By KARIN ROBISON
Editor’s note: This guest perspective, by a real estate broker and former remote asset manager, proposes a foreclosure prevention program that re-envisions lenders as landlords and underwater homeowners as renters. Inman News wants to hear from you about personal experiences working with distressed properties and opportunities to remedy this foreclosure mess. Click here for details on how to participate.
When foreclosures started increasing in number, the top reason was that lenders were giving too much to too many without proper checks and balances — sometimes fraudulently, but more often within the lax underwriting practices at that time.
The second reason was that buyers were using their home as ATM machines, borrowing more and more because they could, and in some cases with no intention of ever making the first payment, let alone subsequent payments. They even flipped homes with no value added — right at the closing table — with no controls imposed. With ever-rising unemployment rates and devalued investments, that picture has changed dramatically.
As someone with firsthand working knowledge, I suggest that lenders have consistently been behind the curve in loss mitigation, even before the stock market debacle of Oct. 10, 2008, and remain so even now, because these behemoth companies are the ocean liner President Obama likens to the U.S. vs. a speedboat, and shifting gears is a multifaceted and slow process.
Statistics bear out that losses attributed to bank-owned properties (REOs) average 50 percent or more of borrowed value, while loss severity in successful loss mitigation is less than half that number. Loss mitigation is certainly now the focal point from the president on down the line, but lenders need to look much further.
From Fannie Mae to national lenders and trickling down from there, some light is shining (albeit with weak batteries) on renting REO properties, with lender as landlord.
To get ahead of the curve though, that ocean liner needs to address the masses not yet in loss mitigation or foreclosure, but who may soon be in arrears if this large group is ignored while chasing others with damage control that is too little, too late.
What better way to see even more foreclosures, with properties whose declining sale prices are already making the market and resetting our home values in this downward spiral than to ignore the next group to default and just hope for the best? And what about the multitudes who actually have a low loan-to-value ratio? Their only hope is to see the decline slow down and eventually stop.
A buyer’s market is by definition comprised of fewer buyers than sellers, and even at clearance prices lenders can’t give some homes away in severely blighted areas. Investors can find something better for just a few dollars more right down the block, and these properties certainly don’t qualify for owner-occupant financing.
The government’s Home Affordable program reaches some, but not enough. Earlier cram-down legislation didn’t provide the answer, but what about a modified version: something that helps anyone who has suffered a reduction in household income or is just upside down? If lenders are willing to be landlords, rather than potentially sitting on more nonperforming assets, why not offer land contracts at slightly higher than current market value … in exchange for a deed in lieu of foreclosure?
This arrangement would give qualifying borrower/owners the opportunity to have an equitable interest in the property while they lease it from the lender, with the right of first refusal at the end of the land contract term. In the meantime, the lender is the owner.
Borrowers still need shelter and will rent somewhere if that’s their only option. If all goes well, the lenders might even have new customers for life when the land contract is up.
In a perfect world, the borrower-turned-lessee can buy back the property at what the borrower and lender agree to as the worth of the home one to two years from the land contract’s execution, but understandably at an interest rate reflecting the amount of risk and probably lack of a sizable down payment. …CONTINUED
If a borrower has a loan outstanding for $250,000, and the house is now worth only $200,000, for example, maybe they agree on $210,000 to $215,000 as the purchase price in 24 months.
During that time, the borrower can get employment and finances back in order, and then close on the house at the agreed-upon price — or move out voluntarily, with the lender finding a new buyer and avoiding foreclosure costs.
In addition, the lender also gets the same tax advantages as a homeowner (except the homestead tax rate), which the lessor forfeits during this time. The house is not vacant and deteriorating, the lenders get good publicity for even having such a program, and they seriously curb their losses as compared to the default process as it stands now.
There has to be some sort of a nonrefundable option fee/down payment upfront from the borrower to make this work. Lenders need the borrower’s financial buy-in at the outset to reduce the number of people just walking away at the end of the term, so it won’t work across the board.
As with any solution, it won’t help everyone and there is plenty of room for abuse, but from a loss severity perspective the statistics favor the lender because the majority of qualified "purchasers" would honor their obligations if given a second chance.
But if it helps even 10 percent of troubled assets, that’s a big dent. There is no one-fix-all solution, but when you keep doing what you’ve been doing, you get what you’ve got!
How many people can’t afford their current mortgage or mortgages anymore, but could afford to rent their same home if rental income were based on current values? If a borrower can stay in the home, everybody wins. Homes won’t sit vacant, becoming a blight on the community, and plummeting values will slow.
There are no closing costs and borrowers will be able to get stress relief while retooling their situation — and they may even have money to put back into the economy.
The lender now owns real property without the burden of property management, versus just holding a bad note, and needs to screen only one applicant. The tax benefits of holding real estate for more than one year are enormous, and potential foreclosure costs are removed from the equation while leaving eviction as a remedy if needed.
Depending on state foreclosure time lines, with redemption states being up to six months in addition to the initial foreclosure timeline, how much will lenders save in loss severity if borrowers now voluntarily call them versus dodging the lender’s communications for months on end?
Public education is another missing link. State government and local communities need to engage local loan officers and real estate professionals to guide willing new buyers through the entire process from how to purchase, to what happens when payments get behind, or foreclosure looms. Who among us read the fine print of the mortgage note during our first closing (or any of them)?
We were in the honeymoon phase, not thinking at all about a possible divorce! It’s a tall order to get participation by those who need it most, but it’s worth the effort for the public to know their obligations and rights before they start viewing homes and "fall in love." Our schools teach our pre-middle-school children about the effects of substance abuse and violence via programs like D.A.R.E. (Drug Abuse Resistance Education).
Why not make one to two semesters of "Your Financial Life 101" mandatory for high-school graduation — we might see a new generation that does not view entitlement as their birthright.
Karin Robison, of Gurnee, Ill., is a real estate broker who works for Socio Homes in Barrington, Ill. She is a former remote asset manager, REO department manager for a subprime lender, and buyer’s agent.
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