Short Sale Commander Blog

 WASHINGTON – In an effort to stabilize home values and improve conditions in communities where foreclosure activity is high, HUD Secretary Shaun Donovan today announced a temporary policy that will expand access to FHA mortgage insurance and allow for the quick resale of foreclosed properties. The announcement is part of the Obama administration commitment to addressing foreclosure. Just yesterday, Secretary Donovan announced $2 billion in Neighborhood Stabilization Program grants to local communities and nonprofit housing developers to combat the effects of vacant and abandoned homes.

“As a result of the tightened credit market, FHA-insured mortgage financing is often the only means of financing available to potential homebuyers,” said Donovan. “FHA has an unprecedented opportunity to fulfill its mission by helping many homebuyers find affordable housing while contributing to neighborhood stabilization.”

With certain exceptions, FHA currently prohibits insuring a mortgage on a home owned by the seller for less than 90 days. This temporary waiver will give FHA borrowers access to a broader array of recently foreclosed properties.

“This change in policy is temporary and will have very strict conditions and guidelines to assure that predatory practices are not allowed,” Donovan said.

In today’s market, FHA research finds that acquiring, rehabilitating and the reselling these properties to prospective homeowners often takes less than 90 days. Prohibiting the use of FHA mortgage insurance for a subsequent resale within 90 days of acquisition adversely impacts the willingness of sellers to allow contracts from potential FHA buyers because they must consider holding costs and the risk of vandalism associated with allowing a property to sit vacant over a 90-day period of time.

The policy change will permit buyers to use FHA-insured financing to purchase HUD-owned properties, bank-owned properties, or properties resold through private sales. This will allow homes to resell as quickly as possible, helping to stabilize real estate prices and to revitalize neighborhoods and communities.

“FHA borrowers, because of the restrictions we are now lifting, have often been shut out from buying affordable properties,” said FHA Commissioner David H. Stevens. “This action will enable our borrowers, especially first-time buyers, to take advantage of this opportunity.”

The waiver will take effect on February 1, 2010 and is effective for one year, unless otherwise extended or withdrawn by the FHA Commissioner. To protect FHA borrowers against predatory practices of “flipping” where properties are quickly resold at inflated prices to unsuspecting borrowers, this waiver is limited to those sales meeting the following general conditions:

• All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.
• In cases in which the sales price of the property is 20 percent or more above the seller’s acquisition cost, the waiver will only apply if the lender meets specific conditions.
• The waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program.

Specific conditions and other details of this new temporary policy are in the text of the waiver, available on HUD’s website.

In responding to the monthly REALTOR® Confidence Index Survey, REALTORS® frequently provide written comments on their understanding of the state of the housing market in addition to answering specific questions. This information is generally of a qualitative nature. This month we received over 1,000 comments, which are summarized below along with a sample of the specific comments received.

The most notable comments were on short sales and foreclosures. Short Sales are a matter of extreme frustration to the respondents: the sales appear to involve inordinate delays, and sales frequently fail to close-with the property subsequently going to foreclosure and selling for less than the short sale offer. The foreclosure market is active, frequently with multiple bids although at significantly lower prices than bids for comparable non-distressed properties. Credit, condos, and appraisals continue to have a number of issues, and there is increasing concern over FHA tightening of lending policies in the condo markets.

Appraisals
The Appraisal process continues to be a major problem. Respondents noted that the use of appraisers unfamiliar with a market area coupled with a perceived focus by appraisers on finding lower valued comps presented problems.
• Two of the biggest obstacles that we will face this year are restrictive lending and appraisals coming in low.
• Appraisal challenges continue to plague the housing recovery. Out of area appraisers lack the local knowledge to accurately value a property.
• Appraisal problems because of listings for short sales unapproved at low prices. It alters true buyers’ perception on value as well.
• Appraisals are a nightmare. Appraisers are undervaluing homes, which is hurting the bottom line on housing sales.
Foreclosures
Foreclosures frequently elicit multiple bids. The foreclosures market is very active. Many foreclosures result in cash purchases by investors rather than mortgage financed purchases by first-time buyers.
• Many transactions are either bank owner or short sale transactions.
• Appears more foreclosures may be on the way due to banks inability to work with current mortgagees.
• Appears to be lots of multi-bidding on foreclosed homes priced $60K to $100K.
• Bank foreclosures lest than $250,000 are typically selling in multiple offers for up to 5 percent over list price.
• Appraisers are artificially keeping the market down.
• Bank owned homes selling rapidly, often with multiple bids as buyers are not wanting to wait out the long short sale process.
• Bank owned properties tend to pick cash buyer offers over financed offers even though they are typically lower.
• Investors are buying pup all the affordable homes before they hit the market, leaving us with very little inventory and 15 to 60 offers on a property.

Short Sales
Short Sales continue to pose a problem to Realtors®. Typically short sales are very slow to close, frequently are not accepted by the bank, and by the time they are accepted buyers have lost patience with the process and found a different property. In addition, once a short sale is accepted, financing is sometimes impossible.
• The financial institutions are taking too much time to make a selling decision, causing many buyers to withdraw offers.
• A lot of agents will not show short sales because of the length of time to get an acceptance for a sale.
• A short sale is never short and usually is not a sale.
• A lot of the homes for sale currently are short sales and foreclosures. Many of my buyers are investors.

Credit
Credit continues to be tight. Respondents noted problems with getting paperwork processed in a timely manner as well as unrealistic and/or unreasonable demands for review and verification of credit details. In addition, respondents noted problems with lender requirements for unrealistic credit scores and excessive down payments.
• Buyers are surprise at how the process has changed. Many are dismayed at the lending process and the amount of “Additional Information Requests” that are required. Some are shocked at how little they are approved to borrow.
• Buyers unable to qualify, even with 20 percent or 25 percent down and good credit.
• Credit is tightening until the money cries out. Very worried about this.
• Credit is still tight. The jumbo market in particular.
• Mortgages are difficult to get, but interest rates are great.
• Mortgages are taking from 15 to 120 days longer than lenders tell buyers.
• Mortgages are taking more than 6 weeks sometimes up to 3 months to get a commitment letter. There is always one more document to obtain and sometimes they don’t even know that they have documents on file that they are requesting.
• It does not matter how much paperwork you give them. As soon as they get it they want more.
• The market at the lower end is increasingly active. The upper end of the market is slow, probably due to financing and move up problems.
• $1 million homes starting to go under contract at deep discounts. Traffic picked up significantly in November but mostly low end homes.6
• I am in the Jumbo market, and there is almost no activity. Buyers do not qualify for jumbo loans.
• The upper bracket is a very tough market and sellers for some reason do not want to accept the reality that their home is closer in worth to 2003. They still want to list high!!!

Condos
There are significant problems in selling condos. The collection of ongoing condo fees, excessive concentrations of renters, and loan availability are mentioned as impediments to transactions.
• Condo loans are almost impossible, causing buyers to give up while waiting forever for approval or meeting unreasonable requirements.
• Condo market would be much stronger if FHA loans were allowed on all complexes and information on condo law approval being marketed to general public and target of first time buyers and college grads.
• Condo mortgages are extremely hard to come by.
• Condominiums in certain areas are having difficulty selling due to requirement and risk reduction in the banking industry.
• Condos have been difficult to sell if they are not FHA approved.
• Condos in general are tough to sell because of the high rate of delinquency in the payment of association fees and because of mortgage credit requirements.
• Condos under $300 K are in high demand due to the first time buyer tax credit.
• High HOA fees are killing the condo market.
• I sell condominiums and it is VERY difficult to get financing.
• I am SO concerned about the new ruling for condominiums: there can only be 30 percent FHA loans in a complex. The government will be causing more foreclosures.
• Some of the property management companies are having problems because owners are not paying common charges because of the weak economy.

FHA Policies on Condos
A number of respondents expressed concerns over FHA policies concerning condos.
• A special problem for Condos and Townhomes is that many are not preapproved by Freddie Mac or FHA and it is nearly impossible to get a loan for these properties.
• Almost impossible to finance condominiums.
• Currently uncertainty over condo sales due to FHA approval issues concerning condo complexes.
• Can’t sell condos. Most buildings don’t qualify with new FHA standards.
• FHA guidelines are becoming very strict. Very hard to obtain financing for some buyers.
• FHA is requiring documentation for loans that I have never encountered before.
• FHA is tough. We had a client close a credit card during the mortgage process. Closing the card also closed their credit history. FHA denied the loan because FICO score dropped.
• FHA mortgage credit difficult to get approved Takes 45 to 60 days to close. Documentation requirements excessive.
• Condos located in large high-rise buildings often do not qualify for FHA loans because of higher renter/owner ratios.
• The restrictions that lenders are putting on condos are hurting the market. I live in a condo and we don’t qualify for FHA and some units have been on the market for over 2 years.

Changing Buyer Preferences
• Preference for smaller because of higher utilities, maintenance and competition with investors.
• There is no urgency for our buyers to move; therefore, buyers wait for “the bottom”.
• A larger number of Seniors are staying in their homes rather than moving to a Senior community, in hopes that the prices will go back up some at least before they Have to sell.
• This perspective may never see the light of day, but there’s more bad news to come. The effect of the looming commercial default has the potential for increasing real estate losses.
• Buyers are looking for smaller homes now because of the energy bills.
• Buyers are purchasing for the first time but are still looking for prices that are not there. They are up against investors that will pay cash versus asking the seller to pay closing costs.
• Buyers have higher expectations for quality and condition than previous years. Prefer close to town and accessibility to services with low tolerance to taxes.
• Buyers still unrealistic-they get a great bargain and still try to bleed the seller/bank. They think since it’s a buyers’ market THEY can impose their demands.
• Due to media-induced expectations, today’s buyers have very high expectations and want updated properties for greatly reduced prices. Repair negotiations are a huge challenge today as a result of buyer feelings of entitlement and work orders from FHA.
• Formal living rooms and dining rooms are going out of style because it is unused living space.

Tax Credit
The tax credit was frequently mentioned as helping the lower end of the market-that part of the market that is most active.
• First time buyers are causing houses between $80K and $125K to sell quickly. Keeps prices up in that price range.
• First time buyers taking advantage of tax credit the predominant buyer. Most do not want to get involved in short sales because they may miss the deadline, further affecting short sale values. Financing requirements are sometimes ridiculous.
• First time home buyers due to incentive program is what is driving the market.

Additional Market Commentary
• All the buyers my husband and I have taken out in the last six months are facing multiple offer situations. There have been in the $100-$150 K range.
• All my potential buyers want a STEAL.
• All the activity is in single-family residences at the low-end. This is a SELLERS market. The rest of the Market is DEAD.
• Buyers are asking for “deals”-they’re mostly looking to try to “steal” something.
• Many of our sellers still think it is 200 5 and the decline in prices doesn’t apply to them. Good, strong, even cash offers come and they turn them down.
• Buyers expect an absolute bargain and that sellers will take whatever is offered.
• Sellers are pricing at very close to exactly what they are willing to take, and buyers are still expecting to get houses at 60 cents on the dollar.
• On the majority of homes I’ve been out to do a listing presentation within the past six months the prospective sellers are not pleased with the amount I tell them they can expect to receive as offers. Homes are worth barely what they paid for them in the past 3 – 4 years.

-By Jed Smith, Managing Director, Quantitative Research

With 2010 expected to bring an increase in the number of distressed home sales, and new federal regulations coming into effect, it is expected that the number of short sales will increase significantly. Still, experts believe that short sales will have limited impact on the housing market since most banks remain resistant to accepting offers they perceive as being too far below market value. See the following article from Housing Predictor for more on this.

Distressed home sales in which the lender cooperates to cut the amount of principal owed are likely to increase in 2010, but the number of “short sales” is unlikely to have any real impact on the housing market, according to a new Housing Predictor study.

The small number of short sales that are actually approved by banks represent less than 1% of all homes at risk of foreclosure. Data from the Office of the Comptroller of Currency shows that only 40,000 short sales were completed in the first half of 2009, the latest period available.

Only an estimated 8 to12% of all homeowners who request short sales accomplish a completed sale. The small percentage leaves a gapping hole in the troubled banking industry’s problem with short sales since lenders only write off short sales as a loss when a property is sold.

An increase in distressed properties listed for sale is already beginning to develop in Southern California, which may be the first indication of a growing second wave of foreclosures. Dana Point has seen its inventory of foreclosures and short sales rise to more than 24% of all homes listed for sale and nearby Laguna Beach and San Clemente have seen similar increases. The rise in troubled properties indicates that lenders have increased foreclosures and may be showing more cooperation in the case of short sales.

As part of its program to repair the damaged housing market, the Treasury Department has passed a sweeping series of rules to expedite short sales. But the program, under which bankers will get $2,000 in exchange for handling a short sale doesn’t start until April. The plan is also beleaguered by the same flawed logic that the Obama administration has with bankers to modify mortgages on only a voluntary basis.

Major banks claim they have hired extra staff to handle short sales, and purchased new software to assist in the process. JP Morgan, with one of the highest default rates in the industry says it has hired 5,000 new employees to handle distressed sales. The longer payments aren’t made on a mortgage the more a bank loses on its capital.

Bank of America has also spent big on upgrading its system to handle short sales and foreclosures, but has also driven many troubled borrowers further away from working with the bank by out-sourcing much of its process to an India call center. The lender services about 14 million mortgages, including millions of troubled loans it got in B of A’s purchase of failed Countrywide Home Loans.

Above all else the biggest problem with short sales is getting approvals from bankers. The number of approved sales increased in the third quarter of 2009, but industry analysts aren’t sure how much yet, awaiting final government figures. Real estate agents are trying to price properties at levels where they will get approvals, but bankers all too often argue that the price being offered by a purchaser is too far under market to approve the sale.

This article has been republished from Housing Predictor. You can also view this article at Housing Predictor, a real estate analysis and forecasting site.

By Sean Sposito/The Star-Ledger

Thinking he’d found a cheap vacation home, Louis Pallante in April bid $300,000 for a fixer-upper in Toms River.

And then he waited to hear from the seller. And waited. After finally learning six months later that his offer had been rejected, he upped his bid to $315,000. But before he could close on the property, it went into foreclosure, only adding to his frustration.

“I can’t get a number or a name or anything from anyone,” said Pallante, 55, a reinsurance claims manager from Belleville.

Like many New Jersey residents hunting for discounted real estate, Pallante is learning firsthand there is nothing short about the short-sale process, in which lenders unload properties for less than they’re owed and borrowers get their debt wiped clean.

That’s because deals must be approved by mortgage holders as well as other creditors, and the sale of the property can be held up for as much as six months as stakeholders haggle over how much money they’re owed, according to real estate lawyers, analysts and agents.

Part of the problem, industry experts say, is that lenders are having trouble keeping up with demand for short sales and foreclosures.

“There is a lot going on all at one time,” said E. Robert Levy, the executive director of the New Jersey Mortgage Bankers Association. “It’s a very, very difficult problem no matter how you deal with it.”

Nationwide, the number of short sales increased by 22.4 percent to 30,766 in the third quarter of 2009, according to the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

About one in 10 residential sales last year was a short sale, according to the National Association of Realtors.

Joe Zinman, chief executive of Aurora Financial Group in Marlton, said he used to deal with just one short sale at a time. Now, he might be handling as many as 15 at any given time.

“It has increased dramatically,” he said. “Understand that three, four years ago you had properties that were appreciating in value, at rather dramatic annual percentages, and you didn’t have a marketplace with this element of depreciation.”

The increase in short sales is leading to more bureaucracy, too.

“Banks aren’t in the business of doing short sales,” said Mark Vitner, a senior economist at Wells Fargo Securities Economics Group. “They’re set up to make loans; they’re not set up to do workouts.”

Buyers, real estate agents and attorneys are playing a guessing game when it comes to figuring out how much a lender wants to unload a troubled property, said Barry Guberman, a Monmouth County real estate attorney.

“The biggest reason why short sales don’t get approved is that the (bank) negotiator will say that the price is below market value,” Guberman said. “They will almost never tell you what figure they’re looking for.”

There are no guarantees a sale will go through once the process has begun, said Sal Poliandro, a Saddle River-based real estate agent who specializes in short sales. Mortgage holders can foreclose before a short sale is completed, he said.

“The short-sale process and the foreclosure process are two trains running on parallel tracks,” he said. “The fact that you’re trying to do a short sale doesn’t stop foreclosure.”

Larger lenders sometimes make closing a short sale more problematic than community banks, he said. Community bankers have been able to close deals relatively quickly, while others are held up as lenders try to figure out who actually holds the mortgage because some loans involve multiple investors, he said.

Still, some of the country’s biggest banks are trying to speed up the process because the longer troubled borrowers remain in them without making mortgage and tax payments, the more money they lose.

Bank of America, like other lenders, has spent millions of dollars to upgrade computer systems and hire thousands of extra workers for its dozen call centers. The bank services about 14 million loans, the most in the nation, including the troubled portfolio of Countrywide Financial, which it bought in 2008.

And, the federal government has taken notice.

The U.S. Treasury passed sweeping rules in late November to help expedite short sales. But mortgage companies don’t have to launch the program until April, which is no relief for homebuyers, sellers and real estate agents mired in deals now. The program is also voluntary for lenders who hold second mortgages, such as home equity loans or piggy-back loans.

In the meantime, Pallante said he’s only recently given up hope on his vacation getaway.

He said he asked his real estate attorney to get back his $2,000 deposit on the property last week.

“How bad can these banks be when they have a piece of property here that someone is willing to buy?” he said of Colorado-based Aurora Loan Services, a former Lehman Brothers subsidiary he is trying to negotiate with.
The Associated Press contributed to this report. Sean Sposito may be reached at ssposito@starledger.com or (973) 392-4018.

From Seeking Alpha Blog

I love the book Freakonomics, by Steven Levitt and Stephen Dubner. I love the way it explores the questioning of questions, and the incentives that back them. And I was impressed by the way it compels readers to proactively uncover higher truths by unlocking the right combination of words that comprise the question.

A Freakonomics-inspired approach to framing questions, plus on-the-ground experience and anecdotal evidence, points to a different conclusion about the 16% plunge in pending home sales. Conventional wisdom views this plunge as a direct result of the coinciding period in which we collectively held our breath for the official announcement that the $8k tax credit would be extended to April… even though the equity market consensus expected a much smaller decrease.

Home shoppers are generally pretty confused about the whole tax credit thing. And since they do not recoup it anytime soon in the form of a lump sum, the benefit seems somewhat intangible. Most clients have even stopped asking about it.

I have another theory about why pending home sales decreased. But understanding the context fist requires some background.

Two years ago, we had record foreclosures. Since then, loan defaults have only been increasing. Inventory of homes for sale has been decreasing, but the number of homes actually being sold have remained flat or decreasing. This means there are a whole bunch of homes out there, not (yet) on the market, with mortgages in default.

Now, I don’t want to spend too much time in this article explaining why banks don’t always automatically foreclose on homes that are in default. But I will address one good reason for this briefly for the benefit of folks who don’t eat, sleep, and breathe this stuff like so many SA enthusiasts.

When a bank forecloses on a home, it triggers an accounting loss on their books, which over time impacts their share price negatively. Additionally, too many foreclosures at once floods the market, thereby putting more downward pressure on home prices, which undermines the value of the bank’s portfolio, which consists, at least in part, of a whole bunch of homes that are in default, causing a vicious cycle.

If the value of a bank’s portfolio drops too far, then the very solvency of the bank comes into question. Raising capital to satisfy reserve requirements in this type of environment becomes, in itself, a self fulfilling death spiral. Throw in the implicit government support to avoid political backlash of displacing folks from homes on Main Street and you get at least an idea of why there is a shadow inventory “out there”.

One last thing, and then I’ll get back on track. To put the scale of shadow inventory in perspective, I recently posted a SA article called, The Forthcoming Prime Mortgage Meltdown. In it I wrote:

“I can’t seem to find any good statistics on shadow inventory, so until someone shows me something better, my front line experience will rule, which tells me to estimate that only about one quarter of the toxic inventory has even been dealt with by foreclosure and subsequent resale. Mark to market relaxation aided this. The government moratoriums aided this. And mainstream media aided the groupthink that the recovery cavalry is on the way. It is not.”

While the article stimulated quite a bit of commentary, no one challenged the estimated statistic.

More background…

In my area in 2009, 71% of detached homes sold below $500k. 65% of detached homes actively listed for sale now are priced above $500k. What stands out to me is that most of the homes actively listed for sale that will realistically be sold are lower-end homes. In other words, the market is top-heavy.

Nearly all lower-end homeowners watched their values get crushed so significantly that they can no longer sell at break-even or better. This means, they either keep on living there, paying upside down mortgages… or they walk. Consequently, the overwhelming majority of listings that come up for sale are either bank owned (REO) or dependant upon bank approval for a short-sale.

For the better part of 2009 folks were scooping up REOs and steering way clear of short-sales, because 2008 proved that only about 15% of short-sales ever end up closing, and most of them get reincarnated as an REO anyway. The few short-sales that did actually close were nightmares from start to finish and the banks ended up nickel-and-diming every party along the way.

The tax credit did stimulate a media frenzy about anticipated demand, and in this sense it took away the negative stigma of buying real estate. Rates dropped around 50 basis points, which added some wind to the sails. Then something weird happened. Banks stopped foreclosing.

And there were no more REOs.

The few REOs that did come online attracted 20+ offers within days of going live. Buyers started to get disillusioned as their many offers kept getting rejected. Agents started to scramble to keep them motivated, and so they revisited short-sales as a final card left to play. If the REOs were going to the full cash investors, then there was no hurry anymore, so we might as well put offers on multiple short-sale listings.

The need to conveyor belt the offer writing process helped push a new technology called “e-Signature” into a critical mass of acceptance. And in this way, agents turned the tables on the banks “shotgunning” offers on multiple listings without even viewing them in person. Whereas up until now it was considered bad etiquette to make more than one offer at a time… agents realized the banks were treating the buyers like numbers so why not return the favor.

The large short-sale segment of the market that was previously getting the cold shoulder, suddenly got traction, and so “pending home sales” spiked, as measured by signed contracts on homes “going to escrow”.

Now the MLS did introduce a new category of status called, “contingent”, and these short-sale listings should have been labeled as such, while they sat in purgatory awaiting approval by some anonymous overworked bank manager. But it’s hard to retrain thought patterns en masse… especially those of real estate agents… and so, many short-sale listings remain in “pending” status to this day.

So what would explain the pending home sales plunge?

On the other hand, many short-sales fell out of pending status… because that’s what happens with most short-sales… namely they fall apart. Many buyers had offers on multiple properties, and when one got approved, they dropped the others. Many of them fell apart because the offer price was rejected by the bank manager. And many of them “fell out” because, believe it or not, some agents actually got with the program, labeling their “contingent” status listings correctly after all.

Anyway you look at it, pending home sales were never a good metric to use in the first place. And they are still not a good metric to use today. But it does serve as a great example of what happens when we look for technical data to paint a picture that contrasts with the fundamentals that underpin the truth. And I fear it’s the first in a very long line of examples as the whole facade starts to crack.

By: Carrie Bay