SHOPPING FOR A LOAN-GETTING A GOOD FAITH ESTIMATE
April 29, 2009
I tell all my friends to call your real estate lawyer before you start the process. Even if you are knowledgeable about interest rates it never hurts to make a call to get some advice that could save money. While it serves to reason that a lower rate is better that is not the whole story because if you do not understand the loan program and the closing costs you do not have the whole story. Remember mortgage brokers are selling a product and ordinarily there will be competition for your loan. Competition between lenders is good in that it can help lower your borrowing costs. So what is the best way to determine loan is best for my situation? Comparing estimates from a few different lenders. To adequately investigate a loan I need to review a Good Faith Estimate of Closing Costs (GFE). A GFE is a from prepared by the lender which should show the interest rate and type of program (30 year term, fixed rate) and the closing costs the borrower can expect to pay to close the loan. A GFE is required as part of a lender’s package and a competent broker should be able to get one for the borrower BEFORE the application.
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WHAT LENDERS LOOK FOR TO REFINANCE YOUR LOAN
April 29, 2009
I often hear from clients “I pay my mortgage on time, my credit is good, I’m not borrowing any extra money, so all I want is to get a lower rate, why do I have to go through a whole process?”
Unfortunately, even if you are just looking to lower your interest rate and loan payment your loan request must go through the whole underwriting process. Therefore most lenders refinance applications are the same forms as a purchase money mortgage application. A borrower must show (and the lender must verify)
1) Credit Report -that the borrower has good credit,
2) Income – that borrower makes enough money to support the loan,
3) Reserves – some available liquid assets (bank or brokerage accounts) and
4) Collateral- an appraisal is done to document the home’s value to determine loan how much of a loan the lender is willing to make.
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WHAT IS MY GOAL IN REFINANCING
April 29, 2009
If you don’t know your goal you will never achieve it, is true of most things including refinancing your home. It is advisable for a borrower to discuss his refinancing plans with his attorney or accountant early on. Before starting the process I ask my clients to get me a copy of your current mortgage statement showing their current loan balance and payments. We discuss their plans on how long they intend to live in the home and if any future investment plans (college or home improvement) need to be dealt with. These factors will help determine the optimal term (years to repay) and the loan amount. A thorough understanding of your goals will allow you shop more efficiently as you can tell your lender what type of product most suits your needs. Once we have a handle on these items we can better determine the goals of the refinance so the borrower is ready to start shopping for a mortgage. Remember a lender is selling a financial product and is looking to make money. Mortgage Lenders do not have a fiduciary responsibility to their borrowers which means they do not any obligation to get the borrower the best loan for the borrower. While it is true lenders are not looking to make bad loans that people can’t pay back, the current mortgage foreclosure crisis is a prime example that lenders were thinking more of their short term profits from making mortgages than the long term effects on borrowers faced with a falling real estate market. By calling your attorney before you make an application he will assist you in clarifying your goals, whether you are seeking a lower rate, to take money out or just to get yourself out of an adjustable mortgage.
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WHY REFINANCE MY MORTGAGE
April 29, 2009
One of the few benefits of the current housing market downturn is that interest rates have fallen to new lows. With interest rates near 5% homeowners with higher rate mortgages can save thousands of dollars by refinancing to a lower rate. While refinancing should save you money it is important to remember that interest rate is not your only consideration. There is also the cost of the bank fees incurred during the refinancing process (closing costs) and in NYS there is a mortgage recording tax which can add several thousand dollars to the cost of your refinance. Prudent owners shop around to before selecting a lender by asking about the rates and closing costs before initiating the refinancing process.
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SAVING MONEY WHEN YOU REFINANCE YOUR MORTGAGE
April 29, 2009
Before attempting to refinance your mortgage a homeowner should make do three things-clarify your refinancing goals, investigate several lenders and make sure you are in fact saving money. Whether your goal is to reduce your payments, borrow additional money for other uses or change your mortgage from an adjustable to a fixed rate, you need to be clear. To be sure that your refinance will meet your goals homeowners must look at three factors BEFORE starting the process. Without a true understanding of INTEREST RATES, CLOSING COSTS and MORTGAGE TAXES, the potential savings from a lower mortgage rate may be lost. Your attorney can explain the best way to determine these costs and whether or not a refinance is appropriate. Speak to your attorney or accountant before beginning the process.
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WHY YOU NEED A WILL
April 29, 2009
As a real estate attorney I often am faced with selling property owned by the estates of deceased clients. While real estate can often be sold without the necessity of probating a will it is always easier when a will is involved as it answers many of the questions asked by the heirs. This is also the case if the property is not going to direct relatives (children/spouse) in equal shares so for anyone who owns property making a will is a must. I remind all my clients that making a will can save your loved ones thousands of dollars and hours of anxiety by giving concrete directions on how your property is to be distributed but a more pressing issue for parents of minor children is who would raise your child in the event of your death. We recently settled an ongoing custody case which was caused by the failure of young parents to make a will.
JOCELYN H was an only child who was the apple of her parents’ eyes. I met Jocelyn when I helped her parents sell their Manhattan coop and buy a nice house with a yard for Jocelyn to play in. College educated and well off her parents set up life insurance and bank accounts to provide for her college needs. I met her when her parents left their Manhattan coop to find a nice house with a yard for Jocelyn to play in. Jocelyn’s life came apart when her parents were killed and her grandparents could not agree on who should have primary custody of the little girl.
The grandparents relationship became so strained that they could not agree on custody or how Jocelyn’s inheritance should be invested. The arguments got more personal and the focus was no longer on what was best for Jocelyn. Finally after several years the custody decision was made by a law guardian leaving both sides unhappy.
If they made a simple will Jocelyn’s parents could have avoided this terrible situation. Like most young couples they never envisioned that they could die and would need a will. They thought they had planned for their daughter by ensuring they had made arrangements for her financial needs but made a critical error in failing to make a will they failed to give direction on who they wanted to raise their daughter. Wills are critically important for families with minor children as they designate who will raise your children and manage their money if you pass away. Making these decisions may be difficult but it is always better for you to make the decision for your children. You are the best person to make spouse and make the decisions on whom you trust with your children’s welfare. It may be difficult and cause some heated discussions but it is always better to make the choice yourself rather than leaving it for a court.
Things you may want to consider when selecting a guardian
1) Health and age of your children and the guardian
2) Will your children have to relocate and can they stay together
3) A single guardian or a couple with children
Being a parent means making difficult choices for your children, discuss this important matter with your spouse and make a will. Hopefully your children will never need a guardian but it’s always better to be prepared rather than having this most important decision made by someone else.
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5 FATAL MISTAKES THAT CAN WRECK YOUR REAL ESTATE SHORT SALE
April 29, 2009
If you can’t keep up with your mortgage payments and your house is worth less than the amount due on your mortgage, what can I do? Unable to refinance your loan and falling further behind in your payments may lead to foreclosure and loss of the property. A solution may be asking your lender to agree to a short sale. If done correctly a short sale will can stop the foreclosure process and allow the homeowner to sell the house being saddled with mortgage debt while allowing his credit to avoid the negative results of a foreclosure. It may sound like a magic bullet but many lenders, faced with the reality of the falling real estate market will allow homeowners to their houses for less than is due on the mortgage (short sale). A Short Sale is the way to get out of a losing situation and put your life back on track unburdened by a bad mortgage.
If not done correctly a short seller can end up out of the house, still owing money to the mortgage holder and with his credit in worse shape. As an attorney who handles Short Sales it is of the utmost importance that any seller facing foreclosure know the potential value a Short Sale can bring prior to entering into a contract to sell their home. Negotiating with your lender before you find a buyer can maximize your leverage and place you in a position whereby the Short Sale can happen quickly and the 5 mistakes can be avoided
MISTAKE # 1 THE WRONG NEGOTIATOR
MISTAKE # 2 OWE MONEY AT CLOSING FOR BILLS
MISTAKE # 3 INCORRECT MARKET PRICING/LOW OFFERS
MISTAKE # 4 DELAY LEADS TO LOST CLOSING
MISTAKE # 5 DEFICIENCY JUDMENTS/CREDIT ISSUES/IRS PROBLEMS
WHAT IS A SHORT SALE
A short sale is an agreement between a lender and borrower (the homeowner) where the owner sells the home for less than is owed on the mortgage. The lender must agree to accept less than the full amount due on the owner’s mortgage otherwise a sale is not possible. If agreed to by the lender at the sale of the house the net sale proceeds (after payment of the sellers closing costs) are paid to the lender who accepts them and releases the house from the mortgage lien.
WHY WOULD A HOMEOWNER NEED A SHORT SALE
An owner who wants to avoid foreclosure and its effects on his credit score should try to utilize a short sale. An owner who is current on his mortgage but is in a negative equity or “Upside Down” may be better off getting out of avoid having to continue to pay a mortgage on a house with no value to him.
WHEN IS A HOMEOWNER IN AN UPSIDE DOWN POSITION
When a homeowner owes more to his lender than the value of the house he has negative equity or is “upside-down”. In this situation even if the home is sold for fair market value, the sales price is not enough to pay all the closing costs and satisfy the outstanding mortgage balance. Since the owner does not have enough from the sale proceeds to pay off his lender (in full) he would be unable to sell the house without having to bring money to the closing to pay the shortfall to his lender. In this situation it costs him money out of pocket to sell his home. Here a short sale request should be made to the lender to ask that it accept the amount paid by the buyer (after payment of seller closing fees). If accepted by the lender the short sale allows a seller to finish the mortgage payments and avoid any further damage to his credit score.
IS THE HOUSE UPSIDE DOWN –
You need to determine if you as the owner have any equity in the house. Equity is the net amount of money a seller would receive if he sold the house. This number is figured by taking the sales price less any expenses (mortgages, taxes, liens and closing costs) that needed to be paid to allow the closing. If the number is positive the seller has equity and if negative the seller is UPSIDE DOWN (negative equity). It is always preferable to discuss these numbers with your attorney. While the expense numbers should be available to you, the sales price is a function of the market and should be determined using a broker appraisal. Your attorney can instruct you on expenses that need to be calculated and the best way to get an appraisal.
WHY WOULD A LENDER ACCEPT A SHORT SALE
In an UPSIDE DOWN situation the homeowner and his lender are both at risk so the question is how to minimize the problem for both parties. When the owner stops paying his mortgage the lender can enforce its mortgage contract rights to the house but to do so he needs to start a foreclosure. The foreclosure process takes time and is expensive for a lender. It can cost the lender thousands of dollars in legal fees and court costs and there is no guarantee what condition a house will be in by the time the foreclosure action is completed. With this in mind it is many lenders will seek to avoid the time and expense of a foreclosure lawsuit and reach an agreement to allow the owner to short sale the house. While the lender may not get back its full amount due there are substantial benefits to the lender. Besides avoiding the time and expense of the foreclosure process, the lender gets paid much quicker and gets to take a bad loan off its balance sheet and avoids having to own and manage a foreclosed property.
HOW DOES A HOMEOWNER DO A SHORT SALE
Steps
1) SPEAK TO YOUR LAWYER-
Many struggling homeowners are contacted by lenders, credit companies and realtors who are all looking to help them get out of their problems. In times of trouble it is so important to make sure that the person handling your home is someone you can trust who is working for you. While some of these companies are looking to help most are looking to make some money off your problem so it is critical that you speak to an attorney. Your lawyer’s obligation is to protect your rights and interests not those of the lender. He will make sure you understand your rights and obligations and can explain the benefits and problems of different approaches to your situation. Every case is different; sometimes a payment plan or refinance can be the answer. Other times even if a short sale can work it may be wiser to live in the home until the foreclosure is done. These and other options will be discussed with your attorney who can help you decide your best course of action.
2) INFORMATION YOU WILL NEED
To get started your lawyer will need to know the following information about your mortgage, lender name, loan number, principal balance, current interest rate, payment amount and how far behind in payments you are. He will also need to get an idea about the market value of your home and about other bills you owe including real estate taxes, homeowners or condo association fees and water bills. He will also ask about your income to determine your ability to make payments and your future plans if you intend to try to stay in the home. With this information a decision can be made as to whether a loan modification, refinance, short sale or foreclosure is the best option.
3) A SHORT SALE IS MY BEST OPTION WHAT NEXT
You’ve met with your attorney and after going over the options you have decided a short sale is the best way to proceed. Remember you still need to find a buyer and the lender needs to approve the deal but hopefully in the end you will be done with a bad mortgage and on your way to better credit. You need to prepare your plan to market the house and get your lender the information it needs to evaluate your short sale request. Your goal is to assist your attorney in putting together a short sale package that your lender will approve in a reasonable amount of time.
MISTAKE # 1 THE WRONG NEGOTIATOR
OR
WHAT IS THE NEGOTIATOR’S MAIN GOAL
Many debt relief companies will offer to negotiate with lenders to get you short sale approval. Short sale approval means that the house can be sold but what about the shortage. If the shortage is not cancelled by the lender the seller may end up selling his home and still owing money on his mortgage. Remember, being able to sell is not the borrower’s only goal. He also needs full debt relief and proper credit reporting.
When a borrower is seeking a short sale it is best to have someone else do the negotiating on his behalf. Your negotiator will try to make your case that settling for less now is more beneficial than the lender having to go through the time and expense of the foreclosure process. The borrower is giving up his rights to remain in the house until the foreclosure process is completed in return for debt relief. If the numbers make sense most lenders will agree to cancel the mortgage at the closing for less than the amount owed. But allowing the property to be sold and the mortgage lien released does not make the full debt go away. Some lenders will ask the seller to sign a promissory note to make payments on the lender’s loss after the closing. Depending on the amount of the lender’s loss and the seller’s finances this can be avoided by a skilled negotiator. This is not the major objective of most debt relief companies who are seeking to make money off the closing. The debt relief company puts its fees into the closing costs. Their sole objective is for the lender to accept a short sale and to release the house so the company will get paid at the closing. As seller you want the short sale approved for you to get two other critical objectives 1) to get the underlying mortgage debt released without any further liability and 2) to have his credit report marked as settled not charged off. If your negotiator does not make this clear from the outset you can be in a position whereby you sold your house, you still owe the lender money and your credit is ruined.
REMEDY MAKE SURE YOUR NEGOTIATOR GETS THE RELIEF YOU NEED NOT JUST THE SHORT SALE
Have your lawyer explain the short sale process to you before you hire a real estate company. Before listing your home to make sure that the short sale will bring full debt relief and not just allows the house to be sold.
MISTAKE # 2 BROKER LISTS THE SALES PRICE TOO LOW
If the buyer’s offer to purchase the premises is too low the lender will reject the short sale. The sales price must be low enough to entice buyers to make offers but also high enough for the lender to agree to a short sale. Before picking a broker speak to your attorney about how to find a realtor who understands your goals as a short seller.
4) PICKING THE RIGHT BROKER
Picking the proper realtor to market your short sale is as important as picking the right attorney. Your broker will sell the house and help get the information necessary to negotiate the short sale with the lender. Your lawyer will discuss the role of your realtor and will be needed to start the short sale negotiation. Your realtor needs to approach the short sale of a house a little differently than a regular house sale. She needs to be able to fully document the market value as this will be relied on by the lender. Next after discussing the sellers timeframe for moving out she can determine the best way to market the house to get a quick sale. A fast sale is a great incentive to the lender. Also she will need to make potential buyers realistic in their offering price as an offer must be approved by seller’s lender. Just because the house is in foreclosure does not mean the lender will accept an offer well below market price.
REMEDY PICK THE RIGHT BROKER WHO UNDERSTANDS SHORT SALES AND A SELLERS GOALS
Pricing too high will scare away potential buyers and too low will lead to the short sale lender to reject the offer. Make sure you understand the market value of the house and the selling strategy before listing with your broker.
MISTAKE # 3 DELAY LEADS TO LOST CLOSING
When completed the short sale package should prominently mention that the buyer has a timeframe for closing. Everything must be expedited including contract signing, short sale package completion and follow-up. The completed package should be sent promptly and follow up calls to the lender made regularly so that the approval process does not drag out so long that the buyer backs out of deal.
5) ACCEPTING THE BUYERS OFFER AND GETTING INTO CONTRACT
A potential buyer makes a written offer (signs a binder) with your realtor. Assuming the offer is close enough to your asking price and the time frame for closing is right the seller can accept and sign the binder. The binder is then sent to the seller’s attorney who will prepare a contract of sale for the buyer’s attorney. While containing all the elements of a regular contract, a short sale contract also must contain a clause indicating that the deal is contingent upon the seller’s lender accepting the contract and approving the short sale. For a buyer this can be problematic as the buyer has to pay money for his engineer inspection, attorney, mortgage application and title search and while all may appears acceptable there is no guarantee that the seller’s lender will approve the short sale and the length of time to obtain a short sale approval may cause difficulty. From a seller’s perspective the contract needs to fully disclose that the sale is contingent upon the short sale approval and that the seller is not liable for any costs of the buyer. The buyer will need to discuss this thoroughly with his attorney.
6) GETTING THE SHORT SALE APPLICATION and PREPARING THE SHORT SALE PACKAGE
a) Requesting the package- You have received an offer and contracts prepared. Your attorney will send the short sale lender the executed contracts along with your broker’s appraisal report (to show how she came up with a market value) and listing agreement indicating the commission structure. With the broker’s appraisal and listing agreement your attorney can now approach the bank with figures for a short sale approval. He will ask you to sign an authorization to allow the lender to discuss your case and will send it to the lender and ask for a short sale application.
b) Package Requirements – The application will contain a list of items the lender will require to process your short sale request. The items will allow the lender to determine if the sales price is fair and if the borrower’s reason for seeking a short sale is reasonable. The lender is trying to determine 1) how much the house is really worth and could the lender get more by going through the foreclosure process. 2) Whether the borrower has a real hardship and really can’t make the payments and is not just seeking to get out of a bad mortgage. 3) Can the lender get any more from the borrower after the closing by having a promissory note signed or seeking to sue the borrower on the mortgage note (deficiency judgment).
c) The Package as a Negotiating Tool – The lender’s negotiator needs as much information as it can get to determine the best way to recover as much of the mortgage loan as possible. There will be a loss on the mortgage and who bears the loss (lender or borrower) is the focus of the negotiation. The lender’s negotiator may empathize with the borrower’s plight but his job is to get as much of the loan money back as possible. To maximize the bank’s return he will want the house to sell for as close to its market value as possible. Speed in closing is also a concern as the missed mortgage payments continue to mount. To minimize the lender’s loss, the bank negotiator will try to force the borrower to bear as much of the loss as he can. This may mean that the borrower will be asked to pay money at or after the closing. The borrower’s negotiator will try to get the lender to absorb the whole (or as much of the) loss as possible to allow the seller to get away with as little additional damage as possible. Remember, the lender has no obligation to accept a short sale even if the buyer’s offer is fair (close to market value). With your realtor’s help, your negotiator needs to make your case that the short sale is a better deal for the lender than it would get from going through the foreclosure process.
MISTAKE # 4 SELLER HAS TO PAY SOME OF CLOSING COSTS
Once a short sale is accepted an approval letter will be prepared showing the minimum amount the lender must receive from the sale(net proceeds). If the net proceeds is less than lender agreed to the seller has to pay the shortage at closing. In such a situation the seller has moved out and has still has to pay money to sell his house. Failure to properly calculate the net proceeds will cost the seller money.
REMEDY: PREPARE A PROPER HUD-1 & DISCLOSE ALL POSSIBLE EXPENSES TO BE PAID AT CLOSING – All closing costs need to be fully disclosed to lender as early as possible so that there are no surprises and the short sale approval does not have to be renegotiated
d) Preparing an accurate HUD-1
As part of the short sale negotiation the lender will be given an amount it can expect to receive from the sale (short sale net proceeds). A closing document (HUD-1) will used at closing and the lender will require a preliminary HUD-1 as part of the short sale package. To prepare the HUD-1 your attorney needs to know all of the current and future bills which could affect the closing. His HUD-1 will be used as part of the negotiation so when done correctly the lender will get net proceeds of at least as much as anticipated. The preliminary HUD-1 should list all sellers closing fees including transfer taxes, broker commission, attorney fees, release fees and any other items that need to be paid out of the sales price. After paying all of the closing fees the net balance is given to the seller’s lender as the proceeds of the short sale. If the expenses on the HUD-1 are greater than the lender has agreed to the difference will need to be paid by the seller at closing or the short sale approval will need to be renegotiated. Listing all possible seller expenses on the preliminary HUD-1 correctly can avoid costing the seller money at closing.
7) LENDER APPROVAL OF CONTRACT AND SHORT SALE TERMS
The contract was signed and submitted and the short sale package is now complete. Once the lender has reviewed and accepted the package a short sale approval letter should follow. Most lenders will not negotiate without a signed contract and the buyer will have a time frame for closing. Therefore it is important that all requested information be ready to go so once the buyer signs contract a complete package can be sent to the lender. Upon submission of the package the lender will need to review the documents and in most cases get its own appraisal. Most lenders want to do their own appraisal so they have a realtor or appraiser do a Broker Price Opinion (BPO) or Automated Valuation Model (AVM) to determine a value on the property. If the seller’s realtor did a thorough job in preparing her appraisal, the lender’s BPO should come in at close to her appraisal number which makes the price negotiations much easier. If the rest of the package is complete the lender should be able to reach a decision to give its approval to the short sale. If however the BPO comes in at a much higher value than the contract price the lender may reject the contract or come back with a counteroffer and ask the buyer to increase his offer price.
MISTAKE # 5 DEFICIENCY JUDGMENTS/CREDIT ISSUES/IRS PROBLEMS- If the short sale approval is not specific the seller could be liable to pay the amount of the bank’s loss (deficiency balance). Also, how will the lender report the short sale to the credit bureau. Most importantly does the short sale result in an IRS issue (tax gain) for the seller.
8) SIGNING THE SHORT SALE AGREEMENT
Once the lender agrees to the short sale a short sale agreement is sent to your attorney. It should detail the terms of the sale and will contain the amount that the lender will accept to release the property from the mortgage lien. The agreement should specifically mention that the lender is accepting the net proceeds in full satisfaction of the debt and that it is not looking at the seller to pay any additional monies toward the deficiency. The agreement should also say that the sale will be reported to the credit bureau as settled for less than the full amount not as a charge off or foreclosure. Third, the agreement should be clear as to what will be reported to the IRS. The difference between the amount due on the mortgage and the amount received as net proceeds will be reported on an IRS 1099 form. Make sure any tax ramifications of the 1099 are explained by your accountant prior to signing the agreement.
9) CLOSING ON YOUR SHORT SALE AGREEMENT AND GETTING THE RELEASE
Shortly after getting the short sale approval your attorney will try to schedule a closing. At the closing the buyer’s title insurance company will be responsible for getting the net proceeds to the short sale lender to cancel the mortgage. Make sure that the short sale agreement is sent with the payoff funds and that the seller’s new mailing address is given so that the release documents can be forwarded. It is important that the seller follow up several weeks after the closing to make sure the loan has been satisfied and the release letter obtained for his records. Having a credit report updated to make sure that the short sale has been reported to the credit bureau is also a good idea.
10) FILING YOUR TAXES
The seller’s accountant would be notified of the proposed short sale prior to the closing. He can explain the tax treatment the short sale will receive and the forms that will need to be filled with the IRS. At closing the seller will receive a 1099 form from his attorney which will show the sale prices. The seller should also receive a copy of the 1099-S form showing how the mortgage payoff was reported to the IRS. These forms must be given to your accountant so proper tax treatment of the short sale will result.
CONCLUSION- A short sale can be a valuable tool in helping a struggling homeowner get out of a bad mortgage situation but it must be done right. Make sure you understand the process, hire the correct lawyer and realtor and prepare the short sale package quickly. Review the short sale agreement to make sure any deficiency is taken care of properly. Follow up after the closing to make sure the sale is reported correctly to the credit bureau and IRS.
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The Great Government Bailout
April 29, 2009
We all are hearing great things from Obama and his advisors about how the so-called Stimulus Package will be helping the economy pull out of its doldrums, but it is silent on the mortgage foreclosure mess. After the failure of the Bush TARP plan many commentators advocate letting the market play out its normal course with thousands of foreclosures and the failure of the banks which hold the bad loans. While this approach probably would allow the system to correct itself, the cost of banks closings and homes lost to foreclosure makes it a politically untenable option for the new administration. A nationwide system of reappraising and revaluing delinquent loans coupled with a streamlined process of modifying loans could do a long way to bringing closure to the burgeoning sub prime mortgage crisis.
My fondest wish is for a package which would give lenders and homeowners some direction on how it plans to handle the sub prime mortgage crisis. Lenders need some idea about how the government proposed to handle the toxic mortgage foreclosure mess which has threatened our banking system. Delinquent homeowners need to know whether to continue to try to hold off foreclosure or leave their properties and get on with their lives. Unfortunately, several plans have been mentioned but none has garnered the needed level of political support. Three interesting options are
1) Toxic Mortgage Bank -a government takeover of the bad loans
2) Mortgage Reformation in Bankruptcy Court- permitting bankruptcy judges to reduce the interest rates and principal balance of mortgage loans
3) National Reappraisal and loan write down program- issue guidelines on valuing delinquent mortgages
From a real estate attorney’s point of view option 3 makes some good sense as it would free up the lending markets and allow assets to be valued and losses to be reported. While the losses will be massive at least the banking system will be able to quantify them and go forward. The worst thing that can happen is to continue to do nothing (although option 2 would vest unprecedented power in judges not envisioned by the credit markets and could be a disaster) and have the market continue to drift aimlessly.
For mortgage lenders having delinquent mortgages on their balance sheet stops them from making new loans as the value of delinquent loans cannot be accurately calculated. Homeowners have no guidance as to what proposals can be made to their lender to work out problem mortgages which would benefit both borrower and lender. A new proposal is for a reappraisal program to allow lender’s to fairly value delinquent mortgages. Once a valuation model could be agreed upon this would set the stage for the bank’s non performing assets to be valued and /or liquidated in an orderly way. Once values are agreed to lenders will be much more willing to listen to current market value based proposals to help homeowners make payments and keep their homes. This proposal would have licensed local area appraisers come up with current fair market values of distressed properties so the lenders could give them real value in their portfolios. The lending markets could now get a true reading on the value of the assets held by the banks and banks would be encouraged to make arrangements with homeowners to modify mortgages based on realistic numbers.
The Bush TARP plan offered government money to struggling mortgage lenders to allow them to remain afloat. The lenders promised to try to help struggling homeowners modify their mortgages to try to keep them in their homes. While the banks did receive the funds new mortgage guidelines caused the vast majority of loan modification requests to be rejected so the TARP bill did little to help homeowners. While this reappraisal plan could be used to allow homeowners to stay in their homes at current values it needs to be coupled with real enforcement mechanisms to insure that lenders and homeowners do not game the system by over or under valuating properties. There should be a streamlined process to determine the value and guidelines to try to allow homeowners to keep their homes. This needs to be coupled with a much quicker foreclosure process for those homeowners who cannot be rescued by this program or who get its protections and again become delinquent. This would serve both lenders and homeowners as the lenders liquidity would be increased as non performing mortgages could be made performing and homeowners would be released from the strictures of bad sub-prime mortgage programs and given a fresh start. This fresh start must come with a price as those homeowners unable to make it despite the new start would end up without their homes but in most cases these people should not have been homeowners in the first place.
Allowing Bankruptcy judges to reform mortgages including reducing principal balances is a radical change that can only serve to further distort an already distorted market. Lenders were encouraged by FANNIE MAE rules to relax lending standards to increase which led to poorly thought out mortgage programs offering which required down payments, credit scores and income levels to qualify for home loans. These programs set the stage for the mortgage crisis as the is participation which encouraged reckless lending would The goal of any mortgage bailout program should be to facilitate new lending while attempting to help delinquent homeowners stay in their homes. The problem is that these goals do not necessarily work together. To facilitate lending the old bad loans need to be dealt with quickly and efficiently but the pain of homeowners faced with the loss of their residences makes this option. The first two options would radically change the lending landscape for good. Both would interject government into the lending equation in a way that would increase lending costs for borrowers and give the government unprecedented influence over homeowners. A toxic mortgage bank option would allow the banks to be rid of the bad loans but could saddle the taxpayer with trillions in losses. Coupled with the likely provision that the government as the owner of these bad loans would be much less likely to start foreclosure proceedings against borrowers would mean these bad loans stay around for a lot longer than if banks followed normal lending practices and brought timely foreclosures. The increased time that the bad loans remain in the system will only increase the government’s losses and continue to weigh down the sales markets.
Lender’s have assets which cannot be valued so they clog up balance sheets stopping them from lending to new qualified borrowers.
Supposedly the $900 Billion will kick start everything and in a couple months everyone will be fully employed at great wages, the housing market will rebound, state and local government deficits will disappear and a new era of general happiness will ensue. While I didn’t vote for Obama, I am someone who had great hopes that a really smart person with a mandate could come in and make some meaningful changes in desperate times. I see first hand the trouble that Washington business as usual politics has wrought as the local housing market continues to flounder under the weight of foreclosures. Maybe the Obama message can lead to meaningful changes that benefit all Americans.
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