Category Archives: Real Estate-Purchases

Garbage can charges morph into loan origination fee

Mortgages, Real Estate-Purchases

I’ve had several buy closings in the last few weeks and it’s surprising  to see how much closing costs have increased since the new Good Faith Estimate (GFE) rules began in January 2010.

It used to be that all lenders charged several “garbage can charges” (my cracker barrel, semi-derogatory  term for excessive closing costs) on the RESPA.

In the old days, common charges were a tax service fee of $70, flood plain check fee of $29 and some sort of document preparation fee of $200 or so.  Standard, non-gouging garbage can charges usually added up to about $300.  There were exceptions to this and many times we would see ridiculous add-ons like “table funding fee” and “loan administration fee” from $300 to $1200.00.

When the new GFE law started, all the garbage can charges were bundled into one “Loan Origination Charge” on line 803 of the RESPA closing statement.  The charges are no longer broken down separately, but  all appear as one lump sum. Buyers have no control over title charges and the other costs on the RESPA. Line 803 is really the only item that a buyer can control.  But,  Line 803 costs have risen over the last year, mostly because buyers don’t questions the cost. Here is a summary of what I have seen over my last few closings:

1. Buy of Rolling Meadows foreclosure                  Origination charge  $1749.00

2. By owner buy of Palatine condo                           Origination charge $1295.00

3. Buy of Northbrook home                                        Orgination charge $1580.00

4. Buy of Carpentersville foreclosure                      Origination charge $3131.00

5. Buy of Palatine home                                                 Origination charge $650.00

If I were buying a home, I don’t think I would pay more than about $600 for origination fees. I have no idea why origination charges have become so inflated.  The average of the above five closings is  over $1600.00 and I think that is way too high.  There is no reason or purpose for these charges other than extra income for the lender. (Note: If your lender is a mortgage broker, there is a complex interplay of the “yield spread” paid to a mortgage broker from the underlying lender into the line 803 costs, but in the risk of boring you to tears, I’m not going to torture you with an explanation of that here. But, it’s not the yield spread that is making these costs higher.)

Closing number 4 above is a case of  classic  overcharging with a whopping  $3131.00 origination fee. I always suggest that clients send me the GFE to review before they go ahead with the loan.  My clients did not send it to me in that case. The first time I saw it was at the closing. The loan officer told them it was his “standard charge on an FHA mortgage.”  Being trusting souls, they agreed to the overcharge and the lender made an extra $2k.  FHA places  no limit on how much can be charged for an origination charge. It is strictly up to the lender to charge what they want on an FHA and it is negotiable.

So if you are refinancing or buying, beware of the origination charge and try not to pay more than $600.00.

 

High earners & strategic default

foreclosures-shortsales, Strategic Default

Masochism alert: If you want to get good and depressed, look up your house on zillow this month.Type your address into www.zillow.com. When your property pops up, click on your address, above where it says “zestimate.” The next screen will show the 30-day price change. This showed my house down $35,000.00, not for the year, just for January.

Wowser, that’s one wicked drop.

There has to be a bottom coming for real estate values, but it is not here yet. The seemingly never-ending  slide of real estate values is also causing high income earners, who can otherwise afford their mortgage, to strategically default on their homes (and second homes) because they have lost hope that the market will rebound in their lifetime.

This excellent post on Dr. Housing Bubble points out that strategic defaults increase greatly once a home is underwater by more than $100,000.00. Also, if the neighbors start walking away the chances are others will do the same. Those with large mortgages and high credit scores are more likely to strategically default on their mortgages than those with small mortgages and low credit scores.

I do telephone consultations with clients almost daily and many of these clients earn $100,000.00 or more and can pay their mortgages, but several factors are pushing them toward strategic default:

1. They can rent a house that is much bigger and in better shape than the one they own for less than they are paying on their mortgage.
2. They are $100,000.00 or more underwater and have lost hope that the home’s value will rebound in a reasonable time. With each big drop on zillow, more people go sub-$100k and the likelihood of their strategic default increases.
3. They view the only negative of strategic default as being the hit to their credit score.

These clients are well-educated and they look into a strategic default  carefully before actually doing it. Most tell me that they have talked to several attorneys about the process.  I have to say that it seems to me that most have already made up their minds to quit paying on their mortgage and I have a hard time convincing them otherwise. Supposedly, all the high earners walking away from their mortgages frees up cash that’s spent on other things and gets the economy rolling (this is kind of a stretch).

There are many negatives to consider for a high earner before walking away from an existing mortgage. Some of these are:

1. Constant phone calls from the lender. Receiving several calls per day for more than 1 year can wear people out. This is the biggest complaint that I hear from clients who are in the foreclosure process.
2. Getting served with the summons by the sheriff. This is a terrible day for all but the most tough-skinned. Worse is being served at work by the sheriff (this rarely happens).
3. Trashing of credit score. Credit will go to 520 and stay there for awhile.
4. Association must be paid and will pursue you vigorously. If there are dues owed to a condo or townhouse association, these have to be paid until the foreclosure is over.
5. Second mortgage must be paid or settled. Second mortgage companies will file collection actions against clients. I highly suggest that no one quit paying a second mortgage unless they are ready to file a bankruptcy, because the second lender will be like a hell hound on your trail. I just filed a bankruptcy for a client who quit paying on a house that had a second mortgage. Two years after the foreclosure, the second mortgage company sued, got a judgment for $40k and was about to garnish his wages. So, a strategic default that involves a second mortgage is a very real financial threat and should not be done unless you are willing to pay the second mortgage or file banktuptcy.
6. First mortgages are not pursuing deficiency judgments, but this could change. Right now there are really no deficiency judgments being taken in Illinois and no collection actions being filed by first mortgage holders. What if this changes and the foreclosing lender dumps the foreclosed notes to a debt collector in the future? What if lenders start to seek deficiency judgments in Illinois? Things can always change, although I think this is unlikely.
5. Biggest worry of high earners: That the foreclosing bank will get a deficiency judgment and take other assets from the client. Clients are absolutely obsessed with this. First, the likelihood of a deficiency judgment on a first mortgage is slim. Right now, the only time this can happen is with a second mortgage, as discussed above. But clients wring their hands about this and worry that the lender will creep up on them down the line and take their cash or a new home bought in their spouse’s name.  This is not likely to happen.

This post titled Not Walking Away is For Suckers and For People Who Aren’t Rich, kind of sums the high earner/strategic default issue, better than I could.

Getting a mortgage after bk, short sale or foreclosure

Bankruptcy, foreclosures-shortsales, Mortgages

It is possible to get a new mortgage after a short sale, bankruptcy or foreclosure, but it takes awhile.

The chart above tells how long it takes, after each of these events occurs, to get a new mortgage.

The first column labeled FNMA is a standard Fannie Mae, conventional mortgage, and this generally requires a 10% downpayment. The second column labeled FNMA 20% is a mortgage with 20% down. The third column is an FHA mortgage, which requires only 3.5% down, and is the current favorite these days with first-time buyers, because it requires credit of about 610 FICO and is otherwise easier to qualify for compared to conventional financing.

Most clients get FHA mortgages after a bankruptcy, which is only a 2 year wait.

The waiting periods are one thing to consider when deciding how to handle a underwater real estate and whether a strategic default is worth it or not.

Strategic default in the news

foreclosures-shortsales, Strategic Default

Strategic default is not funny.

But the video below from “The Daily Show” talks about how the Mortgage Bankers Association strategically defaulted on its own building, yet instructs everyone else to stay put.

Also interesting in today’s Wall Street Journal is “The Great Mortgage Mystery” that starts with this rather eye-opening lead:

“The big question from the mortgage meltdown isn’t why so many distressed homeowners are defaulting on their loans. It’s why any of them are still making payments.”

The story also uses the term “zombie homeowners,” that is  borrowed from the Japanese “zombie banks,” to define underwater homeowners.

Read or browse the 150 plus comments to the WSJ story.  Because strategic default is such a volatile topic, the comments are as good, if not better than than story.

The Daily Show With Jon Stewart Mon – Thurs 11p / 10c
Mortgage Bankers Association Strategic Default
www.thedailyshow.com
Daily Show Full Episodes Political Humor Rally to Restore Sanity

Monster in the closet: Collection agency or deficiency judgment?

Bankruptcy, foreclosures-shortsales, Strategic Default

When it comes to foreclosures and strategic default,  clients are very afraid of deficiency judgments. Deficiency judgments are like the monster in the closet — unseen, but scary as hell. Homeowners in or near foreclosure are terrified of these things, but there is no reason to be afraid because in the cold light of day deficiency judgments shouldn’t be feared  since they are so rare. I have yet to talk with a client against whom a deficiency judgment was entered in Illinois.

In reality, it may be that collection agencies are a much bigger threat to those thinking about strategic default or in foreclosure now. Channel  5 reported on this last summer, but it seems to be increasing since then.

I have had two cases recently in which lenders assigned their foreclosed mortgages to collection agencies. The collection agency starts calling and sending letters and finally files a lawsuit for “Breach of Contract” against the owner. A breach of contract case can be filed because the owner signed a promissory note at closing. The liability on the note survives the foreclosure. The statute of limitations on cases like these is a hefty 10 years.

Mostly this is happening on second mortgages, not first mortgages, but it is still possible on a first mortgage. Citibank seems to be very active in sending its delinquent second mortgages to collection.

Case 1: In the first case, the client had been foreclosed 5 years ago.  Then, suddenly the client started getting letters and calls from a collection agency. This agency specializes in “seriously delinquent and defaulted loan portfolios.”  I don’t know for sure, but most likely they agree to a contingent fee based on whatever they can collect from the foreclosed loans a lender assigns to them.  Most likely the client will have to put up with a series of calls and letters and then a lawsuit will be filed. When a judgment is entered the client will have to file bankruptcy to get rid of the judgment.

Case 2: The client owns a Chicago condo that is currently in foreclosure and, before the foreclosure was even completed, Citibank filed a breach of contract case against the owner based on the client signing the note for a second mortgage.  When this happens a whole separate lawsuit is filed. This is not part of the foreclosure case and it is not a deficiency judgment. A local law firm that is a well-known debt collector filed the case. The client will have no alternative except to file bankruptcy after the judgment is entered.

(Update 10/20/10: Wells Fargo is also filing collection actions on second mortgages. A McHenry County client was served with a $40,000.00 breach of contract case.)

I think that it’s very likely that lenders will continue to hand over their foreclosed loans to collection agencies in the hope of at least getting something back on delinquent loans. This is another reason to carefully weigh whether a strategic default is worth the cost, since you will have to look over your shoulder for 10 years until the statute of limitations expires. Ultimately, a chapter 7 bankruptcy will be the only way to eliminate the collection agency from the picture.

FHA mortgages get more expensive

Mortgages, Real Estate-Purchases

On October 4, FHA mortgages get a little less expensive upfront, but a lot more expensive in the long-run.

FHA mortgages are the only game in town for first-time buyers. Most first-time buyers obtain FHA mortgages.

Until now the FHA premium (called MIP) paid by the buyer at closing was 2.25% of the loan amount. From here forward, it will be reduced to 1%. That’s good and will reduce initial closing costs.

With an FHA mortgage, in addition to the upfront MIP payment, the buyer also pays a monthly MIP premium that’s included in the monthly payment. This payment will increase.

It used to be .55% of the loan amount (this is the yearly amount, divide by 12 for the monthly payment).  Now it will be .9%, almost twice as much.

Buyers should not automatically assume an FHA is best. This increased FHA expense means that buyers should carefully examine FHA vs. conventional mortgages because a 5% down conventional mortgage will be much cheaper than an FHA.

Real estate.. there’s an app for that

Real Estate-Purchases, Real Estate-Sales

The internet is changing (for the better) the way people shop for and view real estate.

There is an new Iphone app that allows you to search listings from your Iphone. The nice thing about this app is that the GPS in the phone senses were you are located and will automatically map listings near you. Or you can search specific addresses. Then it shows you detailed listing with plenty of pics.

I have been playing around with it and it works very well.

FHA may tag Strategic Defaulters with Scarlet S for life

foreclosures-shortsales, Strategic Default

Okay, foreclosures are up 95% this year in Palatine, the town where I live.

The high foreclosure rate in Palatine is because there are a lot of condos here. Many condos were purchased around or after the peak in June 2006.

I would bet that more than half of those condo foreclosures were “strategic defaults” meaning the buyer could continue paying, but chose to walk away from the property. In talking with clients it’s clear that no one defaults on their mortgage without a lot of thought, lack of sleep and anxiety. People care about their property and their credit rating and don’t just decide to descend into a foreclosure for the fun of it.

The lending industry is pressuring Congress now to discipline homeowner’s who have committed the sin of strategic default by limiting their ability to get a mortgage in the future. This excellent post by attorney Steve Beebe explains that Fannie Mae is trying to prohibit those who walked away from their home from getting a new mortgage for 7 years.

Worse yet, a new law being proposed and already passed by the House, called the FHA Reform Act, would prohibit strategic defaulters from getting any FHA mortgage in the future. Most homeowners who go through a foreclosure try to get an FHA mortgage two to five years after their foreclosure because FHAs have a low 3.5% downpayment and relaxed credit requirements of around 640 FICO.

It’s absolutely insane to ban people for life from getting an FHA mortgage.

First, how does one define strategic default? I don’t think lenders should be allowed to decide which unworthy Hester Prynnes get tagged with the scarlet “S” for strategic defaulter.

Second, the government, other than the tax credits that just expired, has done nothing to help the homeowners in or near default. The HAMP loan modification program is considered a joke and a failure.

This is really all about lenders trying to quell the non-stop wave of foreclosures by intimidating current mortgage holders into keeping, and not defaulting on, their homes, many of which are worth far less than the mortgage amount.

Tax credit extended to September 30

Real Estate Tax Credit, Real Estate-Purchases

Congress finally approved an extension of the first-time and move-up buyer tax credits ($8000.00 and $6500.00 respectively) to September 30, 2010. This only applies to those who already signed a contract by April 30, 2010.

I have very few clients who will be affected by this.

I guess it’s good to help out those unfortunate souls who got sucked down some mortgage underwriting vortex and ended up with delayed closings.

I will so miss the tax credit.  I loved the credit with all my heart. It was an awesome, effective stimulus to a dead real estate market. The problem is how do we live without it?