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The New Solution

Mar 24, 2011

Homeownership has lost its luster. Need proof? Pick up a newspaper or ask any Jane on the street; you’ll soon figure out the industry is not viewed in a particularly good light these days. You’ll also figure out that everyone has a fix, like scrapping interest rate deductions or requiring a 20 percent downpayment—which is great if you want homeownership to decline another 10 percent, as history suggests they would. Here’s another idea you’ll hear: “Simply wait ... I can hear a stampede of buyers just around the corner.” Yes, there are some who still speak of the mythical pink unicorn that is pent-up demand. As if during this time of record-breaking bad news of delinquencies, unemployment, underwater homeowners, etc., there is a reserve of money-hungry homebuyers waiting for the stars to align before they break out their checkbooks. Not so. In truth, we have the least capable and least willing group of buyers since the Great Depression. But despite all of this, our woes can be solved by thinking outside of the box and getting to the root of the problem: Creating sufficient capable demand for the coming inventory. Before we begin, just a quick note: Your first instinct will be to dismiss this idea as pure nonsense. Give it a chance. If these suggestions were implemented, we’d have the housing problem whipped in 24 months—and those in the business of making loans would have all the clients they could handle. Here’s the plan: For the next two years, we create a zero-down loan program with two special features that will assure it creates virtually no foreclosures. The loans, of course, would require real qualifying—thus avoiding more garbage paper. First, let’s start with our target demographic. In the chart below, you’ll notice that the under-35 group has the smallest percentage of homeownership. That being the case, their credit is the least damaged coming out of the housing crash. (You can’t lose what you don’t own.) Homeownership rates by age of householder Source: U.S. Census Bureau With zero-down and an interest rate of five percent or less, many would see their monthly obligation actually decrease. By leaving the variable (and often accelerating) rental market in favor of fixed housing costs, over time, this payment would shrink. It’d almost feel like a car payment, freeing up money for other consumer purchases. In short, they would be enjoying the American dream. But what about “virtually no foreclosures,” you’re wondering? Good question. In the highly unlikely event that 10 percent of the borrowers stopped making their housing payment, lenders wouldn’t lose a dime. They’d simply move the loan to someone willing to cover the missed payments and assume the remaining loan balance. Once upon a time, the Federal Housing Administration (FHA) had something called “simple assumption.” (Never was anything more perfectly named.) The new buyer put $35 in the mail and the loan was transferred from the current owner to the new owner; no formal qualifying or assumption paperwork required. The only stipulation was that the loan be made current. Simple indeed. Let’s take a look at a typical example, with a property that has a $150,000 loan at five percent interest: $805 (principal and interest) + $195 (taxes and insurance) = $1,000 monthly payment Assume the owner is three months behind when the lender gives notice of its intent to start foreclosure. Instead of losing the home, the owner finds someone willing to make the payments current and deeds them the property. The lender is made whole, and the new owner goes from being a renter to a homeowner. Take a look at this foreclosure chart. How many buyers do you think might jump at the chance to own a home—without having to formally qualify? Trustees deeds recorded: Southern California Source: Real Estate Research Council of Southern California, Cal Poly Pomona There are record numbers of former owners whose credit was damaged credit in the past few years. Each is a family who lost property to foreclosure, and they’re perfect candidates to again become homeowners via simple assumption. Of course, no lender will make them a new loan because of their credit history. But that doesn’t necessarily make them a risk to lose another home. If they’re able to bring five to 10 percent cash to the deal, they have “skin in the game.” Not only have they made a substantial financial commitment, but they are overjoyed to get a chance to own again. Only this time, their payment is less than rent. As an aside, didn’t we just have a zero-down homeownership program when we gave an $8,000 tax credit to the buyer of a $100,000 house? Buyers didn’t need $8,000 to close escrow, so in essence, that’s a zero-down purchase. The problem is that the loan cannot be easily transferred in case of a default, and that loan program will create foreclosures on top of the $8,000 bill for each sale. The tax rebate program created artificial demand. My nothing-down program would create real demand and permanent benefits. Overjoyed-ness aside, it’s possible that the new owner could stop making loan payments. They hide their head in the sand and the lender takes the property to a trustee sale. Bad news. Or is it? Under this system, the opening bid at the trustee sale will only be the late payments and fees—not the entire principal amount plus late charges and everything else. On our hypothetical $150,000 loan, the back payments wouldn’t exceed $7,000 and the fees $2,000. By show of hands, how many investors would pay $9,000 for a chance to own a positive cash flow rental with five-percent financing for 30 years? I am an investor, I can tell you the number would be unlimited. What’s more, each property would likely see overbids, which normally go to the owner. For this loan program, however, borrowers who default get none of the overbid. Call it “provisional ownership.” If they live rent-free for six months, that’s reward enough. Let the overbid fund an insurance policy that backs any losses for the new loan program. One important element is to allow the participation of Realtors. Give them the assurance that the former owner will have no residual liability by allowing the loan to transfer to the new owner. This would assure huge demand for the inventory across all price sectors of the market. It would also save the lenders a ton of money. Instead of foreclosing and losing money, the loan will be brought back in good standing; just with a different owner’s name. For the time being, the lenders should care more about having a loan payment being made than whose name is on the check. Bottom line … this program creates housing demand in three important ways: ►First, it gets young adults involved in homeownership much earlier than normal. This creates part of the demand we need to turn the percentage of homeownership headed in a positive direction. ►Second, when a borrower defaults on this new loan program, it actually allows a former owner to once again own a home. All they have to do is make the loan current and record a grant deed. Call it forgiveness or amnesty or a failing long-term memory, but the group of credit-damaged former owners is huge and needs to be considered. (And there’s no way the new program would generate enough foreclosures to fill the demand—that’s a guarantee.) ►The third way is taking the property to a trustee sale with an opening bid of only the back payments and fees. Buyers, with cashier’s checks in hand, bid against other trustee sale buyers. The starting bid is the total of the late payments plus foreclosure costs, not the principal under this new loan program (approximately six percent of the balance of the loan. Compare that to today’s typical downpayment requirement for investors: 20 to 30 percent with a limit of 10 loans, which eliminates the best and brightest investors from helping with the economic recovery. If this new loan program would be allowed, investors would be able to prevent a foreclosure from happening and get better financing than they could anywhere else ... and in unlimited quantity. The more buyers are interested in a property, the higher the bid would go. Then, take the overbid and build a fund to do something worthwhile … fund Habitat for Humanity or green building, etc. Now, do you still think this nothing-downpayment idea is ridiculous? Bruce Norris is an active investor, hard money lender and real estate educator with over 30 years of experience. Bruce has been involved in more than 2,000 real estate transactions as a buyer, seller, builder and money partner. For more information, call (951) 780-5856 or visit  
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