Friday, May 27, 2011

HAFA Meeting Update

Yesterday I sat through a HAFA Update meeting with representatives from the US Treasury and the staff of Arizona Association of Realtors. The Treasury staffers are on tour of five hardest hit states, and are meeting with the local Realtor associations to get feedback on the program and to answer questions.

As I have stated elsewhere, I have been a HAFA believer ever since my friend and colleague Ray Mathoda (of AssetPlan USA) helped me to wrap my mind around the intent of the program. The intent is indeed good, but the devil, as they say, is in the execution. Undeniably there are issues with execution, but the purpose of this post is not to replay the sad song that you hear all over the internet, but to post my personal takeaways on the meeting. Here they are:

  1. Whether or not the program is successful, one of the intentions for it was to lead the industry by example, and we are already seeing results of this. Full forgiveness of deficiency on 1st loan balance is much more commonplace than it was before HAFA (this is a requirement for HAFA transactions).
  2. The "trust issue" is still a huge factor to overcome. The distressed borrowers do not trust the lenders, and they do not trust the government, instead choosing to trust the real estate professionals or attorneys (who will represent them exclusively). This makes any kind of public outreach difficult, since a message coming from the lender or the government is not perceived to be as credible, and the real estate agent or an attorney cannot get the contact information of the distressed borrower due to privacy reasons. Be on the lookout for a new PSA campaign from the Treasury this summer.
  3. The borrower who is going through the HAFA program has the right to escalate their file if they believe that the servicer is not adhering to program guidelines. This can be done by calling 1-888-995-HOPE and asking for MHA Help Line (call center is actually in Peoria, AZ). The agent also has ways to escalate, as seen on the website. Email is generally more effective. The Treasury is actively enforcing the program guidelines, and is following up on each complaint submitted through the proper channels.
  4. Valuation reconciliation (valuation dispute) procedures is a common source of frustration, and they are evaluating the creation of a standard procedure for it, which would allow the agent and the borrower to dispute the value presented by the servicers and ask for a correction (provided that they can show support).
  5. If the borrower's house is listed, and they submit the documentation for a HAFA short sale after they receive the offer (what is call the reactive vs the proactive approach), they do not have to be delinquent on their payments, so long as they can prove "imminent default."

In conclusion, I appreciate the work that has been put into this program thus far, and can say that we try to qualify each distressed seller that comes our way for HAFA first, before attempting a proprietary program from the servicer. In the end, I do not believe that HAFA is going to be the final solution to the short sale dilemma, but I do believe that the impact of it will remain felt, and that in the end it will be remembered as a good thing and a benefit for the distressed borrowers who need to short sell their house.

You can read more about the program here.

Saturday, May 21, 2011

Negotiate Now or Later!

If a homeowner, who is underwater and considering his or her options, has a home encumbered by two loans, exploring a short sale is likely the best option.

To over simplify, I am talking about the homeowner who borrowed money to purchase their house and, then, when times were good, took out a second loan - an equity line. And, unfortunately, whether they used that equity line to improve the house, pay down debt or, like me, buy other property, that homeowner has a problem. The problem the homeowner has is, while the first loan may have protections under Arizona's Anti-Deficiency laws (meaning the bank cannot pursue the homeowner if the homeowner defaults and does not pay the debt owed), the second, the line of credit, does not come with those same protections.

Well, the benefit of attempting a short sale in this situation is that the homeowner will have an opportunity, during the short sale, to negotiate the debt on the second. To explain, the short sale is a traditional sale in one sense - someone will offer to buy that property. The question is whether the lenders will accept that offer, given that it will be less than owed on the property. Well, in a classic two loan short sale, the offer will come in, usually less than what is owed on the first loan. The first lender, in turn, will, if the offer is within reason and fair value, agree to accept that offer to release its rights in the property. But, that does not end it. What about the second?

For the second to cooperate, the first lender will usually offer the second a portion of the purchase offer (usually between $2,000 and $5,000). Typically, the second will accept the $2,000 to $5,000 from the first and agree this amount is sufficient to release its lien rights in the property. Whew, glad that is over! It is not.

Even if the second agrees to waive its lien rights in the property, the homeowner still needs to be released from the debt (the promissory note rights). Every loan has two crucial pieces of paper. The first is a Deed of Trust - the lien agains the property that gives the lender the right to force a sale of the property if there is a default on the loan. The second is a promissory note - the note we all signed telling our lender we would pay them back for the loan.

That is where the short sale negotiation process comes in. During the offer, acceptance, review period, the short sale negotiator will work with the second loan and attempt to have that lender accept the contribution from the first for a complete release of debt and/or if that is not acceptable, negotiate acceptable terms (e.g., the seller/borrower contributes some additional monies - but less than full amount owed - and/or agrees to some other terms). Regardless, the goal of the short sale is to negotiate with the second to resolve any and all debt obligations, ideally for less than is owed.

On the other hand, if the borrower/seller does not go through this process and just allows the house to proceed to foreclosure/trustee sale, that will eliminate any debt obligations to the first lender. It will not, however, extinguish the debt owed to the second. And, now, instead of negotiating with that secnd lender in the context of a short sale, with a contribution from the first lender, the borrower will be negotiating with the second lender after being sued on the promissory note and in Court. That will require lawyers, become more adversarial and create further headaches.

So, when I say negotiate now or later, I mean one can negotiate in the friendly confines of a short sale, or in the unfriendly confines of a lawsuit, but, a negotiation will happen with those seconds!

Friday, May 20, 2011

Short Selling: Investor Style

According to a White Paper circulated by American Home Mortgage Servicing, a new effort is mounting to allow the short sale of distressed notes out of mortgage backed securities (MBS). This move would allow about $200 Billion of distressed and underwater notes to be sold in block to new investors at a discount. This is similar to what a homeowner would do in a property short sale, but this time it is the investors who are selling short. There are many moving parts to this idea, including application of recent changes to accounting rules and the need for support from the Treasury. However, the benefits are far and wide with the liquidation of these toxic assets to other investors who could then offer modifications or short sales to the home owner that results in a gain to the new investor. Does that sound right? In the accounting world... I guess?

I'm not an accountant, and perhaps other contributors could shed a bit more light on this concept. From a simple read and initial digest of the idea, I think there is much hope here for the help to housing. Read the full story on Housing Wire for yourself and feel free to comment.

Are You a Qualified Seller?

Before you decide to list your property for sale, you must first determine if a short sale is right for you. In other words, is this truly the best option for you at this time? To get to this answer, it is important to know the WHY behind your decision to go through with a short sale. No one else can conclude this but you. The reasons for someone doing a short sale can be many – avoiding the stigma of a foreclosure, credit preservation, ability to negotiate deficiency demands with the bank prior to foreclosure, neighborhood preservation, etc ... but the specific reasons are yours alone.

In addition to knowing why you want to do a short sale, it is also important to understand what other options are available to you in your particular situation.  Other options may be renting your home, settling or consolidating other debt, getting a second job, working a loan modification with your lender, filing bankruptcy, or letting the home go to foreclosure. It is important to understand ALL options available to you, in order to make the right decision.

While there are many resources for each of those options available on the internet, we strongly recommend that you have a conversation with a local professional experienced in each of the fields (attorneys, accountants, HUD counselors, bank counselors, etc). A true professional immersed in their field will have all the right resources, and can recommend other reputable professionals to you. Please remember that a real estate professional is not qualified to provide you legal, financial/tax or credit advice, so it is important that you get your questions in these areas addressed as well.

Some common options many sellers evaluate are “Short Sale vs. Foreclosure,” or “Short Sale vs. Staying,” or “Short Sale vs. Renting.” The most frequent scenario we encounter is the “Short Sale vs. Foreclosure” decision. It is important to understand that ultimately this is exactly how your bank will view your short sale as well – an alternative to foreclosure. And remember, once you have stopped making payments on your loan you are on a path to foreclosure.

During a short sale the bank will ask about the nature of your hardship, and ask to see supporting documents (to include, but not limited to, recent bank statement, tax return, paycheck stubs, etc). Hardship is a very relative concept, but the most common definition that we use is that something has changed, and you are no longer able to keep making the payments to the bank. Does this describe you? Are you able to avoid foreclosure through another means? Or is a short sale your best option?

Wednesday, May 18, 2011

Bankruptcy Versus Debt Settlement

Here is an email question I received today:
Patrick, I attended your class last year in Worthington, Ohio and have purchased your book.

I have a client who has about $70,000 in credit card debt. They are planning to file bankruptcy but don't want to lose their home or their retirement accounts. I suggested they use a non-profit credit association company to work out a payment plan and pay their debt. I recommended Consumer Credit Counseling Service in Columbus who you mentioned in your book. I don't want to lead them down the wrong path as I am not a financial advisor. You implied in your book and class that bankruptcy might be the best route for their credit.

What is your suggestion?

There are many things they should consider, here is my short list off the top of my head:
  • They likely can keep their retirement accounts in a bankruptcy; the statutes in most states give retirement accounts an exemption from creditors. The list of exemptions will be in your state codes/statutes, the legislative websites have great search features for locating the information.
  • They can reaffirm their mortgage and as long as they continue to make the payments they can keep the house with the permission of the court. This decision needs to be weighed carefully, I am aware of many people who reaffirmed their mortgage and lost the house a year later without bankruptcy protection.
  • People who go through bankruptcy will generally have better credit within 2 - 3 years, whereas people in credit counseling repayment programs can be in bad credit shape for 3 – 5 years.
  • Through bankruptcy (Chapter 7) they may be able to discharge the entire $70,000 balance, depending on if they qualify based on their income.
  • A bankruptcy is a permanent public record, but falls off the credit report within 10 years, they could buy a house again within two years of a Chapter 7 bankruptcy.
  • Credit counseling is not part of the permanent public record and will fall off the credit report in 7 years generally (this is the way to go if they have political aspirations). There are circumstances where it makes sense to go through CCC instead of bankruptcy, generally for smaller amounts; $70,000 is not a small amount.
  • A major consideration is tax consequence when it comes to debt settlement, if they owe $70,000 in credit card debt and settle for half, they are possibly going to be taxed for $35,000, depending on their tax bracket this could be a shock. An important thing for consumers to realize is that even if they do not qualify for a Chapter 7 discharge, going the Chapter 13 route may turn out better than settling through a non-profit. For example, let’s say the non-profit gets the creditors to settle for half, but the court may order that the creditors will receive ten cents on the dollar. Bankruptcy can be superior even from a settlement standpoint.
  • With debt settlement through CCC the consumer does not lose any assets, with a Chapter 7 bankruptcy the debtor would lose any non-exempt assets (personal property, stocks, savings, etc.). In a bankruptcy the non-exempt assets are auctioned off, I go to these auctions frequently. Many times the debtors will go to the auction and bid on their own stuff, which is allowed. Last year I purchased $2,300 worth of framed art for $80, the assets were from an art gallery that went under. The possibility of losing personal property is a major factor in making the decision to go the bankruptcy route, especially if the debtor has cherished keepsakes that would have to go to auction to pay creditors. It is a good idea to sit down with an experienced bankruptcy attorney for an exemption planning session to plan out the bankruptcy thoroughly.

If given the choice between a payment plan and discharging the debt it is almost always a better idea to discharge the debt. At the point of discharge the credit begins to heal, whereas with a repayment plan the damage continues until the account is settled and closed out. It is also important to realize that there are specific laws and procedures for bankruptcy, plus there is oversight. In the world of credit counseling there is no schooling, there is no licensing, there is no bar exam to ensure proficiency, it is a wide open wild west of sorts. I do believe there is a place for credit counseling, as long as the organization sticks to budgeting and interpreting the credit report. An excellent measure of whether a credit counseling agency is trustworthy is if they are HUD approved. I have worked with HUD approved counseling agencies for a number of years and have found NeighborWorks organizations to be the best all around.

As soon as credit counseling crosses into a repayment plan this is where I start to feel shivers up my spine. There is a thing called the sharing rule, which allows a debt settlement/credit counseling company to receive a commission/cut of the amount they can get the consumer to pay to the creditor. I feel this is an outrageous breach of fiduciary duty at the highest level. My second major issue is that many consumers drop out of the repayment program and file for bankruptcy ultimately any way.

This is just some food for thought, being in a position of choosing between bankruptcy and debt settlement is not an easy position to be in. Given the circumstances I think they should consult with a bankruptcy attorney to inquire about their eligibility. I feel strongly about this because I see many credit reports where if someone had just filed bankruptcy they would be fine today, but instead they dabbled with settlement and it prolonged the damage.

Hope this helps!

Monday, May 9, 2011

H.R. 1498 - Cracking the Short Sale Whip?

So, H.R. 1498 has been introduced: "Prompt Decision for Qualification of Short Sale Act of 2011". Kudos to Congressman Rooney of Florida for drafting this bill that proposes an amendment to Chapter 2 of the Truth in Lending Act. Read the text of the Bill here.

Essentially, the flow of the legislation says this...
  •     If mortgagor submits to the servicer a written request for a short sale...
  •     and all information required by the servicer is included...
  •     and the mortgagor does not receive from the servicer before a 45-day period...
  •     a written notification of whether such a request has been approved...
  •     or, has been approved subject to specified changes...
  •     or, that additional information is required...
  •     such request shall be considered to have been approved by the servicer.
    Is this sufficient? Will it crack the whip on the servicers to get an answer to the mortgagor? The answers to these questions can only be hypothetical this side of passage and implementation of the Bill. At face value it sounds pretty good. Having negotiated scores of these transactions, though... I am a bit skeptical. The loophole is HUGE for the servicer to comply and yet still delay. At the end of 45 days, the lender can simply require additional information and delay further. Does that ever happen??? Absolutely!! All the time, and for a host of reasons.

    But here is the real reason to wonder if this legislation has teeth... HAFA (the Government Short Sale program) requirements are already in place and seems to have even more stringent policies, requiring the servicer to provide the short sale applicant an answer in only 30 days. Even though H.R. 1498 has consequences that "bind" the servicer with an automatic approval if they can't get an answer in 45 days, HAFA should be sufficient in standardizing the process and getting banks to conform without these changes. Well, at least that seems logical, right?

    Remember, one of the basic elements in negotiating a deal is the "value creation". Can a bank approve a short sale in less than 45 days? 30 days? 15? I tell you, banks can approve a short sale in 15 minutes, if it is the right deal for them to make. The effort to standardize the short sale process and add teeth to try and get banks to conform is a good effort. However, at the end of the day banks don't need time, they need to know that this is the best deal they are going to get. It is not a time problem. It is not a word problem. It is a math problem.

    In my opinion, the weight that needs to be brought forth to give incentive to the bank is simply this... if the net gain from short selling a home (before foreclosure) is greater than the net gain from selling after foreclosure, banks should be required to approve the short sale. Am I being over-simplistic? Perhaps. But I'm not sure the current proposals will yield the results that legislators are thinking.

    MarketWatch: Housing crash is getting worse: REPORT

    Scary sounding headline, right? And yet, how often do we hear this kind of talk in this day and age? It's almost like we are immune to it, and conveniently ignore it, worrying about today, rather than tomorrow.

    In this blog post, I am going to attempt to draw out a couple of points out of a very well written article that I just read (full link at the end of the post).

    1.      Real Estate is Location Specific.

    From the article:
    In other words, when it comes to distressed housing, I’m finding it hard not to be a contrarian bull.

    Why? Am I crazy?

    Well, maybe. But I’m a medium-bull for all the reasons everyone else is gloomy.
    First, prices in many areas are now cheap. They have corrected a long way since the bubble began to burst five years ago. Of course, it depends on where you are. I’m still skeptical of the real-estate markets that have held up best — prime stuff like Manhattan, San Francisco or Beverly Hills. It’s hard to get a deal there. 
    But in the places that have fallen the furthest, there are deals aplenty. Zillow found only four metro areas in America that have leveled out, or risen, lately. Notably, two of those are in stricken Florida — Fort Myers and Sarasota. Have they fallen so far they’ve hit bottom? Maybe.
    This is very much in line with the point I was making last week in my commentary on the CNN Money Magazine blog. Sure the prices are coming down in areas that were previously considered to be "immune" to the downturn, and sure it looks like the declines are stronger than expected. But to say that this is true about some areas, is not to say it's true about all areas. As the author notes, some of the areas that were hard hit early on, have stabilized, and represent great opportunities, both in that it's cheaper to buy than it is to rent, and in that many of these homes make a great investment, with stronger than historically seen ROI's.

    My personal opinion is that while the values in the Phoenix area may further decline in some locations (ones that have not seen strong blood letting), other areas (ones that were hardest hit) will remain stable, and even appreciate, as the demand for inexpensive housing continues to grow, and investor activity remains strong.

    FWIW, I am actively buying Central Phoenix multi-unit properties for the incredible ROI the represent, and the strong rental demand in the area.

    2.      Distressed Market Solutions are More Needed Than Ever

    From the article:
    Here in America we have “zombie homeowners.” Millions of them. According to Zillow, a record 16.3 million families are upside-down on their home loans. Sixteen million! And many are a long way upside-down. Their homes may never be worth as much as their mortgage. But they are hemorrhaging cash to pay the nut every month.
    Recovery? What recovery? This looks a bit like a depression to me.
    I remember when we were first doing short sales in 2007, many agents thought they were a market fluke that would pass before they have to do anything about it. While in the grand scheme of things, this may turn out to be a fluke, it is by all accounts, a decade or longer, type of a fluke.

    Locally, it is estimated that as many at half of Arizona homes with a mortgage are "under water." The situation is dire no matter how you spin it. Hardship, the type that causes one to be unable to make their payment is also not exactly rare (and the national unemployment figures are not looking positive).

    On the education end, we are seeing an increased demand for our Short Sale training in areas that have been historically strong - Oregon, Washington, Bay Area, etc. And if this is an indication of anything, it is an indication that the agents are seeing an increased demand for these types of services and are in turn getting their skills ready to be able to offer solutions.

    By all accounts the HAFA program has not been as effective as originally hoped, but I don't believe that it has fully been played out yet. Only time will tell. Whether help will come from the government programs, or from the banks themselves, it is clear that these solutions will remain needed in areas that have been struck by price declines already, and will become needed in areas that will be declining in the next couple of years.

    In summary, and in the spirit of this blog - now is not the time to panic. But rather it is the time to cut through the noise and to make educated decisions.  And if you are in the business, it is time to relentlessly work on improving the solutions that we are able to offer to millions upon millions of homeowners who need them. And if help comes from outside (government, banks, etc), we're happy to get by with a little help from our friends.

    Read the full article here.

    Friday, May 6, 2011

    Free Credit Report Offers Examined

    Up until the end of last year it seemed like you could not turn on your television without seeing and hearing the free credit report jingle. Those merry men dressed as pirates lyrically painting a picture of why we should all check our credit reports. Besides, it was free, right? It depends on your personal definition of “free,” which for the advertisers meant free as long as you don’t mind placing your foot in a proverbial snare so they can shake money out of you later. The Federal Trade Commission noticed the advertising, even going as far as mocking them with its own jingle at

    Then the FTC brought down the hammer, full disclosure of where consumers could obtain their federally mandated credit report. Too many consumers did not understand that they could go to for a free credit report with no-strings attached (no credit score though, the law does not require it currently). The level of advertising for commercially generated free reports was enormous; the most well known free credit report site reportedly spent $100 million annually on advertising. How much free stuff can you give away with an advertising budget of $100 million? As it turns out, only so much, people ended up with credit card charges they did not want because to get the free credit report they had to sign-up for a 90 day or so free trial of identity theft protection or credit monitoring. If they did not cancel by the 90th day they would be charged, the complaints flowed like an angry volcano.

    Per the FTC enacted disclosure any website offering free credit reports must now place at the top of the page:

    You have the right to a free credit report from
    or 877-322-8228, the ONLY authorized source under federal law.

    The Web site disclosure must include a clickable button stating “Take me to the authorized source” and clickable links to and FTC.GOV.

    Disclosures are required for radio and television advertising as well, which went into effect on September 1, 2010. This is why we do not see or hear as many of the advertisements. However, there are a thousand ways to skirt regulation, so the new thing is to offer a free credit score instead of a free report. Fortunately consumers are catching on to the unsavory nature of these schemes. Even the free credit score is a ruse in the sense that it generally is not even the score lenders use for underwriting, just a fictitious self-created formula to get money out of unsuspecting consumers.

    If your New Year resolution was to improve yourself this year, go to right now and print off a copy of your credit report for your records.

    Wednesday, May 4, 2011

    The Good, the Bad, and the Unknown

    Calculating the income tax consequences of debt forgiveness can be complicated; however, certain scenarios generally have a better outcome than others. For example, a loan modification on a primary residence with only the original mortgage, usually comes out okay. The same goes for a short sale or trustee’s sale on a primary residence where debt is canceled on mortgages where the loan proceeds were either used to purchase or improve the residence. Properties which were rentals for the entire period of ownership often times will not have adverse tax consequences as a result of distressed property transfers, as well.

    What types of properties, after a distressed property transaction, have a greater likelihood of negative tax consequences? 1) Primary residences that have been refinanced with cash out, the proceeds of which were expended for things other than home improvements; 2) Primary residences where a second mortgage was taken, and the proceeds were not used for home improvements; 3) Homes converted to rentals after losing much of their value; 4) Vacation homes that have been refinanced with cash out; and 5) Investments in raw land.

    There are many other examples of typically good and bad scenarios; and it certainly is possible that the debtor can escape negative tax consequences in the above hypotheticals. But alternate tax law provisions may need to be employed to find exclusions to the debt forgiveness when the general rules don’t help.

    Tuesday, May 3, 2011

    Short sales are bargains, but they take forever?

    Back in February, I was interviewed by Lisa Gibbs of CNN / Money Magazine for a feature she was working on about buying a distressed home. I did two one hour interviews and several email exchanges with Lisa, and while I only have a small quote in the finished article, a lot of the material is right in line with what I said and provided. In general, the article is very well research and presented, and gets to the fine points of the process, without the hysteria that fills many articles of this genre. Click here to read the full article.

    Then yesterday, Lisa did a blog post on More Money blog titled "Short sales are bargains, but they take forever." Lisa did a good job summarizing a lot of the frustrations that buyers experience when trying to purchase a short sale. Click here to read the blog post.

    So, what IS a buyer to do, if they are seeing some attractive homes that are short sales, but are not sure if they are really closeable? As is usually the case, some interesting discussions are developing in the Comments section of the blog, and below is my contribution in an attempt to provide some advice to any prospective buyers:

    As I mentioned when you interviewed me for the original article, I believe that every short sale is different, and the underlying reasons why the banks act the way that they do may never be truly known. That said, I believe there are two fundamental "check points" that must be passed, in order for a short sale to some assurance of a success:
    1. Qualified Seller, and
    2. Qualified Listing Agent. 
    Unfortunately, there are never any guarantees of success, but at least we can improve our chances.

    It is the Listing Agent's job to help qualify the Seller. Not every Seller is a short sale Seller - some are better off pursuing other options. Which leads to the second point - not every Listing Agent is qualified to do a short sale (or knows how to properly do one).

    In your situation, why is the Buyer's Agent speaking with the bank? That's clearly the job of the Listing Agent (representing their Client)! What are they doing, and why weren’t they ready with the package when you presented your offer? Just knowing that leads me to believe that either one, or BOTH of the check points I mention above were not ever passed.

    I hope it’s OK to share a link, but I recently wrote a brief blog post on buying short sales and I hope it helps others who are considering buying one:

    The main point is – as a Buyer (or Seller, or Agent) educate yourself on the process, and work only with people who GET it. Our team has closed hundreds of short sales in the Phoenix area market, and I have taught thousands of agents on the process of doing so. Trust me – not all short sales are created equal.

    Monday, May 2, 2011

    NAR Mid Year and Nothing on Short Sales?

    5 days. 173 meetings. 70+ hours... and NOT A WORD on short sales. Go Figure!?!

    NAR Mid Year in their own words...

    Advance Your Business, Your Industry And Your Association
    The REALTORS(r) mid year meeting and trade expo is where NAR members take an active role to advance the real estate industry, public policy and the association. Join us in Washington, DC for special issues forums, committee meetings, legislative activities, and the industry trade show.

    That is what the lead blurb is on their website and all their marketing material. So naturally, when scores of brokers and agents descend on the nation's capital, one would think they would take on the most relevant and challenging elements of the real estate industry. Yet, not a word about short sales. They do talk about the impact of MARS and what the future of Freddie and Fannie will be, but c'mon... SHORT SALES are all the rage. You're in Washington. Congress is in Session. Housing is in the toilet. How in the world is NAR helping agents advance business, industry and association? With Green Movements?

    Also absent are any real talks about foreclosures and REO sales, the role of the Servicer or Third Party solutions, or even education on these issues.

    Sorry NAR, while I love the credibility you bring to agents, you are out of touch and missing huge opportunities on the Hill during this mid year event. Time to storm the Capitol and lobby for solutions that DON'T involve bailouts or beuracracy.

    Foreclosure Rules Update

    It's been often said that short sale and foreclosure news are like the weather in Oklahoma - if you don't like them, wait five minutes. Some lenders are getting better, some have gotten worse, and others have gotten better again still. That being said, in all the networking and speaking that I do, I get the impression that there is a general understanding that we can do better, and a general desire to do so. This comes from ALL areas of the market - the lenders, the servicers, the real estate community (sales people and attorneys), and of course, the distressed borrowers.

    Couple of interesting articles this weekend. First, is an article from REALTOR Magazine about the bank's progress in improving the foreclosure proceedings and their communication with the distressed borrowers (read about it here). It's been said that accountability is only as good as the underlying enforcement, and it seems that a number of Federal authorities with "teeth" (FTC, the Treasury, the Congress) are wanting to see some measured improvements. Second, is an article from the Wall Street Journal which casts a shadow of doubt on the actual progress that the banks are doing (read about it here).

    So, the progress is certainly give and take. But we continue to believe that short sales are a needed and a wanted tool for disposal of  distressed property, and that the process will get better with time, as all parties learn to work with one another, and continue to improve the process.

    Bankruptcy: What is it good for?

    By way of disclaimer, I am not a Bankruptcy Attorney and do not even play one on TV (insert corny laugh track here). I practice in real estate law. However, as a practitioner in the area of real estate law, and someone who on a daily basis speaks with individuals contemplating how to address the debt on their home or homes, I am becoming more and more acutely aware of the trend to push folks towards Bankruptcy.

    Now, make no mistake about it, the filing of Bankruptcy is a means to address all types of debt, including debt owed to lenders. It is a means of re-organizing debt and discharging debt under certain circumstances. But, in my opinion, if someone owns a home that is "underwater," it should not be their first option in addressing that problem. In fact, often times, it should be their last option.

    There are several ways to deal with a distressed property (an "underwater property"). This includes allowing the home to go back to the lender through a Foreclosure/Trustee Sale, selling the property "short," modifying the loan or even what we call a Deed in Lieu of Foreclosure (issues we will deal with in subsequent blogs). And, there is also Bankruptcy.

    The problem with Bankruptcy is because it provides debt relief, it also carries certain "ramifications". For instance, the Bankruptcy record stays on a persons credit for ten years. Further, once filed, a person cannot avail him or herself of the same protections for several years, depending on the type of Bankruptcy filed, when and how discharged.

    As such, one should not run off to file Bankruptcy just to get rid of that pesky home loan.

    In fact, we usually evaluate it this way: If the distressed property (the "underwater property") is removed or dealt with (eg sold in a "short sale') and the home owner is otherwise able to address any other debt and/or is financially solid or on the way to financial recovery, then bankruptcy is not an option. If, however, in addition to the underwater house, the homeowner is facing other issues, such as mounting credit card debt, loss of employment or financial issues - issues which make their entire portfolio unmanageable - then Bankruptcy could be an option.

    In short, Bankruptcy should not be used solely to address an underwater home. It should be used to address a complete financial hardship.