Loan Modifications: Obama’s Plan

Called the Home Ownership Stability Initiative the heart of Obama’s plan really is the loan modification. As we have all heard, some homeowners are facing payments jumping thousands of dollars a month as adjustable loans readjust. Many homeowners are paying 50% or 60% or more of their income in mortgage payments while the value of their proerties is tumbling.

This plan aims to modify loans for those who qualify at 31% of income. Notice, that just like refinances, modifications require income. That’s the first qualification: income sufficient to pay the modified mortgage.

Until now, banks have been reluctant to offer loan modifications to homeowners who, whatever struggles they were having, remained current on their mortgages. Most banks refused outright to help such borrowers. This plan changes that and makes loan mods available to those who are current in their home loans as well as those who are behind in their payments.

This is important because it allows those who have not missed a payment to maintain their credit. As we all know, often a few dings on the credit and a missed mortgage payment is a major ding, have a cascade effect. Credit card companies find out and jump up rates on credit card debt. It becomes much harder to get any credit at a decent rate, etc.

Let’s say, for instance, that the borrower is paying 43% of his income for his mortgage. He applies for a loan mod and the lender brings the payment down to 38% of his income. Then, the government [Freddie and Fannie] and the lender bring the loan down by equal contributions [3.5% and 3.5%] to 31% of the borrower’s income. That mod stays in place for 5 years. At the end of that time, the rate would be gradually increased to the rate at the time of the loan mod.

Also, and this is important, the government would reinburse the lenders who agree to bring down the principal. Bringing down the principal: all underwater borrowers’ dream and their lenders’ nightmare. Until now, it’s been the rare lender who would touch that principal.

Now, lenders have incentives. If they modify a current loan,servicers receive $500 and lenders [investors] $1500. Borrowers have incentives, too. Every year a borrower stays current in the new mod, he receives $1,000 for up to 5 years. This is clear incentive to help those “good” borrowers who have made tremendous efforts to pay their mortgages during this current crisis and by dint of great sacrifice maintain their credit. Obama’s plan clearly tries to help these people while at least partially answering the persistent critique that responsible homeowners received no help while the irresponsible were being bailed out. Obama’s plan specifically says speculators or flippers cannot particpate.

This, of course, brings up another issue: small investors who own rental properties, especially single family homes or condos, are suffering, too, but seem to be eliminated from this program. Apparently, that is the case except for rental property that was originally a principal residence. So, if you are renting out the condo or 2-bedroom house you bought as your first home before you bought your current residence, then you may be able to participate.

Final details of this plan are supposed to be released this week. The Treasury Department says it will issue clear guidelines for all lenders to follow in doing loan modifications. That would be a relief. At the moment, it’s a free-for-all out there. Some lenders are very cooperative; others refuse to do anything. There’s no doubt we need to do something even if it means helping those who have not, shall we say, been the most prudent in their financial choices. If we don’t the fallout is just too terrible to contemplate.

Where Are Those Foreclosures? An Update

Locally, the rate of foreclosures continues to rise. Previously, the worst of the crisis seemed limited to Riverside and San Bernardino Counties, but, little by little the foreclosure boom has extended to the San Gabriel Valley as well.

For some quick examples, let’s look at one of the worst hit areas, Azusa with 27 foreclosures priced from $159,900 to $659,000. As noted here previously, an obvious place where foreclosures will be widespread is anywhere with many new homes. Voila Azusa where home builders have flooded the market in the past 5 years. This is one reason so many foreclosures are occurring there.

Covina is another foreclosure hotspot with 30 currently on the market ranging in price from $184,900 to $729,000. Single family homes priced below $200,000 are still  a rarity, so  the lower figures are usually condos. In West Covina currently 48 repos are on the market, priced from $205,000 to $527,000. Even pricey Walnut has 6: $209,900 to $994,900. Prestigious Claremont has 9 priced from $237,500 to $489,900.

LaVerne has 6 foreclosures for sale. San Dimas has 8 priced from $269,900 to $631,659. Glendora also has 6 with prices starting at $297,000.

In the western San Gabriel Valley fewer new homes can be built as the area has been built up for a long time. Nevertheless, here as elsewhere, foreclosures are abundant. Our largest city, Pasadena has 32 on the market ranging from $219,000 to $649,000. Monrovia has 10: $220,000 to $579,000. Altadena shows 12 REOs, priced from $190,000 to $565,000. Tiny South Pasadena has 3 and Arcadia has 4.

Economic woes have hit Duarte a bit harder and it shows. Duarte has 16 foreclosures ranging from $106,900 to $474,000.

As always, though, the title of Heartbreak City goes to Pomona which now has 119 foreclosure listings, priced from $106,600 to $454,000 for a lovely 4-bedroom in Phillips Ranch.

Besides our own misery, we also know now that nationwide 12 million homeowners are underwater or owing more than their homes are worth. That is definitely true here as well where on average prices have dropped 25% to 30% over the last year, creating many more “underwater” homeowners.  Of course, that presages more foreclosures in the future as these homeowners bail out of their now way overpriced homes.

7 Points to Ponder When Buying a Foreclosure

Foreclosures! For sure we’ve got ’em as indicated in a previous post. If you’re looking for a foreclosure, though, there are few things to consider first.

  1. What do you really want when you say foreclosure? Most buyers say foreclosure, REO or short sale as shorthand for a bargain home. Think about it. You don’t really care if it’s a foreclosure, do you? What you want is a very well-priced home so you get value for your money. Since that is the case, be sure to let your Realtor know that. Otherwise, you might get just a list of REOs.
  2. Foreclosures usually mean more competition. Since the banks are overloaded with these “non-performing ” properties right now, they are priced very competitively, so they attract lots of competition from other bargain-hunting buyers. You need to be prepared to move fast. If you’re the type who likes to mull things over, not a bad idea when forking over hundreds of thousands of dollars, this market niche may be too fast for your taste.
  3. Be prepared to move fast. So many homes are on the market these days that frequently buyers avoid the preparatory steps and go right for the cake–looking at homes. You Realtor will tell you to get yourself pre-qualified with a good lender. Don’t dodge the call. It takes only a few minutes. You not only now know what you can afford to buy and what the rate will be, but, pre-approval in hand, you can now instantly offer on that foreclosure that just came on the market.
  4. Be prepared to wait. Banks have different modus operandi. Some will immediately take your offer, especially if you have a down payment, have that lender’s letter and offer close to the list price. Others wait and collect as many offers as possible, then counteroffer all to make their “highest and best” offer. Then, it’s a guessing game. If you are offering on a short sale, a pre-foreclosure, be prepared to wait for a significant amount of time, sometimes months.
  5. Inspect, inspect, inspect. You should never buy a home without a professional inspection, of course. It’s even more important for foreclosures and pre-foreclosures. Often the previous owners had been in financial difficulties for quite some time before surrendering the house. Most likely they couldn’t or didn’t do any maintenance either, especially once the foreclosures was a done deal. Sometimes, banks repair REOs damaged by their original owners, but almost always the job is slapdash. Remember that when choosing a foreclosure over someone’s lovingly nurtured home.
  6. Get a good broker. This is crucial. The listing agent represents the seller. That would be the bank in the case of the foreclosure and for short sales often several banks. You need a professional who understands the process and represents your interest. Ideally, you will find an agent with experience who understands the various addenda which all banks require and can explain what you are signing to you.
  7. Take the time to understand the procedure. Your good broker should and will be eager to explain the process, the loan, the rates, the comparables and help with any negotiation during the inspection period which in California is usually 17 days. The bank may try to shorten this time. Again, you are shelling out big bucks. Don’t be the schmuck who doesn’t read his loan docs.
  8. Getting a bargain-priced home is a joy forever. In future years, your friends and relatives, even casual acquaintances, will marvel at your financial acuity once prices skyrocket once again as they are bound to do here in the Golden State. But make sure you are getting a bargain. Repairing sloppy cover-up work or removing improperly-maintained systems, whether air conditioners, pool equipment, roofs or electrical wiring can wind up costing far more than anticipated. Make sure your repo is really a bargain.