For those of you who don’t know me, I have been in the real estate business since 1969 in the Dallas/Fort Worth Metroplex. During my 40 years in real estate, I have seen many up and down periods but the housing crisis today is beyond anything I have ever experienced. The number of foreclosures that have come on the market and the expectation of many more to come are and will be devastating to the American economy.
In the late 70s and early 80s, we also experienced a large number of foreclosures drastically affecting the economy. At that time non-qualifying assumptions were available for buyers to purchase and assume a mortgage. Non-qualifying assumptions were just that. Buyers did not have to qualify for the loan. Buyers did not have to get an appraisal and the closing expenses were very small. Purchasers went to the title company (or a lawyer’s office) and paid the seller the amount of equity they negotiated for the sale then the title company (or the lawyer’s office) would transfer the title into the purchaser’s name. Many of these assumed loan amounts were higher than the current value of the properties.
Non-qualifying assumptions allowed a homeowner to sell their property and save them from foreclosure. During this high interest and high foreclosure time period, non-qualifying assumptions helped stabilize the housing market. As these properties were purchased by new owners, the foreclosure rate slowed giving the market time to revitalize. I purchased several non-qualifying assumptions myself and rented them out over a 10 to 15-year period. Investors also received a tax benefit of deducting some of their expenses to help refurbish these houses. Many small private investors were able to build their personal net worth substantially during this time-frame.
In the 80s, the “due-on-sale” clause was added to the deeds of trust. This change required a seller to pay their mortgage in full upon the sale of their property. This made it almost impossible for homeowners to sell when their property value was below the loan amount, in many cases requiring them to bring large sums of money to the closing table in order to complete the sale. In most situations, their only option was to let the home go into foreclosure, since they were unable to sell the property without refinancing the whole mortgage amount.
If the lawmakers would put a moratorium on the “due-on-sale” clause in the deeds of trust and allow non-qualifying assumptions on the properties that are potential foreclosures, many individual home buyers and private investors would dry up the foreclosure market. This could save the banks and corporate investors billions of dollars in losses. When so many properties are foreclosed on, they often sit vacant and are prone to vandalism leaving the banks, corporate investors and now the taxpayers with huge losses. The current approach gives the banks little or no choice but to sell these properties not just at current market value but usually at discounted prices, causing the additional negative impact of lower values on neighboring homes and surrounding areas where the foreclosures are located.
Bringing back non-qualifying assumptions will help stabilize the real estate market, increase property values, and help to build back equity in the investment and local real estate markets. A moratorium on the “due-on-sale” clause should last until the real estate market has returned to normal. This could take up to five years.