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.

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.

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

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and for info on state forgiveness

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!

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?

This is not to say that all companies of this type are illegal or unethical.  If the DRE has reviewed the company and has approved of them, they perform a useful function and until they prove themselves differently, are reputable.  Ask them if they have a license from the Department of Real Estate and if you have a question, be sure to contact the Department of Real Estate.  You can find them here.  And while you are at it, look at that handsome devil up there in the left hand corner.  Looks like he may have been a movie star, huh?

Obama Administration Announces Financial Incentives and Uniform Process for Short Sales

 The NATIONAL ASSOCIATION OF REALTORS® (NAR) today announced that the Obama Administration has added new incentives and uniform procedures for short sales under its new Foreclosure Alternatives Program (FAP), part of  the administration’s Making Home Affordable plan.

 Loan servicers may consider short sales or deeds-in-lieu of foreclosure for borrowers who do not qualify to have their loans modified on a permanent basis under the Making Home Affordable Loan Modification Program.   

• Borrowers/homeowners qualify under the FAP if they meet minimum eligibility requirements for the Home Affordable Modification program, but don’t qualify for a modification or do not successfully complete the three-month trial period. Before proceeding with a foreclosure, servicers must determine if a short sale is appropriate.

• Incentives include: $1,000 for servicers for successful completion of a short sale or deed-in-lieu of foreclosure; $1,500 for borrowers/homeowners to help with relocation expenses; and up to $1,000 toward the cost of paying junior lien holders to release their liens (one dollar from the government for every $2 paid by the investors to the second lien holders).

• The program will include streamlined and standardized documents, including a Short Sale Agreement and an Offer Acceptance Letter. The goal is to minimize complexity and increase use of the short sale option.

• Servicers will independently establish both property value and minimum acceptable net return, in accordance with investor requirements. The price may be determined based on an appraisal or one or more broker price opinions (BPOs), issued no more than 120 days before the date of the short sale agreement.

• In the Short Sale Agreement, servicers must give borrowers/homeowners at least 90 days to market and sell the property, or up to one year, depending on market conditions. Property must be listed with a licensed real estate professional with experience in the neighborhood. No foreclosure may take place during the marketing period (at least 90 days) specified in the Short Sale Agreement.

• The Short Sale Agreement must specify the reasonable and customary real estate commissions and costs that may be deducted from the sales price. The servicer must agree not to negotiate a lower commission after an offer has been received.

• Servicers may not charge fees to borrowers/homeowners for participating in the FAP.

• The program is in effect through 2012.

• Servicers have the option to require the borrower/homeowner to agree to deed the property to the servicer in exchange for a release from the debt if the property does not sell within the time allowed in the Short Sale Agreement (plus any extensions).

“Be persistent during ordeal of short sale.  Approximately one in five homeowners is “underwater” – meaning they owe more on their mortgage than their home is currently worth. For borrowers in default or at risk of defaulting, selling their house for less than is owed, often termed a short sale, may be the only option. However, short sale offers must be accepted by the bank that owns the mortgage, and can take as long as a few months before an offer is accepted.

MAKING SENSE OF THE STORY FOR CONSUMERS 

Some home buyers are submitting unrealistically low offers on bank-owned properties, hoping to purchase a home at a bargain price. Low offers often use valuable time and resources that could be dedicated toward more favorable offers more likely to garner bank approval. It is vital that home buyers work closely with their REALTORS® to submit appropriate offers, especially when dealing with a short sale property.

 Theoretically, short sales should be a win-win for the bank and the homeowner. Although the bank does not receive the full payment on the mortgage, it also does not incur the costs of foreclosure and/or eviction, if necessary. Many homeowners also prefer short sales because it does less damage to their credit score than a foreclosure. However, many real estate experts say that the majority of banks are reluctant to approve short sales, and often let properties go into foreclosure, even when there are reasonable offers on the property. In addition to considering the price, most lenders also take into consideration whether the homeowner can demonstrate financial hardship. If the homeowner is capable of making payments, many lenders will try to work out a loan modification, rather than a short sale.

 Short sales often are more time intensive than traditional transactions and often require additional paperwork. Due to the large number of short sale offers, many take as long as a few months to receive approval. If information or required forms are missing or incomplete, the bank may set the offer aside, which could delay the process and cause the property to go into foreclosure. To expedite the process, it is important that sellers work closely with their REALTOR® to provide all of the necessary paperwork. “

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FORECLOSURE FILINGS UP 25 PERCENT FROM YEAR AGO
Foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 279,561 U.S. properties in October, a 5 percent increase compared with the previous month and a 25 percent increase compared with October 2007, according to recent report from RealtyTrac®. One in every 452 U.S. housing units received a foreclosure filing in October, according to the report.

“We’ve seen sharp declines in new foreclosure filings after legislation mandating delays to the foreclosure process was signed into law in several states — most notably in California, where overall foreclosure activity was down by double-digit percentage points for the second straight month in October, and where default filings were 44 percent below October 2007 levels,” said James J. Saccacio, chief executive officer of RealtyTrac. “Despite this, October marks the 34th consecutive month where U.S. foreclosure activity has increased compared to the prior year.”

California foreclosure activity in October decreased 18 percent from the previous month, but the state still posted the highest number of properties with foreclosure filings for the month — 56,954. That total was down from a peak of more than 100,000 in August, but represented a 13 percent increase compared with October 2007.