Is mortgage titan Fannie Mae overpricing homes throughout California?
Real estate agents and sellers have raised that question in a growing number of deals that have fallen apart with the taxpayer-supported company because of price disputes.
In those deals, sellers who had hoped for a more graceful exit from homeownership are pushed toward foreclosure.
Fannie Mae — which owns or backs about half of the home loans in California along with fellow mortgage-finance giant Freddie Mac — is trying to juggle two goals that appear to be at odds with each other.
The first is to help homeowners avert foreclosure through short sales.
For sellers, short sales — which allow borrowers to sell their homes for less than they’re worth as long as the owners of the mortgages say OK — are considered better than foreclosures because they shave off fewer points from credit scores and are sometimes more cost-effective for banks.
Sellers also benefit because they can rejoin the housing market faster, often cutting the wait time to as little as two years instead of seven for a foreclosure.
However, Fannie Mae also must price properties appropriately so taxpayers, who have floated the company for four years, are getting a good deal.
The result of those competing goals?
Fannie Mae would agree to start the short-sale process but would price those homes 20 percent to 40 percent above neighboring comparable sales, said Don Faught, president of the California Association of Realtors. The association is one of the largest trade groups in the state.
The disagreement in pricing has left homebuyers feeling ripped off, and at times, has caused short sales to fail. When short sales fail, home sellers could get stuck with foreclosure auction dates.
“Obviously this is a problem because the agent has to (re-)market the property with the Fannie Mae property price,” Faught said. “And often, there’s no time to re-market the property before a foreclosure (auction date.)”
The disputed values, which Fannie Mae says are justified, are based on several factors, said Fannie Mae spokesman Andrew Wilson. They include past sales, the opinions of contract real estate brokers, and sometimes appraisals.
Those factors yield a minimum amount for each property being considered for a short sale.
“We’re comfortable in the values we set,” Wilson said.
At times, the requested price is more than the highest comparable home sale and requested at the eleventh hour, say people involved in these deals.
A DEAL GONE SOUR
Mark DePlachett, a 62-year-old plumber, was trying to short-sell his home in Rancho Peñasquitos during the holidays.
DePlachett wanted to get out of his mortgage because he could no longer afford it, he said. He was hurt on the job and lost a huge source of income.
The buyer interested in the property offered $191,000 for the condo, which appeared to be a fair price because a sampling of condos in the same building were being listed at or had sold below $200,000, said Jacalyn Blank, the short-sale negotiator in that deal. Analyzing comparable units is a common practice in the housing world.
Fannie Mae’s asking price: $260,000, or roughly 30 percent above the highest comparable sale in that area.
That offer was actually made by Bank of America on behalf of Fannie Mae. As with many loans, one company can own the loan and another company can service it. Servicing a loan means accepting and managing mortgage payments from borrowers.
Fannie Mae gives loan servicers a minimum price that it’s willing to take in a short sale. The mortgage-finance company says it will even consider “close” offers, Wilson said.
If the buyer’s offer doesn’t meet the minimum, then servicers like Bank of America negotiate on Fannie’s behalf. This delegated responsibility, in fact, was expanded in the fall as a way to speed up short sales.
If a buyer wants to dispute the Fannie Mae value, then the servicer can send it to Fannie Mae for review.
That happened in DePlachett’s case. Analysis of comparable condos, either listed at or sold for sub-$200,000, were turned in along with other market details.
Fannie Mae ultimately rejected the offer, and the buyer walked. The property was later re-listed at $260,000, the Fannie Mae request. Months passed. No bites.
A new buyer in December offered $251,000. But by then, it was too late.
“That was declined because the foreclosure sale was weeks away,” said Bank of America spokeswoman Jumana Bauwens.
Eventually, the property sold at foreclosure auction for $240,000. That’s about 4 percent less than what the second buyer offered.
FAIRNESS AN ISSUE
However, in some cases, owners of home loans can make more money through a foreclosure because they don’t have to pay real estate fees, such as commissions, escrow and title, said Blank, the short sale negotiator.
“It’s not fair to homeowners who don’t want the foreclosure in their records,” Blank said. “It’s not fair to the buyer. It means they are overpaying. … Sometimes, you have to pay $10,000 more.”
DePlachett now has a black mark on his borrowing history for about seven years.
“Bottom line … just move on,” he said. “What else can you do?”
If a Fannie Mae short sale goes to foreclosure, then it is listed for sale at public auction. Proceeds of that sale would go to Fannie Mae.
If the property fails to sell at auction, then it goes into Fannie Mae’s foreclosure portfolio for resale. Mortgages for those homes generally do not require appraisals.
Accusations of value inflation in Fannie Mae deals appear widespread. It became such an issue that the officials with the California Association of Realtors, which has a 115,000-person membership, recently flew to Washington, D.C., to meet with Fannie Mae officials.
Faught, the California group’s president, said the meeting was cordial, and reps from the company appeared eager to listen. But the bottom line is, price inflation is still very much an issue.
Fannie Mae officials are aware of the pricing disagreements with their short sales. Their answer in February was to create a process that allows agents to send those issues directly to Fannie Mae.
Addressing San Diego resident DePlachett’s short sale, Wilson said, it “would be a prime example of the kind of issue we’d hope to avoid by allowing agents and others to escalate short sale cases directly to Fannie Mae.”
Despite the new process in place, real estate agents are still concerned.
Agents fear that prices in certain areas are already artificially inflated.
NEW VALUE STANDARD
When Fannie Mae sets minimum prices above the highest comparable home sale in a neighborhood, it’s creating a new value standard that may not be justified, said Phil Johnson, a real estate agent who is dealing with Fannie Mae value disputes.
Also, agents say Fannie Mae’s minimum asking prices are driving away qualified buyers and increasing competition for traditional buyers.
When Fannie Mae asks for higher prices, buyers who have secured financing would then have to get more financing to cover the difference.
This could be a problem for borrowers, because they’d have to justify the request for more money from the mortgage company, which may not be possible.
Cash buyers, on the other hand, may not have that issue.
They’re typically backed by companies with capital or hard-money loans, so “they can pay whatever they want,” Johnson said. This could create bidding wars and other issues for traditional buyers, who are already facing a tight inventory.
San Diego real estate broker Kurt Wannebo says the values that Fannie Mae officials set make sense because they’re fully aware that the housing market in areas like San Diego are hot.
Low inventory levels, spurred by high levels of underwater homeowners, have caused prices to go up. The median price for a local home sold in January was $350,000, up 15 percent from a year ago.
Competition for limited inventory, especially in the entry-level price range, has been worsened by declining foreclosures.
Buyers who had typically purchased distressed homes now are forced to enter the regular home market. This means more competition for traditional buyers.
“Fannie realized that certain market prices are appreciating quickly and offers are coming in high,” Wannebo said. “It’s wrong in that you know the values aren’t always there.
“The problem is, let’s say you list a property for $300,000 because that’s what the comps show,” he added. “I actually get an offer of up to $350,000. Buyers will overpay for properties if they just want to get into it. (Fannie Mae) is exploiting that aspect.”