Yearly Archives: 2010

Is Wells Fargo easy on short sales?

foreclosures-shortsales

Image: jscreationzs / FreeDigitalPhotos.net

An urban myth spread through my son’s school that gangs were putting baby seats on the roadside with blankets over the car seats and when an unsuspecting soccer mom stopped by to help out, the gang supposedly would rob the mom. This turned out to be totally untrue, of course.

An urban myth in real estate circles is that Wells Fargo is easy to work with on short sales. This is not true either.

Wells is not 100% horrible to deal with on short sales, but it’s not easy either. I am not saying that they are any worse than other lenders in short sales, just that they are not as smooth as everyone says.

Last week, I closed a short sale with Wells and here’s is how it went:

Short sale Property: Condo in Cary IL bought in 2007 and close to foreclosure (seller several months behind on payments).

Negotiator. The negotiator was appointed pretty quickly, within a few weeks. The negotiator communicated by email only. There were no phone calls. Matt Hernacki of Misterhomes Real Estate in Palatine, IL submitted the short sale package and he dealt with the negotiator, which was all done by email. Matt does a good job of  patiently, but persistently, dealing with short sale lenders. That’s an important first step in getting a short sale approved.

General word of caution: If you get up in the grill of a short sale negotiator and demand to speak to his supervisor, lecture him and impress him with your encyclopedic short sale knowledge, you are a dead man my friend. Your file is going nowhere.

BPO Haggling: Wells immediately insisted that the purchase price of $126,000 was too low. So right away, Wells asked to increase the price by $11,000! The broker price opinion (BPO) done by the lender was about 90 days old and was clearly wrong.

We thought the buyer would run for the hills when asked to increase the price by that much. The seller had no funds to contribute. But the buyer quickly agreed to increase the price by $4000.00 to $130,000.00. This was the first sign that we had a good buyer on our hands.

The lender accepted the $4000.00 purchase price increase, but kept whining that it was below guidelines. I find that very few buyers will increase the price by more than $2000.00.

Short sale Buyers are fickle: Many short sales buyers cancel the contract within 45 days of signing it. In this case, the buyer was obviously committed to buying this condo, which made things much easier. This buyer got fully, unconditionally  approved right away, which was awesome.

Most buyers of short sales don’t even start their loan application until the short sale is approved. This creates a Catch 22, because short sale approvals are valid for anywhere from two weeks to 30 days. The short sale approval often expires before the buyer gets his loan approval and the short sale has to be extended several times. This means all of the figures like tax credits and condo dues will have to be redone and resubmitted and the file will linger forever.

Number of Closing Extensions and Riders: There were five riders signed: One rider to change the purchase price and 4 closing extension date riders. Wells Fargo is absolutely obsessed with closing date extension riders. Most short sales just dink along and you close whenever the short sale and buyer’s loan are approved. Every time we got close to or passed the “closing date” we had to sign another closing date extension rider and send it to Wells.

Promissory note or seller contribution: Lender did not ask for either.

Time to closing: 3 months

Bizarre Final HUD approval takes days: Wells Fargo approves the short sale and issues a short sale approval letter that has all of the allowed closing costs and the “net” figure that it expects to receive. Be careful, though, that because Wells requires final approval of the HUD-1 in addition to the short sale approval. The final closing figures have to be submitted to them 48 hours prior to closing for a separate approval of the HUD-1. We submitted the figures mid-day on Thursday. The closing was Friday. The HUD was not approved until 5 pm on Monday. So it took 4 days for HUD approval. That’s insane especially since all of the figures were the same as the short sale approval letter. The crabby HUD-approver wanted the seller’s forwarding address changed and a couple other micro-managed things changed. Hud-approvers don’t accept calls; they only email. She kept sending back emails saying this:

What you need, ultimately, is a PDF stamp on the HUD saying it’s approved, like this:

This whole HUD approval step is absolutely unnecessary. It  takes so long that it could threaten the closing because the buyer’s lender usually wants to disburse the loan by no later than the day after closing.

Be prepared for this last stage and stay on top of your Hud-approver.  And beware of the myth that Wells is easy on short sales.

FHA may tag Strategic Defaulters with Scarlet S for life

foreclosures-shortsales, Strategic Default

Okay, foreclosures are up 95% this year in Palatine, the town where I live.

The high foreclosure rate in Palatine is because there are a lot of condos here. Many condos were purchased around or after the peak in June 2006.

I would bet that more than half of those condo foreclosures were “strategic defaults” meaning the buyer could continue paying, but chose to walk away from the property. In talking with clients it’s clear that no one defaults on their mortgage without a lot of thought, lack of sleep and anxiety. People care about their property and their credit rating and don’t just decide to descend into a foreclosure for the fun of it.

The lending industry is pressuring Congress now to discipline homeowner’s who have committed the sin of strategic default by limiting their ability to get a mortgage in the future. This excellent post by attorney Steve Beebe explains that Fannie Mae is trying to prohibit those who walked away from their home from getting a new mortgage for 7 years.

Worse yet, a new law being proposed and already passed by the House, called the FHA Reform Act, would prohibit strategic defaulters from getting any FHA mortgage in the future. Most homeowners who go through a foreclosure try to get an FHA mortgage two to five years after their foreclosure because FHAs have a low 3.5% downpayment and relaxed credit requirements of around 640 FICO.

It’s absolutely insane to ban people for life from getting an FHA mortgage.

First, how does one define strategic default? I don’t think lenders should be allowed to decide which unworthy Hester Prynnes get tagged with the scarlet “S” for strategic defaulter.

Second, the government, other than the tax credits that just expired, has done nothing to help the homeowners in or near default. The HAMP loan modification program is considered a joke and a failure.

This is really all about lenders trying to quell the non-stop wave of foreclosures by intimidating current mortgage holders into keeping, and not defaulting on, their homes, many of which are worth far less than the mortgage amount.

Watch mail for Cook Co. suburban tax reassessments

Real estate tax

Every three years, Cook County does the triennial reassessment of real estate tax bills.

Notices were just mailed to Barrington township. Evanston township notices were mailed July 15, 2010 and Barrington on July 8, 2010. These will be followed shortly by notices sent to other northwest suburban townships like Palatine, Schaumburg, Wheeling and Elk Grove.

Why does this matter?

Because this will be your only chance to protest your taxes for the next three years, that’s why.

The key thing here is to watch your mail for the reassessment notice because you only have 30 days from the date the reassessment notice is sent to protest your assessment.

The new assessments will affect the 2010 tax bill issued in the Fall of 2011.

Tax credit extended to September 30

Real Estate Tax Credit, Real Estate-Purchases

Congress finally approved an extension of the first-time and move-up buyer tax credits ($8000.00 and $6500.00 respectively) to September 30, 2010. This only applies to those who already signed a contract by April 30, 2010.

I have very few clients who will be affected by this.

I guess it’s good to help out those unfortunate souls who got sucked down some mortgage underwriting vortex and ended up with delayed closings.

I will so miss the tax credit.  I loved the credit with all my heart. It was an awesome, effective stimulus to a dead real estate market. The problem is how do we live without it?

Strategic Default in Illinois: Q&A

foreclosures-shortsales, Strategic Default, Uncategorized

One client had no problem deciding to strategically default on his Chicago condo due to a triple-witching hour of crime, an abandoned condo complex and a declining market that left the unit worth one-third what he originally paid. For most people, though, the decision to walk away from a property is not easy. Here are some common questions about the process:

What will happen to my credit score and when will I be able to buy another house?

Your FICO score will drop to about 520 when you miss about three mortgage payments. You can get an FHA mortgage with a score of about 650 and over 720 is considered “good” credit. How quickly you rehab your credit is up to you. It will take a minimum of two years to be able to get another mortgage and it may take as long as five years.

Do I apply for a loan modification first?

You can certainly try to apply for a loan modification under HAMP. It is unlikely that your loan modification will be approved and I pretty much consider it a waste time. Some say that HAMP is basically dead, a failed program. Loan modifications are for people who want to stay in their homes.

Should I try a short sale first?

Some owners try a short sale first. Most short sellers are behind on the payments already and are near or in foreclosure. If the property is an investment property, you absolutely should try a short sale first because it will lessen the tax impact.  Many owners can’t stand the thought of the many delays inherit in a short sale.  I think it is smart to at least try a short sale first in most cases.

Once I quit paying the mortgage, when will a foreclosure be filed?

Usually, the foreclosure case is filed about 4 months after the first payment is missed.

Do I have to accept the summons and will they serve me at work?

For the owner, the day the sheriff serves the summons and complaint is a very dark one. The abstract becomes real and owners get very upset by this. A plain-clothes officer will ring the doorbell and ask if you are you. Then the officer hands you the summons and complaint and walks away. Generally, the sheriff will try to serve the summons for about two weeks and then they quit trying. After they quit trying to serve you personally, they will serve you by publication (meaning a notice is published in a legal newspaper). Owners are not supposed to evade service of process by refusing to answer the door (many do). In general, most process servers don’t try very hard to serve the summons. I find that lenders usually will NOT try to serve you with the summons at your work.

Do I have to respond to the complaint and file an appearance after the sheriff serves me?

In most cases, it is not necessary to file an “appearance” with the court or to appear in court. In fact, filing an appearance submits you to the court’s jurisdiction and will allow the lender to get a deficiency judgment against you. Ninety percent or more of foreclosure cases are “default judgments” where the defendant does not appear.

Do I have to go to court?

For some reason, owners want to go to court to explain the case to the judge. This is not necessary and not productive. The judge is overwhelmed with cases. There is no reason to go to court in 99% of strategic default foreclosures.

How long can I stay in the home without paying?

In most cases, an owner can stay in the house without making payments for one year from service of summons. It can be as short as ten months or as long as two years, but one year is about average.

When do I have to hand over the keys?

Some lenders actually call you early in the process to “make arrangements to pick up the keys.” This amazes me, since they have no authority to ask for or to take the keys. They are hoping that you will just turn the keys over. Generally, possession is given to the lender after the sheriff’s sale is confirmed by the court. This takes about one year from the time you are served with the summons. Most owners leave much earlier in the process because they find it too hard to continue to live in the house. You will have to leave the house once the order of possession is entered. If you don’t leave then the lender can file the order with the sheriff and have you evicted, which is a very unpleasant thing that I would not wish on anyone.

Do I have to keep paying the homeowner’s insurance and taxes?

If you are still living in the house, you should keep the homeowner’s insurance in effect since it covers all of your personal property. Once you leave the house, there is no reason to continue paying for homeowner’s insurance. Most owners stop paying the real estate taxes (if there is no escrow) once they stop paying the mortgage. It takes about three years to lose a home for unpaid real estate taxes.

Do I have to pay for utilities?

Yes, all utilities are personal bills and the utility will file suit against you if you don’t pay.

Does it matter if I am served personally or by publication?

Yes, if you are served personally the lender can get a deficiency judgment against you. If you are served by publication, the lender can’t get a deficiency judgment. For more about deficiency judgments, see here.

Does it make any difference if I own a condo?

Yes, it does. If you are planning a strategic default on a condo, the condo association will file a separate lawsuit against you for the unpaid condo dues. So you may have to settle that case or continue to pay the dues until the condo foreclosure is final.

Can the lender sue me for deficiency judgment?

Most foreclosure complaints ask for deficiency judgments. This means that if the lender sells the property at the sheriff’s sale for less than you owe, the lender can try to collect this deficiency from you. Most lenders in Illinois are not seeking deficiency judgments. More information on deficiency judgments is here.  The lender can get a deficiency judgment against you AND 1099 you for the forgiveness of debt, but this is pretty rare.  Most lenders 1099 you for the forgiveness of debt and leave it at that.  However, if you have a second mortgage it is possible that the lender will file a collection case against you. In my opinion, this is a much greater threat than  a deficiency judgment.

Will the lender take my other assets or file a wage garnishment after the foreclosure?

Yes, they could, but it’s rare. If a lender gets a deficiency judgment, the lender could garnish your wages or try to take other property from you. The lender cannot take IRAs, 401ks or life insurance. I have never seen this happen.

Will I get a 1099 after the foreclosure?

Yes, lenders are required to send a 1099 for forgiveness of debt after a foreclosure. Read more about the 1099 issue here. If the property foreclosed was your primary residence then you file form 982 and this makes the income from the 1099 nontaxable.

Will I get 1099’d if I walk away from an investment property?

If the property was an investment property, then you will get 1099’d. Unfortunately, you have to claim the 1099 as income, unless you filed bankruptcy BEFORE the 1099 was issued or unless you can show you are insolvent. Walking away from an investment property has severe tax consequences and you should do everything possible to avoid doing so.

Will I need to file for bankruptcy?

Most likely you will not need to file bankruptcy. Generally, you file a chapter 13 bankruptcy to keep your house, not after a strategic default. You file a chapter 7 bankruptcy to get rid of credit card debt and other personal bills. The only reason to file bankruptcy after a strategic default would be in the unlikely event that the lender got a deficiency judgment against you, if a second mortgage holder filed a collection action against you or if you defaulted on an investment property. The chapter 7 bankruptcy would be needed after a strategic default on an investment property, and the case must be filed prior to a 1099 being issued for forgiveness of debt. Filing bankruptcy after a 1099 is issued will not work.  A chapter 13 bankruptcy can be useful if a homeowner has a high income or other assets that he or she wants to protect. The homeowner files the chapter 13, “surrenders” the home in full satisfaction of the debt and gets rid of any deficiency judgment and tax consequences that way. There will be some payments that have to be made to the bankruptcy trustee but those depend on income, assets and other debts.

Strategic Default in Illinois – Last man out of a dead condo complex

foreclosures-shortsales, Strategic Default

I get many calls and emails from my blog, mostly from people near or in foreclosure.

This week, I spoke with a guy who bought a condo in the city in 2006 (generally considered the market peak). Then, and now, he had a good job, but the Chicago neighborhood where he lives is overrun with foreclosures. The neighborhood  was “up and coming”  in 2006, but now it’s downright dangerous, he said.

In fact, he is now the only owner left in the 4-unit condo building, the other three owners having been foreclosed upon and the units standing vacant with no offers.

His mortgage amount: $275,000.00.  He was current in the mortgage payments. The biggest problem (among several) was that the other foreclosed units in the building were now on the market for $99,000.00! His unit was hopelessly “underwater” and it might take three lifetimes for him to get back to the price he paid in 2006.

We talked about the options and he admitted that he already decided on a “strategic default.”  A strategic default is when an owner quits paying on a mortgage when he or she otherwise could afford to pay and just walks away. Most of the questions I get now are from people considering, or in, strategic defaults.

He decided to quit paying the mortgage in June  and was going to move out right away, due to the unsafe neighborhood.  What are the consequences of walking away from this unit?

  1. Since this was his primary residence, the main effect of his coming default will be that his credit will drop to about 520 (FICO) and he will not be able to get another mortgage for at least two years (probably more like 5 years or longer).
  2. He will get a 1099 for the forgiveness of debt from the lender after the foreclosure, but since it is his primary residence there will be no tax due.
  3. We discussed that there is the possibility of the lender getting a deficiency judgment, but it was not likely. Illinois allows deficiency judgments, but few lenders are pursuing them. Most just issue 1099s and leave it at that.
  4. Walking away from a condo can be problematic because the condo association will file suit against you for the unpaid assessments (and will tack on their attorney’s fees). But, in this case, there was no condo association left to pursue him, so that was not an issue.

Strategic defaults are everywhere now (just take a look at the 400 plus comments in this WSJ story on Strategic Default). There are forums online for homeowners to discuss with each other the many aspects of a foreclosure.

I am especially surprised at the number of senior citizens considering strategic defaults. Many seniors on tight incomes maxed out home equity lines and are walking away from their homes (to rent) because market values dropped like a stone (but that’s another story).

In the next few posts, we will take a look at what homeowners in Illinois have to consider before going down the strategic default path? I am not encouraging strategic defaults and I think that this should be done as a last resort.

There is a debate on the morality of strategic defaults. Some say that strategic defaults are immoral and will drag down our system. I agree with Professor Brent White that in some cases a strategic default is not only morally acceptable, but the right thing to do.

Next: Q&A on Strategic Default in Illinois.

Buddha says: Seller should pre-inspect home

Real Estate-Purchases

My client was able to snag a buyer for his home in Schaumburg after the tax credit expired, which was no easy feat.

With my usual downer tone, I warned him that buyers can be brutal on home inspections and to expect the worst. When the inspection letter came, it had only three minor items.

“That’s because I had the home pre-inspected, and did all of the repairs beforehand,” the client said, with Buddha-like serenity.

In reality, very few sellers are going to do pre-inspections. Most sellers think their homes are in perfect shape (not true). And they also think that the buyer will not raise many issues because the seller cut the price so much in negotiations (Also no true.) Here’s a Trulia thread on the pros and cons of preinspections.

My wise client prevented a 30-item inspection letter by doing the pre-inspection and saved himself a lot of agony.

I think that in this market, which has dropped like a stone since the tax credit expired on April 30, it is a very wise move for the seller to pre-inspect his home and make the repairs in the report. Doing so will remove the huge stress-ball (the home inspection) from the closing process.