Tag Archives: default

What Is a HUD Foreclosure?

Posted on by

Mike Licht

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.

Minority Homeownership During the Great Recession

Posted on by
photo by Daniel X. O'Neil

Print by Andy Kane

Carlos Garriga et al. have posted The Homeownership Experience of Minorities During the Great Recession to SSRN. The paper concludes,

The Great Recession wiped out much of the homeownership gains attained during the housing boom. However, the homeownership experience was very different across racial and ethnic groups. Black and Hispanic borrowers experienced substantial repayment difficulties that ultimately led to a greater share of homes in foreclosure.

Given that home equity often represents a substantial share of household wealth, these foreclosure events severely damaged the balance sheets of minority families. The dynamics of delinquency and foreclosure functioned differently across the income distribution within racial and ethnic groups.

For the majority, higher income was associated with lower delinquency rates and fewer foreclosures as a group. However, for Hispanic families this relationship was surprisingly reversed. Hispanics with the highest incomes fared worse than those with the lowest incomes. This counterintuitive finding suggests how college-educated Hispanic families may have had worse wealth outcomes than their non-college-educated peers: Hispanic families with high income (potentially the result of high educational attainment) had a greater share of home equity lost in foreclosure than lower-income Hispanic families.

Logit regressions suggest that underwriting standards and loan structure explain a significant amount of the greater likelihood of foreclosure among Black and Hispanic borrowers. However, underwriting standards explained more of the gap for Black borrowers, while loan structure was a stronger factor among Hispanic borrowers. Regional concentration and variation in housing markets explained more of the Hispanic-White foreclosure gap than any other group. This is understandable given that Hispanic borrowers in our sample were heavily concentrated in housing markets that experienced some of the largest volatility. Despite accounting for these important factors, sizable gaps remain in foreclosures among Blacks and Hispanics relative to Whites. Incorporating measures of labor market outcomes into the analysis may offer further insights.

In sum, the homeownership experience during the Great Recession proved to be inimical for many families, but far more so for Black and Hispanic families. For these families, financially destructive foreclosure events delayed and potentially derailed the dream of homeownership. (164-65)

I am not sure what this all means for housing finance policy other than the obvious: consumer protection in the mortgage market is a good thing as it ensures that underwriting standards evaluate ability-to-repay and loan structures exclude abusive terms like teaser rates (thanks to the ATR and QM rules and the Consumer Financial Protection Bureau). There are probably other policies that we should consider to reduce the depths of our busts, but they do not seem likely to gain traction in the current political environment.

Dodd-Frank Repeal Unappealing for Homeowners

Posted on by
photo by Gage Skidmore

Congressman Jeb Hensarling

The Hill published my latest column, Why Repealing Dodd-Frank Is Unappealing if You Own a Home. It opens, 

President Trump has made it clear that he wished to dismantle the Dodd-Frank Wall Street Reform and Consumer Protection Act. Just two weeks after his inauguration, he issued an executive order to get the ball rolling by means of agency action, an effort that will be led by the Department of the Treasury. Trump will have lots of allies in Congress as he pursues this agenda. A recent memo by House Financial Services Chairman Jeb Hensarling (R-Texas) to his committee’s leadership team outlines a legislative path that leads to much the same goal.

One of the key components of the Dodd-Frank regulatory regime was the newly-created Consumer Financial Protection Bureau (CFPB). The bureau is responsible for administering a range of consumer protection regulations, some of which predate Dodd-Frank and some of which were mandated by it. Homeowners should sit up and take notice because a lot of protections they can now take for granted will be stripped away if this push is successful.

Many of these regulations protect homeowners as they obtain mortgages for their homes. Others protect homeowners over the life of the mortgages, particularly when they are having trouble keeping up with their mortgage payments because of those common life events that still knock us for a loop when they happen to us: job loss, divorce, medical bills, a death in the family.

Hensarling’s memo makes clear the extent to which he wants to weaken the CFPB. Among many other things, he wants to eliminate the bureau’s consumer education functions, bar it from commencing actions involving unfair, deceptive or abusive acts and practices, end its practice of tracking consumer complaints, and stop if from monitoring and conducting research on the consumer credit market.

Before the financial crisis, homeowners suffered from a range of abusive and predatory behaviors that were prevalent in the mortgage industry for years and years. Lenders would lend without regard to a borrower’s ability to repay a loan, so long as there was sufficient equity in the home to make the lender whole after a foreclosure. Dodd-Frank’s ability-to-repay rule keeps lenders from doing that now. Lenders would make loans that had large balloon payments at the end of the term, forcing unsophisticated borrowers to refinance with all of the fees and costs that that entails. The lenders would look at those refinancing costs as another profit center. Dodd-Frank’s qualified mortgage rule banned those abusive balloon payments for the most part.

While Hensarling claims that Dodd-Frank “clogs the arteries of capitalism,” he seems to forget that unfettered capitalism nearly gave us a fatal heart attack just 10 years ago, when the subprime mortgage crisis led us to the brink of a second Great Depression. He seems to forget that predatory mortgage lending is not only bad for the individuals affected by it, but also for the housing market and economy in general. Housing prices did not just fall for those with unsustainable mortgages—they fell for all of us.

The push to get rid of the CFPB is not being driven by the consumer finance industry. The industry has learned to live with the bureau. It has come to see that there are some benefits that accrue from primarily dealing with one regulator, in place of the patchwork of regulators that was the norm before Dodd-Frank. Rather, the push is being driven by an unfettered free market ideology that is out of step with the workings of the modern economy.

Getting rid of the CFPB will be bad for homeowners. They will no longer be able to assume that a mortgage they receive is one that has payments they can make month-in and month-out. They will need to treat lenders as predators because predatory lending will certainly return to the mortgage market. Caveat emptor.

Foreclosure or Short Sale?

Posted on by

photo by Taber Andrew Bain

BeSmartee.com quoted me in Which One Is Worse: Foreclosure or Short Sale? It opens,

If you’re faced with either a foreclosure or a short sale situation and aren’t sure what to do, read on. We asked some experts which one is worse.

You might have thought that you became a homeowner the day you closed on your home, but that wasn’t exactly the case. Although your status became ”homeowner” as opposed to, maybe, ” renter ,” you don’t really own the home if you have a mortgage. A more accurate term for what you became that day would be ”home borrower.” This isn’t just being picky about semantics. There’s a reason for the distinction.

If you stop paying your mortgage , the real owner of the home, your mortgage lender, could take it back. This process is a foreclosure .

Another option that may be available to you if you can no longer (or no longer wish to) make your mortgage payments is a short sale . A short sale occurs when you sell your home for less than what you owe. Your lender must be on board with this for it to happen.

So which one is worse: foreclosure or short sale? Here are five considerations.

1. Your Credit Score

Your credit score will take a hit, and a huge hit at that, whether you have a foreclosure or short sale on your credit report. ”They are pretty much equally rotten as far as your credit score is concerned,” says David Reiss , professor of law at Brooklyn Law School.

But just how rotten are foreclosures and short sales to your credit? You can probably count on your score tanking somewhere between 100 and 160 points. And like the saying, ”The bigger they are the harder they fall,” the higher your credit score was before the foreclosure or short sale the larger the drop will be. But the good news is that with either a foreclosure or a short sale, you can start to see your score rise in just a couple of years if you continue to pay all your other bills on time, according to myFICO , the consumer division of FICO .

2. What Future Lenders Think

If you wish to get back into the housing game some day, whether you went through a foreclosure or a short sale matters to many lenders. ”There’s not as much of a stigma involved in selling a house via short sale as there is in losing it in a foreclosure proceeding,” says Rick Sharga, chief marketing officer at Ten-X, an online real estate transaction marketplace. ”A short sale indicated that the borrower was willing to work with the lender, and in fact, an active participant in trying to come up with a solution that worked as well as possible for all parties.”

” Fannie Mae and Freddie Mac treat a foreclosure as worse than a short sale when it comes to future lending,” says Reiss. ”Fannie, for instance, won’t buy a mortgage from a lender who lent to someone who has gone through a foreclosure in the past three years in some cases (but as many as seven), but reduces that bar to two years for a short sale.”

What Is a Promissory Note?

Posted on by

by Zoli Erdos

Realtor.com quoted me in What Is a Promissory Note? What You’re Really Promising, Revealed. It opens,

If you get a mortgage to buy a home, you will end up signing something called a promissory note. So what exactly is a promissory note?

In the most basic terms, it’s a legal document you sign containing a written “promise” to pay a lender, says Scott A. Marcus, a shareholder in Becker & Poliakoff’s Real Estate Practice Group, in Fort Lauderdale, FL.

Promissory notes are a standard part of all real estate financing contracts and include basic information such as:

  • The amount due
  • The terms of repayment (e.g., do the payments include principal and interest, or only interest)
  • The interest rate and whether it can change or is fixed
  • Whether there is a prepayment penalty
  • The loan maturity date
  • The names of the lender and borrower

Promissory notes are an important yet often misunderstood part of the loan process.

“The worst mistake someone signing a promissory note can make is to sign a note without reading and understanding all of its terms,” says Marcus.

So let’s clear up a few common misconceptions, shall we?

Promissory note vs. a mortgage: What’s the difference?

Many home buyers mistakenly think that the mortgage—another contract they sign—is their promise to pay back the loan.

Well, they’re wrong! The promissory note is your promise to do that, plain and simple. The mortgage, on the other hand, is a contract that kicks in more when things go wrong.

In a nutshell, a mortgage (also called a deed of trust) is a pledge you sign to put up your property as collateral in case you default on your loan, according to David Reiss, professor of law at Brooklyn Law School and editor of REFinBlog.com.

In other words, if you suddenly find yourself unable to repay your home loan, your lender will eventually confiscate your property and sell it as a foreclosure to help it recoup its losses from lending you all that money.

Subprime v. Non-Prime

Posted on by

photo by TaxRebate.org.uk

The Kroll Bond Rating Agency has issued an RMBS Research report, Credit Evolution: Non-Prime Isn’t Yesterday’s Subprime. It opens,

Following the private label RMBS market’s peak in 2007 and the ensuing credit crisis, non-agency securitizations of newly originated collateral have focused almost exclusively on prime jumbo loans. This is not surprising given the poor performance of loosely underwritten residential mortgage loans that characterized certain vintages leading up to the crisis. While legacy prime, in absolute terms, performed better than Alt-A and subprime collateral, it was apparent that origination practices had a significant impact on subsequent loan performance across product types.

Many consumers were caught in the ensuing waves of defaults, which marred their borrowing records in a manner that has either barred them from accessing housing credit, or at best made it extremely challenging to obtain a home loan. Others that managed to meet their obligations have been unable to qualify for new loans in the post-crisis era due to tighter credit standards that have been influenced by regulation.

The private label securitization market has not met the needs of these consumers for a number of reasons, including, but not limited to, reputational concerns in the aftermath of the crisis, regulatory costs, investor appetite, and the time needed for borrowers to repair their credit. The tide appears to be turning quickly, however, and Kroll Bond Rating Agency (KBRA) has observed the re-emergence of more than a dozen non-prime mortgage origination programs that intend to use securitization as a funding source. Of these, KBRA is aware of at least four securitization sponsors that have accessed the PLS market across nine issuances, two of which include rated offerings.

Thus far, KBRA has observed that today’s non-prime programs are not a simple rebranding of pre-crisis subprime origination, nor do they signal a return to the documentation excesses associated with “liar loans”. While the asset class is meant to serve those with less pristine credit, and can even have characteristics reminiscent of legacy Alt-A, it is expansive, and underwriting practices have been heavily influenced by today’s consumer-focused regulatory environment and government-sponsored entity (GSE) origination guidelines. In evaluating these new non-prime programs, KBRA believes market participants should consider the following factors:

■ Loans originated under sound compliance with Ability-To-Repay (ATR) rules should outperform 2005-2007 vintage loans with similar credit parameters, including LTV and borrower FICO scores. The ATR rules have resulted in strengthened underwriting, which should bode well for originations across the MBS space. This is particularly true of non-prime loans, where differences in origination practices can have a greater influence on future loan performance.

■ Loans that fail to adhere to GSE guidelines regarding the seasoning of credit dispositions (e.g. bankruptcy, foreclosure, etc.) on a borrower’s credit history should be viewed as having increased credit risk relative to those with similar credit profiles that lack recent disposition activity. This relationship likely depends on, among other things, equity position, current FICO score, and the likelihood that any life events relating to the prior credit issue remain unresolved.

■ Alternative documentation programs need to viewed with skepticism as they relate to the ATR rules, particularly those that serve borrowers with sub-prime credit histories. Although many programs will meet technical requirements for income verification, it is also important to demonstrate good faith in determining a borrower’s ability-to-repay. Failure to do so may not only result in poor credit performance, but increased risk of assignee liability.

■ Investor programs underwritten with reliance on expected rental income and limited documentation may pose more risk relative to fully documented investor loans where the borrower’s income and debt profile are considered, all else equal. (1, footnotes omitted)

I think KBRS is documenting a positive trend: looser credit for those with less-than-prime credit is overdue. I also think that KBRS’ concerns about the development of the non-prime market should be heeded — ensuring that borrowers have the ability to repay their mortgages should be job No. 1 for originators (although it seems ridiculous that one would have to say that). We want a mortgage market that serves everyone who is capable of making their mortgage payments for the long term. These developments in the non-prime market are most welcome and a bit overdue.

Fannie & Freddie G-Fee Equilibrium

Posted on by

financial-concept-mortgage

The Federal Housing Finance Agency’s Division of Housing Mission & Goals has issued its report on Fannie Mae and Freddie Mac Single-Family Guarantee Fees in 2015. Guarantee fees (also known as g-fees) are another one of those incredibly technical subjects that actually have a major impact on the housing market. The g-fee is baked into the cost of the mortgage, so the higher the g-fee, the higher the mortgage’s Annual Percentage Rate. Consumer groups and housing trade associations have called upon the FHFA to lower the g-fee to make mortgage credit even cheaper that it is now. This report gives reason to think that the FHFA won’t do that.

The report provides some background on guarantee fees, for the uninitiated:

Guarantee fees are intended to cover the credit risk and other costs that Fannie Mae and Freddie Mac incur when they acquire single-family loans from lenders. Loans are acquired through two methods. A lender may exchange a group of loans for a Fannie Mae or Freddie Mac guaranteed mortgage-backed security (MBS), which may then be sold by the lender into the secondary market to recoup funds to make more loans to borrowers. Alternatively, a lender may deliver loans to an Enterprise in return for a cash payment. Larger lenders tend to exchange loans for MBS, while smaller lenders tend to sell loans for cash and these loans are later bundled by the Enterprises into MBS.

While the private holders of MBS assume market risk (the risk that the price of the security may fall due to changes in interest rates), the Enterprises assume the credit risk on the loans. The Enterprises charge a guarantee fee in exchange for providing this guarantee, which covers administrative costs, projected credit losses from borrower defaults over the life of the loans, and the cost of holding capital to protect against projected credit losses that could occur during stressful macroeconomic conditions. Investors are willing to pay a higher price for Enterprise MBS due to their guarantee of principal and interest. The higher value of the MBS leads to lower interest rates for borrowers.

There are two types of guarantee fees: ongoing and upfront. Ongoing fees are collected each month over the life of a loan. Upfront fees are one-time payments made by lenders upon loan delivery to an Enterprise. Fannie Mae refers to upfront fees as “loan level pricing adjustments,” while Freddie Mac refers to them as “delivery fees.” Both ongoing and upfront fees compensate the Enterprises for the costs of providing the guarantee. Ongoing fees are based primarily on the product type, such as a 30-year fixed rate or a 15-year fixed rate loan. Upfront fees are used to price for specific risk attributes such as the loan-to-value ratio (LTV) and credit score.

Ongoing fees are set by the Enterprises with lenders that exchange loans for MBS, while those fees are embedded in the price offered to lenders that sell loans for cash. In contrast to ongoing fees, the upfront fees are publicly posted on each Enterprise’s website. Upfront fees are paid by the lender at the time of loan delivery to an Enterprise, and those charges are typically rolled into a borrower’s interest rate in the same manner as ongoing fees.

Under the existing protocols of the Enterprises’ conservatorships, FHFA requires that each Enterprise seek FHFA approval for any proposed change in upfront fees. The upfront fees assessed by the two Enterprises generally are in alignment. (2-3)

The report finds that “The average single-family guarantee fee increased by two basis points in 2015 to 59 basis points. This stability is consistent with FHFA’s April 2015 determination that the fees adequately reflected the credit risk of new acquisitions after years of sharp fee increases. During the five year period from 2011 to 2015, fees had more than doubled from 26 basis points to 59 basis points.” (1)

At bottom, your position on the right g-fee level reflects your views about the appropriate role of the government in the housing finance market. If you favor lowering the g-fee, you want to further subsidize homeownership  through cheaper mortgage credit, but you risk a taxpayer bailout.

If you favor raising it, you want to to reduce the government’s footprint in the housing finance market, but you risk rationing credit to those who could use it responsibly.

From this report, it looks like today’s FHFA thinks that it has the balance between those two views in some kind of equilibrium.