Inside San Diego Short Sales

As I mentioned in my last post, there are several reasons why a lender might choose to foreclose versus approving a short sale.   But there are a few things you and your Realtor can do to improve your chance of having your sale approved. 

1.  Submit a quality offer.  Here are a few things your Realtor should look for in any offer you receive: 

• The offered price shouldn’t be significantly less than market value.  The lender is less likely to approve the sale if he feels that his loss is greater than necessary.
• The buyer can show more than sufficient funds to close the deal.  The larger the down payment the better.  Banks will consider a contribution to closing costs, but remember, they are looking for the highest possible net return on the sale.
• The buyer agrees to put his/her earnest money deposit into escrow before short sale approval.  This shows the lender that the buyer is committed and less likely to walk away from the deal.  If the sale is not approved, the deposit is of course returned to the buyer.
• The buyer should plan on paying for any needed repairs, including termite.  Don’t submit an offer that asks for repairs or a home warranty.
• The offer must not be contingent on the sale of the buyer’s current home.  Buyer should be flexible about when they need to move out of their current residence.
• The offer should be well written and easy to understand.  (More on that subject in a future post), 

2.  Submit all required documents. 

• Make sure your Realtor has confirmed with your lender regarding every required document.  They should all be submitted at one time to help prevent certain items from getting lost in the lenders system.
• If additional (or yes, duplicate) documents are requested, submit them as quickly as possible and have your Realtor or negotiator confirm receipt. 

3.  Remember the squeaky wheel…. 

• Whether it is your Realtor or a professional negotiator who is representing your short sale to the bank, they need to be in regular communication with the lender, inquiring about progress on your file.  1 phone call a week is not sufficient.  The negotiator on the bank’s side needs to understand that you are very serious about gaining their approval and selling your home.
• Ask for updates from your Realtor and make sure that there is follow-up with the lender 2-3 times per week.  You should know at all times where you are on the foreclosure timeline.  Make sure you immediately provide your Realtor with any letters you receive from your lender or any legal notices.

There are many important details in a short sale that are very different from a standard equity sale.  When listing your home, make sure you select a Realtor who is experienced with short sales.  Saving your home from foreclosure is way too important a task to trust to an inexperienced agent.

It has been estimated that the average cost to foreclose on a home is about $75,000 including costs to local government for lost tax revenue and services, costs to the homeowner, and the devaluation to neighbor’s properties. Of this amount, the actual cost to the bank averages about $50,000 – $60,000, including attorney’s fees, property maintenance and REO resale fees.  Considering that the hard costs of a short sale are considerably less, and the impact on local government, neighborhoods and individuals is far less destructive, it’s difficult to understand why banks seem to be dragging their feet when it comes to approving short sales.

According to a recent article in the NY Times, many lenders are concerned about fraud. It is known that some homeowners, who actually can afford their mortgage payments, falsely portray their financial picture in order to cut their losses on a property and move on.  Other homeowners may try to sell to a relative who would then sell the home back to them, a practice that is illegal.  A recent industry report estimates that short sale fraud occurs in a least 2 percent of sales and costs banks about $300 million annually.

But fear of fraud and the associated costs is a relatively minor consideration.  The more important reason shouldn’t be too surprising:  There are financial incentives in many cases to choose foreclosure over a short sale.  For instance, institutions that service loans can reap high fees from foreclosures and lenders can often collect on private mortgage insurance that protects against foreclosure losses.  Neither the same high fees nor insurance is collected when a home sells short.  Another little known fact:  A 2009 regulatory change to a federal accounting law allows banks to foreclose on a home, but not take the loss until the home sells.  By contrast, in the case of a short sale, the bank must take the loss immediately.

So obviously, the bank’s decision has nothing to do with what is best for the national or local economy, or the individual homeowner.  Check back for my next blog where I’ll discuss what you can do to improve your chances of having your short sale approved.

According to numbers released on Monday by the Treasury Department, the Home Affordable Modification Program (HAMP) continues to be an ineffective tool for homeowners.  Loan servicers completed just 28,000 modifications during September, down 16% from August.

The goal of the program was to help 3-4 million borrowers keep their homes by modifying their existing loan to an affordable level.  To date, 1,369,414 modifications have been initiated through the program, but there are only 466,708 active permanent modifications.  Through September, 699,924 trial modifications and 21,190 permanent modifications have been canceled.  That’s a failure rate of over 50%, certainly not a good track record for any program.

So why has this program failed so miserably?  According to Edward Pinto, a prominent housing consultant who recently testified before the House Oversight Committee, HAMP requirements are so confusing that servicers have difficulty complying.  In his words, “There are only two words to describe HAMP’s guidelines:  Numbing complexity.”

So from the banks perspective, the program is difficult to implement and lacks financial incentives, but what do the people most affected think? I asked several clients who tried to get loan modifications about their experience and they cited many problems with the program: 

• The interaction with lenders was very frustrating.  They were never able to actually speak with anyone who was making a decision about their loan and could only speak with a customer service representative who had limited information and was often from an outsourced international location.
• They were required to fax reams of documentation, over and over as it apparently was lost and never made it into their file.
• The time period for review was way too long.  Several clients were in forbearance agreements during the process, couldn’t afford to continue to make the payments and simply gave up.
• Even after modification, the payments were still too high.  For many borrowers going from an interest only loan to a fixed rate, their payments were actually higher after the modification.
• The issue of value is not addressed.  Even with modification, paying on negative equity is a difficult pill for many borrowers to swallow.

My prediction?  There will be fewer borrowers even attempting a loan modification and an increase in short sales as more underwater homeowners seek a viable solution.

Remember back in 2005 when anyone with a pulse could get a home loan?  Well obviously, that didn’t work very well, but the qualification paranoia we see today may be equally destructive to the housing market.

I spoke with a client the other day who was grumbling about not being able to get a line of credit.  Mind you, this gentleman used to run a bank, owns 20 rental properties, his own home is valued at $1.5 million, and he owes less than $200,000 on all 21 properties combined.  And let’s add to that the $1 million plus cash in the bank.  He applied to an investment firm (which shall remain nameless) for a $200,000  line of credit in case he finds a great real estate investment opportunity.   After 3 months of supplying documentation several times over, (seems it kept getting lost), his application was denied because they couldn’t understand that he had moved a small amount of money out of an IRA for tax reasons!

So this is a man with exceptional assets, and he can’t get a loan…what about the rest of the population?  According to an article in SmartMoney it’s getting more and more difficult to qualify for a mortgage and even the smallest negative detail can either cost you an approval or thousands of dollars over the life of your loan.  A score of 720 is the ticket these days for a conventional loan with the best rates….that is up 40 points since the housing collapse.  Ed Mierzwinski of the U.S, Public Interest Research Group says that “Credit scores are a blunt tool being abused by creditors as if they were a sharp instrument.”

Ouch.  We feel the pain.  As a Realtor in this market with so many opportunities for buyers, it is extremely frustrating to see how difficult it is for home buyers to get a loan.  Granted, the credit requirements for an FHA loan aren’t quite as stringent, but the increased level of documentation is staggering.  A recent buyer of mine left me a message that was one long scream….she said she just had to vent after being asked by her FHA lender to supply a paper trail for the money her 90 year-old mother in Eastern Europe sent to her as a gift.  She sighed and said she was just waiting for the call requesting a blood sample.

So what can you do to improve your chances of getting a loan in this market?  

• If you’re self-employed, plan ahead.  Banks will primarily look at your last two years tax returns, so your qualifying income is based on your tax returns.  Amounts on your returns should match financial statements and bank statements.
• If you have any skeletons in the closet, deal with them before applying.  This might include things such as an unresolved judgment or child support payment issues.
• Be prepared to explain ANY credit inquiries for the last two years.
• Try to avoid any late payments for a full year prior to applying.
• Maintain balances on revolving credit below 30% of your limit.
• Don’t apply for new credit, and don’t close accounts.  Use zero balance credit cards now and then, but pay them off right away.
• Don’t transfer money from retirement accounts.

And finally, stay calm and realize that over the next year as the number of people with less than perfect credit increases and the market continues to stabilize, it is expected that the banks will gradually release their stranglehold on qualification standards.  But be prepared, that call for the DNA test just might be next on the list.

For the first time in over 6 weeks interest rates for 15 and 30-year fixed mortgages rose…not much mind you, but they did increase.  15 year rates rose from an average of 3.62 to 3.74 percent, and the 30 year rate increased from an average of 4.21 to 4.34 percent.

According to the Mortgage Bankers Association we also saw a sharp drop in the number of applications submitted for the week ending October 15^th, down by 10.5 percent from the previous week.  Refinance applications were down 11.2 percent and applications for home purchases were down 6.7 percent.

Now I’m no economics wiz, but even I can tell you that this is not good.  The MBA attributed the drop in applications to the slightly higher rates, but more importantly to public apprehension and confusion surrounding the mismanagement of foreclosure paper work by some banks and servicers.  So at a time when we have an increased number of foreclosures and short sales hitting the market, we have potential buyers of distressed properties pushing back, fearful that there could be issues in the transaction that would give them less than clear title.  And, oh yeah, let’s throw in a rate increase.

So once again, it appears that the banks are doing nothing to get us out of the mess they created….but of course, it’s not all bad for most of them.  Wells Fargo turned a profit of $3.35 billion for Q3, up from $3.24 billion a year ago.  I’m sure that warms the hearts of everyone who lost their home last quarter.

Numbers were released today for the month of September that show that foreclosures and inventories of bank-owned properties are on the rise in Washington, Oregon, Nevada, Arizona, and California.  The report was issued by ForeclosureRadar, a company that tracks every foreclosure in the five western states and provides auction updates.  Although several bank and loan servicers have announced that they are suspending foreclosures while investigating internal procedures, ForeclosureRadar analysts have yet to see any impact of this suspension on the numbers.

So the report is reminding us that nothing is getting any better, and in fact it’s getting worse.  Last month in California, the number of foreclosed properties that sold declined by 15.6% while inventories of bank-owned homes increased by 5.3%. And according to ForeclosureRadar’s CEO, Sean O’Toole, “…the reality is that far more homeowners are behind on their mortgage payments than are even in foreclosure.”  To me, this spells a further increase in the number of short sales and foreclosures, with no end in sight.

However, in the middle of this disheartening news, Mr. O’Toole voiced the only logical response to the real estate crisis that I’ve heard all year. “The clear problem in the housing market today is not foreclosures, but negative equity; and as long as the focus remains on the symptom rather than the disease we will see little progress towards real solutions and this crisis will drag on for years to come.”

Finally!  Someone gets it!  Negative equity is the real problem that needs to be addressed.  As I mentioned in my earlier post about the FHA principal reduction program, reducing the principal owed to be more in line with current values is the best and quickest way to curtail the growing number of strategic defaults.  Most people who have bought a home, want to keep their home…..but it has to make financial sense, especially in today’s struggling economy.  Reducing the principal amount owed not only makes the mortgage payment more affordable, it provides an incentive to stay and pay.

So from my perspective, until the banks and investors decide that taking a loss through principal reduction is preferable to taking a loss through foreclosure, our housing market will continue to disintegrate.  How many more foreclosures and short sales will it take before the banks are ready to listen?

Last week I wrote about the scam of collecting upfront fees and the scammer absconding with the money without performing any services for the homeowner.  As I mentioned, there are other scams that can occur at virtually any phase of the short sale process.  Because the decision to sell short is often full of emotion, and the process itself is long and confusing to home owners, the short sale transaction is highly vulnerable to scams. 

According to the California Association of Realtors, here are some red flags that may indicate fraudulent activity.  Be wary if someone does any of the following:
• Gives an unqualified promise, such as to obtain short sale approval, stop foreclosure, or other assurances;
• Is unconcerned about the sales price, possession of the property, and other significant terms of sale;
• Is unconcerned about the short sale seller’s financial situation;
• Is involved in a sales transaction where the seller is not the current owner of the property;
• Is involved in a sales transaction where the property owner has purportedly given someone an option to purchase;
• Represents that the buyer is an entity (such as a trust or LLC), rather than an individual person;
• Creates more than one sales contract for the same property;
• Asks for something to be done immediately without delay;
• Asks for a power of attorney;
• Asks for a transfer of title or an interest in the property outside of escrow;
• Asks for signatures on a grant deed or deed of trust;
• Asks for signatures without giving a lot of time to review the documents;
• Asks for signatures on a document that has lines left blank;
• Fails to provide copies of documents signed;
• Refuses or fails to provide written confirmation of an oral promise;
• Instructs the seller, listing agent, escrow officer, or someone else not to contact the short sale lender;
• Instructs a client not to discuss his or her situation with a housing counselor, banker, accountant, attorney, family, friends, or others;
• Has an answer for everything; and
• Engages in “shop talk” that sounds glib, but doesn’t in fact make sense.

If you have any questions or concerns about any part of the transaction, make sure you consult a professional before signing anything!

We all know the old adage, “If it sounds too good to be true, it probably is.”  Well, anyone facing foreclosure or considering a short sale should keep that in mind as there is a new breed of scam artist on the street.

Short sale scams are perpetrated at many different points in the process and can involve, knowingly or unknowingly, the homeowner, the real estate agent, the negotiator or other third party, and/or the buyer; basically anyone who is a party to the transaction. A few types of scams include fraudulent short-sale flips, negotiator scams, bogus short-sale packages, improper payments and upfront fees.

Let’s start with upfront fees, as that is the first scam that an underwater homeowner is likely to face.   To the person unable to pay their mortgage, possibly facing foreclosure, a fast solution is exactly what they are looking for.  The scammer often poses as a negotiator or real estate agent who guarantees a short sale approval in as little as two weeks.  To reinforce credibility of the claim, the scammer might say that they are related to someone on the inside, such as a bank vice president or negotiator…..some sort of relationship that gives them an insider’s advantage.  The scammer then asks for an upfront fee which could range from $1000 to $5000, and he/she might even ask for the required documentation such as pay stubs and bank statements.  At this point, the scammer has the money and proceeds to do little or nothing to work with the bank.  Two weeks later he tells the homeowner that he is sorry, but the bank will not approve the short sale.  The scam might vary, but the basic idea is that the scammer does nothing, and the home owner is not only out the money, but has lost precious time. 

Here are a few ways homeowners can protect themselves from upfront fee scams and make sure they are hiring someone who can help versus hurt their situation: 

• Check the credentials of the individual or company that would provide the service.  If they are licensed, such as a real estate agent, check the status of their license with the department of real estate, www.dre.ca.gov
• Ask for references, and follow through by carefully checking them.
• Thoroughly read all documents before signing anything.  Make sure you understand everything and do not sign anything with spaces left blank, especially if told they are inconsequential.
• Get as much information as possible and consult other professionals, family and friends before making a decision.
• Refuse to pay any upfront fee or provide credit card information.

Check back and we’ll look as some additional red flags for short sale scams.

There is a slight glimmer of hope that we are gradually pulling out of the Great Recession.  According to an elite panel of economists surveyed by the National Association for Business Economics, home prices across the US saw their lowest point in the first part of the year and have been gradually trending upward.

The panel predicts modest gains of approximately 1.2% over 2011, but warns that the record unemployment will continue to be a factor in triggering defaults.  According to the panel, getting more people back to work will be key to slowing foreclosures and the recovery of the housing market.

Single family home values are fairing better in San Diego County where we saw price increases above the national average, but values for condo sales dropped.  Comparing home sales in August of 2009 to sales in August 2010, we saw a 5.5% increase in average sale price for single family homes and a -2.2% decline in sale price for condos during the same period.  The median home price in August 2010 was $375,000 for a single family home and $220,000 for a condo.

Some areas of the county that had been hit hard by foreclosures after the boom period, such as newer areas of Chula Vista, saw an increase by as much at 15.9%, while more pricey areas such as La Jolla and Rancho Santa Fe saw a decline in prices anywhere from -5.0% to -26.5%.  Please contact me if you’d like to know the specifics for your area.

The national numbers were presented in the NABE October 2010 Outlook.  The panel was comprised of 46 professional analysts from such firms as Goldman Sachs, Fannie Mae, Moody’s Analytics and the PMI Group.  The local sales statistics are courtesy of Fidelity National Title Company.

Most loan modification programs are designed to simply lower a borrower’s mortgage interest rate, thus reduce their monthly payment.  However with home values so low, a loan mod that reduces the interest rate still means that most homeowners are paying on negative equity.  They owe more than the home is worth, so even if the payment is more affordable, it could be years before any part of their monthly payment is actually paying down principal on the current value of the home.

For many homeowners, this just doesn’t make financial sense and they are allowing their homes to go to foreclosure, a practice dubbed “strategic default”.  Experts predict that the number of strategic defaults will likely increase as home prices remain stagnant and homeowners become increasingly angry with banks. Everyone including the government, industry analysts, and the public would probably agree that an increase in strategic defaults and the subsequent foreclosures will only slow the housing market recovery.

So the FHA has introduced a new Short Refinance Program aimed at borrowers who are upside down.  The goal is to reduce the actual principal amount owed to a level more in line with current home values and thus encourage homeowners to stay in their homes and continue to make payments.

Sounds like a great idea at face value, but qualifying for the program does come with a list of conditions for the homeowner, including: 

• Be current on their mortgage payments
• Have a credit score of at least 500
• Have negative equity
• Not have a current FHA mortgage
• Occupy the property
• And…..have a bank willing to write off 10% of the loan principal

OK, I was thinking, “This might work….” until I read the last condition.  I don’t know about you, but I haven’t heard of many banks stepping up to the plate and offering principal reductions, (Wachovia being the only exception that comes to mind).  So I’m not sure how successful this will be.  And doing the math, will a 10% reduction really be enough to encourage people to stay and pay?  In some parts of the country where the housing boom had the most impact, such as locations in CA and FL, values have dropped by as much as 50% since 2006.  So if a $500,000 mortgage is reduced to a $450,000 mortgage but the property is only worth $250,000 or even $300,000, will that be sufficient incentive to keep a borrower from walking?

I applaud the concept but am very skeptical about outcomes.  Principal reduction is, I believe, the mechanism that has the best chance of slowing strategic defaults.  The banks certainly take a big financial hit when a home goes to foreclosure…..why can’t they take the hit up front and keep people in their homes?