Lose the House, but Not Your Credit

Lose the House, but Not Your Credit
By Brian Dakss
According to sources in the mortgage industry, people who agree to a short sale with the lender do far less damage to their credit rating than those who go through foreclosure.

While in both cases, short sale and foreclosure, the delinquent mortgage will negatively affect their credit rating, at least short sellers avoid having a "debt discharged due to foreclosure" on their credit reports. Mortgage and credit experts say that, after bankruptcy, having a foreclosure on your credit report is the worst result and will reduce your credit score by over 250 points. You could also have to wait up to three years to qualify for a mortgage at a reasonable rate.

Short sales show up on a credit report as a "pre-foreclosure in redemption" status and can result in a credit score reduction of 100 points or less. After the sale, the mortgage may show up as "discharged." People who successfully complete a short sale may also qualify for a mortgage at a reasonable interest rate in as little as 18 months. So, if buying a home is a future goal, then a short sale is the better option for many.

Homeowners cannot simply decide that they want to unload a home with a short sale; the lender must agree to it. The key to getting a lender to go along is to demonstrate two things: that you have no other financial resources to pay the mortgage, and that the sale price the buyer is willing to pay is the fair price the market will bear. If a lender believes it can get more for the house by taking possession of it and selling it themselves, then they will not go along with a short sale.

To begin the process of a short sale, you first need to call the lender and speak directly with the person in the loan workout or short sale department. At GMAC ResCap, a large residential mortgage lender, there is a "foreclosure prevention department" with people trained to work with homeowners in exactly this situation. Their motivation is summed up by Steve Nelson at that company: "We pretty much know what our loss is going to be if we foreclose. If a short-seller results in a payoff that's better than that number, we're talking all day long with people who want to put a short sale together." Some lenders report a three- to four-times rise in the number of short sales over the past year.

People who want to go this route should contact a local real estate firm and ask to work with a real estate agent who has actual experience with short sales. These specially trained agents will know the process and deliver the documentation that the lender requires to authorize the short sale. The agent can also find a buyer that is qualified to complete the transaction.

If all goes as planned, the lender will receive all of the proceeds, typically not enough to pay off the loan. The remaining balance of the loan is discharged. But a homeowner agreeing to a short sale should also get legal advice to protect his or herself from future claims of the lender. In some states, only purchase mortgages are fully discharged. For all other types of debt (equity loans, refinancing, etc), the homeowner can be held personally liable for repayment in the future. For this reason, a lawyer's advice will include getting the lender to agree to fully discharge all mortgage debt involved in the short sale.


This is a common question I always get asked when taking a short sale listing. The alternative to foreclosure is the answer.
Angel

The Truth Behind Loan Modifications and Frustrated Home Owners

By PETER S. GOODMAN
New York Times
This week, the Obama administration summoned mortgage company executives to Washington to demand they move faster to lower payments for homeowners sliding toward foreclosure. Treasury officials called on the companies to hire and train more people quickly to field applications for relief.

But industry insiders and legal experts say the limited capacity of mortgage companies is not the primary factor impeding the government’s $75 billion program to prevent foreclosures. Instead, it is that many mortgage companies are reluctant to give strapped homeowners a break because the companies collect lucrative fees on delinquent loans.

Even when borrowers stop paying, mortgage companies that service the loans collect fees out of the proceeds when homes are ultimately sold in foreclosure. So the longer borrowers remain delinquent, the greater the opportunities for these mortgage companies to extract revenue — fees for insurance, appraisals, title searches and legal services.

“It frustrates me when I see the government looking to the servicer for the solution, because it will never ever happen,” said Margery Golant, a Florida lawyer who defends homeowners against foreclosure and who worked in the law department of a major mortgage company, Ocwen Financial. “I don’t think they’re motivated to do modifications at all. They keep hitting the loan all the way through for junk fees. It’s a license to do whatever they want.”

Rich Miller, a governance project manager at Countrywide Financial and Bank of America before he left in January, said Bank of America had been reluctant to modify loans, which hurt the bottom line. The company has been waiting and hoping the economy will improve and delinquent customers will resume making payments, he said.

“That’s the short-term strategy,” said Mr. Miller, who oversaw training programs at Countrywide, which was bought by Bank of America. He now works as an industry consultant.

Bank of America disputed that characterization. “To think that somehow or other we would jeopardize investor relationships and customer relationships for the very small incremental income we would receive by delaying seems ludicrous,” said Robert V. James, the bank’s senior vice president for mortgage operations and insurance. “It’s not the right thing to do.”

Mortgage companies, some of which are affiliated with the nation’s largest banks, are paid to manage pools of loans owned by investors. The companies typically collect a percentage of the value of the loans they service. They extract their share regardless of whether borrowers are current on their payments. Indeed, their percentage often increases on delinquent loans.

Legal experts say the opportunities for additional revenue in delinquency are considerable, confronting mortgage companies with a conflict between their own financial interest in collecting fees and their responsibility to recoup money for investors who own most mortgages.

“The rules by which servicers are reimbursed for expenses may provide a perverse incentive to foreclose rather than modify,” concluded a recent paper published by the Federal Reserve Bank of Boston.

Under the Obama administration’s foreclosure program, a servicer that modifies a loan for a homeowner collects $1,000 from the government, followed by $1,000 a year for each of the next three years. A senior Treasury adviser, Seth Wheeler, said these payments amounted to “meaningful incentives to servicers to help overcome the challenges and competing demands they face in considering and completing loan modifications.” He added that mortgage companies “are contractually obligated to the terms of this program, which require them to offer modifications to qualified borrowers.”

But experts say the administration’s incentives are often outweighed by the benefits of collecting fees from delinquency, and then more fees through the sale of homes in foreclosure.

“If they do a loan modification, they get a few shekels from the government,” said David Dickey, who led a mortgage sales team at Countrywide and Bank of America, leaving in March to start his own mortgage advisory firm, National Home Loan Advocates. By contrast, he said, the road to foreclosure is lined with fees, especially if it is prolonged. “There’s all sorts of things behind the scenes,” he said.

When borrowers fall behind, mortgage companies typically collect late fees reaching 6 percent of the monthly payments.

“For many subprime servicers, late fees alone constitute a significant fraction of their total income and profit,” said Diane E. Thompson, a lawyer for the National Consumer Law Center, in testimony to the Senate Banking Committee this month. “Servicers thus have an incentive to push homeowners into late payments and keep them there: if the loan pays late, the servicer is more likely to profit.”

She cited Ocwen Financial, which reported that nearly 12 percent of its income in 2007 came from fees to borrowers.

Paul A. Koches, Ocwen’s general counsel, said: “We’d prefer that to be zero. The costs associated with our delinquent loans are in every instance in excess of the late fees.”

Its no wonder we are in the situation that we are in right now. The banks are taking advantage of the suffering home owner. This all needs to end we are living a mess.
Angel

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Short Sale Approval being Fast Tracked

Short sale approvals being fast tracked
A number of banks have revamped there short sale approval process, decreasing time needed to gain approval significantly. In fact some lenders have even begun to approach homeowners in errears and those in danger of falling into errears and are suggesting that they list their homes as short sales. In these situations lien holders pre-approve the sale at a price, reached in conjunction with a local real estate agent. No doubt many lenders are still stuck in the same rut and have not wrapped their heads around the problem they're having with non-performing loans. On average lenders lose up to 50% more on a property when they foreclosure on it than they would if they were to allow a short sale. Recently the government has launched an effort to streamline the processing of these transactions industry wide. A part of this initiative is cash payments to 2nd lien holders for cooperating in a short sale transaction, as well as a $1500 payment to the homeowner for relocation expenses.Foreclosures are still on the rise but between approved short sales and loan modifications, we may actually see a decrease in the number of foreclosures yet.

Many home buyers are advised to steer clear of short sales due to the headaches involved. Certainly many of these transactions can be a real nightmare. But each should be assessed on based on the number of lien holders involved, how many offers (if any) have been submitted to the lien holder(s) and how long offers have been in process with the lien holder(s).

Home sellers frustrated as short-sale deals collapse

By Stephanie Armour, USA TODAY
Scores of homeowners who thought they'd cut a deal with their banks to sell their houses for less than their unpaid mortgages are seeing those agreements fall apart months later, contributing to the mounting foreclosures that threaten the housing market's recovery.
The sales of homes for less than the amount owed the bank, known as "short sales," have been widely viewed as an alternative that could help slow the foreclosure epidemic. In theory, delinquent homeowners escape a mortgage they cannot afford, and lenders, although taking a loss, avoid the even costlier process of completing a foreclosure.

Instead, many homeowners are watching potential buyers walk away as months pass while they deal with lenders' lengthy delays, lost documents and unreturned calls, according to the National Association of Realtors (NAR). Not all the snafus are lenders' fault; inexperienced real estate agents who fail to turn in complete paperwork also are causing holdups, as are severely underpricedhomes.

The problems have become such a kink in the market's recovery that banks and the federal government are launching new efforts this month to simplify and speed up the short-sale process.

Just 23% of short-sale offers that homeowners receive from potential buyers actually close, according to a February study of 1,300 real estate agents by Campbell Communications. More than 90% of agents cited a slow response from the lender as the reason short sales were lost.

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"The delays are quite extensive and a real problem. It's a serious issue," says Mark Zandi of Moody's Economy.com. "You're seeing a lot of short sales go bust, and it's contributing to the crisis because it's one of the reasons foreclosures continue to mount."

Jorge DeMattos, 45, just completed the short sale on his home in Pembroke Pines, Fla. — a process he and his real estate agent, Edward Goldfarb, say took 17 months and eight separate offers.

DeMattos began pursuing a short sale after he was laid off two years ago and his income plunged from $46,000 to $26,000 a year.

Chase Bank, his mortgage servicer, rejected the first offer, which was $14,000 over what was then fair market value, according to Goldfarb.

On the next seven offers, the bank took months to respond. Each prospective buyer got tired of waiting and canceled the contract. The eighth offer, accepted in May, was $24,000 less than the first one that Chase rejected in February 2008, Goldfarb says.

"Chase made it very difficult. I had to stop paying the mortgage. It was so frustrating," says DeMattos, who now lives with his sister in Kissimmee, Fla. "We would put the paperwork in, and they would never give a definite answer. Buyers waited for months."

DeMattos says he owed $355,000 on his mortgage. The short-sale price was $225,000.

Christine Holevas, a Chase spokeswoman, says earlier offers on the home weren't accepted because they were significantly below the appraised value and the homeowner didn't send in updated financial information.

No longer uncommon

Short sales once were extremely rare. But now, with unemployment climbing and home values down, more homeowners are pursuing short sales when they can't afford their mortgage. About 11% of all sales transactions in June are such short sales, according to the NAR.

Some delays stem from agents who fail to prepare buyers and sellers for the length of time it takes to get a short sale approved or who supply incomplete information to banks.

But many short sales are faltering, largely because some lenders may lack the internal staffing, expertise and systems to process such sales in a timely fashion. And short sales can be complex, especially if they involve home-equity lines of credit or other second liens held by different lenders, who also must agree to take less than the amount they're owed from a home's sale.

Several lenders acknowledge that banks have been part of the problem, in part because most have done so few short sales in the past that they've faced a steep learning curve.

"About half of short sales never close. We see it as a big lost opportunity, and we need to improve the rate we close them," says David Sunlin, vice president in charge of short sales at Bank of America.

Uncompleted short sales that go to foreclosure are costlier for lenders and homeowners. For lenders, a short sale may save as much as 30% of the expense incurred by going to foreclosure.

For homeowners, a foreclosure wreaks longer-lasting damage to their credit records. A homeowner who has gone through a short sale typically can get a new home loan in one to three years, according to the NAR. A foreclosure usually means it takes seven.

Borrowers are expected to pay their mortgage during the short-sale process, but not all can afford to. That leads to abandoned properties that may sit vacant and deteriorate for months. In other cases, homeowners unable to make their payments may stay put and pay nothing, in some cases for up to a year, until the lenders' review-and-approval process plays out.

Large numbers of uncompleted short sales are especially troublesome, because other efforts to stem foreclosures have been less effective than expected. The Obama administration's housing rescue plan, which includes getting banks to rework home loans into more affordable mortgages, has made such slow progress that representatives from 25 major mortgage servicers were called to Washington, D.C., last month to discuss improving the efforts.

Short sales are moving into the national spotlight now as:

•Mortgage servicers ramp up their programs. Bank of America has begun trying to slash the turnaround time on short sales from up to 90 days after a buyer submits an application to just a week. In a typical short sale, a buyer makes an offer, then the bank conducts appraisals to determine the price it will accept. Setting that price can take so long that would-be buyers may walk away. To try to avoid such delays, Bank of America has begun doing appraisals and determining a minimum price it will accept before a home goes up for sale.

Meanwhile, Wells Fargo has created a real estate agent education guide that explains the process, has increased staffing and has set up procedures to handle short-sale requests and explain the process to homeowners. The bank says it has cut its average turnaround time from offer to approval from up to 90 days to about 30.

•The U.S. government is getting more involved. The Treasury Department soon will detail a plan to streamline short sales by providing standardized documentation and cash incentives to lenders and a moving allowance to homeowners.

Treasury has said that servicers have opted to pursue foreclosures instead of short sales because of the complexity and time required to complete the discounted home sales.

Borrowers who complete a short sale will be eligible for $1,500 to help with relocation expenses. Second-lien holders will get up to $1,000 to relinquish their claims in such transactions.

Eligible homeowners can be accepted through Dec. 31, 2012, but the short-sale program is for those unable to get mortgage modifications from their banks.

"We realized we couldn't reach everyone with a modification. For us, that wasn't the end of the story," says Michael Barr, Treasury assistant secretary for financial institutions. "The alternative is to significantly speed up short sales."

No authoritative figures on short sales' completion times are available, but some research indicates the problem is worsening.

A survey in March 2008 by Campbell Communications found that the average time for a mortgage servicer to respond to an offer to buy a short-sale property was 4.5 weeks. Campbell's follow-up survey in February found that the average response time had doubled to nine weeks.

A third survey in June found the response time was 9.5 weeks. The surveys were sponsored by Inside Mortgage Finance, an industry publication.

"The foot-dragging means it's taking six weeks to six months," says Lawrence Yun, chief economist with the NAR. "There are big delays. The review process is taking way too long."

'We had a learning curve'

Lenders say the approval process takes time because there are so many parties involved. Some bank officials say they've been learning as they go.

"We had a learning curve," says David Knight, senior vice president for Default Retention Operations, Wells Fargo Home Mortgage. "Any stakeholder has a right to disapprove the sale. Realtors out there were used to regular sales. Now, all of a sudden, the servicer and Realtor have had to learn a lot."

Some real estate groups also are trying to improve the process. Re/Max International Chairman David Liniger says his company is aggressively working to train agents on handling short sales and other so-called distressed properties. Instead of eight weeks to close a short sale, trained agents can get them done in two to four weeks, he says.

Within the real estate industry, hopes are rising that short sales will become a shorter process.

"It's horrible the amount of time it's taking to do these sales," says Valerie Torelli, who owns Torelli Realty in Costa Mesa, Calif. "It happens all the time that short sales fail and then go to foreclosure. A seller doesn't make payments for a year and then just walks away. It's unbelievable."

I must agree these Short Sales can be extremely frustrating. I think the most important thing is seller have to be educated about the wait times. Here in my office we are successful at getting our Short Sales closed but it can take months before it happens. I had a deal with Countrywide finally close this month that I took the listing on a year ago. I had another close with Indymac that took two weeks. You just never know who your negotiator will be and at the end of the day they have the control.
ANGEL LYNN

Sacramento County Real Estate Market Update

After the hot foreclosure market of last year, this summer seems - in comparison - quiet and lackadaisical. A total of 1883 homes sold this July, a number close to the June homes sold. 50% of these sales are still REOs; however, the change is remarkable. Foreclosures have fallen 36.4% year over year. Short sales have gained ground by 75.6% and non-distressed sales by 30% but even that surge is not enough to make up for the unit volume shortfall of 12.5% year over year.

Sold price per square foot remained around the $120 mark where it was in June giving evidence to the argument that the market may have bottomed out after all. Currently average sold price per square foot is at $120.93. Average sales price has fallen 14% year over year from a high of $228,312 to rest at $196,323. Median sales price is currently at $175,000.

Inventory also continues to hover around the 3 month mark. Total inventory is at 3.3 months based on the last year of sales and 3.4 months based on the last six months of sales. Foreclosure inventory is at 0.5 months and 0.6 months respectively.

California Real Estate Facts

Fast Facts:
Calif. median home price - June 09: $274,740 (Source: C.A.R.)Calif. highest median home price by C.A.R. region June 09: Santa Barbara So. Coast
$850,000 (Source: C.A.R.)Calif. lowest median home price by C.A.R. region June 09: High Desert
$108,600 (Source: C.A.R.)Calif. First-time Buyer Affordability Index - First Quarter 2009: 69 percent (Source: C.A.R.)Mortgage rates - week ending 7/30/09 30-yr. fixed: 5.25% Fees/points: 0.7% 15-yr. fixed: 4.69% Fees/points: 0.7% 1-yr. adjustable: 4.80% Fees/points: 0.5% (Source: Freddie Mac)

Quoted by the CAR California Association of Realtor

Interesting it looks like its still a great time to buy!

Obama's Loan Modification Program

You've probably heard about President Barack Obama's plan to rescue the housing market. He believes that restructuring distressed mortgages will help to keep struggling home owners in their homes. He also believes that this will help slow or stop the decline in housing prices. To this point $75 billion has been allocated toward modifying distressed loans and the Administration claims that it can help up to 4 million homeowners. Unfortunately, over half of those loans that have been modified have re-defaulted within six months.

Can Obama's plan help you? Well, let's look at it's main components:

First, the Obama administrations loan modification plan focuses on payments, not prices. They assume that home owners will want to stay in their homes as long as they can make the monthly payment regardless of the value of their home. This may or may not be the case. Evidence has shown that some homeowners will walk away from their homes even if they could make the payment only because the value of their home has fallen far below what it was once worth.

Second, Obama's loan modifcation program requires loan servicers to lower the borrower's monthly payments to no more than 38 percent of the borrower's gross monthly income. The federal government would then subsidize a portion of the payment so that the borrower would only be paying 31 percent of their gross monthly income. Obama's plan does not require loan servicers to reduce the pricipal amount of the loan. The servicer can reduce the interest rate to as low as 2 percent, extend the loan to a 40 year amortization, or forbear a part of the pricipal at no interest. So, if these terms would help you stay in your homne then you should take a serious look at the Obama Loan Modification Program.

Why would loan servicers want to participate in this program? Well, for one, they will get $1000 for every modification plus an additional $1000 each year for up to three years if the borrower continues to make the payments on the loan. The borrower too can get up to $1000 knocked off of their loan principal each year for up to five years if they make their payment s on time.

Of course, in the Obama Loan Modification Program only owner-occupied primary residences will be considered and only those with loan balances less than $729,750. Applicants will have to sign an affidavit of financial hardship and verify their income and only loans originated on or before January 1, 2009 will be eligible for the program.

So, does the Obama Loan Modification Program sound like it could help you? If so, then give your lender or loan servicer and call and see if you qualify.