Short Sales, Fraud, and the FBI

Short Sales and Fraud

    Yesterday was quite a news day in our local area for Real Estate and short sales. Unfortunately, the news was not necessarily great. A somewhat well known broker/lender/accountant was the target of a search warrant and raid by the FBI and HUD. The warrant was sealed, and at this point the allegations are only allegations, so that story will have to play itself out. Many of you will remember though that just recently, former Michigan Supreme Court Judge Diane Hathaway plead guilty to bank fraud and concealing assets in connection with a previous short sale.

    I did get some calls from past clients with questions about the breaking news. Some of them had gone through a short sale; some of them are right now in the midst of trying to undergo a workout with their lender. One thing they all had in common was an uneasy feeling. When stories such as these steal the headlines, they cast a long, grey shadow over the entire process. This shadow brings additional uncertainty to those homeowners already facing an uncertain future.

    I decided to write this today to hopefully restore a little certainty to both my clients and anyone else may have questions. As a licensed Real Estate Agent and a Realtor, I always strive to be part of the solution and not part of the problem.

    This is a quick and dirty guide to what a short sale is and what it is not. The Department of Housing and Urban Development uses the term ‘Pre-Foreclosure Sale’ (HUD – PFS Faq’s). A pre-foreclosure sale is a mechanism through which a lender will agree to allow a borrower to sell the home for less than the amount owed. The lender will participate in this process when the borrower demonstrates they have a qualified hardship. A ‘qualified hardship’ is generally defined as a hardship that will result in an eventual foreclosure and was not intentionally orchestrated by the borrower.

    A short sale is not a method for someone to buy a bigger and nicer home and then ‘dump’ their current home just because they want too – referred to as a “buy and bail” by Fannie Mae. A short sale is also not a process for someone to sell a home because it is not worth what it once was, unless they have a qualified hardship. A short sale is also not a method for someone to sell their house to a third-party and then buy it back or rent it cheaper than their current mortgage payment (unless this is disclosed in writing to the lender and the lender agrees in writing).

    During the course of a short sale, the seller will be asked to disclose a number of things. These will generally include: bank statements (all accounts that all mortgagees have an interest in or access too), pay stubs, w2’s, tax returns, IRS form 1056-T, a detailed list of monthly household expenses, a narrative explaining the hardship, and other information as requested by the lender. The seller will also be instructed to list the home for sale with a real estate broker who will provide listing documentation, assist the seller in communicating with the lender, and market the home according to highest and best practices, including listing the home at market value to attract a market value offer.

    Short sales can be a difficult process to maneuver; sometimes there are three or four stakeholders that all must agree on the terms before a final approval can be issued. The negotiation process is not overly complicated, but it is tedious and protracted. There are no shortcuts, magic bullets or ‘secret’ telephone numbers. The keys to short sale success are patience, persistence and perseverance.

    The short sale process does have a negative effect on the seller’s credit. This is the result of the missed or late payments that led up to the short sale and the manner in which the short sale is reported to the credit rating agencies. These factors can result in a reduction in not only in a FICO score reduction, but limit the seller’s ability to secure other loans, have an effect on security clearance ratings, cause an increase in insurance premiums and have other collateral effects. A short sale has less impact overall than a foreclosure, but the seller does not walk away unscathed.

    The important points to remember from this brief update are:

"Trust Me"

1. 1.      Short sales are a voluntary resolution agreed to by the seller and their lender based on the mitigating circumstances.
2. 2.      A qualified hardship is a necessary component of a short sale.
3. 3.      You will be signing disclosures and affidavits stating that all representations made are true and accurate and the sale is an Arms-Length transaction.
4. 4.      Any professional (be they a Realtor, accountant, lawyer, title company, or otherwise) who advertises an easier, softer, quicker or cheaper process without disclosing all the options and ramifications upfront is obscuring the truth by omitting facts. 
5. 5. You should always consult an independent attorney and CPA for legal and tax related questions when undergoing a short sale.

    For more information on Short Sale acceptable practices and fraud, be sure and check out these short sale related web pages from Fannie Mae, Freddie Mac, HUD and FHA.

    For any additional questions, you can find my website "here"

ZOMBIE APOCALYPSE WARNING!!! (The foreclosure zombies are coming)

Zombie (foreclosure) Apocalypse is happening!!!

Do not panic! Panic is the enemy of surviving a zombie attack! Please remain calm and continuing reading for (financial) life saving information.

No, despite the EAS warning broadcast recently by KRT-TV in Great Falls, MN, there are no hoards of zombies coming down Main St. You are in no danger of being eaten on your way to work this morning. That undulating mass swelling outside the local electronics mega-store banging on the doors and licking the glass is not the un-dead searching for brains (although, they maybe should be? That is another blog topic all together); they are just waiting for the new iRazor Phone or the X-station 7 or that 187” TV.

     So what exactly am I talking about? Zombie Foreclosures! Yes, you read that right, Zombie Foreclosures. If you do not know what that means, or you or someone you know experienced a foreclosure, or is in the process of a foreclosure, you need to keep reading.

     A zombie foreclosure can occur when a lender starts the foreclosure process (generally by sending a demand letter) and then just…..stops. How many of you have that ‘home’ in your neighborhood? You know the one, it has been vacant for 3 years, yet no foreclosure information can be found. There are a few weathered and sun-bleached papers taped to the front door. The storm door lazily droops off the bottom hinge, giving a mournful groan with every passing breeze. The overgrown landscaping has begun to march up the front steps and is poised to reclaim the front porch. If you suddenly found yourself in the midst of a black and white horror movie, this looks like the place where the zombies live. The truth is they just might.

     You ask your local Realtor about it and they say the deed is still in the name of the last (and still current owner). No evidence of a foreclosure can be found. Realty-Trac reports pre-foreclosure activity, but that information is over 36 months old. It’s a zombie! It can come back from the (foreclosure) dead.

     So, what exactly does that mean? For the owner, it unfortunately means that they could be (and most likely are) responsible for the last 3 years of property taxes, Home Owner Association Dues, blight fines, ordinance violations and any other fees, taxes or assessments levied on the property. It means they still own a property that has no upkeep and is in a horrible state of repair. It means the township may soon condemn the property – and guess who gets the bill for the tear-down and cleanup? You guessed it – the property owner. It also means that the foreclosure they thought happened 3 years ago hasn't happened. Their thoughts of maybe qualifying to buy another home after the 3 year foreclosure rule no longer apply. It can also mean that when they make an attempt to solve this problem, it will re-awaken the bad debt account on their credit and decimate what they have worked hard for three or four years to rebuild.

     For the lender, it means they started the foreclosure process but for one of several reasons it never followed through. They may have decided the collateral was not worth the cost of foreclosing. They may have gotten assumed by another, bigger lender who has not yet gotten to that file. They may have ‘reset’ the foreclosure because a workout plan was being negotiated and then never resumed the process. There is no requirement that a lender must foreclose on a property. There is also no legal requirement that a lender must pursue a foreclosure to completion once they start the process. Some lenders will mail a notice of dismissal when the stop the foreclosure process; many more lenders do not.

     For potential buyers this can mean they may wind up buying a foreclosed property that neither the lender nor the prior owner completely own. This can lead to having large amounts of money tied up into a property they can neither get clear title to nor sell.

     Moneynews.com reports that some 10 million homes have gone through the foreclosure process since 2006; as many as one-fifth (20%, or 2 million) of those foreclosures have not been completely resolved. A hoard of 2 million Zombie titles floating around is enough to put anyone in the market at risk of getting bitten. It also means that there could be as many as 2 million 'bitten' home owners who do not know they are infected.

     So what can you do? If you had a foreclosure, a quick check with a Real Estate agent (::ahem::) is a good place to start. They can pull a copy of the public record to determine if the Sherriff (foreclosure) Sale did in fact take place and to whom the title was transferred. This could also show if the title was re-conveyed back to the previous owner after the foreclosure auction (you can convey a Quit Claim Deed to someone without their knowledge simply by filing it with the county). Your Realtor (:::ahem:::) can also be a great referral source for a qualified Real Estate Attorney to review your foreclosure documents and advise you on how to proceed if there is a zombie lurking in your closet.

     Again, if you had a foreclosure, DO NOT PANIC – panic is your enemy when dealing with a zombie. Call a Realtor (:::ahem:::) let help you learn how to avoid the zombie apocalypse.

(Yes, KRT-TV did broadcast a Zombie warning – I hope it brings a little humor to your day - here it is)

FHA is getting more expensive, but this is a good thing.

Changes are coming to FHA in 2013

Just about everyone who has bought a home in the last five years is familiar with the term “FHA” loan. Since the mortgage crisis in 2007, FHA has become the low down payment loan of choice for many borrowers. In fact, prior to the downturn in 2007, FHA insured about 2% of all purchase money mortgages; that number had increased to over 33% of all mortgage nationally, and is currently floating  in that range. And by now you are probably thinking, so what, right? Things are about to change.

                Let’s talk for a minute about what FHA actually does and does not do. FHA does not loan money. When you get an FHA loan, you are basically getting a conventional loan with a lower down payment and some increased flexibility in the qualifying standards. This increases the risk for the lender. To offset this risk, FHA insures the lender against loss in the case of borrower default. The current top limit on this insurance is 96.5% of the loan value (and this is why FHA loans require a minimum of a 3.5% down payment). This can people who may have bruised credit or less money for a down payment get a home. Sounds like a pretty noble idea, right? It is, sort of…there are some costs though. Please keep reading.

                There are two main costs associated with an FHA mortgage. The upfront mortgage insurance premium (UFMIP) and annual mutual mortgage insurance (MMI) premiums. The UFMIP is paid as a fee at the time of closing and the MMI premium is added to the monthly payment. The standard used to be that the MMI would be dropped when the loan-to-value (LTV) reached 78%. Starting in April of 2013, on a 30 year FHA mortgage with an LTV of greater than 90% at the time of origination, the MMI premium will be payable for the life of the mortgage. This can add cost not only to the monthly payment, but the total paid over the life of the loan. For full details, see the HUD Mortgagee Letter 2013-4.

                There are many factors that determine the amount and term of the FHA costs assessed when closing the mortgage. The purpose of this blog was not to explain them all. A qualified loan officer is always going to be your best reference for that information. The point here is to illustrate that FHA is changing, and the cost is going up. This will begin to make conventional financing options more appealing to buyers.

For sellers this will be good news as the underwriting and appraisal standards for conventional loans are more conducive to closing the transaction. For buyers, this means that if they have not applied for a mortgage by April 2013, they will want to review conventional options with their mortgage professional. For Realtors this means we need to be aware of the changes to properly counsel our clients. For Americans this means that HUD is doing something to shore up the MMI fund before FHA needs to be rescued by another bailout, and that is good for everyone.

As always, please contact me with your Real Estate related questions at www.JasonGault.com. Happy Selling!

Still not convinced the Market is turning around?

   (Author note: I love what I do for a living. I am passionate about Real Estate and my clients. I find myself talking about that subject a lot. The conversation that sparked today's post took place during the infamous 'blackout' of Superbowl 47.)

    So I was having a conversation the other day. A friend of mine asked how the Real Estate business was doing. In a word - it is doing great! I went on to explain that in most local markets (with pretty much all of North Oakland County and the surrounding areas being one of those 'local' markets) in Michigan, the tide has turned in Real Estate. The market went from being heavily in favor of buyers to a sellers market in the last 12-18 months. The response I received: "Well of course you are telling me that, you sell real estate."

   Okay, I confess, I do sell Real Estate. In fact in the last year I sold more of it than any year in the last five. Now, I would like to say that I am just that good, that I crafted gold out of lead and sold the unsellable. I would like to say that sellers are defenseless against my negotiating prowess and my marketing is so powerful that buyers enter a trance-like state, gobbling up homes like zombies on a quest for food. I would love to say those things (some agents actually do! - I am also glad they do and I explain why below.)

   Now, that isn't to say that I am not good at what I do. I am. Very good in fact. What I do is educate my clients on every aspect of their transaction and the local market. In order for me to do that, I have to do my homework. Yes, the dreaded "H" word! It is no more fun than it was in third grade, but it is just as important (I even have to occasionally ground myself because I waited until Sunday night to do that project due on Monday morning.) One of the places I do a bit of business in Brandon Twp, MI. I can tell you almost anything about that market, including average prices, demand trends, inventory levels, average on-market time, yearly transaction numbers and trends, and, well, just about anything else you would want to know. I know this information because I study the market.

   Here is a good snapshot of the current trends in the Brandon Twp real estate market. I know this information is accurate because I did my own homework. I researched the sales in the MLS and public records databases. I compared the numbers seasonally so the comparisons were apples to apples. I made the graphs using the data so I know not only what they mean, but where the information came from.

In thirty seconds my clients can absorb 4 years of data, thousands of transactions worth of information, so they know their decisions are based on solid numbers.

   Here is another snapshot of Inventory levels as a function of buyer demand. Knowing how many homes are for sale in your local area is of little value unless you understand how many buyers are looking in your area. It is also quite helpful to understand what they are buying and how much they are spending.

By Q4 2012, sales were out pacing new listings for the first time in 4 years. This indicates a Seller Market and means buyers will be competing for your home.

   Real Estate is not alchemy, nor is it rocket science. If someone is giving you promises that sound too good to be true - like mom told you - they probably are. If you have questions that can't get answered, but you get offered 'industry jargon' and a keychain and a coffee mug instead, think twice. I said earlier I like it when people make crazy promises and absurd claims. I like it because the 'Kryptonite' to those 'super-claims' is an educated client. My clients get educated.

   Buying and selling a home is an emotional experience, but the process and mechanics of the transaction are not. They are clearly defined, predictable based on past performance, and easily understood - IF - you do your homework. That is what I do. And I do it well. My clients deserve nothing less!

As always, please contact me with your Real Estate related questions at www.JasonGault.com. Happy Selling!