Here's a re-run of my
analysis of the Obama Housing Plan:
Unfortunately,
and not just for St. Louis MO homeowners who may be in trouble, it is much ado
about nothing ... To complicate things, unfortunately, our friends in the media
know little (and want to report less about the truths of the market – remember sensational
title sell best) 
about the housing crisis that we're living through, but let's
start talking about this new "Homeowner Affordability and Stability
Plan" that was announced by the President.
Obama’s administration is saying that the plan will enable "up to 4 to 5
million responsible homeowners to refinance." That's true ... and a
great boom for loan officers and title companies, but let's look a little more
at these claims that they will stop foreclosures. It helps folks who
right now aren't the ones really struggling ... and ignores the folks under
water on their mortgage beyond 5%.
Please let me explain as the media and most of the rest of the world
missed this 5% issue – and it’s a big one for foreclosure and mortgage relief.
Let's read directly from the White
Houses' summary:
Download Home_stability_plan
"Consider a family that took out a 30-year fixed rate mortgage of $207,000
with an interest rate of 6.50% on a house worth $260,000 at the time. Today,
that family has about $200,000 remaining on their mortgage, but the value of
that home has fallen 15 percent to $221,000 - making them ineligible for
today's low interest rates that now generally require the borrower to have 20
percent home equity. Under this refinancing plan, that family could refinance
to a rate near 5.16% - reducing their annual payments by over $2,300."
Yep, they sure can do that ... but guess what? Most of the folks who will
take advantage of this are not the folks that are in foreclosure or currently
facing foreclosure! If they have a conventional mortgage with Fannie and
Freddie, they aren't the issue right now ... for the most part, the subprime
garbage is.
But there's a magic number out there 105%. Yes, that's what we're talking
about. If the loan is less than
than 105% of its current market value, they might be eligible for
refinance.
Here’s
the crux of the issue and why this issue will NOT fix short sales and foreclosure volume in the United
States.
The
vast majority of the people in foreclosure (or who have been foreclosed on in
the past year) purchased with 100% financing (80/20 purchase loans) or have
pulled all of their equity out via a refinance using a home equity loan and/or
a ‘cash out’ first/second mortgage ...
An
here’s the kicker – and a bigger issue outside of St. Louis MO’s Real Estate
Market - most homes lost at least 15%
of value last year, and in California, Nevada, Arizona and Florida, at
least double that to more than 30%. Obam’s plan does nothing for these
homeowners.
Now let's think about this further. In order to refinance with Fannie and
Freddie, you have to not only have equity in your home (or in this case you
can't be under water more than 5%), but you also have the meet the guidelines
for a loan refinance. That means you have be employed. You must
have a job. Stated and exotic NINJA (no income, no job, no assets) loans
aren't around anymore. So everyone who just lost their job doesn't
qualify for this help.
But is this a good idea, regardless of whether it won't help people facing
foreclosure? Our answer is -Yes. If we can reduce mortgage rates – thus allowing
millions of Americans to have more money in their pockets – this will
collectively translate into more consumer spending and a speedier and more
robust recovery from the recession. Frankly
I like this idea a lot more than the $400 a year tax credit that will do little
to actually help our economy.
Now back to the foreclosure / short sale problem at hand. Unfortunately, with 80%+ of distressed
properties having a first and second mortgage, modifications for those who were
over leveraged is going to be next to impossible unless they've been paying
extra payments to bring down their loan balance.
If
you were listening carefully you hear what Obama signaled that he supports?
Cram downs. What is a Cram Down? Unless you were in the real estate business
in the early 1990’s during the commercial real estate S&L crisis – you likely
have never encountered or heard of this term. It was commonplace then and was
effective – but costly (to lenders).
That's when a bankruptcy court judge steps in and basically modifies loans and
cuts its principal balance – the balance amount is crammed down to a lower
amount. If you’re a lender (or mortgage holder) you DO NOT like the thought of
this as it guarantees costs and losses – all from a judicial system that is
supposed to figure out a fair and reasonable amount to cram down the loan
principal balance amount to.
This
certainly sounds like an exciting premise if you are a homeowner facing
foreclosure and ready to file or already in bankruptcy. But here's the rub: if you violate the
sanctity of contracts, you will add uncertainty (and costs – which could be
significant) to the end investor, which means they are not willing to pay as
much for the loan portfolio. Bottom line
here, this cram down scenario will drive up interest rates.
One of the most common question I’m getting now is the following: In fact, I spoke with a 
Ballwin MO homeowner
contemplating his options. Will cram
downs slow short sales?
NO! , the reason people do short sales is to save their credit and stop a
foreclosure. Do you think those doing short sales want a bankruptcy on
their record – something that will certainly delay their ability to purchase a
home in the future significantly longer than short sale w/o foreclosure? NO
– definitely not.
No,
those are the individuals that don't want to a short sale anyhow ... those are
the ones that really want to stay in the home and believe with a modification
they can afford it.
What cram downs may do is create an incentive for lenders to approve more short
sales and modify more loans. Why? Because they don't necessarily
want to roll the dice with a bankruptcy court judge.
Another question we hear every day now – in fact I heard this from a homeowner
from Webster Groves and another in a condo in Kirkwood – “But I read that these
banks are putting moratoriums on foreclosures? Won't that mean fewer REOs
and short sales?”
This is a key fact that the Obama Administration and the media miss daily - Who
owns the majority of loans in trouble? It isn't the banks! It is
the investors that purchased these loans. They then hired a servicing
company to service that loan on behalf of Collateralized Debt Obligation A76XE63
in Singapore. This is critically important: the majority of homes in
foreclosure are not owned by banks, they are owned by investors who bought
mortgaged backed securities.
To further complicate things – as was noted in article in the Wall Street
Journal today – these very investors are now threatening to sue the servicer if
they mess up a modification or mishandle a foreclosure. "The
securitization has split the interest in the home loan among so many different
parties that it is difficult for servicers to make a modification without fear
that some significant party may sue or do something else that hurts the
servicers," Kurt Eggert, a professor at Chapman University, told the
Journal. And Obama thinks that the minor
financial incentive in the plan announced this week will overcome this fear of
being sued – I would not expect so! (see below for specifics on the monetary
carrot offered in the plan to lenders)
So, we've talked about loan refinance and cram downs. What about the
modification for those who are in foreclosure? What is that all about?
Under the plan announced by Obama this week - First, the lender reduces the
interest rate on the mortgage to no more than 38% of the borrower's income.
(Note: what if they don't have a job...kinda hard to do, huh?). Interesting side note – the average debt to
income ratio for our short sale clients who we gain approval on their sale is
83% - BEFORE the mortgage debt is added in – with mortgage debt –their ratios
are over 100% meaning they are paying more out per month at their current loan
interest rate than they take in per month.
These clients would NOT be eligible for the program.
Second, the government will match dollar for dollar the reduction from 38% to
31% debt to income ratio (government is buying down interest rates, not a bad
idea, but the investor has to take the hit getting to 38% which many of them
won't do).
Third, lenders must keep the modification in place for 5 years.
In order to incentivize lenders, the government will pay the $1,000 for the
initial modification and then will give a $1,000 payment for the next three
years if the loan is current.
Then the government will give a carrot to the homeowner of a $1,000 principal
reduction for up to $1,000 each year for the next 5 years.
So does this do anything to really stem the foreclosure tide?
Unfortunately not really ... because lenders know the nasty statistics
that most folks don't want to talk about.
But the New York Times told it to everyone on its front page today. Guess
what? Read it for yourself: "The nation's 14 largest banks reported
that more than half of the loans they
modified last year were delinquent again after just six months,
according to the federal bank regulator, the comptroller of the currency."
Yes, after just six months over half of the modifications that were done went
back into foreclosure. Why? First of all, a lot of people that
never should have been homeowners became homeowners with 100% financing.
They aren't ready for the responsibility of owning a home and aren't able
to manage their finances accordingly. Second, the economy has a lot of folks
wiped out and they've lost their job. And third, after paying for a
property that they know is $75,000+ underwater, at some point they just walk
from it because it frankly doesn't make economic sense to keep it, especially
since their credit is shot already because they've missed so many payments.
They can bail out now, rebuild their credit, and buy something again in a
few more years (with a short sale they only have to generally wait about 2
years).
So what really happened this week? A big mess just got messier.
False hope was given to millions of people facing foreclosure that own
homes that are never going to get refinance or modified in a meaningful manner.
If you are behind on
your mortgage and looking for foreclosure help in Saint. Louis MO – have zero
or negative equity or are looking to evaluate whether a short sale is the right
option for you, please CALL US TODAY – 314-779-3688 or email us at shortsalehelp@cottrellrealty.com .
For qualified homeowners
– we are getting more than 80% of our short sales approved by lenders.
Readers looking for additional short sale information can click here.
We
expect the volume to continue to increase in 2009 with lenders becoming MORE
and not less inclined to do a short sale vs. a cram down or foreclosure. Its saves them money and mitigates their
losses.
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