The Mortgage Scoop

Solving the Riddle of the REO Conundrum is the key to fixing the Twin Cities housing markets’ fall in value.  What is the REO conundrum you ask?  Well, first of all REO is a bit of industry slang for bank owned or foreclosed homes, it stands for “Real Estate Owned” which is what banks call it themselves.  The conundrum is basically this:

• There are currently about 26,00 homes actively listed for sale in the Twin Cities right now according to the Minneapolis Area Association of Realtors.
• Accounts vary, but somewhere between 20-50% of that inventory are bank owned homes.
• If we assume about 40% is the right number that would give you 10,000 bank owned homes for sale in the Twin Cities currently.
• This includes about 5% of the MLS listings which are bank owned new construction homes–meaning the builder lost the homes in foreclosure before selling them to the public.  This would mean about 1,500 homes like this for sale.
• Of the 10,000 foreclosed homes for sale, I’m told by some bank owned property experts that somewhere between 40-60% of them will only accept offers that are “Cash or Conventional.”  Let’s call it 50% to keep numbers simple, which would mean 5,000 homes or about 20% of the total homes on the market.
• This means they won’t accept offers from buyers using FHA or VA loans, mainly because those types of loans require the properties to be fixed up before closing if there are any health or safety issues in the home.  Sometimes the problem is as simple as a new $2,500 furnace and sometimes it’s full blown mold infestation.
• The majority of people considering buying bank owned homes in the Twin Cities are first time buyers
• Right now, I would assume that roughly 80% of first time buyers are using FHA mortgages because they have the smallest down payment requirement of 3.5%, and easier credit score requirements.

Thus, 4 out of every 5 potential buyers for bank owned homes can not buy half the homes which they are really the only potential buyers for (other than investors looking for rental properties).  This is what really smart people call a “market inefficiency.”   Or, others would say, “we’ve got a problem here.”  Today, I’m calling it the REO Conundrum.

So, what needs to happen to solve the REO Conundrum?  In theory it’s not that tough.  You need to find a Conventional loan that doesn’t require a big down payment or super high credit scores that makes money available to repair the damage.  The problem (or riddle) is no lenders have been willing to take on the risk that exists when you combine all these parts together.  To make sure a loan like this is used properly, the lender has to really understand the market and the buyer themselves, which is impossible to do on a large scale.

The closest thing to this has been the FHA 203k and 203ks loans because they give the money to buy and fix up the home.  While some banks will accept these loans on their “cash or conventional” only homes, many still will not.  Also, there are very few mortgage companies in the Twin Cities that offer them.  (At Cornerstone Mortgage, we not only offer them, but we are one of only 3 companies that can use them combined with the State’s CASA loan that can provide down payment assistance).

Ladies and Gentlemen, the Riddle of the REO Conundrum has been solved, and it’s called (drum roll please….)

The Homeownership Opportunity Program (HOP).  HOP is a partnership between Minnesota Housing and Cornerstone Mortgage that aligns all the core pieces in a way that will solve the problem I explained before.

HOP is a Conventional mortgage that provides the money to buy the home, fix it up and then will be converted over a 30 year fixed rate loan that best matches the buyers situation.  So, if you would need to use a FHA loan because of your credit score or smaller down payment, you can still use the HOP Conventional mortgage to get buy the home. 

Being able to us a Conventional mortgage means that those 80% of home buyers can now buy those 50% of bank owned homes in the Twin Cities that previously were not available to them.  Not only can they now buy them, they can have the money they need to turn them back into great, well cared for homes.  The kind of homes we all want in our neighborhoods.

You don’t have to be a first time buyer to use a HOP loan.  Your household income does need to be below $96,500, and you do have to plan on living in the home.  If you want to find out if you are eligible for a HOP loan, you can get started by completing the Can I Get HOP? form on this website.

May 23rd, 2009 | Tags: HOP | Category: HOP | Subscribe to comments | Leave a comment | Trackback URL