US Treasury Plan on Short Sales Coming Together

[Karen Parker]

Short Sales Plan closer to finalization

According to a US Treasury spokeswoman, The Treasury will soon finalize the long awaited plan to expand its incentives for mortgage companies to use "short sales" as a way to stem a rising tide of foreclosures. Short sales eliminate the problem of negative equity and help alleviate fears that a second wave of foreclosures is in the pipeline. Only 12 percent of eligible homeowners have had their loans reworked, leaving millions more foreclosures to come. Lisa Marquis Jackson, a vice president at Irvine, California-based John Burns Real Estate Consulting says, “What they are trying to do is move some of these foreclosures in the pipeline, and bring them to a resolution before (foreclosure) happens. 12 percent of these being modified isn't enough to clean the[m] up.â€

How will these incentives help? Negotiating a short sale can take four to five months to complete, and buyers often walk away from sales because banks are slow to respond, or balk at the offer. The incentives will be calculated on recent declines of local home prices and average home prices in these markets, the Treasury said in May. They would add to other incentives that servicers can receive for reducing loan payments. In May, the Treasury proposed that lenders would receive $1,000 for allowing the owner to sell the house for less than the amount owed on the mortgage, and accepting the proceeds as full repayment. They will also receive $1,000 for accepting a similar deed-in-lieu transaction, in which the deed is simply transferred to the lender instead of going through a costly foreclosure. Borrowers who agree to short sales or deed-in-lieu deals can receive up to $1,500 in closing costs. Treasury also said it will pay second lien holders up to $1,000 to relinquish
their claims in such transactions.

Good news on winter heating costs

The U.S. Energy Information Administration (EIA) says the average U.S. household will pay 8 percent less in heating fuel costs this winter — a savings of about $84 — with natural gas and propane users enjoying the biggest drop in cost. All this is to cheaper fuel prices, plenty of fuel supplies and expected slightly milder weather compared with last winter. "Inventories of all heating fuels are currently well above levels seen at the start of last winter," the EIA said. The agency's forecast covers the U.S. winter heating season that runs from October through next March. Large fuel inventories will help mitigate any increases in energy prices if the winter is colder than expected. Winter expenses are forecast to be 11.8 percent ($105) lower for natural gas, 2.2 percent ($40) less for heating oil, 14.2 percent ($280) cheaper for propane and 2 percent ($20) less for electricity. At the same time, demand for natural gas is expected to be down 1.1 percent this winter, w
ith consumption of heating oil down 1.9 percent, propane down 0.6 percent and electricity up 0.1 percent, the agency said.

MBS purchase program winding down

The Federal Reserve has started to wind down its agency mortgage-backed securities (MBS) purchase program, announcing $2 billion fewer purchases for the week ending September 30, while a separate Fed program, the Term Asset-Backed Securities Loan Facility (TALF) continues to have a strong impact on the commercial mortgage market and has already pulled spreads lower. Through HAMP, the Treasury Department allots capped incentives to servicers who pursue modifications for borrowers at risk of delinquency. Many of those modifications still await permanent modification status within the three-month trial modification period used to determine borrower ability to repay modified terms. Recent analysis by Amherst Securities Group indicates it may take much longer than three months to determine the ultimate performance of HAMP modifications, as historic 12-month recidivism sit at about 70%. Amherst analysis of some 7 million loans “destined to liquidate†was not optimistic abou
t the ultimate success of HAMP modifications.

HomeSteps’ Closing Cost Assistance Program Ends Soon

Freddie Mac’s offer to pay a portion of the closing costs for house buyers in the HomeSteps program is about to expire. HomeSteps is Freddie Mac’s real estate sales unit that sells real estate-owned (REO) properties the government-sponsored enterprise (GSE) owns throughout the US, and under the SmartBuy program, Freddie will pay up to 3.5% of buyers’ closing costs when they purchase a single-family home through HomeSteps. The SmartBuy offer is a two year warranty on HomeSteps purchased properties, and includes electrical, plumbing, air conditioning and heating systems, as well as ductwork and many major appliances like water heaters, stoves, washer and dryers, dishwashers and refrigerators. But to take advantage of the closing cost offer, buyers must submit an initial purchase offer by October 30 and close by December 31, although the warranty offer will continue after the closing cost promotion expires.

Holiday sales expected to be down

The National Retail Federation (NRF) expects 2009 retail industry sales to fall 1 percent this year to $437.6 billion in the months of November and December. Last year, sales in the period fell 3.4 percent to $441.97 billion. If the decline does occur, it would mark the first back-to-back drop since the group began tracking such figures in 1992. "There's a lot of weakness in the consumer sector because of the employment situation, because there's no income growth and so consumer confidence is, I would say, wavering." The unemployment rate now stands at 9.8 percent, and that figure is "just not going to look better in the near term," Wells said. That will pressure holiday sales, she said, despite signs that the U.S. economy started to grow in the third quarter after four quarters of contraction. The year-end holiday shopping season is a critical one for retailers, and can account for 25 percent to 40 percent of full-year sales. The 2008 holiday was a disaster for retail
ers, as a financial crisis swept across the globe in September and consumers cut spending on nearly everything but bare necessities.

Now on to our real estate educational section...

Mortgage Modification Bill May Impact Foreclosures

The newly proposed “Preserving Homes and Communities Act of 2009†introduced by Senators Jack Reed (D-Rhode Island), Dick Durbin (D-Il), Sheldon Whitehouse (D-RI) and Jeff Merkley (D-OR) limits foreclosures and requires lenders and services to offer mortgage modifications if the net present value of the modification is anticipated to be greater than the foreclosure value.

Additional provisions of the newly proposed bill include:

• Limits on foreclosure fees

• Creation of a nationwide database to track foreclosures

• Strict penalties for non-compliant firms

• State sponsored mediation programs

• Grant money for borrowers struggling to make payments regardless of current mortgage product.

• Capitalize the National Housing Trust Fund with $1 billion in proceeds toward preservation and restoration of affordable housing.

While advocates of the bill cite the growing increase in foreclosure rates across the nation as evidence of the need for further intervention, critics of the bill believe it will increase the burden on banks and lenders while simultaneously reducing fees associated with delinquent accounts.
According to Moodys.com, mortgage defaults are expected to rise to as many as four million with more than a third of new defaults associated with prime fixed rate loans rather than the original sub-prime concerns. Currently more than one in every eight homeowners are at least one payment in arrears; the highest level since the Mortgage Bankers Association (MBA) began tracking the data.

How Could This Bill Impact Short Sale Investors?

Potentially in several ways...both positive and negative in nature.

1. New mandates may dramatically reduce the number and availability of low-ball offers on existing loans.

2. Availability of direct grants households via “targeted mortgage payment assistance†may delay or create additional layers of lien-holders on properties which eventually default.

3. Open funding for repairs and renovations in distressed neighborhoods or other areas which quality for Housing Trust Funds (buy now before the price goes up!).

For more information or to read the proposed bill visit http://reed.senate.gov/.