bubbleinfo.com

From the C.A.R.

UNDISCLOSED SHORT SALE PAYMENTS MAY BE ILLEGAL

Undisclosed payments in short sale transactions, especially those paid outside of escrow, may violate the law, including RESPA, laws against loan fraud, and licensing laws.  Short sale agents have increasingly reported to C.A.R. about requests for agents and their clients to pay junior lienholders and others, oftentimes outside of escrow.

One common scenario is when a short sale seller’s senior lender authorizes a payment of $3,000, for example, to extinguish a junior lien, but the junior lender demands that the buyer pays an additional $9,000 outside of escrow.  Not only would it be risky for a buyer to pay outside of escrow, but concealing this additional payment from a federally-insured senior lender may constitute loan fraud, which is a crime punishable by 30 years imprisonment plus a $1 million fine (18 U.S.C. section 1014). 

Furthermore, omitting from the HUD-1 Statement any charges paid at settlement by either a buyer or seller may violate the Real Estate Settlement Procedures Act (RESPA) (Appendix A to 24 C.F.R. Part 3500).  Depending on the specific circumstances, carrying out these payment requests may also violate other laws and regulations, and an agent’s participation in the scheme may be subject to license revocation by the Department of Real Estate or other disciplinary action.

Agents and their clients are encouraged to file any complaints regarding fraudulent activities to the proper authorities, including the following agencies:

Attorney General’s Office
California Department of Justice
800-952-5225 Phone
http://ag.ca.gov/consumers/mailform.htm
Department of Housing and Urban Development (HUD)
HUD Office of Inspector General Hotline (GFI)
800-347-3735 Phone
http://www.hud.gov/offices/oig/hotline
Federal Bureau of Investigation (FBI)
202-324-3000 Phone
https://tips.fbi.gov

From the U-T:

WASHINGTON — With the Obama administration and private lenders now actively considering mortgage principal-reduction programs to help financially distressed homeowners, the Internal Revenue Service has issued a new advisory to taxpayers who receive — or seek to receive — such assistance if it’s offered.

The IRS gets involved in mortgage principal write-downs because the federal tax code generally treats any forgiveness of debt by a creditor in excess of $600 as ordinary taxable income to the recipient.

However, under legislation that took effect in 2007, certain home mortgage debt cancellations — such as through loan modifications, short sales or foreclosures — may be exempted from tax treatment as income.

Sheila C. Bair, chairman of the Federal Deposit Insurance Corp., recently confirmed that her agency is working on a new program to expand the use of principal mortgage reductions to keep underwater borrowers out of foreclosure. Major banks and mortgage companies have preferred monthly payment reductions and other loan modification techniques over cuts of principal balances, but a handful have made limited use of the concept.

One of the largest servicers of subprime home loans, Ocwen Financial Services of West Palm Beach, Fla., has strongly advocated principal reductions to keep people out of foreclosure, and claimed broad success with them. Ron Faris, president of Ocwen, testified to a congressional subcommittee earlier this month that borrowers with negative equity are as much as twice as likely to re-default after a standard, payment-reduction loan modification than those who receive partial forgiveness on their principal debt.

But what are the tax implications when your lender essentially says: OK, we recognize you’re underwater, maybe you’re thinking about walking away, and we’re going to write off some of what you owe to keep you in the house? IRS guidance issued March 4 spelled out step by step how financially troubled and underwater borrowers can qualify for tax relief when a lender agrees to lower their debt.

Read the rest of this entry »

From the U-T:

San Diegans who have lost their homes through foreclosure or short-sales thought they had emerged from the dark times and could start rebuilding their lives.

Then the state tax man came calling.

With less than six weeks before taxes are due, an estimated 16,000 former homeowners statewide will owe $15 million in extra income taxes this year and $29 million through 2012.

The tax applies to what is called the “cancellation of debt” that occurs when property owners lose their homes through foreclosure or arrange a short-sale in which they sell for less than the mortgage balance. The lender sends them a form itemizing the forgiven debt, and the amount is subject to income tax.

Congress exempted most homeowners from the extra federal tax through 2012, and the state followed suit for 2007 and 2008 but did not extend the provision last year. The state Assembly may vote tomorrow on a bill to repeal the tax, but Gov. Arnold Schwarzenegger vetoed such a bill last year over unrelated provisions.

“They’re probably stuck,” San Diego tax attorney Bob Kevane said of former homeowners facing the tax. “The biggest way around it is if you’re insolvent.”

Read the rest of this entry »

On Monday, CR had this SS post and graph on the increase in short sales. The information used was part of a package that included a national audio conference held that day about short sales, and the upcoming HAFA, which begins April 5th.

There were three speakers, from Bank of America, Wells Fargo Bank, and Freddie Mac, who discussed what they are doing about making short sales more palatable.

*********************************************************

Bank of America rolled out their new short sale phone number, 866-880-1232, and mentioned that agents can now use their REO-processing website  for short sales.  The presentation was a little light on details, but I can report a recent success.  

We submitted a short sale on behalf of our seller that only took six weeks to get an approval (and the notice came over on a Sunday, from Plano, Texas).

*********************************************************

Wells Fargo Bank announced that they are placing short-sale managers in the field.  They will be interviewing the sellers on-site, going to their houses to determine their eligibility, and collecting the necessary financial documents.  Once in process they’ll order an appraisal, and have a response in 7-10 business days.

*********************************************************

I think the banks are too optimistic about the sellers’ willingness to cooperate, after training them to crave the free cheese.  WFB is giving $5,000 cash-for-keys to the sellers, but they need to threaten them with foreclosure if we’re going to see any real movement.

Both banks promised to pick up the pace - if they could close short sales within 60 days, it would be a big improvement.  To keep the sales urgency higher, the banks have to move quicker to determine the acceptable price of the properties – buyers would be more willing to wait out the process if they knew their price was approved. 

It’s hard to believe that the servicers will push to pre-approve any short-sale prices, or especially in the volumes necessary to make a difference.  Pre-approvals are, in effect, a voluntary principal reduction, and servicers aren’t going to be rushing those out.  Will they approve a fully-packaged short sale in 2-6 weeks?  It’s possible, and getting an accurate valuation quickly is the key.

Other hurdles: 

• The junior lienholders have to agree to lose money too.
• In the Q&A, it was asked if there are going to be deficiency judgments, or are the sellers off the hook.  Freddie Mac confirmed that sellers in HAFA are released from liability, but the representatives from Bank of America and WFB were conspicuously silent.
• Sellers are still subject to deficiency judgements from junior lienholders, and liable for income tax on capital gains.
• For possession and occupancy to be delivered to the buyers, the sellers have to get out of the house.  But they are addicted to the free rent, plus their credit report will reflect 6 to 18 months of late payments on their mortgages.
• Once the short sale is approved, the buyers then conduct their physical inspection.  Any required repairs fall on the realtor to resolve – expect many potential short sales to fail at this juncture due to inexperience/ineffectiveness. 
• The rampant fraud being committed by realtors is a turn-off.

The housing bailouts have a history of not benefiting the masses.  For short sales to increase significantly, the lenders would have to commit to losing big money, and lately there has been reluctance and feet-dragging.

This two-part video is intended to be an instructional piece on exploring the alternatives to short-selling.  If you come here for the entertainment, you’ll be disappointed – this is only one-person’s dry examination of the facts pertaining to their situation. 

The fairly extreme nature of this case helps magnify how important it is to carefully consider all parts of your puzzle.  Others who are over-encumbered and feel trapped can plug in their own numbers, and decide for themselves if it is worth it to stay or sell:

Part One:

Part Two:

Yesterday Sean saw these NSDCC January numbers posted here:

REO resales on MLS: 21
Short sales on MLS: 14
Trustee sales, REO: 32
Trustee sales, bought by 3rd party: 18
Trustee sales, cancelled: 56

and he asked about the cancelled trustee sales – how do they break down? 

I ran each of the addresses through the MLS and foreclosureradar, and was surprised to see that NONE of the 56 have re-started the foreclosure process, at least not yet.

Here is the breakdown:

MLS short sales:  19

MLS sale, not short:  1

MLS active listing:  2

Cured for now:  34

Total: 56

The short sales closed over the last three months, that’s why the 14 and 19 don’t jive – the servicers are slow to mark them cancelled.

I think we can assume that the ’cured for now’ category, those cancelled defaulters who were never on the MLS, are the loan modifications.  Some folks may be bringing in money to cure their default, but I’d guess those amount to less than 10% of the total.

If the real estate machine is handling 56 defaulters per month, and 50 trustee sales happen successfully per month, we’ll be treading water for the next decade or two.  There are 389 SFRs on the NOD list, and 532 on the auction list.

Bank of America and Wachovia are both rolling out their new and improved short-sale processing packages, and it looks like they are hoping to close short sales within 60 days.  We’ll have more on them as they develop.

With the HAFA plan directing servicers to pre-approve short sales, we might see improved timing, but nowhere do I see anyone stopping the graft and corruption that dominates the SS process.  There are no rules, regualtions, or laws to guide listing agents on how to handle a short-sale listing, and when left to their own devices, they seem to have great difficulty with handling them honestly and ethically.

It’ll be another frustrating year!

updated 12/1/09

I.  Fannie Mae Credit Guidelines

Q 1.  How long is the time period after a foreclosure before a consumer can be eligible to obtain credit to purchase a home?

A  Five years from the date the foreclosure sale was completed. 

Additional requirements that apply after 5 years and up to 7 years following the completion date are as follows:

^.  The purchase of a principal residence is permitted with a minimum 10 percent down payment and minimum representative credit score of 680.

^.  Purchase of a second home or investment property is not permitted.

^.  Limited cash-out refinances are permitted for all occupancy types pursuant to the eligibility requirements in effect at that time.

^.  Cash-out refinances are not permitted for any occupancy type.

(Source:  FNMA Announcement 08-16, 6-25-08 )

Q 2.  Why do the additional requirements for foreclosures in Question 1 only apply from 5 to 7 years following the foreclosure completion date?

A  According to Fannie Mae policy in Part X, Section 103 of the Selling Guide, Fannie Mae requires only a 7-year history to be reviewed for all credit and public record information.  The 7-year timeframe also aligns with the information provided by the borrower on the loan application relative to disclosure of a past foreclosure action.  (Source:  FNMA Selling Guide, 4-1-09. )

Q 3.  Does a shorter time period apply if the borrower has “extenuating circumstances” that led to the foreclosure?

A  Yes.  Three years from the date the foreclosure sale was completed.  The same additional requirements apply as listed in Question 1 except the minimum credit score of 680 is not required.  (Source:  FNMA Announcement 08-16, 6-25-08. )

Read the rest of this entry »

This guy received his first NOD in April, 2006, and has been working the system ever since.

Yesterday he listed the house on the MLS for the first time in almost two years with a broker out of the 916 area code.  With his next trustee sale date being January 14th (the original date was 4/9/09), his generous free-rent program must be winding down, and listing it for sale was a last-ditch effort to extend it further.

It doesn’t look like it’s been a humbling experience though, this is the main MLS photo:

Hopefully 2010 will be the end of the road for the crooks and deadbeats!

From bloomberg.com, hat tip PH!

Homeowners with mortgages of more than $1 million are defaulting at almost twice the U.S. rate and some are turning to so-called short sales to unload properties as stock-market losses and pay cuts squeeze wealthy borrowers.

“The rich aren’t as rich as they used to be,” said Alex Rodriguez, a Miami real estate agent with JM Group USA Inc., whose listings include a $2.9 million property marketed as a short sale because the price is less than the mortgage, leaving the bank with a loss. “People have reached the point where they can’t afford the carrying expenses of a $2 million home.”

Payments on about 12% of mortgages exceeding $1 million were 90 days or more overdue in September, compared with 6.3% on loans less than $250,000 and 7.4% on all U.S. mortgages, according to data from First American CoreLogic Inc., a Santa Ana, California-based research firm. The rate for mortgages above $1 million was 4.7% a year earlier.

 As defaults on the biggest mortgages rise, borrowers such as Steve Holzknecht, 53, are turning to short sales to exit loans that now are larger than the market value of the house. Last month he cut the asking price for his 7,280-square-foot home in Kirkland, Washington, by $550,000 to $1.25 million, lower than the balances of his two mortgages.  Holzknecht, the former owner of Four Suns Inc., a Seattle luxury homebuilder that went out of business two months ago, constructed the Craftsman-style home in 2000. He declined to identify his lenders or the amount he owes.

Read the rest of this entry »

Seen on CR, this summary on Bloomberg discusses the recent developments with short sales, DILs, and loan modifications. 

The article’s ending:

Short sales benefit a neighborhood because they clear out stagnant properties that may have an adverse effect on values, said Sean Shallis, a senior real estate strategist (ed. note: he’s a realtor) with Weichert Realtors in Hoboken, New Jersey. Shallis has one home with bank approval for a short sale and three others waiting approval on the same street in Jersey City with views of the Manhattan skyline.

“In every case we had multiple offers from people who had plenty of money to put down,” Shallis said. “Americans are out there still buying homes and trying to move it along.”

Short sales also help the bank, because foreclosed properties lose more value when they are vacant or a homeowner vandalizes a house on the way out, Sunlin said.

“We typically expect a 10 to 15 percent decrease of loss severity with a short sale,” Sunlin said.

Losses on prime loans going through the foreclosure process averaged 49 percent versus 34 percent for a short sale as of Oct. 1, according to a Nov. 10 report by Laurie S. Goodman, senior managing director of Amherst Securities Group LP. For subprime loans, losses averaged 73 percent for a foreclosure compared with 59 percent for a short sale.

“The loss severity of short sales is lower but it’s not low,” Goodman said.

For a borrower’s credit history, a short sale is typically reported as “settled” and considered as severe as a foreclosure, said Maxine Sweet, vice president of public education for Experian PLC, the world’s largest credit-reporting company. The impact of a short sale on a credit score is similar to that of a foreclosure. It may drop a credit score of 780 to 620, according to Minneapolis-based FICO Corp.

For sellers like Drew Schlosser, who bought 10 properties in Florida as investments during the housing bubble, getting a short sale was a relief even if the process was difficult.

Schlosser said he had to provide Wells Fargo a hardship letter, demonstrating that his financial situation merited a short sale. He also had to provide pay stubs, bank account information and past tax returns. To avoid fraud, the bank also required evidence that the transaction was an arms-length sale and not to one of his relatives, he said.

“They don’t agree to do it because you’re upside down,” Schlosser said. “If they think you can pay for it they’re not going to let you out of it.”

****************************************************

The article also has a link to the government’s assistance package, which includes $1,500 moving incentive to the borrower, $1,000 to the servicer, and $1,000 to the lender for every short sale or deed-in-lieu processed successfully.

The most shocking requirement? The government is hoping to get borrowers off the hook:

With either the HAFA short sale or DIL, the servicer may not require a cash contribution or promissory note from the borrower and must forfeit the ability to pursue a deficiency judgment against the borrower.

Will lenders/servicers agree to forfeit deficiency judgements for a measy $1,000 per loan?