The Quirks of Buying a Fannie Mae Foreclosure

Fannie Mae is perhaps the most difficult seller of foreclosed homes. Fannie Mae and Freddie Mac own more than half of the country’s mortgages. Delinquencies of Fannie Mae homes are rising, so we will likely see more and more of these. Unfortunately, Fannie Mae pops up a lot as a seller of REO (real estate owned) foreclosed properties and I always cringe when I get one of these contracts.

Why is the purchase of a Fannie Mae foreclosure different from any other foreclosure buy? Let me count the ways:

1. The Infamous Addendum

All REO sellers make the buyer sign an Addendum. The Fannie Mae Addendum is tricky and close to incomprehensible. When a buyer makes an offer, the buyer signs a standard real estate contract and sends it to the listing agent. Fannie Mae doesn’t sign this contract. It verbally accepts the contract. (Never mind that real estate contracts have to be in writing an can’t be verbal–they’re Fannie Mae, and if they feel like undoing centuries of contract law…you better get used to it)

Once the contract is verbally accepted, then the listing agent sends the poor, unsuspecting selling agent the Addendum.  The buyer then signs and returns the Addendum. Usually, it takes about three weeks from the time the Addendum is signed by the Buyer to get a signed contract and Addendum back signed from Fannie Mae. It takes FOREVER to get these back. I have a file now that is ready to close according to the closing date in the Addendum, but we don’t even have the signed contract and Addendum back yet from Fannie Mae.

2. Confusion on the Verbal Acceptance Date and the inspection

The main problem with the Addendum is that the home inspection contingency period begins on the verbal acceptance date and runs for 7 days from that date, not on the date that the contract is accepted in writing by Fannie Mae. Many buyers don’t realize this and think that the inspection contingency starts when the signed contract is received back from Fannie Mae.

So the inspection period may pass by and expire, without the Buyer knowing this, and the Buyer cannot cancel the contract if the inspection turns out poorly. So if you buy a Fannie Mae home, schedule your inspection immediately after the verbal acceptance date or your home inspection contingency may expire and you will be stuck with the house or lose your earnest money. Here is an Arizona case in which the Buyer couldn’t get the earnest money refunded after the inspection turned out poorly, largely due to confusion over the verbal acceptance date.

3. Dewinterizing is on the Buyer

Fannie Mae properties are always winterized. The gas, water and electricity are turned off. Fannie Mae does not turn the utilities on. Most REO sellers will dewinterize for a buyer to inspect the property, but not Fannie Mae. On a Palatine property last year, the buyer dewinterized the townhouse and leaks sprang from everywhere. It took the plumber most of the day to patch the leaks it cost more than $600.00, which the buyer had to pay.

If you can get the place dewinterized yourself and you are lucky enough to do an inspection before the contingency expires (due to the verbal acceptance date), please do not even consider asking for any credits or repairs after the inspection because the answer will be no. It is strictly an in/out situation and credits or repairs are extremely unlikely.

4. Buyer pays for Title and Transfer Tax

The Addendum also says that the buyer has to pay for the state and county transfer tax and for the seller’s share of title insurance. This is at least $2000.00 in most cases, that the buyer would not otherwise have to pay. Most buyers do not see this term buried in the Addendum. You can ask for a closing cost credit in Par. 36 of the Addendum to cover the cost of the title and transfer tax. The seller’s attorney will furnish the title even though you have to pay for it. You can’t buy your own title insurance.

5. Penalties for late closing

Whatever closing date you put in the Addendum, you had better be able to close that day, or you will be penalized $100 to $150 per day for each day you are late. Some buyers think that because it took three weeks to get the signed contract back, that the closing date will be extended easily, and that the Addendum closing date is not set in stone. Wrong. Fannie Mae is very strict on closing dates and the Buyer will have to pay for any extensions. Also, the buyer will have to sign all extension requests on a Fannie Mae-provided form. The attorney cannot request extensions unless they are on the Fannie Mae form signed by the buyer.

6. Sorry no keys

Fannie Mae does not provide a key at closing. If you are able to run the gauntlet of buying a Fannie Mae, then the listing agent will not furnish a key and will take back all keys from the selling agent at closing. Supposedly, all FM homes are keyed the same (which I find hard to believe) and there is too much “liability” for Fannie Mae to furnish a key. Thankfully, most of the listing agents pay little to no attention to the property, so doors are often left open and I have not had a buyer have to call a locksmith yet to get entry to the house after closing.

Short sale vs. foreclosure

I was reading this great Wall street Journal  article on “Are distressed homes worth it?” The common wisdom is that it is easier to buy a foreclosed home than a short sale home. This is true in that it is more likely that a foreclosed home will actually close and it is more likely that a short sale will not close.  One telling statistic in the article says that no more than 20% of short sales are successful. I used to say 40% of short sales actually closed, but I now think 20% is right.

However, buys of foreclosed properties are getting more painful for the buyer. A partial list of what makes them hard(er):

1. Seller takes forever to respond to original offer.

2. It takes about two weeks after agreement to get a signed contract.

3. The seller’s attorney does not respond to any requests under the attorney approval or home inspection. They have a million files and will never call back.

4. The utilities are turned off. If you are not smart enough to extend the home inspection until the utilities are turned on by the seller (and all leaks–there will be many– are fixed) then you will be stuck repairing 20 leaks that spring in the walls when you turn on the water.

5. When you do an inspection, it’s unlikely you will get any credit for repairs. The sale is “as is” and the seller means it.

6. Sellers constantly give artificial deadlines. “If this doesn’t close tomorrow we are putting the house back on the market and keeping the earnest money.”

7. The seller may try to stick you with title insurance, transfer tax etc, or if you are buying a condo, they can force you to pay 6 months of the foreclosed owner’s condo dues.

8. No sellers representative will come to closing.

9. Once you are lucky enough to get to closing, it may take up to two days after closing to get a “seller signed HUD.” After the seller has imposed all kinds of phony and irrational deadlines, they will take forever to sign the final closing statement. You cannot move in until they do, so don’t have that moving van parked in the drive.

That being said, many buyers find that the appraisal of the foreclosed home is thousands more than they paid for the property, so they put up with this basically unpleasant exercise.

Cook county real estate taxes coming soon

Rumor has it that the second installment of 2008 taxes will be issued around November 1, 2009 October 16, 2009 (due 30 days later). The bills used to come out in August, but are often late.

Update 10/20/09:  Second installment tax bills will be even later than usual.

Spot approval goes away next month for FHA condos

In order to obtain FHA financing, a condo building must be FHA approved. This meant that the building had to “right of first refusal” and met FHA lending guidelines. Many buildings are not FHA approved, and in those cases, the lender could seek “spot approval.” Spot approval was not fun and often did not go well.

Effective October 1, 2009, spot approval is gone. Instead, an FHA direct endorsement lender can obtain approval for an entire building, even with a right of first refusal. Here is a great summary of the new process.

Since FHA mortgages are really the only game in town, this will help open up FHA financing to many smaller condo buildings that were left off the FHA approved list because of a right of first refusal in the declaration or because approval was just too hard.

Say goodbye to 30-day closings due to new regs

As if the closing process was not difficult enough already, a new set of Truth in Lending  (TIL) and appraisal regulations went into effect on July 30 and the end result will be slower closings. In the past, a lender could rush a mortgage application and close in as little as two weeks. Now, I predict that it will be difficult, if not impossible, to close in less than 30 days.

The new regulations slow things down by requiring the following:

1. Prohibits lenders from accepting payment for the loan application until a new good faith estimate of fees, now called an “early disclosure,”  is given to the buyer.

2. There is now a 7 day waiting period after the early disclosure is given that must expire before closing can occur.

3. A final TIL is then mailed 3 days before closing. If this baby increases by more then .125% from the early disclosure, then the lender has to start over and give you a new 7 day waiting period to think it over. That will be fun when the buyer has his moving van packed!

4. The appraisal must also be sent to the client 3 days before closing.

Lenders are terrified of the TIL laws in general and, believe me, they will follow these regulations to a T. Lenders are afraid of TIL lawsuits because if they lose the case, they pay heavy duty damages, attorney’s fees and costs.

I am already getting calls from lenders on the day that they take an application asking for the buyer’s title charges. This is easy to estimate, but it will further slow down the process while lenders wait for seller’s attorney to call them back with the fees. I put together a simple google spreadsheet that estimates buyer’s title fees.

Ken Harney has a good summary of the new regulations. And here is an interesting, if slightly technical, presentation from Wells Fargo on how it all works.

How to get $8k tax credit asap

This year, most closings are first-time buyers. They are eager to get the $8000.00 tax credit for first-timers. This is a pretty simple process.

To get the $8000.00 tax credit you can either amend your 2008 tax return or wait to file your 2009 tax return. Since most first-buyers were picked clean of available cash at closing,  they amend their 2008 tax return to get the refund right away.

To amend your 2008 tax return, you will need:

1. A copy of your 2008 tax return;
2. Form 1040x, which is the amendment form;
3. Form 5405, the form that indicates that you are a first-time buyer who has joined the land-owning gentry.

If you type “1040x” or “form 5405” into google the forms pop right up. In the attached, I show how to fill out the form. This assumes that the client is single and the adjusted gross income is under $75,000.00.

The refund takes about 6 to 8 weeks to process.

FHA buyers can get downpayment from IL

Illinois will offer $6,000.00 interest free loans that can be used as a downpayment by first time buyers.

Details of the program are here.

The $8000.00 tax credit given to first time buyers has been popular and has helped get first time buyers rolling. I did a closing the other day where my client/buyer had already filled out his 1040x (to amend his 2008 tax return) and had it ready to mail in from the closing. That’s thinking ahead. But, the $8000.00 tax credit comes 4-6 weeks after closing and can’t be used for the downpayment. The new Illinois loan program will provide downpayment advances for FHA loans (FHA requires 3.5% down).

Anything that props up the housing market for awhile is good by me.

FHA lenders now allowed to make loans for $8k tax credit

This just in.

The first time buyer tax credit of up to $8,000 is officially “monetized.”

Lenders making FHA mortgages to first time buyers are now allowed to make a bridge loans of up to $8,000 to apply as extra downpayment, toward closing costs or to lower the interest rate on the loan.

This should help get the first-time buyers rolling.

One man’s mortgage meltdown

I love the NY Times web site’s most emailed list. It was there that I clicked on a story called My Personal Credit Crisis. The story was actually a book excerpt from Times writer Edmund Andrew’s new book called “Busted: A reporter’s look inside the mortgage meltdown.”

The story goes into excruciating detail of how Mr. Andrews got series of  “liar loan” to buy and then refinance a house, ran up $50,000.00 in credit card debt and used the $10 overdraft protection feature on his checking account almost daily. I would be embarrassed to admit doing some of this stuff, but he doesn’t seem terribly worried about it. Most of the comments by readers on this site are less than sympathetic.

The book provides a rear view mirror look at how easy it was to get “no doc” and “stated income” loans. My favorite part is when he tries to apply for a loan modification with Chase because he can’t make his payments no one from Chase will call him back. When he finally gets in touch with Chase, they can’t help him because he’s not 90 days in default on the loan. Now that’s real life for you.

One man's mortgage meltdown

I love the NY Times web site’s most emailed list. It was there that I clicked on a story called My Personal Credit Crisis. The story was actually a book excerpt from Times writer Edmund Andrew’s new book called “Busted: A reporter’s look inside the mortgage meltdown.”

The story goes into excruciating detail of how Mr. Andrews got series of  “liar loan” to buy and then refinance a house, ran up $50,000.00 in credit card debt and used the $10 overdraft protection feature on his checking account almost daily. I would be embarrassed to admit doing some of this stuff, but he doesn’t seem terribly worried about it. Most of the comments by readers on this site are less than sympathetic.

The book provides a rear view mirror look at how easy it was to get “no doc” and “stated income” loans. My favorite part is when he tries to apply for a loan modification with Chase because he can’t make his payments no one from Chase will call him back. When he finally gets in touch with Chase, they can’t help him because he’s not 90 days in default on the loan. Now that’s real life for you.