Good Intentions

This was a post was copied with the poster's permission from Trulia.com advice.

(A) church orchestrated a purchase of a single family home to be used by the senior pastor. About three years ago the church’s Board of decided to purchase a single family home adjacent to the church. At the time since the church was financially burdened, they decided to purchase the property under a junior pastor’s name. During the no-down payment and no income verification era, a junior pastor who only makes $1,000/month was approved and was able to purchase a $680K home now worth $550K, which he handed over to the senior pastor. For the last three years, the church has been paying the mortgage payment of around $1,700 (option-arm loan.) The church is still paying the payment and is willing to continue making the payment. Now the junior pastor is saying that the Board tricked him into this and wants out. How can the church be able to assume the loan w/o paying the negative equity? What should we ask the lender to do? Isn't the bank better off transferring the loan?



When I initially read this post, thoughts raced thought my head. The poster was in Oakland about 20 minutes from where I do business. Close enough to know what is going on there but far enough away to not be involved. In the heyday when Walnut Creek values were high theirs were out of sight. When we were seeing 10 offers on homes they had 30 offers. Prices were through the roof. It was a sign of the times, good times for the agents but not so much for the buyers.

As the peak neared innocent people started pulling together to find innovative solutions to their individual housing problem. Like this example, they worked together, discovered a solution, and solved the problem. Like life, everything goes well until it doesn’t go well anymore. The irony here, of course, is the innocents are member of the church, who pulled together to help the senior pastor.

Some variation of the proverb “The road to hell is paved with good intentions” was coined by Saint Bernard of Clairvaux (1091-1153). I am sure he wasn’t talking about a real estate transaction but I would suggest he may have been the first church attorney. Let’s examine how these innocents stepped over the line.

Everyone for noble reasons allowed the innocent's to purchase a property without the income to support a loan. This business was a common practice; everyone was doing this sort of business. The innocents put one of their own up to get a loan. A loan broker sold (now this is really ironic) them a liar loan of some kind. Some mortgage bank underwrote the loan. Some agent sold them the property. Some seller made some cash.

Then the chips came falling. Prices fell. Accusations are flying. The loan is no good.

Now they are now caught between the law and the bank. The freely admit to finding a (unqualified) buyer to purchase a property on behalf of a financially burdened entity. This process is called finding a straw buyer. The practice as it is commonly known has to be handled carefully in order to avoid falling into the category of unethical or even illegal. In order for the transaction to function properly, all parties need to be made aware the buyer of record is an intermediary, the intermediary buyer has to be qualified to purchase the property, and paperwork has be in order. At best the church is on the hook for the full amount of the loan, at worst its fraud.

The innocents now need help and are looking for ways to reduce the basis of the property. I advised them to seek counsel.

The point of this post is not really to demonstrate how easy it was to step over the ethical and legal lines. It’s that the characterizations of important people and talking heads do not reflect the reality of the last few years of the real estate boom. These people were permitted by a unregulated and broken system to take a risk; a risk that offered a reasonable upside but returned a whole lot of trouble. They were innocents that had a need, who found a solution, and became a statistic.

I sent a client who is early on the path to trouble to his lender to try to do a ‘Help for Homeowners’ loan restructuring. This was the first failed attempt by the government to stem the tide of foreclosures late in last administration.

She would be the latest prospect I had sent to an attorney, an accountant and back to the bank. Her situation is this and generally the same with the other prospects who ran that gamut. She bought when prices were high. She had sold a condominium and put minimal down payment on a house with a conventional loan. When the home price spiked she was sold a negative amortized loan from a friend and pulled cash out. Years passed, the value of the home dropped 50%, and the interest rate reset so that the interest only optional payment is 50% of her take home income.

The attorney told her she is on he hook for the difference should she sell. Having good credit, she saved a nice little nest egg for a young woman in her 30’s and would do fine if she could correct the loan problem. She wants to protect her credit but in order to do so she has to get out of the loan.

Since banks are not refinancing people whose loans are in excess of their home values and they are not giving loans to people who would be paying in excess of 50% of their net take home pay. Every month the negative amortized portion of the loan is added to the loan basis, in other words she is going further underwater. Right now, this woman in on the path to losing the home. It’s not a mater of ‘if’ it’s a matter of ‘when’ unless something changes.

We discussed the ‘Help for Homeowners’ plan. The jist of the program is to help people stay in their homes by restructuring the values to current market prices, with reduced loan basis and fixed rates, but you give as little as 50% of your equity to the bank. Don’t worry about the accuracy of these specifics because the details are as irrelevant as the program. I advised her to give it a try.

She called Indymac Bank and asked about their ‘Help for Homeowners’. Yes, I said Indymac. The bank the federal government owns….THE BANK THE FEDERAL GOVERNMENT OWNS! They told her she had to be 45 day’s late on her mortgage payments in order to qualify.

She called me asking if she should make her tax and mortgage payments. Unfortunately I am licensed and couldn’t tell her what the smart thing to do was.

I am now sending her the specifics of the Obama plan. I’ll keep you posted.

First Real Estate Rant

You have to hand it to those people in Washington. We have about the 5th attempt to reinvent this real estate market. Billions of dollars being pumped into banks to prop them up and all the while the politicians throw snowballs at the avalanche.

So here is my story and I will update it on a periodic basis. I was making crazy dolalrs as a flipper. I did see the top and sold off my junk at a nice profit (I have the 50k tak bill to prove it). I kept one "problem" property and 2 cash flow positive ones. They are my nest egg if I can hold out.

The problem property without getting into too much detail was on account of city zoning and litigation. It was purchased as an investment but I am now living in it to same the property. It is bleeding me about a $1500 month provided the libor index doesn't rise. I figure I have 2 years. Since I have multiple investment's though and my income is not so great on account of the banks not lending. I am living on borrowed time.

So right now my note is at 3%! I'm loving it right now, though the other homes are on floating rate loans and I can't refinance into fixed since its all investor.

Back to the problem, as a realtor the income isn't there to refinance. Since the home was purchased as an investment the bank's won't help but the seem to be willing to foreclose. If you want to know why we have a real estate problem there it is. This story is not uncommon.

If you believe your politicians are looking out for you your living in a fantasy world. More later.