Defaulting on the Dream

The Pew Charitable Trust has just released "Defaulting on the Dream: States Respond to America's Foreclosure Crisis" . This is a state-by-state breakdown of the effects of the mortgage crisis. It details the scope of the problem, as well as identifies state-specific resources for borrowers who are in financial trouble. If you want an in-depth report on the current mortgage crisis, or just want to know if your state is offering help for homeowners, this is the place to look.

Is a Lease-Option a Good Idea?

In the last few months, I have gotten a lot of inquiries about lease-options. First, let's define the term. In a lease-option, the buyer/tenant rents the property from the seller/landlord for a specified period of time. At any point during the lease, the buyer/tenant has the right to purchase the property at a price that was pre-determined in the lease-option. To compensate the seller/landlord, the buyer/tenant gives the owner a specific amount of non-refundable option money when the option is signed. In addition, the buyer/tenant usually pays above-market rent, with a certain amount to be used towards the down payment.

Let's look at an example. Fred wants to put a lease-option on Mary's house for 1 year. Fred and Mary agree that, if the purchase goes through, the price of the home will be $100,000. Fred agrees to give Mary $5,000 option money and agrees to pay $800 per month in rent, even though similar homes are renting for $500 per month. Mary agrees to allow Fred to rent the home for 1 year. At any point during that year, Mary agrees that Fred can buy her house for $100,000. In addition, Mary agrees to set aside $300 per month of Fred's rent. If Fred buys the house, this $300 per month surplus will be used as part of Fred's down payment. If Fred rents for 12 months before buying, he will have "saved" $3,600 to be used towards the purchase. If Fred decides not to buy the home, Mary keeps the extra money and Fred moves out at the end of the lease.

For the seller, a lease-option may be a way to sell a home during times when home sales are slow. But there are real advantages for the buyer as well. Especially today, when mortgage money is hard to come by, credit and income requirements are tougher, and mortgage lenders want to see more down payment money, a lease-option allows a buyer/tenant the time to work on his credit and down-payment savings, while securing the property he wants to buy now.

Other advantages for the buyer/tenant include the ability to live in the home and community before permanently committing to them. This gives the buyer/tenant the chance to try out both the house and the neighborhood to see if he really likes living there. Also, the lease-option acts as a price shield. If prices continue to fall, the buyer/tenant can walk away at the end of the lease without buying. If prices go up, the seller/landlord is locked in to the agreed upon price.

The lease-option agreement must be carefully crafted to make sure that all parties are protected and that no one is paying too much or too little for the purchase, the option money, or the monthly rent. But the biggest risk is one of foreclosure. If the seller/landlord loses the home to the bank during the option period, the tenant/buyer has no recourse other than to sue the seller/landlord. If the seller/landlord has just gone through foreclosure, chances are he doesn't have a lot of money, so even if the buyer/tenant wins, he may not be able to collect.

Before you enter into the lease-option, you can try to protect yourself by investigating what loans are presently on the property and how much the seller pays each month. If their monthly mortgage payments are much higher than the rent, the seller may have problems meeting their obligations. If you do enter into a lease-option, you may want to record it with the County Recorder. That way, if the seller tries to get another loan, the new lender will be notified of the lease-option.

Can I Still Get a Loan?

In a word - yes. Even in these horrible economic times, banks are still making home loans. But the days of signing your name on an application and walking out of the bank with a check are over. Banks are back to wanting to see 20% as a down payment and credit scores 720 or above.

If you can't meet these requirements, don't give up. FHA offers loans with 5%, 3% and even 0% down payments. They have special programs for teachers and police officers, as well as programs for low income borrowers.

For more information, look at their website. It outlines all their programs and requirements. You can even apply on line.

On-Line Title Insurance Could Save You Money

When you buy or refinance property, you are required to purchase an insurance policy that protects the buyer or lender from any financial losses due to defects in the title. The title company searches back through the records and reviews all the previous owners (the "chain of title"), thereby insuring you against such things as a forged deed. Usually, the person paying for the insurance gets to chose the title company. In the case of a purchase, that is usually the buyer, and in the case of a refinance, that is usually the borrower. Since most of us rarely have the need of a title insurer, we're happy to use the company recommended by our realtor or lender. But you may want to reconsider that.

Entitle Direct Insurance has just made title insurance available over the Internet. They are presently only offering services in Alabama, Arkansas, California, Delaware, Florida, Illinois, Louisiana, Massachusetts, Maryland, Mississippi, Pennsylvania, South Carolina and Virginia. But they expect to be available in almost all states by the end of this year. They claim to offer a 35% savings over "brick and mortar" title companies.

They also offer a "Control Panel" service, free to all borrowers, whether they purchase title policies from EDI or not. The core of this service is an online folder that contains all information relevant to the transaction, and which is continually updated as the loan moves toward closing. EDI assigns a closing specialist to each borrower who monitors the entire process, and will alert the borrower to any tasks that need to be completed before the closing.

If you need title insurance, it's worth comparing EDI's pricing with your local title insurance company. Whether or not you buy EDI's insurance, you may want to use the Control Panel. One word of caution - in order for the Control Panel to be effective, you need to make sure other parties to the transaction - Realtors, attorneys, lenders - agree to download their documentation into your file. Otherwise the information you see in the Control Panel will be incomplete and out of date.

Though the first of its kind, it's just a matter of time before other title companies offer similar on-line products, thereby driving the prices down even further. Meanwhile, it makes sense to at least check EDI's pricing before hiring a title company.

If any of you use EDI, I would be very interested to hear about your experiences with them.

Bank of America Agrees to Restructure Countrywide Mortgages

For many, Countrywide Financial is the poster child for predatory lenders. Their abuses were so egregious that in June, a lawsuit was filed against them for making bad loans. Soon after the filing, Countrywide was acquired by Bank of America.

Today, in order to settle this lawsuit, Bank of America announced that it would spend up to 8.4 billion dollars to restructure Countrywide's loan portfolio. In a statement, the bank said the program is intended to benefit those borrowers who "financed their homes with subprime loans or pay-option adjustable-rate mortgages serviced by Countrywide and originated prior to Dec. 31, 2007."

Starting December 1, counselors will begin a proactively outreach to customers that could result in interest rate and principal reductions for nearly 400,000 Countrywide customers nationwide. In addition, foreclosure sales will be temporarily frozen for those borrowers who are likely to qualify for the program.

"With this settlement, homeowners will receive direct relief from the catastrophic damage caused by Countrywide," California Attorney General Jerry Brown said in a statement. "Countrywide's lending practices turned the American dream into a nightmare for tens of thousands of families by putting them into loans they couldn't understand and ultimately couldn't afford."

Are Foreclosure Modifications Helping Borrowers?

In case you have been wondering if lenders are really helping borrowers stay out of foreclosure, we now have the answer -- and it's not encouraging.

On Monday, the Foreclosure Prevention Working Group issued its third quarterly report, covering February through May, 2008. The report concluded that industry measures to keep homeowners out of foreclosure have decreased. "Nearly eight out of ten seriously delinquent borrowers are not on track for any loan work-out or loss mitigation assistance to enable them to avoid foreclosure....Too many homeowners face foreclosure without receiving any meaningful assistance by their mortgage servicer, a reality that is growing worse rather than better, as the number of delinquent loans, prime and subprime, increases."

The report also said that new efforts to prevent foreclosures are on the decline, suggesting that loan modification approaches have now been tailored to a limited group of homeowners. Instead of expanding loan modification for a broader set of homeowners, mitigation efforts are being focused on selling homes before foreclosure, rather than helping people stay in their homes.

For those who have received help, there is also discouraging news. The report finds that one out of five loan modifications made in the past year is currently delinquent. Thus it would appear that a significant number of modifications offered to homeowners have not been sustainable. Recent reports indicate that many loan modifications are not providing any monthly payment relief to struggling homeowners. The report expressed a concern that unrealistic or 'band-aid' modifications have only exacerbated and prolonged the current foreclosure crisis.

The report concludes "While some progress has been made in preventing foreclosures, the empirical evidence is profoundly disappointing."