Short Sale Update 2015

Posted on 20. Mar, 2015 by ctlms in Blog, Foreclosures, My Blog, News, Real Estate, Short Sale, foreclosure

The state of short sales in 2015

It's a whole new world out there.

The loss mitigation industry, policies and procedures, and the general landscape of mortgage servicers is constantly changing.  Keeping track of all these changes can sometimes be a job all in itself.

In the past year the changing landscape of mortgage servicing has been in flux more than usual. Billions of dollars in Mortgage Servicing Rights (MSRs) have been being sold back and forth between mortgage servicers resulting in Servicing Transfers.  This is when the borrower receives notice that a new servicer will be handling their loan.  If you're in an active workout review like a short sale, this means at least a month delay while the loan is ported into the new servicer's systems and likely, you end up starting over from the beginning.  National Servicing Standards were put in place to eliminate these delays, but thus far they have not resulted in much success.

Another big development has been the sale of seriously delinquent loans to hedge funds by FHA, Fannie Mae and Freddie Mac.  All 3 of them have been pooling Billions of dollars in delinquent loans that are either insured by FHA or owned by Fannie or Freddie and putting them up for auction.  These are then bought by hedge funds.  This also results in the same type of servicing transfer as the MSR sales do.  However in these cases, the loans are now owned by a new investor, whereas a MSR sale is just the serving rights, the investor has not changed.

FHA, Fannie Mae, and Freddie Mac all have very details loss mitigation guidelines that the servicer has to follow and many of them have protections for the homeowner.  These guidelines require the servicer to attempt to work things out with the borrower before foreclosing.  Most also include that an approved short sale result in the settlement of the debt so that none of it is left collectible after closing.  This all goes out the window with the Asset sales.  There is talk about enforcing some level of responsibility to attempt a workout with the borrower on future sales, but past sales did not have that.  This has all resulted in some new servicers in the industry that are servicing the loans purchased by these Hedge Funds.  Many of these servicer push to foreclose or push for a deed in lieu of foreclosure rather than a short sale.  That is not to say they will not do a short sale.  But these servicers are more apt to go straight to talking deed in lieu with the borrower and totally skip the short sale option.

One positive result with some of these new servicers and these asset sales has been a shorter decision timeline than with most other short sales.  Not all are faster, but some of these new servicer care less about the financials of the borrower and more about what the offer is and what the market value is.  Remember that these loans are already seriously delinquent.  So this makes more sense since the likelihood of the borrower being able to cure the default on a seriously delinquent loan is pretty low.

HAFA short sale updates.

The HAFA short sale program also got a major update in Feb of 2015.  2 areas of the HAFA guidelines in particular were updated.

The 1st are is the amount of funds allowed to be offered to a junior mortgage.  Previous HAFA guidelines allowed for "up to $8500" to a junior lien.  $8500 was often the highest of any other short sale program, however in recent years many of the servicers have latched onto the "up to" language and have established lower caps.  These caps are typically a percentage of the Unpaid Principal Balance (UPB) of the junior mortgage.  These range to 6-10% of the UPB.  So a junior mortgage owned $30,000 may be offered just 10% or $3,000 rather than the $8500 max allowed.  This can result in the junior lien not accepting since the guidelines also require they forgive the remainder of the balance.

The updated HAFA guidelines allow for a Min of $12,000 to the junior lien.  As has happened with nearly all other HAFA guideline changes, not all of the servicers have correctly implemented the new changes and some are still trying to set a % cap that could be lower than $12,000.  These require escalation to the HAMP Solution Center and the Treasury Dept to get oversight involved.  Unfortunately that ends up causing more delays in the process.

The 2nd guideline that was updated was the Relocation Incentive that Owner Occupied sellers are eligible for on HAFA short sales.  This has been increased to $10,000 from $3,000.  I have seen no idication why this was changed.  But this is great news for those sellers who qualify.

Remember though that HAFA is now a small percentage of short sales.  Fannie Mae and Freddie Mac no longer participate in HAFA and neither do any Government Insured or Guaranteed loans.  So these are only conventional loans not owned by Fannie or Freddie and owned by participating investors and servicers.  So this is a small %.

Current Time-Lines.

Unfortunately time-lines for short sale approvals have not improved and in many cases have regressed.  Revisions to the FHA short sale guidelines in late 2013 added much complication to guidelines already riddled with red tape. So FHA loans take longer than ever to get short sale approval.

Many of the larger banks such as Chase, Bank of America and Wells Fargo have also reduced the size of their loss mitigation staff.  Over all they are seeing fewer applications for short sales due to recover on some of the country.  However areas of the country like here in CT have not seen price appreciation or job growth.  So we are seeing short sales as busy as every and the reduced staff levels at these servicers is causing delays.

In general the mortgage servicers are as dysfunctional as ever.  It is all too common for the servicers to deny files for incorrect guidelines.  I would say that we have escalate at least 75% of our files that would otherwise be denied if we did not know the correct guidelines and escalated to the appropriate dept or oversight agency.

We here are Loss Mit Services are busier than ever processing short sales.  We have added staff over the past year to help manage our caseload and not compromise our service.  We will continue to do so as needed and as always we strive to get every short sale approved.

Income Taxes

The last topic I want to discuss is the Mortgage Debt Forgiveness Act.  This act allows taxpayers who have had mortgage debt cancelled on a purchase money mortgage on their primary residence to avoid the possibility of being taxed on that debt cancellation.  This act was passed in 2007 and extended several times.  It expired at the end of 2013.  It was not extended until just a couple weeks before the end of 2014 and was retroactive to cover all of 2014.

We find ourselves again without this protection for struggling homeowners in 2015.  There are already bills in congress to extend this yet again.  However this was the same this time last year.  So though we expect that this will likely be extended again, it has yet to be and may not be till much later this year.

Sean Wilder

Time is of the Essence for Short Sales right NOW!

Posted on 01. Aug, 2013 by ctlms in Blog, Foreclosures, My Blog, Real Estate, Short Sale, foreclosure

The Mortgage Debt Forgiveness Act of 2007 Expires 12/31/13

What does this mean and why is it important?

This act is what many short sale sellers use to avoid owing any taxes on the debt forgiven by their lender in a short sale.

You see, the IRS considers any forgiven debt to be taxable ordinary income, unless you qualify for an exemption.

This exemption was signed into law in 2007 and has been extended a few times as the housing crisis has continued.  It was most recent extended at the end of 2012, when it was set to expire, as part of the last minute fiscal cliff agreement.

So far there are no signs that it will be extended again and given the budget issues of the federal government, it is very possible it will not be extended again.

So what does this mean for you?

What this means is we have to do everything we can to get your short sale closed by 12/31/13 in order for the seller to be able to utilize this exemption to avoid potentially owing thousands of dollars in taxes to the IRS.

But it is only Aug... Why worry yet?

The reason I bring this up now is that it may already be too late.  The average short sale takes about 90 days from submission of an offer to when the approval letter is issued.  This process has been taking longer in recent months, not less.  Plus, after we have short sale approval it is often 30-60 days before the buyer's financing is ready to close.

So that means we are looking at potentially a 5 month process from Offer to Closing.  We have exactly 5 months left before 12/31/13.  So for some short sales, it may already be too late if they do not already have offers, or have circumstances that may cause their short sale to take more than 90 days to get approval.

So what can you do?

The biggest take away here is that we cannot sit on our hands when marketing these properties.  If it has been 2-3 weeks at your current price and there is no reason to believe an offer is coming, it is time for a price adjustment.  Right now sellers have no time to be waiting around for the perfect buyer at the perfect price.  They need the best offer they can get NOW.

This may mean that the offer you get could be a little lower than the very best offer out there.  And yes this may mean that the offer does not get accepted and the bank counters.

If they counter the buyer has the option to raise their offer.  We can also try to dispute the bank's opinion of value to reduce the counter.  But in the end, an offer may not be accepted.  At this point the seller typically has the option to ask the bank if they will accept a Deed in Lieu of Foreclosure (DIL) and basically give the bank the property in exchange for being relieved of their obligation to repay the loan.  In this situation there is still debt forgiven and if completed by 12/31/13 the seller still may qualify for the exemption.

In a DIL there is typically no commission meaning the agents do not get paid and neither does a debt negotiator like me.  But we have to be always looking out for what is in the best interest of the homeowner, not ourselves.  To that end we have to do everything we can to get the homeowner's debt forgiven and this situation resolved for them by 12/31/13 if at all possible.  It is just the right thing to do, even if not beneficial to us in the end.

The karma will come back to you 10 fold with referrals from grateful homeowners you helped.  Trust me.  I have probably earned more income from referrals from clients we helped but never got paid for, than if each of those transactions had resulted in a short sale closing and a check, rather than some other workout for the homeowner we did not get paid for.

So please keep this in mind moving forward for the rest of this year as it is very important to your clients.

Sean Wilder

Disclaimer:  These are my opinions and nothing here should be considered to be tax or legal advice.  All homeowners should consult with a qualified attorney and CPA when completing any workout option.

The Short Sale Landscape is Changing

Posted on 22. Jan, 2013 by ctlms in Foreclosures, My Blog, Real Estate, Short Sale, foreclosure

Short sales are part of Loss Mitigation for the banks and the Loss Mitigation industry is constantly changing.

Over the past couple of months there have been a few major changes happening that affect short sales.  Not all of them for the better.

One common instance we are seeing is that many of the larger banks, that have had to settle with the government over foreclosure abuses, are service releasing large numbers of their delinquent loans to other services that are not bound by these settlement agreements.  This means many homeowners that are currently with a servicer that offers increased relocation incentives as part of that settlement, may find their loan is transferred and they no longer qualify for that incentive.  This transfer can even happen in the middle of a short sale, causing delays.

Another item we have seen, in particular with Bank of America but also with other lenders, is the forgiveness of some second mortgages in full, without a short sale.  This sounds great and is good when doing a short sale since you no longer have to negotiate with the second mortgage.  However, most of these loans that are forgiven are seriously delinquent and the banks know they will not recoup the money, or very little of it, anyway.  But by forgiving the full amount of it, they can "cook the books" for some of the foreclosure settlements requirements and take credit for a much larger principal forgiveness then they would seen from those loans anyway.

For short sales specifically the biggest change we have seen is the expiration of the Home Affordable Foreclosure Alternative (HAFA) short sale program for Fannie Mae and Freddie Mac owned loans.  HAFA still exists for the rest of this year for eligible loans not owned by the 2 GSE's.

With the expiration of HAFA for Fannie and Freddie came a new program called the Standard Short Sale program or HAFA2.  This program is open to many more homeowners than those that qualified for Fannie and Freddie's very restrictive HAFA program.  This new program also has some streamlined processed for seriously delinquent borrower with low credit scores.

However the program does have it's downside.  Firstly there is a new valuation process in use which is more commonly coming back with inflated values that are well above realistic market value.  This causes reasonable offers to be rejected because the banks are given a much higher Minimum Net requirement from Fannie and Freddie.  NAR and other industry groups are aware of this are attempting to have the FHFA , which is oversight for Fannie and Freddie, address this issue.  But for now we are stuck with it and it can be very frustrating.

Another negative to the program guidelines is that Waiver of the Deficiency balance is not guaranteed.  This means that not all sellers will be able to walk away from the remaining debt.  The new program has a detailed calculation that the lender must do to determine if the seller must be requested to bring cash to closing and/or sign a promissory note.  If the seller refused, the servicer no longer has the authority to approve the short sale on their own if the rest of the file is in line.  Instead they must send the file to Fannie or Freddie for their review and hopefully approval.  This is a negotiable term, but I have seen it go both ways already with some sellers being waived of this requirement and others having their short sales denied for not accepting.

The program is still very new so it is yet to be seen how common this is going to be, but it is here and we have to deal with it when it comes up.

Some other issues currently with short sales are seen with FHA loans. FHA is having serious cash reserve problems and may need to be bailed out.  Because of this, FHA has gotten much tighter on closing costs for attorneys and other fees.  In addition, Variance approvals for sellers that do not meet some of FHA's restrictive guidelines are being denied more often than in the past, likely in an effort to delay having to pay the insurance claim to the bank until later on when the property is foreclosed on.

A big take away from all of this is that we have to get involved with the servicer on the loan(s) as early as possible, preferably before there is an offer.  This way we can determine what kind of potential obstacles await us and can set the correct expectations for the process with all parties involved.

Sean Wilder