Denver Home Resource Short Sale Blog

The Home Affordable Foreclosure Alternatives (HAFA) Program

2010-03-18T05:33:00.000-06:00

The HAFA program applies to loans not backed by Fannie Mae or Freddie Mac, which are expected to issue versions of their own shortly. The program is designed to streamline the use of the short sale process in a foreclosure. There are 43 pages of guidelines, but the National Association of Realtors (NAR) highlights these points of the program:

The program complements the Home Affordable Modification Program (HAMP) by providing an alternative to borrowers (the current homeowners) who are eligible HAMP eligible but are to keep their home.
Uses borrower financial and hardship information that was collected when the homeowner was considering a loan modification.
Prevents the servicers from reducing real estate commission contracted in the listing agreement (up to 6 percent). Homeowners do not pay commissions in short sales.
Provides for homeowners to be fully released from future liability for the first mortgage debt (no cash contribution, promissory note, or deficiency judgment is allowed). This is very important, since these are possible outcomes of a short sale.
Standardizes processes, documents, and timeframes/deadlines.
Gives financial incentives: $1,500 to assist the homeowner; the servicer is given $1,000 s to cover administrative costs; and up to $1,000 for investors; allowing a total of up to $3,000 in short sale proceeds to be distributed to subordinate lien holders (second mortgage).
Requires all servicers participating in HAMP to implement HAFA in accordance with their own written policy, consistent with investor guidelines. The policy may include factors such as the severity of the potential loss, local markets, timing of pending foreclosure actions, and borrower motivation and cooperation.

The program does not take effect until April 5, 2010, but may be implemented before that date if certain requirements are met. The program is in effect until December 31, 2012. Contact me for full details or get a copy of the Treasury Department's HAFA Short Sale Rules program.

No guilt or shame in a Short Sale

2010-03-01T20:17:00.001-07:00

More often than not, when I meet with a financially distressed homeowner to review what options are available in order to correct their finances and avoid foreclosure, the homeowner is apologetic.

Throughout our lives we've been used to working, meeting our bills, and at some lucky times, saving or investing a little bit. Now, due to toxic loan products, the homeowner suddenly notices that they're falling behind, there's not as much money as there used to be. For a while there is borrowing, not acknowledging this as a temporary fix,.

Eventually there's the harsh reality that something has to give.

Could we manage our money better? I know that the answer for me is an absolute yes. Could better money management have avoided this situation. Probably not.

We were sold toxic loans. Financing is complicated. Often, when we're sitting across the desk from a lender we don't ask enough questions, we don't want to appear stupid. Unfortunately there is some extremely important information in that fine print. We remember that we were warned that we would probably need to refinance in a few years.

But in that time, the “collapse” had begun and property values were in decline and now homes weren't appraising for enough to provide enough equity for the refinance.

This video gives a good overview of how we got here:

The homeowners didn't create the situation. Now they need to figure out what the best solution is for themselves. That's also why homeowners should not feel any guilt or shame because of this.

How Much Will a Short Sale Cost?

2010-02-20T00:18:00.000-07:00

A question that we often hear is "How much does a short sale cost?"

That's actually a three part question. Everyone knows that selling a house costs money, and in a traditional real estate transaction it's the seller that pays a lot of the costs, including real estate commissions.

A Short Sale however is a little different than a traditional real estate transaction. The home owner is the one that makes the decision of whether to do a Short Sale or not. Once the home owner decides that a Short Sale is the right solution for them to Avoid a Foreclosure, we then sign a listing agreement and get signed permission from the home owner to speak with their Lender.

After that the holder of the mortgage (the bank), since it is their money, will make all of the decisions regarding what they're willing to accept within for the Short Sale and what they will pay out, this includes all commissions, closing costs, etc. The homeowner does not pay the commissions.

The second cost to the home owner is decide what will cost them more a going through a Foreclosure or doing a Short Sale. The following chart shows the difference between the what the cost of a Short Sale vs Foreclosure is to the homeowner. This report Foreclosure vs Short Sale, shows the difference between these two in many areas including Credit Score, Credit History, Security Clearance, Employment, and more.

The third possible cost is after a Short Sale or a Foreclosure is completed the bank has the right to do one of two things to the now former homeowner. The worst case scenario is that the bank will pursue a Deficiency Judgment to recoup what was lost on the Foreclosure or Short Sale. This means that the former homeowner is responsible for paying off the amount the bank was short on the loan.

Another option the bank has is to take the loss on the Short Sale and than give the former homeowner a 1099 for the bank's loss. The former homeowner will than have to report the amount that the Lender was short as earned income.

There are some strategies that can be employed (depending on the situation) that enable the homeowner to not have to pay. When we meet with our clients we explain the possible risk and the most likely outcome for the homeowner and we explain what needs to happen in order for us to get there.

If you meet a real estate agent that tells you that a Short Sale is like a “get out of jail free card” and that you will not have to pay anything and can just walk away, well then run away from that agent. They don't know what they're doing and there's a huge chance that they'll botch your Short Sale, meaning that you'll probably end up going through Foreclosure. Get our free report Qualify a Short Sale REALTOR to know the questions you must ask any real estate agent you're considering hiring. There's too much at stake to pick the wrong real estate agent.

Lastly, if you're asked to pay anything up front – then move on, it's probably a scam. You should never have to pay any up front costs in order to do a Short Sale.

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2010-02-19T05:08:00.000-07:00

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Why Would a Lender be Willing to Accept a Short Sale?

2010-02-13T23:43:00.006-07:00

A lot of homeowners (and uninformed agents) believe that lenders are waiting to pounce on a homeowner and foreclose on their property the moment a payment is missed. That doing so is a good financial practice. If you look at any successful people or businesses you'll see that they became successful by doing what they do best, and not other specializations. Banks lend money. They absolutely hate having to get into the real estate business. They really don't want your property.

To add to that, a foreclosure is very expensive and opens the bank to huge risks, particularly when a property becomes vacant. If that house is vandalized, that will severely affect the resale value.

An easy way of illustrating the cost of a Foreclosure for a bank is to list some of their expenses, and then to highlight why a Short Sale is acceptable, comparing a Foreclosure to the events and costs of a Short Sale.

So in a Foreclosure the bank will (actual financial numbers are hypothetical and may vary from actual costs to the Lending institution):

Sale Price	$200,000
Seller Concession	-$6,000
Legal Fees	-$7,000
Taxes	-$500
Insurance	-$1,000
6 Month Utilities	-$600
6 Month Maintenance	-$600
6 Month Interest Lost	-$6,650
Association Dues	-$1,200
Closing Costs	-$4,400
Staffing Costs	-$2,000
Commissions	-$12,000
Proceeds from Sale	$158,050

Loan Amount	$190,000
Minus Proceeds from Sale	-$158,050
Lender Loss	$31,950

The above figures have been estimated very conservatively and in a typical Foreclosure may well be higher.

Using the same Market Value and Loan Amount, then the bank accepting the hypothetical Short Sale compares fairly well:

Sale Price	$180,000
Closing Costs	-$4,000
Commissions	-$10,800
Proceeds from Sale	$165,200

Loan Amount	$190,000
Minus Proceeds	-$165,200
Lender Loss	$24,800

As you can see the bank is taking less of a loss accepting a Short Sale with a below market value offer. On top of this, the property did not sit vacant for several months. The property does not have an opportunity to be vandalized. This is huge in reducing the bank's risk and exposure.

A vacant property would very likely decline in value, need repairs, and many other issues may arise during the bank's watch.

A Short Sale is a sure thing for the bank, plus keeps the property off of the bank's books. and inventory. A successful Short Sale is a win-win-win situation. The homeowner gets rid of a financial burden that was stopping them from getting on with their lives. The bank gets rid of a problem quickly, with minimal risk and minimized financial loss. The buyer gets a new home for below market value.

This is why Short Sales are accepted by banks. Our next installment we will address the Cost of a Short Sale and we'll look at how a Short Sale impacts credit by comparing a Short Sale vs. Foreclosure.

What is the Short Sale Process?

2010-02-07T15:36:00.000-07:00

The starting point in a Short Sale is probably when the home owner realizes that, due to some kind of hardship, their expenses are now greater than their income and something needs to change in this situation since it cannot be sustained much longer.

The homeowner starts identifying their expenses and naturally the mortgage payment(s) is one of the largest draws to their budget. If they could get out from under those mortgage payment, they could start their financial recovery.

They meet with a qualified Real Estate agent that has Short Sale experience and a successful track record in performing Short Sales and asks if they may be a candidate for a Short Sale.

First we determine the hardship, what has changed in their situation that is causing a problem with remaining current on their mortgage payments. Ultimately the lending institution will determine if, in their eyes, they agree that there is a hardship.

We typically ask our clients four questions:

In the current market, has the value of your home dropped. This has to be more than the homeowner's opinion and must be backed by actually data. We can provide you with a comparative market analysis that shows if your home's value has dropped.
Is the homeowner behind on payments?
What is the homeowner's hardship?
Does the homeowner have any other assets that may be used to pay the mortgage?

If it looks like the homeowner qualifies, and the homeowner decides that this is the best way for them to avoid a foreclosure, then the home is listed on the MLS just like any other listing. Within the contracts signed for the listing, the state of Colorado will also require the new Short Sale addendum contracts be included. These addendum protect the homeowner.

The homeowner's primary decision is whether they want to perform the Short Sale. Once this empowering decision to move forward is made by the homeowner, then the Lender is the one that will make all final decisions regarding the sale of the property, since they are the ones that will accept the loss on the sale of the property, and the Short Sale is more beneficial than the cost of foreclosing on the homeowner.

This is where our teams experience and our historic data is invaluable to the success of the Short Sale. We have to price the home so it is acceptable to the Lender, while at the same time the price is low enough to quickly attract a buyer or investor.

Once we have a buyer under contract, than the real work begins. We put together a package with the documentation required by the respective Lender and this package (which can range from 40 to over 100 pages) is faxed to the Lender. After that we are constantly monitoring the process, we're in constant contact with the Lender, making sure that they have all of the documentation they need, making sure that if there is a foreclosure sale date that it gets moved out, and basically following up and negotiating with the Lender until we have approval to proceed with the Short Sale. It would be impossible to succeed with this without our team's full-time negotiators driving the process.

When the bank's Loss Mitigation department gives their approval, then a Closing date is scheduled for the Short Sale.

In the next installments we'll discuss “Why would a Lender Accept a Short Sale” and the cost of a Short Sale – how it impacts your credit, what a deficiency judgment is, and what other actions the bank may take against you as a result of the Short Sale.

What is a Short Sale?

2010-02-06T12:09:00.000-07:00

There is a lot of talk in the media these days regarding Foreclosures and Short Sales. To understand a Short Sale, first you need a little background on what is a Foreclosure. If you dig out your Deed of Trust from the stack of Closing Documents that you received when you first bought the house, you'll find a section that explains the right of the trustee to sell the premise if the borrower defaults on in the payment of the debt.

A house was purchased with money borrowed from a lender or bank. The party buying the house agrees to pay the loan. If the payments are not made on the loan, the lender has the right to recoup there interest in the property by initiating a foreclosure. To summarize, if the homeowner doesn't pay the mortgage, the bank has the right to repossess the property.

When a homeowner is informed that the foreclosure proceeding is being initiated the homeowner has a a few of choices. Doing nothing, which is a choice, will result in eventually losing the property and (if the former owner hasn't left) eviction. This choice will have one of the highest impacts on your credit rating.

Another choice, which we always advise the homeowner to do is contact the bank and see if they'll work with you on any type of loan modification.

If the homeowner is unsuccessful with their conversation with the bank, then a Short Sale may be a possibility. In very simple terms a Short Sale is the name of the process where a lender agrees to accept a payoff amount for less than the balance on the homeowner's loan. Accepting an amount less than what is owed causes the loan to come up “short”, hence the name: Short Sale.

In the next installments, we'll be discussing “What is the Short Sale Process”, “How do you qualify for a Short Sale”, and “Why would a lender be willing to accept a Short Sale?” If you can't wait we have more Short Sale Information here, or you may contact us directly if you have an urgent issue that you need resolved immediately.