Greg Wang's Real Estate Blog

Roughly forty percent of the homes for sale on today’s market are short sales and foreclosures! Distressed properties are well known for their value (a reputation which is sometimes accurate, and sometimes not), but they also have a reputation for causing buyers to become distressed, too!
Transactional snafus, last-minute surprises and long, drawn-out escrows that never close seem to be par for the course.

Instead of avoiding these properties altogether, get educated about the most common dramas that go down in these deals, and how you can avoid falling victim.

1.  Run-on (and on, and on) escrows. When you’re buying a home (or selling one, for that matter), time is absolutely of the essence.  And buyers reasonably expect that the big time suck in real estate is in the house hunting process itself; seems like once you find a home you want to buy and the seller agrees to your price and terms, things should move pretty quickly, right?

Not so much, when it comes to some distressed property sales. I’ve heard tell of the occasional, swiftly-moving escrow on an REO (real estate owned – by the bank). But for the most part, these transactions take anywhere from a few days to a few weeks longer than “regular” sales, because of the extra signatures, supervisor-level approvals and even investor involvement required to seal the deal.  Banks don’t have the same sense of urgency individual home sellers do, and it’s not uncommon for the people who need to sign on the dotted line to be on vacation or scattered across the country, adding days’ or weeks’ worth of time to the escrow.

And short sales are also an entirely different animal when it comes to escrow timelines. While a standard sale from an individual seller to an individual buyer might take 45 days from contract to closing, a short sale can take anywhere from 45 days to 6 or 8 months (!) to get the deal closed, after the seller has accepted the contract.

Avoid the drama by: expecting your escrow to run long, and being pleasantly surprised if it doesn’t.  Expectation management is everything. Make sure you take these extended timelines into account when you’re working with your mortgage broker on the issue of when to lock your interest rate, and how long your rate locks will last. You might even need to plan on and/or set aside an allowance for the cost of extending your low interest rate, if rates are rising rapidly during the time you’re waiting for the deal to be done.

2.  Bank won’t take lowball offer. If I had a dollar for every time I’ve received a question from an outraged reader to the effect that a buyer has had their short sale or REO offer rejected on grounds that it was too low, even though the bank has no other offers, I could buy a foreclosure myself (admittedly, it’d be one of those $150 foreclosures in some blighted town with tax liens and no plumbing, but still).

Banks owe their shareholders and investors a duty to get as much as they can for these properties. Just because you see it’s on the market and listed as a short sale or a foreclosure doesn’t mean they’re going to give it to you for a fraction of its worth. The bank’s goal is to get a purchase price as close as possible to the home’s fair market value, as determined by the recent sales prices of similar, nearby homes, with some adjustments made for the property’s condition.  Fact is, many banks would rather see the listing agent reduce the price by a moderate amount, and wait to see what offers come in, than to accept an offer 30 percent below the asking price just because there are no other offers on the table.

Avoid the drama by: working with your agent to make a realistic offer, based on recent comparable sales in the neighborhood, not just on what you think you can get away with.  You can waste a lot of time, spin a lot of wheels and lose out on a lot of properties making lowball offer after lowball offer on distressed homes. Sit down with your broker or agent, review the ‘comps’ and make a smart offer that reflects a good value for you, is within your budget and is not bizarrely out of the realm of the fair market value of the property.

3.  Last minute postponements/cancellations. These transactions have an uncanny way of being delayed at the last minute – or never going through at all, through no fault of the wanna-be buyer. You signed docs yesterday, put your dog in the crate this morning and just hopped in the moving truck, only to get a text from your broker that the deal didn’t close because the escrow company which was selected by the bank flubbed the checkboxes on a single sheet of paper (it happens). Or, you’ve been in contract (with the seller) on a short sale for four months, and the bank refuses the sale entirely because the seller refuses to kick even $1 of their own cash into the deal, despite having a flush savings account.

Avoid the drama by: staying as flexible as possible with your moving plans as long as possible.  Best practice is to plan on some overlap between the time you can be in your last place and your scheduled move-in date.  Also, if you’re in contract on a short sale, you should take the point of view that you don’t have a firm deal until you get the bank’s approval of the transaction. So don’t even think about starting to make moving plans or paying for home inspections and appraisals until you know the bank has greenlit the deal and that the purchase price and terms they’ve approved work for both you and the seller.

4.  The bank’s black box. Make an offer on a normal home and you’re likely to know what the outcome will be within a few hours or a few days, at the outside. If things take longer because the seller is out of town or some such, the listing agent tells you that, and you at least know what’s going on.

Make an offer on a bank-owned property or a short sale?  It’s a crap shoot – could be days, but could also, easily, be weeks or months before you know what’s going on.  And no amount of calling, pleading, prodding or nudging is likely to get you much information on how your offer or the seller’s short sale application is being handled or what (if any) progress is being made.  And that “black box” into which your offer disappears at the benk level is very frustrating.

Avoid the drama by: continuing your house hunt until you have an answer back.  Maniacally pestering the listing agent for answers or harrassing your buyer’s broker into spending hours on hold with the bank is highly unlikely to get you any insight. (With that said, it does make sense for your agent to check in regularly – sometimes even daily –  with a short sale or REO listing agent to stay updated on any developments with the property and to make sure your offer/transaction stays in the front of their mind.)

Most of the angst in these situations arises when a buyer feels they passed on properties that would have really worked for them when they pinned their hopes on a distressed home.  You can only control your efforts and activities, not the bank’s.  So, consult with your own broker or agent about staying proactive in viewing and even pursuing other properties until you have a firm “yes” from the bank on your short sale or REO offer.  Until that time, and usually for a short time after you get the bank’s approval, you have the right to back out of the transaction if you need to (make sure your broker briefs you on precisely when your right to rescind your offer or exercise contingencies – i.e., bail – will expire).

5.  Double standards. In a “regular” equity sale with no bank involvement, both buyer and seller are obligated to meet various timelines.  Seller has to provide disclosures by X date, open the property to inspections – with utilities on – by Y, and close and move out by Z.  REO and short sale buyers, on the other hand, are often dismayed to find that  even though the bank might take weeks or months to sign or handle its deliverables, the bank will insist that the buyer show up, sign or send a check quick-like.

Avoid the drama by: chalking it up to the (admittedly irritating) way things are – the price you pay to buy from the bank.  Realize that working with the bank on the bank’s terms is unavoidable when you buy a distressed property. Then, go into the deal with realistic expectations – including the expectation that the bank will drag its feet, despite expecting you to keep every deadline – and you’ll be less frustrated, and less likely to make poor decisions out of frustration.

Also, make sure you do respond in a timely manner to the bank’s requests and your obligations under the contract.  I’ve seen banks capitalize on buyer delays in returning signatures and removing contingencies to accept higher offers they received in the interim.  Don’t lose your home on a technicality because you assume that the bank’s lackadaisacal timelines apply to you as well.

Source: Tara-Nicholle Nelson, staff writer of Trulia

Have you had a conversation with someone in the last 30 days about the consequences of walking away from your mortgage?

If the answer is yes, you are not alone.

With an estimated 11 million people underwater on their mortgage, (owing more on their mortgage than their home is worth), even the most credit-worthy consumers are considering walking away from their mortgage.

“Walking away from a mortgage,” or what’s known as a strategic default, usually results in either a short sale or foreclosure and many people in this position are asking one simple question:

What are the consequences of walking away from a mortgage?

Walking Away from a Mortgage: The Consequences

Generally speaking, if you are considering walking away from a mortgage the major consequences will include:

• Impaired credit
• Deficiency risks
• Tax consequences
• Moving costs
• Professional implications

Impaired Credit

Most people are aware that walking away from a mortgage will mean their credit score will take a hit. What most people may not be aware of is between short selling and foreclosure, there is very little difference in how much your credit score is impacted.  The main difference between a short sale and foreclosure is how soon you can qualify to buy a home again after the event, not how many points your credit score went down.

In addition to your credit score taking damage points, it is also common for credit card companies to cancel credit cards or lower your credit limit as a result of missing mortgage payments.  It is also common that it will become more difficult to obtain financing for larger ticket items such as autos or furniture — or any other type of revolving account after walking away from a mortgage.

Deficiency Risks

Depending on which state you live in, there are varying deficiency risks associated with walking away from your mortgage. (See anti-deficiency laws by state)

Translation: Your lender may sue you for the difference between what you owe and what your short sale or foreclosure proceeds were.

Anti-deficiency protection is limited to a minority of states and for most states in the U.S., there is no protection for homeowners from a lender pursuing the difference between what they owe and what the home sells for in foreclosure.

Further, even if your state has anti-deficiency laws in place, don’t think you are free from deficiency risk.  Whether you have deficiency risk or not, depends on factors such as: whether you have a second mortgage; did you refinance and take cash out; is your mortgage the one you got when you originally bought the house, and more.

Which is why when it comes to managing your deficiency risk, keep this saying in mind:

Nothing is more expensive than cheap legal advice.

If you are concerned that you may have deficiency risk, you should speak with a real estate lawyer who can provide legal advice for your particular situation.  Only a real estate attorney can accurately provide you the specific advice for your situation. Don’t rely on your neighbor’s advice or your brother-in-law who just short-sold his house and recommends that you should be okay by just walking away.

Tax Consequences

If you are considering walking away from a mortgage on your primary residence, there is a chance that you may have some tax liability.  If you are considering walking away from a mortgage on a second home or investment property, there can be a significant tax liability and you should consult your tax accountant.

Moving Costs

One of the commonly under-estimated consequences of walking away from a mortgage is the expense and process of moving.  Some of the common concerns related to moving include:

• Moving into a rental — perhaps after decades of being a homeowner.
• Possibly explaining to the landlord any credit report concerns as a result of missed mortgage payments.
• Paying for moving expenses. Utilities, deposits, moving trucks and other expenses can add up fast.
• Moving family members school, work or community activities they have gotten used to.

Many of the people I have talked with who have went through the process of walking away from a mortgage cited “moving” as the one consequence they hadn’t fully considered before actually doing it.

Professional Implications

Depending on what you do for a living, you may have professional consequences as a result from walking away from a mortgage.  The number of professions where your credit profile matters has grown over the last decade and if you are in a situation where your credit profile matters, you should know what the professional implications are before you walk. After all, you don’t want to lose your house and your job at the same time.

Walking Away from a Mortgage: The Single Biggest Mistake You Can Make

When making the decision to walk away from a mortgage, the consequences are certainly something to consider as part of the decision process.  And in my our experience of handling many short sales for our Clients we discovered that  there is one big mistake that you can make in the process:

Not being fully informed of what the consequences are of walking away from a mortgage.

Once you have educated yourself about the consequences and researched all of the possible options…

… the choice is still yours.

Source: Justin McHood of Academy Mortgage.

As the U.S. government looks under every rock for more spending cuts, here’s an intriguing thought: What happens if Washington takes this opportunity to take down the tax break on mortgage interest?

 “We believe there is a growing risk that the mortgage interest deduction could fall victim to the deficit reduction mantra,” MF Global said in a research note.

We know fiscal asceticism is the new black, but Congress doesn’t have the guts to take on the popular mortgage tax break, which defenders say makes the cost of homes within reach for Americans. The real-estate and mortgage industries also would fight tooth or nail if the deduction moves to the chopping block.

“At this point, we view this more as a headline risk than a real threat,” MF Global said in its note. “Yet curtailing the mortgage interest deduction has been part of President Obama’s budget proposal and it was one of the bi-partisan deficit reduction commission’s recommendations. So we cannot rule out these threats.”

True, everyone from the International Monetary Fund to the Tax Policy Center to the White House fiscal commission have called for the U.S. to cap, redesign or simply get rid of the deduction. The IMF called the mortgage tax break  “expensive and regressive.” But this comes up every few years or so, before everyone realizes it’s impossible to hack away at a cherished part of the tax code.

Critics of the mortgage tax break says the country simply can’t afford to turn down billions of dollars a year for federal and state coffers. The mortgage deduction also may push people to take on risky mortgage they can’t afford, say critics, and isn’t equitable because the deduction applies to taxpayers who itemize their deductions – and benefits higher-income households more.

The National Association of Realtors (NAR) has shown increasing alarm over the possibility of eliminating the deduction over the past months. Last year, the NAR declared eliminating the deduction would decrease home values by as much as 15 percent. The NAR also asked its 1.1 million members to contact their senators and congressmen and voice their concerns over the potential of eliminating or altering the deduction.

As a Homeowner and a Member of the NAR I sent the following letter to my congressmen asking for his support to urge Congress to preserve, protect and defend the mortgage interest deduction before they whittle it down at the expense of other more expedient budget cuts.

Consider the consequences if homeowners and buyers lose the time-honored and cherished mortgage interest deduction. This tax deduction built the dream of homeownership in America. The bottom line is you may well lose personally, and for certain so will your business if it is eliminated or significantly reduced in any way.

We must speak loudly and clearly with one voice to ensure the further recovery of our economy and the housing market and educate every legislator about how much the mortgage interest deduction matters to us.  Therefore, I urge everyone to take action to Preserve, Protect and Defend the mortgage interest deduction.  No economic recovery is possible without a vibrant housing market.

Please Take Action Today!

Immediate changes coming to the foreclosure industry. Lenders being held accountable for improper foreclosure process. ALL foreclosures starting in 2009 to be examined for infractions and owners given compensation….and/ or their homes are to be GIVEN BACK TO THEM.

NOTE: the AG Robo-Signers settlement will be in addition to this…so, more changes coming to the foreclosure process.

The Office of the Comptroller of the Currency, the Federal Reserve and the Office of Thrift Supervision released enforcement action against 14 major bank/servicers in the form of consent orders.

Bank of America , JP Morgan Chase , Ally Financial, Wells Fargo, SunTrust, Citibank, HSBC, MetLife, PNC, U.S. Bank, Aurora Bank,   EverBank, OneWest Bank and Sovereign Bank will all be hit with no fewer than 16 new requirements for mortgage servicing and loss mitigation.

These 16 new requirements are more or less what the requirements were always thought to be…. forcing the servicers to improve on foreclosure documentation, oversight, and chain of ownership. Additionally, lenders are required independent reviews and a single point of contact for borrowers facing foreclosure. The action prohibits dual tracking, when one arm of the bank pursues foreclosure while another pursues modification.

Another detail, servicers (banks) will also be held accountable of their third-party vendors, including lawyers, who provide foreclosure services. No more…”that was an outside company we hired…we had no idea they were doing X”. Banks must comply within 120 days of the order. Most of the big banks have already implemented many of these ‘new’ requirements. The second we get an official copy of these 16 new requirements we will publish them.

And now the really interesting news….

Penalties are coming… “The Federal Reserve believes monetary sanctions in these cases are appropriate and plans to announce monetary penalties.”

And…. The OCC also says the enforcement actions, “do not preclude determinations regarding assessment of civil money penalties.”

In other words, we are talking about potentially huge penalties and judgments from the civil claims.

As part of this new enforcement the banks will be required to engage an independent firm to review foreclosure actions from January 1, 2009 through December, 2010 to assess whether foreclosures complied with federal and state laws and whether there were in fact grounds to foreclose.

You read that correctly, all foreclosures that happened between 01/01/09 and 12/01/10 will be reviewed by (hopefully) independent firms looking for infractions.

And what happens if (when) infractions are found….?

If borrowers were harmed by the foreclosure process the banks will have to remediate the borrowers in some way. Remediation could include monetary damages and even the borrower getting the home back.

Imagine all the folks who lost their homes to foreclosure that will be filing claims. Lenders will be required to create a system where by anyone who feels they suffered financially can submit a claim.

Click on this link to watch the video from CNBC News: CNBC Video on Fed Cracks Down On Mortgage Servicers, Bank

Source:  Real Estate Insiders News By: Tim and Julie of Harris Real Estate University.

What are the absolute bare-minimum guidelines to obtain a mortgage?

….and perhaps more interesting…how to obtain a mortgage immediately after a Short Sale..read on…

By far the easiest mortgage to obtain is a FHA loan:

1) 3.5 percent down payment, based on the purchase price of the home (e.g., $7,000 on a $200,000 home), or a gift of that same amount;

2) 3 percent to 6 percent of the purchase price, on top of the down payment, for closing costs, or a credit from the seller of the same amount; and

3) 640 FICO credit score — the middle score of those generated by the three credit bureaus (some banks will lend to borrowers with middle scores lower than 640, but will require more than the minimum down payment).

Lenders will want you to document income, asset and job history documentation, current paycheck stubs, two months’ bank statements and two years of W-2 forms or tax returns, and:

• a minimum of two years have passed since the discharge of a bankruptcy;
• a minimum of three years have passed since a foreclosure;
• anywhere from zero to three years have passed since a short sale, depending on the circumstances surrounding the short sale.

Source: Real Estate Insiders News By: Tim and Julie of Harris Real Estate University.

If $1 million seems like a lot for a home, try $100 million — the final price paid by Russian investor Yuri Milner for a French chateau-style mansion in Silicon Valley.

According to the Wall Street Journal, the purchase is “highest known price paid for a single-family home in the U.S.” and is a sharp contrast to the median home price in the U.S. which hits at $177,200 (at this writing), and even above Los Altos Hills home values that are presently a whopping $2,064,000. The sale was first reported to be $70 million by TechCrunch, which is still a remarkable price.

Milner’s new 25,500-sq ft home in Los Altos has views of San Francisco and is within driving distance of many Silicon Valley tech companies, including one of Milner’s investments, Facebook. But despite his new purchase, the 49-year-old founder of Digital Sky Technologies (DST) doesn’t plan on moving to California anytime soon. His primary residence is a home in Russia that he shares with his wife and two children.

The limestone 5-bed, and 9-bath house, pictured above, sits on 11 acres and includes indoor and outdoor pools, a full wine cellar, and outdoor tennis court. Previously owned by Fred Chan, founder of ESS Technology, and Chan’s wife Annie, this enormous piece of Los Altos Hills real estate was designed in 2001 and completed around 2009. The home was never publicly listed for sale, and Chan reportedly accepted a $50 million note on the house. The Chans currently reside in Hawaii.

While the purchase won’t create a jump in normal home sales, it may be an indicator of a rebound in the luxury home market. This should give hope to Candy Spelling, who listed the Spelling Manor for a whopping $150 million in March 2009. Although only 4.7 acres, the Spelling Manor lists 56,500 square feet of “elegant living” including a billiard room, two-lane bowling alley, and arcade room as well as indoor and outdoor pools.

Source: Business Insider

Have you noticed that the national focus on the housing crash has subsided….

…Its almost like Americans have simply come to accept that home prices continue to crash with no clear end in sight. Housing news no longer makes the headlines…almost makes you start to believe that the housing crash is over.

Not even close.

The real bottom line question is…when will home values stop falling…and start leveling off?

Based on an expert panel of 111 leading housing economists there won’t be any sort of bottoming until…2013. Home prices at the national level are now less than 1 percent away from establishing a new post-crash low. Obviously, more home value loss pushes more homeowners underwater. It’s expected that this year there will be 20,000,000 homeowners underwater, 40% of all homeowners with a mortgage.

What will the historic continued erosion of home value value lead to? A huge increase in REO Listings. Also reported today, the Federal government confirmed that January home prices nationally have fallen to the lowest point since May 2004 and they are 16.5 percent below the April 2007 peak during the housing boom.

The Federal Housing Financing Administration found that prices fell 0.3 percent from December to January and for the 12 months ending in January, U.S. prices fell 3.9 percent. Robert Shiller, co-founder and chief economist of MacroMarkets, the firm conducting the monthly survey of experts. The survey is based upon the projected path of the S&P/Case-Shiller U.S. National Home Price Index over the coming five years.

“This uninspiring view must be influenced by the persistently weak market fundamentals – high unemployment, supply overhang, an unabated foreclosure crisis, and constrained mortgage credit”

More from MacroMarkets:

“Many more experts are now projecting a double-dip after witnessing the double-dead cat bounce that came in the wake of expired government stimulus programs. In December, only 15% of our panelists were projecting that a new post-crash low would materialize for national home prices. Now, just three months later, almost 50% foresee a double-dip happening this year, and not a single panelist expects national home prices to recover to the pre-bubble trend in the coming 5 years”

The table below summarizes the panel’s March projections for home prices for the coming 5 years.

Expected Home Price Changes By Year

S&P/Case-Shiller U.S. National Home Price Index

(Mean of all Panelist Responses)

Year-over-Year Cumulative

Year (Q4 vs Q4 Prior Year) (Q4 vs Q4 2010)

2011 -1.38% -1.38%

2012 1.26% -0.09%

2013 2.72% 2.67%

2014 3.19% 5.98%

2015 3.42% 9.64%

Source: MacroMarkets Home Price Expectations Survey, March 2011

Not ready to walk away from your mortgage, but looking for an alternative to the foreclosure process?

As a Short Sale Specialist, I help families in the San Jose Bay Area navigate their underwater mortgages and find suitable solutions to their loan issues. In some situations it’s too late to do anything, but wait for the bank to take their home. But when a client comes to me early enough in the process, we can usually find an alternative that doesn’t leave them out in the cold.

Here is a list of Foreclosure alternatives that are available to you in the early stages of the process:

1. Foreclosure Workout

Up until the time your home is scheduled for auction, most lenders would rather work out a compromise that would allow you to get back on track with your mortgage than take your home in a foreclosure.

2. Short Sale

After your lender files an NOD (Notice of Default) but before they schedule an auction date, if you get an offer from a buyer, you lender must consider it. If they foreclose on your home, the lender is going to simply turn around and try to resell it; if you present them with a reasonable short sale offer, they may see it as saving them the time, effort and trouble of finding a qualified buyer in a soft market.

So, if your home is on the market, continue to aggressively seek a buyer for it, even after your lender initiates the foreclosure process.

3. Bankruptcy

Bankruptcy stops foreclosure dead in its tracks. Once you file a bankruptcy petition, federal law prohibits any debt collectors, including your mortgage lender, from continuing collection activities. Foreclosure is considered a collection activity, and so the day your lender becomes aware that you have filed for bankruptcy, the foreclosure process will effectively be frozen. But here’s the rub; once you get to court, the bankruptcy trustee’s role is simply to play referee or mediator between you and your creditors.

Bankruptcy really just buys you more time to replace your lost job or recover financially from a temporary disability; it doesn’t let you off the hook for your debts. The law requires your mortgage company and other creditors to work in good faith with you to formulate a reasonable repayment plan so you can get back on track. Consult with a bankruptcy attorney regarding whether filing for bankruptcy is a good strategy for you.

4. Assumption/Lease-Option

Most loans these days are no longer assumable. The average mortgage now contains a “due on sale” clause by which the borrower agrees to pay the loan off entirely if and when they transfer the property. However, if you are facing foreclosure, you might be able to persuade your lender to modify your loan, delete this clause and allow another buyer to assume your loan. The lender may want to assess the new buyer’s qualifications, but it can be a win-win-win option for all. You might be able to negotiate a down payment from the buyer which you can use to pay off your outstanding past due mortgage balance.

In a lease-option scenario, the buyer becomes your tenant, and you continue owning the property until the buyer has saved enough down payment money, improved their credit sufficiently or sold their other home. In some situations, the buyer will make a one-time, lump option payment upfront, paying you to obtain the option to purchase your home. You can apply the option payment to bringing your mortgage current. Then, the buyer will make lease payments monthly which you, the seller, then apply to your mortgage.

To successfully use a lease-option to stop the foreclosure process, you must negotiate lease payments that cover most or all of your mortgage payment, property tax and insurance obligations — enough that you can make up any difference and still pay to live somewhere else.

5. Deed in Lieu

A deed in lieu of foreclosure is exactly what it sounds like. The homeowner facing foreclosure signs the deed to the home back over to the bank — voluntarily. This sound like it would be a great option, but actually has the same impact on a homeowner’s credit that foreclosure does.

Lenders are very reluctant to agree to take a home back through a deed in lieu of foreclosure for a number of reasons: They fear the homeowner will sue later alleging they didn’t understand what was happening, the lender must pay any second or third mortgages or home equity lines of credit (HELOCs) off before executing a deed in lieu, and the lender wants to be certain that the borrower’s financial distress is real. Allowing the foreclosure process to proceed is one way the lender can be sure the borrower is not faking poverty.

If you’re not sure where to start or what to do about the foreclosure process, feel free to call me for a FREE consultation and I’ll help you go over your options and get you started on the path that’s right for you.

On Tuesday, data released by CoreLogic Inc., a leading provider of information, analytics and business services, stated that nearly 23.1% or 11.1 million of all U.S. residential mortgage properties were underwater in the 4th quarter of 2010. The figures stood even higher than the 22.5% or 10.8 million households’ loans that were underwater in the preceding quarter.

The total amount of underwater mortgages was $751 billion in the fourth reported quarter, up from $744 billion in the earlier quarter, but down from $800 billion in the year-ago quarter. CoreLogic used data related to 48 million properties with a mortgage (85% of all mortgages in the U.S.) as the base.

In December, home prices had fallen to its lowest point since the housing bust. This was the driving factor behind the 3% rise in underwater mortgages during the quarter. Additionally, about 2.4 million borrowers’ home value was merely 5% more than the loan value (close to underwater).

As per CoreLogic’s report, Nevada had the highest rate of underwater mortgage. About 65% of the mortgaged home property in Nevada was underwater, followed by 51% in Arizona, 47% in Florida, 36% in Michigan and 32% in California. However, there were just nine states that had less than 10% of their total mortgaged home property underwater.

When a mortgage is underwater, the homeowner cannot refinance the loan and has almost no alternative but to continue making payments with a hope that the property will finally regain its original value. But with high levels of foreclosure and unemployment, home prices are further expected to fall by another 5%-10% this year.

With further declines in home prices, the biggest rises in underwater mortgages are expected in Alabama, Idaho and Oregon as they have the largest number of properties that are close to underwater presently.

Moreover, underwater mortgage slows down home sales. Homeowners, who would have otherwise sold their houses, will now wait for the home prices to rise before selling. Also, at times the mortgage providers do not allow the borrowers to sell their property at lower price than owed on the mortgage.

Further, many banks require about 20% of the home value as down payment, which again makes it increasingly difficult for the home owners to sell their property. However, Obama administration is planning for a 10% down payment requirement on loans guaranteed by Fannie Mae and Freddie Mac.

At present, underwater mortgage is one of the menacing problems confronted by the U.S. financial markets. Despite the introduction of Home Affordable Modification Program (HAMP) by the government in 2008, underwater mortgage problem has not diminished.

Currently, state attorneys general are trying to resolve issues related to improper mortgage foreclosures with various large mortgage providers such as JPMorgan Chase & Co. and Bank of America Corporation.

We believe that until underwater mortgages fall and foreclosure mess is resolved, the recovery in the housing and mortgage markets will remain very slow.

Over the past couple of years I often get asked by past Clients this question: We have been making our mortgage payments every month even though our home is underwater. We owe a lot more than our home is worth. Now, we’re thinking about walking away from our home and letting it go to foreclosure, but everyone we talk to are telling us that we may qualify for a short sale. Which is better for us? A short sale or a foreclosure?”

Answer: Whether you should do a short sale or let the home go to foreclosure depends on a number of factors. While for some homeowners, it is easier to throw up your hands and let the bank take your home that might not be the wisest thing to do.

Short Sale Benefits
Here are a few benefits for doing a short sale that may not have occurred to you:
• You are in control of the sale, not the bank.
• You may sleep better at night knowing who is buying your home.
• You will spare yourself the social stigma of the “F” word, foreclosure.
• Contrary to popular belief, you can be current on your payments and still affect a short sale.
• Your home sale will be handled like any other home sale.

Buying Again After a Short Sale
If your payments have never fallen behind 30 days late and the lender does not require that you pay back the loan, Fannie Mae guidelines may allow you to buy another home immediately. The wait for an FHA loan is 3 years.
If your payments are in arrears yet a short sale is granted by your lender, you may qualify to buy another home with a Fannie-Mae backed mortgage within two years, regardless of whether the home is your primary residence.

Buying Again After a Foreclosure
With certain restrictions, you may be eligible to buy another home in 5 years if the home was your primary residence. Without restrictions, the wait is 7 years.
If you are an investor and do not occupy the home, the wait to buy with a Fannie Mae insured loan is 7 years.

Affects on Credit After a Short Sale
A short sale is not a derogatory mark on your credit because credit bureaus do not show the word “short sale” on your credit report. It may say “pay as agreed” or “paid as less than agreed,” among other categories. Some clients have reported negative FICO score drops from 50 points to 130 points.
The point drop is typically due to being in default that is behind on your payments.

Affects on Credit After a Foreclosure
A number of sources have reported FICO score drops from 200 to 400 points after a foreclosure. Generally this credit score will remain on your credit report as a public record for 10 years.

Credit Reports After a Short Sale
All lenders report short sales differently and some do not report them to the credit bureaus at all.
Credit Reports After a Foreclosure
If a prospective employer runs a credit check on you, your job application may be denied if you have a foreclosure on your record.

Deficiency Judgments After a Short Sale
Judgments are often negotiated between the seller and the short sale bank. In some cases, such as California, if the home is your personal residence and was financed through purchase money, there is no deficiency judgment.

Deficiency Judgments After a Foreclosure
Banks are unwilling to negotiate deficiency judgments with the homeowner after a foreclosure. In California, for example, according to the California Association of REALTORS, a deficiency judgment may be filed regarding a hard-money loan if the lender forecloses under a judicial foreclosure versus a trustee sale or if the second loan is a hard money loan and the sale takes place as a trustee’s sale.

Loan Application Questions After a Short Sale
Loan applications do not ask questions about a short sale. You may report that you sold your home.

Loan Application Questions After a Foreclosure
You are required to answer the question: “Have you ever had a property foreclosed upon or given a deed-in-lieu thereof in the past 7 years.” If the bank sees you have had a foreclosure, your loan most likely will be denied. If you lie, you may be subject to investigation by the FBI for mortgage fraud.

Length of Time to Move After a Short Sale
If you’ve had a foreclosure notice filed, you may be able to postpone that action while the bank considers your short sale. The wait for short sale approval can be from 2 to 3 months, or longer.

Length of Time to Move After a Foreclosure
Unless prior arrangements have been made, the bank may want you to immediately vacate the property and can commence eviction proceedings.

Taxation After a Short Sale
A personal residence is exempt from mortgage debt relief until the end of 2012 on a federal level. Some states will still tax you unless you qualify for an exemption. An investor is not exempt from mortgage debt relief, subject to certain conditions.

Taxation After a Foreclosure
Same as with a short sale. Except some lenders immediately send out 1099s, even if the owner is exempt.
In closing, always obtain legal and tax advice before making a decision between a short sale or a foreclosure.

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