Loan modifications, short sales, and principal reductions have been godsends for some homeowners and lenders, but collectively have failed to pull the housing market out of a ditch. Both RealtyTrac and the Mortgage Bankers Association report a surge in foreclosure activity, with more on the way as moratoriums expire on bank actions. Also, most modified subprime loans are destined to unravel, says Fitch Ratings. So what ideas are left as the crisis deepens? One prominent California real estate investor suggests that maybe it's time lenders dust off an old one — the so-called simple assumption loan.
A quick primer: a simple assumption was a loan allowing a buyer to take over a seller's government-insured mortgage, which, until the late '80s, did not require qualification under FHA or VA guidelines. Despised by lenders, the loans were widely used in the 1970s and 1980s, until a Supreme Court ruling and an act of Congress (the Garn-St. Germain Act) permitted banks to enforce "due-on-sale" clauses and effectively slammed the door on them.
Bruce Norris, president of the Norris Group in Riverside, Calif., sees modern simple assumptions as one potential antidote to foreclosures and plunging home values. He points out that assumptions were a crucial buoy for home sales and prices during the housing bust of the early 1980s. In California, the assumption loan was the predominant method for buying a house then, keeping values steady despite a tenfold increase in foreclosures and 11 percent unemployment, he says. "I think this is one of the pieces of the puzzle that would help today."
Norris believes assumption loans (with lender and insurer approval) would work best in markets where mortgage balances are not drastically underwater and foreclosures are driven mostly by job losses. He says many able buyers shut out by stricter credit and down-payment requirements might be better off taking over a fixed-rate loan of an out-of-work homeowner.
Just as importantly, sellers could re-enter the market with their credit intact to buy an affordable home, he says. "In Texas, this could erase the foreclosure problem overnight," Norris says. Lenders could simply take a three-to-five year moratorium on due-on-sales clauses to make assumptions work, he says, but acknowledges the idea is a long shot.
"They would probably faint on the spot" if assumptions came back.
Maybe they already have. No mortgage lenders contacted by U.S. Banker would discuss the topic, and even the Mortgage Bankers Association ignored repeated requests for comment.
Norris has allies. Mortgage workout specialists who are dealing with the muck first-hand say private-equity holders of troubled assets are already more than happy to pass along a property to a buyer who lacks cash down but has the ability to make payments. "Assumptions are something we've always done to some extent, if it makes sense," says Steven Horne, chief executive of Wingspan Portfolio Advisors, a distressed-mortgage servicer in Dallas. Greg Hebner, president of the MOS Group in Farmingdale, N.Y. — a workout firm associated with several top 10 servicers — thinks assumption practices could work for investors through the Treasury's Public Private Investment Program. "It could also be important social policy" in stabilizing prices and communities, he says.
Given the foreclosure forecasts, Norris questions why lenders would object. "I think it's kind of funny a lender would cringe at somebody taking over a loan… after they've brought money to the table to make it current," says Norris. "To me, they've shown more intent than the original borrower."