Maybe it’s time to let Bankruptcy Courts deal with Neg-Am Mortgages.

This blog should fall into the arena of gossip for some more educated source to follow up and provide better and more firm facts.


Someone I trust was talking to a banker and they started to discuss the problems with the banking system. After covering all the numerous talking points about who was to blame and pointing the usual fingers; the Community Investment Act, Fannie and Freddie Mac acting as irresponsible investor on bad loans, and the removal of the restriction preventing Investment Banks from engaging in real estate (Glass-Stegal). In other words the usual complaints. They then started to discuss possible solutions to the debacle, this is where I became interested.

Most real estate agents, and others who have attempted a loan modification, know what kind of a byzantine nightmare the process can be. Many calls, lost paperwork, and low level staff manning the phones that have no authority other than the right to tell you 'NO' and 'declined'.
They talked about the system. Once a bank receives the modification or short sale request, it has to go to its files and pull the loan documents, submit all the paperwork to an underwriter who was given a set of policies drafted by the banks attorney's who may also eventually research the loan. At the same time, if there is a second loan, a concurrent negotiation occurs with an institution that has their own phalanx of underwriters, attorneys, and guidelines.

Part of the bank's research is to determine if there was mortgage insurance and if there was an investor on the loan. Once it is discovered that these entities exist, there are yet another set of guidelines to deal with from corporations who have yet another series of underwriters, guidelines, and attorneys.

So lets review, under the ideal situation in any short sale or loan modification with one loan there
could be as few one and many as three institutions involved; the bank then additionally one insurer and/or one investor. If there are two mortgages, then there are two to six institutions.

Now let's complicate the matter, like the reality for most. No bank has one investor, nor do they use one insurer. So as the pool of loans grows and the number of vendors grows, and the process gets more and more complicated. Other complications arise when you consider the myriad of state laws and the fact that many of the investors are overseas. but then it gets really tricky.
Somewhere along the line, investment banks created these "so-called" risk hedges called the collateralized mortgage obligation or collateralized debt obligation (CMO's or CDO's). This was a new form of investment designed to reduce losses on bad mortgages. So the banks take their pool of assets backed by debt and people's incomes and they divide these obligations into investment vehicles, using another set of contracts (drafted by attorneys) and start trading them on Wall Street to institutional investors (who have their own attorneys).


So at the peak of the bubble we had we had little or no oversight from the Republicans, We had Democrats pushing banks to underwrite bad loans that were purchased by Fannie Mae and Freddie Mac. The Investment Banks poured money into the mortgage market. Banks wrote loans, sold some to investors, and insured others, all while packaging bundles of investments and selling them to insurance companies, other banks, foreign governments and hedge funds.


So now the banker gets to the end of his discussion. "Event's didn't work out so well." he says. "Real Estate agents are working the short sales and individuals are trying to perform loan modifications." He continued, "The reason most loan mod's and short sales do not get approved is because it is just cheaper to foreclose than to deal with all the various companies and their attorneys. Every bank can't come up with one set of guidleines to deal with all the different situations all these contracts and attorneys have created." Once the foreclosure occurs then it wipes the slate clean for the bank holding the loan at the core of this complex system of contracts. The homeowner is treated like one of the investors and gets wiped out with the foreclosure.


This is why it's so hard to do a short sale or loan mod.

Buyer's Agency

For most people, buying a home is their single biggest investment. The process is filled with many complex details that may seem confusing and complicated if not properly understood. The rules are generally governed by the contracts agreed to between buyer and seller. These contracts are typically drawn up by the attorneys for the companies that make up each MLS association across the country. They draft these agreements to reconcile state laws and the court cases of each state where problems arise between buyer and seller.

In the past, agents were legally obligated to protect the interests of the home seller. Today, in our consumer oriented society, that model has been replaced. Agents who represent buyers have the legal duty to protect those buyers under state agency laws. The most recent changes to the business of real istate is the introduction of homebuyer agreements. Homebuyers are choosing to have their own real estate agent, a contracted buyer's agent, to legally represent them under a written agreement.

In every case where an agent is a buyer’s representative is involved, under contract or not, the agency law requires specific represenation for you, the buyer, not the seller, and has full fiduciary duties, including loyalty to the buyer. By definition and law, the buyer’s agent has your best interests in mind throughout the transaction. The percentage of homebuyers with buyer representation has grown significantly in the past decade. According to a recent National Association of Realtors® survey, nearly half (46%) of home buyers used the services of a buyer’s agent last year, and four out of every five buyer’s agent agreements were in writing.

The following points are presented at the beginning of every transaction on a document called the Agency Disclosure regardless of whether or not there is a contract between the buyer and his agent . The buyer’s agent and the homebuyer establish by mutual agreement and in writing, known as a buyer's agency agreement, that will entitle the homebuyer to:

Loyalty: The real estate agent has a fiduciary resposibility, the highest protection under the law, to act in the best interest of the buyer.

Reasonable Skill and Care: Performing the job of an Agent with the utmost care, integrity and honesty. Some of the tasks include; Assisting in the determing a purchase price, resourcing professionals in the discovery of material facts, and investigating the material issues important to the buyer.

Disclosure: All material facts such as relationships between agent and other parties, existence of other offers, status of deposits, and legal effect of important contract provisions.

Confidentiality: Any discussions, facts, or information that should not be revealed to others but does not include responsibility of fairness and honesty in dealings with all parties. Accounting in dealings. Negotiaing you your behalf without compromsing your position or disclosing unnecessary knowledge about you.

Buyers Agency Agreements

There are two types of buyers agency agreements. One is where the agent is compensated by the buyer regardless of what the buyer purchased and the other simply defines and clarifies the legal considerations between buyer and the agent. Buyers should be aware and ask the question about how the agent is compensated since there are legal remifications. For example, if the buyer under a buyers agent compensation agreement innocently discovers that his friend is selling a home he can purchase and makes an agreement to buy his house without agents. The buyer may be obligated to pay a commission to his buyers agent even when the agent was not involved in the process.

Using buyers brokerage agreements is helpful between buyers and their agents because they do make clear the duties and responsibilites of the agent and a buyer.

The ABC's of the Real Estate Market

I recently went to a seminar and the presenter had a great way to describe areas in an investment standpoint.





A residential housing market can be broken into 3 parts the "lower end", homes priced under the conforming loan maximum, and the "high end." The high end has two parts. One is the the market that requires leverage to purchase from the conforming lona limit to somehwere in the lo millions.





The lower end can again be broken into 3 parts. Grade A: The areas that had value 3 years ago and will have value again 3 years form now. Grade B : The areas that will improve in the next recovery. Grade C: The bottom and most challenging areas that are currently flooded with foreclosures.





Each area offers a unique opprotunity for different types of buyers. For example, first time home buyers who are interested in appreciation may be advised to purchase in category B areas if they are not financially able to purchase in category A areas since the B areas should improve in the next up cycle.





With regards to investments, this description should hold true as well. The most money would be expected in the category B areas. Category A markets will be tighter and from an investment standpoint will be characterized as good places to park money. Basically a place to preserve capital. The market may go down, but these category A area have historically been the first to recover in prior upswings, currently these markets are under pressure.





Category B areas have for the most part bottomed and should will hold, all other things being equal, being a good place for capital growth in the long term. The lower the price the more this characterization is true. Over the last few years, these homes have fallen further from their highs as a percentage of price and will recover quicker due to the homes being more affordable and in lower price points.





Category C areas are for cash buyers only and only make sense for LONG term holds (like a bond) the appreciation will be slow but the prices on a per square foot basis are generous making rental streams good only when unlevered and price is a factor.





Category A areas are closer to the top of the conforming loan range (629k). Category B and C areas are in the mid and lower price ranges.





In centreal and east Contra Costa County, places like San Ramon, Danville, Walnut Creek, are solid category A properties. Pleasant Hill starts in the lower end A range and moves into the upper end homes. Concord, Martinez and Livermore are solid B categories with category A components. Antioch, Pittsburg, Brentwood and outlying areas are in the solid C category.

Home Modification Trial Period

http://www.contracostatimes.com/business/ci_12520979?nclick_check=1



This newpaper article was printed on June 8th, 2009 Contra Costa Times. It is a detailed explanation, in Q and A form, about the governments Home Affordable Mortgage Modification program.

Stuck between a Mortgage Rock and a Hard Place?

You are not alone.





http://www.marketwatch.com/story/one-owners-tale-of-mortgage-modification-hell?pagenumber=1







Another Short Post.

Quick Post on Bay Area Real Estate Market

Here is a online news story form CBS Marketwatch on Bay Area housing.

http://www.marketwatch.com/story/were-overlooking-signs-of-housing-comeback?siteid=nwhpf&sguid=vmtIvi8U2kmwaufqPiI3RQ

For more information e-mail me direct under the heading "Trough Bottom"

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.