purchase a second home.
Buying a foreclosed home, or an otherwise distressed property, is becoming particularly commonplace in Las Vegas. In January about 80 percent of residential sales in the area were foreclosures, according to the Greater Las Vegas Association of REALTORS®.
To attract buyers, the association is offering bus tours of foreclosed properties and wooing potential international buyers through global advertising.
Foreclosures are also selling well in Florida and Arizona.
Many of the buyers are people who previously wouldn’t have considered a foreclosure, says Randy Paun, sales manager for Exit Realty in Pensacola, Fla. But today’s buyers, he says, are ordinary people enticed by a bargain and willing to do what’s necessary to buy the homes and make them livable.
Source: The New York Times, Jack Duffy (02/19/2009)
Who Will be Eligible for Foreclosure Help?
With the federal government hoping to finalize details for its $75 billion foreclosure prevention program by March 4, officials are fine-tuning eligibility requirements.
So far, they are targeting borrowers who spend more than 38 percent of their earnings to make loan payments on primary residences.
The Mortgage Bankers Association wants the Obama administration to broaden the refinancing component of the initiative, noting that the threshold of 105 percent of a home’s current property value is inadequate to help home owners in battered housing markets like Arizona, California, and Florida.
Source: Washington Post, Renae Merle (02/20/09)
What’s In the Foreclosure Prevention Plan?
The Obama administration yesterday released its long-awaited plan to stem foreclosures. It’s organized into three categories:
1) Help for homeoners making their payments but at risk of default and foreclosure. Homeowners with a Fannie Mae or Freddie Mac loan would be eligible to refinance as long as their mortgage doesn’t exceed 105 percent of the home’s current market value. Currently owners need to have at least 20 percent equity. Potential impact: 4-5 million households.
2) Help for homeowners already in default and in need of loan modification. For lenders that voluntarily agree to lower a borrower’s payment so that it makes up no more than 38 percent of the borrower’s income, the government would share the cost of lowering the mortgage burden to 31 percent of income. Incentives to lenders to participate include a $1,000 payment. Borrowers can receive up to $1,000 as an incentive to stay current on their new mortgage. Still in the works is a proposed provision that would allow bankruptcy judges to require loan modification (known as a cramdown) as part of a household’s restructuring. That provision requires legislation by Congress. Estimated potential impact: 3-4 million households.
3) Doubled resources to Fannie Mae and Freddie Mac. To encourage investors to buy the secondary market companies’ mortgage-backed securities, the government explicitly backstops them to up to $400 billion, twice the current amount.
The plan does not provide help to investors or to homeowners who are in trouble with a second home, nor does it apply to homeowners whose mortgage is part of a private-label mortgage security that is not backed by Fannie Mae or Freddie Mac.
“The administration’s proposed plan, combined with provisions like the $8,000 first-time home buyer tax credit in the just-enacted American Recovery and Reinvestment Act, will help minimize foreclosures, shrink housing inventory, stabilize home values, and move the country closer to an economic recovery,” says NAR President Charles McMillan.
Source: REALTOR® Magazine Online
Obama’s Next Challenge: Stop Foreclosures
After President Obama signed the $787 billion economic stimulus plan into law Tuesday, he said now the focus needs to be on stopping the spread of foreclosures and falling home values.
“We must … do everything we can to help responsible home owners stay in their homes,” Obama said.
The challenge, say those who have been studying the problem, is to lower the amount of money borrowers must pay every month.
More than half of mortgage modifications have left borrowers with the same or higher loan payments because lenders tack on past-due principal, interest, taxes and insurance, which drives the total owed higher, according to an analysis by Alan M. White, a professor at Valparaiso University School of Law. The study looked at more than 23,000 modifications.
At the same time, White says, lenders have been unwilling to reduce principal even for borrowers owing vastly more than their homes are worth.
As a result, 49 percent of borrowers redefaulted within six months after receiving a modification that increased their principal and interest payments by 10 percent to 20 percent, according to ratings company Fitch.
The re-default rate was 21 percent for borrowers who saw their payments fall by 20 percent or more.
Source: The Wall Street Journal, Ruth Simon (02/18/2009)
Short Sale v. Foreclosure
Q: I am thinking of relocating to Miami Beach, as I’ve read that there are deals there. Is it better to negotiate with a short seller or look for houses already owned by the bank? And if I go for the latter, how low should my offer be—and will the lender offer me financing?
![[Short Sale v. Foreclosure]](http://s.wsj.net/public/resources/images/OB-CX855_miamif_D_20090109152155.jpg)
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A: There’s no shortage of distressed properties in Miami Beach. RealQuest.comcurrently lists 442 homes there that are somewhere in the foreclosure process, and 58 that have gone back to the bank. And Fannie Mae just launched a test program that will preapprove short sales, making it easier for buyers like you. However, the program is not available in your area.
But bear in mind that in the case of both short sales and bank-owned homes you are negotiating with lenders rather than sellers. In a short sale, the seller might be desperate to accept any offer to avoid foreclosure, but that doesn’t matter if the primary and junior lien holders don’t agree to it. With bank-owned properties, you will be dealing with the “real-estate owned” or REO department of the lender who took ownership of the house at the auction. In both cases, you should be prepared to be patient, since lenders are overwhelmed with distress sales these days and may take weeks to respond to your offer. According to a survey of real-estate agents conducted in November by Campbell Communications the average wait time to get an answer from a lender on a short sale is 8.1 weeks, up from 4.5 weeks in a survey conducted earlier in 2008.
It’s hard to know whether or not you’ll get a better deal on a short sale or a bank-owned home because the situation varies with each property. Some short sales are priced higher because the seller has junior lien holders who won’t sign off on the deal unless they’re paid something. But some foreclosures are priced higher than corresponding short sales because the bank needs to recover costs for repairs, especially if an angry former owner decided to punch holes in the walls, steal the light fixtures and flush cement down the toilet.
Because the back stories of properties differ, you should begin your quest by finding a buyer broker that specializes in distressed properties (many won’t touch them, since deals typically take a long time to close, and commissions tend to be minimal). A good buyer broker will be able to provide a comparative market analysis that shows sales of similar homes, and may also be able to get a sense from other brokers of prices of pending sales. That’s important to know because lenders are going to try to hold out for fair market value for the home, even in a declining market, and will insist on an appraisal to justify the sales price to their shareholders. The broker should also investigate how long the property has been on the market, what’s owed on it and how many offers it has received.
While it isn’t unusual to see both short sales and bank-owned properties listed at prices far below those offered by traditional sellers, don’t expect them to sell for much more than 20% below asking price, says Fort Lauderdale, Fla., broker Scott Coloney, who has assembled a “foreclosure response team” of financial and legal partners to facilitate distress sales. In fact, properties in good condition and in desirable locations may even spark bidding wars. “So low-balling is a waste of time,” he says.
Moreover, with your bid you’ll have to show that you have the cash to buy the property, or a letter from a lender pre-approving you for a loan. That letter can be from the bank that owns the property—and you’ll probably be taken more seriously as a bidder if it is—but don’t expect the bank to offer you special low financing terms to close the deal.
Rules for Renting to Post-Foreclosure Tenants
Property managers considering renting to someone who lost a home to foreclosure should determine whether a potential tenant was a good renter prior to the foreclosure and could be again.
Maurice Ortiz, marketing director of Apartment People, a Chicago-based apartment-finding service, suggests setting up a procedure to consider applicants with extenuating circumstances individually. He suggests landlords consider these issues:
Did the tenant leave the foreclosure before he was evicted? Taking control of the situation and moving on is a sign of a reliable person who got in trouble because of the wrong mortgage.
Is the potential tenant upfront and honest about his problem? A tenant who admits his situation and explains it is likely to be a reliable tenant.
Ask for full, documented financial disclosure. Make sure the applicant has a job and a steady income and car and credit card loans are paid on time.
Ask for references and check them.
Seek a larger deposit – two months is not out of line – or ask for a lease co-signer.
Source: Chicago Tribune, Sharon Stangenes (01/25/2009)
Fed Announces Plan to Reduce Foreclosures
The Federal Reserve will take aggressive action to renegotiate mortgages that are likely to enter foreclosure, Fed Chair Ben Bernanke said in a letter to Congress Tuesday.
Under the program, which only affects mortgages owned by the Fed, the central bank will be able to reduce what a home owner owes on a mortgage, lower the interest rate, lengthen the term on the loan, or take other steps that might persuade home owners to keep paying. Borrowers will deal directly with their mortgage servicer.
The Fed says that the mortgages most likely to be affected are those with loan balances that are more than 125 percent of estimated value of the property.
“It’s a step beyond what FDIC is doing with its own portfolio,” said mortgage expert Alan White, an assistant professor at Valparaiso University School of Law. “Principal write-downs are still the critical issue” in keeping borrowers in their homes.
Source: Washington Post, Neil Irwin and Renae Merle (01/28/2009)
Buyers Increasingly Suspicious of Foreclosures
Fewer buyers are willing to consider purchasing foreclosed property than they were seven months ago, according to a study commissioned by Trulia.com and RealtyTrac.
Seven months ago, 54 percent of adults surveyed said they would consider purchasing a foreclosed home. In November, only 47 percent of adults say they’d buy a foreclosure.
The chief turnoff is perceived risk, with 80 percent of those surveyed citing hidden repair costs, a tricky buying process, and the possibility that the neighborhood will lose more value and drag the property down with it.
To compensate for these risks, 75 percent say they expect at least a 25 percent discount and 30 percent say they would only buy if there is a 50 percent discount compared with a comparable home that isn’t in foreclosure.
Other findings:
* 56 percent of single/never married adults were at least somewhat likely to consider purchasing a foreclosed home, down from 60 percent in April.
* 43 percent of married adults were at least somewhat likely to consider purchasing a foreclosed home, down from 50 percent in April.
* 42 percent of divorced/separated/widowed adults were at least somewhat likely to consider purchasing a foreclosed home, down from 50 percent from April.
Source: Trulia.com (12/16/2008)
Investors Bulk Up on Foreclosures
Entrepreneurs are rushing to cash in on the foreclosure market, buying packages of foreclosed homes at steep discounts. Web sites are emerging to fulfull demand.
- ReoLynx.com allows investors to view more than 1,000 homes listed on the site, build a portfolio, and make a bid.
- VerifiedREOs.com and BulkrREO.com both sell packages of properties assembled by sellers.
Finding the properties is the first step, but closing on these deals are proving to be the biggest challenge because financially strapped banks aren’t willing to lend or sell REO homes at sub-basement prices.
“We have shied away from selling in bulk” because buyers are looking for steep discounts, said Ronald Faris, president of Ocwan Financial Corp., a mortgage servicer with a large portfolio of foreclosed homes.
Source: The Wall Street Journal, Rhonda L. Rundle (11/26/2008)
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Highers Group Realty
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