Yearly Archives: 2013

Deficiency Judgments popping up everywhere in IL

foreclosures-shortsales, Mortgages, Strategic Default

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.

 

By-owner sales are back

Real Estate-Purchases, Real Estate-Sales

 

When the real estate market crashed in 2008, the for-sale-by-owner market died along with it. I’ve handled maybe 3 or 4 for-sale-by-owner transactions in the the last 5 years, But, they are picking up now and I’ve had 5 by-owners in the last few months alone. Recently, a property even sold by-owner using zillow.com’s make me an offer feature. Here’s how to sell by owner:

 

How do I set the selling price?

Look at zillow.com and eppraisal.com and that will give you a rough idea. Most sellers interview at least one real estate agent and get a comparative market analysis from the agent and that will help to set a selling price.

 

What do I do when I find a buyer?

When you find a buyer, you should verbally agree on a price and ask the name and phone of the buyer’s attorney. Don’t sign any notes or scraps of paper indicating what the price is because that could be construed as a contract. Verbal agreements to sell real estate are not enforceable. It is just a way to narrow the issues and reach agreement later in writing.

 

How much earnest money do I request?

I don’t think that large earnest money deposits do anything. Usually the amount is between $1000 and $5000. Earnest money is returned to the buyer if agreement can’t be reached under the attorney approval, inspection or mortgage contingencies. The earnest money is sent to the seller’s attorney after the contract is fulled signed.

 

Is the earnest money check cashed?

I am shocked by the number of people who think that the earnest money check is not cashed. It will be cashed and held in the seller’s attorney’s trust account to be released to seller at closing.

 

Should I fill out disclosures before I get a buyer?

Yes, it is helpful to complete the required disclosures before you have a buyer. Then the buyer can just sign your disclosures with the offer. The required disclosures are: Real property disclosure, lead paint, mold and radon.

 

Who prepares the contract?

Generally, the buyer’s attorney will prepare the contract. The buyer’s attorney send it to the seller’s attorney by email to review. Then the buyer signs it and it is sent to the seller to sign. The buyer signs the seller’s disclosures (completed by the seller in advance) with the offer. I use an esigning program called rightsignature to let buyers/sellers easily sign and initial contract using their computer or Ipad. It works great and everyone gets a final signed copy once it is esigned.

 

How long does it take to get the contract signed?

It will take far longer than anyone wants. Often, it takes up to one week from the time of verbal price agreement to get the contract signed. Some attorneys are stuck in the past and can’t create a real estate contract quickly even though with document assembly software it takes very little time.

 

Who handles the scheduling the inspection, the appraisal and walk-through?

The seller and buyer have to coordinate these times between them.

 

Who signs the contract first?

The buyer signs the contract first and then the seller accepts it.

 

Should I get a mortgage pre-approval letter from the buyer’s lender?

Sure, why not. Many, many sellers tell me how great their new buyer is because he is “preapproved.” This always makes me laugh because I have seen many pre-approved buyers get shot out of the saddle and fail to qualify for a mortgage. In reality, all it means is that the buyer talked to a lender, but there is no guarantee that the buyer will be approved for financing. It’s better than nothing though.

 

What if a real estate agent asks to show my house?

Some real estate agents will agree to show your house, but they will ask you to sign a one-time listing agreement that pays them a commission if their buyer writes an offer. Generally, the agent will want a commission of at least $2000.00 and up to 2% of the sales price. It is negotiable. In the old days (80s and early 90s) this never happened, but is is fairly common now.

 

 

 

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

Mortgages, Real Estate-Purchases, Real Estate-Sales

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.

Early Cook tax bill may ruin your 4th of July

Real estate tax

I’ve heard that the Cook County second installment real estate tax bill could be mailed as soon as this Friday June 28, 2013. This is depressing news and kind of a buzz-kill right before the 4th festivities.  I spoke to someone in the local assessor’s office who told me that the tax rate in Palatine is increasing a full one percent over last year so that should produce some jolly good, jumbo tax bills.

This is the second installment bill so it features any increase or decrease (best of luck on the latter) for the year. For the past few years, the bill was mailed very late by the county. This year they are Johnny-on-the-spot and it will be mailed early and will be due August 1, 2013.

Please be sure to check that your homeowner’s or senior exemptions are on the bill. If not, you can get the bill reduced by filing a certificate of error and that allows you to pay the lower amount.

 

Why your BofA Short Sale to an LLC may be DOA

foreclosures-shortsales

If you are trying to short sell your home and have a mortgage with Bank of America (BofA) there is a pretty good chance that you will get an offer from an investor doing business as a Limited Liability Company (LLC).  Large, well-funded LLCs are everywhere now and they are buying up properties quickly and paying cash.

A couple of LLCs that buy a lot of properties in Illinois are Waypoint LLC and IH2 Property Illinois.

If you are doing a short sale with BofA, I would not suggest accepting an offer from one of these LLCs because you will not be able to close. BofA will reject the LLC as a buyer and spike your short sale. Why would BofA do this? I was told that it’s …. cough, cough … “company policy” which means someone just made it up, and there really is no reason for this restriction.

BofA’s short sale rules are as follows:

1. LLC Buyer. If you have an LLC buyer you have to submit the articles of organization for the LLC and the operating agreement for the LLC. Most of the LLCs will give you this.

2. Members of LLC must be individuals. BofA will allow an LLC as a Buyer,  but only if the operating agreement of the LLC shows that an individual or individuals, and no entities, as members of the LLC– they will not approve a short sale where a trust, corporation or another LLC is the member of the LLC. The problem is that with large LLCs like those named above, there are no individual members. The members of the main LLC are always other LLCs or corporations. BofA will kill your short sale when they see an entity buyer within the LLC.

This only applies to BofA short sales, not to short sales in general. So don’t panic if you have a short sale lender other than BofA. Wisely, none of the other lenders look inside the Buyer’s LLC.

Illinois Deficiency Judgment: Still rare, but it can happen

foreclosures-shortsales, Strategic Default

I had a phone conference with a client whose house in the northwest suburbs was nearing the end of a strategic default. He stopped paying the mortgage about 1 year ago due to a divorce and the fact that the property was $100k+ underwater.

The sheriff’s sale was already done and he wanted me to review the order entered in court that confirmed the sheriff’s sale.

I almost spit out my morning coffee as I read this part of it:

“That there be entered an in personam  deficiency judgment in the amount of $136,000 against the Defendants _____________,  with interest as provided in Section 1508 (e) of the Mortgage Foreclosure Act.”

This meant that the lender, Harris Bank, went through the cumbersome, seldom used process of obtaining a deficiency judgment against the owners. The chances of this happening very slim, but it is allowed by law.

Usually the order confirming the sheriff’s sale says that a deficiency judgment is entered in rem against the property. Seeing this freaks out the client, but the words in rem  are nothing to be concerned about it.  The key words in this order that make it white hot are in personam, because when you see that, it means you have been hit with a personal deficiency judgment.

The client only had a few options:

  1. Pay  the lender.
  2. File a chapter 13 bankruptcy (he didn’t qualify for a chapter 7).
  3. File a motion to vacate the judgment and try to work something out with Harris.

I’ve written before about deficiency judgments and how they are extremely rare except when the bank is a small local lender or if the loan was a commercial loan (used to by an investment property).

This does not mean that the world is ending and everyone will now have a deficiency judgment entered against them. Anyone who has a mortgage with Chase, Bank of America, Wells Fargo, US Bank, Nationstar and the rest of the herd of residential lenders has a slim chance of having a deficiency entered against them. If you have a first mortgage with Harris Bank, I would be very cautious.

To me, this reinforces a couple of things:

  1.  It is almost always a good idea to try a short sale first before moving to a strategic default. Why? Because if the short sale closes, we can usually get a full release of deficiency from the lender, cutting off all liability to the lender.
  2. Deficiency judgments can’t be entered unless the defendant is personally served with the summons at the start of the case. If you are served by publication, no deficiency judgment can be entered. Clients have to be aware of the implication of being personally served with the summons and proceed accordingly.
  3. Filing bankruptcy is your final line of defense. If you have a high income, it is likely that you will have to pay the lender back some or all of the judgment, but if you qualify for a chapter 7, you will not have to pay anything to the lender.

Deficiency judgments in Illinois are still very rare, but they are allowed by law and lightning can  strike.

 

Buying a FNMA foreclosure gets a little more expensive

foreclosures-shortsales, Real Estate-Purchases, Uncategorized

If you buy a FNMA foreclosure, watch out for the fine print.  There’s a new paragraph recently added to the infamous foreclosure rider that could cost you some money.

I’ve written before about how FNMA buys are quirky and about what to watch for when buying one.

Starting in December 2012, the FNMA foreclosure rider that’s required was amended to include this more-than-a-little-overbroad statement:

Par. 10 (e) “Regardless of local custom, requirement or practice the Purchaser shall pay all costs and fees incurred in the transfer of the property, including all lender related costs and recording costs, except as expresly assumed by the Seller in this Addendum.”

This paragraph was not in prior versions of the rider and I don’t know how far FNMA will go  to collect from the buyer.

FNMA has to pay for title insurance, pay the real estate commission and give a tax credit under the rider, so those costs are “expressly assumed,” but that’s about it.  In the closing I handled,  the Seller used Par. 10 to charge  my client for state and county transfer stamps and for the $400 cost of obtaining the paid assessment letter from the association. Both of these costs are normally paid by FNMA. But, due to the brand new rider clause my client was stuck paying them.

There is not much that can done to prevent this, except to change the rider under the attorney approval clause (good luck with that). So all of you FNMA buyers out there, please beware that you might be stuck with some extra costs at closing.

Illinois cash for keys payments increasing

foreclosures-shortsales, Strategic Default

hopslamRecently, I went to a birthday party at a Palatine bar not known for its fine beer selection. I looked across the place expecting to see Bud Light or some other run of the mill offering, but like a distant mirage I saw  the words “Bell’s Hopslam” engraved on a tap handle. This is a world class,  high abv beer and it’s not easy to find. My main emotions were surprise, joy, elation and concern that I would spend the next morning in an iron lung recovering from this happenstance.  Mainly, it was a nice surprise and it made for one fun evening.

Those in the middle of a strategic default or foreclosure may be in for a nice surprise too.  Relocation assistance payments (more commonly known as “cash for keys“) are becoming the norm and the payments are getting larger.

In a foreclosure, the lender is entitled to possession of the property after the sheriff’s sale is confirmed in court. But it  became common practice for the lender to pay the occupant between $1000 and $2000 for the keys to the property. This was done so that the property is delivered to the lender in good, clean condition. The lender would rather not physically evict the occupant because the property may be stripped or damaged by the owner.

Here is what is new in the cash for keys arena:

1. Payments higher. The last two cash for keys arrangements that I worked on were $7800 and $4000 respectively. These required possession in 30 days and a check was given when the keys were delivered. It seems like $3000-4000 is obtainable now, whereas $1000-$2000 used to be about the max payment.

2. Don’t expect an offer until after sheriff’s sale confirmation. Clients sometimes want me to ask for relocation assistance during the middle of a foreclosure. I tell them it’s not possible. The only time a lender will offer cash for keys is after the sheriff’s sale has finished AND the motion to confirm the sale in court has been heard and entered.

3. Real estate agent will leave calling card. I have had little to no luck calling the foreclosure attorney to initiate a cash for keys. They always say “call the lender” which is pretty much a fruitless exercise. Have your ever tried to just ring up B of A or Wells Fargo with no contact person? Not fun. Here is what I see most of the time:  After the confirmation of the sheriff’s sale, the REO real estate agent hired by the lender will put a card or flyer under your door with his or her phone number. They are very responsive when called because they want you out of there so they can sell the property and earn a commission.

4. Most checks are given when keys are delivered. I prefer that the agent give the owner a check at the appointment when the keys are delivered. Most of the time this is was happens. Sometimes the agent says that the check will be mailed. No one likes this. I try to speficy in the cash for keys agreement that the check will be delivered in exchange for the keys and will not be mailed afterward.

5. Can’t always get what you want. About 20-30% of the time the lender will not offer a cash for keys. Often, the REO real estate agent initially will say that no relocation assistance is offered and then will come back a week or two later and offer it. So hang in there and wait a few weeks.

6. House has to be occupied. It is best to leave curtains up at the property and some personal property there. If the house/condo is clearly and obviously vacant, the REO real estate agent may just re-key the property and you will not get a cash for keys payment. I have had 2 instances in the last year when REO agents trotted into occupied properties and changed the locks. They are not supposed to do this. In both cases, when I called them the locks were changed back and we later received cash for keys payments. If the property looks like an abandoned haunted mansion, don’t expect to get a cash for keys.

Masochists guide to buying a HUD foreclosure

foreclosures-shortsales, Real Estate Rental, Real Estate-Purchases

Everyone and their brother is buying real estate to rent to a tenant now because prices are low and the rental market is red hot. Most investors pay cash and buy low priced condos. More and more, I see well-meaning folks choosing to buy HUD foreclosures that are $100,000.00 or less. These are properties that had FHA mortgages, were foreclosed and HUD is reselling them after the foreclosure.

Buying a HUD foreclosure is a quirky mess and much harder than buying a Fannie Mae or Freddie Mac foreclosure, which I wrote about here.

In fact, you pretty much have to be a total masochist to put yourself through buying one of these. I don’t recommend buying one of these as your primary residence. Many of the properties are a wreck and you will have problems with the appraisal (see number 2 below). Only seasoned investors should buy these, and even they should be aware that they are marching into a swamp and should proceed with caution.

Here’s why HUD buys are so painful:

1. Earnest money will be gone if you cancel. I often tell clients that there is no way they will lose any earnest money on a purchase because I watch the date deadlines carefully and I know how to get the earnest back. Scratch that on a HUD buy. It is VERY LIKELY that you will lose your earnest money if you cancel a HUD purchase after the home inspection or later. Generally, the earnest money is only $500 to $1000, but who wants to flush that down the drain? HUD is terrible about returning deposits and if you cancel, the earnest money is toast and most likely you will never see it again.

2. Watch out for the appraisal if you get a mortgage. If you try to get a mortgage to buy a HUD property, most likely the appraiser will find problems with the property and will require that these things be repaired before closing. I recently had a Buyer try to purchase a HUD and the appraiser wanted a structural engineer to check the foundation and required thousand in repairs. That deal was dead on arrival. The problem is that you can’t make the repairs since you don’t own the property and HUD will refuse to make them.  There is a type of FHA mortgage called a 203k loan that you can get to make repairs on the property, but getting a 203k loan is like scaling Mt. Everest barefoot.

3. No attorney approval clause. Your attorney can’t make any changes to the HUD contract. You are stuck with it. It is an “as is” sale. You can’t cancel the contract 5 business days after signing it, like a traditional contract.

4. No title insurance from seller. HUD does not pay for title insurance, so you will have to pay $1500 to $2000 for an owner’s title insurance policy. Normally, the seller does buy title insurance, but HUD buys are different and the buyer has to pop for it.

5. With a condo, you will get stuck with 6 months of the foreclosed owners dues (plus attorney’s fees). Illinois law allows condo associations to charge the buyer for 6 months of the foreclosed owner’s condo dues, plus attorney’s fees. Usually, the seller will pay this (about 65% of the time) but not on a HUD buy. You will get sacked with this extra cost which ranges from $900 to $4000. Freaked out about buying a HUD yet? I don’t mean to be so negative, but I speak the truth here and it is not pretty.

6. You pay for extensions even if it’s the seller’s fault. This is perhaps the most annoying facet of buying a HUD. HUDs often close late, mainly due to the seller’s delay in ordering the paid assessment letter from the condo association if the property is a condo. If the closing does not happen in 45 days,the Buyer has to sign an extension form AND pay for the extension. The payment depends on the sales price and is about $200. The buyer has to do this even if the delay is the seller’s fault. The selling real agent has to handle this chore. If the agent doesn’t ask for an extension, the property goes back on the market and you lose your earnest money.

7. Waiting on the RESPA at closing. Assuming you finally get to closing, you have to sit at closing and wait until HUD signs the RESPA form that has all of the closing figures on it. They will not let you sign it until HUD signs it. Make sure you have three books fired up on your Kindle because you will be waiting for some time my friend.

8. Buyer pays for local transfer taxes. If you buy a property in a town that has a local transfer tax (that the seller would normally pay) like Elk Grove or Schaumburg, you Mr. Buyer will have to pay for and obtain the transfer tax stamp before closing. The seller will not pay for it or go get it.

You are far better off buying a Fannie Mae or Freddie Mac foreclosure (although they have their own quirks), but please be careful with HUD buys.

Mortgage Debt Forgiveness Act extended through 2013

foreclosures-shortsales, Mortgages, Strategic Default

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.