Across the country, real estate agents are reporting a dramatic increase of lenders rejecting short sales and pushing forward with foreclosures.  This change of practice seems to be most evidence with Bank of America although they certainly are not alone.  In one recent case in Washington reported on KATU.com, the lender (Flagstar) rejected the buyer’s offer as being too low and demanded a higher price. When a new buyer agreed to pay the lender’s price, the lender rejected the deal and foreclosed anyway.  In a similar situation in California, BofA rejected an offer that was substantially higher than comparable sales (realtown.com).  So what is driving this change?  It may be the interaction of several changes. Here’s what may be going on:

1.  Changes at Bank of America - it is no great surprise that BofA’s foreclosure rate would increase. As reported here on Feb. 9, 2011(Changes coming to BofA), this lender has now divided itself in two with one part holding their good loans and banking business, and the other part - called “Legacy Asset Servicing” - holding the bad. And they’ve brought in a veteran forecloser from One West Bank to lead it.  The expectation is that the two year plus lag times which BofA has taken to foreclose will soon disappear as they push to get these bad debts off their books.

2.  Changes at Fannie Mae and Freddie Mac - These government sponsored enterprises (GSE’s) are the actual investors in nearly 90% of all loans being made today.  As the investors, they have the control over whether a short sale offer is accepted or rejected.  Now that the government wants to get out of the lending business (winknews.com), there is a push underway to wind down the enormous amount of bad debt on their books. On February 23rd, Fannie Mae announced what it has called the “STAR” program which will actually rate lender servicers and provide rewards for those who perform timely and fines for those who don’t.  This could mean that lenders that do not foreclose timely will be fined! (see Bob Hertzog blog).

3.  Problems with Broker Price Opinions - The underlying cause of these rejections often is based upon the lender’s unrealistic opinion of the property’s value. When considering a buyer’s short sale offer, the lender has a responsibility to its investor to independently determine the value and for this they generally have their own real estate representative provide a broker price opinion, commonly called a “BPO”. While this should reasonably match up with what a buyer would be offering, it doesn’t always happen.  And sometimes it bears no relationship to reality.  Again and again we hear about lenders rejecting short sales and then opening the foreclosure sale with a bid even less than the short sale buyer would pay.  How can this make sense?  Well, there are some ways:

      (a)  Investor makes more money on a foreclosure - In many cases lenders’ and investors’ risk of loss is less than we might believe: (1)  lenders may have their own mortgage insurance policies in place that pay them only if there is a foreclosure;  (2) lenders may have some access remaining to TARP bailout money to offset bad loan losses; and (3) lenders such as One West who take over failed banks from FDIC may have government guarantees that pay them more if they foreclose (see: One West blog 8/2010).

     (b)  BPO is defective - Just because a bank requests their agent to run a BPO does not assure that it will be accurate.  In today’s marketplace, real estate values vary widely. If the agent does not use comparative properties of the same size, location, and physical condition, the BPO may tell the lender to demand a higher price than a buyer would be willing to pay.  If this happens to you, request a review of the BPO and provide good detail on the subject property and the comps.  A full-blown appraisal would be better but no-one wants to spend the money on this, especially if the lender is not really motivated to short sell.

    (c)  Negotiator Opposition - Even when everything seems right, the Short Sale must still be approved by the lender’s negotiator and this can add an element that has nothing to do with market value.  We recently were involved in a short sale with Chase in which the seller stayed current on their loan to avoid credit damage (he was a banker). The negotiator refused the short sale because, since he was current on the loan he must not have a hardship. She wanted him to pay the entire deficiency even though he had no ability to do so. This short sale eventually succeeded by “appealing upstairs” to a supervisor but it was a battle all the way. 

IN SUMMARY - Overall, there are five generally recognized reasons that Short Sale offers get rejected.  Make sure that the short sale offer you submit satisfies each of these:

      (1)  Price is too low:  Make sure to supply a fully and accurate comparative market analysis or approasal.  Be ready to counter a defective BPO.

      (2)  Short Sale Package Incomplete:  Don’t expect a lender to tale a hit on the deficiency if the Seller has not provided full information required to evaluate a hardship application, including net worth statement.

      (3) Seller does not Qualify:  If the Seller has assets that they can contribute to reduce the deficiency but refuses to do so, the lender may reject the short sale.  Bridging this requires analysis of the impact that a foreclosure could have on the Seller and on the lender.

     (4)  Buyer does not Qualify:  As with any offer, the lender must be reasonably confident that the Buyer will be able to complete the sale so be sure to provide at least a Prequalification Letter with the offer. Also, make sure that this is a third party transaction. If the Buyer is a friend, family member, or business associate of the Seller, it will probably be rejected as being a sham “straw buyer” seeking to stick the lender and then getting the property back to the seller.

      (5)  Bank sold the Loan:  Banks have thousands of loans on their books. Short Sale offers are often submitted to the lender who is receiving the Seller’s loan payments.  But they may only be a servicer if they have sold the loan.  Seek to get confirmation quickly that the lender still owns the loan… they may not know for certain themselves.

Meanwhile, if you have specific questions about your upside down loans or real estate, feel free to contact us at sjbeede@bpelaw.com.  We offer a $200 flat fee attorney consultation to review your situation and help you evaluate and choose the best opportunities. This can be done in person or by phone. If interested, please call us at 916-966-2260.

The information presented in this Article is not to be taken as legal advice. Every persons situation is different. If you are upside-down on your loan(s), especially if you’re facing a lender lawsuit, get competent legal advice in your State immediately so that you can determine your best options.

 In that matter, it turned out that the decision maker was the loan’s investor, FNMA.

Last Fall, controversy erupted nationwide when it was disclosed that lenders were falsifying Declarations legally required to foreclosure on defaulted property owners. The law requires that someone with personal knowledge of the facts declare under oath that the facts were true and that they justified the foreclosure.  In reality, banks were having staff members sign thousands and thousands of these Declarations without even reading them and with no personal knowledge of the facts they were swearing to.

Although the furor quickly died when banks promised to clean-up their acts, the Attorneys General of many States brought legal charges against the lenders. Last week, they unveiled a draft Settlement which contains a great many provisions which, if adopted, would end the abuses and inefficiencies which have plagued the loan modification process and led to the foreclosure of millions of homes.  Most controversial however is the requirement II.M. of the draft Settlement which would require lenders to consider and apply Principal Reductions as part of the loan modification process.  Opposition has been swift.

As reported in DSNews.com, almost as soon as the draft Settlement was released, Bank of America’s CEO, Brian Moynihan, spoke out against the principal reduction requirement saying “it would not be fair to underwater homeowners who have struggled to remain current”.  Senator Richard Shelby of Alabama stated: “This proposed settlement appears to be an attempt to advance the administration’s political agenda, rather than an effort to help homeowners who were harmed by a servicer’s actual conduct”.  And Iowa Attorney General, Tom Miller, acknowledged that “too generous a program might encourage homeowners to walk away from properties…”.  This was followed by the Chairman of the House Financial Services Committee, Spencer Bachus, who called the draft an effort to “transform the mortgage servicing industry and fundamentally change the rules that have historically governed relationships among borrowers, servicers, and investors”. He asked: “Will forcing servicers to fund principal reductions for underwater loans they service affect the incentive of mortgagors to stay current on their loans?”

Obviously the proposed Settlement is just a draft at this point and the final terms may vary greatly from the initial proposal.  But judging from the initial media reports, there is a widespread opposition to intervening in the lender-borrower relationship by compelling principal write-downs.  If the investors who provide their moneys to lenders to make loans cannot rely on their right to enforce the loan terms when there has been a default, those investors may decide to invest elsewhere. If so, the availablity of loans, especially for the riskier borrowers, will become much more difficult to obtain.  No matter what else happens, the political discussion created as a result of the Robo-Signer scam could potentially change the entire financial system for both the better and for the worse.

Please take the time to review the draft Settlement and let your Attorney General and House and Senate representatives know how you feel on this issue. Watch this Blog and others as the revisions occur.

Meanwhile, if you have specific questions about your upside down loans or real estate, feel free to contact us at sjbeede@bpelaw.com.  We offer a $200 flat fee attorney consultation to review your situation and help you evaluate and choose the best opportunities. This can be done in person or by phone. If interested, please call us at 916-966-2260.

The information presented in this Article is not to be taken as legal advice. Every persons situation is different. If you are upside-down on your loan(s), especially if youre facing a lender lawsuit, get competent legal advise in your State immediately so that you can determine your best options.

As any observer of the real estate market knows, property pricing remains in the dumps with most sales being either short sales or foreclosures and REO’s. While the economy in general appears to be recovering, real estate has been lagging behind. 2011 is projected to see increasing foreclosures as lenders clean-out their backlog of defaulted loans. Meanwhile, we’re just starting into dealing with upside down commercial properties. For this reason, many economists project we won’t really turn the corner on real estate recovery until 2014 at the earliest.  So why might this be the best time to buy?  

1.   Properties are Undervalued - As reported in DSNews.com,  based on the latest Case-Shiller home price index, a study by Capital Economics shows that in the fourth quarter of 2010, housing was 21 percent undervalued when compared with disposable income per capital. Looking at data included in the index published by the Federal Housing Finance Agency (FHFA), the firm found that housing in Q4 was 15 percent undervalued as measured against individuals’ disposable income. Capital Economics says its results illustrate “housing is exceptionally undervalued,” and the gap is getting bigger. In its third quarter 2010 report, the research firm pegged the Case-Shiller index readings as 19 percent undervalued and the FHFA index as 14 percent below what would constitute a balanced housing value in relation to income.  This downward pressure on prices will continue as the foreclosures clear out, opening the gap even further.

2.  Financing Remains Very Affordable - On top of low prices, mortgage rates have fallen back a bit in recent weeks, leaving them even further below the 20-year average of 7 percent. Last week marked the third consecutive week that rates have continued to decline. A national survey conducted by Freddie Mac shows that the average 30-year fixed-rate has dropped to 4.87 percent, while the 15-year fixed-rate has slipped to 4.15 percent. When you wrap declining home prices and historically low mortgage rates together, Capital Economics says, “The incredibly favorable affordability and valuation environment is the housing market’s one big positive.”

3.   Government Financial Support May be Ending - As my readers know, the future of FNMA and Freddie Mac is in jeopardy. These Government Sponsored Enterprises (GSE’s) were originally created to provide a funding source for socially desireable but higher risk loans. When started, GSE’s provided funds for 30% of all loans. Today, that number is 90% and steps are being taken in Congress to get government out of the lending business or at least scale it back.  Last week, Freddie Mac published a Memo that starting June 1st, they will no longer purchase loans with loan-to-value ratios of less than 5%.  As these GSE’s retract from the marketplace, interest rates and down-payment requirements are likely to rise making home ownership less achievable.

4.  Buy to Own or Invest, not to Flip - While there will always be opportunities for the knowledgeable and dilligent to make money flipping properties, declining prices and increasing loan costs will shrink the profit margins available as flippers find it harder to re-sell.  In contrast, those who buy for their home or for rental investment will benefit from 1) locking in the profit margin between current prices and actual value; and 2) potentially higher rental values as the ranks of renters swell with people who cannot obtain a loan to buy their own home. 

All of the above factors indicate that right now may be the ideal time to buy real estate, not for quick profit but for the long-term stability and financial growth that real estate has historically provided as a part of your overall financial plans.

If you have specific questions about real estate, investments, or any other legal issues, feel free to contact us at sjbeede@bpelaw.com.  We offer a $200 flat fee attorney consultation to review your situation and help you evaluate and choose the best opportunities. This can be done in person or by phone. If interested, please call us at 916-966-2260.

The information presented in this Article is not to be taken as legal advice. Every persons situation is different. If you are upside-down on your loan(s), especially if youre facing a lender lawsuit, get competent legal advise in your State immediately so that you can determine your best options.