With Foreclosure rates still rising even with news of the recent news of the bailout where is one to turn for answers. Recently they reported that the numbers of workouts in the last quarter dropped considerably even with rates still rising. My thought on this was banks were laying in wait for the results of this bailout. Now that the bailout relief for banks has been passed there is an aire of relief floating around. Many banks have propelled the short sale processing time literally cutting it in half.
The looming question a homeowner faces when behind on payments is what direction to go. They can opt to do a loan modification or some type of workout to get back on track with their payments. They can simply walk away from the home and allow the bank to Foreclosure or they can try and sell the home before Foreclosure and asking the bank to allow a short sale.
A read an article recently regarding credit scores pertaining to all three options. I am partner in a nationwide short sale company that negotiates for homeowners and investors and also trains investors to perform short sales the right way. Every client asks the same question. How will a short sale effect my credit? The truth of the matter is there is damage to the credit if you do a short sale but not particularly from the short sale itself.
I recently joined a credit company that helps educate homeowners on credit and how to repair their credit legally. There is hope after short sale! With a Foreclosure a judgement is actually placed against the individual and appears in their public records. This judgement can prove to be much higher than the potentially deficiency of a short sale simply because of the continually declining market.
Let me explain. If you conduct a short sale you are left with lates on your credit report. These can be removed rather easily and inexpensively. I know most credit repair companies are expensive but if you check out MyCreditABC you can repair your credit for only $99.95 a year! Now, with a short sale or a loan modification you are going to have to contend with the lates. It is innevitable. The truth is you were already behind. Repairing your credit is a must BUT it is doable and you can get back on your “credit” feet rather quickly.
With a Foreclosure you must contend with additional issues such as the judgement we previously discussed. With the Foreclosure you can count on your judgement being rather on the high side. Certainly expect it to exceed what any deficiency might be simply because there are additional fees. Let’s say you sell your house for $150k in a short sale but owe $200k. That equates to a $50k shortage. Now let’s look at the Foreclosure option. First and foremost and ungodly amount of legal fees will be tacked on. Then consider holding and listing fees that the bank will have to fork out to get the house ready and on the market. Then, because time has passed and REO agents are traditionally more agressive with lower pricing, you home will probably sell for $125k. This means you will have a $75k shortage, legal fees and holding and listing fees pushing your judgement over $100k.
Additionally you will have a judgement placed against you. Many lenders, whether the item has been removed in some places, will not lend you money to purchase another home until 5 years later. This was recently increased from 3 years to 5 by FNMA.
That being said, your best option is to go with a loan modification/workout or with a short sale depending on your situation. Once you have moved forward from this a month or so later it would be wise to look into credit repair that is reliable, informative and inexpensive. If you are in the real estate business and you have clients facing these very same problems you might want to consider joining MyCreditABC and provide this service. MyCreditABC is a great company built on trust and solidity and they offer the clients a GUARANTEE that their program will work. It is also free for affiliates to join. They simply want to help more people the best way they know how…Knowledge!
With the market in such disarray there is much talk about whether banks will take advantage of the bailout by holding onto their foreclosures and take their run with REOs (Real Estate Owned) or if they will become more formidable about short sales. As managing partner of ALMS (American loss mitigation Services) I spend my days negotiating short sales with the banks. Having been active and watching all the changes this market has undergone in the short sale arena I tend to be opinionated on this topic.
What most people don’t understand, banks are FINALLY getting it, is the gap between foreclosures and REOs. Many banks have turned to third party asset managers to liquidate their REOs. Most of the asset managers are using the retail market as a way of unloading them. On paper this looks like the banks are better off selling an REO as opposed to doing a short sale, hence the reason things have been so rough for short sale investors.
Let’s talk about where the problem is. In an example where an investor makes an offer of $150k on a home valued at $200k. Let’s say the bank does the BPO and it comes back right at $200k. This would prompt them to deny the above offer for $150k. Once the house goes into Foreclosure the file is probably noted as having an offer of 75% of the CMV (current market value). Note I just used a percentage instead of the actual dollar difference. Now the asset manager is going to assign an agent. Once they do this the agent that received the property will have to “reassess value”. Here is where all the problems come into play. An REO agent, traditionally, will NOW come in low on value. For the purpose of this example the agent will come in around, say, $170k. Keep in mind that the agent’s motivation is getting that rock bottom number so that it will move quickly which will make them look good and hence the asset manager. They take an offer of $145,500 and close.
What is wrong with this picture? If we go back to percentages the bank will see that the asset management company just sold the home at 85% of current market value. That is 10% more than the investor was offering, but is it? Herein lies the leak that everyone was missing for some time. The “retail” offer itself was $5,500 LESS than the “investor” offer. Again, for purposes of reports most are given in %’s. Somewhere along the line the dollar figure will come into play but the value of $200k will be lost in time and space due to the shuffling of the file. There really isn’t a good enough “checks and balances” system to catch this.
This has been killing the investor market prior to the sale date of the property. Mitigators are told that they can get an average of 85% of CMV if they let it go as REO. This will prompt them to decline offers that will yield, say, 75% of CMV. They are given an analysis system to which they simply plug in numbers and, like the magic 8 ball, the system spits out the infamous yes, no or maybe. This is what the investor’s HAVE been dealing with.
With the feds stepping in now we, ALMS, have already had Freddie Mac force the banks hand to take the property back because there was a current offer on the table. We were negotiating on these properties as a short sale and the mitigator declined the offer and let the file go to sale in these cases. Upon review by Freddie Mac someone internally called us and asked if the offer was still valid. Of course you know my response was ABSOLUTELY! We were able to complete the deal and close. The feds don’t want to flood the market with REOs anymore than we want them to. My honest thought is that someone has recognized this little leak and things will get a little easier, evidence this has already happened, for the short sale investors.
ALMS spent months putting together their full short sale training program but waited until recently to finally release it. One of the reasons we waited was the market shift. We wanted to make sure that our students would have the best of the best and we have dedicated ourselves to keeping it current, creative and comprehensive.
To find out more about our training program visit our website at www.americanlms.com/training
Written by Donna Atwater, American loss mitigation Services, Inc.
