For homeowners facing foreclosure or bankruptcy–or considering a short sale of their property to avoid one or both–the effect the action will have on their credit is undoubtedly a huge concern. Though keeping their homes might not be an option at this point, there could very well be another one in the not-too-distant future, so knowing when they’ll be eligible to qualify for another mortgage is important. 

Be Aware of the Rules of the Road

Earlier this year, Fannie Mae updated its credit guidelines for borrowers who experience one of these circumstances. And, in general, the wait time will now range from two to five years. 

Homeowners who lose their properties to foreclosure or file multiple bankruptcies within a seven-year period will have the longest wait–five years. 

In the case of foreclosure, additional requirements and restrictions will apply after five years and up to seven years as well, which include making a minimum 10% down-payment, having a credit score of at least 680, and having limited cash-out refinance options. Also, the purchase of second homes or investment properties is not permitted. 

A shorter time limit (three years) does apply to both foreclosures and multiple bankruptcy cases if the borrower had what Fannie Mae considers to be “extenuating circumstances” that led to the foreclosure. Of course, the borrower must provide evidence and documentation that the action resulted, from, in their words, “…nonrecurring events…beyond the borrower’s control that result  in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.”  

Borrowers who experience a deed-in-lieu foreclosure must wait the next longest period–four years. However, if they suffered what Fannie Mae considers extenuating circumstances, then they too can qualify to have their waiting period shortened (in this case to two years). 

Bankruptcies–with the exception of Chapter 13 judgments–also mean a four-year wait from the discharge or dismissal date unless–once again–extenuating circumstances apply. In that case, the wait is cut in half to two years as well. 

Two years is the standard waiting period for pre-foreclosure or short sales (whether the mortgage was delinquent or not), as well as Chapter 13 bankruptcy judgments. There are no exceptions permitted for extenuating circumstances, however. 

Requirements to re-establish credit

In all cases, there are several requirements that must be met before credit can be reestablished. These include: 

• Having all accounts current as of the date of the mortgage application
• Including a minimum of four credit references (one of which must be housing-related and cover the period following the foreclosure, bankruptcy or short sale)
• Include no more than two installment or revolving debt payments thirty days past due in the last twenty-four months, or any payments sixty or more days past due since the discharge or dismissal of the bankruptcy or the completion of the foreclosure-related action. 

Of course, this is a general overview of Fannie Mae’s new credit guidelines; for more detailed information, please visit their web site. 

Knowledge is power, and knowing the credit consequences of the various actions mentioned above can help a homeowner in financial trouble decide which course to pursue. As an agent, having this information to pass along to your clients, and having a resources behind you to help keep you updated on the latest legislation and guidelines—as well as help you provide them with foreclosure-prevention options—can help make you their super hero!

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This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Borrowers Should Be Aware of the Effects Foreclosures, Bankruptcies and Shorts Sales Will Have on Their Credit

Many apartment buildings are now facing foreclosure because of falling prices, stricter underwriting guidelines and 5 year mortgages becoming due. For the astute buyer of apartment buildings these apartment building foreclosures could represent an investment windfall.

As a glaring symbol of the burst bubble in national residential real estate prices, the National Association of Realtors announced recently that a full 63% of homeowners in Las Vegas are now “underwater” in their mortgages. This simply means that they owe more than their property is currently worth. For many of these people, it simply makes no economic sense to continue paying for their mortgages when the underlying asset is no longer worth what they owe. This situation will probably lead to further foreclosures and further declines in real estate prices. As all eyes are currently watching the steep decline in residential real estate prices and rising foreclosures, the commercial side of real estate has hardly begun to realize the problems that may be looming on the horizon for many apartment building owners.

Homeowners in Las Vegas, for example, who are able to continue paying their mortgages may decide to hold on to their property for a few years and hope that real estate prices recover. They are able to make this decision because, presumably, they have 30 year mortgages. In contrast to residential mortgage holders, many investors in commercial real estate are holding on to 5 year mortgages. This means that they will be forced to refinance their properties when the notes become due and it couldn’t be happening at a worse time. Many apartment buildings rose in value right along side residential real estate prices and too many of these owners paid too much for their properties because they figured that as long as they were seeing a net profit every year from their rent collection then they had nothing to worry about.

Market Conditions Lead to Great Opportunity in Apartment Market

During the real estate investing frenzy apartment building buyers didn’t take into account the possibility that real estate prices would drop so precipitously is such a short period of time. Now, many apartment building owners are facing a dire situation. For example, let’s assume an apartment building investor purchased an apartment building in 2005 for 1 million dollars. He came out of pocket for $200,000 and he financed the purchase with a 5 year balloon note that becomes due on January 1, 2010. He financed 80% of the purchase price. In the last years, however, the market price of his apartment building has dropped 20%. It is now appraised by the bank as being worth $800,000. Unfortunately, when he goes to the bank to get a loan, the loan officer tells him that the bank has changed their underwriting guidelines and they are now only willing to finance 70% of the appraised value of the property. Now, he is only able to finance $560,000. The problem is that he still owes just around $800,000 on the property. The difference between $800,000 and $560,000 is $240,000. Unless the apartment building owner can come out of pocket to pay this additional $240,000 to the bank then he will eventually be forced into foreclosure. It is safe to assume that many apartment building owners will make the same choice that thousands of home owners have, to walk away from the mortgage and the property, chalking it off as a lesson learned.

For the first time buyer of apartment buildings, this could be a windfall in the making. There could be thousands of properties, in good condition, appearing on the market at rock bottom prices.

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Apartment Building Foreclosures Create a Buyers Market for Apartment Buildings

Could anything be worse than the foreclosure crisis? People who purchased more expensive homes than they could afford or used risky mortgages to obtain them are losing their homes in record numbers. Banks who aggressively pushed loans on poorly qualified borrowers are suffering the consequences. The economy has been dragged down by the crisis. Will this be the last financial crisis? Unfortunately, no.

While mortgage debt in this country is somewhere in excess of $10 trillion, it is secured by the underlying real estate. While lenders suffer losses in the foreclosure process, they do generally recover something. The looming problem is with consumer debt, both secured and unsecured. Secured debt would be auto loans and other obligations backed by an asset. Like home mortgages, the assets could be repossessed if the buyer defaults and the lender stands to make at least a partial recovery.

It is the unsecured debt, mainly credit card, that is looming as a huge problem. According to the Federal Reserve, consumer debt was more than $2.55 trillion as of December 2008. Almost $1 trillion of that was revolving (credit card/line) debt. It is the unsecured debt that is the riskiest form for the lender. It can be wiped out through bankruptcy or otherwise be difficult to collect when a borrower defaults.

Unprecedented Growth

In 1999 consumer debt was approximately $1.5 trillion, ten years later it is 70% higher. Household income has been fairly stagnant during this same period of time. What does this mean? It means that people have been using credit to fund a lifestyle that is higher than their income would justify. Big surprise.

Just as they did with mortgages, banks have aggressively marketed credit cards, often to people who shouldn’t have them. Their insatiable thirst for bottom line profits have left them with another time bomb of “toxic” assets. As the recession deepens more and more of these borrowers will default. People are using credit cards to hang on to a standard of living that no longer exists. What will they do when there is no credit left on those cards?

Foreclosures are a much more visible consequence. Vacant houses with for sale signs with a banner reading “bank owned” illustrates the situation clearly. Credit card defaults aren’t so easy to spot but the consequences are just as ugly. Many banks will have their ability to lend impaired or fail altogether because of this. Just another turn in the downward spiral we are in.

The Cash Standard

The country as a whole needs to return to a time when we saved to buy what we wanted instead of expecting instant gratification. Credit should be used for emergencies, and a 50% off sale at Macys is not an emergency. The paradox is that for the economy to recover consumers need to spend money. The Government understands this and indicated as much with the tax cuts in the recent stimulus package. Rather than sending people checks as they did in 2008, the cuts will show up in weekly paychecks. It is such a small amount that, in theory, people will just spend it and it will stimulate the economy. We’ll see how it works out this time.

In his book, The Total Money Makeover, financial guru Dave Ramsey advocates using cash instead of credit or debit cards. Studies have shown that people will spend significantly less when paying with cash as opposed to plastic. He is also a proponent of living a debt-free lifestyle and advises people to eliminate their debt as quickly as possible.

Try this challenge: for the next week leave the credit and debit cards at home. See if you spend less by using cash. More importantly, see how much more attention you pay to your purchases.

Debt, n. An ingenious substitute for the chain and whip of the slavedriver.
– Ambrose Bierce

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Another Financial Crisis Looming?

This makes sense if the questions were truly new questions engineered for the times. However, after you read the questions, I bet you too will want to know why weren’t these the questions from day one. I write about this stuff because this is the type of mentality that is making decisions on who gets a loan and who doesn’t get a loan.

To me, it is frightening. If one is to measure the qualifications of an individual before granting credit, these questions should form the base of any risk management program.

The Questions

These 4 questions aren’t all of the questions but they seem to form the nucleus of the supposedly new thinking. For the life of me, human behavior has been known to change along with the times for as long as I’ve been alive so where were these questions before the crisis?

1. How has my customers’ spending and payment behavior changed?
2. When did their behavior change and by how much?
3. Has the behavior of all of my customers changed or just that of certain segments?
4. What are the major contributing factors to the various changes?

I found these four questions by the way in the February 2009 issue of Collections & CREDIT RISK magazine in an article titled, “Managing Risk in The New Credit Environment”. The article was written by Edmund V. Tribue. I’m not saying Mr. Tribue is out of line or incorrect. I’m saying these really aren’t new questions or new risk management parameters.

The risk manager, in my opinion, should already have a handle on this type of information. When a person applies for a real estate loan for example, his or her spending and payment behavior is pretty apparent and easily accessible from their credit report. If you were a credit pulling landlord or lender, wouldn’t the answers to the above 4 questions scream out at you from the credit report as well as the answers to a few questions of the applicant?

I don’t believe it is the job of real estate investors to be the macro manager of the credit world. But I do believe it is our job to stay on top of our customer’s behaviors in our personal micro real estate arena. If we don’t, or won’t, aren’t we dooming ourselves to failure?

Your Local Newspaper

Believe it or not, your local print newspaper is probably a good source on the credit aroma in your area. I know our paper is not shy about printing news about problems in the local financial world. It tells us about foreclosure filings, credit card default rates, business failures, etc. I could be lucky in that respect. However, you may enjoy such info in your neck of the woods.

Of course, other sources exist and you may have to rely on them where you live. The local real estate association is a good start. You may even have a local lender’s association. Many regions have real estate investment clubs which are excellent information cauldrons.

So maybe new isn’t really new after all.

Photo Credit: danflo

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Questions & Risk for Lenders In The New Credit Environment

About two months ago I wrote a post that included information from a monthly magazine, (sic), I read religiously. I like the magazine because it gives me a more clear picture on the credit industry given the article writers are industry insiders.

Here’s wishing you and yours a very happy new year and huge success in your endeavors.

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

A Look At 2009 From The Inside: Real Estate, Credit, and Debt

A couple of weeks ago I received a very unusual phone call. The caller stated that she was calling in reference to my XYZ Bank credit card and asked if I was Richard Warren. I have a credit card from XYZ Bank and assumed that the caller was soliciting me for some service even though I am on their internal “Do Not Call” list. When I confirmed my identity the caller took a decidedly different tone.

Her voice took on a menacing quality as she stated that she was with some firm and calling in reference to the XYZ Bank card ending in the numbers 1234. Since I don’t routinely keep card numbers in my head, I did not know off hand if this was my card number or not. I asked what the problem was and she quickly stated that I needed to bring the past due balance current immediately. When I stated that the card had a zero balance she reiterated that it did not and if I didn’t take immediate steps to pay I would be flogged, drawn and quartered, burned at the stake, keelhauled, and if that wasn’t enough they would sue me.

Still calm at this point, I stated that she obviously made a mistake and is talking to the wrong person. Even though I have a common name, she refused to believe it. She kept going on about the debt that I had to pay. I realized that she was following her training very well in that she was totally controlling the conversation and assuming that I was a lying deadbeat. Getting angry at this point, I asked “are you going to listen, or am I going to hang up?” Undeterred, she kept going on, so I hung up.

Identity Theft?

My initial concern was that I had been the victim of identity theft. I located that XYZ Bank card and checked the numbers. The last four were 5678, not the 1234 that the caller had stated. Just to be sure, I pulled a copy of my credit report and there was no credit card account bearing that number nor had there been any suspicious activity. I chalked it up to a case of mistaken identity and thought nothing more of it. Then the fun started.

The next day I came home to find a message on my machine. I was told to call 866-555-1234 regarding a personal matter of extreme importance. I knew immediately what the call was about. I also realized that I had received the same message a few days earlier but ignored it thinking it was a telemarketer calling even though I am in the Do Not Call Registry. I did not call and received a few more of the same messages. Finally they called when I was home.

Once again the caller would not allow me to get a word in edgewise and I hung up. I was ready the next time. When the call came I said “I want your name, your company name, address and phone number or I will hang up immediately.” This time I was able to get the information and said “thank you” and hung up.

Fighting Back

Using the company name and address I was able to get the main phone number and called that instead of the one the collector gave me. I asked to speak to a supervisor in their collection department. To my surprise I was connected to someone who sounded almost human. I explained what was going on and she asked me to hold while she pulled the case file. She came back on the line and asked me several non-invasive questions such as “did I ever live at the following address?”, “were the last four digits of my Social Security number 3456?”, “do I have an XYZ Bank card ending in 1234?” the answers were all no. She then agreed that it was a case of mistaken identity but it could take 24 hours to be removed from their automatic dialer system. Mercifully, the calls stopped.

Your Rights

The Fair Debt Collection Practices Act was created to protect consumers from unscrupulous collection agencies. Unfortunately many of the companies barely stay within the limits of these laws in attempting to collect a debt.

Some Basics
 Collectors may call only between 8am and 9pm                                
 May only discuss your debt with you or your attorney
 Must send written notice within 5 days after 1st contact
 Collector must stop calling if notified in writing to do so

There are many other rules that collectors must follow and they can be found on the Federal Trade Commission website. If the debt is legitimate you should talk to them about your situation in an effort to work things out. If the debt isn’t yours, you need to be persistent in your efforts to get the collection attempts to stop. Do not hesitate to go over the head of the collector and speak with a supervisor if necessary. The worst thing that you can do is ignore them.

Ask not for whom the bell tolls…it tolls for thee - John Donne

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

When The Bill Collector Calls

Today, we’ve got an important guest post to share, written by Dan Gilbert, Chairman of Quicken Loans.

Last week, President Bush signed into law the hotly debated financial rescue package called the Emergency Economic Stabilization Act of 2008. While this legislation helps stabilize Wall Street and the banking system, it does nothing to address the root problems of the housing dilemma that is at the core of the financial crisis. High foreclosures, adjusting ARMS, rapidly falling property values and an oversupply of housing have combined to form a housing market “death spiral”.

Frankly, the $700 billion government bailout isn’t enough to solve the downward spiraling housing market. The country needs more. The current legislation does nothing to address the homeowner. Our nation’s financial recovery must begin at home with the homeowner. Enacting measures that keep homeowners in their homes is the only real way to stem our financial crisis. That’s where A Solution That Works comes in. I’ll summarize the main points of the plan here, but I truly hope that readers will visit the site (www.asolutionthatworks.com) to read the entire plan and give your input, or check out the Choose Thinking blog. Then, if you agree with the solution, please share it with your friends and family, and your representatives in Congress. This is something that will benefit millions of people.

So, here are the main points you’ll want to know about A Solution That Works…

THE PROBLEM:

• At the core of the financial crisis is the housing crisis, which needs to be addressed.
• Stabilizing Wall Street and the banking system is only a start. The current bill does not forestall the tide of foreclosures that are to come.
• Adjusting ARMS, high foreclosures, low property values and an oversupply of housings have combined to form a “death spiral” in the housing market
• The $700B bailout does not address this. That plan (i) doesn’t address how prices will be set for the loans (ii) causes unfair results for borrowers who have dutifully made their payments (iii) is potentially extremely expensive for the taxpayers (iv) will take a long time to have an impact (v) doesn’t address the root cause of the messed up housing market

THERE IS A SOLUTION THAT:

1. Keeps homeowners in their homes with fixed affordable amortizing monthly payments
2. Costs the tax payers a fraction of the cost
3. Stabilizes prices and stops free fall in home values
4. Gives investors higher odds of recovering their investment in these loans/securities vs. expensive foreclosure and resale in declining spiral of housing market

HOW:

• Focus on specific types of loans, each of which must be owner occupied: (i) ARMS with no caps (ii) Option Arms (iii) interest only loans.
• Require servicers of these loans to reset the borrower’s rate to 6.375% fixed with a 30 year term/amortization. But the borrower only pays 4.875%; thus, government pays/subsidizes the difference between 6.375% and 4.875%.
• Over the ensuing 6 years, gradually raise the rate the borrower pays and lower the amount of the government subsidy until year 6, when the borrower pays a rate of 6.375% for the remaining term of the loan.
• The lender/servicer has a one-time chance to write off any negative equity and receive two times the normal write-off
• All prepayment penalties on these loans are voided
• Homeowners get the benefit of lower payment for the first 5 years, and then a low fixed rate for the next 25. They get to keep their homes. Their homes values (and neighborhoods) stabilize.
• Lenders are in a much better position than if they had to forecloses on these borrowers, and the stability this brings to the housing market helps them with their REO’s
• Taxpayers receive benefit because this costs an estimated $50B spread over 5 years– a fraction (1/14th) of the cost of the $700B plan

Under this plan, everyone benefits. Homeowners with troubled mortgage loans (ARMS, OARMS and Interest Only) have a lower payment for the first 5 years, and then a low fixed rate for the next 25. They get to keep their homes. Homeowners who have been responsible in their mortgage choices and payments also experience a more indirect, but no less valuable benefit as their homes’ values and neighborhoods stabilize and eventually appreciate. Lenders find themselves in a much better position as well.

Implemented correctly, this plan would help rapidly stabilize the housing market. It would significantly reduce foreclosures, stabilize home prices and allow millions of American homeowners to work their way out of “upside down” financial situations that continue to perpetuate our downward spiral. And at a fraction of the $700 billion dollar cost.

If you think this sounds like a proposal you could get behind, check out the site asolutionthatworks.com or head to the blog http://choosethinking.com/ for more details.

For more media coverage about A Solution That Works, check out this article in the Detroit Free Press or this interview with WJR Radio in Detroit .

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

A Solution That Works