Fannie Mae Homepath… a great resource for potential values and bargains in the Charlotte area

Whether you are a first time homebuyer researching the purchase your principal residence or you are a seasoned investor, educating yourself on market conditions and sources of home inventories is an ongoing process. Solid analysis identifies great opportunities, and there is no substitute for doing your homework. Case in point: Fannie Mae Homepath. In previous editions of this blog, I have devoted a fair amount of space to HUD homes and FHA financing. In 2009, Fannie Mae launched “Homepath” as its REO brand. (For those who haven’t read earlier editions of this blog, “REO” stands for “real estate owned” after foreclosure. It refers to homes held in the inventory of lenders who foreclosed mortgages.)

Let’s back up for a moment to learn some basics about Fannie Mae. This will give us some context and a better feel for the scope of Fannie Mae’s REO holdings. Fannie Mae is a government-sponsored entity, chartered by Congress and overseen by the U.S. Department of the Treasury. Banks create loans secured against real property by mortgages. Many banks often sell their loans to investors. This can generate a profit of the bank, and provide the bank with more cash with which to loan more money. Fannie Mae and Freddie Mac are essentially investors in mortgages. (I will devote another edition of this blog to a discussion of Freddie Mac.) Their purpose is to purchase mortgages so that banks are provided with more cash– greater “liquidity”– to write and fund more mortgages. The Congressional intention in creating these entities was provide a mechanism by which more mortgages would be written, and more people could become homeowners.

Have you ever heard the saying: “Be careful what you wish for… because you might get it”? To a large degree, that saying applies to Fannie Mae because it has been the subject of increased criticism in recent years for encouraging the creation of too many mortgages for people who really couldn’t afford to own a home. Unless you live in a cave on another continent, you must be well aware of the recent mortgage market “meltdown.” Many critics place a portion of the responsibility for this market condition on Fannie Mae.

I was quite surprised to read in Fannie Mae’s literature that Fannie Mae currently owns over one-half of all mortgages written in 2010, and it owns one-third of all outstanding mortgages. Of course, Fannie Mae is therefore huge. And an inevitable by-product of mortgage ownership is mortgage foreclosure. As much as Fannie Mae purports to have the goal of assisting homeowners in foreclosure avoidance, there are certainly times when this goal cannot be accomplished. Fannie Mae states that it owns 13% of all delinquent mortgages, and it owns about the same percentage of all foreclosed properties. This is an enormous inventory of REO properties to be resold, and an equally huge potential source of value and bargains for both owner-occupants and investors.

Although Fannie Mae Homepath homes are sold “as is,” and each contract for a Homepath home must include a Fannie Mae “as is” addendum, unlike HUD, Fannie Mae will make certain repairs or renovations to a home. Whether it does this, and the extent to which it will do this, depends on how marketable it believes a property in its inventory is. Fannie Mae relies on BPO’s (”Broker Price Opinions”) and prior appraisals to set values for the properties in its inventory. If Fannie Mae is given to believe that new carpeting, for example, will render the property more marketable, it may replace the carpeting throughout the home. Then the home is listed for sale with a listing broker and placed in the mulitple listing service (the “MLS”), like most other properties offered for sale by other owners.

For the first 15 days a Fannie Mae Homepath home is listed for sale, it is offered only to owner-occupants. Thereafter, it is made available to investors as well. However, unlike HUD homes, investors who buy a Homepath home are subject to a deed restriction. Investors cannot resell the home for more than 120% of its purchase price within the first 90 days of ownership. Fannie Mae says its purpose in this restriction is to maintain neighborhood property values, but one might find it difficult to reason how a restriction on selling a home for a HIGHER price can maintain neighborhood property values. (Does that sound like more misguided social engineering by bureaucrats who never had to worry about making a sound investment?) I am just reporting the guidelines, not justifying the policy. But in this market, investors should probably plan to hold a property more than 90 days after acquisition anyway. In fact, those investors who purchase with the intention of buying, holding and renting or lease-optioning properties are probably operating under a more sound business model in our current economic climate than the old-time “fast flippers” anway.

Fannie Mae also provides Homepath financing. Owner-occupants can qualify to purchase with only a 3% downpayment. (FHA requires 3.5%.) Also, there is no private mortgage insurance (”PMI”), as there is with FHA loans of more than 80% loan-to-value, and this can reduce a homeowner’s monthly payment significantly. Moreover, Homepath financing is also made available to investors with as little as 10% down (90% loan-to-value loans), and that can be a big incentive to an investor in a market where most lenders require at least 20% down on investment properties.

Like the FHA 203K program (scroll back to an earlier edition of this blog for a discussion of 203K), Homepath also will provide repair and renovation funding for owner-occupants. This will even allow for upgrades and improvements like new kitchen cabinets, or hardwood floors, for example. Like 203K, acquisition and renovation financing are approved as a single mortgage. The only requirement is that the improvements must add value to the property.

The reader can search for Homepath homes on his or her own by going to the Fannie Mae website: www.homepath.com . You can search Homepath inventory by location… or price… or size… or a wide variety of other criteria. Information on Homepath financing is also available at this site. And more information on Fannie Mae in general is available it its main website: www.fanniemae.com .  Of course, the reader is always invited to search thousands of homes in the entire Charlotte area MLS system free on my web site: http://edorer.wilkinsonandassociates.com.

Lease Purchase... Rent to Own... Lease Option Agreements -- An Alternative for Those With Credit Issues; But Beware

The Charlotte area real estate market appears to be stabilizing in 2012, as foreclosures continue to be absorbed into the market at a faster rate than they are replaced. In spite of that, qualifying for mortgage financing continues to be a difficult task for many buyers. One of the fundamental elements of the American Dream has always been the aspiration of home ownership, and the notion of being a renter into the foreseeable future is not something many people are content to settle for. Most people still desire to establish a home for themselves and their family, let their children settle into schools and neighborhoods and become stakeholders in their communities.

For many of these people, the Lease Option or Lease Purchase Agreement can be an alternative to renting in perpetuity. A Lease Purchase Agreement is really a "rent to own" arrangement whereby the seller and buyer agree to the terms of a purchase and sale of a property, but allow the buyer one or more years to rent the home while they address the credit issues which have disabled them from securing mortgage financing today. In the absence of the sub-prime mortgage market, a Lease Purchase Agreement can be the next best thing to home ownership. But beware. There can be serious risks.

First, in North Carolina, there is no "standard" Lease Purchase Agreement. Unlike many of the commonly used documents in a lease or a purchase situation, realtors have not been given a standard NC Bar or NC Realtor Association approved form to complete for a Lease Purchase agreement. For that reason, many realtors are at a loss in dealing with the possibility, and the parties must retain an attorney or attorneys to prepare the documents.

Secondly, and much more importantly as a practical matter, some despirate sellers have taken to agreeing to lease purchase or lease option arrangements, but do not follow through on their obligations to pay their own mortgage(s), taxes, homeowners' association and other expenses associated with ownership of the property. Instead, some simply "pocket" the monthly payments made by the lessee/buyer. The mortgage(s) go into default, foreclosure is filed. And while it is possible to check the public records where the property is located, the lessee/buyer often has no way of knowing this is going on until he or she receives a notice of foreclosure or notice to vacate the premises. This may happen five or more months into the Lease Purchase Agreement.

Then what? What recourse does the lessee/buyer have in this situation? Sure; he can sue the lessor/seller for breach of contract, and he will probably get a judgment. But what good is a judgment if the seller is essentially bankrupt and unable to pay the judgment? It isn't moral, or ethical, or fair; but it happens more often than may people entering into a Lease Purchase arrangement realize.

So the buyer is well advised to be wary of the Lease Purchase or Lease Option arrangement. Unless he knows the seller personally or is otherwise in a position to verify that the seller is making all required payments during the term of the Lease Purchase agreement, it is often much less risky to simply rent until the buyer has resolved his or her credit issues and can purchase the next home outright.