Sarahiously Speaking

Oh, the banks are at it again!  News has surfaced over the last 2 weeks that GMAC Mortgage and GP Morgan Chase are suspending foreclosures in 23 states (Virginia is NOT included!).  Bank of America announced late last week they were halting foreclosures in all 50 states in order to investigate their foreclosure process.  But this raises an important question:  Have banks been foreclosing on borrowers who are not delinquent?  Will this latest action save a borrower’s home? 

My opinion on this matter may not make me any friends, so let me start by saying that I do not support predatory lending.  I also am an advocate for short sales and think that banks need to be more willing to work with short sales with legitimate hardships.  However, if you have defaulted on your mortgage, the only recourse the lender has is to foreclose.  Last time I checked, we still weren’t giving houses away.  I don’t think many people signed their mortgage paperwork while intoxicated, drugged, under undue duress, or without being told some disclaimer about the terms and conditions of the mortgage.  I do think that many consumers took out very risky loans because they were caught up in the mentality that real estate was a guaranteed quick money maker.  I do know that there are some exceptions to this rule.  I have had clients that really didn’t know what they were signing.  Or, they were told one set of mortgage terms, but at the settlement table there were different terms.  They felt that they had to sign the papers or be in default of the contract.  But, I’ve found that these consumers haven’t waited until the 11th hour to get help. 

So, will consumers who are in default be saved from foreclosure by these latest moratoriums?  The answer is a resounding NO!  Defaulting borrowers will still lose their homes.  Banks will continue to foreclose on homes when the borrower proves they can’t pay the mortgage.  What this moratorium does is gives banks the opportunity to let the government and consumer know that they are not the evil vultures they are portrayed as being.  These investigations will assure the banks that their paperwork is in order. 

In states, like Virginia, that adhere to nonjudicial foreclosure, this moratorium has little bearing on the market.  Virginia borrowers sign their rights away when they sign their mortgage instrument at the settlement table.  There is a clause in the deed of trust that states that the borrower gives the lender the right to repossess the property if the borrower fails to make their mortgage payments when the mortgage payments are due.  There is no court action that needs to be taken for the lender to pursue a foreclosure.  Simply, it is very easy for a lender to foreclose on a property in a nonjudicial foreclosure state.  Foreclosure has a very quick timeline in Virginia, as well.  Some foreclosures in Virginia may have to start over, but the house will still be foreclosed.

Defaulting borrowers should not look at this latest news as the answer to all of their prayers.  This is more of a postponement of the inevitable.  They should still make plans to bring the mortgage current, pursue a short sale, or find a rental.

Ahhhh… the new million dollar question.  So, we’ve all heard that HAMP (Home Affordable Modification Program) is supposed to save defaulting home owners from the disaster that is short sales and foreclosure.  But, you may have noticed that not many consumers who are in distress are actually being approved to modify their loans.  Well, there are several reasons for this.  Let’s examine a few. 

It’s important to remember that banks are NOT in the business to lose money and give away houses.  Banks are in the business  to MAKE money.  How do banks make money?  Banks make money on the interest they charge on their loan products.  The lose money by paying interest to consumers who have deposited money at that bank.  The interest earned on the loan products exceeds the interest paid out to depositors.  The profit the bank makes is the difference between the two.  This difference can make or break a bank.  The more money the bank has going out to consumers, the more money the bank needs coming in from interest payments.  In this market, banks are not getting the interest payments because consumers are not paying their mortgages.  However, banks are still required to pay depositors.  Banks also make money off the fees charged to consumers to make loans, but the big money is still in collecting interest on the actual loan product.  The bank will collapse if their accounting books get too far off balance.  We have become all too familiar with banks collapsing. 

In steps the loan modification alternative.  It is advantageous for banks to grant loan modifications to certain consumers.  Many large banks agreed to pursue loan modifications as a part of the Bail Out Bill passed in 2008.  If the banks are in the business to make money and defaulting borrowers are preventing that from happening, the bank may agree to allow the defaulting borrower to have a trial loan modification period.  This period is usually about 3 months.  If the borrower can make the modified mortgage payments in-full and on time, the bank may make this a permanent loan modification.  Banks are going to look at various factors in determining who gets the permanent modification.  

The #1 factor is risk to the bank.  If you have a history of not making your mortgage payments, is it a good risk to modify your loan terms and give you another chance?  In many cases, the answer is no.  So, banks have found a way around the HAMP requirement.  Banks are using the trial period as a way to get money from defaulting borrowers that they otherwise would not be getting.  Receiving three months of a reduced mortgage payment is better than receiving nothing at all.  After the trial period is over, banks can determine if foreclosure is a better option than a permanate loan modification.  Since risk is the #1 factor in determining permanate loan modification qualification, banks are offering non-defaulting borrowers the opportunity to modify their existing loan.  How does this benefit the bank?  Well, in a time when refinancing a home is so difficult, loan modifications can achieve a similar goal.  The borrower who now has the lower mortgage payment is also very happy with their lender and are likely to express this to their friends, family, and co-workers.  Banks can use all the postive press they can get!  And, banks are fulfilling their duty to pursue loan modifications as outlined by the Bail Out Bill. 

Who can get a loan modification?  Simple, people who are current on their mortages and are good risks for the bank.  What does loan modification mean for the person who is in default?  It gives you time to pursue a short sale.  The short sale is still your best option to get out of an excessive mortgage payment.  It may not be your ideal option, but it is still the most viable option.

The Federal Housing Administration gave a break to investors in September by relaxing the 90-day flipping rule for a period of one year.  The previous rule stated that FHA would not insure a mortgage on a property if the previous sale of the property had occurred less than 91 days before the current sale.  In essence, if a property was purchased on May 1, a purchaser could not secure FHA financing for the same property until 91 days after this initial sale.  Since FHA financing is the largest form of financing in the Fredericksburg area real estate market today, this prevented many investor-owned properties from being sold.  There were a few exemptions to this rule, but most of the exceptions did not apply to out areas market condition. 

David Stevens, Assistant Secretary for Housing - Federal Housing Commissioner, sited several reasons for the temporary change in FHA policy.  

1.  By relaxing the 90-day rule, FHA hopes to minimize the effect of foreclosures and abandoned properties on the surrounding neighborhood.  The faster a home becomes occupied, the less likely the neighborhood will become stigmatized and experience excessive decreases in property values.  

2.  Relaxing the 90-day rule would also help fuel the efforts of the Neighborhood Stabilization Program enacted in the summer of 2008.  $3.92 billion was appropriated to local and state governments to begin rehabilitating foreclosed and abandoned properties.  These grant funds can be levied to sub-contractors and developers.  These properties are then to be sold to low to moderate income families as affordable housing.    The most popular financing option for low to moderate income families is FHA financing.  Relaxing the rule allows for third parties to take title to the properties in question, rehab the properties, and then sell them to buyers that meet the Neighborhood Stabilization Program criteria.

3.  By FHA authorizing this waiver of the 90-day rule, it allows FHA and HUD to more effectively implement other stabalization programs they are backing. 

  However, there are still requirements for qualifying for the waiver.  The property in question must have been previously foreclosed or abandoned.  A non-profit or for-profit entity must have acquired the property and is now reselling it.  Funding for rehab and renovations needs to come from the Neighborhood Stabilization Program and the entity must perform under agreements with state and local government agencies.  The key for investors to take advantage of this rule relaxation is to become a part of the Neighborhood Stabilization Program.  For more information click here. 

Purchasers of REO, real estate owned or bank owned, properties are still able to enjoy a relaxation in a similar FHA rule.  The purchaser of a foreclosed property can still qualify for an FHA mortgage even if the title has not seasoned under the new owner’s name for 90 days.  This is good news in a state like Virginia, where we have no right of redemption on foreclosures.  The Foreclosure banks can put the REO property on the market as soon as the foreclosure is recorded and the property qualifies for FHA financing.  However, this waiver is set to expire May 10, 2010.