Finding Foreclosures:

The Fed endorsed rules on Tuesday that would “protect” homeowners against shady lending practices. Apparently the government feels the need to find another “in” to create a nanny state. There are substantial problems with this that may hurt the entire market.

The proposal applies to all new loans made by all lenders, including banks and brokers. Finalization is expected next year sometime.

Note: While there is a relevant reason for each one noted below, I also noted the reason it is a problem for the buyer. In the end it’s going to make it substantially harder for people to buy homes - period. That will hurt the market overall when we already have ten months worth of inventory!

Here is what is proposed, the reason the government feels it will protect homeowners and the reason it won’t. It will hurt more than it helps. Another reason to keep the government out of private enterprise.

1. Restrict lenders from penalizing some subprime borrowers who pay off their loans early (This is known in the industry as a prepayment penalty, and almost always is a result of refinancing).

• Why is this relevant to homeowners? Many who need to refinance can’t because the cost is so steep in prepays.

• Why is this a problem? The prepays are risk-based and help offset the risk-associated costs of doing business with subprime borrowers.

2. Force lenders to make sure subprime borrowers set aside money for taxes and insurance (This is known in the industry as impounds).

• Why is this relevant? Taxes and insurance that go unpaid force lender-created insurance, and late taxes go on record as tax liens that, when the home is foreclosed upon, also must be paid off.

• Why is this a problem? Some homeowners have flexible income; that is, it isn’t steady. It might be commission-based, for instance. Salespeople, for example, may wait until their end-of-year bonuses to pay taxes. Forcing them to impound could be a monthly hardship.

3. Keep lenders from making loans in which they don’t have proof of borrower’s income.

• Why is this relevant? It protects the lenders from lending to people who are using stated income loans as liar loans.

• Why is this a problem? Some homeowners have flexible income and they work off of bonuses or sales comp checks. People using this loan legitimiately may run into problems that are unfair–they won’t be able to use a loan designed for them. This may keep anyone on commission-based income from buying a home.

4. Prohibing lenders from lending without considering a borrower’s ability to repay a home from sources other than the home itself.

• Why is this relevant? The lenders are using something other than property to securitize it. While this is great for them, it’s a probem:

• Why is this a problem? The general rule has been that you need six months of monthly payments in the bank. That existed throughout the 2000s. To have another source of income or collateral you must have to be able to buy the home negates the entire way our market is set up–that the home is self-securing. It may make sense for lenders to do this to investors, but not for average homebuyers. This is going to make it tougher for people to buy homes in the future.

Dani

What’s next? Not just scams, but crime scenes?

As reported by CNN on November 19, a new wave of crime is hitting foreclosure areas hard.

In Slavic Village Ohio, the worst neighborhood in the nation for foreclosures (its Zip code, according to Realtytrac, has the most foreclosure filings in three months than anywhere else in the U.S.), more than 800 houses sit vacant. What happened after owners moved out? Squatters and looters moved in. In the “inner city,” homes are looted about 72 hours after they become vacant. Thieves take gutters and downspouts, and trash the yard. Thieves rip off aluminum siding, which sells for a pretty penny in the market, and many homes are beaten. Moldings, appliances and doors are common, but it’s gotten worse, with thieves taking out piping with a sledgehammer. Even vinyl siding is being ripped off, with thieves apparently unaware that vinyl siding doesn’t sell on the open market as well as metal.

Putting these homes back into shape so they are livable takes an incredible amount of money. In this area alone, CNN reports at least $100 million is needed.

Once the house is vacant, people dump garbage in the yards rather than pay for trash companies. Windows and doors are stolen, opening up the interior to the weather. The houses deteriorate quickly; others are occupied by drug dealers. Numerous fatal crimes have occurred out of these homes, too.

Some homeowners are trying to salvage anything they can out of houses they vacated, installing doors with thick locks and boarding up windows with 3/4-inch plywood. Others advertise the lack of anything inside, with signs saying “no copper, no wiring, no PVC.” Organized watch groups are lobbying police. One house was even used for months to part out stolen cars, strip and paint them.

Dani

Check out this link - we will be answering YOUR questions about finding foreclosures on the NAR web site!

http://narblog1.realtors.org/mvtype/theweeklybookscan/2007/10/book_review_finding_foreclosur.html

Dani

We have an interesting problem. If an individual files for Chapter 13 bankruptcy to restructure their debt over ten years, they may run into a glitch. The current code prevents mortgage lenders from changing loans on a primary residence, yet they can change terms on a vacation home, investment property, farms and businesses!

There are competing bills in the House and Senate that would allow bankruptcy courts to modify mortgage terms and extend repayment time frames. But as of now, primary homes cannot be modified. (WSJ)

It is suggested that if this modification is made, approximately 600,000 people who will be in foreclosure by the end of next year will save their homes. While it may keep foreclosures away for some, it may discourage lenders from borrowing to low income households. They also worry about what it will do to the loans they’ve turned into securities and sold to investors, because the terms of the loans, which investors paid a price for, could then be changed by the courts. There is, too, some worry that banks will make up the difference by charging everyone else higher rates.

Dani