The new Housing Rescue Plan legislation has a component that I believe will be particularly damaging to real estate investors. It appears that under the new law, many home owners facing foreclosure will have the option to negotiate a short sale with their current lender, and the government (through Fannie Mae, Freddie Mac and FHA) will offer financing for the property at the negotiated property value.
This has seriously negative ramifications for real estate investors in at least two ways:
- It appears investors could essentially be “cut out” of short sales, since the primary value that investors bring to a short sale is the ability to fund the transaction. The government will now provide funding for short sales directly to home owners, leaving real estate investors in a position of questionable value
- Other pre-foreclosure types of transactions are likely to suffer as well (such as Subject-To, etc.) since the government is making it incredibly simple to avoid foreclosure, even in the vast number of cases where foreclosure is the economically and legally correct result
It doesn’t end there. I’m still researching this part due to conflicting reports, but it appears that home owners who use government funds to finance the short sale of their own homes will also be required to split some of the “profit” from the appreciation of their home with the government.
I’ve got a problem with this on two levels:
- This means the government will become the primary short sale investor, cutting out legitimate investors like you and me. Your opportunities just decreased because the government refuses to allow the free market to function as it should.
- The government will instantly have a vast legal interest in real estate all over this country. While the government won’t be the owner of these properties, it will be one short step away from ownership - and frankly, the more private property the government controls, the less freedom we all have.
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23 Comments So Far»
But how Many houses can the government really fund?
At some point this will not work due to funding and the fact that
the ramp up to implement this will take too long
Is it likely that lenders will put a hold on their current short sales until they get this figured out?
Or should those of us who are heavily working short sales (in my case as a realtor)stay the course?
I wouldn’t make any changes yet - but be prepared to adjust in the very near future. — Bryan Ellis
I understand there are restrictions and some qualification requirements in the law. It may not be as easy as, ‘you apply and you get the help.’
And I agree with Linda, ‘how many houses can the goverment really fund ?’ There would be a cut off point for the funding.
I also feel that the new law would encourage irresponsible behaviour of the borrowers which could lead them into more deep waters.
Bryan, I can not agree with you before the details of the new law are clear.
Raj.
Fair enough, Raj - thanks for your comments!
It is really sad that the government waits until the problem is close to being over before they step in. It seems as they want to be the hero of the hour for a small minority, and not really do anything.
The federal government can fund deals as fast as Bernanke can print the money. That’s hyper inflation.
There’s a nonsense saying about “The Law Of Unintended Consequences” applying to legislation. They pass a law trying to solve a problem and something else completely unexpected happens. It’s nonsense, because anybody with a brain can figure out what will happen. The infinite stupidity of congress trying to buy our votes with our own money is absolutely shocking. When the mortgage crisis was in full collapse, what was congress doing? They were talking about steroids and baseball. VOTE AGAINST THE INCUMBENT.
As of last week, Fox Business News says 98% of mortgages are current. Only 2% are late. A minuscule fraction of the late mortgages are declared in default.
The level of intelligence that got us into this mess is inadequate to get us out of this mess.
You pointed out some intersting points to ponder. However you forgot how difficult it is for even us experienced real estate investiors to negotiate a short sale. Do you really think your average homeowner is going to be able to negotiate a short sale with their mortgage holder????
It’s my understanding that none of this goes into effect until October, giving investors a couple of months before any changes. Is that correct?
Do you have any information on the part of the legislation allowing cities to buy properties in foreclosure? How will cities deal with rehabbing and reselling these homes? Will this be a new opportunity for us as investors? I heard one mention that grants will be part of the program, but have heard no details. ???
Joan - that’s very good thinking on your part, and frankly I failed to mention this despite my intention to the contrary. I do not know the answer yet but will be on the lookout for it. — Bryan Ellis
time to write Washington (Leaders?) I already have.
Just one more example of the government having no idea what they are doing and not really caring as long as they stay in office.
If people think there is a mess in the housing market just wait until this goes into effect. It will make what has happened so far look like a joy ride.
There is a good chance mortgage money will dry up almost completely.
Chris
I wouldn’t take Fox’s numbers as accurate. I don’t have the number but I think 2% is way too low!! Just my opinion…
That’s an interesting statement. Upon what is your opinion based? — Bryan Ellis
George Orwell must be laughing himself silly. Hate to say he told us so. And the power brokers in government know full well the ramifications of this legislation.This may have to be challenged with a test case ,and with the Supreme Court being made up of what it is, don’t think victory is a sure thing.
As of the end of March 2008, 1.9% of all mortgages were i default, but I’m sure that has increased .
http://www.mortgagebankers.org/NewsandMedia/PressCenter/50974.htm
Oops…make that March 2007, over a year ago!
This entire piece of legislation is nothing more than political posturing. As to some of the points brought up here:
1) Funding - the government isn’t funding these deals directly. They are only “backing” the deals with FHA financing. When FHA loans are issued they are not funded directly by Uncle Sam, instead they are funded by regular companies like WaMu and CitiMortgage but they are BACKED by the Government. If the property goes down in foreclosure, the bank gives the home to the Department of Housing and Urban Development and they get a check to cover their loss. The home then becomes a “HUD Home” and is placed on the market by HUD. There isn’t any realistic limit to the number of loans that COULD possibly be issued, just limits as to how many will be in the real world.
That’s absolutely correct. One of the problems here is “the check” that you mentioned above, the one provided to private lenders from the government. This is where the sting exists for normal citizens and taxpayers, and is part of what makes this legislation so bad for properties that go south, as so many have of late. — Bryan Ellis
2) The feds have cocked up some crazy scheme here tying Fannie/Freddie to any losses that HUD takes when the loans go down. The three entities are all in on this one. There IS an element of splitting profits on the upside. This is in an attempt to curb the inevitable losses that will be incurred because of the simple fact that some people are just going to be headed fore foreclosure AFTER they get their short refinance anyway, because that’s the kind of people they are.
Yes - but the problem isn’t just the “type” of person you mention above, it’s that the apparent purpose of this legislation is to lessen the financial sting experienced by those who are now losing their homes. That’s simply not wise. — Bryan Ellis
3) As to short sale investors being cut out, this thinking is in poor form in my mind. Short Sale investors justify their existence in most cases with the logic that even though the bank takes a huge hit it would be “less damaging than with a foreclosure”. The homeowner’s only benefit in most cases is avoiding a FC on their credit report. Most don’t want to move. They’d rather stay, but that’s not been an option…until now. If this legislation had a fighting chance of having real impact on the state of affairs (it doesn’t in my mind) then the lenders would lose less and the homeowners would stay in their homes. The only people to lose out would be the investors, but I thought we were looking to help the seller as much as we could…right?
I’m sorry, but your premise is fully incorrect. You think that it helps the homeowner to be allowed to stay in their home even though they are clearly unable to meet their obligations. I think it helps the homeowner to learn to live within their means and not rule their major financial decisions purely on emotion. You think that the objective should be to keep as many people in the homes they can’t afford as possible. I think the objective should be to allow financially strong people to take the place of financially weak people, thereby give motivation to others to behave responsibly. Capitalism is sometimes a bitter pill, but unlike socialism, it always results in a stronger economy. — Bryan Ellis
4) This legislation has very little chance of helping anyone. It’s all a smoke screen designed to give Americans the impression that “everything possible is being done to help people facing foreclosure” but that’s the extent of it. The thing people are not seeing here, the magic ingredient, is that the new financing will be extended IF THE CURRENT LENDER DISCOUNTS THE ORIGINAL AMOUNT OWED. This is known as a short refinance, and there are VERY few people negotiating these for homeowners.
That’s true. But I’ve got to tell you, Brian: If I was a mortgage broker, I’d spend all of my time figuring out how to negotiate short refi’s and make that my unique selling proposition. In fact, I’m willing to bet that a whole lot of mortgage brokers will do exactly that. — Bryan Ellis
Thus an entire army of mortgage brokers and loan officers will have a new weapon come October 1st…but it will be a gun without any bullets. Most mortgage brokers have no clue as to how the short sale (or short refi) processes works. Having the power to overlook missed mortgage payments doesn’t help if you don’t know how to negotiate down the current balance.
Thanks for your comments. I think you’re entirely wrong, but I respect the stand you’ve taken. Please feel free to comment in the future. — Bryan Ellis
Bryan,
While I agree with you assessment that big brother should stay out of this and let the markets function there are two points that I must believe merit consideration that you did not mention.
1. The bill “creates a new program at FHA that will help at least 400,000 families save their homes from foreclosure by providing for new FHA loans after lenders take deep discounts”.
400,000 families is stated as “at least” which in reality means it could potentially include all families. This is not likely to happen not just because of the expense and the political fallout but also . .
2. “Homeowners must certify, under penalty of law, that they have not intentionally defaulted on their loan to qualify for the program and must have a mortgage debt to income ratio greater than 31 percent as of March 1, 2008. Lenders must document and verify borrowers’ income with the IRS.”
Notice that 31 percent only includes mortgage debt. It does not account for the myriad other reasons, medical divorce credit card debt etc., that contribute to default. There will still be plenty of homeowners who will not qualify for this bail out. Nonetheless, I do resent the government going into competition with me and once again flipping off laissez faire
The full text of the quotes above can be found at http://www.asiaing.com/summary-of-the-housing-and-economic-recovery-act-of-2008.html
I also have a serious problem with the provision that allows FHA to fund a short sale for the owner then share the appreciation with them. As an investor who does short sales I am not allowed to give or share anything with the owner.
Ken
I agree with Brian there is still a qualification most people in foreclosure have to go through it is not a sure bet that they will qualify for this and remember what about the next wave of homeowner that will be coming, personally I do short sales and the some people cannot afford to be homeowners we have discussed this at the office many times and it is a band-aid remedy at most. Well there still be short sale to be made by the investors of course there will, in my view most lenders will discount the loan that far down but we will see.
Brian has made the most good points in “known” facts about this latest government screw-up and I applaud him.
My biggest concern is the area of unintended consequences. My quess, and I know it is just a quess right now, is we will have more forclosures. My reasoning is many people will misinform themselves that they can not be foreclosed on because of this bail out. They misinformed themselves on the orignal loans, in many cases, and I see this as a way they will continue to do really stupid things.
I also think this will harm the short sale market because of bank personel thinking they are going to do better with the government’s plan instead of a qualified short sale offer.
I know this is all doom and gloom but I have had lots of experience with the infinite wisdom of big government fixing a problem and it hasn’t bred much in the way of good feelings.
Chris
I wouldn’t be too worried. The reality is that things WILL be a mess for awhile, but homeowner’s can negotiate their own short sales now. They just don’t have the knowledge and/or the time to do it - which is where we come in. The government will do the same thing they did in the S&L crisis when they tried to bail everyone out of that - they will eventually bring someone else in who also won’t be able to resolve and then after an even larger mess is created things will be right back where we started.
Chris is right about homeowners going off into la-la land thinking that the government foreclosure fairy is coming to save them.
I had a prospect call in two days ago that is down 5 payments and wanting to jump on board using this new program to save himself.
He didn’t seem to read the part about the new provisions going into effect after October 1st, and didn’t think about the fact that he would be past the sheriff sale and in redemption by that time…well beyond any help this government “non-bailout” can lend.
That’s right - there will always be people who assume that a government program applies to them while it actually doesn’t. That’s part of the danger - this type of legislation makes it easier for more and more people to make these types of assumptions, and to base their current and future actions upon those flawed assumptions. — Bryan Ellis
Even if it was effective TODAY…if there were not changes to underwriting guidelines (i.e. no more than 3 missed payments in last 12 mos, min 580 credit score, missed payments ONLY allowed after an adjustment) then he would be beyond help anyway.
People are going to get the wrong message and start placing their hope that this is their answer when it’s not. What’s worse, is that they’ll have “emotionally” settled with themselves that their problem is going to go away…that it’s good as fixed and that they can finally breathe a sigh of relief, let the stress off for two to three WEEKS before calling. After all, the program is there for them so why act now?
There are going to be more foreclosures than ever on the horizon (just run a YouTube search for “Alt-A Crisis”) and you can bet your last dollar that short sales will outnumber short refinance workouts at a ratio of 10 or 20 to 1.
I think you’ve made a good case for why short sales are going to be more difficult to get done. At present, many short sales happen because some home owners have the foresight to get help early enough before time has run out. But this type of legislation provides a false sense of security to the uninformed public, and this will likely cause many of them to wait until the last second (and too late for most investors to intervene) because they expect the government will be their “backstop”. — Bryan Ellis
While some loan officers will step up to the plate, most will fall by the wayside when they discover the amount of work and patience required to negotiate these things down. LO’s, more than anyone, tend to choose the path of least resistance.
They also operate in a weird way where pricing is concerned. They seem to pride themselves on how little they charge their clients. Talk to them, you’ll see. The majority of them talk about how they only charge their clients 1 point. Or NO points and get it all paid on the back. Anyone charging more is a scumbag in their mind that is ripping people off.
They’ll have to get around that mental roadblock if they want to survive in the short refi business. The road is too long and rocky with ALL of your paydays often put off for a month or so at a time while the process works through. When writing off 30k, 50k, or even $100k in debt or more, there is a justifiction for charging max allowable fees on the loan for your service PLUS an additional and separate charge for the negotiation service itself.
Heck, you’re selling money at a discount!
As to the concept concept that we should let foreclosures roll through and let the homeowners that made bad decisions feel the sting, I understand the concept but I think that’s it’s more idealistic than realistic.
After all, I find that more people than not, act rather like sheep where many decisions are concerned. The fat-cat bankers and international investment corporations laid a trap for these people because of their greed and desire to lend more and more money on homes. The people took the bait and here we are.
Brian, you as much as anyone else have distinguished yourself with insightful commentary and analysis, for which I applaud you. But is it reasonable to blame these vague “fat cat bankers and international investment corporations” for “laying a trap” for which the “bait” was taken? You don’t honestly think this is the result of a conspiracy as you’ve indicated above, do you? Are you suggesting that no one should have responsibility? If there should be responsibility on the part of individual home owners, to whom should that responsibility be assigned? — Bryan Ellis
We can talk about fiscal responsibility and taking responsibility for the decisions you make, but we’re forgetting about the collateral damage.
While we have a record number of foreclosures right now, it’s still a SMALL percentage of the entire housing stock as a whole. Only 1 in 400 homes are in some state of foreclosure and it is this small number that is causing wide-spread problems for EVERYONE.
What about the people that made wise financial decisions and followed the rules but can’t sell their home because all the foreclosures in the area are beating prices down by 50% in 24 months with more on the horizon. These people didn’t do anything wrong but are locked in their homes for the next 5-10 years because of the actions of the few and the banks that instigated it are blasting the values of EVERYONE, not just those with poor judgement.
This too is an argument with a false premise. Look at the news today. The worst that the media can say is that real estate values have fallen back to the levels where they were FOUR YEARS AGO. This is hardly a meltdown, and the “wide-spread problems for EVERYONE” that you point out simply don’t exist. It may not be PLEASANT that people can’t sell their property within a few weeks like they could in the last 3-4 years, but to think that’s indicative of a fundamental problem is foolhardy. The illiquidity of the real estate market is part of the risk that a property owner takes when they make a purchase. And it may be UNPLEASANT that the mortgage market is now requiring larger down payments and higher interest rates, but that too is a function of a healthy free economy. People who believe that the government owes them either the guarantee of a profit or protection from the risk of loss shouldn’t be involved in real estate in any way, because the government is not equipped nor legally empowered to do so. — Bryan Ellis
There will be plenty of short sales to go around…plenty of foreclosures too. Short Refinances and Aggressive Loan Modifications are better for the nation as a whole because they keep additional inventory off the market. The less inventory the better.
It continues to be unfathomable to me how anyone can say that it’s better for the nation for people who can’t make their house payments to stay in their homes. The beauty of high inventory - YES, I said the beauty of high inventory - is that prices get pushed lower presenting more opportunities for the financially strong and wise. And assets tend to grow more reliably when managed by those who are prepared for it. — Bryan Ellis
When the Alt-A wave starts to crash shortly we may find that values will drop far faster than even we can handle. You’ll have BPOs done and between the time you get it done and the time the deal is approved the values will have dropped so steeply that the end buyer’s appraisal can’t come in at the number you needed to flip it at and get your check for all your hard work. A cut appraisal will mandate a lower purchase price for the end buyer which will trim out your profit…probably all of it.
The values need to stop dropping. It’s not good for us in this business, it’s not good for the homeowners who made poor decisions, and it’s certainly not good for the homeowners that didn’t do anything wrong.
Let’s be clear about this: Falling values don’t effect the home owners who didn’t do anything wrong, because the vast, vast, vast majority of them aren’t trying to sell their properties. If you’re not trying to sell into this market, as most home owners are NOT, then there’s been zero effect. — Bryan Ellis
I personally wish that this bailout legislation had some teeth to it. Something has to stop the bleeding.
We’re on the same page about wishing for a stop to the bleeding. But all the indicators suggest that the free market is doing a good job of that itself, since a huge amount of the current declines can be attributed to 3-5 cities, and there’s even a very significant collection of local areas that have stopped declining and begun appreciating. Thanks for your comments - you’re clearly a very bright guy and I’ve enjoyed and respected your opinions. — Bryan Ellis
I, too, am concerned with unintended consequences. The unintended consequences of deregulation was the savings and loan debacle. The unintended consequences of quasi-regulation–which is what has been proposed–are unknown.
It’s an interesting idea that deregulation is the cause of the savings and loan debacle. I think I can point to more concrete causes than that, but in the interest of open mindedness, please enlighten us about your reasoning. — Bryan Ellis
Bryan I also look forward to getting your blog updates in my mail and I am always impressed with how you choose to blog about topics that affect us today (in real time).
I feel that this new law will only help to mess up the shortsale front for investors and also you have state officials creating stupid laws like the Maryland foreclosure laws that bars good minded investors from even attempting to help these homeowners. Also more states are copying the law and its only a matter of time before most states enact similar laws.
That said I think the way moving forward will be to transform ones shortsale business to a non performing note buying business because has the bank who is owned money a lot of these laws will not apply to you and also we will have more time on our hands to provide homeowners with real solutions much faster than loss mitigation staffs who have piles of homeowners to attend to and move at a snail pace.
I think moving forward becoming the bank is the way to go, I am looking forward to your opinion on my point.
Your points are exactly right: The government is behaving very poorly with respect to the new laws being passed that effectively limit the freedom of real estate investors. But your other point is the more important one: Innovation is the key. Every roadblock creates opportunity if we look closely enough. I enjoyed your comments - thanks! — Bryan Ellis
This is unfortunate to hear, as I am a young up and coming investor. At the same time, every organization in America has a lobbyist in Washington, even Realtors have one, but no one is out their lobbying for us!! That needs to change, someone needs to step up to the plate.
I think we have one called Nahri. I am yet to join and become a full member but I have been getting emails from them with updates of what they are doing on our behalf in Washington DC and also they send summarized updates of law changes in all states in the US that might affect our business.
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