MyShortSaleRescue.com of the U.S. ECONOMY KAREN R. SPELL, ESQ.

Transcription

1 MyShortSaleRescue.com of the U.S. ECONOMY KAREN R. SPELL, ESQ.

2 MY SHORT SALE RESCUE. COM OF THE U.S. ECONOMY Karen R. Spell, Esq. 8/12/2012 This is a short history of the 2006 United States housing market collapse and the corresponding economic recession. It is also a detailed analysis of a simple solution to both through short sales Karen R. Spell All Rights reserved 2011 Myshortsalerescue.com All rights reserved i

3 Disclaimer This booklet is not intended to be a subs0tute for legal advice or the ad- vice of a tax advisor. You are advised to seek the council of both before mak- ing decisions affec0ng your financial future. Neither this booklet nor the website, myshortsalerescue.com are part of or endorsed by the U.S. Gov- ernment or the U.S. Department of HUD. Addi0onally due to the ever changing nature of the government and banking programs discussed herein, and the geographic applicability of these programs, anyone reading this booklet is advised to insure no addi0onal changes have been enacted before making the decision to short sale their property. ii

4 Introduction In this booklet I will outline what a short sale is, why they are so prevalent and your options if you are an upside down homeowner. I will further explore the significant emotional impact short sales have on on homeowners feelings of selfworth and how the media unfairly portrays short sale sellers as irresponsible dead beats and worse. Finally I will demonstrate how through short sales the U.S. economy can once again prosper and thrive. This booklet is a must read for upside down homeowners, realtors, politicians, and anyone who wants the economy to recover and to avoid repeating this period in our economic history. iii

5 Acknowledgements Thank you to my friends, Pam for encouraging me to write this booklet, and Brenda for editing assistance. iv

6 CHAPTER 1 What is a short sale and why are there so many? A short sales occurs when a property owner is upside down, that is, they owe more than their property is worth, (often referred to as underwater) and in order to sell the home the bank(s) holding the mortgage(s) must agree to accept less than they are owed. Why there are so many upside down homes? is a much more complicated answer. In the housing market exploded. The prices of homes in many markets increased at an alarming rate. Some home prices were going up $10,000 a week and more. This resulted in a property buying and selling frenzy, the likes of which has never been seen in our country s history. In many markets there were lotteries by homebuilders to determine who would be allowed to purchase the next homes to be built. Home buyers were camping outside the Lottery location for days in advance, much like outside Best Buy before Black Friday, paying people to attend the lottery (you must be present to win), and Husband and Wife teams splitting up to attend simultaneously held lotteries and communicating by cell phone. For homeowner sellers it was not uncommon to have 5, 10 or more offers on a home the first day on the market. The winning offer was often 10 or 20 thousand dollars or more above the asking price. 5

7 This Real Estate market was sustainable, at least short term, because of the ease in borrowing money. Anyone, and I mean anyone, could get a loan for almost any amount. There were no down payment requirements, almost all the purchases were 80/20 loans, that is a first mortgage for 80% of the loan to value (purchase price for use in this context) and a 2nd mortgage of the balance of the rest of the purchase price. In addition buyers could add any additional closing costs into the loan amount. This 80/20 structure allowed home buyers to avoid the higher credit requirements of mortgage insurance (PMI) as wells as avoid the additional cost of this insurance. PMI is typically required when a homeowner borrows more than 80% of the purchase price and it protects the bank issuing the mortgage in the event the borrower defaults. In addition to no down payment there were a myriad of loans to artificially or temporarily lower the monthly payments thus enabling anyone to meet the already lax credit requirements to get a loan. These type of loans included adjustable rate loans which start out at an unrealistically low interest rate for a short period of time, interest only loans where you never payoff the principal until a balloon payment requires the loan to be paid in full and negative amortization loans where the monthly payment does not even cover the principal and interest so the loan balance is actually increasing each month. Anyone can see this lending atmosphere was a ticking time bomb. If no down payment and artificially low mortgage payments weren t enough most loans were no doc, stated income and asset loans. In a nut shell that is just tell the loan officer how much you make and what your assets are and there is no documents required to back up this information. It was very common for the loan officer to tell the buyer this is how much you need to say you make and what assets you have in order to qualify for the loan but do not worry no one will verify it. The fault as to how the requirements for obtaining a mortgage became so relaxed as to result in the housing boom is a discussion for another day. Suffice it to 6

8 say, political views aside, we can all agree someone or several someone s were at best asleep at the wheel or at worst profiting from these times and so doing nothing to prevent the inevitable from occurring. Speaking of profiting, rampant in this atmosphere of frenzied buying and obtaining mortgages, was enormous amounts of money being made by most of the entities involved in closing transactions. From the banks to the mortgage companies to the title companies everyone was raking in the money. Buyers did not care who got paid what as long as they could get the home of their dreams with no money down and at payments they could qualify for. There were many people who realized at the time of all this was happening that the situation was not sustainable but no one rocks the boat when everyone is happy. Sellers received a lot more for their homes, realtors got paid commission on these inflated prices, title companies were paid based on the title premiums at these prices, mortgage brokers were also often compensated based on the mortgage amount (or they were at that time) and of course other vendors like surveyors and appraisers profited just in the sheer volume of orders not to mention buyers getting far more home than they had ever hoped to be able to afford. The entire economy was booming as credit across the board was easily obtained allowing consumers to fill their new and existing homes with new everything from furniture and appliances to cars in the garage. Who was going to complain? One of my first feelings of unease about the market boom occurred when I walked into a closing of a $400, home where the buyer was actually getting $1, back at closing and I recognized him as the employee of the pest control service I use. How much money could this man actually be making? As it turns out this home buyer made three payments and defaulted on the loan. 7

9 CHAPTER 2 Pop goes the housing bubble! In retrospect it was easy to see that this housing market could not last. If home prices continued to rise at some point no matter how the mortgage requirements were manipulated the prices and payments could not be afforded. What was not foreseen was the behind the scenes impact of these toxic mortgages. Little was known about how mortgages were bundled and sold to investors as high yielding assets at obscene prices. When real estate prices began to stabilize and then fall coupled with alarming rates of default on these toxic loans the housing bubble burst. Seemingly overnight the housing market collapsed. Mortgage money dried up, houses sat on the market for months, prices began to drop almost as fast as they had increased and ultimately fell in many instances to up to 60% of their peak value in 2006 and down to at or below 2001 prices. New housing starts stopped as the demand for new homes ceased to exist. The construction industry was decimated. Demand for all things home related and their respective industries dropped at an ever accelerating pace. Everything from furniture to appliances to construction material suddenly had surplus inventory. The economic theory of supply and demand was much in evidence with the prices of these goods and services dropping along with the housing prices. Real estate offices closed, as did title companies, mortgage brokers, appraisers, home builders and every other real estate driven industry and this was the tip of the iceberg. 8

10 At this point several things began to occur simultaneously to cause the U.S. Economy to spiral downward. The value of real estate was dropping rapidly to the point that many homeowners owed more than their property was worth. Defaults accelerated on mortgages that were given to people whose credit and income did not support the payments. People began to lose jobs as a result of the housing market collapse further exacerbating the default situation. All of these events revealed to the investors of trillions of dollars of these toxic loans that a very large portion of their assets were in fact worthless. Some of the biggest names in American Financial Industry were suddenly on the brink of bankruptcy. The term too big to fail was heard often in the press. Thousands of smaller banks and some of the largest succumbed during this time and it just kept getting worse. Two of the biggest backers of U.S. mortgages, Fannie Mae and Freddie Mac, struggle to survive even today and may well yet be another fatality of the market collapse. What began as an isolated real estate related industry collapse quickly spread to every segment of American industry. Demand for new cars fell as did most other consumer goods and certainly any and all goods and services of a discretionary nature. Self-imposed consumer cut backs were forced for even essentials such as food, heat, medical care, and more. Job losses were enormous and spiraled out of control. The terms recession and depression were spoken by consumers, politicians, and the media alike. The government, in what was in my opinion; a misguided attempt to get the economy back on track issued the largest government bailout in history. The re- 9

11 sult was negligible at best. The banks given the bailouts, intended to pump dollars back into the failing economy, in fact hoarded the funds as their own assets shrank. With little or no conditions attached to these bailout funds the government had no recourse against the banks receiving bailout funds. Jobs continued to be lost and foreclosures continued to increase. 10

12 CHAPTER 3 Today s housing market This brings us to the reality of today s housing market. It should be noted that different housing markets in different parts of the country were affected to varying degrees. The warm states, that is Florida, Nevada, Arizona and California, were definitely impacted the most suffering the most extreme drops in home values and the related issues. Some areas of some states suffered little home devaluation, however, the entire country felt the economic ripples as the U.S. economy all but ground to a halt and there is little disagreement that this is due in large part to the falling housing market.. In the states most affected by the market collapse a huge number of homes are now upside down. In many markets up to 70 % of the homes are more than 50% underwater. In general the newer the neighborhood the higher the foreclosure rate and the more homes are upside down. Homeowners, even those who purchased prior to the boom years, of 2005 mid 2007, and qualified for loans with normal not relaxed credit requirements find themselves upside down. Many of these homeowners experienced job related cuts including loss of jobs due to downsizing, cuts in pay, benefits or hours making them unable to make their monthly payments often having exhausted all or most of their savings trying to save their homes. 11

13 The same reasons people want or need to buy a new home pre- market bubble exist today. Job relocation, change in life circumstances such as births or deaths, illness, divorce, or job loss all often precede the decision to change residences. People experiencing these events found themselves in upside down homes that they were unable to sell without bringing thousands if not tens of thousands and in some instances hundreds of thousands of dollars to closing to pay off their mortgages. Suddenly the terms short sale, foreclosure, strategic default, deed in lieu of foreclosure, and loan modification were seen and heard everywhere in the media as people in upside down homes searched for ways out of their situation. We will explore each of these terms in the next section. A myriad of government backed loan programs with an alphabet soup of acronyms began popping up. HAFA, HAMP, HARP, PRD and more all were touted as the end to the Housing Market bust. Not so fast! 12

14 CHAPTER 4 Options for upside down home owners If you wish to stay in your home but can no longer afford the payments many lenders under HAMP, Home Affordable Modification Program, are offering loan modifications. HAMP came about as a result of their being legislation introduced that would have allowed bankruptcy courts to cram down that is lower, the mortgages on homes down to today s values. Banks of course fought this tooth and nail and compromised by agreeing to HAMP thus avoiding cram down. There are only a few guidelines to qualify for this program which I am not going to cover here as the program does not work even when you do qualify. The problems with HAMP are many. From the grossly disorganized gathering of documentation to qualify you, to the modifications actually issued, to the length of processing time, to the default rate under the newly modified mortgages, HAMP is a disaster. Let s start with document gathering. During this phase you are asked to give all of your financial information as well as personal information to the bank. Often the bank asks for the same documentation several times over a period of several months. Now remember during this time, the foreclosure clock is ticking and foreclosure proceedings continue, there is no hiatus for the period in which you are attempting to get a loan modification. 13

15 A friend of mine was several months into the loan modification process when she was asked for the missing schedule on her IRS tax return related to her earned rental income. She told the bank she did not have rental income that is why there was no such form attached to her return. She was told to submit it with all zeros and that is what she did. After several months, if you are one of the fortunate few, you are given a 3 month trial payment before the loan modification is granted. This payment may or may not be lower than what you are currently paying. Who would do a loan modification to pay more? After the three months assuming you have made the trial payments on time you are supposed to be granted the loan modification. You are not told the terms of the loan modification to be granted until after the three months. In most cases the three months trial turns into 8 to 10 months during which time you are told to just keep making the trial payment. The foreclosure clock is still ticking and proceedings continuing. Approximately 18 months, in most cases, after you begin the modification process, one of two things happens. One you are told that in spite of having made the trial payments on time you are not qualified for a loan modification and no you are not told why. Or two, you are granted a loan modification and the terms are finally disclosed. If you are granted a loan modification the principal balance you owe will not be reduced. The bank will often extend the term of the loan, say from 30 years to 40 years, reduce the interest rate for the short term, and never more than 5 years and usually escalate it after the 5 years to current rates at that time until the loan is paid in full. In other words the bank is not going to lose any money in giving you a loan modification, they just give you longer to pay off your upside down debt thereby earning more interest than on the original loan even though they agree to reduce the rate temporarily. Is it any wonder the default rate on loan modification is a least 50% within 3 months after receiving a modification? 14

16 If at the end of this process you are turned down for a loan modification you now owe the bank the difference of the trial payment and the actual payment for all of the months you were in the process, plus late fees. You are also closer than ever to being foreclosed upon. In my opinion the HAMP is an excuse by the banks to gets as much financial information from you to use against you for foreclosure and deficiency recapture actions and a way to get more money out of you for a long as possible before you give up. In another words just a phishing expedition! Strategic Default: This term was coined to define those homeowners who were upside down in their homes and chose to default on their mortgages as opposed to those who defaulted because they were unable to do otherwise due to circumstances. The theory behind strategic default is the foreclosure process takes several months and in some cases years to complete. During the process the homeowner squats in their home not making payments and saving their money so once they do have to move they have money available to find other housing. To further string out the foreclosure process homeowners can hire an attorney who can substantially delay the process, usually for a fee equal to only the cost of one month s payment. In addition a homeowner, if they qualify, can file bankruptcy which further delays the foreclosure process and absolves them from liability on the foreclosed loan(s). Strategic default is just a fancy term for planned foreclosure. The resulting credit hit is the same as an unplanned foreclosure and if you do not go the bankruptcy route you may well be held liable for the deficiency on the foreclosed loan(s) Deed in lieu of foreclosure: This is a process whereby the mortgage holder on the property agrees to take back the property from the homeowner. It sounds great. Just give the keys back. Rarely, (in 30 years I have only had the bank forgive deficiency rights on one case) 15

17 will the bank forgive the deficiency if they even agree to do a deed in lieu. Yes the bank has to agree to the deed in lieu you cannot just give the house back to the bank if they do not want it. Also a deed in lieu has the same credit impact as a foreclosure. The only upside is, the matter is over quicker than a foreclosure and the deficiency amount will be less as the attorney fees and costs as well as uncollected interest is less. HARP is the government backed refinance plan. In its initial program, only homeowners who were less than 25% upside down in their loan to value ratio and were not behind in their payments qualified. This did not help anyone who truly needed help. Most homes upside down are 30 to 60 percent underwater. Homeowners struggling to make their payments are often late making them if they are able to make them at all. The New HARP was released in March What we do know so far is that the percentage you are upside down does not matter as long as you have not missed or been late in any payments in the last 12 months. Oh and to be eligible for HARP your loan has to be a Fannie Mae or Freddie Mac based loan. So far HARP has only helped 1/10 of the people it was supposed to help. There are a few other requirements for both programs but they are not significant for terms of this discussion. 25 Billion dollar Mortgage Assistance: The latest Government Program, released February 9, 2012, intended to help the housing market and thus the U.S. economy recover is in my opinion yet another inept attempt which accomplishes little to nothing except for a few exceptions. In a nut shell the big 5 banks, Wells Fargo, Citibank, Chase, Bank of America and new comer Ally Bank agreed to pay 25 billion to fund the new program. 16

18 Are these banks being nice? No, the 25 billion dollars is the price to get the government pressure off their backs as to the 3 trillion dollars in bad debt the economy is saddled with because of toxic loans given by these same banks. The 25 billion dollars will be distributed as follows: qualified upside down homeowners will receive up to $20,000 to pay down their mortgage. In the market I am in in Central Florida the average upside down homeowner is $75,000-$150, upside down and many more even more than that. $20, is not going to help their situation at all. What this program does promise that should help the short sale industry is to dedicate money for and resources to expedite the short sale process. Supposedly 30 day approval, 60 day approval would be a tremendous improvement from the normal approval time of days industry wide average. Qualified homeowners who were foreclosed on after 2008 will be eligible for between $1,500 and $2,000. One has to wonder if the recipient of the funds will have to sign a release to receive the funds. This small financial gesture is little consultation if you lost your home due to Robo signing of foreclosure documents. Robo signing will be addressed later. The qualifications for this program are set to be released over the next 6-9 months and payout made over the next three years. The biggest banks, Bank of America being the leader, are continually releasing new short sale incentive programs with many enticing features to encourage upside down homeowners to short sell. These enticements include up to $30, cash to the seller at closing, release of liability on the deficiency and more. The programs vary from state to state and often have a time limit within which to register. These incentives are yet another indication of the banks change in attitude and willingness and even eagerness to eliminate shadow inventory before these home become part of the foreclosure statistics. 17

19 Foreclosure: Foreclosure, not the planned strategic default kind but due to circumstances you can no longer afford your payments is yet another option (really not an option but a consequence of the housing market collapse). In foreclosure the bank(s) holding your mortgage forecloses through procedures established in your state. This is the process whereby the bank regains title to the subject property, and then resells it to recoup some of their loss on the mortgage. The bank may not release you from liability and depending on what state you are in have varying procedures and time frames after foreclosure in which to try and collect on the deficiency amount. The deficiency amount includes but is not limited to a total of the interest not collected from the time the borrower stops paying until the bank obtains title to the property, together with late fees, attorney fees, related foreclosure costs, and the costs to, maintain and market the property less the amount realized upon sale of the property. Foreclosure status remains on your credit report up to seven years. In addition there may be significant income tax implications. ROBO Signing: It is important to note that the foreclosure process already slowed tremendously due to the number of homeowners in foreclosure thus overloading the courts and all related foreclosure systems, was virtually halted upon exposure of Robo signing practices of foreclosure documents. Robo signing is a term given by an attorney in Florida, Matthew Weidner, to describe the practice of mass signing of foreclosure documents, mortgage assignments and satisfactions without benefit of examination or comprehension and not in the presence of a notary, in direct violation of law. Once this widespread practice was exposed banks and foreclosure attorneys were put on notice that this practice would not be tolerated. Many large attorney foreclosure mills were shut down or broken into smaller more manageable entities and still more were fined and or reprimanded. Under intense government scrutiny the already overloaded foreclosure systems slowed 18

20 even more. It is common in some states for foreclosure to routinely take an average of two and a half years to complete without outside attorney or bankruptcy intervention. Small wonder so many people opted to squat in their homes hoarding the money they saved on housing. 19

21 CHAPTER 5 The significant and most overlooked cost of the housing market collapse!! Most, economists, news pundits and most anyone not directly affected by the collapse of the housing market talk about it and the resulting downward spiral of the U.S. economy in terms of dollars and cents. There is another intangible but not insignificant cost associated with losing your home or becoming upside down with nowhere to turn and that is the emotional toll. On a daily basis I have consultations with upside down homeowners who are desperate for answers. Almost exclusively these are homeowners whom did not buy more home than they could afford. They did not receive unconventional loans designed to qualify them for more mortgage than they could afford. These people did not get 100% financing with no equity down payment. These are not people trying to work the system to get their dream home with no regards to the consequences. The people I help are doctors, lawyers, school teachers, college deans, architects, plumbers, secretaries, waitresses, nurses, and more. They are blue collar and white collar workers. They are young people who are in their first home and older couples looking to retire soon. Also in this category are people whom due to life circumstances, failing health, death of an income earner, cut in pay or hours, loss of job, or divorce find it necessary to relocate or downsize. Most of the people by the time they come to me with questions about short selling, have exhausted their savings and often part or all of their retirement savings trying to save their homes. It did not take long of consulting with people to quickly realize these homeowners, who through no fault of their own, are upside down in their home often 20

22 in excess of $150, One particular client gave validity to my feeling s that the main stream media had unfairly labeled upside down homeowners as deadbeats at best and conniving schemers who got what they had coming to them at worst. The client in question came to my office for a consult regarding his options and the consequences of those options in possibly short selling his home. After answering all of the usual questions I concluded our session in my usual manner by telling him that one of the hardest parts to short selling ones home under these circumstances is in realizing that in spite of doing everything the right and responsible way, that is qualifying for a home they could afford, having a down payment and obtaining a normal mortgage, they will be selling their home to someone who will buy it for today s value. In most instances the client could afford their home if they could pay a mortgage based on today s value. To my surprise my client began to laugh heartily. This was not the usual response to my session s conciliatory concluding words! By way of explanation my client then told me that he is a licensed psychologist and I had just said to him exactly what he had been thinking with regards to his and other upside down homeowners finding themselves upside down in their homes. Most often the media portrays short sellers and people the victim of foreclosure as getting what they deserve. As if somehow people in these circumstances should have known better than to get into this situation and should now just tough it out. I cannot tell you how many people have come to my office for their consultation only to dissolve into tears at their circumstance. My clients somehow blame themselves for their situation. I try to reassure them that through little or no fault of their own in most cases, their property values have tumbled right along with the economy. I am often asked the question Why won t the bank lower the mortgage amount by the amount they are willing to forgive by taking a short sale? They go on to say they could afford their home if the mortgage company would reduce the mortgage amount in line with today s values, explaining they have proven 21

23 themselves to the bank by making payments at the higher cost for years, in most cases. My answer, as told to me by an attorney friend, is the bank wants to make you hurt. This is a sad commentary on the very banks largely responsible for the housing bubble in the first place. Unfortunately I cannot seem to find a more plausible answer. 22

24 CHAPTER 6 How has the short sale process evolved in the last 5 years? I often explain the short sale evolution by beginning with the following fictional demonstrative story. One day Mrs. Smith came to work at ABC Bank where she had worked for the past, insert number of your choice I usually say 10, 10 years. Her duties included, among other things, the handling of two or three shorts sales a year. You see short sales are not a new situation and in fact have been around as long as mortgages have been given. When Mrs. Smith exited the elevator on the floor for her office she got her first clue something was amiss. All the way down the long hallway to her office from floor to ceiling were stacks and stacks of files, there were thousands of them. Upon entering her office she realized her desk, floor and every available space were covered in yet more files. This of course was the beginning of the short sale crisis which seemingly overnight blossomed into a full blown overwhelming pandemonium. This scenario was repeated over and over in every bank in the country. At first homeowners or their real estate agents sent in a contract for an offer to purchase the underwater home and they asked the bank to accept what was offered and to let them off the hook. Not so fast. The banks quickly came up with a list of required documents to be submitted with the offer to purchase. What did not happen quickly was the banks willingness to dedicate the funding personnel and resources to handle the onslaught of the documents and the continually increasing number of short sale submissions. 23

25 When short sales first deluged the banks it was not uncommon to be on hold for a negotiator (or anyone for that matter) for upwards of an hour and a half. There was no specific short sale department (Mrs. Smith s office doesn t count) to send documents to. No dedicated fax line so the regular lines were busy for hours on end. No addresses to send document through. It was not uncommon for documents that were sent to banks to be lost 2 and 3 times and even more. Even if you did get the correct documents to the correct department there was not enough bank personnel to process all of it. I recall one transaction where we had finally received a short sale approval letter but by the time the buyer s lender had their loan approved for closing our letter had expired. We needed a 48 hour extension of our approval letter from the short sale lender. My office called the negotiator (I still remember his name and this was 5 years ago) and his voice mail box was either full or we left unreturned messages. We also faxed our request as well as ed it, daily, for SIX weeks. No one else at the bank would speak to us saying it was his case. Finally, over a weekend my office received a message from a young woman, who said she was calling for the negotiator in question and he wanted to know the status of this transaction and was it dead. She went on to say we should call the number we had been calling for six weeks to discuss this matter. I called her back on the number registered as her called from number on my phone. Her first question was how did you get this number? Which I told her. I explained the situation with the case in question and we had our extended approval letter in 30 minutes and we closed in two days. Eventually banks put systems in place, hired and trained personal, dedicated phone lines, fax lines and s to receive the thousands of documents pouring into their offices every day. Even if a bank only had a thousand short sales, the bigger ones have tens if not hundreds of thousands, with each file requiring approximately 40 pages of documents that is forty thousand documents to get processed and into the correct file. People submitting short sales whether they were real estate agents, attorneys, or other third party negotiators came up with their own organized submission systems. Short sale training institutes sprang up and short sale software for the more organized submission became available. All of these im- 24

26 provements slowly reduced short sale approval time frames from 18+ months to 8 to 10 months. Approximately three and a half years into the short sale crisis, the whole ROBO signing issues emerged. It was about this time that those in charge of watching the bottom line for the banks began to realize that the bank was losing significantly less on a short sale than on a home that they had to foreclose on, maintain, and remarket for sale. At this point there was a huge shift of funding and resources from foreclosure mode to short sale approval mode. The largest banks instituted the use of new software known as the Equator System. Approval times went down to 5-6 months. The latest 25 billion program put forth by the five largest banks, as previously discussed, gives even more resources to participating banks to get short sale approval times shortened and the program has stiff penalties for failure to comply. We should soon be seeing approval times in as little as thirty days from file submission to issuance of an approval letter for the five banks a part of the new program. Most of the time the smaller banks follow the big banks lead. One can hope this shortened time frame becomes a reality. Banks have made great strides in turning short sales in to homes once again occupied by families able to pay for them but there is much room for improvement. One of the biggest issues facing approval times could be eliminated completely. If the banks would establish an approved price that they would accept from a qualified buyer even before a home is put on the market for sale this could shorten the process considerably. At present time the real estate agent puts the home on the market at what they feel it is worth, receives an offer and submits it with a short sale package of required documents to the lender. At some point, a couple of weeks into the process, the bank orders a BPO (Brokers price opinion of value). At this time the bank counters the offer they have received or accepts or rejects it. If the bank counters and the buyer does not accept the counter terms the home is relisted for sale at the approved price. It would be much simpler if the bank would tell the homeowner upfront what they must market their home for in 25

27 order to be given an approval. This would also give some level of assurance to the buyers, many of whom are leery of short sales, go figure given their illustrious history, that if they contract for the approved price they will get their home. There has been talk for some time to banks establishing preapproved prices to market short sales but so far in large part it is just that, talk. Banks have come a long way towards streamlining the short sale process and achieving shortened short sale approval times but there is much to be done if we are to rescue the U.S. Economy. 26

28 CHAPTER 7 How short sales can rescue the economy. Until the shadow inventory, homes either in foreclosure or homes wherein the seller is holding off selling until prices improve, has evaporated the economy will not recover. The banks backed off from foreclosures when all of the issues concerning the process were brought to light. This did not reduce the number of homeowners unable or unwilling to make their payments it simply left these homes in limbo. It has already been determined that a bank loses thousands less on average in a short sale than a foreclosure of the same property. Foreclosures take months if not years longer to process than a short sale even at the present short sale rate of approval. Short sales are the answer to getting rid of shadow inventory. If the short sale process was streamlined and reliable, foreclosures would decline dramatically. Sellers on the fence as to short sale or foreclosure would be much more likely to short sell. From credit to tax consequences to the ability to buy a new home within a relatively short time to just getting on with your lives both financially and emotionally a short sale is almost always a better choice. The requirements to achieve a short sale have changed dramatically throughout the past 5 years. A homeowner does not have to be penniless, jobless and have bad credit in order to get a short sale approved. The new HAFA requirements that became effective June 1st, 2012 do not even require a homeowner to be delinquent in order to be eligible for a HAFA short sale. Most banks at present require a homeowner to be delinquent in their payments before a short sale will be considered with a few extenuating circumstances foremost of which is an involuntary job transfer in excess of 50 miles. 27

29 As preserving their credit is one of the primary concerns of most homeowners considering short sale resolving this issue would go a long way towards getting on the fence potential short sale sellers to list their home for sale. The final issue that needs to be addressed to expedite the recovery of the economy by reducing and eliminating shadow inventory and underwater homes is the releasing of the deficiency after a short sale. The deficiency amount is the amount the bank loses including costs and principal shortage when they accept a mortgage payoff in a short sale. Certain programs, HAFA comes to mind, automatically release the homeowner from deficiency. That is if the short sale lender is a HAFA participating bank, the loan is of a certain type, the seller meets the HAFA requirements and on and on. Some states, namely California, have enacted legislation that releases homeowners from deficiency liability in a short sale. This needs to be Federal Law! One of the requirements of a short sale approval is the proof of a hardship as previously discussed. Is this distressed homeowner really a good candidate to go after for any deficiency? The obvious answer is no. So why then do banks not release all homeowners from deficiency liability? To answer this question a short lesson in accounting is required. An unreleased deficiency can technically be counted as an asset on the banks debit and credit balance sheet. This is the balance sheet displayed to stockholders of the banks. Imagine if all of the deficiencies in all of the short sales were released and no longer counted as assets. What would this do to the banks balance sheet if all of these, for the most part uncollectable assets were removed from the debit column? Would this not then be a more accurate reflection of the banks actual net worth? Can you say class action lawsuit against the banks in the not too distant future when the stockholders of the banks realize this inaccurate at best and deceitful at worst portrayal of the banks net worth? Something to ponder! In conclusion just about everyone on either side of the congressional aisle as well as most economic experts agree that resolving the housing market crisis is the 28

30 most crucial step in our US economy making a full and expeditious recovery. A byproduct of fixing the housing market is the creation of more jobs thus lowering unemployment thus further stabilizing the economy. The fastest, most compassionate, fair way, both to the homeowners and the banks holding the upside down mortgages and their investors, to stabilize the U.S. housing market and the U.S economy as a whole is the continued dedication to faster more streamlined procedures to get short sales approved and closed and the removal of the lingering burdens after short selling of a deficiency balance and credit implications. 29