Strategic Defaulters: New Trend in Mortgage Defaults

More and more homeowners who can pay their loans but opt not to. They live in their home FOR FREE without paying mortgage,while they are in the process of foreclosure or short sale. We call them: strategic defaulters --they are "more than we have ever experienced before."

The foreclosure process is taking 13 to 14 months, and so there's over A YEAR of FREE RENT.

31 percent of foreclosures in March were deemed to be "strategic default"!!

我今年年初有一个short sale，于芸芸offer中好不容易拿到。 等了n久, seller从third party那里听来可以free rent, 竟然就不卖了！free 住几个月，对financial 情况不太好的short sale卖家还是很难抗拒的～所以，short sale还是能不沾就不沾吧。 变数实在太多了！

Auto reply of a short sale agent

I found this quite amusing:

Thank you for your email. Please be patient and allow me to respond back to your email within 24-48 hours. If your email is received on the weekend, I will reply back on Monday.
*If you are an agent and need showing instructions, please refer to the MLS.
*If you are inquiring about an update on your offer, please remember this is a Short Sale "Subject to lender's approval." This isn't a typical transaction, the lender is reviewing your offer and are taking a huge loss. They are not typically going to accept an offer immediately when in most cases they are being asked to accept $50-200K less than what is owed.
Please advise your buyers that this process can take 4 weeks and even up to 4 months (depending on the client's and lender's motivation to proceed.)
If you have submitted an offer on a property, an update will be given at least every Friday.
Thank you again for your patience.

Short sale的一点感想

明年会有更多的short sale在市场上。 银行会take some loss to approve the sale, 因为他要foreclose一个房子也要花很多的钱。 很多买家都寄希望于short sale来买一个好deal. 不过要知道很多的short sale都是开价很低来吸引buyers, 所以你要做好homework, 看看这个房子到底值多少钱，给一个reasonable的offer. 因为最后银行也会做BPO和估价，所以给一个low ball基本上是没有任何chance的。

另外一个就是很多人都知道，short sale is not short. 不要把所有的希望放在这一个房子上，Actively look at multiple properties.

My summery of bank own sales

You have to remember： Bank calls all the shots.

Some terms might be deleted and some terms might be added. You have to review them carefully.

Banks will do both BPOs and appraisale to have a clear idea of how much the propertie really worth.

No low ball offers!

Somecases, bank would pay some escrow and closing fees. But not always.

No TDS, and not all disclosures are provided.

As-is!

What you need to do to get a bank own properties:

• Pre-approval with bank or from lender you planning to use.
• Vefification of funds. Don't wait for the bank request it. Include it anyway.
• Be aggressive with time contingencies. 10 days for inspection is preferred. 7 days is becoming the norm.
• Speed things up...order inspections upon verbal acceptance.

Don't submit low offers, change lender or terms, don't enter seller names on any documents, don't ask for credit or repairs.

Short Sales vs. REOs

With the real estate market changing, we're seeing an increase in sellers who want or need to sell their property because they can't make their mortgage payments. Many of them will be facing possible foreclosure. As a buyer, you may see or hear the words, "Short Sale," and "REO," quite often. What is the difference, and is there a benefit to buying one or the other?

First, a short sale happens when a homeowner wants to sell their home, but owes more than what the house can sell for. For example, let's say a homeowner has a $400,000 mortgage on their home but can now only sell the home for $350,000. If they sell the home for $350,000, they'll have to still come up with the extra $50,000 that they owe the bank to pay back the full amount of the mortgage. If they don't have $50,000, and if they don't have other assets available, they may ask the bank if they can come up "short" on what they owe, and pay the bank $350,000, having the bank "forgive" the other $50,000. Sounds good, right? Well, first, they don't have a right to have the bank forgive the amount that is still owed; the bank will decide whether they will take less than is owed. Also, there may be negative tax and credit consequences to the homeowner.

In contrast, an REO (Real Estate Owned), is property that used to be owned by someone, the owner didn't make the mortgage payments, the bank went through the foreclosure process, and now owns the property.

In my experience, buyers who would like to buy a short sale have to be extremely patient and not get too attached to the home that they want. The homeowner still owns the home, but it's the bank who will decide whether to deal with the sale or not. Sometimes a bank doesn't even bother with an offer at this stage; I made an offer for a client on a short sale about 6 weeks ago and the bank still hasn't even assigned someone to review it! (We are now in escrow on another property).

With REOs I have found that it is much easier to get a response. The home is now the bank's asset and they seem to be much more motivated to sell it. Not that it completely smooth, but I have found it to be easier to help buyers buy REOs than to buy short sale properties.

With both short sales and REOs, you really have the bank dictating terms that they will accept, so you don't have too much power over many of the terms of the sale. With REOs I find that it's easier to negotiate a lower price and some closing cost credits; with short sales, the bank really has no motivation to take a lower price or give any kind of credits. With both, if you get into escrow, you will usually have a shorter investigation/inspection and escrow period and probably won't get a home warranty or repairs.

My conclusion? If it's between a short sale and an REO, my opinion is that you can get a better price and some credits and you can at least get a response from the bank. Of course, this can be different depending on the specific home and specific bank involved.


2008/8/26 Connie

After trying to make offers for my clients on short sales, I have "lovingly" termed them "virtual sales."

Like a lot of areas, San Diego has its share of short sales (home sales where the owner owes more to the lender than what the home can sell for). Although the borrower/seller still owns the home, the bank has to approve the contract because they have to agree to take less than what is owed to it. So many buyers enjoy the idea of the short sale because the price usually looks attractive, but so few actually end up selling.

cash

Three motivated buyers, three different offers, all the same result:

Buyer 1: We made an offer for the home back in October. We still have not heard an answer (even to this day), so my clients bought a different (non-short sale) home.

Buyer 2: We made a full price offer on a home in December. We never heard anything, except that an answer was "coming soon." My client got so tired of hearing that, that he recently bought a different home and has now closed escrow. The area that the short sale home is located in has gone down in price so I doubt that it can be sold for what my client offered.

Buyer 3: We made a full price offer on a home, also in December. Finally, after 5 weeks, the bank came back and wanted $30,000 more. My clients have moved on.

Although I know that a portion of short sales actually sell, it's amazing to me how difficult it is to actually get a bank's cooperation. I understand that the banks have other priorities and that they need a lot of information before they will approve a sort sale, but if there is a willing, able and motivated buyer, it seems to be in everyone's best interest to actually sell the home rather than let it go into foreclosure, costing the bank more money.

I can only imagine how frustrating it must be for the listing agents too. I have seen listing agents bend over backwards to get a short sale to be approved only to face the same frustration.

Until banks become more motivated to work to on short sales, I counsel my clients about the pitfalls and risks of those "virtual sales," and let my clients decide whether they want to wait it out. I have to explain that the list price isn't necessarily the price the bank will approve. More often than not, my best buyers decide that waiting for a bank just isn't worth it and will move on to other properties.

Short sale from seller's side

Short sale is a method of disposing of your home without having the lender foreclose on you. Is an arrangement with your lender whereby they will allow you to sell the property for less than the amount of the current mortgage.

Let's take this example: you bought the house last year for $500,000, and foolishly took advantage of the mortgage broker's sales pitch and obtained a 100 percent loan. Now, the house will probably only sell for $475,000, and you lost your job and cannot afford to continue with the monthly mortgage payments.

Why would a lender permit this? First, you should understand that not all lenders will allow a short sale. Their decision depends on a number of factors: where is your house? how much loss will the lender suffer? What is the possibility that a speculator/investor will buy at a foreclosure sale?

Lenders have their own requirements, so I can only provide general information; The sellers will have to consult the specific lender to determine what they need in order to move forward with the short sale process.

The first step is to contact your financial and legal advisors. Do not contact the lender until you fully understand the potential risks involved. Under Federal law, when a debt is forgiven, it can be treated as ordinary income on which tax must be paid. Thus, if your lender allows you to sell the property to $475, less a 2 percent commission, you will pay off your $500,000 mortgage and have a deficit of almost $35,000. According to many tax professionals, you will have to pay income tax on this amount even though you did not actually receive the money.

Furthermore, you want to make absolutely sure that even should the lender approve the short sale, you will not be obligated to make up this difference, which is called a deficiency. Unfortunately, most lenders will not put their agreement in writing, so your legal advisors will have to satisfy themselves -- and you -- on this matter.

In fact, many lenders have been known to use this "forgiveness of debt" issue as a way of dissuading their borrowers from pursuing the short sale approach.

After you are satisfied that you understand the concept and are prepared to move forward, you should contact your lender. Go up the corporate ladder as high as you can and talk with the manager of the short sale department. Typically, the lender has a "loss remediation" department that handles these matters.

If you have authorized your attorney or your real estate agent to act on your behalf, the lender will need a letter of authorization from you. The Privacy Laws enacted after 9-11 prohibit lenders from discussing personal and financial information with a stranger without such written authorization. This letter will include your name, property address and loan number.

You (or your agent) should then prepare a comprehensive letter explaining why you are requesting the short sale. Emphasize -- but not as a "sob story" -- your hardship. It would also help if you include a market analysis which will show what houses in your area are currently selling for. And finally, spell out your request in detail: what price are you asking the lender to approve, what percent commission will the real estate agent be allowed to accept, and what closing costs will be associated with the settlement. Keep in mind that in many jurisdictions, there is a recordation and transfer tax which is typically split between buyer and seller.

Your proposal should be as specific as possible. You don't want to learn at settlement that you still have to come up with a lot of cash, because your lender did not authorize certain out-of-pocket expenses.

You should also request from your lender the amount of your outstanding balance. The lender has a legal obligation to provide this to you on request, and the burden is on the lender to provide an accurate accounting. Review this carefully to make sure that there are no charges which have been erroneously added. If you have missed some payments, you will be assessed late fees. When you present your proposal to the lender, try to get these charges deleted from the amount of the outstanding mortgage balance.

Your proposal should also include your financial situation. Keep in mind that many loans in the past few years were what are called "no-doc" -- in other words, the lender made the decision to fund your loan based on the value of the property and not on your financial status. In your case, since you lost your job, include proof with your letter.

The more documentation you can provide the lender, the faster the decision will be. However, currently lenders are swamped with these requests, since you are not the only one facing a possible foreclosure.

Thus, the earlier you can start the process, the better chance you have of getting it approved.

But the lender's approval to proceed with a short sale does not end the process. When you or your real estate agent find a prospective purchaser, the contract must state that it is contingent on lender's approval. You have to send the contract to the lender, and it would help if you would include an accounting of all expenses which you will have to pay at settlement, and a final number that the lender will receive when settlement takes place.

In fact, if you can have a HUD-1 settlement statement prepared, this would be helpful and would expedite the process. Your lender will then review the documentation, and may reject certain expenses. For example, if the contract provides that you will give your buyer XX dollars for "closing costs" -- or that you will pay some items which are traditionally the buyer's obligation (such as title search and survey) -- the lender may not allow such payments.

You want to go into the settlement knowing exactly all of the terms and conditions on which your lender will accept the short sale, including whether or not you will have to come up with money at the settlement table.

You are in financial trouble. If you have already missed some payments, your lender may already have reported this information to the credit reporting companies. You should try to convince the lender not to report any more delinquencies, but unfortunately, that's in your lender's sole discretion.

The short sale process works, but is complicated, time-consuming and uncertain. If you can start now -- before you are actually in default -- you will be ahead of the game.

Short Sale & Foreclosure

如果借贷人接的数目高于房子的市场价值，他本身也没有能力再偿还了。 他就可以和银行协商要求银行允许他做short sale.

具体做饭是借贷人卖出房子， 把贷款给还上。

借贷人先要和银行达成协议， 银行可以接受比欠款要低一些的short sale金额。
目前报纸上网络上到处出现的2个term. 很多人还是搞不清楚。 有很多人问过我到底什么是Short Sale & Foreclosure。 我在这里解释一下。

Short sale比foreclosure好的地方就是影响到credit score的多少。 short sale要减去80-100分。 Foreclosure要减去很多， 一般250-300左右。 所以如果银行同意的前提下， seller都要先short sale.

Foreclosure对银行来说就是更差的选择了。 一方面是expensive， 一方面是own houses也不是银行的business, 银行是最不愿意手里Hold一大堆房子了。

对房主来讲， short sale要提供一系列的证明来证实你的的确确是没钱。 （prove financial distress）而且大多数的银行都会要求房主还要付欠债和卖价的差额。如果是lender “forgives” the debt, 就叫做debt forgiveness. 那要小心了， IRS出现了，IRS会把整个debt forgiveness的数额作为你的收入上税。 具体的要问你的CPA for tax advice。

San Diego County Notice of Defaults and foreclosure

Below are some houses and condos that have been served notice of defaults (NODs). A notice of default is served to formally commence the pre-foreclosure period. With San Diego real estate prices being substantially higher than the national average, San Diegans look for a way to get a good value by way of purchasing pre-foreclosure or bank-owned properties. Another option for value-conscience condo and house buyers may also be short-sale properties. Short sales are properties that are being sold for less than the owners owe the lenders for them. Hence, the term “short” in short-sale. Though short sales can be bargains, prices are subject to lender-approval. Currently, home buyers can search on San Diego Houserebate’s website for short-sale properties.