Could mortgage handoff cure foreclosure crisis?
But some say circumventing due-on-sale clauses won't be easy
By Steve Bergsman, Friday, June 11, 2010.
Flickr photo by woodleywonderworks.I'm not your typical homebuyer. The home I live in is the one I bought in 1981. I have not moved, although I've refinanced a number of times along the journey and I do own a second property that is a condominium rental.
Not being a serial homebuyer who constantly tries to move up to a bigger home has, quite frankly, put me out of the loop on a number of very basic issues.
For example, I didn't realize that home loans could no longer be "assumed" until I received an e-mail from one of my readers who had what he says was a way to solve the foreclosure crisis.
The reader, Steve Hicks, a broker with Keller Williams Realty in El Paso, Texas, wrote: "A simple solution that will stop at least 50 percent to 60 percent of all foreclosures today is the assumption of all federally backed mortgages.
"Allowing these loans to be assumed without qualifying will result in sales and transfers to buyers. The risk in nonexistent. These homes will go into foreclosure if there is no market for them anyway."
The idea made sense to me so I gave Hicks a call.
"It's not hard to assume a loan," he told me from his El Paso office, "it is just not doable because all of your deeds of trust on existing mortgages have a due-on-sale clause that says, if the owner sells any part of the property or even leases it for a period of longer than three years, then the lender can call the note due and payable in 90 days."
This is what I get for being out of the market for almost 30 years -- I didn't realize due-on-sale clauses had become a mandatory feature in mortgages.
The history of this phenomenon is quite interesting because it goes to the mindset of the banks: A mortgage is a money-making instrument and lenders want every single penny that could possibly be squeezed from the loan. That's OK -- it's their right to do so.
Back about three decades ago, when there was a major increase in interest rates and a 30-year, fixed-rate mortgage was carrying interest rates of 13 percent to 16 percent, assumptions were extremely valuable and widespread because if you could just take over someone else's existing loan at a 6 percent to 7 percent interest rate that would be so much more advantageous that having to get a new loan that was twice as expensive.
This trend line put lenders in a tizzy because an assumption was a sale that was beyond their control and over the long term was costing them money.
At first the lenders went to court to try to prevent assumptions, and when that didn't work they changed their practices and began to insert in all new mortgages due-on-sale clauses stating that if the property is sold, the mortgage is due -- even in the case of an assumption.
"The lenders put in that due-on-sale (clause) years ago to stop people from assuming mortgages," and it was self-serving for banks to do so, says Hicks. "It wasn't because it would hurt the loan."
For Hicks, one way to avoid foreclosures is to reinstate the ability to do assumptions. "The simplest way to do this is set aside due-on-sale clauses in all federally backed mortgages for one or two years," he explains. "If it works, expand the program."
It sounded plausible, but I decided to check in with an expert: Jack Guttentag, professor of finance emeritus at the Wharton School of the University of Pennsylvania and a fellow columnist for Inman News.
Although Guttentag says he understands Hicks' point of view, the whole thought of suspending due-on-sale clauses made him apoplectic.
First off, he exclaims, if the federal government suddenly steps in and says due-on-sale clauses are null and void, "it would mean the government would be getting involved in private contracts and that is so scary it would create a 'firestorm' of controversy.
"The lenders would have a conniption because what you are doing is having the government set aside private contracts. That would be viewed as really bad news."
On a more practical level, Guttentag notes, "the rule that exists now says that to allow a buyer to assume your mortgage, the buyer has to have acceptable credit and be approved by the FHA. If you change the rule and say any buyer can assume a mortgage, you are going to make assumptions a little more attractive."
But, he adds, that would impose new risks on the FHA and probably increase its losses. That's no small problem considering there are concerns the FHA's reserves are already considerably depleted.
(Older FHA loans can still be assumed if a buyer qualifies. In effect, the lender qualifies the buyer the same as if he or she was getting a new loan. There are some transfer fees involved, but they are not onerous. Otherwise, most FHA loans cannot be assumed.)
Of course, there's the most obvious problem: Many loans are underwater. I mean, who would assume a $200,000 loan when the house is now worth only $125,000?
That's not the point, says Hicks. Suspending due-on-sale clauses would not save those people who are holding mortgages that are worth far more than their homes, but it would be a lifeline to "marginal" foreclosures.
"In many cases that I see," he explains, "the owner has very little to no equity in the home. If (such owners) put it on the market for as much as they owe, they are going to have to bring a check to the closing to pay for all the fees.
"If you are dealing with owners who have lost their job or have had to move, they don't have the money for closing fees -- even if the house hasn't lost value. If someone could assume the loans, the owner could be saved from the closing fee and it could still be a better deal for the buyer than getting a new loan."
Steve Bergsman is a freelance writer in Arizona and author of several books, including "After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade."
***
What's your opinion? Leave your comments below or send a letter to the editor.
All rights reserved. This article may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of Inman News. Use of this article without permission is a violation of federal copyright law.
You must login or register to post a comment.
Submitted by Derek Eisenberg on June 11, 2010 - 4:54am.
It's a good idea but it is unlikely that the government will pass an assumption law. Already, the house tried last spring to permit cram downs in bankruptcy court under the same logic that making a loan perform is better than letting it fall into foreclosure. (note a cram down is where the bankruptcy judge is permitted to lower the loan balance to appraised value so the property is not upside down, the borrower has the incentive to hang on to the home and the payment is more affordable.)
Besides the 80s where rates were high and turnover was engineered to reissue the loans at a higher price, lenders want turnover in general. It adds another layer of liquidity to the investment above and beyond selling the loan in the secondary market. Recently the Fed stopped buying mortgage backed securities. What would have happened hypothetically if FNMA had collapsed and there was no secondary market? At one point for a short time, the Fed was the only entity willing to buy mortgage backed securities regardless of the secondary market. So turnover is just a fail safe to add another outlet for turning the money.
While I like the concept, it involves moving mountains. It's more realistic for lenders to just be encouraged by government regulators to selectively send letters to non-performing borrowers that assignments will be considered in lieu of a foreclosure, short sale or deed in lieu. The govt. might add this option to the HAMP/HAFA programs.
Derek Eisenberg
http://www.mls2u.com
Submitted by Sean OToole on June 11, 2010 - 8:35am.
Two thoughts:
1. There really aren't "marginal" foreclosures, at least in the states where most of the foreclosures are - like California. Here the average foreclosure is $200k underwater by the time the home is lost.
2. Jack Guttentag should know the government is already interfering in government contracts. The Protecting Tenants from Foreclosure Act of 2009 subjected lenders to a junior encumbrance (the remaining lease term) that lenders relied on being wiped out when they made their loan. Similarly government has imposed new notice requirements on lenders before they can foreclose, even requiring they participate in mediation. I think will find that is just the beginning as we are politically unwilling to either allow lenders to kick homeowners out, or bail homeowners out. Instead we mess around with contracts, extend and pretend.
Sean O'Toole
Founder / CEO
ForeclosureRadar.com
ForeclosureTruth.com
Submitted by Nan Wimmers on June 11, 2010 - 8:48am.
What an idea... in our community that would really help our sellers as they are in the "marginal" category. Home prices haven't drop so much that they are way under water just a few thousand and if they could pass the mortgage on and walk away that would keep these homes from coming back on the market as bank owned a few months to a year later! besides destroying the owners credit which with this option might be salvaged...
Nan Wimmers
Principal Broker/Owner
Columbia Gorge Real Estate
The Dalles Oregon
Submitted by Jon Astaris on June 11, 2010 - 10:16am.
I dont know if title insurance companies are willing to insure a "vendee's interest" in realty these days - if not, right there you have a great business opportunity, Steve!
The land contract s one way of getting around the problem. Another is a lease that renews automatically. Another is a sale escrow held open for years. The buyer moves in and rents "until close of escrow". There are other creative ways around the due on sale clause.
And, the banks are far too busy these days with defaults to worry about enforcing the clause anyway. There are only a couple of ways the lenders would be alerted. Those can be easily circumvented so they don't find out.
The gov't need not make the clause unenforceable - just tell Fannie Freddy FHA etc to look the other way.
Submitted by Tracey Thomas on June 11, 2010 - 10:23am.
I believe we'll see a huge increase in owner financing (title holding trusts) in the future. With the current short sale and foreclosure explosion, the next generation of buyers have wrecked credit and will need an alternative.
I am revamping my business model to accommodate this need for alternative financing. The Realtors who understand how to structure owner financing, whether it be a title holding trust, or some other type of owner financing will prevail in the future.
There is a secondary market for private loans, so structuring them correctly is critical for sellers. We're already seeing a great need for this type of financing in the luxury market as buyers scramble to find acceptable financing from banks and sellers sit and wait while prices continue to decrease.
This is the future of real estate! (I promise it will be much more fun than foreclosures and short sales)
Tracey Thomas, GRI, SRES, CDPE
Real Estate Broker
Keller Williams Realty
http//www.traceyrealtor.com
http://www.blogcalabasas.com
Submitted by Francene Grewe on June 11, 2010 - 1:11pm.
All the FHA loans I'm originating today still require a document to be signed that speaks to the assumability of the FHA loan; so this story was of particular interest to me - if only because there are more questions than there are answers. Hunting down the FHA guidelines, I found this in 4330.1 Rev 5
6-2 ASSUMPTION RESTRICTIONS IMPOSED BY HUD. HUD places certain
restrictions on the assumption of insured mortgages originated since
December 1, 1986. Depending upon when the mortgage was originated,
HUD or the DE mortgagee may have to review the credit of the person
seeking to assume the mortgage.
A. Mortgages originated before December 1, 1986, generally contain
no restrictions on assumptions.
B. Mortgages originated on or after December 15, 1989, require a
review by the mortgagee to determine if a creditworthiness review
of the assumptor is required. Some mortgages also contain
restrictions on assumptions when the assumptor will not occupy
the home as a principal residence.
C. Mortgages not included in Paragraphs A or B contain assumption
restrictions that have expired.
6-3 CREDIT REVIEW REQUIREMENTS
A. Policy of free assumability with no restrictions. If approval is
required by the mortgage, the mortgagee must not approve the sale
or other transfer of all or part of the property, or the sale or
transfer of a trust owning all or part of the property, whether
or not any person acquires personal liability under the mortgage
in connection with the sale or other transfer, unless:
1. At least one of the persons acquiring ownership is
determined to be creditworthy under applicable standards
prescribed by HUD;
2. The selling mortgagor retains an ownership interest in the
property; or
3.The transfer is by devise or descent.
B.For mortgages originated prior to December 1, 1986, no
creditworthiness restrictions apply to these mortgages unless the
seller requests a release from liability.
C.Mortgagees should note that some mortgages executed between
December 1, 1986 and February 5, 1988, contain a requirement for
creditworthiness review that is not enforceable. Mortgages from
this period are freely assumable despite any restrictions stated
in the mortgage.
1.The First 12 Months. The first 12 months after execution
(closings) of the mortgage if the original mortgagor was an
owner-occupant who purchased the property as a primary or
secondary residence; or
2.The First 24 Months. The first 24 months after execution
(closing) of the mortgage if the original mortgagor
purchased the property as an investment.
NOTE:The above time frames have expired. The information
has been printed for HUD's monitoring purposes.
3.Creditworthiness Review Required. Assumption
creditworthiness processing must be completed within 45 days
from the date the mortgagee receives all the necessary
documents.
D.Mortgages subject to the restrictions of the Department of
Housing and Urban Development Reform Act of 1989. The Act
applies to mortgages that are subject to:
1.A conditional commitment or master commitment issued by HUD
on or after December 15, 1989;
2.An appraisal report or master appraisal report signed by the
DE underwriter on or after December 15, 1989; and
3.A certificate of reasonable value or master certificate of
reasonable value issued by the Department of Veterans
Affairs on or after December 15, 1989.
4.Creditworthiness of the Assumptor. Either HUD or the DE
mortgagee must find the assumptor creditworthy. This policy
extends for the life of the mortgage and applies to:
a.mortgagors who take title to the property subject to
the mortgage without assuming personal liability for
the debt;
b.mortgagors who assume and agree to pay the mortgage.
5.Documentation Required For Creditworthiness Reviews. See
Chapter 4-4 of HUD Handbook 4155.1 REV-4, dated June 23,
1992, Mortgage Credit Analysis for Mortgage Insurance on
One-to-Four Family Properties, for additional information
about this requirement and additional provisions of the Act.
6.Creditworthiness Review Required. Assumption
creditworthiness processing must be completed within 45 days
from the date the mortgagee receives all the necessary
documents.
6-4 OWNER OCCUPANCY REQUIREMENTS AND EXCEPTIONS.
A.Investors And Secondary Residences. Mortgagees must not approve
the sale or other transfer of a property to a person who cannot
be approved as a substitute mortgagor because the property will
not be a primary residence or a secondary residence.
B.Investor Restrictions.
1.Assumptions involving a Release of Liability. An investor
who assumes a high ratio mortgage (1) originated by an
owner-occupant, and (2) pursuant to an original transaction
where the seller is being released from liability, must pay
down the mortgage to 75 percent loan-to-value (LTV) if the
original transaction involved:
a.a HUD Conditional Commitment;
b.a HUD Master Conditional Commitment;
c.a VA Certificate of Reasonable Value or Master
Certificate of Reasonable Value; or
d.an Appraisal or Master Appraisal signed by a direct
endorsement underwriter on or after February 5, 1988.
2.Private Investor Restrictions - Restrictions of The HUD
Reform Act of 1989. (Also See Paragraph 6-3D.) Private
investors may only assume HUD-insured mortgages under the
following conditions:
a.Section 203(K) rehabilitation mortgages where the
maximum loan-to-value ratio is 85 percent;
b.HUD-owned properties where the maximum loan-to-value
mortgage for a one-family dwelling is 75 percent and 85
percent for a two-to-four family dwelling;
c.using streamline refinancing without an appraisal;
d.a member of the armed forces who is unable to occupy
the property due to a duty assignment;
e.the ban on private investors does not apply to an
Indian tribe as provided in Section 248.
C.Secondary Residences. Restrictions Of The Cranston-Gonzalez
National Affordable Housing Act Of 1990. The Act prohibits HUD
from insuring a mortgage for a secondary residence and prohibits
the assumption of an FHA mortgage on property for intended use as
a secondary residence except for hardship exceptions approved by
HUD or under the conditions listed in Paragraph 6-4B2. This
limitation on secondary residences is effective for mortgages
insured:
1.pursuant to a conditional commitment issued on or after
January 27, 1991; or
2.pursuant to an appraisal report or master appraisal report
signed by a Direct Endorsement underwriter on or after
January 27, 1991; or
3.pursuant to a Certificate of Reasonable Value or Master
Certificate of Reasonable Value issued by the Department of
Veterans Affairs on or after January 27, 1991.
D.Secondary residence means a dwelling:
1.where the mortgagor maintains or will maintain a part-time
place or abode and typically spends (or will spend) less
than a majority of the calendar year;
2.which is not a vacation home, and
3.which the Commissioner has determined to be eligible for
insurance in order to avoid undue hardship to the mortgagor.
A person may have only one secondary residence at a time.
E.Undue hardship means that affordable housing which meets the
needs of the mortgagor is not available for lease, or within
reasonable commuting distance from the mortgagor's home to his or
her work place.
F.Vacation home means a dwelling that is used primarily for
recreational purposes and enjoyment, and that is not a primary or
secondary residence.
6-5 ENFORCEMENT OF CREDIT REVIEW AND OWNER-OCCUPANCY REQUIREMENTS.
A.Due-On-Sale Clause. Each mortgage must contain a due-on-sale
clause permitting acceleration. If a sale or other transfer
occurs without mortgagee approval and a prohibition in CFR
203.512(b)(c), the mortgagee must enforce this requirement by
requesting approval from the local Field Office to accelerate the
mortgage provided that acceleration is permitted by law.
B.The mortgagee shall accelerate if approval is granted. This
applies only if the application by the mortgagor is dated on or
after December 1, 1986.
C.Acceleration of the Mortgage. The mortgagee must contact the
local Field Office for guidance with respect to acceleration of a
mortgage if HUD assumption requirements are not met and the
homeowner cannot or will not comply with HUD's requirements at
the time the assumption is discovered.
6-6 RELEASE OF LIABILITY.
A.The mortgagee must release a selling mortgagor from any personal
liability for payment of the mortgage debt, if permitted by CFR
203.258, and in accordance with the following procedures:
1.the mortgagee receives a request for a creditworthiness
determination for a prospective purchaser of all or part of
the property;
2.the mortgagee performs a creditworthiness determination if
the mortgagee is approved for participation in the Direct
Endorsement program, or the mortgagee requests a
creditworthiness determination by the local Field Office.
3.the prospective purchaser is determined to be creditworthy
under the standards applicable when a release of the selling
mortgagor is intended;
4.the prospective purchaser assumes personal liability by
agreeing to pay the mortgage debt; and
5.the mortgagee provides the selling mortgagor with a release
of personal liability form.
Submitted by Dawn Rickabaugh on June 11, 2010 - 5:28pm.
I agree that it is highly unlikely that banks will set aside DOS provisions, and unpalatable to have government interfering any more than they already are.
The latest SAFE Mortgage Act has side-swiped personal property rights by prohibiting owners of residential properties from offering seller financing on their own non-owner-occupied properties without a Mortgage Originator's License. Hope this one gets straightened out - it's very harmful to the real estate market and the note business and unduly restricts free trade and commerce.
With the acceleration clauses in loans, the Powers That Be are setting up everything to be illegal or fraudulent that doesn't involve new loan origination by banks. We'll make it hard for you to owner finance if you have equity, and we'll threaten you with acceleration if you leave your loan in place for the next buyer... you have to come to us for financing (but we won't give it to you if we don't feel like it).
Banks are making fewer and fewer loans, but they're lobbying hard to make sure you don't have creative options without feeling like a renegade.
How 'bout we bathe and shave 'creative financing' and put it in a nice black tux so it can stand in pleasant company and enjoy a nice glass of wine while making intelligent conversation? Why keep 'creative financing' the domain of slimy investors that slither through the dark rooms of desperate sellers and sneak around the system?
There is definitely a place for alternative deal structuring and financing, but it must be done legally, ethically and intelligently with full disclosure of short and long term risks involved.
My whole niche is helping people decide which, if any, seller financing strategy is right for them when they have equity and/or attractive financing in place, or when deferring capital gains is the main concern.
Dawn Rickabaugh, Broker
The "Note Queen"
Owner Financing Consultant/Note Buyer
http://www.NoteQueen.com
Submitted by Linda Eaton on June 18, 2010 - 5:29pm.
In 1985 Arizona saw foreclosures take a huge increase due to assorted problems, economic and political (the Governor was eventually impeached). What kept the housing market from completely imploding was assume/no qualify loans. As a long time Arizona agent I think it should be seriously considered again.