Real Estate Matters. . .

Yvonne Baker, Real Estate Consultant
www.YvonneBaker.com
www.urHomeBase.com
ycbaker@kw.com

Now that the financial bailout is law, can we sell some homes? Maybe, not yet. Banks are gun shy and want to hold on to the money they have received from the federal government instead of lending it out. What this means to buyers and sellers alike is that all we can do now is wait this one out to see if the lending freeze will soon be lifted.  Even then, it is my prediction that the banks will proceed very cautiously when it comes to mortgage loans. For buyers – do not expect to get a mortgage loan if you have had recent credit issues.  For sellers – because a large percentage of buyers have had some form of credit problem, and because you are competing with a large inventory of foreclosed properties – do not expect quick sells of your home.  The market will eventually rebound; it will just be a matter of time.

NEW YORK AP - Washington’s financial bailout plan is now law. So the credit spigot will start flowing again, banks will resume lending, and an economic recovery can begin, right?

Wrong. Experts say the most important thing that needs to happen before the $700 billion bailout even has a chance of working: Home prices must stop falling. That would send a signal to banks that the worst has passed and it’s safe to start doling out money again.

The problem is the lending freeze has made getting a mortgage loan tough for everyone except those with sterling credit. That means it will take several months or longer to pare down the glut of houses built when times were good — and those that have come on the market because of soaring foreclosures — before home prices start appreciating.

Housing is a critical component to the U.S. economy and by extension the availability of credit. Roughly one in eight U.S. jobs depends on housing directly or indirectly — from construction workers to bank loan officers to big brokers on Wall Street. A turnaround in housing prices would boost confidence in the wider economy and, experts hope, goad banks into lending again.

“Housing traditionally does lead the economy through a recovery. I think it’s going to be critical for a sustained recovery in this cycle, too,” said Gary Thayer, senior economist at Wachovia Securities.

In the meantime, people like Alicia Elliott are adjusting to a new American reality: Life without credit. The 21-year old Morgantown, W. Va., resident just bought a used mobile home, borrowing $4,000 from friends and family because she couldn’t get a bank loan.  “I tried to. Couldn’t do it. It’s just hard to get a loan,” said Elliott, who works as a cashier at a Lowe’s store.  She used to get bombarded with offers for credit cards. Now she can’t even get one. “I get denied one after another after another. It doesn’t matter if you have a co-signer or not,” she said.

Trey Simmons, a 31-year-old barber at a Dallas hair salon, said he worries tighter lending standard will squash his goal of buying a home next year.  “Credit is a privilege everybody can’t get,” Simmons said. “I had credit at a young age and messed up.”  He now operates on a strictly cash basis. “If I don’t have it,” he said, referring to cash, “I don’t spend it.”

The dilemma boils down to a matter of trust.

“Credit, by definition, means trust and faith, and for many reasons trust and faith have been damaged,” said Sung Won Sohn, an economics professor at California State University, Channel Islands.  Sohn said the near certainty of a recession makes it too risky for the thousands of small and medium-sized banks across the country to lend to people like Elliot. “Banks know the economy is getting worse, so … they will keep being cautious,” said Sohn, a former banking executive.

Still, the government hopes that by scooping up billions of dollars in bad mortgage debt and other toxic assets, banks eventually can clean up their shaky balance sheets, crack open the vaults and send money washing through the system again.

The rescue plan also raises the federally insured deposit limit from $100,000 to $250,000, a move that could boost banks’ reserves and further grease the lending wheels.

Rep. Barney Frank, D-Mass., the Financial Services Committee chairman and a key negotiator over the past weeks, said the measure was just the beginning of a much larger task Congress will tackle next year: overhauling housing policy and financial regulation in a legislative effort comparable to the New Deal.

In the meantime, the Treasury Department is moving swiftly to get the plan started. Treasury Secretary Henry Paulson said Friday he did not wait for final approval of the measure to begin preparation. He has been lining up outside advisers as his staff works out details on a multitude of complex issues.

But several hurdles could trip up the plan. For starters, even when the Treasury starts buying bad assets, some banks may hoard the cash they receive in return until they see how the plan pans out. That has the potential to make the lending logjam worse, said Vincent R. Reinhart, former director of the Federal Reserve’s monetary affairs division.

“They may sit on the sidelines and wait to see (the bailout) get some traction. The problem is if everybody sits on the sidelines, nobody gets in the game. It’s a risk,” he said.

It also creates a vicious cycle: No trust means no lending; tight credit means it’s harder to buy a home; the more difficult it is to buy or sell a home, the further home prices will fall; and the further prices drop, the more foreclosures there will be.

U.S. home prices — down 20 percent from their peak in July 2006 — still have further to fall, and must hit bottom before demand picks up. The long-awaited bottom in prices could be a year or more away.

But Jim Gillespie, chief executive of Coldwell Banker Real Estate, said he hopes that lower prices, combined with the government’s actions will jump-start stagnant demand. The federal bailout plan, he said, “will give people reassurance that mortgage money is available.”
Jobs are another big concern. The stranglehold on credit has choked companies big and small that depend on regular inflows of borrowed money to pay employees and stay afloat.

The Labor Department said Friday that employers cut 159,000 jobs in September, the fastest pace of losses in more than five years. Experts say that number will grow as the effects of the credit gridlock course through the economy in coming days and weeks.

The nation’s unemployment rate is now 6.1 percent, up from 4.7 percent a year ago. Over the last year, the number of unemployed people has risen by 2.2 million to 9.5 million.

The unemployment rate could rise to as high as 7.5 percent by late 2009, economists predict. If that happens, it would mark the highest since after the 1990-91 recession.
 
Boosting employment is critical to kick-starting lending because “if jobs are growing, then incomes are a growing, and if incomes are growing then people are consuming,” Reinhart said.
Consumers and businesses have retrenched so much that some analysts fear the economy stalled or shrank in the third quarter that ended last week. The Labor Department report Friday showed wage growth for workers is slowing, meaning they’ll be more hard-pressed to spend, especially for something as expensive as a home.

Many economists predict the economy will contract in the final quarter of 2008 and the first quarter of next year. That would meet the classic definition of a recession — two consecutive quarters of a shrinking economy.

One bright spot: optimism hasn’t been totally squashed yet.

Morgan Cavanaugh, proprietor of Moriarty’s Pub in downtown Cleveland, has been trying to sell another bar he owns to ease his workload, but the prospective buyer hasn’t been able to raise the money.

Now that the bailout legislation has the green light, he’s hopeful he’ll get a deal done.
“It passed. Let’s work something out,” Cavanaugh told the man over a cell phone Friday just after the House approved the plan.

He flipped the phone shut and smiled from behind the weathered mahogany bar of his 75-year-old Irish pub.

“He’s going to put the loan request in again. It’s looking up,” Cavanaugh said.

Yvonne Baker, Real Estate Consultant
www.YvonneBaker.com
www.urHomeBase.com
ycbaker@kw.com

As the dominoes continue to fall and the effects felt around the world, we have now lost two more of our financial giants — Washington Mutual and Wachovia being the most recent fatalities. Our government officials continue to push the largest bailout of our time, and continue to point fingers at each other as to who created this sitution. Congressional Democrats and Republicans spent the weekend trying to iron out the details of this massive bailout, but the average taxpayer still has misgivings about this plan mainly because the same officials who helped create this financial mess are now asking us to trust them to fix it. It is very hard to get a straight answer out of any of them as they struggle to present their best spin to this very bad situation. Even in the face of the current financial crisis, our political leaders are shamelessly still playing politics with our future and the future of our children. The inmates are now in total control of the asylum and we the taxpayers must sit idlly by, hands folded in silent prayer — “Oh God, wilt thou deliver us from the evils of partisan politics.”

The following is the latest news on the financial crisis:

NEW YORK - In the latest byproduct of the widening global financial crisis, Citigroup Inc. will acquire the banking operations of Wachovia Corp. in a deal facilitated by the Federal Deposit Insurance Corp.

Citigroup will absorb up to $42 billion of losses in the deal, with the FDIC covering any remaining losses, the government agency said Monday. Citigroup also will grant the FDIC $12 billion in preferred stock and warrants. The deal greatly expands Citigroup’s retail outlets and leaves it among the U.S. banking industry’s Big Three along with Bank of America Corp. and J.P. Morgan Chase & Co.

The deal comes after a fevered weekend courtship in which Citigroup and Wells Fargo & Co. both were reportedly studying the books of Wachovia, which was suffering from mounting mortgage losses linked to its ill-timed 2006 acquisition of mortgage lender Golden West Financial Corp. The FDIC asserted that Wachovia didn’t fail, and that all depositors are protected and there will be no cost to the Deposit Insurance Fund.

Federal Reserve Chairman Ben Bernanke, in a statement Monday, said he supports the “timely actions” taken by the FDIC “which demonstrate our government’s unwavering commitment to financial and economic stability.”

Treasury Secretary Henry Paulson also welcomed the sale of Wachovia to Citigroup, saying it would “mitigate potential market disruptions.” Paulson said he agreed with the FDIC and the Fed that a “failure of Wachovia would have posed a systemic risk” to the nation’s financial system. “As I have said before, in this period of market stress, we are committed to taking all actions necessary to protect our financial system and our economy,” Paulson said.

The sale of the Wachovia assets comes just days after the government’s seizure of Seattle-based Washington Mutual Inc. — the largest bank failure in U.S. history. As details of its takeover unfolded, Wachovia shares plunged 91 percent in Monday premarket trading to 91 cents. The stock had closed Friday at $10, down 74 percent for the year.

Wachovia has been among the banks hardest hit by the ongoing crisis in the mortgage market. It paid roughly $25 billion for Golden West at the height of the nation’s housing boom. With that purchase, Wachovia inherited a deteriorating $122 billion portfolio of Pick-A-Payment loans, Golden West’s specialty, which let borrowers skip some payments.

Yvonne Baker, Real Estate Consultant
www.YvonneBaker.com
www.urHomeBase.com
ycbaker@kw.com

BAILOUT “BIG 4″ IN FRAUD PROBE. . .

The crescendo of the “mad” American taxpayer is beginning to resonate with our political leaders. A week ago, our political leaders were prepared to give away $700 billion of our hard earned dollars to the banks and lenders who were part of the problem and helped in creating the economic disaster we are now faced as the “shot heard around the world.” We need to follow the money trail to find out who did what and when. We need to disgorge those profiteers who made massive illegal profits at the industry’s expense.  We need to make sure this never happens again.

(New York Post, September 24, 2008) The FBI has four major US financial institutions in its crosshairs for triggering the potential collapse of Wall Street and the need for a $700 billion federal bailout plan, law-enforcement officials said yesterday.

Citing potential fraud charges, the feds are probing mortgage-finance giants Fannie Mae and Freddie Mac, Lehman Brothers Holdings Inc., and insurer American International Group Inc., which last night signed papers making its $85 billion federal loan official.

Meanwhile, Congress yesterday gave an icy reception to the government’s top moneymen as they warned of recession, layoffs and lost homes if the Bush administration’s emergency bailout plan isn’t immediately approved.

“Nobody is happy,” said House Majority Leader Steny Hoyer (D-Md.). Republican Minority Leader John Boehner of Ohio, said, “Nobody wants to do this.”

Even as the Republican minority expressed disdain for the bailout plan, Hoyer said some form of the plan could be passed within days, and Boehner was hopeful for a quick resolution of disagreements about the package’s details.

Yvonne Baker, Real Estate Consultant
www.YvonneBaker.com
www.urHomeBase.com
ycbaker@kw.com

With many of us shaking our heads and wonder “are we done yet?” We are still reeling from the fallout of the downed real estate market. What next? What we have here is more finger pointing; no real solution; and more of our good money thrown after bad, as our government bails out yet another failed private company. This move still did nothing to stabilize the falling stock market. There is plenty of blame to go around. As a taxpayer, I am tired of the whining and hand-wringing. Our political leaders from both sides of the isle should have seen this coming from a mile ahead. I do not believe any of them were blindsided.  Enough of the rhetoric already, we need a fix.  Here is the latest on the bailout of the failed AIG.

WASHINGTON (CNN) — Key Republicans on Capitol Hill blasted the Treasury Department and the Federal Reserve on Wednesday for orchestrating an $85 billion bailout of insurance giant American International Group, and the White House for not informing them of the plan. Meanwhile, Democrats blamed the Bush administration for the financial crisis, while the White House pointed a finger at Congress.

The criticism came a day after lawmakers were surprised by the news that taxpayers would again be called on to shore up a member of the struggling financial sector.
“Once again the Fed has put the taxpayers on the hook for billions of dollars to bail out an institution that put greed ahead of responsibility and used their good name to take risky bets that did not pay off,” said Sen. Jim Bunning, R-Kentucky, a member of the Senate Banking Committee.

A spokesman for Sen. Richard Shelby of Alabama, the top Republican on the committee, said the senator “profoundly disagrees with the decision to use taxpayer dollars to bail out a private company” and is upset the government has sent an inconsistent message to the markets by bailing out AIG after it just refused to save investment bank Lehman Brothers from bankruptcy.

“The American taxpayer should not be asked to unwillingly assume the inordinate risks that financial experts knowingly undertook, particularly when taxpayer exposure is increased by the ad hoc manner in which these bailouts have been engineered,” said Shelby’s aide, Jonathan Graffeo. Republican Rep. Roy Blunt of Missouri complained about not getting a heads-up about the bailout and said House Republicans are struggling to “understand a coherent strategy” about which firms get rescued and which ones don’t.

Rep. Adam Putman of Florida, the third-ranking Republican in the House, said the cost is “unnerving” and called on the Treasury Department and Federal Reserve “to dispatch an envoy to the Hill to bring members of Congress up to speed.” “The communications lines are not operating efficiently,” he said.

Late Wednesday, the White House agreed to send a top Bush economic adviser and an official from the Fed to brief House Republicans on Thursday, according to a House GOP aide.

Meanwhile, congressional Democrats placed the blame for the crisis squarely on the Bush administration, arguing it failed to aggressively regulate the financial industry.

“The most recent bailout initiated by the Bush administration — that of AIG — is just another example that George Bush is a failed manager,” said House Speaker Nancy Pelosi, D-California. “Because of the inattention, or a decision on their part to have crony capitalism in our country, Americans across the country are feeling the pain of this.”

Pelosi said two House committees would investigate the recent bailouts “to tell us how we can avoid this in the future, what went wrong here and also to look into this issue of fraud and mismanagement” at AIG.

White House spokeswoman Dana Perino said Congress could have done more to head off the crisis. “I think that Congress needs to take — before they start throwing arrows — take a little bit of time for some self-reflection,” she said. “But also, why don’t we just set that aside for a minute and focus on the fact that we have a crisis that we’re trying to manage.”

Senate Majority Leader Harry Reid — who also complained that he didn’t know a bailout of AIG was in the works — said Congress won’t change laws immediately to address the rapidly unfolding financial crisis because “no one knows what to do.”

“We are in new territory here,” Reid added. “You could ask [Federal Reserve Chairman Ben] Bernanke, you could ask [Treasury Secretary Henry] Paulson. They don’t know what to do, but they are trying to come up with ideas.”

Reid said he will keep the Senate in session through the end of the year so committees can hold hearings and start writing legislation that he said could become law next year. “It’s a multitrillion-dollar issue that’s facing America, and we can’t do it in some timeline that is unrealistic,” Reid said.

Democratic presidential candidate Sen. Barack Obama on Thursday said the bailout plan must “protect the families that count on insurance” from AIG. He also said the Federal Reserve should make sure the bailout plan protects well-paying jobs and helps Americans pay their bills.

At a town hall meeting in Grand Rapids, Michigan, Republican candidates Sen. John McCain and Gov. Sarah Palin both called for reforming the financial markets “in Wall Street and Washington,” as McCain put it.

“We’re going to reform how Wall Street does business and put an end to the greed that has driven our markets into chaos,” McCain said. “We’ll put an end to multimillion-dollar payouts to CEOs who have broken the public trust. We’ll put an end to running Wall Street like a casino. We’ll make businesses work for the benefit of their shareholders and employees, and we’ll make sure your savings — IRA, 401(k) and pension accounts — are protected.”

Yvonne Baker, Real Estate Consultant
www.YvonneBaker.com
www.urHomeBase.com
ycbaker@kw.com

What we have here is the “Domino Effect,” as mega lending institutions topple in the wake of the failing real estate market (Lehman Brothers, Merrill Lynch, Freddie Mac and Fannie Mae to name a few) and the mortgage industry is left reeling. As the troubled US economy vibrates throughout the world economy, many buyers and sellers are left scratching their heads and wondering with dismay when will we see the light at the end of the tunnel.  What will it take to bring the market back? Is “short sale” a viable option to begin to shore up the real estate market? Can short sales stop the market bleed of foreclosures. Will short sale provide the tourniquest needed to save the real estate market?

A vast majority of real estate sales throughout the nation are done through short sale, but not too many people understand it. Many short sale transactions fail because the transaction never makes it through the meandering journey it takes to get to closing.  Lenders are going to be shorted on the loan amount whether the property is sold through short sale or through foreclosure.  What lenders need to understand is that they will, in all probability, lose far less in a short sale than a foreclosure. Therefore, it goes against the lender’s best interest not to allow short sales to be quick sales. If the lender will allow realtors to complete the short sale in a timely manner, they stand to receive their payout sooner rather than later.  This makes good economic sense in the long run.

Moreover, often foreclosured properties are trashed by vacating owners or third party vandals.  Short sales that are permitted to close in a timely manner might prevent some of the vandalism of these properties that are left vacant for months. It would seem to be a good thing if lenders could find a way to streamline the short sale process, making it easier for homes to be sold in this manner, and still keep the regulations and guidelines in place to prevent fraud.

This brings us to the lender’s risk management negotiators.  While it is understandable that these negotiators owe their allegiance to the bank, not to the seller or buyer, it is worth reiterating that it is in the bank’s best interest to allow these distressed properties to be sold at short sale rather than foreclosure for a number of reasons, the lease of which is as previously stated, the property can be severely damaged by vandalism if allowed to sit vacant for month.

The following is a good example of what can happen to property allowed to sit for months: Some investor clients of mine were interested in purchasing a couple of quadraplex properties that had been vacant for months. All of the fixtures in all the units had been removed from the properties, including AC units, bathroom fixtures, kitchen fixtures, some of which had been ripped out of the walls leaving the water running, which lead to further damage in that mold developed throughout the unit on the walls and floor. Many of the rooms had been spray painted. These properties were newly built when foreclosed.  Dispite lenders efforts to secure the properties, the vandals grew increasingly ingenous in creating new ways to gain access to the properties. Lender, despite the condition of the property held fast that it wanted near market value for the properties. Ultimately, my clients decided to walk away. Did the lender make a good, enconomic decision in holding on to these properties expecting a market value or near market value sale? When I checked last, the properties still had not sold.

I challenge banks and lenders to work with realtors in an effort to make the short sale process work to the benefit of all parties. Short sale may help cap and shrink the ever mounting foreclosures and allow the market to stabilize. Short sale can put families back into homes that are destined to sit as foreclosure inventory that further drag down the real estate market and desimating the property value of the neighborhoods where they sit. Lenders made very bad decisions in making loans to individuals that could not afford the loans. Lenders are now compounding that bad decision by making another bad decision in not allowing ready, willing and able buyers to buy some of these properties.

I found the following comprehensive article written by Matthew Graham, published in the Mortgage News Daily which I believe provides good incite on the question of short sale; how it should work; and what are some of the problems encountered by buyers and sellers when attempting to close on a short sale transaction.

The Definitive Short Sale Article

This article will attempt to address the following:
1. Define a short sale
2. Talk about the different ways it can come about and be structured
3. Talk about how it’s different than foreclosure or bankruptcy
4. Talk about the implications for the seller
5. Talk about the implications for the buyer
6. Address investor related questions on capitalizing on short sales (which you will soon find based on the definition is not really what you investors are looking for)

Definition:

A short sale is an “arrangement” between the current owner of a home and the bank that lent them the money to buy their home to accept an offer for less than the total amount owed to pay off the home. The “deficiency” is the difference between the amount owed and what the bank collects at the short sale.

Although, the “arrangement” can take many different forms, there is no other definition of a short sale. I say this because many realtors and some investors simply throw the term around as if it meant “a sale under market value.” No. A bank owned (foreclosed) house is not a short sale. A seller deciding to lower their price and take less profit is not a short sale. An old lady that owns her home free and clear, selling a $150k home for $75k, IS NOT A SHORT SALE. For it to be a Short Sale, someone must be getting “shorted.” Either the seller, or the bank. I will explain how both of those happen in more detail presently.

Another important definition of a short sale is how it differs from foreclosure. In foreclosure, the homeowner falls way behind on their payments and the bank repossesses the house and sells it. In almost all cases, THE BANK PURSUES THE HOMEOWNER FOR THE DEFICIENCY!!! No one seems to know or believe this, but just ask someone who has gone through foreclosure, they will tell you the only way out of this was to file bankruptcy.
 
How It Can Happen - The Arrangement

Most short sales arise when a seller owes more on their house than they can sell it for (upside down). The owner of the home then attempts to make an arrangement with their lender to sell the house for less than is owed.

The term “arrangement” was used in the definition and is intentionally broad because the arrangement depends on the bank that holds the loan. Though there are general practices, every bank does it differently. This article will give you the most common arrangements, but if you take part in a short sale, it’s crucial you assume nothing until you have the bank’s policies in writing.
There are some overriding principles:

1. There is no such thing as a free lunch. This is not some dream come true alternative to foreclosure where the money you owe magically disappears. The deficiency will be accounted for. The deficiency can be 100% loaned to the seller in the form of a promissory note, which they then must repay. If any portion of the deficiency is “written off” meaning that the bank eats it, you can be sure that they will report it as 1099 income to the seller or even as a judgment which will show on your credit for 10 years (not 7 years, 10 years).
2. It is a cumbersome process. If you are entering into a short sale as a buyer or seller, don’t expect it to go as quickly as any other sale. There’s a lot of “back and forth”.
3. The employees of the lender that are negotiating the sale ARE NOT there for the benefit of the seller. Their only goal is to collect as much money possible for the lender and they will use whatever means necessary. You can be sure they will misrepresent their own policies and flat out LIE to the seller in order to intimidate and scare them into paying more money. If you think I’m exaggerating, the joke will be on you.
   For instance, I was once told by a lender negotiating a short sale that, as a policy, they don’t “write off” any of the deficiency and that the seller would have to have a promissory note for $40,000. This lender also told the seller that their hands were tied and this decision came directly from the investor who provides the money for the lender. The lender also said there is absolutely no negotiation on the amount owed, either pay the deficiency, or they will foreclose. The lender made the promissory note very manageable (20 years 0%) so that the seller would be more enticed to just roll over.
   But the seller called the lenders bluff. The seller then provided a letter from an attorney stating they would qualify for a bankruptcy, thus rendering the lender incapable of collecting anything. That same day, the lender called the seller saying they would reduce the promissory note and write off $30,000 of the debt! It would have to be reported as 1099 income, but it would not have to be paid. Amazing change of policy! Then the seller saw what was happening and just said, “no thanks, we don’t want to owe you anything, we’ll just go ahead with the bankruptcy.” Two days later the seller received a written offer that the lender would completely forgive the debt and simply report it as 1099 income! Wow!
   The moral of the story is that the lenders will LIE to obtain their money. Many of the managers of the collections departments are paid on COMMISSION on how much they collect. Just imagine if that seller had rolled over on the first offer! That employee would have been responsible for keeping $40,000 of his company’s money with one five minute phone call!
   One other important thing to remember is that if the lender gets the property back (i.e. short sale doesn’t go through), they have to put it up for auction. This creates the risk that additional money will be lost if the house doesn’t sell for what it’s worth. In the case of the example, the short sale offer was for $550,000, and the amount owed was $590,000. The seller faxed in evidence to the lender that most similar houses in the area were now selling for $480,000. So this enabled the seller to make the argument that it was a much more prudent risk to write off $40,000 instead of running the risk of losing $110,000. This enabled the seller’s representative to intimidate the employee of the lender asking him “did he really want to be responsible for losing his company $110k, when he had the option, right now, to settle for 40k?”
   If it seems like I know a lot about “this example” it would be because I was the mortgage broker for the people making the offer and seller of the property happened to be my wife.

The Details of the Arrangement

Different banks have different policies. The best case scenario is to get a bank that actually “writes off” the deficiency. All that happens here is that the seller has some minor derogatory credit reporting, but doesn’t actually owe the bank any more money. This credit reporting can consist of anything from “creditor settled for less than the amount due” all the way to “foreclosed.”

As the example noted, many banks will do a promissory note for the deficiency.  Some banks are stupid enough to require that the deficiency be paid at closing. Think about it. This does no good because it’s the same thing as the seller selling their house without doing a short sale and simply bringing cash to the table. If a bank tells as seller they need to bring cash to the table in a short sale, they are either idiotic, or more likely LYING.

In cases where the money is “written off” it’s important to understand that the lenders will never actually “write something off.” In most states (I don’t know the law in every state), the lender has the ability to show any deficiency as 1099 income for the seller. All this really means is that the seller has to pay taxes on that income. Depending on one’s situation, it could mean that people that are dependent on some form of aid because of “low income” will have some explaining to do income tax time.

Another way that the deficiency can be written off is in the form of a judgment. This will often occur in conjunction with the 1099 reporting. It might say something on the seller’s credit report such as “judgment filed against John Doe in the amount of $XX,XXX by ABC lender.” This will appear in the “public record” section of the seller’s credit report for 10 years (7 years is only for late payments, 10 years for public record info, don’t argue, trust me). It can either show up as satisfied or unsatisfied. Satisfied is obviously better because it means that the worst thing that can happen is that the lender will report 1099 income.

Unsatisfied could be a problem, because it means that a court has found in favor of the lender to collect the deficiency from you. Now they still might simply do the 1099 thing, or they might try to collect it from you. They can keep trying to collect it from you until they get it. They can garnish your wages. Your only hope then is that you qualify for a Chapter 7 bankruptcy.

This brings up an important note. NEVER, EVER ASSUME THAT A DEBT THAT YOU OWE A LENDER IS GONE UNLESS YOU HAVE THE DETAILS OF THE RELEASE OF THAT DEBT IN WRITING. For instance, someone who had done a short sale had a first and a second loan. The bank agreed to the short sale, which ended up being enough to pay off the first loan, but not the second. The seller had assumed that because the bank agreed to the short sale that they wouldn’t have to worry about the deficiency from the second mortgage. Now they are surprised that they are being pursued for the deficiency. REMEMBER, the lender(s) will always want ALL their money accounted for somehow. NEVER assume something is written off unless you have a formal, signed, written, unconditional release of lien and/or judgment from the lender specifically stating that no further action to collect this debt will be taken.

How did we get to this place in the first point?
A short sale can come about for many different reasons. In my wife’s case, she was the owner of the house and had been making payments. We bought an investment property and put it solely in her name to protect our family in the event that the market took a turn for the worse. It did. We owed 590k, but the best offer we had after 6 months was 550k.

Despite popular belief, YOU DO NOT HAVE TO BE BEHIND ON YOUR MORTGAGE TO REQUEST A SHORT SALE. You just have to demonstrate that your house can’t be sold for what you owe.

In other cases, short sales happen when a seller can’t afford to make their payments and is nearing foreclosure or bankruptcy. It makes life much more complicated if you are living in the house in question. The bank’s ability to scare you is much greater in that case. In this case, a short sale is only slightly better than the alternatives. You will still lose your house, and your credit is still destroyed just because you’ve made 4-5 late payments on your mortgage.

Despite popular belief, A BANKTUPCY, FORECLOSURE, OR REPOSSESSION DO NOT HURT YOUR CREDIT AS MUCH AS THE MULTITUDE OF LATE PAYMENTS THAT OFTEN LEAD UP TO THEM!!!!! I just cannot stress this enough. People think that a bankruptcy damages their credit beyond repair in and of its own accord. I’ve had many clients file bankruptcy with 750 scores and no late payments only to have their score drop to 680. It’s the clients with 20+ late payments that are having their credit hurt.

A final note on how the short sale can come about… Most banks will not agree to a short sale in writing until you have a formal offer. You can simply call your bank and ask them if you could do a short sale at a certain price and they might say “sure, no problem, we’d be happy to facilitate that offer.” BEWARE. That doesn’t mean a thing. Before your short sale is APPROVED, you’ll have to submit an application, hardship letter, financial statements, tax returns, pay stubs, the purchase agreement from the buyer, a HUD statement from the pending transaction, payoff letters from all lenders involved, and several other things depending on the lender.

Once this huge packet of information is submitted to the lender, you will most likely hear back in 1-4 weeks on the TERMS of their “approval.” Be warned their approval will most likely be thinly disguised attempt to collect their debt and will almost never be the “write off” you were hoping for.

Investors

If you’re an investor, by now, I hope I’ve scared you off. Short sales are not some magic way for you to find properties under market value. They are a tool for sellers that owe too much on their homes to sell them at market value.

What you are looking for (or should be if you’re not) are sellers that owe far far less on their homes than what they’re worth. Sellers who don’t care how much they earn because they’re either desperate or have so many houses they don’t care.

Still if you see a house you want, there is one way that a short sale could come into play. Say there’s a distressed property that you’d pay 100k for that you know would be worth 180k if it was fixed up a bit. The seller doesn’t have the money to do it and the house is either vacant or they want out of their situation. In this case, if the seller happens to owe 130k (around there), and you will only pay 100k, AND the seller hasn’t had any viable offers because of the level of distress on the property, then a short might be just what the doctor ordered.

Don’t be unethical and take advantage of people. You’re only going for short sales if the person WANTS to sell their house and no one else but you will buy it because you’re not afraid to rehab a house that’s smells bad and is falling apart.

Conclusion

Again, a short sale is not a magic cure. It’s also not some mystical solution that only an elite few know about. If you’re curious about selling your house as a short sale, you should contact your lender and get information in writing. It’s usually not easy, and you hardly ever will truly “win.” But in some cases, it can leave you much better off than the alternative of foreclosure and bankruptcy. If you’re an investor, there are much better ways to obtain undervalued homes.

Remember that this is a complex process and you should always seek the help of a professional when considering a short sale.

Yvonne Baker, Real Estate Consultant
www.YvonneBaker.com
ycbaker@kw.com

Another large investment banker fails as a result of bad real estate loans.  Lehman Brothers files for bankruptcy protection. Foreclosures continue to increase as housing market values continue on the decline.

(AP NEW YORK – Monday, September 15, 2008) Lehman Brothers, a 158-year-old investment bank choked by the credit crisis and falling real estate values, filed for Chapter 11 bankruptcy protection from its creditors on Monday and said it was trying to sell off key business units.

The filing was made in the U.S. Bankruptcy Court in the Southern District of New York. The case had not yet been assigned to a judge.

Lehman’s last hope of surviving outside of court protection faded Sunday after British bank Barclays PLC withdrew its bid to buy the investment bank. Lehman learned at a last-minute meeting on Friday with federal officials that it would not be getting any emergency funding to give it the liquidity it needed, Chief Financial Officer Ian Lowitt said in an affidavit.

Lehman fell under the weight of $60 billion in soured real estate holdings and tighter credit market that forced it to seek court protection. The filing had been so hastily made that the company had not yet filed motions by Monday morning that are typically made on the first day, such as asking the court for permission to continue paying employees.

Filing for Chapter 11 protection allows a company to restructure while creditor claims are held at bay. The company most likely chose to file under Chapter 11, rather than a Chapter 7 liquidation, so that it could retain more control over the selling off of assets, said Stephen Lubben, the Daniel J. Moore professor of law at Seton Hall Law School. In a Chapter 7 filing, the court would immediately appoint a trustee to take over the case. “I’m sure they think they could conduct a better liquidation themselves, and that’s probably true,” Lubben said.

The investment bank had said earlier that none of its broker-dealer subsidiaries or other units would be included in the Chapter 11 filing. It says it is exploring the sale of its broker-dealer operations and is in “advanced discussions” to sell its investment management unit.

In its bankruptcy petition, Lehman listed Citigroup among its biggest unsecured creditors, with about $138 billion in bonds as of July 2. The Bank of New York Mellon Corp. was listed as holding about $17 billion in debt. Lehman said that as of May 31, it had assets of $639 billion and debt of $613 billion.

Presented by
Yvonne Baker, Real Estate Consultant
www.YvonneBaker
ycbaker@kw.com

(AP – Friday, September 12, 2008) Foreclosure filings in August increased 27% compared to the same month a year ago, a significantly slower pace than in previous months, according to data released Thursday. Nationwide, 303,800 homes received at least one foreclosure-related notice in August, up 12% from July, RealtyTrac Inc. said. That means one in every 416 U.S. households received a foreclosure filing last month.
August’s increase, however, was smaller than the two prior months. June and July both had year-over year increases in foreclosure filings of 50% or more. Still, the total number of foreclosure filings is still the highest since RealtyTrac began issuing its report in January 2005.
Irvine, Calif.-based RealtyTrac monitors default notices, auction sale notices and bank repossessions. More than 90,893 properties were repossessed by lenders nationwide last month — up more than half from 43,141 in August 2007, the company said.
The top three states in foreclosure rates were Nevada, California and Arizona, in that order, RealtyTrac said. Florida, Michigan, Georgia, Ohio, Colorado, Illinois and Indiana rounded out the top 10, though Michigan, Georgia, Ohio and Colorado all reported rate decreases year-over-year.
Weak sales, sinking home values, tighter home loan lending practices and a slowing U.S. economy hamstrung by high fuel prices has left some homeowners with few options to avoid foreclosure. Many can’t find buyers or owe more than their home is worth and can’t refinance into an affordable loan.
Banks and mortgage investors are also holding a glut of foreclosed properties and are slashing prices to get them off the books.
On Thursday, four Democratic senators urged the mortgage companies Fannie Mae and Freddie Mac to freeze foreclosures for 90 days on loans they hold. The troubled companies, seized by the government Sunday, should help struggling borrowers swap their mortgages for more affordable loans and stay in their homes, the lawmakers said.
An estimated 2.8 million U.S. households will face foreclosure, turn over their homes to their lender or sell the properties for less than their mortgage’s value by the end of next year, predicts Moody’s Economy.com.
James J. Saccacio, chief executive officer of RealtyTrac, said the lower percentage increase last month is due to a big spike in activity in August 2007. Last month, default activity was up 10% from a year ago and auction activity up 7% year-over-year, Saccacio said.
“The increases in default and auction activity could be slowing down partly as the result of new legislation passed in several states that is designed to give homeowners in distress more time before foreclosure proceedings are initiated,” Saccacio said.
The next six months will be critical in terms of the housing crisis, noted Albert Saiz, assistant real estate professor at Wharton School of Business. Consumers and investors will be tracking volatile financial markets, judging the success or failure of this year’s housing bill, monitoring the government bailout of Freddie and Fannie, and anticipating the impact of a new president, he said. On the bright side, if home prices and sales stabilize or improve, the foreclosure situation could get better. But the slow economy, high unemployment and volatile financial markets present obstacles to improvement in the foreclosure situation, Saiz said. Together, California, Florida and Arizona accounted for more than half of the nation’s volume of foreclosure activity.
Last month, California’s foreclosure activity increased more than 40% from July and more than 75% from August 2007.
The California cities of Stockton, Merced and Modesto were 1-2-3 in top metro foreclosure rates. July’s leader, the Cape Coral-Fort Myers, Fla., metro area, dropped to sixth. Las Vegas came in seventh.

Yvonne Baker, Real Estate Consultant
www.YvonneBaker.com
ycbaker@kw.com

What does the expected take over of Fannie Mae and Freddie Mac portend to the already troubled housing market? As everyone from mortgage brokers and real estate brokers, to homebuyers and sellers wait with baited breath for the real estate market to recover, the industry receives a one - two punch by the unexpected take over of these two mortgage giants. As a result, can we expect to see more stringent regulation of the industry by the government in an attempt to make sure the disastrous consequences of a soft industry does not happen again? I am speaking of the rampant subprime loans we saw at the height of the market that included loans being made to homebuyers who did not have to show proof of income or their ability to repay these loans. We all danced to the music, now is it time to “pay the piper”?

The following article appeared in the Associated Press:

WASHINGTON - The government is expected to take over Fannie Mae and Freddie Mac as soon as this weekend in a monumental move designed to protect the mortgage market from the failure of the two companies, which together hold or guarantee half of the nation’s mortgage debt, a person briefed on the matter said Friday night. Some of the details of the intervention, which could cost taxpayers billions, were not yet available.
Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and James Lockhart, the companies’ chief regulator, met Friday afternoon with the top executives from the mortgage companies and informed them of the government’s plan to put the troubled companies into a conservatorship.

The news, first reported on The Wall Street Journal’s Web site, came after stock markets closed. In after-hours trading Fannie Mae’s shares plunged $1.54, or 22%, to $5.50. Freddie Mac’s shares fell $1.06, or almost 21%, to $4.04. Common stock in the companies will be worth little to nothing after the government’s actions.

The news also followed a report Friday by the Mortgage Bankers Association that more than 4 million American homeowners with a mortgage, a record 9%, were either behind on their payments or in foreclosure at the end of June. That confirmed what investors saw in Fannie and Freddie’s recent financial results: trouble in the mortgage market has shifted to homeowners who had solid credit but took out exotic loans with little or no proof of their income and assets.

Fannie Mae and Freddie Mac lost a combined $3.1 billion between April and June. Half of their credit losses came from these types of risky loans with ballooning monthly payments. While both companies said they had enough resources to withstand the losses, many investors believe their financial cushions could wither away as defaults and foreclosures mount.

Many in Washington and on Wall Street hadn’t expected Paulson to intervene unless the companies had trouble issuing debt to fund their operations. This summer, Congress passed a plan to provide unlimited government loans to Fannie and Freddie and to purchase stock in the two companies if needed. Critics say the open-ended nature of the rescue package could expose taxpayers to billions of dollars of potential losses. Supporters, however, argue the Bush administration had little choice but to support Fannie and Freddie, which together hold or guarantee $5 trillion in mortgages — almost half the nation’s total.

Concern has been growing that a government rescue of Fannie and Freddie could not only wipe out common stockholders, but also be costly for scores of investment, banking and insurance companies that hold billions of dollars in their preferred shares.

Paulson has been in contact in recent weeks with foreign governments that hold billions of dollars of Fannie and Freddie debt to reassure them that the United States recognizes the importance of the two companies. The two companies had nearly $36 billion in preferred shares outstanding as of June 30, according to filings with the Securities and Exchange Commission.

Fannie Mae was created by the government in 1938, and was turned into a shareholder-owned company 30 years later. Freddie Mac was established in 1970 to provide competition for Fannie.

A government takeover could cost taxpayers up to $25 billion, according to the Congressional Budget Office. But the epic decision highlights the size of the threats facing the housing market and the economy. On Friday, Nevada regulators shut down Silver State Bank, the 11th failure this year of a federally insured bank. And earlier this year, the government orchestrated the takeover of investment bank Bear Stearns by JP Morgan Chase.

Yvonne Baker, Real Estate Consultant
www.YvonneBaker.com
ycbaker@kw.com

If you are having trouble keeping up with your mortgage payments, and have received a notice from your lender asking you to contact them, DON’T PANIC!! The following information provided by HUD may help you avoid foreclosure.

1. Don’t ignore the problem. The further behind you become, the harder it will be to reinstate your loan and the more likely that you will lose your house.
2. Contact your lender as soon as you realize that you have a problem. Lenders do not want your house. They have options to help borrowers through difficult financial times.  
3. Open and respond to all mail from your lender. The first notices you receive will offer good information about foreclosure prevention options that can help you weather financial problems. Later mail may include important notice of pending legal action.  Your failure to open the mail will not be an excuse in foreclosure court.
4. Know your mortgage rights. Find your loan documents and read them so you know what your lender may do if you can’t make your payments.  Learn about the foreclosure laws and timeframes in your state (as every state is different) by contacting the State Government Housing Office. 
5. Understand foreclosure prevention options. Valuable information about foreclosure prevention (also called loss mitigation) options can be found on the internet at portal.hud.gov/portal/page?_pageid=33,717348&_dad=portal&_schema=PORTAL.
6. If you have an FHA loan, contact a HUD-approved housing counselor. The U.S. Department of Housing and Urban Development (HUD) funds free or very low cost housing counseling nationwide.  Housing counselors can help you understand the law and your options, organize your finances and represent you in negotiations with your lender if you need this assistance. Find a HUD-approved housing counselor near you or call (800) 569-4287 or TTY (800) 877-8339.
7. Prioritize your spending. After healthcare, keeping your house should be your first priority.  Review your finances and see where you can cut spending in order to make your mortgage payment.  Look for optional expenses-cable TV, memberships, entertainment-that you can eliminate. Delay payments on credit cards and other “unsecured” debt until you have paid your mortgage.
8. Use your assets. Do you have assets-a second car, jewelry, a whole life insurance policy-that you can sell for cash to help reinstate your loan? Can anyone in your household get an extra job to bring in additional income?  Even if these efforts don’t significantly increase your available cash or your income, they demonstrate to your lender that you are willing to make sacrifices to keep your home. 
9. Avoid foreclosure prevention companies. You don’t need to pay fees for foreclosure prevention help-use that money to pay the mortgage instead. Many for-profit companies will contact you promising to negotiate with your lender.  While these may be legitimate businesses, they will charge you a hefty fee (often two or three month’s mortgage payment) for information and services your lender or a HUD approved housing counselor will provide free if you contact them.
10. Don’t lose your house to foreclosure recovery scams! If any firm claims they can stop your foreclosure immediately if you sign a document appointing them to act on your behalf, you may well be signing over the title to your property and becoming a renter in your own home!  Never sign a legal document without reading and understanding all the terms and getting professional advice from an attorney, a trusted real estate professional, or a HUD approved housing counselor.

Yvonne Baker, Real Estate Consultant
www.YvonneBaker.com
ycbaker@kw.com

When the housing bubble began to explode, the real estate market in states such as California, Nevada and Florida went into “free fall” as homebuyers who had purchased their homes at the height of the housing boom began to suffer massive foreclosures. Those markets hardest hit are now undergoing an adjustment, and a new breed of homebuyer is taking advantage of the downturn by purchasing these destressed properties at a much reduced price either prior to foreclosure from the homeowner or after foreclosure from the bank. Can this mean that there is some relief in sight for the real estate market overall?

Alan Zibel of the Associated press made the following observation:

(WASHINGTON — AP) Sales of existing homes rose in July, surpassing expectations, as buyers snapped up deeply discounted properties in parts of the country hit hardest by the housing bust.

However, the number of unsold properties hit an all-time high, the latest indication that the worst housing slump in decades is far from over. Prices nationwide are not expected to hit bottom until early next year.

The National Association of Realtors reported Monday that sales rose 3.1 percent to a seasonally adjusted annual rate of 5 million units, up from June’s downwardly revised rate of 4.85 million units. Sales had been expected to rise by only 1.6 percent, according to economists surveyed by Thomson/IFR.

“The process of a recovery has begun,” said Joel Naroff, president of Naroff Economic Advisors. “It’s not going to be short and swift, but it’s begun nonetheless.”

Home sales were about 13 percent lower than a year ago and prices were down dramatically. The median price for a home sold in July dropped to $212,000, down by 7.1 percent from a year ago.

Despite the third monthly sales increase this year, the number of unsold single-family homes and condominiums rose to 4.67 million, the highest number since 1968, when the Realtors group started tracking the data.

That represented a 11.2-month supply at the July sales pace, matching the all-time high set in April.

Until the inventory level is reduced to more normal levels, analysts say, the housing slump is likely to persist. The inventory level is being driven higher by a massive wave of mortgage foreclosures.

Between 33 percent and 40 percent of sales activity is coming from foreclosures or other distressed properties, estimated Lawrence Yun, chief economist at the Realtors group.

While buyers are pouncing on lower prices — especially in places like California, Florida and Nevada — sales are sluggish in formerly stable states like Texas.

“People are responding to lower prices,” Yun said, but there is “too much uncertainty” about the housing market’s future to mark a definite bottom.

In Las Vegas, sales were up 96 percent in July, after prices fell more than 25 percent to a median of $220,000, according to The Associated Press-Re/Max Monthly Housing Report, which analyzed home sales recorded by all real estate agents in 55 cities, regardless of company affiliation.

Sales in Los Angeles jumped 31 percent after prices fell 35 percent over the past year to a median of $335,000, according to the AP-Re/Max report.

In Miami, sales were up 9 percent while prices dropped nearly 10 percent to a median of $280,000. One of those sellers last month was Jennifer Del Pino, who unloaded her 3,600 square-foot Miami home to a buyer from Germany for $490,000.