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Articles for ‘Government Programs’

Using FHA 203k Loans To Rehab Your Short Sale or Foreclosure

Monday, December 6th, 2010 by Randy Whiting

There are a few common ways that I have seen an FHA 203k loan used.  Predominantly the clients I’ve worked with use this type of loan to purchase a property that either needs some general rehabbing throughout or to finish a job that was left incomplete for one reason or the other.  As rehab loans of any other type have virtually disappeared the FHA 203k loan has been on the tip of many buyer’s tongues lately.  The only challenge is that the type of property that would motivate a buyer to seek this type of loan typically ends up in a multi-offer situation; speaking in terms of my local market.  If you had a chance to read my short article on TheChicago77.com entitled, “Short Sale and Foreclosure Multi-Offer Strategy“ or you have had any experience as a buyer or buyer’s agent attempting to purchase distressed properties then you already know that in a multi-offer situation an FHA 203k loan gets the lowest priority of any offer on the table.   For an in-depth explanation of why please visit the article mentioned above.  The long and short of it is that the FHA 203k loan has a huge amount of contingencies, outs, or reasons to fail before close, and that is very unattractive to a bank.  As banks are the ultimate decision makers in many distressed property sales it is their opinion that counts, and they want nothing more than the quickest close possible.

Clearing The Air

I’m sure there will be some of you reading this who have used an FHA 203k loan to buy a distressed property, and I do not mean to say it is impossible.  Local market conditions significantly impact the possibility that this loan will be accepted for the purchase of a distressed property.  For example, with most suburbs of Chicago and a few of the fringe neighborhoods of the city proper the competition is virtually nonexistent.  A bank attempting to sell a property in areas with low demand are often so desperate for any type of offer that on the slight chance that one comes it matters not what type of loan it is; they’ll pounce on it like a starving cat.

Back To Business

The purpose of this article is to illustrate an example that worked out very well for a buyer that I have been working with for quite some time.  As with many savvy investors my client was very particular about what he wanted in a property.  His goal was to find a distressed building, preferably a multi-unit, and convert it into a beautiful modern single family home for himself.   As such it took us quite some time to locate the perfect property.  When we finally did it was a gutted two unit that had little more than the bricks, the studs and a pile of rubble lining the floors.  With an asking price of around 180K it was ripe for the plucking.  When he asked me to put an offer in on the place, protocol demanded a pre-approval or proof of funds and I asked him for such.  A few moments later he forwarded me a pre-approval letter from his lender for an FHA 203k loan.  Knowing what I know about this type of loan and also about the desirability of this type of property to other investors I correctly surmised that a multi-offer situation was at hand.  Given a very small number of days on the market, there was little chance the seller of this property would jump on a 203K loan.  Instead, they would graciously acknowledge our offer and hold out for something more attractive; cash or a conventional loan offer with a low number of contingencies.  Given this, I called a couple lenders who I know that have their fingers on the pulse of the lending market and we came up with a solution.

The Challenge

Our challenge was how to make our offer stand out on top versus the others that were sure to come.  Knowing my client had enough cash to buy this property with some to spare, I asked him why he chose an FHA 203K loan.  He gave me the answer I was expecting, “I want to save my cash for the rehab.”  Knowing what we now know about the low desirability of this type of loan it was only natural that I council him on the unlikeliness that his offer would be considered.  As the ball was in my court to find a superior alternative I shared my discovery with him.

FHA 203K Refinance

Let me cut to the chase.  If you buy a property with cash there is no title seasoning requirements to re-finance the property with a 203K loan.  As such the refinance can happen immediately after purchase.  Combine that with the huge desirability of cash in the eyes of the seller and this significantly increases the likelihood of a win-win situation.

What If I Don’t Have Cash?

Here’s the good news for investors out there who want to take advantage of this scenario but don’t have enough capital to purchase with cash.  The FHA 203k refinance has the same title seasoning requirement (zero days) if you purchase with a conventional mortgage.  In other words, if you buy a property with a conventional loan, right after you close you can turn around and re-finance it with a FHA 203k loan allowing you to obtain extra money to do some rehabbing on the property.  So why not make the initial offer with an FHA 203k loan and why did I not recommend a conventional loan to my client and encourage him to save the cash for the rehab?  To get that answer I suggest you read my article on Multi-Offer Strategy.

Ciao for now!

HAFA: Great For Banks – What About Consumers?

Monday, June 14th, 2010 by Randy Whiting

On June first of this year Fannie Mae and Freddie Mac released guidelines that propose to govern the short sale process flow for loans that are owned by either of these two institutions. The recent Home Affordable Mortgage Alternatives Program (HAFA) guidelines for GSE mortgages (mortgages held by Fannie or Freddie) do display marginal improvements over the HAFA guidelines for non-GSE mortgages launched back in April of this year. However then and now these guidelines can be likened to that beautiful storefront in your town built a couple years ago that no one can afford; gorgeous facade, vacant inside.

A little background on mortgages: There is a primary and a secondary market for mortgages. Banks such as Chase loan money to consumers (primary market), then sell those loans to secondary mortgages holders such as Fannie Mae or Freddie Mac. This provides Chase with money to continue offering loans to additional borrowers; the cycle continues. Even though Fannie Mae and Freddie Mac own a majority of the mortgages out there, they still enlist the help of banks to service their loans. For example: Chase may give you a mortgage and then sell the mortgage to Fannie Mae. At that point it is very common for Chase to act as a front for the loan, providing you, the borrower, customer service, the ability to monitor your loan, etc. This also gives Chase a chance to retain you as a customer and market additional services to you; a win-win for the banks. It is also important to note that if Chase wants to resell your mortgage they have to make sure that they lend you money based on guidelines set in place by the secondary mortgage company who will be buying it; in this case Fannie or Freddie. If Chase plans to keep the mortgage themselves, they do not have to conform to these lending guidelines.

HAFA Shortcomings

Opt-In

The HAFA program is opt-in for non-GSE mortgages. After the guidelines were put into place, there was an almost nonexistent response from banks who were already slammed with too much work. As a result, very few banks leapt at the idea of completely re-working the procedures they have been hacking together like a patchwork quilt for the past year or so; especially with one that has no track record to prove a direct benefit to their bottom line.

Learning Curve

Since the policies and procedures of these guidelines are largely untested they are constantly going through revisions. If anything this will discourage banks from participating until the revisions taper off, if ever. There is no way to test these policies except in real life scenarios and selling a financial institution on the stability of standardization, while simultaneously enduring frequent revisions, will be tumultuous at best.

Inconsistent

The fact that the HAFA guidelines for Fannie and Freddie have variations from the HAFA guidelines for non-GSE mortgages is a mistake that needs to be remedied. How can you wave a banner of standardization while at the same time have variations under the same name? Also, banks that service Fannie and Freddie loans will be required to conform to the GSE version of HAFA on loans they wish to resell and continue to service. One question that lingers unanswered in my mind is: If Fannie or Freddie strikes a deal for a bank to service a loan that wasn’t originated by that bank (common), will that bank need to be GSE HAFA “certified” on all of their loans? The answer is important, because if Fannie and Freddie require banks that service their loans to be GSE HAFA accountable, it would be a huge boon for the efforts to standardize the industry as a whole. If the answer is that banks servicing Fannie or Freddie loans can opt-out on all non-GSE short sales this would impede movement toward standardizing the short sale process, which is supposedly the goal of both HAFA programs. If the new GSE HAFA guidelines do not require banks that service their loans to be consistent with the way they handle all of their short sales it opens huge doors for banks to rob consumers out of their portion of the HAFA guidelines depending on what’s best for the bank.

Banks Have Too Much Control

On many mortgages, it may be financially beneficial for banks to opt-out of HAFA. For example: The proposed incentive is $1500 given to a bank for conforming to HAFA guidelines on a short sale ($2200 for GSE HAFA). These guidelines also protect Realtor commissions up to six percent, but given that even a one percent reduction in commission can save the bank many times that amount depending on the purchase price, how attractive are these incentives? Also when compared to the enormous amounts of money the lending institution is losing when they agree to a short sale, the $2200 seems like a drop in the bucket. Combined with the fact that banks are allowed to opt-in on a case-by-case basis, it seems like HAFA is encouraging banks to keep their ad-hoc guidelines running in parallel with those of HAFA. What this will allow them to do is analyze whether or not it is beneficial for them to go HAFA or not; regardless of what’s best for the consumer that is experiencing a financial hardship. If it works out that the bank can save more money by choosing not to go HAFA, then the consumer loses out on the relocation assistance money that HAFA would have awarded them to find a new place to live. Also because the HAFA program puts a cap on the money that junior mortgage holders are allowed to be awarded and many banks hold both the first and second mortgage on a given property, this will be another incentive for a bank to opt-out if they feel that they can recoup more money by doing so. Another thing that may push a bank to opt-out is the fact that with HAFA they can no longer go after the borrower for a deficiency judgement which in some cases is could be a huge loss for them. With regard to the time it takes to process a short sale, HAFA may make things take even longer as now banks have even more risk to analyze before moving forward one way or the other!

No Enforcement

As an optional program, initially there were few banks that chose to be the guinea pig for these guidelines. Many bank workers still have no idea what HAFA is. Anyone working on a short sale right now has undoubtedly encountered this lack of awareness. For many banks that did decide to get involved with HAFA it ended up being on a case-by-case basis rather than a company-wide policy. What is the point of implementing standard procedures if they are not standard across the board at a given institution? What this is turning out to be is more of a way to for banks to work the system by utilizing HAFA when it is financially beneficial to them and avoiding it when it is not. This may bode well for their bottom line but what about the consumer? What happened to focusing on Main Street not Wall Street? The fact of the matter is that in order to accomplish what HAFA claims to, the industry must adapt these guidelines as enforceable regulations, and a governing body must be created to evolve, educate and enforce said regulations with the power to enact penalties for noncompliance.

Prognosis

HAFA is a weak start in a long race.  While trying to regulate and streamline an already laborious process, it seems to accomplish the antithesis.   For now it’s more of a conversation piece than a tool to help us climb the short sale mountain.  At the very least (and not much more) HAFA gives us bloggers something new to BS about.   Until the revisions taper off and an agency to enforce these regulations is implemented, we’re like a hamster with two wheels in our tank… either one we choose, we’re just running in place.

Will Short Sales Become Short?

Saturday, February 6th, 2010 by Sari Levy

Seriously though, the government has again ramped up their efforts to help the millions of Americans who are upside down in their mortgage and need to sell for reasons of financial hardship.  Yet another acronym lurks…HAFA which stands for Home Affordable Foreclosure Alternatives Program goes into effect April 5, 2010.  HAFA is designed to simplify and streamline the short sale process/transaction.   While there are 43 pages of guidelines to review, below are some of  the changes that are key to helping streamline the current process of completing a short sale.

  • The banks will now tell the borrower (or borrower’s real estate agent) the net figure required to complete the sale prior to the borrower listing the home.  This is huge, since in the past in most cases borrowers had no idea what amount the bank would accept and the home sat on the market because it was overpriced or the bank took more than a month to respond.
  • The new laws requires banks to fully release borrowers from future liability for the first mortgage debt.  No cash contribution, promissory note, or deficiency judgment is allowed.
  • New forms were created to standardize the process.  With the new forms comes standardization of responses times for each step in the process.
  • HUD now provides financial incentives to get the short sale completed –  $1,500 for borrower  as “relocation assistance”, $1,000 for servicers to cover administrative and processing costs, and up to $1,000 for investors.

Oh, and a nice bonus included in this program is that banks can’t ask the real estate brokers to cut their commission anymore.  That is if the broker is charging 6% or less on the listing agreement.   And ya know, 3% is fair compensation to an agent having to guide a buyer or a seller through the short sale process.

Officially, the program does not take effect until April 5, 2010.  However, banks can start offering this earlier if they meet requirements.  In fact, I’m certain that they are already using the new process because we have more than one client in this situation.  You can learn more about the government programs at MakingHomeAffordable.gov.

Home Buyer Tax Credit Extended And Expanded

Friday, November 6th, 2009 by Gary Lucido

President Obama signed a revised home buyer tax credit into law today. Before I get too far into this, let me clarify that we are in the business of helping people buy and sell homes and this tax credit is definitely good for our clients today – maybe not tomorrow, but at least for today. As such, we will do whatever it takes to help them take advantage of any misguided government giveaway program that they come up with in Washington. But you know a government spending program is a bad idea when the New York Times comes out against it.

The original program, set to expire at the end of the month, provided an $8,000 tax credit to first time home buyers who made less than $75,000 individually or $150,000 jointly. The new program extends the credit until the end of April, raises the income limit to $125,000 individually or $225,000 jointly, and also introduces a $6500 credit for people who already own a home and want to buy another one. The reason for the inclusion of people who already own homes is…well, they just want to spread our wealth around.

The NAR is jumping for joy at the success of their lobbying campaign – over 500,000 realtors begged congress for this handout. And I assume they will be lined up in the spring with their hands out yet again for the third sequel to this horror show. I can only imagine the concept: Ckash 4 Shacks – a tax credit for bulldozing your house and replacing it with a house that has energy efficient windows.

New FHA Condo Approval Rules Delayed Yet Again

Thursday, November 5th, 2009 by Gary Lucido

First it was going to be October 1, then November 2. That’s when new FHA condo approval rules were going to be implemented. Now it’s December 7. I know it’s shocking but the government just can’t seem to get their act together – in this one rare instance.

One of the more significant items we’ve been waiting for is some relief on the restriction that condo associations can not be approved if they have the right of first refusal. On the one hand, I’ve never understood why condo associations have this right anyway – like they’re going to have the funds to buy a condo and do what with it? On the other hand, I never understood why FHA cared – as long as it’s not discriminatory. But forever promising to remove this restriction on the right of first refusal one month from now is leaving condo associations in limbo. Why incur the legal expense of changing the bylaws to relinquish the right when the government is going to relax the requirements in just one month? However, with 36% of the buyers using FHA mortgages how can the associations afford to keep waiting?

As if this issue weren’t thorny enough, some folks within the mortgage industry aren’t exactly optimistic that things will get better even with the new rules. According to Tom Fishwick of Guaranteed Rate, “I am not sure how much easier it will be once whatever changes do go into place. Clearly they are having trouble figuring out how to implement the changes. As it stands now, they will need to review every single condo building that gets an FHA loan. Currently the spot approval allows an FHA underwriters to sign off on the easy projects once they confirm those basic questions. [with the new process] I am expecting long delays, if not a tougher qualification process, even if they will allow for a right of first refusal. For now I am cheering every time they announce another delay.”



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