I’ve not been one to wax political in public (though I am a rabid idealogue in private) as politics doesn’t always relate to the business of real estate.  And in a sense, my comments here will not be so much politcal as they are societal, and a connection absolutely can be made in this case to real estate and such, and I will do so.

I believe that a case can be made that Americans are feeling a great deal of anxiety right now over both their own circumstances, those of their neighbors and friends, and those of the entire country (and economy) at large.  I think that Americans are caught beween a rock and a hard place.  Or perhaps a better metaphor would be that Americans are at a “fork in the road,” and both roads seem to lead to hell.  Let me explain:

When gasoline was $4 per/gallon it really hit Americans where it hurt: in the pocket.  There was a national uproar. Now consider the problem in the housing market. It’s been bad for 4 years already, and it only seems to be getting worse.  And unlike an expensive tank of gasoline, the foreclosure of a  family’s home is much more personal, emotional, and powerfully troubling. And here is where we come to the fork in the road.

The first road is the public road. This road is run and maintained by the federal government.  The road is wide, and branches off in seemingly endless directions.  There are tolls to pay at every fork in this road, and taking any given fork will theoretically take you to your destination. The problem with this road is that like all government roads it is semi-maintained, the signs are confusing, and once you do get to your destination, you’ve paid dearly for the trip, and you have the nagging sensation that your destination looks a lot like your starting-point. 

The American people have lost faith in the ability of government to actually solve problems.  They have come to understand that government will simply take their money,  throw it at some aspect of the problem, and report success with charts, graphs, and cryptograms that show the problem has been solved, or will be solved “shortly.”

When President Obama came to office in 2009, the people seemed persuaded to give the government one more chance to fix things. It seemed that Obama maybe could make positive changes to the way things were done in Washington. He called for transparency, openness, coming together to solve problems, and offering real solutions.  Instead, what we got was less transparency, more seeming corruption, and a whole lot of the people’s money spend on stimulous that didn’t seem to stimulate anything or anybody except the bureaucrats in Washington and their corporate lobbyists on Wall Street.

Once again, government has failed to fix anything. Just like we secretly knew in our hearts that it would.  But what is our alternative? What is the “other road,” or the “hard place”?  The private sector.

The people’s only other choice is to get the government out of the way, and allow the private sector to fix its own economic problems. Capitalist free markets are harsh in the glare of reality.  If the people allow the market to correct itself, the pain could be intense.  Many people do not trust capitalism because they have been lead to believe that capitalism equals greed and corrution. They believe that if capitalism is given free reign, the rich will simply take all the money, and everybody who’s poor and disenfrachised will become moreso. 

I believe this stems from a misconception people have about the road of capitalism.  The capitalist road is almost always straight. It has to be, because the goal is always to get from point ”A” to point ”B” as quickly, efficiently, and cheaply as possible.  On the capitalist road, if the people decide that a particular branch of the road is no longer useful or desireable, they will abandon it, or use it for something else.

In regard to the housing crisis, I woud like to make the following proposition: “The Government’s Meddling in the Private Sector caused the housing crisis.” You see, the road in the private sector that represents housing was a large road, and many people were on it. It was a well maintained road, the speed limits were set correctly to provide safety to the people on the road, and there were very few “accidents” on this road.

But then, along comes mister government. He has an observation to make, and just like any government observation, it always comes with consequences. The government suddenly mandated that the road be widened, the speed limit be increased to a reckless 150 miles per hour, those who couldn’t pay the toll for this road were subsidized. Union government contractors took over road maintenance, and the rules of the road were expanded, duplicated, and codified into a 12,000 page document that normal Americans couldn’t even understand. 

And just like government always does when its bungling causes misery for the poeple who used to enjoy the road, it blames the former owners of the road. The government’s good intentions are never to be questioned. The outcomes of the government’s bungling always goes bad, and it’s almost always the private sector’s fault when things crumble. It is a strange and wonderful thing that our government feels the need to confound, confuse, and destroy the very system that props it up and gives it its power.

Thus, there are indeed only two roads we can take, and both are scary, but for different reasons. The laws of nature are manipulated and not allowed to function correctly on the private road. The government is determined to make the private road look and feel and function like other government roads. But allow me to ask this:

“Which road will you travel on?”

Unfortunately, the government road is freshly paved, and decorated beautifully. In spite of its confusion, corruption, cost, and unknown destination, people may choose to use this road rather than the people’s road.  The people’s road has a 3 million car pile-up, the roads are in disrepair, the signs and speed limits need to be redone, and it is certainly not safe.  But can we realize that we need to take the road back from the bumbling bureaucrats and fix it ourselves, so it goes where we need it to, and the rules make sense?

Until we determine to fix our own road, and get the government OUT OF THE HOUSING BUSINESS, our choices will look pretty bleak. I for one will be shouting loudly and clearly on the side of the private road:

“Give me my damn road back!”

It might be helpful to define the word “expert” itself. I suppose common sense dictates that anyone claiming to be an expert at anything would have to exhibit the following qualities:

1.) A deep and current knowledge of the subject

2.) Plenty of current experience with the subject

How much knowledge is enough? Consider this: if you had to hire an attorney, a CPA, a doctor, or a mechanic, how much would you expect them to be “up-to-date” on current trends, law, or practice in their subject? My guess is, most folks would like it if their representative was as current and cutting edge as possible. Until 2009, there was virtually no formal educational training for agents in short sale negotiations. Now, there are many training/coaching/certifying entities. Some agents have been certified by the Distressed Property Institute (CDPEs) to handle short sales, others get trained and certified as “Master Short Sale Consultants,” while other agents may have no certifications because they don’t really need any; these might be agents who are either research hounds, or are very experienced and engaged in the practice.

In regards to the subject of experience, consider the same example. How many cases like yours would you like for the attorney you hire to have tried? How comfortable would you be if your mechanic reassured you that he had dealt with exactly this same problem on numerous occasions? Experience also has a shelf life. If I was a short sale expert back in the late 80s, I might have a foundational knowledge of the subject, but might be well behind in the current methods being used to perform short sales. So, how is the homeowner to select a true expert? By getting the answers to just a few questions, when interviewing short sale experts:

1.) Ask them to tell you about the latest laws and programs that are in place to help you in your situation.

*Here, you’ll want to carefully gauge to the agent’s overall knowledge on the subject. Does he or she speak with authority and confidence on the subject, or can you hear lots of paper shuffling in the background? How much detail is he or she able to go into? When there’s an expert on the other end of the line, you can definitely tell.

2.) Ask them for records of actual success.

*Here, you’ll want actual records of success. Not stories, not letters of reference from beaming clients, actual records. The specific document you want is called a “Closed MLS Plano.” Ask them to show you at least a few recently closed short sale transactions. On an Arizona Regional MLS Plano, you’ll see the following data strip (click image for larger view) near the bottom of the page:

The highlighted portions show that it was a short sale (Short Sale Apprvl Req), it took 144 days to complete, and it closed escrow on 12/14/09. Ask for the agent to show you at least 3 of these that are fairly current.

If you can get a good feel for the knowledge level of the agent, and be assured that they actually have experience, you’ll be well on your way to selecting a good representative. That’s not to say the experience is guaranteed to be good, but at least you can be confident that the person is really at least experienced. Beyond this, it all comes down to customer service. At the bare minimum, I think decent service dictates that your representative be able to educate you, answer your questions, communicate with you on progress, and guide you along the way.

Here’s to hoping you never need a short sale expert!

Free Loan Counsel Available Now!

By Phone: (602) 499-4798

or by Email: therealtybutler@gmail.com

*Disclaimer: We DO provide loan counseling services and process short sales for our clients. Please also remember: I am NOT an attorney, and neither do I play one on TV or the Internet. None of these pontifications should be construed as specific legal advice. If you need specific legal advice regarding your personal situation, give us a call. We can help you ourselves, or provide a list of housing counselors that are free!

According to reports from banks, homeowners are to blame because they don’t turn in the paperwork required, nor do they make trial payments.  Homeowners, on the other hand, say mods are failing because lenders are losing paperwork, foreclosing on “accident,” changing terms mid-stream, simply ignoring them, or denying them loan mods based on some mysterious formula.

 There are in fact many homeowners who can qualify for a modification who have decided they don’t want one.  These people who “failed to complete the process,” probably came to the conclusion (after months of emotional hell) that it’s best to ditch the home and start over.  Once these families have been through 6 months of fighting with their lenders about a modification, they start to realize a few things:

 a.)    their credit is already ruined

b.)    the “fix” is somewhat iffy, and temporary

c.)    there is a real chance they’ll be going through this again in 5 years

 These facts add up fast, and signing on the dotted line to temporarily modify an already shaky loan is the last thing these people want. 

 Homeowner accusations of lost paperwork, accidental foreclosures, and unfair dealing are all absolutely true, when viewed in a certain light.  The reasons that banks appear to be unfair in their dealings is probably for a different reason than many think, though. What many fail to realize is that getting three huge bureaucracies to agree, in writing, to give away free money, and coordinate this free money give away on a specified date is no small feat. It can actually feel a lot like trying to trick a gang of bullies into poking each other in the eye while you make a quiet escape.  That’s not to say it can’t be done, just that it’s . . . tricky.  It really helps to understand the bureaucracy part of the equation to understand why you can’t get help from your bank.

 The servicing lender you send your bill to every month? They don’t actually own the mortgage to your house. They’re just “servicing” that mortgage for an investor. So already, you’ve got one road-block. Your servicer can’t actually make a decision regarding modifying or short selling your loan.  Oh, and that lovely and gracious representative on the other end of the line you call for help? She’s about 20 people down the chain of command in this organization that can’t make a decision anyway.  Not only that, she’s likely a low paid “temp” with little incentive to be helpful or friendly. And to make matters worse, she knows absolutely nothing about the process, your file, your problem, or the bank she works for! She’s just reading from a screen that contains very little information. She couldn’t help you even if she did have the best customer service skills in the world. I could actually write an entire book on the process, and the steps that have to be followed, and the executives who need to sign off, and this book would leave a lot of questions unanswered. Imagine, if you will, that you would like the federal government to send you a detailed report of every dollar you’ve paid them in taxes and what they spent it on.  Yeah. It’s kind of like that.

 The housing crisis is an absolute mess. The processes in place for helping troubled homeowners are very confusing, very time intensive, and anything but guaranteed.  Lenders will continue to blame homeowners, and homeowners will blame lenders for lack of progress on the issue.  There is one certain fact that everyone knows, but we’re hiding from and delaying at all costs: there will be millions of families moving out of their homes and renting in the coming years.  The millions of the homes sold between 2000 and 2008 are the crumbling, decaying, “foundation” of all of our household wealth. It is and has been crumbling. Those who abandon ship now will suffer for a time, then thrive and grow again. Those who continue to “re-arrange the deck chairs” on this sinking ship will be floating on a life-raft for quite some time.

Next time, I’ll detail for you the governments new program to “streamline” this process. . .

Free Loan Counsel Available Now!

By Phone: (602) 499-4798

or by Email: therealtybutler@gmail.com

*Disclaimer: We DO provide loan counseling services to our clients, but we NEVER charge the homeowner money. Please also remember: I am NOT an attorney, and neither do I play one on TV or the Internet. None of these pontifications should be construed as specific legal advice. If you need specific legal advice regarding your personal situation, give us a call. We can help you ourselves, or provide a list of housing counselors that are free! 

     Processing a loan modification is a lot like this, only much worse. Whereas a dedicated and persistent person could recover from stolen personal effects in a few weeks at most, negotiating with a lender on a loan mod, short sale, or deed in lieu of foreclosure routinely takes months, and can take over a year. Real estate attorneys, agents, and short sale processors who have experience in dealing with lenders and negotiations on behalf of homeowners are not surprised by this; they expect it. They spend their days on hold, taking copious notes, demanding to speak to supervisors, “expediting” the process, verifying paperwork, and pushing through to the ubiquitous “next level” in the process. This is their job, and in most cases, they are paid well for it.

     There are now hundreds of businesses and “servicers” clamoring for the distressed homeowner’s attention, offering “help” with their foreclosure troubles. I get many of them myself, and I’m not even “distressed,” at least not about real estate! Needless to say, there are many scams being perpetrated on homeowners, and care should be taken. Selecting the right company, attorney, or agent to help you can be daunting and anxiety producing. The following are some tips when shopping for loan mod help:

Be Wary of Paying Money Up Front

     If possible, look for an agreement that provides payment if, and only if, the loan modification is completed on a permanent basis. It should be understood however, that this is a very labor intensive process, and there is no real guarantee of success. The company that worked on your behalf for all those months will likely want compensation if, in spite of all their best efforts, your modification is denied. Remember, there is risk involved for both the homeowner and the processor, and that risk can and should be negotiated, or shared. Perhaps you could work out a deal where only half the fee is due up front? Be very cautious about paying in full up front, with a promise of “your money back,” if the loan mod fails. Some suggest that you insist on paying with a credit card, so that charges may later be disputed if something goes wrong.

Make Sure the Processing Charges Appear on the HUD-1

     When and if the lender agrees to a permanent modification, new loan documents will have to be generated and executed by the borrower, the lender, and the Trustee (in AZ). This will usually happen at a title company, where the documents will be notarized, filed with the county recorder, and distributed to all parties. A regular HUD-1 or “Closing Settlement Statement” will be issued for the transaction. The party who processed your loan modification should be listed on the HUD-1, along with their attendant processing fees. You would then bring that fee to the closing table to as your cost for “settlement charges”.

Make Sure the Processor Understands the Process, and Can Explain

     Make sure that whoever you choose has a plan or strategy in place for fully educating you on the process. Whether this means they meet with you in person or on the phone, or send you a flow chart, graph, or handbook, you should be aware of milestones, what is coming up next, and where you stand with the over-all process. Someone with a good “bedside manner” is what you’re looking for here, as you are in trouble, and you need to feel confident that the process is under control by a competent professional.

Make Sure Communication Lines Are Clear

     You will need to have open lines of communication with your processor. They will have questions for you, and will need you to deliver documents to them periodically. The best practice is email communication, as it is an excellent way to keep records of who said what when, and what documents were sent and when. If you have the ability to scan and email documents through email, you should also do this. The documents will be attached to their original emails, and saved in the system. This is record that you have complied with all pertinent information and data requests. If you have to, use a fax machine for documents, and keep the “Transmission Record” of your having sent it. Only hand-deliver or mail documents as a last resort, and only if they are certified (i.e., someone has to sign for them on the other end). Bottom line: keep neat records of communication and documentation sent.

     Your communication lines will also keep you up to date on the progress on your file. You should receive weekly updates, in writing. This should be a log of all activity on your file. Good processors keep notes on a “transaction” or “processing” form of some kind. Any time they have a conversation with your lender, send some document, or make a call to any third party, the conversation is recorded in this log. You want an updated copy of this log each week. The log should show that the processor is contacting your lender at least once per week, what your lender said, what your lender wants, what the hold up is, etc. Depending upon your level of comfort, you may ask for this document, along with a call to discuss it, on a designated day and time each week.

Make Sure You Check for Experience and References

     You should ask any potential processor what type, and how much, experience they have with loan modifications, how many of their loan mods have been successful versus unsuccessful, and whether they can provide a list of potential references for you to call. You might also visit your local BBB web site to look up the company’s history. Sometimes, a simple Google search with “[Company Name] Scam” is sufficient to root out trouble makers. If there are several Web sites, Blogs, or news stories connecting the word “scam” with the company or person you have selected, well. . . I’ll leave you to your own judgment.

Moving Forward

     If you decide to hire someone to help modify your mortgage, follow the above guidelines to minimize your exposure to scams and ensure the best professional selection. Also remember, there are no guarantees that your loan modification will be successful. If you would rather complete the process yourself, in our next installment we’ll provide guidance and best practices for going it alone.

*Disclaimer: We DO provide loan counseling services to our clients, but we NEVER charge the homeowner money. Please also remember: I am NOT an attorney, and neither do I play one on TV or the Internet. None of these pontifications should be construed as specific legal advice. If you need specific legal advice regarding your personal situation, give us a call. We can help you ourselves, or provide a list of housing counselors that are free! 

Hello Again, and welcome to The Butler Blog. As always, I am your intrepid host, Allen Butler, managing director of TRBLLC and agent of West USA Premier Properties.

Today we’ll continue with our series on pre-foreclosure help for Arizona families. Last time, we talked about loan modifications and the problem with negative equity. Let’s review that for just a moment:

Remember, if you want to stay in your home, you can either bring your account current, or you can modify your loan to make it more affordable. Loan modifications are a personal choice that should be taken cautiously, and with an eye to the future. Also remember, the payments will go up again, and you may be in the home for quite awhile.

Now, for those who can’t keep their homes there are other options to minimize foreclosure damage. Today, we’ll deal with one option, and that’s a short sale.

A short sale is nothing more than selling your home for less than you owe the lender. You are asking the lender to allow you to do a “short payoff” or short sale on the home.  Here is an example.

If you owe $250,000 to your lender on your home, and you can no longer pay, you can get permission from your lender to place your home on the market at the current fair market value and find a buyer.

In Arizona, negative equity is tremendous, and it’s not uncommon for a home like this home to be listed on the open market for $120,000. Once an offer is secured, this offer is submitted to the borrower’s lender, and the lender agrees. They’ll allow you to sell it for $120,000.

However, there is still $130,000 left on the loan balance. What will happen to this “extra debt” you owe the lender? Many times, the debt is simply forgiven and written off by the lender. Of course, there is more to this, as there are lots of legal, credit, and tax pitfalls to look out for. We’ll deal with those in future episodes, but remember, these are serious topics for qualified professionals.

The question begs itself at this point: why would a lender do that? Why wouldn’t they just foreclose on the home and sell it themselves? It’s a good question, and one that we’ll answer in a moment, but first: why would a HOMEOWNER do a short sale? What are the benefits to THEM?

First, for homeowners facing foreclosure, a short sale can

1.) Minimize credit damage resulting from foreclosure

2.) Avoid a foreclosure on credit and/or public records.

3.) Make the foreclosure process less disruptive to personal life.

4.) May allow the borrower to make a new home purchase much quicker.

Now, as to why a lender would do a short sale, it helps to understand the inner workings of the foreclosure process from the lender’s perspective, and it’s ALL about money and finance.

1.) First a lender has to spend LOTS of money to remove a homeowner from their home.

2.) Second, lenders will have to spend thousands on maintenance and holding costs.

3.) Third, lenders can SEE what a home is worth TODAY, but cannot know what the home will be worth later. If prices continue to fall, lenders will lose even more money.

4.) Finally, every time a lender forecloses on a family, it causes further depreciation of the market and THEIR OWN loan portfolios.

A short sale actually benefits both homeowners AND lenders, and is probably the best idea if you simply can’t stay in your home. Let’s take a look at eligibility requirements.

1.) First, any homeowner who has a verifiable hardship can pursue a short sale.

2.) Second, the home has to have negative equity to pursue a short sale.

These really are the ONLY two requirements to pursue a short sale. However, how a short sale is processed and how it works is considerably more complex. One of the most serious complexities is the tax, legal, and credit considerations. Let’s look at those briefly.

1.) Sometimes, due to special circumstances with second lien-holders, insurance companies, or a HELOC, the homeowner may be asked to contribute to the loss, either up front, or with a promissory note.

2.) For some, the Mortgage Debt Forgiveness Act of 2007 may not protect them from having to pay taxes on the discharged debt from the lender.

3.) In rare cases, the lender may demand that the homeowner waive their rights under the Arizona Anti-Deficiency Statutes.

4.) The credit damage arising from mortgage default can also be substantial in cases where short sale processing is anything but “short,” and drags on for almost a year.

These are SERIOUS potential consequences, and you absolutely MUST protect yourself.
1.) First, always talk to trained, certified, professionals about your specific circumstances.

2.) Seek a real estate agent with short sale experience, and at least 3 short sale references from clients with completed short sales.

3.) Know and understand the tax and deficiency laws in your state.

4.) Never pay anyone for help. Almost ALL reputable loan counselors and short sale agents DO NOT charge ANY fees to the client, ever.
Now, this has been a brief overview of the short sale, and in our next installments, we’ll break down short sales even further. Next time, we’ll deal with verifiable hardship, and the immediate actions to take when hardship comes.
Please, if you have questions or concerns about loan modifications, I encourage you to call our offices, or simply send an email. We are always here to help. Also, remember, these broadcasts are just my own personal opinions. The things I say should NEVER be construed as specific legal, credit, or tax advice. If you have questions regarding your specific set of circumstances, I encouraged you to call my offices, and also to seek the appropriate professional counsel.
Until Next time, this is Allen Butler, Managing Director of The Realty Butler LLC, and agent of West USA Premier Properties, signing out.

TRANSCRIPT: PART II: Pre-foreclosure Options (Modification)

Hello again, and thank you for joining us today at the Butler Blog. As always, I am your host, Allen Butler, Managing Director of The Realty Butler LLC and agent of West USA Premier Properties.

Before we get started, let me remind our audience again regarding pre-foreclosure options: there are really only two; you can work it out so you can stay, or work it out so you can leave. Today, we’ll discuss your options for STAYING in the home, and there are two: either rectify the loan, or modify the loan.

Now, before we get too far ahead, I want to go back for just a moment here and pull the timeline of foreclosure, and review the “Action Zone” for homeowners. Remember, the quicker you call for help, the more options you’ll have. And, you’ll feel better knowing that a plan is in place for dealing with the problem.

Now, the reason for you loan “delinquency” is very important, because it determines your options in dealing with the foreclosure. There are two reasons for delinquency.

One reason is Hardship. This can be any number of things, from death to divorce to illness to military or job transfer. Notice that these “certifiable hardships” are something over which the homeowner has little or no control.

The other reason for delinquency is Strategic. This is where homeowners CAN pay their mortgage, but simply don’t want to because the house is too far “upside – down.” Whether fortunate or not, there is no help for people who have the money to pay, but choose not to.

Now, if you have a verifiable hardship, you have two options to STAY IN YOUR HOME:

1.) First, you can bring your balance current. If your hardship was temporary, or you have some way to come up with the money to clear the back payments and fees and continue the payments, you CAN get yourself our of foreclosure, right up until the home is sold at auction. Obviously, this will not be an option for many.

2.) Your only other option to stay in the home is to request a loan modification from your lender. Let’s examine these loan mods, and how they work.

Earlier this year, the US Treasury Dept issued the Home Affordable Modification Program or “HAMP” for short. The program has guidelines to determine eligibility for a loan mod, and it identifies four methods of doing loan mods. We’ll deal specifically with HAMP, as 85% of all mortgage servicers in the US use it, or a program like it, to modify loans.

Now, the primary goal of HAMP is to make loans more “affordable,” and it identifies an affordable mortgage as one that is not more than 31% of monthly net income.

It is important to note that all modifications are on a trial bases for 90 days, and if the payments are made in full and on time, and all requested documents are provided to the lender, the modification will be “locked in” for 5 years.

In order to be eligible for HAMP

1.) You have to either already be behind on payments, or in a position where your ability to make payments is about to stop.

2.) You must also have a certifiable hardship, as discussed previously.

3.) The loan must have been written BEFORE January 1st 2009

4.) Second mortgages and Home Equity Lines of Credit are NOT eligible for this program. The Dept of Treasury is currently working with investors and industry trade groups to develop ways to include second lien-holders into the program.

5.) Finally, your loan balance cannot be greater than $729,750

If you are eligible, your loan can be modified in up to 4 ways:

1.) Most loan modifications are done by lowering the interest rate. Rates can go as low as 2%. At the end of 5 years, the rate will go back to either your original rate, or the Freddie Mac 30 year fixed rate at the time of the modification, whichever is lower. If a rate adjustment is NOT sufficient to reach 31% of your monthly income, the lender can next adjust the term of your loan.

2.) HAMP says that lenders can extend and re-amortize loans for up to 40 years. However, many loans are sold in packages to loan servicers using “Pooling and Servicing Agreements”. These agreements usually will not allow servicers to extend the term of only one loan within the pool.

3.) Now, if lowering your mortgage rate and extending your term are not enough, lenders CAN do principle “forbearance.” This means that a portion of the mortgage will be “lopped off” and placed into an insulated “bubble”. You won’t pay any interest or principle on this portion for a while, but that amount is still attached to the mortgage, and the entire amount is still owed.
4.) The final modification is “principle forgiveness”. This means that a portion of your loan is again, lopped off, but this time, it’s entirely forgiven and “disappears”. Of the 1700+ permanent loan modifications made under HAMP so far, only 5 were achieved by principle reduction. In other words, the chances of this happening are SLIM.
Now, this highlights a problem.

Let’s talk about that for a minute.

I mentioned in our first installment that negative equity was a large part of the foreclosure crisis. Now, in comparing the problems of negative equity and unemployment against the programs in place to combat this foreclosure crisis, we see that these programs may simply delay the inevitable.

Let’s do a simple example for an Arizona family in trouble with their mortgage.

So, this family bought a home in 2005 for $250,000, and the monthly payment is $1,887 per month.

Now, hardship comes, the mortgage is modified, and the new payment is only $1025 per month. Now the family can afford their home. Remember, the family still owes $250,000 on the house. The fact of the matter is, right now, the home in question is really only worth $100,000 TOPS.

Now, let’s fast forward. In year 6, the loan interest rate goes back up. Is the family making more money now, so they can afford the re-adjusted payment? If not, they’re in the same boat they were in 5 years ago. But that’s only part of the problem.

Remember, the family still owes close to $250,000 on the home, and it was only really worth $100,000 at the time of the loan modification. If any life change forces a move, you’re in the same place you were in 2007; upside down, in a big way.

What will the real estate market look like in 2017? Who knows, but I’ll ask you, the viewer: how many years do YOU think it will be before home values in Arizona DOUBLE from what they are now, so these people can sell if they need to? My professional instincts say it’ll be PLENTY longer than 5 years. It’s already been 4, and the problem seems to just keep rolling along, impervious to efforts to stop it.

See, the bottom line is, loan modifications are a personal family decision regarding the home, and families should definitely proceed with caution. Also, be sure to keep an eye toward the future when planning your long term strategy. Remember:

1.) Your payment WILL go up again. IF you can afford to make the new adjusted payment, you’ll live happily forever after.

2.) You may be living in the home well, “forever after”. . .
Now, please listen, and listen carefully: I AM NOT advocating that Arizona homeowners should decide against a loan modification. What I AM saying is: do not jump in blindly, thinking that a loan modification will resolve the underlying issues. And remember that for the remaining 97% of the country where home prices have NOT crashed and burned, a loan modification may be exactly what those families need. They may have a very good expectation that they’ll be able to recover the equity they need to sell their homes again in 5-7 years.
Please, if you have questions or concerns about loan modifications, I encourage you to call our offices, or simply send an email. We are always here to help. Also, remember, these broadcasts are just my personal internet ramblings. The things I say should NEVER be construed as legal, credit, or tax advice. If you have questions regarding your specific set of circumstances, I strongly encouraged you to seek the appropriate professional counsel.

In our next installment, we’ll cover the SHORT SALE, what it is, who can do one, and why they would do one. Until then, if you have questions or concerns regarding your personal pre-foreclosure situation, I encourage you to contact me. My staff of highly trained and certified mortgage default specialists is always ready to take your calls or emails.

Until Next time, this is Allen Butler, Managing Director of The Realty Butler LLC, and agent of West USA Premier Properties, signing out.

Transcript:

Hello and thank you for joining us today at the Butler Blog.  As always, I am your host, Allen Butler, Managing Director of The Realty Butler LLC and agent of West USA Premier Properties. Today I want to examine some of the issues and strategies involving loan delinquency, mortgage default, and foreclosure affecting Arizona’s families.  

   For nearly everyone being affected by this foreclosure crisis, the foundation is almost always negative equity and financial hardship: If financial hardship comes, and you can’t sell the house because it’s “upside down,” you are likely about to stop, or have already stopped, paying your mortgage. This is when the process of foreclosure begins.

     It is absolutely critical that you know the process and timelines of delinquency, default, and foreclosure, and what your options are in dealing with them. The entire foreclosure process starts with your first missed payment. Let’s take a look at the timeline.

When you miss your first payment, you will likely start getting all kinds of communication from your bank. They want to know where their money is, and if you can’t bring your payments current very quickly (usually within 30-90 days), a “notice of default” will be issued.

The Notice of Default is a legal notice filed by your bank, indicating they have notified the courts that you are seriously delinquent on the loan. This notice also indicates that if you do not clear the delinquency within 90 days, the property will be scheduled for public auction.

When the home is scheduled for public auction, a Notice of Trustees Sale will be posted on the home itself, and filed with the courts. This notice identifies the place and time of the trustees’ sale, the loan servicer and/or legal office pursuing the sale, and the homeowner against whom this action is being taken. The auction date for the trustees’ sale is usually 30 to 90 days after the posted notice date. When and if the property is sold at auction, it now belongs to someone else, usually the lender who filed the action. 

The next step in the process is eviction. Once the home has transferred ownership at the trustees’ sale, the new owner is going to take possession. Sometimes, the lender will contact the occupants of the home, and offer a “Cash for Keys” deal in exchange for leaving the home within 15-30 days. If the occupant is uncooperative or not able to be contacted, a forcible detainer action will be filed, and eviction proceedings will commence.

Now, it is absolutely vital that you understand your “Action Zone.” This is the time during which you can act to contain and mitigate the damage to YOURSELF, your family, your credit, and your future. The Action Zone starts before you even miss a payment, and ends just a few weeks after the Notice of Trustees Sale. It is during this time that you absolutely need to contact someone for help with your situation, as there are several programs in place by lenders, and federal and state governments to help.

In our next installment, I’ll discuss these foreclosure prevention programs, how they work, who can do them, and who should do them. Until then, if you have questions or concerns regarding your personal pre-foreclosure situation, I encourage you to contact me. Both myself and my staff of highly trained and certified mortgage default specialists are always ready to take your calls or emails.

Until Next time, this is Allen Butler, Managing Director of The Realty Butler LLC, and agent of West USA Premier Properties, signing out.

 The Case for Loan Modification

     A loan modification will be just right for many Americans, and can indeed save their homes from foreclosure, if “the price is right.”  The key consideration for these people is the level of price declines in their area or city. You see, only about 7 states have foreclosure “crises,” and of those 7, only 4 are causing most of the trouble (AZ, NV, CA, FL). If you live in any of the rest of the 96% of the country, the chances that a loan mod will work for you are pretty good. Let me explain.

    If you live in Cedar Rapids, Iowa, your home has definitely decreased in value over the last 3-5 years, but the price declines were fairly mild, and in fact, home prices INCREASED 1.8% from 2007 to now. Therefore, if you have negative equity in your home, it is likely to be not quite as severe. For example, let us assume that you bought a home Cedar Rapids for $200,000 in 2005. Chances are good that your home is still worth about $175,000 to $185,000. Result: you’re not upside down by a “prohibitive” amount. The loan modification in this case will make your payments more affordable for 5 years. Because of the relatively shallow negative equity, you will likely not have a problem selling your home in 5 years when the loan begins adjusting upward again.

     So, what if you DO live in one of the 7 states where prices have declined up to 54%. Does this mean that you can’t do a loan modification because have too much “negative equity?” Absolutely not, as there are no negative equity restrictions to participation in the program. The question is not whether you CAN, but whether you SHOULD.

The Case Against Loan Modification?

     According to the Congressional Oversight Panel that regulates loan modification programs, loan modifications are probably NOT going to help families with tremendous amounts of negative equity, or families who default because of job loss. For obvious reasons, you can’t modify a loan if you lack sufficient income. But, what about negative equity? Why would this cause a problem for loan modification?

     Let’s use another example, and this time, we’ll apply greater negative equity. If you live in one of the handful of states with the most severe foreclosures, it is likely that your situation looks something like this:

a.)    Bought house for $400,000 (First mortgage balance of $387,000, possible second?)

b.)    Homes just like yours are now worth $197,000.

c.)    You now have approximately $182,600 in “negative equity”.

You now do a loan modification of your interest rate (as occurs in 97% of cases), and as a result:

                                       1.) Old Payment: $2575 p/month

                                      2.) New Payment: $1750 p/month

                                       2.) This modification is in force for five (5) years.

Sounds fabulous, right? Maybe, but this is where practical reality sets in as people contemplate the future:

The Facts:

“I have a new, affordable mortgage payment.”

“I still owe my lender $387,000, plus some late charges, etc.”

“My house is still only worth about $200,000.”

“My loan is going to readjust in five years.”

 The Burning Question:

“Will my home double in value  in 5 years, so I can actually sell it if I have to?”

     This last is what causes many to decide NOT to do a loan modification. They are reasoning, and quite soundly unfortunately, that there is no way their home is going to almost double in value within 5 years. Not only are prices projected to fall for most of 2010, even if they stopped falling and began to rise again (using an optimistic rate of increase of 10% per year), it will still take almost 10 years before the negative equity is wiped out.

     You can see the problem: five years from now, there is a likelihood that you’ll be in exactly the same position you are in now. Your mortgage payments will start to increase again, while the situation at large hasn’t changed much, if at all. To make matters worse, your credit score has likely already taken a hit due to your current troubles. So, just when you’ve got your credit built back up, you’re faced with the negative equity problem again.

     Now, please understand, I am NOT advocating that you dismiss a loan modification as a possible solution to your mortgage troubles. You just need to be fully aware of what your true situation is, and what it needs to be in the future for a loan modification to actually solve your mortgage/housing problem. Many families, when they discover the real situation, decide that a loan modification is simply delaying the inevitable, and it is preferable to just “cut the losses now”. Cutting your losses now is becoming a strong mindset for many borrowers.  These homeowners reason that it is better to get rid of the ridiculously over-valued home (either through foreclosure, a deed in lieu of foreclosure, or a short sale), take a credit hit, and start life over. It’s like pressing the “reset” button.

     These “strategic foreclosures” are absolutely on the rise among many homeowners. Of course there is an ethical and moral consideration to this, but practical economic reality often overtakes the struggling homeowner. Provided that they do not actually go to foreclosure, and instead work with their lender to do a deed in lieu of foreclosure or a short sale, they WILL be better off. Consider: our latest research shows that the average borrower who conducts a short sale or deed in lieu of foreclosure within 5 months of default will suffer a 175 – 225 pt drop in their credit score. These same people are reporting that they are qualified to purchase a home again within 2-3 years.

     The practical reality is that, if you move quickly to expedite the transfer of the home to someone else (the lender or another buyer), your credit damage is fairly manageable. Furthermore, this leads to the positive conclusion that homeowners are much better off dumping their over-priced homes and just buying another home later. Not only will they probably save lots of money on a rental each month, but their credit scores will rebound fairly quickly, enabling them to purchase a newer, cheaper home, WELL BEFORE their old home would have appreciated to the level of the old mortgage. This is hard to argue with, as it makes both economic and common sense. 

     When the Congressional Oversight Panel reviewed the efficacy of the government’s programs to save families from foreclosure, they were extremely concerned. Their skepticism is valid indeed. The foreclosure programs in place now DO NOT address the issue of job loss, or of homeowners who simply decide that staying in the home makes no economic sense. To the extent that these problems continue and increase, well. . .use your imagination. But only for a few minutes; it will lead to anxiety and depression ;>)

Free Loan Counselors Available Now!

By Phone: (602) 499-4798  or by Email: therealtybutler@gmail.com

*Disclaimer: Please always remember: I am NOT an attorney, and neither do I play one on TV or the Internet. None of these pontifications should be construed as specific legal advice. If you need specific legal advice regarding your personal situation, give us a call. We can help you ourselves, or provide a list of housing counselors that are free!

Part II in this Series: Is a loan mod “right” for Arizona Families?

The Rise of “The Loan Mod”     

 Until just this last March, if you couldn’t afford your home, you had little choice but to allow the lender to foreclose, or try to do a short sale. In other words, you were moving; there were no options to stay in your home. Now, in an effort stop foreclosures and stabilize the economy, the federal government has created some programs to enable you to stay in your home and avoid foreclosure by modifying the terms of your current mortgage. 

     There are currently four federal programs to make mortgage modifications available to the public: HARP (Home Affordable Refinance Program), HAMP (Home Affordable Modification Program) HOPE for Homeowners, and the FDIC’s Mortgage Modification Program for IndyMac.  Of these four programs, only HAMP has made any real progress in modifying mortgages. The other programs do not have broad lender participation, and the guidelines are too strict for many borrowers.

     The Congressional Oversight Panel (who oversees these programs) in their review released in October 2009,  reported that 85% of all servicing lenders are either participating in the HAMP program, or have programs of their own that are comparable. For this reason we will focus exclusively on HAMP, as this is how most people will modify mortgages. HAMP modifications are made on a 3 month trial basis first, and if you make the new payments and provide all documentation that your lender requests, your loan modification will become locked in for five years. After the five years, your loan will gradually revert to either your original loan interest rate, or the Freddie Mac 30-year fixed rate at the time of your modification, whichever is less. (The Freddie Mac rate is currently around 5%.)

How Does A Loan Mod Work? 

     How is a mortgage modified to make it more affordable? First, we have to define “affordable.” For the purposes of this plan, the government has determined that a monthly mortgage payment that is 31% or less of your monthly income is affordable. If your monthly mortgage is more than 31% of your monthly income, it is not. In order to reach this 31% affordability level, lenders can make several changes to your mortgage. Before we get to the actual modifications that can be done, we must first advise of a few key points of the program.:

-Lower your interest rate to as low as 2% for a period of up to 5 years.

           *After 5 years, your loan rate goes up again. This is the method used in almost all modifications. The average modified loan rate goes from 7.58% to 2.92%.

-Extend the term of your loan, or re-amortize, for up to 40 years

          *Most lenders are not doing this for two reasons, 1.) an interest rate reduction will usually work to reach the desired 31%, and 2.)  most lender’s Pooling and Servicing Agreements (PSAs) will usually not allow them to modify  loan lengths.

-Principal Forbearance

     *A portion of your loan is “lopped off” and placed into a “bubble” that you don’t pay any interest or payments on. This portion of your loan is due “later”. This is very rare.

-Principle Forgiveness

     *A portion of your loan is again “lopped off,” but this time, it’s forgiven. It’s gone. This is not only rare, it’s an anomaly: of the 362,348 borrowers placed into HAMP loan mods, only 5 had principal forgiven.

   Who Can Participate in The Loan Mod Program?

   So, does anyone who can prove that their mortgage is more than 31% of their monthly income get a loan modification? How do the government and lenders determine who is eligible? The eligibility requirements for HAMP are fairly simple, but also prohibitive for some:

#1.) You must be in default or be in imminent danger of default.

     *Default is defined as “behind on payments,” and in order to be eligible, you must have either already stopped making payments, or demonstrate that your ability to make payments is about to end.

#2.) You must have a certifiable hardship

     * You must be able to explain why you now CAN’T pay your mortgage, whereas you COULD before. Did you lose a job? Get divorced? Get ill? These reasons and others like them are certifiable hardships.

#3.) Your loan has to have been issued prior to January 1^st, 2009

#4.) Only 1^st Mortgages are eligible under the program’s guidelines

     *2^nd loans or home equity lines are not eligible (Treasury is working to include these.)

#5.) Mortgage balance cannot exceed $729,750

* If a review of your finances indicates that 55% or more of your income is servicing consumer debt (credit card, mortgage, etc), enrollment in a credit counseling program is mandatory for program participation.

 What’s To Come:

While mortgage modifications will be a ray of hope for some homeowners in distress, many more will either not qualify for a modification, or will choose not to do one. Why would an Arizona Homeowner NOT do a loan mod?

Part II in this Series: Is a loan mod “right” for Arizona Families?

Free Loan Counselors Available Now!

By Phone: (602) 499-4798, or 

By Email: therealtybutler@gmail.com

*I am not an attorney, and neither do I play one on TV or the Internet. This article  should NOT be construed to impart specific legal recommendations or advice to ANYONE. If you have questions regarding your specific set of circumstances, please call our office, or contact an attorney. (Our Office: 602-499-4798)

     In this first part of our new series on how to strategize your offer on an Arizona foreclosure, short sale, or owner-occupied home, we’ll deal with the basis of all purchases, the price. In later articles, we’ll cover the remaining offer strategies (terms, concessions, inspections, repairs, costs, and closings). Our hope is that once the series is complete, you’ll have a clearer picture of how to write a strong offer on the Arizona home you want, and actually get it. In regards to your offer pricing, you have a few considerations: How much should you offer? Do you have to pay full price, or even over full price to get a home right now?  

How do I determine what a home is worth?   

Home prices are always approximate, and are based on what similar buyers are paying for similar homes, in similar neighborhoods, in the last few months. This will be the case for all homes in neighborhood tracts, condo complexes, etc. Custom homes in custom locations will differ slightly, but not much. For example, when your real estate agent runs a market analysis on the home you would like to make an offer on, they’ll give you a list of homes that are similar to the one you are considering, that have sold most recently. In this example, the prices people paid for those homes will range in price from say, $125,000 to $137,500.  This means that if the “Market Climate” is good for sellers, the seller will be expecting to get near, or over $137,500. Why would a seller expect to get over what the market says a home is worth?

 How Market Climate affects home values.

     Market Climate is an expression that means, “Who is in control of the real estate market?” There are two controlling sides here, the buyers and the sellers. Therefore, we have “Buyer’s Markets,” and “Seller’s Markets.” (There is actually a “transition period” between these two that is very short and usually imperceptible called “Stability”.)

     When you’re a buyer looking for a home in a market where there are many more buyers than there are homes for sale, and competition is fierce, this is called a Seller’s Market. The seller is on control. When the market is flooded with homes for sale, and buyers are few, a buyer is in home-buying-heaven: the Buyer’s Market.  Market climate at the time of this writing is definitely a strong Seller’s Market. In a Seller’s Market, there are likely to be multiple buyers bidding on a single home, and someone is going to offer more than what the seller is asking.  This places pressure on prices, causing them to rise.

Wise Buyer Pricing Strategy

     The first thing that you must remember when the buyer market is competitive is that you probably will not be able to buy a home at the top of your price range. If you have $150,000 cash, or a bank says they’ll lend you the $150,000 to buy a home, should you go look at and bid on homes that are priced at $150,000?  Why would you? Chances are, there are at least 5 other people just like you that are interested in that same home, and at least one of them is likely to bid more than the asking price, and then you’re stuck. You’ve got nowhere to go.  The first part of the strategy involves looking at homes that are priced below your spending limit. This will get you into negotiations, and some wiggle room for when you get there.

     The second part of the strategy is to carefully balance the negotiations from this point. Remember the golden rule of pricing: a house is worth what someone is willing to pay the owner in cash.  If you’re paying cash, you can pay whatever you want. But, if you’re getting a loan, a problem can come up: you may be willing to pay the owner X, but the bank you’re borrowing the money from may not be. This is where the appraiser comes in. The appraiser’s job is to tell the bank if the house is worth the price you are offering. Remember those homes that sold from our previous example for between $125,000 and $137,000?  The appraiser will look at that data, and make a determination.  Can he tell the bank that the home is worth more than the current sold comparables indicate? Yes, he can, but only by a little. What is a safe range in this example? I personally would not advise a client to offer more than $140,000, and would advise them of the dangers of doing so.

     What is the danger? The danger is that the appraiser comes back with a figure of $138,500. Does the seller want the $140,000 you offered? Absolutely, but they can’t get it. You are under no obligation to pay what you offered, but unless the seller agrees to lower the price to the appraised value, the deal falls apart.

     So, when pricing your offer, look carefully with your agent at the comparable sales, and determine a safe range for your offer, keeping in mind the appraisal issue. If you’re paying cash, your strategy will be slightly different. If you are a cash buyer seeking guidance on your offers on investments, give us a call for alternate strategies.

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