rayman mathoda

Clearing misconceptions: Short Sales NOT better for FICO than Foreclosure

April 16, 2012 – 11:48 pm

Short sales are a huge industry today – and I am a (pretty big) proponent of short sales that are “better” for consumers and loan investors compared to other alternatives such as foreclosure. One of the big misconceptions about short sales, though, is that “they are better for your FICO score than foreclosure”…so I thought I’d go check out some primary sources of information on this topic…such as what the creator of the FICO score says about this question.

Here’s what www.myfico.com says about the question (start of www.myfico.com text):

Question: Are the alternatives to foreclosure any better as far as my FICO score is concerned?

Answer: The common alternatives to foreclosure, such as short sales, and deeds-in-lieu of foreclosure are all “not paid as agreed” accounts, and considered the same by your FICO® score. This is not to say that these may not be better options for you from a financial perspective, just that they will be considered no better or worse for your FICO score.

If you are considering bankruptcy as an alternative to foreclosure, that may have a greater impact to your FICO score. While a foreclosure is a single account that you default on, declaring bankruptcy has the opportunity to affect multiple accounts and therefore has potential to have a greater negative impact on your FICO score.

End of official answer from www.myfico.com and back to me:

What does this mean for homeowners struggling with their mortgage and considering a short sale? Not much – these are just the facts as I got them from www.myfico.com today. Anyone who claims otherwise (like a realtor improperly pitching a distressed homeowner for a short sale listing) should not be selected as a professional for hire. There are still many benefits of choosing a foreclosure alternative and solving ones problems proactively instead of going through foreclosure – but those benefits are more about things like:

proactively solving ones problems instead of having the problem forcibly solved by the lender taking the property back in a public fashion
possibly having a lower credit impact, due to faster loan resolution (i.e., the credit score is affected by how long an account is in delinquency so selling it via short sale with only 3 months late is better than getting foreclosed on after being 12 months late)
leveraging the pro-consumer programs and environment of today to negotiate debt forgiveness from a subordinate lien holder (vs. having that lien holder pursue collections after foreclosure, as some have the right to do).

Final tip: Anyone thinking about a short sale on a first loan amount less than $729,750 check our the HAFA program.

Tags fico scores, foreclosure, foreclosure alternatives, hafa, short sale | Comment (0)

Business Housing Life Public Policy

Government Driven Innovation: Will it Work in Mortgage Servicing?

March 27, 2012 – 2:51 am

I recently attended the Mortgage Bankers Association’s Annual National Servicing Conference in Orlando, Florida. The conference was at a massive Marriott – the largest in the world apparently – and was well attended by mortgage lenders, loan Servicers, 3rd party service providers, real estate companies, lawyers, government officials, and other stakeholders in the mortgage servicing industry. As I take a step back and think about what really stood out at this conference relative to 2010 and 2011, I realized that this was the moment where it became clear that real change and resource allocation in the (residential) mortgage servicing industry is currently owned and driven primarily by the government – and not the private, for-profit sector.

Now, I am an entrepreneur and innovator – and one who grew up in pre-economic liberalization India as the daughter of a 35+ year public servant. Coming to America where I studied and learned economics, public policy, and business; and watching India’s economic growth since liberalization started in 1991, has left me believing that capitalism is surely the best way to maximize the size of the economic pie available to society. However, I have also seen how capitalistic and market based systems can be manipulated and abused by those controlling them for their personal benefit – to the detriment, sometimes, of the majority. So I am a capitalist, but one with a healthy appreciation for the role of government in markets and market economies…especially in the arena of consumer protection.

This realization regarding the government’s pre-eminent role in mortgage servicing innovation left me wondering whether there is any precedent for the government getting change and innovation right in market economies…here in the US or elsewhere? This is the million dollar question in the mortgage servicing industry…and time should certainly tell.

Love to hear about any examples of industries that successfully underwent transformation with government leading the way.

Tags government intervention, housing market, innovation, mortgage servicing, residential housing | Comment (1)

Life People Public Policy World Affairs

Khushwant Singh’s 8 Clues to Happiness should Drive USA Housing and Social Policy

July 29, 2011 – 4:18 pm

My friend Jaspreet Sihota shared with me Khushwant Singh’s 8 Clues to Happiness. Khushwant Singh is a famously happy (and old) Sikh author and I agree with him 100%. In fact, I believe these 8 principles should underly housing and social policy in America where millions of families are obese, financially unstable (and insecure about their work prospects due to globalization), and worried that a home of their own may not be a reality for future generations.

EIGHT CLUES TO HAPPINESS

By- KHUSHWANT SINGH

Having lived a reasonably contented life, I was musing over what a

person should strive for to achieve happiness. I drew up a list of a

few essentials which I put forward for the readers’ appraisal.

1. First and foremost is GOOD HEALTH. If you do not enjoy good health

you can never be happy. Any ailment, however trivial, will deduct from

your happiness.

2. Second, A HEALTHY BANK BALANCE. It need not run into millions but

should be enough to provide for creature comforts and something to

spare for recreation, like eating out, going to the pictures,

traveling or going on holidays on the hills or by the sea. Shortage of

money can be only demoralizing. Living on credit or borrowing is

demeaning and lowers one in one’s own eyes.

3. Third, A HOME OF YOUR OWN. Rented premises can never give you the

snug feeling of a nest which is yours for keeps that a home provides:

if it has a garden space, all the better. Plant your own trees and

flowers, see them grow and blossom, cultivate a sense of kinship with

them.

4. Fourth, AN UNDERSTANDING COMPANION, be it your spouse or a friend.

If there are too many misunderstandings, they will rob you of your

peace of mind.

5. Fifth, LACK OF ENVY towards those who have done better than you in

life; risen higher, made more money, or earned more fame.

Envy can be very corroding; avoid comparing yourself with others.

6. Sixth, DO NOT ALLOW OTHER PEOPLE to descend on you for gossip. By

the time you get rid of them, you will feel exhausted and poisoned by

their gossip-mongering.

7. Seventh, CULTIVATE SOME HOBBIES which can bring you a sense of

fulfillment, such as gardening, reading, writing, painting, playing or

listening to music.

8. Eighth, every morning and evening, devote 15 minutes to

INTROSPECTION. In the morning, 10minutes should be spent on stilling

the mind and then 5minutes in listing things you have to do that day.

In the evening, 5minutes to still the mind again, and 10minutes to go

over what you had undertaken to do.

RICHNESS is not

Earning More,

Spending More or

Saving More, but …

RICHNESS IS WHEN YOU NEED NO MORE

Tags happiness, healthy living, home ownership, housing policy, khushwant singh | Comment (0)

Business Life Public Policy Real Estate

Origination News: “New Role Suggested for RE Agents”

March 21, 2011 – 1:02 am

My Utah presentation (subject of the ‘Elephant in the Python’ blog) was quoted/picked up by this reporter for Origination News. Instead of just talking about this though, I am getting involved in leveraging real estate agents as the ‘enlightened self interested party’ in helping us solve this housing crisis by preventing foreclosures. ray

“Origination News: New Role Suggested for RE Agents”
Monday, March 7, 2011
By Lew Sichelman

PARK CITY, UT—Among the numerous and often futile efforts to keep troubled borrowers in their homes, a former IndyMac Bank executive believes real estate agents represent a largely untapped resource.Not agents who list and sell foreclosed properties, said Ray Mathoda, who now bills herself as a housing industry social entrepreneur.

Those professionals are “bank-facing” agents who work for investors.

Rather, consumer-centric agents who have much more to benefit by helping buyers and sellers, Mathoda said at the Midwinter Housing Conference here earlier this month.

Noting that borrower outreach has been pretty much a failure—even today, two out of every five owners who fall into foreclosure claim to have had no contact with their servicers—and that consumers are often poorly informed about their options, Mathoda said realty agents stand a good chance of reaching borrowers who are often “bombarded by a barrage” of confusing, uncoordinated array letters and phone calls.

At the very least, she added, agents can be used by servicers and investors to augment the efforts of overworked, understaffed housing counseling agencies.

Mathoda, who was chief administrative officer at IndyMac, has founded two socially responsible minority-owned businesses—AssetPlanUSA, a national provider of training and education solutions to the housing industry, and HausAngeles, a real estate management consulting firm and brokerage located in the Los Angeles area.

She has been an advocate for standardized, pro-consumer and pro-investor short sales since the start of the housing crisis, arguing that the primary goal of everyone should be financial stability, not home retention.

But noting that short sales aren’t the only viable option, for either the borrower or the investor, Mathoda said no one is in a better position to explain their choices to consumers than real estate agents.

She admitted that realty agents don’t always have the best reputations.

But she said that operating under their brokers’ supervision and an honor code of ethics, agents have the “good business sense” to help people decide what’s best for them.

In return, she added, an agent gets a referral source, if not a client, for life.

And perhaps even a listing or two along the way.

“Real estate agents are our only professional with a fiduciary obligation, yet we’re not taking advantage of that,” Mathoda said.

see the rest here: http://www.originationnews.com/on_features/new-role-suggested-1023709-1.html

Tags foreclosure prevention, hafa, housing crisis, real estate agents, short sales | Comment (1)

Business Politics Public Policy Real Estate World Affairs

Strategies to address the elephant in the python: housing market stability we all want

February 12, 2011 – 8:07 pm

I spoke yesterday in Utah at the mid-Winter Housing Finance Conference on the subject of loan Servicing (what’s wrong and how to fix it). The focus of my presentation was on outlining a new vision for default management – the business of Banks (loan servicers and investor) working with consumers in default on their mortgage. Here is the document I shared with the audience.

Implementing the ideas shared in the presentation is possible – I know of others or am personally involved in implementing several of these approaches myself. The end result of adopting these approaches would be much higher success in preventing residential real estate foreclosures than the default industry is achieving today PLUS significant reductions in investor mortgage loan loss severity relative to current approaches.

Strategies to Address the Elephant in the Python: Housing Market Stability We All Want

Tags default, distressed consumers, foreclosure alternatives, foreclosure prevention, foreclosures, housing market, housing policy, housing stability, housing strategy, loan modifications, short sales | Comment (0)

Business Life People Public Policy Real Estate

492 Days “Free Rent” For Those Choosing Foreclosure

November 30, 2010 – 2:08 am

For those of you who don’t think there’s additional downside risk in the housing market, here is a number that is a shock to almost any reasonable reader: 492.

This is a number that was reported in a Wall Street Journal blog from yesterday…and represents “the number of days since the average borrower in foreclosure last made a mortgage payment”.

I am an ardent advocate that the government and Banks can and should be doing a lot more (more efficiently than current approaches) to help distressed homeowners get educated about their realistic options, avoid foreclosure, and get a fresh start so they can move on to get jobs, stabilize themselves financially, and buy a home again…if they so desire, and if their credit behavior supports the opportunity. However, the housing crisis will not be solved and private mortgage investors will not lend again freely (as they need to in order to support overall economic growth) unless some common sense standards are set for the foreclosure process across the 50 states.

During extraordinary times such as the ones we are living in currently, I am a proponent of a 12 month maximum standard transition timeframe for borrowers with documented financial distress to transition from their properties through either a foreclosure alternative or through foreclosure. I think 12 months is enough time for a family to come to terms with their financial problems, develop a plan to get back on track, and start to implement on that plan including moving out of the home they couldn’t afford.

Here’s some more information from and a link to the relevant blog:

Number of the Week: 492 Days From Default to Foreclosure

492: The number of days since the average borrower in foreclosure last made a mortgage payment.

Banks can’t foreclose fast enough to keep up with all the people defaulting on their mortgage loans. That’s a problem, because it could make stiffing the bank even more attractive to struggling borrowers.

In recent months, the number of borrowers entering severe delinquency — meaning they missed their third monthly mortgage payment — has been on the decline, falling to about 700,000 in October, according to mortgage-data provider LPS Applied Analytics. But it’s still more than double the number of foreclosure processes started.

As a result, banks are taking progressively longer to foreclose. The average borrower in the foreclosure process hadn’t made a payment in 492 days as of the end of October, according to LPS. That compares to 382 days a year ago and a low of 244 days in August 2007. Here’s a link to the full blog: http://tinyurl.com/36ghafg

Tags borrower, distressed borrower, foreclosure, foreclosure process, foreclosure timeline, free rent | Comment (0)

Business Life People Public Policy Real Estate

HAFA Short Sales: A Much Needed “Fresh Start” Program For Troubled Borrowers

November 27, 2010 – 7:14 pm

A recently implemented foreclosure alternatives program created by federal officials is reflective of what many real estate professionals know already: for those experiencing significant loss of household income, financial stability and a job are more important than short term retention of home ownership.

The Home Affordable Foreclosure Alternatives – or HAFA program – designed by the Treasury Department and implemented by Fannie Mae, Freddie Mac, and loan servicers representing more than 90 percent of all loans outstanding offers short sale and deed-in-lieu opportunities to millions of distressed homeowners who are struggling to make their mortgage payments due to labor market issues.

Short sales are the primary foreclosure alternative offered under the HAFA program. With its mandatory implementation in the non-GSE market starting April 5, 2010 and its adoption by both Fannie Mae and Freddie Mac on August 1^st, 2010, HAFA becomes the only standardized nationwide short sale program offered by multiple loan servicers with mandated debt forgiveness by all lien holders and $3000 in relocation support to help families move to affordable housing and regain their financial footing.

Until now, debt forgiveness for qualifying families has been a critical missing ingredient in the short sale industry – affecting homeowners as well as the real estate professionals supporting them during their time of need. Loan servicers – who represent the interests of loan investors (not consumers) – have been reluctant to promise debt forgiveness when approving short sale transactions due to fear of potential lawsuits from loan investors aiming to maximize their collections on bad debt.

Now, the HAFA program has set a clear and much needed market standard – for qualifying families with unaffordable mortgages on their primary residence – debt forgiveness should be the norm. Finally, we can offer distressed borrowers a respectful exit and fresh start outside the foreclosure process.

Tags debt forgiveness, distressed borrower, foreclosure alternatives, foreclosure prevention, hafa, home affordable foreclosure alternatives, mortgage relief, short sales, treasury | Comment (0)

Real Estate

HAFA advice from an expert practitioner (2500 short sales closed since 1991)!

August 2, 2010 – 9:42 pm

I recently met with a real estate professional called Robert Malakouti. Mr. Malakouti is a short sale expert who told me he has completed 2500 short sale transactions since 1991. This is a massive number of short sale transactions…given most people had never heard the words ‘short sale’ until about 2 years ago when the housing crisis forced many to consider home exit options outside foreclosure. I was keen to meet a practitioner with this much experience in a relatively new and innovative segment of the real estate market – short sales.

I am an expert in the Home Affordable Foreclosure Alternatives (HAFA) program created by Treasury and mandated for implementation this year by 105+ servicers administering 90+% loans nationwide (Disclosure: I proposed a HAFA-like program to federal officials in early 2009 and my company AssetPlanUSA offers a HAFA Education and Certification program for real estate professionals).

I went to Mr. Malakouti’s office upon hearing he had closed several HAFA transactions. He was one of the first to do so since HAFA is still relatively new in the marketplace. I believe the best intelligence and insight about a program often comes from analyzing facts on individual deals under that program…and my meeting with Mr. Malakouti reinforced this belief.

Mr. Malakouti has a deep knowledge of short sales and HAFA and has drafted a memo for real estate professionals, lenders, and policy makers regarding HAFA. Here is his memo, verbatim for your convenience, along with a picture of Robert. ray

Early insights and critical feedback on HAFA by Robert Malakouti:

We have two type of HAFA short sale:

RASS (Request for approval of Short Sale). This type of HAFA Short Sale is initiated by the lenders. We are not talking about this type of HAFA in this article. Most of the Banks are not using the RASS HAFA short sale at this time.

ARASS (Alternate Request For Short Sale Approval). This type of HAFA Short Sale is when the property is already listed for short sale and the listing agent asks the lender to use HAFA guidelines for short sale. In this article we will discuss problems and short comings of the current HAFA guidelines.

1-Initiating ARASS HAFA. On my first HAFA short sale with SLS, I had really hard time processing my short sale request using HAFA (ARASS). It took almost 6 weeks before my request was accepted. I have two other short sale files that I am using HAFA for right now. I have been doing regular short sales for the past 19 years. Most of the Banks have not set up their HAFA programs yet or they are not using it. The listing agent should insist to use HAFA. More than 100 lenders and servicers have signed up for HAFA. If the Bank is telling you that they have not signed up to do it, do not believe it, and tell them that almost every lender and servicer has signed up. Tell the Bank that any lender or servicer who has signed up for HAMP (Home Affordable Modification Program) has also signed up for HAFA.

2- Borrower relocation money ($3,000). Right now most of HAFA short Sale is real estate agent initiated ARASS (Alternative Request for approval of Short Sale ). Later on, the banks will approach the sellers for
RASS (Request for approval of short sale). Agent should not forget to put $3000 fee of relocation in RASS or ARASS Form and of course on HUD1.

3- Second Lien problem. Right now the HAFA short sale will not pay more than $6,000 to get second lien release. Some Banks like Chase that are holding a second lien and the first lien holder is another bank, will not accept $6000 dollars to release their lien if they have sent the file to recovery (in house or out of the house collection agencies). This creates a huge problem in timing co-ordination of getting approval from both first and second lien-holders and closing. Some Banks including Chase still in their approval for second lien short pay off are holding the barrower in owner occupied cases liable for balance deficiency.

4- PMI. PMI is a big hurdle. It takes almost 4 weeks to get approval from PMI

5- Investor approval takes up to 15 days.

6- Title. The HAFA does not pay for delinquent HOA Fees and asks for sellers to provide clear title. I have not had any problems in my 3 HAFA deals at this point, but practically any bank can ask the seller to pay delinquent taxes (Requires that borrowers provide clear and marketable title)

7- Time line. Bank did not follow the time line in ARASS cases that I had. It did take almost 75 days to get ARASS approved.

Policy Suggestions:
IF HAFA IS GOING TO BE SUCCESSFUL THEN BANKS SHOULD FOLLOW A GUIDELINE WHERE SHORT SALE IS TREATED THE SAME WAY AS BANK OWNED PROPERTIES:

1- AS SOON AS THE HOMEWONER IS BEHIND THE PAYMENTS, BANK SHOULD SEND THEM A PRELIMINARY FINANCIAL EVALUATION FORM OUTLININNG ALL AVAILABLE ALTERNATIVES TO THEM. IF THE BORROWER IS NOT QUALIFIED FOR HAMP, THEN BANK SHOULD SEND THEM SHORT SALE AGREEMENT FOR RASS.

2- AS SOON AS SHORT SALE AGREEMENT IS SIGNED BY THE HOMEOWNER THEN THE BANK GETS ALL NECESSARY APPROVAL FROM INVESTOR AND PMI IF NECESSARY.

3- SECOND LIEN HOLDER MUST COMPLY WITH HAFA GUIDELINES AND MUST ACCEPT THE AMOUNT WHICH IS PERMITTED UNDER HAFA GUIDELINES. WE NEED SPECIAL FORM TO BE FILLED OUT BY THE FIRST LIEN HOLDER AND BE SENT TO THE SECOND LIEN HOLDER DEMANDING THAT SECOND LIEN HOLDER TO ACCEPT THE AMOUNT WHICH IS AUTHORIZED TO BE PAID TO THE SECOND LIEN HOLDER ACCORDING TO THE HAFA GUIDLINES.

4-CLEANING THE TITLE BY THE HOMEOWNER SHOULD BE REMOVED FROM THE GUIDELINES. IF THE BORROWER HAS TO CLEAN THE TITLE THEN WHO HAS TO PAY FOR DELIQUENT TAXES AND HOA LIEN. I THINK THESE TWO ITEMS SHOULD BE EXAMPT.

5-THERE SHOULD BE A LIST OF BANKS AND SERVICERS THAT HAVE SIGNED ON HAFA IN TREASURY OFFICIAL WEB SITE.

6- WHO IS PAYING FOR A TAX LIEN ON THE TITLE (IRS TAX LIEN)?

THIS APPROACH IS THE ONLY WAY THAT WE CAN HAVE SPEEDY HAFA AND CONTROL DAMAGE TO THE LENDERS. IF HAFA GUIDLINE IS CORRECTED,THEN WE WOULD HAVE VERY FEW FORECLOSURES AND BANKS DO NOT HAVE TO DEAL WITH COSTLY AND RISKY FORECLOSURES AND WILL NOT HAVE TO DEAL WITH REO PROPERTIES ANY MORE. SHORT SALE IS MORE COST EFFECTIVE AND INVOLVES LESS RISK AND LIABILITY FOR LENDERS. HAVING SAID ALL OF THE ABOVE, HAFA IS MUCH BETTER THAN REGULAR SHORT SALES. I STRONGLY RECOMMAND THAT EVERY AGENT WHO IS DOING SHORT SALE SHOULD TAKE CAR HAFA CERTIFICATION COURSE.

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Real Estate

Short Sales Marketshare…25% in Sacramento

January 11, 2010 – 11:15 pm

I just saw this link to some fascinating December real estate sales data for Sacramento County on an excellent housing industry blog www.calculatedrisk.com.

Here are some high level observations:

1. Short Sale Marketshare/Growth: Short Sales have quickly risen from being relatively rare a couple of years ago (so much so, that there is no Short Sale marketshare data available for the December 2008 period) to being about 25% of sales for December 2009.

Assuming these are ‘high quality’ Short Sales (where the sellers were educated about and properly addressed issues like ongoing legal obligation and tax impact), this is good news for both buyers and sellers, as well as mortgage loan investors. Sellers avoided foreclosure by selling properties pre-foreclosure, buyers picked up properties generally less physically distressed than most foreclosures are, and investors generally had to take a lower loss on non-performing loans.

2. Market supply ‘artificially’ low: As I’ve noted before, the Sacramento housing market definitely seems to have artificially constrained supply. The number of months of inventory for sale in Sacramento was only 3.3 months in December. Economists usually view a 6 month inventory as ‘normal’…so it is surprising to see a number so much below 6 months…when approximately 5million US families are behind on their mortgage.

Tags housing market, real estate supply, short sales | Comment (0)

Business Life People Politics Public Policy Real Estate World World Affairs

Responsible 2nd Chances: Loan Modifications Addressing the Issue of Negative Equity and (Borrower) Moral Hazard

January 9, 2010 – 11:46 pm

Proactive government and bank efforts to help distressed borrowers have largely, if not exclusively, been focused on ‘home retention’ programs in 2009. On the one hand this focus makes sense: the first question that should be asked and answered when a family stops making their mortgage payment due to financial hardship is whether an change to the loan terms would make the home affordable for the same borrower (thereby avoiding all the negative effects of a pre or post foreclosure home sale) while being acceptable to the investor.

On the other hand, given constrained resources this almost exclusive focus on home retention, which has come thus far at the expense of those that could not afford to keep ownership of their home, has been a little confusing to me, a former Chief People Officer who had to layoff over 7000 people between mid-2007 and mid-2008 due to the mortgage crisis. Most of these above mentioned responsible employees of my former mortgage bank employer, unfortunately fall into the latter category of families who would not be able to afford homes they once could, and I think we have missed the boat thus far on properly providing and supporting home and life transitions for these families.

My issue with the focus of government and bank programs thus far is not that they shouldn’t focus on helping every family in trouble first try to keep their home if they want…but on the public message and conversation we are having.

America is undergoing a fundamental shift in consumer behavior and economic activity today, and as Charles Darwin said, ‘It’s not the strongest species that survive, nor the most intelligent. It’s the ones most adaptable to change’.

Americans (myself included) need to adapt to the new economy…and if this means they need to sell their home and move…so be it. (Family), jobs and financial stability are more important, in my view, than holding onto a home one cannot afford.

Notwithstanding the above gap in proactive bank and government programs till date, let’s circle back to the issue of home retention first. Early results are in on government and bank home retention efforts…and performance thus far is viewed as below expectations. Only about 20% of the families in trouble have been provided a temporary modification (mod) yet…and conversion rates of these temporary mods to permanent mods are very low thus far. 2 things should be noted before one judge’s the above too soon:

1. The number of loan modifications attempted (this is where progress starts – with a step in the right direction) is significantly larger than in the previous year/s and under the previous administration/team

2. In some ways, the problem isn’t the number of people in trial mods. While lots of effort is and will be put on solving the current problem (hopefully successfully) of converting the 75% or so performing trial mods into permanent ones (except where there was mis-statement of income, which is not kosher in my view), the real issue is improperly set expectations…and lack of enough alternate modification programs (addressing the diversity in situation among those in trouble right now).

A key flaw in most loan modifications offered today including HAMP is highlighted by the article I am including below on a recent by the New York Federal Reserve Bank: they do not address the issue of negative equity.

Since 25% of US homeowners have negative equity today, and since our national goal is to do more to help those in trouble who want to retain their home, I thought I’d resurface a simple loan modification proposal I first introduced in an April 2009 blog….which I believe could significantly expand the success of our home retention efforts.

Responsible Second Chances: A break today in exchange for some of tomorrow’s upside

For every American family who is unable to afford the payment on their primary residence, I would offer them a one page loan modification with the following terms:

1.    Reduction in loan principal down to current market value.
2.    30 year fixed mortgage at current historically low market rates.
3.    25% of any equity appreciation from the written down loan principal (the remaining 75% would go back to the investor taking the loss on the principal write-down today)…thereby reducing the bite of the loss of principal taken today.

4. Requirement that if the borrower misses more than 3 mortgage payments again and is unable to reinstate their loan, they would voluntarily exit the property within 6 months of falling behind…either via a Short Sale or Voluntary Foreclosure.

Why do I think the program above would help many not being helped today? Here’s why:

1.    It addresses the issue of negative equity…which is critical, per the article and study mentioned below
2.    It is ‘economically’ the right answer (in effect, any family that can afford their home today at current values and mortgage rates, gets to keep it)
3.    It addresses the issue of moral hazard: there’s no free lunch in America (at least not for long). The family gives up 75% future equity appreciation in exchange for the investor taking a significant loss on the loan today (via the principal write-down). This should largely eliminate, in my view, the need to collect financial hardship documentation…which is a key reason many mods are not becoming permanent today.
4.    It is simple to understand, unlike the HAMP program…which does not result in a principal reduction, as many borrowers applying for HAMP mistakenly believe it does.

5. It addresses the issue of what happens if the loan goes bad again…which is important for the investor who is making a big compromise today.

Implementability

It is likely my proposal is not implementable in many parts of the private market…particularly the securitized loan market. However, it could be implemented for government sponsored and owned enterprises…Fannie Mae, Freddie Mac and FHA…which represent a large part of the market.

Article from DSNews.com: Fed Study Finds Principal Writedowns Minimize Risk of Redefault

Servicers who lower distressed homeowners’ mortgage payments by reducing the principal balance, as opposed to just making interest rate adjustments, are much more likely to see the payments keep coming in and ward off a redefault, according to a new study published by the Federal Reserve Bank of New York.

The economists found a definite pattern among modifications made since December 2005 that suggests “an intention among servicers to make the loans more affordable, while not losing any of the underlying principle.” However, their analysis shows that modifications that trim off some of the loan balance have higher rates of success and “can double the reduction in re-default rates.”

While principal writedowns essentially mean the lender or investor must eat a loss, many analysts argue that it’s a smaller loss than comes with the eventual foreclosure and the price tag of a nonperforming asset in today’s housing market, already swollen with REO inventories and vacant properties.

According to the New York Fed’s economists, when a borrower’s monthly mortgage payment is cut by 25 percent by reducing the interest rate only, the borrower is 11 percent less likely to default within one year.
But, if the monthly payment is lowered by the same 25 percent, this time by shaving 25 percent off of the outstanding loan balance, coupled with a small interest rate cut, the chances that the borrower will defaulting again within one year drops by nearly 27 percent.

The report’s authors also concluded that borrowers who have a loan-to-value (LTV) ratio of 115 percent or higher – meaning they owe 15 percent or more than their homes are worth – pose a 51 percent higher risk of redefaulting after a modification.

According to a blog by Wall Street Journal reporter Nick Timiraos, the findings of the New York Fed paper could have big implications on the administration’s Home Affordable Modification Program (HAMP). Timiraos explained that while the program doesn’t preclude principal forgiveness on the part of lenders, HAMP’s primary push is on lowering interest rates and extending the loan term to bring monthly payments down – exactly the types of modifications that the Fed report says have a higher chance of becoming delinquent again.

The Congressional Oversight Panel and the special inspector general for the Troubled Asset Relief Program (TARP) have criticized the government’s mortgage modification efforts on numerous occasions for not addressing the issue of negative equity, which would ultimately involve trimming LTV ratios by shaving off outstanding mortgage balances.

A growing number of mortgage experts and foreclosure counselors agree with the federal watchdogs and the New York Fed economists that principal reduction is a powerful incentive for borrowers to keep up with their restructured payments, particularly now, when such a large number of mortgages are underwater.
First American CoreLogic says that nearly 10.7 million, or 23 percent, of the residential mortgages in the United States had negative equity at the end of the third quarter of 2009, with the homeowner owing more on the home than it was worth.

A modification is only worthwhile if it induces borrowers who would otherwise default to continue paying, the New York Fed’s economists noted, and they argue in their analysis that borrowers with positive equity in their properties have a strong incentive to keep current on their mortgage, since delinquency and foreclosure will ultimately lead to a loss of the asset.

“In fact,” they wrote, “borrowers with positive equity (that is, borrowers whose house is worth more than the balance on their mortgage) should rarely default, since refinancing the mortgage or selling the property are better options than foreclosure, which may cause the borrower to lose [their] equity.”

Tags foreclosure prevention, HAMP, home retention, loan modification, Making Home Affordable, negative equity, principal writedowns | Comment (0)

Life Los angeles Politics Public Policy Real Estate

“Shadow REO Inventory” Presents Govt Unique Opportunity For Affordable Housing Expansion

October 16, 2009 – 7:00 pm

If there was ever an example of what it means to “swim upstream in a river” in life or in business…the below article describes it in detail. Despite what is possibly history’s most ambitious and concerted recent effort to protect and expand affordable housing in NYC (led by Mayor Bloomberg)….the City’s total stock of such housing declined over the past 7 years.

This reduction in affordable rental housing is bad news for the City’s lowest income residents, and generally bad news for our society…as housing costs are most families’ single largest expense…and increasing rents without similar increases in earnings….mean the poor continually get “squeezed”….thereby perpetuating a cycle of financial and personal hardship which makes it difficult for families to lift themselves out of poverty into financial stability and growth.

I have been a keen observer of the situation in NYC, as the affordable housing reality on the ground is similar in my hometown of Los Angeles. Here too, affordable housing stock has not kept up with the need for such housing….and the situation has gotten worse (not better) over the past decade.

Not since the end of the 2nd world war – when a lot of the workforce housing that supported the war was converted into affordable housing for lower income families – has affordable housing been created en masse across the USA. And today…I believe history has presented this country and government with another such opportunity…to try to make a big dent in “solving” our affordable housing needs, particularly in high cost urban areas such as Los Angeles and NYC.

As it did back in the 1940’s, the US federal government today either directly or indirectly “owns” or will own a large number of vacant and foreclosed properties. An example of this indirect ownership are the over 100,000 foreclosures estimated to currently be on the balance sheets of Fannie Mae and Freddie Mac. In fact, some have estimated the total “shadow inventory” of current and future foreclosed properties (not yet listed on the market) to be as high as 7 million properties nationwide.

Many housing market observers, myself included, believe this shadow inventory presents significant ongoing risks to the housing market. In other words, as this shadow inventory turns into actual properties listed for sale on the market, it is likely to drive imbalances in real estate demand vs. supply…thereby resulting in declining home prices…which will present risks to millions of homeowners as well as the broader US housing and economic recovery.

Given the above, perhaps it makes sense for the government to come up with a creatively designed program (i.e., one that minimizes/eliminates taxpayer burden) to convert a large number of the properties they either own or will own (directly or indirectly) into affordable housing? Fannie Mae and Freddie Mac REO’s are one good candidate for this type of policy/strategy…as are REO’s owned by the FHA and other governmental agencies.

If we could design the right program and policy to achieve this, it could have enormous social and economic benefits for the US….including helping move the ball forward on a key goal of de-concentrating poverty outside traditionally large, generally poorly maintained, and often crime-ridden public housing developments (aka “projects”) nationwide.

Is this just a dreamer’s dream…or can and will it become reality?

As City Adds Housing for Poor, Market Subtracts It

By MANNY FERNANDEZ; October 15, 2009

Mayor Michael R. Bloomberg is closing in on a milestone: building or preserving 165,000 city-financed apartments and houses for low-, moderate- and middle-income families, the goal of a $7.5 billion housing plan he announced in 2002 and expanded in 2005.
It has already financed the creation or preservation of 94,000 units, including 72,000 for low-income households, city officials say.
But those efforts have been overwhelmed by a far larger number — the 200,000 apartments affordable to low-income renters that New York City has lost over all, because of market forces, during the mayor’s tenure.
The shrinking supply of these apartments, highlighted by researchers at New York University, illustrates not only the increasing strain that housing costs have had on this city of renters, but also the limits of the mayor’s success in providing the city’s poor with reasonable places to live. While the mayor’s plan has put thousands of low-income families in new or rehabilitated buildings and helped stabilize neighborhoods, it has been nearly drowned out by the twin waves of gentrification and rent deregulation.
“We’re losing units even with additions to the stock under the mayor’s housing plan,” said Victor Bach, a senior housing policy analyst for the Community Service Society, a nonprofit antipoverty group, and a member of a panel that advised the Bloomberg administration on housing in 2002. “I’m not knocking the plan. I’m just saying it hasn’t done much to stop the hemorrhaging of lower-rent units across the city.”
Including public housing, the number of apartments considered affordable to low-income households — those earning less than 80 percent of the city’s median income, or less than $37,000 — decreased to 991,592 from 1,189,962, a drop of nearly 17 percent, from 2002 to 2008. About 42 percent of the city’s households fit in that income category in 2008.
The data were supplied by the Furman Center for Real Estate and Urban Policy at New York University, which analyzed the city’s Housing and Vacancy Survey from 2002, 2005 and 2008. The center and other housing experts consider an apartment affordable if it costs no more than 30 percent of a family’s income, or about $925 a month for a family earning $37,000.
Although the numbers present a gloomy picture, they did contain a glimmer of hope. The worst years were between 2002 and 2005, when the city lost affordable apartments at the highest rate of the mayor’s tenure. In the next three years, as the mayor’s plan took hold, the city actually gained about 8,000.

Click here for the rest of the article: As City Adds Housing for Poor, Market Subtracts It

Tags affordable foreclosures, affordable housing, affordable housing development and preservation, affordable housing supply, fannie mae, foreclosures, freddie mac, los angeles affordable housing | Comment (0)

Real Estate

Thoughts on the Current Indications of Possible Housing Market Stabilization

August 6, 2009 – 3:36 am

If you’re wondering what’s going on with the housing market and whether a permanent home price stabilization trend is underway, you should read this article….which is one of the best ones I’ve seen recently on the topic of the US housing market and likely future trends. At HausAngeles we are seeing clear signs of what we would describe as a “mini buying frenzy” at the low (below 400K or so) and medium (below 750K or so) ends of the real estate market in Los Angeles County. Most properly priced homes listed to be sold are seeing multiple offers, with many offers and sales occurring above the property listing price.

While we do believe this is a better time than we’ve seen for a long time for first time home buyers and buyers of lower priced homes to purchase homes due to increased home price affordability, historically low mortgage rates, and a significant first time home buyer tax credit, we do not believe this is the market bottom.

Instead we believe there is likely further downside for home prices, particularly higher priced “jumbo” homes, due to the following key factors which we believe will drive significant increases in housing supply in the future:

1. Unemployment: Increases in the number of people who will need to sell their home – either through foreclosure or (hopefully) a more favorable foreclosure alternative such as a Short Sale (which is one of our specialities) – because they lost their jobs and were not able to replace the lost income adequately or in the same geographic location. We do not believe we have seen the impact of all the layoffs that started in Q4 2008 and are continuing today in the housing market yet for a variety of reasons including the fact that many people continue to make their mortgage payments for several months after experiencing a layoff (by using up their cash reserves/savings)

2. Option ARM Resets: Increases in the number of people who will find themselves unable to afford their mortgage payments due to scheduled payment re-sets on their adjustable rate mortgages, particularly Option ARM’s

3. State Foreclosure Moratoriums and Home Ownership Transfer Delays Resulting from Implementation of the Government’s Loan Modification Programs: Increases in the number of homes listed for sale as state foreclosure moratoriums start to expire, and as people who were unable to qualify for or succeed at a loan modification under the Government’s Making Home Affordable Program move and sell their home.

We’re not sure exactly how the above will play out in the “official numbers”, particularly the “median home price” data most often quoted and published….as the impact is likely to be highest on homes that are typically far “above the median”. However, while the jumbo market may not be reflected appropriately in median numbers….the actual changes (for those going through them either as a client or professional) will likely be very real for a lot of people, particularly on the Coasts and in our home market of Los Angeles.

High-End Homes Frozen Out of Budding Housing Rebound (Wall Street Journal; August 3, 2009)
By NICK TIMIRAOS and JAMES R. HAGERTY

KENILWORTH, Ill. — Housing is fast dividing into two markets: Sales of low- and moderately priced homes are picking up and values have stopped falling in some parts of the nation. But on the upper end, sales remain mired in a deep slump and price declines are expected to accelerate.

Signs of the divide are visible across the country, including in suburban Chicago. In middle-class Schaumburg, Ill., which had a median income of $65,000 in 2007, sales were up 41% in June from the depressed level of a year earlier and bidding wars have broken out on some properties. “I can’t even tell you how many I’ve been in over the last two months,” says Joe Stacy, a local real-estate agent.

But 25 miles away in the affluent town of Kenilworth, with a median income of $230,000, home sales have stalled. While there are 65 homes on the market, just 13 have sold this year. “We’re extremely oversupplied,” says Sherry Molitor, a local real-estate agent. “Sellers are struggling to realize that we’re back to 2001-02 prices.”

The divide between the mass market and the high-end — generally defined as homes that cost above $750,000 — partly reflects the effects of Washington’s housing-rescue plan, which is producing winners and losers.

Policymakers have helped spur sales of lower-priced homes by offering first-time buyers a federal tax credit of as much as $8,000, by driving mortgage rates to near 50-year lows and by expanding the mission of the Federal Housing Administration, which will guarantee mortgages for consumers buying homes with down payments as low as 3.5%.

Click here for the full article: http://online.wsj.com/article/SB124924069909799645.html

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Real Estate

Real Estate Company Creates “Opportunity for All” Scholarship Program for Public Housing Residents

June 23, 2009 – 1:36 am

One of the first things AV and I did when we decided to launch our own entrepreneurial venture, HausAngeles, was ‘integrate’ our professional and community activities and goals into our business model (and therefore, day to day activities). This included a commitment to re-invest 10 to 20 percent of all real estate transaction revenues – i.e. revenues from our core business – back into our Community. Please find below the text from a HausAngeles news release describing how we are working to make our commitment real. ray

Real Estate Company Creates “Opportunity for All” Scholarship Program for Public Housing Residents

HausAngeles to Donate 10% to 20% of Commissions Via Housing Authority of L.A.

Ray Mathoda with Rudolph Montiel, HACLA’s CEO and President with a copy of the first “Opportunity for All” check in the amount of $3641

HausAngeles, a Los Angeles, California-based real estate consulting and transaction services provider, today announced its creation of a scholarship program – entitled “Opportunity for All” — for residents of Los Angeles public housing. The program will be funded by the donation of 10 to 20 percent of HausAngeles’ real estate commissions and will be administered by HACLA (the Housing Authority of the City of Los Angeles), which owns or administers approximately 50,000 units of Section 8 and Public Housing for the City of Los Angeles.

Rayman Mathoda, founder and CEO of HausAngeles and also a HACLA commissioner, said “After spending one-on-one time talking to both children and adults who live in public housing because of my role with HACLA, I realized that many of these residents – who live right in our ‘back yard’ – have access to very little opportunity in comparison to other L.A. residents. Since we conceived of HausAngeles as a socially conscious company, we decided that donating a percentage of our commissions in a manner that would create tangible impact in our own community would be a great way to give back.”

Adds Mathoda: “Real estate commissions grow proportional to the transaction size, so we have decided to donate 10% of our commission for transactions under $1 million, 15% for transactions between $1 and $2 million, and 20% for transactions above $2 million. We are hoping this program will appeal to buyers and sellers who will view this as a way of creating a real opportunity for those in need, without having to reach into their own pockets to do it.”

Any individual, family, or organization that sells or purchases property in Los Angeles can opt into the program. When the transaction closes, HausAngeles donates a portion of its commission towards the creation of the scholarships, the first round of which will be given in early 2010. Scholarships will be awarded after the completion of a competitive application and review and selection process, which will be jointly conducted by HausAngeles and HACLA. Any resident – child, youth or adult – of a City of Los Angeles public housing development managed by HACLA is eligible to apply.

“We are extremely pleased that HausAngeles is helping fill a considerable gap in available scholarships for residents of affordable housing in Los Angeles,” said Rudolf C. Montiel, President and CEO of HACLA. “While HACLA has provided scholarships to residents for the last twelve years, and assisted in providing youth programs through its non-profit, Kid’s Progress Inc., our ability to adequately support these valuable programs has been severely limited in the last two to three years due to lack of funding. HausAngeles’ efforts to make a difference in our residents’ lives via the Opportunity for All program could not be more timely or welcome.”

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Real Estate

Signs of more trouble ahead for housing market (SF Chronicle; 5.26.09)

May 27, 2009 – 5:37 pm

I derive my livelihood from the real estate market, and a significant portion of our business is driven by real estate transactions…i.e., people selling or buying homes. While a pessimistic view of future home prices is not exactly a great thing for our business, we have been telling our clients to expect further home price declines near term (i.e., in the next year or two)…and a likely slow recovery in the real estate market over the coming 3-5 years (consistent with recovery trends in previous housing downturns).

Many real estate professionals shy away from having these types of discussions with their clients, as they fear their clients will delay their home transaction…which delays when the real estate professional will make money. However, we try our best to educate our clients so their understanding of the market is consistent with ours…and they make their real estate decisions with “open eyes”. While this does result in some delaying their real estate transactions…we feel this is the right approach to our business and will benefit us long term, by creating a relationship of trust with our clients.

The truth is that home price and whether or not “the market has hit bottom” is not the only factor that home buyers do or should consider when deciding to buy a home, particularly one they plan to live in. There are many other factors that influence when and where a person buys their primary residence including life issues (“I recently got a divorce and really want to settle into a place that is mine, and where my daughter can go to a good school”), financing issues (“I know mortgage rates are historically low right now so I am OK with buying now even if there’s a risk that prices will go down in the next year or two. I don’t plan to sell for many years…and think I will be OK long term as the market is already way down from it’s 2006 peak”) and other issues such as the type of home a person or family wants to live in (“I’ve been looking for a while and haven’t liked anything. I love this new construction condo and want to live in it now”).

Similar considerations also effect investors’ decision making, particularly for those investors that plan to purchase several properties during this down cycle. For some, it makes sense to “start averaging in” by buying properties now….while also leveraging the low mortgage rates available on conforming balance investor loans.

In any event, noone – including me or any real estate professional – can accurately predict the future…so all we are doing is sharing the best educated guess we can make based on what we do know.

Please see below an article from the San Francisco Chronicle which I think is a good read for anyone considering buying or selling real estate in the near term. This represents a more pessimistic view of the market than is generally discussed in the media…but a lot of what the author is talking about makes sense to me.

Signs of more trouble ahead for housing market

Carolyn Said, Chronicle Staff Writer

Tuesday, May 26, 2009

Warren Buffett and Alan Greenspan say the housing market is near bottom.

Peppy real estate agents and gloomy stock-market traders alike eagerly embrace that supposition. Wall Street is so hungry for good news that stocks rallied at the barest hint of upbeat indicators several times this month.

But an array of serious pending issues undercuts the turnaround theorists.

To be sure, an end to the precipitous collapse that triggered a foreclosure avalanche and wiped out more than $6 trillion of home equity nationwide, not to mention setting off a worldwide economic collapse, would be something to celebrate. And several recent market barometers – diminishing inventory, increasing buyer competition, slowing price depreciation, rising builder confidence – lend credence to the idea that real estate could soon rebound.

A healthy housing market has a decent balance between supply and demand. While at a quick glance those components appear to be stabilizing, on closer look there are numerous factors that are likely to weaken demand and deluge the market with supply in coming months.

On the demand side, the surge in joblessness, still-high home prices, the credit crunch and a dearth of move-up buyers cut into the pool of potential home buyers.

On the supply side, an assortment of factors seems poised to trigger new waves of foreclosures that will continue to bloat inventory. They include the expiration of foreclosure moratoriums, more underwater “walk-away” homeowners, pending recasts of option ARM loans, rising delinquencies in prime and Alt-A loans, and soft sales of high-end homes.

Here’s a link to the full article:

Signs of more trouble ahead for housing market (SF Chronicle, May 26, 2009)

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Public Policy Real Estate

Foreclosure Alternatives for Everyone Who Deserves Them

May 19, 2009 – 7:16 pm

I applaud the recent announcement by Secretaries Geithner and Donovan expanding the government’s ‘Making Homes Affordable’ Initiative to include the ‘Foreclosure Alternatives’ Program…which was in my mind the #1 missing piece in the Administration’s policies to date…and should vastly increase the ability of Americans in trouble to avoid foreclosure and get back on their feet faster…even they cannot afford to continue to own their home.

Full details on the program are not available yet, and I admit I am biased in my enthusiastic response to this policy change as I have been advocating for exactly such a change over the last 6 months and feel/felt so strongly about this program/policy that I have focused a major part of my time and business on Servicer Offered Short Sales.

I will say more once the government releases further details, but in the meantime here’s a memo I sent to key local and national policy makers and influencers in mid-April on exactly this topic. This would be a good read for anyone seeking to understand the rationale for and potential benefits of the new ‘Foreclosure Alternatives’ program.

To: Key Local (Los Angeles) and National Policy Makers and Influencers
From: Ray Mathoda, Founder and CEO, HausAngeles, Inc.
Date: April 15, 2009
Re: Closing the (Large) Gap in our National Foreclosure Prevention & Loss Mitigation Initiatives with Systematic Servicer Initiated Short Sales

I applaud the leadership and efforts of the Obama administration, FDIC and Treasury Department to help consumers, stem foreclosures and stabilize the housing market. Providing responsible homeowners a viable opportunity to stay in their home via an expanded set of loan modification and refinance options designed to lower their monthly housing costs significantly is a welcome and necessary development. Current government and non-government led initiatives in isolation however will prove insufficient in preventing a large number of avoidable foreclosures.

The purpose of this memo is to propose and request your support for a foreclosure prevention solution that simultaneously mitigates investor losses for a currently unaddressed large segment of troubled borrowers: systematic servicer initiated short sales.

Despite generous concessions to payments and loan terms, systematic modification efforts will continue to fail to help those troubled homeowners who are not offered, do not qualify for, or fail a loan modification. The fact is that our collective public and private sector efforts to help troubled homeowners have been focused on providing borrowers with two primary resolution options: loan modification or foreclosure. As a result, those that don’t qualify for or succeed at a loan modification remain “in limbo and uncertainty” until they are foreclosed on and are either offered a small cash payment (typically $1000) to vacate the property or evicted involuntarily.

I strongly believe it is not only possible to significantly mitigate the adverse impact of a likely foreclosure for these millions of responsible homeowners who cannot realistically expect to retain ownership of their homes; it is our responsibility to attempt to do so.

How many troubled homeowners will face foreclosure despite the Obama Loan Modification Plan?
According to the Congressional Oversight Panel’s March Oversight Report, an estimated 1 in 9 US homeowners is likely to be in foreclosure over the next few years. This equates to approximately 10+ million possible foreclosures. Assuming the Obama modification program successfully provides a loan modification for the 3-4 million homeowners it is expected to help, this leaves us with approximately 6-7 million likely foreclosures.

What is a short sale and why is it better than foreclosure?
A short sale is simply the process whereby property ownership is transferred by a borrower to a third party with the servicer and investor’s approval when the loan amount is in excess of the sale proceeds from the property. In short sales, a “deficiency” is created in the amount of this difference and if/when this deficiency is forgiven, it has historically been treated as taxable income resulting in an IRS obligation.

There are three key factors which make short sales a compelling alternative to foreclosure today:

• Scale and scope of the foreclosure issue and its adverse impact on the housing market: The likely number of foreclosures we will face in the coming years is very high (6-7 million as noted above). Foreclosures have a demonstrated and well understood significantly adverse impact on both the communities in which they occur as well as the overall housing market. As a result, there is a macro-economic rationale for preventing as many foreclosures as realistically feasible.

• Tax law: The Mortgage Forgiveness Debt Relief Act of 2007 temporarily changed the tax rules such that most troubled borrowers in owner occupied properties can complete a short sale before January 1, 2010 without incurring a large IRS obligation related to the deficiency.

• Declining home price environment and related investor incentives: We continue to have a (rapidly) declining home price environment in many regions with high numbers of at-risk borrowers. In this type of environment, short sales can help significantly reduce the negative externalities associated with foreclosures, which have the potential to destroy entire neighborhoods.

The potential savings here are material enough that it is possible to create programs that re-invest a portion of these savings to help troubled borrowers relocate to rental housing. I am aware of and personally involved with at least one pilot program which offers borrowers cash payments of between $5,000 and $15,000 for cooperating with their servicer to complete a timely short sale.
Here is an illustration of the investor savings possible due to short sales: The Case Schiller index shows home prices declined at a 26% rate between January 2008 and January 2009 in Los Angeles . This translates to an approximately 2% monthly decline in home prices. Assuming the timing of home sale is accelerated by 6 months for a $200,000 home, the related savings on home price depreciation are approximately 12% of the property value or $24,000. This does not include the 10% – 20% discount attributable to “bank-owned” sales (i.e. distressed sellers) or the savings to investors through expenses avoided by preventing foreclosure which can also be significant.

The below summarizes at a high level, the key benefits of a short sale relative to foreclosure for key stakeholders including consumers, the housing market, investors, and servicers.

Key Stakeholder Benefit of Short Sale vs. Foreclosure

Borrowers (Consumers)
• Avoid emotional and reputational pain of foreclosure
• Credit impact reduced to 2-3 years vs. 5-7 years
• No continuing financial or tax obligation when deficiency forgiven/ not pursued on purchase money owner occupied homes
• Note: Deficiency can and should be treated differently for investors and owners of 2nd/vacation homes, and tax consequences are different for such homes, as well as in the case of cash out mortgages

Investors
• Lower losses due to reduction in duration between loan going delinquent and property disposition (see example above)
• Lower losses due to savings on foreclosure related expenses (e.g., legal, home maintenance/rehab)

Servicers
• Reduction in servicer advances (i.e., reduced liquidity stress and interest expenses on advances)
US Housing Market & Economy
• Home prices stabilize at higher level as property sold is not physically distressed

Don’t we already have short sales? How is this different?
Due to increasing realtor-driven consumer education on the borrower benefits described above, short sales are being attempted by more and more troubled borrowers. Whereas a year ago there were almost no successful short sales, I would estimate that of total distressed residential properties sold in any given month 5-10% are likely short sales and the remaining 90-95% are foreclosures. As a percentage of total short sales attempted, I have heard anecdotally (many times) that a majority fail. The practical reality on the ground is that servicers and investors just aren’t set up to make efficient, timely, economic decisions on short sales where the likely alternative is foreclosure.

While improved borrower requested short sale processes and timelines would help, that issue is not the focus of this memo. In order to do this right, I believe servicers must offer and approve short sales systematically and in bulk right at the time a ‘no’ loan modification decision is made, or a previously executed loan modification fails. While it is perfectly logical that a short sale would be offered to every troubled borrower as an option to foreclosure, this ‘common sense’ solution is not in place today.

It should be noted that the suggested process of systematizing, standardizing and bulk-offering this ‘make sense’ solution is no different than the evolution of our loan modification policies and efforts as a nation over the past year or so since FDIC Chairwoman Shiela Bair led an attempt to conduct bulk modifications at Indymac Bank after the institution was put into FDIC conservatorship.

Why would government leadership and support be helpful and/or necessary?
I believe government leadership and support would increase the total number of troubled borrowers who are ultimately able to avoid foreclosure, accelerate the pace at which these borrowers are helped, and reduce servicer and non-profit foreclosure prevention counseling and process expenses as follows:

• Borrower education and communication: By helping troubled borrowers understand that short sales are a legitimate option that should be considered if a loan modification is not offered or fails. Many troubled borrowers are so inundated by a variety of third parties – some well intentioned, many not – including their servicer constantly calling them that they stop listening to or trusting anyone who contacts them.

• Deficiency related contractual and tax issues: By eliminating uncertainty and creating simple standards regarding how the deficiency created in a short sale is treated contractually and from a tax standpoint by borrower type/situation (e.g., in the case of responsible owner occupied borrowers, investors and/or owners of 2nd/vacation homes). This is a critical issue that will require communication and coordination with investors and is unlikely to be resolved properly without government intervention (e.g., in the systematic short sale pilot program I am familiar with, the contractual language regarding the deficiency leaves the servicer the option of pursuing the deficiency even though there is no intention of doing so in the case of owner occupied borrowers). Finally, state tax laws are not always consistent with federal tax law, and only the government can resolve these differences effectively in a fair and expedient manner.

• Standardization: There is a critical need to maintain as much standardization as possible in both program guidelines and related forms/documentation requirements, and the government is the only stakeholder that can drive this much needed standardization effectively

• Augments the Administration’s Home Affordable Modification Guidelines: Although the Home Affordable Modification Program includes payments to servicers in the guidelines, there is no guidance for servicers as to how to execute meaningful numbers of short sales; this direction is required to minimize foreclosures

Disclaimer: This article is an opinion piece only. It should not be construed as legal or tax advice. Any individuals should contact their legal counsel, tax advisor and/or credit reporting agency to ensure they understand the legal, credit and tax implications of any decision they make.

Tags bulk short sales, foreclosure alternatives, obama foreclosure alternatives program, servicer offered short sales, short sales, systematic short sales | Comment (0)

Business Los angeles People Public Policy Real Estate World World Affairs

Who should get to keep their home and who shouldn’t? Simplicity is key for success

April 23, 2009 – 1:54 am

There are a lot of people who have gotten “unlucky” recently, in one way or another, and are finding themselves unable to make payments on their debt because their income and expense equation is no longer what it used to be (i.e., their income is down, or their expenses are up). Of the millions of homeowners currently not making their full monthly mortgage payments, it’s hard to tell which ones were unlucky, who got defrauded or lied to, and who just plain made a stupid (intentional or unintentional) mistake and bought something they couldn’t really afford.

So who – of the large number of people that aren’t able to make their currently monthly housing payments – should get to keep their home and who shouldn’t? This is more than a million dollar question and we’re having a helluva time as a nation trying to answer this question, in policy and in practice, fairly, systematically and timely.

There are currently a myriad home retention programs implemented across dozens of servicers nationwide, and if I had to pick one word to describe the current landscape of options made available to troubled borrowers, I would pick “complicated”.

I think if we could come up with a simple common sense rule of thumb to answer this key question, we would be much further ahead in stabilizing our housing market. So in the spirit of proposing solutions instead of criticizing current approaches, here’s my simple solution to this problem:

If you can afford the home you currently live in at its current market price with loan terms based on current (historically low) market housing rates….you should get to keep it. If you can’t, you should move on and find rental housing that you can afford based on your current financial reality.

How would I achieve the above if I were designing our national housing programs? I’d keep it pretty simple (although I acknowledge that making it so would be rather complicated and time consuming…with no guarantee of success):

1. Do principle write-downs to current market value for all troubled borrowers who can afford their home on current market terms…but in return for this (massive) accommodation…require them to give up 75% of future home equity appreciation back to the investors who took the loss resulting from the initial principal write-down…until the investors are made whole. After that point, allow the homeowner to keep any remaining equity upside.

2. Allow every other owner occupied troubled borrower to sell their property via a servicer offered short sale accompanied by a cash payment to help the family move to affordable rental housing. Forgive the “deficiency” for these borrowers including any tax that might be owed on the amount forgiven (most families in trouble can’t afford a hefty tax payment anyways, so this would only push them further into the hole)

3. Allow every other non-owner occupied borrower to sell their property via a servicer offered short sale, but with no cash payment and no automatic forgiveness of deficiency

Would we likely require a new governmental entity/group to track the details on the principal write-downs and resulting future home equity appreciation share on behalf of impacted investors? Yes.

Is this simple proposal difficult to gain agreement on? Yes…very difficult. But no more difficult than it will be to deal with the millions of avoidable foreclosures that we will experience otherwise.

Tags foreclosure crisis, foreclosure prevention policies, housing crisis, short sales, systematic short sales, US housing market | Comment (0)

Business Los angeles Public Policy Real Estate

REOMAC Update: REO Brokers Are Hungry For A Better Way

April 9, 2009 – 11:01 pm

I had the privilege of participating on an exciting panel on the future of short sales at the REOMAC semi-annual conference in Palm Springs this week. REOMAC is the non-profit trade organization for REO industry participants – realtors, servicers, lenders, asset managers and other service providers –who focus on the (tough) job of helping Banks manage and sell properties they have acquired through the foreclosure process.

The panel included 2 experienced industry leading REO brokers Patrick Bartolic and Earl Gervais, Ron Garber from Short Sale Plan, Todd Wilson from Prospect Mortgage and myself, was moderated by Art Acosta (another top REO agent and REO industry leader), and was a big success. The room – which was packed with 500+ of the (real estate) professionals most familiar with the emotional and practical human toll of foreclosures – was inspired by the vision of the panel and hungry for a foreclosure alternative that works!

While the panelists started by lauding the efforts of the Obama administration to try to help as many people as possible retain ownership of their homes via loan modifications that reduce their monthly housing costs significantly, they also acknowledged the practical reality on the ground: that many if not most families in trouble have experienced a significant reduction in their income and are unlikely to be able to continue to afford the homes they once thought they could.

The focus of the panel was on this segment of consumers who don’t qualify for or fail a loan modification and the solution presented was systematic, lender offered short sales. Such short sales are very different from the typical borrower-requested short sale seen in the market today, and most everyone in the room agreed this systematic emerging solution should be THE preferred alternative for troubled borrowers living in homes they cannot continue to afford.

As an ardent advocate for systematic short sales (As previously discussed on this very blog, I believe this program is THE missing loss mitigation and foreclosure prevention initiative in our current national approach to the housing crisis), I admit I was pleased to see how unanimously the room agreed this solution is necessary and likely inevitable.

There just aren’t a lot of practical housing crisis solutions available that can simultaneously benefit consumers, the US housing market, investors and servicers, and which don’t come with a heavy taxpayer price tag….except systematic short sales!

Systematic short sales like the ones described by the panel (i.e., those offered to all owner occupied borrowers who fail to qualify for or succeed at a loan modification right when the loan modification decision is made) reduce the emotional and credit impact for borrowers by preventing foreclosure while providing the borrower significant (non-taxpayer funded) financial assistance to help move to rental housing. By accelerating the timing of asset sale in a declining home price environment in a manner that is amicable for the borrower, such short sales help stabilize the housing market faster and at higher levels than foreclosures would. And finally, systematic short sales significantly reduce investor losses and servicer advances…..positively affecting a key pain point in the housing and financial markets today.

So why isn’t this ‘no-brainer’ solution already widespread in the industry? The panel discussed two key reasons. One, this is the first time in the nation’s history that circumstances (including tax law) have collided to make this a no-brainer solution for all involved including the consumer (e.g., prior to some 2007 amendments to tax law, consumers owed taxes on any deficiency forgiven by the lender in a short sale). Second, practically speaking servicers just aren’t set up (yet) to execute on this key opportunity from an organizational, process/techology, and policy/guideline standpoint.

So what’s next? It seemed pretty clear to all in the room that systematic short sales are the right answer. Key panel members – including me – stated they considered this a big policy and business opportunity and were working to help key servicers develop and implement systems, policies and procedures to implement this alternative. So stay tuned for more on that front.

The bottom-line for now, though, is good news in my view. Key REO industry leaders believe it is just a matter of time before systematic, lender offered short sales become a viable foreclosure alternative for borrowers in trouble who currently have no option but foreclosure…..and the REO realtors who deal with foreclosures every day are standing first in line hungry for this solution.

DISCLAIMER
This blog is intended to be a general discussion only and should not be considered legal or tax advice. Your use of it does not create an attorney-client relationship. Any liability that might arise from your use or reliance on this article or any of its links is expressly disclaimed. This blog is not legal, accounting or tax advice, is not to be acted on as such, it may not be current, and is subject to change without notice.

Tags certified short sales, foreclosure prevention, foreclosures, housing crisis, lender assisted short sales, pre-approved short sales, REO, REOMAC, short sale panel, short sales, systematic short sales | Comment (0)

Life Politics World World Affairs

Contrarian View: Tough Times All Around Will Raise America’s Reputation Abroad

March 12, 2009 – 7:20 pm

Most everyone knows that America is not very popular abroad right now, and hasn’t been for the past several years. Just ask any American who has travelled abroad recently. From Davos to Delhi, the general current perspective is that America is on the decline and other countries (such as China and India) will be the global leaders of tomorrow.

While I certainly agree that countries like India and China will continue to gain importance and power as their economic power increases to levels consistent with their massive populations, I disagree with this pessimistic view of the future of America.

I am an Indian born immigrant to America myself and based on what I’ve learned and seen of the world and America, I believe the American framework of life, liberty and opportunity is superior to the socio-economic frameworks in place most anywhere else.

The election of Barack Obama as US President is but one example of the beauty of the American framework….and this example is repeated daily, in ways small and big, by those who weren’t born into money or power but who gain opportunity and success in America as a result purely of their hard work and smarts.

As the economic crisis works it’s way around the world and once fast developing countries slow down and deal with the now-more-apparent weaknesses in their own social, economic and legal frameworks….I actually think America’s reputation abroad will improve.

Tags america's reputation, america's reputation abroad, american views abroad, criticism of America, developing countries, emerging economies | Comment (0)

Business Los angeles Real Estate

Second shoe to drop for CA single family home prices?

March 9, 2009 – 5:36 pm

The article included below from this weekend’s National Mortgage News talks about how the number of single family home sales in CA doubled between January 2009 and January 2008….while the median home price dropped over 40% (during the same period). The article also mentions that the CAR unsold inventory index dropped to 6.7 months in January 2009, from 16.6 months for the same period a year ago….indicating supply is decreasing.

On the surface, the article might lead one to believe that the CA single family real estate market is stabilizing and the rate of home price declines should begin to slow down. However, the unfortunate fact is that there has been no improvement in CA’s real economy during the last year.

Instead the situation has gotten significantly worse, as evidenced by company layoff announcements which are now ubiquitous and reflected in the increased and increasing CA state unemployment rate. This leads me to a hypothesis that “reality” is likely different than one would think based on the CAR home sales and unsold inventory level data.

California’s single family real estate unsold inventory levels are likely artificially low right now, as inventory has been held on Bank/Investor balance sheets for 2 reasons:

1. The moratorium on foreclosures at several large Banks/Servicers including Fannie Mae and Freddie Mac

2. A general slowdown in property disposition activity as Servicers first waited to learn the details of the Obama housing plan (announced about a week ago) and now start the process of assessing borrower’s eligibility for loan modification or refinance under the expanded set of guidelines under the Obama plan. It is only after this process is completed that Servicer’s will start to move forward with alternate plans (including possible foreclosure) on those borrowers who didn’t qualify for a loan modification or refinance.

The truth is the Obama plan (both on loan modifications and refinances) – which only applies to mortgages that have a conforming loan balance – is less likely to help CA home owners than those in states where home prices were lower (i.e., more conforming) during the boom period.

As a result, a large percentage of the assets held on balance sheet will likely need to be sold in the future. While it’s impossible to really know where the CA real estate market will go (as this will be impacted by many yet unknown factors)….my gut instincts tell me there is likely another leg down to come for CA home prices.

PS: Here’s the article I mentioned:

CA Home SalesDouble in Jan.
By Jennifer Harmon

LOS ANGELES-Statewide home sales in January edged past 600,000, double the year before, signifying that the market is gradually working its way through the large numbers of distressed sales caused by the mortgage crisis, according to the president of the California Association of Realtors.
While the median price of a home fell 40.5% in California in January, single-family home sales increased 100.8% with a total of 624,940 homes, according to CAR. The resale activity was up from the revised 311,160 sales pace recorded in January 2008. Sales in January 2009 increased 14% compared with December.

Click here for the full article: NMN Article

Tags CA home prices, CA real estate inventory, california home prices, California housing market, CAR, foreclosure, foreclosures | Comments (2)

Business Life Los angeles Politics Public Policy Real Estate

One Key Missing Piece: Early Thoughts on the Obama Plan for At-Risk Homeowners

March 6, 2009 – 1:00 am

I am pleased to see the Obama administration attempting – much more aggressively than the Bush administration ever did – to help (3-4 million) at-risk homeowners stay in their homes through a variety of loan modification initiatives and incentives which are designed to lower the at-risk homeowners’ payments to levels they can afford to sustain going forward. Creative and aggressive loan modifications are absolutely a critical part of any well designed foreclosure prevention and housing market stabilization program, and the Obama team’s plan included 2 additional elements I liked:

1. A clear stated definition of who the plan is not designed to help: Speculators. This is important because the American taxpayer cannot afford to help everyone, and everyone – particularly speculators – doesn’t deserve help. If anything, I wish the administration had made a further differentiation in treating homeowners who used their homes as a piggybank (by taking out cash and spending it) vs. those who didn’t (these latter borrowers are the most responsible group of at-risk homeowners)

2. Focus on a key practical issue – the lack of standardization (across Banks) on both the loan modification program guidelines (which the Obama plan says they will standardize) as well as documentation/forms (which I assume they will standardize consistent with the new standard guidelines). I cannot emphasize how important an issue this is and will continue to be from an execution standpoint. Just last week, I was in a discussion with a Los Angeles non-profit focused on foreclosure prevention, whose employees were telling me what a barrier to success it is to have different documentation requirements at each Bank.

I don’t know how well the programs the administration is trying to get implemented will work, but I know attempting this is absolutely the right thing to do…and if the administration and others involved in execution remain focused and flexible, they will learn and adapt from early experiences to re-design or enhance the programs to be most successful.

The above being said, I think the Obama plan as announced thus far fails to address what would happen to a critical, real and very large number of at-risk responsible borrowers: those that don’t qualify for a loan modification for their primary residence even under the expanded framework.

This set of borrowers would be particularly heavily concentrated in high cost regions such as California where I live, where the market (in the boom days) was heavily non-conforming and where as a result, refinance options will continue to be scarce despite the Obama plan. Also, there are just a lot of people, particularly from the financial services, real estate and mortgage industries who will just not make the kind of money they used to make during the boom days…anytime soon.

The right answer for these borrowers is not foreclosure; nor is it to keep them in homes they cannot afford anymore. We can and should help these borrowers avoid foreclosure and adapt their housing costs/reality to their new economic reality in a manner that is respectful and graceful – by aggressively implementing short sales programs that work (the short sales process currently practiced is broken and must be fixed).

In order to work, a short sale program must be systematic (just like loan modification programs are)…with clear guidelines, documentation requirements and approval/execution timeframes. Designed right, these programs save the Banks enough money (relative to the foreclosure option) that the Banks should be able to give the homeowner a helping hand (cash) to help them with their move and new rental.

And the best part? There’s no need for additional bailout money needed to “bridge the gap” and help prevent foreclosures even for those responsible homeowners that didn’t qualify for a loan modification or refinance.

Tags foreclosure prevention, lender assisted short sales, loan modification, making homes affordable, obama housing plan, obama making homes affordable plan, short sales, systematic short sales | Comment (1)

rayman mathoda

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Second shoe to drop for CA single family home prices?

One Key Missing Piece: Early Thoughts on the Obama Plan for At-Risk Homeowners

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