We live in a foreclosure bubble right now. Suddenly everyone is an REO (Real Estate Owned) or Short Sale expert. The sad reality is that many individuals such as real estate agents, as well as some attorneys and CPA’s, do not really understand the in’s and out’s of Short Sales & Foreclosures to the point of giving out information that is not only incorrect but dangerous. I have included some bullet points that can shed some light on differences between Short Sales & Foreclosures…

1.] Current Employment

Foreclosure; employers can and do check credit…may create challenges.
Short Sale; not reported on credit report…would not create an employment challenge (However, late payments are reported & may provide challenges).

2.] Future Employment…
Foreclosure; creates challenges as it is highly detrimental. Employers often require a credit check on job applications.
Short Sale; not reported on a credit check and is not a challenge.

3.] Security Clearance…
Foreclosure; Those working in sensitive areas such as police, military, CIA, or any job that requires a high security clearance will almost certainly be transferred or terminated out of that position.
Short Sale; typically, does not create a security clearance issue.

4.] Deficiency Judgment…
Foreclosure; no negotiating with the lender…lender has the right to pursue a deficiency judgment in Nevada.
Short Sale; it may be possible to convince the lender to give up its right to pursue a deficiency judgment against the borrower.

5.] Deficiency Amounts…
Foreclosure; house sits vacant, goes through BPO and auction process…in a declining market values may decrease which can create a higher deficiency.
Short Sale; Typically, the homeowner stays in the home, so property remains in better condition. House is often sold sooner at a higher market value, resulting in a lower deficiency.

6.] Fannie Mae Loans (effective 5/21/2008)…
Foreclosure; homeowners who lose their home to Foreclosure are ineligible for a Fannie Mae loan for 5 years.
Short Sale; homeowners who negotiate and close a Short Sale will be eligible for a Fannie Mae loan in 2 years.

7.] Investor Loans…
Foreclosure; investors who lose a property to Foreclosure are ineligible for a Fannie Mae loan for 7 years
Short Sale; investors who negotiate and close a Short Sale will be eligible for a Fannie Mae loan in 2 years.

8.] Mortgage Loans…
Foreclosure; borrowers who lost a property to Foreclosure will have to disclose this on a 1003 loan application. This could and will affect the interest rate.
Short Sale; no similar question or declaration on the 1003 applications in regards to a Short Sale.

9.] FICO Score…
Foreclosure; FICO scores will drop anywhere from 200-300 points. A Foreclosure will remain on the credit report and as a matter of public record for 10 years.
Short Sale; not reported on the credit history. They are typically reported as “paid in full, settled”…still a derogatory, but not as damaging.

Short Selling Your Home; What is Needed…What is Required?…

Engaging Your Real Estate Professional…

1.] Are they “Short Sale Certified”?
2.] Do they have a Real Estate Team?
3.] Short Sale Package.
A.] Financial statement showing income & expenses.
B.] Last 2 years tax returns.
C.] Last 2 months bank statements.
D.] Last 2 pay stubbs.
E.] Hardship letter.
F.] Letter of Authorization giving the RE agent authority to speak to lender.
G.] Very important to have every page copied and prepared.

Department of Treasury; Guideline Changes as of 11/30/2009 that will apply to the Home Affordable Modification Program (HAMP) and the Home Affordable Foreclosure Alternatives (HAFA) which is part of HAMP.

1.] Streamline the approach by utilizing uniform guidelines

2.] Provide a venue where;
A.] Loan modification is attempted first under timed constraints.
B.] If borrower does not qualify for a loan modification or fails the trial period, the property will be recommended for Short Sale.
C.] Loans that will qualify under this program;
*] Property is borrower’s principal residence.
*] Mortgage is first lien mortgage originated on or before 1/1/2009.
*] Mortgage is delinquent or default is foreseeable.
*] Current unpaid balance is <$729,750.00 on a single family residence (SFR).
*] Borrower’s total monthly mortgage payment exceeds 31% of borrower’s gross monthly income.

3.]If the lender accepts the Short Sale, according to the guidelines…there will be no recourse.

Important Website for More Information:
www.IRS.gov and click on the Mortgage Debt Relief Act of 2007.
www.HUD.gov and click on Avoiding Foreclosure page.
www.MakingHomeAffordable.gov for more information on President Obama’s plan
www.Freddiemac.com/avoidforeclosure

**Importance of good Legal & Tax Advice**  This element I cannot stress enough…totally empowering.  Prior to going forward with a  Short Sale or allowing you real estate to be Foreclosed upon, this is one of the smartest and most empowering things you can do to insulate yourself from further disaster.  Know your rights!

In my two previous posts, I discussed the concept that wraps the Obama “Making Home Affordable Loan Modification Program” along with details of “Making Home Affordable” as well as “Eligibility and Verification”. Today, I will discuss the 3rd and 4th aspects of the plan…”Loan Modification Terms and Procedures” as well as “Transparency and Accountability”.

3.] Loan Modification Terms and Procedures

A.] Participating servicers are required to service all eligible loans under the rules of the program unless explicitly prohibited by contract; servicers are required to use reasonable efforts to obtain waiver of limits on participation.
B.] Participating loan servicers will be required to use a net present value (NPV) test on each loan that is at risk of imminent default or at least 60 days delinquent. The NPV test will compare the net present value of cash flows with modification and without modification. If the test is positive..i.e. meaning that the net present value of expected cash flow is greater in the modification scenario…the servicer must modify, absent of fraud or a contract prohibition.
C.] Parameters of the NPV test are spelled out in the guidelines, including acceptable discount rates, property valuation methodologies, home price appreciation, assumptions, foreclosure costs, time-lines, and borrower cure and re-default rate assumptions.
D.] Servicers will follow a specified sequence of steps in order to reduce the monthly payment to no more than 31% of gross monthly income (DTI).
E.] The modification sequence requires first reducing the interest rate (subject to a rate floor of 2%), then if necessary extending the term of amortization of the loan up to a maximum of 40 years. If necessary “Forbearance” fo the principal can be effected. Principal Forgiveness or a Hope for Homeowners refinancing are acceptable alternatives.
F.] The monthly payment includes principal, interest, taxes, insurance, flood insurance, homeowner’s association and/or condominium fees. Monthly income includes wages, salary, overtime, fees, commissions, tips, social security, pensions, and all other income.
G.] Servicers must enter into the program agreements with Treasury’s financial agent on or before December 31, 2009.
H.] Payments to servicers, lenders, and responsible borrowers.
I.] The program will share with the lender/investor the cost of reductions in monthly payments from 38% to 31% DTI.
J.] Servicers that modify loans according to the guidelines will receive an up-front fee of $1000.00 for each modification, plus “pay for success” fees on still-performing loans of $1000/year.
K.] Homeowners who make their payments on time are eligible for up to $1000 of principal reduction payments each year for up to 5 years.
L.] The program will provide one-time bonus incentive payments of $1500 to lender/investors and $500 to servicers for modification made while a borrower is still current on mortgage payments.
M.] The program will include incentives for extinguishing second liens on loans modified under this program.
N.] No payments will be made under the program to the lender/investor, servicer, or borrower unless and until the servicer has first entered into the program agreements with Treasury’s financial agent.
O.] Similar incentives will be paid for Hope for Homeowner refinances.

4.] Transparency and Accountability

A.] Measures to prevent and detect fraud, such as documentation and audit requirements, will be central to the program.
B.] Servicers will be required to collect, maintain and transmit records for verification and compliance review, including borrower eligibility, underwriting, incentive payments, property verification, and other documentation.
C.] Freddie Mac will audit compliance.

The guidelines are detailed. They are set to protect all parties. Homeowners can effect the transactions themselves, however it is advisable to retain the services of a qualified loan modification professional who will have the expertise to expedite the process and avoid any pitfalls that the individual homeowner is likely to stumble upon. The goal here is to ensure that each homeowner gets the best chance possible to stay in their homes. Other than the personal benefit of being “Empowered“ by being able to remain in their homes…each home loan that is successfully modified will help to insure that our economy begins to stabilize and grow. This will “Empower” each of us…

The Obama Plan has a number of provisions to assist homeowners who are responsible, but are exhibiting hardships. We will discuss 2 segments of the plan and how they are broken down…

1.] Making Home Affordable

1.] Home Affordable Refinance Program for Responsible Homeowners
Suffering From Falling Home Prices.

2.] A Comprehensive $75 Billion Home Affordable Modification Program

A.] A Loan Modification Plan to Reach up to 3-4 Million Homeowners
B.] Shared Effort with Lenders to Reduce Mortgage Payments
C.] Incentives to Servicers and Borrowers
D.] Clear and Consistent Guidelines for Loan Modifications
E.] Required Participation by Financial Stability Plan Participants
F.] Modifications of Home Mortgages During Bankruptcy
G.] Strengthen Hope for Homeowners and Other FHA Loan Programs
H.] Support Local Communities and Help Displaced Renters
I.] Support Low Mortgage Rates by Strengthening Confidence in both Fannie Mae &  Freddie Mac

Making Home Affordable will offer assistance to as many as 7-9 million homeowners, making their mortgages more affordable and helping to prevent the destructive impact of foreclosure on families, communities, and the national economy.

The Home Affordable Refinance program will be available to 4-5 million homeowners who have a solid payment history on an existing mortgage owned by Fannie Mae or Freddie Mac. Under normal conditions these borrowers would be unable to refinance because their homes have lost value, pushing their current loan-to-value ratio above 80%. Under the Home Affordable Refinance program, many of them will now be eligible to refinance their loan to take advantage of today’s lower mortgage rates or to refinance an adjustable-rate mortgage into a more stable mortgage, such as a 30-year fixed rate loan.

GSE lenders and servicers already have much of the borrower’s information on file, so documentation requirements are not likely to be burdensome. In addition, in some cases an appraisal will not be necessary. This flexibility will make the refinance quicker and less costly for both borrowers and lenders. The Home Affordable Refinance program ends in June 2010.

The Home Affordable Modification program will help up to 3-4 million at-risk homeowners avoid foreclosure by reducing monthly mortgage payments. Working with the banking and credit union regulators, the FHA, the VA, the USDA, and the Federal Housing’s Finance Agency, the Treasury Dept has announced program guidelines that are expected to become standard industry practice in pursuing affordable and sustainable mortgage modifications. This program will work in tandem with an expanded and improved Hope for Homeowners Program.

With the information now available, servicers can begin immediately to modify eligible mortgages under the modification program so that at-risk borrowers can better afford their payments. Detailed guidelines will provide information on the following:

2.] Eligibility and Verification

A.] Loan originated on or before January 1, 2009
B.] First-lien loans on owner-occupied properties with unpaid principal balances up to $729,750.00. Higher limits allowed for owner-occupied properties with 2-4 units.
C.] All borrower must fully document income, including signed IRS 4506-T, two most recent pay stubs, and most recent tax returns, and must sign an affidavit of financial hardship.
D.] Property owner occupancy status will be verified through borrower credit report and other documentation; no investor-owned, vacant, or condemned properties.
E.] Incentives to Lenders and servicers to modify at risk borrowers who have not yet missed payments when the servicer determines that the borrower is at imminent risk of default.
F.] Modifications can start from now until December 31, 2012; loans can be modified only once under the program.

In my next post, I will discuss and detail “Loan Modifications Terms and Procedures”, as well as “Transparency and Accountability”. These protocols are detailed so that the public can understand how the process works, who is eligible, and what will be required.

Even if the applicant cannot qualify under these guidelines, there are other “Loan Modification” programs available. Each program is unique to the lender and each situation is unique to the borrower. Some include investor-type properties, as well as second homes. Each is decided on a “case by case” basis. Don’t consider yourself out of the game. If you are experiencing a hardship…if you are experiencing financial challenges…be proactive. “Empower Yourself”. Contact me directly. We can help…