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Updated about 16 years ago, 12/02/2008
Please 'splain it to me like I'm 12 years old.
I do not wish to criticize, but I have found the Norris Group's postings (here and elsewhere on the Internet) to be long on theory and short on detail. It was claimed at another board that lenders exist for end buyers and that these lenders don't require seasoning in order to use new value for a subsequent purchase. When asked specifically for the names of such lenders, there was no response.
If hard money is used for end buyers to purchase a flipper's property, what's the end buyer's down payment requirement, FICO score/credit history, what is the interest rate charged to the end buyer and for how long? If the interest rates are typical for hard money lenders (double digit), how is the end buyer going to afford the resulting monthly payment and for how long?
I would like to see, in clear detailed language, with dollar figures, how the purchase-auction-sale of a typical flip works. I'm really weary of real estate gurus claiming you can flip your way to millions when the practical reality is that major obstacles exist.
New Wells Fargo Bank policy:
Process to Document Valid Increases in Value
Effective with new registrations on or after December 15, 2008, Wells Fargo Wholesale Lending will require that properties with increases in value during a short period of time (0 – 24 months) must include the following requirements to document the validity of the increase in value.
• Reason for the increase: The appraisal must include the reason for the increase. The explanation provided must support the amount of the increase. The appraiser’s comments need to be specific and detailed. Photos and evidence to support the value must be provided. Vague comments such as “the market values in the area are increasing†or “subject has been remodeled†are not acceptable.
• Documentation to support the increase: The file must also contain documentation to support the increase in value, such as proof of increasing values for the market, documented home improvements (along with the improvement contracts and receipts). The amount spent to renovate or improve the property does not automatically equate to an equal value increase.
If the property is in an area with a Market Classification 2, 3 or 4, or the appraisal indicates the property is in a declining market: The reason for the increase in values will only be allowed if significant improvements have been made or the borrower purchased the property under a distressed sale or non-arm's length/at-interest transaction and the above requirements have been met to substantiate the amount of value increase for the market.
If the increase is unsupported or the documentation to support the increase is not provided, the decisioner should use the lower of the original documented purchase price, auction/ foreclosure bid/value or the new appraisal value to determine LTV/TLTV/CLTV.
As we know, the credit markets are contracting. There are essentially only five viable, well-capitalized lenders from which end buyers may obtain a mortgage.
We can all sleep again, knowing that the big boys are stable, and together control 67% of the mortgage market in terms of receivables on first and second liens. Here's how the servicing numbers shake out in terms of market share: Bank of America (21.68%), Wells Fargo (17.65%), Chase Home Finance (15.09%), CitiMortgage (8.49%) and Residential Capital LLC (4.14%).
As you can see, however, these big boys are calling the shots per the new Wells Fargo guideline posted above. They're saying (essentially), "You want us to eat how much on that REO property? And then you're going to resell it for how much more value? In a declining market? Uh, prove it."
Forewarned is forearmed.
Wholesale Capital Corp says they can do conventional loans and haven't had an issue with seasoning yet. http://www.wccmtg.com/
Appraisals are what are starting to cause issues, but the lenders are the ones dictating to the appraisers if they get it wrong they're on a black list.
I emailed a few other people we know in the business from other areas to see what they say.
The only property we flipped recently without rehabbing is in escrow with an all cash buyer so will not apply to this conversation unfortunately. That was the test one I mentioned on the other thread. All the rest have had big improvements and are FHA.
More to come.
Thanks, Aaron.
I'm going to do a survey of the five lenders above. A prospective end buyer should be quizzed as to with whom they're applying for a conventional loan. The $64,000 Question is: "To which major funding lender is your lender selling the loan?" If it's not one of the five above, title seasoning is a big question mark.
(Wholesale Capital Corp. is an "Agency (Fannie/Freddie) conduit lender." Because they don't lend their own money, their fortunes probably follow one of the five lenders above.)
Aaron, who's "Ed?"
Other lenders that reportedly have no title seasoning issues are:
Stearns Lending, Inc. (wholesale)
4 Hutton Centre Dr. # 500
Santa Ana, CA 92707
Paramount Residential Mortgage Group (wholesale)
77933 Las Montanas Ste 103
Palm Desert, CA 9211
So now we have several:
Chase
Citimortgage
GMAC
Paramount Residential Mortgage Group
Stearns Lending
Taylor, Bean & Whitaker
Wells Fargo Bank
Wholesale Capital Corp.
(Josh, would you consider making this thread a sticky?)
Sorry about that, Ed from Wholesale Capital Corp looked into the issue. I am waiting to hear back from two other lenders from LA.
I think the number of lenders above is a good start but here's what happens:
The first time a lender suffers a "buy back" because the underwriter didn't adequately document a flip, the lender simply makes a corporate decision to make 6-12 months seasoning the rule and not the exception. It'd be a good idea, then, in my opinion, to add to and keep this list updated. There's bound to be an end buyer who gets stuck in escrow by a skittish lender that has had its hand slapped by Fannie or Freddie.
This issue is extremely scary. If lending becomes that much of an issue, banks will see even worse losses because no investors will be able to participate. Whether they would like to think so or not, we play a big role in this market. If all they have as comps are REOs and shortsales, prices will continue to drop.
It must be noted that investor speculation manifest in fraudulent appraisals and dubious "rehabs" majorly led to the pitiful situation in which we now find ourselves. To say that investors are now the market's savior is stretchin' it, in my opinion.
Nonetheless, good on us all if we can benefit from this mess by becoming filthy stinkin' rich. :-)
Who, except investors, are going to buy houses that have broken windows, missing a/c units, filthy carpet, vandalized, copper stripped, etc. and turn them into homes that people can live in and love and raise a family again. I know that almost all of the agents I know that are working with buyers want a move-in ready house. So it is the investors that are helping clean up neighborhoods, stabilizing comps, and providing affordable, safe housing. A little idealistic…maybe. But history has shown that investors play a large part in revitalizing neighborhoods after down markets, much like vultures are essential to the ecosystem of cleaning up carrion. (Wow, bad analogy!)
Summerhomes, you're right...there's nothing more gratifying than turning a decaying home into a dwelling in which families can live with pride.
On the other hand, there are thousands of "rehabbers" who don't approach their work with such pride. I've seen these homes. Recently a customer of mine purchased a home where a toilet had been installed inside the shower! Pathetic!
The problem of incompetent investor speculation has become such a burden that an organization has been formed to combat the ill effects of snatch 'n grab investors.
National Association of Responsible Home Rebuilders and Investors
http://www.foreclosures.com/pages/member_signup.asp
You can now sign up for free. :-)
Here are the goals of the National Association of Responsible Home Rebuilders and Investors. Perhaps they resonate with you.
National Association of Responsible Home Rebuilders
and Investors (NARHRI)
Outreach to Investors
by John Grant - July 2007
When NARHRI was first formed, we believed that one of our highest priorities was to provide this industry with the means to properly defend itself, and that meant filling the gaping hole in terms of gathering information about legislation throughout the country. NARHRI believes that it is our obligation and responsibility to inform the industry about the legislative and regulatory challenges facing them. NARHRI has done so through our report that is available to members only.
A report from 2006 can be found on our website as an example of how we track legislation. Investor clubs that are serious about learning how the states are regulating the industry can sign up to join NARHRI online at www.narhri.org or contact Executive Director John Grant at (202) 232-6708 for more information.
For the last two months, NARHRI has distributed its member updates and alerts to state investor clubs around the country in order to raise awareness about our efforts. As we continue to expand, NARHRI is optimistic that the number of state investor groups who become members will increase, and in turn promote NARHRI to their respective individual members.
NARHRI provides weekly updates and timely member alerts on the most critical state issues facing the industry, and also offers members at the appropriate level access to our State Legislative Tracking Report. This report contains information and links to legislation introduced in all 50 states, and intelligence on lobbying efforts NARHRI is conducting in the states.
State Legislative Campaigns
North Carolina: HB 1708, a measure that would end "subject to" transactions in the state, has been referred to a subcommittee of the Senate Judiciary Committee. NARHRI has already been in contact both the chairman of the committee and the subcommittee (see our letters online at www.narhri.org) and continues to work with the committee on the measure. Budget issues are currently at the top of the agenda for the Senate, so as of now the bill that would require an affirmative letter from lenders to permit investors to engage in subject to transactions is not scheduled for a hearing.
NARHRI lobbyist Guy Rohling and Executive Director John Grant are closely monitoring developments in the state and working with lawmakers to prevent passage of this measure, or to significantly amend the bill. The legislature in North Carolina is not expected to adjourn until September, so there is still a significant amount of work yet to be done on behalf of investors. NARHRI also plans to implement our CARES Program in the state later this year as a way to improve the image of the industry and educate lawmakers about the benefits investors provide consumers and the economy.
New Jersey: NARHRI Executive Director John Grant is sending a letter to the New Jersey General Assembly this week regarding several pieces of legislation under consideration in the state. The letter will be sent to members and posted on NARHRI's site. NARHRI lobbyists are beginning their work on the ground in the state as well. NARHRI will provide additional updates on developments in New Jersey as circumstances warrant.
Massachusetts: NARHRI is currently working in Massachusetts in response to the Attorney General's prohibition on certain transactions and subsequent legislation that would codify the regulations issued by the AG's office. NARHRI is not arguing the position Massachusetts is taking in terms of prohibiting leasebacks to owners, however, NARHRI has serious concerns about the potential scope of language under consideration in Massachusetts that would restrict additional transactions and services.
In addition to our lobbying efforts, NARHRI has also sent several letters to officials in the state that are available online at www.narhri.org. NARHRI plans to send an additional letter to the Division of Banks this week offering comments on the Mortgage Summit report and the ensuing legislative recommendations made by the agency. The letter will be sent to our members and posted online. NARHRI will keep our members aware of developments regarding our efforts in the state, but as of now it appears likely that the legislation will pass "as is." However, there will be three opportunities to amend the legislation before it heads to the governor.
Outreach to State Attorneys General
NARHRI is undertaking a new effort to improve the image of the industry with those who have the most influence over how we are regulated. NARHRI is formally requesting an audience with the National Association of Attorneys General, the Democratic Attorneys General Association, and the Republican Attorneys General Association to educate state AGs on the benefits of the industry and to provide solutions on how to remove unscrupulous investors from the industry. NARHRI will update our members as this effort develops. NARHRI believes that this outreach, along with our CARES Program, is the most effective way to alter some of the recent negative developments facing the industry and to preserve the victories that we have achieved.
State Legislative Leaders/Website Changes Nearly Complete
NARHRI is continuing its effort to secure State Legislative Leaders ($25,000 annual contributors) in order to meet the state and federal legislative needs of the industry in 2008. National and regional speakers, corporations, industry data providers, and large state REIA groups are all solid potential targets for this level of membership. NARHRI has made excellent progress in marketing this membership level in the past couple months, but we need to fill more SLL slots in order to engage in an effective, multi-state campaign legislative campaign in 2008, and to implement the CARES Program in more states.
Given the recent events in Massachusetts and the type of legislation under consideration in several more steps, the need to support NARHRI has never been greater, and we are hopeful that those who benefit most from the industry will sign on as State Legislative Leaders. For more information about this level of membership, please contact Executive Director John Grant at (202) 232-6708.
On a different subject, NARHRI's redesign of its website is nearly complete and should be online within the next week or two. The new site will make it easier for visitors to learn more about our efforts, and to spread the word about NARHRI.
John P. Grant
Executive Director
National Association of Responsible Home Rebuilders and Investors
http://www.narhri.org
1444 N St. NW Suite A2
Washington, DC 20005
Office: (202) 232-6708
Cell: (202) 607-7580
[email protected]
To round out this discussion, I thought I would post an informative article about "risk overlays."
In addition to adhering to reps and warranties* imposed by their investors, lenders may impose additional conditions to further insulate themselves from the possibility that they may have to buy back a loan. Lender risk overlays have emerged as a result of the credit crisis. For a loan originator, they’re hard to keep up with. One may think they have automated underwriting approval, only to learn that the particular lender also has risk overlays with which to contend. Here’s an article that partially explains risk overlays in a cynical but humorous way.
Also, the Calculated Risk blog is worthy of bookmarking, in my opinion.
Automated Underwriting Systems: "We Will Add Your Distinctiveness to Our Collective"
http://tinyurl.com/6xor86
* The short definition is that investors require lenders to adhere to specific representations and warranties when selling loans to them in the secondary market. If the lender funds a loan outside the reps and warranties AND THE LOAN GOES BAD, the lender must buy the loan back—which is definitely something they do not want to do. If lenders must buy back very many loans, they’re out of business.
Caitlyn, follow the foreclosure data. Go through foreclosure lists and check and see how many were owner occupied and which were not. Then see how many of those are 100% financed. Consumers (with the help of lenders, Realtors, Wall Street, etc.) became speculators at a much higher rate. We still follow trustee sale data so we see these numbers.
Speculator does not equal professional investor! If consumers wanted beat up stuff we wouldn't be buying homes that have been on the market for over 300 days.
Since Caitlyn is a stickler for data, which I can appreciate, here’s the numbers for Riverside County today.
The following numbers are for Riverside County and the data is from County Records Research. Out of 117 homes on the list, 11 were non-owner occupied and the remaining 106 were owner occupied. Non-owner occupied only make up around 10%.
Or 9.4% to be mathematically correct!
I agree with the consensus that the problems in the lending and re world today were caused in part, by many aspects with many parties to blame, including lenders, RE agents, government, lending brokers, some investors, many owner occupants, etc. etc. To say that investor sare to blame is not even close to the truth. To say that speculators are to blame is not much closer.
If we wnat a label for an all-inclusive, then "greedy bastards" should encoumpass them all.
Aaron Norris wrote: Consumers (with the help of lenders, Realtors, Wall Street, etc.) became speculators at a much higher rate.
This is a good point, but renter-turned-"speculator" is also a recent phenomenon. Perhaps the banking community should have this fact brought to their attention, because they're basing their bias on past eras when investor-speculators were a much higher percentage of purchases gone bad.
For example, investors--not owner occupants--ruined the FHA 203(k) rehab loan program, so it was closed and remains closed to investors.
All loans are risk priced, which is why non-owner occupant loans are priced higher than owner occupant loans. Faced with imminent financial danger, it's a well established fact that a property owner will let his investment properties go to foreclosure before the house he lives in. Likewise, an owner who owns no other property will run through his savings to save the roof over his head before the investor will go broke saving his rental properties. This is reality. Don't shoot the messenger. :-)
I acknowledge that not all investor-rehabbers are greedy bastards but are responsible businessmen and women providing a valuable service.
It could also be FHA 203K served its purpose for the last down cycle. I'm sure HUD/FHA would like to blame it on investors ruining the program but I think they used investors to help with the glut of foreclosures (which they did) and then realized they didn't need us anymore. Besides, a market that is exploding in price and that has 100% financing doesn't require too many 203k programs or FHA for that matter. No body wanted FHA. Everybody knew in 2004-2006 if they held a house for one quarter the price would appreciate and they could refi to another teaser rate loan, take more money out to do fixes or leverage for more buys, and then also by boats and airplanes. OK, maybe a slight exaggeration.
Risk pricing is a renewed concept that’s been put back into place. Banks are actually looking at where you work and if you have money. Go figure.
Aaron Norris wrote: It could also be FHA 203K served its purpose for the last down cycle. I'm sure HUD/FHA would like to blame it on investors ruining the program but I think they used investors to help with the glut of foreclosures (which they did) and then realized they didn't need us anymore.
I'm good friends with Joe Hirsch, a 40+ year employee of HUD who went to the private sector as a 203(k) consultant.
http://www.cmprlaw.com/pdf/PPD%20Brochure.pdf
Joe told me at the time that the 203(k) program was shut down solely due to investor fraud.
Anyway...since this thread is all about being proactively aware of end buyer funding sources, I thought I'd pass along this remarkable claim of funding. I don't know this guy, so this is not an ad.
Can't get your borrower to qualify by himself? We accept cosigners and Non-Occupying Co-Borrowers (conforming and jumbo)
Purchases
Rate & Term
Cashout
We still do Stated--salaried only
Salaried--780 score up to 90%--purchase or rate-and-term
Salaried--740 up to 80%--purchase or rate-and-term
Salaried--780 score up to 60%--Cashout
No limit on the number of financed properties if our subject is a primary residence
Send us your DU/DO & FHA fall-outs. We do business in CA, NV & AZ
For accurate pricing please send over your FNMA 3.2 file and credit report.
Michael A Giacone
Wholesale Manager
Residential Mortgage Banking
1761 East Garry Avenue, Suite 200
Santa Ana, CA 92705
Phone (800) 261-5290 x32
Mobile (714) 928-1572
Fax (949) 269-9142
Note that this lender doesn't care how many financed properties the borrower has so long as its loan is the borrower's primary. Why? Because when the borrower's personal fit hits the shan, an owner occupant loan is less risky than an investor loan.
Aaron Norris wrote: Risk pricing is a renewed concept that’s been put back into place.
Just a "fun fact to know and tell." So called "risk-based pricing" has long been used in industries such as auto financing and other consumer loans such as credit cards. It's a relatively new method of predictive lending that obviously didn't serve the mortgage industry very well.
How risk based pricing came into existence in the late 1980s is partly explained in this article by Jack Guttentag, who formed a company (GHR Systems) that helped the mortgage industry utilize risk based pricing.
What Market Niche Are You In?
http://tinyurl.com/3qvm
Jack's a good friend of mine. I supported him with industry info/data during the start-up of the Upfront Mortgage Brokers Association.