It wasn’t only Roman Emperor Nero who fiddled while his country burned. Fiddle playing is alive and well right here in America. The Fed (Federal Reserve), investors such as: Freddie Mac, Fannie Mae, some lenders and MI (Mortgage Insurance) companies have taken up fiddle playing too. This is costing the already financially strapped home owners $10 trillion[1] in the loss of equity in their homes since the housing bubble started to burst in 2006. The meltdown began when the subprime lenders went belly-up in March 2006, followed by many prime lenders in June. Once the spark was ignited the flames of collapse fueled by the absurd has spread like wild fire across our Country and no extinguisher is yet in sight. To add gasoline to the fire, American taxpayers will, one way or the other, be forced to ante up $60 billion or more in 2011 to cover the losses of foreclosure and stockholders will lose dividends and appreciation of their investments in mortgage related industry corporations.
Whether the losses are given back directly by the Fed through the FDIC (Federal Deposit Insurance Corporation) to the investors and lenders as some believe, or in tax benefits, or indirectly in some other fashion Americans are nevertheless coughing up for the irresponsible decisions to foreclose over a money saving short sale. Even if the lenders are absorbing the losses for foreclosing it is resulting in the loss of billions of dollar of profit that could be added to their bottom lines. If the insanity continues, there will be much more to pay in subsequent years. By 2015, foreclosure losses that taxpayers will have to cover could reach as much as a trillion dollars. That is unless the emergency brakes are immediately applied to the speeding locomotive of economic collapse.
Startling statistics: The average price for a U.S. home in 2008 was $301,900. A sharp drop the following two years brought the average home price down $53,900 to $248,000[2]. Some sources feel we will see another 5 – 10% drop for another $3.24 trillion loss before the market bottoms out in 2015[3].. By applying simple multiplication and multiplying 130,681,000[4] American homes times the average equity loss of $53,900, the total equity loss, so far, is $9.77 trillion (close to the $10 trillion footnoted in the first paragraph). It is a catastrophic figure that is not being addressed as the emergency it should be. The good news is the losses can not only be stopped, they can be reversed. The First Step is to stop foreclosing on a homes when a much better and money saving alternative is available, A SHORT SALE and the Second Step is to standardized and streamline the short sale process between the banks, investors and MI (mortgage insurance) companies and the Third Step is to make it difficult or even force junior lien holders to not accept offers from the first line holders that are established by government guidelines. Extraordinary times call for extraordinary measures and old methods have to be set aside, and new tax laws created until the housing market recovers.
Here is what and why this catastrophe happened: Realtors are well aware of these facts, but most Americans are not: It was the irresponsible lending practices from 1999 to 2006 that forced the collapse of the housing market. The absurd notion that every American has a right to own a home started as far back as Jimmy Carter, but the final nail was hammered into the coffin in 1999 by Bill Clinton and Barney Frank. “In 1999, Fannie Mae came under pressure from the Clinton administration to expand mortgage loans to low and moderate income borrowers by increasing the ratios of their loan portfolios in distressed inner city areas designated in the CRA of 1977 (Community Redevelopment Act). Easing lending standards to low income households eventually brought about the 2002 – 2007 exponential appreciation of housing that caused the “Housing Bubble” to inflate at an uncontrollable rate. The book of common sense was thrown away. Basic and sound business practices were abandoned which forced radical changes in the banking regulations that had been in place since the Great Depression, in part, to keep what just happened from happening again.
The sound criteria bar of lending was lowered so low. it was buried underground for qualifying buyers seeking mortgage loans. Absurd mortgage products were developed such as negative amortization loans, interest only loans, balloon mortgages as well as other loan products that were sure to fail.
The Bush administration tried to regulate the industry in 2003, but was opposed by Rep. Barney Frank, ranking Democrat of the Financial Services committee (Wikipedia.com enter Barney Frank). Legislation aimed at bringing regulation into law,” the Federal Housing Enterprise Regulatory Reform Act of 2005, did not proceed out of committee to the Senate.” [5]
The changes were so absurd they could only lead to one inevitable conclusion, the eventual collapse of the American economy. These changes were unethical, impractical, and lacked any shred of sound judgment by both the Federal government, Fannie Mae, Freddie Mac and the entire mortgage lending industry. The then head of the House Financial Services Committee, Barney Frank, not only convinced, but assured Bill Clinton, that Freddie Mac (and Fannie Mae) could handle any losses sustained by making a few bad loans (see Wikipedia.com and enter Fannie Mae). The outcome of the deregulation drastically eased lenders criteria so that anyone and everyone could buy a home whether they could afford it or not. The litmus test was almost as simple as putting a mirror under the borrower’s nose and if there was moisture, they got the loan.
With so many people jumping into the housing market, homes became in low supply. The principle of supply and demand fanned the wildly spreading home buying fire. This enticed thousands of investors to make thousands or even hundreds of thousands of dollars by flipping a single property. It wasn’t long before homes became totally unaffordable and not only investors, but home owners, were caught with their pants down when the bubble burst.
The lending practices from 2002 to 2006, until the collapse of the subprime mortgage industry, can only be deemed economic irresponsibility. Both the lenders and Federal government knew that most of these absurd loan products, especially the Stated Income or “Liar Loans”, would never be repaid. They also knew that one day the bubble would burst and someone would have to pay “the piper” and cover the lender’s and investor’s losses on foreclosures, of course, that someone could only be the uninformed taxpayers who would reimburse the hundreds of billions of dollars in losses. .
This writer, a seasoned top producing Realtor during the inflationary period of the housing bubble, witnessed unimaginable loan approvals; appraisals that were two to four times over market value, home flipping the same day for hundreds of thousands of dollars more than what was paid and often not even taking title before the flip. It was real estate industry knowledge that these new home owners would, in the short term, not be able to make the mortgage payments. Even though pressure was put on the lenders by the Federal Government to make insane loans, the lenders, investors and MI companies, could have fought back and not gone along with such an absurd scheme. Instead, they got “into bed” with the Government, Freddie Mac, Fannie Mae and the rest.
The result was from late 2006 the American housing market was in shambles that our economy was “knocked out cold”. Since it was Government policies that created the collapse they should be working on standardizing the short sale process and procedures. Tax incentives should be created for those that standardize and work within guidelines such as HAMP (Home Affordable Modification Program) and HAFA (Home Affordable Foreclosure Alternatives) , and penalties for those who either won’t comply and /or choose to foreclosure. The MI companies must also be brought into the fold as they are a major cause for short sales not being approved. So far, no significant steps have been taken to standardize the process and by not doing so keeping their foot is on the throat of any chance of recovery and stabilization of the housing market. It is apparent they do not want a recovery.
Since late 2006, only feeble attempts have been made to correct the course, except for the recent ineffectual programs such as: HAFA (Home Affordable Foreclosure Alternatives) and HAMP (Home Affordable Modification Program) which were doomed from the start because there was no way to enforce the guidelines, and which has since been deemed a “colossal failure…”[6] They are a whole lot of talk without the walk There are solutions that will stabilize the housing market, save Americans several trillion dollars and reboot the housing market to stabilization and maybe even a moderate appreciation of home values. This is not rocket science, but these common sense business practices by the lenders and investors are being totally ignored.
The most significant part of the recovery equation WILL BE SHORT SALE REFORM. Everyone involved in the process must get behind those who market, negotiate and process short sales. Individually we cannot win this war alone. A war that can absolutely be won, but not without everyone’s support. The tide can be turned and the economy start, rebounding in as little as six-months if we deplete the supply of distressed homes and balancing demand. Short Sale Realtors can attest to the barricades to victory that are forced on them by the Federal Government for being weak and the investors, such as Fannie, Freddie, et al. Furthermore, it appears that most of the banks that own the paper are much more responsive in expediting short sales with a few exceptions. Realtors have the tools and weapons to win, but instead of being supported, they are being held back and carry the battle scars and war stories from four years of fighting on the front lines of the Foreclosure War battle field.
For the past four years, Realtors have been abused (see list of 13 abuses below) by the short sale decision makers whether it be the lenders and/or investors. Remember, it was only four years ago mortgage brokers and a few direct lenders were coming “hat in hand” begging for our buyer’s mortgage referrals while generating millions of bad products, knowing that they could never be paid back. And, why were the banks not verifying the data? Why, would they make these loans? Who profited? Why hasn’t there been an investigation to determine who was responsible for the trillions of dollars wasted, millions of Americans out of work and millions of retirees losing their retirement funds? Most of the loans are not owned by the banks as most think, but the banks as for the most part servicers subject to the whims, capriciousness of the investors, the most prevalent, of course, being Freddie and Fannie, but also the rest of them made of approximately 500 other investors from small to large institutions. Since the vast majority are Freddie and Fannie, a quasi-governmental institution, who is reimbursing them for the losses as the ultimate decision to foreclose or short sale is with the investor, i.e., the holder of the “paper” and not the servicer.
t’s a fact well known among real estate and mortgage industry professionals that sell, approve and/or process short sales that there is a $77,935[7] loss for each and every home foreclosed when multiplied by 1.2 million NEEDLESS foreclosure the loss is a staggering $93.5 Billion in 2011, While $50,000[8] of this is directly related to the cost for the foreclosure. The balance of $27,935 per home are cost not directly related to the foreclosure, such as: depreciation of neighboring homes, cost to relocate, repair, etc. With this much money at stake why would the lender/investor foreclosure instead of opting to save $77,935 on each home by doing a Short Sale? If it is not the taxpayer reimbursing the investor, more specifically, Freddie and Fannie who own a majority of the loans, for their losses or giving them undeserved tax breaks who is? The banks are still profitable while Americans continue to lose equity and even worse, lose their homes to the needless foreclosure. It is widely believed that the Fed (Federal Reserve) through the FDIC is reimbursing Freddie and Fannie for their losses; however, it seems to be “Top Secret” as no one has or wants to answer the question. The Fed only reports to Congress and is otherwise not accountable to any agency or position least of all the American people.
There are only two reasons that a foreclosure should move forward rather than a short sale, however, laws could be temporarily enacted to cover the below situations so that not a single property need to be foreclosed. Extraordinary times call for extraordinary measures. The old laws regarding to foreclosure and title must be immediately modified until the situation resolves and the housing market returns to normal.
Below are the only current reasons to foreclose:
1. The junior lien holder or HOA will not accept the settlement offered by the first lien holder.
2. If the borrower cannot be located.
The following are verifiable facts: According to RealtyTrac, in 2010 there were one-million foreclosures. There would have been more if there hadn’t been a freeze on foreclosures due to robo-signing and other improprieties. Also in 2010, 70%[9] of foreclosed home owners never listed and it can be assumed they didn’t list because the home owner never knew about a Short Sale. That means one million foreclosed home owners could have saved their credit and the lenders could have saved $77.9 billion if they went the less costly route of a Short Sale.
According to Rick Sharga, SVP, RealtyTrac there will be another 1.2 million Foreclosures in 2011[10].
As we now know the average cost to Foreclose is $77,935 and there are no such related cost associated with a Short Sale. A Short Sale is considered to be a retail sale while a Foreclosure sells at wholesale. Additionally, a foreclosed home stays off the market much longer over 800 days while a Short Sale is less than 300 days and this could be shortened to 90 days. Because a Foreclosure usually deteriorates and brings much less money, it forces neighborhood homes to depreciate even more. From an objective viewpoint, there is not a single upside to a Foreclosure.
Foreclosing on 1.2 million homes will cost $60 billion in direct lender cost in 2011, Add to this figure the 2.6 million foreclosed homes ($139 billion) since the bubble burst brings a grand total waste of $277.4 billion. Therefore, only two conclusions can be drawn:
1. The Fed is paying the investor/lenders for their losses which is a fraud on the tax payers; or
2. The lenders are taking the losses, but why would they want to reduce their bottom lines?.
In either case, someone is coughing up needless and staggering losses, and in either case it is going to take years instead of months before the housing market is even close to recovery. .
Realtors, lawyers, title companies and others working Short Sales within the system are stymied everyday by the following 13 absurd, and in some instances abusive practices repeated thousands of times every day as they attempt to navigate the short sale maze:
1. Homes must be sold over and over because the banks, investors and MI companies take so long to approve the Short Sale that the first, second, third or even more buyers walked away in desperation.
2. After taking months for Short Sale negotiations, the banks will foreclose on a home only to turn it over to the REO brokers who sells the home within days for thousands less than the Short Sale price previously offered. Again, costing the taxpayer or lender’s stockholders wasted billions.
3. In the middle of negotiation the second mortgage is sold or assigned to an impossible to deal with collection agency that extorts thousands more than the $3000 government guideline to release the lien.
4. Lenders ignore the buyers FHA/VA appraisal and kill the deal or take weeks or months renegotiating.
5. Lenders stall the deal for months only to tell you the file has been closed and the Short Sale package has to be resubmitted.
6. Short Sale approvals often do not give enough time for the mortgage company to fund the loan. Extensions are begged for and can take weeks or even a month or two.
7. Short Sales require months and long hours to be worked only to have the lender cut hard earned commission and fees when the Short Sale is finally approved.
8. Lenders give an approved price and then renege.
9. Many times a Short Sale approval is good for only 30 days or less to close an FHA/VA sale that under the best of circumstances takes 45 days.
10. Lenders often give impossible deadlines to meet.
11. Broker Price Opinion and appraisals come in way over fair market value and it takes weeks of fighting with the bank to get a new evaluation.
12, How many times has the lender/servicer taken so long reviewing the file all the documents (hardship letter, financial worksheets, bank statements, pay stubs) become so old and they require updating so the docs all have to be resubmitted two, three and four or more times over months.
13. How many times has an abandon home needlessly deteriorated thousands of dollars while the lender’s does nothing to expedite the short sale approval.
Based on RealtyTrac, since December 2007 (the “official” beginning of the collapse) and through June 2010 there have been a total of 2.36 million U.S. properties repossessed by lenders through foreclosure (REO).
Again applying simple arithmetic to the National average cost to foreclose over short selling is as follows: $77,935 times 2.36 million units foreclosed since 2007 have already cost either the taxpayers or stockholders $118 billion added to this year’s estimate of 1.2 million needless foreclosures bring the grand total waste to $178billion!
After four years of fiddle playing, the problem is no closer to a solution than it was four years ago. There has been some headway made in short selling more homes, but still more than half of the distressed properties are foreclosed rather than short sold when as there is not a single upside to a foreclosure and only downsides. A few lenders are trying, but they are also stymied by investors and MI companies that are not standardized and seem to be operating under an umbrella of chaos. The biggest barrier to resolution is the investor as there is absolutely no standardization or accountability. Additionally, standardization is also from servicer to servicer, lender to lender, MI (Mortgage Insurance) company to MI company, debt collector to debt collector, FHA and VA. Short Sale processing is as convoluted and has a many rules as the IRS tax system. None of these entities are even remotely close to standardization and constantly apply different criteria to almost every Short Sale file.
It is time to take the fiddles away from all fiddle players and get on to the business at hand. It’s time to have standards applied and streamline the process and FIX THE PROBLEMS, and if the government can’t do it, the lenders and investors, et al can’t do it, than find SOMEONE THAT CAN!
Tune to any news broadcast or distress property story on television, in newspaper, magazine and on the internet news. Short Sales are rarely mentioned and if they are only in passing however, we are bombarded everyday with foreclosure stories and statistics. With the cost to foreclosing on a property it should only be considered the last resort, however, none of the media, neither is the NAR (National Association of Realtors) or Federal Government supporting the one million Realtors in their efforts to successful market short properties.
In conclusion, now is the time to ease credit on “credit worthy” buyers, give tax credits for distressed property purchases and sell off the inventory of distress property, Instead lenders including Freddie and Fannie are in the midst of a “knee-jerking reaction making it difficult to get credit and in doing so keeping their foot on the throat of any hope of housing market recovery?
These are the same lenders whose only litmus test prior to 2006 was a warm body and the ability to write an X by their pre printed name on a mortgage and note. Now, they are raising the bar of home ownership by increasing interest rates, down payments and placing other obstacles in the path of recovery.
What is more amazing is how the pendulum swings from absurdity to absurdity. One would only be led to believe there is some other motive that is driving America toward economic collapse?
To summarize three approaches should be:
- Ease credit only for “credit worthy” buyers
- Provide tax credits for buyer’s of distressed property
- Create a streamline refinancing program for home owners with high interest rates, but are paying their mortgages
- STREAMLINE AND STANDARDIZE THE SHORT SALE PROCESS
[1] http://www.businessinsider.com/zillow-fourth-quarter-798-billion-2011-2
[2] http://www.ehow.com/facts_7379259_average-sale-price-homes.html#ixzz1D9AYKRtJ
[3] Fitch: U.S. RMBS Loss Severities to Rise 5-10% on Rising Costs & Weakening Home Values 16 Dec 2010).
[4] http://www.huduser.org/portal/periodicals/ushmc/fall10/nat_data.pdf
5 http://en.wikipedia.org/wiki/Fannie_mae
[6] http://www.huduser.org/portal/periodicals/ushmc/fall10/nat_data.pdf
[7] http://www.mortgagenewsdaily.com/622008_Foreclosure_Costs.asp
[9] National Association of Realtors. 70% of foreclosed homes were never listed
[10] Rick Shago, SVP, Realty, “The answer to your question depends on your definition of “homes that
will be foreclosed on. “We are projecting that between 3 and 3.2 million homeowners will receive
at least one foreclosure notice during the course of 2011. We are also projecting that
approximately 1.2 million homes will be repossessed (or “foreclosed on”) by the lenders during
the year. Either number can be attributed to us, as long as you keep them in their proper
context.”
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This article was written by Ed Goldfarb
