By Patrick J. Tangney
Consumer confidence is low. One may think this an understatement. One way economists gauge consumer confidence is through wide spreads between market interest rates and the yield on Treasury Securities. These spreads first spiked in August 2007, and have been high through 2008, suggesting confidence has not been restored.1
Due to low consumer confidence, credit has seemingly dried up, or at a minimum, become more difficult to get. Some of the most obvious effects of less consumer credit on our economy are: (1) some small business owners are unable to acquire loans, (2) some homeowners with unfavorable adjustable rate mortgages are unable to refinance, and (3) strong financial institutions are not helping weaker financial institutions, amongst others.
So what caused Consumer confidence to plummet? Was it really the "housing bubble" bursting? Was it the insufficient regulation of sub prime mortgages? Partly yes, but mostly no. 97% of all current borrowers are paying their mortgages on time, which is close to what the average has been for several years in a row. So why is credit so scarce?
First, banks must deal with bad mortgage loans by either raising additional capital or reducing their lending.2 Because consumer confidence is low; banks are not able to raise additional capitol, so they are forced to reduce their lending.
Secondly, changes in accounting and risk management due to deregulation, have made banks less transparent making it more difficult for them raise capital. This is true in both mortgage backed securities (MBS) and non mortgage backed securities. In layman’s terms, banks are having a difficult time raising capital/finding investors because investors do not have the same safeguards that used to be in place protecting their investments.
Several things can be done to help the current credit situation. The government has stepped in with the Economic Bailout Plan and the HERA (Housing and Economic Recover Act of 2008) which will be discussed in another article.
Individual consumers can also help raise confidence, which will open the fluidity of credit our countries economy needs to operate. First, individual consumers can budget to make sure their loans, credit cards, car notes, and any other type of credit are paid on time. Secondly, for those individual consumers who are capable, continue spending and investing.
Although this is a very complex issue that I attempted, with the help of some Congressional Reports drafted for Congress, to explain in simplified terms, the strength of the economy depends on both the Government Bailout and individual consumers.
1 CRS Report RS22956, The Cost of Government Financial Interventions, Past and Present, by Baird Webel, N. Eric Weiss, and Marc Labonte.
2 CRS Report RL34412, Averting Financial Crisis, by Mark Jickling.
By R. Bradley Runyan, Esq.
This Edition’s Topic: Drafting The Contract With Current Economic Conditions and Loan Requirements In Mind
We are all aware of the current market conditions due to factors including the tightening of credit and restrictions on some financing. Now is the time to slow down and keep a few things in mind when drafting the contract and making promises to the Purchaser or Seller.
- Settlement Date for FHA/VA, etc. Loans. Our office has strived to deliver settlements on as quick a time frame as possible to allow for a short turn around. We are experiencing a much longer time frame for FHA/VA loans. We are also seeing a longer period of review and approval for loans above 80% Loan to Value. The underwriters’ requirements on these loans are more strict and finite. The review is more extensive. Some lenders face the challenge of training new people on how to underwrite FHA/VA loans because of the increased volume and infrequency of use in the recent past. Please anticipate and coordinate with the lender on all contracts with FHA/VA, etc. loans. As always, we will do everything we can to ensure that settlement dates are met.
- Closing Cost Credits. In several transactions we have settled lately, an inspection report has resulted in a credit to the Purchaser in lieu of any repairs/replacements done by the Seller. Please make no assumptions that the lender will automatically approve a credit and that no addendum is necessary for this credit. This is especially true for FHA/VA Loans. The lender must approve the credit in advance of settlement, and determine how to show the credit in light of FHA/VA requirements. An addendum must be drafted and signed, even if we do this for you at settlement. Finally, please remember to verify that there are enough actual closing costs to cover the credit amount.
- Lenders Approval and Funding. Again and especially on FHA/VA, etc. Loans, we are seeing a longer period to approve the loan. Sometimes we are waiting at the last minute for approval of the HUD-1 Settlement Statement. Because we are in a "Wet Settlement" jurisdiction, the loan has to be funded at settlement. Lenders may condition funding on approval of the HUD-1 Settlement Statement. If so, it may cause a delay at settlement. We will attempt to always get the approval in advance, but occasionally, there are circumstances beyond our control.
With current conditions, the need to consider timing and credits when drafting the contract is more important than before. As mentioned in previous columns keeping the contract clean, clear and precise leaves little room for disagreement prior to or during settlement.
By Patrick J. Tangney
Let me begin by saying there are a lot of articles that have been published on this topic, and I am not an expert at how HERA and the Bailout Bill will actually be implemented. I do not believe the Treasury Department, the Secretary of Housing and Urban Development, nor the Federal Housing Finance Agency Director know for sure how exactly these pieces of legislation will be implemented. I hope, however, this article gives you enough of the proposed steps our government may take to be informational and helpful.
The main step in HERA and the Bailout Bill is for The Treasury Department to buy up to $700 billion in mortgage-related assets. The price at which the Treasury will purchase mortgage-related assets has not been solidified as of yet, but Secretary Paulson says prices, "will be established through market mechanisms where possible, such as through reverse auctions."1 Bank ledgers would be healthier if higher risk loans were taken off of their hands (purchased by the government), which would allow banks to issue more credit. This, the government hopes, will point the economy back in the right direction.
The main restrictions on which mortgage-related assets the Treasury can buy are: (1) It has to be a mortgage-related asset that was made or issued before September 17, 2008, and (2) The lender has to have their headquarters in the United States. By definition, however, a mortgage-related asset can be a residential loan, mortgage-backed securities (MBS), and subordinated mortgage securities.
The Treasury will be allowed to manage the mortgage-related assets acquired, which essentially means the Treasury will be able to modify mortgage-related assets, as well as manage revenues and risks of the mortgage-related assets.
The Treasury is currently required to report to Congress within three months of enactment, and every six (6) months thereafter. The program is written to last for two (2) years.
Lenders that have loans not purchased by the Treasury that are approaching default, are encouraged "to follow industry best practices and to modify loans in accordance with the Hope for Homeowners Oversight Board."2
The returns/profits the government realizes from interest, and sales of assets, will be returned to the Treasury's general fund for the benefit of the taxpayers.
HERA has a few key items that may be useful for our industry to know:
One, under HERA, FHA can insure up to $300,000 billion for HOPE for Homeowners (H4H). H4H is a voluntary refinance initiative for troubled loans. Some of the requirements are as follows: (1) mortgage originated before January 1, 2008, (2) it is the borrower’s principal residence, (3) the borrow has to show proof they can no longer afford the payments, (4) the debt to income ratio has to be 31% or greater, (4) borrower has to certify that they did not intentionally default, (5) borrower cannot have fraud convictions within the last 10 years, (6) the new loan has to be at least 30 years, (7) loan to value must be 90% or less, (8) the maximum loan amount is $550,440, (9) lender must waive fees and penalties on existing loan, and (10) subordinate loans must be extinguished.
The fascinating part of about the requirement to extinguish subordinate loans is that HERA proposes FHA buys the subordinate loans at a discount, but the subordinate lender gets to recapture any appreciation upon sale of the property. The Bailout Bill has language that allows FHA to buy the subordinate loans at a discounted price, but there is no language allowing recapture of the appreciation by the subordinate lender.3
1 “Statement by Secretary Henry M. Paulson, Jr. on Comprehensive Approach to Market Developments,” Press Release, Department of Treasury, September 19, 2008.
2 CRS Report RS 22957, Proposal to Allow Treasury to Buy Mortgage-Related Assets to Address Financial Instability, by Edward V. Murphy and Baird Webel.
3 Outline for the District of Columbia Bar Association dated October 8, 2008, The Housing and Economic Recovery Act of 2008 (HERA , by Michael C. Flynn, General Deputy General Counsel U.S. Department of Housing and Urban Development.
Default: the failure to make payments in full, on time or at all or to live up to any other obligations placed on the borrower by the loan agreement.
Foreclosure: a popular term used to describe the procedure followed in enforcing a creditor's rights when a debt secured by any lien on property is in default; however, the correct term for a "Foreclosure" involving a deed of trust is a "Trustee's Sale Proceeding."
Trustee's Sale: the public auction of the real property, described in the deed.
Notice of Trustee's Sale: a written document that sets forth the day, date and time of the trustee's sale, describes the property to be sold and gives an estimate of the unpaid debt as of the first publication debt. This document is prepared by the trustee and does not require the acknowledgment of a notary public and must be recorded with the county recorder in the county in which the property is located at least 14 days prior to the scheduled sale date. We must arrange for the notice of trustee's sale to be published in a qualified newspaper in the city (or judicial district), in which the property is located. This publication must appear for 3 consecutive weeks, with the first publication date being at least 20 days prior to the sale date.
Lis Pendens: a recorded notice of pending legal action which notifies prospective purchasers that any interest acquired in the property is subject to litigation and the decision of the court.
Reinstatement: a curing of a default and restoration of the loan to current status through payment of past-due amounts together with the fee and expenses of the trustee.
Bankruptcy: An action filed in a federal bankruptcy court that allows a creditor to reorganize or discharge credit obligations due to insolvency. A property owner may halt foreclosure action by filing bankruptcy. Bankruptcies remain on a credit record for seven years and can severely limit a person's ability to borrow. Chapter 7 - "Debtor Wipeout" The court oversees the liquidation of the debtors' non-exempt assets, distributing the cash proceeds proportionally amongst their creditors. Chapter 11 - This is a business reorganization proceeding. Chapter 13 - "Debtor Workout" This is the almost-automatic choice of most trustors seeking to use a bankruptcy filing to delay the in- evitable trustee's sale as long as they can. The purpose of this proceeding is to give a "wage earner" time for rehabilitation . . . a temporary respite free from the collection efforts of creditors.
Justine Dupree
Settlement Coordinator
Justine Dupree has recently joined the Stewart Title Group team as a Settlement Coordinator. Justine grew up in Connecticut and earned her B.S. in Criminal Justice from Lasell College in Massachusetts. Her first job was for a litigation firm where she began as a filing clerk and later went onto residential real estate. In college, she was the legal assistant for the Clerk Magistrate of the District Court where she had the opportunity to gain great experience inside and outside of the courtroom. After graduating from college she became the paralegal for two attorneys working for a well known civil litigation law firm in New Haven, Connecticut where, which demanded her accuracy, knowledge and attention to detail. After being offered the job to be a part of the Stewart Title Group team she took the opportunity and made the move to DC.
As a Settlement Coordinator, Justine is involved in the pre-closing end of the settlement process. In addition to her attention to detail, Justine loves to help others and is prepared to do her very best to provide a pleasant settlement.
In her free time, Justine enjoys swimming, traveling and art history.
During this time of economic uncertainty, the executive team of Stewart Title Guaranty Company, our underwriter, has asked us to share the following message regarding the strength of our financial position – it is the foundation of the protection we offer to owners and lenders through our title insurance policies.
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