No Miracles in Modification Program

Waiting on a Miracle? The Home Affordable Modification Program (HAMP) is the administration's hope for troubled homeowners trying to avoid foreclosure by modifying their current mortgage payments. The original release said the program was: .aimed at helping 3 to 4 million at-risk homeowners - both those who are in default and those who are at imminent risk of default - by reducing monthly payments to sustainable levels. HAMP publishes a report each month showing their progress. The May report had some interesting data in it. We want to go over that data in the blog today. How many modifications have been completed? HAMP acknowledges that there are over 3 million homes in need of a modification. Thus far, they have offered approximately 1.5 million trial modifications. The results so far: less than 300,000 permanent modifications which is just a 20,000 more than the number of trials that have been cancelled. Here is a table which appeared in report: Will the permanent modifications really work? The big question is whether the modifications will be a long term solution. One item that jumps off the page is the back end "debt-to-ratio income" (DTI). The report defines this as: Ratio of total monthly debt payments (including mortgage principal and interest, taxes, insurance, homeowners association and/or condo fees, plus payments on installment debts, junior liens, alimony, car lease payments and investment property payments) to monthly gross income. Borrowers who have a back-end debt-to-income ratio of greater than 55% are required to seek housing counseling under program guidelines. Why counseling? Because anything over 55% is a re-default waiting to happen. And the report shows a DTI of 64.3%! Diane Olick of CNBC reported: The HAMP report puts that at 64.3 percent, meaning you've got 35.7 percent of your income to spend once you've paid all debt-related bills-not to mention your income taxes! Last month it was 61.3 percent, the month before, 59.8 percent, so it's getting progressively worse. "A 64.3% DTI is so far out of scope with the pre-bubble years safe and sound 36% total DTI - and even typical bubble-years full-doc DTI's of 50% - it is absolutely irresponsible," says mortgage analyst Mark Hanson. "Servicers are pushing the envelope with respect to getting people to qualify," he adds. I have to wonder if any mortgage originator today would even offer a new loan to anyone with those kinds of stats. My guess is no. What does this mean to you? I think it is great news that the program has helped almost 300,000 families stay in their homes. Yet, that is less than 10% of the borrowers that need help. Most of the 3 million+ homes will eventually be a short sale or foreclosure. They will enter the market at discounted prices.

The goal of this blog is to create clarity from the confusion in today's real estate market. We try to take complicated issues and break them down into simpler pieces, and then try to explain how the pieces fit together. There is no situation more difficult to dissect than the current foreclosure numbers.

Yet, understanding this issue is critically important. The number of distressed (discounted) properties entering the market will have a major impact on house values as we proceed through 2010.

Ascertaining an accurate forecast seems impossible at times however. Foreclosure reports consistently seem to be contradicting one another. Take this month's RealtyTrac Foreclosure Report, which was released last week. The headline screamed "Foreclosure Activity Decreases 9% in April". News sources and industry heads shouted this news from mountaintops. Things in the foreclosure sector are finally getting better they claimed.

Here at this blog we attempt to go past the headlines and look at the complete story.

It is true that one type of foreclosure activity did decrease:

During the month a total of 103,762 properties received default notices, a decrease of 12 percent from the previous month and a decrease of 27 percent from April 2009 - when default activity peaked at more than 142,000.

However, reading further in the report we find that:

Bank repossessions (REOs) hit a record monthly high for the report in April, with a total of 92,432 properties repossessed by lenders during the month - an increase of 1 percent from the previous month and an increase of 45 percent from April 2009.

The numbers of notices filed were down 27%, but the number of houses taken back by banks was up 45%. That doesn't sound like such great news to us. And what is the reason notices are down? Could it be that the banks were concentrating their time and efforts repossessing the homes they had already foreclosed on? We already have reported that there are borrowers as much as two years in arrears on their mortgage payments that have yet to receive a foreclosure notice. CNBC reported on this exact point last week:

The fact that fewer loans are going into the pipeline should be our focus, and that's a positive. That's what I thought until I interviewed RealtyTrac's Rick Sharga.

"People are sitting in their houses not paying their mortgages, and the banks are letting those delinquencies extend longer and longer periods of time before they put them in foreclosure," Sharga told me.

That, he adds, is the main reason we're seeing lower numbers of new defaults. The borrowers are in default, but the banks aren't paying attention, so they don't show up in the numbers.

Let's take a closer look at all the pieces of the foreclosure pipeline that add up to our current situation:

Just because one element of the foreclosure process has slowed (in this case #2 - "Notices") does not mean that the other three elements are not continuing on a fast pace.

What does this mean to you?

In order to pick the best option for you and your family, you need someone who truly understands the current housing environment. Find that person, and have them sit down with you and accurately define the market.

Who Cares What The Purchase Price Is. WILL IT APPRAISE?

by The KCM Crew on May 13, 2010 � 0 comments

in For Buyers, For Sellers, Pricing

The classic definition of what a home was worth has always been "what a reasonable buyer will pay a reasonable seller."  That's because MOST real estate transactions have historically involved reasonable people- people not under duress.  But today, with the enormous number of foreclosures, bank-owned property, strategic defaults, and short sales, all the reasonableness has vanished and duress reigns supreme.

Today, appraisers are faced with some dilemmas:

1. If a reasonable buyer and seller come to terms on the price of a home, but at the same time there are other available properties at lower prices, what's the home really worth?
2. If a bank lists a property they own (via a foreclosure) at 10% below market value to get a quick sale, is that a reasonable representation of a neighborhood's true value?
3. With all the short sales starting to move through the system now, does the fact that the seller isn't getting any money from the sale eliminate them as a reasonable party to determine a legitimate value?
4. How about the actual condition of the housing inventory?  How does that get reflected in the appraised value?

And at least another dozen quandaries the market has created.

Recognize that appraisers are charged with the responsibility of independent thinking, geared to protect the lender and buyer from over-lending and overpaying.  They should be revered as our best defense; however, today many are scorned.

The industry norm calls for appraisers to examine value from three perspectives.  One, the Cost Approach: what would it cost to rebuild the structure?  Two, the Income Approach: what could the property be rented for and what multiple of that number would make the house attractive to a real estate investor?  And three, the most impactful, the Market Approach: what have comparable sales in the same market have sold for?

The Market Approach is in sync with the old axiom.. "location, location, location" (with some adjustments for style, square footage, lot size, age and condition of the home, etc.).  It was a look at the past to determine the present. and until recently, it all made sense.  Unfortunately, in a declining market, looking backwards leads to overpricing today.  And predicting all the components of home prices in the future (available inventory, future interest rates, and consumer confidence) is even trickier.

Add into the mix the proliferation of Sales Concessions whereby a seller agrees to pay some or all of the closing costs for the buyer.  How should that impact an appraisal?  If a seller says they will pay $20,000 in closing costs for the buyer on their $320,000, are they really saying they think the house is worth $300,000, or has the market compelled them to offer this inducement to the buyer to get their house chosen from all the other $320,000 homes?

On top of all that, our political representatives and regulators are Monday Morning Quarterbacking the real estate bubble and are looking to blame people..and appraisers have a bull's eye on their backs.  (As if appraisers overvalued properties from 2001-2006 when every home had MULTIPLE OFFERS at the time.)  These political forces came up with new regulations (HVCC) that restrict communication with the appraisers, allegedly to lessen the influence of lenders and real estate agents.  Let's face it, appraisers are scared.

When you recognize the challenges facing appraisers today, it's easy to understand why the "meeting of the minds" between a buyer and seller is only the first "meeting of the minds" necessary to consummate a transaction.  I never believed that appraising was a mathematical science, nor should it be a purely artistic endeavor, but today, it has become chaos...with no real end in sight.

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Dean Hartman is Chief Planning Officer at Continental Home Loans and a 25 year veteran of the mortgage banking industry. He has achieved the designation of Certified Mortgage Planning Specialist, and also specializes in sales leadership, seminar presenting, and team building.

Facebook Dean at Raise the Bar and CHL Dream Team.