aRemember when you were growing up and your parents or teachers said ” if you do this, then you can have that? ” In Real Estate it might be something like IF we get rid of all the distress sales, THEN we can have price stability and the eventual return of appreciation again. That is the way life is supposed to work, right? We like to know that if we do something, something else will naturally follow. If I eat right, I stay in shape, If I follow the rules, I stay out of trouble, If I treat my clients well, they tell their friends etc. Well for 6 years now I have been commenting on a Real Estate business that has not been at all predictable. Starting with The Bush Administration the thinking was IF we make short sales easy to do, sellers will use them as a way out of being upside down. Wrong. Lenders will tell you that fully 60% of people in default never even speak to their lender about options. They don’t return urgent calls and ultimately resign themselves to foreclosure. Then the Obama adminiatration started a series of programs under the umbrella of “HARP” and “HAMP”, the making homes affordable solution. IF they offered loan modifications, then everyone can stay in their homes and ride out their negative equity situation. Wrong. Only about a third (800,000) of the over 2 million people that the program was created for have taken advantage. Not bad, but not what they hoped for, and the people that did it will tell you it was a nightmare trying to get it done. Even more will tell you they were turned down. My experience is that a majority of those people then give up trying to stay. Remember, IF the goal is stopping foreclosures, then what will actually work?
The problem, as so many smart people will tell you, is that none of the many approaches discussed seriously address the elephant in the room. That is that so many people are so far upside down in their homes, they have no prayer of ever being right side up. I see it every day, people that bought homes for 600,000 with little or nothing down, that are worth $400,000 today. As program after program failed to stop the foreclosure crisis we finally started hearing about principal reduction in 2010 and this year it has come up more and more. Of course this infuriates people that have are not upside down (“if someone is upside down, we shouldn’t just reduce what they owe”) and really creates a huge potential problem because the majority of people that have no equity have not stopped making their payment. So IF we want to minimize foreclosures, help people stay in their homes and stop price declines, WHAT do we do to achieve it?
Barring real principal reduction, which is politically challenging and logistically difficult with investors and the complicated mortage backed securities they hold, we may finally have something that will actually help. Last week Obama announced a program which actually identifies the real problem-Negative Equity. The plan is to allow people to refi EVEN IF THEY ARE SERIOUSLY UPSIDE DOWN. Never before has this been approached, and with todays fantastically low interest rates, it allows people to refi into a low rate, save on their monthly payment and ride this out. Theoretically it will also give them more purchasing power to stimulate the economy but that is a side benefit. The real benefit as I see it, is people will finally have an incentive to not give up, reducing the ammount of distressed properties on the market and leading to price stability sooner. So, IF homeowners can refi that $600,000 loan into a 4% interest rate, stay in a home for less than renting, and not just dump it, THEN we can have less distressed homes on the market and stability can be achieved sooner.
Of course there are some holes in it, the most notably being that it only applies to Fannie Mae and Freddie Mac loans. Many loans in Santa Clarita have different investors. Also, the program only applies to loans under 729,900 and it is only for people that bought before June 2009. This eliminates a few more. Lastly, potential candidates have to have a clean payment history. Many of the potential target homeowners do not have good payment histories if they were advised to miss payments to force a loan modification. Still, for the first time we have a program that doesnt care if the home you bought for 600,000, with a loan of $600,000, is now worth only $400,000. Appraisal DOESNT MATTER. You can refi at todays low rates. Further, if you have 2 loans, you can refi into one loan. In the above example that might look like this; you did 80/20 financing with a first of 500,000 and a second of 100,000. If you want to refi into one loan for 600,000, then you can do it. This is groundbreaking in it’s recognition of the big issue-upside down people having no option in the past if they wanted to stay. More of this please. Now for those that don’t want this option can we please have a short sale program that allows people to understand the process, the repurcussions and doesn’t force them to wait 3 years to buy again if all of their other credit is sterling? THAT will really help solve the problem. “If you want stability and buyer confidence to return, then you have to do this too”. But this refi plan is a good step in the right direction. Should you or someone you know need details on this program please call me or your lender for specifics.
