QueenCityHomeBuyers.com

So I was over at my buddy Patrick Riddle’s blog reading about this “Sweetheart Deal” that OneWest got. Very informative and may cause you to raise an eyebrow (or two)…

Click on the comments button to leave your thoughts and opinions.

Jason

Some of you may have heard that Citigroup made an announcement today. That announcement really comes as no surprise as the lending industry continues to dig it’s way out of the current crisis it is in. The announcement: Citi is launching a new “Foreclosure Alternative” program that allows homeowners in default to remain in their homes for an additional 6 months, provided that they hand over the deed to their property after the 6 month time frame is up. For some, this would seem like the answer to their prayers, at least a short-term answer. The homeowner is still required to maintain their utility bills, but Citi promises to pay at least $1,000 in relocation expenses and will keep an open mind about other expenses as well.

Citi will start the pilot for this program this week in the following state: Texas, Florida, Illinois, Michigan, New Jersey and Ohio. Says Citi’s top mortgage executive Sanjiv Das, “Why should we all go through the foreclosure process and evict people?” Das added that avoiding the costly foreclosure process is “less painful for our borrowers as well as for us.” Citi’s program is an effort to counter a growing trend in which many homeowners who owe more than their home is worth in today’s market opt to simply walk away. Many feel that market values will not come back, at least in the foreseeable future. This trend is reflected in data from Moody’s Economy.com, citing that almost a third of all homeowners owe more on their home than it is currently worth.

The announcement of this programs and it’s approach is similar to the program announced from Fannie Mae at the beginning of November, 2009. In the Fannie Mae program, homeowners transfer the title of their property back to Fannie Mae, then turn around and rent the property back at current market rates. The homeowners are allowed to rent on a month-to-month basis for up to one year. There has been a lot of speculation about how effective this program will be, citing that it will only prolong the inevitable and that the majority of homeowners problems are more than a temporary in nature. John V Back of Valley Accounting in Phoenix stated, “The Fannie Mae Deed for Lease Program has some merit in that it allows homeowners to stay in their homes as market-rate renters for up to one year after losing ownership of the homes. The merits of the program are curious to me because while the program does allow the homeowner to avoid the disruption of moving right away and it reduces their monthly payment down to a market rent amount; it is only putting off the inevitable move to more affordable living arrangements. I would think the more logical way to handle this is to simply consider this a loan modification and let the homeowner continue to occupy and own their home on more affordable terms.”

The current crisis in the lending industry is complicated, to say the least. It will take time, flexibility, and many different attempted strategies to get back to ground zero. As a last piece of advice to homeowners, Mr. Back says: “gather all of their loan documents and have your lawyer and your CPA evaluate insolvency, recourse debt provisions, gain or loss on the transaction for investment properties and tax planning before they enter into any transaction with the lender. It is often one of the biggest financial decisions, with the biggest income tax consequences that anyone will ever face.”

By NICK TIMIRAOS And JAMES R. HAGERTY

MCLEAN, Va.—When Charles E. Haldeman Jr. became Freddie Mac’s chief executive officer in August, the ailing housing-finance giant had already consumed $51 billion of government money to stay afloat. It’s likely to need even more.

Freddie’s federal overseers nevertheless have instructed Mr. Haldeman to focus on something that isn’t likely to make the bleak balance sheet look any better: carrying out the Obama administration plan to allow defaulted borrowers to hang onto their homes.

On a recent afternoon, employees at Freddie’s headquarters here peppered Mr. Haldeman with concerns about the company’s future. He responded that they were “fortunate” to have such a clear mission—the government’s foreclosure-prevention drive. “We’re doing what’s best for the country,” he told them.

Freddie and its larger rival, Fannie Mae, were among the first big financial institutions to receive massive federal bailouts after the financial crisis hit in 2008. Government officials have been racing to fix bailed-out car makers and banks and are pushing to reshape the financial-services industry. But Fannie and Freddie remain troubled wards of the state, with no blueprints for the future and no clear exit strategy for the government.

Nearly a year and a half after the outbreak of the global economic crisis, many of the problems that contributed to it haven’t yet been tamed. The U.S. has no system in place to tackle a failure of its largest financial institutions. Derivatives contracts of the kind that crippled American International Group Inc. still trade in the shadows. And investors remain heavily reliant on the same credit-ratings firms that gave AAA ratings to lousy mortgage securities.

Fannie and Freddie, for their part, remain at the core of a housing-finance system that inflated a dangerous housing bubble. After prices collapsed, sending shock waves around the world, the federal government put America’s housing-finance system on life support. It has yet to decide how that troubled system should be rebuilt.

On Dec. 24, Treasury said there would be no limit to the taxpayer money it was willing to deploy over the next three years to keep the two companies afloat, doing away with the previous limit of $200 billion per company. So far, the government has handed the two companies a total of about $111 billion.

The government is willing to tolerate such open-ended exposure for two reasons. First, it sees the companies as essential cogs in the fragile housing market. Fannie and Freddie buy mortgages originated by others, holding some as investments and repackaging others for sale to investors as securities. Together with the Federal Housing Administration, they fund nine in 10 American mortgages. Worries about potential insolvency would cripple their ability to fund home loans, which would hamstring the market.

Second, the companies are a convenient tool for the administration to use in its campaign to clean up the housing mess.

“We’re making decisions on [loan modifications] and other issues, without being guided solely by profitability, that no purely private bank ever could,” Mr. Haldeman said in late January in a speech to the Detroit Economic Club.

Besides playing a key role in the loan-modification program, Fannie and Freddie have jump-started lending by state and local housing-finance agencies by helping to guarantee $24 billion in debt. They also are lending support to the apartment sector by becoming the main funders of loans to builders and buyers of apartment buildings.

By using Fannie and Freddie for such initiatives, the White House doesn’t have to go to Congress for funding. The Treasury and White House can simply issue instructions to Fannie and Freddie via their federal regulator, the Federal Housing Finance Agency, or FHFA.

The government is “running Fannie and Freddie as an instrument of national economic policy, not as a business,” says Daniel Mudd, who was forced out as Fannie Mae’s chief executive in September 2008 when the government took control.

Assistant Treasury Secretary Michael Barr says that because Fannie and Freddie are “owned by the taxpayers in the middle of the biggest housing crisis in 80 years,” it would be unrealistic to expect the companies wouldn’t be used to help stabilize the market. He says the administration’s actions have been “prudent” and “consistent with taxpayer protection.”

The companies are political lightning rods. The government’s decision to absorb unlimited losses followed the Treasury’s approval of multimillion-dollar pay packages for senior executives at each company. Republican critics have blasted those decisions, demanding investigations and pay cuts.

Massachusetts Democratic Rep. Barney Frank, a longtime supporter of the companies, said last month that ultimately they should be abolished and replaced with an entirely new housing-finance system. Last Thursday, he said he would convene a hearing next month to review the future of housing finance and the federal government’s role in it

Some housing experts contend that prolonged government intervention will make it more difficult and costly to eventually wean the companies off government support. “The more aggressively we continue kicking the can down the road, the larger the losses become and the harder it becomes” to address the companies’ future, says Joshua Rosner, managing director at investment-research firm Graham Fisher & Co.

Edward DeMarco, acting director of Fannie and Freddie’s regulator, the FHFA, says efforts to modify loans and to stabilize the housing market ultimately will help the two companies’ bottom lines. “The businesses are trying to mitigate the losses and remediate the problems that led to conservatorship in the first place,” he says.

As mortgage delinquencies rise, Fannie and Freddie are required to set aside more capital to cover anticipated losses. Each quarter, if their revenues are insufficient to meet those financial needs, the Treasury has to kick in more money.

With delinquencies still rising, the outlook is grim. At Freddie, 3.87% of single-family mortgages were at least 90 days past due at the end of December, up from 1.72% a year earlier. Fannie is worse: 5.29% were 90 days past due in November, up from 2.13% a year earlier.

For decades, both Fannie and Freddie were highly profitable. The housing bust hit both hard, sharply reducing the values of the mortgages they guaranteed, along with their investment portfolios, which were stuffed with riskier loans.

By September 2008, their capital reserves were so depleted that the government seized control of both companies, using a legal process known as conservatorship. In exchange for injecting money, the government has received preferred shares that pay a 10% dividend, along with warrants to purchase up to 79.9% of the common stock of each company.

The Obama administration had said it would weigh in on how to revamp the companies when it released its proposed budget earlier this month. Instead, the budget contained only a single line about the companies’ future, promising to “monitor the situation” and to “provide updates…as appropriate.” That stance reflects policy makers’ uncertainty about how to proceed and a lack of urgency about resolving the problem.

Lawrence Summers, the president’s chief economic adviser, has said the companies shouldn’t be run permanently by the U.S. or be allowed to “return to the failed model of the past, where Fannie and Freddie relied on an implicit government [debt] guarantee to borrow cheaply.”

Some Republicans have said the government should play no role whatsoever in the companies in the future, meaning no implied debt guarantee and no government directives to support affordable housing. The other end of the spectrum would be to turn the companies into government agencies.

Many housing-industry leaders believe the eventual plan will fall somewhere in between. Housing-policy experts assembled by the Center for American Progress, a think tank that has provided the White House input on past policy and personnel decisions, recently proposed that Fannie and Freddie be transformed into two or more companies whose profits would be capped like those of public utilities. There would be explicit federal guarantees on certain mortgage-backed securities. The new entities would be required to ensure that mortgages are available to low-income borrowers.

Others have proposed turning the companies into cooperatives owned by lenders, but subject to strict regulation.

With the fate of the two companies now largely in the hands of the government, employees have shifted their attention to the administration’s loan-modification effort, called Home Affordable Modification Program, or HAMP. It provides financial incentives for banks and other owners of mortgages to reduce monthly loan payments for at-risk borrowers. Fannie and Freddie’s job is to oversee how loan servicers—the firms that collect monthly payments on mortgages—are working with homeowners on the front lines.

The program is off to a slow start. The administration said it would offer three million to four million borrowers the chance to modify loans. Through December, loan servicers have signed up 903,000 borrowers for trial modifications. Just 66,000 have received a permanent fix so far.

Both Fannie and Freddie have struggled at times to adjust to the new marching orders. Fannie has warned in financial filings that the modification program had shifted “significant levels of internal resources and management attention” from other parts of the business, which could lead to a “material adverse effect” on the business.

At Freddie, David Moffett, the chief executive who took over when the federal government assumed control, left last March after only six months, partly because it became clear that regulators would be calling the shots.

He says he and others warned administration officials that the loan-modification goals were unrealistic, that borrowers whose homes weren’t worth what they owed were unlikely to take part, and that many participants would be likely to re-default within months. “They really didn’t want our views,” Mr. Moffett says.

Treasury’s Mr. Barr says that isn’t true. The Fannie and Freddie officials he worked with, he says, “were quite supportive of the program, of the structure and the basic design,” and “were integral to the formulation.”

Since then, Freddie has taken some heat for problems with part of the loan-modification drive. In an October report, the government said Freddie failed in its job as the program’s auditor. Its task is to make sure loan servicers deal correctly with applications from borrowers for payment relief. Freddie says it has reassigned the vice president responsible for the effort.

Freddie’s current chief executive, Mr. Haldeman, 61 years old, says it was immediately “very clear” to him that the loan-modification program was a top priority of the Obama administration. But the program isn’t his only headache. As foreclosures mount, Freddie finds itself with title to more and more homes. The company wants to price them to sell, but doesn’t want to put downward pressure on overall housing prices.

“Imagine having to keep the lawns mowed, the lights on, and the property secured for one house, let alone more than 40,000 homes all over the country,” says Mr. Haldeman. “It’s not an easy process.”

John A. Koskinen, a turnaround specialist who became chairman of Freddie’s board when the government stepped in, says that in all his years working for government agencies and troubled companies, “I’ve never been in one with as many challenges.”

Last spring and summer, as interim CEO, he had to recruit executives to fill the top three jobs. Filling those jobs has put the company on firmer ground, he says, and having a clear mission—even a government-mandated one—is helping morale. “At least the getting yelled at by your neighbor in the grocery store is behind us,” he says.

Loan standards today are tighter than they have been in decades. That means the default risk on loans guaranteed recently by Fannie and Freddie is much lower than it was a few years ago. But their mistakes during the housing boom are expected to continue burning holes in their balance sheets.

The Mortgage Bankers Association estimates that mortgage delinquencies won’t peak any sooner than the middle of this year. At the current pace, around 6% of Fannie’s loans and 4.9% of Freddie’s are expected to go into default over the next 18 to 24 months, producing losses that would raise the price tag on Treasury’s bailout to $175 billion, according to October estimates by investment bank Keefe, Bruyette & Woods Inc. The bank has since said that even that dire forecast is too optimistic.

Former FHFA head James Lockhart, the companies’ top regulator until last August, says the U.S. is unlikely to ever fully recoup its investment in the two companies.

—Bob Davis contributed to this article.

Write to Nick Timiraos at nick.timiraos@wsj.com and James R. Hagerty at bob.hagerty@wsj.com

There have been many terms that have been tossed around in real estate industry in recent times.  One of these is the term “Short Sale”.  What is a mortgage short sale and how can it help you?

First of all, lets define what a short sale is.  Bankrate.com defines a short sale as: “A short sale, in real estate terms, is a sale of a house in which the sale price is less than what the owner still owes on the mortgage.  It is a procedure sometimes agreed to by lenders, who often would rather take a small loss then go through the lengthy and costly foreclosure process.”  Why would a lender do this?  There are several reasons why.  The first reason is pretty obvious.  A lender will not even entertain the idea of a short sale unless they have a solid reason to believe that you will not be able to continue making the payments on your loan.  Usually, the evidence to support this belief is in the fact that you are already 90 days late in your payments and that you have no idea how you are going to get back on track.  You may have had a job loss or some unexpected financial disaster.  Whatever the situation, there is little reason to believe that being able to catch up the payments, or “cure” the loan, is a possibility.  This situation is unfortunate, but it does happen…even to those who have said, “That will never happen to me!”

Another reason that the lender may consider a short sale is if property values in your area have fallen, you borrowed heavily against your equity, or otherwise the value of the house is significantly less than what is owed on the loan(s).  So, the lender must consider their options.  One of these options is to accept a short sale.  The reasoning behind accepting a short sale is that it is better to get most of the money they are owed than to lose out and get nothing at all.  They can also take your property back through a foreclosure proceeding, but that’s a completely different post.

Another reason for accepting a short sale is for a very simple reason.  The lender is in the business of lending.  They are not in the business of selling or renting real estate.  A lender is required to maintain a certain amount of cash in reserves for every property that they have taken back in foreclosure.  This means that for every property that a bank has in it’s inventory, that is even more money that they cannot lend out and therefore make a profit on.  Do you see why there are incentives for the lender to accept a short sale?

Is a short sale right for everyone?  Of course not.  Every homeowners situation is different, just like every fingerprint is different.  You must take a look at your own circumstances and resources, taking into account every detail and determining if selling your house through a short sale is the right strategy for you.  You must know that there are disadvantages to a short sale, one of those being a negative hit on your credit report.  How much of a hit will your credit score take?  That is hard to say as there is no set-in-stone formula you can use to determine how many points will be deducted from your credit score (this formula is proprietary).  There are many different factors that go into determining an individual credit score, so no two reports will be identical in the impact from a short sale.  However, a short sale will also reflect that you are proactive and that you did not just “give up” or “quit” on your obligation, as is likely the case when a foreclosure shows up on your credit report.

You must also be aware that the lender does not have to agree to a short sale.  The case must be made to the lender as to why it is in their best interest to accept a short sale.  One way to kill any chance of a short sale being accepted is for the end buyer to offer the homeowner money at closing.  Most lenders will not agree to the homeowner receiving any cash at closing.  The reason for this is simple in that if the lender is taking a loss, they feel that the homeowner should not be “rewarded” for selling their home for less than what is owed on the loan.  For a short sale to work as it is designed, it must be the best option for all parties involved: for the homeowner, for the lender, and for the end buyer.  I hope this helps in explaining the short sale process to you.  Feel free to leave any comments or questions below.