Napa Short Sales
The short sale market in Napa is looking hot. Go to www.silverado-property.com for more info
Lenders Pursue Foreclosure Owners
Wrong.
Former homeowners may still be on the hook if there’s a difference between what they owed on their mortgage and what the bank could sell it for at auction. And these “deficiency judgments” are ticking time bombs that can explode years after borrowers lose their homes.
It can even happen to people who got their bank to approve them selling their home for less than it is worth.
Vanessa Corey, for example, short sold her Fredericksburg, Va., home in April 2008. She and her husband built the house in 2004, but setbacks, both personal (divorce) and professional (housing bust), made it impossible for the real estate agent to keep her home. So she negotiated the short sale and thought that was the end of it.
“My understanding was that the deficiency was negotiated away,” she said. “Then, last November, I got a letter from a lawyer telling me I owed my lender $65,000. I had to declare bankruptcy. There was no way I could pay it.”
Many homeowners are now in the same boat. And not just those who took out bigger loans than they could afford or who did so called “liar loans” where they didn’t have to verify their income.
Because of falling home prices, borrowers who always paid their mortgage but who have run into unforeseen circumstances — like unemployment or a job transfer — can no longer sell their homes for what they owe. As a result, they are being forced to short sell or foreclose and are getting caught up in deficiency judgments.
“After the banks foreclose, it’s very common now to have large deficiencies with houses not worth the balances owed,” said Don Lampe, a North Carolina real estate attorney.
Lenders mostly declined comment. Although Corey’s lender, BB&T did indicate it was pursuing more deficiency judgments.
“They follow the rise and fall of foreclosures,” said the spokeswoman, who would not discuss Corey’s account.
Can they come after you?
Whether banks can and will pursue deficiency judgments depends on many factors, including what state the borrower lives in and whether there’s a second mortgage or other liens. But if borrowers ignore the possibility of deficiencies, it could haunt them.
“Once they have a judgment, they can pursue you anywhere,” said Richard Zaretsky, a board-certified real estate attorney in West Palm Beach, Fla. “They can ask for financial records, have your wages garnished and, if you fail to respond, a judge can put you in jail.”
In the case of foreclosure, lenders can pursue deficiencies in more than 30 states, including Florida, New York and Texas, according to the U.S. Foreclosure Network, an organization of mortgage law firms.
Some states, such as California, are “non-recourse” and don’t allow deficiency judgments. But, even there, if the if the original loan was refinanced, some or all of it may be subject to claims.
Deficiency judgments on short sales and deeds-in-lieu can happen in many more places. In these cases, extinguishing the debt is often a matter of negotiating with the bank.
But even when lenders are willing, many borrowers may not be aware that they have to ask for release. So, if you are pursuing a short sale, be sure your attorney asks the bank to release you from any further obligation.
“People shouldn’t have a false sense of security that a deficiency judgment may not be later sought,” Zaretsky said.
He expects many will be filed over the next few years, based on the fact that banks have sold many of these accounts to collection agencies and other third parties, at discount.
“The parties who bought those notes wouldn’t have paid money for them unless they had the intention of acting,” Zaretsky said.
Ticking time bomb
What can be scary is that the judgments don’t have to be obtained immediately. Lenders or collection agencies may wait until debtors have recovered financially before they swoop in. In Florida, the bank can wait up to five years to file. Once the court grants a judgment, the lender has 20 years there to collect, with interest.
It doesn’t have to be a large amount of debt for a lender or collection agency to come after borrowers. Richard Varno and his wife short sold their Nashville home back in 2004 after he lost his job.
It wasn’t until 2008, when the second lien holder asked him for $25,000, that he realized he still was liable.
“I told them, ‘Hey, you guys released the title,’” he said. “As far as I know, I’m off the hook.”
He wasn’t. Releasing title does not necessarily end the debt. It’s complicated because of variations in state law, but, generally, a mortgage has two parts: a pledge of collateral, represented by the home, and a promise to pay off the loan.
Lenders may release property liens in order to facilitate short sales without releasing borrowers from their obligations to pay under the promissory notes. The secured debt can convert to an unsecured one after the sale.
Zaretsky had one client who was so relieved to have arranged a short sale that he signed every paper his real estate agent shoved at him, even a confession that clearly stated he still owed the debt.
“He had no idea what he was doing,” said Zaretsky. “All the lender had to do was go to court to convert the confession into a deficiency judgment.”
Lenders are also very inconsistent. One of Zaretsky’s short-sale clients was ready, willing and able to pay, but the bank did not even ask; another lender always reserves the right to pursue the deficiency.
Strategic defaults
Sometimes lenders go after borrowers walking away from their homes if they have other assets, according to Florida real estate attorney Larry Tolchinsky.
“Banks are pulling credit reports to see if it’s a strategic default,” he said. “If you’re behind on all your other payments, you’re okay. But if you’re not, they’ll come after you.”
If borrowers have any doubts about their risks, they should seek legal advice. Or, at least, call non-profit organizations such as NeighborWorks for advice. According to Doug Robinson, a NeighborWorks spokesman, its counselors always try to negotiate away deficiencies when they facilitate short sales or deeds-in-lieu.
“We don’t favor any short-sale contracts that leave any deficiency that can be pursued,” he said.
Robinson himself knows what can happen. He paid off a deficiency after his own New Jersey house went through foreclosure 11 years ago.
What is an FHA mortgage loan?
In 1965 the Department of Housing and Urban Development (HUD) was formed. Within HUD operates the Federal Housing Administration (FHA), which has the primary responsibility for administering the government home loan
insurance program. This program allows a first time home buyer who might otherwise not qualify for a home loan to obtain one because the risk is removed from the lender by FHA who insures the loan for the lender.
The most popular FHA home loan program for a first time home buyer is by far is the 203(b). This is your standard fixed rate loan for 1-4 family owner occupied houses and only requires a minimum of 3% from the borrower. This loan also permits 100% of their money needed to close to be a gift from a relative, non-profit organization, or government agency.
The main advantage to a FHA home loan is that the credit criteria for a first time borrower are not as strict as Conventional Loans sold to Fannie Mae (FNMA) or Freddie Mac (FHLMC). Someone who may have had a few credit problems or no traditional credit should not have a problem obtaining FHA financing. Also, FHA home loans are assumable, allowing a person to take over the mortgage without the additional cost of obtaining a new loan. In addition, the seller or lender must pay for part of the “traditional” closing costs (called non-allowable costs) while a borrower’s allowable costs can partially be wrapped into the loan. The monthly mortgage insurance premium is cheaper for an FHA loan verses a conventional loan with 3% down. Finally, FHA loans may may require less income to qualify as they will exceed the Conventional debt ratios of 28/36% as their standard is 29/41%. To learn more about debt ratios, please see the income section.
Many people make the mistake and assume that FHA loans are only available for first time home buyers. This is not true. FHA loans are available to anyone, whether your first or fifth home and can be used to purchase a home or refinance a home. If refinancing a home the current loan DOES NOT have to be an FHA loan.
The greatest disadvantage of FHA home loans is that FHA limits the loan size that a borrower can borrower Please see the link for FHA Loan Limits in your area. Others may try and convince you that the FHA upfront mortgage insurance premium (MIP) is a disadvantage. However this amount makes just a very small increase in the borrower’s month payment and is partially refundable in certain cases. See the section on MIP refunds for more information.
There are several notable FHA home loan programs available as characterized below.
Standard fixed rate (FHA 203b)
Rehab Loan (FHA 203k)
Condominium Loans (FHA 234c)
FHA adjustable rate mortgage (FHA 251)
FHA Hybrid Adjustable Rate Loans
FHA 2-1 buydown (FHA 203b, Not Allowed on FHA 251)
Energy Efficient Mortgages Program
Reverse Mortgages for Seniors
Soaring Sales of Foreclosures
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In California’s Bay Area, sales of foreclosure properties increased to over 5,000 units in the last several months. About 67 percent of total monthly sales are purchases made by first-time homebuyers and investors.
According to Andrew LePage, analyst at San Diego housing research firm MDA DataQuick, more and more people are deciding to buy a home as more foreclosure properties are being sold at bargain prices. Large inventories of bank-owned foreclosure properties and predictions of more foreclosures have put home prices at levels very attractive to first-time homebuyers and investors.
My list of foreclosures is a good place to start looking for investments or your next home. California is among the top three in foreclosure rates and in number of foreclosure properties in 2008 and in the first two months of 2009. It’s a great time to invest out of stocks and go with property.
The first of several factors contributing to increased home sales in the Bay Area is the low median price of homes. Because of the glut of foreclosure properties in the state, the median home price in February dropped to $295,000, staggeringly much lower than the $720,000 median price in 2007. More than 50 percent of all houses sold in February in the Bay Area were priced below $300,000.
Another factor is the availability of financing backed by the U.S. Federal Home Administration. Previously, FHA loans were not popular in the Bay Area because these loans were only for lower-income buyers and low-priced homes. But after FHA increased its loan limits to $729,250, numerous buyers applied for FHA-backed loans, accounting for almost one-fourth of all mortgage loans in the Bay Area in February.
The availability of foreclosure properties and existing homes priced at $200,000 has also increased sales, according to Peter Harris, an agent with Novato-based Bradley Real Estate. The low down payments and the FHA loans have been encouraging low-income first-time homebuyers to grab price opportunities in the housing market.
LePage said FHA loans have been significantly reducing excess inventories of bank-owned foreclosure properties by rejuvenating the first-time home buying sector. Large numbers of first-time homebuyers attracted by FHA loans will ultimately contribute to the stabilization of the mortgage and housing sectors.
Another big reason for the Bay Area’s increased home sales is the investor factor. In February, the number of people buying homes for investment purposes has increased from 10 percent in 2007 to 18.7 percent.
Lastly, the tax credits offered to first-time homebuyers have also rejuvenated home buying. Just like in other areas of the country, people in the Bay Area who have been delaying their home purchases waiting for further home price decreases and lower-priced foreclosure properties have decided to buy a home because of the tax credit.
REO’s vs Foreclosures
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REO is an abbreviation for a REAL ESTATE OWNED property. The term REO can be used ambiguously, to describe a specific type of property, but in real estate the phrase real estate owned property indicates that the property in question has been foreclosed on and has been taken back by the mortgage lender or trustee. REOs and FORECLOSUREs are not the same thing, however an REO is only produced as a result of an unsuccessful foreclosure, in which a buyer for the property cannot be found, and so the mortgage lender repossesses the property to sell separately.
Many people ask the question “which is better to buy, a REO or a house being foreclosed on?” The answer is not so straightforward as to give a specific response, instead it is a personal preference relating to the conditions that you find acceptable, and the benefits that you can gain, in the property purchase that you are looking for.
To attempt to answer the question of REO Vs FORECLOSURE property purchase it is good to look at the specifics of each type of purchase, including the benefits and liabilities that you could possibly incur during, and after, the process.
REO: REAL ESTATE OWNED property, as already stated, is a property that a mortgage lender takes back into its ‘care’ as a result of a foreclosure on a home that has not yielded a buyer during a foreclosure sale. There maybe many reasons why a foreclosure sale by the mortgage lender fails (these will be looked at later), leading to a REO sale. The fact that the house is being sold as a REO property should not detract the buyer from the property. In most cases there is nothing suspect, or wrong, with the property that is for sale by the lender, other than the fact that the previous owner could not afford the repayments.
Most real estate agents and realtors will back the idea that for novice homebuyers, those buying their first home, the idea of buying a REO property is a good one for many reasons. Lenders will always highlight the fact that purchasing an REO from them is “the safest way to buy” real estate, generally as a result of there being no risk to the buyer, and no tenants to evict. In fact statistics show that when it comes to buying a home that has been foreclosed on, REO purchases are the more popular method of purchase.
A bank, or mortgage lender, does not want to have a house or property on its books for long. Banks want to make money; more over they want to invest money to make more money, as is the nature of the finance world. When you bank any money the bank will invest your money in the hope of generating a profit for it, hence being able to pay interest on your account. Any house that the bank owns represents a future, potential financial investment that could be generating a profit if it invested into the stock market. Whilst the house sits unoccupied the bank is not making any money from it and therefore it is in the best interest of the bank, or mortgage lender, to sell the house and invest the money.
Adding to the fact that an unsold, reposed home is a not generating money for the bank is the fact that this unsold item can sit on the banks balance sheet and be viewed by the banks shareholders as mismanagement on the part of the bank manager. This indication of mismanagement on the banks part can cause many problems for a bank if the shareholders decide to take action. Remember that in a capitalist economy, the number one goal of a Public Limited Company (one that is traded on the stock market) is to increase shareholder wealth. If shareholder wealth (seen by looking at the increase in share price) is affected by the banks lack of ability to clear bad debts on its balance sheet then the shareholders will be unhappy and can further affect the banks stock and the jobs and careers of its managers, therefore it is in the best interests of the bank, its shareholders and its staff to sell the house as fast as possible.
To generate a quick sale the bank does many things to a prospective buyer, and because of this there are many benefits to buying a REO property. Some of the major benefits are shown below:
Savings of up to 20% off home market values
Generating a quick sale for the lender is of paramount importance. Some large lenders have entire departments specifically for this type of work and therefore want to move through the backlog of properties as efficiently as possible. Added to this idea all of the problems that having a property on its balance sheet can lead to for a bank (as outlined above) and the lender will always offer a lower purchase price for the property, sometimes as large as 20% off the comparative market price of the property.
Most simple way for first time homebuyers and experienced investors to buy properties
Due to the need for a quick sale the lender usually covers all taxes and other problems, such as evictions etc, making the purchase as straightforward as possible for the homebuyer.
Prospective buyers have immediate access to a property for inspections
All homebuyers have the right to have a house inspected by a qualified assessor or appraiser. Sometimes the sellers may only allow the inspection at certain times, due to commitments and other factors. These problems, and various others, are not of concern with a REO purchase and therefore make having an appraisal carried out easier and faster, than would normally be the case.
No back taxes or liens to worry about
Basically this benefit means the following: No tenants to evict and no financial instrument secured by the property. This is good as it avoids all of the possible hassle and stress of hiring a company to evict any tenants.
Negotiable rehab costs, interest, closing points, loan amount, etc.
All of the above factors maybe important to the buyer and therefore, as the lender wants a quick sale, all of the costs, interest etc can be negotiated, usually for better terms than in a normal purchase.
Almost 100% risk-free
When a bank repossesses a home it always provides a good, clear title. What this means is that when you buy the house you know that it is yours and not someone else’s i.e. there is no ambiguity about the ownership of the property.
Less than normal down payment
A lender looking to sell the home may accept a less than normal initial down payment from an interested buyer, to secure the sale of the home.
Though the benefits of a REO property purchase sound excellent, there are only offered as a result of a failed foreclosure sale by the lender. The foreclosure sale is really a bidding war, or auction, to secure the purchase of house that is being forcefully sold by the bank or lender, as a result of a legal process by which a borrower in default under a mortgage is deprived of his or her interest in the mortgaged property.
The foreclosure sale differs to a REO sale in a few major ways. Foreclosure sales begin with a minimum bid by the buyer. This minimum bid has to include the following items:
The loan balance on the property. This is to cover the missing amount that the previous owner could not afford All accrued interest Attorneys fees All costs associated with the foreclosure process.
To bid at a foreclosure auction, you (the buyer) must have a cashiers check in hand for the full amount of your bid. If you are the successful bidder, you receive the property in its “as is” condition. This means that the sale could include someone still living in the property and there might also be liens (a restriction on a certain parcel of property that usually reflects an amount of money due to a third party from the owner of the property) against the property which you will be liable for.
Looking at the benefits of the REO purchase and what you are liable for in a foreclosure sale may leave a person wondering what is the point of a foreclosure sale, as the negatives seem way worse than the positives, especially when compeered to a REO sale. Whilst this is true and is a valid point, one of the main benefits of a foreclosure purchase is that buying from foreclosing lenders often means that they will offer easy financing to quickly get rid of a property they dont want to own. If the property is in especially bad condition then they may even give a very favorable price.
However, since what is owed to the bank is almost always more than what the property is worth, very few foreclosure auctions result in a successful sale. This type of purchase is more favorable to investors rather than homebuyers because normally the tenants will wish to live in the house and pay rent, rather than move (as they may not have the finances) and so buying a foreclosure property may be a good start to renting property, as you already have tenants.
Bay Area Short Sales & Foreclosures
Are you in need of more information regarding short sales?
Go to www.silverado-property.com for more info
Buying through non-traditional sources can be complicated and emotion driven, so let’s review a few rules to successful property investing.
Rule No. 1: “Know thy-self.” A great deal on a property you don’t really want to own, or can’t afford to own, isn’t a great deal. If you doubt this, ask anyone of the thousands of amateur investors who currently own an “alligator” – a property eating them out of house and home.
Rule No. 2: The only thing that matters is current market value. What something cost 2-3 years ago is irrelevant today. Your goal should be to buy quality real estate at a discount to today’s market.
Rule No. 3: Everything costs something. No property is worth a divorce, financial ruin or a nervous breakdown. Even if you mess up on rules 1 and 2, NEVER forget rule No. 3.
Now for some important legal basics. Title means ownership. When someone owns real estate they are said to have title to it. Transferring ownership from one party to another is accomplished by executing a document called a deed. The holder of the deed controls the property. When recorded (almost always, but not legally required) they become public record.
When someone borrows money to purchase real estate, it’s called a mortgage. In California, at closing, the buyer gets a deed. The bank or lender records a lien against that deed. A lien is a financial claim against a property to secure payment of the debt or other obligation. Key point: Whoever is the legal owner of the deed controls the property.
When a property has a first / second / third mortgage it also has a first / second / third lien. Key point: Before a property can be transferred to a new owner, these liens must be paid off (satisfied) to obtain clean title.
Short Sale: This is a process where the owner of the property behind in mortgage payments attempts to sell a property for less (short) than is owed to the mortgage holder(s).
Why would a lender or lien holders accept less than what is owed? Because a short sale might actually reduce their loss verses a foreclosure, where they might even get nothing! Additionally, foreclosing in California is a lengthy and costly legal process, making the eventual loss even greater. It’s just good business to take a smaller loss now than a greater loss in the future.
Additionally, after foreclosing, the foreclosing lien holder becomes the owner of that property. Lenders don’t want to own property, they want to own mortgages on property!
Now here’s the truth about short sales: Various sources indicate as few as 5 percent of advertised short sales are successful. The reason is that short sales require the full cooperation of everyone involved to be successful. And I mean everyone!
The seller has to cooperate by providing, at the very least, a hardship letter, tax returns, pay stubs, a current financial statement and access to the property for inspections and appraisals.
Why would a seller go through all of this, rather than just letting the foreclosure happen, especially since at the closing table the seller won’t be receiving funds? For two good reasons:
First, on a credit report a settlement looks bad. However, not nearly as bad as a foreclosure looks. A foreclosure can actually prevent future property ownership for many years. A settlement usually doesn’t. In a lender’s eye, a foreclosure is often viewed worse than a bankruptcy. Remember, foreclosing is a lenders last resort.
Second: After foreclosing, a lender(s) or lien holder will often attempt to recover their loss with a deficiency judgment. In a short sale, the settlement agreement can include forgiveness of this debt. And thanks to a new law, the IRS can even forgive the “paper gain” which until recently was considered unearned income and subject to taxation. OUCH!
These two reasons are enough for a distressed seller to cooperate to the fullest extent to achieve a successful short sale verses a foreclosure.
Now the most asked question of all: “How much should a buyer offer in a short sale”? While it’s true that a buyer can make some insane, low-ball offer, it usually will be rejected because foreclosing then becomes a better option. I’ve found in most cases a 10-15 percent discount from current market value will be acceptable.
Current market value is almost always determined by a state certified appraisal ordered by the lender(s) although sometimes a lender will accept a CMA (Comparative Market Analysis). The hard truth is that no lender is going to simply rubber stamp your offer.
So here is a secret that will make reading this article worth it. Before making a short sale offer, get either a third party CMA or appraisal so you will have a defensible basis from which to take a discount. For an offer to be accepted, all lenders and lien holders will have to be convinced (sold) that your offer has a benefit to THEM. So start off right with proper documentation.
Short sale buyers will need patience as the process can take months and often doesn’t succeed. The good news is that you will have both time and access to fully inspect the property and time to secure financing if needed. Finally, you’ll receive clear title with title insurance at closing.
In conclusion; short sales take time, require exceptional skill and the full cooperation of everyone involved. But they benefit everyone; the seller, lien holders and the buyer, making it all worthwhile.
