Several weeks ago we wrote two-parts of a three-part series on foreclosure
fraud, i.e. scams perpetrated against troubled homeowners ostensibly
to help them save their house or at least avoid legal action but are actually
intended to strip off the home's equity or take legal title to the property.
Fraudsters Finding Ways to Exploit Bubble Burst, September 17; and Foreclosure
Scams Can be Complex Enough to Fool Most, Sept. 24.)
While it is pretty depressing to see the lengths to which some people will
go to profit from another's misfortune, there are people who do legitimately
seek to rescue homeowners who are delinquent on their payments.
The first of these are credit counselors. These are organizations, usually
non-profits, who represent borrowers in negotiating with their mortgage companies.
It is a confusing process and the people who work for these agencies are knowledgeable
about the process. BUT, again there are a lot of profiteers out their operating
under the guise of helpers who seek only to help themselves.
For a list of legitimate credit counselors visit the following websites:
The second group is a subset of the group we have been warning about; persons
or companies that seek to purchase your property to get a deal. The trick is
that some of these buyers are actually legitimate. They try to purchase distressed
properties through what is called a short
sale; i.e., to convince the mortgage company to settle the debt and release
the mortgage for less than is owed on the loan.
This is tricky is several ways. First of all, it may be hard to tell the honest
foreclosure investor from the scam artist, second, mortgage companies are not
often eager to participate in a short sale, and even if they are so inclined
the process can be cumbersome and, particularly now, time consuming as loss
mitigation specialists are buried
in short sale requests.
Some of these short sale investors are very skilled at working through the
process with mortgage companies, others may not know the ropes any better than
the homeowner who is being foreclosed, and some will utilize a third-party service
that, for a hefty fee, negotiates with the mortgage lender. In the latter case
the investor may request a good-faith payment from the homeowner to test his
sincerity and insure his cooperation before paying the third party. This should
not be a large amount, perhaps $200 or $300.
Every mortgage lender has its own process for handling requests for short-sales,
but in general it works like this.
The homeowner receives an offer to purchase, usually below both market value
and the mortgage balance. The homeowner should check the would-be purchasers
references (other homeowners who have sold to the investor or perhaps references
from the Better Business Bureau or the purchaser's bank.) The first document
in the process is a signed purchase agreement clearly stating the offer. The
homeowner is generally not permitted to pull any money out of a short sale and
lenders will often refuse to pay a real estate commission but some experienced
investors will sign a side deal to purchase personal property such as appliances
or window treatments or will pay moving expenses to help the homeowner get started
Once the lender is approached with the offer it is going to require
most if not all of the following from the homeowner.
- A "hardship" letter which details why the homeowner is
unable to continue making his mortgage payments or pay the loan in full.
- An authorization to release information so that the purchaser can negotiate
directly with the lender to purchase the house;
- A financial statement detailing assets, income, and liabilities;
- The last two years federal tax returns;
- The last two pay stubs for each signer of the mortgage;
- The last two bank statements
- A copy of the listing agreement and/or sales flyers and ads if the
house has been for sale. Some lenders will insist that the house be on the market
for a period of time before they will consider a short sale.
- If there is a second mortgage involved, a letter from the junior mortgagee
agreeing to the short sale (the junior lender will typically not receive any
proceeds from the sale.)
The lender will commission a BPO
or broker's price opinion which is cheaper and less thorough than an appraisal
in order to determine the fairness of the offering price.
Most lenders will not deal with a partial short sale package
and will refuse to even look at a package that is not complete. Most will, once
they receive a complete package, put the actual foreclosure on a temporary hold
however some (notably HSBC) refuse to stop the process so the homeowner would
be wise to move as quickly as possible to assemble the relevant information
and get a hearing from the lender.
We have anecdotal information that some loss mitigation specialists are coping
with up to ten times the normal number of short sale requests so the process
may take a while. And there are some other caveats.
A completed foreclosure will wipe out all liens that are secondary to the first
mortgage - i.e. home equity lines, second mortgages, condo
fees in those state that do not grant condo loans super-lien status. A short
sale does not do this. We are hearing stories of second mortgage lien holders
insisting on receiving payments on those mortgages even after the sale is complete.
Also, unless pending federal relief legislation is enacted, the homeowner will
receive a 1099 form from the lender for the amount of the debt
that is forgiven in the short sale. Federal taxes will be due on this amount
which is considered "other income."
So why even bother going through the aggravation of a short sale? First of
all, while having a delinquent loan will definitely impact your credit report
and score it will not do so as much damage as a completed foreclosure. Second,
the short-sale usually prevents the lender from proceeding against the homeowner
in court to obtain a judgment for any deficiency after the property is sold
at foreclosure auction (something to look for in the agreement.) Last, if the
short sale package is submitted before the foreclosure is initiated it may keep
the borrowers name out of the paper which can be humiliating.