The Sol Group Arizona Real Estate

Buying bank owned properties
There is a lot of interest in buying bank owned properties these days. A lot of information, some good and some bad, is floating around about the subject. Often the information offered is for sale, with the promise that you can make a lot of money with little effort once you know "the secret formula". The fact is that there are no secrets, and to make money does require effort.

What's an REO?
REO stands for "Real Estate Owned". These are properties that have gone
through foreclosure and are now owned by the bank or mortgage company. This is not the same as a property up for foreclosure auction. When buying a property during a foreclosure sale, you must pay at least the loan balance plus any interest and other fees accumulated during the foreclosure process. You must also be prepared to pay with cash in hand. And on top of all that, you'll receive the property 100% "as is". That could include existing liens and even current occupants that need to be evicted. A REO, by contrast, is a much "cleaner" and attractive transaction. The REO property did not find a buyer during foreclosure auction. The bank now owns it. The bank will see to the removal of tax liens, evict occupants if needed and generally prepare for the issuance of a title insurance policy to the buyer at closing. Do be aware that REO's may be exempt from normal disclosure requirements. In California, for example, banks are exempt from giving a Transfer Disclosure Statement, a document that normally requires sellers to tell you about any defects they are aware of.

Is it a bargain?
It's commonly assumed that any REO must be a bargain and an opportunity for easy money. This simply isn't true. You have to be very careful about buying a REO if your intent is to make money off of it. While it's true that the bank is typically anxious to sell it quickly, they are also strongly motivated to get as much as they can for it. When considering the value of a REO, you need to look closely at comparable sales in the neighborhood and be sure to take into account the time and cost of any repairs or remodeling needed to prepare the house for resale. The bargains with money making potential exist, and many people do very well buying foreclosures. But there are also many REO's that are not good buys and not likely to turn a profit.

Ready to make an offer?
Most banks have a REO department that you'll work with in buying a REO property from them. Typically the REO department will use a listing agent to get their REO properties listed on the local MLS. Since banks almost always sell REO properties "as is", you'll want to be sure and include an inspection contingency in your offer that gives you time to check for hidden damage and terminate the offer if you find it. As with making any offer on real estate, you'll make your offer more attractive if you can include documentation of your ability to pay, such as a pre-approval letter from a lender. After you've made your offer, you can expect the bank to make a counter offer. Then it will be up to you to decide whether to accept their counter, or offer a counter to the counter offer. Realize, you'll be dealing with a process that probably involves multiple people at the bank, and they don't work evenings or weekends. It's not unusual for the process of offers and counter offers to take days or even weeks.

With the growing popularity of the FHA loan over the last 3 years FHA's financial strength has weakened. An actuary study concludes that for the first time since 1994, the capital ratio has fallen below the required two percent level and over the next year you will see FHA taking steps to increase and strengthen their financial position.

Current Changes:

- Credit Tradeline requirement was 2 tradelines of 12months or more has now changed to 3 tradelines. 2 of 3 can be alternative tradelines must be at least 12months.

- Title seasoning requirement of 90days has been removed effective today 2-1-2010 and will be in effect for a fiscal year unless otherwise cancelled by future mortgagee letters. Where you will start seeing issues is if the purchase price for your borrower is more than 20% above what the current seller acquired the property for. We will need more documentation such as receipts and pictures for rehab to justify the increase FYI..

Upcoming Changes:

- Mortgage Insurance premiums set to rise from the current 1.75% to 2.25% effective 4-5-2010 Since this is financed to begin with it will not really effect your borrowers payment by much. (EX: $100k loan at 5% 30yr fixed the payment will rise by $3/month)

- Total allowable seller concessions reduced from 6% to 3% Will be released in a mortgagee letter later this month with a commencement period and going into effective in the summer of this year.

- Minimum fico going to 580. Currently the investors have an overlay guideline of a 620 and some going to a 640. This is really important if you have an approval on your borrower at a 620 right now but are working with short sales you stand the risk of losing the 620 approval from the lender. Your best bet would be to counsel your borrowers on how to improve their credit so there are no surprises later down the road. This is also set to be released this month and go into effect in the summer.

In this update, we are going to focus on major changes to the FHA program that we expect will be implemented in 2010, starting later this month. FHA Commissioner Dave Stevens and his team have been reviewing FHA's performance data and operations for several months and we believe there will be dramatic changes to the FHA program and policies.

Over the next several months, we expect at least five significant policy changes in the FHA program. They are:

I. Major FHA Underwriting & Program Changes

As we discussed in our update on the December 2^nd Congressional hearing at which HUD Secretary Donovan and FHA Commissioner testified, we expect FHA to announce major changes to ensure FHA's long-term financial soundness.

FHA is trying to balance three fundamental objectives: 1) financial soundness - ensuring that its capital ratio does not fall below zero and quickly returns above 2%, 2) its mission of serving those borrowers not adequately by the private sector and 3) facilitating the recovery of the housing industry and the over-all economy. In looking for solutions to FHA's financial concerns, raising cash (i.e. insurance premiums) and lowering loan-to-value ratios have the most significant impact on the FHA's actuarial soundness.

We expect changes in the following areas (Attached is the Secretary's testimony which we believe provides an excellent road map for these changes) :

A. Improve FHA loan quality

· Increase "upfront cash that a borrower has to bring to the table"

· Two options

1) eliminating the ability to finance the upfront premium

2) raising the cash investment requirement above 3.5%

· Reduce seller concessions (from 6% to as low as 3%)

· Raise minimum FICO score

· They could impose an LTV maximum by FICO score (i.e. borrowers w/ higher FICO scores could have higher LTVs)

B. Increase MIP

· Up-front premiums can be raised up to 3%

· An increase to about 2 - 2.25% is more likely

· FHA could also establish higher premiums for specific products (e.g. refinance transactions)

Timing: We expect these changes to be announced in January and could be implemented within a couple months of the announcement. These changes can be made administratively (i.e. without Congressional approval or going through regulatory process) and therefore can be implemented quickly.

II. FHA Budget Proposals

As part of the Administration's FY 2011 budget, which the President will announce in his State of the Union speech in late January-early February, we expect there will be several FHA legislative initiatives. They will likely include:

· Increase the current cap for annual premiums (currently .55%) - FHA has said that raising the annual premium is the "most effective means of raising capital for the fund w/ least impact per borrower"

· Obtain a legislative change to Credit Watch to facilitate the suspension of an FHA lender's entire operation not just individual branches

· Increased accountability of FHA lenders for fraud or misrepresentation

· We are not sure what this could entail. We do know FHA is concerned about the performance of its correspondent business.

Timing: These changes will require legislation and therefore will take at least several months to enact. It would take several more months to implement. The increase in the annual mortgage insurance premium could be "fast-tracked" meaning it could be passed and implemented in several months.

III. Credit Watch Expansion

In addition to the legislative change mentioned above, FHA appears ready to implement Credit Watch for underwriting lenders. Under this program, FHA will compare a Direct Endorsement lender's early default performance for loans underwritten to the HUD field office average similar to what FHA has done for retail branches. FHA will evaluate the Direct Endorsement lender's underwriting performance by field office jurisdiction.

In reviewing the regulation, it states:

"The Secretary will review, on an ongoing basis, the number of defaults and claims on mortgages originated, underwritten or both, by each mortgagee in the geographic area served by the HUD field office."

While we had always seen this rule as a tool to monitor wholesaler performance, the regulation does provide FHA with considerable flexibility. FHA could include loans underwritten in principal-agent relationships as well as total loans underwritten by individual lenders (including retail originations) in the aggregate. In other words, FHA could compare a lender's performance on all loans underwritten (including retail) or loans underwritten for third parties (i.e. mortgage brokers or principals) to the field office average. (We expect FHA to continue to compare retail branch performance like it has been doing.) At the bottom of this email is the Neighborhood Watch screen that you can use to evaluate your company's Direct Endorsement performance. If you have questions, please let us know.

Timing : The Credit Watch change could be announced in conjunction with another initiative or on its own. It should be announced in the first quarter. This change requires no additional legislative or regulatory action prior to implementation.

We assume FHA will start w/ a higher compare ratio (e.g. 300%) like it did when FHA implemented Credit Watch for retail. However, we have a new Commissioner now and there is no requirement that FHA start at a higher percentage. We also assume that FHA will commence this program for the March 2010 quarter.

IV. FHA Lender Eligibility Changes

As you know, FHA published a proposed rule on lender eligibility changes in late November and the comment period ended on December 30^th . The rule would raise net worth requirements for FHA approved lenders and eliminate the loan correspondent approval and renewal process. In other words, an FHA approved mortgagee would be permitted to accept a loan from any source assuming the originating entity met State laws and federal regulatory requirements (e.g. RESPA) subject to the "applicable requirements" discussed below.

There are three main parts to the rule. They are:

Ø Elimination of loan correspondent approval process

We expect FHA will stop approving new loan correspondents or renewing existing loan correspondents. There will be no grandfathering of existing loan correspondents into the FHA process. The loan correspondent program will be stopped in its entirety.

HUD would still collect in FHA Connection the unapproved "entity's legal name and tax identification number". On two operational issues, the rule would only permit "FHA approved mortgagees ... to request FHA case numbers" and the loan would have to be closed in the name of the FHA approved lender.

The key question is: What are the "applicable requirements" that unapproved originators would have to meet and wholesalers would be required to implement?

Many industry groups and individual lenders submitted comments encouraging HUD to establish basic broker approval standards (e.g. net worth and audited financial statements) that FHA approved lenders would be required to apply. Some also asked HUD to provide flexibility on the case number assignment and closing processes. We will have to see what FHA does on these issues. We believe they will consider the comments before making a final decision.

Ø Increased net worth requirements

The proposed rule increases FHA net worth requirements from $250,000 to $2.5 million over a three year period. Within one year (of the effective date of the final rule), all participating mortgagees would be required to have a net worth of $1 million, of which 20% must be liquid assets. The 20% liquid asset requirement would also be required when the net worth is increased in three years.

Some groups asked for an extension of the time period for implementing the $2.5 million net worth requirement from 3 to 5 years.

Ø Codification of rules in ML 2009-31

The proposed rule also includes the changes in ML 2009-31 implementing lender eligibility criteria in the "Helping Families Save Their Homes Act"

Timing: We believe HUD wants to move quickly on finalizing this rule because it does not want to process renewals for the approximate 8,000 brokers currently in the FHA system.

V. Risk Management Improvements

We expect FHA will be overhauling its approach to risk management throughout 2010. FHA historically has focused its resources on post-endorsement technical reviews (PETR reports) and the "box checking" that is extremely frustrating for everyone. Like the GSEs, FHA will likely begin targeting early payment defaults for reviews and loans that result in claims in the first couple of years. This change will likely increase indemnification requests since FHA will be targeting their reviews on early payment defaults (i.e. loans with potential problems).

We also believe that FHA will be highlighting "poor performing" lenders more prominently on their website and in press releases. The Commissioner has frequently discussed the development of a Lender Scorecard. We assume that FHA will follow the outline provided in Neighborhood Watch.

Conclusion

FHA will be transformed over the next several years. We believe that the changes outlined above are the beginning of this process with many more changes occurring during Dave Stevens' tenure as FHA Commissioner. We also believe that FHA will continually evaluate these changes and withdraw those changes that are no longer necessary particularly when the capital ratio returns above 2% (e.g. higher premiums and borrower cash investments). We do not believe that there will be any relaxation of risk management and lender monitoring changes.

1. Define your needs. Write down all the reasons for selling your home. Ask yourself, "Why do I want to sell and what do I expect to accomplish with the sale?" For example, a growing family may prompt your need for a larger home, or a job opportunity in another city may necessitate a move. For your goals, write down if you'd like to sell your house within a certain time frame or make a particular profit margin. Work with your real estate agent to map out the best path to achieve your objectives and set a realistic time frame for the sale.
   
2. Name your price. Your next objective should be to determine the best possible selling price for your house. Setting a fair asking price from the outset will generate the most activity from other real estate agents and buyers. You will need to take into account the condition of your home, what comparable homes in your neighborhood are selling for, and state of the overall market in your area. It's often difficult to remain unbiased when putting a price on your home, so your real estate agent's expertise is invaluable at this step. Your agent will know what comparable homes are selling for in your neighborhood and the average time those homes are sitting on the market. If you want a truly objective opinion about the price of your home, you could have an appraisal done. This typically costs a few hundred dollars. Remember: You're always better off setting a fair market value price than setting your price too high. Studies show that homes priced higher than 3 percent of their market value take longer to sell. If your home sits on the market for too long, potential buyers may think there is something wrong with the property. Often, when this happens, the seller has to drop the price below market value to compete with newer, reasonably priced listings.
   
3. Prepare your home. Most of us don't keep our homes in "showroom" condition. We tend to overlook piles of boxes in the garage, broken porch lights, and doors or windows that stick. It's time to break out of that owner's mindset and get your house in tip-top shape. The condition of your home will affect how quickly it sells and the price the buyer is willing to offer. First impressions are the most important. Your real estate agent can help you take a fresh look at your home and suggest ways to stage it and make it more appealing to buyers. * A home with too much "personality" is harder to sell. Removing family photos, mementos and personalized décor will help buyers visualize the home as theirs. * Make minor repairs and replacements. Small defects, such as a leaky faucet, a torn screen or a worn doormat, can ruin the buyer's first impression. * Clutter is a big no-no when showing your home to potential buyers. Make sure you have removed all knick-knacks from your shelves and cleared all your bathroom and kitchen counters to make every area seem as spacious as possible.
   
4. Get the word out. Now that you're ready to sell, your real estate agent will set up a marketing strategy specifically for your home. There are many ways to get the word out, including: * The Internet * Yard signs * Open houses * Media advertising * Agent-to-agent referrals * Direct mail marketing campaigns In addition to listing your home on the MLS, your agent will use a combination of these tactics to bring the most qualified buyers to your home. Your agent should structure the marketing plan so that the first three to six weeks are the busiest.
   
5. Receive an offer. When you receive a written offer from a potential buyer, your real estate agent will first find out whether or not the individual is prequalified or preapproved to buy your home. If so, then you and your agent will review the proposed contract, taking care to understand what is required of both parties to execute the transaction. The contract, though not limited to this list, should include the following: * Legal description of the property * Offer price * Down payment * Financing arrangements * List of fees and who will pay them * Deposit amount * Inspection rights and possible repair allowances * Method of conveying the title and who will handle the closing * Appliances and furnishings that will stay with the home * Settlement date * Contingencies At this point, you have three options: accept the contract as is, accept it with changes (a counteroffer), or reject it. Remember: Once both parties have signed a written offer, the document becomes legally binding. If you have any questions or concerns, be certain to address them with your real estate agent right away.
   
6. Negotiate to sell. Most offers to purchase your home will require some negotiating to come to a win-win agreement. Your real estate agent is well versed on the intricacies of the contracts used in your area and will protect your best interest throughout the bargaining. Your agent also knows what each contract clause means, what you will net from the sale and what areas are easiest to negotiate. Some negotiable items: * Price * Financing * Closing costs * Repairs * Appliances and fixtures * Landscaping * Painting * Move-in date Once both parties have agreed on the terms of the sale, your agent will prepare a contract.
   
7. Prepare to close. Once you accept an offer to sell your house, you will need to make a list of all the things you and your buyer must do before closing. The property may need to be formally appraised, surveyed, inspected or repaired. Your real estate agent can spearhead the effort and serve as your advocate when dealing with the buyer's agent and service providers. Depending on the written contract, you may pay for all, some or none of these items. If each procedure returns acceptable results as defined by the contract, then the sale may continue. If there are problems with the home, the terms set forth in the contract will dictate your next step. You or the buyer may decide to walk away, open a new round of negotiations or proceed to closing. Important reminder: A few days before the closing, you will want to contact the entity that is closing the transaction and make sure the necessary documents will be ready to sign on the appropriate date. Also, begin to make arrangements for your upcoming move if you have not done so.
   
8. Close the deal. "Closing" refers to the meeting where ownership of the property is legally transferred to the buyer. Your agent will be present during the closing to guide you through the process and make sure everything goes as planned. By being present during the closing, he or she can mediate any last-minute issues that may arise. In some states, an attorney is required and you may wish to have one present. After the closing, you should make a "to do" list for turning the property over to the new owners. Here is a checklist to get you started. * Cancel electricity, gas, lawn care, cable and other routine services. * If the new owner is retaining any of the services, change the name on the account. * Gather owner's manuals and warranties for all conveying appliances.