Real Estate Crisis, this hurts, how long will this last?
The Real Estate crisis is continuing to have the so called “experts” scratch their heads, acknowledging that this downtown is painful and asking “how long will this last?”.
Well, when this all began, back in 2008, those with the most optimistic view said that it would be over by the 2nd quarter of 2009. And since that did not work, all those asked expected that it would be over by the first quarter of 2010. That wasn’t the case either. In fact, mortgage delinquencies were up 36% in the first quarter of this year versus the prior year, but are actually down 7.5% from Q4. That's the first drop in mortgage delinquencies in well over two years. But new mortgage foreclosures in the first quarter were up 18.6% to a bit over 370,000. Now it appears that the housing down turn will last indefinitely or at least until a number of things happen.
Two key factors have me questioning the foreseeable future of the market:
• According to the Mortgage Banker’s Association National Delinquency Survey the total delinquency for all mortgages is at mind-numbing 14%. FOURTEEN PERCENT! How many of those will translate into foreclosures and/or short sales? Well, the answer depends on how effective programs like Home Affordable Modification Program (HAMP) become in assisting homeowners from escaping foreclosure. According to many industry analysts/experts, the current government programs are completely ineffective in producing long-term results and will need major restructuring/overhauls in order to reach their goals.
• The unemployment rate in the US is at 9.3 %. And states that help push/drive the economy are experiencing remarkably high unemployment rates: California is at 12.3%, Florida is at 11.2%, and Michigan is at a staggering 13.7%. And here in New Jersey its 9.6%. Which is higher than national average and its even higher in New Jersey’s urban centers. All those numbers are about 7-8% higher than
during the booming times of 2005-2006. How much stability and long-term appreciation in real estate can we expect if Americans are having a hard time finding and keeping work.
The growing numbers of the factors that I mentioned above help to increase the number of actual foreclosed homes on the market. Foreclosed homes sit on the market for as much as 180 days or more! This constant new crop of foreclosed homes plus the non foreclosed homes for sale combine to create a large glut of homes begging for buyers.
So where are the new buyers?
Well, mortgage rates are down to their lowest level in 39 years according to a survey released on Freddie Mac’s web site. You would think that this would bring in a flock of new buyers. That along with the $8,000 home buyer tax credit brought in some new buyers, but not nearly enough remove the glut of homes that are currently on the market.
So how long will it last?
The end is not in sight. As long as the unemployment rate remains at high levels and the housing glut continues to be feed by a new crop of REO’s (Real Estate Owned bank properties) monthly, the housing down town will continue. It’s a vicious cycle: continued high unemployment leads to more foreclosed homes which increases the glut of homes which continues to breed the real estate down turn.
But there is hope. Proposals from the President, Congress, and Community Based Organizations are all chipping away slowly at the problem. These proposals include, but are not limited to, financial stimulus, increasing jobs, decreasing the number of foreclosures and increasing the overall health of the economy. Each of these proposals will take time to work their way through the economy and eventually increase the health of the real estate market. Its impossible to say when it will end but it will take some time. It will take a lot longer than every one expected but it will end.
Friday, July 2, 2010
Thursday, May 13, 2010
Tuesday, April 13, 2010
WaMu exec: We deserved to be given a chance
By Marcy Gordon
WASHINGTON - A trio of former Washington Mutual officials and a trove of documents on Tuesday portrayed a pattern of breakneck loan-making and alleged fraud at the biggest U.S. bank ever to fail.
Former CEO Kerry Killinger defended WaMu's actions at a Senate hearing and insisted the government should not have seized it at the height of the financial crisis in September 2008.
Killinger argued that WaMu had adequate capital and shouldn't have been shut down and sold for a "bargain" price of $1.9 billion. The bank "should have been given a chance to work its way through the crisis," he testified at a hearing by a Senate panel.
The 18-month investigation by the Senate Homeland Security and Governmental Affairs subcommittee found that WaMu's lending operations were rife with fraud, including fabricated loan documents. It concluded that management failed to stem the deception despite internal probes.
The bank's pay system of rewarding loan officers and sales executives for their volume of loans closed ratcheted up the pressure, the investigators found.
Sen. Carl Levin, D-Mich., the panel's chairman, has said it will decide after its hearings this week whether to make a formal referral to the Justice Department for possible criminal prosecution. Justice, the FBI and the Securities and Exchange Commission opened investigations into Washington Mutual soon after its collapse.
The Senate subcommittee is known for conducting hard-hitting investigations by bipartisan staff and has sometimes made such referrals to federal prosecutors. The former WaMu executives appeared before Congress for the first time since the bank's collapse.
Killinger deflected the criticism and laid blame on the government. He argued that even before the crisis struck with force, the government treated Seattle-based Washington Mutual unfairly. He noted it was excluded from a list of large financial firms whose stock couldn't be sold short under a temporary government ban in July 2008. In short-selling, traders bet a stock price will drop and use borrowed shares to profit from any decline.
"For those that were part of the inner circle and were 'too clubby to fail,' the benefits were obvious," Killinger said. "For those outside of the club, the penalty was severe."
Levin came armed with e-mail correspondence among senior executives at the bank showing anxiety over elevated rates of delinquency and default in the high-risk mortgage loans WaMu had made. The exchanges show the executives wanted to urgently sell the loans packaged as securities to Wall Street, Levin said.
Two former WaMu chief risk officers said they tried to curb risky lending practices by the bank. But they said they met resistance from top management when they brought their concerns to them.
As the housing bust deepened in late 2007 and early 2008, "I was increasingly excluded from senior executive meetings and meetings with financial advisers when the bank's response to the growing crisis was being discussed," Ronald Cathcart, who helped oversee risk until April 2008, testified at the hearing. By January 2008 he was "fully isolated" and was fired by Killinger a few months later, Cathcart said.
The other risk officer, James Vanasek, testified that he tried to limit loans to those who were unlikely to be able to repay and the number of loans made without verifying borrowers' income. But his efforts fell flat "without solid executive management support," Vanasek said.
He said the examiner on the ground at the bank from the U.S. Office of Thrift Supervision, Lawrence Carter, "did an excellent job" of raising issues of credit risk. But, Vanasek added, he was baffled why Carter's superiors at the Treasury Department agency "didn't take a tougher tone with the bank."
"There seemed to be a tolerance there or political influence," he said.
WaMu's release of toxic mortgage securities into the financial bloodstream contributed to the near-collapse of the system in the fall of 2008, Levin and other senators contended. Levin pressed Killinger and the other former executives on when they became aware of loan fraud at the bank and why they failed to act.
"You should have been disturbed," he told Killinger. "Instead you want to wrap it in hypotheticals."
At one point, Killinger did concede some blame. "As CEO, I accept responsibility for our performance and am deeply saddened by what happened."
Fueled by the housing boom, Washington Mutual's sales to investors of subprime mortgage securities leapt from $2.5 billion in 2000 to $29 billion in 2006. The 119-year-old thrift, with $307 billion in assets, was sold for $1.9 billion to JPMorgan Chase & Co. in a deal brokered by the Federal Deposit Insurance Corp.
Killinger said it was "unfair" that Washington Mutual didn't get the benefits of government actions that helped other financial institutions in the days of the crisis in the fall of 2008. He was referring to steps such as a doubling of the limit on deposit insurance to $250,000 and new federal guarantees for bank debt.
Between 2003 and 2007 under his tenure, WaMu cut in half its staff in the home loans division and sold 30 percent of its portfolio of loans, Killinger testified.
WaMu's pay system rewarded loan officers for the volume of loans they closed on. Extra bonuses even went to loan officers who overcharged borrowers on their loans or levied stiff penalties for prepayment, according to the report of the Senate panel's investigation.
"Washington Mutual engaged in lending practices that created a mortgage time bomb," Levin said. "Because volume and speed were king, loan quality fell by the wayside."
WaMu was one of the biggest makers of so-called "option ARM" mortgages. They allowed borrowers to make payments so low that loan debt actually increased every month.
In some cases, sales associates in WaMu offices in California fabricated loan documents, cutting and pasting false names on borrowers' bank statements, the panel found. The company's own probe in 2005, three years before the bank collapsed, found that two top producing offices — in Downey and Montebello, Calif. — had levels of fraud exceeding 58 percent and 83 percent of the loans. Employees violated the bank's policies on verifying borrowers' qualifications and reviewing loans.
Washington Mutual was criticized over the years by its internal auditors and federal regulators for sloppy lending that resulted in high default rates, according to the report. Violations were so serious that in 2007, Washington Mutual closed its affiliate Long Beach Mortgage Co. as a separate entity and took over its subprime lending operations.
Read Source Here
WASHINGTON - A trio of former Washington Mutual officials and a trove of documents on Tuesday portrayed a pattern of breakneck loan-making and alleged fraud at the biggest U.S. bank ever to fail.
Former CEO Kerry Killinger defended WaMu's actions at a Senate hearing and insisted the government should not have seized it at the height of the financial crisis in September 2008.
Killinger argued that WaMu had adequate capital and shouldn't have been shut down and sold for a "bargain" price of $1.9 billion. The bank "should have been given a chance to work its way through the crisis," he testified at a hearing by a Senate panel.
The 18-month investigation by the Senate Homeland Security and Governmental Affairs subcommittee found that WaMu's lending operations were rife with fraud, including fabricated loan documents. It concluded that management failed to stem the deception despite internal probes.
The bank's pay system of rewarding loan officers and sales executives for their volume of loans closed ratcheted up the pressure, the investigators found.
Sen. Carl Levin, D-Mich., the panel's chairman, has said it will decide after its hearings this week whether to make a formal referral to the Justice Department for possible criminal prosecution. Justice, the FBI and the Securities and Exchange Commission opened investigations into Washington Mutual soon after its collapse.
The Senate subcommittee is known for conducting hard-hitting investigations by bipartisan staff and has sometimes made such referrals to federal prosecutors. The former WaMu executives appeared before Congress for the first time since the bank's collapse.
Killinger deflected the criticism and laid blame on the government. He argued that even before the crisis struck with force, the government treated Seattle-based Washington Mutual unfairly. He noted it was excluded from a list of large financial firms whose stock couldn't be sold short under a temporary government ban in July 2008. In short-selling, traders bet a stock price will drop and use borrowed shares to profit from any decline.
"For those that were part of the inner circle and were 'too clubby to fail,' the benefits were obvious," Killinger said. "For those outside of the club, the penalty was severe."
Levin came armed with e-mail correspondence among senior executives at the bank showing anxiety over elevated rates of delinquency and default in the high-risk mortgage loans WaMu had made. The exchanges show the executives wanted to urgently sell the loans packaged as securities to Wall Street, Levin said.
Two former WaMu chief risk officers said they tried to curb risky lending practices by the bank. But they said they met resistance from top management when they brought their concerns to them.
As the housing bust deepened in late 2007 and early 2008, "I was increasingly excluded from senior executive meetings and meetings with financial advisers when the bank's response to the growing crisis was being discussed," Ronald Cathcart, who helped oversee risk until April 2008, testified at the hearing. By January 2008 he was "fully isolated" and was fired by Killinger a few months later, Cathcart said.
The other risk officer, James Vanasek, testified that he tried to limit loans to those who were unlikely to be able to repay and the number of loans made without verifying borrowers' income. But his efforts fell flat "without solid executive management support," Vanasek said.
He said the examiner on the ground at the bank from the U.S. Office of Thrift Supervision, Lawrence Carter, "did an excellent job" of raising issues of credit risk. But, Vanasek added, he was baffled why Carter's superiors at the Treasury Department agency "didn't take a tougher tone with the bank."
"There seemed to be a tolerance there or political influence," he said.
WaMu's release of toxic mortgage securities into the financial bloodstream contributed to the near-collapse of the system in the fall of 2008, Levin and other senators contended. Levin pressed Killinger and the other former executives on when they became aware of loan fraud at the bank and why they failed to act.
"You should have been disturbed," he told Killinger. "Instead you want to wrap it in hypotheticals."
At one point, Killinger did concede some blame. "As CEO, I accept responsibility for our performance and am deeply saddened by what happened."
Fueled by the housing boom, Washington Mutual's sales to investors of subprime mortgage securities leapt from $2.5 billion in 2000 to $29 billion in 2006. The 119-year-old thrift, with $307 billion in assets, was sold for $1.9 billion to JPMorgan Chase & Co. in a deal brokered by the Federal Deposit Insurance Corp.
Killinger said it was "unfair" that Washington Mutual didn't get the benefits of government actions that helped other financial institutions in the days of the crisis in the fall of 2008. He was referring to steps such as a doubling of the limit on deposit insurance to $250,000 and new federal guarantees for bank debt.
Between 2003 and 2007 under his tenure, WaMu cut in half its staff in the home loans division and sold 30 percent of its portfolio of loans, Killinger testified.
WaMu's pay system rewarded loan officers for the volume of loans they closed on. Extra bonuses even went to loan officers who overcharged borrowers on their loans or levied stiff penalties for prepayment, according to the report of the Senate panel's investigation.
"Washington Mutual engaged in lending practices that created a mortgage time bomb," Levin said. "Because volume and speed were king, loan quality fell by the wayside."
WaMu was one of the biggest makers of so-called "option ARM" mortgages. They allowed borrowers to make payments so low that loan debt actually increased every month.
In some cases, sales associates in WaMu offices in California fabricated loan documents, cutting and pasting false names on borrowers' bank statements, the panel found. The company's own probe in 2005, three years before the bank collapsed, found that two top producing offices — in Downey and Montebello, Calif. — had levels of fraud exceeding 58 percent and 83 percent of the loans. Employees violated the bank's policies on verifying borrowers' qualifications and reviewing loans.
Washington Mutual was criticized over the years by its internal auditors and federal regulators for sloppy lending that resulted in high default rates, according to the report. Violations were so serious that in 2007, Washington Mutual closed its affiliate Long Beach Mortgage Co. as a separate entity and took over its subprime lending operations.
Read Source Here
Friday, April 9, 2010
Home Loan Assistance
SmartMoney Deputy Editor, Matthew Heimer tells us about the Home Affordable Modification Program (HAMP) implemented by the Obama administration March 26. The program is intended to help people lower their mortgage payments and stay in their homes.
Saturday, March 6, 2010
Wednesday, February 24, 2010
Short Sale update
Homeowners struggling to sell their homes in a short sale are getting some relief, thanks to the federal government's Home Affordable Foreclosure Alternatives, or HAFA, program.
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Tom Merton | OJO Images | Getty Images |
Up to now, many short sales -- in which the lender accepts a sale of the property for less than the full amount owed -- have taken months to complete. Sometimes, the complex and lengthy process has failed, resulting in foreclosure.
HAFA establishes streamlined short sale rules and incentivizes borrowers and lenders to work together to avoid foreclosure. The rules -- in effect between April 5, 2010, and Dec. 31, 2012 -- also are intended to speed up the short sale process.
"The streamlined short sales process will definitely help homeowners," says David Liniger, Re/Max International chairman and co-founder.
Prior to HAFA, homeowners often listed their home for sale without an idea of what the lender would accept.
"A lot of sellers and their Realtors have not been able to sort out the problems with short sales and have given up on the process because, even after sending in the correct paperwork, they have sometimes waited three or four months for their lender to respond," Liniger says.
Under HAFA, borrowers receive preapproved short sale terms from the lender prior to putting the home on the market.
Lisa Matykiewicz, a Realtor and Certified Distressed Property Expert in Gilbert, Ariz., says the updated short sale rules establish an easy-to-understand process with predefined steps that "make it easier for everyone to understand."
Eligibility requirementsThe HAFA guidelines apply to lenders who voluntarily participate in the HAMP program. The Department of Housing and Urban Development says more than 100 servicers have signed up to participate in HAMP, covering more than 89 percent of mortgage debt outstanding in the country.
To be eligible for HAFA, homeowners must first apply for a loan modification through the Home Affordable Modification Program, or HAMP. Owners who do not qualify for a loan modification or miss payments during the initial loan modification period qualify for HAFA.
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Other HAFA requirements include:Property is principal residence.Mortgage originated before Jan. 1, 2009.Mortgage is owned or guaranteed by Fannie Mae or Freddie Mac. Borrower is delinquent or default is foreseeable. Homeowner demonstrates hardship.Borrower's total monthly housing payment exceeds 31 percent of gross income.Unpaid principal does not exceed $729,750.
According to HAFA rules, lenders now must offer a short sale in writing to the borrower within 30 days if the borrower does not qualify for or complete a loan modification. Borrowers then must respond within 14 days to the lender's short sale agreement.
"I think it's great that the lenders in this program have to offer a short sale before going to foreclosure," Matykiewicz says. When a purchase offer is made, borrowers must submit the sales contract to the lender within three days, along with the buyers' mortgage preapproval and the status of negotiations with other lien holders on the seller's property. Finally, lenders must approve or deny the contract within 10 days. HAFA rules also state that lenders must release borrowers from the obligation to repay the difference between the sales price and the loan amount. No deficiency judgments are allowed for a first or second loan. "Second trust lien holders are often owed five or 10 times that $3,000 payment," says Liniger. "But if the property goes to foreclosure, the second trust holder is not likely to get any money at all. This at least guarantees they get something." Other HAFA financial incentives include $1,000 to loan servicers to cover administrative fees, up to $1,000 for mortgage investors who agree to share short sale proceeds with second lien holders and $1,500 to the homeowners for relocation. "The moving expense allocation acts as an incentive for them to stay in the property until the short sale goes through," says Liniger. "Owner-occupied properties are usually in better condition than vacant homes."Other incentives
In the past, short sales were especially difficult for homeowners with more than one loan on their home, since the home sale typically repaid only the first mortgage. HAFA's financial incentives include a payment of up to $3,000 for second mortgage holders.
Whose to blame?
Is The Government Facilitating The Next Housing Bubble?
Moses Kim from Expected Returns discusses the government intervention in the housing market which could be facilitating a new housing bubble. The artificially low interest rates and tax credits may be artificially inflating homes above what they would be in a purely-free market. See the following post from Expected Returns.
The ongoing economic crisis has brought about massive government intervention in the free markets- intervention which, if history is any guide, will cause more harm than good.
There is a prevailing view that the housing bubble has popped for good, and that clearer skies lie ahead. The thought that housing can once again reach bubble valuations after such a steep decline seems laughable. However, bubbles are formed on the foundation of low interest rates and excessive credit, which promotes an unrealistic illusion of prosperity. These are the conditions the government is currently actively supporting.
Government support of the housing market, if left uncontained, will eventually lead to bubble-like conditions. From Marketwatch, Mortgage Bubble Warning:
The Inevitable Hangover
I sense we are very close to a key inflection point in our economy. Sentiment will likely nosedive and hopes of a quick recovery will disappear. Keep an eye on housing, bond rates, gold and the dollar.
The ongoing economic crisis has brought about massive government intervention in the free markets- intervention which, if history is any guide, will cause more harm than good.
There is a prevailing view that the housing bubble has popped for good, and that clearer skies lie ahead. The thought that housing can once again reach bubble valuations after such a steep decline seems laughable. However, bubbles are formed on the foundation of low interest rates and excessive credit, which promotes an unrealistic illusion of prosperity. These are the conditions the government is currently actively supporting.
Government support of the housing market, if left uncontained, will eventually lead to bubble-like conditions. From Marketwatch, Mortgage Bubble Warning:
The government's $700 billion bank bailout bill has met its goal of helping bring the financial markets back from the brink, but has so far failed to increase lending from the banks who received the taxpayer assistance, a key government overseer reported Sunday in a generally critical review of the program.Bubbles aren't necessarily characterized by prices way above historical norms, but merely valuations that are significantly above what they would be in a purely free-market system. Without the direct purchase of MBS debt, which effectively lowers interest rates, many more homeowners would be out of a home. As is, the government is simply delaying the inevitable readjustment in home prices that will come as a result of the lack of employment.
The report, which was authored by TARP's Special Inspector General, Neil Barofsky, also warned that the Obama administration's and the Federal Reserve's policies to support the mortgage market could in fact be creating another dangerous housing bubble.
"Stated another way, even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car," said the report.
The report charges that high prices for homes between 2004 and 2007 were the result of unrealistic expectations for house values, low interest rates, in-accurate high ratings for mortgage securities, lax standards by lenders for mortgages.I would argue that many of the same conditions that led to the housing bubble are currently present, albeit on a smaller scale. It is quite amazing that we are not seeing a more powerful snap back rally in home prices given interest rates at 0%, sub-5% mortgage rates, and tax incentives.
It argues that that the Federal Reserve could be creating another housing bubble with its response to the crisis by keeping short-term and long-term interest rates low, setting up programs to support the mortgage market that also keep rates low, as well as a first-time homebuyer tax credit and a program near completion to purchase $1.25 trillion in mortgage-backed securities.
"Because increasing access to credit increases the pool of potential home buyers, increasing access to credit boosts home prices," the report wrote. "The Federal Reserve can thus boost home prices by either lowering general interest rates or purchasing mortgages and mortgage-backed securities."
"Both actions, which the Federal Reserve is pursuing, have the effect of lowering interest rates, which increases demand by permitting borrowers to afford a higher home price on a given income. Similarly, the administration is boosting home prices by encouraging bank lending and by instituting purchase incentives such as the First-Time Homebuyer Tax Credit. All of these actions increase the demand for homes, which increases home prices," said the report.
The Inevitable Hangover
However, critics argue that long-term interest rates could increase in response to the Fed's decision to wrap up its $1.25 trillion mortgage-backed securities purchase program by March 31, along with other federal actions, could result in higher interest rates at a time where many regions continue to experience a depressed housing market and record foreclosures.The coming double-dip in our economy will likely be led by a resumed decline in national home prices. Home prices still have a ways to fall, as price to rent ratios and price to income ratios have not adjusted to a point where one would be comfortable calling a bottom in housing.
I sense we are very close to a key inflection point in our economy. Sentiment will likely nosedive and hopes of a quick recovery will disappear. Keep an eye on housing, bond rates, gold and the dollar.
Bank regulators didn't have the systems in place to prevent bubbles, they didn't see the bubble developing until it was too late to prevent major damage, and the systems needed to limit the damage were inadequate, e.g. there were insufficient limits on leverage and other protections in the system. By analogy, the Fire Department's inspections were inadequate and there was much more fire risk than anyone thought, they didn't notice the fire until it was already out of control (even though Dean Baker and others had tried to alert them), when they did notice and respond they were initially confused and didn't have the tools they needed to fight the fire or prevent it from spreading, and they hadn't thought to require protections such as automatic sprinkler systems that might have limited the damage.
What fueled the housing bubble? There were three main sources of the liquidity that inflated the bubble. First, the Fed's (and other central banks') low interest policy added cash to the financial system, second, the high savings in Asia, particularly China, along with cash accumulations within oil producing nations, and third, some of the cash was generated endogenously within the system (e.g. by increasing leverage or by diverting other investments into housing and mortgage markets).
Once the fuel was present, something had to allow the bubble to inflate and then do widespread damage, and that's where the regulatory failure comes in. But I don't think the regulatory failure matters much without a large amount of liquidity within the system, and I don't think the large amount of cash in the system is problematic without the regulatory failures.
I've been making this argument for some time, so is there any support for the idea that bubbles are fueled by excessive liquidity? In the video embedded below of Nobel prize winning economist Vernon Smith that posted today at Big Think (http://bigthink.com/ "Dissecting the Bubbles"), he notes that in the experiments he has conducted that reproduce bubbles in the lab, the existence and size of bubbles depends critically upon the amount of "cash slopping around in the system."
In the video, he also notes that if you ask a different question, why was this bubble so devastating as compared to the dot.com bubble even though the initial losses were smaller -- $10 trillion in 2001 compared to $3 trillion in the housing bubble collapse -- you get a different answer: a failure of regulation. Here, he points to a failure to impose sufficient margin requirements as the key difference between the two episodes (I agree that leverage should be limited through margin requirements, and this would have helped to contain the damage, but I would have focused on the markets for complex financial assets rather than down payments on homes).
So I think the bubble itself was driven by "cash slopping around in the system" that originated from several sources, the Fed being one, and the regulatory failures (such as failing to provide sufficient transparency so that the smoke from the fire could be spotted in time, and failing to limit leverage) allowed the fire to spread rapidly and do major damage.
The Obama Plan
If only the President’s foreclosure-prevention plan worked as well as “cash for clunkers”. But it hasn’t. When the Administration announced the Making Homes Affordable plan in February of 2009, officials said they hoped it would help 4 million distressed homeowners to stay in their homes. As of this writing (8/2/09), the Administration has acknowledged that there are only 200,000 trial loan modifications under way.
Clearly, lenders have been reluctant to modify loans. (Moreover, there are good reasons for their reluctance according to a recent study by the Boston Federal Reserve.) Also, many borrowers have turned out to be ineligible for the programs or – because they are so far ‘under water’ – uninterested. Whatever the cause, the result is the same: a distressed borrower typically needs to choose between (1) a short sale (where the lender agrees to take less than the amount owed) in which, among other things, a commission (paid by the lender) is generated. (2) a foreclosure, or (3) a deed in lieu of foreclosure (where the borrower ‘gives back’ the property to the lender without a foreclosure proceeding). Which is better for the borrower?
Many real estate agents will say and advertise that a short sale is clearly preferable. In support of this view, two claims are usually asserted. (1) A short sale is less damaging to the borrower’s credit than a foreclosure. (2) A short sale provides the borrower with a shorter ‘waiting period’ until the borrower will be able to purchase a home again.
It is important to note that these are two different claims. For example, in a period of time a borrower could become eligible for a purchase loan under Fannie Mae/Freddie Mac guidelines, but he or she might still not have sufficient credit or income to qualify for the loan.
While many say that a short sale is less damaging to one’s credit than is a foreclosure, documenting that claim is another story. This writer has looked hard, but can’t find any verification from Fair Issac (the developer of the FICO scoring system) or any of the major credit providers. That is probably no surprise, because their systems are proprietary. Nonetheless, one wonders what might be the source of the claim.
On the other hand, people who apparently should know deny that there is any difference. Greta Guest of the Free Press (Freep.com) quotes John Ulzheimer, president of consumer education for Atlanta-based Credit.com. Ulzheimer spent seven years at Fair Issac. “The credit bureau sees those all as equal,” Ulzheimer said. “They are all essentially in the eyes of FICO a major delinquency.” Elizabeth Razzi wrote in the Washington Post (July 20, 2008), “A foreclosure and short sale inflict equal damage to your FICO score, according to Fair Issac…” though she provides no specific citation.
Moving on from the credit score issue, there is the question of being again eligible to buy. More precisely, it is a question of when, in the future, the defaulting borrower could get a loan that would be purchased by Fannie Mae or Freddie Mac. The issue is dealt with in Fannie Mae Announcement 08-16, released June 25, 2008.
When it comes to foreclosures and deeds in lieu of foreclosure, the policy distinguishes between events that were precipitated by extenuating circumstances (e.g. job loss, major illness) and those that were not (e.g. financial mismanagement). If you’ve had a foreclosure without extenuating circumstances, you can’t purchase with a Fannie Mae – backed loan for five years. However, if there were extenuating circumstances, it drops to three years. Suppose you chose the deed in lieu of foreclosure option. If there were no extenuating circumstances, the period would be four years, but with such circumstances, it drops to two. Fannie Mae doesn’t draw the distinction when it comes to short sales: the period is two years, the same as doing a deed in lieu with extenuating circumstances.
May 15, 2009, the Treasury Department issued an update to the Making Home Affordable plan. Among other things, it provides for financial incentives (e.g. a $1,500 moving allowance) to distressed borrowers who meet the general eligibility requirements for a loan modification and who will engage in an approved short sale or who will give a deed in lieu of foreclosure.
Distressed and underwater borrowers face a minefield of options for resolving their problems. Not the least of their problems is the vast amount of misinformation floating around. They need to step very carefully.
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