What is a short sale? Do I qualify for a short sale?

SHORT SALE OR LOAN MOD?

The truth behind failed loan mod program Overwhelmed servicers, undeserving borrowers are only part of the story By Jack Guttentag Inman News™ "Who or what is responsible for the failure of the government's mortgage modification program to make a sizable dent in the volume of foreclosures?" Many factors are involved in this complicated story, but in my view, there are two major factors. The deserving-borrower mindset From the beginning, the operating premise of the government's modification program has been that only deserving borrowers should be helped. The programs require that borrowers be suffering from financial hardship, and that their mortgage payment exceeds 31 percent of their income. Balance reductions as a modification tool are discouraged or prohibited because they constitute a permanent benefit that can't be retracted when the borrower is no longer suffering hardship. And borrowers who don't occupy their homes as their permanent residence are ineligible because they are investors looking for profit. Never mind that they are also major purchases of foreclosed homes. The government is not always so discriminating in who it helps. When it rescued insurance corporation AIG from impending failure, for example, it also protected major Wall Street firms who were creditors of AIG from the losses they would have incurred had AIG been allowed to default -- losses these creditors richly deserved. This difference in treatment between Wall Street and Main Street reflected the difference in the challenge faced by policymakers. In the AIG case, they confronted a potential financial crisis that had to be dealt with immediately to avoid a catastrophe. Even if it were possible to design a plan that would have imposed losses on AIG's major creditors while preventing a contagious loss of confidence generally, which is not at all clear, there wasn't time to do it. The government couldn't avoid benefiting the undeserving creditors of AIG. Foreclosures, in contrast, have been viewed as a major problem, but not a crisis. Time was available for planning and deliberation, and out of that process emerged the rules designed to prevent undeserving borrowers from benefiting. This had the effect of disqualifying many borrowers, which was the purpose. But it also made the programs more complex to administer, aggravating dysfunction in the mortgage servicing industry, which resulted in many deserving borrowers not being helped. Had the foreclosure problem been viewed as a crisis, the remedies fashioned would have been much simpler, implementation would have been much faster, and many undeserving borrowers would have benefited. But more deserving borrowers would have benefited as well, and the total impact could have been large enough to do the job. Causes of servicing dysfunction The firms servicing mortgages have been unable to cope with the enormous volume of modification requests that they have received. The results are well known to the borrowers and their advisers who have tried to get their loans modified. Borrowers have faced endless delays; an inability to reach the employee with whom they had their previous contact; conflicting stories from different employees who have been involved with their case; lost documents that don't get reported back to the borrower; and on and on. The service is less terrible now than two years ago, but is still terrible. Servicer dysfunction in connection with modifications has its roots in the prior history of the industry. The evolution of the industry was implicitly based on the assumption that the financial crisis, and the ensuing decline in home prices and rise in foreclosures, could not happen. Separation of servicing and ownership: At one time, mortgages were serviced by the firm that owned them, but today a very large proportion is serviced by firms under contract with the owner. This separation permitted servicing firms to reduce servicing costs by increasing volume, but it made government efforts to increase modifications more difficult because there were two parties involved instead of one. In general, under their contracts with owners, servicers are barred from taking any action that is not in the financial interest of the owners. In attempting to encourage modifications, the government has necessarily dealt with servicers, but has had to take account of the servicers' obligations to owners. This led the government to develop a net present value (NPV) rule that servicers apply to every modification. If the application of the rule indicates that the mortgage will have a higher NPV to the owner with modification than without it, the servicer's obligation to the owner is met. But the NPV rule is a complex step in an already complex process. Furthermore, because the NPV is calculated by the servicer and uses some servicer-specific information, there is no way for borrowers to know in advance if they will qualify for a modification. Rationalization of servicing: The development of mortgage servicing as a separate line of business was accompanied by process changes designed to enhance efficiency. In general, this involved automating everything that could be automated, and simplifying functions that could not be automated so that they could be performed by relatively unskilled (and lower-paid) employees. But modifications require a higher level of skills, which few servicer employees had. Of equal importance, servicers did not have the systems they needed for handling and routing inbound calls and faxes; for tracking files; for compiling and recording documents received from borrowers; for allocating responsibilities among staff; and so on. In effect, servicers were on the beach with no protection when the modification tsunami hit them.

3 options for buying home after short sale

REThink Real Estate By Tara-Nicholle Nelson Inman News™ Share ThisQ: I experienced a hardship two years ago and had to sell my house via short sale. I am now ready to purchase a home but heard I would have to wait another year because of FHA rules. I have been paying my rent on time and my credit is in the 700s. What programs or other options do I have in terms of obtaining a loan? I want to purchase a house for $70,000. --T. Jordan A: I'm glad to hear that your hardship has passed, and that you've been able to get your finances back in shape. Whoever you've spoken to is correct: There is a three-year waiting period after a short sale before you can qualify for an FHA loan on a new home. As I see it, though, you have three clear options: 1. Wait a year. The fact is, time flies -- and you're only 12 months away from the expiration of the FHA waiting period. Frankly, there are so many homes on the market right now, including an enormous percentage of distressed properties with condition problems and such, that between getting their own financial ducks in a row and house hunting, it is taking many homebuyers more than a year from the time they get started to get into contract, even without any waiting period. Unless you have an uber-urgent reason to move or are very flush with cash (see No. 2, below), my advice is to wait the year. In the meantime, pay your bills on time -- every time -- and work with your mortgage and real estate brokers to make sure all your other financial ducks are in a row so there are no surprises when your waiting period is up. 2. Get a non-FHA loan. FHA is popular -- especially among those who only have the cash to make the FHA minimum 3.5 percent down payment -- but it's not the only game in town. The vast majority of conventional (non-FHA) loans available from mainstream lenders are insured by Fannie Mae and Freddie Mac. Both these agencies impose a shorter, two-year, post-short-sale waiting period, as long as the borrower is coming in with a 20 percent down payment. If you wait an additional two years, the minimum down payment requirement comes down to 10 percent, but by then you will qualify for the 3.5 percent FHA mortgage. 3. Plead the case of extenuating circumstances. FHA guidelines do make an exception for the three-year, post-short-sale waiting period for former homeowners/wannabe borrowers who can document that they were forced to do the short sale by extenuating circumstances. The most common fact scenarios that fit the bill are a job transfer to another area (not job loss) or a natural disaster that affected the property (e.g., fire, flood, etc.). Beyond that, whether a "hardship," to use your terminology, rises to the level of an extenuating circumstance for purposes of qualifying for an FHA loan is up to the discretion of the lender, but things like a job loss, the adjustment of a mortgage or the decline of the home's market value do not count. If you had, say, an accident or illness that resulted in a temporary disability, it might be worth the effort to plead your case. Speak with your mortgage professional about whether you can make a credible argument in favor of shortening your waiting period

Foreclosure activity rises in October

RealtyTrac: New state law results in a 75% drop in default notices in Nevada By Inman News Inman News™ In another sign foreclosure activity is ramping up, foreclosure filings rose nationwide in October compared to the month before, according to the latest report from foreclosure data site RealtyTrac. One in every 563 housing units, or 230,678 properties, received a filing -- a default notice, scheduled auction, or bank repossession -- in October. While that's a 7 percent jump from September, filings were still down nearly 31 percent from October 2010. "The October foreclosure numbers continue to show strong signs that foreclosure activity is coming out of the rain delay we've been in for the past year as lenders corrected foreclosure paperwork and processing problems," said James Saccacio, RealtyTrac's CEO, in statement. The number of homes receiving default notices increased 10 percent month to month in October, to 77,733 properties, though that's still down 23 percent from October 2010. In states that follow a judicial foreclosure process, default notices reached an 11-month high of 39,282, accounting for about half of all default notice filings. Three states saw particularly significant month-to-month increases in default notices: Florida (28 percent), Pennsylvania (50 percent) and Indiana (61 percent). Scheduled auctions rose 8 percent month to month but fell 38 percent year over year in October to 85,321. Auctions in judicial foreclosure states also reached an 11-month high last month, to 25,941. On a monthly basis, auctions increased significantly in three states: Florida (57 percent), Minnesota (43 percent) and Illinois (38 percent). Banks repossessed 67,624 properties in October, up 4 percent from September, but down 27 percent from October 2010. Four states saw especially large month-to-month increases in REO (bank-owned home) activity: Michigan (40 percent), Oregon (45 percent), New Jersey (48 percent) and Indiana (73 percent). Five states accounted for 53 percent of nationwide foreclosure activity in October: Nevada, California, Arizona, Florida and Michigan. A new Nevada state law designed to crack down on documentation irregularities by foreclosing lenders took effect in October, likely leading to the 75 percent monthly decrease in default notices in the state, RealtyTrac said. Nevertheless, Nevada had the highest foreclosure rate in the nation for the 58th straight month in October. 10 states with the highest foreclosure activity rates in October: Area Foreclosure rate (October 2011) U.S. 1 in 563 housing units Nevada 1 in 180 California 1 in 243 Arizona 1 in 259 Florida 1 in 268 Michigan 1 in 282 Georgia 1 in 406 Illinois 1 in 423 Idaho 1 in 432 Oregon 1 in 455 Colorado 1 in 458 Source: RealtyTrac Among metropolitan areas with a population of 200,000 or more, Stockton, Calif., had the highest foreclosure rate in October with 1 in 143 units receiving a foreclosure filing. Las Vegas had previously held the top spot for 22 straight months, but dropped down to No. 5 due to an 80 percent monthly drop in new default notices, RealtyTrac said. Metro area Foreclosure rate (October 2011) Stockton, Calif. 1 in 143 housing units Modesto, Calif. 1 in 148 Vallejo-Fairfield, Calif. 1 in 150 Riverside-San Bernardino, Calif. 1 in 155 Las Vegas 1 in 162 Saginaw, Mich. 1 in 174 Sacramento, Calif. 1 in 176 Cape Coral-Fort Myers, Fla. 1 in 190 Merced, Calif. 1 in 200 Orlando, Fla. 1 in 208

Foreclosure inventories growing in states that allow judicial foreclosure

LPS: Fewer homes entering process, but pipeline is clogged Share ThisThe percentage of homes in the foreclosure process continued to climb in September, even as delinquencies and foreclosure starts declined, according to the latest report from data aggregator Lender Processing Services Inc. While fewer homes are entering the foreclosure pipeline, there's been an even more drastic slowdown in homes coming out the other end, due in large part to the "robo-signing" controversy, which has slowed the pace at which lenders can repossess homes and put them back on the market. LPS said foreclosure starts were down 20 percent in September from a year ago, to 220,273, slightly below the three-year average. But foreclosure starts continue to outnumber foreclosure sales by a factor of more than three to one, reflecting the fact many homes are tied up in the system for months or years after lenders initiate foreclosure proceedings. Foreclosure inventories continue to grow in judicial foreclosure states where courts handle foreclosure proceedings, with lenders taking an average 761 days to complete the foreclosure process on delinquent homeowners in those states -- six months longer than in nonjudicial states. Nationwide, nearly 40 percent of homeowners in foreclosure had not made a payment in two years, and 72 percent had not made a payment in a year or more, LPS said. LPS estimated there were 2.17 million homes in some stage of the foreclosure process at the end of September. That's 4.18 percent of all homes with mortgages and an 8.9 percent increase in the foreclosure rate, which stood at 3.84 percent at the same time a year ago. Another 4.2 million homeowners were at least one payment behind on their mortgages. That's 8.09 percent of all homes with mortgages, down 12.7 percent from the 9.27 percent delinquency rate a year ago. A bright spot in the report was that the number of seriously delinquent loans -- mortgages in arrears by 90 days or more but not yet in foreclosure -- continues to decline. While 1.84 million homeowners were seriously delinquent, that's down 39 percent from January 2010, when 3.06 million mortgages were on the verge of foreclosure. The government is standing behind about half of seriously delinquent loans, either through Fannie Mae and Freddie Mac (19 percent) or Federal Housing Administration, U.S. Department of Agriculture and Department of Veterans Affairs loan guarantee programs (32 percent). The rest are loans that were bundled into "private label" mortgage-backed securities (37 percent) or retained by lenders in their investment portfolios (12 percent). While robo-signing has slowed down lender repossessions, many seriously delinquent homeowners are able to avoid foreclosure through loan modifications. Lenders have signed off on about 2 million loan modifications since January 2010, LPS noted in reporting the downward trend in serious delinquencies. There's been a dramatic decline in the redefault rate on modified loans, with about nine out of 10 modifications resulting in reduced payments for borrowers. Loan modifications could be less of a factor going forward, with both Home Affordable Modification Program (HAMP) and non-HAMP loan modifications down sharply in the second quarter from a year ago. Total loan modifications were down 44 percent during the second quarter from a year ago, to 149,000, with HAMP modifications falling 35 percent and proprietary modifications down 50 percent. A separate report by the Census Bureau showed the steady decline in the homeownership rate during the housing bust may have hit bottom during the third quarter. At 66.3 percent, the homeownership rate during the third quarter was down 0.6 percentage points from a year ago, but up 0.4 percentage points from the second quarter, the Census Bureau said. For decades, the rate of homeownership ranged between 63 and 66 percent, though it began a climb above normal rates in the mid-1990s and peaked at above 69 percent just before the housing bust. Writing on the blog Calculated Risk, Bill McBride said decennial Census numbers suggest the actual homeownership rate is now probably closer to the 64 to 65 percent range. LPS estimates that the total number of U.S. first mortgages has declined by 6.8 percent since January 2008, when there were an estimated 55.7 million homes with mortgages. Most of that drop -- a decline of nearly 3.8 million mortgages -- was presumably the result of elevated foreclosures and the lower homeownership rate. Homes that go into lenders' real estate owned (REO) inventories or are purchased by investors in all-cash transactions don't have mortgages. While some homeowners would also have paid off their mortgages in full and owned their homes outright, the total number of outstanding mortgages usually grows as the population and housing stock expands and first-time homebuyers take out new loans.

Will short sales help the housing market.

Great debate on short sales watch and learn!

The Seven most dangerous Short Sale Myths

With 25 - 50% of Sarata property owners owing more on thier mortgages than the value of the property, a short sale can be an excellent solution for homeowners who must sell or face foreclosure. Unfortunately, a number of myths about short sales have developed, and it is important to understand the reality of this process should you find it meets your current needs.

•Myth #1 – The Bank Would Rather Foreclose than Bother with a Short Sale
This is one of the most common misconceptions. The reality is that banks do not want to foreclose on your property because the foreclosure process is incredibly costly.
Banks, investors, and even the federal government have all publicly stated that if a person is qualified for a short sale, the deal needs to be considered. Overwhelmingly, banks receive more on their investment through a short sale than a foreclosure.

The qualifications for a short sale include:
1. Financial Hardship – There is a situation causing you to have trouble affording your mortgage.
2. Monthly Income Shortfall – “You have more month than money.” A lender will want to see that you cannot afford, or soon will not be able to afford your mortgage.
3. Insolvency – The lender will want to see that you do not have significant liquid assets that would allow you to pay down your mortgage.
•Myth #2 – You Must Be Behind on Your Mortgage to Negotiate a Short Sale
While this may have previously been the case, today lenders are looking for verifiable hardship, monthly cash flow shortfall, or pending shortfall and insolvency. If you meet these three requirements and believe that you soon may be unable to afford your mortgage, act immediately. Any delay could limit your options. Do not wait until the countdown clock to foreclosure has started and you have even less time left.
•Myth #3 – There is Not Enough Time to Negotiate a Short Sale Before My Foreclosure
This is a myth that probably hurts homeowners the most. Many do not realize that foreclosure is a process, and that there is time to make decisions that may result in better outcomes.
The foreclosing party—in most cases a lender—can stall a foreclosure up to the final day of the process. Today, many lenders will stall a foreclosure with as little as a phone call from you explaining that you are trying to sell, and almost all lenders will stall a foreclosure with a legitimate contract. For real estate professionals who understand foreclosures and short sales, there is time available until the foreclosure process is
complete.
•Myth #4 – Listing My Home as a Short Sale is an Embarrassment
It is understandable to have reservations about letting the world know that you owe more on your home than it is worth. However, according to recent estimates, more than one out of eight homeowners in the U.S. is in the same situation. You are to be congratulated for admitting you need help, taking action, and finding a professional who can work with you toward a solution.
With recent estimates showing 40-60% of U.S. sales will be short sales or foreclosures, you are not alone.
•Myth #5 – Short Sales are Impossible and Never Get Approved
This is a complete falsehood. Are short sales more difficult to execute? Yes. Do you, as a homeowner, need to learn about a new process? Yes. Are they impossible? Absolutely not. For example, agents with the Certified Distressed Property Expert® (CDPE) Designation
receive thousands of short sale approvals on a monthly basis. These professionals have undergone extensive training in methods to help homeowners in distress and process short sales. While there are no guarantees in any transaction, more and more short sales are being approved regularly. This is far from an impossible process.
•Myth #6 – Banks are Waiting on a Bailout and Not Accepting Short Sales
You may have heard this, but the reality is that banks (and the U.S. government) are trying to do anything they can, within reason, to avoid foreclosing on properties. It is preposterous to believe they would deny a short sale in hopes that some future legislation would pass and pay them for losses. Today, more banks are aggressively pursuing short sales and working with agents who understand how to process them. Freddie Mac recently hosted a national training Webinar for real estate agents where they expressly stated the organizational goal of “eliminating distressed assets through modification or short sale.”
•Myth #7 – Buyers are Not Interested in Short Sale Properties
This is a myth that potential sellers hear all the time. Thankfully, this is just not true. In fact, many agents are getting calls from buyers who say they only want to look at foreclosure and short sales.
For buyers, short sales and foreclosures have become synonymous with “good deals.” More specifically, international buyers are targeting these properties. Listing with an experienced agent who is educated in the short sale process will provide you with a great chance of quickly seeing a contract on your property.