One of the first things AV and I did when we decided to launch our own entrepreneurial venture, HausAngeles, was 'integrate' our professional and community activities and goals into our business model (and therefore, day to day activities). This included a commitment to re-invest 10 to 20 percent of all real estate transaction revenues - i.e. revenues from our core business - back into our Community. Please find below the text from a HausAngeles news release describing how we are working to make our commitment real. ray
Real Estate Company Creates “Opportunity for All” Scholarship Program for Public Housing Residents
HausAngeles to Donate 10% to 20% of Commissions Via Housing Authority of L.A.
[caption id="" align="alignleft" width="400" caption="Ray Mathoda with Rudolph Montiel, HACLA’s CEO and President with a copy of the first “Opportunity for All” check in the amount of $3641"]
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HausAngeles, a Los Angeles, California-based real estate consulting and transaction services provider, today announced its creation of a scholarship program – entitled “Opportunity for All” -- for residents of Los Angeles public housing. The program will be funded by the donation of 10 to 20 percent of HausAngeles’ real estate commissions and will be administered by HACLA (the Housing Authority of the City of Los Angeles), which owns or administers approximately 50,000 units of Section 8 and Public Housing for the City of Los Angeles.
Rayman Mathoda, founder and CEO of HausAngeles and also a HACLA commissioner, said “After spending one-on-one time talking to both children and adults who live in public housing because of my role with HACLA, I realized that many of these residents – who live right in our ‘back yard’ – have access to very little opportunity in comparison to other L.A. residents. Since we conceived of HausAngeles as a socially conscious company, we decided that donating a percentage of our commissions in a manner that would create tangible impact in our own community would be a great way to give back.”
Adds Mathoda: “Real estate commissions grow proportional to the transaction size, so we have decided to donate 10% of our commission for transactions under $1 million, 15% for transactions between $1 and $2 million, and 20% for transactions above $2 million. We are hoping this program will appeal to buyers and sellers who will view this as a way of creating a real opportunity for those in need, without having to reach into their own pockets to do it.”
Any individual, family, or organization that sells or purchases property in Los Angeles can opt into the program. When the transaction closes, HausAngeles donates a portion of its commission towards the creation of the scholarships, the first round of which will be given in early 2010. Scholarships will be awarded after the completion of a competitive application and review and selection process, which will be jointly conducted by HausAngeles and HACLA. Any resident – child, youth or adult – of a City of Los Angeles public housing development managed by HACLA is eligible to apply.
“We are extremely pleased that HausAngeles is helping fill a considerable gap in available scholarships for residents of affordable housing in Los Angeles,” said Rudolf C. Montiel, President and CEO of HACLA. “While HACLA has provided scholarships to residents for the last twelve years, and assisted in providing youth programs through its non-profit, Kid’s Progress Inc., our ability to adequately support these valuable programs has been severely limited in the last two to three years due to lack of funding. HausAngeles’ efforts to make a difference in our residents’ lives via the Opportunity for All program could not be more timely or welcome.”
I derive my livelihood from the real estate market, and a significant portion of our business is driven by real estate transactions...i.e., people selling or buying homes. While a pessimistic view of future home prices is not exactly a great thing for our business, we have been telling our clients to expect further home price declines near term (i.e., in the next year or two)...and a likely slow recovery in the real estate market over the coming 3-5 years (consistent with recovery trends in previous housing downturns).
Many real estate professionals shy away from having these types of discussions with their clients, as they fear their clients will delay their home transaction...which delays when the real estate professional will make money. However, we try our best to educate our clients so their understanding of the market is consistent with ours...and they make their real estate decisions with "open eyes". While this does result in some delaying their real estate transactions...we feel this is the right approach to our business and will benefit us long term, by creating a relationship of trust with our clients.
The truth is that home price and whether or not "the market has hit bottom" is not the only factor that home buyers do or should consider when deciding to buy a home, particularly one they plan to live in. There are many other factors that influence when and where a person buys their primary residence including life issues ("I recently got a divorce and really want to settle into a place that is mine, and where my daughter can go to a good school"), financing issues ("I know mortgage rates are historically low right now so I am OK with buying now even if there's a risk that prices will go down in the next year or two. I don't plan to sell for many years...and think I will be OK long term as the market is already way down from it's 2006 peak") and other issues such as the type of home a person or family wants to live in ("I've been looking for a while and haven't liked anything. I love this new construction condo and want to live in it now").
Similar considerations also effect investors' decision making, particularly for those investors that plan to purchase several properties during this down cycle. For some, it makes sense to "start averaging in" by buying properties now....while also leveraging the low mortgage rates available on conforming balance investor loans.
In any event, noone - including me or any real estate professional - can accurately predict the future...so all we are doing is sharing the best educated guess we can make based on what we do know.
Please see below an article from the San Francisco Chronicle which I think is a good read for anyone considering buying or selling real estate in the near term. This represents a more pessimistic view of the market than is generally discussed in the media...but a lot of what the author is talking about makes sense to me.
Signs of more trouble ahead for housing market
Tuesday, May 26, 2009
Warren Buffett and Alan Greenspan say the housing market is near bottom.
Peppy real estate agents and gloomy stock-market traders alike eagerly embrace that supposition. Wall Street is so hungry for good news that stocks rallied at the barest hint of upbeat indicators several times this month.
But an array of serious pending issues undercuts the turnaround theorists.
To be sure, an end to the precipitous collapse that triggered a foreclosure avalanche and wiped out more than $6 trillion of home equity nationwide, not to mention setting off a worldwide economic collapse, would be something to celebrate. And several recent market barometers - diminishing inventory, increasing buyer competition, slowing price depreciation, rising builder confidence - lend credence to the idea that real estate could soon rebound.
A healthy housing market has a decent balance between supply and demand. While at a quick glance those components appear to be stabilizing, on closer look there are numerous factors that are likely to weaken demand and deluge the market with supply in coming months.
On the demand side, the surge in joblessness, still-high home prices, the credit crunch and a dearth of move-up buyers cut into the pool of potential home buyers.
On the supply side, an assortment of factors seems poised to trigger new waves of foreclosures that will continue to bloat inventory. They include the expiration of foreclosure moratoriums, more underwater "walk-away" homeowners, pending recasts of option ARM loans, rising delinquencies in prime and Alt-A loans, and soft sales of high-end homes.
Here's a link to the full article:
Signs of more trouble ahead for housing market (SF Chronicle, May 26, 2009)
I applaud the recent announcement by Secretaries Geithner and Donovan expanding the government's 'Making Homes Affordable' Initiative to include the 'Foreclosure Alternatives' Program...which was in my mind the #1 missing piece in the Administration's policies to date...and should vastly increase the ability of Americans in trouble to avoid foreclosure and get back on their feet faster...even they cannot afford to continue to own their home.
Full details on the program are not available yet, and I admit I am biased in my enthusiastic response to this policy change as I have been advocating for exactly such a change over the last 6 months and feel/felt so strongly about this program/policy that I have focused a major part of my time and business on Servicer Offered Short Sales.
I will say more once the government releases further details, but in the meantime here's a memo I sent to key local and national policy makers and influencers in mid-April on exactly this topic. This would be a good read for anyone seeking to understand the rationale for and potential benefits of the new 'Foreclosure Alternatives' program.
To: Key Local (Los Angeles) and National Policy Makers and Influencers
From: Ray Mathoda, Founder and CEO, HausAngeles, Inc.
Date: April 15, 2009
Re: Closing the (Large) Gap in our National Foreclosure Prevention & Loss Mitigation Initiatives with Systematic Servicer Initiated Short Sales
I applaud the leadership and efforts of the Obama administration, FDIC and Treasury Department to help consumers, stem foreclosures and stabilize the housing market. Providing responsible homeowners a viable opportunity to stay in their home via an expanded set of loan modification and refinance options designed to lower their monthly housing costs significantly is a welcome and necessary development. Current government and non-government led initiatives in isolation however will prove insufficient in preventing a large number of avoidable foreclosures.
The purpose of this memo is to propose and request your support for a foreclosure prevention solution that simultaneously mitigates investor losses for a currently unaddressed large segment of troubled borrowers: systematic servicer initiated short sales.
Despite generous concessions to payments and loan terms, systematic modification efforts will continue to fail to help those troubled homeowners who are not offered, do not qualify for, or fail a loan modification. The fact is that our collective public and private sector efforts to help troubled homeowners have been focused on providing borrowers with two primary resolution options: loan modification or foreclosure. As a result, those that don’t qualify for or succeed at a loan modification remain “in limbo and uncertainty” until they are foreclosed on and are either offered a small cash payment (typically $1000) to vacate the property or evicted involuntarily.
I strongly believe it is not only possible to significantly mitigate the adverse impact of a likely foreclosure for these millions of responsible homeowners who cannot realistically expect to retain ownership of their homes; it is our responsibility to attempt to do so.
How many troubled homeowners will face foreclosure despite the Obama Loan Modification Plan?
According to the Congressional Oversight Panel’s March Oversight Report, an estimated 1 in 9 US homeowners is likely to be in foreclosure over the next few years. This equates to approximately 10+ million possible foreclosures. Assuming the Obama modification program successfully provides a loan modification for the 3-4 million homeowners it is expected to help, this leaves us with approximately 6-7 million likely foreclosures.
What is a short sale and why is it better than foreclosure?
A short sale is simply the process whereby property ownership is transferred by a borrower to a third party with the servicer and investor’s approval when the loan amount is in excess of the sale proceeds from the property. In short sales, a “deficiency” is created in the amount of this difference and if/when this deficiency is forgiven, it has historically been treated as taxable income resulting in an IRS obligation.
There are three key factors which make short sales a compelling alternative to foreclosure today:
• Scale and scope of the foreclosure issue and its adverse impact on the housing market: The likely number of foreclosures we will face in the coming years is very high (6-7 million as noted above). Foreclosures have a demonstrated and well understood significantly adverse impact on both the communities in which they occur as well as the overall housing market. As a result, there is a macro-economic rationale for preventing as many foreclosures as realistically feasible.
• Tax law: The Mortgage Forgiveness Debt Relief Act of 2007 temporarily changed the tax rules such that most troubled borrowers in owner occupied properties can complete a short sale before January 1, 2010 without incurring a large IRS obligation related to the deficiency.
• Declining home price environment and related investor incentives: We continue to have a (rapidly) declining home price environment in many regions with high numbers of at-risk borrowers. In this type of environment, short sales can help significantly reduce the negative externalities associated with foreclosures, which have the potential to destroy entire neighborhoods.
The potential savings here are material enough that it is possible to create programs that re-invest a portion of these savings to help troubled borrowers relocate to rental housing. I am aware of and personally involved with at least one pilot program which offers borrowers cash payments of between $5,000 and $15,000 for cooperating with their servicer to complete a timely short sale.
Here is an illustration of the investor savings possible due to short sales: The Case Schiller index shows home prices declined at a 26% rate between January 2008 and January 2009 in Los Angeles . This translates to an approximately 2% monthly decline in home prices. Assuming the timing of home sale is accelerated by 6 months for a $200,000 home, the related savings on home price depreciation are approximately 12% of the property value or $24,000. This does not include the 10% - 20% discount attributable to “bank-owned” sales (i.e. distressed sellers) or the savings to investors through expenses avoided by preventing foreclosure which can also be significant.
The below summarizes at a high level, the key benefits of a short sale relative to foreclosure for key stakeholders including consumers, the housing market, investors, and servicers.
Key Stakeholder Benefit of Short Sale vs. Foreclosure
Borrowers (Consumers)
• Avoid emotional and reputational pain of foreclosure
• Credit impact reduced to 2-3 years vs. 5-7 years
• No continuing financial or tax obligation when deficiency forgiven/ not pursued on purchase money owner occupied homes
• Note: Deficiency can and should be treated differently for investors and owners of 2nd/vacation homes, and tax consequences are different for such homes, as well as in the case of cash out mortgages
Investors
• Lower losses due to reduction in duration between loan going delinquent and property disposition (see example above)
• Lower losses due to savings on foreclosure related expenses (e.g., legal, home maintenance/rehab)
Servicers
• Reduction in servicer advances (i.e., reduced liquidity stress and interest expenses on advances)
US Housing Market & Economy
• Home prices stabilize at higher level as property sold is not physically distressed
Don’t we already have short sales? How is this different?
Due to increasing realtor-driven consumer education on the borrower benefits described above, short sales are being attempted by more and more troubled borrowers. Whereas a year ago there were almost no successful short sales, I would estimate that of total distressed residential properties sold in any given month 5-10% are likely short sales and the remaining 90-95% are foreclosures. As a percentage of total short sales attempted, I have heard anecdotally (many times) that a majority fail. The practical reality on the ground is that servicers and investors just aren’t set up to make efficient, timely, economic decisions on short sales where the likely alternative is foreclosure.
While improved borrower requested short sale processes and timelines would help, that issue is not the focus of this memo. In order to do this right, I believe servicers must offer and approve short sales systematically and in bulk right at the time a ‘no’ loan modification decision is made, or a previously executed loan modification fails. While it is perfectly logical that a short sale would be offered to every troubled borrower as an option to foreclosure, this ‘common sense’ solution is not in place today.
It should be noted that the suggested process of systematizing, standardizing and bulk-offering this ‘make sense’ solution is no different than the evolution of our loan modification policies and efforts as a nation over the past year or so since FDIC Chairwoman Shiela Bair led an attempt to conduct bulk modifications at Indymac Bank after the institution was put into FDIC conservatorship.
Why would government leadership and support be helpful and/or necessary?
I believe government leadership and support would increase the total number of troubled borrowers who are ultimately able to avoid foreclosure, accelerate the pace at which these borrowers are helped, and reduce servicer and non-profit foreclosure prevention counseling and process expenses as follows:
• Borrower education and communication: By helping troubled borrowers understand that short sales are a legitimate option that should be considered if a loan modification is not offered or fails. Many troubled borrowers are so inundated by a variety of third parties – some well intentioned, many not – including their servicer constantly calling them that they stop listening to or trusting anyone who contacts them.
• Deficiency related contractual and tax issues: By eliminating uncertainty and creating simple standards regarding how the deficiency created in a short sale is treated contractually and from a tax standpoint by borrower type/situation (e.g., in the case of responsible owner occupied borrowers, investors and/or owners of 2nd/vacation homes). This is a critical issue that will require communication and coordination with investors and is unlikely to be resolved properly without government intervention (e.g., in the systematic short sale pilot program I am familiar with, the contractual language regarding the deficiency leaves the servicer the option of pursuing the deficiency even though there is no intention of doing so in the case of owner occupied borrowers). Finally, state tax laws are not always consistent with federal tax law, and only the government can resolve these differences effectively in a fair and expedient manner.
• Standardization: There is a critical need to maintain as much standardization as possible in both program guidelines and related forms/documentation requirements, and the government is the only stakeholder that can drive this much needed standardization effectively
• Augments the Administration’s Home Affordable Modification Guidelines: Although the Home Affordable Modification Program includes payments to servicers in the guidelines, there is no guidance for servicers as to how to execute meaningful numbers of short sales; this direction is required to minimize foreclosures
Disclaimer: This article is an opinion piece only. It should not be construed as legal or tax advice. Any individuals should contact their legal counsel, tax advisor and/or credit reporting agency to ensure they understand the legal, credit and tax implications of any decision they make.
There are a lot of people who have gotten “unlucky” recently, in one way or another, and are finding themselves unable to make payments on their debt because their income and expense equation is no longer what it used to be (i.e., their income is down, or their expenses are up). Of the millions of homeowners currently not making their full monthly mortgage payments, it’s hard to tell which ones were unlucky, who got defrauded or lied to, and who just plain made a stupid (intentional or unintentional) mistake and bought something they couldn’t really afford.
So who – of the large number of people that aren’t able to make their currently monthly housing payments – should get to keep their home and who shouldn’t? This is more than a million dollar question and we're having a helluva time as a nation trying to answer this question, in policy and in practice, fairly, systematically and timely.
There are currently a myriad home retention programs implemented across dozens of servicers nationwide, and if I had to pick one word to describe the current landscape of options made available to troubled borrowers, I would pick “complicated”.
I think if we could come up with a simple common sense rule of thumb to answer this key question, we would be much further ahead in stabilizing our housing market. So in the spirit of proposing solutions instead of criticizing current approaches, here’s my simple solution to this problem:
If you can afford the home you currently live in at its current market price with loan terms based on current (historically low) market housing rates….you should get to keep it. If you can’t, you should move on and find rental housing that you can afford based on your current financial reality.
How would I achieve the above if I were designing our national housing programs? I’d keep it pretty simple (although I acknowledge that making it so would be rather complicated and time consuming…with no guarantee of success):
1. Do principle write-downs to current market value for all troubled borrowers who can afford their home on current market terms...but in return for this (massive) accommodation…require them to give up 75% of future home equity appreciation back to the investors who took the loss resulting from the initial principal write-down…until the investors are made whole. After that point, allow the homeowner to keep any remaining equity upside.
2. Allow every other owner occupied troubled borrower to sell their property via a servicer offered short sale accompanied by a cash payment to help the family move to affordable rental housing. Forgive the “deficiency” for these borrowers including any tax that might be owed on the amount forgiven (most families in trouble can’t afford a hefty tax payment anyways, so this would only push them further into the hole)
3. Allow every other non-owner occupied borrower to sell their property via a servicer offered short sale, but with no cash payment and no automatic forgiveness of deficiency
Would we likely require a new governmental entity/group to track the details on the principal write-downs and resulting future home equity appreciation share on behalf of impacted investors? Yes.
Is this simple proposal difficult to gain agreement on? Yes…very difficult. But no more difficult than it will be to deal with the millions of avoidable foreclosures that we will experience otherwise.
I had the privilege of participating on an exciting panel on the future of short sales at the REOMAC semi-annual conference in Palm Springs this week. REOMAC is the non-profit trade organization for REO industry participants – realtors, servicers, lenders, asset managers and other service providers –who focus on the (tough) job of helping Banks manage and sell properties they have acquired through the foreclosure process.
The panel included 2 experienced industry leading REO brokers Patrick Bartolic and Earl Gervais, Ron Garber from Short Sale Plan, Todd Wilson from Prospect Mortgage and myself, was moderated by Art Acosta (another top REO agent and REO industry leader), and was a big success. The room – which was packed with 500+ of the (real estate) professionals most familiar with the emotional and practical human toll of foreclosures - was inspired by the vision of the panel and hungry for a foreclosure alternative that works!
While the panelists started by lauding the efforts of the Obama administration to try to help as many people as possible retain ownership of their homes via loan modifications that reduce their monthly housing costs significantly, they also acknowledged the practical reality on the ground: that many if not most families in trouble have experienced a significant reduction in their income and are unlikely to be able to continue to afford the homes they once thought they could.
The focus of the panel was on this segment of consumers who don’t qualify for or fail a loan modification and the solution presented was systematic, lender offered short sales. Such short sales are very different from the typical borrower-requested short sale seen in the market today, and most everyone in the room agreed this systematic emerging solution should be THE preferred alternative for troubled borrowers living in homes they cannot continue to afford.
As an ardent advocate for systematic short sales (As previously discussed on this very blog, I believe this program is THE missing loss mitigation and foreclosure prevention initiative in our current national approach to the housing crisis), I admit I was pleased to see how unanimously the room agreed this solution is necessary and likely inevitable.
There just aren’t a lot of practical housing crisis solutions available that can simultaneously benefit consumers, the US housing market, investors and servicers, and which don’t come with a heavy taxpayer price tag….except systematic short sales!
Systematic short sales like the ones described by the panel (i.e., those offered to all owner occupied borrowers who fail to qualify for or succeed at a loan modification right when the loan modification decision is made) reduce the emotional and credit impact for borrowers by preventing foreclosure while providing the borrower significant (non-taxpayer funded) financial assistance to help move to rental housing. By accelerating the timing of asset sale in a declining home price environment in a manner that is amicable for the borrower, such short sales help stabilize the housing market faster and at higher levels than foreclosures would. And finally, systematic short sales significantly reduce investor losses and servicer advances…..positively affecting a key pain point in the housing and financial markets today.
So why isn’t this ‘no-brainer’ solution already widespread in the industry? The panel discussed two key reasons. One, this is the first time in the nation’s history that circumstances (including tax law) have collided to make this a no-brainer solution for all involved including the consumer (e.g., prior to some 2007 amendments to tax law, consumers owed taxes on any deficiency forgiven by the lender in a short sale). Second, practically speaking servicers just aren’t set up (yet) to execute on this key opportunity from an organizational, process/techology, and policy/guideline standpoint.
So what’s next? It seemed pretty clear to all in the room that systematic short sales are the right answer. Key panel members – including me - stated they considered this a big policy and business opportunity and were working to help key servicers develop and implement systems, policies and procedures to implement this alternative. So stay tuned for more on that front.
The bottom-line for now, though, is good news in my view. Key REO industry leaders believe it is just a matter of time before systematic, lender offered short sales become a viable foreclosure alternative for borrowers in trouble who currently have no option but foreclosure…..and the REO realtors who deal with foreclosures every day are standing first in line hungry for this solution.
DISCLAIMER
This blog is intended to be a general discussion only and should not be considered legal or tax advice. Your use of it does not create an attorney-client relationship. Any liability that might arise from your use or reliance on this article or any of its links is expressly disclaimed. This blog is not legal, accounting or tax advice, is not to be acted on as such, it may not be current, and is subject to change without notice.
Most everyone knows that America is not very popular abroad right now, and hasn’t been for the past several years. Just ask any American who has travelled abroad recently. From Davos to Delhi, the general current perspective is that America is on the decline and other countries (such as China and India) will be the global leaders of tomorrow.
While I certainly agree that countries like India and China will continue to gain importance and power as their economic power increases to levels consistent with their massive populations, I disagree with this pessimistic view of the future of America.
I am an Indian born immigrant to America myself and based on what I’ve learned and seen of the world and America, I believe the American framework of life, liberty and opportunity is superior to the socio-economic frameworks in place most anywhere else.
The election of Barack Obama as US President is but one example of the beauty of the American framework....and this example is repeated daily, in ways small and big, by those who weren't born into money or power but who gain opportunity and success in America as a result purely of their hard work and smarts.
As the economic crisis works it's way around the world and once fast developing countries slow down and deal with the now-more-apparent weaknesses in their own social, economic and legal frameworks....I actually think America's reputation abroad will improve.
The article included below from this weekend’s National Mortgage News talks about how the number of single family home sales in CA doubled between January 2009 and January 2008….while the median home price dropped over 40% (during the same period). The article also mentions that the CAR unsold inventory index dropped to 6.7 months in January 2009, from 16.6 months for the same period a year ago....indicating supply is decreasing.
On the surface, the article might lead one to believe that the CA single family real estate market is stabilizing and the rate of home price declines should begin to slow down. However, the unfortunate fact is that there has been no improvement in CA's real economy during the last year.
Instead the situation has gotten significantly worse, as evidenced by company layoff announcements which are now ubiquitous and reflected in the increased and increasing CA state unemployment rate. This leads me to a hypothesis that “reality” is likely different than one would think based on the CAR home sales and unsold inventory level data.
California's single family real estate unsold inventory levels are likely artificially low right now, as inventory has been held on Bank/Investor balance sheets for 2 reasons:
1. The moratorium on foreclosures at several large Banks/Servicers including Fannie Mae and Freddie Mac
2. A general slowdown in property disposition activity as Servicers first waited to learn the details of the Obama housing plan (announced about a week ago) and now start the process of assessing borrower's eligibility for loan modification or refinance under the expanded set of guidelines under the Obama plan. It is only after this process is completed that Servicer's will start to move forward with alternate plans (including possible foreclosure) on those borrowers who didn’t qualify for a loan modification or refinance.
The truth is the Obama plan (both on loan modifications and refinances) – which only applies to mortgages that have a conforming loan balance - is less likely to help CA home owners than those in states where home prices were lower (i.e., more conforming) during the boom period.
As a result, a large percentage of the assets held on balance sheet will likely need to be sold in the future. While it’s impossible to really know where the CA real estate market will go (as this will be impacted by many yet unknown factors)….my gut instincts tell me there is likely another leg down to come for CA home prices.
PS: Here's the article I mentioned:
CA Home SalesDouble in Jan.
By Jennifer Harmon
LOS ANGELES-Statewide home sales in January edged past 600,000, double the year before, signifying that the market is gradually working its way through the large numbers of distressed sales caused by the mortgage crisis, according to the president of the California Association of Realtors.
While the median price of a home fell 40.5% in California in January, single-family home sales increased 100.8% with a total of 624,940 homes, according to CAR. The resale activity was up from the revised 311,160 sales pace recorded in January 2008. Sales in January 2009 increased 14% compared with December.
Click here for the full article: NMN Article