Chairman of the House Financial Services Committee calls Second Lien Write-downs
Ask anyone who does a lot of short sales about what is becoming a troubling trend in the industry and my guess is a majority of them will bring up the fact that the junior lien holder (or the second mortgage) is refusing to cooperate and demanding unreasonable amounts of money for them to agree to a short sale; or some of them even asking for illegal kickbacks in the form of payments made without being disclosed on the HUD1.
What does all of this mean? Well, the junior liens have been receiving pennies out of the dollar, sometimes getting paid $3,000 on a loan with a balance of $100,000. Yes, the loss is huge, but the junior lien holder has very little alternative, as a foreclosure means their loan is wiped out. Hence, the senior loans have been successful in pressuring the juniors to take the lesser of the two evils, pennies or nothing.
Many junior lien holders are not taking this lying down now. They have figured out they can combat the pressure from the senior liens by refusing to agree to the short sale. They are holding out until they can negotiate better terms. They are simply saying to the senior lien holders: “if we don’t get a better offer, we won’t let the short sale happen; you will be forced to into foreclosure and your net will be much lower in a foreclosure sale than a short sale.” They are simply playing a game of chicken. Remember, if there are two loans in a short sale, both of the lien holders have to agree to permit the sale to proceed.
Or the other tactic is, some junior liens are demanding that the sellers pay them a settlement fee outside of escrow so that it will not show up on the HUD1. A HUD1 discloses to all parties who is getting paid what. By making a payment outside of the HUD1, the junior lien holder is getting paid without the senior lien holder finding out. This is illegal, by the way; mortgage fraud, a Federal Offense from what I am told.
We all understand what the junior lien holder is trying to accomplish, but the problem is that in their game of chicken, the majority of the parties are suffering. We have one party who wants the property; the other party who wants to sell and move on with their lives and get out from under the banks; the senior lien holder who is also taking a huge loss, but because the junior lien holder, who knows they can get nothing if they force the transaction into foreclosure is hell-bent on forcing a foreclosure because they want to get a little bit more: even by illegal means. They pressure the sellers to such an extent, the sellers are sometimes choosing to accept foreclosure rather than to give into what is being demanded. Remember, the collective goal right now for the country is to reduce foreclosures, not to encourage it.
Because this problem is becoming more common and have reached critical mass, Barney Frank, the Chairman of the House Financial Services Committee has sent out a petition to the largest banks to voluntarily take action to permit second lien write downs; or else.
The same banks who are junior lien holders are also senior lien holders on other loans, so in the grand scheme of things, they will benefit if they prevent foreclosures. So what are these guys doing? They are hurting their own bottom line and taking everyone else down with them; it makes no sense.
An emotional response to a foreclosure notice
It is quite common to hear about the emotional responses of homeowners facing foreclosure. I have personally seen many bank owned homes (REOs) where all of the cabinets were torn off the walls, every single door knobs was stolen, walls were peppered with holes and carpets were soiled with who knows what…..
I suppose these were often the emotional responses of perfectly rational homeowners having irrational responses upon learning that their lenders would force their family out of their homes and try to sell their homes at auctions. I imagine I would not react in such drastic ways; but who knows how one would react unless one were in the other person’s shoes?
Well, here is a homeowner’s reaction to a foreclosure notice………
Foreclosing on a property the bank did not own.
Now I’ve heard everything. Can you imagine a lender accidentally foreclosing on your home and throwing all of your belongings out on the streets? Imagine how embarrassing and shocking that would be for you if you paid for your home in cash and owed nothing on it. Imagine further that you informed the bank’s agent and said agent repeatedly informed the bank that they had the wrong house. The bank foreclosed on the property it did not own anyway.
Well it sounds unbelieveable, but leave it to Bank of America to foreclose on a house it did not hold a note on.
What is your plan to stop your foreclosure?
“What is your plan?” When I ask this question, the typical response is something in the order of: “What plan? I didn’t know you needed one.”
I ask this question of my buyers who want to get that “deal” and I also ask that of my sellers who want to sell quickly with no hassle and get top dollars. I use the analogy that a real estate related plan is like having a well platted map before going on a long trip (the analogy still works in this day of the GPS). You may eventually get there, but if you have a well organized plan or a map, you can save tremendous amounts of time, money and heartache and give yourself the opportunity to enjoy the trip rather than wasting time sweating the details on the fly. In Real Estate, you don’t get that deal or you don’t get that multiple offer scenario by accident; there is always lots of work done beforehand.
Most of us would not consider taking our family to Disneyland or Legoland or wherever our destination is, without having some sort of itinerary. Yet, in these difficult times, when it is now so common for homeowners to be struggling to make their mortgage payments and who are facing the very real possibility of foreclosures, homeowners try to “wing it” and approach this very long and arduous trip without any sort of planning or assistance. Almost hoping that foreclosure can be avoided by accident or hoping to talk to someone who will understand and sympathize with their plight and make things stop. Unfortunately, that rarely happens.
Foreclosure is a process driven activity, which means activities are laid out in sequential order. In order to successfully fight a foreclosure, you must understand the process and have a plan to fight the lender and stop the sequence so the final step – foreclosure – is not achieved.
Fighting foreclosure is not something I can write about in a few paragraphs in this blog; as you can imagine, it is much more complex and the situations and hardships differ from homeowner to homeowner. However, I do have a report here which will explain simply and provide information so that the distressed home owner can take action to stop the foreclosure process and learn about the foreclosure prevention options that are available to them. Some sort of action must take place; inaction will not stop, but in most cases will accelerate the foreclosure process.
Client References – ask for them
I am amazed by how surprised prospects are when I advise them I will provide references from past clients who have used my services, particularly, short sale clients. Yes, in the case of short sale clients, it is understandable that clients do not want to bring up and discuss the unpleasant hardships of the past with complete strangers. But as consumers of services you should have the right to see what you agree to buy.
Unfortunately in our changing business environment, there are too many people out there claiming to be “experts” in certain areas of our profession without providing any proof of their adequacy, let alone expertise. One simply is not an expert because one declares oneself as such.
Under normal circumstances, selling a house is important but does not have long term implications if the house cannot be sold. It simply means the homeowners stay in the house until a better time to sell comes along. However, in a foreclosure situation, if the house cannot be sold or if the terms cannot be negotiated with the lenders to get the approval for the sale, people not only lose houses, but they lose that important sense of “home” and go through an emotional roller coaster ride that comes along with being foreclosed. Houses can be replaced, but the emotional scars can remain for a long time……
Ask for references. When you are talking to a Realtor, you are essentially interviewing him/her for a job. And what job interview does not involve providing references from past employers? If a Realtor does a good job for their clients, it is not difficult to get the latter to share their experiences with potential clients; as a matter of facts some become your evangelists if they had a good experience with you.
Some Realtors belong to an organization that rates the service via independent surveys and post those scores on the web. I belong to the QSC organization because I believe in its philosophy and strive to provide the best service I am able to provide and believe if I were on the opposite side, I would want to know how that person’s past clients rated their service before engaging them. These are difficult times and you should get the best quality service available out there. After all, don’t you deserve it?
Foreclosure: A family saga
Unfortunately, foreclosures are no longer reserved for the sub prime borrowers. Now it has spread to the mainstream. All too often, it takes a few of bad months before the borrower falls so far behind, they are unable to catch up.
Besides job loss, catastrophic medical expenses is another common reason why homeowners are unable to make their mortgage payments. This is a why we should have health care overhaul to make sure people are not forced into foreclosures or bankruptcies because of medical expenses. The saga this family is living is being repeated by many other families here in Silicon Valley.
There are better options than foreclosure
Sometimes it breaks my heart to hear stories about homeowners who are so mis-informed about this whole foreclosure phenomenon, they simply give up and decide they will let the banks foreclose on them without even exploring the possibility of alternative solutions like a short sale. With all of the discussions of foreclosures and short sales and loan modification, etc….. in the news media, it shocks me that so many homeowners believe that if they were turned down for a loan modification, their only other alternative is a foreclosure. Not realizing, banks don’t want to foreclose either.
These home owners are so emotionally drained and have beaten themselves up so much about being in their current situation, they almost seem to want to punish themselves.
I had such a meeting with clients yesterday. This lovely couple was so emotionally drained, they simply resigned themselves to the notion that foreclosure was the only avenue available to them. They were not even going to explore short sale as an option. The wife had heard of me through mutual friends and decided to call me just to get some facts to see if there were less invasive methods available to their family. I explained to them that unemployment and negative monthly expenditure are viable causes for hardship and the fact their loans were still original purchase money made them ideal candidates for a short sale. Besides, they had a nice home, which would not be too difficult to sell.
We would try to lessen the impact on their credit and give them a chance to qualify for a Fannie Mae loan in 2 years; and more importantly, give them a better chance in future employment by not having FORECLOSURE show up on their credit reports and possibly get them disqualified as candidates for employment since more and more employers are now doing credit checks as a part of background checks.
After hearing my plan for their home and how to deal with the lenders, I could see the stress leave and smiles appear on their faces. They thanked me repeatedly for stopping them from falling into the foreclosure trap and giving them a chance at a better method and for returning dignity back to them.
A day like yesterday is a perfect day for me, because I know I am helping people and making a difference in their lives.
Foreclosure is not a viable option. There are better ways both for the borrowers and the lenders.
The mystery: why are foreclosure notices increasing but actual foreclosures decreasing in Santa Clara County?
The above article mentions an interesting phenomenon that occurred last month in Santa Clara County’s foreclosure market. Between August and September of 2009, the actual number of homes being foreclosed (either sold at auction or returned to the bank as REO properties) decreased, while filings of Notices of Default and Notices of Trustee Sale remained consistent.
“Lenders foreclosed on 415 homes last month, down about 5 percent from August.….. Of these, 109 homes were sold at auction to third parties and the remaining 306 were taken back by the lender. …… At the same time, lenders filed 1,257 notices of default, the first step in the foreclosure process, and 1,027 notices of trustee sale, the final step before actual sale of a foreclosed home. The numbers for August were almost the same.”
The author doesn’t really reach a conclusion but leaves us wondering as to why this may be happening.
Well, I will pull data from the MLS in an attempt to interpret what may be happening in our back yard.
But first, it is important to understand the process of foreclosure. Simply put, when a person receives a Notice of Default from the lender, they have 90 days to cure the default, or a Notice of Trustee Sale will follow, scheduling a date and time by when the property will be sold at the County Courthouse. By the Notice of Trustee Sale date, if the delinquent amount, plus penalty and interest is not cured, then it is sold. But there is a wonderful vehicle which by now everyone has heard, which can stop that foreclosure if executed properly: the Short Sale.
If, from the time that the lender issues the Notice of Default and before the auction date, an experienced San Jose Short Sale Agent can bring in a qualified buyer who is willing to take the property off the sellers’ hands and if the lender agrees to the terms of the sale, then that foreclosure process is stopped with the closing of escrow on the property in question.
What the article did not factor into the equation were approved short sales that closed escrow. I pulled data about Short Sales that actually closed during the months of August and September.
For the Month of August 2009, in Santa Clara County 187 properties identified as being short sales (both single family and condo/townhomes) successfully closed escrow (Fig A). But in September 2009, 251 properties identified as short sales closed escrow (Fig B). I’m not a mathematician, but by my estimate, that is an increase of 25% from August to September of short sales approved by lenders. And more than sufficient to explain the disparity as to why the notices are increasing but why the final result is decreasing.
So let’s look at the complete picture in September 2009 in Santa Clara County. Over 2000 notices starting the foreclosure process goes out to homeowners. Of those, approximately 1000 attempt a short sale and 251 of them are successful in preventing a short sale (Campbell Communication conducted a survey in February 2009 of Realtors and concluded only 23% of short sale are successfully completed). Of the 750 who were unsuccessful in their short sales, 415 of them actually get foreclosed (109 of them lose their homes to auction and another 306 of them are evicted and the lender takes over their homes). That leaves 1335 people still stuck in foreclosure limbo — the original 1000 who chose not to do a short sale and the remaining 335 who were unsuccessful with their short sales but have not gotten around to being foreclosed yet — wondering when they will be evicted. And these homes that have not been foreclosed or sold through short sales are often referred to as the shadow inventory of bank properties. Depending on how this inventory will be released, it could have a tremendous impact of flooding the market with cheap, bargain priced bank owned (REO) properties. Let’s hope the lenders will release them gradually, rather than all at once or, even bettter, allow more of them to be sold as short sales so they can stop the influx of undervalued properties from hitting the market place and bringing down home values.
Fig A . August 2009
Fig B. September 2009
Greed run amok: a short sale story
I had a listing where a friend referred a friend whose family was going through financial difficulty and could not pay their mortgage. As a San Jose Short Sale agent, I agreed to work on their short sale in an effort at least to prevent the non-payment and the probable foreclosure from greatly affecting their family business. I explained exactly what I would do and how we would go about getting a good offer so as to slow down the foreclosure process and negotiate with the lenders for a mutually beneficial sale. They were genuinely thankful and wanted to do everything they could to help me achieve our mutual goal.
Two weeks later, I get a call from the father saying they wanted to cancel the listing because they wanted to try a loan modification. I had seen all of their financial statements, no lending institution was going to cut their interest rate or forgive portions of their principal – which was what he says he was trying to get. I didn’t want to be the one to splash cold water in his face; so I said I would withdraw the listing while he tried to get a loan modification.
Three weeks later, I get another call from the father. He wanted me to cancel the listing rather than withdraw the property from the market. Why I asked? He said that the loan modification person told him that in order for them to take on the loan modification project, they needed to sign a listing agreement. I was supposedly preventing him from getting a loan modification…… What could I say to that? He sounded so convinced that he would get a loan modification, I didn’t have the heart to tell him with their decrease in income, they were not going to get anything meaningful modified.
I knew a legitimate loan modification organization had no reason to sign a listing agreement. Why would they? All they were trying to do was get the loan re-worked; they had no need to list the house for sale for that purpose. I knew something was not right; but this was a friend of a friend, I didn’t want to appear to be standing in his way of getting at that loan modification in the sky.
Two weeks later, I check and the house is listed as a short sale with a Realtor and not some loan modification company. I sensed something was not right, but I wasn’t going to go back and demand an explanation. I just wrote it off as someone who must have found someone they felt would do a better job at saving them from foreclosure and moved on.
A few days ago, six months after I canceled their listing, I got a frantic call from the father again. He wanted to know if I could help him. According to the MLS, the house was supposed to close escrow in early October, but he was advised by the agent that the buyer had backed out and the Realtor wanted him to write a check for one month of mortgage payment after six months of non-payment to stop the foreclosure (What?!). Apparently he was told three buyers had backed out over the months. He graciously offered to give me the listing if I wanted it……..
I thanked him but declined. I advised him that the listing agreement was active for two more weeks and I could not take the listing even if I wanted it. So I started asking questions to see why the nice house in a good neighborhood had fallen out of contract on three separate occasions.
It turned out that the only reason why the father had me cancel my listing and went with another Realtor was because the other Realtor had offered to kick him back $5,000 after close of escrow! I do a lot of short sales, I understand the need for money and how enticing that could be for a family in financial distress. So right off the bat, I don’t blame him for being enticed and going against the recommendation of the friend who introduced me and my explanation of why I was best equipped to help with their short sale; he saw an opportunity to make free money.
What I was able to find out was: he knew absolutely nothing of what was going on with his short sale which progressed for the past six months and went through three offers. He never saw any paperwork, not even a copy of his own listing agreement, so he didn’t know when his listing agreement expired. He never saw any communication with the lending institutions, never saw the notice of default, the notice of trustee’s sale…..nothing. He was lulled into oblivion with the promise of free money. Yet, the Realtor had persuaded him to move out to an apartment because the buyer was going to close escrow.
I specifically asked him to go and get copies of the listing agreement, notice of default, notice of trust deed sale, and any other written communication from the lending institution explaining the status of his short sale, as he knew nothing except an offer had backed out and he was not going to get his $5,000.
We spoke again today. The realtor did not give him any of the documentation and had told him that the house went through an auction and is now an REO property. So why ask for one month’s worth of mortgage payment to stop the foreclosure on an REO property? They now have a foreclosure on their record, so my initial effort in trying to minimize the effect on their family business by avoiding a foreclosure on their record was thrown to the wind for the promise of free money which never materialized. He now wants to sue the Realtor……
So what did this family gain by going with a Realtor they did not really know but who promised them free money? They lost their family home; have a foreclosure on their record; live in an apartment and paid rent when they did not have to; all the family members probably went through an emotional roller coaster ride which could have been avoided; and now needs to spend money they do not have to sue this Realtor. Did this family’s fate have to end this way? Was one bad decision the result of these compounding negative effects?
What is the moral of this story? I believe it is that short sighted greed should not be the driving force behind your long-term decisions.
What do you think is the moral to this story?
