Lenders given 30 days for short sale decisions Well, someone in government has been listening to the chorus of complaints about lenders taking too long to make short sale decisions. In a *rare* move of federal government housing competence, the Federal Housing Finance Agency has instructed Fannie Mae and Freddie Mac to impose new guidelines which should accelerate short sale decisions. The new rules require that short sale lenders make a decision on a short sale within 30 days of a complete application, and if more time is needed, they must give weekly status updates. This will make short sale agents, sellers and buyers much happier. The new requirements go into effect June 15.FULL ENTRY
However, how much of an impact this will have on national short sales remains to be seen. Freddie Mac has jurisdiction over a small percentage of short sales, mostly HAFA short sales as well as a limited number of traditional short sales, totaling about 45,000 last year. (Bank of America did over 150,000 short sales last year, by comparison). This is certainly a step in the right direction, and hopefully will lead to more regulatory pressure on the big banks to speed up short sales.
I asked short sale negotiator Andrew Coppo of Greater Boston Short Sales, for some commentary on this news, and he has a more tempered reaction:
Was your short sale transaction a great deal or did you spend a lot of time and money for little advantage? My guest writers find themselves on different sides of the short sale issue. Here is what our Attorney Richard D. Vetstein says about a Banker and Tradesman article that quotes Sam Schneiderman in his position as president of MABA. (here is the release on which the Banker and Trademan article was based.)
I was very surprised to see this headline last week in Banker and Tradesman: Buyers’ Agents Caution: Stay Away From Short Sales, If You Can.FULL ENTRY
Behind the provocative headline was a press release put out by the Massachusetts Association of Buyer’s Agents (MABA) which is “warning buyers to say away from short sales.”
Fellow BREN blogger Sam Schneiderman is the President of MABA and was quoted as follows:
“But even though short sales are taking up a greater share of the market, many buyers aren’t fully aware of the trials and tribulations involved in the transactions. Buyers are thinking short sales are great deals – but it hangs you up for two months, three months, six months,” he said. “Whatever your timetable is, it’s bound to not co-operate. . . Even though banks have made efforts to speed up shorts in recent months, Schneiderman says such problems are endemic to the short sale process, with the buyer almost always left hanging while the bank frets and bickers with the seller and any second or third lien holders.”
Today, a lawyer's look at short sales with our Attorney Richard D. Vetstein.
Sam blogged about short sales last week. I will go one step forward and predict an increase in short sales for 2012, with distressed homeowners and lenders opting for the more cost effective method of disposing distressed realty. With some early success, I’ve been advocating for a better way to legally document short sale deals. It’s better for real estate agents, attorneys, sellers and lenders alike.FULL ENTRY
The Offer to Purchase: Now the operative contract document
I am seeing a shift to making the offer the operative contract in a Massachusetts short sale transaction. And for good reason. A short sale, by definition, is subject to a critical contingency: obtaining short sale approval from the seller’s lender(s). No short sale approval, no deal.
Why should a short sale buyer and incur the expense of drafting a comprehensive (and contingent) purchase and sale agreement when there is no guaranty of getting short sale approval? Furthermore, short sale lenders will accept a signed offer from the buyer during the approval process.
When we were first doing short sales, there were many instances where we drafted up purchase and sale agreements and then the short sale approval fell through. We had to charge the client for the drafting work or eat the cost. No one was happy.
I recently ran numbers (using MLS) to determine the impact of short sales on the Greater Boston market in 2011. They appear to impact just over 5 percent of the market, depending upon the neighborhood or municipality. It appears that the more affluent the community, the lower the percentage of short sales. In some neighborhoods that I spot-checked up to 13 percent of sales were short sales. The numbers are consistent with 2010.
I was also looking for a statistic that would tell what percentage of short sale listings actually closed. Depending upon the community, I found that 30 to 50 percent of short sale listings did not close. (I didn’t extract the number of repeat listings because that required examining each listing manually. Therefore, my numbers are off somewhat because some short sales are listed more than once to allow enough time to go through the process or get the asking price to where buyers will make offers on them.)
For those that need a review, a “short sale” is the sale of a property by a seller that can’t sell the property for enough money to pay off all of the mortgage balance(s) on the property in full. Sometimes the seller can’t afford to make payments any longer. Sometimes the seller needs to move and can’t afford to pay the lender(s) the difference between the sale price and the mortgage balance(s).
If you are not sure about the details of a short sale, see my October 2009 post:FULL ENTRY
Short sales are slowly on the rise, now accounting for 12 percent of all home sales, USA Today reports.
That said, real estate agents selling homes across the state report that the short sale process is still anything but short.
In a recent survey by the Massachusetts Association of Realtors, just over half - 54 percent - reported they had handled at least one short sale over the past year.
Here's a breakdown of how long it took:
- 22 percent reported it took an average of 1-3 months to close on the home
- 46 percent reported it took 4-6 months to close
- 25 percent reported 6-12 months to close
- 7 percent reported it took over 12 months on average to close a short sale
Three or so years into the recession, there is an increasing number of people in mortgage default who used to be part of the middle class. House owners who have savings can hold out longer through their periods of unemployment or underemployment. By cutting back on expenses and draining their savings, they pay their mortgages. Eventually, those who did not get reemployed at their previous level fell into default, as their savings drained down too far to hold on.
Early in the foreclosure wave, people who bought farther beyond their ability to repay and developers who were over-extended fell hard and fell early. Those no-longer-allowed mortgages -- that were destined to fail as soon as real estate appreciation stopped -- lead to the first wave of mortgage defaults. Massachusetts saw these early defaults.
The foreclosures and distressed sales now in Massachusetts are part of the second wave. The middle-class wave. The unemployment wave. According to Jeffrey Chubb, in Massachusetts and Boston metro area it is a wave, not a tsunami. Massachusetts, and especially metro Boston, remains below the national average.
But, for unemployed or underemployed house owners, it doesn’t matter how many there are. It matters that they are just hanging on. If you know someone who is hanging on, July 22 is an important deadline for them.FULL ENTRY
At the Fourth of July party, my family was abuzz with the New York Times article about big lenders modifying loans for borrowers who didn’t ask for help.
Banks are proactively overhauling loans for borrowers… who have so-called pay option adjustable rate mortgages, which were popular in the wild late stages of the housing boom but which banks now view as potentially troublesome.
We are never going to solve the question about fairness. I’d rather not try.
Let’s talk about whether this is good business on their part. Is it just good business to get some of the underwater borrowers out of option adjustable rate mortgages and into conventional loans? Doesn’t it make sense to do this for borrowers who are paying on time? Those borrowers are more likely to keep paying on time, since their payments are being held steady. The modification gives them a chance to start paying down principal. Or should modifications only go to those that are headed for foreclosure? Is it better business to stop defaults by giving a leg up to the most vulnerable borrowers?
The two big lenders, Chase and BOA, are using different tactics to convert these toxic loans into something more stable. Chase, in the example in the story, reduced the principal by $150,000. The borrower had started with a large down payment, but her option ARM had swelled her debt to $300,000, well above the 2006 purchase price of
$259,000. $359,000 (corrected)
BOA, on the other hand, is modifying loans without reducing principal. They are waiving prepayment penalties, refinancing, lowering the interest rate, postponing some of the balance and extending the term.FULL ENTRY
Attorney Richard D. Vetstein recently came across a very provocative and interesting idea to address the foreclosure and bankruptcy crisis.
It's Chapter M bankruptcy, as described on FireDogLake:FULL ENTRY“Prof. Adam Levitin has proposed this with his Chapter M for Mortgage bankruptcy. It would remove foreclosure actions from state court to federal bankruptcy court. Successful petitions can be offered a standardized pre-packaged bankruptcy plan. The plan would be based on HAMP modification guidelines (interest rate reduction to achieve 31% DTI goal, but without federal funding) plus cramdown to address negative equity. We can make this fair on the backend. If the homeowner redefaults we can speed up the foreclosure process. It wouldn’t affect non-mortgage lenders. It is fast-tracked relative to traditional Chapter 13. It can have clawback mechanisms to address potential future appreciation.
And going through the process can give the lender clean title. Because there’s this whole issue of who owns what in the securitization chain which is a few court cases away from putting our financial system over a cliff. And the best feature is that it has no cost to the federal government. Like other smart policy, it builds off already existing infrastructure, so it can be started immediately using existing courts and Chapter 7 panel trustees for sales.”
Most real estate agents are people-people more than thing-people. Were they not, the amount of chit-chat necessary to do this job would drive them batty. (Well, maybe that explains some of them, but that is beside the point.) You get my point; agents tend to be social-types.
There’s the rub.
First, agents work during what is social time for most people. I work after 5 PM during the week, when daylight permits, and I work daylight hours on the weekends. For me, and most working agents, going out on Saturday night is like going out on Tuesday night for 9-5ers. Yet our friends have “normal” schedules and are nice and relaxed on a Saturday night.
The second problem is shared by a lot of professionals. People at parties think it is friendly to ask for free advice or they think a social situation is an appropriate place and time to damn your whole profession and challenge you to agree. I hear the same complaint from psychologists, doctors, and carpenters.
The agent version goes like this:
1. Oh, you are a real estate agent! My brother’s house in East Armpit on Crescent Street is for sale. Have you seen it?... No?...Anyway, what do you think it’s worth?
2. Oh, you are a real estate agent. You people make too much money and don’t do any work! What do you think of that?
Since the recession started, I get a new response:
3. Oh, you are a real estate agent! Poor thing! The market is so-o-o tough…
When I say that I am doing OK, thank you, people go back to choice #1 or #2.
The party I most recently attended was not typical. It was in a client’s house and two other client-households were also in attendance. (Some of my clients were friends before they bought. A few become friends in the process. These people were the former.) At a party like that, comment 1 is allowed and usually answered with, “I’ll get the full info to you when I get back to my desk tomorrow.” Comment 2 did not come up.FULL ENTRY
Here's Attorney Richard D. Vetstein. Today, he writes about a refinancing solution that could prevent foreclosure.
The recent historic drop of mortgage rates has created a refinancing boom for qualified homeowners. Unfortunately, the refinancing wave washing over the country has paradoxically left dry homeowners who would most benefit: those who are “underwater.” Underwater mortgages, or “negative equity” (i.e., they owe more on the mortgage than the property is worth) cause foreclosures and serves to bottle up the housing market. Thus, assisting homeowners who are underwater on their mortgage is good public policy.FULL ENTRY
According to a CoreLogic study, there are currently 11 million mortgages underwater and another 2 million nearly at negative equity in the US housing market – a figure that comprises 28 percent of all residential properties with a mortgage. In Massachusetts, there are 225,000 properties with negative equity and another 52,000 with near negative equity.
Another stab at loan mods:
The government has made attempts to address this crisis. Last year the Obama Administration created a loan modification program, the Home Affordable Refinance Program, to help refinance borrowers whose loans were worth up to 125 percent of their homes value. The program did not take hold, and only a relatively minor number of modifications/refinances occurred.
"Jerry," as we shall call him here, wrote to me over the weekend with a dilemma that is increasingly common these days amid a still tough real estate market.
He's engaged and wants to move with his fiancee closer to Boston, where his wife's family lives.
But Jerry bought a townhouse in the Merrimack Valley for $180,000 near the peak of the bubble back in 2005.
And he now finds himself $30,000 underwater on his 1,100 square foot, two bedroom and 1 ½ bath townhouse.
So what should he do? Jerry has thought of everything from trying to do a short sale to renting out his townhouse.
A direct kind of guy, Jerry succinctly laid out the options he is mulling over in his email to me.FULL ENTRY
Attorney Richard D. Vetstein. tells you about HAFA. Will the fast track work? If it does work, will it help?
Lost in the tax credit frenzy was the April 5 start of the Home Affordable Foreclosure Alternative program, known as HAFA, which is billed to streamline short sale transactions. However, read the fine print, and there are a lot of unanswered questions about the program and how it will affect short sale transactions in the “trenches.”
Is the new program really going to streamline the process or create more headaches for the industry?
To begin, it’s important to point out that the HAFA program is part of the federal Home Affordable Modification Program (HAMP). HAFA guidelines will only apply to short sale or deed in lieu of foreclosure requests made by borrowers who have applied for a HAMP loan modification. That means borrowers must go through all the time, hassle and endless forms under the HAMP modification program before even being eligible for a HAFA streamlined short sale approval. This requirement will likely substantially reduce the number of HAFA-required short sales. HAFA also requires participating lenders to forgive a borrower’s loan deficiency if the lender accepts a short sale. This is a significant deviation from many lenders’ policies. There is even some debate about which lenders actually fall within the mandate of HAFA. For all of these reasons, it is far too early to speculate regarding the impact of HAFA on the current backlog of short-sale requests. It is very unlikely, however, that HAFA is going to quickly streamline the short sale process.FULL ENTRY
Having endured more than half a year of short-sale hell and counting, Kevin is one step away from buying a half decent single-family home at a price almost unheard of now in Greater Boston.
But it's turning out to be one very long step indeed.
Kevin, who works in the digital publishing industry, is waiting on a green light from the bank that hold's the seller's second mortgage so he can buy a home in the Boston neighborhood of Roslindale for $233,000.
And he just may make it - that is if the whole thing does not blow up at the last minute, with our would-be buyer so frustrated after months of inexplicable delays that he is musing about legal retribution.
I say hang in there Kevin. But yet I am not the one who has spent months getting jerked around by the bank and by a seller's attorney who, at least from Kevin's decription, appears to be out to lunch.
If nothing else, it shows the lengths buyers sometimes have to go around here to get a home at a relatively "affordable" price, one, mind you, that would still buy you a palace out in Kansas City.
OK, as I write this, I sound just like some of the endless short sale and foreclosure pitches aimed at small-time investors that regularly clog my inbox.
Maybe he's got good stuff, but a guy by the name of Kent Clothier is the worst, with messages like "Re: $500 for your deed leads" and "Congrats on Another Sale."
Sorry Kent, don't believe we have ever talked before.
But seriously, the federal government's new rules aimed at streamlining the agonizing, and typically months-long short sales process, are set to go into effect on April 5th, which happens to be this coming Tuesday.
And Pat Lashinsky, chief excecutive of ZipRealty, made the case to me yesterday that the new rules could result in a bumper crop of discounted homes coming on the market across Greater Boston.
Are banks finally starting to get it when it comes to short sales?
Or are we just looking at some defensive industry PR as a backlash builds?
Those are my questions as I look over a Bloomberg piece that claims that banks may be finally getting on the short sale bandwagon.
The evidence seems to be a tripling of the number of short sales over the course of 2009, though, at 40,000 transactions, it is still a pretty small number.
The major banks are also claiming they have hired extra staff and rolled out new software to help make short sales happen.
JPMorgan claims to have hired 5,000 people to handle distressed mortgages and has doubled its short sale staff.
Sounds great, thought the timing is awfully suspicious given budding anger, both in Washington and across the country, over bank stalling tactics.
Attorney Richard D. Vetstein.writes today on another ugly reality of the recession: divorce. Here's what divorcing couples can do, legally, in regard to their real estate.
When a recession hits, divorce rates spike. Divorce often plays a major role in real estate transactions and decisions. The question posed today is what to do if you are getting a divorce and the marital home is “underwater” – that is, when the balance on the mortgage is more than the fair market value of the house.
Well, here are your choices:FULL ENTRY
1. You stay in the house with your divorced spouse until either one of you can afford to move out or refinance. Seriously!? Yes! More and more people are doing so in this new economy because there is simply not enough money to go around. I know of divorcing spouses creating separate living quarters in a house, akin to an in-law suite with separate entrances, etc.
2. You and your spouse continue to co-own the house together until someone can refinance the property. Either you live in the house or your spouse lives in the house. You could have a situation where only the person who’s living in the house pays for everything or everything is split 50/50. Either way, the couple will still own the house together.
3. Refinance. If you try to refinance, you will have to put up the money to make up the difference between what you owe and what your house is worth. That would be tens of thousands of dollars if not more. Some people have that kind of money but most do not.
Welcome back to Attorney Richard D. Vetstein. Here's Attorney Vetstein's take on the Home Affordable Foreclosure Alternatives Program.
The Obama administration on Monday set long-awaited guidance on a plan for mortgage companies to speed up short sales of homes and other loan modification alternatives to stem the rising tide of foreclosures. The Home Affordable Foreclosure Alternatives Program provides financial incentives and simplifies the procedures for completing short sales, a growing practice in which a lender agrees to accept the sale price of a home to pay off a mortgage even if the price falls short of the amount owed. The announcement can be found here.FULL ENTRY
When I published comments from readers who thought their Offers were not being presented to lenders in short sales and foreclosure situations. I suggest that agents and consumers could do something about it. James wrote:
Where's the incentive for an honest agent in all of this? It seems like it's a lot of work for the agent, and he still won't get a commission. If the lender thinks the borrower is crooked, there will be a Fraud Alert flag on that file forever, making reasonable Offers nearly impossible to approve. Sure, it's the right thing to do, but it takes a lot of time, effort, and money (lawyers ain't cheap), and it doesn't get your client any closer to buying the house. Good community service (if you can get the bank to listen to you), but it won't pay the bills.
First a disclosure: on the bottom of the email address that I use with my clients is this statement:
Always do right. This will gratify some people and astonish the rest. --Mark Twain
So, I am someone who tilts at windmills; that’s who I aspire to be. Marcus thinks doing right to do right is a sign of hopeless naivety. But so be it. Attorney Michailidis thinks I owe someone an apology for saying there is something wrong with hand-picking low Offers to send to a lender in a short sale.
Back to James’ comment: why blow the whistle on sellers and their agents? James is right that the self-interest angle is weak, in the short run. The long-run upside is that action to stop those messing with the process will clear the path for buyers to buy properties; if the lenders are waiting forever to see market-rate Offers, would-be buyers are waiting along with them.
Welcome back to Attorney Richard D. Vetstein. Today, he looks at the wild world of short sales to tell buyers what they can expect...
A short sale is special type of real estate transaction between a homeowner, his mortgage holder, and a third party buyer. In a short sale, the homeowner’s mortgage company agrees to take less than what is owed on the outstanding mortgage, thereby being left “short.” In some but not all cases, the lender will agree to wipe out the entire debt. Many people believe that short sales offer bargain basement prices, but lenders will do their best to get as close to fair market value as possible so as to minimize their loss.
Short sales are a unique type of transaction and far different from the typical transaction between parties of equal bargaining power. Likewise, the legal aspects of a short sale are unique.
A “short sale” is typically the sale of a property by a seller that cannot continue to pay his monthly mortgage(s) and cannot sell the property for enough money to pay off his mortgage balance(s) in full. In a “short sale” the seller must ask his/her lender(s) to take a loss on the mortgage(s) in order to allow the seller to sell the house and move on. The seller’s lender(s) will accept a discounted mortgage payoff and usually forgive the seller’s debt. Buyers, sellers and their agents need to know that lenders have the last word in accepting an offer and final purchase price even after the seller “accepts” an offer.
Lenders might agree to short sales when it’s obvious that they will probably never be able to get paid the full amount of the mortgage balance and it is cheaper and faster to agree to a short sale. (Maybe the seller lost his job or had serious illness that prevents continuing mortgage payments. Maybe the value has declined substantially.) If the seller can’t pay off the mortgage from sale proceeds, the choices are: foreclosure or short sale of the property.
Most people think that short sales are automatically granted but that is not true. In order to grant short sale permission, lenders typically consider two things: the seller’s financial situation and the property’s market value.FULL ENTRY
John responded to my entry about making low offers with a good link showing the continuing foreclosure crisis. The seller I was facing-off with over an $80,000 difference of opinion about price was not a lender-owned or short sale property. But John’s point remains. He wrote:
Hi Rona, Have a look at the graph in the middle of this page:
There's the reality of your post at the macro level. I drive past several unkept properties, likely abandoned, on my current 12 mile back road commute. When banks get serious about selling these, I think we're looking at the next leg down...
I get John’s point. Those foreclosed and unsold properties are sitting around. They are hard to buy. Frequently, they are not worth buying. At least not yet. John sees them every day on the way to work. I see them every week at work.
Last week, I also wrote on appraisal hassles. Foreclosed properties that are used as comparables are also driving down the price that lenders will cover for mortgages.
Shaun wrote me last week with a few questions. Two had quick answers, but the middle one, about foreclosures, is more complicated:
Good afternoon Rona, hope this finds you doing well…[I] was hoping to ask a few quick questions about the foreclosure process as I am a first time homebuyer.
1) Do you have any recommendations for a good attorney?
2) Do you have any primers on the foreclosure process?
3) Besides an inspector that comes with me to visit the property, whom else should I bring with me?
I have recommendations about attorneys. I also think any first-time home buyer should have their own agent.
I wrote on the basics of foreclosure purchasing in October. Here is “the primer” on foreclosure:
First a few definitions:
Mortgage holder or lender is the entity that is owned the amount of the mortgage.
Seller is the owner of the house.
A short sale means that the seller does not have enough money to pay off the existing loan on the property at the point of sale. (Example, the seller owes $350,000, but the sale will yield $320,000) This is sometimes called “upside down.” Most people are saying “under water.” The seller is short because the mortgage holder will get less than the mortgage amount when the property is sold. The seller is “short of cash” to cover the debt. In this case, the mortgage holder has a say in how much of a loss they are willing to take. If a seller can pay the entire mortgage amount, plus whatever closing costs are attached to the sale, then the seller is not short. The seller may have lost equity, but the lender does not have a say in the sale.
Foreclosure happens when the seller stops paying the mortgage holder. By right, lenders can take the house and sell it to get their money back.FULL ENTRY
A lot of readers don't understand what short sales and foreclosures are. I am getting comments and emails. This is foreclosure and short sale 101. Skip it if you know this stuff and have no advice for those who don't.
Tim responded to Monday’s post. He is in a situation that has become more common since the sub-prime meltdown in the summer of 2007:
One of the problems we are facing is, when we tried to sell it, we asked if we could just pay off the difference to our mortgage holder, that was unsuccessful as they tried to push us into a short sale, which I didn't understand because we're current on our mortgage. We tried to take out a personal loan, however the amount was too much and exceeded personal loan limits. We've tried to refinance to make the mortgage lower - so we would actually want to keep it and maybe break even or make money off of the house (with the rental), but we cant refinance since the value has dropped so much we'd have to finance more than 100%, and banks just dont do that now-a-days. What does a person do!?
The foreclosure entry that I wrote on September 9th is still drawing comments. Today this one came in from Polly:
I was a buyer in a short sale and today I got news the deal is off and the house is going into foreclosure. I paid for a home inspection and an attorney to review the P&S. (Wells Fargo was the Seller's lender.) Any advice for me? I really love the house and still want it.
My advice to Polly is the same as my advice so far for buyers who are trying to capitalize on foreclosed homes:
The time is not yet right for buying foreclosed properties. The lenders do not have their systems in order. They can’t manage the sales efficiently. The wait time is long; deals fall through for no reason. Prospective buyers end up wasting time and money. Sometimes they succeed, but the discounts that I have seen have been modest.
If you are going to deal with short sales and foreclosures, hire a lawyer who knows the ropes. Expect delays. Be prepared for the sale to fall through. Choose something that is worth the risk and bother -- or don’t buy that property. If you are expecting a normal deal in a normal time, you are dreaming.
I started in real estate during the last recession, in 1991. By that time, foreclosure sales were working for buyers. There was an agent who handled foreclosed properties who had good communication with her investor’s office. The investor was offering good financing options for the buyers. The management of foreclosure sales worked like a well-oiled machine.FULL ENTRY
I got an email from a reader who signed a Purchase and Sales Agreement on a short sale. He was unhappy when his agent called to say there would be a two-week delay in closing. He was paying cash. He had no lawyer. What should he do?
First thing, if you don’t hire a lawyer you should read your Purchase and Sales Agreement. Most people don’t. They almost all have an automatic thirty day extension to perfect title (get liens and encumbrances off the title.)FULL ENTRY
I get asked regularly about how deep the discount for short sale and foreclosure homes are in my area. My answer is “barely deep enough to be worth it.” When I work with buyers of this kind of property, I prepare them for a long wait, more aggravation, more risk...and some financial reward.
Only undertake a short sale if you have time, flexibility, and risk tolerance. Some things that I regularly see:
1. Slow communication with the investor’s office, which must approve all contracts.
2. Generally poorer condition of the property.