February 2023 Archives

do mortgage companies usually seek a deficiency judgment on home foreclosures

Depends upon whether it is a recourse loan or not. A recourse loan is one where the lender can come after you for any excess amount of money you owe. Whether a loan is recourse or non-recourse varies with the state you are in, whether it was a purchase money loan or a refinance, and always, what it says in the Note.

For a non-recourse loan, that's it. If something happens and the property does not fetch enough money at sale to pay the lender off, that lender is out of luck whether they want to be or not. These are often used in reverse 1031 exchanges, where the accommodator is going to hold title to the property for a while but is usually unwilling to shoulder the risk that the lender may be able to come after them for a deficiency. Due to the fact that the lender cannot come after the borrower for the difference, these are riskier loans and therefore carry a higher rate-cost trade-off than recourse loans. This is nothing more than any rational person would expect.

The law is different everywhere, but I don't think have never seen a cash out refinance that was not a recourse loan. In short, take the money now, but if you don't pay it back, they are going to come after you in court and with a multitude of tools to get that money back.

Note that just because a loan is non-recourse does not mean that the lender will necessarily approve a short payoff. In fact, it is usually harder to get those approved because the lender knows that this is the only chance they have to get their money, whereas with a recourse loan they can attach other assets to pay for their loan. However, note that just because your loan is non-recourse doesn't mean they can't try for a deficiency judgment. If you don't show up in court, they win by default. If you did something to invalidate the non-recourse protection, such as fraud in obtaining the loan, the lender can and probably will win in court.

Finally, it is to be noted that just because a lender does have recourse and can attach other assets does not mean that they will. If you're down to $0.47 to your name, they'd have to be pretty silly to waste a lawyer's time doing so. However, just because you don't have it now doesn't mean that you will never have it. Statute of limitations also varies, but if you receive a financial windfall within the first few years, don't be surprised if the lender who you thought forgave the difference is standing right there, demanding their metaphorical pound of flesh.

Caveat Emptor

Original here

One of the things I've heard and read other agents complaining about is that they can't find qualified buyers to represent.

Welcome to Unintended Consequences 101.

The way that the market had been working is this: Young, often unmarried, buyers buy a starter place, usually a condominium of some description. A few years later, once they're married and have a couple kids, they trade up, using their equity for the down payment and (usually) increased income in order to make the payments. They may do this a second time when the kids are teenagers, or when they get another rise in income. This is all simple demographics.

However, we all know that most buyers want to stretch to their maximum, and even a bit beyond, not understanding that there is no magic wand to make borrowing money more affordable. The absolute hardest thing for a buyer's agent who's trying to do their job correctly, is persuading buyers with property lust in their hearts to limit themselves to properties they really can afford. Traditionally, the penalty for failing to do this was a failed transaction, and a ticked off client who had already spent hundreds of dollars on appraisal, inspection etcetera, and quite often, multiple trips to the decorating store planning and a month or more fantasizing about the decorating they're going to do. When that all comes crashing down, it's kind of difficult to hold onto the client.

During the Era of Make Believe Loans, however, the immediate downside disappeared, and by the time people figured out that they couldn't really afford the property, those agents and loan officers were long gone with their commissions, leaving those buyers high and dry. With easy loan qualification, and initial payments way below a sustainable level, there was no immediate need to restrict themselves to selling what a client could afford. Since given one client or set of clients, most agents would rather make more money than less, they sold higher end properties than clients could really afford. The clients, for their part, were happy that there was no apparent need to spend years living in the lesser property, building equity.

However, by skipping over those starter properties, those agents greatly exacerbated their future problems. When the condominiums and other starter properties don't sell, the owners are stuck with them, and they cannot afford a larger, more expensive property until those properties do sell. These folks are the largest single source for buyers of archetypal three and four bedroom detached housing. If you bought a condo for $90,000 and sold it for $200,000, you have roughly $100,000 down payment for a $500,000 home. This lowers the payments from about $3415 (assuming PMI) to $2398, total cost of housing from roughly $4045 per month to $3030, and the income to qualify from $9000 per month to about $6730, a full 25% less, assuming no other debts. Considering the median family income is approximately $5500 per month in San Diego, this makes a major difference to how many people can qualify - far more than a proportional difference. Assuming a standard normal distribution, you're going from about 3.5 standard deviations over area median income to about one and a quarter. This increases the number of people who qualify from 233 in a million to 110,000 in a million (via Hyperstat). Now, you have 470 times as many people in your target group! But in order for this to happen, the condominiums and other starters have to sell.

The temptation is always there for agents want to hunt the big game, but now that the make-believe loans that enabled it are gone, we've got a situation. We've conditioned the public to believe that everyone can afford the property of their dreams, right off, and that's just not the case. This makes it much harder to sell them starter properties that fit within their budget. Their friend John or Jen was able to get that dream property, why can't they? The fact that John and Jen are fighting a losing battle against foreclosure doesn't enter their thought process. The people that already own the starter properties, having bought five or ten years before and gotten to a position where they're ready to move up, can't. Not until the starter sells. This made the crimp in the market far worse.

If condos and other starter properties don't sell, you don't have the usual influx of buyers with a down payment that enables them to afford more expensive properties. When you're essentially putting contact superglue on the bottom-most rung off the property ladder, you can't be too surprised when the higher rungs are vacant. So if you want buyers for higher end properties, and you want your higher end properties to sell, we've got to start going through the demographic "property ladder" of previous years.

Caveat Emptor

Original article here

If I am buying a foreclosed home for 220k of which 200k is being financed, and the home comes back at being valued at 285k from my mortgage company, am I still required to pay PMI? If so, how in the future would I be able to eliminate it?

At purchase, the lender treats the value as being the lesser of cost (i.e. purchase price) or market (i.e. appraisal value).

So if your purchase price is $220k, that's the most the lender will consider the property to be worth at purchase. You will be required to pay PMI for any single loan amount over $176,000, or eighty percent of this valuation. The only exception to this is the VA loan. Since second mortgage lenders don't want to loan over ninety percent of the value of the property right now, you can either come up with a couple thousand dollars more, or accept PMI.

A couple years ago the wisdom was just to refinance in a few months. Lots of luck with that in the current market. In the current market, lenders are reverting to their standards of several years ago, which is that unless you spend some major sum upgrading it, the most a lender will believe within one year of purchase is 10% - and even that is subject to an appraisal done under HVCC. Were I in your shoes, I'd plan on waiting a year, then doing whatever your state law says is necessary to remove PMI. This might be pay for an appraisal, this might be get a broker's price opinion based upon recent comps, but there have just been too many people over-evaluating property in return for some special compensation (i.e. accepting bribes to return a higher number on the value). They want to see some time to season the transaction between purchase and evaluation. Scam artists don't want to hang onto the property for a year.

Private Mortgage Insurance (PMI) is not a good thing, but it may be the only way to get the loan in the current environment, as I discuss in 100% Financing or Low Down Payment or Low Equity: PMI May Be The Only Option. 100%

You do have the option with a lot of lenders of converting to LPMI, or lender paid mortgage insurance. This folds PMI right into the basic rate of your loan, so (unlike regular PMI), it usually becomes tax deductible. On the other hand, because it's written into the basic Note rate, it has a disadvantage that unlike regular PMI, you need to actually refinance to get rid of it. Since most people spend thousands of dollars to refinance, this isn't a good bargain unless you figure the rates to go down. I don't, or at least not much. Were somebody to put a gun to my head and force me to make a bet right now, I'd bet they were going up over the next twelve months. If I were to decide to accept LPMI, I'd almost certainly want a true zero cost loan now, with the loan I'm getting for the purchase. I would accept the higher rate that comes with it, and quite likely a hybrid ARM as well instead of a thirty year fixed rate loan. The reason for this is that I'm never going to recover closing costs through lowered cost of interest in only one year. In other words, accepting LPMI means I've made up my mind to refinance in a year, or sooner if I can find a lender that will do it, and that I'm not going to willingly pay any loan costs that take longer than a year to recover. Furthermore, if I can get even a slightly lower rate by accepting a shorter term hybrid ARM, that's worth a good idea under these circumstances. As I said, If I'm accepting that I'm going to refinance in a few months, I'm going to want a loan with costs as low as I can get it, and it just isn't important to me to have a thirty year fixed rate loan in such circumstances. Makes no sense to worry about having it be fixed for the entire duration if the loan you're getting will go away in a few months regardless.

(In the zeal to scapegoat brokers and make life better for their campaign contributor major banks, Congress has passed a law that Yield Spread must legally be treated as a cost to the consumer in defiance of all accounting, mathematics, and logic. Without Yield Spread, zero cost loans and minimal cost loans cannot be done, much to the detriment of the savvy consumer. If that doesn't point you to exactly what Barney Frank's and Chris Dodd's priorities really were, there isn't much hope for you)

If I was getting a loan for the purchase where I'm paying closing costs and points to buy it down, regular PMI is the way to go. That can be removed without a full refinance. If I have to refinance in a year to remove LPMI, the vast majority of those loan costs will be wasted, because I need to refinance to get rid of LPMI, and when I do, I'm letting the lender off the hook for the rest of that loan period, and if I haven't yet recovered the closing costs, I certainly won't get any additional benefit from my current rate after I refinance!

Caveat Emptor

Original article here

I recently received an email asking about a Good Faith Estimate on a $200k loan. The person asking my opinion attached the actual "estimate" to the email. In addition to a point of origination and a point of discount and $3000 in other closing costs plus $2500 in alleged government charges separate from the $3500 in FHA's initial mortgage insurance premium, it just assumed a 6% seller credit of $12,000 which made it look like the loan wasn't going to need much more than the down payment money to close the loan. They just automatically assumed that the seller would offer that much or be willing to pay that much, because the FHA says they will permit the seller to do so.

Ladies and gentlemen, the FHA allowable limit on seller-paid closing costs may be 6%, but that doesn't mean every transaction has 6% concessions - or any at all, for that matter. I don't think I've heard about any where the seller concession was maxed out - and I have heard of a couple FHA loans recently where they was no seller concession. Keep in mind that on FHA loans there is no mandatory concession, unlike VA Loans which prohibit the veteran from paying some very real and necessary transaction costs that buyers and borrowers traditionally pay. Nor does it change the fact of how expensive the loan is. If you had a less expensive loan, it would be even less net money out of the seller's pocket.

It also makes it appear as if their loan was less costly because of lowered requirements for cash to close. People are often stupid about cash, because they understand that this is real money which they accumulated in their bank account little by little. Loan amounts, not so much - at least not until they've been paying on them for a while. This has the effect of low-balling the cash necessary to close, and the buyer possibly ending up shy on cash to close.

The loan referenced was a damned expensive loan, but by playing "let's pretend someone else is going to pay this" with the consumer and pretending that consumer weren't going to have to pay these costs, they hope to assuage consumer skepticism. But you always pay these costs. If there's a $10,000 seller concession for whatever in the cost, any well-advised seller would also take $10,000 less with no concession, as they will end up with more money in their pocket. This loan officer was pretending to give with the right hand while taking with the left - the standard lender game of making it appear as if their loan is lest costly than it is so you sign up with them and not the competition. By subtracting that 6% of the sales price off the loan cost, they are making their loan look more attractive than it really is.

Except for VA loans, I would advise people to never accept estimates or figures that assume a seller concession (unless you already have a purchase contract which includes them). Even with VA loans, you're paying for it one way or another, so I would want to know the real cost of the loan without seller concessions. After all, if the seller is going to pay $5000 more of the proceeds if he accepts my offer than if he accepts someone else's offer, he's going to want at least $5000 more in sales price in order to accept my offer over the other guy's. That is, assuming the seller's agent has anything like a clue - and I never assume the other side is stupid or clueless until they prove it. Even if there are no competing offers, they should accept an offer of $5000 less without the $5000 in costs you're asking them to pay. I get the same amount of money to start, but then I don't have to pay for higher commissions, higher title and escrow fees, or anything else. Subtracting the amount of the needed concessions from your offer and submitting it without a demand for such is always superior to an offer that may be for the higher amount, but has more givebacks to compensate. Seller concessions cost the buyer/borrower money - it just might not leap off the page in black and white.

The higher purchase price necessitated by seller concessions in this manner has a possible consequence that may completely torpedo your loan: If the property doesn't appraise for the required amount. Something between forty and fifty percent of all purchase transactions are hitting this iceberg right now. Sometimes it can be fixed by the buyer coming up with more cash, occasionally by the seller agreeing to take less money. I haven't been hitting the issue where I'm the buyer's agent for several reasons, but it still could happen. There is also the issue of the higher purchase price causing your property taxes to be higher.

Finally, unless you have a fully negotiated purchase contract, you have no idea whether a given seller will actually be willing and able to give those concessions. Many times, the lenders in short sales will disallow them even if the purchase contract price reflects those concessions. Asking for closing costs says two things to those in the know - you don't have a lot of cash and there is a high risk the transaction won't actually close. Neither one of those is a signal you want to send to sellers or listing agent if you can help it. On lender owned properties, it can cause the lender to bypass your offer in favor of a lower offer without that request, because the one thing that costs them even more money than accepting a lower offer is accepting an offer that doesn't close. Even on "regular" sales, a competently advised seller is going to know they're risking a lot of money because of the likelihood of you not having enough cash to close.

Caveat Emptor

Original article here