Short Sale Update: Beware of Lenders Trying to Change Non-Recourse Loans into Recourse Loans in Short Sale Approval Verbiage

Short Sale Sellers Beware:  We have seen some investors recently attempting to change the terms of a loan within the short sale approval letter, specifically changing a non-recourse loan into a recourse loan.

The drill goes like this:  the bank approves the short sale on a non recourse loan and then sends out an approval letter stating the short sale is approved etc but adds in the following curious verbiage in the approval:  ”you are still responsible for the deficiency balance remaining on the loan.”  The seller signs it, thinking this is just boilerplate bank verbiage that does not apply to them because they have a non recourse loan.

In our case, our seller refused to sign the letter, the bank, after bluffing repeatedly that they would not remove the verbiage and would cancel the short sale, did in fact remove the verbiage, and the short sale closed escrow with the seller safe from any further recourse from the bank.

The lesson:  Read your short sale approval carefully before you sign it!

New HAFA Guidelines Effective Feb. 1, 2011

The Obama Administration’s HAFA short sale program has been in effect since April 5, 2010 and was created in an attempt to encourage lenders to do short sales and prevent homes from going to foreclosure.

Since its inception, however, only 661 HAFA short sales have been completed nationwide – a fraction of the number the Treasury Department and the Obama Administration had hoped for.

Effective February 1, 2011, the federal HAFA short sale guidelines will be amended in an effort to include more borrowers in the HAFA program and therefore reduce the number of homes in the United States that will go to foreclosure.

HAFA or Home Affordable Foreclosure Alternatives program is a joint government & lender program which allocates both a $3,000 incentive for borrowers who complete a successful short sale, as well as up to $6,000 to go to the 2nd lien holder in the short sale.  It also specifies that the 2nd lender will not pursue a deficiency against the borrower.

The primary change in the HAFA program is the elimination of the debt to income hardship requirement for borrowers.  Previously, in order to qualify for a HAFA short sale, the mortgage payment on the first mortgage had to exceed 31% of the seller’s gross monthly income.

This financial hardship requirement has now been removed, so sellers who wish to do a HAFA short sale will no longer need to meet any arbitrary income or financial hardship ratio, which should dramatically broaden the spectrum of borrowers who will qualify for the HAFA short sale program.

View from the Trenches: 2011 San Diego Real Estate Market Forecast

Every year around this time, I get a host of questions from clients, reporters, economists, neighbors etc. about the direction the San Diego Real Estate Market will take over the next 12 months.

National publications publish articles with predictions about the national real estate market, but as Gary Keller once said, talking about the national real estate market is like talking about the average temperature in the United States.  It doesn’t mean a thing to the person in Minot, ND where it’s -20F, or Death Valley, where its 110F.   Real estate, like the weather, is local.  National averages mean very little.

The good news is that if you know a particular market (i.e. San Diego County), the real estate market is very predictable – significantly more so than almost any other financial market, be it the stock market, the currency or bond market, the market for wine futures – you name it.  As I have often said, if you know a particular real estate market, and you know what to look for, you can set your watch by it.

I said this in January of 2005 when I predicted the San Diego market would drop by 40% over the next several years; I said this in January of 2009 & 2010, when I predicted both years would be the “Year of the Short Sale” and I say it now, in January of 2011.

As someone who works in the trenches with buyers, sellers, agents, lenders, appraisers, mortgage brokers, short sale negotiators, and foreclosure asset managers (just to name a few), the following is my take on what 2011 holds in store for the San Diego real estate market.

Approx. 50% of San Diego Mortgages Upside Down

In December, CoreLogic reported that 30% of San Diego mortgage holders were upside down on their homes, based on home values determined by the San Diego County Assessor’s Office.

However, because this report is based on the County Assessors assessed value of real estate, which is typically high relative to actual prices in a declining market, I believe the actual percentage of upside down mortgage holders in San Diego County is actually closer to 50%.

This is without a doubt the biggest statistical factor impacting the San Diego market.

Loan Modification, Short Sale, Foreclosure – in that order

Due to the increasing lender liability associated with foreclosures, government pressure to give homeowners options to avoid foreclosure and the realization by lenders themselves that they lose less money and incur less damage to their public image through short sales and loan modifications, foreclosures will continue to be lenders’ last resort in dealing with homeowners in default.  This does not mean however, that they will not occur in earnest.

Foreclosure filings and foreclosure sales will likely increase in 2011 over 2010 & 2009 levels, but the current trend is also one of increased foreclosure sale postponements, as lenders continue to encourage borrowers to pursue loan modifications and short sales as alternatives to foreclosure.

In reality, however, since lenders have shown virtually zero willingness to do meaningful loan modifications, the most likely alternative to foreclosure will continue to be short sales, making 2011 once again, the Year of the Short Sale in San Diego County.

In the event that the short sale fails, then and only then will lenders exercise their last resort: foreclosing on the property and either taking it back to resell as an REO or selling it immediately at the courthouse steps.

Foreclosures will be up from the previous 2 years, but so will short sales, as homeowners become more educated about their options and lenders push short sales as the preferred option for borrowers in default.

The Bottom line

So, are we at the bottom of our down cycle in San Diego real estate?  In general, no, though in certain price ranges we are certainly getting close.  Still, many buyers are deciding to pull the trigger anyway and buy due to extremely low interest rates that are finally starting to go up.

The central issue is that we have a tremendous number of people in San Diego County who cannot afford the homes they are in and do not want them due to negative equity.  The only solution for these homeowners, barring the hoped for principle reductions and loan modifications that have thus far been simply a pipe dream for millions of Americans, is getting out of those homes, either via short sales or foreclosures.

While neither is good for the market, short sales are definitely the lesser evil for lenders, homeowners and the market and economy in general.

Bottom line, the sooner we can process these sales and get these homes on the market and sold, the sooner our economy and real estate market can recover.

And that may be the best news of all for 2011.

30% of San Diego mortgage holders underwater in 3Q

*Note* The following is an excellent article by Andrew Keatts of the San Diego Daily Transcript on the San Diego real estate market.   I believe the # of San Diego mortgage holders upside down is actually higher than this – likely as high as 50% – as the CoreLogic report is based on San Diego County Tax Assessor assessed values, which are typically high relative to actual market value.  In addition, the CoreLogic report referenced here mentions another 5% of San Diego homeowners who have less than 5% equity, which means that in the event they need to sell, they will be upside down based on selling costs of 6% to 7%.

By Andrew Keatts  - San Diego Daily Transcript – Dec 13 2010

Nearly a third of all mortgage holders in the San Diego area owed more than their home was worth during the year’s third quarter, according to a report released by CoreLogic.

Negative equity among all residential properties with a mortgage in the county has been on the decline for three consecutive quarters, echoing the national trend.

Commonly referred to as “underwater” or “upside down,” a property in negative equity is one in which the amount owed on the mortgage is greater than the current value.

There were 175,234, or 29.5 percent, of all properties with a mortgage in negative equity during the third quarter, down from 30.5 percent a quarter before and 32 percent in the year’s first quarter.

But most of those improvements in the negative-equity rate have come due to underwater homeowners being foreclosed, rather than by increases in home values pushing their heads above the surface.

The median price of homes sold through November of this year in the county is up roughly 8 percent over the year-ago period, according to the San Diego Association of Realtors (SDAR).

Through the third quarter, the S&P/Case-Shiller Home Price Indices found home values in the county to appreciate 5 percent over the same period a year ago.

For homeowners in mortgages originated at the height of the housing boom, those modest appreciations offer little relief.

“In the immediate and short-term, there won’t be the big price increases needed to offset negative equity,” said Robert Brown, professor of economics at California State University, San Marcos, who also compiles the Homedex, a monthly report on home sales in North County.

He points to a steady supply of distressed inventory, incremental gains in sales prices, and a mostly flat supply of total inventory as evidence.

Nationwide, 22.5 percent of all properties with a mortgage were in negative equity, down from 23 percent in the second quarter and 24 percent in the first.

“Time is the only cure,” said Mark Marquez, president of SDAR. “The trend is saying equity is increasing.”

CoreLogic (NYSE: CLGX) also measured homes in “near negative equity,” or those with less than 5 percent equity, finding 4.8 percent of all homes with mortgages in San Diego County on the brink of going upside down.

“I’m sticking with what I’ve been saying, that the bottom is probably late 2012,” said Matt Battiata, president of Battiata Real Estate Group. “This is the shadow inventory: people who can’t afford their homes. Banks continue to have no interest in helping people, which unfortunately means they need to get out, either by foreclosure or short sale, and that is going to take some time to happen.”

He says it’s possible that the process of transitioning distressed properties back to the market could temporarily increase the number of underwater homeowners.

As the 30 percent of properties are gradually repossessed or sold short, downward pressure would be put on area home values.

In the process, those near negative equity homeowners — and potentially others currently with minimal positive equity — would be pushed underwater.

“When you play out the logic, when those homes go on the market, that’s not going to cause prices to appreciate,” he reasoned. “It’ll do the opposite, and then you’ll have more homes upside down.”

Brown agreed that the market is far from normalcy.

“I don’t see that necessarily these homes are going to reach the inventory, but they’re at risk. And the margin is narrow. No question about it,” he said.

In addition to the possibility that home values might temporarily depreciate, any unexpected circumstance, like loss of employment, could thwart homeowners’ efforts to stay in their homes.

“I don’t think there’s anything on the positive side that would speak to rapidly increasing prices,” he said.

But, Brown said the general feeling that the economy is in a slow but real period of recovery will likely discourage people from walking away from their mortgage.

“The people who were going to have already done it,” he said. “Those steady but small quarterly declines suggest to me it isn’t going to be a significant flood of people.”

Marquez allowed that there probably wouldn’t be a historically normal number of traditional transactions for two to three more years, but says the market has absorbed the lengthy short sale timeline and the depressionary effect of distressed transactions on prices.

“Price appreciation under $500,000 will continue to see 3 percent to 6 percent,” he said. “Higher price points are a little more full of peaks and valleys, so they’re harder to comment on.”

CoreLogic uses its propriety Automated Valuation Model (AVM) to assess the value of homes, which it measures against the Mortgage Debt Outstanding (MDO) that it gathers through public record data.

Chase Bank Short Sale Update: Less than 29 Day Approval time with Full & Final Satisfaction of Debt

Battiata Real Estate Group Update:  We just negotiated an approval with a full and final satisfaction of the debt on a Chase loan in less than 29 days.

Chase Bank Loss Mitigation has typically been one of the slower lenders to deal with, however recently, thanks to a streamlined approach to the submission and negotiation of short sales on the part of our office, The Battiata Real Estate Group has seen our approval times drop and drop.

We are now seeing approvals with a full and final satisfactions of the debt come in within 60 days or less with most lenders.

More updates to come.

Short Sale? Make sure it includes a “Full & Final Satisfaction” of the Debt

At The Battiata Real Estate Group, after starting short sales in earnest in 2005 (and now 5 years & several hundred short sales later), our average time period to get short sales approved has dropped dramatically, and more importantly, our success rate at getting “full & final satisfactions” from lenders, where the seller walks away free and clear with no deficiency judgement, no money brought in to close the deal, no promissory note and with no threat of further recourse from the bank, has reached over 90%.

Let me make sure I am explaining this correctly, because it’s important.

A true short sale is where a seller gets out from under an upside down property, pays absolutely nothing to sell their home (no commissions, no closing costs, no seller contribution, no promissory note) and walks away from the property with a settled, forgiven debt, also known as a “full and final satisfaction” on the outstanding debt of their home.

These sellers walk away from the short sale of their home with no further worry about their lender pursuing them for the outstanding balance on their home – it is a done deal, and they walk away owing nothing.

If you are considering a short sale, be sure you do your homework and hire the best.  You typically only get one shot at a short sale – don’t squander it with an agent who is inexperienced at short sales or doesn’t have the knowledge, the integrity or the negotiating skills to achieve a full release for you from your lender.

Make sure you go with an agent who has a documented track record at not only closing short sales but negotiating full & final satisfactions on the debt.

SB 931 Signed into Law – Prohibits Deficiency Judgements on all 1st liens in CA

Governor Arnold Schwarzenegger signed SB 931 into law this past week, prohibiting lenders from pursuing deficiency judgements after short sales on all 1st liens in California, including “recourse” loans where the borrower has refinanced.

In California, once a seller has refinanced their mortgage, whether it is a cash out refinance or simply a refinance to a better interest rate, the loan becomes a recourse loan, meaning the bank can pursue the seller after the short sale for the deficiency, unless stated in writing that the debt is settled on the short sale approval.

Now, with the passage into law of SB 931, lenders are prohibited from pursuing sellers on all first mortgages in CA after a short sale.

Bank of America Halts All Foreclosures in US – Other Lenders likely to Follow Suit

CA SB 931 Passes Senate – Bans Deficiencies on 1st Liens after Short Sales

The California Senate has passed SB 931 unopposed.  SB 931 prohibits banks from pursuing deficiency judgements against sellers on 1st liens in California, regardless of whether the seller has refinanced or pulled cash out.

In California, once a seller has refinanced their mortgage, whether it is a cash out refinance or simply a refinance to a better interest rate, the loan becomes a “recourse loan”, meaning the bank can pursue the seller after the short sale for the deficiency, unless they state in writing that the debt is settled on the short sale approval.

SB 931 prevents banks from pursuing sellers on all first mortgages in CA.

The bill is now headed to Governor Schwarzenegger’s desk for his signature.

Luxury Property Short Sales & Strategic Defaults

The upper end, luxury real estate market in San Diego, Palm Desert & 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.

Fannie Mae, Freddie Mac Loans Now Eligible for HAFA Short Sale Program

As of August 1, 2010, Fannie Mae & Freddie Mac insured loans are now eligible for the government HAFA short sale program. HAFA, which stands for Home Affordable Foreclosure Alternative, was launched in April of 2010, but did not apply to government insured loans, even though the program is administered through Fannie & Freddie.

HAFA was designed to expedite and streamline the short sale process. HAFA requires lenders to respond to short sale offers within 10 business days and outlines a uniform set of seller documents that are required for lenders to evaluate and approve short sales. HAFA also prevents lenders from foreclosing on borrowers once they are in the HAFA program (the lender must do a deed in lieu of foreclosure if the short sale does not go through), prohibits lenders from pursuing any deficiency judgement after the short sale (all debt is forgiven, so the seller walks away with a settled debt) and requires lenders to credit sellers $3,000 for moving expenses at close of escrow.

To find out if you are eligible for HAFA, contact the Battiata Real Estate Group at 760 930 9898 or visit our website at www.Battiata.com.

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

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.