Inside San Diego Short Sales

Once again, Santa forgot to bring me a crystal ball.  So this look into the future of the housing market is based on trends from the past year, projections from those that crunch the numbers, and my gut feelings based on life in the real estate trenches.

Foreclosures continued to be the top story in 2010 with robo-signing and questionable practices making headlines.  In 2011 so-called shadow inventory will be making news as it grows and clogs the pipeline.  This includes borrowers that are 90 days or more delinquent, homes in foreclosure, and bank-owned properties not yet on the market.  S & P estimates that it will take 41 months to clear the backlog, continuing to slow the recovery.

Short sales will increase as the government and lenders try to stem the deluge of foreclosures that add to the shadow inventory.   Right now about 35% of defaults end in a cure or short sale.  I see that number growing as banks and the government iron out the problems with HAFA (Home Affordable Foreclosure Alternatives), and the processing of short sales is streamlined.

Loan modifications will continue to be largely unsuccessful.   There is some hope for small improvement in the numbers if the FHA principal reduction program can be expanded.

Mortgage interest rates jumped this last month, but are gradually heading down.   Frank Nothaft, chief economist for Freddie Mac foresees rates staying below 5.00% throughout the year.  Let’s hope he’s right.

Home sales will increase, especially for first-time buyers, provided interest rates remain low and the economy continues to improve.  If unemployment continues to decrease and incomes increase we should see an increase in home sales over 2010 by the 2^nd half of the New Year.

Home values throughout most of the country will reach the bottom by mid-year and many areas, such as San Diego County will see modest gains of 2.00 – 4.00%.  The exception continues to be the luxury home market where home prices in locations such as La Jolla and Rancho Santa Fe will continue to decline.

My advice?  If you own a home and are not terribly upside-down, hang tight.  Looking to buy?  Do it now!  This is a great time to purchase your first home or pick-up an investment property.  Struggling with your payments?  Let’s explore your options, before it’s too late.  Overall, I’m cautiously optimistic.

Best wishes for a happy, healthy and prosperous New Year!

Just in time for Christmas, Fannie Mae put new rules into effect on December 13^th that will make it even more difficult for homeowners who have had a foreclosure to buy again.

Under the new lending guidelines that control qualification standards for Fannie Mae backed mortgages, a borrower who has had a foreclosure will now have to wait seven years before being approved for a new mortgage.  That is up from the current wait time of four years.  Another provision of the guideline revision tightens the acceptable debt-to-income ratio (DTI) to 45%, down from 55%, and includes stricter scrutiny of all installment debt.  Under the new guidelines, even one missed payment on a credit card could mean the difference between approval, and not qualifying.  Fannie Mae currently guarantees 28% of all residential loans.

While we all understand the need to move away from the “if you have a pulse, you qualify” standards of a few years ago, these new guidelines seem downright punitive!  On one hand the Fed is pumping money into banks urging them to make more loans to stimulate the economy, yet at the same time the new regulations make it more difficult for banks to lend.   And why the increase from four to seven years?  There is no rational reason for this extended wait time.  The only thing I can figure is that this is intended to scare homeowners considering strategic default into continuing to pay an inflated mortgage on a grossly devalued home.

Although there are several provisions of the new guidelines that may benefit some borrowers, overall this is not an effective way to get the housing market back on its feet.  Thanks Fannie:  You’ve just provided one more reason why I believe we’ll continue to see an increase in short sales over the coming year.

Finally, it appears that something is working to help save homes and stop foreclosures.  In a report released on Monday, NeighborWorks America revealed that a homeowner who works with a housing counselor is nearly two times more likely to avoid foreclosure than those that receive no counseling.

NeighborWorks America is the administrator of the National Foreclosure Mitigation Counseling Program (NFMC) established by the federal government in 2008.  The first two years of the program were analyzed by the Urban Institute of Washington, D.C, and revealed the value of counseling intervention in not only reducing the number of foreclosures for homeowners who were counseled, but in mortgage modification.  Homeowners who worked with a counselor to get their mortgages modified ended up with reductions averaging $555 a month, compared to savings of $288 for those that did not work with a counselor. 

Another benefit of working with a counselor is that the re-default rate is lower.  After receiving a loan modification 49% of non-counseled borrowers re-default after 8 months, compared to 36% of those counseled.  This still seems high, but overall the report clearly demonstrated the value of counseling as 55% of those in foreclosure that sought counseling were able to cure the foreclosure and save their home within 12 months.

The report did not indicate if the lenders involved in the modifications reduced principal balances or simply modified rate and term.  And while counseling may be useful in many cases, I still believe that principal reductions are the only real tool to stop the foreclosure flood as counseling does not address the issue of strategic default.

First, let me just say that I don’t own a wonder hanger and wouldn’t be caught dead in a Snuggie, but I did recently buy something that I saw on TV, and was stunned at how well it worked.

Last weekend, we were getting ready to decorate the front of the house with green Christmas garland.  Several years ago I had carefully intertwined 300 little white lights through all 90 feet…not a quick task.  So before hanging the garland, I of course plugged in the lights to test them and was annoyed to discover that two sections of 50 lights each didn’t work.  I wasted about 30 minutes messing with each bulb to make sure it was all the way in its socket, but to no avail.  Now fuming, I realized that the only solution was to de-construct the garland and re-string it with new lights – a total waste of time when I was already so behind on Christmas!

So I made my way to Home Depot and was picking up some new lights when something clicked in my head, and I remembered a gadget I’d seen on TV that supposedly fixed strings of mini lights like mine.  And there it was on the shelf right in front of me, the Light Keeper Pro.  Kind of expensive at $19.95, but I reasoned, if it happened to work and saved 2-3 hours of my time it was money will spent.

I read the package, and had no idea how it really worked, but followed the directions by removing one of the dead bulbs and putting the socket in the little hole on the Light Keeper.  I squeezed the trigger, and voila, the lights came back on!  I put the bulb back in the socket and like magic all the lights worked. 

I was elated!  And even happier when I discovered and fixed “dead” sections in the  lights I was going to put on the tree.  No more throwing out strings of mini lights!  This little gadget definitely made my Christmas brighter 🙂

This year alone U.S. homes are projected to lose $1.7 trillion in value.  Since the market peaked in 2006 there has been over $9 trillion in lost equity, according to Zillow.  But let’s put that in perspective.

Zillow cites a report by the Congressional Research Service, which says that from 2001 to the end of September of this year, the war in Iraq has cost the U.S. $750.8 billion.  This means that since 2006, the dollar value of home equity lost by U.S. homeowners is greater than the cost of 12 Iraq wars!

Now some might argue that home equity in 2006 wasn’t “real” money, and that inflated prices only created the illusion of equity.  Well, most of the country based many financial decisions on that illusion and by the end of the 3^rd quarter 2010; more than 23.2% of homeowners owe more than their house is worth.

Looking forward into 2011, Dr. Stan Humphries, Zillow’s chief economist, doesn’t see the market settling into a natural equilibrium of supply and demand any time soon.  “Unfortunately, with foreclosures near an all time high in late 2010, and negative equity persisting, it does not appear that the first part of 2011 will bring much relief,” he said.

One bright spot for San Diego emerged however.  Out of the 129 market areas tracked by Zillow, only one-quarter showed any increase in value in 2010, led by Boston with a spike in residential home values of $10.8 billion and San Diego metro with an increase of $10.2 billion.

The message for San Diego homeowners:  Hang-on if you can and you’re not too far underwater.  For would-be buyers:  Don’t wait!  Prices and interest rates are on the rise.

The most frequently asked question about selling your home through a short sale is “What will this do to my credit?”  Like most questions in today’s real estate market, there is no single answer.  But the good news is that you may be able to buy another home much sooner than you think.

There are many factors that determine the all-mighty credit scores, but generally a short sale will cause your score to drop by 100 – 200 points.  This is true if your short sale is reported as “settled for less than agreed”, and no deficiency judgment is filed.  This is a critical point, and it is important that you and your Realtor carefully read the language used in any short sale approval.   In California, SB 931 goes into effect on January 1, 2011 which protects borrowers from lender recourse on a 1^st  mortgage, but may still leave them vulnerable on 2^nd mortgages.  If you are unclear about whether or not your lender can file a judgment or if they ask you to sign a promissory note, consult with an attorney before signing anything!  A deficiency judgment or other recourse will increase the long-term negative impact of the short sale on your credit.

Another important factor is the length of time of default before the sale and whether or not a Notice of Default (NOD) was ever filed.  For many lenders, the filing of a Notice of Default is nearly as derogatory as an actual foreclosure.  A foreclosure stays on your report for 7 years and with either a foreclosure or NOD, you will most likely not be able to buy another home for a full 3 -5 years.  However, with a short sale that did not include an NOD, you may be able to qualify in as little as 2 years, according to some lenders.  This is another reason why it is important to act quickly once you realize you can no longer make your mortgage payments.

The most important factor is improving your score after a short sale is how you manage the rest of your credit.  I have several clients who just 18 months after a short sale have brought their credit back up over 700!  A few of their tips include:

• Don’t take on additional debt
• Stay ruthlessly current on every payment
• Gradually pay down balances to a level that is 1/3 of your total credit line, but don’t close accounts.  Better to pay them off, and use them occasionally.

As short sales become more and more common on credit reports their impact on your non-mortgage credit will likely lessen, and even if you once again choose to buy a home, you may be eligible in as little as 2 years.

Over the past two years we’ve seen an increase in the number of short sales as underwater homeowners try to avoid foreclosure.  Realtors and Federal policy makers have applauded this movement as a means to encourage sales and spur the market recovery.  Too often however, 2^nd lien holders are blocking the short sale and forcing homeowners into foreclosure.

In a short sale, the property is offered for sale for less than what is owed.  Provided the final sales price is reasonable, and the homeowners can prove that they are unable to continue to make mortgage payments, most lenders will accept the short sale as it costs them far less to take the loss than to foreclose.  However, if there is a 2^nd mortgage on the property it becomes a much more complicated transaction.

When there are two or more liens on the property, the 1^st mortgage is in the primary position and when reviewing a short sale, the lender will generally approve only a token payment of $2000 – $3000 to the junior lien holder.  So on a sale of a $320,000 property with a $400,000 1^st mortgage and a $50,000 2^nd mortgage the lender in the first position will recoup approximately 80% of the original loan amount (less fees and expenses), but the 2^nd mortgage holder will recoup only about 5 – 6% of their investment.

As a result, 2^nd lien holders are in no hurry to approve a short sale and what develops is a sort of “chicken game” between the negotiator for the first mortgage, the negotiator for the 2^nd, and the Realtor or negotiator representing the homeowner.  The poor buyer who is trying to purchase the home is at the mercy of everyone involved.  Often the lender in the 2^nd position will ask either the homeowner or the buyer to come up with additional funds to at least get them a 10% return.  Although this might only be a few thousand dollars, that might be enough to kill the deal.  For the 2^nd lien holder, they might choose to just wait for a better offer where the buyer will agree to pay, or they will agree to the sale but file a deficiency judgment against the homeowners.

According to CoreLogic, a company that tracks foreclosure data, of the 1.33 million homes that are in some stage of foreclosure, over a third have a 2^nd mortgage.  Many of these 2^nd mortgages were underwritten to allow the homeowner or buyer to borrow 90 -100% of the home’s inflated value.  Sorry if I’m not sympathetic, but it was a risk the banks knowingly took.  The strategy back-fired as values plummeted, but now the banks holding these 2^nd mortgages need to just write-off the loss and get out of the way. 

How to protect yourself in a short sale transaction with a 2^nd mortgage?  Make sure your Realtor knows how to play the game.

We all agree that reducing the national debt and annual deficit is important to the long-term stability and health of our nation’s economy.  But why, in a time when the housing market is so fragile, would anyone think that reducing one of the principal benefits of home ownership is a good idea?

Yesterday, the Deficit Reduction Commission issued its recommendations which included cuts to Social Security, Medicare, Defense spending, and the Mortgage Interest Deduction, among other programs.  The Mortgage Interest Deduction has been around for over 80 years and is one of the principal benefits of owning a home.  This provision allows homeowners to take the annual interest paid on their mortgage as an income tax deduction. Take away or significantly lower the deduction and the benefits of home ownership are reduced to choosing your own paint colors.   Values are not appreciating; no one is building equity, so why buy?

Coincidentally the Federal Reserve’s Beige Book was also released yesterday showing that the depressed housing market continues to be one of the biggest stumbling blocks to economic recovery.  So if I understand correctly, the Feds are saying that our economy won’t show significant improvement until the housing market recovers and at the same time the Deficit Commission is proposing that we make home ownership less appealing.   The logic eludes me.

I believe that the impact of this proposal will be a significant blow to the struggling housing market, whether or not it is ever enacted.   The public in general is still nervous that home values will continue to decline, so many would-be buyers are sitting on the sidelines waiting to buy.  The news reporting of this proposal, and even the remote possibility that the deduction will disappear gives them one more reason to stall, further delaying recovery.

Although I don’t always agree with their politics, the National Association of Realtors got this one right.  This is a stupid idea and I hope that you’ll join me in asking your Representative to defend the Mortgage Interest Deduction.