Down Payment Assistance Set to Bite The Dust October First

Below is a link to a very informative article from BankRate regarding the possible (PROBABLE) end of Seller down payment assistance.

I had mentioned in an earlier blog what I felt were the pros and cons of these "Gift" programs. As of October 1st if the legislation stands as written - these will no longer be allowed for any Fed Insurance backed mortgages.

My own experience with them is a real mixed bag. Yes they DO allow people with very little of their own money to put in to achieve home ownership and get a mortgage. That in itself is a two edged sword. Home ownership is a positive influence on the economy in many ways and obviously personally for us as well.

The downsides as I see it are these: First, with so little down and with the market in many areas continuing to fall, we will be left again with a large number of these where the folks who feel any financial pinch will realize that they have zero equity and no real reason not to default. For the market to finally stabilize we HAVE to get all these defaults with their corresponding Short Sales and Foreclosures to work their way out of the system. They depress appraisals in general and continue the downward spiral in property values.

Second the entire practice of turning cash back from the seller into a "Gift" that meets the current lending guidelines has created a nice "cottage" industry for companies that do exactly that - they take a Seller's cash back at closing and, for a fee, convert it into a complying "gift".  So what's the problem with that? Well in the ones I have been a party to (and I have NEVER had one of my buyers do it - I have only been part of having my sellers participate) the cost these "not for profit" companies charge is very dear. In one case it was $750 to convert just $5000!!  That's FIFTEEN PERCENT to convert it into a complying gift. No surprise that in this article two of the biggest players in this business are very vocal and actively trying to protect first time homebuyers (and their own best interest) in finding a way to keep this very lucrative (for them) program alive.

My point would be, if you're going to allow seller participation and take the risks associated with it. just allow it, with some reasonable guideline. But let's just call it what it is, let the market assume the risk associated with it, and eliminate the need for "clever" conversions that only add needless expense and just line someone's pockets with the already crimped funds available from a buyer with limited funds and seller's who keep having their equity chipped away. Otherwise let's live without the practice.

www.bankrate.com/brm/news/mortgages/20080821-down-payment-assistance-a1.asp

- Mike W.

More Ranting and Raving on Short Sales.

I had an interesting conversation today. Seems in January I spoke with a very nice lady who, like many others out there - found herself unable to continue making her mortgage payment. I explained how a short sale works and she said she and her husband would discuss it. I followed up a couple times but she seemed to have lost interest - and I moved on to greener pastures.

Today she called my office and my cell - she needs to speak with me RIGHT AWAY. When I got back to my desk I checked at the Clerk of The Circuit Court site - she is being foreclosed upon. And received a summons. The house had been "Lis Pending" for over two months.

So I did call her, and she said there must be something I can do. I said well you really needed to try to short sell this months ago. Turns out that a neighbor of hers is a Real estate agent and she decided to list with them. They had the house listed for 500,000 (appx). I checked and a list of comparables justified a price of about....333,000!!  She says, well he never got much action and nobody made an offer. I said well why is it listed so HIGH?  She says well THAT'S what we OWE on it!!!!! And that's what my real estate agent  (her neighbor) said we have to sell it for! 

Well it's NOT a SHORT SALE when you sell it for what you OWE on it. And maybe the fact that you OWE $200,000 more than your neighbors are selling their houses for is a reason your neighbor can't seem to drum up any interest in the house!  We call it a SHORT SALE when the proceeds of the sale are going to have you "coming up SHORT" against what you owe the bank!!

For a short sale to work you need to have an offer that the lender thinks is reasonable against the current value of the house - not against what you OWE on it. If you do not have ANY offers you won't have any basis for a discussion with a loss mitigator to justify a short sale. In this case the lady's neighbor/agent told her he was unable to have a conversation with the bank - that they are "Too Hard to Get Hold of". Uhhh that's your job if you're short selling - the agent needs to keep dropping the price until you have an offer you can take to the loss mitigation dept. If you don't have an offer, you've got NOTHING the loss mitigator can talk to you about so sitting for months on the market at the current loan value is downright dumb!!  And for this poor lady what that agent did is use up all of her negotiating time ineffectively marketing the home at the wrong price.

Now, with an auction date set, all I could tell her to do was, call a lawyer and start packing! (I thought the lawyer might be able to help her at least negotiate a Deed in Lieu). Even the lawyer said, they waited too long - it's going to foreclose.

I did ask her - "How many short sales has your neighbor/agent done"? She said he told her TWO. I'd say if he left the home in the MLS for six months at the loan value - he sure as heck doesn't know how to do short sales. And here is proof positive - for that agent all he has is a listing he couldn't sell. But for his customer who was not properly served - well they face foreclosure, a severely damaged credit report for seven to ten years, lots of stress and sleepless nights.

If you needed a Thoracic surgeon and your neighbor was a veterinarian but said he had handled these would you pick a neighbor so there wouldn't be "hurt feelings"? Of course not! This process is way too complicated to leave to amateurs and hurt feelings or not - this is an area, like a doctor, a lawyer or a CPA - you pick it for competence - not because they are "nice" and live close by. Those nice neighbors can now help her pack - or just say "Tsk Tsk - what a shame" as she loses her house and her credit!  And they move on to their next sale....

- Mike W.