Real Estate News and Commentary

September 22, 2010October 5, 2019

House Bill Proposes Prompt Short Sale Decisions: H.R. 6133 requires 45 day response

by Dan Krell © 2010

A recently published study by CoreLogic (“The Cost of Short Sales: CoreLogic Research Study”; August 2010) indicated the number of short sales tripled since 2008. The study also indicated that “short sales will continue to be a significant factor for the housing industry.” Additional telling data from CoreLogic’s second quarter Negative Equity Report (2010) indicates that 23% of all properties with a mortgage (approximately 11 million) are in a negative equity position (also referred to as under water or upside down).

For many, this news does not come as a surprise; which is why short sales have become the focus of a new bill introduced last week in the House of Representatives by Rep. Robert Andrews (D-NJ) and Rep. Thomas Rooney (R-FL). The “Prompt Decision for Qualification of Short Sale Act of 2010” was referred to the House Committee on Financial Services on September 15th and, although approximately five pages in length, could potentially impact the housing industry.

Representative Rooney stated, in a September 16th press release regarding the bill, that short sales in his state of Florida are rising, “but lenders haven’t always been able to keep pace”… “By requiring lenders to make decisions on short sales within 45 days, this legislation would speed transactions and help prevent homes from going into foreclosure.”…”This bill would spur growth in the housing market by helping sellers and buyers complete short sales quickly.”

Anyone familiar with a short sale knows that there is uncertainty as to the length of time the seller’s lender will respond to a short sale request; which prompts many buyers and real estate agents to shy away from them. Additionally, some buyers who take a chance on a short sale walk away because the transaction takes too long. These are just a few factors that contribute to failed short sales which add to the foreclosure roll.

The bill, also known as “H.R. 6133: To Require The Lender Or Servicer Of A Home Mortgage, Upon A Request By The Homeowner For A Short Sale, To Make A Prompt Decision Whether To Allow The Sale,” is intended to provide a timeline for the lender to provide a response to a short sale request. The basics of the bill states that the home seller’s lender has 45 days to provide an answer to a short sale request when the seller submits all lender required short sale information and a fully executed sales contract. The lender’s response could be an approval, a conditional approval, or a request for additional information. If the lender fails to respond to the request within 45 days, then the short sale request will be considered to have been approved.

Although the bill puts a necessary spotlight on one weakness of the housing market, the bill obviously falls short in a number of areas. Besides the limitations already specified within the bill, the bill fails to address the complexity of a short sale with multiple lenders as well as the possibility that lenders may “game the system” by issuing requests for additional information or provisional approvals by the 45th day then take several additional months to make a final decision.

Unfortunately, many bills do not make it out of Committee and the odds of passing this particular bill are slim. Ironically, we won’t know the outcome for several or more months.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of September 20, 2010. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell.

September 15, 2010October 5, 2019

Assumable mortgages and housing

The case to expand availability of assumable mortgages

by Dan Krell © 2010

When the financial markets went into crisis mode a couple of years ago, ideas were tossed around to help a housing market sliding into an abyss. One of the least compelling and unpopular, yet sensible proposals in the last two year to assist the housing market was increasing the availability of assumable mortgages. Because the appeal of assumable mortgages is somewhat of a long term plan and the severity of the crisis was deemed to require immediate and direct intervention, the assumable mortgage will have to wait for its day to come (again). That day may be arriving soon.

Besides the criticism about being an unfeasible short term solution to the housing market on the brink, some of the assumable mortgage proposals were unnecessarily complex and suggested immediate changes to existing mortgages and deeds of trusts; in fact some suggested immediate interest rate drops of existing mortgages to provide incentive to home buyers to purchase homes assuming those mortgages. Critics of assumable mortgages also claimed possible interference to the secondary mortgage markets proclaiming additional loss to the industry due to reduced mortgage originations.

If you’ve never heard of an assumable mortgage, it is a mortgage that allows someone to take over mortgage payments from a home seller as part of a home purchase transaction. Up until the late 1980’s many home mortgages were assumable; however of the mortgages originated today, only FHA and VA mortgage programs allow the homeowner’s loan to be assumed.

The features of an assumable mortgage that make it attractive to home buyers and sellers also make it disadvantageous. Besides allowing a home buyer purchase a home acquiring a mortgage with a lower interest rate than prevailing rates, which can make the mortgage payment more affordable; the home buyer undergoes a streamlined credit and income qualifying procedure; which reduces the overall stress of the mortgage process.

The benefits of an assumable mortgage for a home seller include the possibility of using the loan as a selling point to buyers looking to qualify at a lower interest rate with a streamlined mortgage process.

The downside is that the seller’s mortgage interest rate may be higher than market rates. Additionally, if the loan is significantly less than the purchase price the home buyer will most likely have to come up with a higher down payment. Other disadvantages may also include assuming the terms and conditions of the loan- including penalties and any prepayment conditions.

Assumable mortgages assisted lagging housing markets of the past, when sky rocketing interest rates and tight credit made it difficult to buy a home. Like past housing slumps, today’s housing market can also benefit from assumable mortgages. Besides reducing some lending pitfalls, today’s low interest rates could be assumed at a later time (when interest rates may be significantly higher). Although assuming someone else’s mortgage may not seem attractive today, it’s clear that historically low interest rates will not remain at this level much longer; increasingly difficult mortgage underwriting guidelines and higher interest rates will certainly make today’s mortgage attractive to future home buyers.

A simple solution to a probable enduring sluggish housing market is to expand the availability of assumable mortgages beyond FHA and VA so home buyers will have more options and incentive to purchase a home in years to come; in good economic times and bad.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of September 13, 2010. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell.

September 8, 2010October 5, 2019

The Short Refi program for underwater homeowners

by Dan Krell © 2010

Beginning September 7th, a FHA program to assist “under water” home owners will be available as part of the multi-faceted approach under the Making Home Affordable program (which provides home owners relief opportunities). Many home owners who owe more than the value of their homes have eagerly awaited the announcement of the official start of the FHA “short refinance” program that was originally unveiled on March 26th of this year by HUD and the Department of the Treasury.

Somewhat akin to a short sale, the short refinance is a mortgage refinance when the home’s value is less than the existing mortgage principal balance. Much like the short sale, when the mortgage lender writes down the principal balance to allow the sale to occur, the short refinance depends on the existing mortgage lender to write down the existing loan balance to allow the refinance to be approved.

Although the home owner must qualify for a standard FHA refinance mortgage, other eligibility requirements for the short refinance program include (but are not limited to): the home owner must be in a negative equity position, must be current on the existing mortgage, and occupy the subject property as a primary residence; the existing loan must not be a FHA mortgage; the existing lien holder must write off at least 10% of the existing mortgage principal balance; and any subordinate loans that are not eliminated must subordinate to the new mortgage and cannot exceed a combined loan to value ratio of 115% (although the new FHA mortgage cannot exceed a loan to value ratio of 97.75%).

Home owners who obtained a loan modification may be eligible for this FHA refinance. If the loan modification was obtained through HAMP (Home Affordable Mortgage Program), the loan may be approved after the loan modification is made. If the loan modification is a non-HAMP loan, then the short refinance may be eligible after the home owner has made at least three on-time payments and the loan is current.

Since loss coverage for these loans will originate from funds made available from the Emergency Economic Stabilization Act of 2008 (EESA), the FHA short refinance mortgage program must comply with The Dodd-Frank Wall Street Reform and Consumer Protection Act (which became law July 21, 2010). Home owners applying for this refinance program must certify that they are eligible for the program and have not been convicted in the last ten years of (in connection with a mortgage or real estate transaction) felony, larceny, theft, fraud, forgery, money laundering, and/or tax evasion (SEC. 1481 (d)).

HUD is advising that home owners applying for this program should be counseled about the affects of the program on their credit history and score as well as consulting their tax advisors regarding the cancellation of debt and possible tax consequences.

Although HUD’s analysis predicts that between 500,000 and 1,500,000 home owners will take advantage of the program, critics have stated their doubts and point to the lackluster performance and high rates of recidivism from similar MHA and HAMP programs. Additional criticism on the short refinance program is that although lender involvement is voluntary, success of the program relies on the existing lenders’ participation.

Additional information on the FHA short refinance program can be obtained from the Making Home Affordable program (www.makinghomeaffordable.gov; 888-995-HOPE), as well as participating FHA lenders.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of September 6, 2010. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell.

September 2, 2010October 5, 2019

Home renovations reservations

by Dan Krell © 2010

If you’re like the typical home buyer, you’d prefer to purchase a new home. However, most new homes are too big and too expensive. Buying an older home that has been renovated or updated may be a viable alternative. However, renovations and updates can vary in scale and quality; having a sharp eye and a thorough home inspection can assist you in revealing workmanship issues.

If you are considering purchasing a home that has been renovated or updated, the first question you should ask the seller is, “who completed the work?” Additionally, you should ask if there are warranties and if the warranties are transferrable. Many home renovations are completed by reputable, licensed contractors or builders who are familiar with the permitting process as well as building code requirements and sometimes offer a limited warranty.

However, the quality of the renovation/update is often reduced by some contractors who cut corners to save time and money; component installation is frequently the culprit of these problems and may be due to installer inexperience and/or carelessness. Poor workmanship can make the most expensive material look cheap. All identified issues should be pointed out to the seller to be repaired or replaced.

Although you should hire a licensed home inspector to conduct a thorough home inspection, you can sometimes identify quality issues in a renovated/updated home without much effort. The most common workmanship problems noticed by laypeople in a renovated/updated home are in the kitchen, bathrooms, and flooring; identified quality issues may be an indication of other underlying problems.

When looking at a renovated/updated kitchen, check the cabinets and appliances. The cabinets should be securely fastened to the wall; loose or inappropriately secured cabinets indicate a potential problem that could cause the cabinets to come crashing down at a later time. Refrigerator doors should open freely and should not be obstructed by cabinets or walls. The stove should have an anti-tip device installed; this is a safety device that can prevent a hot stove from falling on a child or an unsuspecting adult. The dishwasher should not feel loose and should be secured to the counter; an unsecured dishwasher can “walk” while operating and have the potential to pull plumbing components apart.

If plumbing is not installed properly, leaks can develop and obviously create future problems. Toilets should be firmly secured to the floor; a loose toilet can break the wax seal and result in a leak. Checking the water flow from the faucets may reveal plumbing problems; poorly connected pipes can sometimes be revealed by feeling the pipes under the sink for drips while the faucet is running.

Renovated/updated homes often have new flooring. Poor workmanship can be easily spotted if tiled or wood floors are not flat, even, and square to the walls. The carpet should feel taut; loose carpet is a trip hazard. Although problems in the subfloor cannot be easily detected, red flags should be raised if there are cracked tiles or uneven floors.

Remember that your keen eye is not a substitute for a thorough home inspection; a licensed home inspector should inspect all systems within the home (including plumbing, electrical, HVAC, etc). However, any issues you uncover while viewing a home will not only help you decide on purchasing, but can also assist you in determining your offer.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of August 30, 2010. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell.

August 26, 2010October 5, 2019

How would you choose your real estate agent?

by Dan Krell © 2010

Buying and selling a home can be one of the most expensive and complex transactions you may undertake in your lifetime. So if you plan to hire a real estate agent to assist you, conventional wisdom dictates that you should interview several. However The National Association of Realtors 2009 Profile of Home Buyers and Sellers (NAR 2009) tells a different story. The profile reveals that the majority of home buyers and sellers surveyed (66% of buyers and 64% of sellers) indicated they hired the agent they first encountered.

Although the logic may seem counter intuitive, the means by which home buyers and sellers encounter their agents may provide an explanation. Both home buyers and sellers reported that the top means of finding their real estate agent was through a referral from a friend or family member. Of those surveyed, 44% of home buyers and 40% of home sellers indicated they relied on someone else’s judgment for their choice of real estate agent; first time home buyers were most reliant on their friends’ and family members’ referrals.

Repeat business was the second most frequent way indicated in choosing a real estate agent; meaning that the home buyer and/or seller hired the agent that assisted them in the past. Oh, the internet was also indicated as a way of finding a real estate agent; however it was not one of the top means. However, more home buyers (10%) indicated they found their agent on the internet compared to sellers (3%).

Regardless of how you find your real estate agent, it is probably a good idea to find out more about them before they list or sell your home. A conversation about their experience, knowledge, and expertise is probably a good way to start. Additionally, knowledge about the local market is extremely important these days as market trends have become hyper-local. Two recent conversations with home owners revealed the importance of understanding hyper-local real estate trends; both discussed how the agent they wanted to hire did not have an understanding of the hyper-local impact which resulted in under-pricing or over-pricing their homes.

Because of the increase in number of transactions requiring specialized knowledge (such as short sales, 1031 exchanges, etc), it is probably a good idea to find out if the agent has the experience (or certification) if your purchase or sale falls in this category.

Although choosing an agent should transcend the “big name” myth, some people still get caught up in the name game. It has been many years since residential real estate has been proprietary, brokers now cooperate with each other to sell homes. Home buyers typically search for homes by characteristics, rather than searching for homes sold by individual brokers. Ultimately, your home purchase or sale falls upon the experience and skill of the agent you hire.

If you are considering hiring a real estate team to handle your sale, make sure there is one agent you can call as your point of contact. Questioning the point of contact about their experience and knowledge is also a good idea.

Asking friends and family for referrals as well as calling the agent you previously worked with is a good way to find a real estate agent. However, vetting out potential issues can be achieved by asking the right questions before you hire them.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of August 23, 2010. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell.