WORD: Refunding

And the WORD for Today is...

Refunding – is a real estate term specific to VA loss mitigation. If a VA borrower has fallen into default the VA has the authority to purchase the loan from the lender and take over servicing. This option is called “refunding.” This can be advantageous to the borrower if the lender is either unable or unwilling to grant any further relief. A defaulted borrower (or their representative) might even suggest to a lender that VA be approached with the idea of “refunding” if a road block has been encountered with a workout when the borrower or their representative believes something more is reasonable and possible.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

You can find more helpful definitions of WORDS like these in Your Real Estate Advisor which can be purchased atwww.DovePublishingHouse.com.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

From the Desk of: REO Landmines

Let’s start with the basics: REO (real estate owned) refers to real estate which is owned by entities such as lenders, servicers or corporations. There are several ways property becomes REO but most often it is through default of the borrower who is either foreclosed upon or voluntarily relinquishes the property through deed-in-lieu. Corporations also become entitled if they acquired the home as part of an employee relocation package buyout.

Whatever mechanism resulted in the acquisition, a piece of real estate is now owned by an entity who needs to sell it. A special division, either called the REO or disposition division, is usually charged with the task of turning REO properties into liquid assets. As the foreclosure problem worsens the percentage of homes on the local market for sale which are, in fact, REO’s has increased. Strategies for dealing with the holders of these properties are somewhat different than purchasing from a private citizen. Those differences can be looked at as potential landmines if you are not familiar with the process.

Landmine # 1. Most REO properties are sold using a standardized contract which will be used throughout the nation. (for instance, HUD, Fannie Mae, VA). The language and terms in these contracts will supersede anything you write in your local purchase agreement, therefore, it is critical that you understand all the language in their standard contract.

Landmine # 2. Most REO properties are sold “as is”. While entities must allow for an independent inspection if one is allowed by state law, there is no requirement that any repairs be made as a result of the inspection.

Landmine # 3. Buyer are frequently charged a per day fee for delays in closing caused by their side of the transaction. Whether caused by the borrower, their lender or the realtor does not matter. It is not uncommon for the delay fee to be $100.00 per day.

Landmine # 4. Transfer of title will usually be granted with a special warranty deed or a Sheriff’s deed. Both provide a MARKETABLE title; not a CLEAR title. It is common for liens to remain attached.

Landmine # 5. When submitting an offer on an REO property, you buy the whole “kit and kaboodle.” What’s in the “kaboodle.”

Copyright 2007, Home Ownership Matters, LLC. All Rights Reserved.

(As always, if you have any questions, comments or feedback, we welcome and appreciate them. Just e-mail Heather at homeownershipmatters@gmail.com. Thanks for reading, and come back soon to see what else we've posted!)

Short Sale Fast Facts for Consumers

Short Sale Fast FACTS for Consumers

1. Short Sale could be your solution—but it has some pitfalls

Get informed and Get started

2. Short Sale is an Option Not a RIGHT

You will need to “qualify” for the option to dispose of the house by using a short sale.

Most lenders use the same basic criteria—what I call the “Universal Hardship Test”

• Was the default ‘trigger’ something beyond your control
• Did the trigger lead to an increase in expenses or a decrease in income?
• Are you still an occupant in the home secured by the loan?
• Have you depleted all of your assets available to make mortgage payments?
• Are you willing to pull together the documents required by the lender/guarantor to determine if they believe you qualify for a workout?
• If there is a co-borrower, are both parties committed to this workout attempt?

3. Finding a competent REALTOR could be difficult

A short sale is a Speciality transaction. You need to find a

REALTOR who:

• Works full-time—yes, even in today’s climate
• Is experienced in short sales (means they closed)
• Is familiar with your area and price point
• Whom you feel comfortable with
• Who is able to demonstrate to you what the value of your home is compared to similar homes in the neighborhood
• Has the ability to effectively market your home
• Is pleased to share with you that they have had specialized training in Short Sales (I mentioned this last, because if they haven’t mentioned by now, it is because they don’t have any—Not a good sign)

4. You can list the home for short sale—BEFORE the lender approves the

short sale—

**As long as you indicate that “all offers are subject to lender approval” This should be included on your listing contract, on the seller disclosure form and within the comments on the MLS sheet

**You can’t ACCEPT and CLOSE without the lender’s approval but you don’t have to wait to get started. Why not start today? Is your house ready? Do you have the documents needed for the hardship package?

5. Might leave you with a deficiency—which could be used to get a judgment against you

Negotiate to get the lender to agree to “waive their right to a deficiency judgment” as part of the short sale approval letter.

You should NEVER assume that because the lender agreed to the short sale that they have waived their right to pursue you for the shortage.

If it’s not in writing—signed by an authority—you should expect them to pursue you for the shortage.

6. Foreclosure process—will most likely continue, even while you have the house on the market for sale

FHA loans which are subject to HUD regulations—require that the foreclosure process STOP while the home is marketed for short sale

Foreclosure action continues on ALL other loan types

7. Listing Termination—can be mandated by your lender when you are in default

The Lender is not a party to the listing contract and you might logically assume that therefore they had no say so about what does or does not happen with the attempt to sell your home.

Unfortunately, you would be mistaken.

Government guarantors, HUD, VA, USDA, Fannie Mae, Freddie Mac, and Rural Development have the right under Federal regulations to compel you to withdraw the listing IF:

You are cooperating with showing the property as a show of ‘good faith’

Title issues are uncovered which would prevent the transfer to a new buyer

The condition of the property is such that a sale is unlikely

You have failed to comply with request for information to determine your eligibility for a workout. Remember: This is an Option, not a RIGHT.

8. Second Liens can present a challenge—also known as a ‘stumbling block’

Second lien holders seldom initiate foreclosure; they block short sales all the time with their obstinacy. You cannot transfer real estate to a new buyer when there is a second lien holder without their cooperation.

They must either:

a. Release the lien

b. ‘Lift’ the lien and permit the closing

Usually they can be enticed to do one of these things, preferably the first. Many will accept a token payment as a settlement for the obligation if foreclosure is imminent and they stand to get nothing after the lien is wiped out. Other they may agree to an unsecured loan in exchange for

their cooperation.

Your lender may make a contribution toward getting this second released, especially if you have a government backed loan. Their regulations have a stipulated amount set aside for this purpose. Get your facts and get going.

9. Tax Implications—Didn’t Your REALTOR mention that?

When there is a deficiency (difference between what you owe on the house and what the new buyer is willing to pay for it) you are taxed on that amount as though you received it as a gift.

IRS rules require that the lender provide this information directly to IRS for tax purposes.

You should NEVER assume that because the lender agreed to the short sale that they have waived their right

10. Now about signing those papers…….WAIT

I believe strongly that the seller of a property which is upside down would do well to pretend their fingers are broken once they have signed the listing contract and seller disclosure form until Mr. Smitherman, the supervisor at the bank, has:

a. Approved their short sale, with all continguences

b. Given them permission in writing to sign something

As a trainer, I take the position that ‘lender approval’ means getting the lender’s approval before you agree to anything with a potential buyer.

That means do not sign a purchase agreement, no matter what contingency clauses have been included by a so-called sharp REALTOR. Do not sign a counter offer. I said, ‘pretend your fingers are broken until the supervisor at the bank tells you to sign something.

If you sign BEFORE he tells you to, you are agreeing to terms which he has not yet agreed to. You cannot perform (or deliver the deed to the house) without his agreement. He may:

a. Select a difference ‘potential purchaser’

b. Counter and ask for a lot more money

c. Go ahead and foreclose, then you have nothing to sell.

Don’t get ahead of the bank. “Lender approval required” means the bank gets to decide everything: to whom we will sell, and for what amount, on what terms. Don’t allow yourself to be lulled into thinking it’s okay to make an agreement and then get his approval. That is risky business. Remember, your fingers are broken.

Please share today’s blog with someone you know who is struggling and not sure what steps to take next.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

WORD: Insured Mortgage

And the WORD for Today Is...

Insured Mortgage – is a mortgage which is insured against loss to the lender in the event the borrower defaults and the ultimate sale of the property does not net as much as the outstanding loan, plus the cost of the foreclosure. Such insurance may be provided by FHA, VA or an independent mortgage insurance company.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

You can find more helpful definitions of WORDS like these in Your Real Estate Advisor which can be purchased atwww.DovePublishingHouse.com.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

Did You Know? Guidelines for Loss Mitigation

Guidelines for Loss Mitigation

FYI—Guidelines for the loss mitigation options which are available on government backed loans are public information—available on the internet. Whether you have an FHA, VA, USDA, Fannie Mae or Freddie Mac loan, the regulations which determine what options are available and the factors which need to be considered for each are hidden in plain sight—on the web.

I’m telling you they are there—I am not saying they are easy to find or easy to understand. Nor am I saying that lenders/servicers abide by them even half the time. Do the research, get some clarity and figure out what YOU think will work for you.

The most important thing is to know that they exist and where to find them.

FHA loans: We recommend Mortgagee Letters 00-05 and 08-43 (Click here to go to a page with a listing of HUD's mortgagee letters.

(Please e-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have. We appreciate all feedback, comments, and especially your questions. Don't be shy!)

Q&A: Is the Seller Responsible for back taxes?

Q: When selling their home, is the seller responsible for paying the back taxes or tax liens?

A: Short answer: YES, to both.

Individual sellers of real estate are required to provide a clear chain of title and that requires that any back taxes or tax liens would have to be satisfied prior to or at the closing. In order to demonstrate that there are no outstanding debts against the property, the seller signs a vendor’s affidavit which affirms that there are no outstanding obligations which have not been paid. Additionally, they provide the purchaser with a general warranty deed further guaranteeing that a clear title has been conveyed.

Buyer Beware—Bank-owned sellers

The use of the word ‘their’ in the question above indicates you are talking about buying a home from an individual rather than an REO (bank-owned property) from an insurer such as HUD, VA, Fannie Mae or Freddie Mac. While these insurers are required to pay back taxes and Federal tax liens before they transfer title, they are NOT required to cover all liens and consequently you will most often receive what is called a “special warranty deed”, “sheriff’s deed” or “trustee’s deed”. Irrespective of what it is called, any of these types of deeds will be transferring “marketable title” but not necessarily “clear title” to you. You owe it to yourself to get clarity on all the words highlighted in this section before you purchase a home which is being offered for sale by an institution rather than an individual.

Pass it on! your ‘contingency’ and move to a closing.

What are contingencies?

They are stumbling blocks which must be addressed before you can close on the new home purchase. It might be that you have a home you must sell first. It might be that you need to get money from a 401K and have not yet applied for that to be released. You might need to pay off some outstanding judgments in order to get final loan approval to complete this transaction. It could be that you are awaiting a final answer from your employer about a possible job transfer or any one (or ten) other things.

Most important is to discuss with your agent whether or not there are conditions in the content of your offer, (probably under further conditions) which grant the seller permission to continue to show the home. If there are NO contingencies then I would say the home should have been pended and no, there should be no further showings.

Real estate contracts are somewhat complex but you really can understand them if you take the time to understand what the words really mean. Read your specific contract and see what they can and cannot legally do until the closing actually occurs. Best of luck.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

WORD: Deficiency Judgment

And the WORD for Today is:

Deficiency Judgment—is a possible court judgment against a borrower, which can be requested by the lender who has not received full payment of the amount, owed. A deficiency judgment is the difference between the amount the borrower owes to the lender (including all additional acceptable costs) and the actual amount the lender receives through an eventual sale of the property. As the rate of foreclosure has increased, lenders are pursuing consumers more frequently for this deficiency. However, if the loan is an FHA backed loan the consumer can avoid a deficiency judgment by making a good faith attempt to sell their home prior to foreclosure. Even if the home does not sell and even if they later relinquish it through a deed-in-lieu they still avoided the deficiency judgment. While consumers who are owner-occupants are rarely pursued for deficiencies by FHA, investors almost always will be. Federal employees who have a deficiency judgment on either an FHA or VA loan can expect to have their checks garnished for the repayment. Consumers should be aware that walking away from their home does not mean they will not have any further obligation related to the mortgage.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

You can find more helpful definitions of WORDS like these in Your Real Estate Advisor which can be purchased at www.DovePublishingHouse.com.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

Q&A: Clear Chain of Title

Q: When selling their home, is the seller responsible for paying the back taxes or tax liens? I have always assumed that they would be.

A: Short answer: YES, to both. More accurate answer is: Depends on whether the seller is an individual or an entity.

Individual sellers of real estate are required to provide a clear chain of title and that requires that any back taxes or tax liens would have to be satisfied prior to or at the closing. In order to demonstrate that there are no outstanding debts against the property, the seller signs a vendor’s affidavit which affirms that there are no outstanding obligations which have not been paid. Additionally, they provide the purchaser with a general warranty deed further guaranteeing that a clear title has been conveyed.

Buyer Beware—Bank-owned sellers

The use of the word ‘their’ in the question above indicates you are talking about buying a home from an individual rather than an REO (bank-owned property) from an insurer such as HUD, VA, Fannie Mae or Freddie Mac. While these insurers (as well as other guarantors) are required to pay back taxes and Federal tax liens before they transfer title, they are NOT required to cover all liens and consequently you will most often receive what is called a “special warranty deed”, “sheriff’s deed” or “trustee’s deed”. Irrespective of what it is called, any of these types of deeds will be transferring “marketable title” but not necessarily “clear title” to you. You owe it to yourself to get clarity on all the words highlighted in this section before you purchase a home which is being offered for sale by an institution rather than an individual.

Copyright © 2008, Home Ownership Matters, LLC. All Rights Reserved.

(Please E-mail Heather at homeownershipmatters@gmail.com with any questions, comments or concerns you might have! We appreciate all comments and feedback, so please don't be shy.)

REO Assumptions and Assertions

REO Assumptions and Assertions

Biggest Assumption: They just need to dump it

Translation: They’ll take any kind of crazy offer

Assertion: N-O-T YET

As a former Fannie Mae Broker–Specialist, I can provide insight into the real world of buying and selling bank-owned properties. First, forget most of what you think you know about such transactions—you’re probably way off target.

The Devil’s in the Details . . .

If you’re assuming they just need to dump it, you are half way right. They do, they really do, but not at any price. The most common misconception is that the holder of REO property will accept any offer without consideration for the value of the collateral. I suspect you’ve been watching too much late night television. While it is true that the increased volume of foreclosed properties means a substantial increase in REO inventory, the basic business principles which govern liquidation are not changing as rapidly as they need to (or as you had hoped they would.)

Harsh New Reality

It is a harsh new reality that today’s market is being flooded with REO’s. Thousands more will be added in the months ahead as a result of the backlog which has been created because of political posturing. As a consequence, both federal agencies (HUD, VA, Fannie and Freddie) and private mortgage insurance carriers will need to adjust their guidelines during the upcoming months. Unfortunately, as a practical matter, in the meantime, they and loan servicers must operate within the guidelines of existing regulations and existing contractual stipulations until they are amended. They will be relaxed—necessity will dictate that they must be. The consequence will be a ‘let’s make a deal free-for-all.’ Good for agents and buyers—not so good for price stabilization. But it has to happen and the sooner we get to it the better.

They Don’t Know Its Value

You’re right on target with that assertion. The “local market reality” is a piece of data which is hard for the servicer to grasp when they handle properties around the country from a centralized location. The truth is, their usual resources are less than reliable. They must rely on:

• Their appraisal, and we know how likely that is to be inflated
• A $50-$75 BPO—okay, does anyone really think you’re getting an accurate evaluation with a product produced in a BPO mill? Do you really think that they are trying to determine value with that document? (They are NOT. They are fulfilling a servicing requirement to have a BPO performed.)
• Their gut instinct
• The loan amount shown in their computer—but since when has that been connected to the ACTUAL value of the property?

Hence, the market will dictate and that process takes time. If the property is ‘rejected by the market’ for an extended period of time then it is declining in both actual and perceived value. It’s in everyone’s best interest to determine fairly accurately, from the onset, what is today’s market value. Consequently, the servicer needs a current, as-is appraisal. While many appraisers were rewarded for inflating values during the boom years, they are now stuck with the unpleasant task of trying to justify vast differences between former and current value. Market correction is not enough of an explanation but the recently sold comps don’t lie. It’s worth what someone will pay for it—today—not last year.

The Law of Supply and Demand

In time (I think within the next three to four months) the inventory will be so high that the valuations will plummet and get in line with what a ready and able buyer is willing to pay a reluctant REO owner. During the boom years hundreds of thousands of houses were built across the country without any clear need based on population growth. Speculation in real estate was HOT. The jobs created, the loans generated, and false illusion of prosperity made for wonderful headlines.

I was nearly thrown out of a Foreclosure Task Force meeting in Indiana in 2006 when I dared to mention the need for a moratorium on new construction since the city had already built more than 30,000 new homes in 5 years for only 10,000 new residents. I mentioned a college business class on supply and demand. I visited Denver in 2006 and thought they were building homes for the entire United States to move there. Then I moved to Florida and quickly observed that enough new houses were being built there for the few folks who didn’t want to move to Denver or Indianapolis. Shall I mention Atlanta, Las Vegas and twenty other cities which issued building permits without checking to see where the buyers were coming from. We are paying the piper (and we will be paying for the next ten years) for allowing an excessive amount of housing to be built. We created an economic situation which will dictate FEWER aggregate occupied households as people move to sharing homes in order to survive the financial crisis created, in part, by the ‘creative financing’ used to sell the new housing stock.

In time, the newly created rental housing market (previous homeowners, now renting again) will absorb much of the current excess single family housing but we will have changed the dynamics of communities across the countries from single family, owner-occupant to rental dwellings, perhaps housing more than one family. Investors are the most likely purchasers for the glut of foreclosed homes which will hit the market during the next two years. As businessmen and women, they will make decisions based on totally different criteria than buyers who would be owner-occupants. Financial institutions will have no choice except to reconsider their options when holding costs, fines from municipalities and other constraints dictate they do something to stop the bleeding. Excess has its payback. The law of supply and demand will not be ignored; pretending it does not exist is a sure fire way to pay the piper.

Now About that Insurance and Title Work

If you do not know the difference between a ‘marketable title’ and a ‘clear title’ this would be an excellent thing for you to research if you are planning to purchase an REO property. Suffice it to say that the REO you are purchasing can have gaps in the title coverage which leave room for undisclosed liens to surface after the closing and bite the new owner in the proverbial behind. Since you will have signed numerous documents which stated that you understood that you had no recourse after closing: you will not be surprised when I tell you: YOU HAVE NO RECOURSE AFTER CLOSING.

Watch for an upcoming webinar on the HOM website: “Buying REO is Risky Business”. You might want to put that on your schedule.

Copyright © 2008, Home Ownership Matters, LLC. All rights Reserved.

(Please e-mail Heather at homeownershipmatters@gmail.com with any questions, comments, or concerns you might have. We appreciate all feedback, comments, and especially your questions. Don't be shy!)