THE PROCESS of SHORT SALES and FORECLOSURES

When foreclosed homes began to appear in 2006 after the housing boom, many real estate investors, and people attempting to buy a home at bargain prices, believed they could buy bank owned properties for below market value. Banks were already writing off crushing losses on homes where many stated income loan packages placed buyers into homes which they quickly realized they couldn’t afford. Many other purchasers became unemployed and couldn’t make monthly mortgage payments on unemployment or lesser paying jobs, while others intentionally supplied loan application information which was less than truthful to move into better homes and neighborhoods. There were also those who appeared to commit mortgage fraud while never intending to make a single mortgage payment.

Knowing the home would eventually go into foreclosure, often times the people living in these homes abandoned them in less than acceptable condition. Banks holding the mortgage on such homes were not ready to handle the volume of homeowners who defaulted on their loans. The answer to this was for banks to sell homes in “as-is” condition. Foreclosure departments quickly realized homes were not meeting FHA & VA loan guidelines after property inspections by appraisers determined the condition of foreclosed homes would not support lending money for the purchase.

Most contracts involved investors (below market value) during this time in a declining market with more foreclosures being added to inventory faster than bank foreclosure processors could handle. This created the process of short sales. Homeowners were now in a place to negotiate with the mortgage holder to sell the home for a lesser price while having the difference forgiven, sign a promissory note, or provide funds at closing for the difference.

In 2006, when short sales became a popular method used to sell a home by distressed homeowners, the process required them to give the bank with information related to recent comparable sales in the surrounding area, provide financial information to prove financial hardship, and produce a written statement which declares an acceptable reason to ask for short sale approval. This became a difficult task as bank asset managers in short sale departments literally had files of properties in distress stacked on their desks to process. The good news is lending institutions have increased the size of their short sale departments, put evaluation systems in place for short sale approvals, and properly trained employees to handle homeowners requesting short sale approval.

This brings us to 2011. Housing prices have been stabilized in Northern Virginia. Several factors include increased hiring and realignment in federal government positions in the Washington, D.C. area, along with several banks stopping foreclosures momentarily after allegations of improper conduct by signing attorneys surfaced in September 2010. This has limited the number of available homes for purchase which has stabilized regional prices. But this could change due to several factors including federal budget cuts, and the release schedule of foreclosures held in bank inventory. This rundown tells us one thing; buyers need to move cautiously.

THE REQUIRED STEPS OF A SHORT SALE:

(1) Notify the bank as soon as you find you are having trouble paying your monthly mortgage. You will be assigned an asset manager in the short sale department.You will be asked to give bank statements and pay vouchers for the last 6 months, along with W-2′s and tax returns over the past year. This will be accompanied by a hardship letter which explains why you have been forced to sell your home under short sale conditions.

(2) The bank will instruct you to contact a Realtor to list your home as available for purchase. The short sale process is much different from a standard residential sale. The Realtor you chose to coordinate your short sale should have a proven record of success. Please feel free to contact us for a short sale consultation if you are in Northern Virginia. The bank authorization to put your home on the market does not mean the bank will approve the sale, it is only the next step in the short sale process.

(3) The bank short sale negotiator needs written authorization to allow your Realtor of choice to start a conversation on your behalf. The Realtor will then give the listing agreement, and comparative marketing analysis while communicating the progress of selling your home.

(4) Your listing agent now actively markets your home while advocating on your behalf for bank approval, and arguing for the most favorable terms of the sale with the buyer’s agent upon contract acceptance. During this time the short sale processor will order an appraisal, and Broker’s Price Opinion (BPO). This ensures the listing agent has correctly priced the home to current market conditions, and this process gives the bank an independent evaluation on where the bank should ratify a contract offer.

(5) At this point your agent will continue contact with the bank, and all parties involved in servicing the original loan to insure the contract submitted receives approval under short sale terms. The seller is still responsible for any repairs required for contract and loan approval. If there are any outstanding liens against the property the seller will also be required to satisfy them before the contract is successfully closed.

The most important question for sellers: WHO PAYS REALTOR COMMISSIONS AND CLOSING COSTS? The short answer is it depends on the offer. If the bank receives a favorable contract all associated closing costs, commissions, and fees are usually waived.

SHORT SALE PROGRAMS & OPTIONS:

Before we begin discussion on short sale programs, we would like you to visit the Freddie Mac & Fannie Mae website for avoiding foreclosures. It is comprehensive and is continually updated with program changes, and legislative updates. Click links for more information:

Foreclosure Alternatives for Freddie Mac Homes

Foreclosure Alternatives for Fannie Mae Homes 

(1)  Home Affordable Foreclosure Alternatives Program (HAFA)

This program is an alternative to HARP.  It provides incentives for homeowners and mortgage banks to avoid foreclosure. The biggest difference when using HAFA  is the seller becomes approved for short sale terms before putting the home on the market. This program will also give you minimum net proceeds allowed. It also uses financial information, and circumstances of hardship to consider loan modification.

Mortgage banks participating in HAFA are required to release homeowners from all debt obligations related to the first mortgage. The homeowner is not required to give a promissory note, cash contribution, and becomes free of any liability related to a deficiency judgement.  The homeowner also receives $3K in moving assistance.

For more details: HAFA Program Provisions

(2)  Home Affordable Refinancing Program (HARP)

This program was created for homeowners to take advantage of historically low-interest rates.  By participating in this program with an approved HARP lender, a homeowner can receive a loan for twice the current value of the primary residence.  But refinancing cannot exceed the current mortgage.  Loan approval does require the property to have a mortgage guarantee already in place with Freddie Mac & Fannie Mae.  This program does not serve everyone.  If you have more than 20% equity in your home you cannot qualify for this assistance.

For more details:  HARP Guidelines

(3) Department of Defense Homeowners Assistance Program (HAP)

This program is administered by The Army Corps of Engineers.  It was amended in the American Recovery and Investment Act.  It now benefits eligible military and DOD civilian personnel faced with financial loss on the sale of their primary residence when the present market will not support a sale producing reasonable terms and conditions due to announced BRAC realignment and military base closings. The official website for this program has complete eligibility guidelines, tax exemptions,  and all application instructions.  We have handled several HAP transactions and can give you experienced representation while using HAP to short sale your home.

For more details, and often asked questions:  Department of Defense Official HAP Website

THE PURCHASE OF FORECLOSURES:

Freddie Mac and Fannie Mae set the standard of how foreclosure properties are managed, maintained, released to vendors for marketing and sales, and any contributions or special incentives provided to purchasers upon closing.  By virtue of the numbers of homes they own  across the country during the current housing crisis, foreclosed homes not insured by these government sponsored mortgage entities have to offer the same buyer assistance as the leaders or face remaining on the market.  The Moyers Team are registered agents for Homesteps and HomePath foreclosures.

Freddie Mac (Homesteps Program) & Fannie Mae (HomePath Program) Foreclosures

Homesteps:  After Freddie Mac acquires a residence the Homesteps Program allows for repair and conditioning of the home in accordance to ‘Good Neighbor Standards’ and will either provide repairs for any items which are contingent on loan approval, or cut contributions to the buyer toward closing.  Usually, the Homesteps Program allows 3% of the sales price toward closing costs, and a limited 2 year warranty.

HomePath:  Using HomePath Mortgage allows the purchase of a Fannie Mae home with a low down payment, no mortgage insurance, a low down payment, increased contributions toward closing costs (usually no less than 3%), no lender requested appraisal, and flexible mortgage terms.  These benefits apply to a primary residence, second homes, and investment properties. There are also financing options which allow more funding for renovation if necessary.

Buyer beware when purchasing a foreclosure.  There are several unanswered questions when these transactions occur. Locating the earlier owner and receiving their cooperation on previous maintenance performed on a foreclosed home is not likely to occur.  We doubt this needs to be explained any further.  NEVER PURCHASE A FORECLOSURE WITHOUT A COMPLETE HOME INSPECTION.  Additionally, a legal plat will not be available on these homes.  We encourage a search of local land records to make sure property lines are clearly defined, and there are no encumbrances associated with the lot belonging to the foreclosure before entering into a contract.  Contract acceptance by the bank is another issue.

We have sold 200+ foreclosure properties for several banks. Here are the main reasons contract acceptance is put on hold after an agent has placed a foreclosure on the market:

(1)  Title issues are found by the foreclosing attorney.
(2)  A federal tax lien was placed on the property, and discovered after the foreclosure process was complete.
(3)  Repair issues.  Eliminating the liability of hazardous conditions (mold immediately comes to mind) requires banks to instruct the listing agent to temporarily withdraw the home as available for purchase, arrange to neutralize the hazard, and place the home on the market again as active and ready to accept offers.
(4)  If the home was part of the improper signing process (robosigning) done by foreclosing attorneys, it will be taken off the market, and the foreclosure process will go back to the beginning after the foreclosure has been verified for accuracy.  Most of these homes are now coming back as active listings and available for purchase.

Like any blog post we develop, the information provided here is only an outline of the short sale and foreclosure process. If you have any question about the process of short sales and foreclosures, and any other residential real estate matters, please feel free to contact us.  Advise is always free.  The information provided here is based on our experience and public information.  We have a 100% success record for closed short sale transactions with debt forgiveness for our clients.  Call us if you’re considering a short sale.

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