To Foreclose or Not to Foreclose…
Dustin on 06 30, 2007
I had dinner the other night with someone who is in a pretty tough situation (can you say “rock and a hard place”?). I walked away from the conversation with no good advice for him, so I’m hoping someone at RCG can help guide some next steps he might take…
About three years ago, he purchased a home for his young family in the Bay Area. He’s a life-long resident of the San Jose area, but couldn’t afford anything local to his job, so he, like many other people, bought a property WAY out (about an hour and half commute each way…). Because the home was so far out, he got a “good deal” back when the market was very hot (he paid about $450K for a brand-new home in a prime location within a new development).
However, the situation quickly started to melt… The commute was so painful for both him and his wife, that they started staying with family members in the San Jose area on a regular basis. Until finally, they give up living “out there”, put the house on the market and start renting a MUCH smaller place with another family member.
Due to some unfortunate decisions (like buying the home in the first place with almost no money down), they “need” to sell the place for about $480K in order to “break even” (after sale fees) as they do not have any saving to speak of. However, after a year on the market, their home is simply not selling and he is tired of paying $3,500 per month for a home that his family no longer needs. I should also note that the builders in the area don’t face the same fiscal constraints and have begun to lower their prices considerably, so he is now doubting if it was priced at $450K.
So he asked me, should I just stop paying the mortgage and let the house go into foreclosure?
My first suggestion was to have him call up the bank and try to restructure the payments. But even restructured payments would not make “keeping the house” more desirable to him as monthly rent for his home would go for approximately $1,500/month and wouldn’t cover half the mortgage payments.
What should he do? What are the long-term ramifications of being someone who went into foreclosure? Are there ramifications of going into foreclosure beyond bad credit?
Note I don’t want this conversation to turn into how stupid he was in the first place because I can assure you he already feels dumb enough and I’m simply looking for a way to help him with some pretty tough decisions. I probably wouldn’t even bring it up on RCG, except I’m pretty sure there are more than a few people around the country who face a similar situation and are unclear on their options…
About the Author: Dustin Luther
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Even with that note at the end, you’re just asking for trouble with a post like that.
A friend of mine was telling me a story about a friend of his* that was faced with a similar situation in Texas after the oil bust. His friend just walked away from the mortgage, and suffered very little consequences as a result. I believe after just a few years (of good credit behavior) any dings on his credit record had been erased.
However, I would imagine that there may have been changes to the laws, and potential differences state-to-state, so your mileage may vary.
Also I want to add that personally I think their should be *stiffer* penalties for just walking away from a financial obligation like that. Except in the case of extreme personal circumstances out of your control, it *shouldn’t* be something you can just shrug off. You make choices, and you live with them (said in my best Bill Murray impression). But I guess I’m just an old-fashioned buy like that.
*(Although that setup makes it sound like one of those friend of a friend of a friend stories that are far from the truth, this one is for real. Seriously.)
The first thing he needs to do is call the lender and explain that he is unable to continuing the payments on the home. He needs to explain that the house has been listed for X number of moths without sale and that the builder is selling similar homes for less than what he owes. Have him ask if the company is open to doing a “short sale”. This basically allows the home to be sold for less than what they owe. They will get zero dollars out of the deal and the lender will take a loss. But the lender should be interested because foreclosing is usually more expensive.
More importantly, have him review this idea with his real estate agent. States have different lending laws, and there’s more than one way to do a short sale. The agent should know the details in Cali better than I would.
If he just decides to walk away, again, he should contact the lender to let them take it right away. This is going to kill his credit, but it will be even worse if he stops paying for months on end wile foreclosure proceedings are set in place. He’ll have multiple 30, 60, & 90 day hits on his report in addition to the foreclosure.
Last, I won’t even begin to criticize him. Living in San Jose for just a year, I nearly purchased a home in Tracy. Most people outside of the bay area really don’t understand just how ridiculous expensive it is to live there. Buying real estate out there means small down payments and living in the sticks. I’m very glad I moved back to Colorado instead.
Hi Dustin,
I would just emphasize that foreclosure is a very serious undertaking. I am sure your friend realizes that; but just to be clear it should be a last resort in all cases. It has long-term effects in terms of credit-worthiness for at least the next five years and will make borrowing money and/or getting any credit extended (e.g. a lease) extremely difficult during that time period.
Restructuring the payments via a loan modification with the bank may be a legitimate avenue but banks only like to negotiate workouts after a mortgage delinquency or a claim of “imminent default” by the borrower. This could be a tough road, but one worth investigating.
Another option is a short sale. Where they sell the home for less than the mortgage value. This has to be approved by the lender and the homeowner has to show financial hardships that are causing the sale. There is more to it than that of course. But beyond the scope of a comment to elaborate.
Another option is to rent out the home. Renting is becoming a very popular option as people shy away from buying (at least in CA) and they may be able to offset a large portion of their mortgage payment via a rent setup.
Another option is a lease-option to buy set up where they lease the house to a couple (like renters) but then give the lessees the option to buy the house on favorable terms after a set period of time (6 months, a year, etc.)
So there are lots of options out there to explore. I would just caution against mailing in the keys as step one. Some of these options may be more or less feasible depending on other particulars of the situation.
I hope this helps spur the conversation and provides some sparks for a beneficial solution.
Tim, a foreclosure effects your credit for many years. Your friend might of been able to buy a new home after few years, but I bet it wasn’t at the lowest possible market rate. I also don’t see how a credit company could rate a foreclosure’s circumstances from extreme to walking away. Who would be the judge?
Sorry about the typos in my first post.
Thanks Tim, Todd and Morgan for the quick responses…
Todd and Morgan provide some interesting options. You both hit upon the option of a short sale and that is definitely something I’ll pass along to him.
And Tim, I definitely agree that a mortgage is not something that should be easy to walk away from. But then again, if those are the rules of the game (I’m not so sure Morgan would agree with that statement), then people would be dumb to *not* take that fact into consideration when evaluating risk.
Hey guys,
I wrote at length about short sales here:
http://www.raincityguide.com/2007/03/05/short-sales
Dustin, your friend must understand that if he HAS the money in his bank account to pay back the shortfall, the lender is NOT going to approve a short sale. Your friend will have to PROVE to the bank that he is financially insolvent.
Short sales are for folks who are in financial distress due to situations such as a job loss, failure of a business, medical problems/insurmountable medical bills, divorce, and so forth.
A lender CANNOT just arbitrarily approve short sales left and right. Banks/lenders are heavily regulated. There must be good reasons to approve a short sale.
IF the bank DOES approve the short sale, your friend will be asked to pay back the difference between the sale price and amount owed in the form of a new, unsecured note. If, the bank, out of the goodness of their heart (don’t count on it) writes off the difference, the IRS sees this as a taxable event.
Have your friend seek counseling from an attorney and a tax advisor before proceeding.
We are entering a historical lending period where underwriting guidelines are constricting. With a foreclosure or short sale on his credit, your friend may have a tougher time down the road obtaining a mortgage loan if he decides to try again in a few years.
Housing counseling agencies located in the county where he lives are another resource. Look on the HUD.gov homepage for the link “talk to a housing counselor” and seek out ONLY the agencies that offer default counseling; (some only offer services such as first time homebuyer classes.) HUD-approved agencies are a better bet v. those signs on the side of the road proclaiming “we buy houses” and so forth.
“We didn’t like the long commute” is not a good reason for a short sale or a foreclosure.
Jillayne, 18 months ago, I would agree with everything you said. But the internal communication “leaked” to me over beers with colleagues on the wholesale side tell me that any alternative to foreclosure has been highly liberalized. If the guy really doesn’t have any savings, it can’t hurt to ask.
Excellent point about the tax attorney that I missed. Bottom line, get local professionals involved.
I’ve no good advice to offer,except I would ask that if they really don’t like the house,or if it is just the commute. If it’s just the commute,maybe there are a couple options they could consider…
See if it’s possible to work remotely, at least part of the time. That would ease the commute, and perhaps give them another option. Also,maybe investigate if there are any jobs that would be closer to the house? Changing jobs may be easier.
Rather than dinging my credit, I would probably try to rent it out- if you can at least cover the price of renting an apartment by renting the house out for now, then at least your living arrangements aren’t costing any *more* than they wouldif he just lived in the house. And markets are cyclical-they may have better options a year or two down the road.
More generally, how likely is it that the Puget Sound could start seeing more foreclosures in the next couple years? Most of the sales in the last few years have been done with larger down-payments (proportionately) than in previous periods of real-estate appreciation in our area (like the late ’80s) haven’t they?
So long as our region’s robust economy allows a lower usage of negative amortization, interest only, and 100% financed loans than ever before we should be relatively unscathed from any national downturn in the market.
Jillayne Schlicke said: “We are entering a historical lending period where underwriting guidelines are constricting.”
Are you saying that some of the general mortgage finance issues across the US are impacting the Puget Sound? Doesn’t our region have a much lower use of sub-prime loans than during past periods of real-estate appreciation (like the late ’80s)? If most of the sales in our region are with significant down-payments, and to people with good jobs, then why would the new requirements for 5% down and actual financial documentation have any impact whatsoever on the Puget Sound?
Does anyone know what the Washington State laws are regarding foreclosure? In some states (like California), lenders can’t come after your other assets when you walk away from your primary residence. If this is the case in Washington, then turning in the keys might make a lot of sense if your home is significantly under water.
A short sale is a great option if you can sell it for only a small amount less than is owed. But if the actual value is SIGNIFICANTLY lower than what is owed it is better to hand in the keys since this will result in owing the IRS income tax on the value the bank forgave. If you are really taking a significant bath on the home you are better off having your credit trashed rather than have to sink even more cash into the money pit.
Of course, this is only true if the laws in Washington don’t allow lenders to pursue other assets.
I think mortgages are generally secured/non-recourse – so lenders can’t come after assets other than the house if you go into foreclosure.
I don’t think it’s any different in WA than CA.
Laws differ for what you can keep in Bankruptcy – but I think in general the non-recourse status of mortgages is a safe assumption.
Dustin
Share this link with your friend
http://activerain.com/blogsview/125091/How-The-Foreclosure-Process
He needs to learn his options.
Thanks everyone for the good information… There are more than a few options being discussed that are definitely helpful!
Hi sniglet and deejayoh,
Depending on the state law, a lender can choose to foreclose on a home as a mortgage instead of as a deed of trust, and choose to go for a deficiency judgement against the homeowner. This would be written in your deed of trust. Chances of this happening? An attorney in the state where the property is located will be the best person to advise a homeowner on this topic.
Turning in the keys, also known as a “deed in lieu of foreclosure” aren’t necessarily an option either. A lender may elect NOT to accept the deed in lieu because accepting the deed changes what a lender can and cannot do. THIS IS NOT AN AUTOMATIC OPTION for homeowners.
I repeat: All homeowners facing foreclosure are wise to seek legal counsel and homeowners in financial distress can receive a referral to free legal aid from their local county bar association.
Hi Todd,
If lenders ease restrictions too much for accepting short sales and deeds-in-lieu of foreclosure, then investors and shareholders are going to get pretty pissed off.
Lenders and banks have their own governmental agencies regulating what they can and cannot do on the foreclosure side in terms of leniency.
The exception to this will be in hard hit economic areas such as the problems with the hurricane areas in the south or the economic problems in areas like Detroit.
Big bank lenders don’t want to foreclose. If it makes sense to do a short sale, they’ll do it, HOWEVER, often the homeowners have to prove that they are financially insolvent. I have never yet heard of a short sale approved because the homeowners changed their mind about the long commute.
Hi Sniglet,
See my name up there on the side bar? Right underneath my name, it says “real estate educator.” I teach all kinds of classes for real estate agents and also for mortgage brokers and loan originators.
We have 13,000 loan originators in this state, many of which are right here in the Puget Sound region. The vast majority of loan originators I meet day in and day out originate at least 60% subprime loans (v. 40% prime.) Many ONLY originate subprime loans simply because the money is so good. They never met a conforming loan they liked, and have no intention of ever doing FHA loans because of the restrictions placed on income and the high compliance requirements. Their business models are built on refi-churining (setting people up to constantly ref), or internet leads based on teaser low rates. Pay-option, negative am, interest only loans, the worst of the worst subprime products, are still being sold.
I wrote a 4 part series on the subprime meltdown here on raincityguide and I absolutely believe we are and will continue to see a rise in foreclosures and short sales throughout the state. Homes around Microsoft and Greenlake continue to sell and appreciate and there are not many subprime loans written on those homes. Go out a little farther, though, beyond the magic radius surrounding Microsoft and the Seattle city limits, and it is a different world.
Jillayne Schlicke said: “The vast majority of loan originators I meet day in and day out originate at least 60% subprime loans (v. 40% prime.)”
Aside from just sub-prime vs prime, what portion of the loans are “exotic” (e.g. 100% finance, negative amortization, 100% interest, etc)? Or are all Prime loans always 30 year fixed, and traditional ARMs with substantial down-payments? Would it be safe to say that the sales within the “magic radius” are all with solid traditional loans and large down-payments?
I assume that the proportion of these “exotic” loans in the Puget Sound must be lower in recent years to past booms (like 1990) since our economy is doing so well.
Goodness,
This is interesting and exactly why I think there are a ton of attorneys turning to Real Estate Law. The builder, lender and especially the Real Estate agents are guilty of this type of swindle every day. This is another very good example of why the internet business model is wrong on many levels.
That said; there is a simple process that many people will have to deal with concerning a lease option. Sorry to say the owner of the property will have to pay, the question is how much? The lender won’t like it but the owner can lease the property at a certain rate, it may be below the amount of the mortgage payment.
If this is a stand up person they will rent an apartment, then rent out, or lease the house and pay the difference out of pocket to make the full mortgage payment. If they are some one like myself I would assign the payments to the lender and tell them to pound sand for the remainder. The lender in many cases is happy to get something with a light at the end of the tunnel than get nothing and foreclose.
Lenders are investors looking for opportunity. If a problem can be solved they would prefer to move on. If there is a sale at the end with the arrears addressed over time many lenders will go on to the next more messy problem.
So a lease option is one solution, another is to take in boarders, convert the garage to living space, and get a second or third job. No matter what, this is a decision made and needs to be followed through. There is no going back. There is no benefit to the children, your sanity, or way of life to being a coward and turng back. What ever it takes you do it and build on what you have no matter how bad it may seem.
Third and last, if you were deceived, swindled, or lied to in any way, get an attorney. The one word of caution is that if you sue it will cost you both financially and emotionally.
In rereading this it seems I have forgotten the idea of sending the property back to the bank; you can’t. The banks will never forget. If you have cash money it’s a fine idea. If you are a regular person you will find yourself a target for the worst of financial products. Your economic life will be over.
David, I’m totally not following your comments about the internet business model. He didn’t buy the home on the internet (or even find his agent over the internet)… And your last comments seem to contradict what the mortgage experts are saying, and I don’t see why you would have some special insight into how the banks will react.
In terms of your comments about personal responsibility. I don’t think any of us disagree that he should take responsibility for his situation. Nonetheless, the rules of the game say he can walk away from the situation (foreclose) if he thinks that is in the best interest of his family…
With all that said, I’m really glad I posted this question because I’ve learned a lot about options in lieu of foreclosing and I sent the guy in question a link to this post, so hopefully he can learn a bit too!
Jillayne, this statement “The vast majority of loan originators I meet day in and day out originate at least 60% subprime loans (v. 40% prime.)” may well be true for you, but is not representative of the mortgage industry as a whole. Most figures calculate that sub prime mortgages account at about 20% of the total market.
Underwriting standards are tightening, I agree. Any loan officer that reads the underwriting guideline updates coming from lenders over the six months can tell you that.
Concerning your comment on the how investors will react to a lender doing more short sales. Yes, I agree, but they are going to be even more displeased if the house gets foreclosed upon instead. In addition, that get more bad press and even more heat from the government as the number of foreclosures continue to rise. I personally know of three lenders that have set up dedicated action centers, internal to their companies, with the sole goal of mitigating foreclosure on a loan by loan basis. On the other hand, this guy doesn’t make the best case ever, but again, it’s an option worth investigating with professional council.
Also, can you please reference the banking regulation that would restrict a lender from agreeing to a short sale in a case such as this? I agree that it’s unlikely that the lender will be all that helpful in such a case. But I doubt it would be because the government is tying their hands.
Many borrowers/loan brokers have fudged some aspect of their loan info during the recent boom – “hey, eveyone else was doing it…” – (ie, over stated income, declared property as primary residence when it was not, etc). I wonder if anyone could comment on whether lending institutions are likely to start scrutinizing loan documents of borrowers in trouble seeking to get out of their situation for any such signs of “lite” fraud and if any are found how that might effect what their rights are and how it might impact the eventual options for those borrowers in trouble who “bent the truth”.
Jay, I don’t think there is such a thing as “lite fraud”. Fraud is fraud.
Todd, when I reviewed my business for a post at RCG, I was surprised at how low my subprime percentage was. I expected a higher figure (it’s more in line with you’re quoting). I think it just feels like you’re doing twice as much work than you do on a prime mortgage!
sniglet,
I order to get county, zip code, or radius data, we would need to use a database like the full, subscription based version of Metroscan to run the numbers, and then cross reference by deed type. I do not have access to that program. Companies like First American/Core Logic (firstam just bought them) regularly release reports on subprime loans v. prime sliced by default rates for U.S. metro areas.
Hey Todd,
Banks/Lenders are required to seek investor approval before moving ahead with a short sale, and are required to ask that the homeowner pay back the short fall. NOT doing everything a bank can possibly do to recoup its money means a bank is toying with “unsound lending practices” which puts them in trouble with their regulators.
A homeowner can always choose to NOT move forward with the short sale in which case the home often ends up as a full foreclosure, especially if the loss mitigation team believes they can recoup more losses by going through the full foreclosure and selling the home as an REO property.
Here’s the reference link (opens pdf):
http://www.occ.gov/cdd/Foreclosure_Prevention_Insights.pdf
From page 9
“The federal bank, thrift, and credit union regulatory agencies are encouraging financial institutions to work with homeowners who are unable to make mortgage payments. Prudent workout
arrangements that are consistent with safe and sound lending practices are generally in the longterm best interest of both the financial institution and the borrower. Institutions will not face
regulatory penalties if they pursue reasonable workout arrangements with borrowers”
Sigh.
There are three kinds of mortgage fraud. Consumer fraud, commission fraud, and fraud for profit.
Dustin, would you like me to do a separate post on mortgage fraud?
Jay,
Yes, I believe that if a consumer lied on the application about something such as income or occupancy, and now the consumer is seeking a short sale, the lie will be uncovered very quickly.
“everyone else was doing it” is radically different than “my mortgage person coached me to do it this way.”
In terms of what their rights are, I don’t do that kind of business. That’s called practicing law and it is best to get that kind of advice from your favorite real estate attorney, which is why I have now recommended folks in this situation seek legal counsel three times in the comment section of this blog article.
Everyone is talking about foreclosures. I did an interesting analysis of where these properties are in California, but reviewing what is the MLS databases. I listed what percentage of listings are foreclosure-related among the major metropolitan areas in California, and then I looked the specific zip codes. It is surprising that in some areas, almost 40% of the homes are foreclosure-related. The article:
http://realestateandhomes.blogspot.com/
- Henry
http://www.movoto.com
Jillayne,
Throw in “fake leases” will you? LOL
Jillayne:
>> would you like me to do a separate post on mortgage fraud?
By all means… If you feel there is still stuff to add to the conversation, then I’m always fascinated to learn more!
Often I hear mortgage brokers trying to advise consumers to commit lender fraud.
The three biggest challenges of today’s lending environment, as I see them, are:
1) fake lease supporting rental income of property they are leaving (even saw a major builder doing that and saying “it’s done all the time”)
2) pretending they live in the property during a refinance, when they really don’t
3) pretending they are going to live in the property, when they have no intention of doing so
4) don’t mention any repairs in the contract
Oddly enough, the few times I came across this, all I had to do was show the lender how to do what they were trying to accomplish, by legal means. There was absolutely no reason for anyone to “commit lender faud” in these situations. They just thought that was “the easy way out” when in fact, the legal way was actually much easier.
Sometimes a little one on one education can go a long way. Maybe the lenders learn much in the process and proceed differently afterward. That is my best hope anyway.
Todd and all, this quote will appear in an article to be published by inman news, probably this week:
“many loan servicing agreements prohibit the Servicer from modifying loan agreements entirely, or limit such modifications to no more than 5-10% of a total pool. Further, loan modification may run afoul of FASB Rule #140, which says that if a bank alters the terms of a loan it has pooled, it cannot keep the loan off its books. It must repurchase the loan, return it to the books, set aside a reserve for losses, and actively manage it. The industry is asking for relaxation of this rule.”
Jillyane, Jillayne,Loan servicing agreements are a contract between the lender/servicer and the investor, not a government imposed regulation. Further more, Dustin’s friend has no way of knowing the details of the servicing contract, so why not inquire? If the servicing contract allowed for 10% of the portfolio to be altered, that point would have zero relevance on the lender’s decision. 10% is a huge number. 5% is a huge number.
Rule 140 just says the lender might have to buy the loan back from the investor if they change the terms. It does nothing to directly limit a lender’s ability offer a change of terms. Lender’s are seeking a relaxation of the rule so the don’t have to restate past financial where the profit from this loan was already added to the company’s earnings. In other words the CFO’s are looking for a way to keep their bonus checks.
I see three good options already mentioned here:
Jillayne suggests short selling and paying an unsecured note- best idea but a hard pill to swallow because there is no upside.
Todd’s deed-in-lieu option is dramatic but decisive. It does minimize the late payments to the credit and gets it over with.
Morgan’s, however, in spite of the investor-servicer agreements seems the most pragmatic because it addresses the needs of all parties. The investor doesn’t want the hit. The servicer would like to retain a loan.
Perhaps a forbearance or deferred interest agreement can be negotiated so that the owner can lease the property. San Jose real estate has traditionally bounced back over five year periods so this solution may serve all masters while saving face for the investor and the owner.
Lenders do not like to deviate from the terms of the note and deed of trust.
Consumers ought not count on banks/lenders “forgiving in full” the difference between the payoff including interest and penalties, and the sales price, unless the consumer lives in one of the hard hit economic areas like New Orleans or Detroit.
“I don’t like the long commute” is not a reason to forgive the shortfall. But then again, I’m not a bank regulator.
If bank regulators allow banks/lenders to forgive short sale debts enmass, the banking system becomes less stable. This will not be allowed.
This is why we are now seeing many banks announce movement of funds into loss reserve accounts for foreclosure. This is why we are seeing special funds set aside to refinance those homeowners (who want to stay in the home) from subprime nightmare arms into fixed loans.
True financial distress, where there is no hope of the homeowner ever being able to pay back the short fall is very different from “I don’t like the long commute.” If there are limited loss reserve funds, which one of these folks wins?
Dustin, after your friend has talked with an attorney, perhaps the attorney will order a short sale workout packet from the underlying lender. At that point, your friend will have a much better idea of what will be required by the lender in order to approve the short sale, including repayment of the shortfall.
Years ago, in a miracle type situation, the lender allowed the owner to re-buy the property at the reduced price they would have gotten if they put it on market. The market had gone down in value.
I thought it would be impossible. The market value decreased from $200,000 to $150,000. Since the bank’s best hope was to get $150,000, they opted to skip over the costs in the middle, and sell it directly to the current owner for the $150,000. The County also reduced the tax burden to the $150,000.
It was quite an amazing resolution. The owners could afford the mortgage at the new amount, and actually had paid their mortgage up to that point. The foreclosure was not about the house, but a business loan that had blanket collateral including the personal residence. Technically, I think the new loan and purchase ended up in the name of a family member with the bank’s OK. The bank knowing the current owner would simply stay, and not need to move.
My daughter said Santa did it because they were good people, and it was Christmas Eve when we heard the good news. Her little 4 year old ears were apprently listening
She looked straight up at the 6′3″ crying man who was so happy when he told us, from her less the 3′ height, and said “Santa did it!” YAY!!!
Do lenders really care about “small” lies? If nobody goes after people like Casey Serin, who openly admit to lying about income on their mortgage applications, then I don’t see why they would go after even smaller offences. There are SO many people who agree to throw in freebies like cars, TVs, and other minor kick-backs these days that the jails would be packed if they decided to prosecute them all.
Seperately, do lenders even have the right to go after other assets/income if someone decides they just want to walk away from their primary residence altogether? Don’t the state laws prevent mortgage lenders from trying to go after any other assets than the home itself (unless they are second homes)? If this is the case then it wouldn’t seem to ever make sense to make good on a mortgage if you were significantly under-water, even if you had the financial wherewithall to stay current.
Hi Ardell,
Sounds like a happy ending for that guy. I wonder how many happy endings we’ll be hearing about this holiday season? My prediction: not that many. Why? Because lenders do not want to publicize their ability to forgive debt. They WILL publicize their ability to help homeowners in distress avoid foreclosure in many different ways, hence the recent surge in public service announcements.
sniglet,
you’re asking a host of questions. In terms of dear Casey, whose blog I have visited from the very beginning, If I were the feds, and I’m not, instead I’d be trying to gather as much info from Casey’s blog as I could in order to go after the industry folks who helped him. Will he ever face any recourse? Who knows? Maybe Gus Van Sant will make a movie out of it. Unethical lending practices, subprime loans and foreclosures would make for an interesting Michael Moore movie.
Yes, lenders do have the ability to foreclose on a home as a mortgage instead of as a deed of trust and go after a deficiency judgement if it makes sense to do so. Read your deed of trust.
In terms of gifts padded into the sales price, that’s a completely different dialogue that belongs in another post, not here.
This is a great conversation and there’s some valuable information here for someone who’s just barely treading water, trying to stay afloat and looking for options.
I’ve recently been dealing with people who are a little further down the foreclosure path and some of the stories of how they got to that point are just heart wrenching.
Unfortunately, I think we’re definitely going to see an increase in these types of situations as the market continues to cool while borrowers with adjustable loans see their payments shoot through the roof.
Hi Andy,
How are the short sale negotiations going in East Bay? Are you finding lenders willing to “forgive” the short fall or are they asking homeowners to pay back the difference?
Goodness!
I’m sorry Dustin that my comments don’t make any sense to you. In my opinion this person needed more counseling before making a purchase. I’m well aware that this person had a Real Estate agent, and lender they found some place. Was the client served? Were they served well?
My assumption is they paid full retail for professional advice, then moved ahead based on that advice. An attorney could have helped them at that point by making an opnion and explaining the risks of a home purchase.
Will a reduced commission or rebate generate better advice? Will some one who is paid a fee to fill out paper work counsel the client tailored to a specific set of circumsatances?
Bad markets happen in Real Estate. These same questions about foreclosure come up through the cycles on a regular basis. Those consumers who walk away from a financial obligation are targeted for years. These “investors” are usually large corporation with diverse credit portfolios.
When you counsel people who have been through a short sale or foreclosure as a Real Estate agent how do treat that person? Do they go to the bottom of your client list? Of course they do! Any lender for anything is going to look at these people the same way. There is no insight involved.
You have to do what you have to do to hold on. Real Estate pricing is a function of time. The cycle will come back around.
Jillayne,
This discussion is having me reach for books on the differences between loans secured by mortgages vs deeds of trust.
It was my understanding that while lenders had to face a longer process in order to foreclose without a deed of trust, the advantage to the lender was that they could capture any shortfall. I further thought that the tradeoff from the lender’s perspective for loans secured by deed of trust making the foreclosure process faster, cheaper and easier, was they were then limited to whatever they got at the foreclosure.
That would mean that if a consumer doesn’t want to be responsible for the difference, they should object to the short sale and let it go through the entire process. Are owners forfeiting their rights under Deed of Trust loans by getting into the preforeclosure short sale game? Should they let the process conclude in normal fashion, which would absolve them of being required to compensate the lender for the shortfall?
One might say the consumer is falling short of meeting their obligation to repay the loan in full. But wasn’t that the tradeoff the lender agreed to when the purchaser agreed to a swift deed of trust remedy in the event of default? Seems like in a short sale, if the buyer agrees to particpate in the shortfall, they are getting all of the disadantages and none of the benefits of the Deed of Trust method.
Bottom line, clearly a consumer should seek legal counsel before agreeing to go the short sale route. Once the seller signs the Purchase and Sale agreement, it may be too late to reverse the decision and might force them to take the consequences of a short sale. So the consumer needs to see an attorney before they put the house on the market.
Listing Agents should not be listing the property and explaining “short sale” as if it is a foregone conclusion. Listing agents should rather be counseling sellers to seek legal advices before putting their homes on market.
No seller should list their home before discussing with an attorney the difference between letting the other shoe drop and going the short sale route. Further, no agent should list a home unless they are convinced that the seller is aware of the full ramifications of their actions, and listing with fully informed consent regarding the alternative consequences.
I’d like to hear from Craig on this one regarding a reasonable cost for such a service to owners, before they sign listing agreements. Seems to me it wouldn’t be cost prohibitive for an owner to seek legal advices prior to putting their home on market.
Wow — what a thread. Unfortunately, my work load today is a little heavy and I do not have time to participate in this great conversation. My only comment: I agree wholeheartedly with Ardell that the seller should seek legal counsel before signing an agreement requiring a short sale of the home. The consequences of a short sale vary from state to state, but at the very least the homeowner may in fact have equity in the property that is being “taken” by the buyer at a short sale. Admittedly, the seller is short of money — otherwise there would be no dilemma. Nonetheless, there may be equity and the seller may have additional liability associated with the short sale. The seller should spend some time locating an attorney who can review and explain the transaction for a reasonable fee, something in the order of a few hundred dollars.
Also, Ardell is correct that an agent should NOT be explaining a short sale to the client. This is clearly the practice of law and beyond the agent’s legal authority, not to mention beyond (in many if not most instances) the agent’s knowledge and skill level. I can appreciate the desire to provide “full service,” but as Ardell points out (and as required by statute) full service requires the agent to refer the client to a more knowledgable professional, not to answer all questions him/herself.
I heard something very interesting from one of the many Seattle-area immigrants recently. He said that basically, where he comes from, if you default on a loan, they take your family and (in some cases) kill them. He then went on to say that the reason he and several like him risk so much in leveraging themselves out (i.e. mortgage debt) is simply that the worst-case consequences are so tame compared to those of his original country.
This statement isn’t really made to produce a point, just rather to make you think. I thought it very interesting.
OMG, David. Is that true? I have no reason to doubt you and it’s not April Fools Day. This would make an interesting blog article: “forelosure practices around the world.” Yikes! Talk about hard money lending.
I have an interest in micro-lending and plan to enter this arena someday. I’m sure I’ll learn all about lending practices in different parts of the world. Let me know if you run across any books I should read!
Thanks David,
A very good message for today, Indpendence Day. Given my background even here in this Country, yes, consequences for lack of payment are very tame indeed.
Yes, it is true.
The guy who told me was 2nd generation Russian immigrant. He said that many loans (we’d call them hard money) that go into default are basically collateralized by people.
Anyone here ever heard of John Bunyan? He’s an author from the 17th century (i think 17th) that wrote the book ‘Pilgrim’s Progress’ while in debtor’s prison. Debtor’s prison was a place you go if you can’t repay your debts…oftentimes, families would have to sell their children to repay their debts.
http://en.wikipedia.org/wiki/Debtor’s_prison
Amazing, huh?!? While I bet those people had lower default ratios, I’d rather leave that practice behind.
“oftentimes, families would have to sell their children to repay their debts.”
Now, THAT is collateral.