As most of you know who follow my Blogs already know, last January the California Legislature passed SB931 which barred first lenders that consent to short sales from having any deficiency recourse against the borrowers. However, they quickly learned that it is junior lenders (seconds, HELOCS, etc.) that control the success of short sales. So on July 15th, the Legislature passed SB458 imposing the same recourse bar on junior lenders plus they barred any lender from requiring a money contribution from the sellers. These law changes created and then amended California Code of Civil Procedure Section 580e.

Reaction to SB458 was immediate. Proponents claimed it a victory for upside down homeowners while we and many Realtors thought it would be a disaster and kill further short sales. Indeed many short sales quickly died and pressure started mounting to undo the damage. But there wasn’t much data to go on as to its actual overall effects. So last week I sent out a Survey amongst our clients and contacts asking for input on what they were actually experiencing in their short sale deals. The responses were clarifying. Of those whose short sales were impacted, just over 50% said it hurt while just under 50% said it helped. Most responders were unclear on what the impact would be. I contacted representatives of the California Association of Realtors and learned that they had been polling hotline calls from their Members statewide. CAR found the numbers more positive than negative but again, like us, too little actual numbers to give a clear picture.

The conclusion at this point is that there is still a lot of uncertainty in the market, particularly amongst lenders trying to understand and respond to SB458. However, here are the main benefits we see emerging:

1. SB458 forces junior lenders to evaluate right now whether or not they could collect from a borrower if they waited for the first lender to foreclose and then sued as a sold-out junior lienholder. Prior to SB458, the junior lender could get some money in the short sale while holding out for recourse on the balance. They could then wait this out for several years and hope the borrower gets solvent. Not any more. Clearly this makes the borrower’s hardship application and particularly their net worth statement even more important in the decision making process;

2. SB458 appears to have brought an additional liability protection for borrowers who agreed to a prior short sale with deficiency recourse. The first Paragraph of the new short sale law begins: “No deficiency shall be owed or collected, and no deficiency judgment shall be requested or rendered…..” Nothing in SB458 states that it only applies to short sales after July 15th.

No doubt there will be a lot more debate and analysis and litigation concerning SB458 and its impacts. As with any law, it will be subject to judicial review in the courts and further change, expansion, and clarification by the Legislature. But for now, CCP580e is the law of the State of California.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you have specific questions about dealing with upside down loans or real estate, be sure to contact a real estate attorney in your State. We provide advice worldwide concerning California property.

If you have further questions about SB458, need assistance convincing junior lenders to consent to a short sale, or are facing collection actions by any lender, please feel free to contact us for knowledgeable advice and experienced guidance. You can reach us by calling our office at (916) 966-2260 or you can e-mail me directly at sjbeede@bpelaw.com.

One of the key issues we always examine with consulting with upside-down sellers is the impact of a short sale or a foreclosure on their credit.  While not as damaging as the risk of a deficiency judgment or debt forgiveness tax, credit damage impacts both the capacity to get another loan and can often adversely impact a borrower’s job and career.  To get  greater clarity on the credit impacts, I contacted Jeff Sipes at Blue Water Credit (www.bluewatercredit.com) which helps people restore their credit standing.  Here’s what Jeff provided:

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By Jeff Sipes, Blue Water Credit:  I am often asked what the impact of a short sale or foreclosure is on a credit score.  Unfortunately, there is no straight-forward answer. This is such a difficult question to answer simply because it depends on a variety of factors. In general, a short sale or foreclosure will affect your credit score 85-160 points. Many mistakenly believe, or are misinformed, that a derogatory credit event such as a foreclosure is somehow worse than a short sale. In the world of credit scores, however, both of these events look the same way; the customer did not pay as agreed.

What Is A Credit Score?

A credit score is the statistical prediction of one’s likelihood to pay late over the next two years.  The higher the score, the less likely one is to have a late payment.  The bank then uses this number to assess the amount of risk involved with lending someone money.  Banks are a lot like a casino in a sense, they like to place bets where they feel they will win.

Be aware that there are multiple credit scoring models.  Some of the credit scores in these models go up to 990.  While there are multiple formulas for calculating credit scores, the formulas introduced by the Fair Isaac Corporation (FICO) are the most widely used.  This score ranges from 300-850. Fair Isaac recently released a report stating that credit scores are affected nearly the same whether you go through a foreclosure or short sale. The report stated that the average points lost on a FICO score are as follows:

• 30 Days Late = 40 to 110 Points
• 90 Days Late = 70 to 135 Points
• Foreclosure = 85-160 Points
• Short Sale = 85-160 Points
• Deed-in-lieu = 85-160 Points
• Bankruptcy =130 to 230 Points

How Are Short Sales Reported To The Credit Bureaus?

FICO does not differentiate between a foreclosure and a short sale. Further complicating matters, lenders don’t have a uniform standard as to how they report a short sale to the credit bureaus. Some lenders report short sales as “settled as agreed” while others may report it as “account legally paid in full for less than the full balance.” In some cases, if the account is more than 120 days past due, the short sale will automatically show up as a “foreclosure” on the credit report.  Both a short sale and a foreclosure will report on your credit for seven years from the date of first delinquency.

How to Maximize Your Credit Score during a Short Sale or Foreclosure

Since the number of delinquent accounts is factored into the score, try not to let any other accounts become late or delinquent (if possible).  The second largest factor of your credit score is your debt ratio (the limit of your credit cards compared to the balances you carry) try not to let your balances exceed 30% of the limit.  Only apply for credit when absolutely necessary.  Do not close your credit cards.  If you are able to do all of these things you will be back into the 700’s before you know it.

Credit scores play a large factor in our lives, but ultimately we have many other priorities that are more important.  Credit, like many other things, will be healed over time.

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The information presented in this Article is not to be taken as legal advice. Every person’s situation is different.  If you have specific questions about dealing with upside down loans or real estate, be sure to contact a real estate attorney in your State.  We provide advice worldwide concerning California property. Please 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.

by Steve Beede, Robert Enos, Alexander Munn, and Keith Dunnagan

As readers of this Blog are aware, California recently enacted SB458 dramatically changing the rights of lenders who participate in a short sale. Although as we expected, this new law has made short sales much more difficult, recent experience has shown us an unexpected benefit, a ray of hope for all borrowers who previously completed a short sale and may have junior lender deficiency risk. 

Background on Deficiency Liability: California Code of Civil Procedure Section 580 contains the law governing rights of plaintiffs to obtain a judgment against a defendant. It’s principal Sections, 580a, b, c, and d, govern the rights of lenders to obtain a deficiency judgment against a borrower following a real estate foreclosure. For example, CCP 580b prohibits deficiency judgment for purchase money loans on 1-4 unit owner-occupied property. Until 2011 however there was no clear law defining liability in “short sales”. That changed last January with the passage of SB951 which added Section 580e, commonly called the Short Sale Anti-Deficiency Statute, which bars first lenders who consent to a short sale from getting any deficiency judgment against the borrower. While this was helpful, the change left unclear the rights of junior lenders who would regularly demand recourse and/or money in order to get their consent to do the short sale. This has now changed. 

Passage of SB 458 - On July 15, 2011, California enacted SB 458 which revised Section 580e and drastically changes how short sales are handled in California. The revised CCP580e now provides that:

     1) all lenders are prohibited from seeking or obtaining a deficiency judgment following a voluntary short sale (including junior lenders);  and

     2) no lender can require that the borrower make any monetary contribution to the sale proceeds.

The impact of these two provisions are tremendous for bad or good and since it’s passage we’re seeing both.

First the Bad: As we wrote immediately following the law’s passage (see Will New Law Help or Hurt Short Sales), our fear was that junior lenders would simply kill short sales and seek a better result through post-foreclosure deficiency lawsuits. That certainly has happened and currently short sale participants are scrambling to save sales through first lender, buyer, and agent contributions to junior lenders. There’s even instances of sellers supposedly “volunteering” contributions to junior lenders since under the new law such lenders cannot require them to do so. In other cases, sellers that have access to some cash are negotiating “discounted pay-offs” of junior loans removing them entirely from the short sale. But without question. SB458 made short sales much harder to complete and foreclosures are climbing.

Now the Good: Over the past four years, hundreds of thousands of short sales have been completed in California and in a great many cases sellers agreed to junior lender demands that they remain liable for any deficiency. While we are certain that SB458 bars all attempts at collection of deficiencies for short sales which close on or after July 15, 2011, the legal question is whether the new law will apply retroactively to protect sellers in already closed short sales. We have been arguing that it does and gaining great results from our clients who had been facing lender lawsuits. Here’s a sample of what we’re experiencing since the law was revised:

     (1)   A major credit union in our area unilaterally dismissed a lawsuit against a borrower who had signed a short sale approval letter in 2010 which contained a deficiency clause requiring her to pay nearly $100,000. The credit union dismissed the case because it had yet to obtain a judgment against the borrower, and believed that because the revised statute prohibits any judgment for any deficiency, it’s case no longer was valid;

     (2)    In another instance, a national lender well known for its aggressive deficiency collections settled a borrowers pre-SB458 deficiency for only 10 cents on the dollar due to the uncertainty surrounding the revised CCP580e. What is uncertain is whether the revised statute prohibits collection of pre-July 15, 2011 deficiencies. As with the nationally-known lender, the ambiguities in the statute forced the lender to accept a mere 10 cents on the dollar. Our expectation is that this will compel many lenders may make the same type of settlements.

Most importantly, if the lender has not as yet sued the borrower on a pre-SB458 deficiency, or has sued the borrower and has yet to obtain a judgment, CCP580e can be read as creating an absolute bar to any such actions. In summary, while the revised CCP580e will likely kill many short sales that would have, under the old statute, been approved, it is a ray of hope to those borrowers saddled with a deficiency obligation.

So, if you completed a short sale before July 15, 2011, or know of a past client who did so, and it contained a deficiency clause, contact one of our attorneys immediately to discuss possible defenses under the new statute.  If you’re in the middle of a short sale and having difficulty with junior lender demands, we can possibly help convince the junior lender that doing the short sale is their best option.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are a real estate professional involved with short sales or in anyway providing communication or advice to upside-down owners, be sure to get competent legal advice in your State immediately before giving any advice.

If you have specific questions about dealing with 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.

While we have all looked hopefully to an improving real estate market as 2011 progressed, it is now fairly clear that we’re in for continued uncertainty as financial concerns continue to rock the economy.

On the International level, the downgrade last week of the United States’ credit rating by Standard & Poor’s has triggered a dramatic sell-off in the stock market and raising the borrowing costs for the government. This means the cost of US Treasury bonds will climb and can be expected to push up real estate interest rates for new loans. Those borrowers with adjustable loans tied to Treasury rates can expect similar increases. The biggest fear is that this, combined with instability with European financial markets, will cause businesses to continue holding onto cash instead of investing in new jobs. Business confidence and job growth is needed to lift us out of this recession and avoid further declines.

On the National level, real estate foreclosure rates continue to climb. Lender Processing Servcice reports that 217,000 new foreclosures were started in June and that 4.1 million loans are now either in foreclosure or 90+ days delinquent. This is a 13% increase from last year. What this indicates is that efforts to assist upside-down borrowers continue to fail. Plus, we’re seeing an increase of defaults among borrowers who have interest-only loans which will convert to full-pay in 2012. Without an option to modify, refinance, or sell, many such borrowers are deciding to take the hit now. The key to making such a decision is knowing whether the borrower will be at risk of a lender lawsuit for recourse after a foreclosure or shaort-sale. BPE Law’s consult services for upside-down borrowers can answer these questions for California property owners.

California remains in disarray as borrowers, lenders, and agents still try to make sense of the recently passed SB458 which amended California Civil Code Section 580e. By barring junior lenders from either deficiancy recourse or contribution, the legislature suddenly made short sales an all or nothing situation. All lenders owe their investors a fiduciary duty to try to recover as much as reasonably possible. First lenders generally make more money from a short sale than they would from a foreclosure so, this change has not substantially affected them. But junior lenders now must weigh the nominal amount offered them by a first lender (typically $3,000) against what they might recover by suing the borrower for deficiency after the first lender forecloses. Unless the borrower is clearly a Bankruptcy candidate, junior lenders will increasingly find foreclosure more attractive than short sale. For Realtors, this means further declines in short sale closing rates, more REO properties, and continued market decline.

We have a long way to go and many hurdles to cross before we reach any kind of certainty. Huge lawsuits are being filed against lenders by their investors, most recdently AIG’s $10 billion suit last week against BofA. Meanwhile, the proposed Settlement of the Attorneys General lawsuits against lenders arising from the “robo-signer” scam remains in limbo. The battle-ground there is demands that lenders modify loans and cut principal balances. The lenders refuse… or at least refuse to agree to government-imposed loan changes. For upside-down borrowers, there is no indication that anything transpiring in the economy or in the courts will bring any more hope for homeowners nor will there be any government bailout.

In the long run, as with past recessions, it will take inspiring and effective political leadership to move us forward. Today’s political infighting in Washington and in the States - especially California - has not produced any sense of confidence in the US or the World that we have the political will to make the hard decisions necessary to put our economy on a path to recovery. Any path will be painful. How that pain is balanced will remain the battle-ground.

Effective July 15, 2011, California has prohibited Junior Lenders (2nds, HELOCs, etc) from having any deficiency recourse claims against the borrower if the lender agrees to take part in a short sale. Gov. Jerry Brown signed SB 458 (Corbett) into law and it took effect immediately. In January, 2011, SB 931 (2010) was put into effect requiring that any First lender that agrees to a short sale must accept the agreed upon short sale payment as payment in full of the outstanding balance of all loans. But unfortunately, the rule did not apply to junior lien holders. SB 458 extends the protections of SB 931 to junior liens. Both laws only apply to one to four unit residential properties.

Whether this is a victory for sellers and the real estate industry remains to be seen.

California Association of Realtors President Beth L. Peerce stated: “SB 458 brings closure and certainty to the short sale process and ensures that once a lender has agreed to accept a short sale payment on a property, all lienholders – those in first position and in junior positions – will consider the outstanding balance as paid in full and the homeowner will not be held responsible for any additional payments on the property.”

But the real question is whether this will in fact make short sales harder to get done.  For any lender being asked to take the loss of the deficiency in a short sale, their only obligation is to determine whether a short sale will get more money back for their investors than a foreclosure. For first lenders on one to four unit residential properties, short sales are almost always better because: 1) Buyers pay more at a short sale than at a foreclosure sale; and 2) almost all foreclosures of these type of properties in California are done using a Trustee Sale from which there is no deficiency recourse. So for the foreclosing first lender, the short sale will generally bring them more money than a foreclosure. That is not necessarily the case with junior lenders.

In most short sale situations, there is not enough value in the sale proceeds to pay anything to junior lenders. Unless the junior lender made a “purchase money loan” (acquire personal residence), the junior lender has recourse against the borrower if not paid in full. However, unlike the first lender, the junior lender will not foreclose. They will wait for the first lender to foreclose which will wipe-out the security for the junior loan. Once that happens the junior lender can file a lawsuit against the borrower for whatever is owed them and, unless the borrower files Bankruptcy, the lender can collect everything owed to them. This is very different from what pre-existed this law when at least borrowers had some legal defenses against junior lender collections after a short sale. There are few if any defenses to post-foreclosure junior lender collection lawsuits.

One of Murphy’s Laws is called “The Doctrine of Unintended Consequences”. We got into this market collapse as a result of a government policy to promote expansion of home ownership. But this required making loans to people who were less qualified to repay them. This noble Policy drove up demand for homes and that drove up prices…. until borrowers could no longer afford to pay their debts. SB 458 is a similarly good sounding Policy. As much as I hope it does not occur, I fear that the unintended consequence of the passage of this law will be that junior lenders will reject short sales, more homes will go into foreclosure, and the real estate industry will further decline (except for those handling post-foreclosure REO properties). Time will tell whether this is a victory or a disaster.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are a real estate professional involved with short sales or in anyway providing communication or advice to upside-down owners, be sure to get competent legal advice in your State immediately before giving any advice.

If you have specific questions about dealing with 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 FTC’s Mortgage Assistance Relief (MARS) Rule which took full effect on January 1, 2011 is designed to help distressed homeowners avoid mortgage relief scams through a combination of: 1) an Advance Fee Ban; 2) required Disclosures; and 3) a Prohibition against certain types of claims. See my previous Blog for details: Mars Rules Hope to Block Loan Scams.

Although targeted at Loan Modification Companies, The Rule is causing great concern for Realtors and other real estate professionals handling short sales.  Since short sales in part seek to provide debtors with relief from deficiency loan liability, the challenge has been how to do their job effectively without risk of liability for violating the MARS Rule in short-sale negotiations where they often discuss their clients’ delinquent mortgage situations, or refer clients to companies that specialize in loan workouts.

The National Association of Realtors (NAR) requested that the FTC carve out disclosure exemptions for home sales but that request has been denied. The result is Realtors handling short sales could be exposed to fines of up to $11,000 per day for non-compliance with the Rule.  To facilitate compliance, the California Association of Realtors (CAR) has created four new Disclosures to be used in short sales each of which is formatted with the type sizes and emphasis required under the Rule. Two of these concern short sales and two concern notice to tenants concerning post-foreclosure occupancy rights.  These new Disclosures are:

     (1)   Mortgage Assistance Relief Services Short Sale Negotiation Notice;

    (2)   Mortgage Assistance Relief Services Offer of Mortgage Relief Notice;

    (3)   Notice of Termination of Tenancy within One Year after Foreclosure (Giving Tenant At Least 90 Days to Vacate)

    (4)   Additional Information Regarding Termination of Tenancy within One Year After Foreclosure Giving Tenant Less Than 90 Days to Vacate).

As with any new law, the enforcement and applicability of the MARS Rule may change as courts ultimately interpret its full legal effect.  Meanwhile it is critical that all people involved in real estate transactions be aware of and comply the Rule’s requirements. If you are a Realtor, be sure to stay current with the legal forms being provided by your State Association of Realtors.  We will also seek to keep you informed in these periodic Blog postings.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are a real estate professional involved with short sales or in anyway providing communication or advice to upside-down owners, be sure to get competent legal advice in your State immediately before giving any advice.

If you have specific questions about dealing with 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.

In November, 2010, the Federal Trade Commission passed a rule that bans providers of mortgage foreclosure rescue and loan modification services from collecting fees until homeowners have a written offer from their lender or servicer that they decide is acceptable (FTC MARS Rule).  Called the Mortgage Assistance Relief Services (MARS) Rule, it is designed to protect distressed homeowners from mortgage relief scams that have sprung up during the mortgage crisis. Bogus operations falsely claim that, for a fee, they will negotiate with the consumer’s mortgage lender or servicer to obtain a loan modification, a short sale, or other relief from foreclosure. Many of these operations pretend to be affiliated with the government and government housing assistance programs.

The MARS Rule has three key components:

1.   Advance fee ban - Under this provision, mortgage relief companies may not collect any fees until they have provided consumers with a written offer from their lender or servicer that the consumer decides is acceptable, and a written document from the lender or servicer describing the key changes to the mortgage that would result if the consumer accepts the offer. The companies also must remind consumers of their right to reject the offer without any charge.

2.   Disclosures - The Rule requires mortgage relief companies to disclose key information to consumers to protect them from being misled and to help them make better informed purchasing decisions. In their advertising and in communications directed at individual consumers (such as telemarketing calls), the companies must disclose that:

    (a)  They are not associated with the government, and their services have not been approved by the government or the consumer’s lender;

   (b)  the lender may not agree to change the consumer’s loan; and

   (c)  if companies tell consumers to stop paying their mortgage, they must also tell them that they could lose their home and damage their credit rating.

Companies also must explain in their communications to consumers that they can stop doing business with the company at any time, can accept or reject any offer the company obtains from the lender or servicer, and, if they reject the offer, they don’t have to pay the company’s fee. The companies also must disclose the amount of the fee.

3.   Prohibited claims - The MARS Rule prohibits mortgage relief companies from making any false or misleading claims about their services, including claims about:

   (a)  the likelihood of consumers getting the results they seek;

   (b)  the company’s affiliation with government or private entities;

   (c)  the consumer’s payment and other mortgage obligations;

   (d)  the company’s refund and cancellation policies;

   (e)  whether the company has performed the services it promised;

   (f)  whether the company will provide legal representation to consumers;

   (g)  the availability or cost of any alternative to for-profit mortgage assistance relief services;

   (h)  the amount of money a consumer will save by using their services; or

   (i)  the cost of the services.

In addition, the rule bars mortgage relief companies from telling consumers to stop communicating with their lenders or servicers. Companies also must have reliable evidence to back up any claims they make about the benefits, performance, or effectiveness of the services they provide.

All provisions of the rule except the advance-fee ban become effective December 29, 2010. The advance-fee ban provisions became effective January 31, 2011.

Most people in the real estate and lending community applaud this effort to protect already upside-down homeowners from predators promising help but who in reality are only out to take their money. However, passing a Rule is one thing, understanding and implementing it is another. In my next Article I’ll discuss the challenges being faced by the Real Estate industry to comply.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are upside-down on your loan(s), or if you are being tempted by companies promising to get you a loan modification and enable you avoid foreclosure, get competent legal advice in your State immediately before giving them any money up front.

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.

For the past three years, I’ve been regularly advising upside-down property owners on the challenges, risks, and strategies of dealing with their lenders and upside down loans.  Over 2,000 borrowers and their Realtors have consulted with us to determine what they should do.  As our nation’s economy slowly recovers, some solutions have improved such as lender’s willingness to do short sales while others have gotten worse such as the failure of loan modification programs.  And we’re now defending more and more clients from lender and collection company lawsuits seeking deficiency judgments.

At the request of several clients, we’re providing the following informational links to Outlines that can help owners and Realtors know which questions to ask and learn which way to proceed.

Guide for Upside-Down Property Owners

Outline for Property Owners Seminar

Outline for Realtors Seminar

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 person’s 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.

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.

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.