Inside Real Estate News » RE/MAX Southeast

Fannie Mae gets tough with ‘strategic defaults’

John Rebchook — Mon, 28 Jun 2010 20:51:17 +0000

Take a poll on strategic defaults at the bottom of this blog.

If you can afford to pay your mortgage, but you are contemplating a “strategic default” because your loan is worth more than your mortgage, you might think again.

Defaulting borrowers who walk-away from their mortgages who have the financial wherewithal to pay - or did not complete a workout alternative in good faith – will be ineligible for a new Fannie Mae-backed mortgage loans for seven years from the date of foreclosure, the government-controlled mortgage-finance giant announced last week.

Those borrowers also could face legal actions. Borrowers who have extenuating circumstances may be eligible for new loans in a shorter time-frame.

“We’re taking these steps to highlight the importance of working with your servicer,” said Terence Edwards, executive vice president for credit portfolio management for Fannie Mae, when the new policy was announced. “Walking away from a mortgage is bad for borrowers and bad for communities and our approach is meant to deter the disturbing trend toward strategic defaulting. On the flip side, borrowers facing hardship who make a good faith effort to resolve their situation with their servicer will preserve the option to be considered for a future Fannie Mae loan in a shorter period of time.”

Fannie Mae seeking deficiency judgments

Fannie Mae will also take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments. In July, next month, the company will be instructing its servicers to monitor delinquent loans facing foreclosure and put forth recommendations for cases that warrant the pursuit of deficiency judgments.

Troubled borrowers who work with their servicers, and provide information to help the servicer assess their situation, can be considered for foreclosure alternatives, such as a loan modification, a short sale, or a deed-in-lieu of foreclosure. A borrower with extenuating circumstances who works out one of these options with their servicer could be eligible for a new mortgage loan in three years and in as little as two years depending on the circumstances.

1 out of 4 home mortgages underwater

It’s estimated that as many as 25 percent of the loans in the U.S. are underwater – that is, the mortgage is worth more than the home. And 12 percent of all mortgage defaults in February were estimated to be strategic defaults, according to a Morgan Stanley report.

Local experts applauded Fannie Mae’s move.

“I think walking away from your mortgage when you can afford the payment, is just short of fraud,” said Ron Woodcock, a broker with RE/MAX Southeast. He said he has heard of people walking away from their mortgages, and buying another home at a depressed price, before the consequence of defaulting on the first mortgage is discovered and mars their credit record, which would have made it all but impossible for them to get the loan.

“People will do crazy things,” said Woodcock, who is doing a lot of short sales, in which the lender accepts less than the mortgage amount. “I think people really are cutting their own throat when they do things like walking away from a mortgage, when they can afford to pay it. A banker recently told me that they will go after people for judgments, even if it means turning them over to a collection agency. They will go as far as state and federal statutes allow them to. It might take a while, but it will catch up to them.”

Zachary Urban, spokesman for the Adams County Housing Authority, said that owning a home carries more of a moral responsibility than a stock, or some other investment, that an investor might dump if it loses its value. He said he disagrees with a professor of law at the University of Arizona, who argued that more people should be walking away from their mortgages, because it makes financial sense. Urban was alluding to Brent White, who in 2009 published a paper called Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.

Homeowners have moral obligation to pay, if they can

“I think you have to understand the ramifications of walking away from your house payment in a greater context,” Urban said. “It’s not like you have a stock option that is under water.”

In fact, it’s struck close to home for him- literally. Someone abandoned a house in his Wheat Ridge neighborhood about three months ago. He doesn’t know the circumstances, but that empty house causes the value of surrounding homes to drop in value; it hurts the school district that is not collecting property taxes; and can become a magnet for crime, costing taxpayers and municipalities extra money, at a time virtually all communities are strapped for cash. The home has still not entered the foreclosure process.

Of course, if you have a true financial hardship – or even finite resources and you know that you will run out of money to pay your mortgage in a few months – that is a different story, Urban said.
But a financial hardship might be losing your job, or becoming vastly under-employed, he said. “Your home losing its value is not a financial hardship, but an economic condition,” he was recently told by a Bank Of America official.

However, strategic defaults likely are bigger problems in states such as Florida and Nevada, where homes have lost far more value, than in Colorado.

“Our home prices in Colorado have not fallen as much, and there is a great likelihood that if you can hold on to them through this economic downturn, you will be able to recover your original value relatively quickly,” Urban said. “In places like Nevada and Florida, it may be many, many years before the values came back. If you paid $500,000 for a home that today is worth $225,000, it may not be reasonable for you to see those values coming back in the foreseeable future.”

Fannie Mae speaking for fearful politicians

Peter Lansing, president of Universal Lending (a sponsor of InsideRealEstateNews), said that in his opinion, Fannie Mae is speaking as a proxy for politicians.

“I think what you are hearing, is what politicians cannot speak,” Lansing said. “They are asking Fannie Mae to speak on their behalf. For whatever reason, no American politicians, from the mayor of the smallest city to the President, wants to say is that it is the American thing to do to continue to make your house payment, if you can afford it. Politicians are afraid to do that. So Fannie Mae, which now is really part of the government, is speaking for them. Yes, I know that true hardships do occur. People lose their jobs. People get sick and can’t pay their mortgages. People get divorced and can’t afford a mortgage that depends on two incomes. A true hardship is different than not wanting to pay your mortgage because your house is not worth as much.”

Still, he supports Fannie Mae’s get tough attitude with mortgage scofflaws.

“I just wish that President Obama would stand up and say that is not the ethical thing to do, that is not the American way. Don’t camouflage it through a government agency.”

Note: There is a poll embedded within this post, please visit the site to participate in this post's poll.

Contact John Rebchook at JRCHOOK@gmail.com or 303-945-6865.

Colorado foreclosures: Hopeful signs, but crisis isn't over

John Rebchook — Thu, 04 Feb 2010 20:35:58 +0000

Earlier today I blogged about a state report that shows foreclosure filings in Colorado in 2009 set a record, but foreclosure sales declined from 2008 and 2007 levels.

Later, experts said that without the Colorado Foreclosure Hotline, 1-877-601-HOPE, which has received more than 60,000 phone calls, has played a big role in stemming the tide of people losing their homes.

“We’re making good progress,” said Ryan McMaken, who released the report that showed a record 46,394 foreclosure filings last year, an 18 percent increase from 2008, but only 20,437 foreclosure sales – a 4 percent drop from 2008.

“I think we are doing very well, especially in light of the 2009 foreclosure filings setting a record, but we still had fewer foreclosures being completed,” McMaken said.

Last year, a new state law required people who were facing to receive information about the foreclosure hotline. McMaken noted that there were about 19,000 foreclosure filings in the five-month period when the law was in effect last year, and the hotline received about 18,000 calls during that period.

He noted that some people would have called more than once and not everyone who called the hotline during that time period was just beginning the process. Still, it indicates that people are taking advantage of the free hotline, which is staffed by HUD-approved counselors.

“We know that 16,000 people who called the hotline have reached a resolution,” McMaken said. “If you added another 16,000 people to foreclosure sales, it would had a huge increase.”

Shannon Peer, who heads counseling for the non-profit Brothers Redevelopment, which manages the hotline, said without a doubt it is the single factor that made the biggest dent in the outcome of foreclosure, although he cautioned the state is still dealing with a “foreclosure crisis.”

And it typically takes a great deal of patience and persistence on the part of the homeowners, whether they are trying to get a permanent loan modification, a short sale, or something else.

“This is something that can take many months to resolve,” Peer said. “It is not something that is going to change in a month. It’s a long process. In some ways, it is hard even to compare one six month period to another, because it can take so many months to work its way through the system.”

Statewide, the former hotbeds of foreclosure sales – Denver and Adams County – have shown dramatic drops in foreclosure sales by public trustee offices, noted McMaken.

The growth is primarily occurring in “mid-sized” markets on the Western Slope and eastern plains, which is the past weren’t the victims of rising foreclosures, he said. In some cases, such as around Grand Junction, the problem is because of a job cuts in the formerly growing and lucrative oil and gas industries, he said. In other places, such as Teller and Park counties, people owned homes based on the “drive to buy” principle, can no longer have the income to pay their mortgages, because they either lost their jobs or are grossly under-employed.

In addition, resort communities in places such as Eagle and Summit counties, are reporting rising foreclosures. McMaken said that figures indicate that many of those are second homes and maybe a third of them are some form of timeshare units.

Ron Woodcock, a broker with RE/MAX Southeast, said the overall Denver single-family housing market is the strongest he has seen since moving here from Florida 3-1/2 years ago. He said some counties in Florida had 30,000 foreclosure filings last year.

“We’re really bucking the national trend,” Woodcock said. “We’re nothing like California, Florida, Nevada or Arizona.”

Woodcock, however, disagrees with some people who say that if mortgage loans were once again assumable, that would help the foreclosure crisis. “Currently, mortgage rates are lower now than they were two or three years ago,” he said. “Why would you assume a loan of 5.5 percent, when you can get a 4 percent loan today? It might help going forward, but it is not going to help today. And while it is harder to qualify for a loan, really what has happened is that we have returned to what it used to take to qualify for a loan.”

McMaken, of the housing division, said the first wave of foreclosures was due to bad ARMs, interest-only loans, and subprime mortgages. Rising unemployment and falling incomes are responsible for most of today’s foreclosures, he said.

Woodcock said some lenders now would rather work with borrowers on loan modifications, rather than short sales, in which the bank accepts less than the mortgage amount. Still there have only been 1,072 permanent loan modifications in Colorado through 2009. (For more on loan modifications, please go to this blog.)

But Woodcock said that he does worry about the so-called “shadow market.” The shadow market is an unknown number of homes held by the banks, which are not actively being marketed. Nationally, the banks may be holding as many as 7 million properties in this fashion, Woodock said.

“An influx of a lot of those homes would have a negative effect on the market,” Woodcock said. “On the other hand, a lot of investors groups are raising money to buy big portfolios from lenders. They’ll step in and buy 50, 60 or 100 homes at one time. Those type of deals aren’t reported in the MLS, but that type of activity is going on.”

Contact John Rebchook at JRCHOOK@gmail.com or 303-945-6865.

Rising foreclosure filings worries experts

John Rebchook — Thu, 19 Nov 2009 18:58:55 +0000

As I blogged earlier this morning, foreclosure filings in Colorado rose almost 18 percent to 35,112 in the first nine months of this year, compared with 29,852 during the same period in 2008.

And while the number of foreclosure closings – those that have completed the entire process and have been sold by public trustees – is down 7.9 percent from a year earlier, the rise in filings concerns experts that another wave of foreclosures could hit next year.

“New foreclosure filings are at a peak again,” said Ryan McMaken, spokesman for the Colorado Division of Housing, which released the report.

“That question is, what does this mean for the future? All of these filings…at some point might continue down the foreclosure path all the way to auctions,” held by public trustees, he continued.

He noted that the number of foreclosure sales “are muted now,” but that may not be a trend that is sustainable.

Ron Woodcock, a broker with RE/MAX Southeast, and an expert on short sales, said that recently banks have been faster and better at accepting approvals for the transactions, in which they agree to accept less than the full amount of the mortgage at the sale.

But he advises all of his clients to try to modify their loans before they entertain the notion of a short sale. Lenders will look at lowering interest rates, sometimes extending the lenght of the mortgage to as much as 40 years, which lowers monthly payments. Sometimes they’ll even lower the principal amount.

He said many lenders have beefed up their loan-mitigation departments to deal with increased demand.

“My personal experience is that is not as much of an ordeal as early this year,” Woodcock said. “It was bad. But this may be short-lived. I’m expecting we may be right back where we were earlier this year at the beginning of next year,” because of the influx of new foreclosure filings.

Shannon Peer, of the non-profit Brothers Redevelopment in Edgewater, said that what he is hearing from people who are in danger of losing their homes, that lenders are becoming more aggressive in helping distressed homeowners with loan modifications on a trial basis, but are not as quick as making them permanent.

“If you go back to June, when there were all these stories about no trial modifications in effect, and the banks were just in the process of implementing them and getting them ramped up,” he said. “Now, they have the manpower and the technical ability to do it, but they are not going from the trial programs to the permanent loan modifications as fast as we would like.”

And Stephanie Riggi, manager of the Colorado Foreclosure Hotline’s call center, said that calls to the hotline have increased about 40 percent from where they were a year earlier. She said that four out of five people who complete counseling with their HUD-approved counselors, avoid foreclosures. She also is seeing a surge in people calling who are current on their mortgage payments, but want to take preventative measures to keep their homes.

“I think people are much more sophisticated and aware of programs available to them than they were in the past,” Riggi said.

Contact John Rebchook at JRCHOOK@gmail.com or 303-945-6865

What happens in Las Vegas, shouldn't even stay in Las Vegas

John Rebchook — Wed, 19 Aug 2009 18:22:35 +0000

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Joel Stein, in the latest issue of TIME magazine, wrote the cover story of how Las Vegas gambled big and lost big on the real estate boom.

I couldn’t help think, once again, how much better off Denver is than Las Vegas. But I was shocked when I read about what appeared to me to be an unethical practice of a Realtor in Vegas, who specializes in short sales.

Here is an excerpt from the passage:

“To see the real devastation, I have to leave the line of casinos along the Strip and drive to where people in Las Vegas actually live,” Stein wrote. “I head out to spend the day with real estate agent Brooke Boemio, a bouncy, sweet, recently remarried 31-year-old mom whom I met years ago when I was on another assignment. Boemio is doing great during this recession. In fact, she’s never had a job that paid as well: she made more than $100,000 last year. Even better, she’s willing to show me how messed up the real estate scene is.

“Boemio specializes in short selling, in a particularly Vegas way. Basically, she finds clients who owe more on their house than the house is worth (and that’s about 60% of homeowners in Las Vegas) and sells them a new house similar to the one they’ve been living in at half the price they paid for their old house. Then she tells them to stop paying the mortgage on their old place until the bank becomes so fed up that it’s willing to let the owner sell the house at a huge loss rather than dragging everyone through foreclosure. Since that takes about nine months, many of the owners even rent out their old house in the interim, pocketing a profit.”

When I told Zachary Urban, spokesman for the Colorado Division of Real Estate about this, he said that he is glad that this practice, to the best of his knowledge, is not occurring in Colorado.

“I want to make this absolutely clear,” Urban told me. “We would pull the rug from underneath any broker doing this as fast as we could, to stop this practice.”

And when I told Ron Woodcock, a broker with RE/MAX Southeast, who has been doing short sale transactions for 20 years, he had this to say: “I can guarantee you that if (the broker) was in this state, and (Real Estate Division Director) Erin Toll found out, Erin Toll would go after her…I can’t say for sure this is legally fraud, but it sure sounds like fraud to me.”

The practice, while at first blush may seem to be a clever way to game the system, is fraught with problems, both Urban and Woodcock told me.

“Oh, boy,” Urban said. “It seems to me there is a lot of secrecy going on and not very much disclosure.”

First, the borrower would need to qualify for both mortgages, so it is unclear how deep that market is for this kind of transaction.

But beyond that obstacle, a broker in Colorado would clearly be overstepping his or her legal authority by advising somebody to walk away from their mortgage, Urban said. “The statutes very clearly spell out the role of a broker. They are not the home buyer’s lawyer or accountant.”

Also, no profitable, ethical lender would make the loan on the second home, knowing the borrower planned to default on the loan on the first home, Urban said.

In addition, the first borrower might very well put a lien on the second home for the deficiency on the first loan, he said, negating part or all of the appreciation of the home bought at a fire-sale price.

“It might make money in the short-term, but I don’t think it would in the long-term,” Urban said.

Woodcock predicted that the Vegas broker “won’t be in business for long.”

He said that House Bill 3648, adopted by Congress in 2007, protects people from income tax liability when they can prove a financial hardship, after losing their home in a distressed transaction. “But if you buy a $500,000 home for $250,000, and then you walk away from your (original) $500,000 mortgage, that is not a hardship,” Woodcock pointed out.

“That is so unethical,” what the Vegas broker is advising, Woodcock added. “She is contributing to the lows in our real estate market.”

He said he thinks that the broker is going to be hearing from the IRS, FBI and the real estate commission in Nevada.

“If she were in Colorado and doing this, we would be part of a long line looking into that practice,” Urban said. “I think we can be thankful that is happening in Las Vegas, and not in Colorado.”

Foreclosure filings could hit 40,000 in Colorado this year

John Rebchook — Thu, 13 Aug 2009 19:50:25 +0000

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Foreclosure filings in Colorado could hit or exceed 40,000 filings this year, officials said today, following a report that tracked more than 12,000 foreclosure filings in the second quarter.

“It is possible; it is not outlandish,” Ryan McMaken, who researched and wrote the second-quarter report for the Colorado Division of Housing. “The total for the mid-year is about 22,000. And if that trend continues, it would be the biggest year on record. It is even possible that it could approach 45,000.”

In his report, McMaken noted that foreclosure activity rose dramatically, as expected, from the first quarter to the second quarter, as major banks halted their moratoriums on pursuing foreclosures.

For the last two years, there have been about 39,000 foreclosures in the state.

“If went from a peak of let say 39,850 to 40,150, that is not that big of a deal in terms of numbers – it’s only a couple of hundred more,” said Ron Woodcock, of RE/MAX Southeast. But psychologically, it is very important if we hit that 40,000 number. It’s like buying a car for $29,999 instead of $30,000. It’s a big psychological issue.”

Woodcock said that he thinks that foreclosure filings – which in the second-quarter saw most of the increases outside of the Denver area- will remain flat this year. “I hope they don’t break 40,000. But I’m an eternal optimist,” Woodcock said. He also said that he thinks Colorado is in better shape than many other states, such as Nevada, California, Arizona and Florida.

Woodcock said he thinks the now-expired moratoriums were a “double-edged sword.” He said their most important function seemed to be allow banks to beef-up their loan mitigation departments more than help homeowners, who had been seeking loan-modifications. And he was critical of FHA-loan programs that were touted to allow tens of thousands of people to keep their homes. He said they helped almost no one.

Woodcock said he has a number of clients who were told by their banks not to make any more mortgage payments while they were in discussions with the bank. Now, they are receiving letters from the banks saying they have been turned down for the loan mods, because they don’t have enough income for them to justify taking the risk. And they are quickly setting dates for public auction sales.

Stephanie Riggi, manager of the Colorado Foreclosure Hotline, said they also are seeing a larger number of people who are having their foreclosure auction dates being set quicker than in the past. She said that it behooves lenders to keep the foreclosure process current, so they do not face delays in re-starting the entire process.

The solution to the foreclosure problem is so difficult, Woodcock said, because it may not be a good idea to modify loans for risky borrowers, who never should have gotten their loans in the first place. “What got us into this mess were lax standards,” Woodcock said. He said the solution is to get the homes in the hands of financially strong owners. “That’s what I think needs to happen,” he said.

One disturbing trend is that rising unemployment is causing more senior citizens to lose their homes, said Jodi Gelerter, director of the Pikes Peak Foreclosure Prevention Partnership.

She said one recent case involved a 65-year-old man who “had a great job,” and was suddenly laid off. His wife did not work. “They were close to paying off their home, and a couple of years ago, and they refinanced, pulling out some equity. Their home has dropped in value, so it is a double whammy.”

Gelerter said that in retrospect, they made a mistake in taking cash out of their home when refinancing, “but ultimately, the job loss was the bigger issue.”

McMaken of the housing division, said the third-quarter will most likely be the quarter that determines how bad the foreclosure problem is in Colorado. In the fourth quarter, the public trustee offices do not hold auctions during the Thanksgiving and Christmas weeks, so foreclosure activity always drops for seasonal reasons, he said.

Inside Real Estate News » RE/MAX Southeast

Fannie Mae gets tough with ‘strategic defaults’

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