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Ted Spradlin's Blog

By Ted Spradlin | Mortgage Broker
or Lender in Walnut Creek, CA
  • The Stealth Housing Bailout For People Who “Did The Right Thing”

    Posted Under: Home Buying in Portland, Home Selling in Portland, Financing in Portland  |  March 21, 2013 12:13 PM  |  259 views  |  3 comments

    I read an excellent post in OC Housing News yesterday about a couple from Palmdale, CA who strategically walked away from their $340,000 mortgage on their $190,000 home back in 2009.  Today, they are homeowners again thanks to a Veterans Administration loan that is $163,000 less than their former mortgage.

    It used to be back in 2008-2009, when the couple featured in the article walked away, that all the righteous people who also found themselves $100,000+ underwater in their home were asking, "Why should I pay for people who made stupid financial decisions when I always did the right thing paying my bills on-time and living within my means?  Why should we reward these people for being reckless and stupid with their money?  Where’s my bailout?" 

    I used to smile at the irony when people who still had their jobs played the victim card while vilifying the people who were caught in the crossfire of the Great Recession.  You know, the fifteen million people who lost their jobs, life savings, their homes and cars, often uprooting their children from schools, moving in with family, applying for food stamps and public assistance for the first time ever, and the countless other things that former middle class Americans were faced with, like paying the power bill before the mortgage. 

    Well, for the righteous people, their bailout started in 2009 and has been going on ever since courtesy of the Federal Reserve’s Quantitative Easing and Zero Interest Rate Policy. 

    The people who did “the right thing” and paid their bills on-time, have been able to refinance their underwater mortgages at artificially low rates of 4.25%.  (No lender in their right mind would do a 150% Loan-To-Value loan at 4.25%.  If the former private label mortgage market made this loan, it would carry a 12-14% rate).  

    And if the do-righters were lucky enough to still have a 401K and company stock options, they might have seen their holdings return close to 2007 highs due to Federal Reserve efforts to create a “wealth effect.”  In simple terms, the wealth effect theorizes that people will go out and spend more money in the economy if they see the value of their stocks and real estate rising, or “A rising tide will lift all ships.”  

    Additionally, thanks to The Fed printing press and above the law Too Big To Fail Megabank’s foreclosure mischief, home values have come roaring back all across the country as distressed homes are being held off the market by the TBTF banks, either due to lack of legal standing to foreclose or TBTF bank decision to push foreclosure losses way out into the future.  

    Those who “did the right thing” have been given a multi-trillion dollar gift courtesy of the Federal Reserve.  I’m guessing many of them went out and financed a car at a very low interest rate as well.

    Right on cue, the strategic defaulters, like the couple featured in the OC Housing News post, there are jumping back into the housing market three years after their short sale or foreclosure thanks to artificially low interest rate mortgages from FHA, Fannie Mae, Freddie Mac, and the VA. 

    Whether by strategic default or The Fed’s money printing, most every homeowner has received some kind of bailout, and will likely continue receiving this bailout for many years to come. 
  • Cash Out Refi Of 14 Residential Investment Properties By Cross Collateralizing

    Posted Under: Home Selling in Alameda County, Financing in Alameda County, Investment Properties in Alameda County  |  March 1, 2013 2:07 PM  |  231 views  |  No comments

    We're finalizing a cash out refinance for an investor who is cross collateralizingfourteen of his investment property condos that he acquired at foreclosure auction in 2011, issuing a $300,000 private money loan against the collateral with a combined $750,000 appraised value.

    Cross Collateralized private money or hard money financing is becoming more common with real estate investors who picked up a bunch of low-priced condos and townhouses on the cheap in the 2010-2011 period. They paid cash to buy the properties and are enjoying the $10,000/mo net income they've been taking in for the past few years.

    But, they are real estate investors, and real estate investors don't like sitting on their hands taking in steady paychecks while everybody else is out doing deals in a hot market. They gotta get in on the action and the action du jour is flipping houses. Everyone seems to be buying up outdated homes with Brady Bunch kitchens, going in and renovating the place, and taking an easy $30,000 profit on four months work. It makes complete sense to want to buy a few more properties.

    With cross collateralized financing, most borrowers prefer to have a Partial Release Clause, which in the event they sell a property, they only have to pay off the portion of the loan that was assigned to the property sold. Most lenders charge a small fee at the time of partial release plus recording fees to the borrower.

    Cross collateralized private money or hard money financing makes a lot of sense for investors to get their cash out to do more deals to either flip or to add more to their long-term investment portfolio.

  • What To Do If You're Getting Foreclosed

    Posted Under: Home Selling in Portland, Financing in Portland, Foreclosure in Portland  |  August 29, 2012 10:03 AM  |  229 views  |  No comments

    I've spoken to three different homeowners in the last four days who were seeking advice to either try for a loan modification, short sale, or let the home go to foreclosure auction. (I was a distressed Asset Manager for a large investment fund, working with homeowners and investors across the country, so this is right up my alley).

    Each of the homeowners has a unique situation with specific challenges to overcome.

    What's consistent about these people is they're $125-250k underwater in their property, 8-15 months delinquent on their mortgage due to job losses and income interruptions that depleted their savings, and maxed out their credit cards just to keep the electricity on, food on the table, and gas in the car. Basically, they've just barely hung on during the Great Recession.

    What are the risks?

    The biggest concern they had was having to pay income taxes on the deficiency balance on either a short sale or foreclosure.

    One of the only good things George W. Bush did while in office was pass the Mortgage Forgiveness Debt Relief Act in 2007, that doesn't penalize underwater homeowners who walk away from their properties. Before deciding to walk, make sure to run the 1099-C by a CPA first.

    Another concern is how a foreclosure or short sale will appear on their credit?

    I find this funny when people are facing imminent bankruptcy, that they want to know if they should let the house go or work with the bank on a short sale. IT DOESN'T MATTER! If they're filing BK because they have $50,000 in charged off credit cards, and few deficiency balances on repossessed cars, along with a charged off Home Equity Line of Credit (HELOC), don't worry about it.

    They're going down big and it's going to take 3-5 years to rebuild financially. Credit scores can bounce back within a year or two after a BK, going from a 450 FICO to a 700+ FICO pretty easily.

    With an impending BK, my advice is to stay in the house rent-free for as long as possible, hopefully saving money for deposit on a rental home when the inevitable arrives. Just make sure to pay for Homeowners Insurance to insure valuables and against personal liability of someone breaking their leg on the property or getting golf clubs stolen from their car (falls under Homeowners Insurance, not Auto Insurance).

    To stay, sometimes it makes sense to hire a foreclosure defense attorney, if one can afford it. Attorneys can file numerous motions that prolongs the inevitable, potentially up to three years. In Florida, attorneys advertise on billboards, "For $300/mo, I can keep you in your house for two years."

    If a person cannot afford an attorney, search online for info-sharing groups of homeowners who have represented themselves against the banks. There's a lot of good info out there and many people willing to share their experience, free of charge.

    If not a foreclosure defense attorney, filing that inevitable BK will delay the foreclosure sale, placing an "automatic stay" on the property while the bankruptcy is active.

    I have a few friends who filed and discharged a Chapter 7 BK in 2009. Their bank forgot about them. They've both been there for three years. Each time the mortgage lender calls them, they say, "We filed bankruptcy." The collector immediately apologizes and hangs up. It's illegal for a creditor to call a debtor while they're in bankruptcy.

    The great thing for the homeowner about the big bank servicer call center collector, is that the collector is on a predictive dialer and must make 30-60 phone calls per hour. The turnover rate is horrendous in those jobs, so chances are they won't remember the same homeowner telling them for the past three years that they were in bankruptcy. Nor, are they trained well enough or savvy enough to log in to PACER and verify if that bankruptcy had already been discharged.

    So the loan just lingers in no-man's land, maybe getting back into the dialer in another 3-6 months.

    At this point in the housing crisis, moral judgment on paying ones mortgage has been thrown out the window since The Fed, Treasury, Bush and Obama administrations chose to use HAMPmodifications to "foam the runway for the banks" rather than provide homeowners with a long-term option to keep their homes.

    If a cash-strapped homeowner needs a free place to live until they get back on their feet, by all means go for it. The banks don't want more distressed inventory on the market, so they'll play along with a homeowner pushing the foreclosure out another year or two. Homeowners have to do what's in their best interest because the banks and the government are not coming to their rescue.

  • Why Do Home Buyers Freak Out So Much?

    Posted Under: Home Buying in Portland, Home Selling in Portland, Financing in Portland  |  August 29, 2012 10:01 AM  |  140 views  |  No comments

    I've purchased four homes as a civilian and professionally been involved in hundreds of real estate transactions since 2002, so I keep a pretty even keel throughout the entire escrow period, not getting too worked up over the process.

    What always amazes me is how much home buyers (and sometimes Realtors) freak the heck out when buying a home. Home buying often brings out the worst fears in people, which is really weird, because, all that it really amounts to is qualifying for a loan, shelling out a little bit of down payment money (3-5% down payment in today's market), and then moving in to the house after it closes.

    But in people's mind, they build this process up to be so big and scary. Even scarier than The Rapture!

    However, I do understand that it can be nerve racking because it's a very big personal and financial commitment.Personal note: when I bought my first house in April 2000, I stayed up until 2 am eating ice cream, watching hours of infomercials in a near catatonic state. So I've been there before.

    However, with time and experience, I just don't see the need to get oneself all worked up over something that has a higher closing percentage than top selling men's cologne Sex Panther by Odion ("60% of the time, it works every time"). More like nine times out of ten real estate transactions close on-time.

    There's a few reasons that a purchase transaction doesn't close on time:

    • If it's a short sale or bank-owned property, there's bound to be deferred maintenance issues that must be repaired before the new bank will issue a loan, which causes the need for an extension of the closing date.
    • In the post-bubble era, banks scrutinize personal financial statements much closer, frequently requesting cancelled checks, invoices, verification of cash deposits over $400 (don't deposit your gambling winnings into your bank account if you're buying a home any time soon!).
    • There are 20 hands working on the transaction, from buyer, seller, their agents, loan officer, processor, underwriter, secondary market underwriter, Fannie/Freddie/FHA, mortgage insurance company, title, escrow, seller's lender(s), tax lien(s) if it's a short sale, asset manager at seller's bank, asset managers boss, asset managers boss's boss, owner of the sellers loan ie. "the investor" (pension fund, Fannie, or Freddie), and short sale negotiator.

    It's natural for people to become mentally and emotionally spastic when they're going through something that they don't fully understand (like real estate specific industry lingo), even though they're the ones signing their name to several hundreds of thousands of dollars in mortgage debt. This can be very nerve racking, indeed.

    However, for reassurance sake, the bursting of the housing bubble weeded out all the drug dealers and spiky haired cell phone kiosk kids who used to peddle easy money, ticking time bomb Subprime loans to unsuspecting borrowers (possibly the seller in your short sale transaction?). Those who are left in the mortgage and real estate industry are experienced professionals who can get the job done, which hopefully puts buyers a little more at ease.

  • Chase Mortgage Giving Delinquent Homeowners $25,000 For Short Sale

    Posted Under: Home Selling in Portland, Financing in Portland, Foreclosure in Portland  |  June 11, 2012 2:07 PM  |  176 views  |  No comments

    There's a Linked IN feed I receive every week started by a Realtor who said that Chase Mortgage is giving the homeowner $25,000 for moving assistance on a short sale.  The email chain goes on with short sale agents from across the country sharing stories about similar scenarios where their clients received a generous moving assistance check from Chase.

    Q: Why would Chase be so generous to homeowners who are often badly underwater in their home, meaning they owe $300,000 on a home worth $150,000?  

    A: Chase was handed Washington Mutual on a silver platter for pennies on the dollar.  The FDIC also has loss guarantees that keep prevent the acquiring bank from taking big losses on WAMU legacy assets.  Most of the recipients of Chase's cash-for-keys largesse have old WAMU mortgages that are now owned and serviced by Chase.  Here's a hypothetical breakdown on a $300,000 mortgage on a $175,000 short sale:    

    $30,000   Acquisition Price from FDIC via WAMU Seizure
    $25,000   Moving Assistance to Seller
    $15,000   Closing Costs
    $7,000     Taxes
    $7,000     Forced Place Insurance
    $15,000   Carrying Costs
    $12,000   Foreclosure Costs (if applicable)
    $111,000   TOTAL COSTS

    On a $175,000 transaction, a $64,000 profit looks really good.  Multiply that number by thousands of old WAMU mortgages in default and it starts to look a whole lot better! 

    I'm guessing that Chase probably has the seller sign away their legal right to sue Chase in order to get the cash for keys.  

    Chase is doing the right thing for their immediate and long-term bottom line and for the bottom line of the homeowner by paying $25,000 moving assistance on short sales.

  • HAMP Loan Modifications Becoming Tomorrows Short Sale Inventory

    Posted Under: Home Selling in Portland, Financing in Portland, Foreclosure in Portland  |  May 24, 2012 10:41 AM  |  107 views  |  No comments

    The Obama administration's Home Affordable Modification Program (HAMP) looks to be the temporary holding cell where delinquent and underwater homeowners bide their time until they enter the administrations short sale cash-for-keys program - formally known as Home Affordable Foreclosure Alternatives (HAFA).     

    In the Treasury's May 2011 Making Home Affordable Program Performance Report, there's valuable data and some interesting facts:

    • 4,600,000   60+ days delinquent loans
    • 2,636,033   delinquent loans eligible for HAMP
    • 633,459      permanent HAMP mods
    • 21,299        loans eligible to apply for the Principal Reduction Alternative (PRA)
    • 4,911          completed PRA mods ($69,532 median principal reduction)
    • 8,261          active trial and permanent HAMP mods in Oregon
    • 15,160        active trial and permanent HAMP mods in Washington
    The most important factor in predicting whether a loan will perform or default is the Debt-To-Income ratio (DTI).  DTI is the monthly debt payments against the gross monthly income expressed as a ratio. For example, a $2,000/mo mortgage payment (front end DTI) + $500/mo car payment (back end DTI) against a $10,000/mo gross monthly income would have a 20:25 DTI. 

    On page 5 of the Treasury's report, there is a small, yet extremely significant graph regarding DTI.  

    When you first look at the graph, a savings of $525/mo and a 14% DTI reduction looks impressive. 

    However, when you reverse engineer the numbers, and factor in costs for a family of four, then you realize that HAMP is only delaying the inevitable. 

    $2688/mo Gross Income ($32,256 per year)
    $2150/mo Net Income (20% taken out for taxes)

    $833/mo  -   31.0%    Front End DTI
    $1680/mo  - 62.5%  Back End DTI

    The HAMP borrower has $470 left over for food, gas, insurance, utilities, auto repairs, child care, school activities, medical co-pays, and everything else that comes with providing for a family.  Saving for college or retirement is out of the question. 

    These permanent HAMP mods, with their sky-high DTI, will most likely re-default and become tomorrow's distressed inventory. 

    HAMP clearly was not designed to keep homeowners in their homes as much as it was meant to slow down the losses and write downs on the books of the largest banks.  Banking analysts widely refer to this as a backdoor bank bailout, or an "extend and pretend" policy.  In this respect, HAMP can be considered a success for the banks, having delayed millions of homes from entering the distressed inventory, which slowed the 2008-2009 price free-fall, which kept banks from having to run back to the government for another politically suicidal second, third, or tenth TARP bailout.

    For the HAMP borrower, however, it has placed them in a temporary no-man's land.  With large debt burdens, and most likely deeply underwater, re-default appears inevitable.  At least when they do re-default, they'll have 12-18 months without mortgage payments. And when that ends, they'll receive a parting gift in the form of a $3,000 HAFA cash-for-keys check, thanking them for playing.

  • Wall Street Wizards Slice and Dice Baseball's Worst Mistakes

    Posted Under: Home Selling in Portland, Financing in Portland, Foreclosure in Portland  |  May 22, 2012 9:55 AM  |  139 views  |  No comments

    Today’s post is a relic from September 2008 that incorporates my favorite sport of baseball with a bit irony, sarcasm, and humor to capture the mood of the times, which back then was the height of what was known as the Subprime mortgage crisis. 

    The irony is that it’s been almost four years and the housing and mortgage markets are still dealing with the exact same issues – too much mortgage indebtedness by homeowners from the housing bubble years and way too much political influence by the megabanks that has seen trillions of taxpayer dollars diverted from the productive economy into the coffers of the banks to protect them from themselves.  And in the baseball world, owners are competing with each other to shell out Steroid-Era sized contracts to players whose performance regression will most likely resemble power hitters of the 1970s and 1980s rather than the bloated numbers of the 1990s and early 2000s. 

    Okay, on to my blast from the past.    

    Back in the summer of 2008, I followed the musings of Craig Calcaterra, an attorney in Ohio with a baseball blog called Shysterball.  It quickly became my favorite baseball blog until Craig was hired full-time by NBC Sports to be a professional blogger.  Now I follow NBC’s Hardball Talk quite a bit to get my baseball news and a fill of Craig’s humor.   

    That September, in the midst of the Lehman Brothers bankruptcy, the AIG bailout, Fannie Mae and Freddie Mae’s nationalization, and the TARP legislation being debated in Congress, Craig wrote a parody of the times, linking baseball and Wall Street absurdity together.   

    Here’s my response from the Comments section that Craig re-posted into an entirely new blog post:  

    FRIDAY, SEPTEMBER 19, 2008

    Comment of the Day

    I never run a "Comment of the Day" but I just got one so good that I have to set it apart somehow.  Here's reader Ted Spradlin absolutely crushing my bailout parody from this morning:

    “Bud and the owners found their perfect storm.  Wall Street exploited housing.  Now lets get them to exploit bad baseball contracts.

    The owners can sell their crummy contracts (Barry Zito,Andruw Jones, Gary Matthews Jr, Vernon Wells, Alex Rios, etc) to the surviving Wall Street banks at par or even at a premium.  Wall Street can take $1 billion in contracts and turn it into $3 billion in new SIVs, Derivatives, Credit Default Swaps, Options, ETFs, Contract Backed Securities, etc.

    All General Managers will get to experience Yankees GM Brian Cashman's luxury of wasting money on over the hill players with no recourse.  Ned Colleti and Brian Sabean don't look so stupid after all.

    The owners already got the money for selling off the contract and don't have to pay Lloyd's for contract insurance.

    Players and agents are thrilled with the unprecedented salary boom.

    "Miguel Cairo is a premium utility player and the market recognizes that," said Scott Boras at the press conference introducing Miguel Cairo as the highest paid utility player in history at $12,500,000/yr.

    Bud Selig has a great new revenue source and "new media" explosion on mlb.com.  He can create a Fantasy Contract Derivative League where people can trade all these new fancy financial instruments of crummy players, just like a real Wall Street trader.  MLBTV airs 2-3 hours of "Fast Contracts" and "Squawk Box Baseball," ala CNBC. Jim Kramer was rumored as a host, but loses out to Erin Andrews, which turns out to be a ratings bonanza.

    This opens up an entirely new world of quantitative analysis for Sabermetricians as well.  Rob Neyer never saw it coming. VORP and OPS are a thing of the past.

    Bud Selig needs to pounce on this opportunity. Baseball needs it and Wall Street needs it.  The infrastructure is already in place.  If something goes wrong, march to Congress for taxpayer relief because these institutions are "too big to fail."

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