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

More Sellers to Qualify for HAFA Short Sales after 6/1/12

Posted on 30. Apr, 2012 by ctlms in Foreclosures, My Blog, Real Estate, Short Sale

More sellers, including investors, may qualify for HAFA after June 1, 2012!

The Treasury Dept issued an updated Directive to HAMP and in turn HAFA back in March with an effective date of 6/1/12

Some welcomed news is coming to short sales, unless Fannie Mae or Freddie Mac owns your loan.

There are currently 3 different versions on the Home Affordable Foreclosure Alternative (HAFA) short sale program.  Fannie Mae and Freddie Mac each have their own program guidelines, and then there is Treasuries version that covers everyone else.

The Treasury version has been ever evolving since inception and for the most part those changes have been positive.

Up until now the 2 biggest reasons that borrowers did not qualify for HAFA were either that the property had been non-owner occupied for too long or the borrower's mortgage payment was lower than 31% of their Gross Income.

Both of these issues are being addressed in the upcoming changes.

Owner Occupancy

With these new revised guidelines there will no longer be any occupancy requirements for HAMP modifications or HAFA short sales for Non-Fannie Mae or Freddie Mac owned loans.  This means that even investor owned properties may qualify.

31% Gross Income Rule

This guidelines still exists.  However a new Tie 2 eligibility has been added that can be used to further evaluate borrowers whose mortgage payment is already below 31% of their gross income.  This will allow for more of their overall financial picture to be considered when determining if there is a financial hardship.

The bottom line is more non-owner occupied properties including properties that were never owner occupied and more financially strapped borrowers will qualify for HAFA.  HAFA gives a seller the best chance of walking away from a short sale with full forgiveness of debt.

Sean Wilder