Justin Brennan's Blog

   Bank of America Corp. said it would offer more borrowers reductions in their mortgage-loan balances in the latest twist on efforts to avert foreclosures.

The plan is the mortgage industry's boldest move yet to address the plight of the millions of U.S. homeowners who are "underwater," owing more than the current values of their homes. It enhances an agreement Bank of America reached 18 months ago with state attorneys general to settle claims they made over certain high-risk loans made by Countrywide Financial before Bank of America acquired that lender in mid-2008.

Reductions of as much as 30% in loan principal will be offered to struggling borrowers who have subprime or so-called option adjustable-rate mortgages, known as option ARMs. (Option ARMs, no longer available, allow borrowers to start with minimal monthly payments and face steep increases later.) Also included will be certain loans that have a fixed interest rate for the first two years before starting to adjust annually.

Amid the worst wave of foreclosures since the 1930s, banks generally have been reluctant to reduce principal. Instead, most loan modifications—including those under the government-subsidized Home Affordable Modification Program—involve reducing interest rates to as low as 2%. Some also extend loan terms to 40 years to shrink monthly payments.

But banks are finding that many deeply underwater borrowers aren't willing to keep making even reduced payments because they believe they have little hope of ever having equity in their homes and would be better off renting and perhaps buying a cheaper home later. The Bank of America program is aimed to give such borrowers more hope by reducing their loan balances to current estimated home values.

Bank of America said the program might eventually be extended to other types of loans. The U.S. Treasury, which runs the HAMP loan-modification program, also has been considering ways to encourage more principal reduction but has indicated that any such steps were likely to be modest.

Under the Bank of America plan, the maximum decrease in principal will be 30%, and borrowers will have to "earn" the lower balances in stages over five years by keeping up on their new, lowered payments.

By cutting principal, Bank of America said, it will reduce the risk that these borrowers will default again later. "We believe this could become an industry model for principal forgiveness," the bank said.

The program also addresses the woes of option ARM borrowers whose loan balances have increased over the years because they made minimal payments that deferred part of their interest due. Some of these borrowers will qualify for a reduction in their principal to as low as 95% of the home value.

To determine the market value of a home under the program, Bank of America plans to use computer models that estimate those values or, in some cases, opinions from real-estate brokers. Those estimated values will then be adjusted annually using metropolitan-area price indexes, Bank of America officials said.

First American CoreLogic, a real-estate data provider, has estimated that 11.3 million U.S. households, or 24% of those with mortgages, were underwater at the end of 2009.

$8,000 is a powerful incentive for home buyers who are buying their first home, especially when half of the homes in the country are trading at below $172,000. Visit www.TheLaJollaLife.com

However, we are also a nation of procrastinators, so the tax credit is really only effective as it nears expiration. We saw this with the new home tax credit in California last Spring and we saw it with the national tax credit last Fall. Note the spike in existing home sales in October and November in the chart below. The existing home data is actually closing data, so most of these contracts were entered into in August September. Call Justin Brennan for all your real estate needs. 619-823-2120

I see a large "W" shaped sales volume curve forming, with a huge decline when the December and January data is released, and a potentially even larger spike in May and June, with the new tax credit available to all buyers instead of just entry-level buyers.

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Source _ John Burns Real Estate Consulting.

Timing

The waiver is effective beginning on February 1st for one year.  The waiver also includes  the language “with regard to subsequent sales by purchasers”.  While it appears this waiver applies to new sales, we will check w/ FHA to see if it can be applied to sales that have already occurred and did not meet previous exemptions.

CONDITONS

In the waiver, FHA said it was taking this action to address the foreclosure crisis.

The waiver is limited to sales meeting the following conditions:

• All transactions must arms-length; no identity of interest between buyer, seller or third parties

o   Ways to ensure no unacceptable arrangements include:

•   Seller holds title

•  LLCs, corporations or trusts that are serving as sellers must meet applicable State and Federal law

• No pattern of previous flipping activity exists on property (as evidenced by multiple title transfers w/i 12 month)

• Property marketed openly and fairly (Any sales contracts w/ “assignment of contract of sale”) may be a red flag

• Sales w/ 20% increase over seller’s acquisition cost will only be permitted if the lender: Provides supporting documentation and/or second appraisal which substantiates increase in value (I.e. renovation or rehabilitation)

• Orders a property inspection and provides it to the purchaser. (Borrower may be charged for inspection.)

Waiver provides what the inspection must review and other requirements

• Waiver is limited to forward mortgages