Short Sale, Foreclosure and Strategic Default

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Monday, July 28, 2008

Walk Away, loan modification, new mortgage forgiveness law

I thought some people will appreciate the early speculation on the subject of the new housing bill.

Warning: eventually most threads on this link devolve into a flame war... For now I thought the first few posts were excellent:

1. what about the neighbors real estate price
2. will this cause home prices to fall
3. we more people go into default to gain benefit from the bill
4. why will the lenders go for this
5. which homeowners will take advantage of the relief

I wonder how this will effect the 700 to million dollar home market in San Diego.

Forums - WOW!!! The biggest news in housing market and nobody on ET notices...
07-27-08 06:28 PM

Quote from Bowgett:

Did you read details of this bill?

PS Bill only goes into effect on Oct 1st so we are not going to see its full effect until some time in Q1 of 2009.



Looking on the congress website I found this:

http://thomas.loc.gov/cgi-bin/bdquery/z?d110:HR03221:

But do you have a straightforward (unedited) version of what passed Sat? Please post it here.

Found this as well.

http://dpc.senate.gov/dpc-new.cfm?doc_name=lb-110-2-123

Its not exactly clear to me how the program will work though. From the looks of it, they will facilitate the forgiveness of any underwater amount, and then let the borrower split half the profits on any appreciation from the new refinanced price.

Example:

a. Buy subprime house in bubble for $300k 100% financed.

b. Now subprime house is worth $150k at market. This program forgives the $150k differences and makes a new loan for $150k.

c. If the property appreciates above $150k, lets say back to $300k, the subprime owner splits half of the profit with the govt. (pockets $75k, instead of 'breaking even' in a previous scenario).

Here's the supporting text I found from the above:

HOPE for Homeowners Act of 2008
- The new loan be a 30 year, fixed-rate mortgage for an amount the family can repay or 90 percent of the current value of the home, whichever is less;
- (2) All subordinate liens be extinguished through negotiation with the first lien holder, and all holders receive a portion of any future appreciation of the property;
- (3) The borrower share the newly-created equity and future appreciation equally with FHA until such time as the borrower sells the home or refinances the FHA-insured mortgage, and the borrower's access to the newly-created equity be phased-in over five years.

Whats not clear to me is how the lenders get paid to let the property owner refinance. Seems convoluted. Point #2 seems to contradict point #3. How can lien holders (ie home equity line or second mortgage) 'receive a portion of any future appreciation of the property' when #3 says 'future property appreciation' is split between the 'borrower' and 'FHA' evenly?

I'll admit I'm confused. Found this too on: http://dodd.senate.gov/index.php?q=node/4324

'No investor or lender bailout. Investors and/or lenders will have to take significant losses in order to benefit from the proceeds of the loans refinanced with government insurance. However, these losses would be less than the losses associated with foreclosure.'

Maybe I got all excited over nothing... It is up to lenders to choose between partial cashflow + loss vs. outright loss and no liability. This of course means no asset write-ups or stabilization if lenders don't partake.

Please post the actual final text (without revisions/edits) if you can find it.. It seems difficult to find this.

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