Inside San Diego Short Sales

A survey released on Monday shows that nationally, nearly half of all home sales in March involved distressed properties; either foreclosed homes or short sales.  This is the second highest level seen in the past 12 months.   And while this might not seem like good news, the statistics actually provide a glimmer of hope. 

The Housing Pulse Tracking Survey reported that short sales rose from 17.0% of total sales in February to 19.6% in March, and at the same time REO sales fell from 14.9% to 12.0%.  this is an all-time high for short sales.

So why is this a good thing?   Short sales, though not as speedy as we would like, are resolved much more quickly than foreclosures.  An REO can sit empty on the market for months, often falling into disrepair.  REOs are used as comparables by appraisers and thus drag down neighborhood property values.  Smaller numbers of REOs would be a positive sign for improved home values in the months ahead.

Additionally, from the point of view of an individual, a short sale is usually preferable in terms of both short and long-term impact.    A few of the advantages include the fact that a short sale does not have near the negative impact on a borrower’s credit score as a foreclosure;  there is no set time limit that disallows a borrower from buying again, and a short sale is not reported on a credit report for 7 years, as is a foreclosure.

If you have any questions about short sales, or any other real estate questions, please don’t hesitate to give me a call at 619-846-9249.

Over the past few years as home values have taken a nose dive, we’ve witnessed a new group of borrowers in the default arena – enter the strategic defaulter.  A strategic default occurs when a borrower who is financially able to make their monthly mortgage payment, chooses to walk away from their property because they owe more than the home is currently worth.  The rationale is that it doesn’t make financial sense to continue to pay for negative equity, waiting and hoping that the home’s value will increase and they will re-coup their lost equity.

To banks that are already struggling to cope with the thousands of borrowers who are legitimately unable to make their mortgage payments, this group represents a growing challenge.  According to studies by the Chicago Booth School of Business, strategic defaults in September 2010 represented 35% of all defaults, up from 26% in March 2009.  Last year the problem became so large that Fannie Mae announced that it would seek stringent penalties against borrowers who are able to pay, but choose to walk away.

Hoping to stem the tide of strategic default, banks are looking for ways to identify those borrowers most likely to walk away from their mortgage obligations.  The problem however, is that to date there has been no reliable way to identify the potential strategic defaulter.  Intervention is impossible if you don’t know who you’re looking for.

FICO Research Labs may have developed the tool banks are lacking.  The credit assessment company announced that it has developed a method that analyzes consumer spending and payment habits and allows lenders to identify borrowers who are 100 times more likely to default than others.  

So what is the profile of the strategic defaulter?  They are actually quite savvy managers of their credit having higher FICO scores, lower balances on revolving debt, less retail credit usage, and fewer instances of exceeding credit limits than the general population.  FICO claims the company’s new analytics can provide loan servicers with a method of reaching two-thirds of these would-be strategic defaulters, and according to Dr. Andrew Jennings, head of FICO Labs, “The ability to spot likely strategic defaulters before delinquency enables servicers to intervene early.”

But then what?  It is one thing to identify borrowers who might choose strategic default, but, what intervention can banks offer that will actually deter would-be defaulters? If lenders follow Fannie Mae’s example and simply threaten legal action to recoup outstanding mortgage debts, I doubt that will be much of a deterrent or solve any of the real problems.

The issue comes back to a point I’ve often made in this blog:  I don’t believe we are going to see a significant reduction in defaults, both strategic and involuntary until lenders are ready to consider meaningful principal reductions for borrowers who owe more than their homes are worth.   If Savvy Bob the Homeowner is considering default because he owes $80,000 more than the home is worth, do you think he might consider staying in his home if his principal balance was reduced by $60,000?  Throw-in a lower interest rate and I’m pretty sure you’d have a deal.  Considering the bottom line expenses for banks to foreclose, costs for carrying an REO, lost revenue, and a lower net sales price, principal reduction should start to look pretty good.

So I’m all for identifying those who are likely to choose to walk away, but before banks rush to hit them over the head with penalties, l hope they’ll put some thought into resolving the equity issues that are driving strategic default and offer borrowers a meaningful alternative.

I think we all agree that the lack of regulation in the mortgage lending industry was a primary cause of the housing market collapse.  Not everyone with a pulse should qualify for a zero- down, $400,000 mortgage.  However, the new rules being proposed by the federal government could be the fatal blow to a struggling housing industry that is barely surviving on life-support.

The cornerstone of the proposal is the idea that the very best rates and terms for conventional loans would be reserved for the very best borrowers…..sounds somewhat reasonable, until you understand what an exclusive club that would be, and how difficult it would make buying for first-time or lower-income borrowers.

First, a 20% down payment would be required.  In some parts of the country, you can buy a nice home for $150,000, but even so that would mean a down payment of $30,000 – a big number for a lot of people.  But here inSan Diegowhere a nice 2 bedroom condo is going to cost you around $320,000, a buyer would need $64,000, which is most likely a staggering sum for anyone considering a condo purchase.

If you think that sounds a bit harsh, you’ll love the other suggested requirements for the so-called “Qualified Residential Mortgage” or QRM:

• Strict debt-to-income ratios.  A max of 28% of gross monthly income could be used for housing expense and total monthly debt could not exceed 36%.  Currently, both Freddie Mac and Fannie Mae guidelines take other factors besides DTI into consideration, and Freddie can go up to an overall debt-to-income ratio of 45%.  And of course, this is fully documented income, so tough luck for the self-employed.
• To refinance your existing loan for a better rate you would need a minimum of 25% equity, and if you wanted to take out any cash, 30% equity would be required.  Today’s requirements vary by lender, but are no where near that strict.
• Pristine credit.  If you were 60 days late on any account in the past two years you would not qualify.

So to put this into perspective, let’s see what someone might be able to afford here inSan Diegowhere the median household income is $67,000.  Their total monthly housing expense, including tax and insurance could not exceed $1,563.  This means they could purchase a single family home for $295,000 (if they could find one that would qualify for conventional financing), but would need a down payment of $59,000.  Presuming their monthly take-home pay is $4,466 and they are currently renting a 2 bedroom apartment for $1200, and after all other expenses they could still manage to save $500 a month, it would take these would-be home buyers 9.8 years to save for the down payment!

What if you don’t qualify?  Get ready to pay-up.  The mortgage industry estimates that non-QRM rates will be from .75 – 3.00% higher, again pushing more people out of the market with higher rates.  So if you are like the majority of today’s borrowers and don’t have a big down payment, make an above average income and have perfect credit you could be paying 8.00% interest while the QRM borrower will pay just 5.00%.  Sounds really fair and I’m sure that will mean a big boost to the housing market, right?

This is a total over-reaction that threatens to kill the small gains and recovery that we’ve seen in the past year.  I agree that reforms are necessary, but requirements should not be so stringent that home ownership is only accessible to a privileged minority.  If only the wealthy can purchase a home, some of our troubled neighborhoods (where the QRM buyers won’t want to live themselves) will be owned by investors and would-be buyers will be doomed to a life-time of renting from them.  I don’t know about you, but to me this doesn’t sound like a way to re-build neighborhoods or salvage the American Dream of home ownership.

Believe it or not, a Republican and a Democrat are working together!  The two Representatives are sponsors of a bill that would require lenders to provide a decision of approval or disapproval of a short sale within 45 days of submission of the file.  Hallelujah! 

For those of us in the short-sale trenches, the most painful part of the process is the long period we spend waiting for the bank’s decision.  We meticulously prepare the file and then fax it off into a nameless abyss where it seemingly lies hidden at the bottom of someone’s in box.  Weeks later, we are informed that half of the information we submitted is missing from the file and would we please re-send it, or what we sent is now outdated (because they took so long to review it), and would we please send new pay stubs and bank statements.  It is a vicious process that can make a normally calm Realtor want to jump through the phone and strangle someone.

So yes, a decision in 45 days would be a Godsend!  The Bill is sponsored by Reps Tom Rooney (R- Florida), and Robert Andrews (D-New Jersey), who believe that by imposing a deadline on lenders, more short sales would be successfully executed and fewer homes go to foreclosure.   Although a few banks such as Bank of America have made an effort to improve their processing systems by utilizing a technology platform such as Equator, most banks rely on outdated systems and under trained personnel, ill-equipped to handle the thousands of short sales landing on their desks.  Thus in the current market, many short sale transactions fall-apart because the buyer gets tired of waiting and simply moves on, often leaving the homeowner to face foreclosure.

The Prompt Decision for Short Sale Act of 2011 is currently waiting to be referred to a Committee.  A similar act with the same name was introduced last September, but never came up for debate before the legislative session ended…let’s hope the support of the National Association of Realtors will help prevent this bill from a similar demise.

At the end of the day however, even if we have a shortened time period for decisions, any short sale is only as strong as the negotiator acting on behalf of the homeowner.  Please don’t hesitate to contact me for more information on how to improve your chances for a successful transaction.

Do you know a first time buyer?  Well, now might be the time for them to make their move.  On Monday, Fannie Mae announced the launch of a new incentive aimed at moving some of their REO inventory off the shelves.  For a limited time, buyers purchasing a Fannie Mae owned home, sold through their REO disposition operation known as HomePath may receive up to 3.5% of the purchase price in closing cost assistance.

Fannie Mae has successfully used similar incentives in the past, and hopes that this program will encourage buyers to step forward and purchase a home now.  The company acquired 262,078 homes through foreclosure in 2010, which is a considerable increase over the 145,617 homes they added in 2009. As of the close of the year their inventory was 162,489 single family homes with a carrying value of $15 Billion. Like I said, they have to move some inventory.

In order to qualify, buyers must be purchasing a home they will live in – the incentive is not offered for investor purchases.  The initial offer must be submitted no earlier than April 11, 2011, and must close escrow by June 30, 2011. Buyers may also have the opportunity to take advantage of Fannie Mae HomePath Financing and Homepath Renovation Financing which offer loans with as little as 3.00% down payment.

To a new buyer, this basically means that all their closing costs will be totally covered as those costs generally equal about 3.00% of the purchase price.  On a $300,000 home they would need just a $9,000 down payment in order to get into a home of their own.  Pretty sweet deal.  If you know someone who might be interested, please have them give me a call as I have access to all available qualifying homes in San Diego County.

OK.  I need to vent and it has nothing to do with real estate:  This budget fiasco represents political grandstanding at its worst.  I’m glad they reached a tentative agreement, but it’s BS, and both parties are to blame.  These politicians aren’t my kids, my students, or my employees, but supposedly they are my representatives and I’d like to remind them of a few things:

1. The health of women is not negotiable.  Period. The fact that so many important services are provided by Planned Parenthood and other organizations is not a bargaining chip.  Beyond the moral issues that some may profess, if the people who oppose these organizations ever did the math and figured out how much it would cost, over a lifetime, to support the children that resulted from lack of contraception or poor pre-natal health…never mind the spread of STDs….well, I’d just love to hear who they think is going to pay for it all.  Just a reminder that the majority of Americans support the work of Planned Parenthood.
2. Effective democratic government requires compromise.  Attention Tea Party:  You think you’re going to be the underdog on the playground who gets the sympathy vote because you’re scratching in all the right budget-cut places and pushing the abortion button?…Wrong!  Don’t you see that you’re the very uncomfortable minority and even your pimp Boehner is having trouble being one with you?  There is no reliable information to suggest long-term sustainability for your platform.  Thank God.  But you’re on our radar.
3. Get priorities straight.  In the age of tweets and instant response to everything, I’m happy that our President has chosen not to reply to every national and global fuck-up on his Blackberry.  I actually think it’s a good thing to take some time and weigh options, versus having a knee-jerk response to the media headline of the hour.   That being said however, I think he lagged on the budget crisis and considering the stakes, it would have been better if he had made this a primary agenda item several weeks ago versus allowing the opposition to push him into a corner at the 11^th hour.

So, I may have gotten some of this wrong.  But from where I sit, both parties are to blame:  The Democrats for not acting more quickly to take control and just get it done; and the Republicans for being the spoilers, egged-on by the new kids in the sand box who are determined to set their stubborn little feet and prevent the game from moving forward.

As a result of the foreclosure robo-signing mess uncovered last September, loan servicers are facing new federal and state requirements outlined in a draft settlement proposal last week.  Here are the highlights that could provide greater protection for homeowners:

• Servicers would agree to stop dual tracking.   Hard to believe, but currently many companies will pursue foreclosure, even while the borrower is trying to get a loan modification.    This new requirement would mean that foreclosure processing would be put on hold during the loan modification process.
• Servicers would be required to review any loan modification that is denied.  They would also have to implement a system whereby the borrower would have 10 days to appeal a modification denial.
• Most significant is the provision that would require servicers to “implement processes reasonably designed to ensure that factual assertions made in pleadings, declarations, affidavits, or other sworn statements filed by or on behalf of the servicer are accurate and complete.”  This would help alleviate the problem of minimum wage processors signing-off on foreclosures.
• The proposal also states that servicers may not develop compensation programs for employees that encourage foreclosure over modification or other options.   And yes, that was in place at some institutions.
• And lastly, servicers would be required to offer one point of contact to borrowers trying to complete a loan modification, short sale or forbearance agreement.   Finally!  This alone should improve the process, or at least lessen the frustration level of speaking with a different person every time the borrower calls.

Do I think this will improve loss mitigation for borrowers?  Let’s say I’m cautiously optimistic.  At the end of the day of course, any regulation is only as good as the enforcement that backs it.