David Monroe

Bank of America Short Sales Improving

2010-07-17T21:18:00Z

At this time last year, Bank of America was on my black list for short sales. I would still work with short sale clients that had Bank of America loans, but I had to make an extra effort to mentally and emotionally prepare sellers for a process that could take six months to a year from signing the listing to signing closing papers.

Several months ago, Bank of America started using the Equator system (formerly REOTrans). Equator is the technology platform used by many of the top lenders nationwide for handling bank-owned property transactions. Equator built a short sale portal to be used by Bank of America (and eventually other lenders) to help streamline the short sale process.

While the transition to the Equator system had its challenges, Bank of America’s implementation of this online system for processing short sales has been one of the biggest steps in the right direction that I’ve seen from a large bank in the short sale industry. That doesn’t mean there aren’t still a lot of problems with Bank of America short sales, but it is a massive improvement from where they were a year ago.

Short sales that would have previously taken 6-8 months to negotiate with Bank of America can usually be completed within 60-90 days now when processed through the Equator system. It can still be a painful experience at times, but it’s kind of like pulling a bandage off your arm: It’s going to hurt whether you pull it off slowly or quickly, but isn’t it better to get the pain over with quicker?

So You Stopped Making Your Mortgage Payments -- Now What?

2010-07-17T21:10:00Z

Have you stopped making your mortgage payments? Are you considering it? If you’re just considering it and haven’t already stopped, read the post, Should You Stop Making Your Mortgage Payments?

If you have stopped making your mortgage payments, either because you can no longer afford to pay or for some other reason, here’s what you can expect:

First Mortgage
First mortgage lenders are typically much easier to deal with if you fall behind on your payments. They typically won’t harass you by phone, but they’re likely to fill up your mailbox with letters reminding you that have haven’t made your payment.

If you speak to your first mortgage lender on the phone, they usually won’t use high-pressure collection tactics. That doesn’t mean they won’t ask for a payment, but the collection effort over the phone is not likely to go past that level. They will make a lot of effort to determine if there’s a way to bring the loan out of default status by offering a loan modification, payment moratorium, or some other workout solution. However, these workout solutions are rarely successful, since most borrowers just get lost in the system.

This low-pressure collection strategy may not apply if your loan was sold off to someone that specializes in purchasing loans that are in default for pennies on the dollar.

Second Mortgage
If you stop making payments on your second mortgage, this can create a bit more of a challenge. Not only will the second mortgage lender fill up your mailbox with threatening letters, your phone is likely to ring off the hook as well.

I put second mortgage lenders in the same collection category as credit card collectors. Second mortgage lenders have a lot more to lose, especially if the first mortgage lender forecloses. Therefore, they tend to use high-pressure, threatening, and sometimes unethical collection practices. They may try to contact you at work or they may try to contact your relatives, although you can request in writing that they not do this.

They may lie to you. They may tell you that they won’t approve a short sale or loan modification if you’re behind on your payments. This is not true. If you challenge something that they tell you and they offer to have you talk to their supervisor to confirm, don’t take the bait. Their “supervisor” is most likely just the collector in the cubicle next to them.

Letters In The Mail
During the first 90 days or so, your mailbox is going to fill up with letters from your lender. They may start out friendly, offering lots of options and telling you how much they want to help you, then they will start getting more threatening. Usually around the 60 day mark, they’ll send letters by certified mail as well. They’ll use terms like “Acceleration Warning”, “Notice of Intent to Foreclose”, “accelerate the maturity of the loan”, “declare all sums immediately due and payable”, “commence foreclosure proceedings”, “take legal action”, etc. They're trying to get your attention. Just remember that no matter what they say, there are specific procedures and timelines that they must follow (see Foreclosure Process and Timelines in Washington State).

Two Notices To Take Seriously
If you’re receiving so much correspondence from your lender that you’ve given up even opening your mail, there are two letters (or notices) that you should pay particular attention to. The first one is the “Notice of Default”. This will usually be sent by regular mail, certified mail, as well as a hand-delivered copy (usually taped to your front door if you’re not home). This notice warns you that the bank may start the foreclosure process if you don’t cure the default within 30 days.

The second notice is the “Notice of Trustee's Sale”, which is sent 30 days or more after the Notice of Default. Like the Notice of Default, this notice is also sent by regular mail, certified mail, and hand-delivered. This notice means the bank has scheduled the foreclosure auction for your property. The foreclosure auction will be at least 90 days from the date of the notice. The bank has the ability to postpone the auction at their discretion if you’re in the process of a short sale, loan modification, or some other workout option.

As always, if you’re concerned about your legal rights or legal implications, you should consult with an attorney.

This is just a brief overview of what to expect, and it may differ slightly from lender to lender. Feel free to share your experiences.

Will HAFA Improve The Short Sale Process?

2010-04-08T21:16:00Z

On April 5th, the government implemented the Home Affordable Foreclosure Alternatives (HAFA) program, designed to standardize and streamline the short sale process. I'll give a brief overview of the program, along with some additional comments (and opinions).

HAFA is an extension of HAMP (Home Affordable Modification Program). The HAMP program was a major failure, helping only a very small percentage of eligible borrowers. Out of 4 million eligible borrowers, the HAMP program has produced less than 70,000 permanent loan modifications to date. The problem with HAMP is that it was loosely written, so many banks made little effort to implement the program as it was designed. After reading and studying the 43-page HAFA Supplemental Directive, I think we're likely to see many of the same problems that people experienced with the HAMP program.

The HAFA program provides voluntary guidelines for lenders to streamline the short sale and deed-in-lieu of foreclosure process by offering financial incentives to loan servicers, investors, and borrowers. It establishes an acceptable sale price for the property prior to listing it for sale, allows up to 120 days to sell the property, sends the borrower off with $1,500 at closing, and pays the loan servicer $1,000 for processing the short sale. Sounds like a great deal, right? Well, don't get too excited yet.

Loans that Qualify

To qualify, the loan must be a first lien mortgage originated before January 1, 2009 from a participating lender NOT owned or guaranteed by Fannie Mae or Freddie Mac. VA and FHA loans are also excluded. It is estimated that well over 50% of loans will not qualify for the HAFA program.

Effective Dates

The HAFA program is effective from April 5, 2010 through December 31, 2012.

Borrower Eligibility

The borrower must meet the following eligibility requirements:

The property is the borrower's principal residence;
The mortgage is delinquent or default is reasonably foreseeable;
The current unpaid principal balance is equal to or less than $729,750;
The borrower's total monthly payment exceeds 31% of the borrower's gross income;
If there is mortgage insurance on the loan, the mortgage insurer must approve;
The borrower must be evaluated for a HAMP modification prior to being considered for HAFA. (In other words, you'll have to spend several months running in circles trying to get the bank to respond to a loan modification request, even if you know you'll be turned down.)

Short Sale

Prior to approving a borrower to participate in a HAFA short sale, the loan servicer will determine the minimum net sale proceeds that they'll accept. What's interesting is that there is nothing in the 43-page document that would prevent a loan servicer from establishing an unreasonable amount for the minimum sale proceeds. For example, the loan servicer can require the property to sell for 10% more than the estimated value and the borrower can't dispute it. While that is a bit extreme, the minimum sale proceeds through the HAFA program could be higher than what they would accept on a traditional non-HAFA short sale.

Once a minimum amount is set by the loan servicer, the borrower signs a Short Sale Agreement (SSA), and a real estate agent markets the property and procures a buyer.

A Request for Approval of a Short Sale (RASS) is submitted with the buyer's offer, and within 10 days, the loan servicer must approve or reject the proposed sale. However, while 10 days may seem like a great timeframe for short sale approval, it could take up to three or four months to get to this point. Also, if the loan servicer is unable to comply with the 10 day timeline, they can just reject the offer and make up a reason like "insufficient information available". They're supposed to approve the sale if it meets the minimum net sale proceeds that they had previously set, but they'll find loopholes to get around it. Trust me, they will.

During the term of the SSA, the borrower may be required to make monthly payments of up to 31% of their gross monthly income. Since this would be less than the full payment amount, the loan servicer can still report the payments as late on your credit report.

Deed-In-Lieu Of Foreclosure

If a short sale cannot be completed within 120 days, the borrower will be required to transfer the property to the bank via a deed-in-lieu of foreclosure (DIL). So if the buyer's financing falls through at the last minute and there's not enough time to procure a new buyer, the bank could require the borrower to sign the property over to them without the additional time and legal fees necessary for the standard foreclosure process. Sounds like a great deal for the bank.

Second Mortgages And Other Lienholders

Things start to get complicated is when there is more lienholder involved. For a short sale to be approved, any subordinate lienholders (like a second mortgage) must agree to a payoff of no more than 3% of the unpaid principal balance (up to an aggregate of $3,000 for all subordinate lienholders) in exchange for a lien release and full release of borrower liability. In other words, if there's a $30,000 second mortgage, the second lienholder will have to agree to a payoff of $900 and forgive the borrower of the remaining deficiency according to HAFA. This will kill a lot of HAFA short sales with second mortgages, as many second lienholders won't agree to those terms. The HAFA program only applies to first mortgages, so second mortgage lenders are not required to comply with the HAFA guidelines.

Final Thoughts

While some of the intentions behind the HAFA program may be good, the program is not likely to see much success. Some borrowers may benefit from doing a short sale through the HAFA program, but most borrowers are likely to see better results through a traditional (non-HAFA) short sale. The HAFA program doesn't necessarily change the way short sales are done--It just offers another option for those who may qualify.

Should You Stop Making Your Mortgage Payments?

2010-04-08T20:58:00Z

As short sales are becoming more common, I’m finding that a higher percentage of people who contact me regarding a short sale are still current on their mortgage(s). Many of them have just made the last mortgage payment that they can afford to make, while others are trying to develop a strategy that will produce the best results for their situation.

While I typically recommend paying for basic necessities like food, shelter, utilities, clothing, and basic transportation first, sometimes it’s just not possible to continue paying a mortgage payment that is well above an affordable level. While I cannot advise anyone on whether or not they should stop making their mortgage payments, here are ten things to consider:

If your mortgage is FHA insured, you’ll typically need to be at least 31 days behind on your mortgage before they’ll consider a short sale.
For other types of loans, some lenders will approve a short sale if your payments are current, and some will not. It depends on the underlying investor, and some banks service loans for many different investors.
The short sale process may take longer if you’re current on your mortgage payments. The bank usually won’t feel that there’s a risk of getting the house back if you’re current on your payments, so they may not be as motivated to work on a reasonable timeline. A good real estate agent with short sale experience may be able to assist you with the wording in a hardship letter so the bank understands that even though your mortgage is current now, default is imminent.
If you stop making your mortgage payments, it will have a negative effect on your credit. Therefore, you should make sure you handle anything that would be impacted by negative credit before you stop making payments--And that doesn't mean going out and buying a new car or furniture on credit then not make your mortgage payment. Securing a place to rent could be impacted by negative credit, but this is usually done much later, and you may be able to explain the circumstances to a prospective landlord.
If you have significant liquid assets (cash in the bank, CDs, whole life insurance policies, or other investments), the bank may require you to put up some cash at closing or sign a promissory note as a condition of approving a short sale, regardless of your mortgage payment status. IRAs and other retirement plans are typically exempt, but that won’t necessarily stop the bank from trying to ask for these funds. I’ve heard of situations where sellers were tricked into borrowing from their IRAs to pay back mortgage payments or cover deficiencies on a short sale.
If you stop making your mortgage payments, the bank will attempt to collect the back payments. If you have two mortgages, the second mortgage lender will probably harass you much more than the first mortgage lender will. The second mortgage lender is also much more likely to use unscrupulous and unethical collection tactics. Be prepared. It’s a lot easier to deal with if you know what to expect.
If you have a second mortgage and stop making your mortgage payments, the second mortgage lender may tell you that they won’t approve a short sale if the second mortgage is delinquent. This is a collection tactic and is not true. In fact, the exact opposite is often the case.
Borrowing from a credit card to make your mortgage payment is not recommended. I have yet to come across a situation where this actually ended with a positive outcome.
If you stop making your mortgage payments, it could eventually lead to foreclosure if you are not able work out something with the bank or have a short sale approved.
If the bank determines that you have enough income to make the mortgage payments, they may not approve a loan modification or a short sale. However, the bank may make an exception in special circumstances like divorce or an out of area job transfer, where staying in the house may not be an option.

If you also have credit card debt, here are some things to keep in mind:

If you’re unable to continue making your mortgage payments and intend to do a short sale, staying current on other debt outside your mortgage (car payments, credit cards, etc.) will typically make it easier to secure a place to rent after the short sale is complete. It will show a prospective landlord that although you had stopped making your mortgage payments because the payments were more than you could afford, you are able to make lower rent payments, and the mortgage situation was an isolated incident. Many people in short sale situations would have sold their house before they fell behind on their mortgage payments if they would have been able to sell their house for enough to pay off their mortgage.
Some banks may check your credit before approving a short sale. If they find out that you stopped making your mortgage payments but have stayed current on your credit card payments, they may reject the short sale offer. I’ve only heard of this happening once, and it was with Bank of America. It’s unclear whether it was just a threat or if the underlying investor actually required that. However, consider this a warning—It could happen.

Make sure you understand the foreclosure timelines. See my blog post, Foreclosure Process and Timelines in Washington State for timelines in Washington State.

In the end, the decision is up to you. There may be risks and consequences regardless of your decision. Just make sure you have all the facts so you’re making an educated decision.

Foreclosure Process and Timelines in Washington State

2010-02-26T21:17:00Z

Washington State is a non-judicial foreclosure state, meaning that the lender is not required to sue the borrower in default in order foreclose. Most home loans in Washington State are based on a deed of trust (mortgage instrument) with a “power of sale” clause that pre-authorizes the sale of the property to pay off the balance of the loan in the event of a default by the borrower. When this clause exists, the power given to the lender to sell the property is usually executed by the lender’s representative, typically referred to as the trustee.

While Washington State has minimum timelines required by state law, this is the timeline typically followed by most lenders:

90 days after the first missed payment: Lender sends a “Notice of Default” to the borrower. The notice will be posted at the property (usually taped on or near the front door) or delivered to the borrower in person. The notice may also be mailed to the borrower, usually by certified mail. The borrower has 30 days to respond before the actual foreclosure process is started and the property is scheduled for public sale.

120 days after the first missed payment: Lender records a Notice of Trustee Sale with the county recorder, stating the scheduled sale (auction) date. The notice of sale must be recorded at least 90 days before the sale date. The notice of sale is also posted at the property or delivered to the borrower in person, and mailed to the borrower and any other affected parties (such as additional lienholders).

Approximately 7 months after the first missed payment: Property is sold at public auction to the highest bidder, who must pay in cash at the time of the auction. If nobody bids the minimum bid amount set by the lender, ownership of the property will revert back to the lender. The winning bidder, or the lender if there were no bids, can take possession of the property 20 days after the foreclosure sale. The borrower has no right to redeem the property after the foreclosure sale. Foreclosure sales are usually held on the county courthouse steps each Friday, or the next business day if Friday is a holiday.

The timelines above are the most common timelines. Actual timelines specified by Washington State are:

The foreclosure sale must be scheduled a minimum of 190 days from the date of default.
The borrower has up to 11 days before the foreclosure sale to stop the foreclosure process by paying the past due payments, plus expenses and legal fees.
The lender may postpone the foreclosure sale at their discretion. This will often times occur when loan modification, short sale, or other agreement is being negotiated with the bank.
The lender or the high bidder at the foreclosure sale can take possession of the property 20 days after the foreclosure sale.

The Pre-Approved Short Sale Fallacy

2010-02-24T22:40:00Z

I’ve received many calls from prospective buyers interested in my short sale listings asking if the listing price has been approved by the bank. On a short sale, the seller owes more than their house is worth, so the seller’s lender(s) must approve the sale price and accept a discounted loan payoff in order for the house to be sold. However, is it not common in these situations for banks to pre-approve a listing price for a house.

Because there are so many short sales on the market, buyers are searching for short sale information on the Internet and finding a wealth of information and advice on how to handle short sale situations. I did some searching myself, and while there was some good information available, I found a lot of incorrect or incomplete information.

Many websites advised buyers to ask the listing agent if the list price had been approved by the bank. However, buyers aren’t necessarily getting the whole story.

Here are some situations that may lead a listing agent to claim that the bank has approved the listing price, along with some things to consider:

The seller’s loan is an FHA loan, and HUD has sent the seller a letter stating the minimum net payoff proceeds that they would accept. This can be fairly reliable as long as all of the conditions set by HUD are satisfied. In this situation, you also need to know the following:
1. When is the deadline for obtaining a signed Purchase and Sale contract from a buyer? The HUD pre-approval is only valid for a specific period of time, usually around 90 days.
2. What is the appraised value of the property? The pre-approved price set by HUD is based on a percentage of the appraised value, usually 88%. Since this is the net amount after all selling expenses (including commissions and closing costs), that translates to a purchase price of approximately 97% of appraised value. However, HUD will often times accept less than the pre-approved amount depending on how long the property has been on the market—A buyer’s agent that specializes in short sales will know when you can make a lower offer that will net HUD less than their pre-approved amount and still have it approved by HUD. If your agent doesn’t know this, you could be paying more than you should for the house.
3. How long has the property been on the market? This relates to Point (b) above—HUD may accept a lower payoff than their pre-approved amount depending on how long the property has been on the market.
The bank has verbally approved a listing price or has verbally disclosed the minimum payoff that they’ll accept. This is possible, but rare. Banks want the property sold at the highest price possible and don’t want to leave money on the table. If they approve a listing price of $300,000 and the property could have been sold for $320,000, then they haven’t done their job of mitigating the loss. Most banks prefer to receive an offer, then determine if the price offered is acceptable. Also, if the price approval was not in writing, there’s no guarantee that they’ll follow through with their verbal commitment (banks are notorious for “forgetting” verbal commitments that they’ve made).
The bank has given written approval of the listing price. As in Point #2, banks rarely approve a price prior to procuring a bona-fide buyer for the property. If the listing agent claims to have written approval of the listing price, ask them to send a copy to you in writing. If they say they can’t because it contains confidential information, ask them to black out the confidential information with a marker and send a copy to you (make sure they don’t black out the borrower’s name or property address). If the letter states an approved price, make sure it also states the net payoff proceeds that the bank will accept. The bank is less concerned about the sale price—They’re concerned about the amount of money they’ll end up with after the deal is done. You’ll want to avoid potential situations where the bank approved a listing price but comes back in the eleventh hour and says something like, “That price was based on 4% in real estate commissions, not 6%,” or “That price didn’t account for prorated real estate taxes, homeowner association dues, etc.”
A previous buyer’s short sale offer was approved by the bank, but the buyer backed out or could not complete the transaction. This situation would seem like a slam-dunk since the bank had already approved another buyer’s offer. But beware—Just because the bank approved another buyer’s offer at the same price doesn’t guarantee that they’ll approve your offer. The previous buyer may have had different financial qualifications and the terms of the previous offer may have been different than the terms that you’ll offer. Maybe the previous offer didn’t include an inspection contingency, and that made it desirable to the bank. Also, short sale approvals are usually good for up to 30 days, or sometimes 45 days. If the bank finds out that a different buyer was substituted, they could reject the short sale.

I had a recent transaction where we had a short sale approval (approved specifically for the original buyer), we sent in a new offer to the bank for approval at the same price, and the bank changed their mind and decided they wanted a higher price. We had to fight with the bank for the next month to get them to come back down to the original price that they approved the first time around.

My point here is that just because the bank approved an offer from another buyer doesn’t necessarily mean that you can just substitute a new buyer and expect the deal to go through. The only way to assure that the bank will go through with the deal after the approved buyer backed out is to submit the new offer and get a new approval. Depending on the bank, this could take anywhere from several days to several weeks.

If you find yourself in this situation, ask the listing agent to send you a copy of the short sale approval letter. Make note of the deadline. Many banks will issue an updated approval letter for the new buyer but won’t change the date that the approval expires (the deadline for closing).

Keep in mind that I’m not saying that you should completely discount any claim that the price of a property has been approved by the bank. Just make sure you know the facts behind the claim, so you’ll be able to set the proper expectations.

Most banks won’t start short sale negotiations or discuss any price they’ll be willing to accept until an offer is received from a buyer, although there are exceptions. As time goes by, we’ll probably see more banks opening up to the idea of pre-approving prices for short sales to speed up the process.

Unlicensed Third-Party Short Sale Negotiators - Washington Department Of Licensing’s Official Stance

2010-02-11T21:35:00Z

Many real estate agents in Washington State use unlicensed third-party negotiators to handle their short sales. I have always discouraged that practice (see my March, 2009 blog post, Is Your Real Estate Agent Breaking The Law?).

The Washington State Department of Licensing has now taken an official stance on this. On their website under “New Real Estate Law Frequently Asked Questions”, they state that short sale negotiators must hold active real estate licenses or be appropriately licensed by the Department of Financial Institutions, and work under the authority of their designated broker. The department of licensing is currently investigating complaints of unlicensed short sale negotiators (see Real Estate Commission Meeting Minutes). Real estate agents who are using unlicensed short sale negotiators can be charged with aiding or abetting unlicensed activity and are subject to disciplinary action, according to the Department of Licensing.

Unlicensed third-party short sale negotiators are responding by stating that they’re really “facilitators”, not “negotiators”. That may technically be true, but that doesn’t mean that the state sees it that way. I certainly wouldn’t want to be standing in front of a judge trying to explain the difference between “facilitating” and “negotiating”. And as a real estate licensee, I wouldn’t want to risk my license being suspended while my relationship with an unlicensed short sale negotiator is being investigated.

I use an experienced short sale attorney to handle my short sales. My attorney also happens to have a real estate license, in addition to being an escrow attorney. He was working with short sales before most real estate agents even knew what a short sale was. If you’re a real estate agent in the Seattle-Tacoma-Everett area reading this, I would be happy to refer you to the short sale attorney that I use, no strings attached--I can’t receive any payment for an attorney referral. (See Short Sales For Real Estate Agents for more information.) As real estate agents, we need to keep our business practices above-board and eliminate opportunities for any bad press relating to real estate agents. Would you put your license at risk?

Is There Such A Thing As An Unsellable House?

2010-02-08T20:30:00Z

Is there such a thing as an unsellable house? There’s a wealth of information available on preparing and staging a house to sell, but what about situations where the house can’t be properly prepared or fixed up to sell? I work a lot with short sales and pre-foreclosures, and in many of these situations the houses aren’t in great condition. Often times the seller has no motivation to fix up or clean up the house.

One house I recently sold was no exception. It was in foreclosure and we had to sell it quickly. The house was only 13 years old and needed new flooring, interior paint, and some landscaping work, but it looked much worse. The owner had multiple large dogs that were allowed to go in and out as they pleased and the house smelled like a wet dog. Nearly every room in the house had boxes, clothing, and other personal belongings stacked floor to ceiling, and some of these rooms were so cluttered that it wasn’t even possible to get inside the room.

In the listing, I requested that agents contact me prior to showing so I could warn them of what they were walking into and help set the proper expectations. I could see the potential of this house, but most buyers and their agents could not. Some buyers turned around and walked out as soon as they opened the front door.

Critical Feedback

I always request feedback from agents that show my listings. I received several scathing comments about this house from other agents: “Get it off the market!”, “You should be embarrassed for listing this house”, “It stinks!”, not to mention some of the direct insults to the seller even though the agents had never even met the seller.

Seller In Distress

The seller was actually a very nice, thoughtful, intelligent, and hard-working couple. They got in over their heads on a couple projects, and as a result had a lot of distress in their lives. They were spending so much time putting out fires in their lives that taking care of the house became a low priority. Many people are quick to judge because they’ve never been in true distress. They don’t understand that most people make different decisions when in distress than they would in normal situations.

In the end, this house did sell—The short sale was approved and the bank took a $190,000 loss. It was sold to a retail buyer, not an investor as many people might assume. This buyer saw great potential in this house and ended up getting a great deal.

Would You Give A Loan To This Buyer?

2010-02-07T02:49:00Z

Consider this scenario: You paid off your house a few years ago now you’re selling it for $300,000. You figure that you would make a better return on your money by offering owner financing instead of cashing out and investing the money somewhere else. This is a big part of your retirement, so it’s a very important investment decision.

A buyer is willing to pay your asking price of $300,000. Here’s a snapshot of the buyer’s situation:

The buyer can only give you $11,000 down.
The down payment is part of a $17,000 gift received from the buyer’s parents, the remainder of which will be used to pay closing costs. The buyer has no savings outside of that.
The buyer has marginal credit with a credit score of 620 and had a couple 30-day late payments on credit cards just over a year ago when they had some unexpected car repairs.
Based on conventional lending guidelines, the buyer has just enough monthly income to make the mortgage payments.
The buyer has been pre-approved for an FHA loan (assuming a seller contribution toward the buyer’s closing costs), but they figure they can save on some of the closing costs and FHA insurance costs by going with the seller financing.
The buyer loves the house, wants to live there forever, and assures you that their mortgage payment will always be the first check written every month.

Based on that information alone, would you do the deal? FHA would. I would not.

Let’s look at the statistics. Edward Pinto, a former Fannie Mae chief credit officer, recently testified before a House panel that that an estimated 20 percent of FHA’s entire portfolio will end up in foreclosure, which was also supported by estimates that FHA provided to Congress. That’s one in every five loans.

If you have to foreclose, you could be looking at $15-$20,000 in legal fees and lost interest, not to mention that you may have to make repairs before putting it back on the market, and if the market has declined, you would lose more money in the form of a lower selling price.

Why do we expect our government to take financial risks that we’re not willing to take ourselves? Is it because it’s not money? Well, it is our money. And if we don’t support responsible lending, we’ll end up bailing out the FHA program as well. Adding to our national debt to bail out FHA will lead to higher taxes, which will lead to less disposable household income, which will lead to less available money for home purchases, which will lead to declining housing prices.

Instead of blaming the government for damaging the housing market because of the more stringent FHA rules that were announced, perhaps we should be thankful that a low down payment program such as FHA exists at all.

How To Fix The Short Sale System

2010-02-07T02:46:00Z

We’ve all seen the horror stories relating to short sales, and some of us have experienced them. As a short sale specialist, I often times find myself questioning the logic of banks.

The government has even stepped in on occasion, passing legislation that is supposed to improve how banks handle the short sale process. However, each time, banks find loopholes and nothing really changes. The legislation isn’t specific enough, because the people writing the legislation don’t understand the short sale process.

Here Is My Proposal

Establish required timelines for each specific step in the short sale process:

Acknowledge receipt of short sale package and assign to a negotiator (3 business days)
Negotiator introduction call to seller, agent, or third-party negotiator (3 business days)
General property evaluation and appraisal or interior BPO (10 business days)
Mortgage insurer and/or investor approval (10 business days)
Decision letter issued (2 business days)

Total time required for short sale approval: 28 business days (5 ½ weeks).

The bank should allow Steps 1-3 to occur prior to receiving an offer from a buyer, as long as the property is listed for sale. This way, only 12 business days are required for written approval once an offer is received from a buyer.

Loan servicers are currently required to forward all buyer offers to the investor, but that often times does not happen. A bank negotiator may prevent an offer from reaching the investor because they don’t want to go through the hassle, or they have a personality conflict with the seller, agent, or third-party negotiator. I propose establishing a requirement that all bona-fide offers must be forwarded from the loan servicer to the investor within 3 days after receipt, or be fined at least $5,000 for each failure to comply. A bona-fide offer is a valid Purchase and Sale Agreement with a pre-approval letter from the buyer’s lender or proof of funds for a cash offer.

Loan servicers would receive $1000 for each short sale approved within the required 28 day timeline, in addition to any other fees established in the contract between the loan servicer and the investor. The only problem here is that the $1000 really should be paid by the investor that owns the loan (not the government), but it would be difficult to force all investors to revise their contracts with their loan servicers even though it would be in their best interests to do so.

Lenders would be given 60 days to start complying with the new short sale regulations, which would give them sufficient time to hire and train additional staff if necessary. The additional $1000 per approved short sale would more than pay for the additional labor and office expenses.

The End Result

Short sales would no longer have the bad stigma currently associated with them.
Short sales would sell for higher prices, because buyers wouldn’t require significant discounts to compensate for an indefinite short sale approval period.
Real estate values would stabilize, because short sales and foreclosures wouldn’t have as much of a negative impact on prices.
Banks would reduce their losses, because short sales would sell for closer to market value. With a defined short sale approval timeline on all short sales, the buyer pool for short sales would expand since many buyers who are avoiding short sales now would be likely to consider short sales with a guaranteed short approval period.

In an effort to keep this blog post from running on, I left out many other details that would need to be included. However, this should serve as a general starting point.

Bank's Actions Defy Logic

2010-02-07T02:39:00Z

I specialize in short sales, and I’ve observed many actions by banks that seem to defy logic. This particular experience is no exception.

A while back, I had a short sale listing that was being negotiated with the bank at $300,000. The buyer ended up backing out right before we received the short sale approval, because their financial situation changed. We received the short sale approval letter, and the approval was conditioned upon the seller signing a promissory note for $20,000 or coming up with $10,000 cash at closing.

We managed to quickly find another buyer who was willing to pay $10,000 more, but the bank refused to even consider the offer and asked to have the offer rewritten at $300,000. They also said that regardless of the price offered, the seller would still be required to sign a promissory note unless the bank was receiving a full payoff. Since full payoff would have been $450,000, that wasn’t going to happen.

We gave the bank what they asked for -- $300,000 plus an additional $10,000 cash at closing, but the bank said they wouldn’t accept the additional $10,000 from the buyer—It had to come from the seller. So what was the motive here? To punish the seller?

In the end, the offer was reduced to $300,000, the seller signed the promissory note (at 0% interest, payable over 10 years), and the deal closed. I typically don’t like the idea of sellers signing promissory notes in these situations, but this seller’s situation was a bit unique and they felt it was in their best interest to do so. They’ll most likely file for Chapter 7 Bankruptcy, which will wipe out the note. The money was on the table and the bank refused it. Now they’ll end up with nothing.

Short Sales And Lenders - Do You Know Who Your Lender Really Is?

2010-02-07T02:35:00Z

If you were asked who your lender is—who actually owns your mortgage, what would your answer be? Your mortgage statement may come from Wells Fargo, Aurora Loan Services, Select Portfolio Servicing, or some other lender, so they must own the loan, right? It’s easy to assume that the company listed on your mortgage statement is the owner of your loan, but it’s usually not.

The Loan Servicer / Investor Relationship

The company listed on your mortgage statement is the loan servicer. The loan servicer doesn’t own the loan. They are paid to collect, monitor, and report the loan payments, handle property tax and insurance payments, collect late fees, and foreclose on defaulted loans.
The entity that actually owns the loan is the investor. The investor pays the loan servicer a fee to service the loan for them.

Why Is This Important In Short Sale Situations?

On a short sale, the investor takes a loss, not the loan servicer. However, a short sale must be “negotiated” with the loan servicer, and the person or entity handling the short sale for the seller is typically not allowed to communicate directly with the investor. Also, loan servicers are typically paid more to foreclose than to facilitate a short sale. So, if this is the case, you’re probably wondering why a loan servicer would ever consider a short sale over foreclosure.

The contract between a loan servicer and the investor requires the loan servicer to act in the best interest of the investor. Since a short sale will usually net the investor more money (a smaller loss) than foreclosing and selling the property as a bank-owned property, the loan servicer will usually entertain a short sale as part of their contractual requirement with the investor. However, because loan servicers typically get paid more to foreclose, they will often make the short sale process difficult, sometimes even trying to find small technicalities to kill the short sale deal.

First and Second Mortgages With the Same Bank

If you have a first and second mortgage with the same bank, they are probably owned by different investors. This generally means that each loan is negotiated separately (with different short sale negotiators at the bank), and there may be different short sale requirements and timelines for each loan. Even the information contained in the short sale package that is sent to the bank could be different on a first and second mortgage serviced by the same bank.

If a short sale is necessary to sell your home, it’s important to make sure you’re working with someone who has short sale experience. Someone who has experience dealing with difficult lenders will typically have more success and be able to prevent unnecessary delays better than someone who doesn’t specialize in short sales.

Can Investors Help Stop Foreclosure in Seattle?

2010-02-07T00:18:00Z

Can investors help stop foreclosure in Seattle? There are many real estate agents and investors offering to help stop foreclosure in Washington State. Have you been approached by an investor claiming that they can help you stop foreclosure?

The general concept is that the investor will help you stop foreclosure by purchasing your house. This usually involves you owing more than your house is worth, which is the situation I’ll be addressing here. The investor will make an offer to purchase your house, then negotiate with your lender(s) to get them to approve a discounted payoff on your mortgage(s). This is known as a “short sale”. When the bank approves, you get to sell the house, get out from under the debt, stop foreclosure, and save your credit. Sounds pretty simple, right? Not necessarily.

First, I’ll clarify that investors are an important part of our real estate market. I’m an investor myself, as well as a real estate agent. Most investors I know are honest people trying to make a reasonable living. However, it’s important to realize when an investor is your best option and when it is not.

When selling to an investor to stop foreclosure may be worth considering:

The foreclosure auction is just around the corner: If the foreclosure auction is less than two or three weeks away and you don’t already have a retail buyer in place, an investor may provide the best option (and possibly the only option) to stop foreclosure by getting the auction postponed while the bank evaluates their short sale offer.
Your house is a fixer: If your house needs a significant amount of repairs, a retail buyer may not be able to secure conventional financing, and a cash buyer may be required. Investors need to make a profit, and purchasing a fixer at a discount and fixing it up can be a good way for an experienced investor to make a profit. When a house needs a lot of repairs, the bank will often times accept a larger discount in a short sale situation.

When selling to an investor to stop foreclosure may not be a good option:

Your house is in good condition: If your house is in reasonably good condition or only needs some minor cosmetic upgrades, the bank may not be able to justify accepting a large discount that an investor would typically require. The bank will attempt to mitigate their losses, so they may feel that the house could be sold to a retail buyer, thus reducing their loss on the loan.
You haven’t received a foreclosure notice or the foreclosure auction is more than 60 days away: If there is enough time to find a retail buyer, the bank may not be willing to accept a heavily discounted offer from an investor. The bank may believe that less of a discount would be required if the property is listed for sale and sold to a retail buyer.
Your loan is an FHA or VA loan: HUD is now using a minimum threshold net receipt to lender percentage of the market value as a basis for short sale approval on FHA and VA loans. For example, they may accept a different minimum percentage of market value depending on whether your home has been listed for sale less than 30 days, 30-60 days, or over 60 days. If the short sale proposal does not achieve the minimum threshold, it will not be approved. If your home hasn’t not been listed for sale and an investor offers to purchase it, HUD may calculate the minimum amount that can be accepted based on a time-on-market of less than 30 days, causing the bank to require a higher net payoff.

Also, many investors offering to help stop foreclosure are wholesalers. They don’t actually purchase the property themselves. They “flip” the contract to another investor for a fee (usually several thousand dollars). This means that they need to negotiate a discounted payoff with your bank that’s low enough for them to make their profit as well as the investor they’re flipping the property to. The success rate of short sales in this situation is fairly low, except when the house is in very bad condition.

If an investor claims to be a cash buyer, ask them for proof of funds. If they’re negotiating a short sale on your home, they will typically need to provide proof of funds to the bank to get the short sale approved. If they really are cash buyers, they shouldn’t have a problem providing proof that they can actually purchase your home. If they don’t want to show you their bank account balance, sometimes seeing proof of other recent cash property purchases they’ve made can be sufficient.

While the information here may apply in most situations where an investor is offering to help stop foreclosure, it’s difficult to condense all possible scenarios into a single blog post and address every exception. I encourage you to seek legal counsel from an attorney if you have any legal questions. Also, I would be happy to share my experience if you contact me.

Do You Qualify For A Short Sale

2010-02-07T00:08:00Z

Do you qualify for a short sale? You may have determined that you wouldn’t be able to sell your house for a high enough price to pay off the existing mortgage(s), and you’re now considering a short sale. You may be in foreclosure or just one or two payments behind, or maybe you’re current on your mortgage but unable to continue making the payments. You know you will not be able to stay in the home and you need to get out from under the debt.

First, make sure you know all of your options for avoiding foreclosure. I recommend downloading the special report, 8 Ways to Avoid or Stop Foreclosure, if you haven’t reviewed all of your options.

Doing a short sale will take some work and cooperation on your part, even if you use a professional to assist you. However, the benefits of a successful short sale compared to foreclosure are significant enough that it should be well worth the effort.

Here are some questions to ask yourself (and be honest):

Do you have a legitimate hardship that prevents you (or will soon prevent you) from being able to pay your mortgage? Valid hardships include out-of-area job relocation, job loss, pay cut or other income reduction, divorce, significant home repairs needed that you can’t afford, and sudden increase in monthly expenses. There are other acceptable hardships as well, but you will need to be able to demonstrate to the bank that you cannot afford the house.
Is your hardship short-term or long-term? If your hardship is short-term (maybe you lost your job, but you were able to regain similar employment a few months later), the bank may require that you attempt a loan modification or other workout plan first.
Can you produce two months of bank statements, two years of tax returns, two months of pay stubs, a personal financial statement (a list of what you own, what you owe, your income and expenses), and write a hardship letter when you put your house on the market? This could take a couple hours or more depending on how organized you are.
Are you willing to review and accept a reasonable offer on your property within 24-48 hours of receiving it?
If you’re still occupying the house, are you willing to allow the property to be shown at all reasonable times?
Are you willing to do some basic things to help your house sell, like clean the house, de-clutter, and clean up the yard? If a buyer expects a significant discount just because the house is a mess, the bank may think they can better mitigate their losses by foreclosing, cleaning up the property, and selling it at a higher price as a bank-owned property.
Have you filed bankruptcy? If so, you’ll need to ask your bankruptcy attorney if it would be helpful sell the house in a short sale.

If your hardship is caused by you moving out of the area, the bank usually will not consider it a hardship until after you have moved. If you’re being relocated in two months, the bank may not look at your situation as being a hardship now.

Deed In Lieu Of Foreclosure - Is It A Viable Alternative?

2009-11-07T20:17:00Z

Is a deed in lieu of foreclosure a viable alternative to foreclosure? I don't usually spend a lot of time discussing the deed in lieu of foreclosure option, because it isn't used very often for homeowners in Washington State, but several people have asked me about it recently, so I thought it would be something worth explaining.

With a deed in lieu of foreclosure, you give your house to the bank instead of going through the complete foreclosure process. This may seem like an easy way out, but it often isn't as easy as it sounds.

First, let's look at the primary advantage for the homeowner. If the bank agrees to accept the deed in lieu of foreclosure and agrees in writing not to pursue a deficiency judgment or put a foreclosure on your credit report, this could be a way to get out of the house and out from under the mortgage without the bank foreclosing.

However, there are a few things that you would need to consider:

The bank will usually require that your house is listed for sale by a real estate agent for at least 60-90 days. They want to see that you’ve made an effort to sell it first. If there isn’t that much time before the foreclosure auction, this option may not be available to you.
If you don't have enough equity, the bank may pursue you for more money.
The bank may still record a foreclosure on your credit report.
The bank will generally not approve a deed in lieu of foreclosure if there are any other liens against the property, including a second mortgage.
The bank will usually require that the property is owner-occupied, not abandoned or an investment property. However, exceptions may include vacating the property due to job loss, job transfer, divorce, or death.
You must be at least 31 days delinquent on your mortgage.
You will usually need to prove a hardship (income reduction or increase in living expense).
You would have to move immediately.
There may be income tax consequences.
You’ll most likely be on your own when negotiating with the bank, because the bank will rarely compensate an attorney or real estate agent for assisting you as they would in a short sale.

A deed in lieu of foreclosure is most beneficial for the lender in states where the foreclosure process is very long (usually in judicial foreclosure states where the lender is required to file a lawsuit against the borrower in order to foreclose). When foreclosure is a very long and expensive process for the lender, they would benefit by getting the property back several months earlier than they would have by foreclosing, and most likely in better condition (especially if the house is vacant). This would typically save them thousands of dollars in legal and administrative fees, and allow them to sell the property as a bank-owned property to get it off their books sooner.

Washington State is a non-judicial foreclosure state, and the foreclosure process only takes a few months. The foreclosure auction, or trustee sale, can be scheduled for roughly six months after the date of default, so the lender doesn’t have as much to gain from a deed in lieu of foreclosure. Also, lenders typically lose more money by taking a house back and selling it as a bank-owned property than they would from a short sale, which is one reason why they will usually require that you attempt a short sale first.

In some cases, the deed in lieu of foreclosure is a viable option. However, by knowing all of your options, you'll be able to make an informed decision and know whether this option is best for you.