"Seasoning" Requirements after a Foreclosure, BK, or Short Sale

From Ted Kohn of RPM Mortgage: One of the most often asked questions I receive is how long does a borrower have to wait after a BK, Short Sale, or  Foreclosure to purchase or refinance a property with RPM Mortgage.  Here's a guide of current mortgage seasoning requirements for a new loan.  

Note: If the attachment doesn't link or enlarge, contact Ted at the link above or me for a full sized copy. -David

Types of Distressed Property Sales

In the current strong market for real estate, distress sales have dropped to a minimal level in the South Bay and most areas.  Investors snap them up when prices are right. Nonetheless, now and then I'm asked what the principal types of distress sale terms mean.  Here's a refresher:

First, a link to an article from my real estate blog back in 2011 that gives an overview of the different types of distress sales: 

http://www.beachcitydigs.com/2011/12/post-recession-real-estate-terms-great.html

In a short sale, the owner offers the home for sale through a Realtor and the bank, if they approve an offer, accepts less than they are owed, forgiving the rest of the debt.

In pre-foreclosure, the bank has given the owner a Notice of Default, saying in effect “pay up or we will sell your home in a foreclosure sale.  Some owners list their homes after receiving a Notice of Default, but they are typically in denial and won’t actually sell their home, but if they do it’s typically for cash or a very fast loan.  [expansion on this topic:  Here's the thing about pre-foreclosures:  It's just a term meaning the homeowner has been served a Notice of Default (that's a 90-day waiting period notice in California).  If the homeowner, considering this fact, decides to sell their home, then it comes out on the MLS as a Notice of Default sale.  All the rest (those who don't list their homes) are just that:  owners very late on their mortgages who have NOT decided to sell.  So the fact that eager websites like to tell us how much trouble these people are in doesn't translate into those homes actually being for sale, and the lender has no standing to sell them.]

Foreclosure is when the Notice of Default has matured and the bank has scheduled a foreclosure sale (the ones you hear about on the “courthouse steps”).  At this point, you have an angry seller who is still probably in denial but might sell for cash (there’s no time for buyer to get a loan).

Foreclosed or Real Estate Owned (REO) properties have been foreclosed by the lender and taken into their ownership.  The foreclosure is over, now the bank just owns the home.

And thank God most of these are over! -David

Latest on Short Sale Mortgage Forgiveness Tax Relief for Sellers in California

From the California Association of Realtors and IRS:
NO FEDERAL DEBT RELIEF INCOME TAX FOR SHORT SALES

A short sale in California is generally not subject to federal income tax for mortgage debt forgiveness, according to a recent letter from the Internal Revenue Service (IRS).... We are also hopeful that we can promptly obtain similar guidance regarding state income tax for mortgage debt relief income from the California Franchise Tax Board (FTB), which has been awaiting this IRS letter.

Given that a homeowner in California generally cannot be held personally liable for a short sale deficiency (see below), the IRS stated in its letter that it would consider the mortgage loan as a nonrecourse obligation that is not subject to federal debt relief income tax.  The amount of indebtedness, however, must be reported as the amount realized for capital gains purposes. Of course, a principal residence is generally excluded from capital gains tax up to $250,000 for single taxpayers and $500,000 for married couples filing joint returns (under 26 U.S.C. § 121).

As background, California law generally protects a borrower from owing a deficiency after a short sale of a residential property with one-to-four units, including both first and junior trust deeds (Cal. Code of Civ. Proc. section 580e). Exceptions include fraud, waste, cross-collateralized loan, and a borrower that is a corporation, LLC, or limited partnership. For more information, see C.A.R.’s legal article on Short Sale Deficiencies.

Although short sale sellers of a qualified principal residence are currently protected against federal debt relief income tax under the Mortgage Forgiveness Debt Relief Act of 2007, that federal law is set to expire on December 31, 2013, whereas the tax exemption set forth in the IRS letter has no expiration date. Similar protection to the federal Mortgage Forgiveness Debt Relief Act for state income tax under California law has already expired on December 31, 2012. However, other exemptions from federal and state taxation of debt relief income are available, such as for bankruptcies and insolvencies. REALTORS® should encourage their clients to seek the advice of a tax professional regarding the tax consequences of a short sale.

4-Unit Income Property Near Miracle Mile

Here's a second-chance opportunity to acquire a lovely French Normandy style 4-unit income property in the South Carthay area near the Miracle Mile.  Here's a Visual Tour of this short sale priced at $1.3 million.

For details, see David's listing on Loopnet and on the Multiple Listing Service.  

Post-Recession Real Estate Terms & A Great Picture of Ralphie

Via Trulia and Forbes, 14 Translated Real Estate Terms for the current market.  How many of them did you know?  BTW, the South Bay has a far lower proportion of distressed properties (REO, S/S, etc.) than the county, state, and country as a whole. In fact, current inventories of homes for sale are unusually LOW. - David

First-Time Buyers Losing Interest in Short Sales

Short sales are certainly an important component of South Bay real estate sales these days, but not what I would call a dominant force.  In fact, inventories of all types of homes are remarkably low already - - more like November and December levels.

Still first-time buyers unaware of the delays often involved have been pursuing short sale homes in hopes of getting a bargain.  According to RISMedia, though, they're Losing Interest in Short Sales.

In many cases, the best idea is to look for the best deal, whether it's a short sale or not!  Short sales aren't for the feint of heart, as blogged here before, and may be best suited to investors or others not in need of a home right away. - David

New Short Sale Website for California Consumers AND Realtors

With fewer than three of five short sales closing in California, C.A.R. is well aware of the complexity and difficulty of navigating lenders’ and servicers’ short-sale procedures.  To assist both REALTORS® and consumers, C.A.R. has launched shortsalescalifornia.org, a website specifically focused on short sales.

On the new site, visitors will find information ranging from short sale news, foreclosure timelines, and red flags to watch for, to legal Q&As, a short-sale glossary, and much more.


Additionally, consumers can find a REALTOR® to assist with their short-sale transaction, learn what to expect as a buyer or seller of a short-sale property, and find out whether they qualify for government programs to keep their home.


Visit the new site at www.shortsalescalifornia.org 

From CAR President: Ads Will Call for Short Sale Improvements

Tomorrow, the California Association of Realtors (C.A.R.) is placing an open letter advertisement in California’s seven largest daily newspapers, calling on lenders and industry regulators to streamline and improve the short sale process.  C.A.R. is taking a leadership role in this effort by getting this letter published and pointing out lenders’ and servicers’ unworkable short sale processes.  We’re also appealing to various constituencies, such as regulators, elected officials, nonprofits, business organizations, companies, and individuals to join us so that more families are able to arrange a short sale, rather than lose their homes.
In the letter, I write, “With the number of homeowners who owe more than their mortgage 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.”

The open letter will appear in a full-page advertisement in tomorrow’s Los Angeles Times, San Francisco Chronicle, San Jose Mercury News, Sacramento Bee, San Diego Union-Tribune, Bakersfield Californian, and Fresno Bee.  If you live in one of those areas, I hope you can pick up a copy of one of those newspapers tomorrow and read the open letter....


Sincerely,
Beth L. Peerce
2011 President
CALIFORNIA ASSOCIATION OF REALTORS®

Q & A: Do you think that the current foreclosure stoppage will affect short sales?

Q via Trulia: Do you think that the current foreclosure stoppage will affect short sales?  I''m seriously considering putting down an offer on a short sale condo...


David's Answer:  Make the offer! While the current foreclosure stoppage is based on a technicality, anything that slows foreclosures increases the incentive for lenders to consent to short sales, which are ultimately much less costly to the bank (but cause them to recognize losses sooner than they would prefer).

Use an experienced, licensed, full-time Realtor (quality, service, ethics, and professionalism vary widely) who's been recommended to you by others. You should have professional representation in what can be an uncertain and time-consuming process, because you deserve it AND because that's what your smartest competitor will have. Good luck! - David

Link to this Q&A on Trulia: http://www.trulia.com/voices/Market_Conditions/Do_you_think_that_the_current_foreclosure_stoppage-247955-p_1-recent?answerId=872368&thisanswer=1#left_content

Best Way to Get the Most Home for your Money? - Depends on Where You Are

Amy Hoak explains that getting the most for your housing dollar depends on your market area.  In some, like the South Bay, your best deal may be a standard sale, properly negotiated.  Let investors fight it out over the relatively few foreclosures and short sales!

In others, prevalent foreclosures (REO's) could be a better bet.

How about short sales? Those are a very long shot UNLESS a previously bank-approved sale has fallen through.  Then the pump may be primed for a successful short sale.

More info: Home buyers, get the most for your money Amy Hoak's Home Economics - MarketWatch

Short sale vs. loan modification

Your home value is underwater.  Not like in the Nashville flooding disaster, but as in home value less than mortgage debt.  Should you consider a short sale, loan modification, or another option?  Tara-Nicholle Nelson offers a smart perspective in her article 3 tips for a successful short sale | Inman News.

Because each of these options is somwhat hit or miss, the answer may be "all of the above." - David

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Foreclosure Properties and How to Buy Them

A number of people have asked me how to buy a foreclosure property. Of course, the answer begins with "that depends," because foreclosure is a process with several stages through which distressed properties may pass, including:

• Short sales (usually during pre-foreclosure) 
• Last minute fire sales (seller trying to extract a little bit of equity before the property is lost to foreclosure) 
• Foreclosure auctions (bank has just acquired possession and is trying to sell "on the courthouse steps" in order to avoid carrying the property on its books as Real Estate Owned (REO, a nonperforming asset from the perspective of a bank) 
• REO (foreclosed property) sales, after the property has been taken onto the lender's books, the bank having now decided to list and sell the property 
• HUD homes, repossessed by the government.

The the answer is different at each stage, and of course there are other ways to acquire distressed properties not involved in the foreclosure process (such as trust sales, cash for keys, etc.).

A big factor is location.  Where foreclosure properties are scarce, bidders are many (60 at a recent trust auction I attended), meaning any bargain achieved by the buyer will be relatively small, and the risk of bidding too much is great.  Where foreclosure properties are plentiful, you're generally dealing with a depressed marketplace, meaning that prices will be low but so are the prospects for near-term appreciation.

And of course nearly all distressed properties, including foreclosures, are fixer-uppers.

Here's a good overview by CNN Money on the topic of foreclosure-related distressed property sales:: How to buy a foreclosure - May. 4, 2010.  For more info, contact your real estate blogger! - David

Pursue short sale before deed-in-lieu | Inman News

Your home is underwater (vs. the mortgage, that is).  Why not just hand over the keys and the title deed to the bank and walk away?  Because the bank probably won't accept them.  Here's why:

Pursue short sale before deed-in-lieu | Inman News

-David

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Short-sale success strategies | Inman News

What's it take to achieve a successful short sale?

Short-sale success strategies | Inman News

Pretty much what it takes to be successful at anything in real estate: Tenacity, and tenacious, experienced representation! - David

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BofA to start reducing mortgage principal - Yahoo! News

Despite the legal motivation, B of A is beginning a very important process.

Quoting from the Yahoo News article, "The bank, the largest mortgage servicer in the country, said Wednesday it will forgive up to 30 percent of some customers' total mortgage balances. The homeowners must have missed at least two months of mortgage payments and owe at least 20 percent more than their home is currently worth."

This should put pressure on other lending institutions to follow suit, preventing a slew of foreclosures and short sales. Good news indeed! - David

Years after loan default, homeowners may still owe - Sacramento Bee

Don't let this happen to you:  The downturn forces you to do a short sale, relieving your first mortgage debt.  But the second mortgage isn't officially forgiven, and later comes back to bite you.  Quoting from the Sacramento Bee,

"In many short sales, experienced real estate agents or attorneys can negotiate away debt obligations for the second-lien loan. But many inexperienced borrowers don't know that, and sign final-hour agreements giving lenders the right to pursue them later."

If you're involved in a distress sale from either side of the transaction, an experienced advisor is crucial. - David

Many Stay at Home for Free as Banks Defer Evictions | RISMedia

Deferred evictions mean some owners who are underwater or severely behind on their payments continue to occupy their homes without being ousted.  This is much more of a problem in areas more troubled than the South Bay, but we've seen it happen here too. 

But some short sales in the area display this same behavior - - somehow, the offers that come in never seem to get approved.  In some cases, the short sale is just a sham, giving the homeowner the opportunity to tell their lender that the home is listed for sale when in fact they have no intention of moving out!

The meaning of all this is

New short sale rules impact homebuyers

It remains to be seen how new short sale rules will impact homebuyers.  The Home Affordable Foreclosure Alternatives program (HAFA) hopes to speed the short sale process, but all parties will be affected. - David

IRS tells homeowners how to get tax relief if a lender forgives part of their debt - latimes.com

Here's how to get tax relief if a lender forgives part of your debt.  This is an important point, as debt forgiveness is typically a taxable event (should you be fortunate enough to successfully negotiate a principal reduction or short sale, assuming you're unfortunate enough to need one). 

Early in the housing crisis, the Bush II administration initiated a policy, which remains today, exempting mortgage debt forgiveness from being taxable. - David

Cutting through the red tape of home short sales - MarketWatch

More about short sales, some hopeful.

Cutting through the red tape of home short sales - MarketWatch

If lenders get serious about allowing these and processing them within a reasonable time (there are reasons why they don't want to do so; see my earlier posts on the subject), this is another opportunity to stabilize the real estate market, get homeowners out from their underwater mortgages, and avert foreclosures. That's a good thing, and banks who comprehend it will be making a tough situation better on themselves and the market. - David