REOtoGo Blog

The Landscape Has Changed In The Mortgage Industry

Remember the good old days (2002 to 2005), when all you had to do to buy a house was be able to fog a mirror and prove that you had a heart beat?  Well, those days are over, and here’s why.

Some of you may remember other industries that have had “price wars”, gas stations across the street from each other is a classic example.  Something similar was happening about 6 years ago in the mortgage industry.  With mortgage companies, and Wall Street investors becoming increasingly hungry to cash in on the booming real estate market, they got more and more aggressive with their underwriting guidelines allowing more and more people to qualify for a mortgage loan.  As the mortgage paper continued to perform (and provide profitable for investors), the guidelines continued to loosen.  Finally in 2005, it was almost a joke (in the industry and among my colleagues) at how many people were able to get approved for a loan.

Of course, in true American style, no one thinks about tomorrow, they only see the shiny brass ring and say “I want it now”, with little regard to the long term affects.  Enter 2007 when adjustable rates starting adjusting right about the same time that the market was cooling, and all those that were convinced they could take and adjustable rate and refinance later were slapped with the reality that a refinance is not an option if there is no longer any equity in the home.  It has been more than a year now since that storm cloud began forming, and we are not out of the woods yet, but here is where we stand in the mortgage industry today.

- Fannie Mae (the nations top backer of mortgage loans) has had many changes in the way that they will underwrite and execute a mortgage loan.  The term “Declining Markets” has entered the vocabulary of many mortgage professionals meaning that if a property is located in a zip code that is deemed to have declining values, the amount of the required down payment is increased by 5%.  This means that if you are looking to buy a house in Florida with a Fannie Mae loan, and the property shows up in the database for declining markets, you will have to come up with more money out of pocket.  This has a ripple effect because the value of your home is what someone is willing to pay for it in an unbiased open market transaction.  However, if the available buyers are limited to only those who can come up with the extra cash, you as a seller have just had your pool of available buyers drained.

- Subprime companies came into existence as an alternative to borrowers that wanted to buy a home, but for one reason or another, could not meet the underwriting criteria placed by Fannie Mae.  In exchange, they charge higher rates and give worse terms for taking the added risk associated with the borrower.  Five years ago, life was good for the subprime companies, but their “Ready…Fire….Aim” policies proved to be their own demise and consequently 95% of them are out of business today.  The ones left have been so debilitated by the investors willing to buy their mortgage backed securities that there is very little difference between them and Fannie Mae (only with worse terms).

- Welcome back FHA and VA!  Add the words “Government” and “Loan Program” together and you hear the collective groaning of mortgage people everywhere.  There was a time where I would rather stab myself in the eye with a rusty spoon than deal with government underwriting….and today….there is no choice.  In today’s market (as a mortgage professional), you fall into one of 2 categories: 1) Those who are writing government loans, or 2) Those who are looking for a new job.  It really is that simple.

FHA was the original “subprime” mortgage.  Allowing people with outside of the box credit or income criteria to still get qualified for a mortgage.  And the VA loan has always been available to qualified military personnel, but it hasn’t always been the best option due to the costs of the VA funding fee.  Today, if you want to get 100% financing, the VA loan one one of the handful of options left.

In summary, there are still loans available for qualified buyers, it just may be harder to qualify than it was when you bought your last home.

Posted in Credit, Mortgage | No Comments »

Is Your Name Being Sold? It probably is, and you don’t even know it.

Something you may or may not be aware of is how valuable your name is to those who sell information.

When you apply for a home loan (or any loan for that matter), the lender will perform a credit check with Equifax, Transunion and Experian. These are the 3 primary credit repositories, and an inquiry with all three is necessary for a mortgage approval. This is common, and obvious to most people.

What you may not know is that when an inquiry is made on your credit file, you become a “hot lead” in the eyes of the credit bureau. This means that they know that you are now actively seeking new lines of credit, and therefore they seize the opportunity by selling your personal information as a “lead” to other lenders that may be competing with the lender that you are already working with. If you are on this hot lead list, you will instantly be farmed out to any of dozens of other lending institutions that have paid for the right to access your personal information. The information acquired may include your name, address, phone number (including unlisted numbers), date of birth, credit score, debt history, property info, and more. Put aside the obvious concerns about identity theft in a time where you are statistically more likely to have your identity stolen than to have your car stolen, and focus instead on the reason for the lead sales in the first place, competition.

So What’s Wrong With A Little Competition?

Free market and competition is nothing new, and in fact, it is one of the core values that makes this country great. That being said, competition just for the sake of competition is not always a good thing. Lets take a look at just 5 of the reasons that this could be bad for you as a consumer.
1) Bait and switch - I know, there are laws in place to protect consumers. But it may also come as no shock that not everyone in this world follows the law by the letter. The mortgage business is highly competitive, and this can drive loan officers to give “misleading” information in an attempt to make a sale. If you have done your due diligence, and chosen the person you trust, don’t switch in the middle of the process because someone in a cubicle 1000 miles away just quoted you something that is $100 less. You will be better off later if you exercise good business practices in the beginning.

2) Costs - The lenders that purchase such leads are not non-profit organizations, and they fully intend to recover the costs spent to acquire such leads. This can result in hidden fees and misunderstandings.

3) Time - Just because you chose to go with another lender in the middle of the process doesn’t mean that the seller of the property will care that you are saving a few bucks. When a lender takes over a file, there is time involved with putting it together. If you decide to change lenders the week of closing, most likely you will not meet your deadline. If you do not meet your deadline, the seller is under no obligation to continue to sell to you, especially if another buyer came along and offered more money.

4) Recourse - Most lenders require that the appraisal fee be paid up front, this fee is typically $300 to $400 depending on your area. What you may not know is that regardless whether the appraisal has already been paid or not, it is the property of the lender who ordered it. It is at their sole discretion as to whether they allow it to be released to another lender who undercut them after work was done and time was spent. In this case, you would be out the cost of the appraisal, and be forced to order a new one, again with the out of pocket expense to the new lender. This not only can happen, but it does happen on a daily basis.

5) The Golden Rule - Ok, maybe this one is a stretch. But if you believe that what goes around comes around, it is bad Karma to cancel a deal in the middle of the process to switch to another vendor for a small savings. Most mortgage originators are only paid when a loan closes, but there is a lot of work that goes into the file prior to that. Consider for a moment if after working for a week at your job, you go in to get your paycheck, and your boss says to you “Sorry, I found someone that will do the same job for $100 less, so I don’t need you anymore”.

All of this assumes that the original person you are dealing with is trustworthy, and you are comfortable doing business with them. If you are being taken advantage of, move on to someone else. Just do it for the right reasons.

The consumer credit reporting industry has devised a way to “opt out” , or remove yourself from these lead lists. You may do so by visiting OptOutPrescreen.com or call 1-888-567-8688. You must do this at least 48 hours before getting a credit check to make sure there is enough time for the request to process.

By doing this, you will also be removed from the list for pre-approved credit card offers to arrive in the mail. These offers are a breeding ground for identity thieves, and it is best to have them stopped immediately.

Posted in Credit, Mortgage, Real Estate | No Comments »

The Number of Foreclosures More Than Doubles in First Quarter 2008

According to RealtyTrac (a leading real estate research firm), in addition to foreclosure activity increasing for the last 7 quarters in a row, foreclosure filings for the first quarter of 2008 are more than double the same period for 2007. With the current state of the economy, and continued lagging real estate re-sale market, experts predict that the “meltdown” will continue well into next year.

This is not welcome news for those who are struggling with their financial woes now.

With almost 650,000 homes going into some level of default in the first quarter of 2008, the increase equates to 23% more than the previous quarter. It is no surprise that Nevada, Arizona, California and Florida topped the list.

Something else that comes as no surprise (or at least it shouldn’t) is the fact that little if any impact has been felt from any of the governments proposals for relief. Even though Hope Now (a non-profit home owner relief organization) has claimed to have helped some 500,000 home owners in the first quarter of 2008, a very small percentage of those received long term foreclosure help. Most work out programs have equated to a temporary “band-aid” fix to the problem.

Hardest Hit States

1) Nevada - With a 137% gain year over year, Nevada tops the list with the most foreclosure filings where in Las Vegas alone, 1 in 44 homes has had foreclosure filed on it.

2) California - Up 213% year over year, California comes in second place with over 161,000 foreclosure filings in the first quarter of 2008. With California having the dubious distinction of 6 of the top 10 metro areas nationwide with the highest levels of foreclosure, it is particularly disheartening that many of those come from the Central Valley region where they are predominantly first time buyers that got overextended.

Note: Stockton, CA came in first in the nation for foreclosure filings with 1 of every 30 homes having foreclosure activity in the first quarter.

3) Arizona - Coming in third place, Arizona had over 27,000 foreclosure filings in the first quarter with a ratio of 1 of every 95 homes. This is an increase of 245% over this time last year, and 45% over the previous quarter.

4) Florida - With the second highest number of total filings at 87,893, Florida came in 4th place in foreclosure rate overall at 1 of every 97 homes having foreclosure activity. That is an increase of 178% year over year, and 17% over the previous quarter. This is probably no surprise to most Floridians since the for sale sign has become common place in any residential neighborhood throughout the state.

As we continue to see the problem escilate, we may be in for a long road ahead. Keep an eye on our resources and helpful web page recommendations to see your way through this difficult time.

Posted in Foreclosure, Foreclosure Help | No Comments »

Facing Foreclosure? A Short Sale Could Be Your Best Way Out

A little known option (that is gaining popularity) has been offered by banks for years. A Short Sale/Pre-Foreclosure Sale allows you to sell the home before it is foreclosed on for less than the outstanding balance on the mortgage.

There are approximately 120 million homes in the United States. Estimates show that as much as 4% (or 4.8 million) of them will be facing foreclosure in the next 18 months. This means that if you are facing foreclosure, you are not alone. There are a lot of Americans that are hurting financially right now. With the talk of recession looming in the news, the job layoffs, and the never-ending saga of the subprime mortgage debacle; a perfect storm is brewing in the economy. Meanwhile, the average American still has to earn a living, and provide for their family.

While a Short Sale is not the ideal situation, it is a definite solution to the long lasting effects of a foreclosure. A short sale will affect your credit in the same way that a forgiven debt would. For instance, if you have a credit card for $5000, and you make a settlement with the issuer for $4000, the account will show on your credit report as a closed account (settled for less than the outstanding balance). The same is true with a short sale. It will report as a paid and closed mortgage account, but one that they agreed to accept less than the full balance as settlement. This is not viewed as a positive factor on your credit report, but it is significantly less damaging than a foreclosure.

Why would a mortgage company accept less than what is owed as a payoff on a short sale? Simply put, it is a calculated risk. The average foreclosure costs the mortgage company anywhere from $30,000 to $60,000 not to mention the time associated with attorneys and the court system. A short sale avoids all of that by dealing directly with the mortgage company’s loss mitigation department rather than getting the attorneys and the court involved. This saves time, saves liability (the mortgage company must secure the home and insure it while it is being marketed for sale after a foreclosure), and usually it is cheaper than a foreclosure.

If you need to sell your home, but you have no equity, you will have to consider a short sale, or risk losing it to foreclosure. To find out more about short sales and how to avoid foreclosure, go to www.PreForeclosureFSBO.com.

Posted in Foreclosure Help, Short Sale | No Comments »

How Will Your Foreclosure Or Short Sale Affect Your Taxes?

Well, it’s that time of year again. They say that there are only 2 things guaranteed in life; death and taxes. Hopefully death is a long way off, but the tax man comes knocking once a year. So how does your foreclosure or short sale of real estate affect your taxes?

In the spirit of kicking you while you are down, the IRS has always considered forgiven debt to be taxable income. For instance, if you owe $300,000 on your home and it is taken in foreclosure, the bank will sell the home to the highest bidder. If that bid was $200,000, there would be a deficiency balance of $100,000 on the original debt. The IRS considers this to be taxable income. There has been a change recently though.

In December of 2007, President Bush signed into law a relief bill that will eliminate the taxes on forgiven debt on your primary residence. This means that whether your home was foreclosed, or you did a “short sale” for less than the outstanding balance, you will not be penalized for the difference in original balance and what it sold for. The bill will remain in effect through 2009, so you still have time to act on a short sale if you need to sell your home for less than the balance owed. Home equity loans and lines of credit are also addressed with this bill provided that they were used for the purchase of the home, or to make improvements to it.

All other debt including unsecured credit card debt and deficiency balances on investment and vacation property will still be hit with the taxation on the remainder. The only way to avoid this would be bankruptcy or proving insolvency with the IRS (which is no easy task). You can learn more about the requirements for a short sale at www.PreForeclosureFSBO.com.

In this difficult time in the real estate markets, it is important to know your options and how to move forward if you are facing foreclosure. A foreclosure can remain on your credit for 7 years, and can seriously affect your ability to finance a home or even rent an apartment for quite some time. If you are facing foreclosure and don’t know what to do next, the worst thing you can do is nothing.

Please consult with your tax professional to determine your exposure and tax ramifications for either a foreclosure or a short sale.

Posted in Foreclosure, Short Sale | No Comments »

How Do I Sell My House When I Owe More Than It’s Worth?

If you are worried about selling your house when you have no equity, you are not alone. There are thousands of home owners just like you all over the country. Some of them are looking to get out of their home because of a divorce, or job transfer. Others are desperate because they were speculating that they could buy 5 condos today, and sell them in 6 months for a 50% profit. Depending on which part of the country you live in, you might be feeling different levels of pain, so here are some ways to cope with the need to sell a property when you owe more than you can sell it for in today’s market.

You can sell the property for lower than the existing balance, and bring money to closing to cover the difference. This is a painful realization, and for many, it just is not an option. Either you don’t have the money, or you don’t want to give it up.

Another option would be a deed in lieu of foreclosure. A “deed-in-lieu” of foreclosure is where the home owner signs over all rights to the home back to the mortgage company in lieu of allowing them to foreclose on the property. Be aware that this is reflected on your credit as a foreclosure, and the only difference is that you may have less headache and fewer collection calls. The only possible upside to this option is to work it out with the lender that they accept this deed without recourse or further collection activity. The term “without recourse” would be very important in working this out with the mortgage company as it is common practice to sell the property at auction, and come after the original home owner for the deficiency balance after the foreclosure sale. This is commonly tens of thousands of dollars, so “without recourse” is very important.

A short sale is often used to avoid foreclosure in the event that you owe more than the home is worth. This is when the bank agrees to accept the lower purchase price as short sale payment in full in an effort to avoid foreclosure. Since foreclosure is costly for the bank as well as the homeowner, it is relatively common for banks and mortgage companies to accept a short sale if the offer is reasonable. A short sale often takes weeks for the bank to approve, so you don’t need to give the impression to the buyer making the offer that they can get their offer approved within 48 hours. It just won’t happen.

A short sale may not be for everyone. If you are current on your mortgage, there may be other ways to recover (refinance, market price sale, etc.). But, if you are in default or have been served your notice of intent to foreclose, you will have to try short sale, or be stuck with a foreclosure.

There are different options for your individual situation. To find out more about what is best for you, go to www.PreForeclosureFSBO.com . There is more detailed information in their resources section that will help you decide what is right for you based on the details of your specific situation.

Posted in Short Sale | No Comments »