My title representative keeps track of the foreclosure status on all my clients who are currently not paying their mortgages. He checks on 16 homes for me every week and told me yesterday he is tired of checking EVERY WEEK because, “Nothing ever changes, Erik.  There has been no filing of foreclosure on any of them, some for over 2 years now!” I asked him if that is the case for his other Realtors and he said, “yes.”

Why aren’t banks foreclosing?

“Are they just inundated?” I asked. “Maybe,” he said, ”or maybe they just want to work it out in another way, like a short sale or something else.”

There is no way to know what all the banks are thinking. But on a case by case basis, you can find out if you ask the RIGHT QUESTIONS to the RIGHT PERSON at the bank.

I got a real shock last night

So imagine my surprise when, just hours after this conversation, while watching the national news, a report came up saying “foreclosures are up!” Well, I know that to be untrue! Maybe there are more homes this year than last year that aren’t paying their mortgages.

But the media makes it sound like banks are taking away people’s homes even MORE now than before.

I know that the banks are not aggressively pursuing foreclosure. I am not a reporter. I am on the ground, every day, with my finger on the pulse of this market. So I thought I’d put my experience out there in case you are scared like I was when I negotiated with my bank.

INFORMATION IS POWER!

If you are in an emergency and need to talk now, please call me at 310-754-8144. I’ll do all I possibly can!

In today’s difficult real estate climate, the most important criteria for getting your home sold is pricing it correctly. Overpricing your home is the #1 reason that properties don’t sell.  In a city like Los Angeles, there are thousands of buyers in each zip code, and at the right price, there is ALWAYS a buyer for every home.  This is a fact.  If the home is staying on the market for a long time, it’s not because there aren’t any buyers, it’s not because the countertops aren’t made of granite, and it’s not because the agent doesn’t wear a suit, or has bad breath…it’s because the home is overpriced and the buyers rejected it at that price.  It often seems complicated, but it is actually very cut and dry.

It is the job of a strong real estate agent to do the research, use their experience, and know the area well enough to price your property correctly.  In this 4 part series, we will explore the most common pitfalls of overpricing your home.

Part 1

“Let’s list high and leave room to negotiate.” 

Sellers often overprice because they are emotional about their house. There are no hard rules for how much you list for, so some people list high, at an unreasonable price, because they think their house is the best house in the neighborhood.  I certainly understand the train of thought…when you have put a lot of time, effort, money, and love into your home, it makes it really difficult to be objective.  They often think “This is house is so amazing and so much better than the rest!” and, “Let’s list high and leave room to negotiate.”  This line of thinking is hugely detrimental to getting the property sold, and it is the job of the agent to try to gently help the client understand the realistic value of their home, emotions aside.  The market is unemotional, and it is the market that ultimately decides the value of your home.

So how do you get an unrealistic and emotional seller to see the light?  This is much easier said than done.  Strong agents often simply won’t take overpriced listings because it can be such an ordeal to handle an unrealistic seller. These relationships can be fraught with friction and a lot of extra work for an end result that is probably going to disappoint the seller…that is, a market price.  Unrealistic sellers often think that when their agent tells them their house is not as valuable as they think it is, he/she must be against them and are trying to undersell the house to sell it quickly.  The truth is, the quicker the sale, the more emotional the buyer, the more emotional the buyer, the higher the price.  The strong agent is actually doing a great job PROTECTING the seller’s value and profits by encouraging them to list at the price that will get it sold sooner than later.

How do Listings End Up Overpriced?

Weak agents often take overpriced listings because they usually don’t have very much business.  Because they don’t have much business, they have time to deal with the hassle of unrealistic sellers.  Meanwhile, unrealistic sellers choose weak agents because they agree with their price.  Weak agents don’t warn them upfront about this because they are afraid to tell them.  The agents don’t want to create friction with the seller, and are afraid the seller won’t hire them if they argue.  And they are often right…they won’t be hired if they tell the sellers the true price.  Since they need the business so badly, they opt to let the market educate the sellers.  What do I mean by that? They say to themselves, “ I’ll list it for THEIR price, and then when it doesn’t sell, that will prove to them that the price is too high.”  This can become a very costly decision for the sellers, however, because they have now delayed their sale, potentially lost thousands in holding costs and market returns, and lost vital momentum for the sale of their property.  In the end, the inevitable still occurs.  Those sellers don’t get their properties sold until they do a price reduction or two.

I have seen first-hand  sellers lose hundreds of thousands of dollars ultimately by sticking to an unrealistic price, only to be forced to sell 6-12 months later at a much lower price due to holding costs and market drops.  Remaining unemotional about your property and being realistic about what the market is currently dictating regarding price is ESSENTIAL to getting your property sold in a timely manner.

CHECK BACK NEXT WEEK for the next part of Erik’s 4 Part Series on home sales!

There are many pitfalls in any of the options above so it’s critical that we sit down with you and decide which of the above options is most appropriate for you. In order for this conversation to be efficient and productive there are two very different skill sets required.

1.  A deep understanding of each bank’s processes and what they are looking for.

 AND 

2.    A deep understanding of the local real estate marketplace around your property.

Keep in mind many Realtors have some understanding of #2 above. However, our experience has been that maybe less than 5% understand the banks. That is why short sales have such a bad rap. In most cases, the agent is able to get a buyer, but he/she is not able to get the bank to agree to do the deal.

With regards to your property, since it is located in our local marketplace, we fall into a very specialized category of professionals who can actually help YOU because we understand BOTH of the issues above.

We will go over each option above with you and how it relates to you and your property. Following are some of the questions and issues we will discuss with you:

1. Do I qualify for a short sale?
2. What is a mortgage modification?
3. Why would a lender modify my mortgage?
4. What do I need to qualify for a mortgage modification?
5. How do I qualify for a mortgage modification?
6. What if I don’t qualify for a mortgage modification, can’t afford my home, and owe more than it’s worth?
7. What is a Home Affordable Refinance?
8. What are the qualifications for a Home Affordable Refinance?
9. Consultation on current market conditions
10. Comparable market evaluation of your home for both sale and rent
11. Credit consultation about short sale versus bankruptcy or foreclosure
12. Guidance on how to repair your credit quickly
13. How to capitalize and maximize your future real estate investments

This seems simple enough, but it is a complicated process that takes years of training, expertise and negotiating SKILL.

Please call me todayat (310) 754-8144 for a free confidential evaluation of your individual situation, property value, and possible options.

To be technical, here’s an official definition of a short sale:

• A homeowner is ’short’ when the amount owed on his/her property is higher than current market value.
• A short sale occurs when a negotiation is entered into with the homeowner’s mortgage company (or companies) to accept less than the full balance of the loan at closing. A buyer closes on the property, and the property is then ’sold short’ of the total value of the mortgage.

In most cases, a short sale can be an excellent solution for homeowners who need to sell, and who owe more on their homes than they are worth. In the past, it was rare for a bank or lender to accept a short sale. Today, however, due to overwhelming market changes, banks and lenders have become much more negotiable when it comes to these transactions. Recent changes in corporate policy and the Obama administration have also improved the chances of getting a short sale approved.

For homeowners to qualify for a short sale, they must fall into any or all of the following circumstances:

• Financial Hardship – There is a situation causing you to have trouble affording your mortgage.
• Monthly Income Shortfall – In other words: “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.
• Insolvency – The lender will want to see that you do not have significant liquid assets that would allow you to pay down your mortgage.

If a homeowner owes more on their property than it is currently worth, then they can hire a qualified real estate agent to market and sell their property through the negotiation of a short sale with their lender. This typically requires the property to be on the market and the homeowner must have a financial hardship to qualify. Hardship can be simply defined as a material change in the financial stability of the homeowner between the date of the home purchase and the date of the short sale negotiation. Acceptable hardships include but are not limited to: mortgage payment increase, job loss, divorce, excessive debt, forced or unplanned relocation, and more.

• Benefit: A short sale allows the homeowner to avoid foreclosure and salvage some of their credit rating. This also keeps foreclosure off the individual’s public record, and in many cases will allow the homeowner to avoid a deficiency judgment. Borrower may qualify for another mortgage in as little as 24 months (as opposed to five years for a foreclosure).
• Drawback: Short sales can be a trying process in which a homeowner is best served by contracting with a qualified real estate agent to guide the way.

For the 4th post in this series, be sure to check out this blog on Wednesday, March 23rd.

During a negotiation, banks are looking for the best alternative to foreclosure. Since they profess to wanting to keep the homeowner in the property, the first option that they recommend is usually a loan or mortgage modification.

Mortgage Modification
A mortgage modification involves the reduction of one of the following: the interest rate on the loan, the principal balance of the loan, the term of the loan, or any combination of these. These typically result in a lower payment to the homeowner and a more affordable mortgage.

• Benefit: Reduces the payment a homeowner is required to make on a monthly basis and may reduce the principal balance of the loan
• Drawback: Requires that a homeowner ‘qualify’ for the new payment and will often require full documentation. Lender has to be actively pursuing modifications.

This is a very difficult and exhausting process for a homeowner. The loan modification application is often 50 – 100 pages and requires the homeowner to provide extremely detailed documentation of every expense.

If you have not already started the process of looking into loan modification, let me know and I’ll start you down that road with your bank.

Assuming that this is not an option, banks will look at the following alternatives:

Reinstatement
A reinstatement is the simplest solution for a foreclosure, however it is often the most difficult. The homeowner simply requests the total amount owed to the mortgage company to date and pays it. This solution does not require the lender’s approval and will ‘reinstate’ a mortgage up to the day before the final foreclosure sale.

• Benefit: Does not require the mortgage company or lender’s approval.
• Drawback: Requires that a homeowner be able to pay all back payments, fines and fees.

Forbearance or Repayment Plan
A forbearance or repayment plan involves the homeowner negotiating with the mortgage company to allow them to repay back payments over a period of time. The homeowner typically makes their current mortgage payment in addition to a portion of the back payments they owe.

• Benefit: Allows the homeowner to make back payments over time.
• Drawback: Requires that a homeowner be in a financial position to pay not only their current mortgage, but also a portion of the back payments owed. Some mortgage companies will require a homeowner to ‘qualify’ for forbearance.

Rent the Property
A homeowner who has a mortgage payment low enough that market rent will allow it to be paid, is able to convert their property to a rental and use the rental income to pay the mortgage.

• Benefit: Allows homeowner to keep property indefinitely.
• Drawback: The issues that can arise with a rental property are many, and rent often does not cover the full cost of property ownership and maintenance.

Deed in Lieu of Foreclosure
Also known as a ‘friendly foreclosure’, a deed in lieu allows the homeowner to return the property to the lender rather than go through the foreclosure process. Lender approval is required for this option, and the homeowner must also vacate the property.

• Benefit: Many times in a successful deed in lieu, the lender will forego their right to a deficiency judgment.
• Drawback: Requires that a homeowner vacate the property, and a deed in lieu may be reported to credit bureaus as a foreclosure.

Bankruptcy
Many have considered and marketed bankruptcy as a ‘foreclosure solution,’ but this is only true in some states and situations. If the homeowner has non-mortgage debts that cause a shortfall of paying their mortgage payments and a personal bankruptcy will eliminate these debts, this may be a viable solution.

• Benefit: Does not require lender approval.
• Drawback: If a homeowner cannot afford their mortgage payment, a bankruptcy will only stall—not stop—the foreclosure process. Bankruptcy can be costly, is damaging to credit scores, and can only be declared once every seven years.

Refinance
If a homeowner has sufficient equity in their property and their credit is still in good standing, they may be able to refinance their mortgage.

• Benefit: In some cases, this will lower payments.
• Drawback: In today’s market, a refinance will almost always raise mortgage payments, and is an expensive process.

Servicemembers Civil Relief Act (military personnel only)
If a member of the military is experiencing financial distress due to deployment, and that person can show that their debt was entered into prior to deployment, they may qualify for relief under the Servicemembers Civil Relief Act. The American Bar Association has a network of attorneys that will work with servicemembers in relation to qualifying for this relief.

• Benefit: If qualified, this will lower payments on all consumer debt in addition to mortgage payments.
• Drawback: Must be active military to qualify.

Sell the Property
Homeowners with sufficient equity can list their property with a qualified agent that understands the foreclosure process in their area.

• Benefit: Allows homeowner to avoid foreclosure and harvest some of their equity.
• Drawback: In many cases today, homeowners do not have sufficient equity to sell their property without negotiating a short sale (see next solution). 

This represents only a summary of some of the solutions available to homeowners facing foreclosure. The most common option in today’s marketplace is a short sale.

For the next post in this series, be sure to check this blog page on Friday, March 18th.

First and foremost, it is important to remember that banks negotiate. Every item is negotiable when a bank is looking at an alternative to foreclosure. Banks do not wish to foreclose. I met with a Wells Fargo negotiator this week and according to her, the foreclosure process costs the bank an additional 10 – 15% more than a short sale.

The first rule of negotiation is, “know your enemy”. In order to understand how to negotiate with banks, it’s critical you know what is going on with them. Did you know that 1 in 7 homes in America are currently underwater? Underwater is another way of saying that the homeowner owes more than the house is worth. In California, the ratio is more like 1 in 4 homes that are underwater. There are millions of homes in California so you can imagine how many problems the banks have. Millions of problems! They are inundated with hundreds of thousands of applications for short sales, loan modifications and all the other options available (see below for details on options).

One major difficulty for banks is simply being able to respond to all of the people trying to get in touch with them. I just spoke with a bank negotiator at Bank of America who used to service 600 applications for short sales. She said that a sharp negotiator might be able to handle 100. 600 is impossible! Another problem is fraud. There are tens of thousands of cases where people are doing a short sale and secretly having their family member buy the property at a reduced price and then selling it back to the original owner. This is a sneaky way for the homeowner to get a principal reduction. And it’s illegal. Finally, to add to these problems, even a normal real estate transaction has multiple opportunities for a law suit. Distressed sales are even more litigious!

So banks have problems. Banks actually need US to hold their hands through the short sale process. In a sense, we have to make it very easy for them to approve our sale and free the homeowner of all future financial liability. Banks employ a very paper-intensive, time sensitive approach to negotiation. I have found that when I am extremely pleasant with my negotiator AND I make his or her job easy, I get what I want for my client.

For the next post in this series, be sure to check out this blog page next Wednesday, March 16th.

It turns out that many households aren’t exactly tightening their wallets and using all their saved cash to pay down debts. They’re simply defaulting on them.

Total household debt fell by $77 billion during the three months ending in June, but nearly half of that decline stemmed from bank charge-offs of residential mortgages, credit cards and other consumer loans, according to Capital Economics Group. In a recent report, the London-based economic research consultancy found that this isn’t necessarily a new development. Household debt has fallen every quarter since the beginning of 2008, leaving it $473 billion below the peak, which is the equivalent of reducing debt at every household by $4,200.

Shedding away debt – however it’s done – is critical to the overall health of the economy. But the wave of households de-leveraging by default is worrisome. And many Americans are using their new savings to buy up U.S. Treasuries instead of devoting it all toward paying down debt. During the past year, households bought 42% of the new Treasury debt issued, equal to about $616 billion and far more than the $432 billion absorbed by foreign investors.

This will probably prolong the de-leveraging process further, say analysts at Capital Economics. Until households can meaningfully shed off debt, it will likely be one of the key factors stalling economic growth and the job market as many companies wait for GDP to pick up significantly before hiring more workers.

Cutting plastic or cutting credit card bills?  The wave of defaults on mortgage loans is no surprise, given the rise in foreclosures and the fall in housing prices.  But perhaps even more troublesome is the increase in consumer defaults on credit card debt.

It’s been widely reported that debt levels on credit cards have fallen – at one point surprisingly dropping below the level of outstanding student loans, according to an August story in The Wall Street Journal.  But consumers haven’t exactly discovered a newfound sense of frugality.

In 2009, outstanding credit card debt dropped by about $93.2 billion compared with the previous year, according to a report from CardHub.com, a credit card comparison website.  This might sound like good news, but the reality is that the majority of the drop — $81.6 billion — is due to Americans defaulting on their debt.

So the real decrease is much smaller – about $11.6 billion – and much of that came during the first quarter when many people used tax returns to pay down card debt. At this rate, CardHub.com predicts consumers in 2010 will actually accumulate at least $26.2 billion more in credit card debt over last year.

“It’s alarming,” CardHub.com CEO and founder Odysseas Papadimitriou says. “We cannot revert to pre-recession debt levels.”

Household debt might generally be falling, but at what cost? Those who default, depending on the size of the loan, take sizeable hits to their credit background, which could impact the terms of future loans.

So while consumers’ debt burdens might technically be less today than they were just a few years ago, at least on paper, the burden is still quite heavy on the minds of consumers.

Mac could transform mortgage

landscape

The Obama administration aims to phase out Fannie Mae and Freddie Mac and to cut the FHA’s market share.

By Kenneth R. Harney

February 20, 2011

Reporting from Washington —

Fixed 30-year mortgage rates in the 5% range? Minimum down payments below 5%? Jumbo-sized home loans for high-cost markets at regular interest rates? Kiss them goodbye — possibly sooner than you might guess.

Take a snapshot of today’s mortgage market conditions and frame it. It’s highly likely you’ll never see anything like these favorable combinations of rates and terms again. That’s the inescapable conclusion emerging from the Obama administration’s white paper on possible remedies for the two ailing giants of housing finance — Fannie Mae and Freddie Mac — along with events underway in the national economy.

The administration’s long-delayed housing report, released Feb. 11, drew a mix of catcalls and mild applause. Apartment developers praised the report’s emphasis on expanding opportunities for people to rent their housing as opposed to the idea that homeownership is something for everybody.

Big banks and their allies in Congress welcomed the prospect that Fannie Mae and Freddie Mac — which together account for about 60% of the mortgage market but have cost taxpayers a net $150 billion in bailout money in the last three years — will be heading into oblivion. Consumer and real estate industry groups lamented the phase-out of Fannie and Freddie, both of which supplied steady streams of mortgage money for decades, their recent crashes notwithstanding.

The report offered not only options for Congress to consider in winding down the two companies but also recommendations on more immediate transition measures to achieve a smaller federal footprint in the mortgage market. Some of these transitional steps require no congressional approval, and therefore are likely to affect borrowers and home buyers in the months ahead. Factor these changes into your timing for any loan application or purchase you’re contemplating this year:

•Higher insurance fees on Federal Housing Administration mortgages — another quarter of a percentage point on annual premiums. That’s vitally important to consumers with moderate incomes and assets, especially in the African American and Hispanic communities where FHA loans are the dominant route to homeownership. The report also hints at a possible increase in minimum down payments for FHA loans — currently just 3.5% — but provided no specifics. Congressional approval would be required for any change.

•Significant reductions in maximum loan amounts later this year for both FHA and conventional loans eligible for purchase by Fannie Mae or Freddie Mac, unless Congress votes to retain the current statutory $729,750 limit for high-cost areas before its expiration Oct. 1. Loans above each local market’s limit — whatever the reduced ceiling turns out to be — will be considered jumbos and will come with higher interest rates from private lenders.

•Raising the fees Fannie Mae and Freddie Mac charge lenders to guarantee pools of their mortgages for resale to bond investors. Lenders will automatically pass those on to borrowers as a cost of doing business. The report also calls for raising down payment requirements at Fannie and Freddie to 10%.

•Retaining the controversial and costly add-on fees charged by Fannie Mae and Freddie Mac that can increase the expense of obtaining even a moderate-size mortgage by thousands of dollars. These add-ons extend to applicants with FICO credit scores of 800 and above who are making substantial down payments. The white paper actually applauded the imposition of these fees, calling them one of several first steps on the path to weaning consumers off reliance on Fannie and Freddie for mortgage money.

The administration not only wants to wind down the two companies over the coming several years but also to severely reduce the size of the FHA’s role — cutting its market share from around 30% today to as low as 10%. Where will the buyers who depend upon the FHA for affordable financing turn when that sharp cut has been accomplished? That’s not clear.

The white paper makes an oblique reference to a major issue bubbling on the back burner that could also push rates up: Regulators are debating what should be a “qualified residential mortgage” under the terms of last year’s financial reform legislation. Loans that aren’t qualified — in terms of down payment size and other criteria — will require extra investments by lenders when they pool them into bonds; that in turn could raise rates for nonqualified mortgages as much as 3 percentage points.

One proposal is to make 20% to 30% down payments the minimum to meet the qualified test. Under the worst-case scenario, you’ll be charged significantly higher rates if you have only enough for a small down payment.

Bottom line: Get ready to pay more for mortgages, no matter what happens to Fannie Mae and Freddie Mac.

kenharney@earthlink.net

Distributed by Washington Post Writers Group.

Copyright © 2011, Los Angeles Times

In California, prior to Senate Bill 931 being signed by Governor Schwarzenegger, once a seller has refinanced their mortgage, whether it is a cash out refinance or simply a refinance to a lower interest rate or term, the loan becomes a “recourse loan”, meaning the bank can pursue the seller after the short sale for the deficiency, unless they state in writing that the debt is settled on the short sale approval.

Many banks have been unrelenting in their short sale approval letter verbiage on refinances, saying they will follow state laws to pursue a deficiency judgment. California lawyers sometimes argue that even if the loan was purchase money and exempt from a deficiency, such language in the short sale approval letter allowed the bank to pursue sellers after closing a short sale because the approval letter changed the status of the loan.

California short sale sellers with a first mortgage will no longer have to worry about a deficiency judgment after a short sale.

Starting January 1, 2011 a seller’s first trust deed lender cannot obtain a deficiency judgment against the seller after a short sale. Providing written consent to a short sale will obligate the first trust deed lender to accept the sales proceeds a full payment and discharge of the remaining amount owed on the loan.

This law pertains to first trust deeds secured by one-to-four unit residential properties and does not have to be owner occupied. It does not apply to junior liens and does not limit the lender from seeking damages for fraud or waste by the borrower. Senate Bill 931-Deficiency Judgments-creates California Civil Code section 580(e).