Copy for Real Estate Guide Column for 4-2-10
REAL ESTATE PATTERNS
By Ken DuVall

LINGERING LOAN GHOSTS

Homeowners defaulting on mortgages today may be surprised to learn years from now that they still owe thousands of dollars—and a collection agency is coming after them to get it.

That’s because lenders have been quietly selling 2nd mortgages and home equity lines left unpaid after foreclosures or short sales. The buyers are collection agencies. If they win court judgments, these collectors could have years to pursue borrowers with repayment plans, or attach their wages. The only relief a consumer will have is by entering into a debt negotiating plan or filing for bankruptcy.

The phenomenon suggests an ominous, looming echo of today’s real estate meltdown. As debt collectors surely seek at least partial repayment of millions of dollars in unpaid home loans, renewed financial stresses on tens of thousands of consumers could dampen economic recovery. Just when you think you’re back on your feet they hit you with this.

You’ve got many thousands of people in California who have this hanging over their heads that don’t even know it. A new wave of bankruptcies might flatten people just starting to recover from losing their homes.

An entire industry is gearing up to buy their debt at deep discounts and collect what they can. It’s big business, very lucrative, and investors are coming out of the woodwork. Real estate insiders and financial players know it as “scratch and dent.” Boy, for every victim, there’s always some predator hovering out there, waiting to pounce on the unfortunate casualty.

No one knows for sure how much unpaid debt is on the line. People who used their borrowings for a traditional loan on a house in which they lived generally have little to worry about. But borrowers may be vulnerable in years ahead, generally those who defaulted not only on their 1st mortgage but also on a 2nd mortgage.

In California’s trust deed “mortgages”, banks can’t collect from borrowers for primary, so-called “first-lien,” loans that go unpaid. No deficiency judgment is allowed unless the lender forecloses in a court proceeding. They dislike that process as they must wait a year for the money. When a house is foreclosed via a trustee’s sale or sold through a short sale, the lender of the 1st loan’s remedy is limited to getting the house back or the proceeds from another buyer.

But banks also made thousands of “second-lien” loans, including those used to finance 20% down payments during the housing boom, including home equity lines of credit. Nationally, about 3.4% of those loans are currently delinquent, a huge amount. Owners are generally, but not always, on the hook for the second loans left over from a foreclosure or short sale. Most investor mortgages, too, leave the borrower liable for potential unpaid debt.

“Seek legal advice,” counsels Doug Robinson, spokesman for national nonprofit mortgage counselor Neighbor Works America. So do I. He says nonprofit counselors can help. Government forces are already moving to limit potential damage to millions now struggling with home loans. This ugly saga continues. The foreclosure beast has a long tail.

Ken owns Ken DuVall & Associates, REALTORS at 3rd Ave. & Mangrove in Chico. Ken was the 2001 President of the Chico Assn. of Realtors and the 1995 Chico Realtor of the Year. See Chico MLS listings and all his columns at www.KenDuVall.com. Call Ken at 345-3700 for all your real estate needs. Free consulting.

Copy for Real Estate Guide Column for 4-2-10

REAL ESTATE PATTERNS
By Ken DuVall

LINGERING LOAN GHOSTS

Homeowners defaulting on mortgages today may be surprised to learn years from now that they still owe thousands of dollars—and a collection agency is coming after them to get it.

That’s because lenders have been quietly selling 2nd mortgages and home equity lines left unpaid after foreclosures or short sales. The buyers are collection agencies. If they win court judgments, these collectors could have years to pursue borrowers with repayment plans, or attach their wages. The only relief a consumer will have is by entering into a debt negotiating plan or filing for bankruptcy.

The phenomenon suggests an ominous, looming echo of today’s real estate meltdown. As debt collectors surely seek at least partial repayment of millions of dollars in unpaid home loans, renewed financial stresses on tens of thousands of consumers could dampen economic recovery. Just when you think you’re back on your feet they hit you with this.

You’ve got many thousands of people in California who have this hanging over their heads that don’t even know it. A new wave of bankruptcies might flatten people just starting to recover from losing their homes.

An entire industry is gearing up to buy their debt at deep discounts and collect what they can. It’s big business, very lucrative, and investors are coming out of the woodwork. Real estate insiders and financial players know it as “scratch and dent.” Boy, for every victim, there’s always some predator hovering out there, waiting to pounce on the unfortunate casualty.

No one knows for sure how much unpaid debt is on the line. People who used their borrowings for a traditional loan on a house in which they lived generally have little to worry about. But borrowers may be vulnerable in years ahead, generally those who defaulted not only on their 1st mortgage but also on a 2nd mortgage.

In California’s trust deed “mortgages”, banks can’t collect from borrowers for primary, so-called “first-lien,” loans that go unpaid. No deficiency judgment is allowed unless the lender forecloses in a court proceeding. They dislike that process as they must wait a year for the money. When a house is foreclosed via a trustee’s sale or sold through a short sale, the lender of the 1st loan’s remedy is limited to getting the house back or the proceeds from another buyer.

But banks also made thousands of “second-lien” loans, including those used to finance 20% down payments during the housing boom, including home equity lines of credit. Nationally, about 3.4% of those loans are currently delinquent, a huge amount. Owners are generally, but not always, on the hook for the second loans left over from a foreclosure or short sale. Most investor mortgages, too, leave the borrower liable for potential unpaid debt.

“Seek legal advice,” counsels Doug Robinson, spokesman for national nonprofit mortgage counselor Neighbor Works America. So do I. He says nonprofit counselors can help. Government forces are already moving to limit potential damage to millions now struggling with home loans. This ugly saga continues. The foreclosure beast has a long tail.

Ken owns Ken DuVall & Associates, REALTORS at 3rd Ave. & Mangrove in Chico. Ken was the 2001 President of the Chico Assn. of Realtors and the 1995 Chico Realtor of the Year. See Chico MLS listings and all his columns at www.KenDuVall.com. Call Ken at 345-3700 for all your real estate needs. Free consulting.

Copy for Real Estate Guide Column for 3-26-10

REAL ESTATE PATTERNS
By Ken DuVall

LOANS TODAY

We now know lenders were focused on making a quick buck rather than acting responsibly, too many borrowers acted irresponsibly by taking on mortgages they couldn’t afford, and government regulators turned a blind eye to the problem.

Millions of resultant foreclosures coupled with high unemployment have created major challenges. The Fed recently announced a new $1.5 billion fund to help struggling borrowers. Five states—Arizona, California, Florida, Michigan and Nevada—have home prices that have fallen enough to qualify for the additional assistance.

State and local housing-finance agencies must submit proposals to the Treasury Department, which will evaluate and decide if they qualify. The funds are allocated from capital set aside from the $700 billion Troubled Asset Relief Program (TARP).

States where the average price for all homeowners in the state have fallen more than 20% from their peak are eligible to participate. The average price for all homeowners in Nevada, for example, has fallen more than 40% from the peak.

Three sorts of problems may be addressed with funding: unemployed borrowers, underwater borrowers, and those with second mortgages. This fund is going to help out-of-work homeowners avoid preventable foreclosures. It will help homeowners who owe more than their homes are worth find a way to pay their mortgages that works for both borrowers and lenders alike. The program is intended to encourage innovative approaches to limit still more foreclosures.

The program, known as the Home Affordable Modification Program (HAMP) seeks to aid borrowers by allowing them to modify their mortgages through any participating lender. Under this plan, the lender voluntarily lowers the interest rate, and the government provides subsidies to the lender and borrower. Don’t hold your breath on this one. Talk to your lender.

As we enter the spring home-buying season, buyers are motivated to take advantage of record low home prices, but lenders are still wary and determined to protect their interests in a fragile market. Financing is available to qualified borrowers- but the emphasis is on qualified. Would-be buyers are encouraged to see a lender before going out with a REALTOR to see homes to avoid thinking that they may qualify but don’t. There’s a lot new regs and lending criteria in play now.

You must show income, expenses, verify down payment cash available, and your credit history. Easy qualifier loans don’t exist anymore. Larger down payments may be required in areas that are still declining in value. Verifying income now involves digging deeper into tax returns. Side businesses showing a tax loss will count against your income now. Appraisals are a lot tougher anymore too.

The criteria for FICO scores have also gone up. Two years ago a 620 to 660 score was OK. Today buyers must score 720 or above to get the best loans. Conventional loans now require 5% to 10% down or more, no more zero down. FHA loans require 3.5% down. Closings take longer now too due to all the new regs designed to protect both the lender and borrower. Getting a loan used to be easy. It’s no fun anymore. I rather have a root canal than go for a new loan today!

Ken owns Ken DuVall & Associates, REALTORS at 3rd Ave. & Mangrove in Chico. Ken was the 2001 President of the Chico Assn. of Realtors and the 1995 Chico Realtor of the Year. See Chico MLS listings and all his columns at www.KenDuVall.com. Call Ken at 345-3700 for all your real estate needs. Free consulting.

Copy for Real Estate Guide Column for 3-19-10

REAL ESTATE PATTERNS
By Ken DuVall

MORE ON THE LOAN UNDERWORLD

The data in this column is paraphrased by me from a recent article by an eminently qualified guy named George W. Mantor. He’s a nationally respected authority in all areas of real estate, author, and is frequently quoted in a wide range of publications. He is often a guest on Fox Business Network. He’s been involved with extensive consumer education efforts since 1978. He has served as a Director of the California Association of REALTORS.

If you are one of an estimated 50 to 60 million homeowners whose mortgage is part of a securitized pool, the law is on your side and more people are deciding to exercise their legal rights. Virtually all securitized private label loans are part of a massive and ongoing fraud upon both the borrower and the investor. And, the fraud continues as the “pretender lenders” force more defaults, stop making payments to the pools, collect on credit default swaps, and top it all off by seizing the underlying assets and keeping any proceeds for themselves.

What borrowers and investors agreed to and what they actually got are at odds and raise serious legal issues including Truth In Lending violations, Real Estate Settlement Procedures Act violations, fraud, bait and switch, illegal kickbacks involving the borrower, and outright fraud and conversion upon the investor. We are talking about a complex system of deceit by financial intermediaries that can turn modest home loans into millions of dollars in profit for them.

Suppose a buyer qualifies for a $300,000 fully amortized, fixed rate loan at 5%. But, right at the end of the process the underwriter tells your loan officer, “We’ve just had a change to our underwriting guidelines and we aren’t going to fund the loan.”

This is really funny because the loan is already funded. Now, it’s time to kick up the profits. Of course, your surprised loan officer asks “Why?” Underwriter: “His ratios. He needs a lower monthly payment. Resubmit in our new super-duper, magical flex loan with the built in implosion feature.” Now, before we run out and lynch a bunch of loan officers, it’s not their fault. They get pushed into these loans too.

The end loan product is determined by the underwriter who is able to “tweak” the loan to increase the Yield Spread Premium and the Service Release Premium, as well as increase the likelihood of collecting on the credit default swaps. That is the process of putting you into the most profitable loan possible. And, it is where the real predatory lending takes place.

By bumping our highly qualified borrower from 5% to say 8% not only increases the likelihood of default but they are able to extract an enormous undisclosed Service Release Premium and a Yield Spread Premium. The Yield Spread Premium is supposed to be disclosed, but often isn’t.

The Service Release Premium is where the real money is, and it’s hidden. The investor provides $480,000 to the financial intermediary in exchange for a 5% annual return of $24,000 plus a guaranteed return of principal.

The financial intermediary only loans our borrower $300,000, but when the rate adjusts to 8%, the investor has his $24,000 annual income, the financial intermediary pockets a $180,000 Service Release Premium, makes up the initial shortfall in the pool payments, and buys credit default swaps.

Bottom line: Intermediaries call themselves banks, but they aren’t banks. They did not lend you any money. They loaned you someone else’s money. If the investors recouped their losses from TARP funds, you no longer even owe them anything! Is this crazy or what?!

But there’s more: They may even owe you money. If you were the victim of predatory lending, your damages could be into the hundreds of thousands of dollars, plus legal expenses. They may have no legal right to foreclose on you. You have a legal right under the terms of your loan agreement and common law to raise the above issues with the true holder of the original note you signed.

Why? Because securitized loans presented an opportunity to commit fraud on both the true lender by skimming, and the borrower by convincing him he should accept a far more expensive loan than the one for which he qualified.

This is all very complex legal stuff. I don’t give legal advice. I’m just repeating what Mantor wrote because there are predators out there. Beware. We live, unfortunately, in an Age of Corruption.

Ken owns Ken DuVall & Associates, REALTORS at 3rd Ave. & Mangrove in Chico. Ken was the 2001 President of the Chico Assn. of Realtors and the 1995 Chico Realtor of the Year. See Chico MLS listings and all his columns at www.KenDuVall.com. Call Ken at 345-3700 for all your real estate needs. Free consulting.

Copy for Real Estate Guide Column for 3-12-10

REAL ESTATE PATTERNS
By Ken DuVall

CASH IS KING

Buyers paying cash accounted for fully 25% of Sacramento home sales, becoming the dominant players in a distressed market, and squeezing out many first time buyers. Many (two-thirds) of these cash buyers are from the Bay Area. They are scoring houses way below list prices.

A Sunnyvale investor recently bought a Sac area bank repo for only $55,000 cash and never even saw the house first! Cash buys tell us there’s still plenty of money out there despite the bad economy, and it’s flowing into the housing market big time. Old line: Good goods will always sell, and anything will sell at a price.

Cash buyers can obtain discounts unavailable to borrowers, and their purchases rarely fall out of escrow. They push aside conventional new loan buyers who can’t compete. One REALTOR says his client made offers on several homes, even way over the list prices, only to hear from the seller, “Sorry. We already have a cash offer.”

Cash buyers around the North Valley accounted for 26.7% of last month’s sales, up to 32% for all of 2009, and fully 60% of all January 2010 sales in the under $100,000 category. Even with California’s 12% unemployment rate, on the bright side that means there’s still 88% of the work force that do have jobs and incomes and can buy houses. But cash is still king.

Meanwhile, we keep getting gloomy housing and economic news: housing starts and new home sales are down, commercial loan failures as stores continue to go out of business (when the rent stops, it’s hard for the landlord to make the payments); more banks face insolvency; home “shadow inventory” which are the huge number of foreclosures and delinquencies looming as even more workers lose their jobs, on and on. Fully half of the nation’s homeowners are up to 3 payments behind and/or already in foreclosure. All threaten recovery.

Even General Motors is folding their Hummer car division. And ABC media is laying off 400 people. Yet at the same time, many economists say that housing is on the path to recovery, albeit via a long, gradual process. It’s all true. But it’s also being said that we’re near to the beginning of the end of the housing down cycle. That’s the way I see it at this point in time too. Housing is not going to just dry up and die. You can’t shut down housing like it was Hummer.

Obama has allotted another $1.5 billion in financial rescue funds for California among other states to aid troubled borrowers including short sales which may help stave off a deluge of even more delinquencies and foreclosures. So far Chico is going along just fine. We’re in a relatively and seasonally normal sales and acceptable inventory pattern.

Guess what? A website where you can find foreclosed homes just filed for bankruptcy. They were having “severe cash flow” issues. The name? Foreclosure.com! Foreclosure.com goes broke. Now that is ironic!

Ken owns Ken DuVall & Associates, REALTORS at 3rd Ave. & Mangrove in Chico. Ken was the 2001 President of the Chico Assn. of Realtors and the 1995 Chico Realtor of the Year. See Chico MLS listings and all his columns at www.KenDuVall.com. Call Ken at 345-3700 for all your real estate needs. Free consulting.