Short Sale Update

Short Sales are proliferating lately and the good news is that they are working through the system at a much faster pace than they did 2 years ago.

Again, the definition of a “short sale” is when a homeowner decides that he no longer can make the payments on a mortgage which is collateralized by a home that is no longer worth what it was when the mortgage was made.  When this happens, the homeowner works with his real estate professional to come up with a listing price that will sell the house.  Once a buyer is procured, the seller/homeowner agrees to a contract with that buyer subject to approval from the mortgagor.  2 years ago, the waiting time for the response from mortgagee was anywhere from 6 months to a year.  Now, the process has been streamlined and mortgagee acceptance can be accomplished in as little as 2 weeks.

One of the things that is making the “short sale” a viable exit for the underwater homeowner is the new State of California law ( in effect since July 15, 2011) prohibiting the mortgage lender from collecting a deficiency (the difference between the outstanding loan balance and the loan payoff received by the lender)  or obtaining a deficiency judgment for a short sale involving a loan secured by a one-to-four residential unit property.  This law applies to first trust deeds, second trust deeds and other junior trust deeds including equity lines of credit.  Prior to this new law, short sale deficiencies were only prohibited on first deeds of trust.

Furthermore, the new law SB 458 (anti-deficiency law) for short sales applies to owner-occupied or non-owner occupied properties. Non-owner occupied properties include rental properties, vacant homes, second homes or vacation homes.  This is definitely relevant in our area as there are many second home owners who are struggling with what to do about their properties that carry onerous mortgages.  While not forced to accept a short sale contract, the bank that holds the mortgage who does accept the contract will be bound by this law.

So, the California Association of Realtors Legal Services recaps the circumstances under which the California Anti-deficiency protection law applies for us here:

• Mortgage loan is solely secured by a deed of trust or mortgage;
• Mortgage loan is for a dwelling of not more than four units;
• Borrower sells the property for less than the outstanding loan balance;
• Lender provides written consent for the short sale;
• Title voluntarily transfer to a buyer by grant deed or other document of conveyance recorded in the county where the property is located; and
• Proceeds of the sale have been tendered to the lender or lender’s agent in accordance with the parties’ agreement.

There is nothing in this article however, that speaks to the sellers’ tax liability for the forgiven, either Federal or State.

As always, we would strongly urge anyone considering this form of sale to consult their attorney and/or tax accountant before making any decision.

Short Sale & Bankruptcy – What do YOU think?

We value your opinion, reader so we would love to hear what you think about this:

I was at an office meeting this week and one of the agents described the following scenario in one of his short sale escrows — true story.  The agent was representing the seller of a home which was in escrow as a short sale that had been approved by the seller and the bank which held the note.  The buyer was approved and ready to close on the house when about 3 days from closing the sellers filed bankruptcy.  The sale was frozen which means that the buyer can’t buy and the seller can’t sell and, of course, the agents cannot collect their commissions on the deal that they put together.

The question from the agent at the meeting was should they file to become one of the vendors that the bankruptcy court orders paid?  My answer was yes, of course.  The agent had provided the service that was contracted for.  He had brought a bonafide offer that was approved by the seller and their bank.  The agent did what was contracted for — so he should be paid.  What do you think?

Also, I was wondering what you might think of this scenario in general.  The seller was able to stay in this house without making a mortgage payment for about 1 year.  Now that the situation has changed and they have filed bankruptcy, more than likely they will be able to stay in the house for another 6-12 months without paying a mortgage.  Yes, the bankruptcy will destroy the sellers’ credit but not paying your mortgage for a year probably had a similar affect on the credit too.

If  someone out there has an opinion on either of these issues,  I would like to hear it.

New Developments in Short Sale and Foreclosure

There were a couple of new developments this past month in the banking industry with regard to foreclosures and short sales. The 2 largest banks have made some movement in changing their policies.

First, the Bank of America announced this past month that it will introduce “principal forgiveness.” This term refers to reducing the loan balances of some distressed homeowners who have either adjustable rate mortgages or sub-prime loans. If a borrower “qualifies” for this reduction, it will not only reduce his principal (the loan amount) but also his monthly payments.

The Obama administration’s Home Affordable Modification Program, or HAMP, has a goal of lowering the payment on a first mortgage to about 31% of a borrower’s gross income.

Not sure how this is going to work, or how it will be received by the people who are not currently “distressed,” but it remains to be seen whether or not the Bank of America actually carries through with this promise.

Another problem that has held homeowner’s hostage over the past 2-4 years is the second mortgage. It seems that even though some people qualified for relief for their principal mortgage under the U.S. Treasury’s mortgage-modification program, their home equity or second mortgages were still putting them at risk for default (some consumers’ second loan payments are higher than their first’s). Wells Fargo and the Bank of America have bowed to pressure from the federal government to modify these home-equity loans.

As for its part, government has come to the aid of distressed homeowners in that the IRS has been told not to pursue taxing the forgiveness (the difference between what a short sale/foreclosure/loan modification nets the bank and what the borrower owes), on principal residences. For a while it looked like this would NOT be the case in the state of California but another bill passed very recently by the state legislature (SB 401) and expected to be signed by Governor Swartzenegger in time for April 15, 2010, would, make homeowners immune from state taxation on this “forgiveness” also.

for more info

and even more

and for info on state forgiveness

Short Sale Mahem from Another Aspect

You know, Banks have gotten a really bad rap lately.  Yes, they did do some pretty risky and unconscionable loans over the past 6-7 years but you know I have been dealing with a really nice “negotiator” at the bank of America and yesterday, after 6 months, the short sale that I was working on crashed and burned, and it wasn’t the bank’s fault.  The property in question has been under contract twice in the past 6 months.  The first one involved a loan and for reasons that I don’t want to go into right now (would take too much time).  It did not succeed even though it had bank (the seller’s bank) approval.  The good thing about this failed attempt is that I was able to ascertain just exactly what the bank wanted.  Armed with this piece of information, I was able to find an agent who had a cash buyer and was willing to pay the closing costs that the bank would not accept.  15 day escrow  . . . . . well you guessed it, the buyer decided after 15 days to pull out of the contract.   Bummer for everybody!

After 20 years of working in this industry, you would have thought I would recognize all of the warning signs of something too good to be true.  Well, maybe I did but was just thinking that just this once, things would work out.

When the press reports about the difficulties we are having getting these about to be foreclosed upon homes sold, they don’t mention that the banks aren’t always the ones that stymie the deals.  Yes, they are difficult to work with, unless you follow the rules.  On this particular transaction, I felt that the bank was totally up front about what they would accept and considering that the loan amount was $640K and the sale price that they agreed to was $379K, I am sure you would agree that this constitutes the bank working with the seller, the buyer and the real estate professionals.

Yes, this time it was the consumer who messed up the deal.

Oh well, enough of this feeling sorry for myself — back to the drawing board.  Back on the Market!

Short Sale Explanation

It occured to me today, after typing the following explanation on an e-mail for about the 6th time, that I should just save it in my documents so I could use it again without having to re-create it every time.  So since I have done that, I would like to share it with anyone out there who is unfamiliar with the term “short sale.”  I have asked some non-real estate related consumers (who are also my friends) what they think a “short sale” is and at least 50% of the time, they come back with the answer:  “it is a really short escrow.”  Well, this answer could not be further from the truth.  Please, if you are interested, read on. . . . .

1)  The owner of the house decides for one reason or another he cannot make the payments on mortgage that is secured by his house;

2)  The owner of the house stops making payments;

3)  The owner of the house and his real estate agent put the house on the market at a price that they are certain will bring some offers and this is published in the mls as a “short sale” which is subject to the lien holder (bank’s) approval.  It is called a “short sale” because the amount of money that the market will bear for the house is not as much as the mortgage indebtedness,  there will be a shortfall;

4)  An offer comes in from a buyer;

5)  The owner of the house agrees to the offer – they really don’t care what they agree too as long as it does not involve them actually paying any money;

6)  The contract goes to the lien holder for their approval.  The lein holder essentially agrees to take over the contract and perform as the seller and buyer agreed;

7)  The lien holder orders a BPO (broker’s price opinion) or an appraisal and sees how close the offer he has in hand is and makes a decision as to whether to accept, counter or reject the buyer’s offer.

8)  Once the bank approves, the escrow goes forward as if it is normal – getting approval takes anywhere from 1-4, 5, 6 months. 

In the meantime, the bank is working on foreclosure proceedings on this house too.  So one never knows whether one will beat the clock and stop the foreclosure proceedings.

Kind of interesting, huh?

Now what can I help you with?

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