Federal changes affect buyers of foreclosed homes

Published: Monday, August 02, 2010, 1:24 PM     Updated: Monday, August 02, 2010, 1:25 PM

By Jean M. McLean

Special assignments writer 

Want to buy a foreclosed home or seek FHA financing? Due to recent federal changes, it’s more important than ever to talk with your Realtor and lender first.

 

Last month Fannie Mae announced it will no longer extend loans for foreclosed homes within a state’s Right of Redemption period. The unexpected change could affect Birmingham neighborhoods with foreclosed homes and buyers of those properties, said Rob Henger, CEO/owner of Henger Rast Mortgage. “Fannie Mae is the largest holder of mortgages in our country,” Henger said. “Freddie Mac hasn’t done that yet, but there’s a lot of concern they will.”

   

Alabama will be more affected than most states because it is one of the few that extends Right of Redemption to 12 months. 

 

Right of Redemption allows owners of foreclosed homes to buy their properties back. In Alabama that right extends up to 12 months after foreclosure, even if the home has been purchased by someone else. The former owner must pay the full value of the property, not just the missing mortgage payments, and all fees. 

 

Most states only allow a 30- to 90-day redemption period.

 

“The spirit of the law was a consumer protection law, but it’s having the opposite effect,” said Lee Townsend, Henger Rast’s vice president of production and business development. Alabama’s Right of Redemption is very rarely used. Less than one-tenth of one percent of all Alabama foreclosures are redeemed, said Henger. Former owners are unlikely to be able to pay the entire amount owed, and could wind up paying more than the property is worth, due to fees levied during the process.

   

The catalyst for Fannie Mae’s decision came not from Alabama or individual homeowners, but from developers in other states. In places like Georgia, under-development subdivisions were foreclosed upon when developers defaulted. The question then arose of who had the Right of Redemption – the unpaid contractors, original landowner, or other parties.  If someone buys those foreclosed properties, Henger said, “How many people could have a claim against the house that’s sold?” 

   

That led Fannie Mae officials to consider such loans too risky. Fannie Mae will still extend loans to foreclosed properties, but only after the Right of Redemption period has passed.

   

Since Fannie and Freddie are the country’s largest mortgage holders, they set standards for the industry. Henger wonders if other lenders will follow suit, but believes smaller banks may still take Right of Redemption risks.

   

Those hoping to get a great deal on a foreclosed property can still do so, said Scott Long, CEO/team leader of Keller Williams’ Hoover Market Center. 

   

“A foreclosure can be an awesome purchase. But you have to come up with a plan.” Long said most real estate agents know which lenders are willing to loan money on foreclosed properties, even when the property falls within the Right of Redemption period. He said that’s one more reason buyers should consult a local lender and a full-time Realtor for help. 

   

It is not only important to be sure loan requirements will be met, Long said, but that the sales contract is written specifically for a foreclosed property. Working with experienced professionals is essential in the foreclosure market, said both Long and Townsend.

 

“As a consumer, I’d ask a lender upfront if they’ve dealt with foreclosures before,” Townsend said.

 

Meanwhile, FHA has increased its Mortgage Insurance Premium from 1.5 percent of the loan to 2.25 percent. The fee is used to protect lenders from foreclosure costs. 

Buyers often choose FHA loans because they require only 3.5 percent down, combined with low interest rates. However, the 2.25 percent fee, which is rolled into the loan, negates some of those advantages.

 

“I call it a FHA funding fee, because you can’t get out of it,” said Long. Unlike Private Mortgage Insurance (PMI), waived with a 20 percent or more down payment, FHA’s fees are collected regardless of down payment amounts.

 

Henger hopes Alabama’s Legislature will reduce the Right of Redemption period and that new federal policies will ease buyers’ burdens. “In a general sense I really believe that the leadership at HUD, Fannie and Freddie recognize that a vacant house is a bad thing for everybody, and there is an effort to make loans available for people to buy these houses.”

 

Meanwhile, those ready to buy can still find loans at unprecedented rates. Henger compared the current four percent interest rate to the average rate of six percent. At four percent, a typical $100,000 loan would cost $600 per month. At six percent, it would be nearly $900. “This is like the perfect storm for a buyer,” said Long. “Everything’s lined up – prices are right, rates are low and money is available, if you know where to find it.”