HAFA, homeowners underwater until 2010

HAFA is here as of  April 5, 2010.  This is Important if you are in Real Estate.

Short sales are already picking up in the distressed-property market, and the trend is expected to explode in coming weeks, when the government starts handing out cash to encourage lenders to close these deals. “Banks have ramped up short sale approvals,” said Duane Legate of House Buyer Network. “They’re hiring a lot of the people who once worked in the mortgage-lending industry and moved them over to short sales.”  Short sales accounted for 17% of all residential real estate sales in February, up from nearly 13% in November, according to a monthly real estate market survey by Campbell/Inside Mortgage Finance.

And Bank of America, the country’s largest mortgage servicer, has more than doubled the number of short sales it processed in recent months.  This is a huge change from even just six months ago when the short-sale market was stalled and most people would describe the process has real estate hell. Because lenders stand to lose so much on these transactions, they have been reluctant to make short sales happen, often waiting months before getting back to potential buyers.  But that has been changing.

For one thing, banks realize that they make out far better financially with a short sale than a foreclosure. “The lenders lose 50% on a foreclosure and only 30% on a short sale,” said Glenn Kelman, founder of the real estate Web site Redfin. “And short sales offer a way to get distressed properties off their books quickly.”  And on April 5, lenders and mortgage investors will have even more incentives to offer troubled borrowers short sales instead of foreclosing.  Under the new Home Affordable Foreclosure Alternatives (HAFA) program, borrowers will earn a $3,000 “relocation incentive” and servicers will get $1,500 for handling a short sale.  The investors who actually own the mortgage notes will get $2,000 in exchange for sharing proceeds of the short sales with any second-lien holders. And, finally, those second lien holders will receive up to $6,000 for releasing their claims. Lenders participating in the program must also determine the market values of properties early on
and inform the owners of just what price they’re willing to accept. Then, if owners come back to the lenders with bonafide offers, they have to be accepted within 10 days.

What’s in HAFA?

The coming boom in short sales may accelerate the end to the foreclosure crisis by cleaning out the overhang of borrowers in distress and replacing them with more stable homeowners.  Plus, these sales are better for distressed borrowers because their credit scores suffer less. Going through a foreclosure can knock 200 points off a FICO score, twice as much as the penalty for a short sale.  I’ll provide details as they come along, but here’s a primer from the National Association of Realtors (NAR):

-  Complements HAMP by providing a viable alternative for borrowers (the current homeowners) who are HAMP eligible but nevertheless unable to keep their home.

-  Uses borrower financial and hardship information already collected in connection with consideration of a loan modification.

-  Allows borrowers to receive pre-approved short sales terms before listing the property (including the minimum acceptable net proceeds).

-  Prohibits the servicers from requiring a reduction in the real estate commission agreed upon in the listing agreement (up to 6%).

-  Requires borrowers to be fully released from future liability for the first mortgage debt (no cash contribution, promissory note, or deficiency judgment is allowed).

-  Uses standard processes, documents, and timeframes/deadlines.

-  Provides financial incentives: $1,500 for borrower relocation assistance; $1,000 for servicers to cover administrative and processing costs; and up to $1,000 for investors for allowing a total of up to $3,000 in short sale proceeds to be distributed to subordinate lien holders (on a one-for-three matching basis).

-  Requires all servicers participating in HAMP to implement HAFA in accordance with their own written policy, consistent with investor guidelines. The policy may include factors such as the severity of the potential loss, local markets, timing of pending foreclosure actions, and borrower motivation and cooperation.

DSNews.com – Treasury to sell Citigroup shares

The U.S. Department of the Treasury announced Monday that it is ready sell off its 27% ownership stake in Citigroup.  Treasury said it plans to fully dispose of its 7.7 billion shares of Citigroup common stock over the course of 2010. The shares were acquired under a June 2009 agreement between Treasury and Citi, which allowed the bank to exchange the preferred stock the government received for its bailout into common shares and made taxpayers the company’s largest common shareholder.  The Treasury’s $25 billion original investment in Citi now carries a market value of $33.2 billion. According to Thomson Reuters, it would be one of the biggest stock deals in history, bested only by the 1987 stock offering of Japan’s Nippon Telegraph and Telephone, which raised $36.8 billion.  Treasury officials say they intend to sell off the Citigroup common shares “through various means in an orderly and measured fashion,” and noted that the timing of the disposition would be depe
ndent on market factors.  The planned sale does not affect Treasury’s holdings of Citigroup trust preferred securities or warrants for its common stock, which were acquired through bailout transactions. But when the deal does go through, it will represent a major step for Citigroup in severing its ties to the federal government.

Home prices firm up

In January the Standard & Poor’s/Case-Shiller 20-city home price index fell just 0.7% from last year on a seasonally adjusted basis, showing the smallest annual decline in almost three years.  The index reading of 146.32 was almost in line with analysts expectations, according to a survey by Thomson Reuters.  Better still, prices rose 0.3% from December to January, the eighth consecutive monthly gain. Among the 20 cities in the index, 12 rose.  “The housing market still has something of the blahs,” David Blitzer, an S&P managing director, told CNBC in an interview. “It’s a mixed report—one or two cities going better than last month—but overall ‘flat’ is probably a better description.”  The index, released Tuesday, is up nearly 4% from its bottom in May 2009, but still almost 30% below its May 2006 peak.  Many analysts expect that the Case Shiller number will eventually turn downward.  “It is only a matter of time before the index records a double-dip in prices,” wrote Pau
l Dales, U.S. economist with Capital Economics, who forecasts a 5% drop. The market will be tested in the second half of the year, he wrote, when a tax credit that has boosted sales is gone.

Half of all commercial mortgages to be underwater

Elizabeth Warren, chairperson of the TARP Congressional Oversight Panel, says that by the end of 2010 about half of all commercial real estate mortgages will be underwater.  “[The mortgages] are [mostly] concentrated in the mid-sized banks,” Warren told CNBC. “We now have 2,988 banks—mostly midsized, that have these dangerous concentrations in commercial real estate lending.”  As a result, the economy will face another “very serious problem” that will have to be resolved over the next three years, she said, adding that things are unlikely to return to normalcy in 2010.  Speaking on troubled mortgage lenders, Warren said it’s time for the government to “pull the plug” on mortgage lenders Fannie Mae and Freddie Mac.  “I’m one of those people who never liked public-private partnership to begin with. I think what they did was use public when public was useful and private when private was useful,” she said. “And I think we’ve got to rethink that whole thing
.  There is no implicit guarantee anymore,” she added. “I don’t care how big you are, if you make serious enough mistakes, then your business can be entirely wiped out.”

Underwater till 2014 – 2020

First American CoreLogic estimates that the typical US homeowner who is in negative equity will not experience positive equity until late 2015 to early 2016. In severely depressed markets, the typical borrower in negative equity may not experience positive equity until 2020 or later.  CoreLogic projects more than 11.3 million — or 24% — of all residential properties with mortgages had negative equity at the end of the Q409. While the largest decreases in home prices appear to have already happened, it remains to be seen when borrowers will return to positive equity.  To predict how much long borrowers will remain in negative equity, CoreLogic projected future home values and unpaid principal balances for a selected set of Core Based Statistical Areas (CBSAs) to gauge how long it will take for the average underwater borrower to return to positive equity.

According to the projections, it will take the typical borrower until late 2015 or early 2016 for negative equity to disappear. But in severely depressed markets, like Detroit, negative equity won’t dissipate even by 2020, because of its depressed economy. Negative equity is widely considered a trigger to strategic default, and a Treasury Department program announced Friday attempts to address the problem by pushing lenders and servicers to offer borrowers principal reductions on their mortgages.  And although house price appreciation will, over time, offset negative equity, amortization — the paying down of loan balances — will in most cases be a more significant remedy to negative equity, a research note from CoreLogic economists states. Over the next 10 years, the average loan balance will decrease by an annual rate of 3.3%; meanwhile home price are expected to increase at a 3% annual rate over the next decade, they claim.

Now on to our real estate investing education section …

How Healthcare Reform Will Impact Real Estate Investors

Short sale and foreclosure investors probably have given little consideration to the impact of healthcare reform on their profit potential but that could be a big mistake. In fact, tax experts agree the newly revised healthcare reform bill could have a rather large impact on your bottom line. Learn how the new healthcare reform bill will impact short sale investors and how to position yourself for maximum success.
Cost of Mandatory Coverage

The current healthcare reform bill mandates that every American must purchase health insurance. Premiums will be the responsibility of each individual with a cap based upon individual earnings. So, what will this mandatory coverage cost? Apparently the sky is the limit for those of a higher income but even households of modest means are likely to see significant insurance premiums based upon the following table.  Remember, the current poverty level for 2 people is currently $14,500 and for a family of four $22.050

If you make up to 133% of poverty level you will pay 2% of income for the basic insurance policy.

If you make 133% up to 150% you will pay 3.0% to 4.0%
If you make 150% up to 200% you will pay 4.0% to 6.3%
If you make 200% up to 250% you will pay 6.3% to 8.05%
If you make 250% up to 300% you will pay 8.05% to 9.5%
If you make 300% up to 400% you will pay 9.5% to 9.5%
If you make more than 400% of the poverty level there is no cap on what you will be responsible for paying in order to purchase a mandatory insurance policy.

So, what does this mean for short sale investors? For those that “flip” properties, and make at least 300% of the poverty level, mandatory coverage will consist of at least 9.5% of you income.

Expanded FICA Tax on Rentals & Dividends

Of course, this doesn’t mean all is well for those that use short sales to purchase rental properties or other long term “buy and hold” strategies…an additional 3.8% FICA tax will go into effect for rental income, dividend payments and other income generating returns. Remember, this is in addition to the cost of purchasing a mandatory health insurance policy that will easily cost nearly 10% of your annual earnings or more. An average American household earning 300 percent of the poverty level (a mere $45,000 for a family of two and only $75,000 for a family of four) will pay insurance premiums of $4,000 to $7,000 annually plus an additional 3.8% FICA tax on rental income or dividends….excluding co-payments, deductibles and other out of pocket medical expenditures! Savvy real estate investors will begin positioning their portfolio’s now to maximize deductions and limit liabilities.

For the Moment, In the Moment,

Your Friend, Christian Yepez, Investor

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