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Jerry Heard's Blog

Short Sales… Good Bad or Ugly

By Jerry Heard | Broker in San Diego County, CA
  • How Did We Get Into This Situation??

    Posted Under: Home Buying in San Diego County, Foreclosure in San Diego County, Property Q&A in San Diego County  |  February 14, 2012 2:14 PM  |  286 views  |  No comments

    As with many government programs, it started with good intentions.  In 1977 Congress passed the Housing and Community Development Act of 1977 better known as the Community Reinvestment Act (CRA) to reduce discriminatory lending practices in low to moderate income neighborhoods and increase lending to minorities. There have been several modifications to the original act over the years.

    Among these modifications were provisions that allowed Fannie Mae and Freddie Mac to securitize mortgages and sell them to investors. These securities were insured or guaranteed by these entities. Lenders would originate loans and sell them to Fannie and Freddie who in turn would bundle them into securities and sell them to investors all over the world. This created a ready market for the mortgage backed securities and encouraged lenders to make more loans. If the asset underlying these loans remained strong, then the security would also be strong.

    Some have charged that the regulations forced lenders to make loans to people who would not have, under previous credit standards, qualified for the loans they were getting. Many lenders created new types of loans, primarily negative amortizing adjustable rate loans as well as loans of up to 100% of the value of the home. Many did not require any proof of income for the borrower. All of this was done to increase lending among low to moderate income borrowers and in many cases to meet CRA requirements.

    As the supply of money increased, due to relaxed underwriting standards, more people were able to purchase homes. When there are more people with more money chasing a limited supply of homes, prices will rise. Some of the people who purchased homes in the early stages of this boom were able to sell their homes for 20-50% more than they paid for them in a short time, often in 3-6 months. Many took the equity and repeated the process. Some refinanced and remodeled the home, bought cars and TVs or used the money for their children’s education.

    Eventually the bubble burst and people were not able to turn the homes over as quickly as they had just a few months before. Now people had mortgages of 100% or more of the value of the home and also were faced with a mortgage payment that was going to increase. Many of these borrowers had initial interest rates as low as 1% and now were facing rates of 5-8%. A loan of $150,000 at 1% had a payment of $482 a month. Now when the interest rate adjustedborrowers were faced with a payment of $805 a month or more. Many could not afford this new payment and had to sell their home.

    Now we were in a reverse situation from what we had been in before. The supply of homes on the market increased and prices started falling. Many borrowers walked away from their homes and the lenders foreclosed. As prices fell on these homes that the borrowers could no longer afford, other homes in the neighborhood also fell in value and equity evaporated. Many people tried to keep up with their payments but after seeing the value of their home fall 50% or more in some cases, they made the decision, often called a strategic default, just to stop paying the mortgage. Sadly the ones hit hardest are the ones that the law was created to help.

    So now our real estate market is dominated with short sales, homes selling for less than is owed to the lender, and foreclosed properties, called REOs for Real Estate Owned. Only time will cure the problem but meantime now is a great time to purchase a home for your own use or as an investment. Interest rates are at all-time lows for both personal residence and investment properties.

  • Repo Options

    Posted Under: Home Buying, Foreclosure, Property Q&A  |  January 25, 2011 2:32 PM  |  331 views  |  1 comment

    The FHA and FNMA HomePath programs are great ways to buy a home. The FHA homes can at times be purchased for as little as $100 down. The homes may have an escrow account to take care of some of the repairs that may need to be done to the homes. The website http://hudhomestore.com/HudHome/Index.aspx has a listing of all of the FHA Repo homes that are for sale in the United States. Most are available only to owner occupants but many are available for investors. Only brokers, like me, who are registered with FHA can make offers on these homes for their clients.
    The FNMA HomePath program does not require an appraisal or condo certification which may be a problem for some non HomePath repo purchases. These homes are available with as little as 3% down and FNMA may pay 3% of the closing costs. Check http://www.homepath.com for information on these homes.
    Not all lenders will do the FNMA HomePath loans but I work with several that do. Any lender who does FHA loans can do the FHA Repo loans.
    If you are interested contact me
    Jerry Heard
    www.TheSanDiegoPropertyShop.com
  • Short Sales… Good Bad or Ugly Part 3

    Posted Under: Market Conditions, Home Buying, Home Selling  |  January 12, 2011 10:06 AM  |  259 views  |  No comments

    If the loan modification does not work, either it is unacceptable to you, you did not qualify for the modification or you cannot make the payments, you still have some options. If you are in default on your loan or at risk of being in default on the loan you may qualify for a Home Affordable Foreclosure Alternative program (HAFA) short sale.

    A short sale requires the lender to agree to accept a payoff that is less than the outstanding balance of the loan. Most loans will qualify for the HAFA program and the property owner is relieved of the obligation to repay the deficiency. The other advantage is that the lender determines, prior to receiving an offer, what is the minimum that they will accept to satisfy the loan. Prior to HAFA an offer was presented to the lender and they would determine if the offer was sufficient or if they required a higher amount. The time frame for this old process could take several months. Using HAFA the bank has 10 days to respond to the offer greatly speeding up the sales process. Using the old method buyers often made several offers on properties because they had no idea if the lender would approve the offer or reject it. HAFA provides a greater sense of confidence tha the offer will be accepted and close in a timely manner.

    The process for a HAFA short sales is clearly defined for FNMA, FHLMC and other investors. Although it is not required, it is recommended that the property owner utilizes the services of a HAFA certified Realtor. These Realtors are trained in the proper procedures and can speed up the process. The property owner does not have to have the property listed with the Realtor to start the process.

    The documentation that was used for the HAMP loan modification process will be used in the HAFA process so there will not be duplication of paperwork. Some information may be needed to be updated such as paystubs or bank statements but the majority of the paperwork will be in the possession of the lender.

    A Request for Approval of Short Sale (RASS) needs to be completed and sent to the lender. The lender will then either approve or provide a minimum sales price or net proceeds to the lender. Once this is completed the property can be listed with a real estate broker.

    The major advantage of using HAFA is that the time frame is drastically reduced and the buyer has confidence that the offer will be accepted and the seller can make plans to move in a timely manner. In many cases the lender will even provide the seller with funds to assist in the move.

  • Short Sales… Good Bad or Ugly Part 2

    Posted Under: Market Conditions, Home Buying, Home Selling  |  January 12, 2011 10:02 AM  |  235 views  |  No comments

    If you have decided to weather the storm and stay in your home congratulations. If you simply cannot make the payments because of interest rate increases, a decrease in your family’s income or other unexpected event there are still some options available to you.  The first you should explore is a loan modification. Fannie Mae (FNMA) offers a Home Affordability Modification Plan (HAMP). Programs similar to this are offered by many lenders.

    In order to qualify for a loan modification, you will have to contact your lender and provide them with a reason to modify your loan. Has there been a change in your financial situation? Have you increased the size of your family?  Are you currently in default (delinquent on your payments) or in risk of going into default ? According to the HAMP website, https://www.hmpadmin.com/portal/programs/hamp.html , you may qualify for a loan modification. Not all loans are FNMA qualified but the majority of loans are.

    In order to be eligible for this modification there are some requirements:

    1) You must be delinquent on your mortgage or face imminent risk of default
    2) Your property is occupied as your primary residence-not a rental 
    3)Your mortgage was originated on or before Jan. 1, 2009 and unpaid principal balance must be no greater than $729,750 for one-unit properties.

    If you meet these requirements then you may be eligible for a modification that will lower your total mortgage expense to 31% of your pre tax income. This is achieved in the following manner:

  • First, reduce the interest rate to as low as 2%,
  • Next, if necessary, extend the loan term to 40 years,
  • Finally, if necessary, forbear (defer) a portion of the principal until the loan is paid off and waive interest on the deferred amount.
  • You will have to provide your lender evidence of the hardship, copies of your tax returns and recent paystubs as well as a detailed budget. This information will be reviewed by the lender to determine if a hardship exists and you are either currently in default or at risk of going into default. This process may take several of weeks.

    If the lender determines that there is a hardship, you will be offered a trial modification and if you successfully complete the trial period, the modification will become permanent. If you fail to make the payments under this trial plan, you will not be eligible for another modification attempt and may need to consider a short sale, deed in lieu of foreclosure or foreclosure.

    Many Realtors can assist you during the modification process at no cost to you. If the modification does not work it would be only fair to ask them to list your home for sale and help you through the short sale process.

    There are plans to assist you if the short sale is the alternative that is best for you. That is a topic for another day

  • Short Sales… Good Bad or Ugly

    Posted Under: Market Conditions, Home Buying, Home Selling  |  January 9, 2011 8:28 PM  |  296 views  |  1 comment

    For the last several years the real estate market has been hit with falling prices resulting in homeowners owing more on their homes than they are worth. To make matters worse the recession has resulted in high unemployment rates making it difficult, at the least, for many people to continue making their mortgage payments. What caused this is not the subject of this article but an interesting topic for discussion at another time.

    There are four options for homeowners at this time.

    1. Weather the storm and continue making your payments. If the home works for you and your family this may be the best option. More than likely over the next 5 to 10 years the value will return and meantime you have a place to call home.
    2. Request a loan modification from your lender. If your total housing expense (mortgage payment, insurance, property taxes and HOA dues) is more than 31% of your gross income you may qualify for a loan modification.
    3. Short sell the home. This involves selling your home and negotiating with your lender(s) so they will take a payoff that is lower than what you owe. There are several government sponsored programs that may make this process easier and faster than just a few months ago.This procedure is approximately 50% of the market at any given time.
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