Dallas Real Estate and Short Sale Blog

December 23^rd was the frustrating end to a five-month attempt to complete a short sale. We listed the property in July and executed a contract in early August. While we worked the package with both lenders, our first buyer walked. We quickly found a new buyer who was more than willing to wait for us to get this done.



There were two liens with two different banks. The second was fine with $3000. The first (who will remain nameless) was willing to work with us but bounced our file from negotiator to negotiator. Of course, we continued to provide updated documents and various affidavits. We also had to release the home form the bankruptcy so we could move forward. While slow, we were making progress.

In the final week, things took a turn for the worse. The negotiator took the last two pay statements we provided and came up with a monthly income that was $1000 over what we had submitted. One of those two pay statements showed $800 in overtime pay. The seller is a police officer and had moonlighted at some local football games to make a few extra dollars.

The bank averaged the two pay statements and added the extra income from the football games to arrive at a net monthly pay. I discussed the issue with the negotiator and her supervisor. They declined to reopen the file and it will be sold at a Trustee Sale on January 4^th.

Let’s look at their logic.

The December pay statement with the overtime pay showed YTD gross overtime of $2200. Clearly overtime was very rare. An originating lender would have not allowed it to qualify for a mortgage so why should we use it to undo a mortgage? I argued that $2200 gross was about $1750 take home and if they felt the need to include it, they should divide it by 12 and add the result to the monthly figure. This would have added $145 to his monthly take home.

The football pay is $195 gross for 10 games or $1950. After taxes, the take-home is about $1500 or $125 a month.

Neither overtime nor the football pay may exist in the future and we would have ignored it on the origination side unless we had a letter from the employer stating that the pay would continue.

I’m normally very supportive of the banks, but in this case they have applied a dual standard to accounting for income. If they had followed the origination standard they would not have allowed any of the income. Even if they used the annual figures (converted to monthly), the seller would have been negative cash flowing and they would have approved the Short Sale.

Lose, lose, lose, lose. The seller has a foreclosure on his credit report, the bank has to foreclose and incur the costs to sell the property (likely for less than the Short Sale offer), the investor takes a greater loss, and the current buyer has wasted 3 months waiting on this to be approved.

This is the kind of thing that winds up in a lawsuit...

 

Source: http://www.thebranchteam.com/wordpress/2010/12/25/calculating-income-for-a-short-sale-is-there-a-dual-standard/

Photo licensed from iStockPhoto

It doesn't happen every day but every now and then someone will do, say, or write something that makes working Short Sales worth all the headache and extra work.

This morning a little package and note card were delivered to my office. When I picked it up I had no idea what it was, who delivered it, or the impact it would have on my day.

I opened the card and read the kind words. The card was attached to a small box with a necktie in it.

While I've saved 20 or more families from foreclosure this year alone, I've only received a thank-you card twice.

It's the simple handwritten acknowledgement that the work I do is appreciated that renews my faith in working Short Sales. I saved another family from foreclosure and they realized the extra work that goes into it without any additional compensation.

Tomorrow is a fresh day and I have more families to help!

Another short sale closed! The sellers avoided foreclosure, the buyers purchased a nice home at a discount, and the lender did not have the losses involved with a foreclosure.

Many people feel that the nation's economy rises and falls with the housing market. While this is often true, we believe the current housing crisis is a direct result of the economic downturn and massive job loss across the nation.

In the Short Sale community, the vast majority of homeowners did not get a bad loan or buy more house than they could afford; they're just good, hardworking Americans who fell on bad times.

All indicators point to Short Sales being on the real estate horizon for the foreseeable future, at least through 2012, and maybe longer. Industry experts see another wave of distressed homeowners surfacing when the once popular Pay Option Adjustable Rate Mortgages (ARMs) begin to adjust in the coming months.

These mortgages allowed the borrower to essentially "pick a payment" that fit their budget in order to get into the house they wanted to purchase. These loans have the potential to negatively amortize and the rate will adjust upward - it's just a matter of time. Pay Option ARMs were widely used in California and will begin adjusting soon.

We encourage homeowners across the United States to get educated on the options available should they become financially distressed. Short Sales are a great tool, providing relief to all parties.

Just remember to choose a REALTOR® with a proven Short Sale track record to negotiate on your behalf. Making the right choice can mean the world of difference to your financial future.

The easiest way to understand the Short Sale process is to think about qualifying for a mortgage.  When you apply for a mortgage, the lender reviews your recent bank statements, pay stubs, tax returns, etc. to determine your ability to repay the mortgage.  

When you apply for a Short Sale, it's like undoing a mortgage.  The lender will want to see the same documentation, along with a hardship letter, to determine your inability to repay the mortgage.  If you can do this successfully, the lender will likely approve a Short Sale.

Below is a list of documents that comprise a complete Short Sale package: 

•             Bank Statements for prior two months

•             Pay Stubs for prior 30 days

•             IRS Tax Returns for prior two years

•             Hardship Letter

•             Authorization to Release Information

•             Residential Real Estate Listing Agreement

•             Executed Purchase Contract

•             Lender Pre-approval Letter for Buyer or Proof of Funds for cash offers

•             Preliminary Settlement Statement

Some lenders may require other documents such as an Arms-Length Affidavit and a Short Sale Contract Addendum which they will provide.

If the package arrives for lender review incomplete, oftentimes the lender will just move the file aside and pick up the next one on the stack.  If the real estate agent isn't diligent about following up with the lender, your file could just sit on the lender's desk indefinitely with no action being taken.  In the mean time, you're moving ever closer to foreclosure.

The important thing is working with a REALTOR® who understands the process, knows the proper documents to gather, knows how to submit a complete package, and regularly follows up with the lender.

Based on The Field Guide to Short Sales. Copyright © 2010 by Tom Branch & Gina Branch. 

More than 80 percent of distressed homeowners who go into foreclosure have never contacted their lender or a real estate professional for help.  That's a staggering number when help and relief are available.

In this blog, part of a multi-part series, we'll discuss the different pit stops and road blocks along the Short Sale path; who the players are, what documents are required, and we'll give a cursory overview of how Short Sales work.  We'll explore these concepts in more detail as we apply them to real world situations throughout the series.

An important thing to understand about Short Sales is that the process is anything but "short."  The only thing "short" about a Short Sale is the payoff to the lender.  Whether you are a buyer or a seller, patience is your friend while the real estate professional negotiates the Short Sale with the lender.  Otherwise your hair will gray at an alarming rate.

The first thing the homeowner needs to prepare for is explaining the hardship.  Lenders do not care if you simply owe more now than the house is worth; they are looking for a valid hardship. You originally qualified for the mortgage and the lender is looking to see what has changed financially.  A decrease in the home's value alone is not qualification for a Short Sale.  So what is? 

Examples of valid financial hardships are: Loss of Job, Reduced Income, Mandatory Job Relocation, Business Failure, Death of a Spouse or Family Member, Severe Illness, Medical Bills, Divorce or Separation Payment Increase, Mortgage Adjustment, Insurance or Tax Increase, Military Service, Damage to Property, Too Much Debt, Inheritance, and Incarceration.

While not an all-inclusive list, it's a good start. If you're able to prove any of these hardships, the lender will seriously look at your case.

The easiest way to understand the Short Sale process is to think about qualifying for a mortgage.  When you apply for a mortgage, the lender reviews your recent bank statements, pay stubs, tax returns, etc. to determine your ability to repay the mortgage. 

When you apply for a Short Sale, it's like undoing a mortgage.  The lender will want to see the same documentation, along with a hardship letter, to determine your inability to repay the mortgage.  If you can do this successfully, the lender will likely approve a Short Sale.

In Anatomy of a Short Sale, Part 2, we'll look at what makes up a Short Sale Package.

Based on The Field Guide to Short Sales. Copyright © 2010 by Tom & Gina Branch.

Regardless of the reasons used to explain the current mortgage crisis in the United States, the grim reality is that more homeowners are in financial distress than at any other time in the history of residential real estate, according to the Distressed Property Institute. 

Hence, real estate Short Sales.  If you're not yet familiar with them, you soon will be.  They are reshaping the way lenders liquidate homes in default.  Historically, these homes would simply be foreclosed upon.  Today, the Short Sale offers a favorable alternative.

Nolo's Plain-English Law Dictionary defines a Short Sale as, "a sale of a house in which the proceeds fall short of what the owner still owes on the mortgage."  The lender decides that selling the house at a moderate loss results in less loss and expense for the bank than a foreclosure.  Both the lender and the borrower (homeowner) must consent to the Short Sale process.

You may think Short Sales were created in response to the housing market meltdown in 2007, but they have been around for years.  They have not been widely used in the past for two reasons:

- Until just recently, the lender could seek a deficiency judgment against the borrower for the amount of the loss.   Laws vary from State to State, but the lender was able to garnish wages, engage a collection agency to collect the debt, or seek other legal relief.

- The lender can elect to forgive all or a portion of the mortgage balance.  However, until 2007, the amount forgiven became taxable income.  The lender simply issued an IRS Form 1099 to the borrower.  The tax implications were dramatic.  If the lender forgave $100,000 and issued an IRS Form 1099 to the borrower for the same amount, the borrower potentially wound up owing the IRS tens of thousands of dollars depending on their tax rate.

The Mortgage Forgiveness Debt Relief Act was a major piece of legislation passed by Congress and signed into law by President George W. Bush.  The Act offered relief to homeowners, who, after a Short Sale, owed taxes on the forgiven mortgage debt.  This relief is great news!  Most homeowners no longer have to pay taxes on that forgiven debt.  The Act applied to debts forgiven between 2007 and 2009, but was extended through 2012 by the Economic Stabilization Act of 2008.

The Home Affordable Foreclosure Alternatives (HAFA) Program that went into effect April 5, 2010 is a huge step forward in improving the Short Sale process.  It requires borrowers to be fully released from future liability for their first mortgage debt, and, if a second lender receives an incentive under HAFA, that debt as well.  Lenders cannot ask for cash contributions or promissory notes from borrowers, and deficiency judgments are not allowed.  It also places timelines on the lenders to approve or deny Short Sale packages.

Why are these three pieces of legislation important?  They changed the Short Sale from a tool that was not widely used in the past to one we feel offers the best solution to distressed homeowners, lenders, purchasers, the neighborhoods where these homes are located, and the housing market in general.

With the economic downturn that began in 2008, many homeowners lost their jobs.  Others are going through a divorce or have had a spouse pass away.  Losing that income makes it very difficult, if not impossible, to keep up with mortgage payments. 

Most of the individuals or families we consult with would rather lose anything but their home.  They often stop paying credit card bills or even car notes in an effort to keep their home.  Eventually though, they just can't keep up with the mortgage.  That's where we can help with a Short Sale.  Sadly, 80% of Americans facing foreclosure have never picked up the phone and talked with their lender or a real estate professional.

Watch for Part 2 in the series where we will begin to explore The Anatomy of a Short Sale

Excerpt from The Field Guide to Short Sales. Copyright © 2010 by Tom & Gina Branch.

According to the Distressed Property Institute, more than 80 percent of distressed homeowners who go into foreclosure have never contacted their lender or a real estate professional for help. That's a staggering number when help and relief are available.

Without fail, our phone rings off the hook near the end of every month from desperate homeowners looking for help. After checking the local foreclosure lists, we often find that the house is already scheduled for foreclosure the following week. At that point, it's nearly impossible to get a Short Sale in place to stop it. If you are falling behind on your mortgage payments, don't wait! For best results, please seek help from a qualified Short Sale Professional right away.

The easiest way to understand the Short Sale process is to think about qualifying for a mortgage. When you apply for a mortgage, the lender reviews your recent bank statements, pay stubs, tax returns, etc. to determine your ability to repay the mortgage. When you apply for a Short Sale, it's like undoing a mortgage. The lender will want to see the same documentation, along with a hardship letter, to determine your inability to repay the mortgage. If you can do this successfully, the lender will likely approve a Short Sale.  But first things first.  None of this can happen until your house has been listed for sale and a workable contract for purchase has been received.

If you're having problems paying your mortgage, please do not wait to seek help and advice from a qualified professional.

I've been trying to finish up two short sales with a conventional lender.  I listed them in late October and executed contracts the first week of December.    

Each property had about $85k remaining on the mortgage.  Property values have plummeted in this particular part of town and the vacant homes in the area are vandalized, further driving down values.  The BPOs came in at $29k on each of them and we had cash contracts at $28,800. 

With the holidays, we got the files into the lender in January.  By the middle of February, we find out that both files were declined when the lender could not contact the seller. I checked and both the email address and phone number were correct. 

The second pass through was somewhat better and at least we got the files processed.  The bank does their BPOs and all looks well.  Last week we finally get a response on the first file.  While the lender is good to go, the PMI company wants the seller to hold a $20,000 note for 6 years. In 75-plus short sales I've never seen anyone ask for more than $5,000 from a seller and only had to get a seller to carry a note once.  The seller really did not want a foreclosure and offered them $5,000.  It took less than four hours for it to be declined.

By allowing the property to go into foreclosure they cost themselves about $20k which is not recoverable.  The lender will take back the property and evict the tenants.  Once vacant, the properties will be vandalized within days.  What's worth $29k today will be worth $19k so the lender will lose another $10k.

If they had moved forward with the short sale, the PMI company would have recovered $5k from the seller, the lender would have come out $10k better, and the neighborhood would be that much closer to stabilizing. 

The original note was $87,500 and the PMI was likely 25% or $21,875.  The seller has been paying the premium for 5 years.  It appears the PMI company wants come out even or ahead on this sale.

Are PMI companies the new short sale train wreck?

It may seem counterintuitive for a lender to go along with a Short Sale since they are legally entitled to pursue the full balance of the loan. Yet, more and more lenders are approving Short Sales.

Lenders are painfully aware of just how bad the current mortgage crisis and resulting foreclosures are. They know the disturbing reality is that a large number of distressed borrowers will helps the lender look good on paper since the house never gets listed as an actual foreclosure. Second, while the lender is taking a loss, the loss is far less than it would be in a foreclosure situation.

On a recent industry call with a major lender, they disclosed that the average recovery in a Short Sale is 60 cents on the dollar. Now before you get all excited that you can buy a property for 60 cents on the dollar, let us explain how they arrive at that number.

Let's assume that a borrower owes $200,000 on a property. The market value is set at $150,000 by the appraisal or Broker Price Opinion and the property sells for $140,000, which is 94 percent of market value. The closing costs come to $14,000, leaving the lender a net of $126,000. $126,000 is 63 percent of the $200,000 loan balance.

With a foreclosure, the lender only recovers about 30 cents on the dollar. Which would you choose? The numbers make this a no-brainer.

The other issue with foreclosures is the impact they have on neighborhoods. If a neighborhood experiences a number of foreclosures, the property values in that neighborhood drop as well. Why is this important to the lender? They may be holding other mortgages in the same neighborhood, and a foreclosure drives down the value of those houses as well. They're poisoning their own portfolio!

Bottom line is if the numbers work for the lender, they are very likely to approve a Short Sale. It's the lesser of two evils when compared with foreclosure.

I'm often asked if short sales are good for the housing market.   Of course "good" is a relative term.  The best market environment would include no distressed sales of any kind-no foreclosures, no short sales, and no deeds in lieu-just regular sales with mortgages paid in full.  Conversely, a housing market riddled with distressed sales is a nightmare on Main Street. 

While distressed sales were not a large part of the landscape in previous years, we're seeing more and more of them these days.  Some blame this on sub-prime or other risky mortgages.  While each geographic region is different, most of my distressed sale listings are a result of the downturn in the economy, not from risky loans.  I've talked to many homeowners who have exhausted their savings trying to keep their homes after job loss.  Others are not so "fortunate" to have large cash reserves.  They list their homes in hopes of selling, but find that decreasing values make it impossible to sell and have the funds needed to close. They eventually wind up in default and lose their home to foreclosure.    It's a vicious cycle.

The cycle does have some roots in sub-prime and other risky loans.  These loans foreclose at a higher rate and when the homes sell at foreclosure prices, they impact values in the area.  The mortgage industry reacted to this by requiring appraisers to use a smaller window of comparable sales and to give greater weight to distressed sales. 

Adding to the issue was the creation of the Home Valuation Code of Conduct (HVCC).  HVCC was intended to take loan originators out of the appraisal loop by having the appraiser assigned from a random pool.  Sound idea, poor execution.  Appraisal Management Companies (AMCs) were set up to manage the appraiser pools.  The AMCs charge the consumer a fee for the appraisal and then seek appraisers to perform the work.  In an effort to drive up their own profitability, the AMCs often assign the work to the low-bidding appraiser.  Many of the more experienced and qualified appraisers refuse to work for the reduced fees offered by the AMCs.  As a result, the appraisal quality suffers.  Many desperate sellers often reduce their home prices just to complete the sale.  These sales are then used as comparables for the next appraisal in the area. 

So back to the original question-are short sales good for the housing market?  Short sales are clearly better than foreclosures for all parties.  Sellers take less of a hit to their credit scores and are generally relieved of debt liability.  Buyers purchase homes at discounted prices.  While not priced as low as foreclosures, the houses are usually in better condition and have not sat vacant.  Lenders get to clear the mortgage and asset off the books and take less of a loss than they would if they had to foreclose.  Finally, home values in the area are not as severely impacted by short sales as they would be by foreclosures.  Research done by Jack Harris (Bubbles, Buying, and Bank-Owned Sales, Jack C. Harris, Published in Tierra Grande, October 2009), a former research economist with the Real Estate Center at Texas A&M University, supports these conclusions.