Category Archives: Mortgages

FHA 90-day seasoning requirement is back for flips

Be careful if you are buying a property that the seller is trying to flip. WIth a flip, the seller buys a distressed or foreclosed property, fixes it up and then quickly resells it. If you are getting an FHA mortgage to buy a  property being flipped, you will not be able to sign a contract to purchase the property until 90 days after the seller has owned the property.

The 90 day time period is measured from the date the seller acquired the property (closed on the property)  to the dale the seller signs a contract with the new FHA buyer.
The purpose of this FHA “seasoning” rule is to prevent sellers from acquiring a property, doing cosmetic repairs and then reselling it at an inflated price. For the past few years, during the depressed real estate market, FHA waived this rule and allowed the buyer to sign the contract earlier than 90 days, but that changed on January 1, 2015.
But now, FHA is back to enforcing the seasoning requirement.
I have also found that many lenders will require two appraisals to be done if the buyer is buying a flipped property. This will often delay closing because the parties have to wait for the second appraisal.

Mortgage Debt Forgiveness Act extended thru 2014

Both the House and the Senate finally agreed to pass an extension  of the Mortgage Debt Forgiveness Act.

It expired at the end of 2013.

But now that it is revived, those homeowners whose primary residences were foreclosed or short sold during 2014 will NOT have to pay income tax on the difference between the mortgage balance that was unpaid and the market value of the property.


Appraisals coming in short this spring

appraisalLast week, I had 6 properties appraise for less than the contract sales price. It ‘s not real fun when this happens. No news is good news when it comes to appraisals, but when I get an email with an appraisal attached I know things are about to come unglued.

Seller’s instant reaction = “I am getting scr**** by the buyer’s lender and I am NOT cutting the sales price.” The seller’s  second stress induced reaction is “I’m going to “fight the appraisal” (good luck with that, tiger).

Buyer’s instant reaction = “I can’t believe I overpaid for the casa of my dreams and I hope the seller doesn’t cancel the contract.”

Fortunately, the amount by which these properties under appraised was between $5000.00 and $14,000.00 and the parities were all sensible. All of them were resolved without tanking. Half of them “met in the middle” and for the other half, the seller reduced the price to the appraised price.

Usually when a property appraises low, I estimate that about 75% of the time the end result is that the seller cuts the price to the appraised price. If the appraisal is for an FHA loan, the seller will be stuck with that appraisal for 1 year even if the contract cancels (and a new FHA buyer comes in).

I find that it is nearly impossible to “contest” the appraisal. Appraisers rarely change the result of an appraisal. There is supposed to be no way to communicate directly with the appraiser. I find that when the parties try to contest the appraisal that 2 to 3 weeks are wasted while the loan processing comes to standstill and closing is delayed.

The spring market has been very fast moving with multiple offers on many homes within a day or two the listing hitting the internet. I’ve seen a lot of contracts at or over list price. Sellers are getting more for than they expected in some cases and there are not the comparable sales to support the appraisals.

If you are a buyer be sure to add an appraisal contingency to the contract. The mortgage contingency will act like an appraisal contingency unless you are putting a ton of money (50%) down and then it won’t work and you need a separate appraisal contingency. If you are a seller, just be aware that selling for list price is cool, but it may be cut after the appraiser trots through.

Internet lenders: Take a pass

I love buying stuff online. Here’s some of the things I’ve bought on the internet recently: a living room couch, a rowing machine and a 10 speed road bike (fully assembled). I trust online buying and hardly ever have any problems.

The one thing I would NOT get online is a mortgage.

About 25% of the buyers that I see use an  internet lender. I specifically recommend against selecting a lender online when I describe the closing process to new buyers.

The advantage of getting a loan online is that the rate is usually pretty low.

There are many reasons not to get a mortgage online. First, almost every time the approval and closing process turns into a semi-nightmare.  With online lenders, there is no single responsible party who can answer questions and resolve issues. The online lenders use a team approach, but usually no one knows what is going on. Our Illinois closing process is kind of quirky compared to other states and funds need to be at closing when it starts, not 10 hours after closing. Online lenders often don’t wire the funds to closing under after the loan is ‘”funded” at closing rather than sending the funds before closing.

If you are near a computer, go ahead and google “best mortgage rate.” Near the top will be Quicken loans, and Lendingtree. Lendingtree takes you through a series of screens that ask you questions about the loan you are seeking and then suggests some lenders for you. Click here to read some reviews of Lendingtree. They are absolutely scathing. Same here for Quicken loans. Brutal reviews. There are many accusations of pulling credit reports without authorization and endless complaints about lack of communication. Many complain of constant spamming the minute they enter data on the site.

Go ahead and scan through them and I doubt that you will have a warm fuzzy feeling about internet lenders.

My recommendation is to pick a good, local lender referred by someone you trust. The online mortgage market is not ready for prime time. Do you really want to be a beta tester?

Deficiency Judgments popping up everywhere in IL

A few years ago, I wrote a post about how a subdivision in Florida called Lehigh Acres  had so many deficiency judgments entered against foreclosed owners that it should be called “deficiency judgment acres.” Unfortunately, the same can now be said for the Chicago area.

Foreclosure cases are way down in Chicago. They have dropped almost 60% over since last year. But, with the slowdown, lenders are now entering deficiency judgments  against homeowners on first mortgages in droves. Deficiency judgments were rare to nonexistent for the last 5 or 6 years (although they were always allowed by law in Illinois).

A deficiency judgment is a personal judgment against the homeowner for the difference between the market value of the property at the end of a foreclosure and the amount owed to the lender. The lender can try to collect the judgment by filing a wage garnishment or taking non-exempt assets from the homeowner. The only remedy for a homeowner is to settle the judgment, or to  file a chapter 7 or chapter 13 bankruptcy.

In the last 5 years, I did not see a single deficiency judgment entered (on a normal residential mortgage). In the last 4 weeks alone I’ve seen these deficiency judgment entered:

Deutsche Bank $58,000.00 – Lake Co. condo.

Nationstar $50,000 – Chicago house

Nationstar $105,000 – Northwest suburban condo

Citimortgage- $25,000 – Northwest suburban house

Now, any time a mortgage company gets personal service on an owner in a foreclosure case (or substitute “abode” service on someone who answers the door) there is a real risk of a deficiency judgment being entered. If the lender is not able to personally serve you with the foreclosure complaint at the beginning of the case, then a deficiency judgment cannot be entered.

Why are so many deficiency judgment being entered? I don’t know the answer to this. For one thing, the volume of foreclosures is way down. Also FNMA and Freddie Mac have said that they intend to pursue strategic defaulters for deficiency judgments. Chancery court judges have clearly reversed course and now routinely enter them when they previously refused to do so.

So what does this mean to Illinois homeowners who have underwater properties?

  •  Strategic Default is dead. There used to be little to no risk in stopping payments on a first mortgage in Illinois. The 1099 issued at the end of the foreclosure was wiped out by the Mortgage Debt Forgiveness Act. That expires at the end of this year and I doubt it will be renewed. Also, the risk of deficiency judgment is now so high that it makes no sense to stop paying on a mortgage unless you plan to file bankruptcy.
  • Short sales are close to dead too. A favored strategy was to attempt a short sale, because the homeowner could get a release of deficiency from the lender.  But the Mortgage Debt Forgiveness Act is about to expire, meaning the homeowner will have to pay tax on the 1099 after the short sale closes AND if the short sales doesn’t close, the risk of deficiency judgment is way too high to try a short sale.
  • Bankruptcy’s the only route. The only sure-fire way to get rid of a deficiency judgment is to file a chapter 7 or chapter 13 bankruptcy. Chapter 7 is cleaner than Chapter 13, but there is an income limit (called the “means test”) that has to be met and an asset limit. I’ve had to file several bankruptcies for clients lately after deficiency judgments were entered. Chapter 13 bankruptcies are less desirable because the creditors have to be repaid, but the income and asset limits are very broad and most people can easily meet them.


Help I’m stuck in an Illinois real estate closing and can’t get out!

With the new, red hot real estate market, the length of real estate closings has increased dramatically. In the good old days, closings took 1 hour. Now, we routinely endure closings of 2 to 3 hours.

Why? Well, there’s a lot of reasons and we’ll get to those in a minute. First, here’s what happens at an Illinois real estate closing:

  1. Parties gather. The sellers’ attorney, buyers’ attorney, buyers and real estate agents meet at the title company location selected by the sellers’ attorney. The “closer” is there too and he or she is an employee of the title company whose assignment is to close the loan for the lender. The lender and loan officer usually don’t attend. The sellers rarely attend closing because they presign the documents. Some states handle closings in escrow where no one attends, but in Illinois we don’t use escrows and closings are done with everyone present at the title company.
  1. Buyer signs loan documents. The buyers sign their loan documents and those documents are sent by fax or email by the closer to the lender for “funding.” Funding means that the lender has checked the final loan documents, approved the figures on the final HUD statement, and has given the okay to disburse. Lately, lenders require 60-150 pages of documents to be send back for approval. The entire process of loan funding has pretty much gotten out of hand.
  1. Wired funds are received. The closer checks to see if the lender’s funds and buyers’ funds have been wired to the title company’s bank. At least 40-50% of the time, the lender’s funds have not been wired. Be sure to tell your lender that you expect the funds to be at closing. I have found that lenders do listen to this. (Side note: Title companies are so busy that at least 50% of the time we get no final figure for the buyer prior to closing. We have to estimate the amount and the final figure is a mystery until you get to closing.)
  1. Lender okays final documents and loan is funded. It usually takes anywhere from 30 to 90 minutes for the lender to review the documents and fund the loan. Often, they require picky changes and that slows things down. Some closers wait 60-90 minutes to send the documents to the lender for approval and that will slow things down for sure.
  1. Checks are issued and everyone is happy. Once all of the above happen, the closer issues the checks, gives the buyers their copies and everyone is happy happy.

Some of the reasons closings are slower now that in the past are as follows:

Title companies are understaffed and overbooked. Real estate was deader than a doornail from 2007 through the beginning of 2013. Now it is up 30-50%, but title companies have not added employees. I recently slogged through the swamp that was a 3 hour closing and our closer had 18 closings the next day. That is not even remotely possible. Given that it took her 3 hours to do my closing, I pity the poor buyers stuck in one of those 18. Most (90%) title company closers are really good and efficient at their jobs. It is not easy. There are a few, though, that are phantoms. If your closer leaves the room and disappears you are in for a long wait.

-Title companies don’t get HUD preapproved. The better title companies will get the HUD closing statement pre-approved by the lender before everyone gets to closing. This will speed up the closing a lot. A closer for a besieged title company will say “I didn’t have a chance to look at the package” and will print out the 150 page loan package from a pdf file and start on it while everyone sits there. Be sure to pack a sandwich if this happens because it will be a long wait.

-Buyers show up late. A surprising number of Buyers show up very late to closing. Last week, at a 9 am closing, we waited 1 hour while the buyer did his walk through of the property. He showed up at 10 am and the closing was a 3 hour blockbuster.

Loan funding process is fundamentally flawed. The entire process of getting a loan “funded” is a joke that should be revised. The whole thing is self-serving and the lender is trying to protect itself from getting stuck with the loan for some minor defect.

So what can be done to speed things up? If you’re a Buyer, show up on time. Be sure that funds are wired to the title company the day before closing. Insist that your lender wire the funds in advance of closing (not during the closing). The rest is pretty much out of your control, but don’t be surprised if you are at closing for 2 plus hours.

Mortgage Debt Forgiveness Act extended through 2013

As part of the fiscal cliff bill passed early this morning, the Mortgage Debt Forgiveness Act (MDFA) was extended for an additional year through 2013. It expired on 12/31/12.

As long as your short sale closes before the end of 2013, and provided the property was your primary residence, there will be no income tax due on the 1099 that is issued after closing.

The same will apply to properties foreclosed in 2013. If the foreclosure is completed in 2013 (sheriff’s sale held and confirmed by the court), then there will be no tax owed on the difference between the market value of the property and the outstanding mortgage amount. This will only help owners of properties already in foreclosure. Since foreclosure takes so long in Illinois (14-20 months), you will have to carefully examine if beginning a strategic default makes sense now makes sense or not, because the law will likely expire again before the foreclosure is completed. And who knows if it will be extended again.




GMAC: My short sale BFF

I just closed a short sale with GMAC Mortgage and it only took 3 months to close from the date of the contract. In the normally slow moving short sale world, that’s blindingly fast. So GMAC is my short sale best friend forever. Closing one of these makes up for the many death march short sales I’ve endured with the likes of Citibank and B of A.

My clients bought their home in Pingree Grove in 2006 and paid $250,000. They listed it for a short sale and got an offer for $150,000.00. GMAC short sales are initiated on the online Equator system and they quickly ordered the broker price opinion (BPO) and asked the buyer to raise the price by $5k. The buyer agreed to this and the short sale was approved in about 45 days. GMAC did not ask for a seller “contribution” despite the fact that the married couple selling were both employed and had good incomes. GMAC shorties also include a waiver of deficiency, so the seller is released from liability on the note (which is one of the main reasons to do a short sale in the first place).

When the buyer applied for his new loan, the property appraised $4,000 under the agreed short sale price after the increase. GMAC agreed to reduce the price back down to the appraised price, which was a minor miracle. Appraisal problems are everywhere now and a week does not pass without a property under-appraising, but that’s a post for another day.

GMAC also agreed to extend the initial short sale approval while the buyer finished his loan approval. For some reason, when lenders approve a short sale they put a very short wick on the time for closing, often less than 30 days. In this market, it takes a buyer a minimum of 30 days to obtain financing, so a short sale extension is often needed. Extending short sale approvals can be a mess. I am working on another short sale and the lender did a new BPO when asked to extend the short sale approval and increased the price $10,000 in mid-stream. That was not fun.

GMAC has a simple, final approval process for closing. The final HUD-1 closing statement is uploaded 48 hours before closing and, in this case, it was approved in about 1 hour. The final approval is fast and easy and not the extended nightmare of say, a Wells Fargo short sale.

So if you have an underwater home with a GMAC mortgage, you might consider a short sale. My unscientific guess is that you have an 85% or better chance of closing your short sale quickly and with a full release.

New Illinois short sale law chopped to pieces

This video from one of my favorite movies (Monty Python and The Holy Grail) is symbolic of what happened to the new Illinois short sale law as it wound its way through the legislature. You’ve seen it.  King Arthur and the Black Knight get into a sword fight. King Arthur carves up the Black Knight  limb by limb, until nothing remains.  That’s pretty much what happened to this new statute just signed into law last week.

When I first saw that a new short sale law was working its way through the legislature, I hoped that it would help clear out the backlog of near-foreclosures and get the real estate market back on track. Initially, the new law required lenders to respond to a short sale offer in 30 days and it said that all approved short sales in Illinois must include a release of deficiency. California passed a law that prohibited deficiency claims on first and second mortgages not too long ago and I was hoping for a law similar to theirs. But as the law worked its way through the legislature over the past year, the forgiveness of deficiency was amended out of it and the requirement that the lender respond in 30 days was extended to 90 days.

As passed,  the law does one thing:  Requires the lender to respond to a short sale offer in 90 days. That’s it. And there’s no penalty if the lender doesn’t respond. Basically, the new law does nothing and that’s  not good at a time like this when so many homes are way, way underwater.

How many mortgages really get loan modifications?


The last three clients I spoke to were approved for loan modifications. About 20 before that were shot down.

The reductions  in their monthly payments (among those approved) were from $500 to $1300.

I am so overwhelmingly negative and cynical about loan modifications that I don’t like to even hear myself talk about them. I sound worse than some crabby, old guy on the SCORE complaining about the White Sox bullpen.

I do believe that loan modifications are too hard to get and that they lead many homeowners down the path to foreclosure, instead of helping them.

This cool graph that shows how many loan modifications are cancelled and how many become “permanent” and it shows the percentages for each at all of the major lenders. Of all of the trial modifications applied for, about half are cancelled. It was surprising to me that there are such differences between lenders in the number of modifications made permanent.

Considering that half of those who get loan modifications end up in default again (after the modification) I still consider loan modification a long shot.