Sunday, August 2, 2009

"Multiple offers" - Are taxpayers on the hook for the REO bidding frenzy?

One of the loan servicers, Ocwen, has a website where you can see active offers on their foreclosed properties. Here is an example of some homes on the market getting offers. Click to enlarge any graphics shown.

1377 North Heathdale Avenue, Covina,Ca (Note: link will no longer be valid when offer is accepted)

So the highest net offer is $307,000. Lets break that down.

Offer price: $345,000
Assumed Commissions and fees ~5%: $17,250
Difference between offer and net: $20,188 or approximately 6%.

Here is another house 2020 Snow Avenue, Oxnard, Ca

Two offers at $270,000 with a net of approximately $240,000.

Offer price: $270,000
Assumed Commissions and fees ~5%: $13,500
Difference between offer and net: $16,500 or approximately 6%.

That maximum seller contribution for a FHA loan turns out to be.... 6%! Coincidence?

So FHA buyers are offering more because they are using the FHA guarantee to overbid. FHA doesn't fall under HVCC so the appraisal can be shopped as well. The 6% will go to closing costs, the up front mortgage insurance premium (so the FHA insurance permium fund is partly funded by funds it is guaranteeing!), buying down the rate, origination fees, etc. I have even see mortgage brokers indicate that the funds can be used to pay the first year property tax and/or HOA fees (unknown if true). I am betting many FHA borrower are beg/borrowing/stealing the 3.5% downpayment and then overbidding essentially making the lender and insurer pay itself all its fees through money the lender provides itself. If a borrower asked his/her parents for $8,000 with the promise to pay them back once they get the tax credit... It would be technically loan fraud but the kind that would never be found out. FHA allows downpayment funds to be "gifted".

You can go through the property list for California here. And you can see many homes have offers on them but obviously much lower than current list. So any buyer should be aware of that "multiple offers" doesn't really have any meaning without proper context and knowing the details of the offer. Cash offers are much different than Conventional or FHA offers. And just simply knowing the offer price doesn't really tell you how desirable the offer is. Many foreclosed homes won't meet the Minimum Property Requirements of FHA so an FHA offer is essentially useless. The new appraisal code (HVCC) can present an issue for REOs going over list so Conventional loans can present a problem as far as getting closed.

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