Category Archives: foreclosures-shortsales

The costs of skipping a house payment

Bankruptcy, foreclosures-shortsales, Strategic Default

 

 

 

 

 

 

 

What kind of damage to your credit happens after 1 missed mortgage payment?

Oddly, it depends on if you have good or bad credit to start with. Those with good credit suffer more than those with bad credit.  (Answer: It’s about a 60-100 point drop in your FICO score for one missed payment.)

This great post talks about the effects of missed mortgage payments, short sales, foreclosure and bankruptcy on the owner’s FICO score. The post refers to a chart on the FICO blog that details how these events affect credit scores and how long it takes to recover from each one.

This is required reading for anyone weighing their options among foreclosure/short sale/bankruptcy.

Most interesting to me was that your credit suffers more if you have a deficiency balance after a short sale than if there is no deficiency balance. I find that deficiencies are NOT forgiven in most short sales, so the credit effect of a short sale with no release is the same as a foreclosure!

I review the credit of many clients and most of them are around 520 to 600 after they have missed three mortgage payments (much lower than indicated in the chart).

As far as recovery of credit after goes, one can get a new FHA mortgage with a 620 FICO score (after the required wait), and that’s not too much of a leap from even the lowest levels listed.

 

 

 

 

 

Update: Quirks of buying FNMA foreclosure

foreclosures-shortsales, Real Estate-Purchases
This month I did four closings for clients buying foreclosed homes owned by Fannie Mae (FNMA). FNMA mortgages account for well more than 50% of the mortgages in the universe and its Homepath website lists all of the FNMA foreclosures currently for sale. Many of the foreclosed homes on the market (also known as “real estate owned” (REOs)) are FNMA owned, so if you are buying a foreclosure, its likely that it is FNMA owned. 

Buying a FNMA home is easier than buying a short sale, but harder than buying from a seller who’s not in foreclosure.  In October 2009, I wrote about the quirks of buying a FNMA foreclosure. Buying a FNMA is still as quirky as Napoleon Dynamite on a first date, but it’s a little easier than it was in 2009. Here’s an update on what to expect if you buy a FNMA foreclosure:

1.The infamous addendum still exists. This is a rider that goes on the standard real estate contract.  The addendum is hard to understand. It still takes about one week from the time the offer is submitted to get the final signed contract and addendum back from FNMA. Most of the time, we get the final signed contract back faster now than we did in the past.

2. Acknowledgement Date Confusion. The FNMA Addendum still  has a weirdo clause that says the inspection contingency starts on the date of verbal “acknowledgement” of acceptance of the offer by FNMA. No other REO sellers do this, only FNMA.   Be sure to set up your inspection right away, or ask in writing for an extension of the inspection contingency, so that you don’t accidentally blow the contingency date. I really wish they would get rid of this and just start from the date of acceptance of the contract.  I have not had any problems with this, but you have to be on top of scheduling the inspection and do it right away.

3. Dewinterizing for Inspection. All REO sales are winterized, meaning the water and utilities are shut off. You need them turned on to inspect the property. Back in the good old days of 2009, FNMA often forced the buyer to dewinterize the property which was a hassle because you had to have a plumber there to plug the two thousand leaks that sprung when the water was turned on. Thankfully, FNMA now almost always dewinterizes the house before the home inspection instead of passing it off on the buyer, which is good. In my experience, you are unlikely to get any credits after the inspection and FNMA will not agree to repair anything. Unfortunately, clients rarely listen to me on this and insist on bringing up a long list of repairs that FNMA always rejects.

4. Title Insurance, Transfer tax and survey. FNMA used to try to get the buyer to pay for seller’s title insurance and often tried to get the buyer to pay for the village transfer tax. I find that they don’t do this much anymore. FNMA will not provide a survey and never has. They now always pay for title insurance and usually pay for the state, county and municipal transfer tax. I always confirm that they will pay for these in my attorney approval letter.

5. Penalties for closing late. The addendum has some wicked penalties for closing late. Generally, the reason one would close late is because the mortgage approval is delayed. As long as the mortgage contingency extension has been requested there will not be any penalties. Recently, I have not had any client pay a closing delay fee, so FNMA seems to have lightened up. FNMA attorneys often randomly say “the house is going back on the market if you don’t close by Friday.”   All extensions, whether for the closing date or the mortgage contingency, have to be signed by the Buyer and have to be on the FNMA form. This is annoying, but it’s just how it’s done.

6. Keys at closing. FNMA homes supposedly are all “keyed” the same with one master key. So the addendum said that no keys will be given at closing and a few times the listing agent demanded back all keys at closing. The poor buyer closed on the home and couldn’t get in without calling a locksmith. Now they are supposed to charge a $120.00 re-key fee to the buyer, but they do furnish a key at the closing.

7. Other issues.

-Like most REO closings, no seller’s representative attends closing and it can still take up to 48 hours to get the seller to sign the closing statement. The buyer cannot move in until the seller signs the closing statement. This is pretty obnoxious, but lately the seller has been signing the closing statement within a few hours of closing.

-Be sure to check the water bill because it is often missed and should be paid in full by FNMA at closing.

-If you are buying a condo from FNMA, be sure to ask them to pay the 6 months dues from the prior foreclosed owner. Even though this can be passed to the buyer under Illinois law, FNMA will usually pay it. It often takes up until the closing date to resolve this issue. Don’t give up on it.

High earners & strategic default

foreclosures-shortsales, Strategic Default

Masochism alert: If you want to get good and depressed, look up your house on zillow this month.Type your address into www.zillow.com. When your property pops up, click on your address, above where it says “zestimate.” The next screen will show the 30-day price change. This showed my house down $35,000.00, not for the year, just for January.

Wowser, that’s one wicked drop.

There has to be a bottom coming for real estate values, but it is not here yet. The seemingly never-ending  slide of real estate values is also causing high income earners, who can otherwise afford their mortgage, to strategically default on their homes (and second homes) because they have lost hope that the market will rebound in their lifetime.

This excellent post on Dr. Housing Bubble points out that strategic defaults increase greatly once a home is underwater by more than $100,000.00. Also, if the neighbors start walking away the chances are others will do the same. Those with large mortgages and high credit scores are more likely to strategically default on their mortgages than those with small mortgages and low credit scores.

I do telephone consultations with clients almost daily and many of these clients earn $100,000.00 or more and can pay their mortgages, but several factors are pushing them toward strategic default:

1. They can rent a house that is much bigger and in better shape than the one they own for less than they are paying on their mortgage.
2. They are $100,000.00 or more underwater and have lost hope that the home’s value will rebound in a reasonable time. With each big drop on zillow, more people go sub-$100k and the likelihood of their strategic default increases.
3. They view the only negative of strategic default as being the hit to their credit score.

These clients are well-educated and they look into a strategic default  carefully before actually doing it. Most tell me that they have talked to several attorneys about the process.  I have to say that it seems to me that most have already made up their minds to quit paying on their mortgage and I have a hard time convincing them otherwise. Supposedly, all the high earners walking away from their mortgages frees up cash that’s spent on other things and gets the economy rolling (this is kind of a stretch).

There are many negatives to consider for a high earner before walking away from an existing mortgage. Some of these are:

1. Constant phone calls from the lender. Receiving several calls per day for more than 1 year can wear people out. This is the biggest complaint that I hear from clients who are in the foreclosure process.
2. Getting served with the summons by the sheriff. This is a terrible day for all but the most tough-skinned. Worse is being served at work by the sheriff (this rarely happens).
3. Trashing of credit score. Credit will go to 520 and stay there for awhile.
4. Association must be paid and will pursue you vigorously. If there are dues owed to a condo or townhouse association, these have to be paid until the foreclosure is over.
5. Second mortgage must be paid or settled. Second mortgage companies will file collection actions against clients. I highly suggest that no one quit paying a second mortgage unless they are ready to file a bankruptcy, because the second lender will be like a hell hound on your trail. I just filed a bankruptcy for a client who quit paying on a house that had a second mortgage. Two years after the foreclosure, the second mortgage company sued, got a judgment for $40k and was about to garnish his wages. So, a strategic default that involves a second mortgage is a very real financial threat and should not be done unless you are willing to pay the second mortgage or file banktuptcy.
6. First mortgages are not pursuing deficiency judgments, but this could change. Right now there are really no deficiency judgments being taken in Illinois and no collection actions being filed by first mortgage holders. What if this changes and the foreclosing lender dumps the foreclosed notes to a debt collector in the future? What if lenders start to seek deficiency judgments in Illinois? Things can always change, although I think this is unlikely.
5. Biggest worry of high earners: That the foreclosing bank will get a deficiency judgment and take other assets from the client. Clients are absolutely obsessed with this. First, the likelihood of a deficiency judgment on a first mortgage is slim. Right now, the only time this can happen is with a second mortgage, as discussed above. But clients wring their hands about this and worry that the lender will creep up on them down the line and take their cash or a new home bought in their spouse’s name.  This is not likely to happen.

This post titled Not Walking Away is For Suckers and For People Who Aren’t Rich, kind of sums the high earner/strategic default issue, better than I could.

Hammer time: 1099s coming soon for 2010 foreclosures

foreclosures-shortsales
The first week of February 2011 will be bleak for those that went through a foreclosure in 2010. That’s because lenders are required to issue form 1099 after a foreclosure and the 1099s are usually received that week.

Some ignore the 1099 and don’t claim it as income and have problems with IRS for years to come. If there’s one piece of advice I can offer to those who were foreclosed in 2010 (and there were many of you)  it’s this: Don’t ignore the 1099. For most, the foreclosure was of their primary residence, and luckily there is an exception for primary residences through 2012 that makes the foreclosure tax free, but that doesn’t mean you can ignore the 1099.

For those who had an investment property foreclosed, or a property that was not their primary residence, it is truly hammer time and all I can suggest is please, please get some good tax advice asap.

Here’s how the whole 1099-after-a-foreclosure thing  works. The lender must issued form 1099-C which is titled “Cancellation of Debt” after the foreclosure. This does not mean the mortgage debt is cancelled. It means that the lender is reporting to IRS that the debt was cancelled. Cancelled debt is taxable. Fortunately, you will not owe income tax on the entire amount of the 1099, just a portion of it.

Here’s how cancellation of debt is calculated:

Step 1: Take the total amount of the debt at the time of the foreclosure. If your mortgage was $200,000 and there was an additional $10,000 in interest and attorneys fees, the total, for example would be $210,000.00.

Step 2. Subtract the fair market value of the property as shown on the 1099C. Usually the lender reports this on the 1099, but if not, you will have to determine the value. Let’s assume the value of the property was $150,000.00

Step 3. The result is $60,000.00 that is taxable to the foreclosed owner in 2010.

Fortunately, there are three ways to completely knock the 1099 out of the tax picture and make it totally nontaxable. That is where form 982 comes in. The 1099 is shown as income on your tax return, but then it is subtracted by filing form 982, so the net effect is no additional tax. Here are the three ways to avoid paying taxes on the 1099 and these are shown on form 982:

1. Taxpayer filed bankruptcy. If a chapter 7 was filed before the 1099 was issued no tax is due. One cannot wait until after the 1099 is issued to file bankruptcy, it is too late then. The case has to be filed before the 1099 comes out.

2. Insolvency. The taxpayer is insolvent, in other words,  the debts exceed the assets. I want to caution that this is not as easy as it sounds and you absolutely, positively have to talk to a tax professional about this well in advance of receiving the 1099.

3. Primary residence. If a primary residence was foreclosed, then no tax is due on the 1099. This exception only runs through 2012. A primary residence is a property used as your primary home for any 2 of the last 5 years.

So those whose primary residences were foreclosed will be fine, but those who had investment properties foreclosed are left with only two remedies: File bankruptcy before the 1099 hits or claim to be insolvent.

The fact that you received a 1099 does not mean that you the lender has given up getting a deficiency judgment against you. In most cases, the lender will not pursue you for a deficiency judgment if a first mortgage was foreclosed and the lender issued the 1099 to you. Technically, the lender could still pursue you for deficiency judgment even after a 1099 was issued, but I am seeing no deficiency judgments for first mortgages here in Illinois.

Do you need foreclosure defense?

foreclosures-shortsales

I laughed  when I read about the woman who was able to stretch out her foreclosure for 25 years and continued to live in her home the whole time making no payments. She appealed the case seven times and the bank’s foreclosure attorney is terrified of her. She’s the Alonzo Mourning of foreclosure defense.

She deserves the litigant of the year award (not intended as a compliment), but she’s also  learned to be a more-than-competent foreclosure defense attorney.  Many attorneys have jumped into the new sub-specialty called foreclosure defense. Very few homeowners in foreclosure hire attorneys to defend them. Most cases, probably more than 90%, proceed unopposed.  Basically, a foreclosure defense attorney will file an “appearance,” that costs about $200.00, on your behalf and will act as your attorney against the bank. At a minimum, the attorney should file an answer and affirmative defenses for you.

There are a number of defenses that can be raised, the most common of which is “show me the note.”  Many lenders are not the actual owners of the foreclosed mortgage because an assignment of mortgage was not filed correctly by the bank. I have seen quite a few foreclosures dismissed because the wrong mortgage company filed the foreclosure suit.

Does everyone in foreclosure need an attorney? No, most don’t.

If you want to delay the process (which already takes over one year as it is) then it is wise to hire a foreclosure defense attorney. I spoke with a Chicago condo owner recently who hired a foreclosure defense attorney. She did this because she did not understand the process. However, the attorney was charging her almost $1000.00 per month, even if no work was done. That’s a pretty heavy, monthly price tag. Reviewing the case online, I saw that the attorney had filed an appearance, but done nothing else. And the poor client was left in the dark and didn’t know what was going on.

Most times you will not need a foreclosure defense attorney. If you do, expect to pay $250-$350/hour. The attorney should be able to explain how a 1099 works after a foreclosure, if a bankruptcy will help you, how the foreclosure process works and many other issues.

Getting a mortgage after bk, short sale or foreclosure

Bankruptcy, foreclosures-shortsales, Mortgages

It is possible to get a new mortgage after a short sale, bankruptcy or foreclosure, but it takes awhile.

The chart above tells how long it takes, after each of these events occurs, to get a new mortgage.

The first column labeled FNMA is a standard Fannie Mae, conventional mortgage, and this generally requires a 10% downpayment. The second column labeled FNMA 20% is a mortgage with 20% down. The third column is an FHA mortgage, which requires only 3.5% down, and is the current favorite these days with first-time buyers, because it requires credit of about 610 FICO and is otherwise easier to qualify for compared to conventional financing.

Most clients get FHA mortgages after a bankruptcy, which is only a 2 year wait.

The waiting periods are one thing to consider when deciding how to handle a underwater real estate and whether a strategic default is worth it or not.

Strategic default in the news

foreclosures-shortsales, Strategic Default

Strategic default is not funny.

But the video below from “The Daily Show” talks about how the Mortgage Bankers Association strategically defaulted on its own building, yet instructs everyone else to stay put.

Also interesting in today’s Wall Street Journal is “The Great Mortgage Mystery” that starts with this rather eye-opening lead:

“The big question from the mortgage meltdown isn’t why so many distressed homeowners are defaulting on their loans. It’s why any of them are still making payments.”

The story also uses the term “zombie homeowners,” that is  borrowed from the Japanese “zombie banks,” to define underwater homeowners.

Read or browse the 150 plus comments to the WSJ story.  Because strategic default is such a volatile topic, the comments are as good, if not better than than story.

The Daily Show With Jon Stewart Mon – Thurs 11p / 10c
Mortgage Bankers Association Strategic Default
www.thedailyshow.com
Daily Show Full Episodes Political Humor Rally to Restore Sanity

Monster in the closet: Collection agency or deficiency judgment?

Bankruptcy, foreclosures-shortsales, Strategic Default

When it comes to foreclosures and strategic default,  clients are very afraid of deficiency judgments. Deficiency judgments are like the monster in the closet — unseen, but scary as hell. Homeowners in or near foreclosure are terrified of these things, but there is no reason to be afraid because in the cold light of day deficiency judgments shouldn’t be feared  since they are so rare. I have yet to talk with a client against whom a deficiency judgment was entered in Illinois.

In reality, it may be that collection agencies are a much bigger threat to those thinking about strategic default or in foreclosure now. Channel  5 reported on this last summer, but it seems to be increasing since then.

I have had two cases recently in which lenders assigned their foreclosed mortgages to collection agencies. The collection agency starts calling and sending letters and finally files a lawsuit for “Breach of Contract” against the owner. A breach of contract case can be filed because the owner signed a promissory note at closing. The liability on the note survives the foreclosure. The statute of limitations on cases like these is a hefty 10 years.

Mostly this is happening on second mortgages, not first mortgages, but it is still possible on a first mortgage. Citibank seems to be very active in sending its delinquent second mortgages to collection.

Case 1: In the first case, the client had been foreclosed 5 years ago.  Then, suddenly the client started getting letters and calls from a collection agency. This agency specializes in “seriously delinquent and defaulted loan portfolios.”  I don’t know for sure, but most likely they agree to a contingent fee based on whatever they can collect from the foreclosed loans a lender assigns to them.  Most likely the client will have to put up with a series of calls and letters and then a lawsuit will be filed. When a judgment is entered the client will have to file bankruptcy to get rid of the judgment.

Case 2: The client owns a Chicago condo that is currently in foreclosure and, before the foreclosure was even completed, Citibank filed a breach of contract case against the owner based on the client signing the note for a second mortgage.  When this happens a whole separate lawsuit is filed. This is not part of the foreclosure case and it is not a deficiency judgment. A local law firm that is a well-known debt collector filed the case. The client will have no alternative except to file bankruptcy after the judgment is entered.

(Update 10/20/10: Wells Fargo is also filing collection actions on second mortgages. A McHenry County client was served with a $40,000.00 breach of contract case.)

I think that it’s very likely that lenders will continue to hand over their foreclosed loans to collection agencies in the hope of at least getting something back on delinquent loans. This is another reason to carefully weigh whether a strategic default is worth the cost, since you will have to look over your shoulder for 10 years until the statute of limitations expires. Ultimately, a chapter 7 bankruptcy will be the only way to eliminate the collection agency from the picture.

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.