April 11, 2017
What Is a HUD Foreclosure?
Realtor.com quoted me in What Is a HUD Foreclosure? A Home That’s Below Market Value. It reads,
“Foreclosure” is a scary word with a simple definition: It’s the process of a lender attempting to recoup the balance owed on a loan after the homeowner fails to pay the mortgage. Mortgage lenders can be banks, private institutions, or the Federal Housing Administration. The FHA is the world’s largest insurer of mortgages; FHA loans are managed by the Department of Housing and Urban Development. So any foreclosed house that was purchased with an FHA loan is called a HUD foreclosure. But what exactly is a HUD foreclosure?
What is HUD?
HUD is a federal agency with the mission to help low-income and first-time home buyers. Through mortgage assistance and subsidized housing, it helps make the dream of owning a home a reality for many Americans.
A major division of HUD is the FHA, which is the world’s largest insurer of mortgages.
“A HUD foreclosure is the foreclosure of a loan that was insured by the FHA,” says David Reiss, professor of law and research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School .
When a homeowner defaults on this government-backed loan, HUD pays off the mortgage and becomes the property’s de facto owner. To recoup financial losses, HUD then puts the house on the market.
The benefit of buying a HUD foreclosure
The upside for bargain home hunters is that HUD-owned properties are usually sold well below market value.
While anyone can buy a HUD home, “the agency has a special program for teachers, police officers, firefighters, and EMS personnel called the Good Neighbor Next Door program,” says Reiss.
This program allows people in those professions to purchase a HUD property at a whooping 50% discount if it’s in a “revitalization area” and the owner occupies it for three years. Revitalization areas are neighborhoods with very low income, low homeownership, or a high concentration of foreclosed homes.
How to buy a HUD foreclosure
HUD foreclosures are not sold in the typical manner, according to Reiss. Instead of open houses and offer letters, he explains, HUD foreclosures are sold through a bidding process that favors owner-occupants (people who actually want to live in the house) over investors by giving them priority in bidding.
Prospective owners working with a real estate agent authorized to sell HUD property submit bids but have no idea what the other bids are. If the property fails to sell to an owner-occupant, the HUD foreclosure is then open to investors.
How to find a HUD foreclosure
According to Reiss, HUD maintains the HUD Home Store, an online database that lists all its foreclosures. And unlike some foreclosed properties that may have liens (a notice attached to your property that means you owe a creditor money), HUD homes are for sale lien-free.
April 11, 2017 | Permalink | No Comments
Tuesday Regulatory & Legislative Roundup
- An article in The New York Times looks at the movement of health care providers who use federal housing and tax programs to prescribe housing along with medications to treat patients. Some hospitals and health care providers have brokered deals with local housing authorities to obtain housing vouchers, while other hospitals have created housing units themselves.
- Governor Andrew Cuomo of New York and state legislators came to an agreement last week on a $153.1 billion state budget for fiscal year of 2018, including $2.5 billion in housing funds for a variety of programs. The budget allocates $1 billion for 6,000 supportive housing units statewide, $125 million for senior housing and $200 million for the New York City Housing Authority (NYCHA).
- Former Federal Housing Finance Agency Acting Director Ed DeMarco joins the Financial Services Roundtable leadership team as FSR’s Housing Policy Council president, effective June 1. DeMarco has a long and extensive history in the housing market, which even landed him as HousingWire Magazine’s Person of the Year in 2012 for his efforts impacting housing policy and the industry landscape.
April 11, 2017 | Permalink | No Comments
April 10, 2017
What Is Compound Interest?
US News & World Report quoted in What Is Compound Interest? It opens,
When it comes to investing, compound interest really is the most powerful force in the universe. Remarkable in both its simplicity and its power, compound interest is the concept of reinvesting, along with the original principal sum, the interest earned on your investment.
As a result, you earn interest on top of interest, and then more on top of that larger sum, and so on. “Over time, a small amount of money can become a mountain of money,” says David Winters, CEO of Wintergreen Advisers.
Compound interest is one of the most basic concepts for investors to understand, in no small part because its magical results work the same whether you have $100 or $100 million.
In that sense, it’s every investor’s secret weapon – and you probably want to use your secret weapon if it can help you build your retirement nest egg (which it can). Unfortunately, if you look at how the average American spends and invests, it doesn’t reflect a great respect or understanding of compound interest.
It’s time to change that.
Proving its power in a thought experiment. David Reiss, professor of law at Brooklyn Law School, likes to convey the profound power of compound interest with a riddle of sorts.
“Would you rather receive a gift on Jan. 1 of $1 million, or a penny that doubles every day for the rest of the month?” Reiss says. “Most kids would go for the million bucks, but those who are patient enough to do the math know that they can get millions more if they are patient enough to wait the month.”
It’s true. The penny-doubler would in fact finish January with $9.7 million more than his or her instant gratification-seeking friend.
April 10, 2017 | Permalink | No Comments
Monday’s Adjudication Roundup
- A Brooklyn federal judge on Friday cast doubt on an expected push by Barclays PLC to dismiss the U.S. Department of Justice’s case accusing the British bank and two former employees of deceiving investors about the quality of $31 billion worth of residential mortgage-backed securities.
- Morgan Stanley on Wednesday asked a New York state judge to quash a pair of lawsuits brought by the trustee for more than $2.5 billion of toxic residential mortgage-backed securities.
- The Bank of New York Mellon asked a New York federal judge on Tuesday to reconsider his decision to let Commerzbank AG’s billion-dollar case proceed against it for poor oversight of residential mortgage-backed securities trusts, saying the case came too late under German law.
- Fannie Mae and Freddie Mac investors whose class claims against the government-backed mortgage companies were largely thrown out asked the full D.C. Circuit on Friday to fix a panel ruling that could make it harder for the investors to fight for what is left
April 10, 2017 | Permalink | No Comments
April 7, 2017
When Buyers Change Their Minds
The Wall Street Journal quoted me in When Home Buyers Change Their Minds (behind paywall). It opens,
The offer was accepted. The mortgage was approved. What happens when the buyer gets cold feet and wants to back out of the deal?
Jason Michael faced this issue about 18 months ago when he listed his three-bedroom home in St. Louis. Mr. Michael, a 36-year-old public-relations executive, asked $130,000 for his home and accepted an offer for $127,000. The buyers posted a $1,000 deposit of “earnest money,” completed inspections, negotiated repairs and were approved for a mortgage.
Then they told Mr. Michael that they had found another house and didn’t want to move ahead with the purchase.
While the contract allowed Mr. Michael to pocket the deposit if the buyers defaulted, they refused to authorize their agent to release it. Only after Mr. Michael threatened to sue did they surrender the $1,000.
“My agent had said that people don’t back out of house purchases—that this won’t happen,” Mr. Michael says. “But now I approach it as if the buyer can back out until the very last minute.” He ultimately decided to rent out the house.
According to an online survey of 2,241 adults conducted for finance website Nerdwallet.com in January, home-buyer’s remorse isn’t uncommon. Nearly half (49%) of homeowners who responded said they would do something differently if they had to go through the process again. Broken down by age group, 61% of Generation Xers (the mid-1960s through the 1970s) and 57% of millennial homeowners (born in the early 1980s through about 2004) indicated they had regrets. Many wished they had bought a bigger home or saved more money before buying.
* * *
Here are a few things to consider if you might want to back out of your real-estate contract. Buyers and sellers should consult a qualified real-estate attorney for advice.
• Craft carefully. Rather than having a mortgage contingency allowing you to obtain a mortgage “at prevailing rates,” specify that the mortgage rate can be no more than 4%, for example. Or, consider making the contract contingent on the mortgage actually being funded by the lender. “This extends the contingency all the way to the closing,” says David Reiss, a Brooklyn Law School professor who specializes in real estate.
• Sharpen your negotiation skills. Even if you can’t back out legally, try to negotiate a reduction or return of the deposit with the seller. In a market where prices are rising and the homeowner can get a higher price for their home, there might be a chance to come to terms.
• Remember the broker. Even if the seller lets the buyer off the hook, he may still be liable to the broker for the commission. Contracts state that the commission is due when the broker finds a ready, willing and able buyer. Many brokers will work with the seller in this situation, Mr. Haber says, but it is an issue that needs to be addressed.
April 7, 2017 | Permalink | No Comments
Friday’s Government Reports Roundup
- Once per quarter the Securities and Exchange Commission surveys consumers to receive feedback regarding their access to credit. This quarter consumers reported feelings of discouragement when applying for credit; however, the agency found a decrease in credit applications and denials.
- The Board of Governors of the Federal Reserve Systems studied the “effectiveness of central bank liquidity injections in restoring bank credit supply following a wholesale funding dry-up.” The report found that banks use various European resources to help support an increase in their credit supply or to boost “their holdings of high-yield government bonds.”
April 7, 2017 | Permalink | No Comments
April 6, 2017
Is There a Bipartisan Fix for Fannie and Freddie?
The Hill published my latest column, Congress May Have Finally Found a Bipartisan Fix to Fannie and Freddie. It reads,
It is welcome news to hear that Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va.) are looking to craft a bipartisan solution to the problem of Fannie Mae and Freddie Mac. The two massive mortgage companies have been in conservatorship since 2008 when they were on the verge of failing. At that time, nobody, just nobody, believed that they would still be in conservatorship nearly a decade later.
But here we are. Resolving this situation is of great importance to the financial well-being of the nation. These two companies guarantee trillions of dollars worth of mortgages and operate like black boxes, run by employees who don’t have a clear mission from their multiple masters in government.
This is the recipe for some kind of crisis.Maybe they will not underwrite their mortgage-backed securities properly. Maybe they will undertake a risky hedging strategy. We just don’t know, but there is reason to think that gargantuan organizations that have been in limbo for ten years may have developed all sorts of operational pathologies.
There have been a couple of serious attempts in the Senate to craft a long-term solution to this problem, but it was not a high priority for the Obama Administration and does not yet appear to be a high priority for the Trump Administration. Deep ideological divisions over the appropriate role of the government in the mortgage have also stymied progress on reform.
Rep. Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, leads a faction that wants to dramatically reduce the role of the government in the mortgage market. Sen. Elizabeth Warren (D-Mass.) leads a faction that wants to ensure that the government plays an active role in making homeownership, and housing more generally, more affordable to low- and moderate-income households. At this point, it is not clear whether a sufficiently broad coalition could be cobbled together to overcome the opposition to a compromise at the two ends of the spectrum.
2017 presents an opportunity to push reform forward, however. The terms of the conservatorship were changed in 2012 to require that the Fannie and Freddie reduce their capital cushion to zero by the end of this year. That means that if Fannie or Freddie has even one bad quarter and suffers losses, something that is bound to happen sooner or later, they would technically require a bailout from Treasury.
Now, such a bailout would not be such a terrible thing from a policy perspective as Fannie and Freddie have paid tens of billions of dollars more to the Treasury than they received in the bailout. But politically, a second bailout of Fannie or Freddie would be toxic for those who authorize it.
Some are arguing that we should kick the can down the housing finance reform road once again, by allowing Fannie and Freddie to retain some of their capital to protect them from such a scenario. But Corker and Warner seem to want to use the Dec. 31, 2017 end date to focus minds in Congress. They, along with some other colleagues, have warned Fannie and Freddie’s conservator, Federal Housing Finance Agency Director Mel Watt, not to increase the capital cushion for the two companies. They claim that it is Congress’ prerogative to make this call.
The conventional wisdom is that the stars have not aligned to make housing finance reform politically viable in the short term. The conventional wisdom is probably right because the housing finance system is working well enough for now. Mortgage rates are very low and while access to credit is a bit tight, it is not so tight that it is making headlines. So perhaps Senators Corker and Warner are right to use the fear factor of future bailouts as a goad to action.
Housing finance reform requires statesmanship because there are no short-term gains that will accrue to the politicians that lead it. And the long-term gains will be very diffuse – nobody will praise them for the crises that were averted by their actions to create a housing finance system fit for the 21st century. But this work is of great importance and far-thinking leaders on both sides of the aisle should support a solution that takes Fannie and Freddie out of the limbo of conservatorship.
It will require compromise and an acceptance of the fact that the perfect is the enemy of the good. But if compromise is reached, it may help to avoid another catastrophe that will be measured in the hundreds of billions of dollars. And it will ensure that we have a mortgage market that meets the needs of America’s families.
April 6, 2017 | Permalink | No Comments
