Wednesday, January 29, 2014

Short Sales In Question With Mortgage Debt Relief Act On Fence

The failure of Congress to renew the Mortgage Forgiveness Debt Relief Act on January 1, 2014 is leaving troubled homeowners in a difficult position regarding their future options. If elected officials in Washington don’t continue the Act, it may not be financially feasible for them to attempt a short sale.

From 2007 to 2013, the IRS provided mortgage tax forgiveness to those homeowners who participated in short sales in the Mortgage Forgiveness Debt Relief Act. Before this initiative was enacted, if a lender forgave $50,000, borrowers still had to pay the income tax on the loan. The act was a way to prevent already financially-strapped homeowners from going into serious jeopardy.

Despite bipartisan support for the bill to continue the Mortgage Forgiveness Debt Relief Act into the new year, the act has been having a hard time getting out of committee in Congress.There are currently two House of Representatives bills and one Senate bill trying to get the act passed. The current Ryan-Murray budget proposal, as it stands, does not include the Act. However, Congressman Bill Foster (D-Illinois) introduced the Homeowners Debt Relief Extension Act (H.R. 3856), which would extend the mortgage debt tax exemption that's been in place since 2007 for another two years. 

Attorney General Tom Miller, along with 41 state attorneys, recently gave his support for extending the initiative. “Without this tax relief for homeowners who really need it, families barely making ends meet will face tax bills they can’t afford,” Miller said in a statement. “Congress needs to extend it to help ensure that these families stay in their homes and the housing market recovery stays on track.” Miller also said that not extending the Mortgage Debt Relief Act could cause a serious hindrance to the improving economy.

Miller also got involved last year in the fight to continue the Mortgage Forgiveness Debt Relief Act, which was not renewed on time. After the bill finally passed, it took retroactive effect to help cover homeowners. However, as 2014 brings higher standards for mortgages as well as increased interest rates, the pressure is on to make sure homeowners aren’t penalized.

Although on a national level this deal is having issues, the state of California has remained an exception to income tax as resulting from a short sale. In a letter addressed to Sen. Barbara Boxer (D-Calif.), the IRS and California Franchise Tax Board clarified that short sale debt does not count as recourse debt under the state’s anti-deficiency law, which has been in effect since 2011. This law was used to help prevent homeowners from benefitting from the additional assets of a short sale, but the IRS recently clarified that these laws also make sure that homeowners would not have to face the taxes that come with it.

More than six million households throughout the United States are estimated to be in financial distress, many of which can benefit from short sales.

Tuesday, November 26, 2013

Mortgage Delinquencies: Where Do We Go From Here?

With the housing market improving, mortgage delinquencies are continuing to plummet for Q3 2013. TransUnion, which researches based on credit data, has reported that the mortgage delinquency rate is at 4.09 percent for Q3 2013, a 23.3 percent drop year over year, and the seventh straight quarter of decline. According to TransUnion, this will continue into Q4 2013.

The data is strong, but it could be masking the real problem. Mortgage delinquencies may be decreasing steadily, but the rate is still higher than it should be — about one to two percent higher than the historical range. The Q3 2013 rate is the lowest the delinquency rate has been since Q3 2008, and there were already problems stirring in the housing market at that time. In addition, there are fewer mortgages than there were. Despite 2.34 million new account originations in Q3 2013, up from 2.09 million from the previous year. TransUnion only recorded 52.31 million mortgages as opposed to 54.23 million from Q3 2012. In Q3 2008, there were 63.14 million, which was the high prior to the housing crisis.

Although there is also an additional decrease expected for Q4 2013, with a new year comes new challenges and adjustments in lending law. 2014 brings changes with the Dodd-Frank Act. The law is known more for Wall Street reform, but it takes a direct hit on mortgage lenders. This means changing regulations on lending practices, which will leave about 48 percent of potential home buyers who are able to obtain a loan in 2013 unable to do so in the coming year. Lenders will have to abide by stricter “ability to pay” regulations and servicers are prohibited from making the “first notice or filing” during the first 120 days of delinquency.

The effect that this will have on the mortgage delinquency rate, whether positive or negative, is still unknown. However, it’s important as the economy is improving to remain cautiously optimistic. After all, as we learned before, you never know when the rug is going to be stolen out from under you.

Thursday, August 8, 2013

Making the Most of the Making Home Affordable Act

There's some good news and some tough news for homeowners.

Since the beginning of the year, around 2.4 million homeowners have finally been able to begin rebuilding equity thanks to increasing home prices and decreasing foreclosures. According to the latest Corelogic Report (June 2013), almost all of the statistics measured have indicated an improvement in the state of the foreclosure market since June 2012. The balance of severely delinquent first mortgages has decreased 27% from the same time last year. There were 55,000 foreclosures in June 2013, down from 68,000 in June 2012, a year-over-year decrease of 20%. Foreclosure inventory has decreased from 1.4 million to 1.0 million, a change of 28%. These are good signs of a housing recovery, albeit a fragile one.

While we did experience the first month-over-month increase in delinquency rates in five months, a 9.91% increase between May and June, it can be mostly attributed to expected seasonal patterns.

Nevertheless, we are still at a relative high point in delinquency rates. We are still far from pre-crisis levels of foreclosures, which averaged 21,000 a month between 2000 and 2006. There is no ignoring the more than 7 million mortgages that are still underwater. Some cities, such as Richmond CA, are facing such a crisis that they are considering using the power of eminent domain to seize homes and gain control over the process of making them more affordable for residents. Shadow inventory is creating a backlog for banks that slows processing and blurs inventory numbers. 

The main issue lies with the fact that many do not qualify for loan re-modifications in today’s market where credit is still relatively tight. Homeowners are left with no other option but to go through the costly process of foreclosure. 

That was the motivation behind the Making Home Affordable (MHA) act by the Obama Administration. Originally only available for loans backed by Fannie Mae and Freddie, the MHA uses the Home Affordable Modification Program (HAMP) to help eligible homeowners modify or rewrite their loans terms to avoid foreclosure. Usually, this means lowering monthly payments (subject to rate floor of 2%) and/or extending the term of the loan to a maximum of 40 years. Recently, changes have been made to make the MHA benefits better and more accessible. The two biggest changes were:

  1. The program was extended to the end of 2015
  2. Loans modified under HAMP have been made available for loans serviced by other qualified mortgage servicers, who are provided with the opportunity to enter into contracts with the Federal Government (the U.S. Treasury) to modify homeowners' mortgage loans in a particular and uniform fashion.
Peak Loan Servicing, our mortgage servicing entity, just earned this important certification this summer and can begin helping homeowners. HAMP certification allows Peak to reach out to those seeking to modify distressed loans and avoid foreclosure. According to Scott Sawyer, an industry specialist at Peak, having more qualified servicers is going to be a boon to these homeowners, the mortgage market and the housing market in general.

Although the housing market is markedly improving, we cannot ignore the millions of homeowners still facing foreclosure and volatile market conditions. Eli Tene, managing Directors and Principal of The Peak entities makes it clear that its new HAMP certification represents “strengthened endorsement [of Peak] on the part of Treasury, HUD and the Obama Administration’s Making Home Affordable program but also… another major step in fulfilling the Peak Corporate Network’s brand promise as a comprehensive real estate services provider for both consumers, investors, and other real estate professionals.”

Thursday, March 14, 2013

The Foreclosure Crisis: Not What It Appears to Be

Regardless of industry trends showing a decline in foreclosure starts, each month thousands of Americans are still facing a scenario that could mean the loss of their home. The foreclosure crisis is not fully behind us yet.

While an improving economy combined with government intervention and lender workouts has significantly reduced the number of homeowners in mortgage default since the height of the recession in 2008, the problem persists. Thousands of Notices of Default are still being issued each month in spite of the current optimism of a complete housing recovery touted in the press.

Two factors contribute to the discrepancy between prevailing sentiment and the actual facts regarding foreclosures. First, industry data consistently aggregates information on foreclosures, providing a broad averaging of foreclosure activity, whereas review of the actual data on a state-by state basis shows a different picture. According to RealtyTrac, Foreclosure activity in 2012 decreased from 2011 in 12 out of the nation’s 20 largest metro areas, led by Phoenix (down 37 %), San Francisco (down 30 %), Detroit (down 26 %), Los Angeles (down 24 %), and San Diego (down 24 %). But 2012 foreclosure activity increased in eight of the 20 largest metros, led by Tampa (80 % %), Miami (36 t %), Baltimore (34 %), Chicago (30 %), and New York (28 %).

Newly enacted foreclosure laws at the state level over the past two years have caused a contributing factor in the drop of default filings. California, Florida and Nevada arguably had the highest foreclosures rates in the nation. Yet recent statistics show a relationship between various state legislative actions and a slowdown in foreclosures, including Nevada requiring lenders to prove their rights to foreclose in 2011 and California’s Homeowner’s Bill of Rights enacted in 2013. So while these laws inevitably contributed to a dramatic decrease in completed foreclosures which is reflected in lower default-filing statistics, in reality, there are still eight to ten million units that comprise a substantial ‘shadow inventory’ of housing supply still subject to foreclosure. California and Nevada follow non-judicial procedures for filings. Judicial states, are still coping with pending cases simply caught in the court system. Foreclosure inventory in judicial states is still three times higher than that of non-judicial states, according to Lender Processing Services (LPS).

Second, industry data on distressed assets reports historically, typically analyzing activity 60 – 90 days prior to the actual reporting date. While real-time foreclosure data would be difficult to obtain and verify, default servicing specialists are as active as ever these days processing foreclosures. This trend is confirmed by two Peak Corporate Network executives. Kelli Espinoza is Executive Vice President overseeing operations at Peak Foreclosure Services, Inc., which serves as the primary Peak entity specializing in a wide range of default servicing solutions catering to banks, credit unions, and small investors nationwide. She characterizes current activity as “brisk.” Peak’s foreclosure unit is currently processing a steady flow of files generated by private equity and investment firms in the distressed asset sector. While prevailing housing analysis reporting on past distressed performance have indicated a decline in defaults, there are still a significant number of foreclosures making their way through the pipeline. Espinoza states that“While we’ve been able to facilitate many workouts on the borrower’s behalf to avoid a default situation, I’m pretty confident in saying that we’ll be processing foreclosures for clients for some time to come.”

Raffi Tal, Executive Vice President of I Short Sale, Inc., one of the Peak entities working exclusively with distressed homeowners, affirms that there’s still a “clear and present danger of Americans losing their homes. We are still heavily involved in negotiating workout solutions on behalf of homeowners that have no other alternative.”

It is important to note that regardless of industry trends showing a decline in foreclosure starts, each month thousands of Americans are still losing their homes at a rapid pace. The real estate industry cannot and should not become complacent in aggressively pursuing ways to help homeowners retain their most valuable asset. While the battle to stem the tide of foreclosures seems to be tipping in the favor of distressed homeowners, it would be a grave mistake to assume the crisis is over.


Monday, January 7, 2013

Tax Forgiveness for Short Sales and Insurance to Continue in 2013

The California real estate market can finally breathe a sigh of relief over news of new tax concessions that will avert going over the fiscal cliff. As a result of the fiscal cliff deal, California homeowners and investors can look forward to the continuation of several popular real estate deductions. Many economists lobbied for the extension of certain deductions and tax holidays as a method of averting the fiscal cliff, which was purported to have the potential to push the country into another recession.The prominent immediate concern for California’s housing market was the effect of downward pressure that going over the cliff might have on housing prices. According to Kenneth Harney, “Any significant reductions in long-established tax benefits would inevitably trigger declines in home values.”

Economist Lawrence Yun of the National Association of Realtors warned that prices were certain to fall as much as 15% simply due to buyers discounting their purchase offers to counterbalance losses in write-offs for things like mortgage insurance and local property taxes. California homeowners are no doubt familiar with the mortgage interest deduction, which was created solely to encourage homeownership. The fiscal cliff forced California’s housing economists to consider what the market would be like if such incentives were removed. The loss of such incentives was widely predicted to precipitate severe damage to the recovery of the California Housing market in terms of prices first and foremost.

One of the more important factors in the deal was the American Taxpayer Relief Act of 2012, which originally extended tax breaks scheduled to end in 2011. It now extends certain tax breaks for California property owners through 2013. This act - which is one among several that were negotiated to avoid the fiscal cliff – will allow California homeowners who make less than $100,000 to write off 100% of their mortgage insurance premiums. California homeowners who make more than $100,000 will also receive a write-off, but on a sliding scale. California property owners will also be delighted to know that the Relief Act applies to both private and FHA insurance.

California homeowners who have received debt forgiveness in 2012 in some form were no doubt riveted to fiscal cliff developments regarding the Mortgage Forgiveness Debt Relief Act of 2007, originally set to expire at year-end 2012. Due to Congress’ New Year’s Day fiscal cliff concessions, California homeowners who have gotten a principal reduction or short sale will move into 2013 with one less worry. The Mortgage Forgiveness Act will extend the exemption for California homeowners from paying taxes on the debt they have been forgiven through a principal reduction or short sale. According to Compass Research, in order to qualify for forgiveness up to two million dollars, California homeowners only have to show that the debt in question was “created to buy, build or substantially improve their primary residence.”

With these concessions in place, the recovery of California housing stands to receive a push in momentum. There are winners on both sides, whether that’s lenders and mortgage insurers or buyers and investors. The fiscal cliff deal is starting the year off with a brighter outlook for many California homeowners, and somewhat less uncertainty for the future of California’s housing market.

Friday, December 7, 2012

Fiscal Cliff Crisis or Financial Stability for 2013?

What will the effects of this so-called Fiscal Cliff bring to real estate in 2013?  We've all heard of the potential economic disaster if Congress fails to keep the Bush-era tax cuts in effect. Everyone's taxes will go up by thousands of dollars. But this is just the tip of the iceberg for the real estate industry.

In addition to overall taxes increasing after January 1st, the Mortgage Forgiveness Debt Relief Act may also be allowed to expire at the end of the year. If this happens we can potentially see a drop in home sales by as much as 20% in 2013. How can this be possible?  If homeowners currently underwater choose to short sell their home, they will be required to report their debt cancellation as income to the IRS. This can have a devastating effect on short sales as fewer people will want to take this route and may instead be forced into foreclosure.

In addition, if Congress and the Federal Administration force us off this fiscal cliff, we may also experience a reduction in mortgage interest deductions. The mortgage interest deduction has been a mainstay for decades and has helped spur first-time home purchases.

If the Bush tax cuts are allowed to expire, NBC News states, the current capital-gains tax of 15 percent will rise to 20 percent. Alan Kufeld, a principal with accounting firm Rothstein Kass and an advisor to wealthy families, explains that families who sell a second home that they’ve owned for more than a year pay capital-gains taxes on the difference between the sale price and their original purchase price (minus certain fees, improvements and other deductions).

An example, states NBC News, is a $38 million home purchased for $8 million with $2 million in improvements could show a gain of about $28 million. The current federal tax bill on that gain would be around $4 million. If taxes go up next year, the tax would be $5.5 million – a difference of $1.5 million.

Currently, there's a cap on mortgage deductions for loans up to $1,000,000. Anything higher is capped on your itemized 1040 return. A number currently being discussed in Washington is $500,000. Since the average price of a home in the U.S. is only $170,000, lowering the cap to $500,000, according to the Greenwich Citizen, would be easy for Congress to get passed, since in most of the country it would only affect the rich.

In an extreme case, the mortgage insurance deduction may also be eliminated. These tax deduction losses would likely result in more people continuing to rent, slowing down home purchases.

As for commercial real estate, according to the San Francisco Chronicle the Fiscal Cliff could result in a huge drop in office space demand, resulting in as much as a 20 basis-point increase in vacancy rates with rents only moving sideways at best.

However, not all is doom and gloom. Most believe that our lawmakers will not allow us to dive off the fiscal cliff and will in fact come to some compromise by the end of the year. If this does in fact occur, the real estate industry will continue to strengthen with home values and home sales increasing throughout 2013. Commercially, if we are able to avoid the cliff, we could see as many as two million new jobs created in 2013 and potentially a drop in vacancy by as much as 70 basis-points.

Plus, we may find compromises which could limit certain tax increases and mortgage deductions. If this takes place, we may find mortgage interest deductions being kept intact, but limited to less than the current interest of one million dollars. Either way, we are sure to see a greater level of home sales closing prior to the end of year.

Whether we fall off the Fiscal Cliff or Washington gets their act together and comes to an effective compromise, real estate will continue to be bought and sold and life will continue. The devil will always be in the details and every situation is different, whether you’re a homeowner or investor. The key is to know how the law will affect you personally and to plan various alternatives accordingly.

Wednesday, September 19, 2012

A Leaner and Smarter Second Blooming for Real Estate

By all accounts, real estate is returning to a state of normalcy in 2012. While the improvement in the overall economy has not hit all the marks we would have hoped for by this point, the real estate industry is in the midst of a much needed revival.  Real estate professionals are lauding the return of buyers to the market and home values, as a result of scarce inventories generating multiple bids on available properties, are rising. 
Additionally, thanks to government and regulatory programs making refinancing and principal reduction options accessible to distressed homeowners and homeowners facing negative equity, the deluge of foreclosures forecast by analysts is being mitigated.   A new set of circumstances emerging have sparked the current renaissance of the industry and are worth noting, including:

  • New attitude on short sales.  Once the bane of loss mitigation efforts, lenders now embrace short sales as a panacea to slow the flow of distressed properties into eventual REO.   
  • A prolonged low interest rate environment.  Consumers can’t afford a home unless the cost of borrowing remains affordable.  Recent actions by the Federal Reserve to keep interest rates low and stimulate the economy  will ensure that low cost mortgages remain available. Moreover, a welcome side effect of the previous housing downturn is that it created a new class of more informed, more cautious, and better-qualified borrowers that can fully leverage the advantages of low interest rates while keeping risk levels low for lenders.
  • The decline of investor influence on the housing market.  Rising home prices impact both distressed (foreclosure sales and REO) and non-distressed properties, and are squeezing the once substantial returns enjoyed by all-cash investors.  Average consumers comprise an increasing percentage of purchases today, bringing more equilibrium to the market by stratifying the types of buyers participating in it.
  • The swinging pendulum of renting versus buying.  Today’s low cost mortgages and home prices still at reasonable levels,  in contrast to rising rents in major U.S. markets,  seem to make more sense for many consumers over  the long-term.  The important caveat, however, is if consumers can qualify for those affordable mortgages under existing tight underwriting conditions.  Recent events point toward a thawing in underwriting constraints as GSEs relax documentation requirements to process mortgage applications.
These circumstances, combined with cautiously-optimistic reports on improving GDP and job growth, give real estate professionals encouragement that the industry has finally stabilized after years of volatility. Not only have “Open House” signs begun to spring up again on neighborhood street corners, buyer interest is so brisk that many agents don’t have the availability of listings to meet demand.  Brisk loan activity both for purchases and refinances are keeping loan origination shops busy and revitalized the mortgage broker industry. What’s important to realize is that these new-found fortunes for the real estate industry are based on a new set of fundamentals that eschew the speculative “boom” principles of the previous cycle, and instead rely on controlled growth combined with consumers and professionals taking a much more responsible approach to real estate’s lending process.   In the end, more responsible buyers, sellers, Realtors® and lenders should extend the life of our current promising cycle for many years to come.

Tuesday, August 7, 2012

Navigating the New Territory of Financing in Today's Real Estate Recovery

The real estate industry is finally beginning to stabilize, giving real estate agents, brokers, and real estate support industries reason for guarded optimism. Record-low interest rates, combined with more consumer confidence in the overall economy are bringing buyers back to the market. As more buyers return to weekend open houses, the prevailing question on the minds of that potential client is locating an affordable mortgage.

Real estate professionals can grow their business exponentially if they position themselves as a resource that helps clients secure the buying power they need to afford their first or next home. Here are just a few tips:

• Know prevailing mortgage rates. Mortgage rates change daily based on market conditions, shift in indices and bond markets, lender pricing, and a number of other factors. Stay up to date on rate trends resources that publish daily rates. Developing a relationship with a mortgage broker who has access to a number of lenders extends your knowledge base even more.

• Assess your clients’ long-term goals to recommend the best loan program. Depending on the motives behind your clients’ search for a new home, their goals may or may not be met with the traditional 30-year-fixed loan product.

• Understand lenders’ underwriting guidelines. Even for stable homeowners looking to buy a larger home, loan-to-value requirements, debt-to-income ratios, what qualifies as liquid assets, and other factors can create a maze for your clients aspiring for a new home.

Real estate agents and brokers should also familiarize themselves with alternative loan products, which are better-regulated products than in the previous cycle. Underwriting standards have tightened considerably, making it tougher for clients to qualify for a traditional 30-year fixed mortgage. For example, there are clients with great credit, but lower income or higher debt levels than lenders are comfortable with, as well as clients with less-than-perfect credit and even those whose long-term goals aren’t best suited for a standard loan. It’s in the real estate professional’s best interests to partner with a mortgage professional who knows the latest loan sources and loan products to better educate your clients.
These products include:

• FHA mortgage programs that typically require lower down payments and are more lenient with credit criteria

• 40-year fixed loans amortizing the loan over a longer period, offering the security of a fixed payment lower than the traditional 30-year mortgage

• 15 and 20-year fixed loans for clients with a tolerance for higher payments looking to maximize equity over a shorter period of time

• Adjustable rate loans with beginning interest rates considerably lower than their 30-year fixed counterparts

• Fixed / Adjustable Rate Loans, with a lower interest rate fixed for 3, 5, 7 or 10 years

• “Hard Money” loans carrying higher interest rates and shorter terms for buyers with strong income and reserves, or needing to use the capital as a bridge loan to meet LTV requirements or other criteria

• Jumbo loans exceeding most lenders’ conforming loan maximums for buyers

There are a number of ways for real estate professionals to make the most out of the recent good fortunes befalling the housing industry. But knowing how to connect homebuyers with the best mortgage, at the best price, and in the least amount of time will put the savvy real estate pro ahead of the pack and helpt to close more transactions.

Tuesday, July 10, 2012

Short Sale vs Foreclosure: Which Pill to Swallow?

Being a homeowner today is not easy, unless you own your home outright. For most that make mortgage payments, even if you have sufficient funds to make payments regularly, declining property values have crippled re-financing as a viable option. If you are a distressed home owner and have lost income and can’t make mortgage payments, you can either surrender to foreclosure, whereby the bank or loan company takes legal action to take total control of the property or you can attempt a short sale, whereby the bank agrees to accept less than the total amount owed on a mortgage to avoid having to foreclose on the property.
Being foreclosed has severe consequences to one’s reputation and credit. Participating in a short sale also has consequences, but they are less severe than those associated with foreclosure.
The following compares and contrasts some life options if you do a short sale vs. being foreclosed.

Buying Again: Short Sale vs. Foreclosure

If your payments have never fallen behind 30 days late and the lender does not require that you pay back the loan, Fannie Mae guidelines may allow you to buy another home immediately. Finding a lender who will fund that kind of loan is very difficult. If you are current on your mortgage, you can qualify for an FHA loan immediately as well, but lender requirements can be weird such as you have to move more than 600 miles away.
If your payments are in arrears yet a short sale is granted by your lender, you may qualify to buy another home with a Fannie-Mae backed mortgage within two years, regardless of whether the home is your primary residence. The wait for FHA is 3 years.
With certain restrictions, you may be eligible, after having your home foreclosed, to buy another home in 5 years if the home was your primary residence. Without restrictions, the wait is 7 years.
If you are an investor and do not occupy the home, the wait to buy with a Fannie Mae insured loan is 7 years.

Affects on Credit: Short Sale vs. Foreclosure

A short sale may be considered to be a derogatory mark on your credit even though credit bureaus do not show the word "short sale" on your credit report. It may say "paid in full for less than agreed" or "settled for less," among other categories. Some clients have reported negative FICO score drops from 50 points to 130 points.
Major point drops are typically due to being in default, meaning you have fallen behind on your payments.
Depending on your credit history and other guidelines, a credit score could fall 105 points to 160 points after a foreclosure. Generally, a foreclosure will remain on your credit report in the tradelines section for 7 years.

Credit Reports: Short Sale vs. Foreclosure

All lenders report short sales differently, with many reporting "paid in full for less than agreed," and some report the short sale as a charge off. Negative credit, however, stays on your report for 7 years. If a prospective employer runs a credit check on you, your job application may be denied if you have a foreclosure on your record.

Deficiency Judgments: Short Sale vs. Foreclosure

Judgments are often negotiated between the seller and the short sale bank. In some cases, such as California, if the home is your personal residence and was financed through purchase money, there is no deficiency judgment. Banks are generally unwilling to negotiate deficiency judgments with the homeowner after a foreclosure. In California, for example, according to the California Association of REALTORS, a deficiency judgment may be filed regarding a hard-money loan if the lender forecloses under a judicial foreclosure versus a trustee sale or if the second loan is a hard money loan and the sale takes place as a trustee's sale.

Loan Application Questions: Short Sale vs. Foreclosure

Loan applications do not ask questions about a short sale. You may report that you sold your home. However, you are required to answer the question: "Have you ever had a property foreclosed upon or given a deed-in-lieu thereof in the past 7 years." If the bank sees you have had a foreclosure, your loan most likely will be denied. If you lie, you may be subject to investigation by the FBI for mortgage fraud.

Length of Time to Move:  Short Sale vs. Foreclosure

If you've had a foreclosure notice filed, you may be able to postpone that action while the bank considers your short sale. The wait for short sale approval can be from 2 to 3 months, or longer. Unless prior arrangements have been made, the bank may want you to immediately vacate the property and can commence eviction proceedings.

Taxation: Short Sale vs. Foreclosure

A personal residence is exempt from mortgage debt relief until the end of 2012 on a federal level. Some states will still tax you unless you qualify for an exemption. An investor is not exempt from mortgage debt relief, subject to certain conditions.

A person who has had their home foreclosed, is protected under the mortgage debt relief act that is in place until the end of 2012. Nevertheless,  some lenders immediately send out 1099s, even if the owner is exempt.
Going for a Short Sale: Time is of the Essence
To qualify for a short sale your home must be worth less than you owe on it, and you  must be able to prove that you are the victim of a true financial hardship, such as a decrease in wages, job loss, or medical condition that has altered your ability to make the same income as when the loan was originated. Divorce, estate situations, etc… also qualify.
As a seller of a property you should never have to pay for any short sale cost upfront to any professional service. Realtors charge a commission that is paid for by the bank. In most communities there are also non-profits and HUD counselors who can help you with foreclosure prevention options for free. The only potential cost you could incur is if the bank would not release you from a deficiency balance in the short sale, which is happening less and less now.
The farther you get behind on your payments, the harder it is to get a short sale approved. The closer a property gets to a foreclosure the harder it is to convince the bank to perform a short sale; as they get closer to a foreclosure sale more money is spent, thus deterring them from doing a short sale.
If you think you need to perform a short sale, time is of the essence; the sooner you start the process, the better. Waiting too long can trigger the ramifications of a foreclosure, rendering the short sale unviable.

Monday, June 11, 2012

To Be or Not to Be: The Mortgage Forgiveness Debt Relief Act Extension Beyond December 31, 2012

The Mortgage Forgiveness Debt Relief Act is set to expire December 31, 2012, and there are early indications on Capitol Hill that it might not make the cut. The law, first enacted in 2007, allows homeowners who have received principal reductions on their mortgages as the result of loan modifications, short sales or foreclosures to avoid income taxation on the amounts forgiven.

Prior to 2007, all cancellations of debt by creditors — whether on auto loans, personal loans or mortgages — were treated as taxable events under the federal tax code. If a person owed, say, $200,000, but paid off only $150,000 through an agreement with the lender, the $50,000 difference would be ordinary income, taxable at regular rates. Thanks to the Mortgage Forgiveness Debt Relief Act, however, that $50,000 difference would not be taxable.

Under the debt relief law for qualified home owners, taxation can be avoided on forgiven mortgage amounts up to $2 million (married filing jointly) and $1 million for single filers. To be eligible, the debt must be canceled by a lender in connection with a mortgage restructuring, short sale, deed-in-lieu of foreclosure or foreclosure. The transaction must be completed no later than December 31, 2012.

Having a foreclosure on one’s credit report will impact a credit score much more than will a short sale. If one is successful in completing a short sale, in many cases, he or she may qualify for a mortgage much sooner than with a foreclosure. Not surprisingly, short sales have thrived under the Mortgage Forgiveness Debt Relief Act. There have been 1.6 million short sales reported by the National Association of Realtors since late 2008, accounting for between 10 percent and 14 percent of home sales activity each month during that time. If the Mortgage Forgiveness Debt Relief Act is not going to be extended beyond 2012, we can expect short sales to plummet in 2013, with real estate sales in general, taking a dive. So if you’re a home owner contemplating a short sale, should you act now or hold off?

Given the huge public and private resources now being devoted to helping financially distressed home owners — including the recently announced $25 billion national mortgage settlement with five major banks — you might assume that a key federal tax law benefit underpinning these efforts would be a shoo-in for renewal.

Election-year politics and a contentious lame-duck, year-end congressional session loaded down with tax and budget issues could doom renewal of the debt relief tax legislation and put large numbers of loan modification participants deeply in the hole. Republican strategists say the cost of continuing the program — $2.7 billion for two years — is substantial enough to catch the eyes of budget-deficit hawks. Beyond that, they add, some members of Congress may be opposed to what they see as still another targeted federal benefit for people who didn’t pay their mortgages — subsidized by taxpayers and stayed current on their loans, even while underwater or facing severe financial distress. Douglas Holtz-Eakin, president of the center-right American Action Forum, former director of the Congressional Budget Office and economic adviser to Sen. John McCain’s 2008 presidential campaign, said in an interview that there is “a powerful sentiment,” especially among conservative freshman House members supported by the Tea Party, that tax code “bailouts” to delinquent and underwater home owners are fundamentally unfair.

On the one hand, only 27 Republicans voted against the original 2007 bill, which was written by Rep. Charles Rangel, D-N.Y., and handily passed the House before sweeping through the Senate with unanimous consent. On the other hand, that all happened before the Tea Party picked up steam. A look at the 2007 roll call for the original 2007 bill shows that two of the "no" votes came from GOP members who are now heavyweights on the Ways and Means Committee-through which the original bill traversed -- Rep. David Camp of Michigan, the Ways and Means Committee chairman, and Rep. Kevin Brady of Texas, the GOP deputy whip. Both Camp and Brady are on record having signed an opposition statement attached to the original legislation highlighting concerns that the temporary measure could morph into a permanent entitlement, creating "an environment where the American tax system is complicit in promoting 'risk-free' mortgages." Camp has since been unsympathetic to many home owner relief measures proposed from across the partisan divide. He voted to kill the Home Affordable Modification Program (HAMP) and to deny federal bankruptcy judges "cramdown" powers, in which they could mark down the amount owed on a mortgage to the current market value of the property.

The extension of the Mortgage Debt Forgiveness Act beyond December 31, 2012, therefore, is hardly a slam dunk. That being said, home owners contemplating whether to do a short sale now or wait until next year might be best served to take the “I’d rather be safe than sorry” stance and do their short sale before year end..

Friday, May 11, 2012

The Strategic Short Sale: How Distressed Borrowers can Build a Better Future

Strategic defaults, from the inception of the mortgage meltdown through the Recession and
now the potential recovery have followed an interesting cycle. Borrowers holding exotic mortgage products characterized by lowball introductory rates with steep mortgage payment hikes after an initial fixed period comprised the first wave of strategic defaulters, followed then by conventional mortgage holders caught in the Recessionary fallout of unemployment or other calamities and couldn’t afford a fixed monthly payment. As the Recession came to a close, a new strain of affluent strategic defaulter appeared that walked away from their mortgage as a business decision to avoid losing more money on a declining investment. In each example, the borrower deems the short-term benefits of a clean default are much more valuable than the immediate consequences associated with abandoning the mortgage. There is yet another aspect to strategically forfeiting the home that takes into consideration long-term benefits with a more satisfying outcome.

Borrowers today have more options than ever keep their homes, ranging from proactive lenders reaching out to modify loans, to government and regulatory actions aimed to prevent more foreclosures. Moreover, today’s borrower takes a more prudent approach to their credit obligations, as evidenced by significant declines in consumer debt and delinquency levels across the board. However, there are still homeowners that have absolutely no backstop to avoid severe delinquency and ultimately foreclosure. Usually, the only option left other than foreclosure is a short sale, which under today’s conditions is more favorable alternative. The government has been incentivizing lenders and sellers to participate, along with lenders offering some pretty sweet cash bonus to delinquent borrowers to sell before a notice of default is filed. Moreover, real estate agents and brokers have become more familiar with short sales as part of their routine and are becoming better equipped expedite the process. But this is where the conversation usually ends. The lender accepts a lower price for the loan amount in return for removing toxic assets off its books. Borrowers dodge the horrors of foreclosure by selling it. Distressed borrowers, however, should be able to strategically leverage a short sale process as a stepping stone that helps them gain a stronger financial footing to recoup their most valued asset --- their home.

The strategic short sale is ideal for borrowers who, above all, are honest with themselves about their predicament. They acknowledge early in the process that at some point in their near future they will not be able to make either their current mortgage payments, or even sustain reduced mortgage payments they would be eligible for through loan modification. This is the critical juncture where they decide relinquishing the home through a short sale is a viable route. The short sale wipes out the debt on the first lien, and many short sale negotiations include the cancellation of the debt owed as a result of difference between the remaining loan amount balance and the final sale price of the home. Borrowers may also be entitled to cash incentives through the government, the lender, or a combination of both. Moreover, a short sale clearly has a significantly smaller impact on a borrowers’ credit rating than a foreclosure. These are the obvious advantages.

While it may appear that distressed homeowners initially lose their most valued asset, the strategic perspective of the short sale process provides for a more optimistic end game. The true goal is actually for the strategic short seller is to position themselves to comfortably handle the responsibilities of a mortgage for the long term. By relinquishing the debt of the original mortgage through the short sale, homeowners give themselves an opportunity to regroup financially and develop a savings routine based on new budgeting strategies. The fresh start allows the former homeowner to address other outstanding debt, and as a result build a stronger credit profile that would have a better chance of meeting today’s strict lending guidelines. The most important advantage to the former homeowner is that home prices, compared to when the original home was purchased, will be far more affordable when they are ready to enter the market again. While today’s low home values are projected to rise in the next cycle of the housing industry, they won’t approach the highs of the last cycle. The homeowner who takes the high road by strategically exiting the mortgage via short sale has the opportunity to return as a homeowner on more stable footing with a home and mortgage that can be sustained.

Losing a home may not the end of the world. It could be the beginning if approached with the right plan.

Wednesday, April 4, 2012

CA SB 1191 -- A Cure or More Big Brother?

SB 1191 has been introduced in the California Senate. It would require every landlord who is in default under a mortgage or deed of trust and who has received a notice of sale, to disclose the notice of sale to any prospective tenant prior to executing a lease agreement for the property. The bill would also provide that a violation of those provisions would invalidate the lease and entitle the tenant to recovery of “all” rent paid under the lease.

Granted, I have heard of past abuses by absentee landlords that may be valid causes to enact legislation to protect renters of single family homes but to include all landlords is a much more serious issue. When viewed on the macro-economic level, however, SB 1191 assumes an over-reactive, over-protectionist, “big brother” stance by imposing actions to cure ills in the single family residential sector on a much more complex commercial environment that operates by a completely different set of rules. And quite frankly, it’s extremely counter-productive to this struggling market.

Let’s look at this from an investor’s perspective: as an owner of a building, there are many reasons I could get into a default situation, and not because I may be trying to negotiate with my lender (though this does happen, but not often). I may well have a legitimate issue with my lender who could take a hard stance and slap me with a default. Under this proposed legislation, I would have to tell all of my tenants and prospective tenants about the default. What then are my chances of maintaining my building? Not very good. This could create the complete devaluation of my building, to a point that in all likelihood, I couldn’t recover.

And what about maturity defaults – I’m current but my loan is due and I can’t get refinancing. Having to notify my tenants and prospective tenants would turn a maturity default into a real default with ensuing consequences of serious devaluation and deterioration of commercial properties.

This proposed legislation is also a disaster from the lender’s perspective. Let’s say the building is half leased and needs an investment to bring it up to par. The note holder isn’t paying the lender; should the lender put him in default? If it does, it’s going to drive away existing tenants and not even get to first base with prospective tenants. The lender is, in essence, destroying the security in its own asset and should be very reluctant to enforce their rights under the terms of the loan.

It’s not often that investors and lenders have the same point of view on an issue but in this case, this proposed legislation is damaging for both groups. The last thing we need is more, empty buildings which this legislation would surely help achieve.

We all understand that the government is trying to protect renters; and granted, there are some “victims” out there who do need protecting, but the pendulum has swung too far with this bill. This over-reaching and over-reaction by government would create a new crisis in an already fragile environment. Let’s hope that appropriate limitations will be written in to this legislation to help maintain a market that is showing signs of recovery.

Gil Priel is Managing Director and Principal of the Peak entities. Gil Priel has been involved in the real estate industry since 1978, starting with the private equity acquisition and management of several office buildings in the Los Angeles area.

Priel has worked in all phases of the real estate industry including land development, management, financing (portfolio lending for commercial and residential properties plus non-performing debt acquisition and broken development cycles) and disposition of all product types. His expertise in distressed real estate has spanned many cycles. Priel has been a guest speaker for many media outlets and publishes a monthly real estate newsletter. Priel has his BA from California State University, Northridge and a Juris Doctorate from Southwestern University School of Law.

Gil can be reached at

Thursday, March 8, 2012

Is the Marketplace Poised for a Return of Alternative Loan Products?

A return on the horizon for alternative loan products is inevitable.  While the products associated with this category have all but vanished, a new type of borrower is emerging that will reshape how loans that don’t fit the traditional 30-year-fixed model are fashioned.
Single family loans originated in 2010 and 2011 has proven to be the most solidly underwritten loans in years according to recent data from LPS.  While lenders’ conservative credit standards have been vilified as excluding many potential buyers from the market, the upside is that high quality mortgages are being originated by lenders, and eventually purchased by GSEs. 

From the lender perspective, this could indicate no need for subprime, Alt-A, or other types of “exotic” loans which were considered to be the root cause of the mortgage meltdown.  The issue with these products was that their underwriting standards weren’t based in reality. The predominance of these vehicles in the market was driven by lender/mortgage broker misuse, by marketing securities based on pools of mortgages with these shaky underwriting yet high returns, by appraisers being aware of the value needed for the loan to happen, and by poor oversight by government entities that guaranteed these products. As a result, poor loan quality destined for default was a defining element of this product set.

Stricter underwriting and scrutiny by regulators made subprime and Alt-A products virtually extinct and made borrowers with strong credit, deep reserves, and positive equity in existing properties the perfect borrower scenario for lenders. But now, the pendulum has swung the other way; qualified buyers who don’t meet these criteria are left in the cold and risk-averse lenders have taken the position that it is better to hold off on lending except in a perfect borrower scenario.

The need exists, however, to service this class of borrower.  New regulations governing our current lending environment, combined with more responsible lending practices, should provide the necessary restraints to prevent the credit misuse characteristic of alternative loan products seen in the last lending cycle.

Regulations requiring appraisals independence from broker shops, the end of yield-spread premium bonuses paid by lenders to brokers, and more upfront consumer disclosures are examples of current practices which should mitigate the risks of inflating home values and stop predatory marketing of non-traditional loan products to unqualified borrowers characteristic of the past real estate boom.  Moreover, the mortgage industry has taken a much more responsible stance toward to who it lends money.

The end result of these factors is twofold:  home values are substantiated and grounded in fair market value, and buyers will be vetted by a clear ability to afford the purchase price.  As the market stabilizes, more lenders should then feel comfortable originating loans at higher loan-to-value ratios, relaxing FICO criteria, or eventually streamlining documentation requirements for qualified buyers. 

“Qualified buyers” is of course, a moving target as the housing market regains its confidence and equilibrium.  But the class of qualified buyer is sure to grow past what the standard conforming 30-year loan model can accommodate. Lenders will need to relax some standards and offer new or better monitored “old” products to fill the void.