July 1, 2010

Short Sale Vs Bankruptcy

Posted in Bankruptcy, Short Sale tagged , at 1:40 pm by demetriagraves

I’ve had many of my clients come to me wanting information on short sales and bankruptcy. In particular, I’ve been asked by clients who are considering filing for bankruptcy if they should proceed with a short sale on their real estate.  This is a very interesting question and becoming more common these days. Most people don’t fully understand what a short sale is and how that may affect a possible bankruptcy filing.

If someone is upside down on their mortgage either a short sale or filing for bankruptcy could be an option but often people come to me wanting to do both. In my experience, it seems that a short sale or filling for bankruptcy are different alternatives to solve the same problem. So how do you know which one is best for your own individual circumstances? Obviously getting some advice from an experienced family law attorney is vital as a first step. The purpose of the article is to go over some of the basics on short sales and bankruptcy to help clear up any possible confusion on the subject.

A short sale is where the the lender takes less money than is actually owed because it may be a better alternative for the lender than a foreclosure sale in a down market. You are asking the lender to approve the sale without receiving the full amount of their loan, which is very common now in this depressed real estate market. For example: you bought a home in 2005 for $500,000 with a first mortgage of $400,000 and second mortgage of $100,000. The property is now worth $300,000 and you have a buyer willing to pay $300,000. If the first mortgage agrees with the sale, they will receive about $100,000 less than their current debt and the second will receive $0. Typically the second signs off with a nominal payment such as $5,000.00.

What many people don’t realize is that they could be liable for tax on the $100,000 debt that has been forgiven in the above example and the lender will issue you with a 1099 which needs to be declared to the IRS when you do your taxes. Most people qualify for exemptions to this and won’t end up having to pay tax, particularly if it’s their primary residence or if they were insolvent. But this ‘income’ still needs to be declared and the appropriate paperwork for any exemptions submitted to the IRS.

A successful short sale gives a homeowner some control over their destiny. The homeowner may be able to avoid bankruptcy and a foreclosure on their credit rating with a successful sale. However, short sales are often time consuming and difficult to negotiate and they can still adversely affect your credit.

One factor that’s often not considered is the total debt picture of the homeowner. While a short sale may resolve the issue of escalating mortgage payments, the homeowner may have other debts that need to be dealt with in a bankruptcy. A short sale won’t do much good to protect a consumer’s credit rating if a bankruptcy becomes necessary at a later date. Bankruptcy is an option for borrowers when doing short sales. One thing that lenders should be made aware of is that by accepting your short sale offer the lender will not have to deal with a possible bankruptcy by the borrower!

Depending on your circumstances, often there are very good reasons to file for bankruptcy. These would include things like avoiding financial liability for those credit cards you got in over your head with. Or maybe to avoid having to repay the balance on a underwater mortgage for a house that you plan on giving back to the bank. Perhaps you have some outstanding car loans on a car that has been repossessed or is about to be.

There also might be good reasons for doing a short sale. For example, it may save your credit from the hit of a bankruptcy for the home that’s under water. But both? If you have already made the decision of filing bankruptcy, who benefits from doing a short sale? When a borrower files for bankruptcy the lender cannot pursue collection of the debt and it stops the foreclosure process during the bankruptcy. When accepting a short sale the lender does not have to be concerned with the borrower filing bankruptcy and having to wait an indefinite amount of time for payment or to complete a foreclosure.

Plus when you file bankruptcy, there is no transferring or selling of your property. Without taking additional measures, basically you cannot sell your property while in bankruptcy. Why would you want to? You can let the bankruptcy take care of the upside down mortgage and any other debts that you can’t pay.

Every situation is different, but I when I see clients who who cannot afford their mortgage payments they usually have other debt problems. Sometimes paralyzed with fear, they do not know which way to turn. In many cases, their best option is to file for Chapter 7 bankruptcy to get out from under all of their debt burden and avoid the potential tax problems with a short sale or letting the bank take the property back in a foreclosure.

The only way to determine what is best for your situation is to seek the advice of a competent attorney who is experienced in this area. Short sales are not always the magic solution that some proponents make them out to be. It’s vital that you’re fully informed on all your options before deciding which course of action to take. I offer I free confidential initial consultation where you can get your questions answered and you can get the guidance that you’ll need to navigate your way through these difficult circumstances.

June 10, 2010

Good News on Short Sales

Posted in Short Sale tagged at 9:46 am by demetriagraves

I’ve reviewed some potential good news on a federal program that has come into effect recently that is designed to make short sales a more desirable and more easily attainable option. Previously the perception has been that short sales are a slow and complicated process with no guarantee of success. There has been some co operation from banks which are starting to adjust to the market and are becoming more proactive in creating systems and solutions for homeowners in distress. Plus the U.S. Treasury has enhanced the guidelines and incentives for banks that are committed to improving the loan modification and short sale processes.

The Home Affordable Foreclosure Alternatives (HAFA) program, announced in November 2009 and fully implemented April 5, is the government’s answer to the problem. It’s a supplement to the February 2009 Home Affordable Modification Program (HAMP) that outlines a separate set of criteria for short sales or deeds-in-lieu to address the group of homeowners who are facing foreclosure because loan modification hasn’t worked out.

HAMP was a well-intentioned, albeit slow, start to helping at-risk borrowers. Unfortunately, the guidelines for modifications leave out many distressed homeowners who are eligible but are not successful in supporting a new loan.

HAFA provides that missing next step for homeowners who are not approved for modifications. Now, they can pursue a short sale in a more timely and orderly manner. Here are some of the ways the HAFA program is already improving the process:

-Standardizes paperwork and timelines
-Requires lender response on an offer within 10 days
-Allows for preapproval on pricing of a short sale
-Eliminates deficiency judgments on first mortgages
-Offers $3,000 in relocation assistance
-Pays servicers $1,500 toward administrative costs

Many homeowners that have seen their home’s value drop to a much lower price than they owe on their mortgage (commonly known as being underwater), are looking for ways to simply get out of their mortgage obligation.

It is thought that a short sale would be more advantageous for mortgage lenders than a foreclosure and with various programs available from top lenders to help homeowners short sell and governmental incentives for lenders to accept short sales, underwater homeowners may have more options.

This latest program, which will allow owners to sell for less than they owe and will give them a little cash to speed them on their way, is one of the administration’s most aggressive attempts to grapple with a problem that has defied solutions. More than five million households are behind on their mortgages and risk foreclosure. The government’s $75 billion mortgage modification plan has helped only a small percentage of these households.
This new program could encourage hundreds of thousands of delinquent borrowers who have not been rescued by the loan modification program to shed their homes by short sale, in which the property is sold for less than the balance of the mortgage. Lenders will be compelled to accept that arrangement, forgiving the difference between the market price of the property and what they are owed.The idea is to streamline and standardize the short sale process to make it much easier on the borrower and much easier on the lender.
One of the difficulties of short sales is that estimates on a home’s value are highly subjective. Plus banks don’t want to sell at a discount. Another complicating factor is when there is a second mortgage. There are often disagreements between the first and second lenders on what they are willing to accept and this is usually a deal-breaker. Historically, it has been much simpler and easier to proceed with a short sale if there is only one lender involved but this tends to be the minority of cases.

The idea is to bring the various parties to the table;  the homeowner, the lender that services the loan, the investor that owns the loan and the bank that owns the second. The government intends to spread its cash around. Under the new program, the servicing bank, as with all modifications, will get $1,000. Another $1,000 can go toward a second loan, if there is one. And for the first time the government would give money to the distressed homeowners themselves, up to $3,000 in “relocation assistance”.

Should the incentives prove successful, the short sales program could have multiple benefits. For the investment pools that own many home loans, there is the prospect of getting more money with a sale than with a foreclosure. On the positive side for borrowers, there is the likelihood of suffering less damage to credit ratings. Plus as part of the transaction, they will get the lender’s assurance that they will not later be sued for an unpaid mortgage balance.

For communities, the plan will mean fewer empty foreclosed homes waiting to be sold by banks. By some estimates, as many as half of all foreclosed properties are ransacked by either the former owners or vandals, which depresses the value of the property further and pulls down the value of neighboring homes.

It seems that short sales are about to have their moment, which has been a long time coming. At the beginning of the foreclosure crisis, lenders shunned short sales. They were not equipped to deal with the labor-intensive process and were suspicious of it.
Last year, short sales started to increase, although they remain relatively uncommon. Real estate agents say many lenders still seem to disapprove of short sales. Under the new federal program, a lender will use real estate agents to determine the value of a home and thus the minimum to accept. This figure will not be shared with the owner, but if an offer comes in that is equal to or higher than this amount, the lender must take it.
There are myriad other potential conflicts over short sales that may not be solved by this new program, whose details are still being fine-tuned. Many would-be short sellers have second and even third mortgages on their houses. Banks that own these loans are in a position to block any sale unless they get a piece of the deal. Major lenders seem to be taking a cautious approach to the new initiative. In many cases, big banks do not actually own the mortgages; they simply administer them and collect payments. So this can add another dynamic to the picture.

When considering this process, it’s important that you get the right advice based on your own particular circumstances. There is never a ‘one size fits all’ approach or solution if you are finding yourself in ‘deep water’ financially. I’m here to help and to make sure that you get the right advice.

January 26, 2010

Loan Modification Vs Short Sale

Posted in Loan Modification, Short Sale tagged , at 2:13 am by demetriagraves

When a homeowner is faced with an unaffordable mortgage payment there are two principal choices for the homeowner in today’s market to avoid foreclosure. These are either a loan modification or a short sale. I offer advice for clients in this situation and can help you work out what are your best options, whether it’s a short sale or a loan modification or something else. Many of my clients have asked me for a brief explanation of what’s involved in either a loan modification or short sale. In this article I’ll explain each and go over some of their pros and cons so you can get a better picture of which one might be best for you. Though, don’t forget I’m here to help you out with both of these, so don’t be discouraged as I can offer you expert advice on which option is best for your individual circumstances.

Loan modification:

A loan modification is best for homeowners that have a temporary financial hardship or have an adjustable rate loan, finding themselves unable to make the loan payments under current terms of the loan. A loan modification focuses on changing the interest rate or length of the terms of the loan (extending it up to 40 years) to make the current loan more affordable.

Reduction in the amount that is owed rarely occurs. So if you are upside down in your mortgage – you will remain so. In high foreclosure states such as California, Nevada, and Florida which have experienced a significant price drop, homeowners may find themselves with negative equity that may take years to recover. A loan modification will not solve this issue and some may be forced to do a short sale anyway if they need to sell in the future. There are some significant drawbacks to loan modifications, so choose carefully and get some legal advice before you pursue this approach.

Here are some little known facts about Loan Modifications:

1.53% of all loan modifications fail after 6 months
2.Strict qualifications may not make you eligible
3.Most loan modification companies charge money and offer no guarantees
4.You will remain upside down on your mortgage if you currently have no equity
5.Interest rates are fixed for only 5 years – subject to future inflationary rates
6.33% of all loan modifications result in HIGHER payments
7.May or may not result in reduced interest rate and loan terms

Is a short sale for you?

The short sale of a home is most appropriate if the home is truly doesn’t make sense to keep, with either unaffordable payments, or significant negative equity. Job loss, reduction of income, illness, divorce, or just a bad loan, are all valid reasons that homeowners are selling today. When the house is worth less than the mortgage balance, the sale of the home will not pay off the existing debt. One of two scenarios must happen: 1) The homeowner comes out of pocket to pay the shortfall amount for the existing debt to be extinguished or 2) The existing mortgage holder (bank) agrees to take a loss on their debt to allow the home to be sold, granting a short payoff. This is known as a short sale.

With the high negative equity situations, banks are electing to grant the short sale to sell the house. The banks are not required to do this -their other choice when homeowners have stopped paying them, is to foreclose. Ultimately if the financial numbers work, it may be cheaper for a bank to short sale rather than foreclose.

Why a Short Sale?

1.Enables the sale of the house without money coming out of pocket for closing
2.Allows for financial recovery during the short sale process
3.Releases you from your negative equity (upside down) position
4.Capitalizes on the bank’s current motivation to grant a short sale
5.May forgive taxes owed from the short sale
6.Provides quicker credit recovery than foreclosure
7.May allow you to buy another home at today’s bargain prices!

Closing Short Sales can be tricky – banks don’t make it easy. Most successful short sales are done using a team of real estate experts, but most importantly, a professional bank negotiator should be on the team. Nine out of ten unsuccessful short sales (ending in foreclosure) generally are real estate agents trying to negotiate their own deals. So once again make sure you get the right advice and know who you are dealing with. I offer a free initial consultation to anyone who would like further help in this area.