The most prevalent question and one that continues to permeate the industry is:

“Why should a seller go through the short sale process rather than letting their house be foreclosed upon?”

While we cannot speak to every client circumstance, we can say one thing with complete conviction. In almost all instances in which a potential seller is contemplating whether they should short sell their house or let it go through the foreclosure process, a short sale is the better option. The following are examples to consider:

Example A- Short Sale
Mr. Smith owns a home in which he has a mortgage balance of $220,000 and a current market value of $150,000. Mr. Smith has elected to short sell his property. His Realtor successfully obtains a buyer who puts forth an offer price of $120,000 (80% current market value according to Realty Trac Foreclosure Report 5/26/2011). After reviewing the buyers offer and the financial hardship information from Mr. Smith, Mr Smith’s bank agrees to accept the short payoff of $120,000 which would leave a deficiency balance of $100,000.

The transaction closes and is final. Mr. Smith then pulls his credit report 30 days after the transaction takes place. On the report he notices that the mortgage trade line states “Mortgage debt was settled for less than full” and the balance on the mortgage is $0. Mr. Smith is now on the road to financial recovery.

Example B- Foreclosure
For the ease of illustration we will use the same value and mortgage debt amounts as in Example A. However, Mr. Smith has elected to forgo the short sale process and let the bank foreclose on the property. The bank holding his mortgage facilitates the proper legal procedures to foreclose on the property, all of which are costly. Mr. Smith is notified and his property foreclosed upon of which is taken back by the bank to sell as an REO.

Six months later, the bank finally sells Mr. Smith’s home only they sell it for $90,000 (60% of current market value according to Realty Trac Foreclosure report dated 5/26/2011). Remember, as a short sale, the home would have sold for $120,000 keeping the deficiency to $100,000. In addition to the deficiency now being $130,000, the bank has elected to add on legal costs of $15,000 and asset preservation costs of another $5000 for a total deficiency liability of $150,000. Mr. Smith pulls his credit report 30 days after being notified that the bank has sold his property and of his liability.

On the report he notices that the mortgage trade line states “Foreclosure” and the balance is $150,000. Because of Mr Smith’s choice to choose foreclosure vs. short sale his road to financial recovery has taken a major detour. He not only has a foreclosure on his credit report but now has a much larger deficiency balance in which the bank, in most cases, will report on his credit report as a balance owed.

The Best Option is Clear
While the financial and credit advantages are clear when choosing a short sale over a foreclosure, other advantages are sometimes overlooked. The most important of all of them is maintaining the seller’s dignity and peace of mind. We have heard too many stories of families having to leave their homes because of a Sheriff’s order or some other type of legal action. The short sale process alleviates this negative social impact. The process puts the control back in the seller’s hands so that they can get back on the road to financial recovery and start providing for their families. In the battle of the two evils, a short sale always wins!!!

Article Courtesy of:
Christopher Reale, Director of Short Sale Operations at Lepizzera and Laprocina Title and Escrow Services. He is an expert on the short sale process.

IF YOU ARE READING THIS IN ANOTHER STATE (NOT NEW YORK) – PLEASE NOTE THAT STATES HAVE DIFFERENT LAWS REGULATING HOMEOWNERSHIP. PLEASE CONSULT AN ATTORNEY IN YOUR STATE. IF YOU HAVE ANY QUESTIONS OR WOULD LIKE ME TO REFER YOU TO SOMEONE IN YOUR STATE, PLEASE FEEL FREE TO CONTACT ME.

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This video talks about what to look for if you need an attorney to help you negotiate a short sale.

IF YOU ARE READING THIS IN ANOTHER STATE (NOT NEW YORK) – PLEASE NOTE THAT STATES HAVE DIFFERENT LAWS REGULATING HOMEOWNERSHIP. PLEASE CONSULT AN ATTORNEY IN YOUR STATE. IF YOU HAVE ANY QUESTIONS OR WOULD LIKE ME TO REFER YOU TO SOMEONE IN YOUR STATE, PLEASE FEEL FREE TO CONTACT ME.

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Once this settlement is reached, the banks will again move forward on many homes which are currently stalled at some stage in the foreclosure process.

How many homes are we talking about?

There are millions of homes in this category. Calculated Risk quantified the situation:

“There are a large number of seriously delinquent mortgage loans in limbo waiting for this settlement. According to LPS, at the end of August there were about 1.87 million loans seriously delinquent and another 2.15 million loans in the foreclosure process. This is only down slightly from a year ago when 4.4 million loans were seriously delinquent or in-foreclosure. Once the settlement is reached, the pace of foreclosures will pick up sharply.”

The pace will “pick up sharply”.

Bottom Line

As more foreclosures come to the market at discounted prices, there will be greater downward pressure on all housing values. Waiting for the spring selling season to put your house on the market may not make sense this year. The increase in demand may be overshadowed by an increased supply of distressed properties.

Article Courtesy of KCM
IF YOU ARE READING THIS IN ANOTHER STATE (NOT NEW YORK) – PLEASE NOTE THAT STATES HAVE DIFFERENT LAWS REGULATING HOMEOWNERSHIP. PLEASE CONSULT AN ATTORNEY IN YOUR STATE. IF YOU HAVE ANY QUESTIONS OR WOULD LIKE ME TO REFER YOU TO SOMEONE IN YOUR STATE, PLEASE FEEL FREE TO CONTACT ME.

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1. Preventing future delinquencies (people falling behind on their payments)
2. Clearing the backlog of foreclosures already owned by the banks (REOs).

As proof of this, we just need to look at the speech by Edward J. DeMarco, the Acting Director of the Federal Housing Finance Agency (FHFA), to the American Mortgage Conference.

The text of the speech was released earlier this week . Mr. DeMarco explains:

“At the end of the Bush Administration and in the early days of the Obama Administration, attention focused on loan modifications as a way of stabilizing troubled borrowers’ monthly payments and aiding them in avoiding foreclosure. These efforts resulted in the Home Affordable Modification Program, or HAMP. For much of 2009, the key priority was developing and then implementing HAMP; in late 2009 and into 2010, the challenge became making HAMP more operationally effective and converting borrowers from trial modifications to permanent modifications.”

DeMarco then talks about what initiatives the agency is now concentrating on:

“Current priorities are focused on issues at the two ends of the foreclosure process – at one end, we are enhancing efforts to keep current borrowers from going delinquent in the first place and at the other end, we are now focusing on the challenges of disposing of the real estate owned that is left after a foreclosure.”

Preventing New Delinquencies

Trying to prevent more American families from falling delinquent on their mortgage payments is a great first step to a recovery in the housing sector. DeMarco claims:

“FHFA is carefully reviewing the mechanics of the Home Affordable Refinance Program (HARP) program to identify possible enhancements that would reduce barriers for borrowers already otherwise eligible to refinance using HARP. If there are frictions associated with the origination of HARP loans that can be eased while still achieving the program’s intent of assisting borrowers …we will seek to do so.”

Clearing Existing Foreclosures

We must also clear the inventories of foreclosures currently held by the banks. This is seen by FHFA as a crucial component to any plan to help the real estate market recover.

“The second area I would like to briefly discuss is the disposition of Real Estate Owned or REO. In August, FHFA, Treasury, and HUD issued a Request for Information (RFI) on ways to dispose of REO properties. While the Enterprises have considered various approaches to disposing of REO over time, the RFI represents an opportunity to consider new approaches, including possible approaches that include both the Enterprises and the Federal Housing Administration (FHA). By taking this collaborative approach, the three agencies seek ways to improve returns to taxpayers and bring greater stability to local housing markets. We have received nearly 4,000 submissions in response to the RFI. We are encouraged by the strong response and interest in this effort. Obviously it will take a little time to review so many responses but we are already hard at work doing so.

To be clear, this effort is not intended to develop a single, national program for REO disposition. Rather, we are most interested in proposals tailored to the needs and economic conditions of local communities.”

Bottom Line

To help the market, the two major initiatives FHFA is pursuing are preventing new delinquencies and selling off the backlog of foreclosures that currently exists. Modifications, at best, now appear to be on the back burner.

IF YOU ARE READING THIS IN ANOTHER STATE (NOT NEW YORK) – PLEASE NOTE THAT STATES HAVE DIFFERENT LAWS REGULATING HOMEOWNERSHIP. PLEASE CONSULT AN ATTORNEY IN YOUR STATE. IF YOU HAVE ANY QUESTIONS OR WOULD LIKE ME TO REFER YOU TO SOMEONE IN YOUR STATE, PLEASE FEEL FREE TO CONTACT ME.

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(Pssst…there’s a recession going on…people are afraid of losing jobs…and they believe they won’t “get back” the money they spend by renovating upon sale).

The 203K loan can be used for small repairs (with a minimum of $5000 of work) such as a new roof or replacing the boiler. It can go all the way up to practically rebuilding the home and anything in between. Maybe you love a home, the neighborhood, etc., but you hate the kitchen cabinets. The 203K may be for you. As long as the existing foundation stays intact, we can talk about any type of repair, upgrade, modernization or expansion.

With one closing, we will give borrowers money to satisfy their contract with the seller AND establish a Rehab Escrow Account to fund the agreed renovations. The Rehab Escrow Account is managed like a Construction Loan. Money is released after work is completed, the property is inspected by the lender and the title is updated.

Like all FHA loans, the property must be owner occupied and loan approval requires full documentation of income, assets and credit worthiness. At the same time, underwriting guidelines have some flexibility built in. (In theory, we can lend up to 110% of the After-Improved Value of the home for example.)

Loans are processed in the same fashion as any other loan (in terms of income, asset and credit) with the exception of the appraisal. Appraisers work in conjunction with the home improvement contractor and a HUD Approved Pre-Planner to determine: “As-Is” Value, “After-Improved” Value, costs of construction and the draw schedule of the renovation portion of the loan. This work typically adds about a week to the approval process, largely because it should be done BEFORE contracts are signed.

SOME UNIQUE FEATURES OF THE 203K

Mixed-Use Properties may be eligible! As long as the commercial space is no more than the allowable square footage based on the number of floors in the building and none of the renovation monies are used for a commercial renovation, the 203K gives tremendous interest rates for Mixed-Use Properties.
The loan can be used to change property usage (when appropriate municipality approval)…..converting a 1 Family Home to a 2 Family or a 4 Family to a 3 Family or any variation that stays within the 1-4 Family boundaries works.
On major renovations we will finance up to six months payments into the loan. In these cases,the house will not be habitable until after the work is completed.
There is a Streamline 203K for projects that require less than $35,000 of repairs. Typically, we like to see only one or two items of work that can be done quickly (with one inspection).
It is recommended that you work with an experienced loan officer when exploring the 203K Program, as there are many details that need to be considered (from selecting a qualified contractor to the inner workings of the draw schedule and preparing for different contingencies). While the program is more intricate, with the right education ahead of time, it is extremely manageable.

By Dean Hartman
Benchmark Mortgage

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IF YOU ARE READING THIS IN ANOTHER STATE (NOT NEW YORK) – PLEASE NOTE THAT STATES HAVE DIFFERENT LAWS REGULATING HOMEOWNERSHIP. PLEASE CONSULT AN ATTORNEY IN YOUR STATE. IF YOU HAVE ANY QUESTIONS OR WOULD LIKE ME TO REFER YOU TO SOMEONE IN YOUR STATE, PLEASE FEEL FREE TO CONTACT ME.

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I’ve got news for you, in this market, you’re not saving anything.

We are in the middle of a housing crisis, not a “bad market”. And from the numbers I’m looking at, Long Island is in the middle of its uphill battle. I’m not saying prices are going to decline another 30% or that housing values will continue to decline for the next 5 years (yes it’s been nearly 5 years that home prices have steadily declined – since 2007). Time flies when you’re…well time just flies I guess.

In any event, I decided to run the numbers on some random towns and what I looked at was the current available inventory in 10 towns. I then looked at how many short sales and REO (real estate owned – bank owned properties) listings were available and came up with a percentage for each town. The numbers are incredible.

10 Towns

Baldwin 22.6% [190 homes for sale, 42 short sales, 1 Active REO]
Bay Shore 44.8% [386 | 165 | 8]
Bellport 38% [50 | 19 | 0]
Centereach 30.5% [154 | 42 |5]
Corona 23.1% [221 | 48 | 3]
E. Patchogue 29.9% [144 | 42 | 1]
East Hampton 18.4% [87 | 15 | 1]
Hempstead 72.1% [208 | 137 | 13 ]
Lindenhurst 24.6% [260 | 59 | 5]
Shirley 38% [310 | 115 | 3]

When I did this random sample of towns on Long Island, it wasn’t just the numbers that caught my eye, but the differences between how many short sales there are on the market and how little foreclosures are currently listed in comparison. This is a problem and it’s spelled out very good in the graph below.

When you look at a town like Hempstead (in bold), I wasn’t just shocked that nearly 3 in 4 homes is in distress, but that there are only 13 bank-owned homes. The graph above demonstrates how far behind the banks and courts really are to clearing out these homes or fixing the crisis. There’s that word again!

If you take into account that in July of last year, the Times pointed out that the process was taking nearly a year and a half to actually foreclose on a homeowner shows that this problem is systemic.

Fast-forward to the end of 2010 and you see that Nassau and Suffolk county rank in the top three areas of the country with the most months of shadow inventory and what you have an area that has a lot of work to do.

Now I also looked at the national REO numbers in comparison to the sales prices of homes throughout the period from 2008 through 2011 and it’s a mirror image.

As foreclosures go up in volume, the prices drop just as much in the opposite direction.

The Bottom Line

If you’re a homeowner and you’re trying to sell on your own to “save a commission”, please stop and call me right now. This is a housing crisis we’re in, not a “bad market”. It takes special and careful planning and review of information like this, to determine where your price point should be and what marketing strategies to use. If you’re behind on your payments, do not delay, contact me now to go over your options.

If you’re buying, now or 2 years from now – the differences will be tremendous. The cost of mortgages is going up, but prices won’t move all that much from here on out. Shadow inventory or steady short sales and slow-to-the-market foreclosures aren’t going to move the housing prices much further down so you won’t be “saving” either.

Call me to discuss this. I have more slides and information than you can possibly need to make an educated decision about investing in real estate (631)831-9048. I look forward to your call.

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IF YOU ARE READING THIS IN ANOTHER STATE (NOT NEW YORK) – PLEASE NOTE THAT STATES HAVE DIFFERENT LAWS REGULATING HOMEOWNERSHIP. PLEASE CONSULT AN ATTORNEY IN YOUR STATE. IF YOU HAVE ANY QUESTIONS OR WOULD LIKE ME TO REFER YOU TO SOMEONE IN YOUR STATE, PLEASE FEEL FREE TO CONTACT ME.

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