Real Estate News

Freddie Mac said on Friday that it would stop buying and securitizing interest-only loans in September because those mortgages have performed so poorly.

Interest-only mortgages allow borrowers to make payments on interest for an initial period, usually between three and 10 years, before requiring principal and interest payments for the remainder of the term. An adjustable-rate variety of those loans, called “hybrid ARMs,” feature a fixed-rate during the interest-only period that resets annually to a market benchmark when the loan begins amortizing.

During the housing boom, those interest-only ARMs became increasingly popular because they allowed homeowners to make purchases even as homes became less affordable. “It normally allows you to buy more house than you would be able to afford,” says Guy Cecala, publisher of Inside Mortgage Finance.

After the private mortgage market collapsed in late 2007, Freddie and its larger rival, Fannie Mae, remained the only buyers of interest-only mortgages. Fannie has been more active in buying interest-only loans, and purchased $9 billion last year, compared to just $2.1 billion in purchases by Freddie Mac, according to Inside Mortgage Finance. Freddie bought just $413 million during the fourth quarter.

A Freddie spokesman said the company was exiting the interest-only market as a result of “continuing poor performance of these products” and as a result of the company’s efforts “to promote responsible lending and sustainable homeownership.”

As we approach the deadline for creating binding purchase agreements that qualify purchasers for the home buyer tax credit, questions have recently been raised about how the IRS will define the term “binding agreement.”

MAR’s legal counsel crafted an opinion just last week that raises several issues that could be raised by the IRS relative to future claims for the tax credit. The full opinion can be viewed by accessing this link: First-Time Homebuyer Tax Credit.

CBWM is recommending the following measures be taken at a minimum:

1. All purchase agreements executed between now and April 30, 2010 under which the buyer intends to claim the Home Buyer Tax Credit shall include the following language in Paragraph 40:

“Broker has advised Buyer to seek the advice of an attorney, financial planner and/or accountant for professional guidance relative to whether this purchase qualifies for the Home Buyer Tax Credit.”

Market Statistics

2. If any purchase agreement existing on April 30, 2010 under which the tax credit will be sought is modified after that date, the above language shall also be included on the addendum.

3. All parties to these transactions should be aware that any attempt to circumvent the April 30th deadline by creating false or fraudulent documents, such as back dating purchase agreements or drafting a purchase agreement with a “straw buyer” and assigning the contract to a new buyer and close before July 1, 2010, is illegal. Pursuant to 26 USC Section 7206 (2) of the IRS Code, this willful and fraudulent conduct is a felony, punishable by up to three years in prison or a fine of not more than $250,000 for individuals or both, together with the costs of prosecution. Agents participating in such activity would also be in violation of Company policy and lose coverage under our error and omissions policy.

Home Affordable Foreclosure Alternatives (HAFA), which is part of the Home Affordable Modification Program (HAMP), aims to help homeowners who are unable to qualify for a loan modification under HAMP by providing them with the option to pursue a short sale or deed-in-lieu. Under the program, financial incentives are provided to servicers and borrowers who use these foreclosure alternatives.

According to the program guidelines, 30 days after a borrower is determined to be ineligible for a HAMP modification, the servicer must consider that borrower for HAFA. Every potential eligible borrower must be considered for the program before the borrower’s loan is referred to foreclosure or the servicer allows a pending foreclosure sale to be conducted.

If the servicer determines that the borrower is eligible for HAFA, the short sale or deed-in-lieu process will begin. Qualified borrowers will be given pre-approved short sale terms before the property is listed, and once an offer is made, mortgage servicers will have 10 days to approve or reject the sale.

According to Treasury, the foreclosure alternative options offered under HAFA reduce the need for potentially lengthy and expensive foreclosure proceedings and also help preserve the condition and value of the property by minimizing the time a property is vacant and subject to vandalism and deterioration. In addition, Treasury said short sales and deeds-in-lieu generally provide a substantially better outcome than a foreclosure sale for borrowers, investors, and communities.

To encourage HAFA participation, the Treasury Department raised financial incentives under the program in late March. Borrowers are now eligible for $3,000 in relocation assistance, and servicers will receive $1,500 to cover administrative and processing costs for a short sale or deed-in-lieu completed under the program.

In addition, investors will be paid as much as $2,000 for allowing a total of up to $6,000 in short sale proceeds to be distributed to subordinate lien holders. This reimbursement will be earned on a one-for-three matching basis, and to receive the incentive, subordinate lien holders must release their liens and waive all future claims against the borrower.

HAFA became effective on April 5. The National Association of Realtors said its members are already hearing that the employees of many servicers have not yet heard about the program, making it clear that many servicers will not “hit the ground running.” However, many are ready, and the program is expected to be a success.

Metro Detroit will share in the nation’s sustained but gradual economic recovery according to Stu Hoffman, the chief economist for Pittsburgh-based PNC Financial Services Group, Inc.

Hoffman said he expected to see job growth in the area lag job growth in the U.S., but incomes will grow here by an average of 2.5 percent in 2010 after falling by 4.2 percent in 2009. And they will grow by 3.7 percent in 2011.

Though Hoffman expects the U.S. could start seeing significant job growth as early as this month, he expected Detroit area unemployment to peak this year at 16.4 percent, up from 15.4 percent in 2009, and then fall to 16 percent next year. Michigan will continue to suffer higher unemployment than the rest of the nation, but the trend is certainly positive.

Normally, post-recession job growth matches the numbers for job loss during the recession. This recession has cost eight million jobs in two years, but only about four million jobs will be added in the next two years, Hoffman said.

There will be better news on home prices, too. After falling by 21.4 percent locally in 2009, they will decline 3.1 percent this year and rise 3.2 percent next year. That’s better than the national predictions. Of the 26 metropolitan regions PNC studies, only Baltimore is forecast to have better house-price appreciation next year, 3.3 percent.

Hoffman said he expected home prices to rise locally through 2013, with their current low prices actually helping fuel a recovery as those going back to work decide the time is right for buying. He also predicted continued growth in light vehicle sales by the Detroit Three, from 10.3 million last year to 11.4 million this year and 13 million in 2011.

While Hoffman predicts a sustained U.S. and global recovery, he said it will be much slower than post-recession recoveries of the last 50 years. He disagreed with economists who predict a W shaped, or double-dip recession. Barring a major spike in oil prices from unforeseen events, “I don’t think the recovery will be snuffed out,” he said. “This isn’t the eye of a hurricane. But it’s not the full-speed recovery we would like.”