Can someone explain HUD and Fannie Mae?

Question

Excuse me if this is not the right forum.

I am in Tampa, Florida. I see a house that SunTrust Mortgage bought at auction in August 2013 for $72,100. The property appraiser's website shows a Certificate of Title issued. It then shows a Warranty Deed for $100 for HUD in September 2013 but no activity is listed for the house in September on the foreclosure website. The house is now listed on the HUD website for $89K. I see this also with Fannie Mae at times. A bank bids at auction for $x amount and then Fannie Mae gets a warranty deed soon after that for $100 and lists the property on their website.

How does this work? Do HUD and Fannie Mae buy these properties? Do the banks still own them and HUD / Fannie Mae are underwriting them?

Jon Holdman · Answer

One thing to realize about the mortgage business is that there are often two parties involved. One is the company you mail a mortgage check to. They're the "servicer". But they are rarely the company you actually owe the money to. That's the "investor". For many residential loans, Fannie Mae or Freddie Mac are actually the investor. After the loan is created ("originated") it gets sold by the originator to someone else. Many companies originate a lot of loans but sell almost all of them. In addition to Fannie & Freddie, there are many other buyers of mortgages, in various forms.

When a foreclosure is needed, its often the servicer that performs the process, takes the property and then hands it over to the investor for disposal. That sounds like what happened with your example. The property is now owed by Fannie Mae.

I believe the process is similar for HUD.

When a foreclosure is needed, its often the servicer that performs the process, takes the property and then hands it over to the investor for disposal.  That sounds like what happened with your example.  The property is now owed by Fannie Mae.

I believe the process is similar for HUD.

Bill Gulley · Answer

David, this loan appears to have been an FHA loan originated by Sun Trust. In default it will go to foreclosure and if not sold the note holder will turn the collateral over to the mortgage insurance pool where the originator or holder will have it's note paid according to the participation of the loan guarantee. Then HUD-FHA will dispose of the property and receive it's money back.

Basically the same thing goes on with any secondary market insured loan, Fannie-Freddie insure through private mortgage companies much like an insurance pool, so do USDA and VA.

Insurance and subsidies buy the loan, not the property but they property is conveyed as collateral, the value has nothing to do with it at this point and you'll see conveyances at minimal amounts as consideration paid for the collateral for title purposes.

These loans may have had third party servicers or the loans can be sold with servicing retained by the originator. This aspect, of retained servicing, usually has a borrower thinking they are "paying the bank back" when in fact the loan may have been sold, securitized with other mortgages to back the bonds sold that generate the funds to complete the cycle. Your money for your mortgage may have come from an insurance company or an oil company from buying bonds securitized by prior mortgages. That's how it's suppose to work, without government funds, but that's another matter.

Banks or lenders don't "buy" properties, they secure properties as collateral and dispose of the collateral to recover the money loaned. They too may insure their loans to a percentage of their portfolio or loan amount in which case the mortgage insurance company steps in, buys the loan under contract and receives collateral.

Your loan in question was foreclosed on 6 months ago, it appears. Another side note is that title must be cleared, the collateral secured, insured under blanket type policies or assessed under self insured plans or subsidies and managed in trust. Servicers often are assigned or asset managers. These are the folks you may deal with for disposal of collateral. There are also redemption periods that vary from state to state and time may pass allowing these to expire if necessary. It generally takes time to process collateral, meet state requirements, address securitization matters in replacing any loan and redemption periods.

As Jon mentioned, you can't value a property based on a loan amount per se, but you can in some cases come close to what money a lender may have in the property. Loans are usually insured to 80%, sometimes less of the balance. The lender may remain on the hook for any deficiency not insured. You can, in some states, look up the entry bid through the clerk of court that usually oversees non-judicial foreclosures. Amounts are in a non-interest accrual status, so further interest doesn't apply. You can also investigate the costs of collection to some extent as state law sets fees allowed to be charged and limits costs of sales.

Banks holding collateral (or any holder under federal supervision) may be required to automatically write down the book value of collateral over time. After one year, collateral may go out the door with an offer of 80% or more of the book value. So, that roughly 82K bad loan and collateral might be disposed of at about 65,600 (the insured amount)!  Must they dump it? Yes, if there are state regulations in play over a period of time. No lender or PMI company is to be in the real estate business, the forces at play are the reserve requirements  and liquidity. Don't look for crammed down values within one year.

I'm not up on the newer write off benefits that lenders may receive due to underwater properties, basically allowances made for losses from short sales which is a different matter than collateral sales.

All that, but base your offer on the market with costs applicable to your purpose. You may find a distressed property that might be viewed from the above comments, but, every lender has a duty to obtain any excess equity from the sale of any type of collateral above what they were owed and remit that back to the owner. I'd bet 76,500 to 79,500 could buy that 89 asking price if activity was slow. Wait and you might get it for less, then if you wait you may not be buying it. You gotta love the game! :)

David Weis · Answer

And that's why I am a member of Bigger Pockets! Great responses folks.

Robert Brubaker · Answer

What moves Fannie and HUD make in transferring property

or buying at auction are all related to the  Loan Guarantee

issued by either to the lender originating the Loan now in

default.  These numbers mean nothing as related to subsequent

sale!   The HUD  REO and Homepath Operations are to be

looked at as "liquidators".  They are selling in the  " Marketplace"

both are  " market focused " with mission to get HIGHEST RETURN.!

Bill Gully gives good direction!  Your Bidding should

take Market Values and your Costs( both FIX-up and Soft)

into consideration.  Like any seller what they have in it  means

little. Once offered by these " Guarantors"  they call the shots

previous history  no longer relevant.

Market focus is important not only for "AS-IS "   valuation

but also the limits on your " back-end " after fix-up/resale

potential.  The margins you come up with will tell you

what you can bid!   Best for Success!

Jon Holdman · Answer

From what I've read the market in FL in general is pretty hot.  So while your 65% formula is good for being profitable, it may be very, very difficult to find anything you can actually buy with that formula.

As far as determining ARV, that's one of the most difficult steps in this business.  My advice would be to ignore all these distressed transactions.  They aren't very meaningful for establishing ARVs.  If you're in the fix and flip business you need to be looking at the retail sales.  That is, what do fixed up houses sell for.  You want to look at the distressed sales to be aware of what an appriaser might see and consider when doing an appraisal.

My warning here is that thinking "the bank overpaid" isn't really what happened here.  The bank likely started the bidding at what they were owed.  Saying they paid that is incorrect.  Nobody overbid them, so they took it back.  They didn't pay anything.  That is unlikely to be what they put the house on the market at.  No matter what it seems like sometimes, banks aren't stupid.  Once they've taken it back, they've taken the loss.  Now they own a chunk of real estate and they want to get as must as they can for it.  They will do a price opinion on it, consider the repairs and typically then price it at full market price less repairs.  Sometimes they seem to price it below market in hopes of generating offers.  If the repairs are minor (paint and carpet) they can sometimes find a owner occupant to buy it with only a small discount.  If repairs are extensive (I've looked at REOs with missing walls and extensive vandalism) then OO's won't be interested.  Those are your opportunities.  But even then they will tough to find with that formula.  An experience rehabber who has his or her own crew and money can go much higher than 65% and still make money.

Using your formula and comparing your max offer to the listing price is a good idea.  If you're close, you may come to a deal.  If you're a long ways off, unlikely the bank will take your offer.  But can certainly still make it.  Over time, the bank will slowly drop the price.  Keep making your offers.  Make lots of offers and you should eventually buy something.

David Weis · Answer

I'm sorry Jon, I should have been more specific. I have been investing for awhile now and know how to determine ARV. I take ARV and multiply by .65 then subtract my rehab costs. That is my highest offer on a house.

The reason I mentioned "starting point" was because this house is listed by HUD for $78K which is just a bit higher than what I would offer but still within the ballpark of my ARV times .65 minus rehab costs. So I feel comfortable now with my offer.

On the other hand, there is another house that the bank bought for $153K and Fannie Mae got a Certificate of Title for $100. The ARV on that house is ~$160K so the bank way overpaid and my bid formula would be way under what the bank would probably look at. It also explains now why the bank is willing to sit for so long now on a crappy house.

I was just always curious why I saw a warranty deed issued at auction for a higher amount suddenly followed by a $100 Certificate of Tile to HUD or Fannie Mae.

I don't know about the market in other areas, but the Tampa Bay market is extremely difficult now to find houses. So I am trying to educate myself as much as possible.

Jon Holdman · Answer

Sorry, but that information is completely unrelated to what you should or might pay.  The starting bid is often set to the amount owed.  If the bank ends up taking it back, the only thing that tells you is its not worth that much.  If it was,someone would have bid and won the auction instead of it going to the bank.  This really is unrelated to the price the bank will ask and get for the property.  You still have to do your own evaluation and determine what you're willing to pay for the property.

Because its a HUD, you should be aware of their special rules.  They let owner occupants bid for the first couple of weeks.  After that, investors can bid.  As an investor, if you hand over earnest money to HUD (typically withing 48 hours of getting an accepted bid) you will never get that money back.  You must do any inspections ahead of time and be sure your bid will be acceptable if you win.

David Weis · Answer

Thanks Jon. That's pretty much what I thought. The reason I was asking is because I am trying to get an idea of a good offer price. Since I know that HUD / SunTrust paid $72K at auction, that gives me a good starting point.

Can someone explain HUD and Fannie Mae?

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