By Mike Bodeen · 30 March 2020
The early 80’s was a tough time to be in real estate. In conjunction with sky-high oil costs (Arab oil embargo) and 18% mortgage rates, Real Estate had nearly ground to a halt. This was true nationally, but especially in the recreational communities around Lake Tahoe in California and Nevada where I practiced.
But a 1978 court case called Wellenkamp vs Bank of America gave us some help and hope. The case basically decided that a buyer of residential real estate could “assume” a loan at the original interest rate, unless that lender could prove that such assumption would impair or jeopardize the loan’s security. In most cases, they would not be able to do that.
The effect of that is that a seller would make a deal with a buyer by assuming a “low” interest of 8%, 9%, or 10% by bringing a cash down payment of say 5% or 10% down and then have the seller carry back a 2nd mortgage (junior to the senior lien), for say, 5 years at say 10% interest. So the buyer would need to pay off the 2nd mortgage or refinance it within that 5 year period.
Example:
$100,000 (Purchase price – which was HUGE in those days)
$ -10,000 (10% cash down payment)
$ -60,000 (Buyer assumes the existing conventional loan at say 9% interest with existing payment)
$ -30,000 (2nd Mortgage payable at 10% interest for $250 per month and a balloon payment in 5 years)
This was a huge victory for the national housing market, enabling sellers to sell and buyers to buy. And there were no loan fees, another plus for buyers. This was an example of one person fighting the traditional banks that benefitted an entire national economy. Thank you, Cynthia Wellenkamp,!
Then there was 2007-2010, known as the great recession, was another tough market to be a Realtor. So many homeowners lost their homes. In time, to prevent foreclosures, banks were agreeing to take less than what was owed to them (aka = short sales) which were almost the only sales happening. We learned (tried) to become experts in these complicated transactions, and were often successful, but in some cases, the banks foreclosed on our sellers anyway after months and months of perseverance.
“This crisis will end, we just don’t know when.” Mark Stapp, ASU
Well, here I am, four decades later, entering another tough time to be in real estate – perhaps the toughest. The Corona Virus (CV) is an indiscriminate international killer which will bring about an unknown loss of life. We hope there will be a near term cure for our sick.
I spoke with an elderly woman on the phone today whose name is Mary (not her real name). She sounded very weak and could not talk long. She believes she has contracted CV. She’s not been tested and is trying to ride this out, but thus far has refused getting help. Though she says she’s improving, I’m encouraging her to get taken to a hospital. Pray for Mary.
I appreciated an article in the Phoenix Business Journal that I read this morning by Mark Stapp, an ASU executive for the university’s real estate development program. The article, titled, “…In real estate, it’s no time for traditional thinking or actions,” I quote in part:
“The entire system that is real estate industry needs to recognize that forbearance and support for those who establish our value is needed. This crisis will end, we just don’t know when. But when it does, what is left? I hope the industry, including lenders, recognize that just because they can foreclose, lock out, evict, doesn’t mean it results in a better outcome and possibly it makes matters worse. No one knows what happens, what impacts there will be, we can only speculate. What we know is our decisions require careful, thoughtful, non-traditional and more compassionate thinking. Past challenges for real estate practitioners were, with exceptions, economic in nature. We had to adapt if we were to remain in the business. We utilized non-traditional methods to do so.”
This challenge is different and Mr. Stapp brings it down to a very personal level strongly suggesting that we, as an industry, especially lenders and landlords, stress the social, familial and personal costs in a “thoughtful, non-traditional and more compassionate thinking.”
The economy will return. As an owner/landlord of rental units myself, I hope I will personally take Mr. Stapp’s advice to heart.
Mr. Stapp’s full article can be accessed here.