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Tag Archives: foreclosure

Wayback Wednesday… Title Insurance…

Abraham Lincoln, the sixteenth President of th...

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A couple of years ago I wrote a quick little primer on Title Insurance.  (Check out the link for more details…)  Title Insurance is one of the subjects I am questioned about regularly… even by buyers that have previously purchased 3 or 4 homes.

It can be confusing… there are two distinct flavors of Title Insurance, Owner’s and Lender’s.  And while sitting at the closing table, buyers are usually paying for a pant-load of other items.  Sometimes they draw a line and decide that skipping the Owner’s policy is a way to avoid spending another few hundred dollars.  Other times, they just give in and spend the money without knowing what they are buying.

Neither of those situations are good for the buyer.  Some buyers ABSOLUTELY need to have Owner’s Title Insurance.  For others, it is a luxury, or even a waste.  (Sorry, but if you have a loan, you WILL be paying for Lender’s Title Insurance… they will require it, and despite the fact that you won’t benefit, you get to pay for it).

Of course, I would be remiss if I didn’t remind you that I am not a lawyer, and I don’t even play one on TV.  You should always ask your attorney about the legal ramifications of a decision like this.  But keep in mind, the closing attorney is selling the insurance product, and they DO make money from it.  Some of the closing attorneys I have worked with have flat out told buyers that they would NOT answer questions about the suitability of the insurance product because of their conflict of interest.

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Wayback Wednesday… Bankrupt Subdivisions… Good Deal?

Sign of the times - Foreclosure

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Two years ago, I wrote about some of the pros and cons of buying a home in a ‘distressed’ subdivision.  While there aren’t quite as many builder foreclosure properties as there were a couple of years ago, there are resales coming into the market now from people that bought builder foreclosures.

As with many things, all that is old is new again.  I’m hearing from buyers more than any time in the last year and a half that they are thinking about buying a home in an abandoned subdivision.

As I said in the original post, there are both pros and cons.  It would be a great post to go back and read.

Oddly, a couple of months after writing the post, I got a call from a local TV station that wanted to interview me on camera regarding this situation with a specific subdivision.  Unfortunately, I was on vacation with my family and out of town.  I wasn’t important enough to warrant a satellite interview…

Homes had originally been marketed at $600k to $800k in the neighborhood.  As the market started to slide, the prices offered by the builder started to drop.  They weren’t able to sell many units though.  Eventually, the bank took over and was selling the homes in the $400k to $500k range.  Just after the last existing home had been sold, another builder bought the remaining lots and began selling homes under $300k.

Some of the owners in the neighborhood that had purchased at higher prices were VERY upset with the builder and everyone else involved.  One owner had purchased for just over $800k, and needed to relocate.  Her house was not likely to sell for much over half that.

The bottom line is that there is potential for a VERY good deal… and there are some major pitfalls that could make that deal go very sour.  Step in with your eyes wide open…

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Wayback Wednesday… A Foreclosure Mitigation Too Good to be True…

Showing how the rapid rise in in mortgage cred...

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I don’t know about you, but I have heard the stores and even seen the occasional late night TV ad talking about getting out of your mortgage for free.  Two years ago, I wrote about how it was the latest scam being pulled on people facing foreclosure.  And be aware… it is nothing but a scam.

Here is the “meat” of the old post…

Here is the way it works (and it all sounds so legit…):

  • Mr. and Mrs. Consumer buy a house and get a mortgage from MonsterMegaMortgageCompany (MMMC).
  • MMMC sells their mortgage to Investor Pool #1.
  • Then it is bundled and sold to IP#2… and #3 and #4 over a span of a few years.
  • Mr. & Mrs. Consumer start having problems, and despite everything they are facing foreclosure.
  • To try to get help they contact a “Foreclosure Mitigation” Law Firm that fights the foreclosure by filing a “missing title” lawsuit.
  • The law firm (or other entity) charges an up-front fee (maybe $2000) and then monthly fees (maybe $1000 or $1500)… as well as a contingency fee upon settlement of either 50% of the reduction or 75% or 80% of the value if the mortgage were completely eliminated.
  • After stringing along Mr. & Mrs. Consumer for a few months or longer (collecting fees), they fail to actually prosecute the case.
  • Mr. & Mrs. Consumer lose their home…

According to a few of the sources I looked at, their are no recorded examples of any suit of this type EVER being resolved in the consumer’s favor.

There are also a couple of links.  As an update, there are a couple of stories over the last few years of judges setting aside mortgages because the holder could not produce the right paperwork.  But, you have a better chance of getting hit by lightning.  The lenders have gotten smart and are making sure their paperwork is better… and in the few cases that I have heard about mortgages being set aside, the lenders also committed fraud in ginning up the paperwork… and that isn’t likely to happen many more times.

Follow the link above and visit the old post…  It’s lonely.

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Another Way to Increase Existing Home Values…

Abolish the IRS

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I am a fan of the FairTax.  I don’t think that income taxes are right… at ANY level.  When taxing production, the government is laying claim to a portion of the life of the taxpayer… and I don’t feel that ANYONE has the right to lay claim to a portion of the life of another.  By taxing consumption, there is no direct taxation on the production of a person, but rather on what they take up.

But that is another post…

But, as I was thinking the other day, I had a thought…  Implementation of the FairTax might be a natural solution for homeowners that are underwater on their homes. The FairTax would eliminate all payroll and income taxes, replacing them with a single retail level sales tax.  That tax would make up 23% of the cost of new retail goods and services.  In effect, new construction homes would be subject to the tax, but existing homes would not.

While the savings for builders (and their subcontractors) would likely drive down new construction prices by some portion, there would likely be a period at the beginning where existing home prices would bump up.  In effect, sellers would be able to raise their prices since the competition from new homes would be limited.  In the long run, prices for new homes would return to pre-FairTax levels (or slightly higher), but there would be a window allowing some sellers to get out from under their homes.

There is also the matter of economic growth.  There are a fair number of studies that point to increasing economic growth (spelled J-O-B-S) going hand in hand with the FairTax.  Increasing employment would also increase housing demand… increasing prices.  Again, that would help those that are just hanging on by letting them get out without resorting to short sales and foreclosures.

 

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A Seat at the Table…

Freddie Mac

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Millions of American families are facing foreclosure.  Millions more have already been through the process… and there are millions that don’t know it yet, but they will be staring at foreclosure proceedings in the future.  It is an epidemic, one that is difficult to escape.  Not impossible… but difficult.

Foreclosures are accelerating for a couple of reasons… but one of them is momentum.  As a neighborhood faces foreclosures, the values of the non-foreclosed homes dwindles.  Foreclosures generally bring lower prices, which pushes down the prices of non-foreclosed homes… which pushes down the prices of the foreclosures.  It is a self-perpetuating cycle.  Buyers are afraid to jump in because they see prices still moving down.  Sellers get desperate to get out because they see their equity (if they have any) drying up.  The cycle continues.  Some of the people that needed to move couldn’t hack the values anymore, and they let their home slide into foreclosure.

Those that are marginal or that trying to be proactive call their banks.  They talk with them about short sales or loan modification.  For the vast majority seeking a loan modification (we are talking 98%+ here), they might as well talk to a brick wall.  Short sales are slightly more common, assuming the seller only has one mortgage.

Banks simply aren’t really open to talking with the homeowners about their situation.  And there are a variety of reasons.  Some of them they are willing to say (in an unguarded moment, perhaps).  Other reasons the people in the Loss Mitigation department might not even realize… if they do, they aren’t talking.

  • The sign in the lobby of AIG's headquarters at...

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    The borrower doesn’t have enough income anymore to support the modified loan (in their opinion…)

  • If they grant a principal reduction to one borrower, they will be flooded with others expecting the same thing.
  • The “other bank” won’t accept an amount that is inside of their guidelines.
  • There just isn’t enough staff/resources to handle the load.

And the big one that nobody seems to talk about…

  • The banks insurance on the loan will cover them in a default, limiting the amount of loss they will suffer.  However, if they modify or allow a short sale, their insurance won’t kick in.  That increases their loss.

This is the one that really needs to be worked on.  The insurance company… the people that REALLY need to be involved in loss mitigation, don’t have a seat at the table.  And the big losses are at the loan insurance level.  Whether it is a private insurer like AIG (remember their bailout?), a government sponsored entity  like Freddie Mac or Fannie Mae or a public loan guarantor HUD, they don’t have the chance to be actively involved in the process until it is too late.

To Fix it…

The first thing that would need to happen is for the entity that insures of guarantees the loan to have an active role in the decision about modification or foreclosure.  Right now, in the case of a short sale, it is up to the “investors”, those that actually own the loan (often that is NOT the bank).

When a homeowner inquires about a loan modification, the bank should do their best to determine two things… they should look at the value of the property and the homeowner’s ability to pay.  What they should be looking for is to find at what level the homeowner would likely be able to pay.  At that point, the insurance company (or loan guarantor) should take over if the numbers look like they would be bearing the loss.

 

graph shows U.S. foreclosure trends (quantity ...

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Example:

 

  1. Bob the homeowner loses his job and ends up working for less money.  He can no longer really afford his home, but doesn’t want to walk away.  He paid $300,000 for the house and owes $285,000.
  2. Bob contacts his bank.  The bank determines that the house would likely sell in a foreclosure sale for $210,000.  Bob would be able to qualify for a loan of $220,000.  The banks insurance kicks in at $240,000.
  3. At this point, the insurer would review the file.  If the bank takes the house, they would have to pay the bank whatever loss they suffered under $240,000.
  4. Rather than the bank going through with foreclosure, the insurance company agrees to pay $30,000 if they re-write Bob’s loan to $215,000.

Bob ends up owing a little more than the house might fetch in a foreclosure sale.  The bank doesn’t incur the costs of foreclosing and having to get the property ready for sale.  The insurance company takes a hit, but it might be a smaller hit than they would have taken had the house been foreclosed.  And there is less risk for everyone involved.

 

 

Free Money Collection in Cash

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Of course, the example above is completely fictitious.  The numbers are pulled out of thin air…  And honestly, there are a LOT of people that would not be helped in such a situation.  The goal, however, isn’t to save every homeowner in the country that is upside-down.  The goal is to minimize losses to consumers, the banks, insurance companies, GSEs and the government, while helping people that still have some capacity to participate.

 

 

People without income or expenses too high to make a reasonable payment are not going to be helped.  People that take advantage of the system once and are trying to get a third chance would likely not be helped (I would call a program like this a good second chance).

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