Buying property at the foreclosure auction, or trustee sale, can be rewarding or disastrous. The difference between gain and pain comes down to knowing how it works and being prepared. As a veteran of hundreds of auctions I put together this video to give everyone an overview of the auction process. In less than ten minutes you can watch and learn the basics of how an auction works.

• How to find the actual location of the auction
• The three possible outcomes: postponement, cancellation, or sale
• Things to watch out for, such as
  • Multiple auctioneers operating simultaneously
  • How to make sure you bid on the correct property
  • The implications of the As-Is sale
• Qualifying as a bidder
• A typical bidding scenario
• What happens when you win

ForeclosureRadar.com gives auction investors the freshest foreclosure information – including exclusive daily auction updates – and is the only foreclosure service with tools for making sense of it.Armed with this information, you have the best chance of a rewarding experience on the courthouse steps.

8 Comments

The U.S. Department of the Treasury and the Department of Housing and Urban Development (HUD) announced this past Thursday an updated guideline for servicers participating in the Administration’s mortgage modification program commonly known as H.A.M.P. The rule change is intended to speed conversions of trial modifications to permanent ones by requiring documentation up front. “The updated process requires that key documents, including proof of income, be obtained from the borrower before a borrower evaluation can begin. This more robust requirement of upfront documentation will make it easier and quicker to convert trial modifications to permanent modifications and enable servicers to use their resources more effectively.” http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2010/HUDNo.10-021. The full text of Supplemental Directive 10-01, Home Affordable Modification Program – Program Update and Resolution of Active Trial Modifications, dated January 28, 2010 can be found at https://www.hmpadmin.com/portal/docs/hamp_servicer/sd1001.pdf.

Before the new requirements, a trial period plan could be based on verbal financial information obtained from the borrower, subject to later verification during the trial period. Now for all trial period plans with effective dates on or after June 1, 2010, a servicer may evaluate a borrower for HAMP only after the servicer receives the following documents: (1) Request for Modification and Affidavit (RMA) Form; (2) IRS Form 4506-T or 4506T-EZ; and (3) Evidence of Income.

We previously pointed out that the lack of permanent loan modification conversions might be more the result of homeowner’s resisting a program that leaves them in yet another exotic mortgage. Not just a paperwork-processing problem as the Administration suggests. Regardless, homeowners will be better off with the “more robust requirement” because the homeowner will be less likely to make several mortgage payments under a trial modification only to be denied permanency due to disqualification caused by the documentation. In other words, it will be less likely that the homeowner will throw good money after bad on a mortgage that does not qualify for modification. Ostensibly, under the new requirements the homeowner’s qualifications can be better assessed before any modified mortgage payments are made in good faith by the homeowner during the trial period.

Whether the new documentation requirements really make it easier and quicker to convert trial modifications remains to be seen. An argument can be made that the new requirements don’t simplify the documentary complexities associated with H.A.M.P. but merely push the problem forward in the loan modification timeline so that the ultimate number of permanent loan modifications achieved will not change. But if nothing else, in many cases the homeowner and the servicer should know sooner if the sought after loan modification is destined for failure and that makes good sense.

3 Comments

Are higher home prices really the answer to the housing crisis?

Looking back at 2009 we saw unprecedented support for the housing market in terms of government subsidized interest rates, tax credits, foreclosure moratoria and loan modifications that make subprime lending look safe. Clearly the drop from the dizzying heights homes prices reached in 2006 was staggering, and just as clearly the drop would have been far worse without this intervention. To justify this intervention one has to assume that higher home prices are in our best interest. But are they really?

Like an athlete using performance-enhancing steroids, should we be willing to risk our economic health and future for a remarkable, but likely unsustainable, performance now? Is it really reasonable to expect our current steroid induced housing market won’t come back to haunt both our personal finances and our national economy in the future?

Looking back to our previous foreclosure crisis in the 1990’s, we worked our way out of that one with housing steroids as well. We started with the Taxpayers Relief Act of 1997 that incentivized every homeowner to flip-that-house with tax-free gains on real estate. As we entered the millennium the housing steroid cocktail was enhanced with a loosening of regulations and an extended period of low interest rates. This stimulus led to the greatest housing bubble in our history, the aftermath of which we will continue to deal with for years to come.

As with steroid use by athletes, there are short term artificially induced gains followed by serious negative side effects. The gain was stratospherically higher but unsustainable home prices. The side effect has been negative equity, foreclosure and recession as the steroids wore off and homes prices returned to earth. As we once again embark on injecting a powerful cocktail of stimulus into the housing market let’s look at the winners and the losers of housing on steroids.

Who are the winners and losers of housing on steroids?

Winners

• Government: Higher property values mean higher property taxes and higher government revenues.
• Title & Escrow companies: Higher prices mean higher transaction fees.
• Realtors: Higher prices mean higher commissions.
• Insurance Companies: Higher prices mean higher premiums.
• Sellers: Anyone who flips, sells, downsizes, or simply cashes out – assuming they get the timing right.

Losers

• Homeowners: Periods of artificially inflated values only mean inflated taxes, insurance premiums and unpredictable future value potentially leaving them stuck in an underwater prison-of-debt during the inevitable busts.
• Realtors: While the highs are great, the busts are devastating – not only to their own income, but also to their reputation among those who trusted their mantra that “now is a good time to buy” at the peak.
• Retirees: And other fixed-income investors who can’t get a decent return on investment thanks to artificially low interest rates. It’s hard to get those 5-10% returns your retirement plans are counting on during a period of near zero interest rate policy.

Is the solution to our housing crisis really more housing steroids in the form of government intervention? Might we better off by kicking the habit and returning to a sustainable market, realistic growth that keeps pace with inflation, and prices that reflect actual incomes? Ask yourself a few questions:

As a homeowner, which would you prefer?

• Artificially inflated home values that eat at your income with higher taxes and insurance premiums while not otherwise benefitting you so long as you still need a roof over your head , or
• Confidence that the value of your home will remain stable and keep pace with inflation as you build equity by paying down the mortgage.

As a Realtor, which would you prefer?

• An unstable and dysfunctional boom/bust housing market with periods where commissions can be hard to find, or
• A stable housing market with continuous sales bringing a consistent stream of commissions.

As a citizen, which would you prefer?

• Covering up the real problem (too much debt) by artificially inflating home prices using tax payer dollars we don’t have (creating more debt) while still leaving our consumer-driven economy weak because too much income is going to mortgage payments, or
• Addressing the negative-equity problem and allowing prices to return to levels supported by reasonable incomes and loan terms.

The reality is that housing prices aren’t too low; it is our debt that is too high. Rather than continue to waste tax dollars we don’t have on temporarily inflating home prices, perhaps its time to “Just Say No” to the housing steroids that got us in this mess to start with.

5 Comments

On Friday, HUD Secretary Shaun Donovan announced that FHA mortgage insurance will be allowed on foreclosed properties that are quickly resold or “flipped.” The policy shift is a welcomed change. The Anti-Flipping Rule adopted in 2003 as 24 CFR 203.37a(b)(2) was designed to address predatory lending practices where a Lender, Seller and/or Appraiser might perpetrate fraud on an unwitting homebuyer by reselling a property far in excess of the fair market value or with substantial overcharges tied to the new mortgage. While the Rule may have helped on that front, it unnecessarily targeted foreclosures which are commonly flipped… either by the bank or an investor.

Typically, in today’s foreclosure environment an investor will purchase a foreclosed home at the Trustee’s Sale only when the property can be bought at a discount from the fair market value. The home is then rehabbed as necessary and resold at fair market value as quickly as possible to avoid holding costs and risks incident to ownership, often the resale occurs well within 90 days. Importantly, the notion of a fraudulent sale in excess of fair market value to an unwitting homebuyer does not arise nor is it a threat. Instead, the reality in today’s market is that an investor will not entertain a purchase offer from a buyer who requires FHA financing which is bad for the buyer, bad for the seller and bad for the community seeking to stabilize property values at full fair market. Kudos to HUD for finally recognizing this negative influence in the housing market and doing something about it.

The waiver will take effect on February 1, 2010 for one year unless otherwise extended or withdrawn. Also, note that the waiver comes with the following limitations:

• The transaction must be at arms-length
• If the sales price is 20% or more above the acquisition cost the lender must meet conditions concerning appraisal and property inspection
• The waiver is limited to forward mortgages, no Home Equity Conversion Mortgages

Interestingly, HUD acknowledged that eliminating the 90-day resale restriction will give the FHA greater opportunity to dispose of it’s single family REO “in a way that maximizes return to the FHA mortgage insurance fund” (in other words at the highest price). So HUD saw that the Anti-Flipping Rule not only hurt buyers, sellers and our communities, but hurt the FHA too. (See http://www.hud.gov/offices/hsg/sfh/waivpropflip2010.pdf for full text of the Waiver.)

The waiver is good in that it helps investors quickly resell foreclosed properties at full fair market price which will also help occupy homes and stabilize values. The waiver is good in that it makes available to buyers FHA-insured mortgage financing on a growing portion of the available homes for sale. The waiver is good in that it helps mitigate potential FHA mortgage insurance fund loses by increasing what buyers may be willing to pay for distressed properties. Bottom line, it’s all good.

2 Comments

We just posted our latest California Foreclosure Report: DOWNLOAD HERE

Highlights from this report:

• Dramatic declines in Foreclosure Activity – not simply seasonal
• New Preforeclosure Inventory data – clearly shows we fewer filings, NOT fewer foreclosures
• Big Drop in Sales to 3rd Parties – banks cut discounts leaving fewer deals

Sign-up for our FREE monthly California Foreclosure Report by email

Video version:

0 Comments

The cry of “wave!” continues. You don’t have to wait long between news stories about shadow inventories and impending waves of foreclosures that are poised to devastate the housing market.

In September, Bank of America predicted “a spike from now to the end of the year in foreclosures.” A spike that didn’t happen. Also in September, Amherst said that “favorable seasonals will disappear over the coming months, and the reality of a 7 million-unit housing overhang is likely to set in,” a prediction that was repeated last month in a hearing before the House Financial Services Committee.

Auctioneers on the courthouse steps called me before the end of the year to tell me to get ready for January as they had heard from their managers that properties will finally start selling, rather than continually postponing come January 1. Didn’t happen.

Even commenter’s on my  blog posts try to explain to me that there is a huge shadow inventory — as if I wasn’t aware that there a lot of property owners who are underwater, delinquent on their mortgage, or stuck in foreclosure limbo.

Like everyone else, I see the signs that a wave of foreclosures should have been upon us long before now. Yet for some time now I’ve been a fairly lone voice in saying that a foreclosure wave isn’t coming.

So why do I believe there will be no foreclosure wave, at least not in the near future?

Because we simply don’t have either the political will, or the financial capacity to foreclose on everyone who is currently delinquent, not to mention the millions more who will become delinquent if the housing market is crushed with a wave of new inventory.

Our financial institutions are still struggling to get their footing, the FDIC is in no position to bail them out, and taxpayers have had more than enough of bank bailouts.

And while little has been done by Congress to address the root problem of negative equity, they certainly have worked to prevent foreclosures and preserve home values.

So if not a wave of foreclosures, what do I think we can expect instead?

Foreclosure limbo consisting of continued government interventions, whether in the executive, legislative or judicial branch, at the state level, by the Fed or even supposedly independent oversight boards.

They’ll accomplish this by keeping a bid under housing prices through low interest rates and tax credits; forcing banks through hoops; threats; foreclosure moratoriums or any other means necessary. As such I see little chance that housing will be allowed to fall, no matter the cost.  Instead we will “extend and pretend” for years to come.

Foreclsoures will continue to be trickled out  at something near the current rate. They can’t stop foreclosures completely or everyone would simply stop paying their mortgage.

Some may argue this won’t work. Certainly homeowners can’t just stay in their homes free forever. Perhaps, but governments should also not be able to run deficits forever – yet for now at least, they do.

26 Comments

Nick Timiraos over at the Wall Street Journal called my attention to a new study out from the New York Fed. It essentially says that loan modifications are less likely to default if they include a principal balance reduction. While my initial reaction was simply “Duh”, I’m glad to see this minor acknowledgement of the real issue – negative equity – at the federal level.

I’ve known for a long time that with the exception of the Five D’s (Death, Divorce, Drugs, Disease and Denial), foreclosure is the result of negative equity which leaves the homeowner trapped in a prison of debt unable to sell or refinance (with the possible exception of a short sale). Negative equity is so obviously the root cause of foreclosure it is hard for me to believe that the Fed had to commission a study to find out that loan mods which fail to address this core issue are less likely to succeed.

The root problem with the current Making Home Affordable loan modification programs, and the general idea that negative equity does not have to be addressed in order to avert this crisis can be traced back to a study by the Boston Fed. That study  essentially concluded that negative equity was not enough in and of itself to result in default and that job loss or some form of payment shock, like payment resets, was also required. They looked at Massachusetts foreclosures from the 1990’s to come to this conclusion. I instantly had issues with the study, given that the 90’s downturn was due to a recession rather than a massive bubble, because home prices dropped far less then vs. now, and a much smaller percentage of the population was affected. How anyone could think that period was indicative of what we could expect this time around was a clear example to me of how economists regularly get lost by failing to take into account basic common sense. You’d think they’d get that after nearly universally missing the housing and credit bubbles which got us here in the first place. I wasn’t the only one who thought this study was off base and I thought the folks over at the Kellogg School addressed its short comings nicely in their study on Strategic Default.

Now perhaps, with this latest study, the Fed is finally getting a clue and coming to the realization that addressing negative equity will ultimately be a required part of getting back to a healthy housing market. And if so, what’s next? Nick Timiraos noted today that Barney Frank doesn’t think we can force lenders to lower principal balances. But perhaps the quiet move on Christmas Eve by the Treasury to remove the cap on funding to Fannie Mae and Freddie Mac is an effort to get this done through the backdoor… at taxpayer expense.

No question in my mind that we have to address the negative equity problem. The only question now is how. Will the powers that be try to sneak it onto the back of taxpayers, will they force lenders to eat the losses potentially pushing our financial system back to the brink of collapse, will there be a national discussion and administrative leadership on how to best deal with the excess $4 Trillion in housing debt, or will they continue to extend and pretend with foreclosures trickling out for years to come? My money remains on the last choice, but I’ll be watching closely.

10 Comments

Three interesting news items on the foreclosure front. First from the Atlanta Journal Constitution comes the story of a man robbing a bank to pay his mortgage. Apparently, the man handed the teller at SunTrust Bank a note that read “give me the money … I need to pay my mortgage … Merry Christmas.”

I was beginning to think we might see some better alternatives for homeowners terminally underwater than bank robbery after the Treasury Department provided details on their upcoming Home Affordable Foreclosure Alternatives program that made some progress on making short sales and deeds-in-lieu easier for homeowners who work with their lenders rather than simply “walking away”. Yet, just days later, HUD issued a letter to lenders classifying short sales by homeowners looking to escape their prison of debt as “strategic defaults,” and making those homeowners ineligible for future FHA financing with few exceptions. Examples of acceptable exceptions include “death of primary wage earner,” or “long-term uninsured illness,” with no mention of job loss.

Now contrast that with the following story from Bloomberg News – Morgan Stanley relinquished to the lender 5 commercial properties in San Francisco they bought at the top of the market in 2007. The current value of the property is estimated at $279 million, close to half of the value when Morgan Stanley bought it 2 years ago. Alyson Barnes of Morgan Stanley assured reporters, “This isn’t a default or foreclosure situation. It is a negotiated transfer to our lenders.”

Let’s compare and contrast. When things got tough for financial institution Morgan Stanley, they got $10B in TARP money, they walked away from their mortgage as part of a “negotiated transfer”, and got to keep their investment grade A+ credit rating. Joe Homeowner, on the other hand, is left to choose from continuing to throw good money after bad (payment based loan modifications), ruining their credit and chance to buy another home (short sale, deed-in-lieu or foreclosure), or apparently, robbing a bank.

5 Comments

Why the army of 1.2 million Realtors should be deployed to fight the war against negative equity.

By any measure, the administration’s attempts to resolve the housing crisis have been, and continue to be, dreadfully ineffective. And they’ll continue to fail while they offer solutions that are worse than the policies that created the crisis in the first place.

Instead, let’s find real solutions and engage an army of Realtors, 1.2 million strong, to address the real problem.

The problem isn’t a big mortgage payment or a temporary drop in home value. The problem is $4 trillion in negative equity that was created by an epic credit bubble.

The best Washington can come up with is to incentivize mortgage servicers and lenders to push payment-focused loan modifications, which only leave homeowners upside down in a prison of debt, albeit with affordable payments. If we ever want to return to a healthy housing market, or a strong consumer base in our consumer driven economy, we’ll have to address the reality that millions of U.S. households are terminally upside down. And, as the administration has already realized, that can only be accomplished the way Realtors do things, one household at a time.

Realtors are on the front lines in this struggle. Like homeowners, their personal wealth has been adversely affected by the dramatic change in the housing market. Some may say Realtors took advantage of the housing bubble and helped create the crisis. However, in reality, they simply and dutifully followed our leaders in Washington, and the powerful financial institutions on Wall Street who rewrote the rules of the game.

Yes, these rules were often supported by the Realtor’s own industry leaders, who pushed for new loan programs, home-buyer tax credits and unsustainably low interest rates. Those same leaders encouraged them to ignore negative signs in the market and ceaselessly insisted that “now is a great time to buy;” even writing and promoting books on why the bubble would never burst.

We shouldn’t blame the foot soldiers for the mistakes of their generals.

It is in every Realtor’s best interest to see this nation get back to a healthy housing market. One where 25 percent of homeowners aren’t upside down in their mortgage, one where homeowners make their mortgage payments, and one where foreclosure isn’t a daily headline.

What we need are for our generals in Washington to develop policies that make sense, translate them into coherent marching orders, and unleash a troop surge of ready, willing, and able-bodied Realtors that can and will make real gains in the struggle against negative equity and return us to a healthy housing market, one household at a time.

The reality is that there is no one solution to this problem. Some owners are in homes they will never be able to afford; some are suffering temporary job loss; while others have already abandoned their home and moved on. Mortgage servicers are not equipped to address the problem. They lack the manpower to answer their phones, let alone talk with each owner, visit their home, and walk them through their options. Realtor’s have the manpower, and are eagerly awaiting clear instructions on how to best help homeowners and make a difference in their community. The truth is that their livelihoods depend on it.

Our army of Realtors should be mobilized now, as they can be the front-line resource for homeowners looking for a rational way to win their personal housing battle that will, in turn, lead to our winning the war against negative equity, returning us to a healthy housing market, and perhaps even a strong national economy.

9 Comments

Monday, the administration announced a nationwide campaign to push their failing Home Affordable Modification Program (HAMP) out of the HAMPer. Until now the focus has been on getting loan modifications started with a stated goal of reaching 500,000 trial modifications by November 1, 2009. Unfortunately, despite having successfully hit this goal, it is becoming increasingly clear that the program is failing, as few of these trial modifications have converted to permanent modifications. A little over half of the 650,000 borrowers who started trial loan modifications are eligible to convert to permanent modifications by the end of 2009. The administration’s announcement today is an effort to rescue the program and make sure these modifications actually do convert with a campaign to:

• Extend the trial period, to allow more borrowers to complete the paperwork.
• Develop publicly reported operational metrics, to hold servicers accountable for their performance.
• Possibly impose monetary penalties and sanctions on under-performing servicers.
• Engage HUD field-office staff and HUD-approved counseling organizations to distribute outreach tools.
• Engage the National Governors Association (NGA), National League of Cities (NLC) and National Association of Counties (NACo) in thousands of state, local, and county offices, to increase awareness of the program and assistance for borrowers.

Apparently the assumption is that borrowers aren’t completing the paperwork because it’s too complex or confusing. But what if they aren’t completing the paperwork because they’re reluctant to fall for another toxic mortgage?

High-risk, sub-prime option ARM loans contributed to this mess in the first place. To fix the problem the administration proposes to:

• Offer homeowners temporarily lower payments on loans they are unlikely to ever be able to repay.
• Force servicers to expedite applications under threat of public flogging, financial penalties and sanctions.
• Enlist private associations and government agencies at all levels to hawk the its program as being good for homeowners.

Maybe borrowers have figured out that this program is really only another exotic mortgage like one they fell prey to when they bought or refinanced the house that resulted in their current predicament. HAMP and the adminstration’s newly announced campaign isn’t digging borrowers out of a hole. It’s only digging them a new one, and delaying the inevitable.

The original hole was created with a clear downside and a theoretical upside:

• The downside: exotic financing, that qualified buyers for homes they clearly couldn’t afford by offering a low payment up front, despite unaffordably high payments in the future.
• The upside: the expectation that the appreciated value in the house will allow the borrower to refinance or sell at a profit before their payment skyrockets.

The new hole offered by HAMP is all the downside with none of the upside.

• The downside: exotic re-financing, by which they make payments affordable today, but leave homeowners in the same boat down the road when payments ratchet back up after 5 years.
• The bonus downside: there is no reasonable expectation that home values will appreciate anywhere near enough to get these loans above water before the 5 years is up, or before the homeowner runs into a real life event like job loss, divorce or job relocation – leaving them stuck in an upside down prison of debt.

What’s more, it’s not just bad for borrowers, it’s bad for everybody. Servicers and lenders simply delay their inevitable losses and suffer a lousy rate of return thanks to the artificially low payment until then. Everybody suffers as the economy limps along, as it is hard to justify a spending spree when you are upside down in your home by tens or even hundreds of thousands of dollars. Even the stealth stimulus package disappears as people make their modified mortgage payments.

The housing problem may need an intervention, but not this intervention. Like offering drugs to an addict, repeating our past mistakes by putting people back into exotic mortgages is certainly not the cure. It’s time to go through withdrawal and kick the habit by addressing the real problem, negative equity.

19 Comments