02.13.09
4 mortgage limit lifted by Fannie Mae
I recently viewed a real estate presentation. The speaker was visibly perturbed by the recent decision of Fannie Mae to limit investors to 4 mortgages. His point was that experienced investors will help the housing recovery by buying the REO/foreclosed properties and holding them. Helping clear the inventory of bank owned properties on the market could only help the housing market. But by limiting investors to 4 mortgages, Fannie Mae was unnecessarily limiting investor activity that could help the economy.
I’m sure he was pleased by the recent announcement by Fannie Mae, that it will be updating its guidelines so that investors will be able to obtain financing if they have between five to ten mortgages not four (note that the mortgages can be with any lender, not just Fannie Mae). Not surprisingly the criteria is more stringent than in the past, bigger down payments and a minimum credit scores of 720, but at least for those who qualify the artificial ceiling of 4 mortgages has been lifted.
12.21.08
Loan modifications for the non-delinquent
Some of us already knew it was possible to get a bank to do a loan modification prior to delinquency, now Fannie Mae joins the party. Kenneth Harney’s column in the Sunday San Francisco Chronicle announced that Fannie Mae will allow borrowers to request alterations to their mortgage even if they have never been late.
Essentially a loan modification is when a bank agrees to changes the terms of your mortgage due to financial hardship. Most banks won’t reduce the principal owed, often leaving the property underwater, but they will lower the rate (I recently heard of a mortgage that was modified to an interest rate of 1% for 5 years) and they will extend the term (ie. from 30 years to 40).
The loan modification industry is a wide open field and lots of confusion abounds. The feds have been slow to put any regulation in place, so as usual the market is making it’s own rules. Unfortunately, some people are getting scammed by brokers that say they will negotiate the loan, and then disappear with the fee. But loan modifications can work and for some people banks have been quietly modifying loans even before the mortgage ends up in the loss mitigation department. Some banks are even proactively looking for signs of distress and contacting the borrower early.
Harney’s article is a good read and documents that a trend that was already underway comes into the mainstream with the Fannie Mae announcement.
11.05.08
loan modifications, alternative to foreclosure
Loan modifications are becoming a popular alternative to foreclosure. A loan modification, sometimes called a workout, is where the lender changes the terms of the loan, such as the interest rate, the amortization type, or even the principal balance (dropping the principal balance is still not common but it does happen). The idea is by changing the terms of the loan to lower the payments the borrower can continue to make payments on the loan and prevents loan from becoming non performing.
Here’s what I have heard so far on loan modifications:
- They are not working with investors
- They won’t talk to you unless you are behind on your payments
- The customer service folks won’t help you, you have to talk to the actual decision makers
Of course this is all hearsay. However I do believe there is some truth to the buzz I’m hearing. Navigating the bank hierarchy to get agreement on a loan modification is hard. That is why there are a number of companies that will help you do just that.
According, to the Loan Modification Handbook
10.27.08
Loan modification handbook
In dealing with a toxic mortgage you can no longer carry, so far I have identified three options:
- Stop making payments and let the bank foreclose on you.
- Find a buyer and negotiate a short sale with the bank
- Keep the property and get a loan modification
I’ve written about short sales previously in this blog. The foreclosure option is the option of last resort. Although I have no emotional attachment to the properties it appears the least harmful thing I can do to my credit is to try and negotiate a loan modification as a first step. If that didn’t work I could look into a short sale or simply give the deed back to the lender. This is called a “deed in lieu of foreclosure” and not quite the same as a foreclosure.
I belong to a few real estate mailing lists. One poster to the group, claimed she was able to negotiate a loan modification that cut down on her payments and knocked $46K off the principal balance. That sounded pretty good to me, so purchased the book she recommended: The Loan Modification Handbook
Written by Michael Albert and Rami Ibrahim, it arrived from Amazon a few days ago. The Loan Modification Pamphlet would have been a better name for it. So at first I was rather disappointed at the rather slim size for the price. However it is a good introduction to the topic. It provides examples of letters you write to the lender and good advice on how to get to the right decision maker (hint: it’s not the person that answers the customer service line). A nice touch was a listing of the actual phone numbers for many banks’ loss mitigation departments. That alone is quite useful, as anyone knows from navigating a large corporate bureaucracy by phone.
So far I haven’t acted on any of the steps in the book, but I will soon. I read somewhere that a loan modification is 40% cheaper for a bank than a foreclosure. For one of my houses in particular, the area is gutted with foreclosures and nothing is selling, if the lender has any sense at all they should be willing to work with me.
10.03.08
Will the bailout bill help real estate developers?
In a stunning slap to President Bush, the original bailout bill was rejected by Congress. Now a new modified bill is making the rounds, with some sweetners (I’m watching the AMT earmark myself) that might just get everyone to vote yes.
Understand that no one wants this bill. It’s like cough medicine, you know you have to take it but it still tastes awful going down. Of course cough medicine usually helps your cough, but the country’s financial system has caught bronchitis not just a trifling cold — so it is questionable whether the bailout bill will end the financial crisis. Still everyone seems resigned to the cold hard fact that there is really not much choice.
I’m involved with two real estate development deals. Thankfully they are not condos. One of the developer wisely switched to building apartments from the original condo plan. The other is a commercial development. So what’s the problem? Like you had to ask, of course it is financing.
Recently overheard in a corporate hallway somewhere in Silicon Valley, “our stock price is so low, we are prime take over bait .. but no one can organize the financing”. Even the tech section is affected, isn’t that food for thought.
With both the real estate deals that I’m involved in, the bank providing the original construction financing went under. So the developers are scrambling to find new financing .. but to no avail. Word is, that banks are getting downgraded just for having construction loans on their balance sheets, whether performing or not, so they have the door firmly closed for new ones.
So will the bailout bill help real estate developers? Well if it helps the banks start lending again, it should.
09.26.08
WAMU fails, sold off to JP Morgan
Ah, nothing like sitting down with a cup of tea and reading the morning news. And if you follow the financial sector, it continues to be bad news after bad news after bad. This morning’s shocker was the spectacular failure of WAMU. I just recently wrote about WAMU a few weeks ago. They offered me a loan modification that I gratefully took. Maybe it was a desperate move on their part (although I still think it worked out well for them).
This opens up some speculation. Since I’m not in a strong position to weather this crisis forever, could my lenders become more pliable in the future? Maybe I should monitor their health and swoop in in their waning days and offer to keep paying the loan, on my terms. With the way things are going, with so many walking away from their houses, people who are actually paying their mortgages could have negotiating power. Now or in the future.
09.14.08
Changes in the mortgage market
The mortgage market, particularly with the take over of Fannie Mae and Freddie Mac by the US government, continues to be in flux. If you own more than 4 properties or want to do a cash out refi: watch this mortgage market update.
Disclaimer: I am not recommending this business. However I have talked to Todd and in my opinion he is knowledgeable.
09.07.08
Smart loan modification strategy from WAMU
I had an 5 year ARM on a duplex whose fixed interest rate was about to expire. As I previously written it was a dilemma. Refinance and increase my already negative cash flow by hundreds of dollars. There are no investor loans out there for 5.6% (my current rate). Or try to sell in a down market. Since my real estate broker said there was investor activity, I listed. However my listing hit the market literally hours before the Humboldt fire which almost wiped out the town of Paradise. A last minute wind shift spared most of Paradise but the fledging real estate activity was snuffed out.
So I then spent some time reading through the note trying to understand what would happen in a few months. It was confusing so I called my lender, WAMU, they had been sending me letters about the reset anyway.
The bad news? Once the ARM expired, the interest rate would be recalculated every month. If it had been once a year, I could have taken my chances and re-evaluated the situation next year as the margin would have kept the rate around 6%. Although interest rates are not moving up very quickly right now, in time, inflation will push them up, so a significant risk.
The good news? They offered me a loan modification. And get this, I did not have to qualify for it. The deal was a 7% 5 year fixed rate with interest only payments. Since my current 5.6% loan was fully amortized, my payments would actually go down by $50. I took the deal.
Is a good deal? Well it’s really not a great deal. I would stop making progress at paying down the principal. And I would be paying quite a bit more in interest. So the numbers are not great. However for my current situation, it was a good enough deal. Here’s why:
I didn’t have to qualify. While my FICO is good, my debt to income ratio is not the best and I have more than four properties. Some of you might not know this, but borrowers with more than four properties are having problems getting any loans at all. I recently talked to a big time investor that has hundreds of properties. His financials are pretty good, but no one will give him a loan, he has to pay cash.
5 years of breathing room. The property is essentially break even, and with this deal it will stay break even. The extra $50 a month cashflow will cover the loan modification fee in a year.
I keep the HELOC that sits behind this loan. I have a second lien on this property that is a HELOC, there is a balance that would need to be paid off with any refinance or sale. The property isn’t underwater but in this market paying off the first and second liens when selling would leave very little profit likely to be eaten up by the transaction fees. Also keeping the HELOC is a nice bonus as it is a possible emergency cash source for me. It helps me sleep a bit better at night.
Since WAMU is making better money on the increased interest rate, it’s a good deal for them. And by offering this deal they prevent a possible foreclosure and have a performing loan on their books. I believe WAMU is yet another lender that has been slammed by foreclosures and the subprime debacle. So it’s a win win for every one. I wonder how many banks are adopting this strategy.
08.25.08
How to buy a $500K house w/ $2500 a month
I don’t normally hang out in the peanut gallery and post comments to articles and blogs. I simply don’t have the time. But for some reason, I felt compelled to add my 2 cents on a marketwatch article. The questioner wanted to know if it was possible to assume a mortage of a seller in distress even though their credit was shot from a bankruptcy a year ago. Since the questioner lived in the Bay Are they were looking for a house in the 500K range (yes that is the low end of the market here). And they had $2500 a month to spend on mortgage payments.
First of all the answer to the question was weak. “Talk to a professional”. And no creative thinking was in sight. Then the peanut gallery decided to lambast the audacity of someone that was recently in bankruptcy that thought they could obtain a $500K house .. for $2500 monthly payments with no down payment.
Farfetched? Yes, of course it is. But it could happen. So I posted, in the spirit that the only stupid question .. is the one not asked.
BTW, my avatar is named ksf.
06.22.08
Financed a real estate property lately?
Have you tried to finance or re-finance a property lately? It’s a different world. A reader’s question featured in the Benny Kass column wondered if the lenders would laugh in their face if they applied for a home equity line. Since all they have in equity is the down payment they made a year ago, it would be pretty tough to get a line of credit on that property. Hopefully their broker won’t laugh in their face as well.
I’ve recently talked to a mortgage broker as well. I wanted to refinance some land and I also have an ARM on a duplex that is expiring in October. I have the ARM at a great rate, 5.6% however unfortunately that kind of a rate is not available now, ARM or no ARM, for an investor. Homeowner rates are the highest they have been since September, 30 year fixed is at 6.42% and 5 year ARMS are at 5.89%. Since investor loans are at least a point more, I’m likely looking at a 7% loan which means a higher payment. So I have to decide whether to sell or absorb the higher payment. It’s a close to breakeven property.
Lenders will no longer finance land at a 80% LTV. They will only consider loans at 65% or 70% LTV for land. With the loan I currently have, it is at best 75% LTV depending on what the appraiser would say. So in that case I would have to come to the table with money.
It was not a very encouraging conversation, certainly not much in the way of options. I commented to the broker that he must have heard many stories like mine where we are stuck with negative cash flow property that is tough to refinance and that puts us in a tough spot. His answer was memorable, at least to me, “Actually, you are a success story”. Eeek, since I’m not feeling like a success story at all, I really feel for the “failures”.
