Facts as per CAR attorneys:
1. FICO impacts are the same on SS and foreclosures
2. Banks will seldom if ever relinquish their right to recover on deficiencies
3. There will likely be tax consequences with SS and they will be NO better than with foreclosure if they exist (1099 for deficiencies)
I'm an honest broker and have generated a volume of calls from sellers with NODs. I will only offer TRUE counsel and can rarely if ever find a case when a SS is in the benefit of the seller. I would love to find a real way to help these people while creating an opportunity to earn a commission.
Any ideas?
I disagree.. I have done a ton of research about fico scores,,,
This may help... Read about the process and that may help you understand how to deal with a seller in that situation...
Foreclosure Stages
Stage 1:
Typically a borrower will have to be two to three months delinquent in their monthly mortgage payments to cause a lender to begin the foreclosure process. However, although rare, the lender does have the right to call a loan for other legal reasons. At which time they will file what is known as a Notice of Default (NOD)
Also note that during the Pre-NOD stage most lenders will allow a borrower to miss a single payment and add that missed payment onto the end of their mortgage. This is an excellent alternative to foreclosure for both borrower and the lender.
Stage 2:
On July 8th 2008 Senate Bill No. 1137 took effect. The new law requires that foreclosing lenders take certain steps to help, or attempt to help, homeowners who are in default on mortgages that were originated between January 1, 2003 and December 31, 2007. At a minimum of thirty days prior to filing a notice of default the lender or its agent must attempt to contact the borrower by phone "in order to assess the borrower’s financial situation and explore options for the borrower to avoid foreclosure
The Lender if unable to contact the borrower despite its due diligence may file for NOD. Due diligence here means sending a first-class letter that includes the toll-free HUD number and attempting telephone contact at least three different times on different days and at different times. If there is no response in two weeks a certified letter is to be sent, return receipt requested, that provides "a means for the borrower to contact it in a timely manner, including a toll-free telephone number that will provide access to a live representative during business hours."
In the event that the borrower’s billing or contact address is different from that of the property, the lender is obliged to notify any residents (such as renters) when a notice of sale is posted. The notice shall be posted on the property and also sent by mail. It must be in English, Spanish, Chinese, Tagalog, Vietnamese, and Korean (California’s major spoken languages). It advises residents that the property is in the foreclosure process and may be transferred as soon as within twenty days. It also tells them that the new owner may give them a notice to vacate. The notice, however must be for at least 60 days, not the usual 30.
Stage 3:
NOD Period (90 days): Borrowers have the right to cure the mortgage and remove the loan from foreclosure status throughout the entire 90 days by paying the arrearage amount.
In others words, the borrower can pay to the lender the back payments and when they do the lender must cancel the foreclosure. It is important to be aware that the lender is incurring cost during this process and the borrower is responsible to pay the lender all reasonable costs for the foreclosure process.
Often times the lender will make arrangements with the borrower and work out a payment plan. On occasion the lender will ask for an income and expense statement from the borrower and if there is sufficient income to pay an increased monthly amount some lenders will divide the arrearage amount by 6 months and add that amount to the next 6 month loan payment. After 90 days, the notice of Trustee’s Sale can be recorded and published.
Stage 4:
Trustee’s Sale (21 days): The Trustee’s Sale more commonly referred to as the “Auction Date†can be scheduled as soon as 21 days after the recordation of the Trustee’s Sale notice. During this period, it is vital for all parties involved to be in constant communication if a short sale is in the process.
Also realize that during the foreclosure process the lender is using a “Trustee†to handle the foreclosure process. However, the communication regarding the short sale will be with the Loss Mitigation Department.
During this trustee sale period depending on your state, the lender has the right to refuse reinstatement of the loan and can demand payment in full of the entire unpaid balance of the loan. However, in the state of California the lender must accept the borrower’s reinstatement if it is paid more than five days before the trustee sale date. Within five days of the sale the lender may refuse reinstatement and demand full payment. It has been my experience that most lenders will allow reinstatement during the entire process.
State 5:
The Auction: This is the final day when the borrower can regain control of the dwelling by paying to the trustee the amount owed to the lender just prior to the trustee calling an auction and requesting bids from the buyers at the auction.
Stage 6:
Obtaining possession of the property. Whether the house was sold at auction to a third party, or maybe no one bid higher than the outstanding loan balance, someone, or some company, ended up owning the property and acquired title via Trustee Deed.
Whoever ends up with the property at the auction sale must now start another legal action in order to get physical possession of the property. This process is referred to as an unlawful detainer and can usually be completed within four to six weeks.
During this process it isn’t uncommon for the lender to send out a “Boarding†crew to go out to the property and change the locks and board up the windows in fear of vandalism. During this boarding stage, if the dwelling is occupied the occupants cannot typically be forced out onto the street.
Quick overview of the Short Sale Process!
• A borrower has a major hardship happen in his/her life.
• The Borrower falls 3 months behind on his/her mortgage payments.
• Lender sends out required “contact me notice†and tries at least three times to contact borrower.
• The Lender (may/may not) files a Notice of Default.
• A Buyer/Investor makes an offer to purchase the property from the Seller/Borrower.
• Seller/Borrower accepts offer.
• Buyer/Investor builds the Short Sale Package and submits it to the lender
• Buyer/Investor negotiates with lender.
• A lender approves the short sale.
• The homeowner avoids foreclosure and the destruction to his/her credit score that goes with it.
• The homeowner gets a full release from the lender and is not financially responsible to repay the loss the lender takes.
• The transaction can be completed at no cost to the homeowner. The costs are all paid by the lender.
• Everyone Wins… The homeowner wins by getting the home sold, getting the loan paid off and having the ability to move forward without a foreclosure on his/her credit. The lender wins by saving the added expense of the foreclosure process. The Buyer/Investor wins…
Steps to a Successful Short Sale…
Call the Lender: It isn’t uncommon to speak to a half dozen people before finding the one who will and more importantly can, help you. Keep in mind this is like pulling teeth until you finf the right person.
Submit Letter of Authorization to speak to the Lender: Lenders typically do not want to disclose any of a borrower’s personal information without written authorization to do so. We will fax, or email, them a signed Authorization to speak to them. The letter is part of the agreement you will sign to start the Short Sale process:
Preliminary Net Sheet ( HUD1): This is an estimated closing statement that shows the sales price you expect to receive and all the costs of the sale, unpaid loan balances, outstanding payments due and late fees, including real estate commissions, if any. On the HUD1 the seller/borrower can not receive any money from the sell.
Hardship Letter: The sadder, the better. This statement of facts describes how the Seller/Buyer got into this financial bind and makes a plea to the lender to accept less than full payment. Keep it real and keep it honest… Understand that if the Seller/Borrower is fat with assets and cash the lender is not going to approve their short sale.
Proof of Income and Assets: It is best to be truthful and honest about your financial situation and disclose assets. Lenders will want to know if the borrower has savings accounts, money market accounts, stocks or bonds, negotiable instruments, cash or other real estate, or anything of tangible value. Lenders are not in the charity business and often require assurance that the debtor cannot pay back any of the debt that it is forgiving. If the borrower recently used credit to finance vehicles, trips, toys and the like as they will be uncovered by the lender when the lender runs a credit report on the borrower.
Copies of Bank Statements: If the seller’s bank statements reflect unaccountable deposits, large cash withdrawals, or an unusual number of checks, it's probably a good idea to explain each of those line items to the lender. In addition, the lender might want the seller to account for each and every deposit so it can determine whether deposits will continue. Do not cheat or not disclose the correct information. The Lender is going to do their due diligence to determine if fraud or misrepresentation is taking place.
Residential Price Opinion: Sometimes referred to as a BPO (Brokers Price Opinion). Sometimes markets decline and property values fall. If this is part of the reason that the seller cannot sell his/her home for enough to pay off the lender, this fact should be substantiated for the lender through a comparative market analysis (CMA).
Contract for Purchase and Deposit Receipt California Buyers:This document is crucial. If you’re in California and buying a 1-4 unit building which you do not intend to live in and the Seller/Borrower is living in one of the units then you must include certain verbiage and rescind notices for the Seller/Borrower. California labels the investor an “Equity Investorâ€. Understand your state laws as they apply to buying a pre-foreclosure.
Short sale, is it RIGHT for a borrower?
This is a question often asked by both people facing Foreclosure-Short Sale and people who buy Short Sales.
Why would someone sell his or her house utilizing a Short Sale method? Let me put it simply, to avoid a foreclosure on your record and to decrease the length of time an “A†paper lender will require prior to lending to the borrower again and the cost of a reduced credit score.
I verified with a major lender and asked them these questions.
If a borrower has a foreclosure on their record, how much time must pass between the foreclosure and the new loan before they can borrow again and buy a new home utilizing “A†paper lenders?
Then I asked the same question regarding the time period if the borrower had gone through a Short Sale. The lender indicated 18 - 24 months of “Good†payment history on the borrower’s credit report for individuals who went through a short sale and 3 to 7 years for those that went through a foreclosure.
Not that a borrower won’t be able to borrow money in the mean time, assuming they have shown a solid 24 months of good credit history. My point is, however, that the interest rate charged to them will be dramatically increased with a foreclosure on the borrower’s record over a pre-foreclosure in redemption status.
A difference between a 6 percent 30-year mortgage and a 7 percent 30-year mortgage over the life of the loan is over $71,000.00 on a $300,000.00 mortgage. That is 71,000 reasons to follow through and do a short sale.
Everyone Wins
It isn't often in real estate transactions that virtually all parties with a financial interest can be winners in the same transaction. A successful Short Sale is one of those rare situations where everyone wins.
The Seller Wins by avoiding foreclosure and all the credit damage that goes along with it. The property gets sold, all the loans get paid off, or forgiven and the existing lender pays all the sales costs. In most cases, the Seller has no out-of-pocket expenses.
The Mortgage Holder Wins by reducing the loss they absorb to get the delinquent loan off their books. Mortgage companies know that the costs associated with acquiring a property through a foreclosure hit their bottom line - hard. To resell the property, the mortgage company frequently needs to invest money in clean up and repairs, and they need to pay staff to manage and maintain the property as well. This is precisely why they have set up Loss Mitigation Departments to resolve delinquent mortgages before the foreclosure is complete.
The Buyer Wins by acquiring a property at below market price. While some Short Sales will be bigger bargains than others, nearly all Short Sales will represent a good deal for the buyer. This is especially true for buyers who intend on making the property their personal residence.
Why would a lender accept a short sale?
In today’s economy of rising foreclosure rates, most mortgage lenders are increasingly willing to work with borrowers faced with a financial hardship to accept a discounted payoff on a mortgage, more commonly referred to as a short sale. If a borrower is faced with a hardship that makes it likely that they will be unable to meet their obligation on their mortgage the lender typically prefers to settle the matter as opposed to taking the property through foreclosure.
If a lender does take back the property there are not any guarantees that they will recoup their cost and have their original loan paid to them when they sale the foreclosure property. Keep in mind, the lender would become responsible for a variety of costs, including property maintenance, utilities, HOA fees, and might risk destruction of the property by vandalism. Furthermore, lender-owned properties (REO) may take a long time to sell, in part because so many REO properties are now for sale.
Not to mention the reserve requirements. For a loan which is in “Normal†status, meaning that the borrower is making on time payments and is not delinquent or in foreclosure banks, must hold in reserve a certain percentage of their deposits. This number is usually around 3 percent of the deposits on hand. The issue is that banks must keep a reserve against anticipated losses. In fact, in the state of California, newly chartered state banks need to set aside reserves against loan losses equal to 5 years worth of losses for banks of similar size.
For all delinquent and non-performing loans lenders must set aside funds in reserve to deal with potential losses. Because of this, the lending power of a bank is diminished and the loss to the banks of their ability to make additional loans utilizing the same amount of reserve is extremely hampered.
If mortgages perform poorly after they are sold, it could impact the lender's ability to sell their loans on the secondary market. A successful Short Sale gets the loan payoff resolved quickly.
Lender's Options upon Borrower's Loan Default
Foreclosure:
In order for a lender to recover their outstanding loan balance of a non performing loan, the lender may begin the foreclosure process and seize the property. To do this, the lender must foreclose on the defaulting borrower's real property which secures the loan.
In the state of California, there are two types of "foreclosures": A trustee's sale and a judicial foreclosure.
On certain loans, a lender has no choice and must conduct a trustee's sale. With a trustee's sale, a lender cannot go after a deficiency judgment. A deficiency occurs when the current market value of the property is less than the loan on the property.
Loan Workout:
Basically, the borrower and the lender work out a modification of terms of the original loan agreement. Some of these options may include a forbearance agreement, deferment of outstanding loan payments, renegotiating the loans interest rate, which affects the monthly payment amount, even reduction of principal amount and loan payoff date.
Forbearance Agreement:
A Forbearance Agreement is a written agreement with your mortgage company in which you arrange to keep your home. The agreement will normally include two primary elements:
The borrower’s promise to remain current on the mortgage going forward
Some plan for making up the delinquent interest and other charges. It may mean making additional payments to the mortgage company or the delinquent amount could be added to the loan to be paid later.
Deed in Lieu of Foreclosure:
A deed to real property accepted by a lender from a defaulting borrower to avoid the necessity of foreclosure proceedings by the lender and cost associated to a foreclosure.
Short Sale:
A short sale is a transaction in which a lender allows the real property securing the loan to be sold for less than the remaining mortgage amount due and accepts the proceeds as full payment of the loan.
Short Payoff:
With a short payoff, the lender accepts less than the remaining mortgage amount as full payment of the loan. The property need not be sold. Just a note however, that some lenders do not differentiate between a short sale and a short payoff.
How is the Borrower's FICO score affected?
The disadvantage for a seller who has a foreclosure is much greater over a seller who goes through a short sale. Let me explain it in terms of their FICO store and the numbers involved.
Foreclosure on the Credit Score
A seller who goes through a foreclosure and has a foreclosure on their record may have a reduction of 250-280 points on their FICO. If the borrower started off with a FICO score of say, 725 prior to a foreclosure, after a foreclosure is posted against their credit score their FICO could be severely less then 500. What is worse, is that the foreclosure will be on their record for 7 years.
Short Sale on the Credit Score
The affect of a short sale on a Borrower’s credit report is much less damaging and the light at the end of the tunnel is much brighter. First, the short sale will show up on the borrower’s credit repost as a pre-foreclosure in redemption status rather then a completed foreclosure. The reduction of the borrower’s credit score is typically only 80-100 points. The above example would be a reduction from 725 on the FICO score to only a 625 FICO score. As you can see, the difference between a 625 FICO score and a sub 500 FICO score is tremendous.
Is the method by which lenders report a short sale a negotiable item?
Typically speaking, no. The short sale is usually reported to credit reporting agencies as settled for less than the full balance. Remember, the short sale shows up as a pre-foreclosure in redemption not a foreclosure.
What is a deficiency judgment?
A deficiency judgment is a judgment obtained by the lender in court against the borrower for the difference between the unpaid balance of the secured debt and the amount produced by sale or the fair market value of the security, whichever is greater, in a judicial foreclosure. A lender may obtain a deficiency judgment only with a judicial foreclosure. With a trustee's sale foreclosure, the lender cannot go after a deficiency judgment.
What are the five situations in which a deficiency judgment is prohibited?
1) Trustee's Sale.
A lender may not be able to pursue a deficiency judgment against the borrower should the lender opt to foreclose by a trustee's sale foreclosure.
2) Seller Carryback.
If the purchase money loan for any type of real property is financed by the seller and secured by that same property, the lender/seller may not obtain a deficiency judgment against the defaulting borrower/buyer.
3) Purchase Money.
If the loan is obtained to purchase a residential 1-4 unit dwelling all or part of which is owner occupied and the loan is secured by that property, the lender may not obtain a deficiency judgment against the defaulting borrower. This loan is entitled to "purchase money" protection. Note, however, that should the buyer refinance the home, the new loan is no longer "purchase money." Thus, the buyer would lose the protection against a deficiency judgment in the event of a default if the lender elects to use a judicial foreclosure process.
4) 3 Month Time Limit.
An action for a deficiency judgment must be brought within 3 months from the time of judicially-ordered sale.
5) Fair Value Limitations.
A deficiency judgment is limited by the difference between the amount of the indebtedness and the fair market value of the property, unless the actual sale price exceeds that value.
Holders of a junior deed of trust (second, third, etc.) should note that if the "wiped-out" junior lien is not purchase money or seller carryback, then the junior lien holder may sue on the note and the borrower on the junior loan may be personally liable.
What are the hardships that a bank looks at as justification for approving a Short Sale?
The borrower must have a legitimate excuse for falling behind… The inability to pay the mortgage, the loss of a job, death in the family or an illness would be an acceptable reason to fall behind on your Mortgage temporarily.
A big key to getting Loss Mitigation to accept a hardship is to submit a strong hardship letter. The hardship letter sets the tone for the entire file.
• Family illness or injury
• Illness or injury in the extended family – particularly if it forces relocation
• Job relocation when the property is equity deficient
• Job loss or significant income loss
• Divorce or split of domestic partners
• Adjustment in mortgage payment or unforeseen increase in living expenses
Also keep in mind that if the borrower has other assets, like real property, or the ability to borrow money the lender is not going to accept borrower as having a hardship.
Additional documentation lenders typically require?
• Copy of the Transfer Disclosure Statement
• Proof of the buyer's ability to purchase the property, i.e., a completed loan application, pre-approval by another lender, or evidence of cash on hand (bank statement);
• Copy of the certified escrow instructions;
• Sellers/Borrowers previous two years tax returns;
• Sellers/Borrowers Employment paycheck stubs for the past two months;
• Profit and loss statement (if the borrower is self-employed);
• Copy of the Sellers/Borrowers previous two months bank statements
During this process it isn’t uncommon for the lender to send out a “Boarding†crew to go out to the property and change the locks and board up the windows in fear of vandalism. During this boarding stage, if the dwelling is occupied the occupants cannot typically be forced out onto the street.
I am current on my mortgage; will my lender consider a Short Sale?
The answer is, maybe. Some lenders will accept a Short Sale file for approval on loans that are not delinquent. Other lenders will not accept the file until the loan is delinquent.
There are two loans; can a Short Sale still be accomplished?
Yes. You can work with both lenders (many times the same lender holds the 1st and the 2nd loans) to put together a Short Sale transaction. Even if the value of your home is below the balance of the 1st mortgage, you can normally get the two lenders to cooperate.
The property is in rough shape and needs work; can I still do a Short Sale?
Absolutely. In fact, lenders are more motivated to do a Short Sale on a property that needs work than on a property that doesn’t. The lender knows the risk of loss goes up when they foreclose on a property that needs a lot of work.
Aside from expense of completing the work, lenders are simply not set up to get the work done. They are in the loan business, not the fix- it business.
The process is a difficult process to say the least. It requires training and understanding of the laws and lender procedures. I caution everyone that Short Sales are a lot of work and in the long run in your best interest.
Are there any tax effects of a short sale?
Great news has come out of Washington that help people facing foreclosure or short sale. Until recently, if the value of a borrowers house declined and their bank/lender forgave a portion of their mortgage (via a short sale or deed in lieu), the tax code treated that amount forgiven as ordinary taxable income.
For a borrower already financially strapped, this makes a bad situation worse. When a borrower is worried about making their payments, higher taxes are the last thing you need to think about.
On December 20, 2007 the “Mortgage Forgiveness Debt Relief Act of 2007†became Public Law No: 110-142. The law is retroactive to January 1, 2007 and will extend until December 31, 2009. The passing of this bill creates a three-year window for homeowners to either refinance their mortgage or sell, and pay no taxes on any debt forgiveness that they receive.
The newly-enacted relief for mortgage debt forgiveness is Congress’s response to the problems generated by the subprime crisis, short sales, rising foreclosure rates and price corrections in some markets. Thus, when a lender forgives some portion of a borrower’s mortgage debt in a short sale, a foreclosure, a workout with the lender or some similar circumstance, the borrower will NOT be required to recognize income or pay tax on the forgiven amount.
Here is an excerpt of the law:
“Mortgage Forgiveness Debt Relief Act of 2007 - Amends the Internal Revenue Code to exclude from gross income amounts attributable to a discharge, prior to January 1, 2010, of indebtedness incurred to acquire a principal residence. Limits to $2 million the excludable amount of such indebtedness. Reduces the basis of a principal residence by the amount of discharged indebtedness excluded from gross income. Disallows an exclusion for a discharge of indebtedness on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the financial condition of the taxpayer. Sets forth rules for determining the allowable amount of the exclusion for taxpayers with non-qualifying indebtedness and taxpayers who are insolvent. Extends through 2010 the tax deduction for mortgage insurance premiums.â€
To be on the safe side I believe that before a short sale is contemplated, it is strongly recommended that the borrower seek the advice of a professional tax advisor.
If a borrower does do a Short Sale, how much will they have to pay to sell their home?
Zero. A borrower cannot pay, nor receive, any proceeds from the short sale of real property. All costs, commissions, title, escrow fees, repairs and such are paid by the lender as part of the Short Sale approval.
The agreement to sell is subject to approval by existing lender(s) of a Short Sale at no cost to Seller. Seller shall not be required to deposit funds to close escrow.
Short Sale Terms
Advertising- (or Publishing)
A copy of the Notice of Trustee Sale must be published once a week for three weeks.
Bankruptcy-Chapter 7
Often called a straight bankruptcy-involves the liquidation of all non-exempt by the bankruptcy trustee, who in turn distributes the proceeds to qualified creditors. All dischargeable debts are discharged and the person(s) filing receive a ‘fresh start’.
Bankruptcy-Chapter 13
Often called debt reorganization. A Chapter 13 Bankruptcy is generally appropriate for those individuals who have non-exempt property they wish to retain and who have enough income to reasonably pay the reorganized debt after covering reasonable living expenses.
Beneficiary
The beneficiary in a foreclosure context is generally the mortgage lender. Frequently referred to as the ‘Benny’.
Credit Counseling
Under the new bankruptcy law which took effect in October of 2005, those wishing to file bankruptcy must complete an approved credit counseling course within the six (6) months prior to filing.
Deed in Lieu of Foreclosure
The voluntary surrender of property by an owner/borrower to a lien holder that eliminates the need to continue foreclosure action by the lien holder. The lien holder can refuse to accept the Deed in Lieu and file a Notice of Non Acceptance with the County Recorder.
Discounted Payoff
The payoff of a mortgage loan where the lender accepts an amount less than the actual amount owed to payoff the loan.
Equity Deficient
A property is Equity Deficient when, if sold, sales proceeds would not fully pay off existing mortgage debt.
Forbearance Agreement
An agreement between a mortgage holder and a borrower that lays out a specific loan payment plan and puts a stop on the foreclosure action so long as the borrower meets the terms of the agreement. The payment plan includes provisions for repayment to the mortgage holder of all delinquent interest and fees and could include extending the life of the mortgage beyond its original term. A Forbearance Agreement is a tool that allows the borrower to keep the property.
Judicial Foreclosure
A foreclosure action conducted through the courts instead of through a foreclosure trustee. Judicial Foreclosures are very uncommon in California, particularly on residential properties. Should a lender elect to pursue a deficiency judgment, it would be through a Judicial Foreclosure.
Junior Liens
A lien, usually a mortgage loan, which is subordinate to a Senior Lien, usually a first mortgage. Lien priority is generally established by order of recordation. NOTE: If you refinance a 1st mortgage on a property with a 2nd mortgage already in place the new 1st mortgage holder will require a subordination agreement from Junior Lien holders to legally establish the new mortgage holder as 1st or Senior Position.
LIBOR (London Interbank Offered Rate)
The interest rate charged among banks for short-term Eurodollars loans - LIBOR is a very common index for adjustable rate mortgages (ARM).
Loss Mitigation
Home mortgage lenders look to limit losses on delinquent mortgages by working out solutions with borrowers through their Loss Mitigation Departments.
Mailing
A copy of the Notice of Trustee’s Sale must be mailed (certified and first class) at least 20 days before the foreclosure sale to the borrower and to anyone who was entitled to receive a copy of the Notice of Default and Secretary of State and IRS, if applicable.
NOD
Short for Notice of Default.
Notice of Default
An official notice filed and recorded by a designated trustee at the request of a lender indicating lender has commenced foreclosure action.
Notice of Trustee Sale
An official notice that is posted, mailed, published/advertised and recorded by trustee at the direction of lender indicating lender’s intention to sell the property at public auction. The notice includes a specific date, time and location.
Posting
A copy of the notice of sale must be posted in a conspicuous place on the property to be sold at least twenty days before the sale. Also, a copy of the notice must be posted at one public place in the city where the property is to be sold at least twenty days before the sale.
Postponement
Trustee Sales may be postponed by the first at the direction of the lien holder. Notice may be given in advance or at the time and location specified for the intended sale.
Private Mortgage Insurance (PMI)
A policy of insurance paid for by the borrower to protect the lender in the event the borrower defaults on the mortgage. Typically PMI is required by the mortgage holder when the down payment is less than 20% of the purchase price.
Qualifying Funds
In order to bid at a Trustee Sale, a bidder must have qualifying funds available at the sale. Qualifying funds are cash or a cashiers check(s) drawn by a State or National Bank, a check(s) drawn by a State or Federal Credit Union or check drawn by a State or Federal Savings and Loan Association, savings association or savings bank specified in section 5102 or the Financial Code and authorized to do business in the State of California.
REO
Short for Real Estate Owned. When a mortgage lender acquires a property, typically through foreclosure, it becomes real estate owned â€" or REO.
Reinstatement
To bring the loan current. Borrower may reinstate up to five (5) business days before foreclosure sale.
Short Sale
The sale of a home which is completed through negotiation with the existing lender(s) in which the lender(s) agrees to accept less than the full amount owed to satisfy the debt allowing the debt to be ‘paid off’, short.
1099-C
IRS Form 1099-c is issued by those canceling all or part of a debt to the person receiving debt relief. Note: The cancelled debt may not need to be reported as income.
Trustee (Foreclosure Trustee)
A Foreclosure Trustee is appointed by the mortgage company when a mortgage reaches the default status for the purpose of processing the foreclosure.
Trustee Deed
The deed given to the highest bidder at auction or the foreclosing lender upon completion of the foreclosure.
Trustee Sale
Conducted by the Trustee. The property is sold at auction to the highest bidder, or taken back by a foreclosing lender.
Good to meet you.
As a CA broker too I have little issue explaining the differences...
And there is a large credit score difference... But lets assume for a second youre correct... NO financial benefit...Youre not but lets assume it...
The largest reason is a 5 letter word.... PRIDE
Do you really think people want the word "failure" attached to them?
Please...
Now lets look at CAR... They are there to protect REALTORS not consumers.... They have a very biased view point...
Good points about CAR however the research is clear. FICO impact are the SAME!
Repurchase opportunities occur sooner with short sale vs. foreclosure but please help me understand how a seller's bottom line is better with a short sale?
I disagree.. I have done a ton of research about fico scores,,,
This may help... Read about the process and that may help you understand how to deal with a seller in that situation...
Foreclosure Stages
Stage 1:
Typically a borrower will have to be two to three months delinquent in their monthly mortgage payments to cause a lender to begin the foreclosure process. However, although rare, the lender does have the right to call a loan for other legal reasons. At which time they will file what is known as a Notice of Default (NOD)
Also note that during the Pre-NOD stage most lenders will allow a borrower to miss a single payment and add that missed payment onto the end of their mortgage. This is an excellent alternative to foreclosure for both borrower and the lender.
Stage 2:
On July 8th 2008 Senate Bill No. 1137 took effect. The new law requires that foreclosing lenders take certain steps to help, or attempt to help, homeowners who are in default on mortgages that were originated between January 1, 2003 and December 31, 2007. At a minimum of thirty days prior to filing a notice of default the lender or its agent must attempt to contact the borrower by phone "in order to assess the borrower’s financial situation and explore options for the borrower to avoid foreclosure
The Lender if unable to contact the borrower despite its due diligence may file for NOD. Due diligence here means sending a first-class letter that includes the toll-free HUD number and attempting telephone contact at least three different times on different days and at different times. If there is no response in two weeks a certified letter is to be sent, return receipt requested, that provides "a means for the borrower to contact it in a timely manner, including a toll-free telephone number that will provide access to a live representative during business hours."
In the event that the borrower’s billing or contact address is different from that of the property, the lender is obliged to notify any residents (such as renters) when a notice of sale is posted. The notice shall be posted on the property and also sent by mail. It must be in English, Spanish, Chinese, Tagalog, Vietnamese, and Korean (California’s major spoken languages). It advises residents that the property is in the foreclosure process and may be transferred as soon as within twenty days. It also tells them that the new owner may give them a notice to vacate. The notice, however must be for at least 60 days, not the usual 30.
Stage 3:
NOD Period (90 days): Borrowers have the right to cure the mortgage and remove the loan from foreclosure status throughout the entire 90 days by paying the arrearage amount.
In others words, the borrower can pay to the lender the back payments and when they do the lender must cancel the foreclosure. It is important to be aware that the lender is incurring cost during this process and the borrower is responsible to pay the lender all reasonable costs for the foreclosure process.
Often times the lender will make arrangements with the borrower and work out a payment plan. On occasion the lender will ask for an income and expense statement from the borrower and if there is sufficient income to pay an increased monthly amount some lenders will divide the arrearage amount by 6 months and add that amount to the next 6 month loan payment. After 90 days, the notice of Trustee’s Sale can be recorded and published.
Stage 4:
Trustee’s Sale (21 days): The Trustee’s Sale more commonly referred to as the “Auction Date†can be scheduled as soon as 21 days after the recordation of the Trustee’s Sale notice. During this period, it is vital for all parties involved to be in constant communication if a short sale is in the process.
Also realize that during the foreclosure process the lender is using a “Trustee†to handle the foreclosure process. However, the communication regarding the short sale will be with the Loss Mitigation Department.
During this trustee sale period depending on your state, the lender has the right to refuse reinstatement of the loan and can demand payment in full of the entire unpaid balance of the loan. However, in the state of California the lender must accept the borrower’s reinstatement if it is paid more than five days before the trustee sale date. Within five days of the sale the lender may refuse reinstatement and demand full payment. It has been my experience that most lenders will allow reinstatement during the entire process.
State 5:
The Auction: This is the final day when the borrower can regain control of the dwelling by paying to the trustee the amount owed to the lender just prior to the trustee calling an auction and requesting bids from the buyers at the auction.
Stage 6:
Obtaining possession of the property. Whether the house was sold at auction to a third party, or maybe no one bid higher than the outstanding loan balance, someone, or some company, ended up owning the property and acquired title via Trustee Deed.
Whoever ends up with the property at the auction sale must now start another legal action in order to get physical possession of the property. This process is referred to as an unlawful detainer and can usually be completed within four to six weeks.
During this process it isn’t uncommon for the lender to send out a “Boarding†crew to go out to the property and change the locks and board up the windows in fear of vandalism. During this boarding stage, if the dwelling is occupied the occupants cannot typically be forced out onto the street.
Quick overview of the Short Sale Process!
• A borrower has a major hardship happen in his/her life.
• The Borrower falls 3 months behind on his/her mortgage payments.
• Lender sends out required “contact me notice†and tries at least three times to contact borrower.
• The Lender (may/may not) files a Notice of Default.
• A Buyer/Investor makes an offer to purchase the property from the Seller/Borrower.
• Seller/Borrower accepts offer.
• Buyer/Investor builds the Short Sale Package and submits it to the lender
• Buyer/Investor negotiates with lender.
• A lender approves the short sale.
• The homeowner avoids foreclosure and the destruction to his/her credit score that goes with it.
• The homeowner gets a full release from the lender and is not financially responsible to repay the loss the lender takes.
• The transaction can be completed at no cost to the homeowner. The costs are all paid by the lender.
• Everyone Wins… The homeowner wins by getting the home sold, getting the loan paid off and having the ability to move forward without a foreclosure on his/her credit. The lender wins by saving the added expense of the foreclosure process. The Buyer/Investor wins…
Steps to a Successful Short Sale…
Call the Lender: It isn’t uncommon to speak to a half dozen people before finding the one who will and more importantly can, help you. Keep in mind this is like pulling teeth until you finf the right person.
Submit Letter of Authorization to speak to the Lender: Lenders typically do not want to disclose any of a borrower’s personal information without written authorization to do so. We will fax, or email, them a signed Authorization to speak to them. The letter is part of the agreement you will sign to start the Short Sale process:
Preliminary Net Sheet ( HUD1): This is an estimated closing statement that shows the sales price you expect to receive and all the costs of the sale, unpaid loan balances, outstanding payments due and late fees, including real estate commissions, if any. On the HUD1 the seller/borrower can not receive any money from the sell.
Hardship Letter: The sadder, the better. This statement of facts describes how the Seller/Buyer got into this financial bind and makes a plea to the lender to accept less than full payment. Keep it real and keep it honest… Understand that if the Seller/Borrower is fat with assets and cash the lender is not going to approve their short sale.
Proof of Income and Assets: It is best to be truthful and honest about your financial situation and disclose assets. Lenders will want to know if the borrower has savings accounts, money market accounts, stocks or bonds, negotiable instruments, cash or other real estate, or anything of tangible value. Lenders are not in the charity business and often require assurance that the debtor cannot pay back any of the debt that it is forgiving. If the borrower recently used credit to finance vehicles, trips, toys and the like as they will be uncovered by the lender when the lender runs a credit report on the borrower.
Copies of Bank Statements: If the seller’s bank statements reflect unaccountable deposits, large cash withdrawals, or an unusual number of checks, it's probably a good idea to explain each of those line items to the lender. In addition, the lender might want the seller to account for each and every deposit so it can determine whether deposits will continue. Do not cheat or not disclose the correct information. The Lender is going to do their due diligence to determine if fraud or misrepresentation is taking place.
Residential Price Opinion: Sometimes referred to as a BPO (Brokers Price Opinion). Sometimes markets decline and property values fall. If this is part of the reason that the seller cannot sell his/her home for enough to pay off the lender, this fact should be substantiated for the lender through a comparative market analysis (CMA).
Contract for Purchase and Deposit Receipt California Buyers:This document is crucial. If you’re in California and buying a 1-4 unit building which you do not intend to live in and the Seller/Borrower is living in one of the units then you must include certain verbiage and rescind notices for the Seller/Borrower. California labels the investor an “Equity Investorâ€. Understand your state laws as they apply to buying a pre-foreclosure.
Short sale, is it RIGHT for a borrower?
This is a question often asked by both people facing Foreclosure-Short Sale and people who buy Short Sales.
Why would someone sell his or her house utilizing a Short Sale method? Let me put it simply, to avoid a foreclosure on your record and to decrease the length of time an “A†paper lender will require prior to lending to the borrower again and the cost of a reduced credit score.
I verified with a major lender and asked them these questions.
If a borrower has a foreclosure on their record, how much time must pass between the foreclosure and the new loan before they can borrow again and buy a new home utilizing “A†paper lenders?
Then I asked the same question regarding the time period if the borrower had gone through a Short Sale. The lender indicated 18 - 24 months of “Good†payment history on the borrower’s credit report for individuals who went through a short sale and 3 to 7 years for those that went through a foreclosure.
Not that a borrower won’t be able to borrow money in the mean time, assuming they have shown a solid 24 months of good credit history. My point is, however, that the interest rate charged to them will be dramatically increased with a foreclosure on the borrower’s record over a pre-foreclosure in redemption status.
A difference between a 6 percent 30-year mortgage and a 7 percent 30-year mortgage over the life of the loan is over $71,000.00 on a $300,000.00 mortgage. That is 71,000 reasons to follow through and do a short sale.
Everyone Wins
It isn't often in real estate transactions that virtually all parties with a financial interest can be winners in the same transaction. A successful Short Sale is one of those rare situations where everyone wins.
The Seller Wins by avoiding foreclosure and all the credit damage that goes along with it. The property gets sold, all the loans get paid off, or forgiven and the existing lender pays all the sales costs. In most cases, the Seller has no out-of-pocket expenses.
The Mortgage Holder Wins by reducing the loss they absorb to get the delinquent loan off their books. Mortgage companies know that the costs associated with acquiring a property through a foreclosure hit their bottom line - hard. To resell the property, the mortgage company frequently needs to invest money in clean up and repairs, and they need to pay staff to manage and maintain the property as well. This is precisely why they have set up Loss Mitigation Departments to resolve delinquent mortgages before the foreclosure is complete.
The Buyer Wins by acquiring a property at below market price. While some Short Sales will be bigger bargains than others, nearly all Short Sales will represent a good deal for the buyer. This is especially true for buyers who intend on making the property their personal residence.
Why would a lender accept a short sale?
In today’s economy of rising foreclosure rates, most mortgage lenders are increasingly willing to work with borrowers faced with a financial hardship to accept a discounted payoff on a mortgage, more commonly referred to as a short sale. If a borrower is faced with a hardship that makes it likely that they will be unable to meet their obligation on their mortgage the lender typically prefers to settle the matter as opposed to taking the property through foreclosure.
If a lender does take back the property there are not any guarantees that they will recoup their cost and have their original loan paid to them when they sale the foreclosure property. Keep in mind, the lender would become responsible for a variety of costs, including property maintenance, utilities, HOA fees, and might risk destruction of the property by vandalism. Furthermore, lender-owned properties (REO) may take a long time to sell, in part because so many REO properties are now for sale.
Not to mention the reserve requirements. For a loan which is in “Normal†status, meaning that the borrower is making on time payments and is not delinquent or in foreclosure banks, must hold in reserve a certain percentage of their deposits. This number is usually around 3 percent of the deposits on hand. The issue is that banks must keep a reserve against anticipated losses. In fact, in the state of California, newly chartered state banks need to set aside reserves against loan losses equal to 5 years worth of losses for banks of similar size.
For all delinquent and non-performing loans lenders must set aside funds in reserve to deal with potential losses. Because of this, the lending power of a bank is diminished and the loss to the banks of their ability to make additional loans utilizing the same amount of reserve is extremely hampered.
If mortgages perform poorly after they are sold, it could impact the lender's ability to sell their loans on the secondary market. A successful Short Sale gets the loan payoff resolved quickly.
Lender's Options upon Borrower's Loan Default
Foreclosure:
In order for a lender to recover their outstanding loan balance of a non performing loan, the lender may begin the foreclosure process and seize the property. To do this, the lender must foreclose on the defaulting borrower's real property which secures the loan.
In the state of California, there are two types of "foreclosures": A trustee's sale and a judicial foreclosure.
On certain loans, a lender has no choice and must conduct a trustee's sale. With a trustee's sale, a lender cannot go after a deficiency judgment. A deficiency occurs when the current market value of the property is less than the loan on the property.
Loan Workout:
Basically, the borrower and the lender work out a modification of terms of the original loan agreement. Some of these options may include a forbearance agreement, deferment of outstanding loan payments, renegotiating the loans interest rate, which affects the monthly payment amount, even reduction of principal amount and loan payoff date.
Forbearance Agreement:
A Forbearance Agreement is a written agreement with your mortgage company in which you arrange to keep your home. The agreement will normally include two primary elements:
The borrower’s promise to remain current on the mortgage going forward
Some plan for making up the delinquent interest and other charges. It may mean making additional payments to the mortgage company or the delinquent amount could be added to the loan to be paid later.
Deed in Lieu of Foreclosure:
A deed to real property accepted by a lender from a defaulting borrower to avoid the necessity of foreclosure proceedings by the lender and cost associated to a foreclosure.
Short Sale:
A short sale is a transaction in which a lender allows the real property securing the loan to be sold for less than the remaining mortgage amount due and accepts the proceeds as full payment of the loan.
Short Payoff:
With a short payoff, the lender accepts less than the remaining mortgage amount as full payment of the loan. The property need not be sold. Just a note however, that some lenders do not differentiate between a short sale and a short payoff.
How is the Borrower's FICO score affected?
The disadvantage for a seller who has a foreclosure is much greater over a seller who goes through a short sale. Let me explain it in terms of their FICO store and the numbers involved.
Foreclosure on the Credit Score
A seller who goes through a foreclosure and has a foreclosure on their record may have a reduction of 250-280 points on their FICO. If the borrower started off with a FICO score of say, 725 prior to a foreclosure, after a foreclosure is posted against their credit score their FICO could be severely less then 500. What is worse, is that the foreclosure will be on their record for 7 years.
Short Sale on the Credit Score
The affect of a short sale on a Borrower’s credit report is much less damaging and the light at the end of the tunnel is much brighter. First, the short sale will show up on the borrower’s credit repost as a pre-foreclosure in redemption status rather then a completed foreclosure. The reduction of the borrower’s credit score is typically only 80-100 points. The above example would be a reduction from 725 on the FICO score to only a 625 FICO score. As you can see, the difference between a 625 FICO score and a sub 500 FICO score is tremendous.
Is the method by which lenders report a short sale a negotiable item?
Typically speaking, no. The short sale is usually reported to credit reporting agencies as settled for less than the full balance. Remember, the short sale shows up as a pre-foreclosure in redemption not a foreclosure.
What is a deficiency judgment?
A deficiency judgment is a judgment obtained by the lender in court against the borrower for the difference between the unpaid balance of the secured debt and the amount produced by sale or the fair market value of the security, whichever is greater, in a judicial foreclosure. A lender may obtain a deficiency judgment only with a judicial foreclosure. With a trustee's sale foreclosure, the lender cannot go after a deficiency judgment.
What are the five situations in which a deficiency judgment is prohibited?
1) Trustee's Sale.
A lender may not be able to pursue a deficiency judgment against the borrower should the lender opt to foreclose by a trustee's sale foreclosure.
2) Seller Carryback.
If the purchase money loan for any type of real property is financed by the seller and secured by that same property, the lender/seller may not obtain a deficiency judgment against the defaulting borrower/buyer.
3) Purchase Money.
If the loan is obtained to purchase a residential 1-4 unit dwelling all or part of which is owner occupied and the loan is secured by that property, the lender may not obtain a deficiency judgment against the defaulting borrower. This loan is entitled to "purchase money" protection. Note, however, that should the buyer refinance the home, the new loan is no longer "purchase money." Thus, the buyer would lose the protection against a deficiency judgment in the event of a default if the lender elects to use a judicial foreclosure process.
4) 3 Month Time Limit.
An action for a deficiency judgment must be brought within 3 months from the time of judicially-ordered sale.
5) Fair Value Limitations.
A deficiency judgment is limited by the difference between the amount of the indebtedness and the fair market value of the property, unless the actual sale price exceeds that value.
Holders of a junior deed of trust (second, third, etc.) should note that if the "wiped-out" junior lien is not purchase money or seller carryback, then the junior lien holder may sue on the note and the borrower on the junior loan may be personally liable.
What are the hardships that a bank looks at as justification for approving a Short Sale?
The borrower must have a legitimate excuse for falling behind… The inability to pay the mortgage, the loss of a job, death in the family or an illness would be an acceptable reason to fall behind on your Mortgage temporarily.
A big key to getting Loss Mitigation to accept a hardship is to submit a strong hardship letter. The hardship letter sets the tone for the entire file.
• Family illness or injury
• Illness or injury in the extended family – particularly if it forces relocation
• Job relocation when the property is equity deficient
• Job loss or significant income loss
• Divorce or split of domestic partners
• Adjustment in mortgage payment or unforeseen increase in living expenses
Also keep in mind that if the borrower has other assets, like real property, or the ability to borrow money the lender is not going to accept borrower as having a hardship.
Additional documentation lenders typically require?
• Copy of the Transfer Disclosure Statement
• Proof of the buyer's ability to purchase the property, i.e., a completed loan application, pre-approval by another lender, or evidence of cash on hand (bank statement);
• Copy of the certified escrow instructions;
• Sellers/Borrowers previous two years tax returns;
• Sellers/Borrowers Employment paycheck stubs for the past two months;
• Profit and loss statement (if the borrower is self-employed);
• Copy of the Sellers/Borrowers previous two months bank statements
During this process it isn’t uncommon for the lender to send out a “Boarding†crew to go out to the property and change the locks and board up the windows in fear of vandalism. During this boarding stage, if the dwelling is occupied the occupants cannot typically be forced out onto the street.
I am current on my mortgage; will my lender consider a Short Sale?
The answer is, maybe. Some lenders will accept a Short Sale file for approval on loans that are not delinquent. Other lenders will not accept the file until the loan is delinquent.
There are two loans; can a Short Sale still be accomplished?
Yes. You can work with both lenders (many times the same lender holds the 1st and the 2nd loans) to put together a Short Sale transaction. Even if the value of your home is below the balance of the 1st mortgage, you can normally get the two lenders to cooperate.
The property is in rough shape and needs work; can I still do a Short Sale?
Absolutely. In fact, lenders are more motivated to do a Short Sale on a property that needs work than on a property that doesn’t. The lender knows the risk of loss goes up when they foreclose on a property that needs a lot of work.
Aside from expense of completing the work, lenders are simply not set up to get the work done. They are in the loan business, not the fix- it business.
The process is a difficult process to say the least. It requires training and understanding of the laws and lender procedures. I caution everyone that Short Sales are a lot of work and in the long run in your best interest.
Are there any tax effects of a short sale?
Great news has come out of Washington that help people facing foreclosure or short sale. Until recently, if the value of a borrowers house declined and their bank/lender forgave a portion of their mortgage (via a short sale or deed in lieu), the tax code treated that amount forgiven as ordinary taxable income.
For a borrower already financially strapped, this makes a bad situation worse. When a borrower is worried about making their payments, higher taxes are the last thing you need to think about.
On December 20, 2007 the “Mortgage Forgiveness Debt Relief Act of 2007†became Public Law No: 110-142. The law is retroactive to January 1, 2007 and will extend until December 31, 2009. The passing of this bill creates a three-year window for homeowners to either refinance their mortgage or sell, and pay no taxes on any debt forgiveness that they receive.
The newly-enacted relief for mortgage debt forgiveness is Congress’s response to the problems generated by the subprime crisis, short sales, rising foreclosure rates and price corrections in some markets. Thus, when a lender forgives some portion of a borrower’s mortgage debt in a short sale, a foreclosure, a workout with the lender or some similar circumstance, the borrower will NOT be required to recognize income or pay tax on the forgiven amount.
Here is an excerpt of the law:
“Mortgage Forgiveness Debt Relief Act of 2007 - Amends the Internal Revenue Code to exclude from gross income amounts attributable to a discharge, prior to January 1, 2010, of indebtedness incurred to acquire a principal residence. Limits to $2 million the excludable amount of such indebtedness. Reduces the basis of a principal residence by the amount of discharged indebtedness excluded from gross income. Disallows an exclusion for a discharge of indebtedness on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the financial condition of the taxpayer. Sets forth rules for determining the allowable amount of the exclusion for taxpayers with non-qualifying indebtedness and taxpayers who are insolvent. Extends through 2010 the tax deduction for mortgage insurance premiums.â€
To be on the safe side I believe that before a short sale is contemplated, it is strongly recommended that the borrower seek the advice of a professional tax advisor.
If a borrower does do a Short Sale, how much will they have to pay to sell their home?
Zero. A borrower cannot pay, nor receive, any proceeds from the short sale of real property. All costs, commissions, title, escrow fees, repairs and such are paid by the lender as part of the Short Sale approval.
The agreement to sell is subject to approval by existing lender(s) of a Short Sale at no cost to Seller. Seller shall not be required to deposit funds to close escrow.
Short Sale Terms
Advertising- (or Publishing)
A copy of the Notice of Trustee Sale must be published once a week for three weeks.
Bankruptcy-Chapter 7
Often called a straight bankruptcy-involves the liquidation of all non-exempt by the bankruptcy trustee, who in turn distributes the proceeds to qualified creditors. All dischargeable debts are discharged and the person(s) filing receive a ‘fresh start’.
Bankruptcy-Chapter 13
Often called debt reorganization. A Chapter 13 Bankruptcy is generally appropriate for those individuals who have non-exempt property they wish to retain and who have enough income to reasonably pay the reorganized debt after covering reasonable living expenses.
Beneficiary
The beneficiary in a foreclosure context is generally the mortgage lender. Frequently referred to as the ‘Benny’.
Credit Counseling
Under the new bankruptcy law which took effect in October of 2005, those wishing to file bankruptcy must complete an approved credit counseling course within the six (6) months prior to filing.
Deed in Lieu of Foreclosure
The voluntary surrender of property by an owner/borrower to a lien holder that eliminates the need to continue foreclosure action by the lien holder. The lien holder can refuse to accept the Deed in Lieu and file a Notice of Non Acceptance with the County Recorder.
Discounted Payoff
The payoff of a mortgage loan where the lender accepts an amount less than the actual amount owed to payoff the loan.
Equity Deficient
A property is Equity Deficient when, if sold, sales proceeds would not fully pay off existing mortgage debt.
Forbearance Agreement
An agreement between a mortgage holder and a borrower that lays out a specific loan payment plan and puts a stop on the foreclosure action so long as the borrower meets the terms of the agreement. The payment plan includes provisions for repayment to the mortgage holder of all delinquent interest and fees and could include extending the life of the mortgage beyond its original term. A Forbearance Agreement is a tool that allows the borrower to keep the property.
Judicial Foreclosure
A foreclosure action conducted through the courts instead of through a foreclosure trustee. Judicial Foreclosures are very uncommon in California, particularly on residential properties. Should a lender elect to pursue a deficiency judgment, it would be through a Judicial Foreclosure.
Junior Liens
A lien, usually a mortgage loan, which is subordinate to a Senior Lien, usually a first mortgage. Lien priority is generally established by order of recordation. NOTE: If you refinance a 1st mortgage on a property with a 2nd mortgage already in place the new 1st mortgage holder will require a subordination agreement from Junior Lien holders to legally establish the new mortgage holder as 1st or Senior Position.
LIBOR (London Interbank Offered Rate)
The interest rate charged among banks for short-term Eurodollars loans - LIBOR is a very common index for adjustable rate mortgages (ARM).
Loss Mitigation
Home mortgage lenders look to limit losses on delinquent mortgages by working out solutions with borrowers through their Loss Mitigation Departments.
Mailing
A copy of the Notice of Trustee’s Sale must be mailed (certified and first class) at least 20 days before the foreclosure sale to the borrower and to anyone who was entitled to receive a copy of the Notice of Default and Secretary of State and IRS, if applicable.
NOD
Short for Notice of Default.
Notice of Default
An official notice filed and recorded by a designated trustee at the request of a lender indicating lender has commenced foreclosure action.
Notice of Trustee Sale
An official notice that is posted, mailed, published/advertised and recorded by trustee at the direction of lender indicating lender’s intention to sell the property at public auction. The notice includes a specific date, time and location.
Posting
A copy of the notice of sale must be posted in a conspicuous place on the property to be sold at least twenty days before the sale. Also, a copy of the notice must be posted at one public place in the city where the property is to be sold at least twenty days before the sale.
Postponement
Trustee Sales may be postponed by the first at the direction of the lien holder. Notice may be given in advance or at the time and location specified for the intended sale.
Private Mortgage Insurance (PMI)
A policy of insurance paid for by the borrower to protect the lender in the event the borrower defaults on the mortgage. Typically PMI is required by the mortgage holder when the down payment is less than 20% of the purchase price.
Qualifying Funds
In order to bid at a Trustee Sale, a bidder must have qualifying funds available at the sale. Qualifying funds are cash or a cashiers check(s) drawn by a State or National Bank, a check(s) drawn by a State or Federal Credit Union or check drawn by a State or Federal Savings and Loan Association, savings association or savings bank specified in section 5102 or the Financial Code and authorized to do business in the State of California.
REO
Short for Real Estate Owned. When a mortgage lender acquires a property, typically through foreclosure, it becomes real estate owned â€" or REO.
Reinstatement
To bring the loan current. Borrower may reinstate up to five (5) business days before foreclosure sale.
Short Sale
The sale of a home which is completed through negotiation with the existing lender(s) in which the lender(s) agrees to accept less than the full amount owed to satisfy the debt allowing the debt to be ‘paid off’, short.
1099-C
IRS Form 1099-c is issued by those canceling all or part of a debt to the person receiving debt relief. Note: The cancelled debt may not need to be reported as income.
Trustee (Foreclosure Trustee)
A Foreclosure Trustee is appointed by the mortgage company when a mortgage reaches the default status for the purpose of processing the foreclosure.
Trustee Deed
The deed given to the highest bidder at auction or the foreclosing lender upon completion of the foreclosure.
Trustee Sale
Conducted by the Trustee. The property is sold at auction to the highest bidder, or taken back by a foreclosing lender.
Hey Michael,Do you think you could maybe clarify that response in a little more detail..that's kind of a vague answer there..
jk That is a LOT of info! thank you kindly! Wow
Wes,
So, what to do tell a person that calls into your office?
Thanks!
Wes,
Another quick question. Does the fact that you have an auction website (In you signature) effect your thought process?
Thanks!
Great response, Michael!
Michael, Thanks! There is a ton of great information in there! The couple issue I have starts with the statement, "• The homeowner gets a full release from the lender and is not financially responsible to repay the loss the lender takes. "
I've watched and helped buyers with many short sales and have NEVER seen the lender release their rights to recovery regardless of wether or not those rights were exempted by the criteria listed in your post.
Secondly, the information in regarding the FICO score impacts is dated. The latest answer, from Myfico.com is :
How does a foreclosure or short-sale affect my score?
Question
How does a foreclosure or short-sale affect my score?
Answer
Credit bureau reports are limited in how they represent foreclosures today, so it's generally not possible to tell from the credit report if a reported foreclosure is a short sale, deed in lieu of foreclosure, settled account, regular foreclosure, or some other variation.
The FICO® score treats all of these descriptions that appear on credit reports as serious delinquencies, so they have an impact on the score similar to the impact from a charge off, tax lien or account included in bankruptcy.
I sincerely thank you for engaging in the thread and appreciate your input. There is some great info there! What was the source by the way? (if you're willing to share)
James, The home auction was a project we worked on over a year ago, we are not participating in any home auctions any more.
We handle each call individually but we always recommend legal and tax council prior to an owner making any decisions. We have found Michael's one word answer, "PRIDE" to be a huge factor in the equation but it does not lead everyone to make decisions that have higher financial impacts and sometimes foreclosure may provide a better outcome.
First, Thank you very much Wes for answering my questions.
Now, let me give my opinion:
Once again, just my opinion.
Thanks!
Scott, Thanks!
The reason for the post is that I believe I can help people in these situations and want to do that. I obviously need to get my head around a few issues and this thread has helped immensely! I've got a way to go yet but will keep learning.
Thanks so much for your feedback. I'll be calling to learn more about your services.
BiggerPockets is wonderful!
Hello Wes
Probably the best SS negotiators are real estate investors... Reason I say that is, and to all agents dont hate, real estate agents dont necessarily negotiate with lenders they accept what a lender agrees to..
There is a very big difference...
I would find a SS house that does both... And the cool part is most negotiators can includ on the HUD their fee... Kinda cool...
Good Luck
Michael
Nobody brought up Fannie Mae guidelines, so I'll mention them. Fannie has issued guidelines for how soon a defaulted borrower can get finance underwritten by Fannie; I am typing in from memory, but you can look it up:
* Pre-foreclosure sale (short sale is the more commonly heard term): 2 years
* Deed-in-lieu of foreclosure: 4 years
* Foreclosure: 5 years
IMO, this is based on whether the lender has to deal with liquidating the real estate. The short sale gets preferred treatment because the lender does not get stuck with more REO.
Since Fannie Mae guidelines are published for public consumption, there's no secrets with this stuff.
Michael, if I could vote twice I would. Appropriate comments by Scott and Steve also. The additional costs, and there are typically $10-20k, for a foreclosure are added to the deficiency if there is one. I fund short sales for investors and have found that when professionally negotiated (typically by a short sale negotiation company) the majority of approvals I see do grant a release from deficiency. Prior to this business I worked in the mortgage business both owning a brokerage and for lenders on the wholesale side. FICO may have changed since I made my transition, but conventional wisdom has always been 70-100 points less for a short sale versus foreclosure. I guess I would have to see the CAR data. It is not logical that a homeowner who made some attempt with the lender as opposed to making them take the home in foreclosure suffers the same damage. But maybe FICO has changed. There is also less stigma from an underwriters point of view for a short sale versus a foreclosure, which transitions into Steves point regarding FNMA guidelines for a new purchase. FNMA clearly views a foreclosure as more damaging. I would have to check if FNMA is at 5 years, although I believe that is correct. By way of indication that number used to be 4 years for FNMA, so they have lengthened the penalty for foreclosure. No slight intended here toward realtors, but I believe negotiators who do this every day do achieve better net results.
Hi Wes,
I might be able to help.i sent you a colleague request
Wes,
There are several companies here on BiggerPockets that perform negotiations professionally. Before you just get anyone, you will be best served by reading some more info by those that negotiate. Also ask around on here and you will get some pretty good references.
Your company and more importantly your clients will be best served by a company that works daily on files from many Lenders and can prove not only a good close ratio, but also great results for the client (Property Owner).
P.S.: I too would be more than happy to discuss my companies services.
A short sale doesn't necessarily completely get the homeowner off the hook in terms of paying off whatever is remaining on the original mortgage after a short sale. Below is a recent story on CNN.com:
As terrible as it is to lose your house to foreclosure, at least it's a relief to put your biggest financial headache behind you, right?
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.
This is a great discussion. Wes, I work with some of the top short sale negotiators in my area with many years of experience in the mortgage industry--they successfully and consistently negotiate waivers. In one instance I had a client that they negotiated a waiver of the past two years of back taxes. Feel free to PM me for their info.
Steve--completely agree with you. Here's a link to the actual document for all of your reference: https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0816.pdf
Credit impact is a complex combination among missed payments, the actual foreclosure/short sale, and how good your short sale negotiator is. I've found each missed payment impacts a score by 100/payment, the actual short sale by 80-100, and a foreclosure (missed payments noninclusive) by 250-300. I work with reliable negotiators who have closed 20+ short sales, and I had a homeowner who sold her house in a short sale without missing any payments, and the impact on her credit score was only 100 pts.
With the Mortgage Forgiveness Act being extended to 2012, lenders basically have no right to pursue a deficiency judgment but it takes a good short sale negotiator to get that waiver. Here's a link to the IRS' a faq:
http://www.irs.gov/individuals/article/0,,id=179414,00.html
Wes, you're right, negotiators do get better results, but being a negotiator and an agent aren't necessarily mutually exclusive--I guess the rare breed of short sale negotiator agent is kind of like a UFO as well.
Obtaining a Settlement in Full vs. a lien release only:
All investors are different so I can only speak for the handful that we service for, but typically we will not settle an account in full from a SS unless we are netting at least 30% of our Unpaid balance (can go up from there depending on the case). This excludes the following states:
Washington
Idaho
Oregon
Utah
Nebraska
Montana
New York
Arizona-Purchase money only
California-Purchase money only
In the states above, the investor must settle an account in full upon completion of the SS. There will be no deficiency balance after the SS. However, there will be tax repercussions for the deficiency balance.
Wes,
The short answer is yes, they are better off doing a short sale. Here are a few reasons why. First, the biggest reason is in almost all cases a homeowner who does a short sale is going to show less delinquent on their credit report when they complete a short sale as opposed to a foreclosure. This obviously helps their credit score. Say it takes on average 3-9 months for a short sale to complete (off the top of my head). A typical foreclosure will probably take double that on average (excluding speed Texas). So just from this right here they are far better off with the short sale on their credit as opposed to a foreclosure.
An exception to the above may be if someone was really delinquent, was back and forth in loss mit and ended up as delinquent as a similar foreclosured home. If they were both say 24 months delinquent at the time of a short sale in one instance and at the time of foreclosure in another, then the hit to the credit report will be pretty similar IMHO because they both were 24 months delinquent when the bank action closed out the loan. But even in this case, they are still better off with the short sale, even if the score is closer than in the previous paragraph. Why? Someone who does a short sale is someone who tried to make an effort to fix his or her problem instead of a foreclosure where they just let it go. They had to participate in the short sale process so are seen as less bad or less of a debtor than the person who just let the bank foreclose. Think of it this way. If you were a bank and someone fixed his or her problems and now 5 years later are getting a new loan, who do you think will have a better chance of getting that loan? The person who did a short sale or the person who had a foreclosure on their record? Seems like a no brainer to me (although they both are certainly derogatory credit wise, the foreclosure is just worse).
Regarding deficiency judgments, you need to be better informed in my opinion (unless you are brand new) because many banks do not pursue deficiency judgments at all. This is complicated by the fact that for the most part the bank is just a servicer so whether a judgment is pursued is entirely laid out in the guidelines of the investor (Freddie, Fannie and FHA are the big three). For instance, FHA, did not pursue deficiency judgments and the short sale approval letter says that on the document a homeowner gets when they are approved. Now this certainly could have changed recently but based on government’s ability to change, is doubtful to me. The rules are obviously different for privately held paper as they can do what they want (but would still disclose this), but this is a pretty small part of the overall market.
Now some of the MI companies have been starting to pursue def judgments, especially companies such as PMI. I seem to remember Freddie doing this the most. But they don’t pursue them much more frequently than they do pursue them. Again, this would be disclosed as part of the short sale approval letter so at no time, have I ever seen a bank, MI company, servicer or investor pursue a deficiency judgment after a short sale closed where it wasn’t disclosed up front (in the short sale approval paperwork).
Be very careful when choosing a company or consultant to represent you and your clients in short sales or general negotiations with a loss mit department. The reason being only about 1% are even close to competent and the rest are worthless in my experience. Every person who has loss mit experience has learned this over time and in my opinion correctly, is pretty suspect of most “consultants.†You are always better off without a consultant IMHO. Just my opinion only here.
Good investing all
Mike C
MI Companies should not pursue deficiency judgements, they will often ask the debtor to sign an interest free promissory note at the SS closing, or they may ask for a cash contribution at closing. They request either of these, and in some cases both, to offset the MI claim that the investor will be filing once the SS/FCL/DIL is finalized. It is the investor's choice weather or not to proceed with the SS/DIL without meeting the MI Company's terms to offset the claim. This in turn results in a claim less the difference of the amount they tried to offset prior to fcl. We deal with the following MI Companies:
PMI
MGIC
United Guaranty
RMIC
Genworth
Radian
Triad
Paul, are you talking about properties that are not primary residences? The short sale negotiators I work with consistently get both deficiency waivers and tax waivers. As per the Mortgage Forgiveness Debt Relief Act of 2007, homeowners are exempt from deficiency judgments on primary residence on a federal level. In my state, that exemption is excluded if the property has been refinanced or has a HELOC.
Mike--I totally agree with you. Most banks do not pursue them. If you are in a deficiency state with a bank that tends to pursue judgments, preventing a deficiency judgment is entirely dependent on your lender negotiator. Short sale specialists in deficiency states on this site get waivers all the time, but alot of less savvy negotiators tend to treat them like UFO's--they've heard about them, but have never actually seen one themselves. They do exist! Ask around the site, I'm sure you'll be able to find some folks who can help you get that waiver in your state.