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Loan Mod versus Short sale?

I just received a call from a homeowner that went like this. “We applied for a loan modification 6 months ago. The lender told us that if we started making payments again we would be approved. Every time we spoke to the bank they told us everything looked great. Two days ago we got a letter that we were denied on the loan mod and yesterday we got a notice that we have a foreclosure sale scheduled for next week”.

I wish I could say this was an unusual situation, unfortunately I get calls just like this at least 2 or 3 times a week. California just passed a new law to prevent this from happening that I applaud. It requires lenders to only seek one remedy at a time. They can no longer entertain a loan mod and pursue foreclosure at the same time.

People ask me all the time if the bank will short sale my home to someone else for less than what I owe why won’t they let me buy it back or at least stay for a payment that I can afford? What should I do?

My answer after explaining that I am not an attorney and they should check with a local lawyer is to tell them that the banks do not do anything out of the goodness of their hearts. In my opinion they do not want to do a loan mod and lower their yield for the next 20 or 30 years especially with a borrower that may well end up back in the same situation again in the future.

They do not really want to foreclose but they will certainly do so if they have no other option. The reality is that many studies have shown that the lenders lose 30 to 40% less on a short sale than on a foreclosure and that between loan mod. short sale or foreclosure, short sale is nearly always the best business decision for the lender.

So why do lenders encourage people to apply for a loan mod when they have little chance of being approved. Again this is just my opinion but I think they often use it as a collection technique to get more money from the owners before the property gets foreclosed.

I just had an interesting long conversation with a very successful loan mod negotiator. Out of all the calls he gets for loan mods he is only able and willing to try to help about 10% of the callers and he gets nearly all of them approved.

By the way he used to work for NACA which is a so called non profit set up by and funded by lenders. He said it was his job to keep telling loan mod applicants that everything looked great right up until the day they got denied.

According to this gentlemen the only people that get loan mods are people who had a temporary setback like a short illness of loss of job and they are now back to where they were before the setback. They are people who could qualify for a new loan now were it not for a few late payments caused by a temporary difficulty.

If you are a homeowner reading this and you do not meet the above criteria please don’t wait till you have a sale date, call us today!

If you do meet this criteria call us and we will refer you to the reputable and successful loan mod negotiator that I have referenced above.

Distress…Hope…Denial…Reality

We talk to many homeowners who are faced with losing their homes. Based on these discussions we have seen some patterns develop. Something has happened in their life to cause this situation and they are overwhelmed with the thoughts of losing their home and ways to try to avoid that from happening. Unfortunately, many of those potential options to save their home are in vain because modifications are rarely approved and the other options are often very expensive and only postpone the inevitable…the loss of their home. Homeowners go through various life changing cycles during this time of Distress. They hold out Hope that the lender will do a modification that will solve their problem. Once they are denied a modification after many months of trying, they reach a state of Denial where they cannot believe this is really happening to them and that there must be a miracle around the corner that will save their home. Unfortunately, by this time the clock has been ticking for a long time towards the lender forcing a foreclosure. Reality begins to set in that they have no other recourse but to lose their home and move on with their life. Once this has happened, the only remaining option for them is to find the best way to minimize the impact on their life; avoid the foreclosure and its negative impact on their credit rating and find a dignified exit from their home. The best course of action at this point is to do a Short Sale. Many of these homeowners are upside down in their property and a short sale becomes a viable option to achieve the things listed above. We can help these homeowners because many of them are not aware that a short sale can buy them more time in their home while the short sale is processed and the home is sold and it has a lesser impact on their credit scores while giving them time and resources to make a dignified exit from their home. Look around your neighborhood, town, city, market…short sale opportunities abound. Let’s try to help these homeowners. They are good people put into a bad situation. Often they follow a course of action outlined below…a very frustrating process. As agents, you can help them understand how a typical process works and how best to help them.

1. They develop some type of hardship resulting in the inability to pay their home mortgage and they have fallen months behind.

2. They approach mortgage lender to do a loan modification to reduce payment.

a. Lender requests loan to be brought current or will add deficient payments to the backend of the loan.

b. In most cases, they will be turned down for a loan modification. The approval rate for loan modifications is very low. National averages are less than 5% approved.

c. In some cases, if approved the actual monthly loan payment will increase thus not resolving the issue of not being able to make their monthly payments.

d. Often, they will not be given an answer on their mod request until it is too late. Typically the excuse is that the underwriters are still looking, etc. Months can go by and many times they will receive a notice from the mortgage lender during this process that they are moving forward with a foreclosure.

e. They will still be holding on to hope that they will receive a positive confirmation that the mod will be approved, however, most of the time that answer is no. They will be turned down and the clock will be ticking towards foreclosure.

3. Some homeowners will turn to a Foreclosure attorney at this point to see if they can assist in stalling the foreclosure. Often, the attorney can assist in stalling the inevitable foreclosure for several months or longer, however, homeowners pay significant monthly fees for such service. But remember, they are only stalling the foreclosure….the home will eventually have to be foreclosed.

4. The reality “shocker” is that they will lose their home and there is nothing they can do about it now. The period of “denial” is over…they have to make some decisions quickly.

5. Avoiding a foreclosure is still in their best interest because it is better on their credit rating since it would remain on their records for approximately 10 years in the event of foreclosure.

6. If they have equity in their home which most homeowners do not have, they should try to sell it fast, but many homeowners throughout the country do not have equity in their home anymore and it is upside down…they owe more than what they can sell it for!

7. At this point, a viable alternative to foreclosure for homeowners in this situation is to do a short sale on the property. Find a company that can help them do the short sale process by providing all the documentation required by the lender(s), negotiate a price with the lender that will allow the home to be sold, find a realtor that will be aggressive in selling the property, and buy them a few months to stay in the property until it is sold. It is not the result they wanted which was to stay in their home, however, it gives them a dignified exit from their home, has a minimal impact on their credit rating and in some cases provides them money at closing to make the move. They can move on with their life…and within a couple of years they will be able to buy a new home, if desired. If they are in this situation, they need to move quickly now to avoid the foreclosure and get on with their life!

Observation by Tom Ownby - Partner Nationwide Short Sale Solutions

Strategic Default

4 years ago when we first started working short sales virtually 100% of our customers were homeowners who were in desperate financial situations.

While we still have customers like this today at least half of our clients can actually afford their properties but they choose to make a business decision to stop supporting an upside down property.

We are here to help people that want our help and we make no moral judgments about their reasons for doing a short sale. I have not and never would advise anyone to not make payments or not pay their debts. That is a very personal decision. I do believe however that it is important to level the playing field by making sure that all parties understand how the system is currently working and all of the possible outcomes. There are several interesting articles on this subject under the articles tab on this website.

I received a call yesterday from a seller who told me "I owe over $200,000 on a home that is worth less than $100,000 and I can go rent a house in the neighborhood for half of what this place is costing me. When real estate was going up in value this place was an asset now it’s just a liability that I need to get rid of".

Many sellers have the idea that they cannot do a short sale unless they have a desperate hardship. In our experience this is not the case at all. We recently had a surgeon making hundreds of thousands of dollars per year who was over $400,000 upside down on a luxury condo. We got the short sale approved and any deficiency forgiven. He did have to bring $10,000 to closing but he thought this was a great deal to get rid of a $400,000 headache.

Regardless of a sellers situation they still need to fill out all of the paperwork and state some reason or type of hardship as to why they want to do a short sale.

So why would the bank approve a short sale for someone who can afford their property? Why do we get 95% of our short sales approved when sellers who apply for loan modifications have less than a 2% success rate?

If the banks want to help people why would they not just let them stay in their homes and approve a loan modification? The cold hard truth is that the lenders do not do anything out of the goodness of their hearts. Just like a homeowner who chooses strategic default denying a loan mod and approving a short sale is a business decision for the banks.

The lenders know that a vast majority of the people who somehow do get a loan modification will get right back into trouble again. They also know that on most loans they have insurance to cover loses and on a short sale if they do lose money they know that they will lose up to 30% less than on a foreclosure.

So does it make any sense for a homeowner to try to do the “right thing” and disregard the business decision that might make the most sense for their family when the lender is doing only what makes the most sense for the lender?

As I said in the beginning this is a decision that is highly personal and up to each individual homeowner to decide for themselves!

Increasing the odds

We are sometimes asked “can you guarantee that the home will not be foreclosed?” As we have discussed in previous blogs there are no guarantees with short sales. Every single situation is uniquely different. Fortunately over the past 4 years we as a company have perfected our process enough to get successful results 95% of the time.

So how can we all increase the odds of success?

If you are a homeowner reading this find a Realtor that has successfully completed hundreds of short sales or find one that is smart enough to know what they are good at and is willing to delegate that task to a company that has.

If you are an investor reading this ask yourself "Are you being honest approaching a homeowner and promising to save them from foreclosure knowing full well that there is less than a 10% chance that you will be able to buy the house cheap enough?" What if you told them I am going to try to buy it cheap and if I can’t the company that facilitates my short sales will make sure that the house is sold through their Realtor network.

If you are a Realtor reading this ask yourself. Is facilitating short sales the best use of my time? Do I really have time to do a great job? Would I better serve my sellers and myself by delegating this task to a company that has completed hundreds? Whether you decide to delegate or do them yourself it is vitally important that you find a mortgage broker and a title company or attorney that fully understands and is experienced with short sales. If you need recommendations please ask us?

Too often after months of work we get an approval only to have the mortgage broker send over an extension days before the approval expires. Just this week we had a title company wire into our company bank account $185,000 that was supposed to be sent to Bank of America. What if this had been sent to an unethical company? Good luck getting the money back any time soon.

Over 70% of all homeowners who do get foreclosed never contact anyone. If they do contact you don’t you owe it to them to give them every chance of success? By dealing with experienced professionals in every aspect of the transaction you are providing the highest possible quality of service to the homeowner. They deserve nothing less!!!

Are we There Yet?

I am constantly asked if the real estate market has hit bottom yet, meaning; Have real estate prices fallen as far as they are going to fall?

Predicting tomorrow's prices, like predicting the stock market, is technically impossible, and if you listen to 10 people, you will receive 10 opinions. There are, however, several indicators that always give us valuable insights as to the direction of the market.

Let's start with Supply and Demand. Relative to demand, limited supply (think gold or truffles) causes prices to increase, as more people vie for the same commodity. Again, relative to demand, high supply (think about corn in Iowa) causes prices to fall.

Currently, most US real estate markets are experiencing record high levels of inventory, vacancies, and bank-owned homes listed for sale. Not long ago, Florida had in excess of a 13 year supply of condos on the market. Rumors abound regarding the millions of homes that have been foreclosed, and not yet sold, also known as the "shadow inventory". The 4th quarter of 2010 was the largest quarter of real estate foreclosures in history. These all point to a massive, and growing, supply of available properties.

Unemployment. As the unemployment numbers maintain at record highs, there are fewer and fewer people qualified to purchase. With every hike in unemployment, the available buyer pool shrinks. There are also millions of "recent homeowners" with damaged credit, who have largely been removed from the buyer pool for several years. Will the financial bailouts become a tax burden, further damaging employment numbers? As the pool of employed, qualified buyers shrinks, demand falls.

Availability of capital. We were told that the bailouts would give the banks the solvency to make new home loans, thereby helping to get the real estate meltdown under control. Has this been happening? While the banks are making loans, their lending parameters have gotten more stringent, and they are moving slowly regarding investing in real estate. This too will adversely affect the demand for homes, as fewer homes loans are made available to fewer people.

What about the increasing sales begin reported in the news? Yes, in many cities there are sudden spikes in sales volumes. Is this a sign that those markets are in recovery, or it is the naturally reaction to continually falling prices. In real estate, when sales prices fall with respect to rental rates, investors will begin to purchase properties to hold as rentals, so even if the capital value falls, their investment is protected by the income it produces.

Climbing supply, falling demand, increasing unemployment, and limited availability to capital. It feels like we still have a way to go before bottoming out.

When will this end? That is a great question. Some of the brightest minds in this business are saying that we have another 2-5 years of falling prices before we hit bottom. Personally, I believe we will need some policy changes to slow this down, and eventually reverse this trend, meaning that this could continue even longer without some correctional help. Is there any way to know before the prices start to jump up? Yes, when inventory begins to approach normal levels (6-8 months supply of homes available) and when consumer confidence returns from an authentically recovering employment market.

Joel Rico

P.S. From Jim- If you want to read an interesting book on this subject from 2 authors that very accurately predicted the current meltdown I reccommend "Aftershock" by Robert Weidemer and Cindy Spitzer

Why did the lender do that?

One of the most common questions we get asked by realtors and homeowners is "That makes no sense why did the lender do that".

A recent example is a property in Florida that had mutliple issues and took 7 months to get a buyer willing to deal with the issues approved to buy the short sale. The approval after 7 months gave the buyer 30 days to close. The buyer jumped thru hoops to get his mortgage approval and showed up to close with his funds on the 30th day. The title company had instructions from the lender to obtain final Hud approval prior to funding. When they attempted to send the Hud for approval they found out that the lender in the midwest was closed due to the blizzard.

This morning the lender told our office that they will now need to re approve the file and they will try to get it done in 30 days.

Another example is a file where the bank negotiator asked for fianancials from the seller 3 times in 6 weeks. When we explained that we had recently sent them and asked why they needed them again the frustrated negotiator admitted to our facilitator that she had been on the job for 3 months, was making $12 an hour and had over 300 files. She indicated that she had to take an action on every file every 30 days so if she got behind and the 30 day deadline was near she would often just ask for something again that she already had in order to reset the 30 day clock.

So the answer to the queston why did the lender do that is that In the big picture very little of this process makes sense. There are overwhelmed people on all sides of the short sale transaction trying to make the best of a difficult situation.

The more we can all try to understand each other the more we can reduce the frustraton and make a difficult process more bearable.

Good News and Bad News

This Weeks we have Good news and Bad News

First the bad, FHA Insured loans are not eligible for HAFA

Now the Good.. FHA loans are now eligible for a Pre foreclosure Sale program which includes:

1. Very quick answers on price often in a few weeks 2. A bottom line “approval to participate” which includes the lenders required net and the lender generally does not care how the net is achieved. 3. The approval is not buyer specific so there is no delay when one buyer backs out and another steps in. 4. Up to 120 days to close once the price is determined 5. Often includes a seller incentive of up to $1,000.

Now you will know what we mean and what to do when we tell you we have an approval to participate. I would suggest that you go find your own buyer and double end the deal!!!

Team Work

This week’s Tip Involves Team Work

I am sure you have all heard the word team used as an acronym for Together Everyone Achieves More..

We had an excellent example of this in a recent deal…

We had a very cooperative seller who fully worked with us every step of the way… He cooperated fully with the listing agent in giving free access for BPO’s and showings.. When we needed updated documents he got them back to us often the same day as our request…

We got to the end of his deal with an approved buyer.. an approved price and a lender who was insisting on a big cash contribution and a big promissory note…

Since the seller did not have the cash it looked as though the deal might die…

When we informed the seller of this he asked “can I speak with the lender?” While we did not expect any results we asked the lender if the seller could speak with the investor who was insisting on seller contributions and to our surprise the lender gave us a phone number which we passed on to the seller…

To our amazement the next day we received a new approval with no seller concessions and a complete waiver of any deficiency.

So.. The moral of this true story is that everyone involved in this process are human beings and the more all of us are willing to do whatever it takes to help each other the better the chances of a successful closing!




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