HUD’s Preforeclosure Sales Program Avoids Foreclosure

HUDHousing and Urban Development (HUD) has a Preforeclosure Sales Program that will allow a homeowner in default on a HUD mortgage to prevent a foreclosure and sell a home, even if it results in a short sale. To read all the details of this program to avoid foreclosure, click here

The short summary of the program is that owners who are 31 days or more late on mortgage loan payments on certain loans related to HUD can contact HUD to start the process. They will fill out applications and get a Information/Disclosure form 90035 mailed from HUD. If the owner is approved for the program, they receive an Approval to Participate notice from HUD. The owner must then list the property with a Realtor, who is not a relative for an arms length real estate sales effort, including an MLS listing. This sales program gives the owner four months to get a contract to sell the short sale home, and the sale must close within 6 months of when the owner is accepted into the program (or 8 months with special qualification) . During that time, the home mortgage lender will stop foreclosure.

As a part of selling a home using this program, the owner will need to get an FHA approved appraisal to establish an “as-is” value. Then, the owner can place the property for sale, sell for less than the appraised value. and use the proceeds to pay as much as possible on the home loans. The amount of the allowed sales price goes down as time goes on. During the first 30 days on the market, the sales price has to be at least 88% of the appraised value. In the next 30 days, the sales price can be at least 86%, and for the rest of the program it has to be at least 84% of the appraised “as is” value. This approved sales price creates a quick form of mortgage loss mitigation, as the loss mitigation department should give a quick approval to any offer that meets these guidelines.

As a part of the sales program, the owner may receive some portion of the sales proceeds, which is extremely unusual for short sales because the seller is typically required to walk away with nothing. If the home sale is closed within 3 months, the incentive is $1,000 and it decreases to $750 after that. The program has an additional $1,500 that can be used to pay off any junior mortgage loans after the incentive payment is applied, i.e. to pay off a second trust deed loan or a home equity loan.

The program allows the seller to pay up to 1% of the sales price as a payment toward the buyer’s closing costs which is also unusual for short sales. In order to encourage good marketing, this program to prevent a foreclosure sale allows a real estate commission of up to 6% of the sales price, which is consistent with the new Fannie Mae policy on reasonable commissions in real estate short sales.

This program applies only to owner occupied homes for sale. If it is an investment property, or a property abandoned by the owner, those houses for sale do not qualify.

For homes that qualify under the Preforeclosure Sales Program with home loans associated with HUD , you can do a sale that is up to 16% below the appraised value and those proceeds will be approved to satisfy the HUD related mortgage loans. There is no restriction on how short the payment is in comparison to the mortgage balance, just a limit on how low the price can be in relation to the appraised value. So, if the mortgage balance is above the appraised value, the sale could be well over 16% “short”. In other words, you can get this short sale approved easily by the loss mitigation department if you comply with the procedural requirements established by HUD.

This program is a little know part of the Realtor training of how to short sale a home, but it decreases the number of foreclosed homes and gives the buyer a smooth home buying experience.

Do Disclose Short Sales in the MLS and Advertising

mls-70The fact that a property will be a short sale has to be disclosed in the MLS. You must disclose material facts, and the fact that a buyer will have to go through a short sale process is a material fact.

By the way, MLS is a registered trademark of Major League Soccer. We are not talking about that MLS, we are talking about the Multiple Listing Service.

The simplest way to disclose a short sale is to say something like “the sale is contingent on lender approval of a short payoff of the existing loan.” There are all sorts of other phrases to disclose this. “The sale is contingent on the lender’s acceptance of less than a full payoff for the existing loans.” I put this phrase in the Agent Only section of the listing in the MLS.

What about commissions? Since lenders frequently try to cut the commission, how does the listing agent deal with that possibility? If you specify a certain commission to be paid to the agent for the buyer, you will have to pay that amount at closing, unless the buyer’s agent volontarily lowers their commission. If you want to be able to adjust the commission, specify in the listing that the commission is subject to the lender’s approval and may be renegotiated. The listing agent can also specify that the commission to the buyers agent will be 50% of the total commission approved by the lender.

This commissionectomy by lenders discourages short sales. Agents for buyers need every dollar they can get in todays market. If they are going to have to make an offer on a short sale property and speculate on whether it will close based on the lender’s approval, there should be a bonus to the commission to compensate for that risk. Instead there may be a commission penalty, a risk that the sale won’t close, and a longer time for the buyer’s agent to work with the buyer holding the deal together. On the other hand, the listing agent is taking the same risk, doing much more work in submitting the short sale package and negotiating the decreased payoff and full release of the loans, not to mention explaining lien priority, tax consequences and other issues. So, it is not fair that the listing agent eat the entire commissionectomy. The new guidelines by Fannie Mae are a step in the right direction to prohibit renegotiation of the commission if the total commission is 6% or less.

Some Realtors feel that the fact that a property will be a short sale should be put in advertising. There is not enough room in most ads to put in every material fact about the property, so I do not see how that should be required. You do not have to put all the required disclosure statemtents in your advertising, so you should not be olbigated to say it is a short sale. Before a buyer makes any kind of offer on the property, the fact that this will be a short sale should be disclosed. Bringing this fact up in a counter offer is too late, as it would result in the buyers feeling they have been mislead.

Most short sales are sold “as is” because the bank wants to get the amount shown on the closing statement (HUD) that is presented at the time the lender approves the sale. Since the seller usually has no money, any repair costs would come out of the proceeds of the sale, reducing the payment to the lender. Do you have to put “as is” in the MLS and the advertising. I do not believe it is required, so it should be left to the negotiating abilities of the listing agent. If you want to frame the negotiations to start with the idea that the property is sold “as is”, put it in the MLS. If you want to deal with it as the negotiations proceed, that may be your preference, as you may be able to get some basic repairs done as a part of the transaction. For example, if the property does not meet the FHA standards, certain repairs are going to need to be made for the buyer to get FHA financing. The existing lender should realize that this is an expense that is necessary to get the sale to close and allow that charge on the closing statement. I have had an easier time convincing the existing lender to pay more in closing costs, then have the buyer pay that same amount for the repairs directly to the contractor. For some reason, adjusting closing costs is easier for the short sale lender to swallow than to pay for repairs. Since the amount of money for the buyer is the same by paying the repair cost instead of the closing costs, most buyers are happy work in this manner.

To set the proper expectation, you need to disclose that the house is a short sale. It does not make a pleasant surprise.

Owner’s Choices: Short Sale versus Deed In Lieu of Foreclosure

March 14, 2009 by  
Filed under Short Sale How To

warranty-w-red-110A deed in lieu of foreclosure occurs when an owner gives a deed to the property to the lender in order to avoid the foreclosure process. It is commonly called a deed in lieu. The benefit to the lender is it saves the time and expense of the foreclosure. The lender will only accept a deed in lieu if there are no other liens on the property i.e. not other loans, judgments or secured debts. The reason for this is that the lender does not want to take over the obligation to pay the other debts that are secured by the property. If the lender has a first lien and forecloses, that foreclosure eliminates the other junior liens, other than IRS liens. So the deed in lieu has to be the same result of clean title as a foreclosure in order for the lender to be interested.

The advantage of a deed in lieu is that it only takes one negotiation. If the bank accepts, the owner is done with the house. One of the essential goals of the negotiating with the bank is to get a complete release from the debt. In other words, the owner wants the bank to accept the property in full satisfaction of the entire debt, so that the owner will not be chased by any debt collectors after the recording of the deed.

The byproduct of this result is a benefit for tax consequences. If the property is taken in full satisfaction of the debt, there is no debt relief i.e. the debt was fully paid. Without debt relief, there is no income tax consequences of the deed in lieu, unless the IRS wants to challenge the transaction by claiming that the market value of the house was less than the full value of the debt. So, the owner needs something like a market analysis to have on file showing that the amount of the debt was equal to the market value of the property.

The owner can also negotiate as smooth transition out of the house, with a reasonable time to move to a new location.

One disadvantage of a deed in lieu of foreclosure is the effect on your credit score. Under the Fannie Mae guidelines, a deed in lieu will make you ineligible for that type of loan for four years. In contrast, a short sale takes two years to “season.” Also, the standard loan appllication not only asks about foreclosures in the last 7 years, it also asks about a deed in lieu of foreclosure for that same period of time. For a deed in lieu, you have to answer the question “yes” for 7 years. For a short sale, the answer is “no.”

A lender does not have to accept a deed in lieu. There have been owners who have written out a deed, recorded it and sent it to the lender. They do not have to accept it. So, a deed in lieu is not a sure thing. Neither is a short sale, a bank does not have to do a short sale either.

The deed in lieu is a sale for purposes of income tax, just like a foreclosure and a short sale. So, if you made a profit you may owe tax on the gain. But section 121 of the Internal Revenue code eliminates the tax on a gain of up to $250,000 for a single tax filer and up to $500,000 for taxpayers filing jointly for a qualified principal residence.

Why aren’t there more deeds given in lieu of foreclosure? Many people do not know about them and some Realtors do not discuss that alternative as there is normally no commission paid. Since the short sale is a sale, the Realtor gets a commission. Since the deed in lieu is not like a normal sale, there is normally no commission.

“Don’t Cut Commissions” – Fannie Mae

fannie-mae1These are some of the most beautiful words in the Fannie Mae Servicing Guide:

Effective March 1, 2009, closing of preforeclosure sales may not be conditioned upon a reduction of the total commission to be paid to real estate agents to a level below what was negotiated by the listing agent with the borrower, unless the fee exceeds 6 percent of the sales price of the property in aggregate. Servicers are reminded that they must continue to obtain any approvals that may be required by interested third parties in connection with preforeclosure sales. (Part VII Section 504.02)

You need a translation from Fannie Mae speak to Realtor language. Preforeclosure is Fannie Mae’s term for a short sale. As long as the total commission is 6% or less, Fannie Mae as the investor is directing the servicer to leave the commission alone.

I have grabbed the microphone at REOMAC meetings to question the practice of cutting Realtors commissions. I have button holed Fannie Mae and Freddie Mac executives to discuss this practice. I lead an ovation for the Freddie Mac executive on a Short Sale panel who said they did not want the practice of cutting Realtor’s commissions to be allowed. I questioned a short sale panel that was so proud of paying a closing attorney extra money when the attorney worked to help loss mitigation, yet they condoned cutting the Realtors commission, and objected to me getting paid when I advised Realtors how to work their way through the short sale process.

Fannie Mae has said that Realtors are not to be treated like dogs.

Why is this important to the homeowners? Because it is the Realtor who is taking on the challenge of selling the home, getting the buyers to put up with the delays in a short sale review, and negotiating with all the lien holders. If the Realtor knows that the commission will be cut, they are much less likely to take on this task that is much more difficult than a traditional sale. If the Realtor knows that they will be properly compensated if the sale closes, there will be many more short sales with their benefit to the borrower, the lender and the neighborhood.

In an individual case, the bank will make more if it steals some of the Realtor’s commission. That is what CitiMortgage did to me in the short sale of a property on Crest Road in Rancho Palos Verdes, California. By negotiating in a questionable manner, they withheld approval of their short payoff until everyone else was up against a foreclosure deadline. Then, they would only approve a much larger payoff than allowed by the first and the second loans, so the only way to accomplish that was to have the Realtors pay CitiMortgage. Their negotiating trick left no time to get the situation corrected. In this one situation, they made more money. I have not done a short sale involving Citi since. Also, I disclose this experience to any Realtor that I educate on short sales. I will not do a short sale where Citi is involved unless they are representing a loan where Fannie Mae or Freddie Mac is the investor.

So, Citi made $25,000 more in this one situation. I will bet that they are losing many other short sale opportunities, where their total loss dwarfs the one time savings.

Fannie Mae has done an excellent job of emphasizing the long term benefit of short sales and eliminating the short term gain of stealing one commission. If Realtors know they will not have a commissionectomy, it is much more likely that they will do short sales.

Thank you Fannie Mae.

Step By Step Short Sale

February 24, 2009 by  
Filed under Short Sale How To

baby-on-steps-70x70You need to know how to get through the entire process, step by step. Part of your education is to know when each step is to be taken, and how to do it gracefully.

1. The very first step is to decide if you can sell the home for enough money to pay off the mortgages. If so, list it at that price, even if it is debatable. Some lenders ask for a history of the marketing of the property. If you can show that you tried to sell it for enough to pay off the loans, that will help your presentation for a short sale. In other words, your first step is to try to avoid the short sale all together.

If it is clear that the market will not support a regular sale, explain the entire process to the seller to be sure they are willing to go through everything it takes to get it sold. There is nothing worst than doing all the work of a short sale, then failing to close. Even before you list the house have the sellers get everything they will have to submit to the bank. Many times it is the same information they gathered to get a loan.

2. The sellers have to qualify for the short sale. Before you list the home, be sure they have the financial hardship that will enable to lender to cooperate with the short sale. If the sellers have plenty of income, and plenty of assets, the bank will not be cooperative, asking the sellers to bring money to closing to pay off the rest of the debt, or to sign a note to make payments after the sale closes. If the sellers have no way to pay the balance of what is owed to the bank, you will have an easier time convincing the bank to accept the short payment.

Even before you put the house on the market, ask the seller to find all the financial information that you will need to supply to the bank. Every bank ask for different items, but typically they want a hardship letter, a financial form showing their assets and liabilities, two month of bank statements, their last two pay stubs as well as copies of the mortgage statements. If the sellers are self employed, you may need two years of tax returns.

3. Get a letter of authorization that allows the bank to talk to you in the same manner that they would talk to the seller. Send it to the bank when you list the house, as most lenders take days and sometimes weeks, to review these documents. Some banks have odd requirements for what those letters have to say, and the only way to find out about those requirements is to send in the letter and have them respond to it.

4. Find who you will be dealing with at the bank. Some are Loss Mitigation departments, others have different names. Most of them will not talk to you until you have an offer. If they will, find out what they want, how they want it done, and how you can make their job easier. Try every way you can to avoid dealing with the collections department, they get bonuses for getting the loan reinstated but get penalized if the property does not get back into performing status, so they usually are not helpful for short sales.

5. Research the title to the property to find out all the liens, judgments, unpaid taxes and assessments. Get the amount necessary to pay off each of the liens, e.g. order the payoff statements from the mortgages and contact the attorneys for the other lien holders. Many Realtors will not do short sales if there is more than one mortgage. My record is three mortgages, one judgment and unpaid property taxes, the second place finisher was one mortgage, four judgments and unpaid property taxes. If the situation is too complex, either walk away, or call me.

6. When you put the property in the MLS, you have to price it in accord with the time you have . If the seller is facing foreclosure, you do not have time to test the waters, just price it aggressively. Even if you are not pressured, you still want to be competitive. Look at the recent sales in the last three months, so you are aware of what it takes to be sold. Also look at the homes for sale to be sure you stand out from your competition. You need a reason for a buyer’s agent to put up with all the trouble that comes with a short sale, so you need at least an appealing price.

7. Get a buyer, and you hope for a fair market value. But, take the best you can get. The review time by the lender is long, so get it started with any reasonable offer. If you get a better offer during the review period, you can submit it. The contract provisions have to include a Short Sale Addendum that provides that the sale is contingent on the approval of the lender. If you do not have that provision in your contract, your sellers are signing a contract that obligates them to pay the “short” amount at closing.

One of the ironies of a short sale is that lenders take long to review them, but when they approve them, they want them to close quickly. So, try to get a contract that has a quick closing, but have the time for the closing start when the bank approves the sale.

8. Develop a HUD-1 closing statement. If you are in an area that does not use a HUD-1, get some software and develop one. You are dealing with a bank that is reviewing massive numbers of short sales, so you have to put the information in a format that is easy for them to review. Put the HUD-1 in with the rest of the short sale package.

9. Send the short sale package to the bank. How you send it is extremely important, and we will discuss it elsewhere in more detail. Watch out for a bank that requires you to fax it to a number that is constantly busy. If they do, fax it in the middle of the night, or send it to one of the supervisors in the loss mitigation department. Send a separate copy by registered mail, requiring a signature to prove that it was received. This prevents the loss mitigation department from claiming that they never received your short sale package.

10. Some of the traditional documents for a short sale package are the following:
a. Fax transmittal

b. Letter of Authorization (to talk with you)

c. Cover letter discussing the offer

d. The complete contract of sale

e. HUD 1 with an estimate of the payment to the bank

f. Listing agreement

g. History of the Listing: Dates of the listing and price reductions

h. Form showing the seller’s financial condition, such as a financial statement or worksheet

i. Hardship letter describing the reason for the financial problems

j. Last two pay stubs. if employee, profit and loss if self employed

k. Last two bank statements for every bank account, include all pages

l. Last two years tax returns, particularly if self employed, including all schedules

m. The pre-approval letter for the buyer’s loan or verification of funds on deposit for a cash buyer

n. recent mortgage statement to help identify the loan.
This is where you have to know what the bank wants. For example, Bank of America normally wants only the hardship letter, letter of authorization to talk to the Realtor, the HUD-1 and short financial statement. Give them what they want, and no more. Some lenders will ask for statements of all accounts, such as IRAs, stock brokerage and similar accounts. If they ask, provide them. If they do not ask, do not volonteer them.

11. If there are judgement liens, send the purchase contract as well as the HUD 1 to the lien holders along with a letter describing your offer to pay their debt for less than the amount owed.

12. Call to see if the package has been received and put into the system. You will need the loan number, name of the seller/borrower, the address of the property, and sometimes the last four digits of the seller/borrower’s social security number to get past the initial person that you talk to. You have to be sure your package gets into the system. My record is sending the package four times before it was finally registered properly.

13. Call regularly to see when the package is assigned to a loss mitigation negotiator. The lender will tell you it makes no difference if you call. In fact, your package will languish unless you see that it is moved along, and each time you call, someone will look over what you sent to tell you if they need something more.

14. Hopefully, the lender will order a Broker’s Price Opinion (BPO) before the case is assigned to a negotiator. Some will only order the BPO when the negotiator takes the case. The BPO is what the negotiator will use to determine if the price offered is close to the market value, so the lower the BPO price, the more likely your offer will be accepted. Be sure to point out the issues with the property and problems with the market to try to get the BPO price to be reasonable. The best practice is to have pictures of the problems and two bids for repairing them.

15. Occasionally, you get to talk to the negotiator. Other times, they only send emails. Other times, they will have no contact with you at all, so be sure that your letter explaining the transaction is clear and complete.

16. Sometimes you can learn the BPO price. Most of the time, you cannot. If you can communicate with the loss mitigation negotiator, show the merits of the offer and how it gets the bank a better result than all their other choices. The negotiator has a huge effect on your offer, so try to get their support, and definitely do not alienate them.

17. Find out who is taking the loss. If you are dealing with a bank, is it their loan, or are they representing an investor. Is there a guarantor or mortgage insurance, so the bank will get paid but the guarantor will take the loss. You need to know who is making the decision, so you can appeal to them.

18. Keep calling to see how it is progressing. Many banks will not notify you of their decision. The only way you will find out is when you call the loss mitigation department.

19. Get the response to your proposal. First mortgage holders will generally take 80 to 100% of the value established by the BPO. The second mortgage will generally take 5-20% of the outstanding balance of the loan. The third mortgage holders will generally accept 5 to 10% of the balance owed. Depending on the priority of a lien, they will typically take 5-10% of the debt.

20. If they do not accept your offer, see if they will give you a counter offer. Some lenders are extremely difficult when they just turn down your proposal and give you nothing to aim at. If you get a specific counter offer, see if your buyer will accept it. If so, send the revised contract to the loss mitigation negotiator. If not, see if the buyer will give you a counter offer to present. The revised offers will need a revised HUD-1.

21. During the negotiations, you may need to escalate to the supervisors and their supervisors. Remember, if you do that, you will alienate the loss mitigation negotiator, so figure you have lost their support by going over their heads. If you cannot get the bank approval and their is a guarantor (or mortgage insurance) move your negotiations to the guarantor. If you have problems with the bank, find the investor who actually owns the loan, and negotiate with the investor.

22. As a part of the negotiations, you will also negotiate how the lender will report the short sale to the credit reporting agencies. This is covered in more detail on this site. You will also be negotiating whether your short payment will be in full satisfaction of the debt, or if the lender will be able to pursue the seller after the sale closes. Occasionally, the lender will want the seller to execute an unsecured note promising to pay some of the balance due.

23. Watch out for commissionectomy! Many banks will try to take your money, even after you have done all this work to get them paid. Look at all these steps that you are doing to make the sale work, but many banks only look at their loss. To counteract this tactic, refer to the Servicing Guide of Fannie Mae saying it is against their policy to reduce the commission on a preforeclosure.

24. If the offer is approved, you must get the approval in writing with all its terms, then give it to the attorney or escrow that is closing the sale. The lender will require that they approve the final HUD-1 before the closing of the sale, and specify how the funds will be sent. If the settlement will not only release the lien but also eliminate the balance of the debt, be sure to get that inwriting.

25. If you do not get an approval, but learn what the lender(s) will accept, adjust your asking price to make it more likely that you will get offers that match the lender(s) requirements.

26. Once the bank has approved the sale, all the items that are normally done when a seller signs the contract are accomplished. Most of the time, the bank will insist that the buyer take the property “as is” because they do not want to have any more money taken out of their proceeds. You may have a problem closing if the buyer objects to the condition of the property and the seller has no money to do the repairs.

27. Have the attorney or the escrow officer close the sale and pay off the mortgages and liens. The seller will probably receive a 1099 from the transaction reporting to the Internal Revenue Service how much of the loan was not paid off. There may be tax consequences from having a portion of the debt forgiven, which is covered in detail in the post Income Tax and Short Sales. There may also be tax consequences from the sale itself, unless the gain is not taxed due to Section 121 of the Internal Revenue code (sindle tax return can make $250,000 and joint tax return can make $500,000 profit and pay no tax)

28. Celebrate your success.

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