Short Sale vs. Foreclosure

People often ask me if a short sale is really worth the effort.  Well, I’d be the first to admit that short sales can be a real pain for everyone involved…sellers, Realtors, buyers…and because so many fail, people often have a negative view of the short sale process.  But, do you really know the benefits over foreclosure that might make it worth the effort?  Watch this short video and see why short sale if becoming an attractive alternative to foreclosure for many homeowners.

 

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As we all know, foreclosures are a big part of the current real estate market, and they can offer buyers a great deal….or a disaster.  Here are a few important things to know before sinking your money into a foreclosure.

#1.  The biggest difference between buying a foreclosure and a traditional sale is that the current owner has no knowledge of the property and most likely has never even seen it!  With a traditional sale, the owner is legally bound to disclose anything and everything they know about the property that could impact the functionality or value of the property.  Not so with a foreclosure.

#2.  The second thing to understand is that the property is sold “As Is”.  This could mean anything from the home simply missing a refrigerator or stove to missing all the toilets, floor coverings and windows.   This also includes everything you don’t want, such as any old belongings or outbuildings that were not cleared.

#3.  Now this may sound like, what you see is what you get….but that would be too simple.  You also get what you often can’t see such as termites, bad electrical wiring or a failing roof or rotting pipes.  This is why it is imperative that you spend the money for a general home inspection by a qualified home inspector, and then spend the extra money for additional inspections of any areas that seem to be waving a red flag, such as a roof or plumbing.  Unless otherwise stipulated in the contract, in California you have 17 days after acceptance of your offer to complete your inspections and pull out of the deal with all of your money if you don’t like what you discover.

#4.  I’ve seen this one trip-up would-be buyers too often….make sure that the condition of the property is consistent with what your lender will approve.  For instance, if you are doing an FHA or VA loan, the house has to be habitable; no mold, floor coverings must be in place and appliances and heater must all be in working order.  Talk with your Realtor about the type of loan you are getting and make sure the houses you’re seeing will qualify.

#5.  You will be asked to sign a bank Addendum which basically relieves them of any liability.  A part of the Addendum will cover late closing.  Make sure your loan is in place and ready to close on time.  If there is a late close of escrow and it is the fault of the buyer, it will cost you about $100 a day for each day that you’re late to close escrow.

And finally, make sure you work with a Realtor who is experienced in foreclosures!  There are way too many pitfalls and potential hazards to risk your deal in the hands of an inexperienced agent.

If you have any specific questions, or would like to see foreclosure opportunities in San Diego, please don’t hesitate to give me a call!

If I’ve sounded a bit like a broken record over the last 10 months, it’s because I strongly believe that principal reductions are an import key to ending the housing crisis.  People who are struggling to make payments on an upside down mortgage are more likely to avoid default if they are paying on a mortgage based on 2011 home values.  Fewer defaults mean more stable values and ultimately an end to the real estate crash.  And apparently some of the banks now agree.

According to the Wall Street Journal, Bank of America is finally bringing principal reduction modifications to the bargaining table.  For months now, B of A and the nation’s other four largest servicers have been in discussion with state and federal officials in an attempt to settle charges of inappropriate activities in connection with foreclosure proceedings.  Investigations last September revealed that several servicers used illegal affidavits and faulty paperwork in their foreclosure practices, and the banks are now hoping to settle and avoid any further liability.

The state attorneys general have pushed for principal reduction as part of the settlement, but until recently the banks have refused.  The private negotiations have been going on for months, and the June 15th target for resolution has come and gone.  As a means of kicking the discussion into high gear, B of A has now offered principal reductions as a bargaining chip, and the other banks are expected to follow.

Of course, Bank of America is not offering principal reductions because they actually care about keeping people in their homes, but rather because they hope to make the problems caused by sloppy and illegal foreclosure practices go away.  But in any case, the end result could be the answer to the prayers of many homeowners facing default.

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For those of us in the industry, it hardly comes as any surprise that Bank of America has failed to help thousands of Americans receive a permanent loan modification through the Home Affordable Modification Program (HAMP).  And it now looks like they might have some explaining to do:  A judge has denied the bank’s request to dismiss a case involving tens of thousands of homeowners who claim they were refused help through the HAMP program.

As you remember, HAMP uses federal funds to help struggling homeowners.   Under the program, Bank of America is required to provide foreclosure alternatives and permanent loan modifications to eligible homeowners.

However, according to Steve Berman, managing partner of Hagens Berman, the firm representing the homeowners. Bank of America has refused to permanently modify the loans of thousands of borrowers, even after successfully completing a Trial Period Plan (TPP).  “The vast majority tell us the same thing: Bank of America claims to have lost their paperwork, failed to return phone calls, made false claims about the status of their loan and even taken actions toward foreclosure without informing homeowners of their options,”  said Berman.

In the lawsuit, Berman seeks to prove that Bank of America “intentionally postpones homeowners’ requests to modify mortgages, depriving borrowers of federal bailout funds that could save them from foreclosure.”

“The bank ends up reaping the financial benefits provided by taxpayer dollars financing TARP-funds and also collects higher fees and interest rates associated with stressed home loans,” Berman added.

The case will be limited to homeowners who entered a TPP, but were denied a permanent modification.  Judge Rya Zobel also ruled that homeowners in nine state, including California could pursue claims in their states where consumer protection laws are stronger. 

So if you’re a homeowner in the middle of trying to get a HAMPmodification form B of A, the outlook is not encouraging.  The federal government has cut-off HAMPfunds to Bank of America until they make improvements in how they administer the program, which could mean more foreclosures and short sales on the horizon for Bank of America borrowers.

Anyone who knows me would probably say that I’m a fairly optimistic person, but lately it seems as though the real estate market is developing into a vicious cycle with no way to correct itself.   In a report released on Monday, the researchers at Capital Economics said that we could expect nationwide home prices to fall an additional 3% this year, bringing the year’s total decline to about 5%.  So, despite the fact that some markets inSan DiegoCountyhave seen modest gains in home prices over last year, overall, the picture is less than rosy.

So what are the driving forces behind this downward spiral?  Well, the obvious answer is that there are many complicated factors at play, but the cycle we’re seeing is really pretty simple:   Housing prices are falling due to low demand and too much inventory. Normally after a recession, home sales start to pick-up, but that’s not what we’re seeing.  Instead, demand is being strangled by increasingly stringent lending requirements which restrict buying power.  So instead of more buyers coming into the market to take advantage of the low interest rates, we’re seeing fewer that are able to qualify because of high credit score and/or high down payment requirements.   Even existing homeowners looking to sell and buy up or down are caught in a stalemate as most have limited or no equity to leverage against a new property. 

The cycle picks up momentum every time prices drop.  Lower prices, mean less equity for existing homeowners and for those with a mortgage, an increasing number of borrowers are choosing strategic default.  These voluntary defaults are adding to the foreclosure inventory already on the market and the estimated 5 million foreclosed homes lurking in the shadows.  And so the cycle continues; more foreclosures create a bloated inventory.  With an insufficient number of buyers able to buy, sales drop and prices fall, which breeds more foreclosures, and on, and on.

As I’ve noted before, I’m no economist and certainly don’t have all the answers, but there are clearly two actions that could put the brakes on falling prices and encourage increased sales:

  1. Congress should oppose the Quality Residential Mortgage (QRM) requirements being proposed.   The QRM would require an unnecessarily high down payment of 20% and impose a very stringent debt-to-income ratio for conventional loans.  The result would be that more borrowers would seek FHA loans, which in turn would likely raise qualification standards and insurance requirements.  The bottom line result will be fewer qualified buyers and fewer sales.
  2. Banks need to address the issue of negative equity by offering programs that provide principal reductions.  When a borrower feels that he/she is paying on lost equity that they will never recoup they are more likely to choose to default, adding to the inventory glut.

Do you have any ideas about breaking the cycle of falling prices?  I’d love to hear from you!

 

On May 24th, The New York Times ran an article in their Opinion section that revealed a nasty, little-known truth about loan servicing that I find outrageous.

As most homeowners know, your mortgage is probably not owned or serviced by the bank or company from whom you originally borrowed.  Not only was your loan probably sold in the secondary market, but it is likely that it is serviced by an entirely different company than the bank or company you actually owe. 

Loan servicing refers to the tasks associated with collecting your monthly payment, paying the investor, and often times, managing payments for insurance and property taxes.  These servicers are also responsible for sending out notices associated with delinquencies, collection activities, and if needed managing defaults.  In return, the servicer is paid a percentage of the principal amount owed, usually 12.5 – 50 basis points (1bp = 0.01%).  Additionally, the flat servicing fee may be augmented with a variety of incentives, all designed to create additional cash flow from each loan on the books.  The total value of these fees and incentives are noted on the servicer’s balance sheet as MSRs – Mortgage Servicing Rights.

Now here is the kicker:  Banks make more from the fees and charges associated with managing a defaulted loan and foreclosure than they can make on a loan modification!  Surprised?  No wonder so few modifications are approved; the servicers have their MSRs to protect! 

The only winners in this game are the servicers.  Not only do the homeowners seeking a modification lose, but so do the banks and investors who will foot the high cost of foreclosures and carrying REOs. 

Luckily, there are others that find this behavior unacceptable.  Democrats Jack Reed and Sheldon Whitehouse of Rhode Island and Sherrod Brown of Ohio have introduced Senate bills to establish standards for the loan servicing industry.  The proposed laws and regulations are designed to prevent banks from putting their financial interests above those of everyone else.

Here are 3 suggested new rules: 

1)      Homeowners would be evaluated for loan modification before ANY foreclosure activity, or related fee is initiated.

2)      Lender analysis used to approve or reject loan modifications would be standardized and public.

3)      Should a lender fail to offer a modification when analysis indicates that one is warranted the lender would be blocked from proceeding with foreclosure.

Whether it is the result of a Senate Bill, or actions by the new Consumer Financial Protection Bureau, someone needs to rein-in the greed of the loan servicing industry and give borrowers a much-needed break.

The short answer is “No” and “Maybe”.  When faced with the prospect of losing their home to foreclosure, many people are willing to try most anything to halt the process and save their home.  Bankruptcy however, is probably not the answer.

Let me first say that I’m not an attorney, and do not intend this as legal advice.  If you are considering bankruptcy, please consult an attorney before taking any action.

Personal bankruptcy is generally filed under Chapter 7 or Chapter 13.  Under Chapter 7 most of your unsecured debt (such as credit card debt) is permanently discharged, while Chapter 13 allows you to reorganize your debt with your creditors and develop a plan to pay-off your debts over a specific period of time.  If you qualify and file personal bankruptcy under either Chapter 7 or 13, an automatic stay is put on all your creditors, including a lender that might be pursuing foreclosure.   However, this is only a temporary halt to the foreclosure process.

As mentioned above, filing Chapter 7 does not discharge your secured debts.  A mortgage is a secured debt and the collateral is your home.  If you do not pay, your lender has the right to take back the security you offered in exchange for the money advanced as a mortgage.  So filing a Chapter 7 will not save your home from foreclosure.  At any time before your unsecured debts are discharged, the court can allow your lender’s request for “relief from the automatic stay” and the foreclosure can proceed.  After discharge, the foreclosing lender is free to continue the process.

Filing Chapter 13 however may allow you to save your home from foreclosure.  In a Chapter 13 bankruptcy you are allowed to make arrangements with your creditors for repayment of debts owed, including your mortgage.  However, this is generally allowed by the courts only when you have a stable source of income that will allow you to make all payments as agreed for the entire repayment period.  There are many factors that determine if filing for protection under Chapter 13 will allow you to keep your home. The only way you will know if this will work in your particular situation is to consult an attorney.

It is also important to note that a bankruptcy will remain on your credit report for 10 years after date of filing. If this doesn’t seem like a viable solution, please read more about other options to avoid foreclosure.