Government Foreclosure Rescue Program
Jun 24th, 2008 | By cboatright | Category: Short Sale Questions, Short SalesThis is something all of us need to keep a pulse on.
http://news.yahoo.com/s/ap/20080624/ap_on_go_co/congress_housing
Summary:
The centerpiece of the package is a foreclosure rescue program in which the Federal Housing Administration would provide $300 billion in new, cheaper mortgages for distressed homeowners who otherwise would be considered too financially risky to qualify for government-insured, fixed-rate loans.
Borrowers would be eligible for the housing rescue if their mortgage holders were willing to take a substantial loss and allow them to refinance, and would ultimately have to share with the government a portion of any profits they made from selling or refinancing their properties.
HOW DO YOU THINK THIS WILL AFFECT YOUR SHORT SALE BUSINESS? I appreciate your comments.
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Over all I am not sure this will be very helpful to homeowners but it will make short sales easier to get approved. The government is basically trying to figure out how to reimburse the lenders that 20% (or more) without the tax payers going nuts! Once they figure this out then 80% of fair market value will not even need to be negotiated, it will be accepted. My understanding is this is going to get vetoed by Bush. We shall see!
Josh Culver
http://www.weshortsell.com
Cory,
I’d like to understand the qualifications for this FHA rescue program, as I just talked to a homeowner in BK and pre-foreclosure who wants to fight to stay in the property by a loan modification of sorts.
This $300 billion rescue, if approved and obtainable, would erase many SS opportunities for us investors.
Robert
I’m glad to see this legislation coming into play. I’m so sick and tired of people running around waving the flag of “Don’t do anything! Let the market work itself out!”
This is absolutely ridiculous in light of the current conditions. I’m usually against big brother getting involved in things like this, but prices in my area are in a complete free fall right now. Something needs to be done to bring some stabilization to the market. Houses are more than just affordable right now, they are an overall STEAL at the average full retail prices we are seeing here in Metro Detroit.
Action on behalf of the government would not only inject an active solution into the mix, but it would also help buyers who are confused and afraid, and thus sitting on the sidelines, to actually pull the trigger and buy something.
My short sale business had more leads than ever. One of the problems is that prices are rushing down faster than I can process them. Adding an additional 10% discount factor into the mix doesn’t work that well because the BPO doesn’t take an extra 10% into consideration when placing a value on the property which ultimately causes deals to fall apart or have any profit squeezed out of them.
I’m ready for things to level out. I don’t care about the lenders, but I do care about the overflow of homeowner that are in a tough situation because of the mistakes of others. Good people that didn’t refi and suck equity out. People a house for 10 years and find out that it’s worth the same thing now as when they bought it. These people are paying for the sins of the mortgage companies, the scammers, and the irresponsible “liar loan” borrowers.
I’m going to be talking about this very thing in an upcoming episode of The Short Sale Show. Take a look at it at http://www.ShortSaleShow.com if you are interested.
This is a bit odd… because we all know what will happen with a LOT of these, is they’ll refinance, and then 6 months later STILL lose the house due to non-payment. Those who “play the system” will be able to play it longer, won’t they?
Will this create a bunch of properties that have pre-negotiated discounts waiting for us? The home-owner will negotiate the deal, get a lower mortgage, stop paying, and then we’ll get the call…
Hmmmm….
Nick
Host: http://www.REI-TV.com
Like Nick, said I think it will be a good deal for those investors that know how to position themselves with homeowners in distress. In this shifty market it’s best to move with the flow and adjust because, now is the time to make a killing with a lot of smaller deals until of waiting for the one hitter quiter.
My first reaction is that this is going to give the appearance of helping at first, as some desperate homeowners take advantage of it and feel the immediate relief of being bailed out. Then (as Nick said) without really getting to the root of the problem, the band aid will eventually fall off and they’ll be upside down and losing their homes again.
But it’ll “help” just long enough for the proponents to get all the pats on the back and/or advancement they need from it’s “success”.
That’s my initial reaction anyway.
…jp
I don’t think the new legislation will much of an impact on Short Sales. The changes that have already been made to FHA has had minimal impact on those in trouble. Furthermore, FHA is not able to keep up with the exixting demands they are currently encountering. Hence the need to suspend the “90 Day Rule”, and discussion of letting non-FHA Approved Brokers originated FHA loans temporarily.
More important, I can just imagine all the strings attached to these bailout loans will turn many distressed homewoners off. I mean really you may as well be on Welfare, because I am sure there will be constant monitoring of your personal business in addition to limiting any financial benefit you may gain in regards to Equity and to whom you may sell your property to once the market turns around.
So, if you want to put on the government shackles, then stand in line for the government handout. If not contact me and I will get that Short Sale approved for you and get you on your way to a fresh start!
Oh Geez, yet another program that won’t work! I hate to sound anything less than optimistic but let’s face it, this is just another plan that blows smoke…
I have homeowners right now that want to stay in their home and the lenders won’t even work out a decent loan modifcation or repayment plan! Reduced principal would be nirvana but reality is that too many lenders won’t even agree to reduce the interest rate.
As to short sales, some lenders are trying to hold out for full market value. In my area of FL, even sellers that are NOT distressed aren’t even getting FMV so why should the banks? This is just another plan where the tail is wagging the dog.
This whole concept is preposterous; if foreclosure wasn’t so serious, this solution would be comical. Sometimes our government is so asinine that it embarrasses me.
Hey wait a minute……..
My home is upside down. I want one of these loans! My lender is willing to short sale, I’ve already talked to them. As a matter of fact I know lots of people that would be interested in this kind of loan. So, I can short sale my home AND keep it? I like it. I think I do like it after all. Where do I sign up?
I think that this is a great idea but how many people can it reach. We have more than 80% of all homes currently for sale in forclosure. How are they going to discide who gets the help? Who do we contact for help? Is this just talk? Are they going to work with people who are not owner occupied homes? We have a lot of investors in trouble also.
I dont want to pass judgement, but the devil is always in the details, and this article is quite vaige. There are many details that are not uncovered here. The first which comes to mind is what exactly is meant by homeowners who would be considered “Too Risky to qualify for FHA loans”. What is the exact criteria to qualify? 600 Score ? 500?.
We all know the Govt isn’t exactly efficient at anything it does, I think if they were to keep it real simply and offer incentives to the banks who are willing to participate it could be a good thing and another service we offer as a solution, but What I have read this far, whereby the Govt wants to split profits its looks to me like they would over regulate this type of program.
I don’t like it, maybe its because I just don’t like big govt programs, especially so close to an election. Its the appearance they are looking for, the appearance that they feel your pain, and not about finding a well planned and tested solution. So I am very skeptical…
John M Pierro
I see this as an opportunity. While in the long run, it will most likely backfire, as most government rescue programs do, there is an income opportunity.
Part of our service is loan modification and mortgage restructuring which we charge a fee to negotiate. While all of the big money is being made in short sales, and we’re doing a lot of those these days, we pay our ongoing bills with loan modifcation professional services. If I can add this type of program, market it, and get paid for processing the paperwork necessary to get this kind of deal for the homeowner, we could add an additional income stream to our pipeline.
If this solution works best for the homeowner, and if it ends up being for real, I see it as a plus. I don’t think it will really affect our short sale business because all of our leads come from realtors.
Teresa Pringle
Kwik Homeowner Solutions, LLC.
It looks to me like this is actually a bailout of the banks and their 1 trillion dollars in bad loans. Every 10 years or so, there is a radical shift in the reality of house ownership. Prices will drop 30 to 50 percent and in a few years recover. When I went to California in 1957, a 3 bedroom, 2 bath house cost $ 10,500. In 2007 it was $ 500,000. So my question is this: When was it too high, or too low? Four or Five times we have gone through what we are going through now. Real Estate will recover unless the banks cut off credit and the Federal Reserve raise interest rates. That is what causes the depression of the 1930’s. Less than 5% of the people in trouble will be helped, and when the Alt-A houses start hitting the market, short sales will quadruple where they are now. We are in a time in our country, where the people say help me, no matter how or why. It’s not my fault, so make me whole. I lost a home to foreclosure, so I know when a business fails, or medical expenses pile up, what happens. We didn’t tear out the fixtures or paint grafitti etc. We left it spick and span and B of A got top price for it. We signed an agreement and failed to live up to our side of the agreement. So we were happy the bank sold it for much more than they were owed. That’s life and you go on. Richard Houston
This is not a government bail-out for the banks. I don’t know why that keeps coming up. The loan program proposed right now is really an expansion of the FHA Secure program. People were calling that a bail-out as well.
The key point on this legislation that everyone is overlooking is that goes:
“Borrowers would be eligible for the housing rescue if their mortgage holders were willing to take a substantial loss and allow them to refinance, and if they could show an ability to make payments on the new loan”
This isn’t somoene owing $250k on a house that is only worth $125k getting an FHA refinance for their $250k loan. The way this really plays out is that the homeowner gets an FHA loan for either 90 or 97% LTV. So on a home worth $125,000 they would get a loan for $121,250. Subtract another 5% for closing costs/escorw startup and you have a net figure of about $115,200. Take that away from the $250,000 owed to the bank and you have a loss of $134,800!!! Some bail-out.
The loss to the banks with these programs is only slightly less than a short sale. The true benefit is to the homeowner. They are in essence getting a short sale but not being forced to move. They get to stay in their homes!
This factor along is HUGE! For every homeowner that is upside down on their house and locked into an exploding ARM that does NOT get foreclosed on and does NOT have to sell with a short sale…that is one less house on the market.
Most of these people would gladly stay in their homes if they could. Instead they are being forced out. Whether it’s short sales or foreclosures it’s still more inventory on the market hammering values down.
I repeat, this is NOT a bank bail-out. The banks benefit only slightly. The homeowners of America caught in this nightmare are the ones that truly benefit.
Robert - Don’t plan on this thing reaching that far. If you research it, the program is more of an expansion of the FHA Secure program. That program doesn’t help as many as we would like. Plan for more of the same. Here are the stips that will most likely stay in place:
1) Full Doc w/ Standar 31/41% Debt-to-Income Ratios - if you can’t afford the house on paper, even after a principal reduction, then don’t plan on getting qual’d for the loan.
2) No Major Derogs - No previous foreclosures, BKs, or 120 day late mortgage marks in the last 36 months. No 120 day late pays on other tradelines for the previous 12 months.
3) 97% & 90% LTVs - Plan to see 97% LTV for people that have not missed more than 2 payments in the last year, hacked down to 90% LTV if they’ve gone 90 days late.
The thing will have far less reach than most would probably hope for. One thing I’m hoping to see is the lifting of the restriction that the rate had to have adjusted up before late payments were made on the mortgage to qualify.
We’ve got plenty of people that are in Fixed Mortgages that have situations in their lives that need this type of program but can’t get it because they fell behind and there was no adjustment in payment…so they don’t qualify.
Also, don’t worry about there not being enough short sale opportunities. You’ll be trying to sip from a fire hose once the Alt-A melt-down hits. There are just too many banks that will NEVER agree to principal reduction in any other from than a short sale. They just can’t see the light.
The poor people that DO qualify for these life-preservers are going to be few and far between. We should be happy for each and every person that gets this help.
I feel to this is another program that won’t work. I do think that there will still be strict qualifications on this. My personal thoughts is why wouldn’t the gov’t just create a program that allow all homeowners to modify there loan instead of refinancing it??? With a refi you have cost that are not associated with a loan mod. If the gov’t’s position is to help homeowners and banks just how are they doing it by making them take a lost and they making a profit. How about they train the right people on how to negotiate for homeowners that are deliquent on there mortgage to get them better terms, rates, and payments…..That would be too much like right.
As far as the short sale buisness. I already can’t keep up. I don’t think this is going to affect our business because of the power in numbers. It is just too many homeowners who want to walk away or who is so upside down on their mortgage they can’t come from under the covers. THAT IS WHERE WE STEP IN! In reality, this program won’t work for many homeowners. I am waiting to see what is the next program introduced….HOW ABOUT A 45% PRINCIPAL FORGIVNESS PROGRAM “no strings attached” I THINK THE BIG DECISION MAKERS IN THE FEDERAL GOVERNMENT HAS FINALLY REALIZE “GAS PRICES ARE JUST TOO DARN HIGH” we need to find a way to get the economy back on track! This is definitely a true “RECESSION”
The question put to us by Cory is how will our short sales business be affected if this bill is enacted in its present form?
The quick answer is that it may diminish the number of potential short sales. The Congressional Budget Office (CBO) has estimated that the Senate’s version of the bill would help about 400,000 borrowers out of an estimated 2.2 million who face foreclosure in the next few years. So, about 18% of the estimated borrowers who face foreclosure could be helped by this bill. The CBO estimates this 18% would account for approximately $68 billion in FHA loans, out of a total funding cap of $300 billion.
Conversely, 78% would not receive help and I think that is the “take away” point for many of us. To answer Cory’s question then, about 18% of distressed borrowers could possible receive help under this plan, thereby removing them as short sale opportunities.
Now, the rest of my post is slightly off topic, but is tangentially-related and of great interest. Tthe CBO goes on to state that of those who do receive help an estimated 35% will again be in default and “recoveries” on these loans would be about 60% of the principal balance. That means that 40% will be written off!
Let’s do some math to see how this pencils out. 400,000 borrowers potentially helped through 2011. Total new loans to these folks would be $68 billion. Of these borrowers, 35% will default, with a 60% recovery of the loan amount. 35% of $68 billion is $23.8b, and let’s round to $24 billion. Of this amount, 40% is non-recoverable, or $9.6 billion. That is the potential estimated loss to FHA — using the CBO’s own figures. Here is the full text of the CBO report for you to read: http://www.cbo.gov/ftpdocs/93xx/doc9366/Senate_Housing.pdf
In its report the CBO goes on to state “those rates reflect CBO’s view that mortgage
holders would have an incentive to direct their highest-risk loans to the program, and are based on the expectation that the underwriting standards established for the new program would be less restrictive than those currently in place for FHA’s single-family loan guarantee program, thereby allowing FHA to insure loans with a greater risk of default.”
So, what they’re saying here, albeit diplomatically, is that banks will pass off their worst (most toxic, crappiest, most likely to default) loans to this program, which then becomes the problem of the FHA. To the extent that the FHA incurs any losses with these loans (potential for at least $10b), then it is ultimately the U.S. tax payer that is potentially on the hook for these losses if FHA cannot cover them.
Here is a link to a much better analysis of the Dodd-Shelby bill: http://www.heritage.org/Research/Economy/wm1941.cfm. While you may or may not agree with the full analysis, the writer does make some very compelling arguments.
And finally, we haven’t even touched the topic of how this bill was created, by whom and the ethical, legal and moral issues swirling around it. I’ll let you read the following analyses and make up your own mind:
http://article.nationalreview.com/?q=MmEwYzQ1NmY2NDc1ZGIzNTIzZDVkMTRhMzg4ZTA5ZGY=
http://losangeles.injuryboard.com/miscellaneous/bank-of-america-may-have-influenced-doddshelby-housing-bailout-package.aspx?googleid=242410
http://mrmortgage.ml-implode.com/2008/06/21/bofa-perhaps-countrywide-wrote-dodd-shelby-bailout-this-news-must-get-out-there/
Best, Mitch
This is a great topic and everyone has made some great valid points. I agree with Brian in the sense that the government has to step in one way or another so we can get these home prices back up. Although I do not think this is the government program that’s going to do it. Thats if they pass it in mid July as they say. Its all about the money in the eyes of the government so if this does get passed this will affect us all in one way or another, I think. Property taxes are high enough already.
The Alt-A Crisis is right around the corner and who is really going to qualify for this new government program. I don’t think this will affect my short sale business in any way, shape, or form. Keep Rockin!!!
Gosh, at the risk of sounding dumb….what is the Alt-A crisis?
Wendy,
You’re not dumb. Alt-A isn’t commonly referred in the industry. Here is a great video that explains it in DETAIL. I hope this helps.
http://www.shortsalefundamentals.com/blog/2008/04/23/get-in-the-short-sale-real-estate-investing-game-now/
Yep,
Shocked! Shocked! I am shocked! The lenders trying to dump losses from bad loans on taxpayers! B of A ghost writing consumer protection legislation (not)! And Congress aiding and abetting! Who’d-a-thunk-it!
Your blog is interesting!
Keep up the good work!