Citi, J.P Morgan Agree to Foreclosure Moratorium

This is all over the news today. This particular report comes from  MEENA THIRUVENGADAM of the Wall Street Journal. Please see the article below.

I suspect all this wonderful stuff is for homeowners only. It will be interesting to see if there is a specific program for investment properties (my guess is no). The other point is if the lenders will automatically not foreclose on ANYTHING without bothering to check what is an investment property and what is not. Of course even if that were to happen (and it’s likely given the general chaos), the fact that a property is not a primary home will surface later, during the loan modification process. At that point there may be nothing available to the investor – at least not an official program.)

Citi, J.P. Morgan Chase Agree to Foreclosure Moratorium
 
By MEENA THIRUVENGADAM
WASHINGTON — J.P. Morgan Chase and Citigroup Inc. have agreed to weeks-long moratoriums on foreclosures as the government works on a financial stability plan slated to include billions of dollars aimed at keeping people in their homes.

“We will not add to the foreclosure process any new owner-occupied residential loans that are owned and serviced by J.P. Morgan Chase,” the company’s Chief Executive Jamie Dimon said in a Feb. 12 letter to Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee. The moratorium on new foreclosure actions would remain in effect through March 6 and is similar to a 90-day foreclosure freeze J.P.Morgan announced Oct. 31.

“We believe three weeks is adequate time for the Treasury to announce — and for us to implement — a new plan,” Mr. Dimon said.

Citigroup in a statement said it would place a moratorium on foreclosures for all Citi-owned first mortgage loans that are on principal residences and on loans for which understandings with investors have been reached. The moratorium is scheduled to last until March 12 unless the government finalizes a loan-modification program before that date.

Lawmakers in a congressional hearing earlier this week asked the executives of some of the nation’s largest banks to institute a moratorium on foreclosures until the details of a revamped government bailout effort are announced.

U.S. Treasury Secretary Timothy Geithner on Tuesday unveiled the outlines of that effort and said details would be released later. Mr. Geithner has been meeting with other members of President Barack Obama’s economic team and the Secretary of Housing and Urban Development to discuss foreclosure prevention.

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Is a 25-30% Down Payment Acceptable for New Fannie Mae Backed Loans for Investors with over 4 mortgages?

Many investors are certainly rejoicing in the fact that they can now go in and purchase some ludicrously-priced houses and get good Fannie Mae-backed loans.
However for investors with between 5 and 10 mortgages, the down-payment requirement is 25-30%. Is that acceptable?
We have all been spoiled rotten when credit was flowing like wine and even investors with many dozens, if not hundreds of properties, got used to paying only 10% down.
Clearly those days are gone and every investor knows that 20% down is now the norm. This holds for people with under 4 loans as well.
That means that if an investor has 5-10 loans, the ADDITIONAL down payment is really only 5-10%.
One item to keep in mind is this:
When credit was easy and prices were high, such as in 2005, investors wouldn’t blink at buying a house for $275,000 and putting 10% down. This means the down payment was $27,500 (plus closing costs, of course). PMI was also part of the equation as an extra.
Today that same house, in the right markets, after cratering in price to perhaps $180,000, can sometimes be bought from a desperate bank for the absurd price of perhaps $115,000. 25% of $115,000 is $28,750. There is NO PMI and interest rates (for Fannie Mae backed loans) will surely be better than they used to be with 10% down (no PMI also helps the payments).
Thus despite the fact that the percentage of the down-payment is higher, the actual cash amount is virtually the same for the same property.
If you add to that the fact that in a few years, one can refinance the property for most likely 60-70% of the value at that time, it may be quite possible that after such a refinance one would actually get every penny they had put into the down-payment back. This is because the absurd lender-fueled prices are unlikely to persist for too many years. A property such as the one discussed here may very well be worth $200,000 in a few years (no one knows for sure, of course, but in this example $200,000 is not much more than the raw construction costs and thus is a likely value to be achieved once the bank panic subsides). If the house is indeed worth $200,000 in a few years, then even a 60% refinance will yield $120,000 - enough to pay off the existing loan and get back every penny that had been put as a down payment.
The new Fannie Mae guidelines are not perfect but they sure open the door wide to investors with over 4 properties. The down-payment requirement is not as onerous as some may reflexively think.
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Fannie Mae to the Rescue! Fannie Mae to Up Limit on Multiple Mortgages to Same Investor

This is hot off the presses: directly from Fannie Mae’s website.

Apparently Fannie Mae has reconsidered the loan limit for investors. I wonder if everyone’s efforts made a difference.

Fannie Mae will allow investors to hold 5-10 mortgages and still get Fannie Mae backed loans. This apparently will start as of 3/1/2009 and will be announced on Monday 2/9/2009.

The reserve and qualifying criteria for the 5-10 loan range will be more stringent, as well as the down payment requirements. Still – a major improvement over 4 properties. This should make a real dent in the uptake of the excellent deals available in some markets by experienced investors. 2009 is shaping up to be better already – at least for real estate buyers.

Announcement 09-02, Updates to Multiple Mortgages to the Same Borrower Policy, Reserve Requirements, Reserves Definition, and Form 3170 .

Read full announcement

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Sale of Tenant-In-Common Interests Must Comply With Securities Laws

Here is information that came from my friend Jeffrey Lerman, an attorney in San Rafael, CA. It is very relevant to sponsors considering setting up a TIC and for investors considering moving all or part of a 1031 exchange into a TIC share:

The Securities and Exchange Commission (SEC) recently issued a no-action letter taking the definitive position that Tenant in Common (TIC) transactions, structured either as a master lease or property management, are considered securities. Since the SEC has now stated, in no uncertain times, that these TIC interests are securities, prudent sponsors (any person or entity offering or selling TIC interests) will have to comply with securities laws, particularly with regards to disclosure and investor suitability. This is newsworthy because there has been much debate in the TIC industry over the last seven years as to whether a syndication involving TIC interests could be sold just as real estate or must comply with applicable federal and state securities laws.

TICs have been popular among investors as a way to own their investments. It allows two or more persons to own undivided interests in a single piece of real property. One of the primary benefits of using the TIC ownership structure is that it enables joint venture investors to each make their own decision whether they want to take advantage of the tax free exchange rules under IRC Section 1031 by exchanging currently held real estate for their TIC interests.

This ruling only applies to TICs involving “passive” investors (a passive investor just invests their dollars and are not actively involved in the investment; this is a complicated area and you should consult an attorney before taking any action). This ruling does not apply where all TIC investors are actively involved.

For all TICs involving at least one passive investor, it is now essential to get a solid, clear understanding of how to make sure your deals comply with applicable securities laws.

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Fannie Mae to the Rescue?

In light of recent efforts by Fannie Mae which include re-opening the discussions of the 4-property limit for investor financing (see post: Kenneth Harney on Rethinking Controversial Limits), and the short-sale speed-up pilot in Orlando (see post: Jerry Jackson of the Orlando Sentinel on Fannie Mae Short Sale Pilot ), there may be some hope that this agency is starting to wake up to its power to alleviate the housing market trouble in many markets. If cooler heads prevail at the higher level, we may see an easier time for real estate investor as well as reflief for people who truly need to dispose of properties. Both will be welcome developments during the current environment. Stay tuned.

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Jerry Jackson of the Orlando Sentinel on Fannie Mae Short Sale Pilot

This was sent to me by Liam Gillen, one of our Orlando realtors. it’s an article in the Orlando Sentinel about Fannie Mae running a pilot to speed short sales processes considerably. This holds promise to everyone thinking of doing a short sale. if the pilot succeeds, hopefully the program will become widespread and cut the long wait (many months) associated with short sales.

Orlando Sentinel: Fannie Mae tries program to speed up ’short sales’ in Orlando area
Jerry W. Jackson | Sentinel Staff Writer, Published: January 28, 2009

Orlando is one of the leading metro areas in Florida for single-family-home resales, soaring past larger markets such as Miami, Fort Lauderdale and Jacksonville during the past year as local deals on distressed homes have mushroomed. Now the mortgage giant Fannie Mae is testing a small pilot program in Orlando to speed up some of those sales.

A “short sale” is a distress sale in which the lender agree to take less than the amount owed on the home’s mortgage, so it can avoid the costs of a foreclosure. The number of such deals has been rising in lock step with the surge in foreclosures the past year.

Read full article on Orlando Sentinel

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Release The Fly to Eat The Moth

House

The economy is in the doldrums. The bailout efforts shift directions and so far neither liquidity nor activity is seen at any meaningful level.

Everyone agrees that the root of all difficulties is HOUSING and HOUSING PRICES. Digging in a little deeper in the most afflicted markets, everyone will tell you that the root of the trouble is EXCESS INVENTORY of houses. With excess inventory it is hard to gauge whether a true bottom has been reached. It is hard for prices to start marching upwards, and the banks remain in a deep freeze. In addition, banks keep adding to the inventory via their REOS.

Remember how a few times in the past, when there was a pest (say some type of moth) that was dangerous to our crops, the government released another benign pest, like a fly, that eats the dangerous moth, thus ridding us of the problem? Well there is a way to solve the economic problem, and the fly/moth analogy can point to the solution.

If you notice the language being used to describe various investors it goes like this: people who buy stocks are called INVESTORS. Everyone cares about these investors, realizing their importance to the equities market. People who buy real estate are dubbed SPECULATORS in a deriding tone. No bailout or loan modification effort should be bestowed upon these SPECULATORS, according to the government. No one calls people who buy real estate by the name “investors”. This attitude, my friends, may be hampering the solution to the economic problems. Changing this attitude may hold the seeds for the solution.

The exact markets that were hit the hardest present the best investment opportunities for serious real estate investors worldwide. Like the benign fly, serious real estate investors can swoop in and buy the outrageously-priced REOs, foreclosures etc. By buying these distressed bargains, real estate investors will not only improve their own financial situation for the future, but they will assist in lowering inventories in those markets, thus hastening the recovery. Everyone wins. This, when done on a large scale, can have a major beneficial effect on the ENTIRE ECONOMY!

One would think that the government, or lending agencies controlled by the government, would bend over backwards to make it as easy as possible for QUALIFIED investors to get into the market and gobble up this bargain excess inventory. In reality, the government has done EXACTLY THE OPPOSITE of what needs to be done. The ability of qualified, strong real estate investors to get financing, has been cut and limited to the point that this incredible phenomenon of real estate investors absorbing excess inventory and helping the economy has ground to a halt before it can begin in earnest.

The “Conforming Loan” limit as defined by FNMA and Freddie Mac, used to be 10 properties up until a few months ago. This means a qualified real estate investor could get a good loan at a good interest rate and a reasonable down payment, if they had less than 10 properties with mortgages on them.

As a knee-jerk reaction to the downturn, these agencies have reduced that limit to 4 properties a few months ago. As a result, real estate investors who own over 4 properties are having a much more difficult time getting loans to buy property. This group of experienced investors are EXACTLY the ones realizing the great opportunities this low cycle presents . Yet exactly this group is severely hampered from going in and buying.

Another important group are the FOREIGN INVESTORS. Foreigners not only realize that there are incredible real estate opportunities present in the United States today, but they get an even bigger discount by virtue of their currency being stronger against the dollar than it normally is (despite the dollar’s recent recovery). The foreign investors, up until about a year ago, used to be able to invest in US property and get good loans by putting 30% down. Most of the foreign investor loan sources have now been closed as well. This, of course, means that a very large number of excellent investors are on the sidelines, unable to buy.

The result of this mindless reaction is to shut down the exact sources of help this downturn needs. The flies that can eat the deadly moth are not enabled to take flight. The true, serious real estate investors who can gobble up the excess inventory, which is priced so well, are hampered and delayed in their efforts. The government is doing THE EXACT OPPOSITE of what needs to be done!

THE SOLUTION: What needs to be done is that the limit for conforming loans needs to be raised from 4 to 20, or even 30 properties. I am not saying that banks should lend money to investors who are not qualified. On the contrary: every loan will be a full-documentation loan. Only qualified investors will get approved. Raising the limit for conforming loans will raise by hundreds of thousands the number of qualified investors who can get into the hardest-hit markets and buy up excess inventory - to their benefit as well as the benefit of those markets and the overall economy. Everybody wins! As a bonus, banks will be making more loans, thus freeing up the lending machine to start rolling more freely. All that is needed for this to happen is for FNMA and Freddie Mac to change the number from 4 to 20 or 30. No expensive bailouts, no extra federal funds!

The foreigners should be allowed to come in and invest as well. Putting 30-35% down should be enough to let the foreigners get good loans. Again these loans should only be approved for qualified people (income and assets can be verified for foreigners as well). This will unleash another wave of investors to pick up the discounted excess inventory in the hardest-hit markets. it will also enable the banks to lend to many other qualified individuals and grease the wheels of credit liquidity. No extra money needs to be spent by the government for this.

The beneficial flies that can eat the harmful moth can be made to spread their wings without any bailout money!

Why does the government not see this simple solution? It is because everyone handling the problems comes from a Wall-Street background. Everyone is focused on stocks and bonds. Housing is only looked upon as places owned by owner-occupants. “Speculators” are seen as a scourge.

Even the new administration, so intent on CHANGE, is commissioning very well-respected experts (including the infinitely wise Warren Buffet) in the realm of STOCKS, Wall-Street and Bonds.

THERE IS NOT A SINGLE EXPERT FROM THE RESIDENTIAL REAL ESTATE INVESTMENT COMMUNITY BEING CONSULTED. NO ONE TO SHOW THE SIMPLE, EFFECTIVE, AND VERY “FREE MARKET” SOLUTION TO SO MANY PROBLEMS.

Handling this issue, which can be done so easily, can literally stave off a prolonged recession and get the economy going. What a boon that would be for the new administration! Even their first 100 days in office can look very different if these solutions are implemented.

Let’s all try to raise our voices and be heard on this issue. I will gladly sit in front of any committee to discuss this. I will talk to any leaders and in any forum to shed light on this very simple solution to such a painful problem.

I hope very much that this issue is both heard and handled by the government and its agencies. We, real estate investors, and our brethren worldwide, can hold the key to a much speedier recovery.

Adiel Gorel,
CEO, ICG

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