Real Estate Investing Coaching - Brian Gibbons

Mortgage Short Sale - An Exit Strategy or an Investment Opportunity?

Real Estate Short Sale and Mortgage Foreclosure Investments

My clients' property is in foreclosure and they have been approached by a foreclosure investor who wants to purchase their home. What alternatives does an owner have to selling to a foreclosure investor?

Alternatives to Fire Sale

by Jonathan A. Goodman, Esq.

My clients' property is in foreclosure and they have been approached by a foreclosure investor who wants to purchase their home. What alternatives does an owner have to selling to a foreclosure investor? A.    Alternatives to Selling to a Foreclosure Investor. 1.  Redemption with the borrower's own funds. The law permits a borrower to redeem with his own funds. It is rare for a borrower who is not servicing the debt to pay off the entire loan with his own funds. However, such redemptions might occur, for example, where a borrower is an institution unaware of the foreclosure because an employee of the owner is embezzling the payments intended for the lender and intercepting the foreclosure notices. Other examples where an owner might redeem with his own funds are where the borrower receives a windfall after the foreclosure sale, or a financially strong borrower snaps out of some impaired mental state in time to save the property from foreclosure. When a borrower redeems with his own funds, he need not pay liens junior to the foreclosed deed of trust. Yet these scenarios are rare and the law recognizes that a borrower who has defaulted on his mortgage and who was unable to raise the funds to cure is unlikely to have the much bigger amount needed to redeem. A debtor can get the money to redeem in two primary ways. 2.  Refinance. The debtor can obtain a new loan by refinancing the certificate of purchase. The debtor then keeps the property and has a new mortgage. In theory, when an owner redeems a certificate of purchase from the foreclosure of a senior loan, the owner does not need to pay off liens junior to the foreclosed upon loan. However, if a borrower is redeeming with borrowed funds, the new lender will not want be junior to deeds of trust junior to the foreclosed upon deed of trust. The funds from the refinancing lender need to be sufficient to redeem the certificate of purchase and satisfy junior liens. If the funds from the refinance are not sufficient to cover the junior liens, then the borrower or his representative must try to educate the junior lenders who will not be covered that it is in their best interest to receive the reduced amount (a "short pay off"). Among the advantages of a redemption funded by a refinance is that it allows the borrower to keep the property. Among the disadvantages is that it generally does not produce a commission for a real estate broker. 3.  Sale to a market Buyer. A debtor can sell the property to a purchaser and use the money to redeem the certificate of purchase. In a garden variety real estate sale, money comes into the closing from the buyer and the buyer's lender, and those sums are sent to the seller's lender to pay off the seller's loan. With a redemption, instead of the funds being payed to the seller's lender, they are paid to the public trustee to redeem the certificate of purchase. The debtor can then retain any money from the sale that remains after the original lender is paid. Again, in theory, when an owner redeems a certificate of purchase from the foreclosure of a senior loan, the owner does not need to pay off liens junior to the foreclosed upon loan. However, the buyer and the buyer's lender(s) will not want to be junior to deeds of trust junior to the foreclosed upon deed of trust. The funds from the buyer need to be sufficient to redeem the certificate of purchase and satisfy junior liens. If the funds from the sale are not sufficient to cover the junior liens, then the borrower or his representative must try to educate the junior lenders whose debt will not be satisfied that it is in their best interest to receive the reduced amount. The proceeds from the sale might be more than enough to cover the existing debt against the property, in which case the seller may keep the extra proceeds.

Jonathan A. Goodman is a shareholder in Frascona, Joiner, Goodman and Greenstein, P.C., a Colorado law firm.  His practice areas include Real Estate, Brokerage Law, Contracts, Land Use, Leasing, Real Estate Title, Association Law, Business Law, and Finance.   He can be reached at jon@frascona.com.

A version of this article appeared in the Colorado REALTOR® News, the monthly publication of the Colorado Association of REALTORS®.

Disclaimer -- Content is general information only.  Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship.   For legal advice on a specific matter, consult an attorney.

Home | About the Firm | Resource Center | Comments

Copyright ©2005  Frascona, Joiner, Goodman and Greenstein, P.C.   All rights reserved.

Posted by Brian Gibbons on February 15, 2008 at 01:56 PM in Foreclosure Prevention | Permalink

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Alternatives to Fire Sale

by Jonathan A. Goodman, Esq.

My clients' property is in foreclosure and they have been approached by a foreclosure investor who wants to purchase their home. What alternatives does an owner have to selling to a foreclosure investor? A.    Alternatives to Selling to a Foreclosure Investor. 1.  Redemption with the borrower's own funds. The law permits a borrower to redeem with his own funds. It is rare for a borrower who is not servicing the debt to pay off the entire loan with his own funds. However, such redemptions might occur, for example, where a borrower is an institution unaware of the foreclosure because an employee of the owner is embezzling the payments intended for the lender and intercepting the foreclosure notices. Other examples where an owner might redeem with his own funds are where the borrower receives a windfall after the foreclosure sale, or a financially strong borrower snaps out of some impaired mental state in time to save the property from foreclosure. When a borrower redeems with his own funds, he need not pay liens junior to the foreclosed deed of trust. Yet these scenarios are rare and the law recognizes that a borrower who has defaulted on his mortgage and who was unable to raise the funds to cure is unlikely to have the much bigger amount needed to redeem. A debtor can get the money to redeem in two primary ways. 2.  Refinance. The debtor can obtain a new loan by refinancing the certificate of purchase. The debtor then keeps the property and has a new mortgage. In theory, when an owner redeems a certificate of purchase from the foreclosure of a senior loan, the owner does not need to pay off liens junior to the foreclosed upon loan. However, if a borrower is redeeming with borrowed funds, the new lender will not want be junior to deeds of trust junior to the foreclosed upon deed of trust. The funds from the refinancing lender need to be sufficient to redeem the certificate of purchase and satisfy junior liens. If the funds from the refinance are not sufficient to cover the junior liens, then the borrower or his representative must try to educate the junior lenders who will not be covered that it is in their best interest to receive the reduced amount (a "short pay off"). Among the advantages of a redemption funded by a refinance is that it allows the borrower to keep the property. Among the disadvantages is that it generally does not produce a commission for a real estate broker. 3.  Sale to a market Buyer. A debtor can sell the property to a purchaser and use the money to redeem the certificate of purchase. In a garden variety real estate sale, money comes into the closing from the buyer and the buyer's lender, and those sums are sent to the seller's lender to pay off the seller's loan. With a redemption, instead of the funds being payed to the seller's lender, they are paid to the public trustee to redeem the certificate of purchase. The debtor can then retain any money from the sale that remains after the original lender is paid. Again, in theory, when an owner redeems a certificate of purchase from the foreclosure of a senior loan, the owner does not need to pay off liens junior to the foreclosed upon loan. However, the buyer and the buyer's lender(s) will not want to be junior to deeds of trust junior to the foreclosed upon deed of trust. The funds from the buyer need to be sufficient to redeem the certificate of purchase and satisfy junior liens. If the funds from the sale are not sufficient to cover the junior liens, then the borrower or his representative must try to educate the junior lenders whose debt will not be satisfied that it is in their best interest to receive the reduced amount. The proceeds from the sale might be more than enough to cover the existing debt against the property, in which case the seller may keep the extra proceeds.

Jonathan A. Goodman is a shareholder in Frascona, Joiner, Goodman and Greenstein, P.C., a Colorado law firm.  His practice areas include Real Estate, Brokerage Law, Contracts, Land Use, Leasing, Real Estate Title, Association Law, Business Law, and Finance.   He can be reached at jon@frascona.com.

A version of this article appeared in the Colorado REALTOR® News, the monthly publication of the Colorado Association of REALTORS®.

Disclaimer -- Content is general information only.  Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship.   For legal advice on a specific matter, consult an attorney.

Home | About the Firm | Resource Center | Comments

Copyright ©2005  Frascona, Joiner, Goodman and Greenstein, P.C.   All rights reserved.

Foreclosurees Up - In upscale as well as downtrodden neighborhoods around Marlborough and Hudson, foreclosures have been on the rise, causing anguish for the neighbors as well as the homeowners and stressing community services.

Foreclosures rise in area
By Catherine Buday
Wed Feb 06, 2008, 06:13 PM EST
Marlborough , Massachusetts USA
http://www.wickedlocal.com/hudson/news/business/x142945507#

Marlborough -  During one frigid day last month, Code Enforcement Officer Pam Wilderman took a call from an anxious Milham Street resident, who reported that an uncontrolled flow of water was pouring out from a neighbor’s home. - Wilderman, police and firefighters rushed to the scene, and the Water Department shut off the home’s water supply.   Later, Wilderman found out that the home – purchased seven years ago for $438,000 – had been foreclosed. Its former residents had left town without shutting off the water.  Today neighbors are facing the prospect of the home being abandoned and unkempt for a long time.

“Now there’s a potential mold problem,” Wilderman said. “Nobody can live in it until it’s been properly inspected and mitigated.”

In upscale as well as downtrodden neighborhoods around Marlborough and Hudson, foreclosures have been on the rise, causing anguish for the neighbors as well as the homeowners and stressing community services. Wilderman said she and other city services visited nine foreclosed properties in November alone.

“The problem is not just in French Hill,” she said. “It’s hitting all over the city. More and more people are just walking away from their homes when they’re foreclosed.” And until a new owner takes possession, she added, “nobody pays attention to the house.”

ForeclosuresMass, a web site that tracks foreclosures by community, reports that 111 Marlborough properties started the foreclosure process over the last six months. They include properties on Lincoln Street, Boston Post Road, Leoleis Drive, Priscilla Drive, McGee Avenue, Conrad Road and many other locations. ForeclosuresMass says that only 27 Massachusetts communities have more foreclosures than Marlborough.

In Hudson, ForeclosuresMass reports 28 properties have started the foreclosure process in the last six months, ranking it 65th in the state in the number of foreclosures. The properties are on Manning Street, Richard Road, Stow Court, Davis Road and other locations.

Banker and Tradesman, a publication that tracks real estate sales and foreclosures, reports that foreclosures nearly quadrupled in Marlborough between 2005 and 2007, to 59 last year. In Hudson, the number of foreclosures went from 1 in 2005 to 23 last year.

People who are watching the process blame financial institutions who misled unsophisticated buyers, and starry-eyed homeowners who bought more than they could afford with no money down.

Marlborough Savings Bank Vice President Jeff Dale said some recent immigrants have sought refinancing help from his bank after they secured risky mortgages from other sources. The bank has a loan officer, Paula DiGregorio, dedicated to helping Spanish-speaking people who are burdened with now-unmanageable mortgages.

“A lot of people got into sub-prime mortgage situations where they financed 95 or 100 percent of their properties,” Dale said. “Now, what they owe is equivalent to 105 or 120 percent of what their property is worth, and there’s very little we can do in cases like that.”

“We help as much as we can,” said Dale. “But if people are ‘upside down’ in a loan – owing more than a home is worth – we can’t do very much.”

Dale blames unscrupulous lenders who prey on lower-income people. “You can’t sell a $300,000 loan to someone who’s making $15,000 a year,” he said.

Vince Valvo of The Warren Group, which publishes Banker and Tradesman, said that foreclosure trends in Marlborough and Hudson mirror that around the state and the country. While all types of neighborhoods are hit, Valvo said that poorer neighborhoods tend to suffer the most.

“In communities with lower income residents and neighborhoods with older homes, we tend to see more of these foreclosures,” Valvo said. “Lower income residents have tended to take out riskier loans, that later reset at rates that they can no longer afford.”

But he added that people of all income levels have lost homes that they could not afford in the first place.

“People who decided to really stretch and buy the biggest house they could afford with as little down as possible are also in trouble,” Valvo said. “It could be the guy down the street driving the Lexus. He’s got a pool and a car but he’s in debt up to his ears.”

“It’s all part of the culture we have…that it’s our right to be living not just in a home, but a home with granite countertops, three bathrooms and tons of garage space,” Valvo said.

City Councilor Peter Juaire, whose ward includes some of Marlborough’s less wealthy neighborhoods, also agrees that the problem cuts across economic lines.

“Marlborough is a combination of white collar and blue collar, and we all know that the economy is not in the best condition,” said Juaire. “People are losing their jobs, after they bit off more than they could chew when they bought their homes. Some who bought an adjustable rate are now getting hit with a $300 a month increase. Their costs for gas and fuel are also going up. Everything’s going up except salaries.”

And both Wilderman and Juaire agree that foreclosures have led to more troubled properties and, in turn, troubled neighborhoods.

“Some people just walk away after their homes are foreclosed,” said Juaire. “If they don’t winterize, the pipes can break. Sometimes the home gets vandalized.”

Wilderman said she has seen first-hand how neighbors suffer from a neglected, foreclosed home. She took a complaint a year ago about a crowded home on Ridge Road, which she described as a “solid, middle class Cape Cod type neighborhood where everybody keeps up their yard.”

After the home changed hands, “there was suddenly a lot of traffic going in and out of it,” Wilderman said.

“I found out that the owner of the home had been able to purchase a $340,000 home with no money down,” she said. “The very next day he closed on another house on Barnard Road for $500,000, again with no money down.

“Now tell me that person didn’t know what he was doing. Both of those homes ended up in foreclosure within 18 months.”

Negotiating the path to keeping a home - When trouble arises, it’s important to know what to ask for, what your options might be

By David Fisher / The Bulletin

Paul Helikson stepped into the swirling snow on the steps of the Deschutes County Courthouse on a Thursday morning just before Christmas and barked out the legal singsong that brought an all-too-familiar end to a homeowner’s dreams.

Another day, another foreclosure auction.

As is usually the case, nobody raised a hand to bid on the little north Bend house, where the owner owed the bank more than $12,000 in unpaid mortgage payments. In fact, as is often the case, no potential bidders showed up at all.

So the house went back to the lender to join the county’s growing ranks of bank-owned houses for sale.

Helikson, a legal process server, works with most of the trustee companies that handle foreclosure operations in Central Oregon for the country’s major lenders, and business has been booming. The frequency of his legally scripted courthouse-steps auctions has gone from one every few days to about 15 a week as the real estate market has worsened, Helikson said. Still, it’s something that no one connected with the process enjoys.

“What’s worse than losing your house?” Helikson said. “Especially at this time of year.”

Losing the house is not always necessary, credit counselors say, even for people who face a temporary layoff, or a huge increase in their adjustable loan payments.

About 40 percent of the 37,000 homeowners who worked with mortgage counselors from the national Homeownership Preservation Foundation in the last three months of 2007 managed to hang onto their homes, said John Snyder, a homeownership specialist with the federally chartered NeighborWorks America program.

Still, the number of people needing help is growing.

More than 590 properties entered the earliest stages of the formal foreclosure process last year in Deschutes County, according to records on file in the Deschutes County Clerk’s Office, the highest number this decade and, even in proportion to the county’s growth, the highest rate of potential defaults per 1,000 housing units since the post-9/11 recession of 2002.

For stressed homeowners, negotiating a successful path through the arcane world of banks, defaults and debt relief can get complicated, NeighborWorks spokesman Doug Robinson said, but the first recommended steps are relatively simple.

“At 9 o’clock in the morning, you call your bank,” Robinson said. “At 9:15, you call your credit counselor.”

Doing it right

 

Katie Magana did it right.

Her husband, a Volvo mechanic who is paid only when cars are in his shop to work on, fell behind on the newlywed couple’s house payment late last year as car owners postponed their routine maintenance to save cash, and his income slid. When the bank issued a formal notice that it would foreclose — known as a pre-foreclosure notice — she didn’t hesitate.

She got on the phone. First, to the trustee who sent the notice. Then, when that bore little fruit, to the bank itself.

Magana found a bank official who agreed to waive any late payments if the Maganas use their tax refund, as planned, to bring their payments current later in the spring.

“They have a lot of people who are doing this, and it’s better for them to keep the money coming in,” Magana said. “They really don’t want the house.”

The important point to remember in any pre-foreclosure negotiation is just that, Robinson said — that it’s a negotiation.

Lenders often stand to lose money if they take a house back through a full foreclosure, either through the expense of the foreclosure process itself, or through the expense of having to sell a house that is no longer worth as much as its loan, or both, he noted, so they have an interest in keeping their borrowers in place if at all possible.

Still, the lenders want their money, so it’s important for borrowers to know what to ask for, and what their options might be.

The options

 

The options for most stressed borrowers will be a lot brighter if they contact their lender as soon as they see financial trouble ahead, Robinson said.

Lenders may be willing to negotiate a temporary suspension or reduction in payments for borrowers who have just lost a job or have suffered some other temporary setback, Robinson said, even before they have actually missed a payment. And most lenders have fairly standard and easy-to-use repayment programs for borrowers who have fallen only a payment or two behind.

Typically in those cases, the lenders will waive late fees and other penalties if the borrower comes up with a doable plan to, say, add a couple hundred dollars per month to their future payments to bring the loan current.

It’s important to ask lenders specifically about their repayment plans at that stage, Robinson said — they won’t always volunteer the fact that they have one, but most do. And it’s important to take note of exactly who was contacted, and to get a direct phone number for further contact.

Generally, lenders will be willing to use an off-the-shelf repayment plan if the missed payments can be repaid within a year, Robinson said. Anything beyond that — three or four months of missed payments, for example — are likely to result in the initiation of a formal foreclosure process, and negotiations that can grow much more complicated.

Depending on the borrower’s creditworthiness and ability to pay, and on the property’s value, lenders could opt to find a way to reduce the loan’s payments, either by extending its terms to as long as 40 years or by recasting it to remove a huge uptick in its adjustable payment schedule, said Catherine Williams, a vice president for the national nonprofit credit counseling agency Money Management International.

Again depending on the situation, the lender might opt to forego some of the lost payments altogether — a process known as forebearance — Williams said. Or they might agree to add the missed payments to the underlying loan amount, just to keep the borrower in the house. Williams said.

If none of that is possible, the lender might opt to accept a “short sale” — the sale of a house for less than its loan value — to avert full foreclosure. Or they might agree to simply let the borrower sign over their deed and walk away, leaving the bank to sell the house but, again, averting a formal foreclosure.

As long as full foreclosure is avoided, borrowers might be able to negotiate with their lender to keep any black marks from appearing on their credit records, Williams said, although that can be tough to do if a forebearance is large, or the deed is returned. A full foreclosure can remain on a borrower’s credit report for up to seven years, causing about as much damage as a bankruptcy would, Williams said.

Jeff Stenman, foreclosure manager for Bellevue, Wash.-based Northwest Trustee Services, a company that handles foreclosure actions for a variety of lenders throughout the Northwest, said his company’s caseload has about tripled since last year. But lenders are entering into more loss-mitigation deals before their foreclosures ripen — everything from refinancings to short sales — in an effort to keep a wave of troubled home buyers from washing a tide of unsold homes onto their asset sheets.

“I think everybody is trying to adjust to it, to see what they can do about it,” Stenman said. “Nobody wants to see these things go to sale. That’s for sure.”

Help

 

Help is available to guide stressed borrowers through their negotiations, and more is likely on its way.

Congress appropriated $180 million through NeighborWorks America late last year to increase the availability of mortgage credit counseling throughout the country, Snyder said.

NeighborWorks already helps fund the national 888-995-HOPE hot line run by the nonprofit Homeownership Preservation Foundation. Hot line counselors can either help callers directly or refer them to local agencies, or both.

In Deschutes County, the national network refers borrowers to mortgage counselors at NeighborImpact in Redmond, where they can work in-depth with a local counselor, NeighborImpact Executive Director Sharon Miller said.

Money Management International also maintains a national hot line and refers borrowers in Deschutes County to its local arm, Consumer Credit Counseling Services, for free help, Williams said.

The national network of NeighborWorks-affiliated counselors can help their clients do everything from creating personal financial statements to help with bank negotiations to making referrals to social service agencies who can help deal with underlying problems like health issues, substance abuse, or job loss, Snyder said.

“They really take charge with the borrowers,” he said.

The aftermath

The rise in local pre-foreclosures is driven by a mix of factors.

Failed investments account for some of it. One investor went on a buying spree from September 2006 through February 2007, county records show, taking out mortgages on 17 different properties. He stopped paying on all of them last July, leaving about $23,305 per month in unpaid mortgage payments in his wake.

Other cases, like the single mother’s home that Helikson auctioned on the courthouse steps, were driven by a combination of loans that were given out too generously at the peak of the housing boom’s price spike, a borrower’s job loss, a health problem, or some other financial setback that caused their payments to fall behind.

Whatever the case, some houses are coming back to the market.

Thirty-eight Bend-area houses were designated “short sales” on the Central Oregon Multiple Listing Service Thursday, Duke Warner Realty agent Jane Flood said, out of a total of about 1,200 listed for sale.

That generally means the homes are listed for sale at asking prices that are below the lender’s loan amount, Flood said, but that doesn’t mean they are the only homes that will ultimately sell short.

Often, GoBend Realty broker Terry Denoux said, borrowers will list their homes while a foreclosure is pending, fishing for the best deal they can find to pitch to the bank. If an offer comes in that’s higher than the loan amount, everybody wins.

If not, the borrowers may have to pitch it to the bank as a short-sale option, which must be weighed and approved by the bank’s loan loss-mitigation department before a deal can go through. Either way, he said, it may not show up on the MLS as a potential short sale if the offer price is higher than the loan, but it may end up becoming a short sale anyway.

For potential buyers, is it worth shopping in the foreclosure bin for bargains?

Maybe, Denoux said. But maybe not.

Some houses that were bought with 100 percent financing 12 to 18 months ago may have lost 10 percent of their market value since then, depending on where they are and what they are, Denoux said, so picking them up at auction at the lender’s asking price might be a mistake.

Homes sold through the foreclosure process come as-is, so it’s up to a potential buyer to dig through county records to make sure there are no other loans or liens that may cloud the title after a purchase, Stenman said. And then there’s the possibility that a house may come with a disgruntled tenant — the former owner — still in it. Or its maintenance might not have been the best.

“To a lot of people, the word foreclosure indicates, ‘Oh! Good deal! Fire sale!’” Denoux said. “And sometimes that’s not the case.”

Still, foreclosures or the threat of foreclosure have become an active segment of the market. Denoux, who advertises on RealtyTrac.com, a foreclosure tracking site, figures foreclosure-related activity accounts for about 15 percent to 20 percent of his business this year.

Flood, who contracted with RealtyTrac to send her sales leads last year, said she dropped that contract this year to concentrate more on relocation business, even though she still bills herself as a “foreclosure specialist.”

“I felt I knew everything I wanted to know about foreclosures,” Flood said. “And, you know, some of the people you couldn’t help — it was just depressing.”

David Fisher can be reached at 617-7862 or at dfisher@bendbulletin.com.