Short Sale, Loan Modification & Foreclosure Specialist

What if I have a second mortgage?

It doesn’t matter if you take out a second mortgage to help buy the home or if you have secured a home equity loan after the fact. The second lender will always be in second position, unless the first is willing to subordinate. Ordinarily, a mortgage lender who is in first position will not subordinate the position.

First in position is first in the right to collect from foreclosure proceedings. This means when a Notice of Default is filed, if the second lender wants to be first in line to receive proceeds from the auction or sale or to take the property back, the second lender must initiate its own foreclosure proceedings.
In most parts of the country, this means the second lender must make up the back payments to the first lender, pay the first lender’s cost to file the Notice of Default and associated expenses, and then file its own Notice of Default. If the second lender does not do this, the second lender could get wiped out in the foreclosure and receive nothing, especially if there is not enough money to go around.
When the second lender receives a notice that states the first has foreclosed, after checking the value of the home, many second lenders do not initiate their own foreclosure proceedings. They take this stance because there might not be enough equity to make the cost of foreclosure profitable for the second lender. This non-action leaves the second lender in a vulnerable position. During a short sale your Realtor can and will need to negotiate with the holder of the second mortgage note. Typically the second lien holder will lose money, and in the past have sometimes been difficult to negotiate with. The bank will have final say over the accepted contract.
Will I still have to pay taxes if I do a short sale?

This is a broad question depending on whether we’re talking about property taxes or federal income taxes. In a short sale, the lender voluntarily accepts the sales price as full payment of the loan so the borrower is protected by any deficiency judgment in a short sale so be sure to negotiate that the short sale is full payment and that there is no deficiency. Otherwise, you will have to pay extra income tax if the bank sends you a 1099 for the deficiency. Some states allow for personal liability and deficiency judgments. However, in states like California, all purchase-money loans on one to four unit residential dwellings are exempt from deficiency judgments. You should consult an attorney first before making any decisions to find out what the laws are in our state.

SOMEONE will always have to pay property taxes. Whether it’s you or the lender depends on their policies and the specific agreement you reach while negotiating the short sale. It is important to remember that when a homeowner must utilize the short sale, deed–in-lieu option, or a foreclosure takes place, the IRS requires all lenders to send a 1099 Income Earnings Statement to all borrowers on the note for any deficiency balance (forgiveness of debt according to the IRS) in excess of $600. This must be reported on the borrower’s tax returns as income and taxes may be assessed. The exception would be for a purchase money loan (an original loan when the house was purchased, and no refinance has taken place), or when insolvency can be proven and the IRS determines the tax liability should be waived or lowered. In any event, a CPA and attorney who are knowledgeable in short sales and foreclosures is essential to help you.
Short Sales and your Credit

The most painful part of doing a short sale is the damage it does to your credit, 99% of the mortgage companies out there won’t even consider a short sale until you are behind on your mortgage payment, and the further you fall behind, the more it damages your credit. However time is of the essence, and a short sale will not hurt your credit as much as the multitude of late payments that often lead up to them. After you finish the short sale you will have absolutely avoided the foreclosure and your credit report will also be better than before. You may be able to negotiate with the lender that they remove any negative items from your credit report once the short sale transaction is complete.

The impact of delinquent mortgage payments can be devastating on a credit report, but until it happens, the full extent is unknown. Most credit grantors rely on credit reports to assess an individual’s bill paying reliability. Employers and insurance companies also look at past credit history to evaluate how we handle our finances. Payment histories are reported for seven years unless it is a matter of public record, such as a judgment, which remains on the credit file for 10 years. There are levels of severity, but how a future lender views your current situation depends upon how well you documented the hardship, how you have overcome it, and what other compensating factors you now have to offset the derogatory credit history.
Even if you are successful in keeping your home, your credit report will probably show 30, 60, 90-day lates by your lender. You may also have credit card lates during the same time period. These will stay on for seven years. If you file a Chapter 13 bankruptcy, and successfully complete it, it will also show for 7 years from the date of filing. If it is not completed, it will stay on your credit report for 10 years the same as a Chapter 7 bankruptcy.
If you sell your home, the above lates, if any, will stay on your credit report for the same time period. A short sale may or may not show on your credit report but is generally not considered as harmful since you took positive steps to remedy your situation.
A foreclosure is probably the worst rating that can appear on a credit report. A deed-in-lieu of foreclosure is only slightly better. Both will stay on your credit report for seven years.

You usually must wait about three to four years before buying another home at competitive interest rates.
Reestablishing a good credit history is imperative. This can be done with an excellent payment history on a new credit card, timely utility payments, and/or satisfactory rental payment records. If you have trouble obtaining an unsecured credit card, you may seek out a secured card.

Finally, it is a good idea to write a 100 word or less explanation, called a Consumer Statement, explaining the hardship to submit to the credit bureaus to include in your credit file. This explanation will remain as long as the items being explained show on the credit report.

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With the short sale steps plan, I will walk you through the short sale from start to finish and be able to answer some of the most common questions and concerns that many homeowners have when faced with doing a short sale. From contacting the lender in the beginning of the process to rebuilding your credit once the short sale has transpired. Let Short Sale Steps be the directory to your short sale.

Short Sale Steps

The short sale process can vary, but it will generally work as follows:

Step 1 Pre-Qualification – Contacting the Lender

First step is you have to consider if you are qualified for a short sale. It involves the process of contacting the lender and explaining to them your condition and your intention to sell the house to avoid the foreclosure. (An experienced short sale real estate agent or foreclosure defense attorney will do most of this for you). Each lender has different qualification guidelines, but they generally will want you to meet the following:
1. Your property (house) should be worth less than the value of your loan.
2. The property should have dropped in value.
3. Your mortgage should be in default or on the verge of default.
4. Your property should be listed on the MLS for at least 60 days.
5. You must be able to show a financial hardship that you are no longer capable of paying your loan and that you don’t even have assets to satisfy this loan. Just be sure to understand that short sales will not make you any money or even save your equity. That is not the purpose of a short sale. The objective here is to sell your house as fast as possible to get you out from under your mortgage and avoid paying for an expensive foreclosure proceeding.
You may need to make a half dozen phone calls before you find the person responsible for handling short sales. Depending on who the lender is that you are dealing with you will either need to ask for the loss mitigation department or the short sale department. Much like getting your phone bill corrected, you can expect the process to involve a lot of waiting on hold and being bounced around an intricate maze of automated voice mail systems. You want the supervisor’s name and the name of the individual capable of making a decision.

Step 2 Submitting the Authorization Letter to the Lender

When working with a real estate agent, closing agent, title company or lawyer, you will receive better cooperation if you write a letter to the lender giving the lender an authorization letter and permission to talk with those specific interested parties about your loan. The letter should include the following:

• Property Address
• Loan Reference Number
• Your Name
• The Date
• Your Agent’s Name & Contact Information

Step 3 Hire an experienced “short sale” real estate agent

Banks prefer to negotiate a short sale with Realtors. The real estate agent will be needed to initially place the property on the market by listing in the local Multiple Listing Service (“MLS”), locating a buyer to purchase the property and negotiating the short sale with the bank. Banks find it difficult to work directly with the homeowner because they are already “on the hook” for the amount they owe. Why negotiate when you don’t have to! It could take 2..3..4.. or more months battling it out with your lenders. This period is difficult for most homeowners because they are sitting around waiting for an answer. It might not seem like not much is progressing, however if chosen wisely, your real estate agent is negotiating on your behalf. The bank and your Realtor negotiate commissions (which are always at a reduced rate), so this is something the homeowner need not be concerned with and frankly, they have no control over. It is a fairly easy process if you work with the right real estate agent and he/she follows the process, most agent don’t like, won’t do and don’t understand it. A good real estate agent will give you an update on a weekly basis. It is critical you work with someone with experience. . .after all most Realtors can take a short sale listing. . but only a few know how to make it a success and create a win-win for you and the bank.

Step 4 Verify the Value of your Property

The bank will require a fair market estimated value of the property. This is when your real estate agent steps in with their many tools of determining market values and provides this information to the bank. This should include properties that are active on the market, pending sales, and solds from the past three to six months.
Calculate the Cost’s
With this step you and your real estate agent will be able to establish an estimated net bottom line once the short sale is in the closing process. You and/or your real estate agent can enlist the help of a local title company or real estate attorney and ask, as a seller, what the closing costs will be. Generally the seller closing cost’ can run anywhere from 1 to 5 percent of the sales price of the property, however every state varies. Determine the amount owed against the property. This will be the total of all loans against the property. Subtract the total amount owing against the property, including closing costs from the estimated market value of the property. On a short sale, this will be a negative number. The local closing company should be able to prepare an estimated HUD-1 Settlement statement, which would include all of the figures associated with the transaction.
Step Submit Short Sale Package to Lender
The lender will request that you submit what may seem a mountain of paperwork to get the process started. Generally the lender will be able to send you what is called a “short sale package”. Below are the documents that the lender will request to be submitted or completed with their formatted documents.
A. Preliminary Net Sheet
This is an estimated closing statement that shows the sales price you expect to receive and all the costs of sale, unpaid loan balances, outstanding payments due and late fees, including real estate commissions, if any. Your real estate agent, closing agent or lawyer should be able to prepare this for you, if you do not know how to calculate any of these fees. If the bottom line shows cash to the seller, you will probably not need a short sale.
B. Proof of Income and Assets
It is best to be truthful and honest about your financial situation and disclose assets. Lenders will want to know if you have savings accounts, money market accounts, stocks or bonds, negotiable instruments, cash or other real estate or anything of tangible value. Lenders are not in the charity business and often require assurance that the debtor cannot pay back any of the debt that it is forgiving. The lender will also want to see two of your most recent pay stubs.
C. Copies of Bank Statements
If your bank statements reflect unaccountable deposits, large cash withdrawals or an unusual number of checks, it’s probably a good idea to explain each of those line items to the lender. In addition, the lender might want you to account for each and every deposit so it can determine whether deposits will continue.
D. Two years of tax returns and W-2’s.
Remember to provide signed copies of tax returns.
E. Signed IRS Form 4506 “Request for Copy of Tax Form”
This is so that the lender can verify that the submitted returns actually match the originals sent to the IRS.
F. Hardship Letter
This statement of facts describes how you got into this financial bind and makes a plea to the lender to accept less than full payment. Lenders are not inhumane and can understand if you lost your job, were hospitalized or a truck ran over your entire family, but lenders are not particularly empathetic to situations involving dishonesty or criminal behavior.
G.Broker Price Opinion (BPO)

A BPO is needed for the lender to verify the value of the home. It is similar to an appraisal, but less costly and quite as detailed. It provides the lender a reliable accurate opinion of the property value and what it should sell for rather than an appraisal that will tell the lender what the value should be. Your real estate agent, should be able to perform the BPO.
Once you have completed the packet make sure you review it carefully with your Realtor. Different lenders have different requirements, but all lenders have some basic requirements that you’ll need to know to get your short sale packet complete. Remember that every lender is different, and will have different guidelines. If you follow the outline of this article, you should be able to complete a short sale packet quickly, easily, and accurately.
Find a Buyer
The next step in the short sale process is finding a buyer. With your property being listed on the MLS during the beginning process of the short sale, your property should have been receiving tons of exposure. Now would be a good time for your Realtor to have open houses, and use all of the marketing strategies available to get your property noticed by the next potential buyer.
Purchase agreement & Listing agreement
Once you have found a buyer the next step is to complete a purchase agreement. When you reach an agreement to sell with a prospective purchaser, the lender will want a copy of the offer, along with a copy of your listing agreement, in which the Realtor will submit to the lender. Be prepared for the lender to renegotiate commissions and to refuse to pay for certain items such as Homeowner Warranties or termite inspections.
Once the offer is in the lender’s hands, it is up to the lender to decide if the short sale is approved or not. Don’t be surprised if your short sale bid is rejected and countered. Lenders aren’t emotionally attached to their properties, so they aren’t as likely to give you “steal.” Many short sales fall through if the BPO comes in too high, which is often the case. You can’t pull the wool over a lender’s eyes - if the property isn’t is need of serious repair, it is unlikely you can convince the lender the property is worth a whole lot less than the appraised value. If the offer is rejected, then ask the buyer to counter their offer so you can submit an offer that the lender will accept, as long as it is reasonable and within fair market value.

Then have your Realtor submit the counter offer to the lender. It may take a few rounds of counter offering on both sides before an offer gets accepted. However, be prepared that the deal must just fall through and you may have to wait for another buyer with a higher offer or the worse scenario is that your home goes to foreclosure sale. Of course, the whole point of the short sale is to prevent that, but not every transaction can be turned into a short sale.

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Statistics

The economy, job losses and a record number of foreclosures and short sales have resulted in homes under contract for the month of November 2008 falling 4.0 percent to 82.3 from 85.7 in October 2008. This is 5.3 percent below November 2007 pending contracts which were 86.9 according to the National Association of Realtors national pending home sales index (“PHSI”). The NAR index is the lowest since 2001 when they started reporting the PHSI. The index is a pretty good measurement of home sales and the real estate market for the next couple months, since pending home sales typically close 30 -60 days after signing. So don’t except the numbers to dramatically increase.

Lawrence Yun, the NAR’s chief economist said “…December’s housing market activity could be comparably lower due to ongoing problems in the economy, so a real estate-focused stimulus plan is urgently needed.” … With a proper real-estate focused stimulus measure, home sales could rise more than expected, by more than 10 percent to 5.5 million in 2009, and easily begin to stabilize home prices in many parts of the country. Stable home prices will, in turn, lessen foreclosure pressures and lay the foundations for a solid economic recovery as the nation’s 75 million homeowners regain confidence….”. December’s number will be released on January 26, 2009.

The near 50 year lows in mortgage rates are not reflected in the above statistics and should help the December numbers a bit because more buyers are being able to afford low interest mortgages, helping to stimulate the economy and reduce the foreclosure numbers as well.
4th Quarter 2008 Foreclosure Activity
First American Corporation, a provider of advanced property and ownership information, statistics and services released their latest issue of Core Mortgage Risk Monitor (CMRM). CMRM forecasts delinquency risk for the real estate and mortgage industry, providing information on areas where homeowners are mostly likely and less likely to face foreclosures due to mortgage default.
The results of the study revealed that the likelihood that homeowners will default on their mortgages increased by 12 percent from a year ago and is up 54 percent from early 2002. According to the report, the rate of home prices declining has stabilized at around 11 percent, with almost zero acceleration. Mark Fleming, chief economist with First American CoreLogic said “… Because this rate is not increasing, home price declines are not raising the national risk index further at this time, but they’re not reducing the risk either. While the risk index has been driven upward throughout 2007 and 2008 primarily by the acceleration of declines in home prices, there is now a geographic expansion of risk driven by fundamental economic conditions. Flat or declining wages and increasing job losses are beginning to affect the index more heavily in many markets.”
The report reflects that California is at the top of the list with seven of the eight riskiest markets. The top three markets in California being Riverside/San Bernardino, Los Angeles and Sacramento. Florida is number two on the list, with Miami in the top 10 and Fort Myers and Port St. Lucie having high risk foreclosure factors. In November, California had 60,500 foreclosures, and Florida had 49,190 foreclosures.
Dayton, Ohio was the least risky market, with Austin, Texas, Omaha, Nebraska and Wichita, Kansas are included among the five least risky markets.
For California, there is a little bit of good news though. Pre-foreclosure activity slowed in the fourth quarter, from 130,658 in the third quarter to 108,284 in the final three months of the year. For the region, the totals during those periods fell from 22,636 to 20,567. The decline may largely be a result of a procedural change in California’s foreclosure process that took effect in September 2008, which requires lenders to contact homeowners 30 days before filing a notice of default.
However, nationwide, many industry observers are expecting another wave of foreclosures in 2009 as a result of rising job losses, continued declining home values and higher monthly mortgages that had interest rates re-adjust.
Unemployment Rates at All Time High

The nation lost 524,000 jobs in December 2008. It appears that employers are afraid that if they don’t lay off workers, their companies may go under in a recession which is being compared as the worst since the 1930’s.

According to the Bureau of Labor figures released on Friday January 9, 2009, the unemployment rate jumped to a 16-year-high of 7.2 percent. 11.1 million are out of work, which is nearly 50 percent higher than at the start of the recession a year ago. The total number of jobs lost in the recession now totals 2.59 million. Hundreds of thousands more people were looking for full-time work in December, but many could not get more than just part-time jobs if they were luck. Employers in nearly every industry have cut payrolls. Only health care and education added a combined 45,000 jobs as reported by the Bureau of Labor Statistics.

Economists agree that this recession is going to be a long hard one, and the Blue Chip Economic Indicators reflect that the economy will continue to contract until July 2009, with a slowing pace during the second quarter. This would make it the longest recession since the 1930s, outlasting the mid-1970s and early 1980s downturns, which each lasted 16 months. The current recession started in December 2007 and would reach the 16 month milestone in April 2009.

The Bureau of Labor reported that the average number of hours that Americans worked fell to 33.3 a week in December, which was down two-tenths of an hour, to the lowest level since records first were kept in 1964. During the course of this recession, average weekly hours worked are down 4 percent. Economists predict that even with the help of a government stimulus, the unemployment rate will keep rising. Bleak reports for our nation.

Government Help

In addition to the government bailout of the financial industry, there is also currently pending legislation that would allow bankruptcy judges to adjust mortgages for at-risk borrowers. Other proposed changes include: only existing mortgages will be eligible; homeowners will have to certify they tried to contact their mortgage holder lenders regarding loan modifications before filing for bankruptcy; and only major violations of the Truth in Lending Act will cause lenders to forfeit their claims in a bankruptcy. Those who support the legislation such as Citigroup, Bank of America and Wells Fargo believe this will help homeowners. Opponents, including The American Bankers Association have expressed concerns that the proposal to give bankruptcy judges broader authority to modify mortgage terms could end up making home loans more expensive and less available.
The Treasury Department, Federal Reserve and the FDIC jointly expressed that they expect all banking and lending organizations to work with their existing borrowers to avoid preventable foreclosures. They said “Given escalating mortgage foreclosures, the agencies urge all lenders and servicers to adopt systematic, proactive, and streamlined mortgage loan modification protocols and to review troubled loans,” “… Systematic efforts to address delinquent mortgages should seek to achieve modifications that result in mortgages that borrowers will be able to sustain over the remaining maturity of their loan.” This continued effort by lenders to help stop foreclosures through short sales and mortgage modifications should reduce the number of foreclosures in 2009.

The President has also asked for the remaining $350 billion in bailout funds from the $700 billion Troubled Asset Relief Program (TARP) passed in October 2008, to be released. However, congressional sources on both sides have been unhappy that none of the first $350 billion has been used to prevent foreclosures. Lawmakers are working on ways to make sure that the money is only released if some of it goes toward aiding those homeowners at risk of losing their homes to foreclosure and helping consumers obtain automobile and home loans. Treasury Secretary nominee Timothy Geithner is working on plans to revise the way TARP is used to help foreclosure prevention. Under the bailout legislation approved by Congress in October, the administration must formally notify Congress that it wants to access the second installment of $350 billion. Unless Congress passes a resolution rejecting the request within 15 days, the Treasury department can begin tapping the funds.
If Congress rejects the request, the President could veto the resolution, allowing the Treasury to proceed. Congress would have to override the veto to stop, which requires a two-thirds majority in both the House and Senate.
Short Sales – Viable Option for Homeowners

So in these difficult financial times, more and more homeowners are finding the need to sell their homes through the short sell process because they are upside down on their mortgages as a result of declining home prices and the present state of the economy.
For all the homeowners who are upside down and can no longer make their mortgage payment (due to a job loss, divorce, or a resetting option ARM), foreclosure seemed like the only alternative. Foreclosure is not a good option for borrowers or banks. A foreclosure sticks on your credit record for at least 10 years. A foreclosure costs the lender fees for attorneys and maintaining the property. Now that the government has put pressure on lenders to avoid preventable foreclosures with their borrowers, and the fact that the lenders already have numerous foreclosures on their books, lenders are finally waking up and realizing that they need to work with their borrowers on resolving these issues. Short sales and mortgage modifications are the most popular solutions for many upside down homeowners right now.
A “short sale “occurs when the homeowner owes more on their mortgage than their property is worth at current market value. In a short sale, the lender agrees to accept a payoff on a home mortgage that is less than what the owner of the property actually owes on the mortgage. For example: A homeowner, who is facing foreclosure, has an existing first mortgage of $300,000, yet the house is only worth $220,000. You submit your accepted buyer’s offer to the lender for $220,000. If the lender agrees to the offer, then the lender accepts the offer as full payment for the loan. The transaction is now referred to as a short sale.
From the lender’s perspective, a short sale saves many of the costs associated with the foreclosure process - attorney fees, the eviction process, delays from borrower bankruptcy, damage to the property, costs associated with resale, etc. In a short sale scenario, the lender gets the property back faster, so it is able to cut its losses. No court approval is necessary. If the lender has instituted foreclosure proceedings, they will withdraw them.
A short sale can be a long and drawn out process, that can take anywhere from 30 days to 6 months or more. Once your loan is in default, normally you will have at least 6 months to short sell the home with the lender. A lender generally waits three months before filing a notice of default (beginning the foreclosure). Then it usually takes another three months (or more) for the foreclosure process to run its course before an actual auction sale of the property takes place. Considering the complexity of the short sale process, you should be educated on the process beforehand. If you are considering a short sale, make sure that you discuss your situation with a foreclosure defense lawyer, an accountant and your Realtor. The more educated you are on the process, the easier the transaction will be, and the better the impression you will make on the lender.

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