Why The US Hope Program Failed
Author: Ryan Wright
There are talks all over the world about the United States' program to save homeowners from foreclosure. Five months ago Congress made $300 Billion dollars available for this purpose. Let me first start by giving you an idea how much $300 Billion Dollars. First let's put things in perspective. A million dollars is a lot of money. If you multiply a million dollars by ONE THOUSAND, YOU GET 1 BILLION Dollars. So $300 Billion would equal $300,000 Million.
Another way of putting this into perspective is The United State CIA (Central Intelligence Agency) in there The World Fact Book of 2008 showed Iran's GDP (Gross Domestic Product) is $382 Billion Dollars. South Africa's GDP was $300 Billion, Hong Kong's was $223 Billion and Egypt's was $158 Billion. On my count $300 Billion dollars is more GDP of several countries. I will go into this explanation to help understand how much money we are talking about.
This extraordinary amount of money is available to help homeowners that have lost their homes in USA. This program has been in effect for over 5 months. The United States Government backed this program and has spent millions and millions of dollars promoting the program setting up web sites, hiring counselors and setting for the guidelines.
The United States Government expected that this program would help over 400,000 homeowners.
I am sure you are as curious as I am as to how many homeowners were helped in the last 5 months….. Well the answer is surprising…..
Yes you read it right. One single solitary person participated in the program! CNN Money.com New York reported on March 25, 2009 that the program had only insured ONE loan.
The Federal Housing Authority spokesman Brian Sullivan stated "Needless to say, the program is not working terribly well"
A Member of the House financial Service Committee Michael Castle (R-Del) said the HOPE program is "one of the most failed programs we've had in a long time"
Congress is working on revising the program. I am here to tell you that the revisions will not work unless the Government stops handing out money to people with no responsibility.
Why did the HOPE program fail? Why will the revision fail? Let's explore the reasons.
1. The government is NOT a business and has No Business altering free markets. Adam Smith in The Wealth of Nations proved that free markets are best served by individuals pursuing their own self interests. This promotes the good of the economy as a whole. Maximizing individuals' revenue ultimately maximizes total revenue of the society. This is knows as the Invisible hand. By the government altering the natural cause and effects has consequences that last for hundreds of years. Future generations will pay the price for the money the government is handing out.
2. The HOPE program would only help homeowners that owed 5% more than there homes was worth. Meaning if you owed $150,000 on your home and your home only appraise for $142,000 then you would be $500 short of getting help with the HOPE program. You could only owe 5% more than what your home was worth.
3. The private lenders had to agree to work with the Government in this program. The lenders don't like the program. They think that they are keeping people in homes that will be foreclosed on in the future. They see it as delaying the problem rather than fixing it for good. The lenders think why should they bring a loan current and then after some time bring the foreclosure process all over again.
4. Many of the borrowers had Interest only loans. An interest only loan is where you are only paying interest to the bank and the balance you owe the bank stays the same and never goes down no matter how many years you make payments. Or the borrowers had Negative Amortization loans. A Negative amortization loan is a loan where each month the payment made is less than the interest charge. So each month the balance you owe the lender goes up. So the borrowers with either of these types of loans and others would need to have payment increase to go to a 30 year fixed loan. The problem being if the borrowers could not make the payment at the lower amount how could they be able to make the payment at the higher amount!
5. The HOPE program was exclusive to Fannie Mae and Freddie Mac loans. It is impossible for a homeowner to know if their loan is Fannie or Freddie backed loan. The representatives from the HOPE program call your lender. I have done that very thing and lender didn't even have the idea what I was talking about.
6. Many borrowers qualified to purchase the home by a 50% ratio. That is 50% of their income could go to their total housing obligations (interest, principle, taxes, insurance, HOA etc). The new program says that you have to be under 31% of your total income for your total housing payment. So if a borrower qualified at a 50% ratio and they have had some cut backs at work. Their new ration is going to be higher than 50% not lower. But the program only allows for 31% max total housing ratio.
7. You have to live in the home to qualify. So if you have moved out of the home or if you owned an investment property you could not get into the HOPE program.
The above Seven Reasons are why I think the HOPE program has failed. Although Congress is working on a new plan that they "hope" to be more successful. Maybe they will get two homeowners approved by the program so in five months they can report a 200% increase success.
There is a better alternative! Homeowners behind on house payments do need help. They are in difficult situation and they need a solution. However this solution should not come from the Government giving them money, or giving the banks that gave the loans money. Banks took on the risk of giving the loan, made the profit in good times and they should have saved money in reserve for bad times.
There are many private companies all over the country with real estate agents and real estate investors who are helping homeowners through these difficult times. Agents are able to work with homeowners on short sales. This is where the homeowner is behind on house payments hires an agent or representative to work on his/her behalf. The agent then completes and submits hundreds of pages of information to the lender, the agent works with the lender to take less than what is owed on the property.
The Lender agrees to sell the property for less than what is owed on the loan. The benefits of this help the homeowner, the bank, the new buyer, the community, and economy as a whole.
Why would the bank want to do a Short Sale? Because they have reviewed the property and agree that the home is not worth what is owed. Knowing that the bank would sell the home now rather than going through the time and expense of having it to foreclose. Banks typically take a 25% loss when they do a foreclosure that amount is just in actual cost. That does not include the decline in value that the property is now versus what it was when the loan was given.
The banks are HAPPY to do short sales. Banks realize it is much better option, having homeowners cooperating with them in the sale of the home. Banks lose much less and get cash back much faster.
Homeowners are able to leave their home with a clear conscious. They know that they did everything possible to make the situation right with the bank. Homeowners need to realize that they can not control the market place. In doing a short sale the bank agrees that the home is not worth what is owed. The homeowner is able to walk away with head held up high knowing they did everything to make the situation right. In addition they have helped their credit report by avoiding a foreclosure, they have helped their neighbors by getting a new homeowner in the home rather than letting the home vacant.
Neighborhoods with vacant homes tend to decline in value rapidly. They have problems with crime, vandalism, drugs, and many others. That is not to mention the lack of property taxes being paid. They also reduce the value of the surrounding homes and push property values down, and decrease property taxes revenue.
A short sale is very simple, a homeowner who is willing to cooperate contacts a short sale specialist that work with his/her bank and take over all the details of the process. The bank reviews the property and agrees to take less than what is owed on the home. The bank is paid off at a discounted amount. This helps the homeowner, the bank, the community and the economy as a whole.
Many Homeowners want to stay in their home. That was the idea of the HOPE program. That is where private investors come in. Private real estate investors all over this country have money on the sidelines. It is widely known that there are billions and billions of dollars of investor funds that are not being used. Investors are afraid of the economic crisis and are uncertain where to put the money. They are looking for shelter from the storm. Many of these investors can find a safe haven in purchasing these properties at a discount from the bank. They then allow the previous homeowners to stay in the home and rent the property from them.
The homeowners have many benefits:
1. They are able to stay in there home, they do not have to move their family, move their kids' schools, find new friends etc.
2. The homeowners' payments typically go down.
3. The homeowners do not pay any money while the short sale is in process. Any extra money they can save up can go to pay off other bills.
4. The homeowners no longer have the debt to the mortgage company. In fact in most cases they will walk away without owing the bank anything. So they get relief from a major debt.
5. You have to remember the homeowner did not have any equity in their home whatsoever. They owed much more than the home was worth. So, doing a short sale is the best option for homeowners to get rid of the overvalued monthly payments and potential home foreclosure.
The Investors have many benefits too:
1. They have purchased a home at the lowest times of the real estate market.
2. They bought the home at a discounted price even in today's market.
3. They have renter that has a homeowner's mentality rather than a tenant mentality. We recommend that the tenants should be responsible for all repairs major and minor. This way the Investor prevents late night leaky toilet phone calls. The tenant is responsible for that.
4. The investor is going to have monthly return for rental cash flow, as well as upside return for the future value of the property.
Now many Homeowners want to be able to buy the property back in the future. I really like the idea of this program. I think if the homeowner is willing to take on all expenses for the property and be responsible for all repairs major or minor for the property, and pay the rent on time every month no exceptions then the tenant (previous homeowner) could have the option to purchase the property in the future. I would recommend 12 to 24 month's option. Rather than setting sales right price now it can be determined in the future based upon an appraisal given with a condition that the underlying obligations are covered and reasonable profit is paid to the investor. In those cases I recommend that the previous homeowners get a generous discount off the appraisal of the home.
Now an ideal situation has been created.
1. The homeowner has avoided foreclosure.
2. The homeowner is able to stay in his/her home.
3. The homeowner is able to keep the home on rent.
4. The homeowner is able get chances of buying the home back in the future.
5. If the homeowner buys the home back he/she will buy it for less money in most cases than what they owed to their original lender when they started the process.
6. Homeowner's monthly housing payment was reduced.
1. Investor has purchased a property at the lowest point in the real estate market.
2. Investor has purchased the home at present market value.
3. Investor found a tenant who would take care of all repairs
4. Investor found a tenant who is going to take care of the home and treat it like his/her own.
5. Investor has an in-home buyer for the property.
6. Investor will get the benefit of appreciation on the home.
7. Low maintenance.
1. Does not have to foreclose on the property
2. Saves 25% of the cost associated with the foreclosure
3. Gets money back in their pocket right away so they can meet reserve requirements on other loans.
4. One less loan on the books.
5. Is able to look good to regulators that they completed a loss mitigation rather than foreclosure.
1. One less vacant home that wont be sitting on the market
2. Better community rather than having a house used for drug deals and teenage hang outs
3. The grass will get watered and the home will look nice
4. Property Taxes will be paid now rather than in the future for this property. Thus enabling local communities and states to function.
5. The United States Government does not need to give money out to anyone!
6. The people of the United States will not have to be taxed $300 Billion dollars to pay back all the money they where going to provide.
As you can see the benefits to everyone involved are substantial. The government involvement is not necessary. If the bank wants to sell the home at a discount they can otherwise they can foreclose and sell it latter suffering the consequences and the losses that come from that poor decision.
The major problem with this program is that banks are waiting to see if they can get money from the government rather than follow the above program. The banks will prefer money from government rather than trying different options. The bank knows that government is more generous and will give them more for the home than open market. If the government would get out of the way free enterprise and the invisible hand would bring this housing problem to a fast resolution. This resolution would come without our children and our children's, children having to pay the price financial for centuries to come. That being said banks are participating in this program every day. They are just holding back, and processing much slower than they could be if free money from the government is off the table.
Let me give you some Case Study Examples.
Davis County Homeowner Gets Saved from Foreclosure
In February, we started working with a family from Davis County. The husband worked in the construction industry and his hours went from more than full time to less than part time. With this under employment they were unable to pay for their house payments. They had a loan on the home with Litton Servicing. They owed around $180,000 on the home for the first loan. After months of effort our team was able to work out a deal with the bank. We found a buyer on the property for $155,000 and we worked with the bank on a short sale. The Homeowners walked away not owing the bank any money.
Riverton Real Estate Investor Gets Saved from Foreclosure.
We had a client that was a real estate investor. With the downturn in the economy, he was not able to rent the property and find tenants. He also lost his job. He purchased the property at the very high side of the market. He owed $270,000 as a first loan to Chase Bank. We were able to work out a deal where the home was sold for $205,000.
Holliday Homeowner Saved from Foreclosure
A client of ours owned a home in Holliday. It was an investment property that she had been renting. There were two loans on the property (i) First to Wells Fargo and (ii) Second to Citi Mortgage. The two loans equaled around $325,000. She was cut down on her hours at work, her husband lost his job, and the tenants in the home refused to pay rent. We were able to work out something with the tenants, Wells Fargo, Citi Mortgage, and some new buyers and the home was sold for $220,000
Murray Homeowner Is able to STAY in her home
Another Client of ours just went through the passing of her husband. She has been out of the workforce and is not able to make enough money to make the payments that her loan went up to. Her loan was $175,000 with Countrywide bank. We had private investors that purchased the home and she is able to stay in the home as a tenant with a much lower payments so it is in the range that she can make the payments. She was also given the option to buy the home back in the future when her financial situation improves.
Utah County Homeowners Foreclosure is STOPED!
A Utah County client of ours was going through a divorce. They needed both husband and wife income to be able to make the house payments. So they just could not afford the house payment on one person's income. They owed $175,000 to United Bank. We were able to work out a deal where the property was sold to a resident buyer for $144,000.
Magna Homeowner walks away not owing the bank ANYTHING!
A Magna Client of ours had a loan with Wells Fargo on his home in the amount of $182,000. He ended up with Medical Bills that the insurance did not cover. He tried everything and just could not keep up on the house payment while trying to pay the medical bills. It also ended up that he owed more than his home was presenting worth. We were able to sell the home to a new resident buyer for $121,000. He was able to walk away not owing the bank anything.
Local Builder was HELPED!
We helped a local Builder that had lots of inventory. We worked with the lenders and negotiated with them to take less than what was owed on the property. We were able to get the property sold and avoid foreclosure with the homes for the Builder. The Builder was able to eliminate the inventory. One of the banks that agree to accept less than what was owed on homes said that because our company was involved he would do business again with this builder in the future. He appreciated that the builder took an active stance to solve the property rather than just running away.
As you can clearly see, there is a better way. As the government has committed $300 Billion dollars to the housing crisis and has spent millions in promoting the HOPE program, not to mention all the time and effort congress has made to designing and implementing this HOPE program for homeowners.
If the government would get out of the way and let private enterprise solve this problem it will be over soon. Did I mention that our little real estate company in last month helped 7 families avoid foreclosure and some of those were able to stay in there homes. We are helping homeowners avoid foreclosure every month without any money from the government.
About the author: Ryan is the president of http://www.SaveUtahHomes.com. Ryan began his career in real estate by working in the mortgage industry. He has vast experience in real estate transactions. Ryan is a home owner and property investor himself.
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