So Cal Real Estate News

Last night and this morning I got involved in an interesting discussion of the “Federal Housing Finance Regulatory Reform Act of 2008,” better known as the “mortgage bailout” or “foreclosure relief” act.

The discussion took place in the comments section of a post on the Irvine Company’s apartments in John Lansner’s always interesting OC Register real estate blog.

In the process, I learned some surprisingly positive things about that bill.  Ultimately, it led me to the Congressional Budget Office’s June 9 Cost Estimate of the Federal Housing Finance Regulatory Reform Act of 2008, more commonly referred to as the housing “bailout bill.”

According to the generally reliable, non-partisan C.B.O., this bill should actually make $800,000,000 for the taxpayers. Yup, you read that right–it’s supposed to save us money, not cost us! I quote from the summary on p. 1 of the report:

CBO estimates that enacting this legislation would increase revenues by about$8.0 billion over the 2009-2018 period. . . . Over that period, we estimate that spending from those proceeds would total about $7.2 billion. The additional revenues would thus exceed direct spending by an estimated$800 million, decreasing future deficits (or increasing surpluses) by that amount over the next 10 years.

How is that possible?  Well, far from giving borrowers and lenders a free ride, the bill actually makes participating lenders discount their note to 90% of current market value, and then makes the borrowers pay FHA 1.5%  of the loan balance every year and then share 50% of their equity with the FHA when they eventually do sell!

Here’s how the C.B.O. explains it (p. 7, bolding mine):

This legislation also would require FHA to charge the borrower an annual fee of 1.5 percent of the remaining insured principal balance each year. Furthermore, the program would
provide that, upon sale, refinancing, or other disposition of the residence, the borrower
would pay to FHA a share of the new equity that would be created under the program.
(This new equity would be at least 10 percent of the property’s value because of the
required write down to no more than 90 percent of the current appraised value.) [note by Dave:  Some or all of this 10% could disappear if the home declined further in value after the refinance]

FHA’s share would start at 100 percent of that newly created equity, and would drop to
50 percent in the sixth year of the term of the new loan; it would remain at that level for
the duration of the loan. In addition, upon sale or refinancing of the home, the borrower
would be required to pay FHA 50 percent of any appreciation in the appraised value of
the home since the date on which the mortgage was insured (excluding the initial
10 percent equity created by participating in the program).

In the discussion last night, one poster thought that was excessively harsh on the borrower.  Maybe, but the lender wrote down the loan to 90% of current market value, so that 10% equity was a gift from the lender to begin with.  I’m not shedding tears for the lender, either–they’re the ones who got us into this mess with those ridiculous loans to begin with. (see “How we got into this mess“)

I do sympathize with some of the naive borrowers who trusted their lender (who was often also their Realtor) way too much, I think the main focus should be on protecting the overall economy against a collapse. Protecting the taxpayer would come second, then the borrower and the lender.

So if the cost of the program is the owner giving up half their equity, so be it. Remember, the lender’s making a major discount on the principal balance, so that’s basically a gift to the borrower. Sounds like a pretty sweet deal for the borrower to me. And not a bad deal for the taxpayer, either. (See “How we got into this mortgage mess.”)

Sounds like maybe it won’t cost the taxpayers anything, and maybe we all win. Perhaps this specific bailout bill’s not such a bad idea after all!

Maybe I was right about the need for this bill after all! (See “Why we need a mortgage relief bill.”)

There’s lots more to the report, some good & some bad from my perspective, but much better than I expected overall.

That’s my opinion–for now, at least. Feel free to share your opinion below, in relatively polite language, of course. (There is a lot of passion about this topic.)

I’ve been going back on forth on the bailout bill since it was introduced, but I just finished a phone call that’s got me jumping onto the pro-bailout bandwagon.

I just got off the phone with an efficient but polite collections representative folks at legendary sub-prime EMC Mortgage. We were discussing a “short sale,” which is anything but short. Basically, it’s the sale of an “upside down” (over encumbered) property where the lender takes a reduced or “short” payoff to enable the sale. The seller is a client of ours, and reflecting on her situation gave me a renewed desire to see at least the core parts of the bill passed.

This borrower is now upside down due to both market declines and negative amortization. A change in her family situation has created major challenges, and there’s no way she’ll be able to make her payment once massive scheduled payment reset kick in down the road.

When she first called me a few months back, I referred her to “Trouble making your mortgage payment? 7 ways to get back on track.” I suggested she review that post, then contact her lender to try to work out a waiver of the negative amortization and reduction of her interest rate. After about two months, EMC told her they weren’t interested.

It seemed like EMC was just too busy dealing with people whose loans had already reset. They didn’t want to deal with borrowers whose reset is still months away. They basically told her they’d talk to her then, but she felt that if they wouldn’t make a commitment to reduce the principal balance and interest rate now, she’d be better off biting the bullet sooner than later.

That’s when we started on the short sale. Despite another short sale listing across the street and a new REO listing a few houses away, we now have a buyer in escrow and are awaiting approval from EMC Mortgage’s loss mitigation department.

Were the Mortgage Relief Bill already in place, I’m pretty sure the owner would have been able to keep her home, we’d have one less listing in a saturated market, and EMC’s loss would be lessened, and the home owner’s equity increased. Pretty much a “win” all the way around.

Under the provisions of the Mortgage Relief Bill, as I understand them, if EMC accepted a write-down of the loan to 97% of current market value, FHA would insure a refinance with at least 3% equity if the borrower actually qualified, which I’m pretty sure would be the case in this situation.

Some people oppose the “bailout” bill because they feel like it rewards greedy lenders and imprudent borrowers. In this case, however, the lender would still have to write down at least $100,000. The homeowner, a hard-working, honest first-time buyer who trusted her lender too much, has lost her original equity and has certainly learned from her mistake.

However, the bigger issue isn’t helping undeserving borrowers & homeowners, but cutting back on the oncoming wave of foreclosures to help our economy by stabilizing home prices and keeping more banks solvent.

Some have suggested that private initiatives could do the same. They might to some extent, but they sure haven’t helped any of the upside down sellers I’ve worked with so far. The truth is, the bailout bill itself is significantly limited in how many homeowners it would help.

From where I sit, on the front lines of the market crash, it sure looks like it will take both private and government assistance to get us out of this hole, or at least keep us falling into one unseen since the Great Depression.

The increase in sales indicates prices have fallen to a reasonably affordable level. But the oncoming wave of foreclosures is apt to drive prices even lower, resulting in even more foreclosures and a spiral downward only compounded by energy, interest, inflation, and manufacturing woes.

We’re all in the same boat, & I’m not in favor of letting it sink just because someone else kicked a hole in the bottom. Sometimes even the “innocent” have to help bail out the boat! Private and government initiatives alike.

I’m not in favor of bailing out anyone who can’t qualify for the new loan. No more “liar loans,” please! If I understand this bailout bill correctly, the FHA would only loan to homeowners who could qualify.

In this specific case, what my seller was trying to negotiate with EMC was similar to what the bailout’s proposing. I’m sure she’d make it work if her principal balance was down to 3% below market instead of $100,000 over market and if she had a fixed FHA loan at say 6.25% instead of an adjustable about to adjust to 13%.

There’s plenty not to like about the govt. bail out, but the basic concept of the lender writing the loan down to a little below market value in return for FHA rewriting the loan if the buyer qualifies should reduce the foreclosure onslaught somewhat. I think the Senate tends to produce better law then the House, and they did some significant changes from Barney Frank’s original bill. They got more of it right than I expected.

We’ve seen a price correction around 25%, which is enough to bring buyers back even in such a negative environment. If it weren’t for all the additional REOs in the pipeline we’d probably be nearing a price bottom, based on current activity.

But the decline of an additional 25% that some people are predicting due to the REO problem would trigger a whole new round of foreclosures–a downward spiral of doom that could be worse than the Great Depression. That would cost FHA and taxpayers more than reducing the flood by guaranteeing some loans to stem the tide somewhat.

To me, it looks like a “pay me now, or pay me later” sort of thing, regardless of whose fault it is.  And there’s plenty of blame to go around, believe me! (see “How we got into this mess“)