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Short Sale Perspective

I asked if I could publish this article about short sales by Danette, because she has a unique view of the process as an escrow closer. –Lynette

Short Sales

By Danette Johnson, of Ballard Escrow

A short sale is when a seller doesn’t have enough equity in their property to fully pay off the underlying mortgage debt and negotiates a reduced payoff with one or more lenders holding a security interest in the property.  So long as the lender agrees to accept less than the amount needed to pay the debt in full, the seller is able to proceed with the sale of their property — shorting the lender or lenders the full balance due under the terms of the original loan.

With real estate values declining, sellers may consider a short sale as the answer to avoid foreclosure.  Anyone considering a short sale — sellers and listing agents and perhaps more significantly buyers and selling agents – should be educated in the world of short sales to formulate their plan of attack.

It is important to understand that a short sale does NOT protect a seller’s credit rating.  Once a payment is late or missed, the lender may report the late payment to the credit agencies. Upon completion of the sale, it may appear as a “charge off” or a “pre-foreclosure” on their credit rating.  Hence, short sales not only adversely affect the seller’s credit rating, but sellers need also be aware that they remain liable for the unpaid balance of the loan or loans being paid short unless the lender(s) agree in writing to excuse payment and confirm in writing that the debt is paid in full. Without something in writing from the lender confirming that all further payment of debt is excused, sellers may find that one or more of their lenders, post closing, will pursue payment of any unpaid loan balances by obtaining a judgement or a lien. Short sale approvals are also frequently conditioned upon the seller’s agreement to pay some portion of the remaining debt after closing.

Buyers need to be educated about the process of a short sale transaction.  Buyers may see a property advertised as a “short sale” and believe that property will be sold at bargain basement pricing, and therefore a wonderful opportunity for them.  However, buyers beware,  as short sales are plagued with delays and seemingly endless extensions of closing dates.  We find that more often than not, buyers end up extremely frustrated with the constant delay and re-negotiations by the lenders and finanlly just walk away from the transaction.  And, because of the fluctuating closing date, even buyers with the patience to wait the process out should be wary when locking in their financing until absolutely certain that their closing date will accommodate their lock-in deadlines. With interest rates again predicted to fall to record lows, short sales could cause a buyer to miss out on a very low interest rate while waiting out the lender’s approval of the short sale.  Interest rate fluctuations can mean the difference in qualifying for a buyer’s dream home or losing the opportunity to take advantage of the low rates anticipated for 2009. These frustrations should give pause and lead selling agents to question the wisdom of subjecting buyers to a short sale.

It would be helpful if our industry had a list of specific requirements that lenders consider when approving a short sale transaction.  If such a list existed, more certainty in the process would exist, and it would be easier to evaluate the property up front. To date we have found the approval process to be riddled with tentative approvals, then new conditions, and out of nowhere a new department or supervisor steps in to review what was believed to have been a pre-approved short sale. Unfortunately the work-out departments within the lending institutions are currently overwhelmed and appear to be under-trained, underpaid and under-valued by the lending institutions as a whole.   With lending regulations in turmoil and lenders continuing layoffs, short sales with preliminary approval may never reach final approval. Our experience over the last couple of years at Ballard Escrow tells us that short sales require a minimum of six months to close.  We are also finding that short sale transactions are closing with very low success rates of five to ten percent.  That means 90-95 percent are rescinded, often as a result of the buyers simply giving up and perhaps taking themselves out of the market altogether as a result of the negative experience of dealing with a short sale.

All of these issues combined should cause everyone to question the wisdom of dealing with properties that are subject to a short sale.  Be ready for a fight, or run for your life.  The choice is yours.

Foreclosure Plan Summary from NAR

The Obama plan is designed to help stave off foreclosure for 7-9 million families by restructuring or refinancing their mortgages.  This will keep families in their homes, keep communities stable, and strengthen confidence in Fannie Mae and Freddie Mac. 

The Obama Plan for Homeowner Affordability and Stability

Feel free to call or email for more details.

Lynette Hensley
Associate Broker

Rates at 4.375%

WOW!

Big changes, Small changes

The financial world is having its woes, and many of us are affected by it.  I read today that even Circuit City is reporting dismal quarterly earnings, so the Wall St mess is definitely encroaching on Main Street.

I came into the market as a real estate agent and loan officer in 1999.  For the first time in that 10 years, I am going to leave the mortgage work to others.  I have a couple of compelling reasons: 1) changes in mortgage lending rules are changing so fast that I am going to recommend our clients to professionals who are focused only on loan originating, 2) FHA loans are some of the most competitive loans on the market today and I cannot originate them (real estate agents cannot originate FHA loans for their own clients). 

Larry and I are enjoying our real estate work, finding houses for folks that really suit their needs and wishes.  This is a wonderful way to share our interests, time and individual strengths and talents and to help people at the same time! 

In our commitment to serving our clients the best way possible, we have built a network of lenders as well as other professionals that are utilized in a real estate transaction.  We are also commited to coordinating with our clients chosen vendors, and welcome new relationships.

Lynette Hensley
Real Estate Broker

Fed cuts short term interest rate by .5%

The Fed cut the short term interest rate by .5% today in a move to improve the housing market. The stock market responded with immediate gains of about 1.5%, showing a hopeful outlook for recovery and a soft landing for the wider economy.

From CNN Money, “The federal funds rate, an overnight lending rate that banks charge each other, is important since it influences the amount of interest consumers must pay for various types of debt, such as credit cards, home equity lines of credit and auto loans. The rate cut should help some beleaguered home borrowers who are set to see monthly payments on adjustable rate mortgages rise later this year.”

The immediate response among the lenders that I work with? Rates dropped in many conforming loan products. This should allow people who need to refinance to do so with a very attractive rate, and move into a long term product, especially for those who want to stay in their homes for the long haul.

Mortgage Developments

 This past couple of months found a number of lenders closing their doors, and others including the largest lender in the nation, Countrywide, in tight circumstances.  Those that are still with us have made huge changes in the loan programs they are offering.  Gone are the days of low interest stated income, stated asset, 100% financing, or loans that are likely to lead to borrower default. 
This is a good thing

Better quality mortgage products equals a better financial outlook for each of you, our clients, assuring the future affordability of your homes.
I always watch daily  interest rates on conservative products—30 year fixed, for example has been hovering around 6.25-6.5%.  A very good rate.  If you are a W-2 worker, with good credit and reasonable income, assets and even a small down payment, you are the kind of borrower that lenders really want right now, and they show it by offering low rates to you.  If you are about ready to refinance, this would be a great one to consider.
Already, our lenders are releasing modified versions of some of the more versatile loans like the Option Arm, and Jumbo Loans with Stated Income. 
Reverse Mortgage:  a better tool than you might think
As the nation ages and baby boomers reach that magic age of 62, more and more of us will be interested in a product known as a reverse mortgage.   I am certified in reverse mortgage origination. 
In a nutshell, a reverse mortgage is a cash flow/income tool. Unlike ordinary home equity loans, a reverse mortgage does not require repayment as long as the borrower lives in the home. Lenders recover their principal, plus interest, when the home is sold or refinanced by the heirs. The remaining value of the home goes to the homeowner or to his or her survivors. If the sales proceeds are insufficient to pay the amount owed, HUD will pay the lender the amount of the shortfall.
To know more about this product or to consult with Lynette regarding mortgage financing, please call or email us.

Hope for the mortgage market

GSE Changes Could Ease Mortgage Concerns
The two secondary mortgage market giants Fannie Mae and Freddie Mac could help ensure stability in conventional mortgage markets if the government would temporarily lift a restriction on how much in mortgages they can hold in their portfolios, NAR told a federal regulator in a letter sent jointly with the National Association of Home Builders and the Mortgage Bankers Association.

The main function of the two government-sponsored enterprises is to ensure mortgage market liquidity by buying mortgages from lenders and bundling them into securities for sale to investors. But Fannie Mae and Freddie Mac also buy and hold a portion of the loans in their own portfolios.

The companies’ regulator, the Office of Federal Housing Enterprise Oversight, limits this portfolio activity to a combined $1.4 trillion. Easing that limit would send a powerful signal to lenders and borrowers that mortgage markets will remain flush with liquidity, NAR says.

The Financial Services Roundtable, which represents large financial institutions, has sent a letter to OFHEO, saying that easing the portfolio limit makes sense given recent volatility in capital markets. Fannie Mae CEO Daniel Mudd has suggested raising the limit by 10 percent.

For now, no cap hike is planned, although credit availability will be closely watched going forward, OFHEO Director James Lockhart said in a letter to Sen. Charles Schumer (D-N.Y.), who sits on the Senate Finance and Banking committees and has called for a cap hike.

— REALTOR® Magazine Online

Finding a Mortgage Is Getting Tougher

The news is all over the place–from my lenders I get daily updates with program changes, rate changes and borrower criteria changes.  Then I also hear– “bring us the mortgages anyway–we’ll get creative”.  I’ll be honest with you–it is not as easy to get a loan as it used to be in recent years.  So — OK — they’re more realistic now, and we won’t find ourselves two years later with an outlandish payment we can’t afford. 

This blurb came to me from Realtor Magazine: 

Borrowers with good credit but without 5 or 10 percent to put down are likely to be shocked at the rate they’re offered, if they’re offered a mortgage at all.

Lenders are eliminating certain products altogether as well as requiring higher credit scores and down payments, more extensive appraisals, larger savings accounts, and additional income verification.

To Washington state appraiser Bill Hanson, the shift is dramatic. He says lenders are “asking for unrelated information, such as permit numbers for remodeling work,” he says. “Before they would ask: ‘Is the home still there and does the roof leak?’”

“We thought the dust was going to settle, but instead, it just blew up,” says Mitchell Reiner, president of Mortgage Associates, a Los Angeles-based lender that does business in 48 states. “Everyone is being affected.”

Source: The Wall Street Journal, Jonathan Karp (08/14/2007)

Mortgage Market Uh Oh’s

This article came to me in a newsletter, and I share it with you:

Industry visionary Stefan Swanepoel speaks out

RISMEDIA, August 13, 2007–The public media this past week headlined the apparent surprise “mortgage meltdown” as many reported the filing for bankruptcy protection by the nation’s 10th-largest residential financer; American Home Mortgage Investment Corp., Melville, New York. Real estate, contradictory to its glamorous profile a year or two ago, was again headlined but this time as the big bad wolf. So is this the end of the real estate mortgage Merry-Go-Round? Probably not, as I haven’t heard “a certain lady sing yet!”

So what’s happened? The sub-prime mortgage meltdown has spilled over into other areas of the residential mortgage market, including the jumbo market. For example Wells Fargo, one of the nation’s biggest mortgage lenders, recently raised the interest rates on it 30-year, fixed-rate, non-conforming jumbo loans to 8%. Overall the interest rates on these so-called jumbo loans have risen nearly 25 basis points in the past week, and are up nearly 100 basis points over the last 90 days. Concerns are even entering the commercial arena as increasing speculation among the hedge fund fraternity notes that the greatest risk may be for mortgages issued at inflated price levels in the commercial real estate market.

Ah, so what do we have today? A “Mortgage Meltdown” as the media, both in print and TV, has labeled the fiasco. This is largely based on the fact that market conditions in both the secondary mortgage market and the national real estate market have deteriorated to the point that many mortgage businesses are no longer viable or as profitable as before.

But then maybe they should never have been in business or should be penalized for not preparing for a shifting market. Only the foolish could really have believed that the “gravy train” was going to ride in perpetuity. Numerous prominent blogs warned about the bubble. Yes some were a bit over the top but many spoke the truth; we were forewarned. In the 2007 Swanepoel Trends Report published back in January dedicated an entire chapter to what it titled “The Bubble, Exotic Loans, Fraud and Declining Commissions have created The Hangover.”

But just like in the new CBS reality program “The Power of 10,” greed on the side of home owners, and of course mortgage brokers, lured millions of homeowners with the promise of irresistible low monthly payments and the illusion of owning the “American Dream” – whether they where qualified for it, or not.

So now, or soon, as millions of homeowners experience the clutches of the financial vice-grip tightening we have a market that is in a quandary. The result will most likely be a continuing rise in the number of delinquencies and foreclosures, particularly among low-income borrowers in conjunction with a declining housing market in many areas across the county.

With an estimated $130-billion in mortgages that have payments being reset this year, the adjustable-rate mortgage, once a solution, is now a ticking time bomb. These homes seemed affordable when house prices soared and home equity credit lines were the ticket to luxury cars, swimming pools and overseas trips.

But now the Pied Piper has come to collect. You can’t live in “Never-Never Land” forever. Borrowers are now getting a lesson in what the words “adjustable,” “deferred” and “balloon” really mean. The resulting ripple-down effect is placing even more pressure on declining property values.

However, what is surprising is that in those areas where housing prices have already stalled or fallen, many people appear to be truly flabbergasted and shocked; looking for someone to blame. Valid or not, Realtors as well as mortgage brokers may carry the proverbial “bulls-eye” on their back as many search for a scapegoat.

Realistically of course, house prices had to come down. It is simple economics 101 – supply and demand. If there are more sellers than buyers the market will be flooded with homes that simply won’t sell until prices drop and they become affordable again for the early phase speculators and opportunists.

According to Allen Fishbein, director of housing policy for the Consumer Federation of America, “What happened in a lot of expensive real estate markets is that first-time home buyers who felt they could not afford a home otherwise, took on a loan that had lower monthly payments than a traditional mortgage would have.”  That means borrowers who can’t afford their payments can’t count on being able to sell their homes, while lack of price appreciation means many don’t have the equity in their homes they need to refinance at a good interest rate. Both factors make foreclosures more likely.

But maybe it’s not all that bad as the doomsayers say it is. According to the Mortgage Bankers Association, overall, 4.41 percent of mortgages are delinquent, up from 4.34 percent a year ago, but lower than they were three years ago. So, that means 96 percent of mortgages are being paid on time. That’s not too bad – we are still far from a real “Meltdown” as the media painted our industry this past week.

Good it’s not -but a meltdown it isn’t. Let’s just say we are in a much needed correction for a real estate and mortgage market.  Markets that have been too strong for too long.  At the same time, however, the market creates numerous opportunities to grow a business and gain market share. As with any trend or change, knowledge is the key and being pre-warned is also strategically smart.

How much interest do you really pay?

Interest and Tax Deductions

If you itemize deductions on your federal income tax returns, you may be able to deduct all the interest you pay on your mortgage loan.  (We are not tax professionals. Please consult one for your own situation.)  I have created a table that shows actual interest rates you may be paying on your mortgage and the effective interest rate based on your tax bracket.  For example, you have a 7% mortgage rate and your tax bracket is 15%, then your effective rate is actually 6% after interest deductions.

Link to Table