Despite the Government’s best efforts and greatest intentions the wave of foreclosures continues to increase. The borrowers that are now defaulting on their mortgages and not qualifying for loan modifications are no longer people with subprime loans and bad credit rating. The fastest growing demographic in foreclosures are prime borrowers with prime loans that have lost their jobs and cannot afford any kind of deal on their mortgage.
This is a tragedy for the millions of families that face losing their homes. However there is a flip side to the crisis in the housing market. The flip side is that the foreclosure market is doing great. More and more buyers with cash in their pockets are looking for bargains among the millions of homes that are going through a foreclosure.
Many have the idea that the only homes that are on the foreclosure market are located in crime-ridden areas and are run down shacks. This is simply not true, during economic crisis like the one we are now going through all kinds of homes can be found, from beachfront luxury homes to shacks in the ghetto.
There is another myth a serious buyer must forget about as soon as possible. You are not going to find a great property selling at pennies on the dollar. Sometimes you can find amazing deals but this is probably because there are other circumstances that reduce the value of the home besides being on the foreclosure market.
However, you can get some great deals and discounts. A typical discount is probably around 5% less than the market value, although you can sometimes pay up to 30% or 40% less.
If you are savvy enough, this could only be the beginning of your savings. If you buy the property from the lender you could ask/demand for some of the buying costs to be waivered. If you ask nicely you might even get a discount on the interest rate or a break on the down payment.
Buying a home, whether on the foreclosure market or not, is a huge investment for most of us. It is therefore worth us spending some time doing our research and due diligence before we spend tens or even hundreds of thousands of dollars.
The foreclosure ball begins to roll when a borrowers falls behind on mortgage payments. A homeowner that loves his home will try his best to keep his home, making some payments, looking for a loan modification, or any other measure he can. However, if the home still forecloses the chances are that maintenance has not been carried out for some time on the home. Include the costs of bring maintenance up-to-date in your investment research.
What this might include will depend on the property. Some just need some gentle manicuring, while others have underlying structural damage that is prohibitively expensive to fix. It is true that homes in need of some tender lover and care will come at a discount, but it is important to make sure you can afford the cost of providing it.
The sad truth is that most troubled homeowners do not qualify for a trial loan modification. Of these, only a small percentage will receive a permanent modification. Analysts estimate that over 5 million households have underwater mortgages and are struggling with their payments. This represents nearly 20% of all American households. Many of these homeowners are going to lose their houses. The question is how soon can borrowers that foreclose on their homes buy a new home. The answer depends on the type of foreclosure and the extenuating circumstances of your particular case.
Who decides how soon you can get a new home loan?
The answer is the lender and their insurer. Although there is not one central body that sets fixed rules on this issue, there are clear guidelines set by Fannie Mae. Fannie Mae is America’s largest mortgage buyer. You might not even know that Fannie owns your mortgage because “she” does this on the secondary mortgage market. Because this corporation buys such a large percentage of mortgages, lenders will often follow in line with its guidelines.
What are the guidelines?
They can be found in Fannie Mae’s website and documentation. Below I detail the current guidelines, but these can change quite regularly so I encourage you to see them as a ballpark figure and then check for yourself.
How long you must wait after a foreclosure?
The quick answer is 5 to 7 years. However if there are extenuating circumstances the waiting period can be reduced from 3 to 7 years.
What about when you carry out a Deed-in-Lieu of Foreclosure?
It is actually worse; you should expect to wait between 4 to 7 years. However, if there are extenuating circumstances this might be a good option for troubled borrowers that want to buy a new home quickly, as the waiting time is reduced from 2 to 7 years.
What about short sales?
The current waiting period is two years. However, and this is an important point, if you are current on your monthly payments you can purchase a new home immediately. This is a powerful reason to stay up-to-date with your payments if you possibly can.
What are extenuating circumstances?
This refers to the reasons (or excuses) you provide to explain why you cannot pay your mortgage. There are many extenuating circumstances but your bank is only going to accept those you can prove, with documentation, are beyond your control and fall within their list of acceptable extenuating circumstances.
Fannie May will consider death (of a close relative, or partner), illness, job transfer, serious injuries from an accident, and other mitigating factors that dramatically affect your ability to pay your loan and are outside of your control. Unfortunately not being able to afford your payments because the interest rate on your variable interest loan has increased is not considered a mitigating circumstance.
These guidelines can help you make better decisions when trying to find the best choice when foreclosing on your home. Make sure you can prove the financial hardship you are going through and try to work with your lender with an option that will give the best chances of getting a clean start as soon as possible.
Loan Modifications have taken over the financial news in the last year. This is not at all surprising, with over 11.3 million people, nearly 25 per cent of all homes, with underwater mortgages; this is an issue that has the nation’s attention.
This makes any research into the issue of loan modifications and their effect on foreclosure of great interest to borrowers, banks, and the government.
One professor whose research has received a lot of attention is Sanjiv Ranjan Das, from the University of Santa Clara in California. Last year Das attacked the underwater issue, this refers to borrowers whose mortgage balances are larger than the market value of their homes. The underwater issue is one of the big problems the United States housing market has to deal with.
Professor Sanjiv Ranjan Das had a large and interested audience to his research; one big fan was his namesake Sanjiv Das, a top executive at CitiMortgage, the fourth biggest bank in the US, lender and servicer of over seven hundred billion dollars in mortgages.
Interestingly, these two men, one a professor and the other a banker, share more than just a name. Not least among the things they have in common is an education at the Indian Institute of Management.
Now they are working together on research that seeks to explain the behavior of borrowers that are stuck with underwater homes, unemployment and mortgage payments they cannot afford.
Interestingly the partnership between the two Das, began when the professor started receiving emails meant for the CitiMortgage Das. However, the accidental emails were great for the research of Santa Clara’s professor.
According to Das’ research the perfect or optimal loan modification includes an element of forgiving some of the balance in the loan. This is not easy for bankers to accept. Reducing the balance of the loan increases the speed at which the bank must accept losses and there is the added fear that it will create a counterproductive culture among borrowers.
However research has shown that re-defaulting on mortgages is much higher among borrowers that do not receive a reduction of their mortgage balance. This is because having an underwater home, a house with negative equity, makes many homeowners feel there is no financial sense in keeping their homes. However, when a principal reduction is carried out, even if only a modest one, re-defaulting on mortgages is sharply reduced.
Nevertheless lenders still shy away from this radical loan modification method and prefer using interest rate reductions and term extensions to reduce the monthly payments of troubled homeowners.
The good news is that the research carried out is getting the attention of the right people. The more is studied about the effects of income shock, or wealth shock, on troubled borrowers the more effective loan modifications and debt management as whole will be.
This Thursday the Obama Loan Modification Plan, HAMP, will be a year old. It was on the 4th of March, 2009 that the Obama administration started the largest and most ambitious homeowner’s aid package since the 1930s. The goal was to stop the wave of foreclosures that was destroying the housing market. The Government’s reply was huge. The aim was to help four million homeowners avoid foreclosure and they were willing to spend $75 billion to do so. How are things looking as we approach HAMP’s first birthday. By December 2009 there were nearly 760,000 loans in the trial stage of the program. This three month trial stage is designed to test if the homeowner will pay his modified loan for three months before the modification is final. However, only 31,000 homeowners had actually received a permanent loan modification by the end of 2009. Of these many had seen only the slightest of changes to their monthly payments. The Obama administration realized they needed to do more, and quickly. This triggered a list of amendments and countermeasures designed to speed up the process and open the doors to more homeowners. Soon it became obvious that the issue was not the interest rates of bad loans that were hurting homeowners but the increasing rates of unemployment that was reducing the income of homeowners that could not afford to pay for their mortgage. In fact, the fastest growing demographic in the foreclosure market consisted of homeowners with prime loans that had lost their jobs. From the beginning of the program, the Treasury Department made it very clear that the program would not cater for families that no longer had an income because of losing their job. The aid was focused on families whose income had shrunk but could still afford the payments of a modified loan. Another issue was the complexity of the loan modification process. Homeowners complained that mortgage servicers were not consistent, lost important documents regularly and did not provide accurate information. Mortgage servicers on the other hand explained that homeowners often did not provide the right documentation and were less than honest when filling forms. Treasury reacted by simplifying the system and providing greater concessions to lenders and mortgage servicers. Industry leaders often made the valid point that the HAMP plan incentives did not cover the costs and it was better for them to continue charging fees from delinquent homeowners and foreclosure proceedings than approve loan modifications. The reaction was to increase the incentives and the arm twisting of lenders that would not comply with the program’s expectations. The incentives did become rather generous for both servicers and borrowers. Every loan a servicer modified came with a $1,000 upfront payment, with an extra thousand dollars every year the homeowners was current on payments. This means the Treasury will pay $1,000 every year the borrower is not delinquent, to reduce the loan balance. However the biggest subsidy was offered to reduce the actual monthly payments of mortgages. If the lender could reduce the monthly payments to 38% of the borrower’s income the government would pay for the cost of reducing the payments to 31% of the family’s income. The problem is that these measures have not been sufficient to stem the increase in foreclosures and new guidelines are being worked on to look for a solution. Unfortunately the prospects do not look good for the second year of the Obama Loan Modification Plan.
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