Short Sale Solution - Foreclosure Alternatives

Let’s start to consider short sales, by seeing them as the lenders do. Lenders see short sales as an alternative to foreclosure. In other words when a homeowner is unable to keep making their mortgage payments and foreclosure is imminent, the lender may encourage the borrower to do a short sale instead. Generally, this is because the lenders net more money through a short sale (up to 30% more, according to Mortgage Bankers Association of America). The lenders have setup special programs and departments to manage these transaction, and are continually improving their systems. At a recent REO conference all the largest servicers and investors have indicated that they are trying to move away from the REO (bank owned foreclosed properties) model to the short sale model.

From the homeowner’s perspective, a short sale has been called a “dignified exit,” and we think that is a fitting description. A short sale allows the homeowner to sell the property to a new buyer, while settling their obligations with the lender. The general reasons for someone doing a short sale can be many – avoiding the stigma of a foreclosure, credit preservation, ability to negotiate deficiency demands with the bank prior to foreclosure, neighborhood preservation, etc ... but the specific reasons are unique to each situation.

Finally, short sales are in the best interest of the community. Abandoned properties are often vandalized, could be inhabited by squatters, and generally fall into disrepair. As a result, they sell for less than market value once they become bank owned. This creates a snow ball effect for values, dragging down the value of surrounding properties, and causing other homeowners to become upside down, which in turn may create the need for them to short sell or foreclose.

The US Treasury HAFA Program is gaining popularity, largely due to the fact that it provides an incentive of $3,000 for moving costs to a qualified seller, and guarantees a full release from the first lender's deficiency. Many banks are following suit. For example, Chase is offering as much as $35,000 in incentive to short sell, on select loans.

To watch a video of a real estate attorney talking about short sales click here.

Mortgage Modification

A mortgage modification involves the modification of one or more of the following: the interest rate on the loan, the principal balance of the loan, the term of the loan. The process of modification may take a long time, and is subject to programs available to the servicer (and the underlying investors), and the borrower’s ability to qualify for these programs. Qualifying for a mortgage modification is much like qualifying for the mortgage in the first place. The borrower has to prove hardship by disclosing their finances, and the lender will try to match up the borrowers situation to the available programs. The bulk of modifications that we see involve a temporary reduction of interest to reduce a payment, and do not involve principal reductions, or longer term changes to the existing note.

Please be extra careful when applying for a loan modification with a third party servicer. Federal Trade Commission reports an abnormally high amount of fraud activity in this area. The best way to apply for a modification is to go direct to your lender, or to speak with a HUD certified counselor, or to go through the HOPE Hotline (ran in conjunction with US Treasury).

Keep in mind, that if a loan modification does not work out for you, you can still try one of the other options listed here: short sale, foreclosure, deed in lieu, etc.

Reinstatement

A reinstatement is the simplest solution for a foreclosure, but often the most difficult to achieve.The homeowner simply pays the total amount past due (including late fees) to the lender, to bring their account current. Typically once the back payments are repayed, the lender no longer has the right to foreclose, and must cancel the scheduled foreclosure date.

Deed in Lieu of Foreclosure

Also known as a “friendly foreclosure,” a deed-in-lieu allows the homeowner to return the property to the lender rather than go through the foreclosure process. This process has to be approved by your lender and typically will not be approved if you have a 2nd mortgage. You cannot just mail back your keys - the process is still subject to approval and may take a long time.

Forbearance

A forbearance or repayment plan involves the homeowner negotiating with the mortgage company to allow them to repay back-payments over a period of time. This may or may not include the repayment of penalties, a probation period, or other additional terms between the borrower and the lender.

Rent the Property

Since the borrower cannot sell the property for what is owed, they may choose to rent the property out instead. Due to the fact that a lot of upside down homes have a very high principal, the mortgage payments may be higher than market rent, which would cause the homeowner to be negative with the monthly cashflow. In this lies the problem - a homeowner who is facing hardship does not entirely eliminate it by renting the house, since it still costs them additional money, and since the large principal remains an issue.

One final consideration - becoming an “accidental landlord” - should really be weighed heavily for what it really is. The owner/landlord owes a number of duties to the new tenant, including but not limited to - timely repairs, professional management, certain contractual warranties, etc. Please don’t rush into this option without fully understanding everything that is involved, for the sake of your future tenant.

Servicemembers Civil Relief Act

The Servicemember's Civil Relief Act (SCRA) expanded and improved the former Soldiers' and Sailors' Civil Relief Act (SSCRA). The SCRA provides a wide range of protections for individuals entering, called to active duty in the military, or deployed servicemembers. It is intended to postpone or suspend certain civil obligations to enable service members to devote full attention to duty and relieve stress on the family members of those deployed servicemembers. A few examples of such obligations you may be protected against are:

Expands current law that protects servicemembers and their families from eviction from housing while on active duty due to nonpayment of rents that are $1,200 per month or less. Under the new provisions this protection would be significantly updated to meet today’s higher cost of living covering housing leases up to $2,932.31 per month and then be adjusted annually to account for inflation.
Provides a servicemember who receives permanent change of station orders or who is deployed to a new location for 90 days or more the right to terminate a housing lease.
Clarifies and restates existing law that limits to 6 percent interest on credit obligations incurred prior to military service or activation, including credit card debt, for active duty servicemembers. The SCRA unambiguously states that no interest above 6 percent can accrue for credit obligations (that were established prior to active duty or activation) while on active duty, nor can that excess interest become due once the servicemember leaves active duty A? instead that portion above 6 percent is permanently forgiven. Furthermore, the monthly payment must be reduced by the amount of interest saved during the covered period.
Note: This law only covers debt incurred prior to military service.
Updates life insurance protections provided to activated Guard and reserve members by increasing from $10,000 to $250,000 the maximum policy coverage that the federal government will protect from default for nonpayment while on active duty.
Prevents servicemembers from a form of double taxation that can occur when they have a spouse who works and is taxed in a state other than the state in which they maintain their permanent legal residence. SCRA will prevent states from using the income earned by a servicemember in determining the spouse’s tax rate when they do not maintain their permanent legal residence in that state.

The SCRA covers all Active Duty servicemembers, Reservists and the members of the National Guard while on active duty. The protection begins on the date of entering active duty and generally terminates within 30 to 90 days after the date of discharge from active duty.

Bankruptcy

Many believe bankruptcy is a “foreclosure solution,” but this is only true in some states and situations. Entering bankruptcy can be a risky and costly process. Be sure to seek the advice of a qualified bankruptcy attorney when pursuing this as an option.

Refinance

Refinancing means you will acquire a new loan based on your current credit standing. If you have already missed mortgage payments, your credit score may make it difficult to find a loan with cheaper payments. Additionally, if you are upside down, this makes refinancing impossible unless you are willing to bring cash to close, to make the loan to value ratios fit current available programs.

As much as 40% of the sales activity in this market is due to investor purchases. A property that is already occupied by an owner who is willing to stay and rent the property may be really attractive to an investor, especially if it is apparent that the property has been well maintained. The homeowners gets rid of the burden of excessive mortgage, can stay in the house, and the investor gets the property at market value and with an instant tenant to boot. Please note that while this may be possible in some instances, there are no guarantees because in some instances the lender may be opposed to such arrangements due to Arms Length regulations, and in some instances an investor buyer may not be easily found.