Talking About a Housing Revolution – Predictions on Housing

The Beatles song comes to mind when I consider what the bottom of the housing market and recovery will look like.


June 28, 2009 -- DETROIT, MI – Recent housing reports brought apparently good news on housing as it was reported that Housing Starts in May jumped 17.2% and Building Permits jumped 4% in April. Also, the National Association of Realtors (NAR) reported that Existing Home Sales, the Pending Home Sales Index and New Home Sales were all up in recent months.

According to Lawrence Yun, chief economist for NAR, "We are at or near bottom in terms of sales."

So, it’s a great time to put that home of yours on the market that you desperately want to sell?

Not even close.

One month of good news doesn’t mean the housing crisis is over. On top of that, it’s spring – a time when home sales invariably go up after winter. Look at the following graph, the same thing happens just about every year:

As for the housing starts and building permit numbers – it’s amazing how theses numbers were skewed to look good. The numbers reported by NAR and the media compared May of 2009 numbers to April of 2009. If one references the source of these numbers, the U.S. Census Bureau website, the May numbers for 2009 when compared to 2008 are actually down – by 45.2% for Housing Starts and 47.0% for Building Permits. How does that qualify as good news?

Yesterday it was also reported by NAR that May home sales were up 2.4% over April. Yet again, when compared to May of 2008, sales were actually off 3.6%. Not really good news as it doesn’t show we’ve reached a bottom yet.

THE REAL STORY
Looking at the big picture, it’s obvious that the housing market is not out of the woods yet.

The FNMA/FHLMC foreclosure moratorium from Thanksgiving through March (waiting for Obama’s housing plan) created an artificial shortage of foreclosed properties on the market. Not surprisingly, April foreclosure filings set a record.

Last week, California announced its own 90 day moratorium on foreclosures which will further hide the true extent of the housing problems in that state. Michigan recently passed legislation that will have a similar, albeit more limited, effect. Several other states have passed or are considering doing the same.

All the Adjustable Rate Mortgages (ARM) that borrowers took out at the peak of the housing market so they could afford to buy or cashout of their homes, are starting to reset in record numbers and will continue to do so for the next two years. The ugliest situation is for those with “Option ARMS” also known as “Pick a Payment” plans, but technically called “Negative Amortizing” ARMs. Anything with the word “negative” in it is usually not good. In the case of these products, they were originally designed for sophisticated borrowers that understood how they worked and the inherent dangers. Only two lenders, WAMU and World Savings, initially offered them. At the height of the housing boom, many more banks jumped on the bandwagon to offer them and pushed mortgage brokers to sell them to their clients by offering insane commissions. Of course, many unscrupulous brokers, few understanding the product themselves, pushed these loans onto borrowers that didn’t take the time to understand anything but the artificially low payment. Now, many of these borrowers will see their payments increase by 50% or even double. Many won’t be able to afford the payment shock and will eventually be added to the foreclose statistics.

There’s also the issue of a “Shadow Inventory” of homes. How many of you see vacant homes in your neighborhoods that aren’t for sale? Many of these are foreclosures where the lender is just sitting on the home instead of trying to sell it at a loss. There’s also the inventory of homes where owners aren’t making payments, but haven’t been foreclosed on yet, despite being well past the point where they should’ve been. Several sources have estimated this shadow inventory at 600,000 homes. Now do you understand why banks were forced to take TARP funds?

Real estate investors are also contributing to the problem. I know of many that are struggling with rentals where the rents don’t cover their payments. Many of them will eventually throw in the towel as their reserves run dry or the value of the rental falls to where it just doesn’t make sense to keep throwing good money after bad.

Finally, we have the unemployment situation. May’s unemployment figure hit 9.4%, the highest since 1983. June’s number is expected to hit 9.6%. Since the recession begin in December 2007, we’ve lost 6 million jobs. These numbers are bad, but actually are worse if you include all the workers that have had to settle for part-time jobs or are making less than half of what they used to. Housing won’t stabilize until unemployment does. Even then, there’ll be a lagging effect as households paydown debt, replenish reserves and proceed cautiously.


PUTTING IT ALL IN PERSPECTIVE

The highly touted, and over referenced, Case-Shiller Index predicted that housing prices would fall 10-20% this year. As of May, the median price of a home is off 16.8% from last year.

Faced with these numbers and all this information, what would you do if you were in charge of our government?

Would you let housing free-fall and probably put the country into a Great Depression II?

Or would you use every financial tool at your disposal to soften the landing, wherever that may be?

Obviously, the current administration has chosen the soft-landing option and is pulling out all the stops to make it happen:

The real reason for the Thanksgiving to March foreclosure moratorium was to come up with a plan to force banks to modify mortgages and slow the flow of foreclosures hitting the market and driving down prices. Obama’s administration had to do something dramatic after the disaster of Bush’s “Hope for Homeowners” plan that resulted in only 50 or so homeowners being helped. TARP funds were probably used as “bribes” to get banks to go along with the new plan.

Ben Bernanke is doing his best to keep mortgage rates low. Not only does this encourage home buying, it also encourages people to refinance to lower their payments and not let them go to foreclosure. After a brief spike to 6%, when Wall Street bluffed the Fed, rates are back to the mid 5’s, still historically low.

FNMA/FHLMC, now under government control, currently allow homeowners to refinance up to 105% of their home’s value so they can lower their monthly payment. Again, this was done to keep people in their homes through lower monthly payments. I expect to see the 105% increased to at least 115%, or done away with altogether, as housing prices have fallen faster than expected and the number of homeowners qualifying for a 105% refinance are much lower than the original target.

The $8,000 tax credit to buy a home has generated quite a bit of home buying activity as intended. I predicted a couple of months ago that the tax credit program would probably be extended past its December 2009 deadline. There’s now talk in Congress about not only extending the program, but increasing the tax credit to $15,000 and opening it up to anyone that buys a home. It’ll be interesting to see what they do with the income restrictions as the current plan has propped up the lower end of the housing market, but left the rest of the market struggling.


PREDICTIONS

So far, the housing market is down over 30% from its 2006 highs.

The government is doing its best to prop up our housing market, but it’s expected to fall further. How far is anyone’s guess, as one can’t predict it any better than one can predict where the stock market is going.

I don’t think we’ll see housing bottom until late 2010 at the earliest. That being said, I think the pace of the decrease will slow after this winter.

I also think that we won’t see a rebound for quite some time and it won’t be the rebound that many are hoping for. We won’t see double digit appreciation of housing for decades, if ever again. Nationally, we’ll see very slow anemic appreciation as homebuyers will be extremely cautious after this crisis.

There will be a rebound bounce in areas where prices dropped ridiculously low. Detroit immediately comes to mind. The median price of a home in Detroit (the actual city) stands at $6,000 as of today. As long as one buys in a decent area of the city, that price could easily double, triple, even quadruple once unemployment improves. A house at $24,000 is still quite a bargain, especially when it would cost at least $80,000 to build a new one. The southern Florida condo market is another place that might have a double digit rebound as prices there are quite low due to over building. Understand that any double digit rebound in areas like these will be a quick, one-time thing as values bounce back from their oversold positions. Then they’ll follow the national trend of anemic appreciation.

It could take a generation (25 years) for nationwide home values to return to the peaks of this decade.


THE HOUSING REVOLUTION

We’re also going to see residual effects from this crisis, much the same as we saw after the Great Depression. People that lived through the scarcity of those years tended to be savers and hoarders, not throwing anything away. Going forward, I think we’ll see a large increase in the number of people that never buy another home. After going through the trauma of getting foreclosed on or watching their parents, family, neighbors and/or friends go through it, they’ll choose to be lifetime renters. That’s good news for real estate investors as many of these people will still want to raise their families in houses, not apartments.

I also think we’re seeing the end of the “McMansions” and sprawling suburbia. Inland California was overbuilt, in the middle of nowhere (that’s why it was cheap to develop) and is now turning out near vacant ghost towns due to all the foreclosures. Values have already dropped over 50% in many of these areas and show no signs of slowing yet. Why? It’s too far to commute to work. Eventually population growth will fill these towns back up, but that could take a decade or more.

Millennial’s, those born after 1980, are flocking to urban landscapes and smaller homes. They don’t want to be house poor or commute more than minutes to work, preferably via mass transit. As gas and energy prices rise when the world economy recovers, more of us will be forced to address these same issues. This will eventually be good news for decaying urban areas and those that invest there ahead of the curve.

People will also stop looking at their homes as a source of wealth. Homes will be seen less as “castles” and more as just places to live. Europe and Asia are already like this. People there don’t socialize in their homes as much as we do (most are too small), they meet at cafes, restaurants, parks, etc.


SHOULD YOU BUY NOW?

No one can predict the bottom of the housing market. So, if you’re in the market for a home, you should buy something that fits your budget, that you think is a good deal, when you think you’re ready for the monthly liability. Notice I didn’t say a great deal or a steal of a deal. Too many people still fall into the trap of following the herd lining up for the sensationalism the media peddles to get our attention. They want to hit the jackpot with the deal of a lifetime on a home. Well, keep in mind that very few hit the jackpot in Las Vegas and even fewer win the lottery. It’s usually better to play it safe and follow you head than gamble your future away by listening to others.

Buy a home you can afford now that fits your lifestyle. Don’t stretch to afford something and put yourself in a tenuous financial situation. You also don’t need to be keeping up with the Jones’ and getting in over your head by doing so.

Homes should be bought that fit one’s monthly budget. I can’t believe all the homebuyers I talk to that have never sat down and put together a monthly budget to figure out what they can afford for a monthly housing payment. They expect ME to tell THEM what they can afford! I’d be very appreciative if this was because they trusted me, but it’s actually due to laziness. Don’t they realize that they’re looking at buying a foreclosure where the previous owner probably made this same mistake?

Consider how long you plan to live in a home before deciding whether to buy it. Don’t count on buying something and being able to break even if you sell it 2 years from now. You’ll probably need 5 years or so to be able to do that.

Overall, homes are now more affordable than they’ve been in over a decade. Foreclosures have created unique opportunities for many to get solid deals on homes. Throw in the current $8,000 tax credit (with talk of it going to $15k soon) and this could be the time for many to buy a home. Not for everyone, but for many.

If all of this is a bit much to take in and analyze, find professionals that can assist you. Run from those that are pushy. They should ask a lot of questions and rarely tell you what to do, but rather help you find your own answers.

Michigan tries to Slow Foreclosures with New Laws

Three new laws make foreclosures tougher on lenders to force them to do more loan modifications.


June 18, 2009 -- DETROIT, MI – On May 20th, Governor Granholm signed new laws into effect that will put more pressure on lenders to work out loan modifications as opposed to just foreclosing.

The new laws, PA 29, PA30 & PA 31, go into effect July 5th and force lenders to perform several addition steps before foreclosing. Interesting that the effective date falls right after Independence Day.

The new laws only apply to foreclosures started after July 5th and only on real estate that is the primary residence of a mortgage borrower. The laws also expire in two years. The state legislators appear to be pretty optimistic the housing crisis will be over by then. More likely, there won’t be anyone with a mortgage that hasn’t been foreclosed on or had their mortgage modified by then.

Lenders will be required to give written notice to a defaulting borrower, providing the name and phone number for a real person the borrower can speak with. What’s more, this person has to have the authority to negotiate and approve a loan modification. Anyone that’s had to deal with the customer service department at a lender can tell you how frustrating it is to get someone on the phone that can make a decision. So, this is great news.

Lenders will also be required to send a defaulting borrower a list of state approved housing counselors and gives borrower the right to require a lender’s authority person to meet with the borrower and the counselor to work out a loan modification. Once a borrower asks for this meeting, the foreclosure is put on hold for 90 days.

The laws basically mimic Obama’s “Making Home Affordable” program by requiring a borrower’s housing related debt be no more than 38% of their gross monthly income. Also outlined is how to get to the 38% figure – lowering the interest rate to as low as 3% for at least 5 years, and/or extending the loan term to up to 40 years, and/or deferring up to 20% of the principal balance until the end of the loan term, sale or future refinance.

If the borrower qualifies under this outline, but the lender refuses to approve the loan modification, then the lender must go through a judicial foreclosure. This means they have to take the borrower to court, a lengthy and costly endeavor. In other states where judicial foreclosure is required, it can easily take 18 months for this to happen. This is a huge penalty to lenders and should force most of them to approve a loan modification.

The new laws were written so that federally chartered lenders cannot claim “federal pre-emption” and ignore state laws. A great move by the state legislators.

The laws also have exceptions that defer to FNMA and FHLMC loan modification plans.

There are doubts about the number of available counselors to meet with borrowers and representatives from their lenders. This may work in a borrower’s favor though as lenders may prefer to wait until a counselor is available versus pursing the judicial foreclosure process.

Of special interest is how the new laws will affect FHA and VA mortgages. FHA & VA loans were not addressed in the Obama loan modification plan. So, will the new Michigan laws force FHA & VA lenders to modify loans down to 38% of a homeowner's gross monthly income?

Fed Losing Battle to keep Mortgage Rates Low?

Mortgage rates spike almost 1% in just over two weeks, what’s going on?

June 6, 2009 -- DETROIT, MI – One of the government’s stated goals this year is to stabilize the housing market. The thinking is that a long as home values continue to fall, homeowners will lack confidence in the economy and in response, won’t spend money.

To stop home values from falling, the number of foreclosures must be curtailed. One of the ways the government has been trying to curtail foreclosures is by keeping mortgage rates low. Low rates allows homeowners to refinance and lower their payments, so they don’t let their homes go to foreclosure and makes buying homes more affordable, so it increases homes sales to absorb the homes that have been foreclosed on.

Recent events might have put a damper on those plans. The chart below shows the price of Mortgage Backed Securities (MBS) over the last three months. Keep in mind that the price is the opposite, or inverse, of interest rates. The higher the price of the MBS, the lower the corresponding interest rate. To keep it simple, “green” is a good day for mortgage rates on the chart and “red” is a bad day. (MBS are sold by FNMA and FHLMC to fund their purchases of mortgages from banks and brokers)

Starting May 21st the chart shows four bad days in a row, culminating in one of the worst days for mortgage rates ever on May 26th. Intermixed with attempts to rally, mortgage rates have continued to worsen since then. Rates haven’t been this high since late November 2008.


What caused the sudden spike in mortgage rates?

To answer that, we have to go back a bit to look at why they were so low to begin with.

At the end of 2008, there was a lot of doom and gloom on Wall Street about the economy due to the bankruptcy of Lehman Brothers, the forced sale of Merrill Lynch, and the federal bailouts of AIG, Goldman Sachs, Morgan Stanley and a slew of banks deemed too big to fail.

In response, money flowed away from high-risk to low-risk investments. U.S. Treasuries and MBS are considered fairly low-risk, so prices on them were bid up, lowering interest rates.

On top of that, the Federal Reserve announced in early December that it was buying up to $500 billion in MBS over the next several months to lower mortgage rates even further. In mid March this figure was increased to $1.25 trillion.

The result of these two factors was the lowest mortgage rates in over 50 years.


Nothing Lasts Forever

Recent positive news on the economy now has Wall Street investors thinking that the worst recession in memory, may be ending. Over the last two weeks, economic reports are showing signs that unemployment, housing and consumer confidence may be stabilizing. The key word there is, “may”. The stock markets though, have responded to this news by increasing, pulling money away from the MBS market and causing rates to rise.

So, has the government’s stimulus working to lift us out of the recession? Will a turn around in the economy lead to lower unemployment, higher wages and housing prices, making rising mortgage rates a minor issue?

The chart below compares several recessions to our current one. The chart shows that historically, recessions tend to last around 30 months, a tad longer than the 20 months we’ve experienced in the current one.


The term, “Bear Market Rally, is used on Wall Street to describe a false rally in the stock markets, that’s followed by further downturn. The chart below shows that during the Great Depression, there were six bear market rally’s that were followed by the market dropping to new lows.


Is the current stock market rally something similar and we have several months to go until we see a true end to the recession?

What about the Fed’s $1.25 trillion allocated to buy MBS to keep mortgage rates low? So far, they’ve only used about $370 billion of that total, so there’s a lot left that could be used to attempt to drive mortgage rates back down. The problem is, that may not work much longer.

The game only works to lower mortgage rates when Wall Street investors play along. There’s growing concern on Wall Street that the amount of borrowing by the federal government to fund all the economic plans, including the Federal Reserve, is simply becoming a game of “borrowing from Peter to pay Paul” and vice versa.

Figure 2 shows that when the federal government borrowers too much to fund its stimulus packages, the effect of the stimulus funds loses steam. So, throwing more money at the economy doesn’t help.


Our concern is that the same rules may apply to the Federal Reserve’s game on mortgage rates. The markets may have arrived at the point where even if the Federal Reserve increases its purchases of MBS, mortgage rates may not respond and go lower.


Summary

I wish I had a crystal ball and could accurately predict what mortgage rates are going to do. We’re in this economic mess because people way smarter than I, thought they had a good grasp on the financial markets.

It is my opinion (only) that we’ll soon find out if this is all a bear market rally or not. If it is, we’ll see the stock market drop and rates will improve. I don’t think we’ll see the same recent lows though, unless there’s major bad news on the horizon.

On the other hand, if this is the end of the current recession, than better days are ahead for the economy and all of us. Higher interest rates won’t be that big of an issue when sanity returns to the housing market and unemployment drops.

Someone says, "Crud my Name is Mud!" for HUD's Dud

HUD issues then retracts a letter, "Using First-Time Home Buyer Tax Credits" and then releases it again.

May 29, 2009 -- DETROIT, MI - Oops! Someone has some explaining to do to their boss at HUD. In case you missed all the hoopla, on May 11th HUD issued Mortgagee Letter 2009-15 on its website and then pulled it later that same day. The letter, with an important change, was released again on May 29th.

It sounds like someone didn't follow protocol and jumped the gun in releasing the letter the first time. Hope they still have a job.

If you've been out of touch with the housing news of late, President Obama's housing recovery plan includes an $8,000 tax credit for anyone buying a home that hasn't owned one in the last three years. Home purchases between January1, 2009 and December 1, 2009 qualify.

Unlike President Bush's homebuyer incentive, which was really a $7500 loan that had to be paid back over 15 years, the $8,000 tax credit is a real credit. Qualifying homebuyers just have to file their federal tax return to claim it. They can even amend their 2008 return after buying a home to get the credit this year.

HUD was basically forced to release their letter and play catch up, in response to several state governments creating programs using second mortgage and/or short-term loans to advance the tax credit money to qualifying homebuyers. The homebuyers than used this money as their down payment to buy homes with FHA financing.

At this time there are 10 states with these "tax credit advance programs" and several more working on and considering them.

HUD now allows the following entities to offer tax credit advance programs:

• Federal, state and local government agencies
  
• Non-Profit Instrumentalities of government
  
• FHA-approved non-profits
  
• FHA approved lenders

These entities can either advance the tax credit through a second mortgage or by purchasing the tax credit from the homebuyer.

If using a program with a second mortgage:

• No cash back to a borrower.


• The loan amount can't exceed the total needed for down payment, closing costs and prepaids.


• Secondary financing may OR may not require monthly payments.


• If payments are required, they must be included in debt ratios for the FHA mortgage.


• If payments are deferred, the deferment must be at least 36 months in order to exclude the payment from qualifying ratios.


• If the tax credit advance loan has a short term for repayment and the borrower fails to repay by the designated deadline, principal and interest payments begin automatically or the loan converts to a "soft" second (no payments).


• No balloon payments before 10 years.

If using a tax credit purchase program:

• Proceeds of the sale of the tax credit may not exceed the anticipated tax credit due.


• Borrower must sign a certification that the tax credit is not subject to offset of other debt.


• Copy of form IRS 5405 must be retained by the FHA lender.


• Costs associated with the tax credit purchase cannot exceed 2.5% of the anticipated credit. (Example: $8k tax credit means maximum $200 cost)


• The proceeds of the sale of the tax credit to FHA approved lenders, the seller, or any other person or entity that financially benefits from the transaction (or any third party or entity that is reimbursed, directly or indirectly, by the financially benefiting person or entity), may not be used to meet the 3.5% minimum downpayment, but may be used as additional downpayment, buying down of interest rate, or other closing costs.

This last condition is mainly what HUD changed when they retracted the first letter they released.

Many real estate agents and mortgage lenders are misinterpreting HUD's announcement to mean that Down Payment Assistance (DPA) programs are back. (DPA programs allowed a seller to basically give the buyer their down payment funds). They're hoping the $8k tax credit can be used to fund the DPA. Not going to happen. Let me be clear - HUD will not allow the $8k tax credit to be used for the 3.5% down payment required on FHA loans.

HUD was pretty adamant about stopping the use of DPA programs and finally succeeded in April of 2008. Their internal statistics showed default rates on loans with DPA were three times higher than the rest of their portfolio.

The revision HUD made to their mortgagee letter was specifically done to avoid the return of DPA programs. The language, "any third party or entity that is reimbursed, directly or indirectly" is the key to that goal. Any entity that advances the tax credit can only be paid back by the borrower, no one else. On top of that, they can only charge 2.5% of the tax credit, which means a maximum of $200.

I don't think many lenders are going to go through the hassle of setting up a special program to take advantage of this allowance by HUD, given that the tax credit program ends December 1st.

So, that leaves buyers in the other 40 states without a tax credit advance program hoping that one develops in their state soon - or else the opportunity will be gone.

Of course, they can also hope that President Obama extends the program past its December 1st deadline. That might actually happen as the housing crisis is far from over.

A Very Bad Day to be Betting on Low Mortgage Rates

Another bubble may have burst, this time with low mortgage rates.


DETROIT, MI – It’s an unsettling feeling watching a market in free-fall. You watch it drop, drop and drop some more, wondering and hoping that it’ll level off. When it doesn’t, panic and paranoia creep in and your stomach starts to tighten.

I’m sure a lot of bond traders on Wall Street were going through this as one of the WORST days for Mortgaged Backed Securities played out. Take a look at the chart below:


(NOTE: this chart reflects MBS prices which are the inverse of interest rates.)

As if to set the market up like a pool hustler, the day started with a bit of improvement after a bad day yesterday. Then the market kept dropping and dropping and dropping, etc.

What’s this mean for interest rates?

Well, you’re looking at rates being ½% worse than they were at the start of last week, maybe even higher.

What caused the sell off?

It was an accumulation of factors plus mob hysteria thrown in for good measure. The government’s auctioning off a slew of Treasuries this week, consumer confidence shot up last month and was reported yesterday, housing sales are up and the market was just nervous that all this will lead to inflation.

The question is, is this a reset of the markets or will the next round of bad news drive rates back down? We also have the Fed to watch and see how team Bernanke will react to this. The Fed pledged 1.25 trillion dollars to buy MBS and keep mortgage rates around 5%. They’ve only used up about half of this amount. Will they go “all in” and blow the rest on a gamble to call Wall Street’s bluff?

Stay tuned.

The Misconduct of the Home Valuation Code of Conduct (HVCC) - Detroit

HVCC, as currently written, will be kicking a housing market that’s already on its knees.


DETROIT, MI – Despite the efforts of the real estate and lending industries, the Home Valuation Code of Conduct went into effect May 1, 2009, bringing a dramatic change to the home financing process.

HVCC is the result of a 2007 lawsuit brought against an appraisal division of First American Corp. by the New York Attorney General, Andrew Cuomo, for allegedly inflating appraisal values on an estimated 260,000 WAMU mortgages.

So now, in typical government fashion, we go from one extreme to the other – unmonitored appraisal inflation replaced with bureaucratic appraisal deflation.

The intent of HVCC is to prevent loan originators from having undue influence over appraisers on the valuation of homes and prevent inflated appraisals.

Appraisals for mortgages on 1-4 family homes to be sold to FNMA or FHLMC, will no longer allowed to be directly ordered by loan originators. They must be ordered through Appraisal Management Companies (AMC) that act as middlemen between appraisers and loan originators. (Currently HUD’s FHA loans are not subject to HVCC. Loan originators can still order their own appraisals from trusted appraisers for FHA loans.)

Sounds great in theory, but the reality is far from perfect.

I had lunch with several of my mortgage competitors this past week. The main topic ended up being the HVCC and what it’ll mean to the process of financing a home. The consensus was that there are going to be a lot of unhappy people – homeowners, homebuyers, sellers, real estate agents, loan originators and more.

Was there a problem with inflated appraisals?

Yes, but HVCC in its current version, creates more problems than it solves. Underwriting departments at most lenders were already using advanced computer programs to address the problem of inflated appraisals. Appraisers found to be providing questionable values and work, were banned by that lender.

Why is the industry so up in arms over HVCC? Well, let’s look at how the system is supposed to work:

• Loan originator orders appraisal from AMC (usually via internet)


• Payment must be made when the order is placed to avoid appraisers being forced to bring in a specific value in order to get paid.


• AMC randomly assigns the appraisal order to one of the appraisers on its list of approved appraisers


• Appraiser is typically required to complete & deliver the appraisal within an acceptable amount of time.

Sound easy doesn’t it! So what’s the problem?

• There are no requirements concerning the proximity of an appraiser to a property or their knowledge of an area. On a recent transaction, an appraiser came from 145 miles away to appraise a home. Not surprisingly, the value came in significantly under what local real estate agents estimated it to be.
  
• The cost of appraisals has gone up. Our appraisers typically charged $300-$350, now the AMC’s charge $450 or more. Instead of an appraiser getting their full $300, AMC’s only pay them $175-$250 of the $450 charged. So, appraisers will have to do more appraisals to earn the same amount they have in the past. This will lead to shoddy work.


• The AMC doesn’t care if data for the appraisal is difficult to find and would normally take longer to provide an accurate value. They want them ALL back in 48 hours, failure to do so could exclude the appraiser from their list. Again, this will lead to shoddy work. Many high end homes sold in the past recorded the sales price as $1 in the MLS. Also, many builders sold houses outside the MLS. Normally, an appraiser would go to county records to research these sales and prices if needed. The 48 hour turn time requirement will now lead to appraisers just ignoring these sales, which could negatively impact appraisal accuracy and value.
  
• There is very little anyone can do to challenge a low valuation at this time. Oh sure, there are forms you can fill out to do so, but the real chances of an override occurring are slim. The only option then is changing lenders and paying for another appraisal, while still hoping for a better value. This will all have to be paid by borrowers and mean longer application timelines.


• Each lender has their own approved AMC. There is nothing in HVCC requiring lenders to honor each other’s appraisals, so switching lenders could mean paying for another appraisal.


• I haven’t seen anything in writing about how AMC’s will monitor and rate appraisers for the quality of their work. Will it be any surprise that appraisers will just use the first three comparables that pop up on their computer searches? What incentive do they have to put more time into making sure an appraisal reflects the best and most accurate value possible?
• HVCC has no ethics, screening or performance requirements for AMC’s or their owners. Several AMC’s have been started by retreads from the subprime debacle.
  These are not the type of challenges you want to hear when real estate values are dropping, especially for those trying to refinance.
  
  Should we blame the appraisers when their valuations start affecting transactions? I don’t think we should. None of the appraisers I know have anything good to say about HVCC. Many of them have spent years building their businesses by establishing relationships through providing great service. Now those relationships are all being taken away from them. They’re also not happy about the time constraints the AMC’s are placing on them. HVCC and the AMC’s treat appraisers like they’re a commodity and 100% the same. It’ll create a race to the bottom and reward appraisers who work the cheapest & fastest at the expense of accuracy & quality.
  
  I’m going on record here advising real estate agents to pull their own comparables and hand them to the appraiser when you meet them at a property. Maybe even go one step further and do a mini Broker Price Opinion! Otherwise you’re leaving the fate of your transaction in the hands of an appraiser who really may not care if your deal closes or not. Real estate agents, by the way, are the only industry professionals involved in the transaction that are allowed to speak with appraisers under HVCC.
  
  If you’re a homeowner looking to refinance, you may want to get back in contact with the real estate agent that sold you your home and have them do what I suggested for a purchase transaction in the paragraph above.
  
  By the way, anyone thinking that going to a bank or a certain lender will avoid the problem, is seriously mistaken. Everyone in the industry will be facing the same problems. Homeowners trying to refinance won’t be able to threaten to go to their banks to avoid the problem. Real estate agents won’t be able to blame loan originators if a sales price is not met. It’s a new reality we’ll all have to learn to deal with.
  
  A BETTER SOLUTION?
  Obviously, there was a problem with inflated appraisals. HVCC is a step in the right direction to address the problem, but several logical modifications can be made to improve it.
  
  
• Create a nationwide, central database where all appraisers have to register, so “bad eggs” can be identified by all. The federal government required it for loan originators due to fraud issues, so why not appraisers? The same mechanism can also be used.


• Require any and all owners of AMC’s to pass a background check. Currently, an appraiser, lender or real estate agent could have their license revoked, but still open an AMC.


• Create a national system to randomly review the work of appraisers and address complaints. HVCC as it is, leaves this to the AMC’s themselves. Self-regulation really worked in the banking industry, didn’t it?


• Require all lenders to use independent AMC’s. Banks are currently allowed to use their own appraisal staffs and own AMC’s, which makes absolutely no sense - unless you’re a politician getting bribed/lobbied by the banking industry. The original version of HVCC required 100% independency, but I think the fact that most of the top U.S. banks already owned an AMC might have had a little to do with this rule miraculously changing. Now, does anyone seriously believe that an invisible wall between a bank’s appraisers and all other employees will really be honored?


• Standardize the AMC’s appraiser approval process and require that they all accept each other’s appraisals.


• Create penalties for AMC’s that pressure appraisers to work on unrealistic deadlines to stay on their approved lists. The 48 hours that most AMC’s require is foolhardy. A week is more realistic. Pressuring appraisers to rush their work is really no different than pressuring them to inflate values.


• There should be geographic proximity requirements for assigning appraisals. Is it reasonable to expect an appraiser desperate for work to turn down an order in an area they don’t know?


• Create a standardized system of review, so shoddy appraisal reports can be properly addressed. Since any review system takes time, which could cause a transaction to fall apart, the review system should provide a borrower the option of ordering and paying for a 2nd appraisal, but then require a full refund of the 1st appraisal if it’s found to be suspect.

The improvements suggested above won’t create a perfect solution as that’s impossible in the real world. They could dramatically improve a seriously flawed HVCC though.

Please keep in mind that we’re all in this together, both borrowers and industry professionals. We have a government that’s giving out hundreds of billions in bailout relief to those at the top that caused the housing crisis – while seeming to make everything harder for the average person on the street. We all have to stick together to find our way through this new challenge.

If you’d like to protest against HVCC in its current form, please check out this electronic petition:

http://www.petitiononline.com/hvcc/petition.html.

For additional facts about HVCC watch this short video:

https://www.thinkbigworksmall.com/mypage/tbws/7789/661622

Saving the American Dream?

A step-by-step, logical outline for a homeowner on the options to save their home.

DETROIT, MI – Homeowners everywhere are struggling to save their piece of the American Dream, their castle, their home.

Every week of news seems to promise a ray of hope, that’s quickly followed by more bad news for the economy, which means more bad news for them. More layoffs, pay cuts, benefit cuts, business bankruptcies, bailouts, rising expenses, the list goes on and on.

When they go looking for options to help them keep their homes, they run into a confusing array of claims, programs, advice, rumors and gossip.

There’s no shortage of bold headlines regarding the subject, but the media really offers very little in the way of a step-by-step analysis that makes sense of what’s real, what’s fraud and what’s realistic.

Caution is the key for homeowners when considering their options.

Take loan modification services, for example. A Google search for “Loan Modification” returns 320,000 matches for just the last month. How can anyone possibly make sense of that much information?

Making matters worse, a similar Google search for “Loan Modification Fraud” returns 33,000 matches. The problem has gotten so big that the FBI formed a special unit to investigate foreclosure rescue scams in December of 2008, supervised by Travis Yarbrough. He was quoted in a Bloomberg article on the topic when asked who is running the scams, “A number of them previously worked in subprime mortgage companies. Some of these perpetrators have gotten very creative at separating homeowners from their money.”

So what’s a homeowner supposed to do?

Be very careful of who you take advice from. Don’t blindly trust the media, family, friends, neighbors or even “experts” as they often don’t have 100% of the facts. Nor do they have to live with the repercussions of their advice – only you will.

So, do your own research and question everything. Understand that there’s no “magic” that will solve all your problems, despite how desperate you may be for a solution. Yes, there are always several actual outrageous success stories, but the chances of it happening for you are similar to your chances of winning the lottery. Most actual solutions involve a LOT OF WORK.

Lastly, remember that hope is not a plan, nor a strategy. You MUST take action or someone will do so for you and their solution will be what’s best for them, not you.

Now let’s try to bring some clarity to the chaos.

STEP #1: Build a Budget!

If you’re struggling with your finances, the only logical way to fix the problem is to complete a very comprehensive monthly budget. Issues to keep in mind:

- For your income remember there are 52 weeks in a year, not 4 weeks in a month.
- Don’t forget items you may pay only quarterly, semi-annually or once a year.
- Be careful about being unrealistically aggressive when budgeting.

STEP #2: Can You AFFORD to Stay in your Home?

This is one of the hardest questions to honestly answer as it involves a lot of emotion. You may want to seek the assistance of someone you trust outside of your household to review your budget and be blunt with you on its viability.

If you wait too long to take proactive action, you’re options will be fewer, if any.

USING SAVINGS TO LIVE OFF OR SUPPLEMENT INCOME – if you plan to ride out the storm by living off savings or a buyout, then you need to know how long you can do so. The challenge here is being realistic and knowing when to throw the towel in and look at the other options.

STEP #3: You Want to Stay, but Can’t Afford the Current Payment

If you’ve reduced your spending on everything you can, but your expenses are still greater than your income, then you need to consider other options to reduce expenses.

REDUCING YOUR MORTGAGE PAYMENT – Obama’s “Making Home Affordable Program”

The Obama administration initiated a plan on March 4, 2009 to help an estimated 7 to 9 million homeowners keep their homes by lowering their mortgage payments through one of two ways:

Home Affordable Refinance
Even if you owe slightly more than your home is worth, you may be able to refinance to a lower rate if:

- Your mortgage payments are current (no more than 30 days late in the last 12 months)
- The property is your primary residence
- Your loan is owned or guaranteed by FNMA or FHLMC
- You owe no more than 105% of your home’s value
- Your stable & continuing income will support the new monthly payment
- You apply before June 10, 2010

Challenges on this program:
- No cash out or debt consolidation is allowed
- 2nd mortgages may not be paid off.
- 2nd mortgages must subordinate for this program, but they don’t always agree to do so!

Home Affordable Modification
If you owe more than 105% of your home’s value or you’re behind on your mortgage payments, this option may help you if:

- Your primary residence is a 1-4 family property
- Your mortgage was originated prior to January 1, 2009
- Your mortgage payment + taxes + insurance exceeds 31% of your gross monthly income
- The Servicer of your mortgage voluntarily participates in the program
- A modification plan must be in place prior to December 31, 2012

Participating (voluntary) lenders are instructed by the plan to modify mortgages to 31% of a homeowner’s income, using the following steps in order:
- Lower the interest rate in 1/8% increments to a floor of 2%
- Extend term of a loan in 12 month increments to a maximum of 40 years from mod date
- Forebear a part of the loan, with no interest, which will have a balloon payment.
- Voluntarily only – agree to reduce the principal of the loan.

LOWERING UNSECURED DEBT PAYMENTS
Many credit companies will negotiate payments and interest rates to help consumers avoid defaulting on their accounts. Some things to keep in mind:

- The credit account will usually be closed so it can no longer be accessed.
- It may also result in late payments being reported to credit bureaus. This is done to make it difficult for a consumer to open up new credit accounts until the negotiated account has been paid. Often, an agreement in writing can be made that upon full payment, the reported late payments will be removed.
- Get all agreements in writing!
- HUD Certified Consumer Debt Counselors are available 888-995-HOPE, website http://www.hud.gov/offices/hsg/sfh/hcc/fc/)


STEP #4: No Options to Afford to Stay or Don’t Want to Stay

If you’ve explored all your options, but still can’t afford your home OR you wish to more on for other reasons, then you can explore a short sale, deed-in-lieu of foreclosure or wait for the inevitable foreclosure.

RENTING OUT YOUR HOME
It’s most likely that whatever rental income you can get won’t cover your payment. If it does great, just be careful to go over this with a rental professional as there are all sorts of hidden costs associated with being a landlord.

If the projected market rent doesn’t cover your payment, it may cover enough for you to be able to comfortably make up the difference. Again though, check with a professional so you’re aware of the hidden costs involved.

NOTE: Be VERY careful when considering this strategy! Once you rent out your home you lose many tax benefits and legal protections.

SHORT SALE
A short sale is where you get your mortgage lender to accept less than you owe them in order to sell your home. Keep in mind:

- The average short sale takes 2-3 months to complete AFTER a buyer is found
- Your lender may not stop their foreclosure actions even if you find a buyer
- 2nd lien lenders will make short sale negotiations much more difficult
- TAX ISSUES – most lenders will send a 1099-C and leave it to you to address tax issues. At the end of 2007, the Mortgage Debt Forgiveness Act was enacted. If you receive a 1099-C, it may not be taxable under this act. Read IRS Publication 4681 for details. NOTE: cash out from your home used for anything but home improvement will usually be taxable!
- DEFICIENCY JUDGMENTS: most 1st lenders will agree not to pursue. Many 2nd lenders will want to preserve their rights to pursue a judgment at some later time.
- NEW MORTGAGE: FNMA currently requires a 2 year waiting period after a short sale.

DEED-IN-LIEU
This is where a lender agrees to take your home back via a Quit Claim Deed, instead of pursuing foreclosure. Due to excessive foreclosure inventory, many lenders are not currently agreeing to this strategy.

- If you have a 2nd lien, this strategy is usually NOT an option unless both liens held by same lender.
- Tax & Deficiency issues from above apply
- NEW MORTGAGE: FHA allows the shortest waiting period of 3 years.

FORECLOSURE
In Michigan, the foreclosure process can take up to 9 months or more to complete. During this time, you can live in your home without making payments.

- Michigan gives lenders two options for foreclosure: judicial and by advertisement (most common)
- A homeowner has no legal obligation to move out of their home immediately after Sheriff’s Sale
- Most residential homeowners in Michigan are allowed a 6 month Redemption Period
- You have no Tenant rights in Michigan after expiration of Redemption Period
- DEFICIENCY JUDGMENTS: If 1st lender bids amount they are owed, it’s unlikely they will pursue a deficiency judgment. If they bid less than they are owed (becoming more common) they can pursue a deficiency judgment for the difference between what they are owed and what they bid (must be at least fair market value). 2nd lenders can pursue deficiency judgments unless they agree to forego for a reduced settlement.
- NEW MORTGAGE: FHA currently requires a 3 year waiting period after a foreclosure, an exception is possible if extenuating circumstances.

BANKRUPTCY
The possibility of deficiency judgments may force many homeowners to also consider filing bankruptcy after a short sale, deed-in-lieu or foreclosure.

A homeowner may also consider bankruptcy if they feel strongly about staying in their home and choose to let all their unsecured debt go and focus all income on saving their home.

Closing Thoughts

Many people reading this document may be desperate enough to believe almost anything that appears to offer some sort of assistance out of their dilemma. Do not make this mistake.

There are many websites advertising how they can help you ‘walk-away” from your home, many of them represent you can do so with no financial repercussions. As mentioned above, this is not the case.

Be proactive and seek out the assistance of experienced and reputable professionals. Question everything! If someone cannot or will not explain your options to your satisfaction – run, don’t just walk away from them. This is a sign they either don’t know themselves, don’t think you’re worth the time or don’t want you to know. None of which you should accept.


WARNING: This post is not intended to offer any legal advice so, it’s highly recommended that competent legal & professional advice be obtained.