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I got a chance to watch a couple of agents go at it with each other in a real estate forum trying to answer a question about doing short sales. It was interesting, to say the least. Besides the two main agents who proclaimed themselves the “experts” and hijacked the conversation, there were a few others who chimed in and made some comments. But the question was never specifically answered.
The question posed was whether a lender will approve a short sale if the borrower had assets. He didn’t provide a lot of detail but wanted to either do a short sale or let his home go into foreclosure and he specifically asked not to get into a debate about the ethics in not paying his mortgage.
The argument or “discussion” in the forum quickly evolved into a big debate about the ethics of what people considered to be strategic default. One expert proclaimed it was morally and ethically wrong to engage in strategic default and the lenders would not go for it. The other expert proclaimed morality and ethics had nothing to do with his decision and it was more about money.
As a San Jose Short Sale Agent, I tend to agree with the latter expert. When you are dealing with short sales with lenders, the department you deal with is called Loss Mitigation. Let me say it again: Loss Mitigation. Their job description is patently obvious: it is to mitigate or lessen the loss for the lenders.
Yes, there obviously are moral and ethical implications of not paying your mortgage when you have the financial ability to do so. I firmly believe you should pay when you can and live up to your contractual obligations. However, the question posed specifically asked not to judge the ethical implications but sought opinion as to whether a lender would agree to a short sale when the borrower stopped paying and was headed towards foreclosure.
There is no definite yes or no answer in these matters as the answer lies in the details. It has a lot to do with how much assets the borrower has or does not have. However, if the lender is faced between foreclosure and short sale, from my experience, the loss mitigation department chooses short sales over foreclosures. At the end of the day, the primary decision will be about which method loses less money for the lenders, then, other factors like ethics and mortality can be entertained.
Why do you think big lenders like Chase and Wells Fargo are offering people up to $35,000 to do a short sale without even verifying their financial information? HAFA recently amended its rules to state that servicers are no longer required to verify any financial information, but only to collect signed hardship letters. Do these actions by large lenders and servicers sound like they are overly concerned about the ethical or moral issues surrounding foreclosures?
I can’t speak for other States, but in California, the recent changes in the law means if the lenders agree to permit a short sale, then the issues about deficiencies become null and void. Once a short sale has been approved, the seller can walk away clean without looking over their shoulders. Yet, another procedure that make completing a short sale more effective and efficient and preferable to foreclosure. It’s all about money; if the institutions can make more money foreclosing, they will certainly choose that method, but everything recently is geared towards choosing short sales. Yes, the lenders hate strategic defaulters, but they hate losing money even more.
So back to the question about would a lender approve a short sale if the borrower has assets? It would depend on how much assets the borrower had and whether foreclosure would yield more money for the lender or a short sale.
It is this San Jose Short Sale Agent’s opinion that HAFA and the new California anti deficiency law make the time ideal now for homeowners who cannot make their mortgage payments solve their problem without having to worry about extended obligations to the lenders after the sale. If a homeowner has made the difficult decision that letting go of the home is the best solution available for their current situation, here are the top 3 reasons or benefits* available to them.
1. HAFA allows the proceeds of the sale to be used to pay off all of the parties including commissions to the realtors and a $3000 relocation fee to the homeowners and possibly $6000 to pay off a second mortgage. So there is potentially no out of pocket costs to the homeowner to market and sell the home. A big burden off the minds of those who are not familiar with the process.
2. One of the tactics the second lien holders tried to use to extract extra money from the homeowners was approving the short sale but refusing to release the homeowner of the deficiency obligation. Unless you had an astute Realtor who was aware of this trick and refused to go forth without first obtaining a waiver of the deficiency, homeowners were often stuck owing money to the lenders after they sold off the house. NO MORE. The new law says once you permit a short sale approval, the lenders cannot try to retain their deficiency claims.
3. Finally, until the end of 2012, Mortgage Debt Relief Act, relieves the homeowners of the capital gains tax obligations of their mortgage debt being forgiven. Homeowners were often blind-sided by the notion of the forgiven debt being considered capital gains and having to pay taxes on it. Well, until the end of 2012, this potentially huge tax obligation is waived. This could be tens of thousands of dollars. This is huge.
For those who have made up their mind that they need to get out from under their mortgage obligations, the situation is now ideal. All of the potential hurdles that lay in front of them have now been pushed down. The only thing that may be problematic is if the homeowner is in a state of shock or denial and unable to take action, and forcing the lenders to take action for them.
These are general overviews, for specific details, please contact us.
Please always deal with people who have actual experience and have data to prove they have successfully completed and closed multiple short sales. Do your own research, be a smart consumer. There is much at risk if a short sale goes awry.
*These are my opinions. I am not an attorney or a tax professional, so please confirm with them first before making your decision.
Woo Hoo! SB 458 is now the law in California! This means the second mortgage holder must relieve a homeowner of any deficiency claim if they approve a short sale. SB 931 made the same type of deficiency waiver mandatory for first mortgage holders, but the second mortgages were exempt. This led the seconds to put a stranglehold on many homeowners, making unreasonable demands on distressed homeowners. NO MORE. Short Sales mean paid in full.
As a San Jose Short Sale Agent, I believe this announcement is one of the most significant in the Short Sale process because it permits homeowners to simply walk away after the sale. I spent many many hours negotiating with seconds to permit the homeowners to walk away without paying anything or paying as little as possible. The passage of this new law eliminates that whole unpleasant process.
Kudos to Governor Brown for having the compassion to help distressed homeowners. Finally, some protection for the homeowners and not just for the large banks. We must allow short sales to process quicker and more efficiently, rather than drag on because of the seconds want to squeeze more blood out of homeowners who already suffered from negative equity and are losing their homes. This new law makes it easier California homeowners to do a short sale now and avoid foreclosure because that little sticky issue with the deficiency claim is preserved after a foreclosure sale. Now the reason for doing a short sale over a foreclosure becomes infinitely more clear.
CALIFORNIA ASSOCIATION OF REALTORS® applauds Gov. Brown on signing SB 458 into law
LOS ANGELES (July 15) – The CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) applauds Gov. Jerry Brown on signing SB 458 (Corbett) into law. SB 458 extends the protections of SB 931 (2010), to ensure that any lender that agrees to a short sale must accept the agreed upon short sale payment as payment in full of the outstanding balance of all loans.
Under previous law (SB 931 of 2010), a first mortgage holder could accept an agreed-upon short sale payment as full payment for the outstanding balance of the loan, but unfortunately, the rule did not apply to junior lien holders. SB 458 extends the protections of SB 931 to junior liens.
“The signing of this bill is a victory for California homeowners who have been forced to short sell their home only to find that the lender will pursue them after the short sale closes, and demand an additional payment to subsidize the difference,” said C.A.R. President Beth L. Peerce. “SB 458 brings closure and certainty to the short sale process and ensures that once a lender has agreed to accept a short sale payment on a property, all lienholders – those in first position and in junior positions – will consider the outstanding balance as paid in full and the homeowner will not be held responsible for any additional payments on the property.”
SB 458 contains an urgency clause making it effective upon signing.
Ask a San Jose Short Sale Agent like myself what the biggest potential headache in trying to get a short sale completed is, and I will bet the single most repeated response is the impatient buyer walking out in the middle of a transaction. There is nothing as troublesome as working for weeks and months to convince a lender that the perfect buyer will close escrow and stop the foreclosure process, only to have that heroic buyer say they are moving on to another property or they are just tired of the waiting and want to take a break.
We listing agents try to overcome this havoc by having back-up buyers in place, however, the short sale apporval system was designed so that if the original buyer backs out, even if you had a back-up buyer in place, you would have to re-start the entire process. Most of the time, you will be assigned to a different negotiator and the whole process which could have taken months, start over from zero. And even if you had a willing back-up buyer who was extrememly excited, once they had been in back-up position for several weeks or months, they also lose interest or go out and buy something else.
The problem is the system, that triggers a “re-boot” if you will, when the buyer walked away. The underlying hardship which caused the property to become distressed did not change; the verification of the financial condition did not change; the market condition did not change; the only thing that changed is the buyer and sometimes you can get the a buyer willing to pay the same amount. So why have the whole process repeat? There is no rational purpose in starting from zero when a lot of the other procedures would have progressed.
Well, today Bank of America announced something which breaks from this ridiculous tradition and permits a back-up buyer to slide right in without having to start the whole process over. Kudos to Bank of America. They are definitely going in the right direction and are living up to their declaration more than a year ago on their stance on short sales and whom they consider to be the clients in the process. They are focusing on making the process go smoother, not just follow the trend.
As Bank of America is utilizing Equator to accomplish this, hopefully the other lenders and servicers who use the same system will follow suit and also do the rational thing.
BofA Announcement
The internet is great for getting information quickly. I love the fact that I can go to one of the search engines and type up a questions and get a list of responses which I can quickly look over. However, there is so much unfiltered information out there; sometimes you become more confused about the topic after reading a lot of conflicting information.
This obviously applies, and perhaps more so, in the world of Short Sales and Foreclosures. There seems to be so much incorrect and half correct and sometimes completely wrong floating around out there.
The one that I hear frequently and had to deal with today was the one about HAFA. There seems to be a consensus out there that HAFA slows down the short sale process.
I’ve heard of this before and interestingly I heard it from a negotiator with Chase who flat out told me that HAFA will tack on 90-120 days to the overall process (I didn’t bother grilling her on how she arrived at these statistics). I’ve often heard Realtors on the buy side of my transactions tell me that they are not interested if the sellers were going for a HAFA short sale because it would add months to the process. I try to explain that is not a universal truth, and that things are different on a case by case basis; but some listen most don’t. To combat these issues, revisions were made to HAFA as of February 2011, one of the key revisions specifically states that a request or application for HAFA (with an executed contract) MUST BE responded to within 30 days. New information takes time to filter downward.
I just received an approval from Chase today. And it was a huge surprise for the buyer’s agent. As you can see from the filing of the request to the issuance of the approval letter, it took 12 days (within the revised 30 days requirement and not 120 days as claimed by the negotiator). The Request was made on June 2, 2011 and the approval letter was generated on June 14, 2011. Granted this particular one only involved one loan so there was no second to deal with, but it still took less than two weeks.
This particular agent repeatedly asked me who was the third party handling the HAFA, but I always assumed he was asking me who was servicing the loan. And as such, I never paid too much attention to his query about the HAFA third party.
When I emailed him a copy of the approval letter, he was obviously happy about the quick turn around time but again asked me about the third party handling HAFA. This time I asked him to what he was referring?
This Realtor was under the impression that HAFA was a government program, so there was a central clearing house where all HAFA files went and that a third party was somehow responsible for getting the approval from HAFA. In our case, it was his belief that the Chase negotiator would simply collect the documents and then forward everything to a “HAFA negotiator” who would then take months to get the approval from this entity called HAFA and then refer the approval or denial back to the Chase negotiator.
Now I understood why he thought simply doing a HAFA short sale would delay the approval process by several months. (Now I appreciated him taking my word and sticking out the waiting period). I had to explain to this seasoned Realtor that HAFA is not a thing or a place which de-toured the short sale process; rather, it was just another process or a set of guidelines by which the participating lenders all agreed to abide to actually shorten the process; not cause further delay. He seemed surprised to learn this.
So what was my take-away from this experience? There is a lot of mis-information regarding HAFA and other things associated with short sales and distressed properties out there. Even the negotiators inside the banks are under the false belief that HAFA automatically means there will be a delay in the process and are not up to date on changes to the program. This is quite ironic in that HAFA was designed to expedite the short sale process; but the rumor has it complicating and delaying the process instead.
HAFA could take more time once the reponse has been granted but need more information or denied and must pursue a traditional short sale, but from my experience, it has to do with number of issues such as: not using the correct forms to initiate the request, or not providing sufficient documentations requested, not responding to requests in a timely manner, or a myriad of other reasons. After all, this is a new program which is only one year old, so there is the learning process by which everyone subjected to endure some discomfort. But one thing is certain: simply by requesting a HAFA short sale DOES NOT AUTOMATICALLY cause months of delay.
Don’t buy into the Urban Legend and continue to feed it more misinformation or half-truths.
More and more people are talking about Strategic Default and the more people talk about it, the more nervous and angry the lenders become. This is a situation where the homeowner has the financial wherewithal to make the payments, but simply choose not to. The homeowners are choosing to go into foreclosure voluntarily, presumably because they came to the conclusion it was better than keeping the property and paying the mortgage.
Contrary to popular belief floating out there in the internet world, there are consequences to walking away. And the lenders are trying to make it more onerous on those who they identify as strategic defaulters.
The single biggest consequence to homeowners is the harm to their ability to borrow money in the future. Yes, the homeowners can walk away and let the house foreclose, but that does not mean that the lenders will take it lying down. Once the homes foreclose, the homeowners will have to answer “Yes” on their future mortgage applications (form 1003) or other loan applications when asked if they had ever been a party to foreclosure. These defaulters will be tagged as greater risks, so the cost of obtaining any type of consumer loan products will be higher with this item tagged on their credit histories and it will take longer to get this derogatory item off their credit reports. Huge opportunity costs involved here.
Another cost is the deficiency claim that the lenders will most likely preserve. In California, if the homeowners have two loans, the junior lien holder will most likely preserve their deficiency claim after a foreclosure. Because the homeowner simply walked away from the loan, the lenders will preserve their claim to the loss they endured.
Effects on future employments is another consequence to bear in mind. More and more employers are doing checks on credit reports prior to hiring new employees. In these days of 10%+ unemployment rate, these homeowners do not want to give the employers any reason to gloss over their resumes and pass along to the next applicant.
Homeowners should not simply walk away from their homes. Seek out other alternatives.
Finally, some news that paints a true picture of how the Financial Crisis has made many decent homeowners unfairly portrayed as dead-beats. As a San Jose Short Sale Agent, I see many many people who through circumstances outside of their control, fall into economic catastrophes from which they are unable to recover. The ones I see most are unemployment or reduction in income, negative equity preventing homeowners from getting better interest rates when their ARMs reset, and unforeseen medical bills.
People who fell so far behind and are facing foreclosure or seeking short sale to avoid foreclosure are generally not bad people (of course there are those who try to work the system), they just suffered some tragic economic hardships. Most of these clients struggle for a long time before coming to the conclusion they cannot pay their mortgages. And I believe the TransUnion finding is finally vindicating many of them from being incorrectly labled as dead-beats.
Foreclosures share of California sales inches down in April « HousingWire
According to Dataquick, in April 2011, distressed properties accounted for 54% of all sales. Mind you that your local neighborhood numbers will differ, but this gives an insight into where the market is headed. Because California still has a higher than the National average in unemployment rate of 12.3%, versus 9.0% for the nation, people who are having trouble meeting their mortgage obligations will continue to present itself as a serious problem. Silicon Valley’s unemployment rate was 10.3% in Santa Clara County and 8.4% in San Mateo County.
The direct correlation between unemployment rate vs. foreclosure is quite obvious. Until we can address this issue of 12.3% of our fellow Californians who want to work but cannot find a job, we cannot resolve the housing crisis and start discussing the prospect of increase in housing prices.
The responsibility of the listing agent does not change because we are dealing with Short Sales. We still owe a fiduciary duty of “utmost care, integrity, honesty and loyalty in our dealings with the seller.” What does fiduciary duty mean: simply put, I place my client’s interest over my own. I would argue this is more so in short sales because of the very real possibility our actions or inactions will directly impact whether our client’s homes get foreclosed or not.
Unfortunately, some agents do not seem to understand this serious duty and obligation by which we are contractually obligated. Because they hear that short sale transactions take a long time to close, they only see hard work and long close time ahead and do not engage in “utmost care” as prescribed in the Agency Relationship Disclosure. (See Attached)
This attitude sometimes leads to simply accepting any offer and trying to push it through, rather than doing more due diligence to insure that you accept an offer that has a high probability of being approved. You don’t have to accept the first offer that comes in.
Let me explain. I got an offer where the buyer was trying to use a Veterans Affair (VA) loan. One challenge with a VA loan when trying to buy a short sale is that there are strict requirements: such as requiring the section 1 work be cleared in order for the loan to fund. However, the fees associated with such clearance like the pest report and the actual corrective work cannot be paid by the borrower. If the buyer cannot pay, the logical conclusion is that the seller should pay.
The problem is that in a short sale situation, the seller does not have money to pay for inspections and certainly cannot commit to making repairs based on those reports. Short Sellers are ideally looking for buyers who have the resources to pick up some of the fees they cannot afford to pay.
In my situation, there were contingencies requiring a pest inspection to be ordered and if any section 1 items were identified, they were to be corrected at the seller’s expense. These could be major issues for my client; we challenged these contingencies. We eventually decided to reject this particular VA offer.
The VA buyer returned a couple of days later with a second offer. This time they simply stated in the terms that the seller would not be responsible for the cost of ordering the pest inspection and the cost of the section 1 items that would result from said inspection.
There was a problem: simply stating the seller would not be responsible for these costs did not means they were no longer an issue. The pre-condition of a VA loan is that the buyer is prohibited from paying for these two items. I was speaking with the VA buyer’s loan broker who was trying to explain to me that there was a way to get around this issue; that he was an expert in VA loans and had done dozens of these loans with no problems.
Neither my client nor I was interested in hearing about work-arounds or his past successes. My only interest was making sure I was not going to get in to contract with this particular buyer unless and until I was certain there would not be any issues with this loan funding in the near future. I wanted the buyer to be pre-qualified with my own trusted lender if we were going to talk further with this VA buyer. Both he and his client’s agent were a bit upset telling me other short sale listing agents had no issue with these types of terms nor would they go so far as to have the buyer needlessly pre-approved again and refusing to accept an otherwise good offer.
Apparently the buyer liked the house enough to contact my lender to find out what he needed to do. My lender called me to inform me not to worry about focusing on whether there were ways to side step the issue of the inspection fee and section 1 clearance; this buyer did not qualify for the VA loan. His conclusion was that the other loan broker pre-approved this buyer without reviewing his financials; there were too many red flags to justify a pre-approval letter if someone had gone over the financial documentation.
If I simply accepted this buyer and his agent’s claim that they could simply waive the pest inspection fee and the subsequent section 1 work, I would never have discovered that this buyer did not qualify for the VA loan he wanted to use. My seller would have received the approval from the lenders, only to have this buyer back out because he could not get the loan he depended on. This is a common story in the Short Sale world and I was not going to let me client suffer through such a scenario. It was much better to take a week or so to do my due diligence before getting into contract with this buyer; at least the result was not harmful to my seller.
Now we are speaking with other buyers who are financially capable of buying this home and have no contingencies which may be detrimental to my client’s, are working with real estate agents and loan brokers who have done their own due diligence about their client’s ability to buy a home.
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