How Non-Qualifying Assumptions Can Help Reduce Foreclosures

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.

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8 Comments

  1. Deborah Kline
    Posted April 23, 2009 at 10:28 am | Permalink

    Absolutely right! I am a Texas Real Estate Broker with 25 years selling in San Antonio. Bringing back the NQAs is what needs to happen.

  2. Deborah Kline
    Posted April 23, 2009 at 10:30 am | Permalink

    Can we get TAR or NAR to lobby for it?

  3. Dorthy Casten
    Posted June 29, 2009 at 12:00 pm | Permalink

    I am a homeowner. However, years ago as a single mother of 3 kids I would not have qualified for a home purchase – even though I had funds for downpayment. I was able to get into a good 3 bedroom 2 bath home in the Saginaw area because I could assume the loan. We stayed in that house for 10 years until the kids graduated from school.

    Now I am 61, have a home I need to sell but can’t in SW FW because I would have to take $$ to the table to unload the house. We are considering walking out of it so that we can move to Mansfield to be close to the kids – we need the help from them and they need the help from us. We don’t know what else to do; our house won’t sell.

  4. Posted March 14, 2010 at 3:49 pm | Permalink

    Amen, I was a Realtor in the late 80′s and became a Mortgage Professional shortly after that. I bought my first home at the age of 21 on a Blind Assumption in Oregon…. I am hopefull that some changes will come very soon. I would think that, Although not legal some lenders would not persur the Due on Sale Clause if the payments are being made…..Can’t wait to see the changes soon

  5. GB
    Posted November 17, 2010 at 3:35 pm | Permalink

    A lot has changed since the 80s’ though. There are a lot more unscrupulous people who would take advantage of the situation, buy up tons of properties, milk them for whatever rental cash they could get, and then file for bankruptcy or just walk. It doesn’t fix the problem, just adds to the uncertainty of mortgage business.

  6. maria gardner
    Posted January 2, 2011 at 11:32 am | Permalink

    I brought my 1st house was a non qualified assumption, and i agree that they should bring back the NAQ, that would help so many people find homes and be able to help lenders, banks, and realtor get back on there feet. It’s really a shame because there so many people that want a home but can’t finance though a real mortgage loan. And then there are the homeless who need help and some of those houses are just sitting there. I reall hope that they do i know a lot of people that can use the help.

  7. Mike
    Posted January 5, 2011 at 2:28 pm | Permalink

    My experience was that when investors purchased those properties and rented them out, they held onto them and sold them as assumable low equity purchases at a later date when the values had increased. Consumers purchased these equities when they didn’t have enough cash for higher down payments for new loans or their credit scores weren’t where they needed to be to qualify for a new loan. If they got in trouble where they couldn’t pay the mortgage any longer they just sold it on an equity to someone else. When they know there is a cash benefit for selling the equity they were more likely to do that rather than let it go back into bankruptcy. What happened was that instead of foreclosed properties not being cared for or being sold for a lower value in the neighborhood and bringing the overall property values down, it stopped the neighboring properties from being devalued. There also were a lot less properties that went back to the government. You can also make these non-qualifying assumptions only for owner-occupants. That would solve your concern.

    Quote Moody’s Analytics: “Moody’s estimated that 2.1 million families would be foreclosed in 2011, and the Mortgage Bankers Association, the industry trade group, said that the total number threatened with losing their homes is four million.
    That would bring the total number who lost or will lose their homes over the five-year period, 2007-2011, under the combined impact of financial collapse and economic slump, to a staggering nine million families. An additional 10.9 million families are “under water” on their homes, meaning that they owe more in mortgage debt than the home can be sold for in the current depressed market. Adding to the potential financial impact is the $426 billion in second mortgages on the balance sheets of just four banks: Bank of America, JPMorgan Chase, Wells Fargo and Citigroup.”

    If the 10.9 million families “under water” right now could sell their properties to a purchaser on a non-qualifying assumption at a low equity, I believe that a majority of those families could save a foreclosure and their credit and a large number of purchasers would be able to own a home instead of renting.

  8. Mike
    Posted January 5, 2011 at 2:30 pm | Permalink

    Thanks for your email. I wish there was enough backing from the public to encourage their congressmen to look into this. It would have been a big benefit if non-qualifying assumptions would have been available since 2007. I don’t believe we would have had the huge amount of foreclosures that we’ve experienced so far.

    Quote Moody’s Analytics: “Moody’s estimated that 2.1 million families would be foreclosed in 2011, and the Mortgage Bankers Association, the industry trade group, said that the total number threatened with losing their homes is four million.
    That would bring the total number who lost or will lose their homes over the five-year period, 2007-2011, under the combined impact of financial collapse and economic slump, to a staggering nine million families. An additional 10.9 million families are “under water” on their homes, meaning that they owe more in mortgage debt than the home can be sold for in the current depressed market. Adding to the potential financial impact is the $426 billion in second mortgages on the balance sheets of just four banks: Bank of America, JPMorgan Chase, Wells Fargo and Citigroup.”

    If the 10.9 million families “under water” right now could sell their properties to a purchaser on a non-qualifying assumption at a low equity, I believe that a majority of those families could save a foreclosure and their credit and a large number of purchasers would be able to own a home instead of renting.

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