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DON'T BE HAMMERED BY YOUR DEBT

DON'T BE HAMMERED BY YOUR DEBT

Wednesday, September 19, 2007

SAVE YOUR CREDIT-THE MERCY OF THE SHORT SALE IN THE FACE OF FORECLOSURE

The Wall Street Journal recently reported that the rate of foreclosures has now equaled that of the Great Depression. Record numbers of Americans now face foreclosure on their homes. Aside from the immediate tragedy of losing their homes, these homeowners face the lasting legacy of severely damaged credit. The record of a foreclosure will stay on your credit report for a minimum of seven (7) years. A year ago this would have meant that when you apply for a home loan you would have been assigned to the sub-prime mortgage market. This would have merely meant a higher interest rate which would translate to a higher monthly house note. However, in today’s world the sub-prime market has simply disappeared. Therefore if you have a foreclosure on your credit report it is highly unlikely that you will be able to obtain a home loan. This will change as the credit market swings back to a more liberal pole, but that will not occur for several years. So what is a homeowner to do if faced with imminent foreclosure? The solution may be in the most desperate of circumstances, the short sale. The collapse of the sub-prime market and the drastically increased number of foreclosures has created an entirely new market place for what is commonly called short sales. A broker or a short-sale specialist will contact the home owner and offer to purchase their home for an extremely discounted price. Typically this price is for less than the outstanding balance of the home mortgage. If the homeowner accepts this offer the short-sale specialist will then contact the mortgage company’s loss prevention department. The loss prevention department is the department whose primary function is to prevent default on loans and when default cannot be prevented to proceed with foreclosure and recover as much of the loan as possible. This branch of the mortgage company will acquire the property through foreclosure, then they will sell the real property and subsequently, file a civil suit against the defaulting home owner for the remaining balance of the home loan not covered by the sale of the property. The short sale specialist will negotiate with the loss prevention officer a satisfaction of the mortgage for a discount. These examples work better if some arbitrary numbers are applied. In our case let us assume that a homeowner has purchased a $200,000.00 house on a no money down, interest only loan. Five years into the loan, the balloon refinancing note has become due or the arm as kicked in and the homeowner’s monthly payment has skyrocketed. Because the homeowner has only been paying interest for the first five years of the loan the principle balance of the mortgage is still $200,000.00. The homeowner may very well have equity in the home due to the home’s appreciation in value or the homeowner may be over-leveraged in the home due to collapse of the local home market and devaluation of properties. The amount of equity the homeowner has is immaterial in the short sale scenario. The short sale specialist will offer the homeowner $150,000.00. If the homeowner accepts, the short sale specialist will then contact the loss prevention officer for the bank and offer payment of $140,000.00 in full satisfaction of the $200,000.00 mortgage. Now you are asking why in the world would the bank accept $140,000.00 on a $200,000.00 loan. The reason is the bank is in the business of loaning money and making money off those loans. The bank is not in the business of taking possession of thousands of pieces of real estate, paying the carrying costs on those pieces of real estate, paying the maintenance and upkeep on those thousands of pieces of real estate, paying the repair and remediation costs in order to make those pieces of property marketable and then paying real estate brokerage fees and closing costs for the sale of that property. Banks have already been glutted with foreclosed property and now are no longer interested in taking on new properties. If the loss prevention officer accepts the $140,000.00 offer, the short sale specialist will then go out and find an investor. An investor is someone who is buying property to convert them into rental property or has enough liquidity to purchase property and hold them until the market recovers and returns to normal, when he can then sell the property at a substantial profit. The short sale specialist will locate an investor who is willing to accept assignment of his contract for sale with the owner at $150,000.00. At the closing of that sale the investor will pay $150,000.00. $140,000.00 of that will be paid to the bank in full and final satisfaction of the $200,000.00 mortgage. The remaining $10,000.00 will be paid to the short-sale specialist essentially as a commission for his work in setting up the deal. At the end of the closing the bank walks away with 70¢ on the dollar on its mortgage. The investor walks away with a $200,000.00 house that he bought for $150,000.00 which will now either generate rental income or when the market returns to normal give him a $50,000.00 profit. The short-sale specialist walks away with $10,000.00 cash for a tremendous amount of legwork and negotiation. Your first impression is that the homeowner has been screwed. That is absolutely not the case. The homeowner walks away from the closing with his credit report reflecting that he paid in full a $200,000.00 mortgage with no record of a foreclosure. The homeowner can now go back into the market place and buy a home that he can actually afford under a realistic thirty (30) year fixed rate mortgage. The only true downside for the homeowner is that if in fact he had equity in the home. If he in fact had equity in the home he has lost that appreciation. However, in truth he lost that equity when he could not sell the house for his asking price and that loss was inevitable once the property was foreclosed. Therefore if you are facing imminent foreclosure, one strategy which may preserve your credit is to seek out the short sale specialist who is willing to make an offer to purchase your house for a substantial discount.

8 comments:

sweet apple said...

Hi,

Thanks for sharing this info about foreclosure. I'll share with you an article, "Stop Foreclosure! Know What To Do", that's somewhat related to this post. Anyway great blog! So informative. :)

Anonymous said...

Very helpful, thanks.

600 University Blvd, Suite 200 said...

You have great information in your blog. In your last post about how to save your credit when in foreclosure it's worth mentioning that after a successfully short sale negotiation the I.R.S. will hit the homeowner previously in foreclosure with a 1099 showing income of the difference between what the mortgage lender lent him upon the purchase/refinancing of his/her house and what the mortgage lender gets on the short sale.

Anonymous said...

Now, I am absolutely no expert in this field, but this statement:

"The homeowner walks away from the closing with his credit report reflecting that he paid in full a $200,000.00 mortgage with no record of a foreclosure."

runs contrary to everything else I have read on the subject of short sales.

I'd like to get a divorce, short sale my home, and purchase another for me and my kids with a VA loan or other type of similar loan. From what I've researched so far, the short sale would damage my 7.5 credit score too immensely to be able to pull it off.

I appreciate your assistance in this area, but I am quite frustrated by the conflicting reports I hear on the subject of short sales and credit. I just don't know what to believe.

Real Estate Short Sale said...

A real estate short sale is a great way for a homeowner to avoid foreclosure. I feel really great about helping people out if foreclosure with a short sale. It is a great alternative.

Ardent Penguin said...

I have a home secured by two mortages: the first for 318k and the second for 62k. If the house were to sell today for 327k obviously only the bank holding the first mortgage would be happy. Could the bank holding the second mortgage sue me for any unsatisfied balance of the outstanding principal?

Rick said...

I agree with "anonymous".

My understanding is that the best thing that the creditor will put on your credit report is "Settled Charge Off".

That still puts your credit rating in the crapper for 7.5 years.

Ardent Penguin said...

Consider this: Two brothers, Steve and Joe, have spouses/children and each family has a mortgage much higher than the current market value of their TH. Joe says to Steve, why don't you get your wife's sister (trusted family relative) to make a short sale offer on my TH. I'll get my wife's brother to do the same for you. They each move their families into apartments for six month leases to allow the short sale process to work its way through the banks (vacant property, appraisal, TH listed for sale, offer, bank accepts offer, etc). The brothers then move from the apt to the TH occupied by their brother under a rental lease for something that is maybe even less than the mortgage payment.

I ran this idea by a wise realtor who told me that the only thing wrong with this picture is that it violates the need for the transaction to be at 'arm's length' from the seller. While this may not stop the Tony Rezkos' of the world it may be the closest any of us gets to a housing bailout.
I don't recommend voluntarily with holding mortgage payments to the lender to press your case for a loan mod - my lender seems to be fully onboard with the program, no secrets, no surprises. And you do NOT need to give out lots of money to these new startup companies who promise to deliver you a mortgage modification (for $500, or a sum equal to one mortgage payment). My lender assured me that we would get the same loan mod in direct negotiations (Wells Fargo). Your comments welcome.

Btw, Chris Dodd and Barney Frank, may you rot in Hell.