David’s Real Estate Blog
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Mortgage Meltdown FAQs

What is the Mortgage Market Meltdown?

This refers to a culmination of factors that has led to massive tightening in credit standards among lenders. This tightening is due to an excessive number of mortgages that are both delinquent and in default. As a result of tighter credit standards and the devaluation of mortgage-backed securities, global investors are shying away from purchasing additional pools of loans, causing over 100 lenders to close and leaving many homebuyers and homeowners unable to locate financing alternatives.

Why should a real estate SELLER be concerned?

The pool of potential buyers will shrink as many individuals find it difficult, if not impossible, to obtain mortgage financing. Experts have speculated that the number of potential buyers will contract anywhere from 15%-30%. Sellers should also be aware that increased foreclosures can depress community values and result in a glut of local inventories, which could further drive down home prices.

So how many foreclosures are there?

According to www.foreclosures.com, there are currently 1,447,451 homes in pre-foreclosure; 832,281 homes are currently set to go to auction; and 1,217,885 homes have already been taken back by the lender. The number of homes in the foreclosure process as of July 2007 is double what it was as of July 2006.

What types of loans have been most impacted by credit tightening?

Subprime and Alt-A have suffered the greatest setback because these borrowers are at greater risk for defaulting. Subprime loans are those loans which have typically been taken by borrowers with poor credit. Alt-A type loans are for borrowers that typically have good or excellent credit but are unable or unwilling to provide documentation for income and/or assets.

What is the impact on the real estate market?

The National Association of Realtors estimates that home sales nationally will decline by nearly 13% in 2007. Median home prices nationally are projected to fall by 1.2% in 2007. According to the PMI Group, Inc., however, many local markets are experiencing price declines well in excess of that, up to a high of 11.44% in Miami. States that have experienced and will continue to face the greatest declines are California, Florida, Arizona and Nevada.

What should sellers and buyers do now?

Sellers should be realistic about home prices – the high prices of 2004 and 2005 are a distant memory. Home prices have taken a fall, and for those with houses currently available for sale, reductions may be in order to generate activity and offers. Sellers should demand that any offer from a buyer be accompanied by a pre-approval from a local mortgage professional.

Buyers need to be pre-approved – and frequently – as mortgage availability can change drastically, in some cases even daily. This is particularly true for those borrowers who have poor credit or are unable to provide income and/or asset documentation. Buyers should meet with a mortgage professional today to seek a pre-approval. They should be prepared to provide income and asset information including: two years of tax returns, including all schedules, W-2s, 1099s, up to three month’s worth of liquid asset statements, and their most recent pay stubs.

What types of loans are NOT being impacted by this crisis?

Loans that are offered and treated as conforming type loans, traditionally under $417,000 in most states, although that number may be higher in some states. In addition, government loans including those offered by FHA and VA have not been impacted to date. For these loans, it is typically a requirement that a borrower provide full income and asset documentation.

Can’t sell your house? Use persuasion — in the form of money or lucrative handouts. Here are some popular buyer incentives available in today’s buyer’s market:

Down-payment help: As home prices hold steady and credit tightens, more buyers are hard-pressed to put money down on a home. A little help with the down payment can help them over this hurdle.

• Mortgage buy-down: Are your buyers nervous about their prospective monthly house payments or the interest rate on their loan? You can lower both by buying down their mortgage; each point you pay equals 1 percent of the loan amount. First-time buyers or young families can often use the help to free up cash to furnish their new home.

• Homeowner/condo association dues: Welcome your buyers to the neighborhood by springing for their first year of association dues.

• Maintenance fees: If the buyers will be contracting for lawn maintenance anyway, or if they will be required to do so in your community, paying a year of their maintenance fees is money in the bank for them. The same applies to a year of pool service.

• Home warranty: As the cost of service calls increases, a year of home warranty coverage is becoming a commonplace incentive to attract buyers. Typical policies cover service to the home’s interior plumbing, HVAC, appliances and fixtures such as lights and fans. Typically excluded are pools, hot tubs, sprinkler systems and attic fans. Their only expense: a per-call fee, usually around $60.

• Closing costs: What buyer wouldn’t welcome some help with those teeth-gritting closing costs (legal, title, filing fees, etc.) that, according to a Freddy Mac estimate, typically run between 2 percent to 7 percent of the loan amount?

• Landscaping: Springing for a few shrubs, new turf or other landscaping features can help a buyer feel right at home.

• Leave a treasure behind: Some home furnishings, especially those custom-made to fit a part of your house, can be profitably sacrificed if they help close the deal. After all, you likely know where and how to get another one. If the buyers are smitten with it, they may be more inclined to meet your terms if you agree to leave that prized puzzle piece in place.

Countless seminars and how-to books promise to turn even the most novice buyer into a high-powered real estate investor through the magic of foreclosed homes. The trouble is the dream of instant, safe, trouble-free wealth often turns out to be like most things that sound too good to be true — a scam. If easy money was to be made, everyone would be getting rich off of foreclosures.

True, some people do, just like some people get rich in the stock and commodities markets, oil wells and foreign currencies. But, just like these other forms of investing, profitably buying and selling real estate takes research, knowledge, experience, money and time. And nearly every deal with a huge profit potential also comes with an appropriately sized risk.

Beyond get-rich-quick seminars and informational classes offered by nonprofit agencies and local sheriff’s offices, few, if any professionals are available or willing to teach novice investors the ins and outs of foreclosure sales. Why should they show you how to buy a great property at a deep discount instead of doing the deal themselves?

Still, if you are willing to go it alone and invest the time and cash required to deal in foreclosures, your first step should be to understand the process as thoroughly as possible.

The basics
Foreclosure is the legal method by which lenders or governmental agencies take properties from owners who fail to make payments, and then resell those homes to recoup money owed them.

Nonpayment of a mortgage or home equity loan is the most common reason a home gets foreclosed, but it is far from the only reason. But people could also be facing a foreclosure because of a balloon payment, not paying property taxes, not carrying enough insurance, or even failing to keep the property in good working condition, says Rande Johnsen, a trustee for Trustee Corps in Irvine, Calif.

There are three distinct phases of foreclosures, each with its own advantages and each fraught with peril.

The 3 phases of foreclosure:

• Preforeclosure: The time between when the homeowner has stopped making payments and when the land is actually put up for sale at auction. Investors take this opportunity to deal directly with the homeowner. • Auction: When the courts seize the property from the homeowner and sell it to the highest bidder. The county sheriff or a trustee handles this process, depending on the state. • REO: If the property fails to sell at auction, or if the lender ends up as the highest bidder, the home becomes "real estate owned" (REO) by the bank. Banks then try to sell these REO properties on the open market, often through a real estate agent or third-party marketing company.

Often these homes are sold to buyers who don’t even know they are buying a foreclosure and go through the entire process as they would with any other home.

Going once …
The typical foreclosure is literally bought on the county courthouse steps during a sheriff’s auction or a trustee’s sale. These auctions are typically held on a weekday morning, and bidders must come to the sale armed with information and flush with cash or its equivalent. Plastic, personal checks and IOUs are almost universally shunned at auction and, depending on where you live, investors usually must make a sizable deposit or pay the entire sum on the spot, says John T. Reed, editor of Real Estate Investor’s Monthly newsletter and author of the book "How to Buy Real Estate For At Least 20% Below Market Value."

Details vary widely by state, but as a rule, prospective buyers are not allowed inside the house before bidding begins. This is a frightening concept for many buyers, who must lay down thousands of dollars in cash upfront without knowing anything about the home beyond what is available through basic public records searches and a curbside appraisal.

The house could be infested with termites, gutted to the rafters by previous residents or filled with lead paint or asbestos, and a buyer wouldn’t know until after the sale is final.

This as-is aspect of auctions is only part of what can make foreclosures so perilous for beginning buyers. Another is that these homes can never be guaranteed to come with a clear title.

"You can never be absolutely sure you are going to be buying a house with a clean title in any sale, but foreclosures are particularly problematic," says John Mixon, law alumni professor at University of Houston Law Center.

During a typical foreclosure auction, the homes that will be sold are listed in the legal advertising section of the county’s newspaper of record at least a week before the sale. And while you may have a week to research the records and history for each house scheduled for auction, many homeowners settle their disputes with the bank at the 11th hour, halting the sale. This means any time, effort or expense you invested to research the home is lost. Given these constraints, obtaining title insurance is out of the question.

But choosing to forgo title research could end up being infinitely more costly. "There are so many regulations, so many procedures that if you leave out a step, a previous owner may come out of the woodworks and show this to the court and you lose everything you put into the deal," says John T. Reed, editor of Real Estate Investor’s Monthly newsletter and author of the book "How to Buy Real Estate For At Least 20% Below Market Value."

Even if a title blunder doesn’t invalidate the sale, overlooking a lien that wasn’t wiped out by the foreclosure, such as an IRS debt you now have to pay, could wipe out any profit you hoped to earn. Procedural errors and court rulings could also halt a foreclosure sale. What’s more, some state laws include a statutory redemption period, allowing the original homeowner to repay the past-due amount on their loan, regain ownership and leave the investor holding the bag.

Not all hopeless
But all that doesn’t mean every auction deal is hopelessly risky.

"Very few institutional foreclosures are defectively handled," Mixon says, so the best bet is to stick to homes that were foreclosed by reputable lenders, but only if they were the first lien holder, usually through a first mortgage. If the deal was done properly on the front end, complete with title insurance, there’s less likelihood that a skeleton is lurking, and about a 90-percent chance of getting a good title. "If you are buying a foreclosure brought by a small or shady lender or by a family member who lent the money, you may be looking at odds that are no better than you would get at the roulette table," Mixon says.

Government auctions
Another variation on the auction is buying properties foreclosed by a government agency, such as the Department of Housing and Urban Development or the Veterans Administration.

These auctions are typically conducted online through a marketing company. Buyers are allowed to tour the homes in advance, conduct inspections and can often get title insurance.

While these auctions are appealing, the availability of homes is limited and the small stock is often bid on by several buyers. This makes it a very competitive market with prices discounted only slightly, if at all, off current market value.

Tabletop negotiations
One purchase method advocated by numerous seminars and real estate gurus is to find property owners delinquent in their payments through legal ads or online services that search public records and courthouse documents. You could then approach the owner directly to negotiate a private deal.

Advocates of this method call it "buying equity." Essentially, investors pay the owner a fee and then take over the existing debt and the home. This keeps protects the homeowner’s credit report from the black mark of foreclosure.

Buying equity this way is difficult if a seller’s market exists because the owner could just as easily sell the home and usually pocket a greater amount in appreciation than an investor would be willing to pay.

"Some people call this stealing property," Reed says. "It is a situation fraught with ethical problems."

But similar to auction situations, the slightest slip-up could blow the deal, leaving the homeowner in the house and the investor out significant amounts of money. Also, all of the title problems inherent in an auction also apply in preforeclosure sales, except that without the legal proceedings of a foreclosure, all subordinate liens, such as home equity loans and construction liens, remain in place.

Sale mentality
Despite all the potential pitfalls, interest in foreclosures runs high. Part of the attraction comes from the same motivation that makes bargain shopping trendy, says C.J. Gehlke, editorial director of "The Resource," a monthly newsletter published by REO Nationwide.

"What you find is a frenzy similar to what you get at a department store sale," she says. "When you buy a house at foreclosure, it has the same mystique. You can brag to people at a cocktail party about how much you saved."

Reed agrees that get-rich-quick fantasies are driving most buyers’ interest in foreclosures. "Buying foreclosures is not something a beginner should try. Many of the gurus are out there telling crowds anything they want to hear, true or not, just to sell some books."

I have just read an interesting article in RISMedia about GMAC Financial Services, which should be a bit of good news for first-time and low income homebuyers.  Click to read this article.  GMAC will be providing volunteers and financial support to Habitat for Humanity affiliates in Philadelphia, Pa and Camden, New Jersey.  The end result will be the first “low-income, LEED-certified homes in Philadelphia,” For those of you who do not know, LEED stands for Leadership in Energy and Environmental Design.  These LEED-certified green homes will be sold to low-income homebuyers through zero-interest mortgages.  Other sponsors of this project include GlaxoSmithKline, JP Morgan Chase, Nationwide, the Patrick J. Monaghan Foundation and USAIR, who are currently finishing seven three-story homes in East Parkside.

GMAC’s ultimate goal is to create safe affordable housing for low-income buyers.  They are convinced that this is a positive step towards “supporting the communities where we live and work, and we know that homeowners play a vital role in building safe, strong and healthy communities.”  With the average cost of a home far beyond the reach of many families in the country, especially first-time and low income buyers, GMAC’s gambit should be very welcomed in the communities where they are working.

Increased affordability through the use of energy efficient building materials and appliances is the vision of GMAC and Habitat for Humanity of Philadelphia.  By utilizing environmentally friendly practices, they hope to foment a change in the way homes are built in Philadelphia and provide high quality cost effective homes.  LEED-certified green homes incorporate innovative building materials and methods in order to save homeowners money over the long term.  Energy efficient appliances and building materials also help to reduce greenhouse gas emissions and indoor toxins such as mold and mildew.

However, Philadelphia and Camden are just the beginning.  Habitat for Humanity affiliates across the continent are teaming-up with GMAC Financial Services and GMAC ResCap to provide funds and volunteers to build and refurbish hundreds of homes in the U.S. Canada and Mexico.  This, along with GMAC’s support of literacy and homeownership programs, including foreclosure prevention programs, will go a long way towards helping low-income homebuyers realize the “American Dream”.

Are you currently thinking of buying a home in Delaware County or Chester County, Pennsylvania?  Have you browsed My Featured Listings yet?  I currently have 5 active listings in Briarcliffe, Drexel Hill, Springfield, Greenbriar at Thornbury and Upper Providence Township.  These great homes start as low as 155,900 for a 3 bedroom with 1.5 baths to over $650,000 for a 7 bedroom with 3.5 baths and guest quarters.  My website also features an MLS search option where you can search for just the right home for you and your family.

It is a good time to buy in these areas of Pennsylvania.  Like many areas across the United States, the inventory of homes for sale is currently greater than the number of qualified buyers; as a result, this area is in what is called a buyer’s market.  That is great news for buyers, however, if you want to make sure you get the best deal, it may be a good idea to hire a buyer’s representative with extensive knowledge of local real estate markets.  An experienced buyer’s representative can use their skills to help you find the right home and make sure you do not pay too much.  For more information about real estate in Delaware County or Chester County, Pennsylvania including tips for home buyers, be sure to check out my website, http://davidhillsold.com/.  And, if you need further assistance, or would like to set up an interview to see how I can represent your interests better than the competition, regardless of whether you are buying or selling, please contact me, David Hill.  

In real estate, closing the deal has two meanings. The first is actually getting a buyer to sign on the dotted line. The second is closing the transaction, and getting title to change hands. Let’s see how that is accomplished.

You’re selling "by owner" and have found a purchaser ready, willing, and able to buy your home. You go to a real estate agent or attorney who draws up a sales agreement and everyone signs off. Now what?

There are 5 more steps that a "by owner" seller must go through in order to close the deal. Since there’s no agent involved, it’s up to you to do these.

• Open Escrow
• Follow the buyer’s progress in securing financing
• Clear title
• Deal with disclosures and inspections
• Sign the deed and close escrow

It’s not necessary to follow these in exact order, although the first obvious thing to do is to open the escrow. This starts the process of searching the title to be sure there isn’t a hidden lien somewhere. (A lien is typically a loan or other debt that encumbers or prevents the title from being cleared–these rarely turn up, but when they do, it’s up to you to go back to the lender and get them cleared.) Escrow can be opened simply by bringing the sales agreement to an escrow officer.

You’ll also want to keep track (by phone calls) of the buyer’s progress in getting financing. Presumably the buyer gave you a pre-approval letter showing that financing was available. Now, the buyer has to perform, and get the lender to make the loan. Any hitch or breakdown along the way means that the buyer might not be able to get the mortgage necessary to make the purchase, and that could break the deal. If the deal can’t be made, you’ll want to find out as quickly as possible and get the house back on the market.

Of course, you’ll need to disclose to the buyer (as required by your state or the purchase contract) defects in your property, and deal with the buyer’s professional inspection as well as a termite and pest inspection (and other reports that may be required). If serious problems turn up, you might have to make repairs, or even renegotiate the price or terms of the deal.

It may sound like a lot to do, and in some transactions it can be, but it usually goes fast. A typical closing today lasts only about three or four weeks. (The reason is that lenders can quickly make decisions and fund loans electronically.)

Soon the escrow company will call and say they are ready to close the deal. The down payment and closing costs from the buyer are in escrow and the lender is ready to fund. All that remains is for you to sign the deed. You go down to escrow, see your closing statements and learn the actual amount of money you’ll get out of the sale, then sign the deed. A few days later escrow closes and you get your check.

TIP

Don’t get so involved in closing the deal that you forget to make plans for your own move. If you’re buying another home, its closing should be tied to that of your old house so they close simultaneously. You’ll need to arrange for utility turn- offs and -ons as well as movers. Moving is the other side of closing!

As soon as you put your home up for sale "by owner," you can expect to start getting some traffic through it. If no one else, your neighbors will want to come by to see what you’ve done to fix up your house -they’ll be comparing it to theirs and judging how much they can get when they sell!

Chances are you’ll also get some real estate agents who may come by. They may say they’ve got buyers looking for a home in your area and, if they bring a buyer by, would you pay them a "selling agent’s commission." This is usually half a regular commission, so if you’d regularly pay 6 percent, they’re asking for 3 percent. I usually suggest agreeing since it can make for a quick sale and you’ll still be saving half the commission.

Finally, hopefully, you’ll get some actual buyers who come by to see your home. They may have seen your sign, or your advertisement, or your listing on the Internet. They’ve called to say they want to see your home, and now they’re here.

GET BUYERS TO SIGN IN

While it may seem so obvious that it’s hardly worth mentioning, one of the biggest mistakes that people selling by owner make, is to overlook the "sign in" register. It’s very important that you get everyone who comes to your house to sign in. You should have a notebook or register near the front door so that as people come in, they can list their names, addresses, and phone numbers and, very importantly, the date. You want to say something such as, "Have you signed in, yet?" If you ask as they enter, almost always people will sign your register. If you wait until after they’ve seen your house, they may simply leave.

One big reason to get lookers signed in, is so that you can call them back. Buyers rarely purchase on their first visit. And sometimes all that it takes to peak their interest and get them to come back (and hopefully make an offer), is a phone call. Call them up, ask them if they have any questions, and start a conversation. It could lead to a sale. But, you can’t do it if you don’t know who came by and if you don’t have their phone number. Be sure to call neighbors, too. While they may not be interested themselves, they may have friends who are. And you can compose a list of agents from your register, in case you want to list later on.

EXCLUDING BUYERS

A second big reason to sign people in, is that if you do later list with an agent, you can use the names from your register to exclude buyers. You can say you’ll pay the agent a commission for buyers he or she brings by. But, if the buyers first saw the home while you were selling "by owner," they’re your buyers, you’ll deal with them directly, and no commission is due. This is why it’s important to get as much information on the buyers as possible, including the date they saw your home.

TIP

Keep your sign-in register until you sell your home and escrow closes, or for at least six months if it doesn’t sell. It can be a great resource that you can refer to, sometimes calling potential buyers back at 1 or 2 month intervals to see if they’ve changed their minds and would like to reconsider and see your home again

"Co-broking" is a term that has special meaning for those selling "by owner".

First off, it is "co-broking," not co-brokering. As those in the field know, this refers to agents sharing a listing. For example, an office with a listing will "co-broke" with another office, which may have a buyer. If there’s a sale, the agents will split the commission.

When it comes to selling "by owner", it is possible, even desirable, for you as the seller to co-broke your own property.

But, you may be wondering, how can I do this when I’m not an agent? The answer is that when you’re selling "by owner", you’re performing the functions of the listing agent (or, at least, you should be!). You’ve put a sign in front, you’re advertising, you’re taking phone calls, you’re showing the property and on and on. Therefore, you can claim the equivalent of half the commission.

In a typical real estate sale where there’s a 6 percent commission, the listing office gets half the commission (3%). The other half (the other 3%) goes to the selling office, the agency that produces the buyers. Your half is the same as the listing office’s half, when you deal with an agent while selling "by owner". Here’s how it works:

WHEN A BROKER HAS A BUYER

Often, an agent will call a FSBO seller and say that he or she has a potential buyer for your property. They will ask if you’re willing to co-broke? What does the agent mean?

What the agent wants to know is whether or not you’ll give them the selling office’s share of the commission? In other words, if they bring in a buyer, will you pay them a half, or a 3 percent, commission? (As noted, since you’re doing the work of the listing office, you’ll be keeping the other 3 percent.)

If you’re agreeable, they’ll usually want you to sign a short term listing (typically a day or two), to protect themselves, and then they’ll produce the buyer. If you sell, you’ll owe them that 3 percent commission.

SHOULD YOU DO IT?

I would. Many "by owner" sellers are purists. They are determined to pay no commission at all. They hope to find a buyer on their own.

If you feel this way, more power to you. But, keep in mind the odds are stacked against you. The majority of purist by-owners, fail.

On the other hand, why not go with a bird-in-the-hand? A broker who has a buyer for your property could mean a quick sale. And you’ll still only be paying half the usual commission. Just beware of a broker who might run a "pretend" buyer through your home hoping to trick you into signing a long-term listing. (This would be unethical conduct on the part of an agent.)

TIP

Don’t expect the selling office to do your work for you for half a commission. They won’t want to handle disclosures, run your end of the escrow, help you clear title or all of the other work that a listing office normally does. For that, they will want a full (5 or 6 percent) commission.

On the other hand, don’t do this work yourself, and still end up paying a full commission!