EDITOR’S NOTE: Now Banks are facing the consequences of their own wrongful actions in originating, servicing and foreclosing on homes. They are carrying property on their balance sheet as “real-estate owed” (REO) when in fact they don’t own it, they never financed it and they never bought any receivable coming out of it.
In turn, the inflated appraisals, defective mortgages have left homeowners with the need and desire to get or take what they can from the house before the “Bank” moves in.
Instead of correcting the problem and enabling an economic recovery, the government is compounding the problems, essentially increasing leverage again through loan guarantee on homes that can’t support even today’s prices. Rolled into each 30 year loan under the 203(k) program are unrecoverable costs of replacement of appliances, carpeting and window treatments that the prior occupant took with him.
Same old Same old. Those that fight for their homes will get, collectively, better results than those who don’t. But the majority of homeowners don’t know or don’t care whether they have remedies and real defenses to foreclosure, much less counterclaims for amounts that are multiples of the principal balance on the mortgage claimed to be enforceable.
The title problems that will come up over the years will also be an interesting show to watch as legislatures are pressed to reset the title chains artificially to make up for the fact that the mortgage before was invalid, the note was invalid, the obligation was not in default, and the owner of the obligation didn’t want to get involved in the messy foreclosure market.
The failure of a creditor to submit a credit bid combined with the fact that nobody paid cash means that the auction was conducted out of bounds and that any title derived from the auction process is at best problematic and most probably fatally defective, meaning that the old homeowner still owns the property and the new buyer is sliding into den of snakes.
Financing Foreclosed Homes
By MARYANN HAGGERTY
FORECLOSED homes don’t show very well — financially strained borrowers may ignore maintenance; lenders turn off the water and power to cut the cost of letting the place sit. A poor appearance can complicate financing, but it doesn’t prevent sales.
Most of what people call foreclosed homes are being sold by lenders saddled with a property because there were no other takers at the foreclosure auction. The borrower on such a house owes more on it than the house is worth. These are known as R.E.O. houses, short for “real estate owned” on a bank’s balance sheet.
Distressed properties — those sold at a discount — made up 40 percent of resales in March, up from 35 percent a year earlier, according to the National Association of Realtors. (That includes not only R.E.O. but also short sales, in which a buyer pays less than the loan balance, once it gets the bank’s blessing.) Though not a record, it is a huge portion of sales compared with what used to be considered normal.
Where the money comes from depends on the buyer and the property. If a house was in relatively good physical shape — with water and power turned on — it could be eligible for standard financing.
Otherwise, right now, all-cash sales are at their highest level ever — 35 percent of total sales, according to the Realtors. Cash buyers, often investors who don’t plan to live in the home, “are a major player in the R.E.O. market,” said Tom McGiveron of Realty Connect in Hauppauge, N.Y., a real estate agent who specializes in foreclosures on Long Island. “Asset managers want to move their portfolios as fast as possible,” he added.
For would-be owner-occupants without cash, the federally insured 203(k) loan is key, said Mark Yecies, the president of SunQuest Funding in Cranford, N.J. Borrowers can roll projected rehab costs into the loan.
As Mr. McGiveron put it, “Since most R.E.O.’s are as is, and the heat, plumbing and electric are turned off frequently, a 203(k) loan is necessary to cover the borrower and the lender — a lender will not lend money on a home where the major heating and electrical systems are not operable.”
Buyers generally hire an independent consultant certified by the Federal Housing Administration to review contractor cost estimates and architectural plans for things like whether the work will bring the property up to minimum standards while not going overboard on improvements.
“In other words,” Mr. Yecies said, “if you’re buying a home in Newark and you want to put in a Viking range, it’s not going to happen.”
Yet in a higher-priced neighborhood like Short Hills, N.J., he added, you probably would be able to borrow for more upscale appliances. The F.H.A. appraiser takes the consultant’s report into account when reviewing a property and determining how big the loan can be.
Not all R.E.O. properties are eligible, Mr. Yecies pointed out. For instance, a partially built house that has never had a certificate of occupancy requires a construction loan of the kind that a commercial developer would use.
Mr. Yecies estimated that an F.H.A-certified consultant would cost $500 to $1,200, depending on the extent of the repairs and the number of units in a property.
The interest rate on a 203(k) loan is about a quarter of a percentage point higher than on a standard F.H.A.-insured loan, and a buyer also can expect to pay 1 or 2 points, he said. (A point is an upfront charge equivalent to 1 percent of the loan amount.)
As with other F.H.A.-backed loans, down payments may be as low as 3.5 percent, and loan limits apply. Currently, most F.H.A. loans in the area are capped at $729,750. (Energy-efficient rehabs may be eligible for more.)
Despite the extra steps, these loans work, Mr. Yecies said. “We’re doing a half dozen a month here,” he said. “They can be done in a normal period of time, as long as everyone cooperates.”
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