April 17, 2011

Improving Short Sales: Not a Political Issue

Posted by martikilby under Bank of America, Short Sale | Tags: , , , , , , , |
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Believe it or not, a Republican and a Democrat are working together!  The two Representatives are sponsors of a bill that would require lenders to provide a decision of approval or disapproval of a short sale within 45 days of submission of the file.  Hallelujah! 

For those of us in the short-sale trenches, the most painful part of the process is the long period we spend waiting for the bank’s decision.  We meticulously prepare the file and then fax it off into a nameless abyss where it seemingly lies hidden at the bottom of someone’s in box.  Weeks later, we are informed that half of the information we submitted is missing from the file and would we please re-send it, or what we sent is now outdated (because they took so long to review it), and would we please send new pay stubs and bank statements.  It is a vicious process that can make a normally calm Realtor want to jump through the phone and strangle someone.

So yes, a decision in 45 days would be a Godsend!  The Bill is sponsored by Reps Tom Rooney (R- Florida), and Robert Andrews (D-New Jersey), who believe that by imposing a deadline on lenders, more short sales would be successfully executed and fewer homes go to foreclosure.   Although a few banks such as Bank of America have made an effort to improve their processing systems by utilizing a technology platform such as Equator, most banks rely on outdated systems and under trained personnel, ill-equipped to handle the thousands of short sales landing on their desks.  Thus in the current market, many short sale transactions fall-apart because the buyer gets tired of waiting and simply moves on, often leaving the homeowner to face foreclosure.

The Prompt Decision for Short Sale Act of 2011 is currently waiting to be referred to a Committee.  A similar act with the same name was introduced last September, but never came up for debate before the legislative session ended…let’s hope the support of the National Association of Realtors will help prevent this bill from a similar demise.

At the end of the day however, even if we have a shortened time period for decisions, any short sale is only as strong as the negotiator acting on behalf of the homeowner.  Please don’t hesitate to contact me for more information on how to improve your chances for a successful transaction.

 

March 24, 2011

Bank of America’s Cooperative Short Sale Program…Really Any Better?

Posted by martikilby under Bank of America, HAFA, Short Sale | Tags: , , , , |
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I was part of a Bank of America Webinar today during which they outlined the benefits of their new Cooperative Short Sale Program and took questions from way too many clueless agents.  To listen to the speaker, this new program is the greatest thing since sliced bread, but I think that remains to be seen.

The key difference between this new program and the traditional short sale program is that much of the work on the bank’s side that usually doesn’t begin until after an offer is submitted, can now begin before the home is even put up for sale.  This means that a homeowner with a B of A 1st mortgage who recognizes that a short sale is his/her best option can work with their Realtor and get the process started before actually marketing the property.  B of A will complete the valuation process and let the Realtor and homeowner know the suggested list price prior to listing, in theory speeding up the approval process once a qualifying offer is submitted.  In fact, with the review of the homeowner’s financials and the valuation completed prior to marketing, B of A is promising a response to an offer in 10 days.

The program is modeled to a large degree after the HAFA program, and like HAFA, the homeowner may qualify for a relocation fee in the amount of $2500, (HAFA is $3000).   Approval in the cooperative program would also halt foreclosure action and give the homeowner 120 days to find a buyer.  Unlike HAFA, the Bank of America cooperative Short Sale Program can apply to non-owner occupied properties.

While this all sounds pretty rosy, it was not exactly clear what happens when there is a 2nd mortgage held by another bank.  Are we to believe that they’ll speed up their approval processing to keep pace with B of A?  Ha!  And what about deficiency judgments?  In a HAFA short sale the bank has to agree not to pursue a deficiency judgment, promissory note, or the collection of funds from the borrower.  But in the B of A program, there are no such promises and the speaker today danced around discussion of deficiencies by suggesting that we all investigate the laws in our own states.  Pretty vague to me, and it has been suggested that B of A requires such in-depth financial information so that they better know who to target for deficiencies.

While I am hardly a fan of Bank of America, I’ll keep an open mind…but I’m watching closely.  I somehow just don’t trust that protecting the homeowner is their #1 priority.

For information about a short sale in San Diego County please don’t hesitate to contact me directly.

Here is an update on this post!

 

February 28, 2011

Do You Qualify for a Short Sale?

Posted by martikilby under Selling your home, Short Sale | Tags: , , , , , , |
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A short sale is an attractive alternative to foreclosure, mainly because the impact on your credit is far less severe.  However, just because you owe more on your mortgage than your home is worth doesn’t necessarily mean that a short sale is a viable option.

In a short sale, the lender agrees to accept a pay-off on your mortgage for less than the amount owed.  Logically, the lender is not going to agree to receive less money if there is evidence that you can continue to pay your mortgage as promised.  Thus, a homeowner hoping to sell their home in a short sale must demonstrate that they can no longer afford the mortgage payments. 

The first question the lender will ask is “What happened?”  At the time of loan origination you were able to make your payments….why not now?  You will be asked to identify one or more recent hardship factors that have negatively impacted your ability to pay.  Examples of hardship factors include: 

  • Illness/Disability                                             
  • Death of a Spouse
  • Unemployment                                               
  • Reduced Income
  • Medical Bills                                                   
  • Too much Debt
  • Divorce/Separation                                        
  • Military Service
  • Incarceration                                                  
  • Business Failure

The lender will also request that you complete a financial worksheet that lists all of your monthly expenses and income.  You will need to provide bank statements and pay stubs to document the information on the financial worksheet.  Contrary to popular belief, it is OK to have a small amount of money in savings and lenders do not expect you to drain your 401K to pay your bills.

So the bottom line is that if you have experienced an event(s) that triggered a financial hardship and your monthly expenses are greater than your monthly income you probably qualify for a short sale.  Please feel free to contact me with specific questions about your situation.

 

February 22, 2011

Short Sale vs. Foreclosure: You Be the Judge

Posted by martikilby under Credit score, Credit Scores, foreclosure, Short Sale | Tags: , , , , , , , , , , |
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Short sales can be a real pain for everyone involved…sellers, Realtors, buyers…and because so many fail, people are often left with a negative view of the short sale process.  But, do you really know the benefits that might make it worth the effort?

As I’ve mentioned before, I work with an exceptional short sale negotiation company that has a 99% success rate in getting approvals.  The president of that company recently put together a nice chart outlining the benefits of a short sale vs. a foreclosure and I’ll share the highlights.

Future Ability to Purchase a Home:    When you apply for a home loan, there is a question on the application that asks, “Have you had a property foreclosed upon or given title or deed-in-lieu thereof in the last 7 years?”  A positive response may impact your ability to qualify and will certainly influence the interest rate you are charged.  Currently, there is no question on the loan application with regard to short sales.

Impact on Credit Score:    With a foreclosure, credit scores can drop 250 – 300 points.  Conversely, with a short sale only late payments will impact the credit score.  After a short sale, the mortgage that was paid-off short will be reported as ‘paid as agreed’, ‘negotiated’, or ‘settled for less than agreed’.  This can lower your score as little as 50 points and will usually have little to no effect in twelve to eighteen months.

Impact on Credit History:   Foreclosure remains on your credit history for seven years.  Since short sales are not specifically reported their impact is only as great as the number of missed payments, as noted above.

Deficiency Judgment:  Unless you’re in a state with anti-deficiency laws, the bank can pursue a deficiency judgment.  In a successful short sale, the bank will waive the right to pursue a deficiency judgment.

Current and Future Employment and Security Clearance:   Many employers require credit checks for all employees, and certainly for anyone hoping to attain a security clearance.  While individual companies and agencies have different requirements, a foreclosure can have a negative impact on your ability to get a job, keep your job, or get certain clearances.

Of course I’m not a lawyer or accountant, and each individual’s situation is different, and not everyone will qualify for a short sale.  You should always consult the appropriate professional for advice.  But as a real estate professional, I would definitely give the short sale serious consideration before deciding to just walk away.  For a confidential consultation just give me a call at 619-846-9249.

 

February 10, 2011

Ammunition for Short Sale Success

Posted by martikilby under Short Sale | Tags: , , , , , , , |
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Negotiating a short sale is one of the most challenging jobs in real estate today.  As an agent representing a short sale client you are responsible for helping them get out from under a huge financial burden and save their credit, and responsible to the new buyers for closing the deal in a reasonable length of time.  Not only is it often stressful, but it can be downright frustrating;  re-faxing documents to the bank that you’ve sent three times, waiting for responses to phone messages and emails, and trying to find someone at the bank who actually cares about getting the transaction completed.

One of the short sales that I’m currently working on is especially trying as there are two different lenders involved on a 1st and 2nd mortgage, and as in similar cases, the 2nd mortgage holder won’t really look at the file until we have approval from the 1st.  After weeks of sending documents the 1st lien holder comes back to the table with an offer of approving the short sale, if the borrowers paid them $9,000.  Impossible!  If my clients had an extra $9,000 they wouldn’t be selling their home!  We counter at $1,000.  The bank then comes back at $3,000, insisting that according to their financial statement the borrowers can afford to contribute $3,000.

Hmmm…..my clients are insisting that as much as they would like to sell their house short and avoid foreclosure, they can’t afford the $3,000, especially as they just did their 2010 taxes and learned that they owe close to $10,000!  Aha!  More ammunition to make their case!  We submit their tax return and two days later have a short sale approval from the 1st lien holder with a $1,000 contribution!  Exactly what we countered!  The approval has been submitted to the 2nd lien holder and we’re pushing for a speedy response.

The bottom line is that my clients are thrilled and half seriously asked if I could help them negotiate their tax liability!  Ha!  I think I’ll stick to short sales.  Banks are tough enough…..I can’t imagine negotiating with the IRS!

 

January 12, 2011

Struggling HAFA Gets Some Updates

Posted by martikilby under foreclosure, HAFA, Short Sale | Tags: , , , , , |
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It’s no secret that the government’s short sale program, HAFA, has had less than stellar results.  The Home Affordable Foreclosure Alternative program was started in April 2010 to provide alternatives to foreclosure when a loan modification wouldn’t work.  Through September, the program has processed only 342 short sales or deed-in-lieu transactions.  This number is ridiculously low considering that third-party technology provider Equator, who provides the platform for processing short sales for several banks, including B of A, reports that over 117,000 HAFA short sales were initiated in the period from April – October.   What happened to all of those transactions?

Mortgage servicers and Realtors have complained about the confusing rules and the stringent requirements for participation that have made it difficult to complete a transaction.  In December the California Association of Realtors sent a letter to government regulators complaining about the program and requesting specific changes to expedite approvals.  The government responded quickly and issed a directive on December 28 that made some significant changes to the program.  Here are a few of the highlights:

  • Servicers are no longer required to verify that an applicant’s mortgage payment exceeds 31% of their gross income, although a hardship must still be demonstrated.
  • Applicants do not need to be currently living in the home so long as it was their principal residence in the last 12 months.
  • Payments to subordinate lien holders are no longer capped at 6%, but have an aggregate cap of $6,000.
  • Servicers participating in the HAFA program will be required to either approve, disapprove or provide a counter to any complete short sale application and purchase offer within 30 days.
  • Servicers who pay contractors to assist in processing the short sale cannot charge those fees to the borrower or deduct it from the real estate commissions.

Will these changes improve the approval rate?  Probably, but the key will lie in how well the banks comply and the rules are enforced.

 

December 6, 2010

2nd Lien Holders Standing in the Way of Recovery

Posted by martikilby under 2nd mortgage, foreclosure, Short Sale | Tags: , , , , , , |
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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, 2nd 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 2nd mortgage on the property it becomes a much more complicated transaction.

When there are two or more liens on the property, the 1st 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 1st mortgage and a $50,000 2nd mortgage the lender in the first position will recoup approximately 80% of the original loan amount (less fees and expenses), but the 2nd mortgage holder will recoup only about 5 – 6% of their investment.

As a result, 2nd 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 2nd, 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 2nd 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 2nd 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 2nd mortgage.  Many of these 2nd 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 2nd 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 2nd mortgage?  Make sure your Realtor knows how to play the game.

 

November 19, 2010

What to Expect in a Short Sale

Posted by martikilby under lenders, Realtor, Short Sale | Tags: , , , , , , , |
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Whether you’re considering a short sale purchase, or the short sale of your own home, understanding the process will relieve some of the stress.

The first thing to understand about a short sale is that unlike a traditional equity sale there is an all-important 3rd party that controls the fate of the deal:  The lender(s).  In order for a short sale to occur, the lender or lenders must approve the transaction.  This involves 3 items for their consideration:

  1. Can the current owner show sufficient financial hardship to prove that he cannot pay his mortgage?
  2. Is the price offered consistent with comparable sales in the area?  The bank wants to re-coup as much of their investment as possible.
  3. Will the bank or investor agree to settle for less than the amount owed, or will they choose to foreclose?

Step #1 – Pre-Qualification

Let’s start with pre-qualification of the homeowner.  Before taking a short sale listing it should be the job of the Realtor to understand the financial requirements and pre-qualify the seller.  This involves having the sellers complete a financial worksheet and reviewing their income and assets.  Whether buying or selling, this is a critical step and one reason why working with an agent that is experienced in short sales is important.  If the sellers don’t financially qualify, there is no point going any further. 

Step #2 – Documentation

Once it has been determined that the sellers qualify, the Realtor or qualified short sale negotiator, will contact the seller’s lender and determine the exact requirements for submission as they are all slightly different.  It will also be determined at this point if the lender participates in the government HAFA (Home Affordable Foreclosure Alternatives) program as there may be incentives for both the sellers and the lender, and certain procedures may be streamlined.  In any case, the Realtor will work with the sellers and collect all the necessary documentation.  This will include: 

  1. A statement of general information
  2. Financial worksheet
  3. Handwritten letter explaining their hardship
  4. 2 months pay stubs or year-to-date Profit and Loss statement if self-employed
  5. 2 months bank statements
  6. Tax returns for the last 2 years
  7. Most current statements for all retirement accounts or other assets
  8. Authorization form to allow Realtor or negotiator to speak with the lender(s)

Step #3 – Sale of the Property

The house is then listed for sale as a short sale.  Both listing and selling agents must agree to equally split whatever commission the lender decides to pay.  Once an offer is received the Realtor should carefully examine the offer and make sure that it is an offer the lender is likely to accept; the price should be consistent with comps; the offer must not be contingent on the sale of the buyer’s home; and the buyer must understand that it is unlikely that the lender will pay for any termite work or other repairs.

Step #4 – Submission of the Short Sale Package

The listing Realtor or negotiator submits everything to the lender for approval of the short sale and the sale is noted in the MLS as “Contingent”.  Again, it is important to have an experienced Realtor or negotiator who makes sure that the submission is not only complete, but that it is packaged neatly and easy to read and understand.

The package goes to a special department at the lender where it is reviewed.  If there is any documentation missing or unclear, they will request additional information. Unfortunately, even this initial review can sometimes take 4 weeks or longer.

Once this initial review is completed and the package confirmed as complete, a negotiator representing the lender will be assigned.  It is the job of this negotiator to carefully review the file and make a recommendation as to whether it should be approved, or not.  If there are 2 lenders (a 1st and 2nd mortgage), this entire process must be completed for both lenders. 

Step #5 – Negotiation

During the actual review and negotiation process, the lender’s negotiator may counter specific items in the offer including the purchase price and the requested commission.  In the case of the second mortgage holder (who stands to lose the most), they may also request that the buyers make a financial contribution.  Again, this is where experience counts.  The seller’s Realtor or negotiator should be in communication with the lender’s negotiator several times a week, working to move the deal along and arrive at terms that are favorable to the seller and buyer.  This part of the process can drag on for weeks, or even months, although some lenders have streamlined the process.  Also, keep in mind that many of the 2nd mortgage holders won’t even begin the review process until the 1st lien holder has approved the sale.

Step #6 – Approval

If the lender’s negotiator recommends approval, the file goes to upper management or the investor for final approval.  Generally speaking, if the file makes it this far, it is usually approved.  But again, this final leg of the process may take an additional week or two.

And finally, the letter everyone has been waiting for – the approval letter.  Assuming all terms are acceptable to sellers and buyers the sale will now proceed as a “normal” sale.  The approval letter will stipulate a date by which the sale must close or the approval is no longer valid, usually 30 days.  Hopefully the buyer has hung-in during the approval process, and at this point the clock starts ticking for buyer inspections and contingency removals.

Navigating a short sale as either a buyer or seller can be overwhelming.  Making sure you’ve got an experienced professional on your team is the best way to protect your interests.  Questions?  Just give me a call.  619-846-9249.

 

October 31, 2010

Improve your Odds for Short Sale Approval

Posted by martikilby under foreclosure, lenders, Short Sale | Tags: , , , , |
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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.

 

October 29, 2010

Why Banks May Choose Foreclosure over a Short Sale

Posted by martikilby under foreclosure, lenders, Short Sale | Tags: , , , , , |
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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.

 

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