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Credit Counselors and Short Sales May Bail Out Mortgagors
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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.
(See Mortgage
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
again.
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.
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Comments (15)
| Old thread, evolving area of the marketplace. Read the blog referenced above - specifically the June posting on the Truth About Short Sales & Foreclosures! |
|
| Above Posted By:
Vicky Chrisner
| Sat, 5 Jul 2008 10:00:10 EST |
| My condo in LV has been foreclosed by the first lender. Now the second has been sold to a collection agency, called Faslo Solutions. They have been calling me and wanted to collect a payment. Please advise. |
|
| Above Posted By:
Hope
| Wed, 18 Jun 2008 10:33:58 EST |
| Regarding short sales bringing down values. I am a mortgage broker in SF bay area and according to a very experienced appraiser they can not use properties that were sold in short sale as comparables. That means it should not affect refi values. |
|
| Above Posted By:
greg
| Mon, 28 Jan 2008 13:03:34 EST |
| Sounds like the homeowner is still stuck with a huge debt if the IRS sticks them with the difference between the loan payoff and the agreed to purchase price! How long does the homeowner have to pay that debt? This is the IRS...if the homeowner doesn't pay the debt, he goes to prison! Or do I have this all wrong? |
|
| Above Posted By:
Steve
| Mon, 12 Nov 2007 15:23:16 EST |
| One point the article does not address is the cost to the lender to foreclose. Lenders are stuck with properties that need a ton of work, in a free-falling market, and they are represented (usually) by completely unprepared REO Portfolio managers. If the lenders stand by and wait for regulator or market shifts to bail them out - it won't happen. They will all go under. The adjustable rate alarm clock is just about to go off - and there is no snooze button. |
|
| Above Posted By:
Rich
| Wed, 7 Nov 2007 01:21:29 EST |
| Stop spreading Negativity. The investor will make a profit yes but instead of the house foreclosing it is sold at a cheaper price then usually re-sold within a month or two for close to top dollar. Obviously something that will benefit people in the neighborhood. Or the purchaser may be a first-time home buyer looking for a 1st home at a good price and is willing to do some renovations. Good for 2 groups of people so far and I can keep going. Shorts are better than sitting around doing nothing. |
|
| Above Posted By:
Scott
| Mon, 5 Nov 2007 06:02:46 EST |
| Sorry, I stick by my posting. In reviewing underwriting criteria for major subprime lenders, there will be very little deference given to the short sale in lieu of a formal foreclosure. There will be some leeway given and that will increase as it ages out but it will greatly impact the borrowers credit. It is the best case scenario of the two but a win-win, benefit-benefit, it is not. If you want to categorize it that way, it is a "win-lose less" scenario. |
|
| Above Posted By:
Watchdog
| Fri, 2 Nov 2007 11:10:53 EST |
| Like literally millions of families facing foreclosure, it all began with unscrupulous people knowing breaking laws to put together a sub prime package for sale to the likes of Merrill. Back to the part about breaking laws. Why have there not been any calls for prosecution? Here in Florida, thousands will lose their homes and it is no less than any other type of grand theft. We cannot play this like monopoly any more. If you must take my home move the criminals into a new home, prison. |
|
| Above Posted By:
Jim Hardison
| Wed, 31 Oct 2007 13:06:13 EST |
| I am a lender in the midwest and unfortunately each investor we work with views 120 lates as foreclosure. It is in the homeowners best interest to sell the property prior to going 120 days down. But the reality is that no one involved in this situation benefits other than the investor. The homeowner loses any equity they may have had in the home, the lender takes a significant loss on the loan and it is an excellent point that these short sales will perpetuate declining real estate values. |
|
| Above Posted By:
Anonymous
| Tue, 30 Oct 2007 05:56:37 EST |
| Short sale investors are now crawling out of the woodwork. the problem is, I have not seen to many that actually know what they are doing. This can cause more headache then it's worth sometimes. Just as a side note, you may want to check with your local real estate office to see if they have a short sale expert on staff. The lender pays any real estate commissions and costs, so it will cost you nothing to try that route. At least you have a better chance that it's reputable. |
|
| Above Posted By:
Frank Wible
| Tue, 30 Oct 2007 04:57:45 EST |
| A foreclosure is absolutely not viewed the same a 90 or 120 day late. A foreclosure stays on your 'record' forever. Fannie Mae Form 1003, page 4 of 5, Declarations, question e.: "Have you directly or indirectly been obligated on any loan which resulted in foreclosure, transfer of title in lieu of foreclosure, or judgment?" If a homeowner has had catastrophic events in their lives to create a situation where they no longer can handle their mortgage payment, wouldn't a short sale be the best alternative for all concerned? A 'benefit-benefit' scenario is formulated with a short sale. Yes this is a terrible time we are facing right now, but homeowners must protect themselves and their families as best they can. No one wants to be a statistic, but with loans recasting, home values dropping and lenders disappearing, individuals are being dealt a hand they did not expect. The family is still displaced, yes, but with more dignity than if they were forced through a formal foreclosure. |
|
| Above Posted By:
Robert
| Tue, 30 Oct 2007 03:38:28 EST |
| I believe that the counseling agencies will have a major problem reaching the millions at risk. The most effective counseling is doing one-one counseling. However, since this is time consuming and labor intensive, it would be impossible to reach these borrowers in time. I suggest that the borrowers should be given a web-based tool which should act as a self-contained advisor. This will accomplish the need to reach many in the shortest time. |
|
| Above Posted By:
Prof. Samuel D. Bornstein
| Mon, 29 Oct 2007 14:02:25 EST |
| Last person to comment. You are so right |
|
| Above Posted By:
charles
| Mon, 29 Oct 2007 12:38:40 EST |
| In response to Watchdog's comment regarding short sales. Short sales are most often a win-win situation for everyone involved. The homeowner avoids the daunting task of foreclosure, and NO, lenders do not perceive a 120 days late on a mortgage the same as a foreclosure, it is only a late. The note holder saves the cost of forcing a foreclosure, and able to satisfactorily close a nonperforming account, and without going into an economics lesson, this is a good thing. |
|
| Above Posted By:
Sherry Brockenbrough
| Mon, 29 Oct 2007 12:13:32 EST |
| I think that people need to stop looking at a short sale as something that bails out a homeowner. The only thing that it does it prevent a formal foreclosure from being on someone's credit. The delinquency is still reported and most lenders will view a 90+ or 120 day late the same as foreclosure. The homeowner and the family is still displaced and the sale will effect the prices of other homes in the area. |
|
| Above Posted By:
Watchdog
| Mon, 29 Oct 2007 10:23:00 EST |
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