Austin Property Talk

Good News on the Foreclosure Front

This past Friday, HUD secretary Shaun Donovan announced a temporary lift on the FHA mortgage seasoning requirement.  This change will allow for quicker resale of many properties in short sale or foreclosure. 

Since that probably didn't make any sense to you, lets try that again in English.  Up until Friday, when this announcement was made, if the current owner of a property did not own that property  for a minimum of 90 days, it could not be sold to a buyer who planned on using FHA financing.  FHA financing is a government insured loan program that has become the program of choice for many home buyers these days due to its qualifying criteria and lower down payment requirements.  

The original primary reason for the "seasoning" requirement was valid.  HUD wanted to ensure that prospective house flippers were not purchasing properties under the premise of owner occupancy, using the lower down payment requirement, rehabbing the houses, and turning around and selling them quickly for a profit.  That part of it made sense.  However, a secondary effect was that many short sale or foreclosed properties that were held or purchased by an intermediary were no longer eligible for the FHA financing until they became "seasoned".  Thus, many would-be buyers were turned away as a result.

This temporary change will have a broader effect on areas outside of Austin and Texas that have been hard hit by foreclosure activity, but it hit very close to home last week.  

I am currently working with a first time buyer couple who's only option at this point is FHA financing.  Fortunately, we received news last we that we'd "won" out in a multiple offer situation on a great short sale deal, only to find out that it came with a stipulation:  No FHA financing.  It turns out that the loss mitigation company (short sale negotiation company) currently has an option to purchase the property and turn right around and sell it almost simultaneously.  This is a huge benefit to the seller because he almost assuredly avoids foreclosure, but we found ourselves in a situation where the "seasoning" requirement was not going to be met.  Talk about frustrating!

Then low and behold, the real estate Gods looked favorably upon us and this announcement was made on the very day that we had to make some sort of decision.

I know all of this might be a little confusing, but trust that this is going to benefit the Austin Real Estate market as a whole. Though our foreclosure numbers are lower than some, the quicker they sell, the quicker resale prices will come back in some areas.  

Underwater Homeowners Continue to Struggle

The government is ramping up its foreclosure prevention plan.   As part of the President's $75 billion foreclosure modification program, eligible borrowers who are at risk of default are being allowed (upon approval of course) to lower their monthly payments on a trial basis for several months to make sure that they can handle the adjusted payments.  

Trouble is that so far only 4% of the trial adjustments have been made permanent after 3 months.   The reason:  well depends on who you ask.  The mortgage companies claim that only 33% of the homeowners currently involved in the "trial" have submitted all of the necessary paperwork to make the adjustment permanent.  In fact, 20% have not submitted anything.   On the other hand, frustrated homeowners say that the financial institutions are repeatedly losing their paperwork.  

The bottom line is that to this point the program that was supposed to have a widespread affect on stemming the foreclosure trend has not lived up to its billing.  

Last week the government again stepped its game up and send what they called "SWAT" teams into these financial institutions to determine what the biggest hold up may be.  The banks are now responsible for submitting progress reports on their modification files twice a day during the month of December as a means to speeding up the conversion process.   

The goal has been to shift 375,000 borrowers from temporary status to permanent status by years end.  A benchmark that is quickly appearing quite unrealistic. 

Option ARMs - What a Mess!

About a month after I got my real estate license in 2006, I had a meeting set up with a lender acquaintance of mine for a brief seminar on some of the "hot" loan programs.  One of the first things he was so anxious to tell me about was option-ARMs.  I distinctly remember him telling me, "you need to push this on all of your investor clients. It's really the way for them to go."

If you aren't familiar with the term option ARM (option adjustable rate mortgage), basically it is/was an exotic loan program that allowed the borrower to decide whether he/she was going to pay principal and interest, interest only, or a minimum amount less than the interest amount due.  And this decision was made on a monthly basis.  Not only that, but the program also allowed the purchaser to come to closing with little cash and in some parts of the country allowed 40 year loan terms.  

Now you don't have to be a rocket scientist to figure out that was probably a bad idea.   According to a recent report released by Standard and Poors, over 93% of option arm borrowers selected the option of paying an amount each month that was less than the interest amount due on the note.  So in addition to not gaining any equity in the property, the unpaid interest was also being tacked back onto the original loan amount.   

Thankfully, the last year that this loan program was issued was in 2007.  The default rate for borrowers issued an option arm in 2007 alone has reached almost 25%, and the projected default rate has already been labeled a possible "housing recovery killer." 

Its no secret that the option arm program was most popular in the "bubble markets," where house prices soared in the middle of the decade.  These same areas have been hit the hardest in the past two years as once lofty property values have fallen rapidly, sending the financial industry into a tailspin.  

In the last quarter alone, California, Florida, Arizona and Nevada represented 44% of all homes beginning the foreclosure process.  Nationwide, almost one in four (23%) of people with mortgages owe more than their home is worth.  

As borrowers across the country are falling behind in record numbers, the government has ramped up its efforts to help struggling homeowners.  Just this past week, President Obama and the treasury department have tightened the screws on mortgage firms who are largely in responsible for implementing the $75 Billion Home Affordable Modification Program aimed toward modifying existing loans to keep borrowers out of foreclosure.