C.A.R. open letter on short sales

March 10, 2011

An important message from the CALIFORNIA ASSOCIATION OF REALTORS®:

I write on behalf of the CALIFORNIA ASSOCIATION OF REALTORS®, whose 170,000 members continue to witness the devastating consequences the home foreclosure crisis is having on California’s families, neighborhoods, and communities on a daily basis.

The number of families affected by foreclosure is staggering. During the past three years, more than 640,000 Californians have lost their homes. With the number of homeowners who owe more than their home is worth hovering at 30 percent, experts predict there will be many more foreclosures in 2011 and 2012. Unless we take immediate, aggressive action to assist these homeowners, any meaningful recovery in the housing market and overall economy will continue to be delayed.

Tragically, only a fraction of those who face foreclosure will remain in their homes when all is said and done. Those whose incomes and financial circumstances meet strict guidelines may qualify for a loan modification that will reduce their monthly payment to more affordable levels. Yet the federal Home Affordable Modification Program (HAMP) is expected to prevent only 700,000 to 800,000 foreclosures nationwide before it expires at the end of 2012, and the program does little to help those homeowners who are unemployed or otherwise no longer able to meet their financial commitments. Their last hope is to sell their home, which often means convincing their lender or the investor who “owns” the loan (and, in many cases, the holder of a second mortgage lien and the mortgage insurer) to accept a “short sale.”

With a short sale, homeowners with a proven hardship negotiate an agreement to sell their home for less than the balance owed. Although not every homeowner or mortgage is eligible, those who are able to finalize a short sale avoid a foreclosure on their credit record and can move on with their lives. Last year, 20 percent of home sales in our state involved short sales.

Short sales can play an important role in our state’s economic recovery by accelerating the pace of home sales and reducing the inventory of bank-owned homes on the market. There are other benefits as well. Homebuyers who can qualify for a mortgage at today’s low interest rates also are able to purchase a home at below-market prices. Banks get a nonperforming asset off their books and avoid the headaches associated with disposing of assets they don’t want to own in the first place. Neighborhoods have fewer abandoned homes, and local businesses have more customers with money to spend.

Unfortunately, many homeowners are unable to successfully negotiate a short sale. According to a recent survey of 2,150 California REALTORS® who have assisted clients with a short sale, only three out of five transactions closed – even when there was an interested and qualified buyer.

What’s the problem? For one, no two mortgage agreements are the same, so it can be difficult to standardize short sale processes and procedures. Many homeowners have second mortgages, which further complicate matters. Then there’s the challenge of convincing multiple parties to take a financial loss or, in the case of loan servicers, to forego fees they otherwise might earn during the course of the foreclosure process. Poor and slow service by many banks and servicers has only exacerbated the problem. Horror stories abound from potential homebuyers and REALTORS® forced to wait 90 or more days for a response to a purchase offer or being required to fax short sale applications or other paperwork as many as 50 times. These delays discourage potential homebuyers from considering a short sale purchase and undermine the process for those who short sales are intended to benefit – the hundreds of thousands of families facing foreclosure.

Increasing the number of closed short sales by speeding up and streamlining the short sale process is one important way we can help California families avoid foreclosure and move our economy closer to recovery. That’s why the California Association of REALTORS® is taking steps to enable more families to arrange a short sale. Recently, we advocated for improvements to short sale guidelines established under the federal Home Affordable Foreclosure Alternative (HAFA) program. We’re meeting with major banks, U.S. Treasury officials, government-sponsored entities (including Fannie Mae and Freddie Mac), and others to urge them to standardize processes, comply with federal guidelines, improve communication with other stakeholders and increase staffing with the goal of eliminating service issues. We’ve also offered our members training in every aspect of the short sale process so they can assist their clients.

But we can’t do it alone. That’s why we’re focusing the spotlight on short sales and calling on regulators, elected officials, nonprofits, business organizations, companies, and individuals with a stake in California’s economic future to resolve this issue and others that get in the way of a recovery. It won’t be easy, and some compromises will be required. The important thing is that we need to act today. Our families and our communities can’t wait any longer.

Sincerely,

Beth L. Peerce
President
CALIFORNIA ASSOCIATION OF REALTORS®

DRE Issues Short Sale Consumer Alert

The following alert was first posted in September of 2010.

DRE Consumer Alert: “Warning Regarding ‘Short’ Sales”

If you find yourself in a situation where your financial circumstances either challenge your ability to make your home mortgage payments or you are no longer able to make the mortgage payments at all, you will be presented with a series of difficult options that will have an impact on your personal and financial life for years to come.

One of the more familiar options is foreclosure. In a foreclosure, the bank/lender (owner of your loan) decides to sell your house as a means to get back the money they loaned you. However, in this current real estate market, some banks/lenders are not exercising their foreclosure rights and instead have opted for either “loan modifications” or “short-sale” deals. Since it appears that successful loan modifications have not been very prevalent, this alert is written to discuss another option that is currently available to the banks/lenders: short sale transactions.

Short Sale Transactions:

What is a short sale? To put it simply, a short sale transaction is a sale of a property in which the outstanding debt (in the form of mortgages – such as purchase loans, refinance loans, home-equity loans, or one of the various other types of loans secured by your property) was more than the price for which the property was sold. Example: 1st and 2nd mortgages totaled $470,000.00 and the property was sold for $325,000.00. The sale price was $145,000.00 “short” of the amount that the seller had originally borrowed – thus the term “short sale.” Since the banks/lenders were essentially paid back less than what you borrowed, you could be deemed to have received a debt “forgiveness” of $145,000.00. A sale of this type requires bank/lender approval.

While there are many reasons why a bank/lender would choose this manner of sale, the important question is: What should you (as the seller of the property) know about this type of sale? If you participate in this type of sale, please be aware that:

1. In some instances, you may be sued by the lender/bank for the money that was “forgiven”.
2. The amount you did not pay back, which is a form of “debt forgiveness”, may be taxed by tax agencies for the “forgiven” amount. In the example above, you may be taxed on $145,000.00. For Mortgage Forgiveness Debt Relief Act and Debt Cancellation tax information visit: http://www.irs.gov/individuals/article/0,,id=179414,00.html
3. If there are other lenders or lien holders (such as a 2nd or 3rd loan), the holders of the second or subordinate liens, may file a deficiency judgment in civil court against you to get their money back, even though the first lien holder allowed debt forgiveness.

These are just three major consequences of choosing to sell through a short sale. Therefore, it is very important that you seek:

1. A licensed and qualified real estate agent to represent you in these types of transactions. To determine if the person is licensed by the California State Department of Real Estate and/or to check on a license status, please visit our website at www.dre.ca.gov.
2. The advice of an accountant. To obtain the status of a Certified Public Accountant or a Public Accountant, please visit the California Department of Consumer Affairs - California Board of Accountancy at www.dca.ca.gov.
3. The advice of a lawyer. To obtain the status of an attorney, please visit the State Bar of California at www.calbar.gov.

In addition, contact a free United States Department of Housing and Urban Development (HUD)-approved housing counselor at www.hud.gov or contact your lender directly.

In April of 2010, the federal government will offer financial incentives to push short sales through a program called Home Affordable Foreclosure Alternatives. The program is designed to spur home sales and one of its components will be providing government payments to homeowners (for moving and/or relocation expenses). For more information, please visit www.makinghomeaffordable.gov.

Be aware that in response to this new program there may be an increase in the number of companies soliciting homeowners in distressed situations and offering to conduct the short sale negotiations with your bank/lender in exchange for charges and fees. Their interest may not so much be to help you as it may be to try to be the vehicle through which they could “flip” the short sale for a profit.

Flipping of Short Sale Properties: Either an unscrupulous agent or a short sale negotiator will misrepresent the true market value of the property to the bank/lender and/or fail to forward all offers to the bank reflecting the true market value. They try to buy it themselves through the use of “straw buyers”, many of whom are limited liability companies, which are their alter egos. They will use false broker price opinions or appraisals to support a depressed valuation. Once the unscrupulous agent or a short sale negotiator has convinced the bank of the false value, they have their straw buyer purchase the property and immediately attempt to sell it at the true market value, re-visiting buyers who had made legitimate offers. Had the property been sold for the most amount of money that the market will bear, the potential tax consequence to the seller is diminished. Conversely, by accepting an artificially deflated offer, the seller’s potential tax liability is increased.

The key elements for you as a homeowner to look out for are:

1. Short sale negotiators must be licensed real estate brokers (or a licensed real estate salesperson where that person is working under the supervision of his or her broker).
2. Real estate licensees wishing to collect an advance fee in connection with performing short sales must first submit an advance fee contract to the DRE for review and then receive from the DRE the issuance of a no-objection letter relative to that contract. All advance fees collected thereafter under the terms of that contract must be placed in a trust account and handled as client trust funds.
3. Any and all payments must be fully disclosed and made part of the escrow documents. If there are any fees to be paid “outside” of escrow, this may be the red flag that the payment is illegal.
4. If your agent explains that the buyer is a fictitious person or entity or your buyer is purchasing the property under a power-of-attorney or is a limited liability company (LLC), this may be a red flag that fraud is involved in your transaction.
5. If you are told that an unlicensed processor, negotiator or facilitator is handling your short sale, this is a red flag that unlicensed activity is taking place. Only real estate licensees, California lawyers acting as lawyers and investors acting on their own behalf can engage in short sale negotiations.

If your house is already listed with a real estate broker and the broker recommends the services of a “short sale negotiator” or its variations, “debt negotiator”, “debt resolution experts”, “loss mitigation practitioners”, “foreclosure rescue negotiators”, “short sale processors”, “short sale coordinators”, “short sale expeditors” or some other type of unlicensed short sale or debt specialist, ask him or her to provide you with a printout of that person/company’s real estate licenses.

If you are considering engaging in a short sale transaction, you should fully educate yourself about the mechanics of the process and the related legal and ethical issues and work only with legitimate professionals. In addition, become aware of other options that made be available to you by visiting the Homeownership Prevention Foundation at www.995hope.org.

Finally, if you become aware of information about fraudulent short sale activity, please contact the DRE’s Enforcement section in Sacramento or at the office closest to you, or via the Internet at http://www.dre.ca.gov/cons_complaint.html. In addition, report suspected scams to the California Attorney General’s Office at www.ag.ca.gov, the U.S. Department of Housing and Urban Development at www.hud.gov, and the Federal Bureau of Investigation at www.fbi.gov.

For additional information on Short Sales, please review the Department of Real Estate’s web page on Consumer Alerts: Short Sales – An Overview and Warning to Real Estate Licensees Re: Fraud, and Legal and Ethical Minefields, which may be accessed by visiting www.dre.ca.gov/pdf_docs/article_shortsales03_2010.pdf.

(Source: http://dre.ca.gov/pdf_docs/ca/ConsumerAlert_ShortSales.pdf)

Title Insurance Helps a Home Haunted by a Short Sale Past

When you buy a new home, it is wise to purchase title insurance in order to confirm clear ownership in the new property and to protect the bundle of rights associated with ownership against claims of another. In today's market, with its short sales and bank foreclosures, a title insurance policy may prove even more valuable.

After the chaos of 2008 and by the beginning of 2011, many banks have worked to better organize themselves around the short sale process. For others, the right hand still doesn't know what the left hand is doing. In some instances, home sellers have been told by a representative of the bank that their short sale is going to be approved, only to discover that another department of the same bank has finalized their foreclosure-- eliminating their ownership thus canceling the sale.

In one extreme circumstance, a privately sold home made an unexpected appearance at a public sale on the court house steps. First, the home's new owner noticed a card in the mail warning of actions the bank can take after a default, including public auction. Having just purchased the house, his first payment was not yet due much less delinquent. He promptly disregarded the notice. Soon after, a buyer standing at his doorstep (with information about the house on a smart phone) informed the unsuspecting homeowner that the sale of his property was taking place that day!

Luckily, the homeowner had a title insurance policy and the title company was able to confirm his rights. The back story at the bank; the completed short sale was not posted to the proper bank personnel and another department kept the foreclosure process moving toward the trustee's sale despite the fact that the property had already in fact been sold.

Not all short sales are disrupted by the foreclosure process. In fact, a property can still be considered a short sale even if the seller has never missed a payment. "Short sale" means only that the property will sell for less than the amount owed, not that the property is delinquent in its payments on that loan.

Even if foreclosure is not a factor, time is a consideration. Short sales, regardless of the level of hardship, still take longer than a traditional sale. The process is driven by how the bank is set up to make its decisions and this varies bank by bank. Aware of continued difficulties with short sales, the Treasury Department recently released a new directive offering revamped short sale incentives to lenders. The directive also includes stricter time lines for approving or rejecting a short sales.

Tips for Homebuyers:

• If you are pursuing the purchased of a distressed property, make sure you get as much information, the best advice and the best representation possible as you move through the transaction. We can help http://berkhills.com
  
• If pursuing a short sale, know that a foreclosure could still disrupt your sale. Ask if the seller has received a Notice of Default.
  
• In most cases, be prepared for a long "short" sale process.
  
• Remember that your title insurance policy offers essential after-sale protection.