WSJ - Short Sales Stepping Out

The move to short sales is an ongoing theme on this blog. No wonder - I have believed that short sales are the better solution for an upside down homeowner since 2006. Common sense seems to be prevailing all over, and we are now seeing the nationwide trends support what we have been advocating all along. Here is the latest WSJ article talking about how short sale closings are now outnumbering REO closings in Phoenix, Los Angeles and Miami - three of the hardest struck markets in the country.

Expect More Short Sales in 2012 (if all goes as planned)

The move to short sales. This is a theme that I keep returning to, as the financial juggernauts see further benefits of approving short sales, rather than going with the "traditional" REO model, when faced with someone who is unable (or unwilling) to keep their upside down house. More good news here, this time from Fannie and Freddie, via their presentations at the MBA servicing conference. Full articles here.

CNNMoney: When can I buy a home again after a short sale?

Good brief article from CNNMoney.com.

I've heard that you have to miss one or two mortgage payments in order for a lender to approve a short sale. Is that true? Also, how long do I have to wait in order to get a new mortgage if I do go ahead with a short sale? –Name withheld 

You don't necessarily have to miss a payment to have a short sale approved. You may be able to arrange one by simply writing a hardship letter. "The letter would describe why the borrower is unable to fulfill his obligations," says Mike Fratantoni, vice president of research and economics for the Mortgage Bankers Association. Some banks will still say no, but you may get lucky. 

The answer to your second question depends on the circumstances of the short sale. If you were current on all mortgage and other debt payments for the 12 months preceding the short sale, you're eligible immediately for a new FHA-insured mortgage, says Lemar Wooley, a spokesman for the Department of Housing and Urban Development. 

If you're in default on your mortgage at the time of the short sale, you won't be eligible for a new FHA-insured mortgage for three years. That said, if you were in default due to circumstances beyond your control, such as the death of the primary wage earner or a long-term illness, and you were in good financial and credit shape prior to that time, a lender may make an exception. 

In either case, even once you're eligible, you may have trouble qualifying, depending on how the bank reports the loan settlement to the credit bureaus. Sometimes a bank will call the balance "paid in full," while other times a bank might say, "settled for a lesser amount;" the latter can cause your score to drop significantly. A bank can also go after the rest of the balance in a judgment—it's up to the financial institution. 

"You can do a short sale, have it not hit your credit, and purchase a new home right away," says Mark Boyer, CEO of Foundation Financial Group. "But that's really kind of a perfect scenario."

Here is a flyer from our friends at Smart Financial with some of the most common investor guidelines for buying after a short sale, foreclosure, or bankruptcy.

MSNBC - Increase in short sales give market a little breathing room

Another article talking about the move away from foreclosures and short sales. Couple of interesting points:

• Blaming the robosigning scandal for the slowing of foreclosures. This seems simplistic to me ... I think it's simpler than that - banks net more money in a short sale, and they are in business to increase the profits and minimize the losses.
• Honest assessment of foreclosure vs. short sale credit impact (immediately after talk of "torching" credit ratings) - Fair Isaac says they are the same. And yes - all future movement shows that lenders prefer to see a short sale on the  report, and give loans sooner.
• Value preservation, and better for the neighborhood. This is a great, and often overlooked point. Not only doing what is best for YOU, but also what is best for OTHERS.
• Ability to negotiate the settlement pre-foreclosure. Yes, this is true in states without anti-deficiency statutes, but it is also true in states where certain loans are not covered by anti-deficiency statutes (like most HELOC's in Arizona).
• Vandalism of vacant homes. This is HUGE - massive issue that is not addressed often enough. I cannot tell you how many homes I have seen with AC's and plumbing stolen - in a short sale, the property is typically occupied until the day of closing, at which point the new owner moves in.

All in all, a bit surfacey, but good reading, and obviously I agree with the overall conclusion. Click here to read the full article.

Is upside down housing having an effect on the job market?

Nick Timiraos with WSJ has another article shedding light on yet another dark corner of the distressed housing market, namely it's effect on the jobs market. Here is a haunting quote:

Borrowers who are underwater are about 30% less likely to move than those who rent or have equity in their homes, according to a study co-authored by Joseph Gyourko, a professor of real-estate finance at the University of Pennsylvania's Wharton School.

I was interviewed for the article, along with one of our clients who is in this exact situation. Here is a link to the online article. Since you need a WSJ subscription and login, full text included as well.  


http://online.wsj.com/article/SB10001424052970203479104577124360560884468.html


Housing Imperils Job Gains

Price Slump Keeps Workers Who Want to Relocate Tethered to Their Homes

By NICK TIMIRAOS and BEN CASSELMAN
The prolonged U.S. housing bust is threatening to claim yet another victim: the nascent recovery in the labor market.

New data released Tuesday showed just how bad the housing market remains. Home prices in 20 major metropolitan areas fell 3.4% in October from the previous year, according to the S&P/Case-Shiller Home Price Index. It was the 13th consecutive year-to-year decline.

The job market, by contrast, has finally been showing signs of improvement. The unemployment rate fell to 8.6% in November, the lowest level in more than 2½ years, and recent weekly reports have suggested the trend continued in December. Consumers also remained surprisingly upbeat, according to a report released Tuesday. The Conference Board, a private research group, said its index of consumer confidence jumped in December to its highest level since April.

But now some economists fear the continued slump in housing could short-circuit the recovery in jobs by making it harder for Americans to relocate to find work.

In theory, as the economy improves, people tend to relocate from places where jobs are scarce to areas where companies are hiring. In the current cycle, that means families should be leaving California and Nevada and heading to Nebraska and Texas. Workers with particular skills, such as machinists, accountants or computer programmers, should move to places where those skills are in demand. That would shrink the big pools of unemployed workers in hard-hit areas and help resolve shortages of skilled workers that have held companies back from expanding.

While some relocation continues, economists believe mobility overall has been muted in part because of the housing bust. Low home values have made it much harder for Americans to move because selling a home is so difficult. That is especially true for the 10.7 million Americans—or 22% of homeowners with a mortgage—who owed more than their homes were worth as of the end of September, according to figures from real-estate firm CoreLogic. In hard-hit markets such as Phoenix and Las Vegas, the share of such "underwater" mortgages is much higher, at about 52% and 61%, respectively.

Borrowers who are underwater are about 30% less likely to move than those who rent or have equity in their homes, according to a study co-authored by Joseph Gyourko, a professor of real-estate finance at the University of Pennsylvania's Wharton School.

Economists have generally found that the housing slump has had only a minor effect on the job market until now. That's likely because with unemployment so high across the country, there are generally plenty of unemployed workers already nearby to fill any available jobs.

But that could change as the labor market springs back to life. There are some parts of the country "that people should be thinking of moving to, but they're locked into their current housing situation," said Kenneth Rosen, a housing economist at the University of California, Berkeley. "This becomes a bigger problem as the recovery starts to gain some traction. It's a big issue, bigger than people think."

The weak real-estate market doesn't just discourage unemployed workers from moving to find work. It also makes people who do have jobs less likely to relocate for a promotion or a better opportunity in another city, and therefore less likely to open up jobs in the cities they leave behind.

Randy Badia, an engineer for an auto maker, is ready to apply for a promotion to his firm's Michigan headquarters, but he can't easily relocate because he owes more than his Phoenix home is worth.

"I'd like to go back and attack my career aspirations, but being underwater, is it feasible at this point or am I stuck here?" said Mr. Badia, 35 years old, who six months ago passed up a job posting. He owes about $100,000 more than the house he bought six years ago is now worth. "If I didn't have the house, I'd be gone, moving on with my career," he said.

Mr. Badia has considered a short sale, where his lender would have to agree to sell the house for less than what he owes. But that isn't guaranteed to wipe out the $70,000 second mortgage he has on the property. He said he has nearly ruled out renting out the house because he doesn't want to be a landlord from 2,000 miles away.

"A lot of people here are simply staying put," said Greg Markov, the Phoenix real-estate agent advising Mr. Badia. Underwater mortgages "have become a big deterrent to changing jobs."

The issue is increasingly a problem for employers as they ramp up hiring. The extended downturn has made it harder to get both job candidates and existing employees to relocate, said David Barlow, senior vice president and senior consultant at moving company Sirva Inc.

"Without a doubt, it is magnitudes more difficult to get folks to move," Mr. Barlow said. A job candidate's housing and equity situation "is one of the first questions that comes up" in a relocation discussion, he said.

In response, some companies are offering increased benefits, which cover the cost of selling a house for less than the purchase price, according to a survey by Weichert Relocation Resources Inc. But as the cost of such benefits rise, companies are also being more selective. Expensive moving costs more often may "lead companies to consider Candidate B or Candidate C," Mr. Barlow said.

BofA expects 60% to 70% more short sales in 2012

I have often discussed the lenders' move away from the foreclosure / REO model toward a short sale model, and this recent quote from one of Bank of America executives is further confirmation of this trend:

"Bank of America plans a 60 - 70% increase in short sales in 2012. Expand your short sale knowledge. Get training if you don't have the training."  Bob Hora, Bank of America Executive

Taxing Consequences of Short Sales

While I am not nearly the expert on the subject of taxation after a short sale or foreclosure that my fellow blogger Robert Marsh is, I thought this article was a great introductory overview. And of course, here is the daddy of all articles on the topic, straight from the pages of the ever-exciting IRS.gov.

New Year Credit Resolutions for 2012

Can you believe 2011 is almost over? How did those 2011 resolutions go? For me I would say I was moderately successful, in some areas I excelled, in others I failed. At the beginning of 2011 I could not run 13 miles non-stop, but here it is December 2011 and I can, it isn't pretty, but if I am being chased by a lion I know I can run for 13 miles before I collapse to the ground into a ball of jelly. In January I could barely run 2 miles consecutively.

What happens every year? Gyms are packed in January, then by February they are back to normal. When it comes to credit we don't have to commit to daily or weekly goals, just a once a year check-up. Actually, you could still salvage your 2011 resolutions if you slip this in before the end of the year.

Go to the government mandated site www.annualcreditreport.com to retrieve a copy of your credit report. Any other website offering a free credit report is only baiting you to get your money in some other manner, don't fall for that. If you hear a company advertising a "free" credit report or credit score on television or radio, keep in mind advertising costs a lot, so look for the strings attached to the "free" offer, there will be strings, annoying strings, you will hate yourself for falling into their trap, so don't. Avoid this all together by sticking with the site the government required the three major credit bureaus to create and maintain, www.annualcreditreport.com. Look at all three credit bureau reports to make sure all of your information is correct.

Here are some things to look for:

•Is everything reporting on-time?
•Are there any accounts that I do not recognize?
•Are the accounts I have already paid off reflecting paid in full?
•What available limits are being reported on my credit cards?
•What original dates are reporting on my credit cards?
•Is my address correct?
•Do I have a long lost account I co-signed for that is still active?

These are just some basic things to look for to ensure there are no problems on your report. Keep in mind, DO NOT close any credit card accounts as this will hurt your credit score. If you have an old credit card account that you have not used in a long time call the creditor to make sure it has your correct billing address. Credit cards should be used every 12 months at a minimum to make sure they are not closed down by the issuer.

This is a simple way to put your 2012 New Year's resolution in the books, but if you are an overachiever now you can go to the gym and not have to worry about your credit report. Happy New Year, all the best in 2012!!

Save Our Home AZ Program

On September 22nd I blogged about a new program that was in the works from the AZ Department of Housing, that is supposed to help upside down homeowners. Recently, I have been hearing more about the program, including this flyer that makes it sound really good. So, I decided to call in to get the scoop - how can this program help homeowners looking to do a short sale?

When I called the hotline, the gentleman who answered the phone was nice enough, but could not for the life of him explain anything about short sales. All he could tell me, was that a struggling homeowner is expected to go to the Save Our Home AZ website, and take the Self Assessment. From there, he will be contacted by a HUD certified counselor, who could discuss their options with them.

Fair enough, I am all for a definitive first step. So, I went ahead and called Take Charge America Mortgage Foreclosure Counseling, which is one of the counselors who sees these registrations. The person there also didn't know much about short sales, but was at least honest enough to tell me that he hasn't seen a single person helped through a short sale (to be fair the program IS fairly new), and that their most popular program is the Unemployment and Underemployment Assistance.

In other words ... short sale is a possibility, but how and what ... is really uncertain. And in my opinion, the last thing we need more of in a short sale transaction, is uncertainty. There are many other good programs available now, like the government HAFA program and the Chase incentive program, which are far more popular and which work. Not to mention that regular short sales plain WORK - to accomplish the main goal, which in my opinion is to avoid foreclosure and to permanently dispose of a burdensome debt. 


On September 22nd, I said "Interesting program, but much like other programs, its success is linked directly to its ability to enforce." That remains true ... any program is only as good as its execution. And while I wish the best for Save Our Home AZ program, and still think that its intentions are good - I am not impressed by the execution.

State of the market - 11/15/2011

Notice the continued increase of short sale transactions.


From Cromford Report (Mike Orr):

Each month about this time we look back at the previous month, analyze how pricing has behaved and report on how well our forecasting techniques performed. We also give a forecast for how pricing will move over the next 30 days.

For the monthly period ending November 14, we are currently recording a sales $/SF of $82.36 averaged for all areas and types. This is 1.7% higher than the $80.99 we now measure for October 15. Our forecast range was $79.06 to $82.26 with a mid-point of $80.67. In a pattern similar to last month, this month the actual figure fell just above our forecast range by 10 cents. Pricing (as measured by $/SF for all areas and types) hit bottom in the second half of August and again in the first half of September but has been moving steadily upwards since then. We are now back at the level we last saw on July 3.

The current price level is 2.01% lower than last year on November 14.

On November 14 REO sales across Greater Phoenix (all types) averaged $62.95 per sq. ft. (up 0.8% from October 15). Pre-foreclosures and short sales averaged $72.25 (up 0.4%) while normal sales averaged $104.56 (up 0.6%). Normal sales gained market share, moving from 35.0% to 36.4% of sales, while REOs were the big losers, moving from 37.9% to 33.8%. Short sales and pre-foreclosures advanced once again this month, moving from 27.1% to 29.8% - another record high.

It is clear that the age of the REO is in decline while short sales and pre-foreclosures are becoming ever more important. As they become scarcer, REOs are getting more expensive. In addition the pricing for short sales and pre-foreclosures is no longer declining.

It is clear that the overall price movement (up 1.7%) is more than twice the movement of each individual component (REO up 0.8%, normal up 0.6%, short sales up 0.4%). This happens because of the change in the mix in favor of more expensive normal and short sales and away from the cheaper REOs.

On November 14 the pending listings for all areas & types showed an average list $/SF of $80.61, 3.0% above the reading for October 15 - so pending $/SF has moved upwards in a serious way for the first time in many months. This is a very positive signal, especially when all three sales components are moving upwards at the same time. Among pending listings we have a fast growing 30.5% normal, a sharply declining 28.3% REO and a steadily growing 41.2% in short sales and pre-foreclosures. The average pricing for pending listings on November 14 in each category were: $110.40 normal, $67.21 short sales & pre-foreclosures and $62.64 for REOs. Normal and REO are significantly higher but short sales and pre-foreclosures are lower than they were was last month. Together with the changing mix this tells us we are likely to see a further rise in sales price per sq. ft. over the next month.

Our new mid-point forecast for the average monthly sales $/SF on December 14 is $84.79, which is 2.95% above the November 14 reading, and we have a 90% confidence that it will fall within ± 2% of this mid point, i.e. in the range $83.09 to $86.49. A substantial change in the mix can still have a significant effect on the average price per sq. ft. and we are seeing considerable variation from day to day. However notice that even the lowest point in our forecast range is higher than today's reading.

It is now becoming very clear that our reading for September 15 - $78.54 per sq. ft. - will remain the low point over the near term. The lowest monthly average sales price is $150,503 and was also set on September 15. However the record low monthly median sales price is still standing at $107,000 and this was set nine months ago on February 24. Our current monthly median sales price is back up to $112,000, so median price changes have not followed the pattern of average prices or $/SF.

The shift to short sales.

Arizona Republic published an article about something I have been discussing for a long time on this blog - the shift to short sales. However, I disagree with one of the premises of the article - that the lenders changed their mind. The entire reason they started short sales, is that they net more money for the servicer and investor. Do not be deceived - a bank is a corporation, whose goal is to increase the profits and decrease the losses for their investors. EVERYTHING they do can be explained using one of those categories.

So, it isn't that they woke up one morning this year thinking that they want short sales, it's that their process is finally to the point where they can do them more efficiently. The other factor, is that the real estate industry finally has the skills and the knowledge to get short sales done. Back in 2006, when I first started doing short sales - I wanted to do them, and the banks wanted to do them. It's that neither of us had it figured out. Five years later - we still have much to figure out, but much progress has been made as well.

Let's keep working at it!

Read the full article here.

Upside-Down Refinancing Program Changes

So, it sounds like government is stepping in with a program that will allow upside down homeowners to refinance their mortgage. This should, at least in theory, help some struggling homeowners in Arizona. You see, they can now refinance their interest payment to today's historically low rate, even if they are WAY upside down, and lower their payment.

Read the Arizona Republic article discussing the program changes here.

So, what does it really mean? I have to agree with my colleague Kevin Kaufman (quoted in the article), in saying that I am skeptical that it will actually help. Based on what I see in my day to day practice, loan modifications are a gateway drug to short sales and foreclosures. This is why I personally believe that this program change (while full of good intentions, and helpful to some homeowners in the long run), will result in more short sales and more foreclosures.

First a word about why modifications don't work from the lender's point of view. Brent White's theory is that they don't work, because the lenders don't want them to. If they were easy -  who wouldn't want one? And yet, statistically as many as 80% of upside down home owners will never do anything about their situation. Why? Because it's not easy to enter into a modification.

The other point I question is the whole competition for these loans:

"Some lenders, frankly, just refuse to refinance," he [Obama] said Monday. "So, these changes are going to encourage other lenders to compete for that business by offering better terms and rates, and eligible homeowners are going to be able to shop around."

So ... let me get this straight - servicers are going to trip over each to service an upside down loan, that is already showing signs of trouble, with a seller who is documenting hardship, and that is much more likely to fall apart and require additional loss mitigation work? I know, I know ... the loss is the investors, theirs is the program, they probably guarantee that the mitigation work will be paid for, but STILL - this isn't the servicers primary business - I strongly doubt that they will be aggressively competing for it! What they REALLY want is financially strong, paying customers.

Second a word on why modifications don't work from a seller's point of view. Because they are a TEMPORARY relief. The biggest burden facing an upside down homeowner is the large payment. Second biggest is the large negative principal. Once they have trouble making the payment, the logic goes "Why NOT just deal with the whole thing and get it over with?" This is what I mean by loan modifications being the gateway drug to short sales and foreclosures. Once the homeowner gets their head out of the sand, and starts to move in the direction of actually doing something about their situation, they are very likely to go all the way with a permanent solution that will hurt more now, but be better for their long term financial standing. Modification is the logical first step - "What if I get good terms?" But, once the terms of modification, and the long term implications become known ... the homeowner has less of a barrier to keep going all the way, and disposing of the upside down house permanently, and moving on for good.

So, yes, I think this is a needed change, but I also think that it will mean a lot more short sales and foreclosures. And I don't mean that as a bad thing, necessarily.

Is my loan owned by Fannie Mae or Freddie Mac?

Most borrowers don't know who owns their loan, only who services it. And yet, knowing the investor on your loan can have many ramifications for you (short sale, modification, foreclosure, etc). So, here is a quick post giving you a way to find out who your investor is. It only takes seconds - click below:

Is my loan owned by Fannie Mae?
Is my loan owned by Freddie Mac?

Note - the only thing these websites can tell you is "Yes, we own it" or "No, we don't" - and if they don't, they can't tell you anything beyond that. So, if neither Freddie or Fannie own your loan, it can be an FHA owned loan, it can be a portfolio loan (owned by the bank themselves), or it can be any number of private investors. To find THAT out, you may have to call your servicer and ask them.

Are short sales getting easier?

These two articles sure seem to indicate that that's the case!

Article 1 (Realtor Magazine)
Article 2 (MarketWatch)

An interesting bit mentioned in there is the new program by Chase, where they incentivize the Seller to the tune of $3,000 - $35,000 as part of their Short Sale Acceleration Program, to encourage them to do a short sale vs. just walking away and foreclosing. Sounds too good to be true? It's real: We recently had a client who received a $25,000 incentive from Chase AND a $3,000 HAFA incentive when they short sold their primary residence. Yes, they were VERY happy. The criteria here, is that this is only applicable to Chase portfolio loans (meaning, owned by Chase, and not Fannie, Freddie, etc). As I mentioned before - banks want to see more short sales, and less foreclosures, and they are willing to put their money where their mouth is!

In my next post, I will discuss how to find out if your loan is owned by Fannie or Freddie, since this question comes up all the time. 

Short Sales - Back to Basics

I taught in Bakersfield, California back in June of this year. Their market is actually VERY similar to Phoenix, and short sales are quite prevalent. As a follow up to my training, I got asked to write an article for their industry publication - the Bakersfield Realtor Magazine. The topic was up to me (so long as it was related to short sales, of course ...) So, I considered a number of topics in my head, but in the end, the exercise that intrigued me the most was to write an article about the basics of a short sale, rather than about a specific aspect of a short sale transaction. You can see the result of my efforts here. Hope you like it!

Free Financial Recovery Classes from Neighborhood Housing Services of Phoenix

Neighborhood Housing Services of Phoenix has received a grant from the Nina Mason Pulliam Charitable Trust to develop and present Financial Recovery classes to assist Maricopa County residents with recovering from foreclosure, short sale, bankruptcy, and overall financial issues, anyone may attend this class free of charge.

The next workshop is on 10/29/2011 from 9:00 AM – 5:00 PM, breakfast and lunch will be provided.

I am partial to this program because I developed the curriculum and will be presenting it. Each attendee receives a 39 page workbook and has the opportunity throughout the class to ask questions and participate in the discussion.

If you know a homeowner who is struggling and needs some answers, or has already lost their home and looking to get back on track, please share this link with them: http://www.nhsphoenix.org/financial_recovery.html

Financial recovery topics to be covered include:

• Avoiding Fraudulent Foreclosure Rescue Operations
• Budgeting for Survival
• Credit Ramifications in a Mortgage Crisis
• Potential Legal Ramifications in a Mortgage Crisis
• Surviving Debt
• Rebuilding and Correcting your Credit

In the class I focus a lot on the credit report, we will review sample credit reports and study common errors often overlooked by consumers. There are a lot of example case studies we will discuss to give the material a real world feel, I am a firm believer that theory is not relevant for someone trying to get their financial life back together. My focus is on solutions to best prepare the class to move forward toward recovery.

The remaining dates for the class are:

10/29/2011 9:00 AM – 5:00 PM
12/10/2011 9:00 AM – 5:00 PM
1/21/2012 9:00 AM – 5:00 PM
3/3/2012 9:00 AM – 5:00 PM
5/12/2012 9:00 AM – 5:00 PM

The class is held near downtown at Neighborhood Housing Services of Phoenix, which is located at 1405 E. McDowell, Suite 100, Phoenix, AZ 85006.

It is an eight hour course, but it goes by fast, there is a lot of information I need to share. Some of the sub-topics we discuss are:

• Dealing with creditors and collection agencies
• Rights and protections for consumers
• Employment issues stemming from credit
• Protecting yourself from credit abuses
• How long will the credit be impacted
• What to do now in order to buy a house again the soonest
• Step-by-step course of action to correcting your credit report

Can The Bank Take My Car, My Other House, Everything???

One question we field over and over again is, if the bank takes back my home and there is money still owed, can the bank take my car, my other house, the swing set in the backyard, anything or everything? To oversimplify, it is not that simple.

In very basic terms, at the time of a foreclosure (or more common in Arizona, a Trustee Sale), the house is lost. And, the bank will have either sold the house right then at the public auction, or it will take the house back for resale at a later date. The final sale of the property will set the total amount of what the bank did not recover for you (the borrower). Now, that does not necessarily mean that the bank is entitled to that full amount. In fact, the bank cannot "fire sell" the property. Instead, the bank is entitled to the difference between the loan amount and the fair market value of the property.

By way of example. If I borrowed $400,000 to buy a house and it was foreclosed upon by the bank. If at the time of losing the house, it was worth $200,000, but the bank "fire sells" the house for $100,000, it does not follow that I owe the full $300,000. Instead, the bank is only entitled to $200,000 as the bank should have sold the property for fair value.

Now that said, on to the larger question, at the time of the sale itself, can the bank immediately come after me for the debt owed and attach or lien all of my possessions? No - not immediately. The bank, after the foreclosure, then has to file a lawsuit against you, for the amount forgiven. The bank has to then prove that it is owed the money at issue (ie, did not do a "fire sale") and win that case. AFTER the bank wins the case, it can start collections on the amount owed.

This is not an absolute as there are situations when the bank could, if inclined, try to tie-up assets as part of that lawsuit, but, that is rarely done as it requires the bank to post a large up-front bond and is incredibly cost prohibitive to the bank.

So, long and short of it, while the bank someday may be able to come after certain assets, they have to go through the entire process first. That is not to say that you will not owe the bank money and/or that they will not perfect the right to pursue other assets, it is just not an overnight event.

The sunset of REO's, and the move toward short sales.

Below is an excerpt from our friends over at the Cromford Report, which talks about the Phoenix housing market trending away from foreclosures, and toward short sales. Moreover, I recently heard from a friend who attended the largest REO conference in the nation, that ALL the big players are positioning themselves to do more short sales, and fewer foreclosures in 2012 and beyond.

Why? Because short sales are generally better for everyone involved. As I've been preaching since 2006 - win-win-win-win.

From Cromford Report October 2011 Housing Update:

REOs are losing market share very quickly now. Fewer trustee sales are taking place. There were 2,689 residential trustee sales in Maricopa County during September 2011, 44% fewer than the 4,808 of September 2010. In addition a larger percentage of these auctions are now won by third parties (42% in September 2011 versus 20% a year ago). So the quantity of homes reverting to the beneficiary is dropping extremely fast. Only 1,280 single family homes went back to the lenders in Maricopa County in September 2011. This is the lowest total since November 2007. It is also 61% lower than the 3,289 that they received in September 2010. They are selling far more than this number through ARMLS each month and so the lenders' inventory is being rapidly depleted.

It is a clear sign of the strength and dominance of negative sentiment that this remarkable turn round is mostly overlooked. At the same time, a completely irrelevant increase in foreclosures between July and August (due entirely to August having 23 trustee sale days instead of July's 20) managed to make headlines in the local papers. When bad news is amplified like this and good news is ignored we know sentiment has swung too far.

For the housing doom fans who like foreclosures, September 2011 was a pretty dismal month. There were a total of 4,544 new notices issued in Maricopa County of which 4,335 were residential. This is 39% lower than September 2010. This new number is actually slightly higher than April through July 2011, but 15% lower than last month and lower than every month prior to April until we get all the way back to December 2007. The downward trend has slowed but remains in place. The bigger news is that there were only 2,840 trustee sales of all property types. This is 44% down from September 2010. This is also the lowest number since March 2008 (except for November 2010 when Bank of America completely halted its trustee sales). Foreclosures are clearly well past their peak and the short sale is looking likely to overtake the foreclosure in the coming months as the primary mechanism to resolve homeowners' financial distress.

AZ Department of Housing encourages short sales by offering money.

In a model, not unlike the HAFA program, AZ Department of Housing is trying to offer incentives for upsidedown homeowners to choose a short sale over a foreclosure. Interesting program, but much like other programs, its success is linked directly to its ability to enforce. If we have issues with HAFA (enforced by the US Treasury), will a local program work? Personally, I am all for it - this sounds like a legitimate solution and a good use of money already allocated to the cause.

Full article from AZ Central here.
Arizona Department of Housing portal here.

Short Sales by the Number - August 2011

Another excellent number breakdown by my good friend Mike Orr, who runs the MLS statistics website Cromford Report. While I think the entire article is good news for the short sale market, the last paragraph is particularly good (and thus bolded by yours truly). Originally published in the AAR Magazine, direct link here.

Success Rates

The success rate has improved markedly and in June reached 61.8%, the highest we have ever seen. May's success rate was 53.9%, which was also a strong improvement over April's 48.0%

Short Sale Supply

The supply of short sale and pre-foreclosure active listings was 16,509 homes on July 1, 2010, of which 6,735 had a contingent contract (AWC) leaving 9,767 active without a contract. These numbers one year later on July 1, 2011 were:  11,085 (down 33%), 6,616 (down 2%) and 4,469 (down 54%). So we now have fewer than half the number of available short sales without an existing contract.

Time on Market

Time on market is still relatively high for short sales, currently averaging 146 days for closed transactions, but at least this is now trending down from a high point of 160 in April. Many short sales stay in AWC status for a long time awaiting lender approval. Unlike pending status, AWC listings still accumulate days on market because, in theory at least, they are still being marketed for sale to attract another buyer.

Pre-Approvals

Listings shown as pre-approved started to be marked as such on September 17, 2010 and reached a peak of 1,042 active on April 16, 2011. The current number active is now down to 772, so as elsewhere, supply is drying up. There have been 3,584 preapproved short sales listing added to ARMLS since September 17, 2010, which is just under 12% of all short sale listings.

On the Rise

The lender owned market is now declining in size as foreclosure volumes are falling, and short sales are the sector of the market that is growing fastest. They still take patience, but for buyers, they represent excellent value. It is possible to find many short sales in great condition at prices only slightly higher than REOs, and sometimes even cheaper. Given that there are usually far fewer buyers competing for them and often much less fix-up required, I strongly recommend them to buyers who have the time to wait.

With the current decline in supply, these low prices will not last forever. Since our negative equity problem is not going to disappear quickly, we will all need to work with short sales for many years to come, long after the foreclosure backlog has been eliminated. 

Qualifying Short Sales

I have been speaking of qualifying the players in a short sale as means of increasing your odds of success for a very long time now, and recently got interviewed by the AAR Magazine on the topic. I think the article turned out very well, and I am very happy about the caliber of other professionals that I got to share page space with. You can read the full article here.

What is a Purchase Money Loan?

Arizona, as you know from reading this blog, is an Anti-Deficiency State. That means, in certain situations, when a bank loans money for the purchase of the house, the bank's only collateral (or recourse) is the house itself. In other words, if I borrow $100,000 from the bank to buy a house, and lose it to a foreclosure for only $50,000 - the bank cannot pursue me for the $50,000 I never paid back.

As you also know from reading this blog, the key to having this protection is the loan must be what we call a "purchase money loan" - the loan used to "purchase" the house. One of the most prevalent questions we hear is, well "what if I refinanced my first loan and took out extra money to improve the house, does that count?" Unfortunately, we do not know that answer for sure. The law on the books, as of today, does not give us a definitive answer as to whether a "cash-out refinance," in which the refinanced portion is put back into the house, would still be considered purchase money. That is just another challenge of dealing with these issues - we cannot definitively answer all the burning questions.

But, one thing we/you can do, is complete a short sale of these "cash-out refinanced" loans and ask the lender to waive any deficiency from the refinance. If the lender agrees to do so, then no worries!

Fitting Quote

This evening I stumbled upon a quote that I find most fitting for short sales. Seems like a good answer to the often asked question of "why do short sales work":

"When you owe the bank $1,000 and you're broke, you have a problem. When you owe the bank $1,000,000 and you're broke, the BANK has a problem." (Unknown) 

FTC decides not to enforce parts of MARS

Today the FTC has ruled that it will not enforce certain provisions of the MARS rules, specifically ones that apply to licensed real estate agents. There has been much gripe about MARS in the real estate community, because instead of help and protection, the rules created a lot of confusion and unnecessary barriers for the very people who are needed by the distressed sellers and by the banks - the real estate agents who can put together a short sale transaction. 


"As a result of the stay on enforcement, these real estate professionals will not have to make several disclosures required by the rule that, in the context of assisting with short sales, could be misleading or confuse consumers," the FTC said in a statement.


Short sales are hard enough as is - we need less barriers to helping distressed borrowers, not more!


HousingWire Article
FTC Press release

Bank of America Improving Short Sales

Just this past week as I was teaching in San Jose, I had an agent come up to ask a question. He started out by saying "Fortunately, this isn't a BofA short sale ...." I hear this A LOT, and it has everything to do with the fact that BofA used to be THE WORST lender to do short sales with. But a year and a half ago, they really started making an effort to change that. Under the guidance of Matt Vernon (and now Kimberly Dawson), BofA has gone from the worst to being among the best. Starting with transition to Equator (which was not initially well received by the real estate community), moving to simplified process, one by one, BofA appears to really try and do better. The fact remains that BofA left a very bad taste in a lot of people's mouth, and they know that. 

Below you will see a press release from today that aims to solve a well known problem of Buyer cancellation forcing a restart of the process and a delay in closing. BofA is now allowing for a backup offer to be submitted, and so long as it matches the previous offer, the process will not be delayed. This is great news for thinly stretched agents and distressed borrowers! 

Keep up the great work, BofA!

Now You Can Substitute a New Buyer for One Who Walked Without Restart

As an example of our commitment to improving the short sale process, Bank of America now allows real estate agents to submit a backup offer on a transaction if the original buyer has walked away from the sale.  This means you will no longer have to initiate a new short sale; instead, you can continue with the original transaction in Equator and still work with your same short sale specialist.  This change will save you time by not having to repeat a number of process steps. When a Backup Offer Is Ready You should send a message to your short sale specialist via Equator when the original buyer is no longer interested in the property.  Your short sale specialist will then respond to you within two business days and ask if you have a backup offer ready to submit.  If you have another buyer prepared to make an offer, the short sale can proceed without having to repeat the short sale initiation steps.  The short sale status in Equator will change to "Marketing," and you will be directed to complete the following tasks within 14 business days:   ·         Complete the "Listing Data" task. ·         Provide the marketing description. ·         Review the marketing plan. ·         Upload the offer.  (To do this in Equator, locate "My Properties," then "Offers" and select "Place New Offer.") If the "Listing Data" task is not completed and the new offer is not uploaded within 14 business days, the file will be closed. When No Backup Offer Is Ready This new process applies only if there's an available backup offer when a buyer walks.  If you do not have a backup offer ready to be submitted, the short sale will be declined.  In that case, you should return to marketing the property and initiate a new short sale in Equator once you receive another offer. A new educational guide, How and When to Submit a Short Sale Backup Offer, is available to explain the backup offer process.  If you have any questions, please contact your short sale specialist via Equator or call Customer Care at 1.866.880.1232. Visit the Real Estate Agent Resource Center at bankofamerica.com/realestateagent for additional educational guides, news and resources to help you complete short sales at Bank of America.

Which Banks Are Pursuing the Most Short Sales?

Interesting article in Realtor Magazine (citing Inman, citing the Treasury) about which banks do more short sales. According to their findings, Chase and Wells Fargo. Couple of points on this:

1. When we say Chase and Wells Fargo, we also include their acquisitions of troubled banks like WaMu and Wachovia. WaMu committed much fraud and encouraged risky lending - is there any wonder their loans are turning out to be short sales? A HUGE chunk of Wachovia loans was written off when it was acquired (which coincidentally makes them some of the easiest short sales to work). So, of course these lenders are doing a lot of short sales. But what about BofA's acquisition of Countrywide? See #2.
2. Once again, we have to remember that real estate is a geographical phenomenon, and generalizing can lead to false conclusions. Countrywide was very active in Arizona, so our personal experience is that most of the short sales we are doing are BofA short sales. To put it simply - to say that all banks work all markets equally is a fallacy. For example, we rarely see US Bank short sales, but they are quite prevalent in Pacific Northwest, due to the fact that USB has a larger presence in that market. 

Security Breach: What Should You Do?

Every week it seems like I read something about a security breach, whether it is a bank, government entity, university, or hospital, the possibilities of a breach are endless. Criminals are grabbing sensitive information such as social security numbers to commit fraud. The topic comes up frequently in my classes about credit, people want to know how they can protect themselves if they are part of a security breach.

The standard recommendation is to add a fraud alert to your credit report. This is a notation on the credit report notifying anyone looking at the credit report that there is a chance of identity theft, therefore the identity of the person requesting credit should be scrutinized. I am not a firm believer in relying on a fraud alert as a sound protection from identity theft. The reality is it does not stop anything, but rather it is simply a cautionary notice.

The better approach is to consider a security freeze as a protection because it denies access to your credit report. When a freeze is added to your credit report, all third parties, such as lenders or other companies, whose use is not exempt under law will not be able to access your credit report without your consent (you give them a pin for access). A security freeze is more beneficial than a fraud alert because it actually stops access to your credit report without your permission. It is available to ID theft victims with a police report and non-victims who have no police report for a specific incident, but wish to protect themselves.

You need to go to each credit bureau individually to institute a freeze:

TransUnion: http://www.transunion.com/corporate/personal/fraudIdentityTheft/fraudPrevention/securityFreeze.page#3

Experian:
http://www.experian.com/consumer/security_freeze.html

Equifax:
http://www.equifax.com/cs7/Satellite?c=EFX_Page_C&childpagename=EFX%2FEFX_Page_C%2FGetcreditCP&cid=1182374732430&p=1182374732489&packedargs=locale%3Den_cp&pagename=EFX%2FWrapper#NextSteps

If the links change just go into each credit bureau website and search the term “security freeze.”

The reason I like the security freeze is because if someone has your social security number and tries to apply for credit, a creditor will not be able to access your credit report and therefore credit will likely be denied. You should still check your credit report annually to make sure there are no issues, and the security freeze will not prevent someone from using your credit card if your account number is stolen, so remain on guard and realize the freeze will only prevent new accounts from being opened in your name. Existing accounts are still susceptible.

The security freeze may delay or interfere with the timely approval of any subsequent request or application you make that involves access to your credit report. This includes new loans, credit, mortgages, insurance, rental housing, employment, investments, licenses, cellular phone service, utility service, digital signature service, and extension of credit at point of sale.

Additionally, while your report is frozen, companies that provide consumer data to the credit bureaus will not be allowed to update name, address, social security number and date of birth information on your credit report. If there are any changes made to your name or address while your file is frozen, you must notify the credit bureaus directly so that they can update your personal information.

If you wish to apply for a new credit account or other credit relationship, and the prospective lender or company needs to access your credit report, you will need to get a pin code to give access to your report or remove the security freeze.

As a method of protection the security freeze is a way to lock up your credit report and the cost is generally free if you have a police report or a $5 - $10 onetime fee if you do not. It is not only the best protection, but it is also a very inexpensive protection.

June Arizona Housing Update

I am going to repost June housing opinion from our friends at the Cromford Report in it's entirety. Very interesting information. So, why is it, when such good signs abound, are we reading so many doom and gloom stories (like this CR piece)? I believe it is for the same reason we've discussed multiple times on this blog - real estate is talked about as a national trend, whereas in reality it is a local phenomenon. Yes, I believe that the "housing market" in general has a ways to go down. No, I do not believe that Arizona will continue to decline at the pace it has been. Let's remember - we were among the first to go down (starting at the end of 2006), and are among the hardest hit (in the top five biggest pricing declines nationwide). Logically, this also means that we will reach our bottom sooner. Practically, this means that investors and savvy buyers will continue to pick up great deals for years to come, since the general mood about housing will remain dour until the other markets reach their natural correction levels, and start to level off.

Unfortunately, this is still not good news for millions of Arizona homeowners who are hopelessly upside down. I do not believe that we will see sharp and fast pricing increases, and they will remain upside down for years to come, with only solutions remaining what they are today - staying put if they can, or short selling or foreclosing if they cannot afford the house.

Here is the full June housing opinion:

A child of five would understand this. Send someone to fetch a child of five.
Groucho Marx

While researching the definition of robo-signers, I came across this partial definition in Investorpedia: “robo-signers assume the paperwork to be correct and sign it automatically, like robots.” This is a perfect description of how I was at my last loan closing. I think I may be a robo-signer.

Distressed Inventory Continues Slide

The big news in Maricopa County’s housing market in May continues to be the rapidly declining distressed housing inventory. This decline is not subtle folks; it hits you over the head like a sledge hammer. We define distressed inventory as the number of homes with an active notice combined with the number of bank held properties. On January 1st of this year Maricopa County had 39,724 homes with an active notice and another 18,889 REOs.  Our distressed inventory began 2011 at 58,613 homes. At the end of May these numbers had fallen to 27,396 and 18,451 respectively, combined 45,847. In the last five months distressed inventory has fallen on average 2,553 homes per month. During the last two months these declines have continued at an accelerating pace, reducing inventory by 3,704 in April and 4,265 in May. The decline we saw in May was the highest on record indicating the snowball is gaining momentum and heading down hill. Our early June numbers are projecting the same accelerated pace. Simple math tells us that if distressed inventory continues to decline at its current rate, in 10 months it will dry up, but then, that’s merely simple math. 

When I present my simple logic, readers and other experts counter with complex math factoring together a Massive Backlog of “Shadow Inventory”, "Robo-Signings", a declining demand as QE2 ends and the ever popular bank conspiracies. Sometimes, I feel like I’m conversing with Hollywood screen writers. Maybe there is a need for Rocky 7. Stallone is going to be 65, maybe it’s time he quit competitive boxing, maybe it’s time for him to leave the ring and get his real estate license.  “Yo, Adrian, we’re movin to Phoenix, two warm up bouts with ‘Robo’ and ‘Shadow’, and I think I’ll be able to take down da champ, Russell Shaw. Cut me Mick, I’m going 15.”  Boom.  Sorry, sometimes I drift.

Since January 1, 2007 Maricopa County has seen 165,385 home foreclosures, a numbing number in anybody’s book. One of the main reasons I believe we’re heading into the home stretch is how far we’ve come. The news links above talk about the same decline in distressed inventory that I just mentioned; only they attribute the decline to massive processing delays. These same articles talk about how foreclosures rose through last summer, and then began their decline in September when the robo-signings scandal broke. Information Market numbers tell a slightly different story, a short-lived Bank of America moratorium in November and December briefly lowered foreclosures. In January foreclosure numbers picked back up resuming their steady and consistent flow. In May, Maricopa County saw 4,206 homes sold at auction with 1 in 3 being purchased by investors, leaving only 2,800 reverting to the lender.  So, at the end of the day while our detractors have similar numbers, their explanation as to where we are and where we’re headed is completely different. Since January 1, 2007, Maricopa County has seen 165,385 homes removed from the “bad mortgage” file leading loan delinquencies to their inevitable decline.

I believe the decline we’re seeing in new notices runs parallel to the report of Jay Brinkman, the chief economist of the Mortgage Bankers Association, where in he states, "Of particular importance is that the drop in the percentage of loans 90 days or more past due was driven by improving numbers for loans originated between 2005 and 2007. These are the loans that drove the mortgage market collapse and now represent about 31 percent of loans outstanding but 65 percent of the loans seriously delinquent. Given that loans originated during this period are now past the point where loans normally default, and that loans originated since then generally have better credit quality, mortgage performance should continue to improve.” 

The Wall Street Journal article would disagree, arguing that banks have decided to slow the foreclosure process while they perfect their procedures, in turn stabilizing property prices while minimizing losses and legal issues. There are two points in the WSJ which I have difficulty grasping. First, I find it hard to believe that the banks would foreclose on 165,000 homes in Maricopa County and just now realize they have a problem with declining home values. Second, why would you be concerned about robo-signings and legal issues when many of your current foreclosures are strategic defaults? How can there be vast legal issues when the majority of home owners facing foreclose, are saying in Henny Youngman fashion: “Take my house-please”. Why would the banks conduct a more thorough review when the party with the “alleged” claim is mailing in the keys? I may be wrong, and the Wall Street Journal article may be right; but in life, I’ve always found the simplest explanation is usually the best.

The following graph compares the number of homes with an active foreclosure notice on March 1, 2010 to homes with an active notice on June 1, 2011 by origination date.

May’s Sales Activity

Case-Shiller, announced the dreaded double dip in home pricing in its May 31st report.  In response to the report, David Blizter, chairman of the S&P index committee reportedly said, “Home prices continue on their downward spiral with no relief in sight.” In response to Mr. Blizter’s statement the Maricopa County housing market immediately responded the next day by registering its 6th consecutive month with a resale median home price of $115,000 while quoting Mark Twain, “The reports of my death are greatly exaggerated.”

May’s Sales Summary

Final Thoughts

There has been a lot of speculation in a series of recent articles regarding the purchase of a home in Scottsdale by one Sarah Palin. Questions swirl, is she running for President? Is she making a run for John Kyl’s seat?  One article even questioned whether or not she has title issues.  In a recent Huffington Post article, Massachusetts Register of Deeds John O’Brien and Forensic Mortgage Fraud Examiner Marie McDonnell gave this opinion, “the title to Sarah Palin’s new home in Scottsdale is clouded by robo-signers.”  They even published a copyright protected "McDonnell's Mortgage Map"  exploring the property’s chain of title in depth.  Ms. McDonnell, what were you thinking? Not once in your report do you mention the “livery of seisen” ceremony. Did it take place or not?  What was symbolically passed? A token cactus? A clump of dirt?  Was the cactus of native variety? Was the soil clayish and high in alkaline content? Ms. McDonnell, these are the rudimentary tenets of common law, the Normans are not pleased. I drifted again, didn’t I?   The simple explanation is probably best. I’m certain Ms. Palin’s local attorney required title insurance, and I’m also certain our local title experts are confident in their $1,700,000 guarantee. In parting, the speculation as to why the home was purchased, I’m going with Scottsdale is a good investment opportunity and a great reprieve from Alaska’s frigid temperatures.

Cheers,
Tom Ruff

"McDonnell's Mortgage Map"
Huffington Post
"Robo-Signings"
Massive Backlog
Case-Shiller
The Information Market

Jay Brinkman

Debtors can end up being on the receiving end of an abandonment.

What if the bankruptcy trustee abandons your property back to you?

Bankruptcy and insolvency may cause debt cancellation income to be nontaxable to the debtor, but bankruptcy can cause tax problems for an individual if the court allows or orders the trustee to abandon property under 11 USC 554.

If a property is of no value, or a potential burden to the bankruptcy estate (by virtue of tax on built-in gain for example), the court may authorize or order the property’s abandonment. If the debtor subsequently voluntarily (eg. short sale) or involuntarily (trustee’s sale) transfers title to the property, a taxable gain to the debtor may occur.

Discharge of debt income is excludable under IRC Sec. 108 to the estate and to the debtor while in a bankruptcy proceeding, but gain from the sale is generally not. If a property is sold by the estate, any potential tax would generally be an administrative expense of the estate. However if the property were to be abandoned to the debtor, then the debtor assumes the cost basis of the property subject to any reductions in basis by virtue of the debt discharge. Some practitioners believe that abandonment may be made to the secured party, rather than the debtor, in which case the debtor may be insulated from the tax consequences of a future transfer. The transfer of property between a bankruptcy estate and the debtor is non-taxable under IRC Sec. 1398. This section refers to a “termination of the estate,” but most practitioners believe it would also apply to an abandonment.

Depending on the other tax attributes of the debtor, the basis of the property abandoned might not be reduced, as the ordering rules of IRC Sec. 108 require net operating losses, capital losses, and other attributes to be reduced first, unless an election is made. There is also a limit to the reduction of basis under IRC Sec. 1017, where generally the basis of assets cannot be reduced below the aggregate of the taxpayer’s liabilities immediately after discharge.

Because any deficiency relating to the debt secured by the abandoned property is discharged, all debt secured by the property now becomes non-recourse. While some practitioners believe that the tax law should be changed, the current law treats all such transfers of the abandoned property as sales with the selling price equal to the balance of the secured loans, and the cost basis to the debtor equal to his basis before the bankruptcy reduced by any required reductions due to debt forgiveness.

If the property qualifies as a primary residence for two out of the last five years, the gain upon sale, trustee’s sale, deed in lieu, may be excluded up to $500,000 for a married person under IRC Sec. 121. If the property does not qualify as a primary residence, other losses, carryover losses, or other tax attributes (although possibly reduced by debt forgiveness) may lessen the tax burden to the debtor.

In Private Letter Ruling 8918016 (no precedent), the IRS in a pre-BAPCPA 1989 ruling, stated that an underwater farm abandoned to the taxpayer in a Chapter 7 proceeding, retained the tax basis of the property in the hands of the estate reduced by adjustments for debt forgiveness. The ruling went on to state that the abandonment of the farm to the taxpayer lifted the stay on foreclosure, and that the unsecured deficiency claim was discharged, leaving the lender’s lien against the property as a nonrecourse claim. A subsequent foreclosure would cause the taxpayer to recognize gain equal to the balance of the mortgage over the basis of the property.

In Tax Court Memo Decision 2000-82, the issue was addressed as to whether an abandonment was the equivalent of granting relief from the automatic stay. The Tax Court cited conflicting decisions as to whether property was necessarily removed from the bankruptcy estate upon the lifting of the stay. At the time of the Tax Court’s decision, it deferred to the Ninth Circuit’s 1987 decision in Wilson v. Enters, Inc. (822 F.2d 859), that relief from stay as to petitioner’s residence was an abandonment whereby the property reverted to petitioner, resulting in the petitioner, not the bankruptcy estate, having to account for the tax effects of the property’s foreclosure.

Based on the possibilities above, I would suggest that if your attorney believes it likely that a property will be abandoned by the bankruptcy trustee, a tax projection be prepared estimating the tax consequences of the property’s transfer, pre-petition versus post-petition, in order to minimize the tax penalty to the debtor.