Minnesota Foreclosure Prevention Options

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The Minnesota Home Ownership Center publishes a regular newsletter on foreclosure prevention and I wanted to share the latest version with you:

 

June 24, 2008
Foreclosure Prevention Resources Newsletter
Legislative Update on Foreclosures
New legislation provides early notice of available help for distressed homeowners  Last month, the Governor signed a bill that ensures distressed homeowners will learn of available help before it is too late. The new law requires lenders to provide homeowners with information about availability of non-profit foreclosure counseling agencies before starting the foreclosure process. It also requires the lenders to provide local counseling agencies with the contact information for borrowers entering foreclosure, which will allow counselors to reach out to distressed homeowners. Prior to this legislation, homeowners were notified about foreclosure counseling services when given notice of the Sheriff&r squo;s Sale – a time in which few option are left for most homeowners.  Legislation also changes information given to homeowners with along with the Sheriff’s sale notice. New language encourages the person to contact a foreclosure prevention counselor for help in answering questions, getting advice, and creating a plan for their situation.  The revised notice also gives additional information about the foreclosure process, including that the occupant does not need to move at the time of the Sheriff’s sale.  The new law applies to properties with one to four units, one of which is owner-occupied.  
Workshops for Homeowners
Free, confidential foreclosure informationThe Minnesota Home Ownership Center continues to offer free workshops for homeowners who are worried about making upcoming mortgage payments, are already facing foreclosure or for anyone interested in learning more about foreclosure. These are open-house events. Participants are encouraged to come any time that is convenient during the workshop hours. The workshop will provide information on what happens during foreclosures, homeowners’ rights, and solutions for long-term housing needs. Participants will be able to ask questions and get free advice – confidentially – from mortgage lending and foreclosure specialists. No RSVP is needed. For more information call the Minnesota Home Ownership Center at (651) 659-9336.  Upcoming workshops:

  • Duluth– Tuesday, July 15th
       First Lutheran Church
       1100 East Superior Street
       4:30 to 7:30pm 
  •  Minneapolis – Tuesday, August 5th
       Park Avenue United Methodist Church
       3400 Park Avenue South
       4:30 to 7:30pm 
  •  St. Cloud – Tuesday, August 19th
       St. Cloud Civic Center – Opportunity Suite
       10 South Fourth Avenue
       4:30 to 7:30pm 

 In addition there are a number of workshops being held in Hennepin County at local libraries, and other partner organizations are also holding events.  For additional information, visit www.hocmn.org/HomeownerResources.cfm. If you would like to receive an electronic version of a flyer you can use to advertise these workshops to your clients, feel free to contact Ed Nelson at the MN Home Ownership Center.  
Workshops for Professionals
Information and Referral Workshops

The Minnesota Home Ownership Center is offering a series of free training workshops to provide information on how to help distressed homeowners. The trainings will provide an overview of the foreclosure process, where to refer homeowners and how to prepare them to talk with a housing counselor or loan servicer. The training is specifically designed for staff from public, private, and non-profit organizations that come in contact with distressed homeowners – but who do not normally work with mortgage foreclosure as part of their job. Upcoming training workshops: Shoreview– June 26th, 9:00 – 10:30amShoreview City Council ChambersFor more information or to RSVP for this free workshop visit http://shoreviewtrainingworkshop.eventbrite.com/  

St. Paul – July 16th,  10:30am – NoonRondo Community Outreach LibraryFor more information or to RSVP for this free workshop visit http://www.rondotrainingworkshop.eventbrite.com/  

Minneapolis – July 31st, 9:00 – 10:30amEspecially For Churches and Faith-Based Initiatives Park Avenue United Methodist ChurchFor more information or to RSVP for this free workshop visit http://parkaveumctrainingworkshop.eventbrite.com/ 

A New Way to Handle Foreclosures

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Background

The foreclosure process in Minnesota is a long one… often consuming an entire year from when the borrower first misses a payment until the time that the bank assumes control of the home. The Minnesota Home Ownership Center has put together a great flyer on the process and an average timeline.

Right now the Minnesota Legislature is considering a bill to “defer” the foreclosure process for up to an additional year if the borrower of an owner-occupied home makes partial payments (65% of principal and interest amount due). If this bill is signed by Governor Pawlenty, Minnesota could potentially have a 24 month disposition window for some foreclosures.

Problem

A lot can happen to a home in the 12 months from the date the borrower stops making payments. In many cases, the homes fall into disrepair as the borrower knows that any investment of time or money on the property will ultimately be lost when the bank assumes possession. Property taxes and municipal bills are also often neglected… I have seen delinquent water & sewer bills for a foreclosed property above $1000 and delinquent property taxes above $5000. These are all bills that will have to be assumed/paid for by the mortgage company. Also, often times there is a significant amount of trash/debris left by the borrower… it is not uncommon to see a large dumpster in front of these properties full to the brim. Add to all of that the year of non-payment of the loan and the legal expenses to the lender to complete the foreclosure process and it is likely that a lender already has a $10,000 – $20,000+ loss at the time they repossess it.

In Minnesota, we have 5 months of average low temperatures below freezing. If a home in foreclosure is vacated during these months, often the utilities are shut off before the bank secures the property and the home’s plumbing ends up freezing and pipes burst. In good circumstances the water was shut off at the meter or the street (sometimes done by the city from non-payment of the water bill) so that only the pipes need to be repaired, which could cost as little as a few hundred dollars or climb to several thousand, depending on the location and extent of pipe damage. In bad circumstances the water can literally fill the house and cause near complete destruction of the interior of the homes, which then become great incubators for mold when they thaw in the spring. In a house profiled by the Star Tribune, one house once worth nearly $700,000 was resold at auction for only $280,000… a loss of over $400,000… about 60% of the value of the home.

Once the bank has possession of the property, the previous owner has vacated, and any debris has been removed from the property, the bank can go about listing the home for sale. Based on a sample of homes sold in Plymouth and Maple Grove in the last 10 months, when the bank resells the property they will lose 23.4% from the value at the previous sale. All told, banks lose $10’s of thousands of dollars on the average property… and on some, $100’s of thousands!

Current Actions

While the banks are already overloaded with the huge numbers of foreclosures they have been taking on and are even more buried in their short-sale departments, where responses to offers can take months, the more proactive a bank can be with their defaulted borrowers, the more likely it is that they can recover a larger share of their investment.

Regulatory and industry efforts to create work-out agreements between lenders and borrowers has met limited success and while without these programs foreclosures would be higher, the number of foreclosures today and in the near future are still substantial.

The mortgage lenders are trying to ramp-up staffing for their short sale and foreclosure departments, but these efforts are not proactive, but rather reactive.

While it is in the banks’ best interests to work with their borrowers to modify the loan terms and keep the borrower in the home, there are many circumstances where no reasonable workout can be made. Instead of the banks letting these homes go through the foreclosure process, they should attempt to work with the borrower to get the home sold directly from the borrower to a new buyer, with the bank accepting a sales price that only returns a portion of what they lent back to them, which is called a “short sale.”

The approval of a short sale is a long and difficult process that can take a lender 60-90 days to approve once an offer has been submitted. The largest problem with short sales is that many buyers simply do not have the time nor the patience to wait 2-3 months for a response. Further, the process is not the most appealing for sellers either, since they receive no monetary gain from the sale, many borrowers see little value in the enterprise. These short sales are seller-initiated and more than 1/2 of the listings never close.

A New Way to Handle Foreclosures

Lenders can be more proactive with their defaulted borrowers by initiating a short sale process when the probability of foreclosure is high and the likelihood that a lender-negotiated loan modification that will allow the borrower to become current on their mortgage is low.

Based upon my analysis of sales in Maple Grove and Plymouth in the last 10 months, bank owned properties on average sold for 23.4% less than their previous sale but short sale properties sold for only 16.4% less than their previous sale. Taking into account many of the other costs I mentioned earlier in this article, the savings to lenders could easily be in the 10’s of thousands of dollars vs. letting the home go through the standard foreclosure process.

Here’s the overview of the concept:

  • For loans in default where the borrow and lender are unable to provide a viable loan modification program, the lender refers the loan to their short sale department.
  • The short sale department immediately initiates the approval process for a short sale, including reviewing the borrower’s financials (which they have updated copies due to the failed loan modification program), get BPO’s (Broker Price Opinions) of the property, and send a letter to the borrower detailing this new option.
  • The borrower is presented the option to basically do nothing and let the home eventually go through foreclosure or work with the lender to get the home sold via a short sale.
  • If the home is successfully sold via a short sale and the foreclosure process is averted, the lender would offer the borrower monetary compensation for their participation and their assurance to maintain the property and leave it in good condition when they vacate.
  • If the borrower agrees to the terms, the lender sends out one of their pre-approved real estate agents for a more in-depth valuation, lists the home for sale and actively markets the property.
  • There is no cost to the in-default borrower for participation in the program… all costs are borne by the lender.
  • When an offer comes in, review and negotiation of the offer can occur quickly since the lender has been working on the file for some time already and can better rely on the advice of the listing agent as it is someone whom they have an existing relationship with and knows their processes.
  • The home is sold directly from the in-default borrower to the buyer, giving the defaulted borrower some money to walk away and the lender with substantially fewer expenses, return of more of the original investment, and substantially less risk of damage to the property in the meantime.

Caveats

To discuss a new way to handle foreclosures is not helpful if it ignores the realities in the market. Here are the biggest hurdles (as I see them) that could make such a plan difficult to implement:

  • Banks can’t sell real estate
  • 80/20 loans where the 20% 2nd lien is not held by the same bank… much harder to coordinate but quite often the 2nd lien holder gets NOTHING from a foreclosure so it is in their best interests to cooperate.
  • Mortgage insurance companies that don’t want to get with the program
  • Investors/CDOs/etc that add so much complexity and/or bureaucracy that makes it a logistical nightmare
  • Already overburdened Short Sale Departments that simply cannot handle more files
  • Simple inertia: with so much of this problem centered in large banks, it is likely that only smaller, more nimble banks could
  • As Minnesota has one of the longest (if not the longest) timeframes from default to end of redemption, banks may not understand the true consequences of a 12 month process.
  • No one to champion the cause. Someone would have to step up and try this as a “guinea pig” before it is likely any other banks would adopt it.

Conclusion

Until these properties cycle through the system and are resold to new buyers they cast a negative effect on neighborhoods, other homes for sale, and other foreclosures too. Waiting for defaulted borrowers to complete the foreclosure cycle when it is all but a sure-thing earlier on in the process is not the best way to protect the investment but rather employing a proactive approach is something can benefit all parties involved and the housing market in general.

Short Sales are Locking Up Minneapolis/St. Paul Buyers

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With so many short sale listings on the MLS in the Twin Cities right now, there are a lot of buyers that are “locked up” in offers on these properties for weeks… and months… with the high probability that they will ultimately not be able to purchase the house at the price they offered.  See my previous article for more background on my short sale experiences.

Since many times the eventual response from the bank is a no or “you need to bring your offer up x%” or the buyer gets outbid by a later offer, these properties could be tying up significant numbers of buyers who would otherwise be purchasing (and closing!) on another property.  This weekend I was told there were 4 offers on a short sale I was showing to my buyer.  That means 4 houses with ready, willing and able sellers (“traditional sellers”) are stuck waiting for the bank to reject 3 or all 4 offers sometime in the next 30 – 75 days before they’ll get their chance at those buyers.

Foreclosures and Short Sales are Comparables

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A debate recently in my office between another agent and I focused on whether foreclosures and short sale properties really should be used for comparables for “normal” sales.

My esteemed colleague believes that since foreclosures and short sales are sold under “distressed” situations, they are not good comparables for other homes for sale.  My counter is that many foreclosures and short sale properties are not in bad condition and so they should sell at a fair market price regardless of their “distressed” situation.

When it comes down to it, foreclosure and short sale listings most often do sell at a discount to regular listings and should have that taken into consideration, but even in a slow market houses priced appropriately are selling quickly, so those are market prices.

What we do find is a substantial disparity on how much of an impact those foreclosures have on the houses around them.  In areas with low numbers of foreclosure and short sale properties, we find that those properties have little effect on the market as a whole.  Where there are a high number of these properties in a single area, we find the the impact is more like an exponential impact: the higher the number, the more substantial the impact each additional listing has.

Minneapolis in a Housing Crisis

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While this housing market has been tough on many communities, parts of Minneapolis are being hit extremely hard.  The foreclosure and short sales taking place in Camden, Phillips and North Minneapolis are not only often becoming eyesores in the community, they are also dragging average sales prices down substantially.

Based upon MAAR’s Top 100 report for Minneapolis for December 2007, I was able to construct the following chart of average sales prices in Minneapolis communities:

Average Sales Price Change in Minneapolis from 2006 to 2007

I wish this chart was wrong, I wish it didn’t show such a disparity amongst neighborhoods, and I wish I didn’t have to talk about it.  Alas, not talking about it will not solve the problem and this is an issue I simply could not be silent on any longer.

I have been working on some figures showing the number of homes for sale in these communities that are either in a short sale or foreclosure situation but the data isn’t complete yet and I want to make sure it’s right before I release it.  What I can tell you though is that these communities have been hit hard by the rise in short sales and foreclosures, as can be seen by anybody showing houses in these neighborhoods.

While there are still many homes for sale that are owner-occupied and in great condition, the sheer number of distressed properties for sale have a hugely negative effect on the market for the following reasons:

  1. Competition – Simply having so many homes for sale increases buyer’s options, which puts pricing pressure on sellers.
  2. Impression – Some homes in a short sale situation and a majority of bank owned properties have been neglected or even boarded up… having a few in a neighborhood brings down the perceived character of the neighborhood.
  3. Comparables – Eventually these distressed properties sell and then become comparables for appraisers and future buyers.  Though the condition may be terrible, that isn’t readily apparent in most MLS reports and therefore the appraiser or buyer may believe the home was in better condition that it actually was, thus pulling down the value of homes it is compared against.

As we are still in the middle of the subprime and ARM mortgage fallout, the high inventory and pricing pressure in theses neighborhoods is not likely to moderate for quite some time, which could lead to further price erosion this year.

While this is terrible news for the current homeowners in these neighborhoods, there is supposed to be a “silver lining” to this market downturn: housing affordability in these neighborhoods has headed substantially higher in the last year to the point that many people who could not afford to buy a home years ago can get into a home today.

I just recently closed on a deal with a 1st time buyer who purchased a 3 bedroom, 1 bathroom home with 1 car attached garage just a few blocks off the Parkway in North Minneapolis.  This home had quite a few cosmetic issues to fix but had a new furnace and newer roof and some great built-ins and woodwork.  Her total payment is under what she was paying in rent and her home has a lot more space for her family!

While she was successful, it was a big struggle to get her into the home, mainly because of the catch-22 on the only loan we were able to get for her:

  • Like most 1st time buyers, she had little cash upfront.
  • 100% financing is almost completely gone, so the next best thing is FHA financing, with a 3% downpayment requirement and upfront Mortgage Insurance Premium.
  • This buyer was able to secure some downpayment assistance money and we had the seller pay the closing costs, so her total out of pocket cash to close was approximately $1000.
  • To meet FHA guidelines, the home had to be livable at closing.  This means the plumbing, electrical and heating all had to be in working condition and operating for the appraiser’s inspection.
  • Like a large number of homes that are bank-owned, the utilities were off when we saw it, but we were able to get the seller(bank) to agree to dewinterize and turn on the heating and water.
  • There were items that needed repairs to get it to pass the FHA appraisal and most banks do not permit a buyer to complete any work on the property prior to close, but we were able to secure permission from the listing broker to make minor repairs.
  • When the water was turned on we found out that that the water heater was broken and we had to have a plumber install a new one, which was an unexpected expense.
  • There was exterior paint on the foundation that was peeling (an FHA issue) but since it was too cold to fix it the money had to be set aside at closing for the repairs.

While this buyer was able to get into this home, most other first time buyers will not be as lucky.  As I said above, most banks will not let anyone do anything to repair the home prior to closing and so if the home is out of FHA compliance for almost anything, the buyer will not be able to purchase that home.  Homes that are in a short-sale position are typically in better condition and sellers would work with a buyer on repairs but if it is anything costly no one will have any money to fix it!

The other issue is the 3% downpayment… many buyers simply do not have that saved, but are more than capable of making the monthly payments.  There are some downpayment assistance programs available but they are a small share of the total market and many loan officers are either unaware of them or in the case of government-sponsored programs, are not approved to use them.  This will put many of the rest of the homes that are in good condition still out of reach.

If a 1st time buyer does have cash, they can go with a Conventional loan & eliminate most of the lender required repairs but most of those loans need a minimum of 5% down payment and if the appraiser or Fannie Mae or Freddie Mac describe the neighborhood as a “declining market,” then the down payment requirement would jump from 5% to 10% for most and the zero down payment loans would go to 5%.

What this all means is that only a limited number of 1st time buyers will be able to take advantage of this “silver lining.”  The rest of this inventory will need to be acquired by buyers who have significant cash: typically rehabbers and landlords.  Rehabbers are likely to remain on the sidelines for a while longer simply because the fundamentals of the market in these areas are still softening and that makes it risky to go in and try to fix it up and sell it for a profit.

That really leaves us with landlords.  As with my buyer, these landlords can come in and buy these homes for less than their rental value and make great cash flow off them.  While that will mean the neglected exteriors of many of these houses will likely get some attention, it could take largely owner-occupied neighborhoods to largely rental neighborhoods and I believe that most people would agree that strong neighborhoods are those that have a good balance between owner-occupied and rental.

This situation needs immediate attention by the community.  In the best of circumstances, a public-private partnership would be formed to help assist more 1st time buyers in acquiring these affordable homes and try to help keep these communities occupied and maintain the balance between owner-occupied and rental.  This assistance could be in the form of additional downpayment assistance or nonprofit rehabbers turning around and selling it to eligible buyers.  Either way this takes money that doesn’t appear to be just sitting around, so this will take a considerable effort to achieve.

Top 10 Reasons Why Countrywide is Being Stupid With REO's

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Time and time again, I see Countrywide Home Loans (CHL) listing their Real Estate Owned (REO) properties on our local MLS and requiring buyers to get pre-approved with a Countrywide Retail Loan Officer prior to submission of their offer.  In fact, in their required addendums, it is specifically noted:

If the Agreement is contingent on financing, as a sales condition, Buyer must obtain a pre-approval letter from a branch office of Countrywide Home Loans, Inc. (“CHL”) for a mortgage loan in an amount and under terms sufficient for Buyer to perform its obligations under the Agreement, and such letter must accompany the Agreement.  The pre-approval shall include, but is not limited to, the pre-approval letter, a satisfactory credit report, and proof of funds sufficient to meet Buyer’s obligations under the Agreement. Buyer’s submission of proof of pre-approval is a condition precedent to Seller’s acceptance of Buyer’s offer. Seller may require Buyer to obtain, at no cost to Buyer, loan pre-approval as Seller may direct. Notwithstanding any Seller required pre-approval, Buyer is not required to obtain financing from CHL or Seller- Buyer may obtain financing from any source.  As an incentive for the Buyer to obtain financing from CHL, CHL will offer a free appraisal and a free credit report if the Buyer finances and closes the purchase of the Property through financing from CHL.

This is ludicrously stupid for the following reasons (not a complete list):

  1. Most buyers are pre-approved early in the home search process and have already chosen a lender they are comfortable with and are ready to buy NOW.
  2. Most buyers do not want to share private information with a stranger.
  3. Most buyers have no intention of working with the Countrywide Loan Officer.
  4. Countrywide pulls credit, meaning another inquiry on buyer’s credit report.
  5. Countrywide’s lending capabilities (product options) have been dramatically reduced since they are doing mostly/only loans that Fannie Mae or Freddie Mac will buy.
  6. Agents have existing relationships with loan officers that they know, trust, and can count on… they don’t like to have an ultimatium put to them any more than a buyer and don’t like interference in their client relationship.
  7. Agents often have such a long list of potential homes to show that they need to find reasons to eliminate some… this is an obvious candidate for removal.
  8. Countrywide doesn’t care who the approval is from or how solid the buyer is… if they are using financing, they HAVE TO get a pre-approval from Countrywide Retail. Period.
  9. Offering to do a free appraisal on a home that they own is akin to having the fox guard the hen house simply because he’ll do it for free… where’s the buyer’s protection when the seller is the loan originator?
  10. And finally- buyers are not stupid and they know when they’re being jerked around.  With so much inventory on the market, they can choose to tell Countrywide to keep their property and they’ll go find someone else who won’t treat them like a fool.

According to the Countrywide Foreclosure Blog, Countrywide had 14,442 REO homes listed on their site as of 12/5/07 at a total asking price of just over $3 Billion.  With so much inventory, so much competition, such a difficult buyer market, and tough times keeping Countrywide financially afloat, you would think that they would want to do everything they could to get their properties sold!

Recently I have seen several of Countrywide’s properties in the $200,000 range price reduced $30,000 and $40,000 all at once.  Such drastic price reductions have generated interest in the properties but also shows the motivation, and possibly desperation, of Countrywide to get these houses off their books.  If they eliminated their pre-approval requirement, they might see more interest from qualified buyers without having to so drastically reduce prices.

Some people suggest that Countrywide requiring a pre-approval is smart business, that it gives them an opportunity to pick up the buyer’s mortgage.  I would be surprised if they had more than a 20% capture rate on these leads (but I have no knowledgewhat their capture rate is), and the added holding costs for longer sale, disinterested buyers, and further price reductions make me think that this is a losing battle for them. 

Message to Countrywide: eliminate your CHL pre-approval requirement.  You’ll sell more houses, sell them faster, and likely at a higher price.

Should Banks Convert ARMs into Fixed Rate Loans?

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CNBC has a great aricle titled: “Loan Modification Anyone?”

The article does bring up a good point… while saving buyers that are in danger of losing their homes is a good policy, going too far is not fair for everyone else and can potentially lead to more fraud in the market.  It’s amazing to see the differences in opinion and direction this market seems to be taking.

All I know is that they better come up with something… the foreclosure market continues to grow as a percentage of listings for sale on the MLS and that isn’t good for the long-term health of our housing market.

Foreclosed Homes Need Interior Photos

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I wrote in June about agents who still had snow pictures on the MLS.  Today I mention another thorn in my side: agents who represent bank-owned foreclosed homes that do not take photos of the inside.

In the Twin Cities, as in many other large metro areas nationwide, we have seen a sharp increase in foreclosures over the last year.  This has been a boon to the business of agents that work with the banks carrying this inventory.  Unfortunately, some of these agents are either too busy or feel they are getting paid too little to take the effort to snap interior photos of the house and also often do not measure room dimensions.  Sometimes the house’s interior is in bad condition, sometimes it is in remarkably good condition.  Either way, consumers want to see layout and general condition before they make the trek out to see the home.

When we have record levels of inventory on the market and many investors waiting on the sidelines, the consumer looking for a home for owner-occupied use is still the best buyer for most homes.  Since these consumers have so many choices, they narrow down their options using the photos and other MLS information provided online.  Fewer buyers seeing the home means less potential to sell the home quickly and at a good price.

Until banks wake up and demand the agents selling their inventory to do more to market the home, they will find that they are not receiving the full benefits of the MLS and are missing many potential buyers.

Short Sale or Bank Owned: Which is Better to Buy?

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If you’re looking to buy a home right now from a distressed seller, be careful what you offer on!

75 days.  That is how long a buyer and I have been waiting for a response from the banks on an offer we submitted for a property in the process of foreclosure, but still owned by the seller.  To get this offer to work, both banks have to agree to a “short pay” or “short sale” since the seller has no cash and our offer is less than what is owed to the banks after selling expenses.  In this case it is two banks (1st mortgage and 2nd mortgage) that we need to agree to the short sale.  By the way- we’re still waiting today…

30 days.  That is how long this same buyer and I waited for a response from another bank on a short sale situation on a different property before we found out they rejected the offer.  I’ve had this happen several times this year with different houses & clients.

1-2 weeks max.  That is how long I’ve waited for an acceptance or rejection on offers I’ve submitted on bank owned properties.  While this is still a frustratingly long time for a buyer, it is at least dramatically less than my experience with short sales.

If you’re willing to wait a(for) month(s) for an answer, short sale properties may be an interesting option.  If you want to move into a house yet this year, maybe stick with bank owned properties or an owner occupied residence.  I’m only half kidding about moving this year… :-)