Important FHA Loan Information

With over 40% of purchase loans now being FHA, FHA loans have become a huge part of the US real estate market.

The following outlines some important points about FHA loans:

1. FHA loans are not only for lower-income borrowers. FHA loans are available to everyone. There is no maximum income restriction associated with FHA loans, but borrowers do need to substantiate income and assets by submitting proper documentation. This requirement ensures that borrowers are well-vetted and truly able to afford their future homes.

2. FHA loans are not only for first-time buyers. Many people believe FHA loans are available only to first-time home buyers, but this is not the case. Whether borrowers are making their first home purchase or their fifth, they can look to FHA loans as a home financing option.

3. FHA loans are not just small loans; in fact, loan amounts can be as high as almost $800,000. The government recently raised the maximum loan amount from its original cap of $362,790 to $793,750 as a way to help stabilize the housing market. The amount a buyer can borrow varies from county to county.

In San Diego County, the 2010 FHA loan limit is $697,500, in Riverside County it is $500,000, and in Orange County and Los Angeles County it is $729,750. Condo buyers interested in FHA loans can visit www.hud.gov to instantly identify FHA-approved condo associations.

4. FHA loans are not affiliated with the section 8 housing program. While both programs are administered by the U.S. Department of Housing and Urban Development (HUD), FHA loans have nothing to do with low-income subsidized housing. FHA loans are simply mortgages insured by FHA. This insurance provided by the federal government allows lenders to lend more freely by assuring them that they will be repaid in the event of default. Most traditional lenders, including Wells Fargo & Co., JP Morgan Chase and Citigroup are able to provide FHA loans to their customers.

5. FHA loans are often more affordable than conventional loans. While FHA loans typically offer the same interest rates as other loans, borrowers benefit from a much lower down payment of as low as 3.5%.

6. FHA-approved condo developments are more desirable to buyers. With 87% of home buyers indicating that they plan to use FHA loans, condo associations that are not FHA approved are missing out on a significant pool of prospective buyers. Under rules in place since February 2010, an entire condominium development must now apply to HUD and be granted FHA approval before a buyer can purchase a unit in an association with an FHA loan or before an existing unit owner can refinance into an FHA loan.

Due to the general unwillingness of today’s lenders to extend credit with respect to conventional loans, many borrowers find that FHA is their best bet. Lenders don’t mind lending when the federal government (FHA) assures them of repayment.

Homeowners associations (HOAs) should note that although FHA-insured mortgages might be easier to obtain, they are not “risky” loans, due in large part to the strict “full documentation” requirements placed on borrowers. Individual buyers or sellers can initiate the approval process or current owners can encourage their HOA to apply.

7. FHA loans are assumable. In addition to lower down-payment and credit-qualifying requirements as compared to conventional loans, FHA loans are assumable. This means that when a seller with an FHA loan sells his or her property, the loan and its financing terms (interest rate) can be transferred to the new buyer. This unique feature will certainly make a property more valuable in times of rising interest rates.

Source RIS Media (“7 things all borrowers should know about FHA Loans”).

San Diego Real Estate Market Statistical Update July 2010

Updated Real Estate Statistics, July 2010*

Avg time it takes for a homeowner in default to lose their home has gone from 251 days in Jan 2008 to 438 days in April 2010 – a 75% increase.

40% of all mortgages issued in 2010 are FHA (gov insured) – up from 20% in 2009, and 2% in 2005 & 2006

Because FHA loans only require a 3.5% down payment (“a subprime loan in sheep’s clothing”), 25% of 2007 & 2008 FHA loans have defaulted.

David Stevens, current FHA Commissioner, “This is a real estate market purely on life support, sustained by the federal government. Having FHA do this much volume is a sign of a very sick system.”

New Home Building Permits fell 10.9% in April & 5.9% in May, to its lowest level in over 50 years. Historically, new home building permits are the best leading indicator for the overall US economy.

New Home Sales dropped by 33% from April to May to their lowest point since WWII

As of mid June, mortgage purchase applications are down 42% since the April 30 end of tax credits (a 13 yr low).

The Pending Home Sales Index, a forward looking indicator, dropped 30% in May compared to April, the worst decline in 9 years.

The Bottom Line

Now that federal and state government tax credits have expired, the real estate market is beginning to face reality. The only saving grace is that 1) The US government is still insuring FHA loans and will likely continue to do so for the foreseeable future & 2) Lenders have learned that they are better off doing short sales vs. foreclosing, and thus are postponing foreclosure sales in favor of short sales.

As I said in my January 2010 San Diego Union Tribune Op-Ed Piece, and contrary to what realtors, newspaper columnists, real estate “experts” and economists have claimed over the past year, the San Diego real estate market has not “hit bottom” and is unfortunately not on the road to recovery. Far from it.

We are a solid 24 months from the bottom of this market. We still have a veritable tidal wave of defaults coming, both in the form of foreclosures (worst case) and short sales (best case). We still have a huge number of homeowners who owe more than their home is worth. And we have a huge number of people who will not be able to afford their payments once mortgage rates go back up to “normal” levels (i.e. not at the historic lows we are at now).

To quote my aforementioned January 17 2010 SDUT Op-Ed piece:

“The truth, unpopular as it may be to say it, is that the market in San Diego County is not ‘at the bottom’ as many would like to believe. There are an unprecedented number of foreclosures and short sales that will be hitting the market here and in other parts of the country over the next few years. Until banks take action to modify mortgages, facilitate short sales, prevent foreclosures and start lending again, these homes will continue to hang over the market, preventing any meaningful improvement.

The public looks to real estate industry experts to evaluate the data and advise them in order to make informed decisions. Speaking in platitudes and ignoring the realities of the market doesn’t do anyone any favors.”

*Real estate statistics source Robert Campbell Real Estate Timing Newsletter July 2010

Luxury Property Short Sales & Strategic Defaults

The upper end, luxury real estate market in San Diego & Orange County has finally taken a significant hit in property values. Prices in the upper end (here defined as properties that were worth at least $1,750,000 or more at the peak of the market), have dropped by as much as 50%, and in some cases more.

Properties that listed and sold in the mid to high $3,000,000′s a few years ago, are now selling in the low $2,000,000′s and even lower. As more and more of these sales close escrow, and the comps get lower and lower, more and more homeowners are questioning the wisdom and business sense of making large monthly payments on properties that they may not have equity in for years to come.

Thus arises the luxury or upper end short sale and strategic default.

$1,000,000+ short sales are truly a different animal than short sales in lower price ranges.

Many high dollar short sales involve “recourse loans” – loans which have been refinanced, and in many cases, where borrowers have pulled out substantial amounts of cash on 2nd’s or equity lines. This means that we need to negotiate a “full and final satisfaction” in order to prevent the seller from being pursued for the deficiency, or remaining balance, by their lender.

We have been extremely successful of late in negotiating high dollar short sales for our clients. A recent deal in the Rancho Santa Fe area resulted in Bank of America accepting a short payoff of $2,200,000 on a loan amount of over $3,200,000. The short sale was negotiated in less than 30 days and was negotiated without the lender requiring any cash contribution by the seller.

In this case, the sellers got out from under the debt of the property and paid absolutely nothing to sell their home.

We have done similar deals with Chase, Wells Fargo, Citi, IndyMac etc.

Every short sale, and especially every high dollar short sale, is unique and requires a unique strategy and approach. One size does not fit all.

In my experience, perhaps the biggest mistake any homeowner can make when considering a short sale is assuming that all agents are the same, and that any agent, (i.e. their neighborhood realtor), can effectively negotiate a short sale.

High dollar short sales are handled differently than lower priced short sales by the banks, and they require a different approach.

Unlike many realtors and attorneys, we do not subcontract out any of our short sale negotiations – we do it all in-house. We have negotiated several hundred short sales and have a documented 90+% success rate.

If you are considering doing a short sale on your home, and have a loan amount of $800,000 or more, do yourself a favor and call me. I am more than happy to answer any questions over the phone, and describe in detail the short sale process I have developed over the past 4-5 years for doing high dollar short sales.

There is no obligation when you call, and whether or not you list with me or not, I guarantee I will give you information that will make the call well worth your time.

I can be reached at 760 930 9898 or 760 390 3895 or via email at matt@battiata.com.

Home Affordable Foreclosure Alternative (HAFA) program and San Diego California

HAFA & The Year of the Short Sale

At the end of 2008, I predicted 2009 would be the “Year of the Short Sale” because lenders would finally come to the realization that short sales save them a tremendous amount of money versus foreclosing. They did and it was.

I made the same prediction this past December about 2010 – that it would be a repeat of 2009, but with an even higher ratio of short sales to foreclosures, and again be the “Year of the Short Sale”. It is.

For this reason, the New Obama HAFA Short Sale program, which went into effect about a month ago (April 5 2010), is already making a significant impact on the San Diego real estate market.

Short sales, which currently represent roughly 30% of the inventory and sales in San Diego County, can be a notoriously difficult and lengthy process. They take place when a homeowner needs to sell a property that they are upside down on – in other words, a property on which they owe more than is currently worth. In a short sale, the lender agrees to take a loss on the property and accept the proceeds from the sale at current market value instead of foreclosing.

The problem with short sales has been that banks are not real estate companies. They’re banks – they specialize in lending money and collecting interest. They are not good, it turns out, at doing real estate and processing and negotiating short sales. In fact they are really, really bad at it and they do not have the necessary staff to handle the volume of short sales they are faced with.

The result is that banks can often take anywhere from 30 days to 6 months, and in sometimes longer, to respond to offers on short sales and approve them so the sale can close escrow, causing buyers to drop off in frustration.

This process, aside from being incredibly frustrating, is also a very expensive one for banks because it causes many properties to needlessly go to foreclosure.

The reason for this is that a short sale is a race against time – specifically the foreclosure timeline – because the foreclosure process goes on in tandem with the short sale process.

One arm of the bank – the loss mitigation department – is working toward a short sale while the other is moving toward foreclosure. At most lending institutions, these departments have no communication whatsoever, so the left hand literally has no idea what the right hand is doing. When the short sale process drags on, sometimes time expires and the bank forecloses despite the fact that a ready and willing buyer is waiting to purchase the property.

The HAFA program addresses these problems by requiring banks to streamline their short sale approval process.

Once an offer is submitted, the bank must evaluate and respond to the offer within 10 business days. The bank may not foreclose on the property during the short sale process and must agree to waive any rights to pursue a deficiency against the seller after the short sale. Finally, the HAFA program requires lenders to credit sellers $3,000 at closing for moving expenses.

This is good news because short sales are a win-win for lenders, homeowners and the real estate market in general. Banks net significantly more out of a short sale than they do out of a foreclosure. They learn this in every real estate downturn but for some reason forget it in every real estate recovery and then have to learn it all over again.

Homeowners benefit from a short sale versus a foreclosure as well: they preserve their credit, avoid having a foreclosure on their record, get out from under the debt owed on the property (it becomes a settled debt), avoid federal and state taxes on the debt forgiveness and can buy again in 24 months or less.

For many San Diego homeowners who are hopelessly underwater on their homes and are saddled with huge payments, a short sale simply represents a wise business decision – getting out from under a property that may take years to ever appreciate back to what they owe on it, and buying again in a year or two at current market value.

Wall Street giant Morgan Stanley did exactly this on over $2 billion dollars of commercial real estate in the financial district of downtown San Francisco though they were careful to refer to it as an “orderly transfer of assets back to the lender” as opposed to a foreclosure.

Fannie Mae & Freddie Mac stipulate a 24 month seasoning period after a short sale before a borrower can be approved for a home purchase with a government insured loan. However many lenders and credit unions will approve buyers for home loans within less than 24 months of a short sale, and in some cases in a year or less on non government insured loan programs.

Finally, the market benefits because banks typically dramatically under price foreclosures at fire sale prices, causing values to plummet in the areas around a bank owned sale. Less foreclosures means higher comparable sales and a faster recovery for the San Diego market.

The HAFA program, combined with the banks just naturally refining their approval process and getting better and faster at processing short sales after 4 years of practice, means that short sales are actually starting to live up to their name.

The Growing Phenomenon of The Strategic Default

60 minutes ran a story tonight about the growing phenomenon of “strategic defaults” – people who are walking away from their homes and letting them go to foreclosure, not because they cannot afford them, but because it makes the most business sense in light of how upside down they are on their homes.

The story was based in Arizona, where state law prohibits banks from pursuing a deficiency against a seller after a foreclosure.

In California however, state law does not prohibit banks from pursuing deficiencies against sellers, unless the loans are original purchase money loans. If a seller has refinanced their loans at any point, regardless of whether they have pulled out cash or not, their loans are considered “recourse” loans in California, which means their lender can pursue the seller for the deficiency after a foreclosure.

California is also a “one action state”, which means the lender can only pursue one action to recoup their losses. If the first lien holder forecloses in the typical way it is done in California (a Trustee Sale Auction), that counts as their one action, and they cannot pursue the seller for any losses. The second lien however, which gets nothing in a foreclosure, can and will pursue the seller for 100% of the balance owed on the second loan.

It is for this reason that a short sale represents a much better business decision than a “strategic default” or foreclosure. I have written several blog posts about the fact that, in my opinion, a “strategic default” is a business decision, plain and simple, not a moral or ethical one. Yes, you signed on the dotted line, but the contract on which that dotted line was printed stated that the home was the collateral for the loan and that if the seller defaulted on their payments, the bank could foreclose.

The point is that a short sale makes infinitely more sense than a “strategic” foreclosure primarily because it settles the debt on the first and second liens so the seller walks away without any debt. It also dramatically lessens the impact on the seller’s credit.

For more information on this topic, see my related posts on this blog or visit the short sale page of www.Battiata.com.

Bank of America Short Sale Update 5/7/2010

With the implementation of their new Equator software platform, Bank of America has dramatically improved their short sale processing. We are now generating short sale approvals from Bank of America in an average of 30-60 days, and in many cases less, which is a huge improvement. Bank of America also assigns one negotiator to handle both their first and second loans on short sales where there is a Bank of America first and second lien, which also expedites the process.

We recently closed a Bank of America short sale (first and second lien, both with Bank of America) that we got approved in about 2 weeks, which has got to be some kind of record.

We are also currently working on our first HAFA short sales, which we expect will move quickly as well thanks to the HAFA government guidelines which require the banks to approve or reject short sale offers in no more than 10 business days.

CA Dept of Real Estate Alert: Be Aware of Short Sale Scams

The following is an excerpt from the California Department of Real Estate Alert to consumers regarding the prevalence of real estate scams surrounding short sales.

In April of 2010, the federal government will offer financial incentives to push short sales through a program called Home Affordable Foreclosure Alternatives. The program is designed to spur home sales and one of its components will be providing government payments to homeowners (for moving and/or relocation expenses). For more information, please visit www.makinghomeaffordable.gov.

Be aware that in response to this new program there may be an increase in the number of companies soliciting homeowners in distressed situations and offering to conduct the short sale negotiations with your bank/lender in exchange for charges and fees. Their interest may not so much be to help you as it may be to try to be the vehicle through which they could The following is an excerpt from the California Department of Real Estate Alert to consumers regarding the prevalence of real estate scams surrounding short sales.

In April of 2010, the federal government will offer financial incentives to push short sales through a program called Home Affordable Foreclosure Alternatives. The program is designed to spur home sales and one of its components will be providing government payments to homeowners (for moving and/or relocation expenses). For more information, please visit www.makinghomeaffordable.gov.

Be aware that in response to this new program there may be an increase in the number of companies soliciting homeowners in distressed situations and offering to conduct the short sale negotiations with your bank/lender in exchange for charges and fees. Their interest may not so much be to help you as it may be to try to be the vehicle through which they could “flip” the short sale for a profit.

Flipping of Short Sale Properties: Either an unscrupulous agent or a short sale negotiator will misrepresent the true market value of the property to the bank/lender and/or fail to forward all offers to the bank reflecting the true market value. They try to buy it themselves through the use of “straw buyers”, many of whom are limited liability companies, which are their alter egos. They will use false broker price opinions or appraisals to support a depressed valuation.

Once the unscrupulous agent or a short sale negotiator has convinced the bank of the false value, they have their straw buyer purchase the property and immediately attempt to sell it at the true market value, re-visiting buyers who had made legitimate offers. Had the property been sold for the most amount of money that the market will bear, the potential tax consequence to the seller is diminished. Conversely, by accepting an artificially deflated offer, the seller’s potential tax liability is increased.

The key elements for you as a homeowner to look out for are:

1. Short sale negotiators must be licensed real estate brokers (or a licensed real estate salesperson where that person is working under the supervision of his or her broker).

2. Real estate licensees wishing to collect an advance fee in connection with performing short sales must first submit an advance fee contract to the DRE for review and then receive from the DRE the issuance of a no-objection letter relative to that contract. All advance fees collected thereafter under the terms of that contract must be placed in a trust account and handled as client trust funds.

3. Any and all payments must be fully disclosed and made part of the escrow documents. If there are any fees to be paid “outside” of escrow, this may be the red flag that the payment is illegal.

4. If your agent explains that the buyer is a fictitious person or entity or your buyer is purchasing the property under a power-of-attorney or is a limited liability company (LLC), this may be a red flag that fraud is involved in your transaction.

5. If you are told that an unlicensed processor, negotiator or facilitator is handling your short sale, this is a red flag that unlicensed activity is taking place. Only real estate licensees, California lawyers acting as lawyers and investors acting on their own behalf can engage in short sale negotiations.

If your house is already listed with a real estate broker and the broker recommends the services of a “short sale negotiator” or its variations, “debt negotiator”, “debt resolution experts”, “loss mitigation practitioners”, “foreclosure rescue negotiators”, “short sale processors”, “short sale coordinators”, “short sale expeditors” or some other type of unlicensed short sale or debt specialist, ask him or her to provide you with a printout of that person/company’s real estate licenses.

If you are considering engaging in a short sale transaction, you should fully educate yourself about the mechanics of the process and the related legal and ethical issues and work only with legitimate professionals.

California Foreclosure Timeline

I am often asked by homeowners considering a short sale what the timeline is for the foreclosure process in California. The following is the special foreclosure timeline for loans originated between 2003 & 2007 on owner occupied residences. This timeline does not apply to borrowers who have filed for bankruptcy. The difference between this timeline, and the traditional foreclosure timeline, is the extra time between the filing of the NOD and the Notice of Trustee Sale or NOTS. Traditionally, lenders could file a foreclosure sale date within 25 days of a NOD. This special timeline extends the period between the NOD and the NOTS.

Keep in mind that lenders often take longer than the timeframes below to foreclose, primarily because they typically prefer to workout a short sale with the borrower rather than foreclose. With that said, I highly recommend all borrowers be proactive and not allow their home to get to the 11th hour in the foreclosure process.

Once a NOTS (Notice of Trustee Sale) or foreclosure sale date, has been filed, while we can often successfully get the sale date postponed, there are no guarantees, and lenders sometimes either elect to foreclose or foreclose by mistake, simply because the left hand very often does not know what the right hand is doing at most of the nation’s major lending institutions.

Generally, lenders will file a NOD 90-120 days after a borrower stops making payments, and file a NOTS 90-120 days after the NOD, making the whole process take about 6-7 months start to finish. Many lenders extend this period dramatically when a seller is doing a short sale.

Finally, many people are under the mistaken impression that they can stay in their homes for months and even years without making payments and not get foreclosed on. While this was true in many instances in 2009, this was due to the 4 concurrent foreclosure moratoriums that were in effect in California. As of September 2009, those moratoriums have ended and lenders are now foreclosing at a brisk pace on borrowers who are simply not making payments and not pursuing any other avenues to avoid foreclosure.

Again, a short sale is almost always a better alternative to foreclosure.

As of September 8, 2008, California has a special foreclosure timeline for loans originated between 2003 and 2007, inclusive, which are secured by owner-occupied residences. The special foreclosure timeline will remain in effect until January 1, 2013. (Cal. Civ. Code § 2923.5.)

FORECLOSURE TIMELINE FOR OWNER-OCCUPIED REAL PROPERTY LOANS (made from 2003 to 2007)

Pre-Foreclosure Period

A lender may initiate the foreclosure process when a borrower defaults on a loan, such as by missing a mortgage payment. However, a slight delay may not justify acceleration and foreclosure by the lender. Hence, in practice, lenders generally wait a few months after a missed payment before starting the foreclosure process. Generally the following process begins once a borrower is 2-3 months behind on their payments.

Day 1: Lender Contacts Borrower

For owner-occupied loans from 2003 to 2007, a lender initiating the foreclosure process must generally contact the borrower by phone or in person to assess the borrower’s financial situation and explore options for avoiding foreclosure. During the conversation, the lender must inform the borrower of the right to meet with the lender within 14 days. The lender must also give the borrower the toll-free number for finding a HUD-certified housing counseling agency.

Day 31: Filing of Notice of Default (minimum of 90 days after borrower stops making payments)

For owner-occupied loans from 2003 to 2007, the lender may file a notice of default 30 days after contacting the borrower to explore options for avoiding foreclosure. The notice of default must be filed in the county where the property is located and a copy must be mailed within 10 business days after recordation to the borrower and all other persons who have requested such notice. The notice of default informs the borrower of the default. It must also include the lender’s declaration that it has contacted the borrower to explore options for avoiding foreclosure, tried with due diligence to contact the borrower, or the borrower has surrendered the property.

Day 121: Filing of Notice of Trustee’s Sale (minimum of 90 days after NOD is filed)

Three months after the filing of the notice of default, the lender may record a notice of trustee’s sale setting forth the date, time, and place of the upcoming trustee’s sale. Because of the gravity of a notice of trustee’s sale, it must be widely disseminated. The notice of trustee’s sale must be recorded, posted, mailed to the borrower and others, as well as published once a week for three consecutive weeks in a newspaper of general circulation.

Day 145: Deadline to Cure Default

Up to five business days before the trustee’s sale, the borrower may reinstate the loan by curing the default or paying the missed payments plus allowable costs. After the reinstatement period expires, the borrower still has the right to redeem the property by paying the entire debt, plus interest and costs (not just the arrearage), before the bidding begins at the trustee’s sale.

Day 152: Trustee’s Sale

Although California law allows a trustee’s sale to take place 20 days after the posting of the notice of trustee’s sale, lenders customarily wait at least 31 days instead to help protect against federal tax liens. At the trustee’s sale, the property is sold through a public auction to the highest bidder. Title is transferred to the successful bidder by trustee’s deed. The lender can also elect to take the property back as an REO (which stands for Real Estate Owned by the bank). They do this by purposely starting the bidding above market value. In this case, the property will eventually go on the market as a bank owned foreclosure.

Source – California Association of Realtors

Finally, it is often possible to get a foreclosure sale date postponed as long as an offer has been submitted to the bank and the borrower is moving forward with the short sale process. If you have currently have a NOD or NOTS filed on your property, you still have time to do a short sale, but you need to move quickly. A realtor experienced in short sales can generate an offer quickly and get it submitted to your lender and postpone the sale date.

How to Find out if you have a Fannie Mae or Freddie Mac loan – New HAFA Program does not Apply to Fannie or Freddie Loans

The new government HAFA program that regulates and streamlines the short sale process does not apply to Fannie Mae or Freddie Mac insured loans. Fannie & Freddie have their own short sale guidelines.

You can find out if you have a Fannie Mae or Freddie Mac insured loan by going to this link:

Click Here

If you have a government insured loan, this does not mean by any stretch that you cannot do a short sale – it just means the process will be different.

With that said, the government has said they will come out with a HAFA version for Freddie Mac & Fannie Mae loans shortly.

New HAFA Short Sale Rules – Program Ends Dec 31 2010

The HAFA program simplifies and streamlines the use of short sales by incorporating the following unique features:

• Complements HAMP by providing viable alternatives for borrowers who are HAMP- eligible.

• Utilizes borrower financial and hardship information collected in conjunction with HAMP, eliminating the need for additional eligibility analysis.

• Allows the borrower to receive pre-approved short sale terms prior to the property listing.

• Prohibits the servicer from requiring, as a condition of approving the short sale, a reduction in the real estate commission agreed upon in the listing agreement.

• Requires borrowers be fully released from any future liability for the first mortgage debt. If the 2nd lien holder receives an incentive under HAFA, then the borrower must be released from any future liability on that debt as well (meaning no cash contribution, promissory note or deficiency judgment is allowed).

• Provides $3,000 in relocation assistance to sellers at the close of escrow of the short sale.

• Servicers must evaluate a borrower for a HAMP loan modification prior to any consideration being given to HAFA options.

• The property must be listed with a licensed real estate professional who is regularly doing business in the community where the property is located.

• The sale must represent an arm’s length transaction and that the purchaser may not sell the property within 90 calendar days of closing.

• If the lender requires the borrower make payments during the short sale process, the amount must not exceed 31% of the borrower’s gross monthly income.

• Borrowers must cooperate with the listing broker to actively market the property and respond to servicer inquiries.

• Borrower must maintain the interior and exterior of the property in a manner that facilitates marketability.

• Borrower must make the monthly payment stipulated in the SSA, if applicable.

• As long as the borrower performs in accordance with the terms of the Short Sale Agreement, the servicer may not foreclose on the property during the short sale process.

Loan Eligibility for HAFA Short Sale Plan

• The property is the borrower’s principal residence
• The mortgage loan is a first lien mortgage originated on or before January 1, 2009
• The mortgage is delinquent or default is reasonably foreseeable
• The current unpaid principal balance is equal to or less than $729,750
• The borrower’s total monthly mortgage payment exceeds 31 percent of the borrower’s gross income.

During the term of the SSA, the servicer may terminate the SSA before its expiration due to any of the following events:

• The borrower’s financial situation improves significantly, the borrower qualifies for a modification, or the borrower brings the account current or pays the mortgage in full.

• The borrower or the listing broker fails to act in good faith in listing, marketing and/or closing the sale, or otherwise fails to abide by the terms of the SSA.

• A significant change occurs to the property condition and/or value.

• There is evidence of fraud or misrepresentation.

• The borrower files for bankruptcy and the Bankruptcy Court declines to approve the SSA.

• Litigation is initiated or threatened that could affect title to the property or interfere with a valid conveyance.

• The borrower fails to make the monthly payment stipulated in the SSA, if applicable.

NOTE: For more information on this program, also see my previous blog post “Details of New Obama Short Sale Program (HAFA)”

Schwarzenegger signs Short Sale Bill SB401- Forgives CA Taxes on Short Sales

Governor Arnold Schwarzenegger has signed CA Senate Bill 401 into law, which conforms California tax law with Federal tax law on debt forgiveness from short sales and foreclosures on a primary residence.

Governor Schwarzenegger made the following the statement:

“”This legislation is a great example of what we can accomplish when we work together to solve problems that affect Californians, and I applaud Senator Lois Wolk, Senator Ron Calderon, Assemblymember V. Manuel Perez and Assemblymember Anthony Portantino for their work. It is important that we continue to provide all possible assistance to homeowners who were negatively impacted by the mortgage crisis, and this bill will provide them with necessary mortgage debt relief and protect them from thousands of dollars in unfair taxes,” said Governor Schwarzenegger. “SB 401 will also help promote the growth of renewable energy projects in California by providing tax assistance to businesses to get their projects of the ground, which is good news for our economy.”

Details of the New Obama Short Sale Plan (HAFA)

The New Obama Short Sale Plan has gone into effect.

HAFA contains provisions that regulate the short sale process in order to help homeowner’s avoid foreclosure through a short sale.

The details of HAFA are as follows:

- Targeted at homeowners who have tried to modify their loans through the government HAMP program.

- The homeowner must be behind in payments or at risk of default; the unpaid principal balance must be equal to or less than $729,750, and the total mortgage monthly payment must be greater than 31% of the borrower’s income.

- Requires lenders to agree to completely “settle the debt” in the short sale transaction. In other words, banks
cannot require borrowers to sign a promissory note or make a cash contribution. Further, banks cannot pursue a deficiency judgment after the short sale has closed.

- Lenders must stipulate what terms (including the sales price or net proceeds of the sale) they are willing to accept in the short sale prior to the property going on the market. Currently, banks wait until they have received an offer to determine what they believe the market value of the property to be, frustrating buyers, sellers and agents.

- Sellers will receive $3,000 from lenders to use toward their moving expenses.

- In the event the short sale does not go through, lenders must accept a deed in lieu of foreclosure, in which the borrower surrenders the property to the bank, and the bank agrees to forgive or “settle” the debt – in other words, not pursue a deficiency judgment or require a promissory note.

- Regulates the time frames for the short sale process. For example, lenders have 10 business days to evaluate and approve the short sale once all required documentation has been submitted.

HAFA does not cover all mortgages – only those that are not insured by Fannie Mae or Freddie Mac (Fannie & Freddie have their own short sale guidelines).

Also, as with all government programs aimed at preventing foreclosures to date, participation in HAFA is voluntary for lenders.

California to Forgive Taxes on Short Sales – Retroactive to 2009

The California State Assembly has passed CA SB 401 which conforms California state tax law with federal law with regard to lenders’ debt forgiveness on real estate short sales, foreclosures or loan modifications.

This bill picks up where the last bill, which expired at the end of 2008, left off.

The Assembly passed a similar bill in March, however the Governor vetoed the bill due to riders that were attached to the bill that the Governor viewed as unfriendly to business in California.

The Governor said in a news conference yesterday that he will sign this bill into law prior to the April 15th 2010 tax deadline.

Bank of America Eases Qualifying Guidelines for Self Employed Borrowers

Bank of America announced today that it would allow the use of business funds for down payments, closing costs and reserves. This is a significant move by the nation’s largest bank toward easing lending guidelines by allowing self employed borrowers to use their business capital in order to qualify for a mortgage. While this falls short of bringing back stated income loans, it does make qualifying for a mortgage infinitely easier for self employed business owners. It is likely that we will see other lenders follow suit in the near future.

CA Legislature Approves Bill Aligning State Tax Law with Feds on Short Sales

The CA state legislature approved a bill that would exclude homeowners who do a real estate short sale from having to pay taxes on the debt forgiveness, aligning state law with the federal Mortgage Tax Debt Forgiveness Act.

CA had a similar law on the books up until the end of 2008, at which point the law expired. Since then, some tax experts have said that the debt forgiveness in a real estate short sale would be taxed at the CA state level as ordinary income, while others have argued that due to CA Revenue & Taxation Code 17131 – which states that when there is no applicable state law for a specific tax situation, state tax law tracks with federal tax law – that borrowers would not be taxed on short sales as long as their situation conformed with the dictates of the federal law.

This measure clears up any confusion regarding whether CA homeowners will have to pay taxes on the debt forgiveness resulting from real estate short sales.

The Senate approved the bill on March 11th 2010. It will now go to Gov. Arnold Schwarzenegger.

Obama Short Sale Program kicks off April 5th

The Obama Administration’s new short sale plan, which begins April 5, calls for banks to agree to not pursue borrowers for any deficiency judgments after a short sale, requires second lien holders to accept a maximum of $3000 to settle their debt, allots $1000 to mortgage servicers for a successful short sale, and allows for up to $1,500 in “relocation” assistance to borrowers.

The plan – Home Affordable Foreclosure Alternatives, or HAFA – is for borrowers who qualify for or have participated in the Home Affordable Modification Program, or HAMP, but have not been able to make their new reduced mortgage payments through the trial period. It is also for any borrower who has tried to modify their loan through HAMP and now requests a short sale in order to avoid foreclosure.

The program calls for banks to decide what they are willing to take $ wise in the short sale before the property goes on the market, so that the buyer, real estate broker and seller know what price the property needs to sell for in order for the bank to approve the short sale. It also requires lenders and servicers to use uniform documentation and short sale terms, prevents them from reducing the real estate agent’s commissions in a short sale and greatly expedites the lender’s short sale approval process to ten business days after receipt of an offer.

HAFA also allows lenders to offer a deed in lieu of foreclosure to borrowers with government insured loans without requiring borrowers to first put the property on the market for 90 days, which is the typical protocol for a deed in lieu of foreclosure.

With all of this said, the glaring, overwhelming problem with HAFA, like all government programs to date geared toward preventing foreclosures, (starting with the Bush Administration’s Housing Economic Recovery Act), is that bank participation will be voluntary and on the individual lender’s terms.

HAMP, which set out to help 3.4 million borrowers, to date has modified less than 120,000 borrowers’ loans, and even for the loans that have been modified, the lasting impact is questionable.

The good news with short sales is that, at least in my experience thus far in 2010, the nation’s lenders, simply by virtue of the fact that they have had the past 3 years to practice, are starting to move faster on short sales and issue approvals with less stringent qualifying criteria. This means that, without regard to government programs, the average homeowner has a better chance doing a successful short sale than ever before.

What’s the Deal with a Deed in Lieu of Foreclosure?

A deed in lieu of foreclosure is basically a voluntary foreclosure, where the homeowner agrees to surrender the property to the bank, and the bank, in exchange for not having to incur the legal expenses of going through the foreclosure process, in some cases agrees to not pursue any deficiency against the seller.

In past real estate downturns, banks were willing to take properties back in a deed in lieu of foreclosure. Today, however, most banks are not interested in doing deeds in lieu of foreclosure because they are already overwhelmed with foreclosed properties and do not want to take any more properties back.

For this reason, typically, when a seller calls their lender to request a deed in lieu, they are told that the bank does not want it, and to short sale the property.

The other major obstacle in most cases to a deed in lieu is that there can only be one loan on the property. If a homeowner has a first and a second lien on the property, they cannot do a deed in lieu of foreclosure.

Finally, a deed in lieu shows up as a foreclosure on a borrowers credit report.

Chase Bank Short Sale Update

Chase Bank will no longer accept offers on short sales from any investor/corporate/trust entities i.e. any offer from an LLC, Corporation, Trust etc. This is becoming increasingly common among the nation’s large lenders as more and more short sale investors attempt to purchase short sales at below market prices in order to immediately flip them for a profit.

Sound Familiar? Morgan Stanley walks away from $2 Billion in Commercial Real Estate

Giant Wall Street securities firm Morgan Stanley has announced the “orderly transfer” (read “strategic foreclosure”) of five commercial San Francisco buildings back to their lender, Barclays Capital. Morgan Stanley bought the buildings at the peak of the market and since then, the properties have lost as much as 50% of their value. Like any business, they made the “business decision” to rid themselves of the assets to better their bottom line. They just don’t like to call it what it is, lest the millions of homeowners in the same situation decide to do the same thing.

And of course herein lies the irony. Morgan Stanley spokesperson Alyson Barnes, who apparently has no sense of shame whatsoever, was quick to point out that this is completely different from a homeowner strategically walking away from a home they are upside down on: ““This isn’t a default or foreclosure situation, we are going to give them the properties to get out of the loan obligation.” No, it’s not a default or a foreclosure situation, of course not.

Banks and corporations, and the media they control, continue to take great pains to report instances like this in a completely different light than the way they portray homeowners doing precisely the same thing. For banks and corporations, it’s an “orderly transfer” based on sound business principles, while for homeowners it’s a “foreclosure” as the result of irresponsible behavior.

Bottom line, if you’re a homeowner who is upside down on your home, make the best business decision for you and your family and don’t allow yourself to be swayed by the propaganda put out by the banks and the media about your moral obligation to hang onto an asset that makes no economic sense for you to keep.

Beware – All lender short sale policies include a “waiver of funds” clause

Beware: All lender short sale policies include a “waiver of funds” clause that prohibits sellers from receiving any compensation from the short sale transaction, including a kickback from the real estate agent’s commission. Violations of this clause are a federal offense and constitute loan fraud.

Short Sale: Ethical Dilemma or Business Decision?

Not a day goes by that I do not get a call from a San Diego homeowner who is struggling with the moral dilemma of whether or not they should short sale their home.

I say “moral dilemma” because that’s how they perceive it, but the truth is that morals and ethics have nothing to do with it – it’s a business decision, plain and simple.

The banks would like the public to believe that they have a moral obligation to pay their mortgage (“you signed on the dotted line” they say), but the reality is that when you signed, you signed a contract that specified the real estate as collateral for the loan you were taking out. If you defaulted, willingly or not, the bank could take back the property. Period.

The irony here is of course that the banks are notorious for making “business decisions” which are to their benefit and profit, and everyone else’s detriment.

For example, the banks devised stated income, no qualifying, zero down, interest only loan programs that were so easy to qualify for that almost anyone could get them, carved up the mortgages into mortgage backed securities, sold them multiple times, made billions of dollars, and then blamed anybody and everybody else for the real estate crash and mortgage crisis – business decision.

The banks take billions of dollars of government bailout money and in exchange pledge to modify homeowners’ loans, increase lending and make a real effort to stem the tide of foreclosures – and then do none of the above – business decision.

The banks foreclose on homeowners after leading them along for months under the guise of doing loan modifications, take the properties back and then sit on them in order to cook their books and make themselves look more solvent than they actually are so they can pay back the government bailout faster and give themselves huge bonuses – business decision.

Finally, a corporation owns a luxury hotel, say the W Hotel in Downtown San Diego, or the St. Regis Monarch Beach in Dana Point, and after trying unsuccessfully to get its lender to modify its loan, decides to simply walk away and turn the property over to the bank – business decision. And a real life example by the way, as both of these hotels are now in receivership.

In other words, do you think for a moment that the board members of Sunstone Hotel Investors, the corporation that owned the W Hotel, debated giving up the property on moral or ethical grounds? Do you think that even came up? No – it was a business decision.

So, when a homeowner who is $100K, $200K, $300K or more, upside down on their property, makes the decision to give up the property and do a short sale, it is every bit as much of a business decision as it was for the owner of that luxury hotel. Ethics and morals have absolutely nothing to do with it, and it is disingenuous at best for lenders to imply anything different.

Bank of America (BofA) Short Sale Update

Bank of America, via their new Equator software platform, has implemented a requirement that the buyers financial information be input into the system – i.e. buyers Social Security #, address, etc. We speculate that they are requiring this information so they can do checks to make sure the buyer and seller are not related in any way and that it is an arms length transaction.