From RealtyTrac Monthy Newsletter ...... I see Much more pain to come.
Need A Mortgage? Forget Banks Peter Miller
You might think that after the government gave the nation's nine largest banks $250 billion that new mortgages would be as common as tree pollen. Unfortunately, banks are hoarding their federal money in large measure to bolster their own balance sheets and potentially to buy other banks.
“The banks could use the money from the government for any number of things,” says The New York Times. “Some analysts say the banks may use it to acquire weaker competitors. Others say they might use it to avoid painful cost-cutting. And still others say the banks may sit on the capital.”
Acquiring, cost-cutting and sitting accomplish nothing for those who need to finance or refinance a home or to trade a toxic mortgage for something safe and sensible. In fact, the Times says that “lenders have been pulling back on credit lines for businesses, mortgages, home equity loans and credit card offers, and analysts said that trend was unlikely to be reversed by the government's money.”
The problem today is usually described as a “liquidity crisis,” an expression which means that lenders have dollars but are not making loans. And while there have surely been tight times with few mortgages in the past, the situation now is different because several traditional financing alternatives are missing.
It used to be that if banks weren't lending you could assume an existing mortgage — often at a below-market interest rate. Such loans were “freely assumable,” meaning you did not need lender approval to take over someone else's mortgage. Unfortunately, those days are long gone. As examples, FHA loans made after December 15, 1989 are no longer freely assumable
and the same is true with VA mortgages originated after March 1, 1988. Today loans are either not assumable or only assumable with permission of the lender, so-called “qualified” assumptions. In the past owners during hard times could “take back” second trust financing from prospective buyers, but for this strategy to work sellers had to have equity. The problem here is three-fold: First, in many markets homes values are down significantly and owners often owe more than the property is worth. There is no equity to take back. Second, many owners started out with little or no equity. A 2007 study by the National Association of Realtors shows that a typical first-time buyer bought with just 2 percent down while repeat buyers had 84 percent financing or 16 percent down. Amazingly, 45 percent of all first-time buyers bought with nothing down. Third, even if there was equity the existing loans are not assumable. In the mists of mortgage history there used to be something called “wrap-around” financing. The idea was for owners in strong markets to keep making payments on their current loans and to then take back (or wrap the existing loan) in a larger loan at a higher rate. Example: Seller Jenkins has an existing $100,000 mortgage at 6 percent. He sells his home to Buyer Mitchell for $160,000. Mitchell puts down $10,000 and Jenkins provides a $150,000 mortgage at 8 percent. Jenkins gets 2 percent interest on the existing $100,000 mortgage plus 8 percent on the additional $50,000 he took back. Wrap-around advocates argue that since the original borrower continues to make payments on the original loan that it has not been assumed. Lenders and many lawyers say nonsense; when a seller gives up occupancy and title the lender can call the loan at anytime.
“In the past year many lenders have closed and those that remain have stiffened loan requirements for even the best borrowers,” says Jim Saccacio, chairman and CEO at RealtyTrac.com, the nation's largest source of foreclosure listings and data. “We need to get reputable lenders back into the game with loan products that make sense for reasonably qualified borrowers. That will happen over time, but for the moment some buyers will need to look outside the commercial lending system to find financing.”
Given the loss of several traditional mortgage alternatives are there any remaining choices? There are, but tread gingerly — these forms of financing are complicated.
Lease Option: Instead of selling a home outright, the property is rented at a premium rate. The amount of the rent above fair-market value is credited to the tenants if they buy at a price set in advance. If the tenant does not buy within a certain timeframe the owner has gotten a bigger rent than otherwise would have been possible. Cautions:
Many lenders have stiff rules about rental credits so be sure to work with a stable lender before entering into a lease-purchase agreement. Sellers, for example, may be required to place excess rental money in an escrow account. In areas with rent control a lease-purchase arrangement may set off rent-control requirements. To do a lease purchase agreement right you need both a sale agreement and a lease. The reason for a formal lease is to establish the amount of the deposit, insurance coverage, obligations in case of damage, etc. Speak with brokers and attorneys for details.
Installment Sale: Also called a “land contract,” an “agreement for sale” and a “contract for deed,” installment sales are set up so that the buyer only gets title after some or all payments are made. A number of states have created borrower protections because such financing can be abusive. For example, miss one payment and you lose all equity. Caution: Do not enter into an installment sale without a proper written agreement. Get help from an attorney or legal clinic.
Seller Take-Backs: It's generally estimated that 35 percent of all homes are owned free and clear. With such properties there are no loans to assume, owners can take back financing if they wish because they have equity.
Seller take-backs can make perfect sense — if an owner does not require lots of cash from the sale to purchase a replacement property and the sale is done the right way with title insurance, a survey, a recorded note, etc.
Some within the get-rich-by-Tuesday crowd love seller take-backs because they want to supply grossly pro-buyer sale agreements and mortgage notes which eliminate basic seller protections. These are lousy deals for owners and will not pass muster with seller attorneys.
For a seller take-back expect to make a significant down payment — say 5 to 20 percent — and to have a full-blown closing with proper forms, credit checks, documents and requirements in a form satisfactory to the owner.
Foreclosure Financing: With a huge and growing inventory of foreclosed properties, many lenders are open to “combo” deals — buy a foreclosed property from us at discount and we'll provide the financing. If the underlying property is attractive such deals can work well.
Family Financing: The U.S. economy is enormous and while much of the news is glum the reality is that many of us are doing well. FactCheck.org says “those reporting adjusted gross income of more than $250,000 to the IRS are projected to make up 2 percent of households next year, when the new president will take office. Those folks will earn 24.1 percent of all income, and pay 43.6 percent of all personal federal income taxes, the Tax Policy Center figures.”
Seen another way, there are relatives with cash who might consider a loan to help you avoid bad credit, tide you over until a toxic mortgage can be refinanced or even provide money for a down payment, closing costs or both.
The catch is that asking family members for money is tricky. Problems often involve issues of psychology, sibling rivalries, status and ego as much as finances, accounting and dollars.
You want to avoid debates and disputes, and the solution is to structure a written, detailed, business arrangement. This is important for tax and estate purposes and also to clarify financial obligations if personal relationships change (that is, you finally tell rich Uncle Ralph that martinis are not a breakfast food...).
One quick and easy way to create private loans is to check out VirginMoneyUS.com. The company sets up and services private loans, a smart idea in the sense of creating a formal business arrangement among friends and family.
Peter G. Miller is the author of the Common-Sense Mortgage and is syndicated in more than 100 newspapers.