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.

 

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.

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.