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To: President Barack Obama

To:       President Barack Obama

From:  Jay Hill, Hill Mortgage Consulting

Re:      “...Refinance Options for Troubled Borrowers...” (WSJ, Nick Timiraos, 9/6/11)

            “Call for Investor Ideas for Government-Owned Foreclosure Properties” (WSJ, Nick Timiraos, 8/10/11)

Date:   September  3, 2011

 

As a mortgage consultant on the front lines with work-a-day Americans mired in the quicksand of the financial crisis, I have a strong opinion with regard to a refinance plan viable plan for investor participation in managing rental programs for the glut of unsold homes-turned government property.

 

Currently, there are two micro-fix solutions floating around. One is for a government-backed mortgage refinance program that would allow millions of Americans with government-backed mortgages to refinance at a lower rate. The other is for a government-investor partnership in forming rental companies that share the monthly cash flow and potential equity from property sales. But realistically, the problem isn’t an interest rate problem—it’s an equity problem, and until we face the equity issue with a macro-fix we won’t see a floor in the housing market. Moreover, when Fannie Mae and Freddie Mac sell off their glut of government-owned “unsellable” homes, investors will purchase these properties in the most risk-free manner—which actually leads to more risk and/or loss for the government.

Example: A property has a $200,000 mortgage, with a current market value of $100,000. Any savvy investor will discount the current market value by 30-40 percent, reducing the purchase price to $65,000—a $35,000 loss to the government.

 

Furthermore, just as the investor discounts the property, the original homeowner views the property from a surcharge or premium to the current market value. If the loan was modified and the principle reduced to meet current market value plus a premium, the homeowner would view the same scenario from a standpoint of a 20-30 percent premium.

 

My plan has two options, both of which are voluntary for ALL properties, commercial and residential.

 

Option one is institutional: The lender writes down the principal to market plus 20-30 percent in the form of a first mortgage with a 30-year amortization 15-year balloon (payments are based on 30-year amortization but the loan is due in 15 years), then secures a non-interest bearing, non-accruing second mortgage on the property for the

remaining balance of the principle reduction. The second mortgage has a “trigger clause” stating that sale or refinance of the property within 15 years has a set balance equal to 80 percent of the equity. Equity would be established, if under dispute, by averaging three certified appraisals. This option requires the regulator to reword the capital requirements for banks and classify loans put into this program as something other than impaired.

 

Option two is governmental: Lenders write down the loans to market then submit those losses for a government subsidy equal to a portion of the loss. The government is then entitled to an 85 percent capital gain tax on all gains above the new principle balances. If the property sale doesn’t yield enough to cover the government’s subsidy, the shortfall follows the individual and is recovered through future capital gains.

 

If enacted, together these options could cure the moral hazard of strategic default and unclog the court system by reducing the number of foreclosures.

 

 

 

 

  

Short Sales: The Impending Tsunami!!

Are the receding waters of short sales leading to a “lawsuit” Tsunami for the uninformed consumer?   

Just as unaware vacationers flock to the beach to pick up the unique shells exposed by the seemingly innocent receding tide, unaware of the mounting Tsunami wave lingering just miles off the shoreline; so are uninformed consumers flocking to the closing table for resolution by short sale, oblivious to the potential mounting “law-suit” Tsunami wave that is lingering, just over the horizon, building to flood an already battered consumer in years to come.  Five years to be exact.

A short sale is the sale of a collateralized property in which the sale proceeds fall short of the balance owed on the loan.It often occurs when a borrower cannot repay the loan on their property, and the lender decides that selling the property at a moderate loss is better than pressing the borrower. Both parties consent to the short sale process, because it allows them to avoid foreclosure, which involves hefty fees for the bank. This agreement, however, does not necessarily release the borrower from the obligation to repay the remaining balance of the loan, known as the deficiency.

 It is my belief that many borrowers, in this case borrower meaning the seller of the property,  do not fully understand the implications of their position, and take advice from uninformed parties by agreeing to a short sale with a settlement agreement that does not clearly define the resolution of the Note and Mortgage.

In Florida, a loan for the purpose of purchasing or refinancing real property is secured with what is commonly referred to as a Mortgage, or mortgage loan. The Mortgage is the instrument that secures or collateralizes the real property; the Note is the instrument that dictates the terms of the loan.

The loan terms in the Note are made up of the following:  the interest rate, amount of time to repay or loan maturity, and frequency of payments, IE:  monthly, quarterly, annually, etc.   Additionally, the terms are made up of what is considered by the lender to be a cause of default, or default clause.  This clause is key, due to the fact that it can reflect a multitude of reasons why the lender may call your loan due or require payment in full.  This is sometimes referred to as an acceleration clause.  A few ways this clause may be triggered is:    missed payments, the lender feels the collateral is in jeopardy, if the lender becomes aware of any other obligation the borrower may have defaulted on. When this clause is triggered, the lender commonly enacts the default interest rate  

The default interest rate incurs once one of the default clauses above is triggered, and typically as high as 18%.

The vast majority of lenders that are participating in the short sale process only release the property from the mortgage loan, which if you remember from the definition above only represents the instrument that collateralizes, or secures the property to the Note. Therefore, the borrower has the mortgage satisfied, but the Note is still in full effect.  As a result, the Note can be enforced up to five years from the date of the last payment made.

If a borrower has effectively defaulted on the loan and the property is short sold and the Note is not satisfied, then the loan balance minus the net to the lender equals the deficiency.  That deficiency amount can carry an interest rate of up to 18% (Default Rate), until it is either satisfied or the statute of limitation is met, five years.

The key focus in a short sale or a deed in lieu should be the Deficiency, this is the part that most people misunderstand, or miss altogether. 

For example, let’s say the deficiency balance on the Note is $100,000.00 and has a default rate of 18%.  The lender doesn’t attempt to collect on the Note until the eve of the statute of limitations on collections, or five years from the date of the last documented payment ($100,000.00 X 18% = $18,000.00 annual in interest alone multiplied by 5 years = $90,000.00 just in interest on the deficiency balance, now add the deficiency balance of $100,000.00.  That would mean the borrower/consumer could be looking at a potential judgment of up to $190,000.00). This would assume the default rate kicked in close to the time of the short sale.  If the default rate kicked in months or even years before, the actual deficiency would be reflective of the total balance before the sale, then multiplied by 18%, and then reduced by the net from the sale leaving the remaining balance reflecting an interest rate of 18%.

Many people believe that since they did a “short sale” they are free from the nightmare, only to be contacted at some point in the future by either the lender, or more likely a debt collection company.  Debt collection companies buy these short sale Notes for pennies on the dollar and pursue the Note holder for the entire deficiency balance plus the accrued interest.

Unfortunately, many are uninformed and unaware of this lurking Tsunami. You don’t want to be one of those caught up in this impending wave of high pressure debt collectors and lawsuits, therefore we recommend everyone considering this path seek qualified planning prior to beginning the process, and the advice of a competent attorney once a short sale agreement is proposed.   

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