When I talk to realtors in many parts of the nation, they admit that foreclosures and short sales continue to be a key part of the housing activity in their area. Many analysts feel that the pace of short sales is likely to increase, especially given market conditions and the opinion that short sales are an alternative to foreclosure that can benefit the borrower and the lender. The lender sees potentially lower losses on the loan, and the borrower avoids the stigma of having a foreclosure on their credit history. The government continues to use various tools, such as modifications or foreclosure moratoria (moratoriums?) to prevent more loans from entering the REO market.

The short sale option is mostly offered to borrowers who are ineligible for or have failed to succeed in loan modifications, or just choose not to be modified and are certain to enter foreclosure (or are already there). The program can be economically beneficial to both parties involved.

For the servicer, the four main costs involved in selling the house are:

  • Possible further depreciation in a declining market
  • A discount to the overall market when sold
  • The cost of principal and interest advanced to the trust until the house is sold
  • Repair and maintenance costs.

Foreclosures, which turn into REO situations, typically take longer than a short sale, exposing the parties to more possible depreciation, and few banks & institutions are in the business of owning real estate (despite Fannie's D4L program).In a foreclosure, servicers find that the expenses associated with the liquidation and repair costs are significant, given that foreclosed upon borrowers are unlikely to maintain the property. Most of the benefits of a short sale are due to the shortened timeline and cooperation from the resident. The house would also potentially attract better bids, as it is being actively maintained and lived in.

From the troubled borrower's viewpoint, they have to decide among a foreclosure or short sale, staying in the house for free until evicted, staying in the house until it is sold in a short sale. A short sale will have a lesser hit on their credit history, and probably be able, if they really want, to buy a house after a few years. Of course there are emotional differences between a foreclosure and a short sale, potential deficiency judgment issues, the stigma of having been foreclosed upon, and tax implications of forgiven debt. The lender typically reports a successful short sale differently from a foreclosure to the credit bureaus although if the loan had gone deeply delinquent prior to completion of a short sale, the hit to credit history would already be significant and, thus, not much different from foreclosure. The biggest advantage to a borrower when opting for a short sale is the timeframe within which a new mortgage loan can be taken out: two years versus (I believe) five for a foreclosure.

Union Bank of California weighed in with some broker changes. These updates target condominiums and PUD's, and follow Fannie Mae's criteria for approved projects for conditional final project acceptance.  In addition, UBOC added some conditions to the disposition of a borrower's current residence when there is a pending sale for the principal residence.  Additionally, information has been added for 2 - 4 unit properties.

Freddie announced a series of six critical version updates for their MIDANET software between 11/23 and 12/14. Anyone using MIDANET needs to download all six updates to ensure they do not experience reporting and loan purchase transmission delays beginning at midnight on December 11. "These updates will modify the Rate Spread rules in Form 11 and Form 13SF; add new Federal Housing Finance Agency (FHFA) Title V fields in Form 11 and Form 13SF so Sellers can provide detailed loan origination and appraiser information; update the Exclusionary List; and allow Servicers to report additional loan-level data for the Home Affordable Modification program (HAMP)." Freddie spells out exactly what is required for users, along with the precise schedule, and it best to consult their announcement for details.

Flagstar reminded clients that FHA spot condo approvals have been extended. "FHA has again extended the implementation date for the condominium approval process changes originally announced in mortgagee letter 2009-19.  The new processes are now effective for case numbers assigned on or after December 7, 2009.  Until then, spot condominium approvals are permitted by Flagstar. FHA has announced they will be publishing a revision and expansion of Mortgagee Letter 2009-19 'within the next two weeks.'"

Wells Fargo & Co. settled a $1.4 billion lawsuit brought on by California Attorney General Jerry Brown, who also happens to be running for governor. The suit focused on Wells improperly marketing risky investments (auction-rate securities) as safe. The investments resemble corporate debt, except that the rate of interest they pay is frequently reset at auctions. In early 2008 the market collapsed and the investors' accounts were frozen. Wells has agreed to buy back the securities and pay a $1.9 million fine but not admit any wrongdoing. To their credit Wells Fargo said that before any firm agreed to buy back such securities, it started lending money at favorable rates to customers who purchased the securities at until the issuers could refinance the debt.

Both CitiMortgage and Bank of America Home Loan echoed Fannie & Freddie's extension of the 2009 loan limits into 2010, saying that the conventional conforming loan limits are unchanged, the permanent loan limits are unchanged, and that the temporary loan limits are unchanged. Sounds like unchanged to me!

Citi also stated that they are changing the way that they look at income certification for FHA loans. In addition to, per FHA, loans including "a cover letter on letterhead, signed and dated by a lender representative, certifying that the borrower is employed and has income at the time of loan application", CitiMortgage will also require the following items. For wage earner borrowers, the most recent year-to-date pay stub must be obtained showing income on the date of application. For self-employed or "other income borrowers", documentation as determined by the underwriter to certify income on the date of application. And for their FHA Streamline program, starting Friday, FHA "Purchase and Refinance loans must receive an Approve/Accept through TOTAL Scorecard. Findings of "Refer" are no longer eligible, even for manual underwriting."

And Bank of America followed HUD's new FHA Streamline Refinance transactions: "A minimum 640 credit score is now required on all FHA Streamline transactions. FHA Streamline loans with scores less than 640 must close by December 31, 2009 and be purchased by Correspondent Lending by January 31, 2010. All FHA Streamline guidelines contingent upon whether Bank of America is servicing the loan being refinanced have been eliminated."

I swear I am not making this up. Comptroller of the Currency John C. Dugan called on regulators around the world to adopt minimum mortgage standards to address the ongoing mortgage crisis. Apparently he feels that since the US is having a crisis, the entire world is having one. (Germany, to name one, may have a different opinion.) He noted that each country has its own "unique credit culture" and "different approaches to mortgage financing," but that every country should establish a set of standards and periodically report on their performance. Here in the US he believes that mandatory requirements include verification of income and assets, meaningful down payments, and qualifying borrowers on the fully indexed interest rates tied to the mortgages they choose. He did, however, note that lending cultures in other countries are different than here in the U.S.

Today the only news out is scheduled to be the usual Jobless Claims number, along with the Philly Fed Survey. After Tuesday and Wednesday the markets can use a little break. (We also find out the auction amounts for next week's 2-yr, 5-yr, and 7-yr note sales on Monday, Tuesday, and Wednesday - Thursday being a holiday and Friday being a throw away work day.) Besides the economic news yesterday, the market was cogitating on Federal Reserve Bank of St. Louis President James Bullard's comments that past experience suggests policy makers may not start to raise rates until early 2012, while facing a "too low for too long" argument that may "weigh heavily" on the central bank. Although they may be taken out of context slightly - remember that typically the Fed does not start raising overnight rates until a recovery is well under way.

Anyway, Claims were unchanged last week, but the four-week moving average of claims dropped to its lowest in almost a year. Initial claims for state unemployment benefits were flat at 505k, and new claims have been grinding lower in recent weeks, indicating a slowdown in the pace of layoffs. The four-week moving average for new claims is the lowest they've been in a year. After the news we find the 10-yr at 3.34% and mortgage prices roughly unchanged.

A Harley biker is riding by the zoo in Washington, DC when he sees a little girl leaning into the lion's cage. Suddenly, the lion grabs her by the cuff of her jacket and tries to pull her inside to slaughter her, under the eyes of her screaming parents.

The biker jumps off his Harley, runs to the cage and hits the lion square on the nose with a powerful punch. 

Whimpering from the pain the lion jumps back letting go of the girl, and the biker brings her to her terrified parents, who thank him endlessly. A reporter has watched the whole event.

The reporter addressing the Harley rider says, "Sir, this was the most gallant and brave thing I've seen a man do in my whole life."

The Harley rider replies, "Why, it was nothing, really, the lion was behind bars. I just saw this little kid in danger and acted as I felt right."

The reporter says, "Well, I'll make sure this won't go unnoticed. I'm a journalist, you know, and tomorrow's paper will have this story on the front page... So, what do you do for a living and what political affiliation do you have?"

The biker replies, "I'm a U.S. Marine and a Republican." The journalist leaves.

The following morning the biker buys the paper to see if it indeed brings news of his actions, and reads, on the front page: