Foreclosure Alternatives – Short Sale vs Foreclosure

My team and I have been working on an area of our business that I think is extremely important right now; foreclosure alternatives.  The interesting thing is that the most desirable result is one in which we do not make any money – loan modifications.   We don’t make any money from them because I don’t do them and I will not accept a referral fee from people who do.  I want my clients to know that I am sending them to the most qualified people, not the ones who are paying me the most.  Now, I am not doing charity work. I explain to everyone I meet with that if I introduce them to the company that helps save their home, then I hope they will call me in 10 years when they want to sell – and in the meantime tell all their friends about me.  It’s an arrangement that I hope will work well.
However, through this process there is an attitude I am noticing that is detrimental to everyone and I want to let clients as well as other agents know why.  The attitude is, “If the bank won’t approve my loan modification then screw them, I’m going to let them foreclose.”  The problem with this is that it harms the owner more than the bank.
The first obvious reason this is detrimental is that a foreclosure will hit your credit harder than a short sale.  But the second reason is more important.  On June 25, 2008, FNMA (Fannie Mae) put published Announcement 8-16 which amended guidelines for loan approval.  The key point in this document for our purposes is that if a borrower completes a short sale, they cannot purchase a home using a FNMA guaranteed loan (which will be the large majority of loans going forward) for two years after the completion of the short sale.  However, if the borrower goes through a foreclosure, they cannot purchase a home for five years.
Nobody has a crystal ball and can tell you when the housing market will hit bottom and start to rebound.  Nor can anyone say with certainty how far it will fall and how fast it will come back.  There are a lot of people that think we will hit the bottom sometime in the next year or two and then start to come back.  If this is true and a borrower does a short sale today, he or she will be eligible to purchase again at or very near the bottom of the market.  If the borrower instead allows the foreclosure to happen, he or she will have to watch from the sidelines as the market rises.
Short sales are not fun, but there is a way to do them right and to time them so they work best for the borrower.  While a year ago, only 10% of short sales were getting approved, we are now working with a company that is getting 80% of them approved.  It takes more effort than allowing the bank to foreclose and the rewards are not anything the borrower sees immediately.  However, if the borrower can focus on what will put him or her in the best position five years from now it is clear that a short sale is much preferred to letting the bank foreclose – even if all they want to do now is screw the bank.

Loan Modification Trap

I was talking with a client of mine who is doing a loan modification on her own and she told me that the bank was giving her a forebearance.  After we hung up, I thought through what she told me and realized that they are giving her the shaft.  Here is what they told her:

They can’t qualify her for a loan modification now, and they have to file the Notice of Default.  But, if she makes her next three payments they will talk to her about the loan modification then.

Here is what it really means (most likely):

We don’t think you qualify for a loan modification.  The State of California requires that we wait three months after filing a Notice of Default before we can file a Notice of Trustee Sale.  We would rather you pay us the mortgage for those three months.  If you do, we promise to look at your file again at that time (if you don’t qualify now, you probably won’t qualify then) and then decide if we will foreclose.  Bottom line is she pays 3 more months of mortgage and still loses her home.

I have seen this happen a couple of times.  The owner gets to the end of the three month period, does not qualify for a loan modification and only has three weeks to try and sell the home to avoid the foreclosure.  Inevitably, the bank forecloses and the owner now has a foreclosure on their record which makes it next to impossible to purchase a home for five years whereas if we had done a short sale, they could re-purchase in two years (about the time most experts think we will hit the bottom of the market).

When you call a bank as a homeowner, you need to understand that the bank is not required to modify your loan.  They are encouraged by the government to do it, but that encouragement is only about $6,000.  While that might be a nice amount on a loan in South Dakota, it doesn’t do much to offest losses the banks are seeing in San Diego.   So the government is not helping our local situation much. The bank is going to look at your loan modification as a straight business decision with the following factors considered:

• Can you make the new payment?
• At the level of the new payment, how large would the loan be?
• Is the value of the home more than the above loan size (if so, foreclose)

Each bank has its own criteria on which loans it will modify and the calculations are fairly complex.  Understand that although this is emotional for you,  it is just business for the bank.  Most likely, the person you are talking to is new to the industry and doesn’t really know what they are doing.  They have about 500 files on their desk and are emotionally detached from your situation.  Either your file has to fit into a very precise formula, or you had better know how to get past this person and into the department with working calculators and a manager that can make a decision other than what the computer screen tells her.

If you are serious about saving your home and your credit, you should work with someone who has experience modifying loans.  There are two types of people who can modify loans in California:  Lawyers and Real Estate Brokers (I do not modify loans, nor do I accept referrals from people who do – I will refer clients to the best people I know and hope that in exchange they will call me in five years when they want to sell).  If you are talking with a lawyer about a loan modification, make sure they have a background in Real Estate.  A lawyer will likely charge you about $5k to do a loan mod – make sure you do not pay everything up front unless you get several references first.  If you are not a lawyer, California law requires you to have a real estate license to modify loans for other people.  In addition, if an agent is going to collect an advance fee (they all do) for the service, that agent has to get special authorization from the state to do so.  You can look this information up on the California Department of Real Estate web site.  Real Estate professionals will typically charge $2,500 – $3,000 to do a loan modification, but have to put the money in a trust and can only withdraw funds as certain milestones are hit – you get money back if they are unsuccessful (unlike with most lawyers).

It might be attractive to try this yourself, but if you do, be sure you have all the information on your rights and responsibilities so that you don’t use up all your time counting on the bank’s good intentions.

San Diego February Home Sales – Early Look

A quick early look at February’s numbers for San Diego home sales shows all positives.  The number of homes for sale (excluding manufactured homes) was 15,134 in the county (down from 18,362 last year).  The number of homes in escrow is up 66% to 6,273, and we closed 1,855 homes in February (this number will go up as agents report late) as opposed to 1,207 last February.

The best picture comes when you use the number to calculate the months of inventory currently for sale.  Last year, we stood at 10 months inventory for sale at the end of February.  This year, we ended February at 6.5 months of inventory.  This is a continuation of a very positive trend.  However, this not to say we have turned the corner.  The banks are starting to get more foreclosures on the market while at the same time tightening lending requirements.  This will lead to more available homes and most likely, fewer homes sold.  So the months-of-inventory number will likely grow a bit, but I think it should stay in the single digits, which is very welcome.