Governor Signs SB 458 into Law
July 15, 2011
CALIFORNIA ASSOCIATION OF REALTORS® applauds Gov. Brown on signing SB 458 into law
LOS ANGELES (July 15) – The CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) applauds Gov. Jerry Brown on signing SB 458 (Corbett) into law. SB 458 extends the protections of SB 931 (2010), to ensure that any lender that agrees to a short sale must accept the agreed upon short sale payment as payment in full of the outstanding balance of all loans.
Under previous law (SB 931 of 2010), a first mortgage holder could accept an agreed-upon short sale payment as full payment for the outstanding balance of the loan, but unfortunately, the rule did not apply to junior lien holders. SB 458 extends the protections of SB 931 to junior liens.
“The signing of this bill is a victory for California homeowners who have been forced to short sell their home only to find that the lender will pursue them after the short sale closes, and demand an additional payment to subsidize the difference,” said C.A.R. President Beth L. Peerce. “SB 458 brings closure and certainty to the short sale process and ensures that once a lender has agreed to accept a short sale payment on a property, all lienholders – those in first position and in junior positions – will consider the outstanding balance as paid in full and the homeowner will not be held responsible for any additional payments on the property.”
SB 458 contains an urgency clause making it effective upon signing.
Short Sale Fraud: California DRE Warns Real Estate Licensees
CALIFORNIA DRE – In the current distressed California residential real estate
environment, where many mortgage loan
borrowers owe more on their homes than their properties are worth and some have opted to simply walk away from their homes and mail in their keys, so-called short sales have become favored transactions. For a long time, loan modifications were the primary strategy of the day for financially distressed homeowners. However, the results for loan modifications have been anemic at best.
In April of 2010, the federal government will offer financial incentives to push short sales through a program called Home Affordable Foreclosure Alternatives. The program is designed to spur home sales, and it specifically imposes new requirements on lien holders, including requiring certain debt forgiveness, an abbreviated time frame to respond to short sale offers, and provides government payments to homeowners (for moving and/or relocation expenses), servicers, and lien holders.
A. What is a Short Sale?
Because not all real estate
professionals are aware of the mechanics of short sale transactions, the following overview is offered as a quick primer.
A short sale is a pre-foreclosure residential real estate transaction where the owner of the mortgage loan, the lender or lien holder (hereinafter sometimes “Lender”), agrees to (i) allow the home owner to sell his or her property
for less than — or “short” of — the outstanding amount owed on the mortgage loan, and to (ii) release the property from the mortgage.
Homeowners who are “underwater” or “upside down” with respect to their mortgage loans, seek to sell their homes “short” to avoid the threat of foreclosure action and to lessen the credit
damage that would accompany a foreclosure. Because of the “shortage”, the transaction may involve “debt forgiveness” by the Lender. But this is often preferable to the Lender compared to a foreclosure – which has costs and risks for
The authors wish to express their appreciation to Summer Bakotich, Deputy Commissioner of the California Department of Real Estate, for her insightful and helpful comments, and for her editorial review of this publication. 1the Lender in terms of lost payments, eviction, property maintenance, insurance, taxes, fees, and the like — or a loan modification, with the associated lack of certainty. Also, a short sale gets the non-performing mortgage loan asset off of the Lender’s financial books.
B. Is a Real Estate License Required to Represent the Parties to a Short Sale?
The simple answer is YES, with some extremely narrow and limited exceptions and exemptions.
A real estate broker license (or a real estate salesperson license where that person is working under the supervision of his or her broker) is required under section 10131 (d) of the California Business and Professions Code (B&P Code) where a person, in a representative capacity on behalf of another, “negotiates loans…or performs services for borrowers or lenders …in connection with loans secured directly or collaterally by liens on real property
…” for or in expectation of compensation, “regardless of the form or time of payment”.
In addition, under section 10131 (a) of the B&P Code, a real estate broker license (or salesperson license with appropriate supervision by the broker of record) is required of any person who, as a representative of another, “Sells or offers to sell, buys or offers to buy, solicits prospective sellers or purchasers of, solicits or obtains listings of, or negotiates the purchase, sale or exchange of real property…”
The exceptions and exemptions from the licensure requirement are few and narrowly drawn. For example, a California licensed lawyer is exempt when that person renders services in the course and scope of his or her practice as an attorney. Additionally, if a person is acting solely on behalf of himself or herself, or itself in the case of an entity, there is no need for a real estate license since the person or entity is not acting on behalf of another or others.
Because there is or may be mortgage loan “debt forgiveness” in a short sale, some people and entities argue that they can, and attempt to, consummate short sales on behalf of others without a real estate license by asserting that they are “debt negotiators”, “debt resolution experts”, “loss mitigation practitioners”, “foreclosure rescue negotiators”, “short sale processors”, “short sale facilitators”, “short sale coordinators”, “short sale expeditors”, or some other type of unlicensed short sale or debt specialist.
Yet it is because the loan debt is “secured directly or collaterally by liens on real property” that brings into play the legal mandate for a real estate broker license under California law.
If a real estate licensee wants to take a short sale listing and not conduct the short sale negotiations with the homeowner’s lender, then the licensee must seek to ensure that an unlicensed third party is not performing the negotiations on behalf of the seller.
Criminal Penalties for Those Who Participate in Unlicensed Activities. Those who engage in short sale transactions, including the related “negotiations”, and who are unlicensed (and do not have the benefit of an exception/exemption), are in violation of California law. The penalties include fines and/or imprisonment under section 10139 of the B&P Code.
II. Fraud, and Questionable Conduct and Activities.
In addition to seeing unlicensed activities in the market with respect to short sales, the California Department of Real Estate (hereinafter “DRE”) has also been alerted to fraudulent short sale transactions. Before discussing an example of short sale fraud that is becoming prevalent, it must be noted that the types and varieties of fraud (some quite elaborate) are many and are limited only by the imaginations of those who commit fraud. Thus, this segment and the succeeding discussion on scenario/scheme variations and legal and ethical minefields, is intended to raise concerns and issues for real estate licensees in California. But it is not intended to be comprehensive in scope.
A. Short Sale Fraud — Flipping by Unlicensed Entities Using Straw Buyers.In some cases, unlicensed “short sale facilitators” hone in on homes that are on the verge of foreclosure and persuade the lenders to accept “lowball” purchase offers, often times by using “straw buyers”, questionable or self-interested broker price opinions or appraisals, and by failing to disclose that a sale at a higher price has previously been put on the table or negotiated.
In this case example, ABC Short Sale Services (hereinafter “ABC” — the name has been changed for the purposes of this example), an unlicensed “short sale facilitator”, contacts a distressed homeowner and tells him that ABC will facilitate the sale of underwater property with the best possible economic outcome to the homeowner. Payments to the homeowner may even be promised to entice interest.
ABC then contacts a licensed California real estate broker (hereinafter “Broker”) with little or no knowledge about short sale transactions, and offers to refer a short sale listing to the Broker. For the business, the Broker pays a referral fee to ABC. Once ABC has a Broker on board, ABC requires that the homeowner/seller sign a contract with ABC, in which the homeowner/seller agrees to permit ABC to serve as the homeowner/seller’s “short sale negotiator”. The contract has language like the following: “Seller agrees that he will no longer market the property and grants to ABC all necessary rights to market, negotiate, and enter into an agreement to sell the property to an unrelated third party”.
For its services, ABC charges the homeowner/seller a $395 upfront fee and then a second
$195 fee for the negotiation services.
In this case, $480,000 is owed on the mortgage loan to the Lender, a federally insured financial institution, and the fair market value has fallen to $410,000. The property is listed by the Broker for $410,000, and the Broker takes no part in the “negotiations”. Because lenders and lien holders do not always require the listing brokers to present to them every single offer made for the short sale property, ABC only presents to the Lender the offer(s) it so chooses. Because ABC controls all of the information provided to the Lender, ABC also decides to withhold legitimate offers from the Lender and convinces the Lender that the home is overpriced at $410,000.
ABC presents its own $340,000 offer to the Lender, in the name of a fictitious buyer or “straw person” (hereinafter “SP 1?). Because ABC has controlled all of the information to the Lender during the listing period, and has withheld legitimate higher offers, the Lender is led to conclude that SP 1’s $340,000 offer is the highest and best, and the Lender accepts SP 1’s offer.
Following acceptance of SP 1’s $340,000 offer, and once escrow is open, ABC will focus on the primary objective of its scam by finding a second, legitimate buyer for more money as a “flip”. To accomplish this, ABC, through SP 1, will offer the soon to be newly purchased property for sale via the Multiple Listing Service. ABC will also contact the various buyers’ agents who presented offers higher than $340,000 during the short sale listing process, but whose offers were not presented to and withheld by ABC from the Lender.
ABC will inform all prospective buyers’ agents that “the short sale property is already in escrow”, but that it will be available for immediate sale after the close of escrow.Buyer 1 is extremely interested in the property, and is willing to pay the fair market value of $410,000. Buyer 1 then agrees to participate in a double or simultaneous escrow and offers $410,000. ABC, through SP 1 (ABC’s confederate), concurrently enters into a $410,000 purchase contract for the property with Buyer 1, conditioned upon SP 1 obtaining title, and that the “second” sale to Buyer 1 go through ABC’s handpicked lender.
After the closing of the second sale, ABC makes over $70,000, including referral fees from the Broker and fees from the original distressed homeowner/seller.
Brief Analysis of Short Sale Flipping Fraud Example.
In the case above, ABC has violated the California B&P Code by engaging in real estate licensed activities without a license. Also, they have collected advance fees in violation of California law. Then, they have made a large profit through false pretenses at the expense of a federally insured financial institution, by misrepresenting the value of the home to the Lender. This may constitute federal loan fraud, which is a serious felony offense which is punishable by imprisonment and fines.
The Federal Bureau of Investigation lists variations of short sale flipping as real estate fraud.
B. Short Sale Fraud – Scenario/Scheme Variations and Warnings re: Legal and Ethical Minefields.
1. Multiple Lenders and Lien Holders, and Payments Outside of Escrow.Where more than one Lender or lien holder is involved, the negotiations are complicated. Second and other subordinate lien holders often hold up the short sale transaction, and seek to extract the largest possible payment in consideration for releasing their lien.
Often times there are monies secretly paid outside of escrow, without the knowledge of the senior lien holder. This is a sure sign of fraud. Such undisclosed payments are likely illegal. The economic substance of and all payments in the short sale transaction should be disclosed on the HUD 1 statement. There should never be dual or multiple contracts, only one of which shows the true purchase price.
Added Twist re: Payments Outside of Escrow – some short sale listing contracts have a provision in an addendum for payments outside of escrow for some amount of money (usually $1,000 up to 1 percent of the sales price) to a third party short sale negotiator, processor, or facilitator, for some unknown or unspecified service. The money is sometimes to be paid by the seller, and other times by the buyer. These may be payments to a confederate of the real estate broker, some affiliate of the broker, and/or an unlicensed short sale entity. It is not known from a review of the addendum whether these fees are paid for a real service, or whether they are “junk” fees paid to increase the monies payable to the real estate licensee. If they are paid for a legitimate purpose, they must be disclosed to all parties to the transaction, including the senior Lender. If they are “junk” fees, or fees paid to an unlicensed entity, they are problematic from a legal perspective.
All such payments may violate RESPA, the Real Estate Law, and other federal and/or State laws.
2. Sometimes the End or Retail Buyer is the Only One Putting Money into the Short Sale Transaction.
Here the end buyer’s money is used to close the transaction, without any or proper disclosure.
3. The Ownership of the Underwater Property is Transferred to Some Sort of Trust.This may be done to keep the chain of title in tact and to hide the true owner of the property. In many cases, the homeowner seller is listed as the beneficiary of the trust.
4. Additional Things to Consider (A Word to the Wise):
a. Your fiduciary duties are to your principal(s), which cannot be signed away. The duties include honesty, loyalty, confidentiality, full disclosure of all material and relevant facts, skill, care, and diligence, and placing your client’s interests ahead of yours. For a more complete discussion of fiduciary duties that are imposed on California real estate licensees, please see DRE’s Real Estate Bulletin of Summer 2007.
If you are the listing agent, you have a number of fiduciary duties to the seller imposed on you. You certainly cannot delegate your real estate license and fiduciary duties to an unlicensed third party who shuts you off from communication with the short sale Lender.
Dual Agency Considerations. Consider also if you are an agent of the third party investor/short sale facilitator. You may have a dual agency situation which raises a whole host of issues. If you are a dual agent, you may have an irrevocable conflict that a dual agency disclosure cannot remedy.
By getting the best price for the first buyer/investor, you most assuredly cannot get the best sales price for the seller. If you have listed the home for the seller, your duty should run to that seller. How can it also run to the third party?
b. Your legal obligations under the California real estate law regarding disclosures, including agency relationships, and the prohibitions against fraud and secret profits.
c. Real estate licensees wishing to collect an advance fee in connection with performing short sales must first submit an advance fee contract to the DRE for review and then receive from the DRE the issuance of a no-objection letter relative to that contract. All advance fees collected thereafter under the terms of that contract must be placed in a trust account and handled as client trust funds under the California Real Estate Law and Regulations of the Real Estate Commissioner.
d. By entering into an agreement with a person who is engaged in mortgage fraud (even unwittingly or innocently), you can be held liable both civilly and criminally, and may be the subject of administrative discipline by the DRE.e. RESPA’s anti-kickback and unearned fee provisions. The U.S. Department of Housing and Urban Development has many informative materials on RESPA and the prohibitions against giving or receiving any fee, kickback, or any thing of value for the referral of settlement service business.
f. By participating in a short sale fraud, with artificially deflated offers for the short sale property, you may be defrauding the new lender on the retail sale – in addition to the fraud committed against the short sale Lender. In a typical simultaneous sale transaction, a property is stated as having two different values to two separate lenders – the short sale
Lender, and the new retail lender. While one of the values may represent a “distressed” property value, and the other a “non-distressed” property value, an issue regarding fraud is presented.
g. There is potential harm to the short sale home seller. In addition to not obtaining the highest price for the seller, which is or may be a violation of the law and or your fiduciary duty, the Lender may still require the seller (the original borrower) to pay off the remaining debt. In this case, there is no debt forgiveness. Even where the holder of the first lien allows for debt forgiveness, the holder of the second or subordinate liens might not forgive that debt. A deficiency judgment may then be pursued and obtained by the lien holder(s) for the deficiency. Moreover, the greater the debt forgiveness, the greater the potential tax liability. While the federal government has imposed a freeze on taxing the forgiven amount, State tax law may not do the same. Thus, if the short sale property is sold for the most amount of money that the market will bear, the potential tax consequence to the seller is diminished. Conversely, by accepting an artificially deflated offer, the seller’s potential tax liability is increased.
Real estate and mortgage fraud is escalating and is never acceptable. It hurts everyone. Those who engage in short sale flipping fraud through the use of misrepresented valuations and/or manipulated prices make profits at the expense of lenders, which often times means at the expense of taxpayers. This takes money out of the system that is designed to assist homeowners and lenders. Furthermore, it manipulates the value of the real estate market, harms communities, innocent buyers, sellers, and lenders, and may ultimately scare off lenders from doing short sales, or from lending to purchasers of short sale properties.
While this publication addresses one particular type of short sale flipping transaction, and some varying related and other scenarios, California real estate licensees would be well-advised to be completely transparent and to fully disclose, and document the disclosure of, all material information, side-deals, and concurrent and related transactions to all parties to short sale transactions, including, without limitation, all involved third party participants and payments.
Licensees would also be wise to advise their clients to contact and consult with a qualified attorney or tax professional regarding the potential tax consequences of a short sale transaction.
Further, if you are considering engaging in short sale transactions, you should fully educate yourself about the mechanics of the process and the related legal and ethical issues, and work only with legitimate professionals.
Finally, if you become aware of information about fraudulent short sale activity, please contact the DRE’s Enforcement section in Sacramento or at the office closest to you, or via the Internet at http://www.dre.ca.gov/cons_complaint.html
. In addition, you may want to contact the California Attorney General’s Office, the U.S. Department of Housing and Urban Development, and the Federal Bureau of Investigation.
Years after Default, Homeowners May Still Owe
Homeowners defaulting on mortgages today may be surprised to learn years from now that they still owe thousands of dollars—and a collection agency is coming after them to get it.
That’s because lenders have been quietly selling second mortgages and home equity lines left unpaid after foreclosures and short sales. The buyers: collection agencies, which in some states have years to make a claim. If they win court judgments, these collectors could have years to pursue borrowers with repayment plans, and even garnish their wages, said Scott CoBen, a Sacramento bankruptcy attorney.
“The only relief a consumer will have is entering into a debt negotiating plan or filing for bankruptcy,” said Sylvia Alayon, a vice president with the New York-based Consumer Mortgage Audit Center. The firm provides mortgage analysis to lenders, advocacy groups and attorneys.
The phenomenon suggests an ominous, looming echo of today’s real estate meltdown. As debt collectors surely seek at least partial repayment of millions of dollars in unpaid home loans, some say renewed financial stresses on tens of thousands of local consumers could dampen economic recovery.
“I think there will be a lot of unhappy people when it hits,” said CoBen. “We saw this in the ’90s. This is not really new. Just when you think you’re back on your feet, you’re making money and the economy’s good, they hit you with this.”
Alayon said most people are so stressed out and exhausted by trying to save their homes today that they are unaware they could face another hit later. And many who are losing homes don’t get the advice necessary to prevent future fallout, say nonprofit loan counselors.
“You’ve got tens of thousands of people in California who have this hanging over their heads who don’t even know it,” said Scott Thompson, principal at for-profit Mortgage Resolution Services in Carmichael, Calif. He fears a new wave of bankruptcies might flatten people just starting to recover from losing their homes.
“So many of these are people with 750 or 800 credit scores who made a bad decision,” said Thompson. “Or they’re people who suffered income cuts. These are people, in terms of the economy, whom we need to participate.”
But an entire industry is gearing up to buy their debt at deep discounts and collect what they can, Alayon said. “It’s a big business and investors are coming out of the woodwork. It’s a very lucrative business,” she said. Real estate insiders and financial players know it as “scratch and dent.”
Regionally, no one knows for sure how much unpaid debt is on the line. CoBen said people who used their borrowings for a traditional loan on a house in which they lived generally have little to worry about. But borrowers may be vulnerable in years ahead—generally, those who defaulted not only on their first mortgage but also on a home equity loan or second mortgage.
In California, banks can’t collect from borrowers for primary, so-called “first-lien,” loans that go unpaid. When a house is foreclosed or sold through a short sale, the lender of the first loan gets the house back or the proceeds from another buyer.
But banks also made thousands of “second-lien” loans, including those used to finance 20% down payments during the housing boom. A separate category of “seconds” includes home equity loans and home equity lines of credit. Nationally, about 3.4% of those loans are currently delinquent, according to Foresight.
Owners are generally, but not always, on the hook for the second loans left over from a foreclosure or short sale. Most investor mortgages, too, leave the borrower liable for potential unpaid debt. In many short sales, experienced real estate agents or attorneys can negotiate away debt obligations for the second-lien loan. But many inexperienced borrowers don’t know that, and sign final-hour agreements giving lenders the right to pursue them later.
“Seek advice,” counseled Doug Robinson, spokesman for national nonprofit mortgage counselor NeighborWorks America. He said nonprofit counselors can help. “Often when you work with a real estate agent, they’re not really equipped to handle the repercussions. They’re set up to make the sale,” he said.
Government forces are already moving to limit potential damage to millions now struggling with home loans. A new Obama administration short sale program aims to prevent banks that hold second-lien loans from pursuing collections from homeowners after the short sale. It goes into effect April 5, 2010 and works this way: Sellers will receive notice that their servicer has steered part of the sales proceeds to secondary lien holders “in exchange for release and full satisfaction of their liens.” This release would apply only to short sales done through the administration’s Home Affordable Foreclosure Alternatives program.
In California, Democratic state Sen. Ellen Corbett recently introduced SB 1178, which would expand California’s protections for some people who refinance and take on a second mortgage.
People who refinance, but use the funds to improve their homes or to stay in their homes with a better interest rate, would be protected. Lenders could not seek court judgments to collect from these borrowers in the event of foreclosure or short sales.
“If you refinance a property and aren’t using the money for personal reasons, you shouldn’t lose your personal protections,” said California Association of Realtors lobbyist Alex Creel. He said the idea has been around for years but has become more urgent as thousands lose income and fall into mortgage trouble. The bill would apply to all foreclosures or short sales that occur after it becomes law. It doesn’t matter when the loan was made, Creel said. SB 1178 is still in the early stages of consideration. It must clear both houses of the Legislature and be signed by Gov. Arnold Schwarzenegger by Sept. 30 in order to take effect. (c) 2010, The Sacramento Bee (Sacramento, Calif.).
HUD TAKES ACTION TO SPEED RESALE OF FORECLOSED PROPERTIES TO NEW OWNERS
WASHINGTON – In an effort to stabilize home values and improve conditions in communities where foreclosure activity is high, HUD Secretary Shaun Donovan today announced a temporary policy that will expand access to FHA mortgage insurance and allow for the quick resale of foreclosed properties. The announcement is part of the Obama administration commitment to addressing foreclosure. Just yesterday, Secretary Donovan announced $2 billion in Neighborhood Stabilization Program grants to local communities and nonprofit housing developers to combat the effects of vacant and abandoned homes.
“As a result of the tightened credit market, FHA-insured mortgage financing is often the only means of financing available to potential homebuyers,” said Donovan. “FHA has an unprecedented opportunity to fulfill its mission by helping many homebuyers find affordable housing while contributing to neighborhood stabilization.”
With certain exceptions, FHA currently prohibits insuring a mortgage on a home owned by the seller for less than 90 days. This temporary waiver will give FHA borrowers access to a broader array of recently foreclosed properties.
“This change in policy is temporary and will have very strict conditions and guidelines to assure that predatory practices are not allowed,” Donovan said.
In today’s market, FHA research finds that acquiring, rehabilitating and the reselling these properties to prospective homeowners often takes less than 90 days. Prohibiting the use of FHA mortgage insurance for a subsequent resale within 90 days of acquisition adversely impacts the willingness of sellers to allow contracts from potential FHA buyers because they must consider holding costs and the risk of vandalism associated with allowing a property to sit vacant over a 90-day period of time.
The policy change will permit buyers to use FHA-insured financing to purchase HUD-owned properties, bank-owned properties, or properties resold through private sales. This will allow homes to resell as quickly as possible, helping to stabilize real estate prices and to revitalize neighborhoods and communities.
“FHA borrowers, because of the restrictions we are now lifting, have often been shut out from buying affordable properties,” said FHA Commissioner David H. Stevens. “This action will enable our borrowers, especially first-time buyers, to take advantage of this opportunity.”
The waiver will take effect on February 1, 2010 and is effective for one year, unless otherwise extended or withdrawn by the FHA Commissioner. To protect FHA borrowers against predatory practices of “flipping” where properties are quickly resold at inflated prices to unsuspecting borrowers, this waiver is limited to those sales meeting the following general conditions:
- All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.
- In cases in which the sales price of the property is 20 percent or more above the seller’s acquisition cost, the waiver will only apply if the lender meets specific conditions.
- The waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program.
Specific conditions and other details of this new temporary policy are in the text of the waiver, available on HUD’s website.
Treasury sets guidance to simplify “short sales”
NEW YORK (Reuters) – The U.S. Treasury on Monday set long-awaited guidance on a plan for mortgage companies peed “short sales” of homes and other loan modification alternatives to stem a rising tide of foreclosures.
The Home Affordable Foreclosure Alternatives Program provides financial incentives and simplifies the procedures for completing short sales, a growing practice in which a lender agrees to accept the sale price of a home to pay off a mortgage even if the price falls short of the amount owed, according to an announcement on the Treasury’s website.
Guidelines address barriers that have often sidelined short sales by setting limits on the time it takes a bank to approve an offer, freeing borrowers from debt and capping claims of subordinate lenders.
The incentives, first announced in May, expand on the government’s Home Affordable Modification Program, known as HAMP, that has seen limited success in lowering payments for distressed homeowners. The Treasury earlier on Monday stepped up pressure on mortgage companies to make permanent the 650,000 trial modifications they have started.
“While HAMP program guidelines are intended to reach a broad range of at-risk borrowers, it is expected that servicers will encounter situations where they are unable to approve” or offer a modification, the Treasury said in its announcement.
Financial incentives for completing short sales or similar deed-in-lieu transactions — in which the deed is simply transferred to the lender — include a $1,000 payment to servicers, and a maximum of $1,000 to go to investors who sign off on payments to subordinate lien holders, the Treasury said. Borrowers would receive $1,500 in relocation expenses.
Short sales are favored by real estate agents and community groups over foreclosure because they can preserve the borrower’s credit rating and leave the property in better condition than when a homeowner is evicted. While primary lenders typically realize steep losses, their recovery is typically far better than under foreclosure.
But short sales have been frustrating for borrowers and real estate agents, often hung up by negotiations with multiple lien holders and mortgage insurance companies. Real estate agents have complained that sales fall through as lenders bicker over the sales price, what they should receive from the proceeds, and whether the borrower will be held accountable for the debt in the future.
Among requirements, mortgage servicers have 10 days to approve or disapprove a request for short sale, and when done the transaction must fully release the borrower from the debt.
It also prohibits mortgage servicing companies from reducing real estate commissions on the sale, a practice that has dissuaded many agents from taking short sale listings.
In one of the most contentious issues gumming up negotiations between lenders, the guidance caps the aggregate proceeds to subordinate lien holders at $3,000.
Second lien holders in recent months have begun demanding more money from the first lender, seller, buyer or agent in exchange for releasing their claim, agents have said. Because primary lenders would face larger losses in a foreclosure, some subordinate lenders have felt empowered, the agents said.
The largest second-lien holders are Bank of America Corp, Wells Fargo & Co, JPMorgan Chase & Co and Citigroup Inc.
Second lien holders may proceed with a short sale outside of the Treasury program, if they felt the cap was too low, a Treasury official said in October.
“If there was a short sale program that didn’t recognize the second lien holder position, it could have pretty damaging consequences for the industry,” Sanjiv Das, chief executive officer of CitiMortgage, said in an interview last week.
(Editing by Leslie Adler)
President signs federal tax credit extension
President Obama today signed a bill extending and expanding the Federal Tax Credit for Home Buyers. The bill passed the U.S. House of Representatives yesterday and the U.S. Senate late Wednesday.
The tax credit will be extended through April 30, 2010, with a 60-day extension if a binding contract is in place prior to the deadline. First-time home buyers will continue to receive a tax credit of up to $8,000, while existing homeowners will receive a reduced credit of up to $6,500. Existing homeowners will be eligible for the $6,500 if they have lived in their current residences for at least five years. The bill also will increase the qualifying income limits from $75,000 for single tax filers and $150,000 for joint filers, to $125,000 and $225,000, respectively. The purchase price of the home is capped at $800,000.
Under additional provisions in the bill, taxpayers can claim the credit on purchases completed in 2010 on their 2009 income tax returns. The bill maintains the provision that home buyers do not have to repay the credit provided the home remains their primary residence for 36 months after purchase, and waives this requirement for active duty military personnel who move due to a military order.
Obama Administration Announces Financial Incentives and Uniform Process for Short Sales
Responding to the call of the National Association of REALTORS®, on May 14, 2009, the Obama Administration announced incentives and uniform procedures for short sales under its new Foreclosure Alternatives Program (FAP). For borrowers who are unable to retain their home under the Making Home Affordable Loan Modification Program, the servicer may consider a short sale or, if that is not successful, a deed-in-lieu of foreclosure. Participating servicers must comply with program requirements so long as they do not conflict with contractual agreements with investors.
Borrowers (Homeowners). Borrowers/homeowners qualify under the FAP if they meet minimum eligibility requirements for the Home Affordable Modification program but don’t qualify for a modification or do not successfully complete the three month trial period. Before proceeding with a foreclosure, servicers must determine if a short sale is appropriate.
Incentives. Incentives include: (1) $1,000 for servicers for successful completion of a short sale or deed-in-lieu of foreclosure; (2) $1,500 for borrowers/homeowners to help with relocation expenses; and (3) up to $1,000 toward the cost of paying junior lien holders to release their liens (one dollar from the government for every $2 paid by the investors to the second lien holders).
Standardized Documents. The program will include streamlined and standardized documents, including a Short Sale Agreement and an Offer Acceptance Letter. The goal is to minimize complexity and increase use of the short sale option.
Property Valuation by Appraisal or BPO. Servicers will independently establish both property value and minimum acceptable net return, in accordance with investor requirements. The price may be determined based on an appraisal or one or more broker price opinions (BPOs), issued no more than 120 days before the date of the short sale agreement.
Timeline. In the Short Sale Agreement, servicers must give borrowers/homeowners at least 90 days to market and sell the property, or up to one year, depending on market conditions. Property must be listed with a licensed real estate professional with experience in the neighborhood. No foreclosure may take place during the marketing period (at least 90 days) specified in the Short Sale Agreement.
Commissions. The Short Sale Agreement must specify the reasonable and customary real estate commissions and costs that may be deducted from the sales price. The servicer must agree not to negotiate a lower commission after an offer has been received.
No Borrower Fees. Servicers may not charge fees to borrowers/homeowners for participating in the FAP.
Program Expiration. The program is in effect through 2012.
Deed-in-Lieu of Foreclosure Option. Servicers have the option to require the borrower/homeowner to agree to deed the property to the servicer in exchange for a release from the debt if the property does not sell within the time allowed in the Short Sale Agreement (plus any extensions).
Call Short Sale Gallery for more information at (951)359-4860 or visit http://www.ShortSaleGallery.com
DEBT RELIEF BILL CLEARS KEY SENATE COMMITTEE
A bill that would make it possible for California taxpayers to avoid paying taxes on forgiven mortgage debt through a short sale, short payoff or some other loan modification, recently passed a key senate committee.
Senate Bill (SB) 1055, authored by Sen. Michael J. Machado, passed the Senate Revenue and Taxation Committee on an 8-0 vote. The measure would help California taxpayers whose lenders have forgiven a portion of their mortgage debt, by allowing them to exclude the forgiven debt from their incomes for state income tax purposes. Under existing state tax law, forgiven debt on mortgages is taxable to the borrower as ordinary income for the year in which the debt is forgiven.
“SB 1055 an example of something the Legislature can do to help mitigate the pain that the mortgage crisis is causing,” said Machado. “The last thing we want to do to a borrower who has just lost his or her home is hit them with a higher tax bill.”
The measure is now before the full Senate.
Tax Relief Granted for Forgiven Debt
Bush administration allows Three-year window
By Matt Carter
President Bush signed into law Thursday a bill creating a temporary tax break for homeowners who are able to persuade lenders to forgive part of their debt, and extends a tax deduction for some families with private mortgage insurance.
For the next three years, the IRS won’t count as income debt forgiven by lenders when troubled borrowers negotiate short sales or workouts on their primary residence that involve forgiveness of part of their debt.
HR 3648, the Mortgage Forgiveness Debt Relief Act of 2007, also extends for three years a tax deduction allowing families earning $109,000 or less to deduct all or part their private mortgage insurance premiums from their taxable income — which could save them an average of $350 a year.
In signing the bill, Bush said that not counting forgiven debt as income for tax purposes “will increase the incentive for borrowers and lenders to work together to refinance loans — and it will allow American families to secure lower mortgage payments without facing higher taxes.”
Richard Gaylord, president of the National Association of Realtors, said NAR has been advocating for such a change to the IRS tax code for nearly 10 years.
“We have always believed that it is clearly an issue of fairness and of not kicking people when they are down,” Gaylord said in a statement.
As originally passed by the House Oct. 4 in a 386-27 vote, HR 3648 would have made the exemption permanent, and extended the tax deduction for private mortgage insurance until 2014. But those steps would have eliminated about $2 billion in tax revenue over a 10-year period, a problem the bill sought to offset tightening the rules for claiming a deduction on the sale of a second home.
The Bush administration argued that an exemption for forgiven debt should be temporary, and objected to provisions raising taxes on the sale of second homes. The Senate amended HR 3648 to address those concerns, and those changes were agreed to by House lawmakers in a Dec. 18 voice vote.
The deduction for private mortgage insurance allows families with an adjusted gross income of $100,000 or less to deduct all of their premium payments. Families with incomes up to $109,000 are eligible for partial deductions.
The private mortgage insurance deduction was first approved late in 2006 and initially applied only to the 2007 tax year. With the passage of HR 3648, the deduction has been extended to mortgages originated between 2007 and 2010.
Extension of the tax deduction for mortgage insurance premiums was part of the Mortgage Forgiveness Debt Relief Act of 2007 approved earlier this month by both the U.S. House of Representatives and the U.S. Senate.
Kevin Schneider, president of the Mortgage Insurance Companies of America (MICA), said borrowers who can claim the deduction could save an average of $350 a year.
The cost of private mortgage insurance — required by most lenders on loans with less than a 20 percent down payment — is going up, as companies that provide it raise their rates in the face of mounting losses.
PMI Group Inc. and MGIC Investment Corp. have raised or will soon raise rates for borrowers with lower credit scores and loan-to-value (LTVs) ratios above 95 percent. The companies have stopped insuring loans with LTVs above 95 percent for borrowers with credit scores below 620.
MICA reports there was $790.5 billion in primary private mortgage insurance in force as of October, up 17 percent from $650.2 billion a year ago. The number of primary insurance defaults in October hit 59,308, up 28 percent from the same month a year ago.
Facing foreclosure? 9 options
By Liz Pulliam Weston
Real estate markets are slowing. Interest rates are ticking up. And the phones are ringing at ByDesign, a Los Angeles-based credit counselor, as homeowners start to panic about not being able to make their mortgage payments.
“The number of people asking for appointments to talk about foreclosure is definitely up,” said Susan Ulaga, the nonprofit service’s senior vice president of counseling. Rising rates “are really putting a crunch” on homeowners with adjustable-rate loans.
Nearly a quarter of the nation’s mortgages have rates scheduled to reset this year or next, which means higher payments for millions of homeowners. How many will default isn’t known, but the Mortgage Bankers Association, which tracks delinquencies and foreclosures, expects a “modest” uptick in both by the end of the year.
If you’re in danger of falling behind on your mortgage, or if you’re already delinquent, it’s important to know what’s ahead and what your options are. Usually, the faster you move, the more choices you’ll have about your financial future.
30 days: Your troubles actually start as soon as you miss a single payment. Lenders may not contact you until you’ve skipped a second payment, but most will report the first late payment and every subsequent delinquency to the credit bureaus. Even a single late payment can devastate your credit score, the three-digit number that lenders use to help gauge your creditworthiness. Each subsequent “late” further decreases your score, making it more difficult and expensive to get a loan or a refinance that might help your situation. In addition, lenders typically tack on late fees of 5% or so for each missed payment.
90 days to one year: Eventually, if the payments aren’t made, the lender will file a “notice of default” with a local courthouse and send you a letter saying that the foreclosure process will start unless you make good the missing payments.
How quickly the notice is filed depends on the individual lender. Some hold off if you contact them to work out a payment plan or otherwise explain your situation. Others are more aggressive and start the process as soon as possible to try to protect their investment.
“They may do it as early as 90 days, or as late as a year,” explained Anthony Hsieh, president of LendingTree.com. “It really depends on the lender’s temperament.”
Usually, this notice means that the amount you owe has shot up as well, since the lender typically adds substantial fees to cover its legal costs.
The notice of default “is a big threshold,” Hsieh said. “Once you get into that state, it’s a whole different world. Your options are fewer.”
The notice of default is generally picked up by the credit bureaus, further depressing your credit score and making refinancing the loan extremely difficult.
(In addition, the notice tips off scam artists that you’re in trouble and may be vulnerable to various “equity skimming” schemes. One common ploy: The scam artist promises to take over your payments, but instead rents out your house and keeps the rent payments as pure profit. The home goes into foreclosure, your credit is trashed and you’ve lost any equity you had in the home.)
90 days more: Borrowers typically have 90 days from the notice of default to make up the deficit before the lender sends out a “notice of sale,” which sets a sale date for the house (typically within the next 15 to 30 days).
Some lenders will allow you to keep your original loan if you can make up the missing payments plus any late fees and legal charges. Others will insist you refinance with another lender. You can also halt the foreclosure, at least temporarily, by filing a lawsuit or filing for bankruptcy. For either legal option to work, you’ll have to be able to come up with a payment plan to fix the deficit.
Lenders today typically offer a variety of solutions for people who have fallen behind on their mortgages. Among them:
- Temporarily reducing or waiving payments.
- Setting up short-term repayment plans to help you make up the deficit.
- Adding the unpaid balance to the principal of your loan and increasing your payments slightly to cover the extra amount.
If you have certain types of loans, you may have even more options. If you have a mortgage insured by the Federal Housing Administration, for example, you may qualify for an interest-free (and payment-free) loan to get your mortgage current. The money doesn’t need to be paid back until you pay off the mortgage or sell the house.
If you can work out a solution with the lender quickly enough, you can contain or even avoid serious damage to your credit. That’s among the reasons housing experts typically urge you to call your lender as soon as you know you’ll have trouble making a payment.
This is good advice, but trickier than it may seem at first, for two reasons:
Lenders can make it tough to get to the right people. The folks you want to talk to are in the “loss mitigation” department. But many lenders don’t routinely route borrowers to that department until they’ve missed several payments. Until then, you might be dealing with the lender’s collections department, which typically offers one option: Pay up now. If you’re serious about keeping your home, you may have to really push to get to right people.
“The loss mitigation department (is) where the options are really going to open up,” ByDesign’s Ulaga said.
You have to be able to make the payments. If you agree to a lender’s “workout” or “loan modification” solution and then fail to make the agreed-upon payments, you’ll be in a world of hurt. At best, you’ll have “a lot fewer options the second time around,” Ulaga said. More likely, Hsieh said, the lender will simply accelerate the foreclosure process.
This can be a big problem if the financial crisis that caused you to fall behind isn’t over. If you don’t know where you’re going to get the money to make the payments, trying to work out a solution with your lender will be tough.
“If you’re honest like that, (lenders) are not going to want to work with you,” said New Jersey bankruptcy attorney John Amorison. “If you’re dishonest, you breach the agreement.”
That’s no reason to hide from your lender or ignore its letters, Hsieh said. Even if you can’t work out an agreement, keeping in contact is usually the right choice: “At least you know where you stand.”
Filing a lawsuit or bankruptcy carries similar risk: If you don’t have the money to make the payments, the foreclosure can proceed, and you may have further damaged your credit score.
9 steps to getting out of this mess
So what to do? First, you’ll need to take a hard, clear-eyed look at your financial situation. To that end:
Make a budget. Sketch out a spending plan for the next several months, including expected income and expenses. See what costs you can trim to free up as much money as possible for home payments. You may need to pay the minimums, or even less, on other debts. In certain very limited circumstances — such as when you are absolutely sure your financial hardship will be short-lived — it may make sense to skip payments on some bills so you can pay your mortgage. Read “How to not pay your bills” to learn about the consequences that may follow. Another option: borrowing money from friends or family, or tapping retirement funds. Do the latter only if you’re convinced you can make future payments; you don’t want to drain your retirement funds if you’re only going to end up losing the house.
Consider getting help. Legitimate credit counseling services, those associated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies, typically have housing counselors that can help you evaluate your options. Or you can find a housing counseling agency approved by the Housing and Urban Development Department by calling (800) 569-4287. If you have a Veterans Administration loan, you can call (800) 827-1000 to get a referral to a financial counselor.
Check your refinance options. If you have equity in your home, your credit rating is relatively intact and your lender hasn’t yet filed a notice of default, you may be able to get another loan with more affordable payments. An experienced mortgage broker, preferably one affiliated with the National Association of Mortgage Brokers, can let you know your options. Be cautious about jumping into another risky loan, though: adjustable, interest-only or “option” mortgages might just put off the day of reckoning and you could find yourself facing even higher payments down the road.
Be realistic. Many times, Amorison said, people struggle to hang on to a house that they simply can’t afford when they’d be far better off without it.
“People are just too tied to their homes,” Amorison said. “It’s just property.”
That may seem harsh, but it’s far better to sell a home while you still have equity and some semblance of a credit score than to have it taken away in foreclosure.
Get organized. If you are going to try for a loan modification, you’ll need to prepare a small mound of documentation. The lender will specify what it wants, but typically you’ll need to supply the details of your financial situation, a budget, documentation of your hardship (a letter from your doctor explaining an income-reducing illness, for example, or your layoff notice from your employer) and a “hardship letter” that outlines, in heart-rending detail, the circumstances that led you to fall behind and the improved prospects that will allow you to get your financial life back on track.
You may also want (or be required) to provide a market analysis of your house, Ulaga said, to document how much equity you have in your home. A real estate agent can typically prepare this for free in exchange for the chance of winning your business should you decide to sell.
If a loan modification or refinance isn’t possible or feasible, your options come down to these:
Sell the house. If you have enough equity in your home to allow you to pay off your mortgage in full, after deducting any real estate agent commissions, then a quick sale is usually your best option. You’ll preserve what’s left of your credit score and your equity, leaving you in a much better position should you want to buy another home in the future.
Offer a deed in lieu of foreclosure. If you can’t sell the house for what you owe, but you’re not deeply “upside down” on your mortgage, this may be an option: you propose handing over the deed to your home and your lender agrees to release you from your mortgage. This usually keeps you from having to pay any deficit that might be owed on the property, while the lender avoids further legal costs related to a foreclosure.
Lenders can’t be forced to accept a deed, however. Typically, lenders require that the borrower make “a really good effort” to sell the home first, Ulaga said, and show that their delinquency was due to “unavoidable hardship” before they’ll agree to a deed in lieu of foreclosure.
Negotiate a short sale. If you owe substantially more on your home than it’s worth, you may be able to get the lender to accept less than it is owed by negotiating a “short sale.” You essentially sell the house for whatever you can get, and the lender agrees to accept the proceeds and not go after you for the deficit.
A short sale can further damage your credit scores, often showing up as a “settlement” that indicates you paid less than you owed. You may also face an IRS bill on the unpaid debt, which is generally considered income to you. A skilled negotiator may be able to avoid these consequences or at least minimize them, so you may want to consider getting an experienced attorney’s help.
Allow the foreclosure to proceed. This is generally the worst choice. In some states and in some circumstances, the lender can even go after you in court for any deficit between what the house eventually sells for and what you owe. An attorney or housing counselor can let you know if that’s a possibility.
Even if the worst happens, though, the damage to your financial life needn’t be permanent. If your situation improves, you may be able to get another mortgage, at a reasonable interest rate, within a few years. For more details, check out “Bounce back fast after bankruptcy” for suggestions on how to rebuild your credit after financial disaster.
Liz Pulliam Weston’s column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.