I don't understand my second mortgage company

It's been said: "What you don't know won't hurt you as much as what you're sure you know but are wrong." 

I learned a couple things today, that shook the foundation of what I thought I knew about short sales.

 

Does this sound familiar?
“I’ve got a short sale approval from the first and they even agreed to pay the second $3000. I called the second and now they want 25% of their balance owed.

 

What’s the matter with those people? Don’t they know if the house goes into foreclosure they get nothing?"

Well, it seems certain second lien holders are in a stronger position than we might believe.

 

If you're a distressed homeowner with a second lien that is a fixed rate (closed end) loan, chances are (depending on lender) that the lender may have taken out “lien insurance” (Think MI for second mortgages) and is insured up to 25% of the balance.

 

Even if the home goes into foreclosure the lender will receive up to 25% of the balance from the insurer (a big percentage of AIG’s losses were from lien insurance). 

A business partner of mine was asked to help negotiate a second lien and was told by the loss mitigator, in a rare moment of candor, that they would “get their money”  one way or another. “Even if the buyer agrees to the 25% payoff, we are going to require the seller to sign a note for the balance.”

That note is in the form of a non-bankruptable lien (haven’t had a chance to verify if they can do that) but just like a child support lien or federal tax lien, it stays with you forever (or until paid).

 

So what does this mean to you?

 

If you have a fixed rate second mortgage for $50,000 and your lender is protected with "lien insurance", they are going to demand payment of 25% ($12,500) to agree to the short sale.

 

They may also require you to sign a note for the balance owed ($37,500) and that loan may not be able to be discharged in bankruptcy, so it will stay with you forever (or until paid off).

 

In short, it means, don't agree to the bank's terms until you have fully investigated your options. Then you can decide whether just letting your house go to foreclosure is better than the terms of a short sale. 

Posted via email from Greg's posterous

But would we have Disneyland?

Over the last few months the subject of government involvement in the real estate business has been debated at great length (talk about an understatement), and I don't expect to change the views or opinions who think that all government involvement in the Real Estate business has been a disaster.

 

But, the fact is "it's just not true!", but what is true is that the government has been successfully involved in the real estate business for more than 70 years and were it not for at least two of the programs, most of us wouldn't have the title Realtor or Mortgage Banker/Broker.

 

Now before you go labeling me a "socialist", I'm not advocating that the "Barney Frankian" form of government involvement is the solution either, in fact the "Frankian" theory of "housing for everyone" is probably number one on the list of causes for our current dilemna.

 

What does this have to do with Disneyland?

 

This past weekend my wife and I visited Disneyland for my birthday (got in free!). Now I have been to Disneyland hundreds of times. I was raised seven miles from the Magic Kingdom (seven miles by the way is close enough to bike there but way too far to bike back). When my kids were younger, my mom worked there, so we got free admission. Needless to say, I have seen everything the Magic Kingdom has to offer but this past weekend I was able to view it from a completely different perspective.

 

We stayed at a local hotel and the morning after our excursion I was standing on my 14th floor balcony and saw the areas surrounding Disneyland in a new light. It was a magnificent day and I could see all the way to the ocean. But as I pulled my field of vision closer I noticed tens of thousands of homes and I paused to reflect on how it all happened.

 

Disneyland opened in 1955 as Walt Disney's dream, but at the time it was little more than an amusement park in the middle of orange groves. Interstate 5 the main north-south thoroughfare in California wouldn't be completed for a few more years and Los Angeles was still the primary employment center of Southern California. There were more orange groves than houses at the time.

 

As I overlooked all these houses, I realized that without government assistance in the housing market, none of this would have existed without government assistance and I think they did a darn good job of it.

 

In 1934 the federal government created the Federal Housing Administration (FHA) which provided for low down payment loans and perhaps more importantly long term 20 or 30 year loans. Up until that point, financing for homes was either non-existent, required large down payments and was short term.

 

If not for FHA (and later VA) how many of those families would have been able to make the westward migration after the end of WWII, and buy the affordable housing that would eventually surround the "happiest place on earth"?

 

The charters of Fannie Mae and later Freddie Mac were the second steps in creating the housing market as we know it. By putting the "full faith and credit" of the United States government behind mortgage backed securities, Fannie and Freddie created investment grade instruments with interest rates that were competitive in the market. The replenishable source of funds, allowed the mortgage market to grow to meet the ever increasing demand.

 

Their higher loan limits, also allowed those wishing to buy a home above entry level, a source for financing.

 

The two most significant events in the United States real estate market had nothing to do with the houses, nothing to do with indoor plumbing or electricity, nothing to do with mass production but everything to do with financing and how people were able to buy mass produced tract homes with indoor plumbing and electricity.

 

I'm can't justify the excesses of the past few years, but I think seventy plus years of getting it right, can't be ignored.

 

Millions of families had and have the "American Dream" of homeownership, but unless they have a viable way to pay for it, it remains just that a "DREAM!"

Posted via email from Greg's posterous

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Posted via email from Greg's posterous