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Short Sales… Good Bad or Ugly

By Jerry Heard | Broker in San Diego County, CA
  • How Did We Get Into This Situation??

    Posted Under: Home Buying in San Diego County, Foreclosure in San Diego County, Property Q&A in San Diego County  |  February 14, 2012 2:14 PM  |  287 views  |  No comments

    As with many government programs, it started with good intentions.  In 1977 Congress passed the Housing and Community Development Act of 1977 better known as the Community Reinvestment Act (CRA) to reduce discriminatory lending practices in low to moderate income neighborhoods and increase lending to minorities. There have been several modifications to the original act over the years.

    Among these modifications were provisions that allowed Fannie Mae and Freddie Mac to securitize mortgages and sell them to investors. These securities were insured or guaranteed by these entities. Lenders would originate loans and sell them to Fannie and Freddie who in turn would bundle them into securities and sell them to investors all over the world. This created a ready market for the mortgage backed securities and encouraged lenders to make more loans. If the asset underlying these loans remained strong, then the security would also be strong.

    Some have charged that the regulations forced lenders to make loans to people who would not have, under previous credit standards, qualified for the loans they were getting. Many lenders created new types of loans, primarily negative amortizing adjustable rate loans as well as loans of up to 100% of the value of the home. Many did not require any proof of income for the borrower. All of this was done to increase lending among low to moderate income borrowers and in many cases to meet CRA requirements.

    As the supply of money increased, due to relaxed underwriting standards, more people were able to purchase homes. When there are more people with more money chasing a limited supply of homes, prices will rise. Some of the people who purchased homes in the early stages of this boom were able to sell their homes for 20-50% more than they paid for them in a short time, often in 3-6 months. Many took the equity and repeated the process. Some refinanced and remodeled the home, bought cars and TVs or used the money for their children’s education.

    Eventually the bubble burst and people were not able to turn the homes over as quickly as they had just a few months before. Now people had mortgages of 100% or more of the value of the home and also were faced with a mortgage payment that was going to increase. Many of these borrowers had initial interest rates as low as 1% and now were facing rates of 5-8%. A loan of $150,000 at 1% had a payment of $482 a month. Now when the interest rate adjustedborrowers were faced with a payment of $805 a month or more. Many could not afford this new payment and had to sell their home.

    Now we were in a reverse situation from what we had been in before. The supply of homes on the market increased and prices started falling. Many borrowers walked away from their homes and the lenders foreclosed. As prices fell on these homes that the borrowers could no longer afford, other homes in the neighborhood also fell in value and equity evaporated. Many people tried to keep up with their payments but after seeing the value of their home fall 50% or more in some cases, they made the decision, often called a strategic default, just to stop paying the mortgage. Sadly the ones hit hardest are the ones that the law was created to help.

    So now our real estate market is dominated with short sales, homes selling for less than is owed to the lender, and foreclosed properties, called REOs for Real Estate Owned. Only time will cure the problem but meantime now is a great time to purchase a home for your own use or as an investment. Interest rates are at all-time lows for both personal residence and investment properties.

  • Repo Options

    Posted Under: Home Buying, Foreclosure, Property Q&A  |  January 25, 2011 2:32 PM  |  333 views  |  1 comment

    The FHA and FNMA HomePath programs are great ways to buy a home. The FHA homes can at times be purchased for as little as $100 down. The homes may have an escrow account to take care of some of the repairs that may need to be done to the homes. The website http://hudhomestore.com/HudHome/Index.aspx has a listing of all of the FHA Repo homes that are for sale in the United States. Most are available only to owner occupants but many are available for investors. Only brokers, like me, who are registered with FHA can make offers on these homes for their clients.
    The FNMA HomePath program does not require an appraisal or condo certification which may be a problem for some non HomePath repo purchases. These homes are available with as little as 3% down and FNMA may pay 3% of the closing costs. Check http://www.homepath.com for information on these homes.
    Not all lenders will do the FNMA HomePath loans but I work with several that do. Any lender who does FHA loans can do the FHA Repo loans.
    If you are interested contact me
    Jerry Heard
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