10 Options for Sellers facing Foreclosure

Labirinth

Understanding the different options a seller may be considering is important when negotiating.  Here are 10 of the most common options for sellers in default or anticipating being in default.

1. Reinstatement of Loan (Cure): Paying the lender everything that is owed in one lump sum including missed payments, any late fees associated with these payments, foreclosure fees, legal fees and the principal owed during the delinquency. A cure may involve the seller curing or deeding it to the investor “subject to” the existing loans, and the investor will then cure.  Risk to the seller includes that the lender may accelerate the loan because of the due-on-sale clause, the seller no longer owns the property and the seller has no recourse if the investor doesn’t pay the loans.

2. Repayment Plan: A written agreement between the lender and the homeowner. These plans require higher payments than the regular monthly mortgage amount for a period of time until the loan is brought up-to-date.

3. Loan Modification: Involves changing one or more terms of a mortgage. Modifications may be considered to reduce the interest rate of the mortgage, change the mortgage product (i.e., from an adjustable rate to a fixed rate), extend the term of the mortgage or capitalize delinquent payments (add delinquent payments to the mortgage balance-only available in extreme hardship situations). Modifications are NOT easily granted and there must be strong, justifiable reasons for the request.

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Lenders Repossessing Homes at Record Levels

House

Lenders have been repossessing homes at record levels in the first half of 2010 according to RealtyTrac.  Let’s hope banks are focused on  regulating these properties to protect market values from deteriorating even further!

Here in North Carolina, REO sales accounted for almost 15% of all sales so far this year with an average discount of about 25% off market value.

Nationally, REO sales represent 31% of all home sales!  Short sales accounted for about another 12%. Those two categories together account for almost half of all homes sold nationally!

What does this mean to the average homeowner trying to sell their property today?  Well, there are a lot of cheap properties for sale and you’ll probably have to take less than you feel your home is worth to get it sold.  If you have to move now, you may want to consider renting out your property until the market changes so you won’t have to take a significant loss with today’s competitive pricing market. I know people worry about renters messing up the property, but if you’re looking at a potential increase of $30,000 to $40,000 in the next few years, that additional income to you would buy a lot of paint and carpet!

Nationally, the average REO discount is reported to be about 34% while the average work out or short sale discount is about 15%. According to these numbers, as a seller you may want to get a discount to be able to sell your property but, as a buyer you may get a better price if you can buy the property after it has foreclosed.

RealtyTrac also announced that foreclosures were up 2500% from 2005 to 2009! Nevada, California and Arizona continue to post the highest percentage of foreclosure sales. Interestingly, Ohio, Kentucky and  Illinois post the highest percentage of foreclosure discount.

Is your house in the foreclosure process? What are you doing about it? Have you decided to let it proceed? Are you trying a workout? Are you thinking about walking away?

Leave your comment here so we can help with your efforts and decision making process.

Short Sale vs. Foreclosure – how does it impact you?

Lenders

Did you know:

Time lenders typically require to repurchase a home:
Short sale: 3 years
Foreclosure: 5-7 years

Points drop in credit score
Short sale: 50-130
Foreclosure: 200-400

Buying again after a short sale

If your payments have never fallen behind 30 days late and the lender does not require that you pay back the loan, Fannie Mae guidelines may allow you to buy another home immediately. The wait for an FHA loan is 3 years.

If your payments are in arrears yet a short sale is granted by your lender, you may qualify to buy another home with a Fannie-Mae backed mortgage within two years, regardless of whether the home is your primary residence.

Buying Again After a Foreclosure

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Short Sales – The Mortgage Forgiveness Debt Relief Act

Mortgage relief

If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.

In US law, when a lender decides to forgive all or a portion of a borrower’s debt and accept less, the forgiven amount is considered income for the borrower and is liable to be taxed.

Have you done a workout on your home loan?  Have you had any of your mortgage forgiven?  If so, law states you would be taxed on the amount of the forgiveness.  Debt that is forgiven or canceled by a lender must be included as income on your tax return and is taxable.

However, the Mortgage Debt Relief Act of 2007 allows some debt to be forgiven.  If your mortgage debt is partly or entirely forgiven during tax years 2007 through 2012, mortgage restructuring, even mortgage debt forgiven due to foreclosure, may be forgiven from your income. Up to $2 million dollars of debt, $1 million if married filing separately,  may be excluded on your principal residence.

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Mortgage Resets – Here comes the next wave

Mortgage Resets

I know everyone really wants to believe the housing market is going to get better in 2010. I know we’ve all had enough of the gloom and doom, but it appears we have to brace ourselves for more of the same, at best.

We’re so used to turning the channel when we get bored with what’s on. We expect to drive up to the window and have our food ready. We swallow a pill in anticipation of instant headache relief.

But, from the looks of this graph, we’re going to be in this one for a while.

From the graph, you can see the first wave that’s already passed, the grey wave.  It peaked mid ’07 then again in January ’09.  Those were the sub-prime loans resetting that put us into the tailspin we’re just now trying to come out of.

The next, and far more layered wave is just beginning to form.  You can see the dotted line where it began in January 2010.  It is 4 layers deep – the grey sub-primes, the red prime loans, the blue Alt A’s and the yellow Option Arms.  Everything peaks mid year 2011.

Add to that all the “shadow inventory” the banks have taken back and are still holding that some people say is more than they’ve already released.  Hang on, boys and girls, it’s going to be a bumpy ride.

It’s better to know ahead of time to be prepared. Stop spending. Save what you can, when you can. Scale back, downsize, reuse, recycle.

The real estate market will come back strong. It always does. We’ll just have to be patient a while longer.

So, what’s the good news?  There’s never been a better time to invest in real estate.

If you live in the Triad area of North Carolina, we’d love to help you with your investing.  Check out our Triad Master Mind. It’s a great group of local investors and we’re all working together to help each other profit through real estate.

Don’t wait to invest, invest and wait!  Huge returns will be there to reap in your future.

Happy investing!

Top 10 States for Foreclosure

US Map

  1. Nevada – in the third quarter of 2009, more than one in every 20 Nevada households went into foreclosure.
  2. Florida – had unrealistic appreciation for the last 4 years.
  3. California – claims many toxic loans to non-English speaking buyers.
  4. Arizona – is severely overbuilt – over 80,000 vacant homes in Phoenix alone.
  5. Idaho – unable to sustain their 20% appreciation every year from 2003-2006 combined with the current economy.
  6. Michigan – automotive related job losses.
  7. Illinois – received the third largest volume of foreclosure notices in the US
  8. Utah – in 2009, more than 42% of their sub-prime loans adjusted, the national average was 27.8%
  9. Maryland – officials are blaming exotic loans and balloon mortgages
  10. New Jersey

These state all had unsustainably high home prices and many buyers who really couldn’t afford the houses they were purchasing — most with toxic mortgages — followed by downturn-related unemployment. It was the perfect storm for a real estate collapse.

Unfortunately, foreclosures are not letting up.  RealtyTrac reports more than 300,000 U.S. properties received a foreclosure filing in November 2009 for the ninth straight month.

Produce the Note – pro-active steps when facing foreclosure

Are you in or facing foreclosure? To protect yourself and your property, ask your lender to produce your original mortgage note.

A request to produce the note requires the lender to prove it actually has the authority to foreclose on you.  The lender must officially produce the original promissory note, with your signature, in the lawsuit.

Your goal with this process is to make certain the institution foreclosing is, in fact, the owner of the note. There is only one original note for your mortgage that has your signature on it. This is the document that proves you owe the debt.

In the past few years, many mortgage notes have been sold and re-sold to other institutions and investment companies either individually or, more often, when bundled together as huge securitized packages on Wall Street. These sales were done so often and so quickly that, many times, proper documentation did not follow the exchanges resulting in the final institution who’s collecting the debt not having paperwork to verify their legal right to collect.  In fact, this happens about 1/2 the time!

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Foreclosure Upset Bid Refund – how do you get it?

Federal Courthouse

Have you ever bid at the courthouse on a foreclosed property? Was yours the original bid or was it an upset bid?

What is an “upset bid”?

At a foreclosure auction at the courthouse, once a highest bidder is determined, there is a 10 day period during which North Carolina allows someone willing to pay more to place a higher bid. They must raise the accepted bid by a minimum of 5% and include a cash deposit of 5% of their bid price.

If you are outbid or your bid is “upset”, the process begins again and another higher bidder has 10 days to make a better offer. If, after the 10 day upset period expires there are no higher bids, the person who placed the last highest bid wins the right to purchase for their bid price if it has been accepted by the seller.

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Mortgage Meltdown: the Risks of Walking Away

Guest Post – an REO Agent Perspective

Guest Post

I had many inquiries and comments in response to the post Foreclosures, More Profitable than Loan Modifications?

Unfortunately, they came to my email instead of being posted here on the blog where everyone could read them.  Please comment here on the post if you can!

Rick Godbee, Foreclosure Broker and Team Leader for ReMax Realty Consultants wrote an excellent email response.  I asked his permission to put it here as a “guest post” and he, fortunately, agreed.

Thank you, Rick.  Here is his letter:

I’ll try to explain some things that may help your column and your clients better understand a different perspective.

The bank doesn’t necessarily make money (on a foreclosure) because of the huge expense of managing the foreclosure.   I’ll mention a few:  Eviction attorney, Asset Manager salary, Real Estate Broker Commissions, yard maintenance, winterization and de-winterization, repairs necessary to make the home qualify for a future loan, utilities while marketing, seller Closing Attorney, Title Company and it goes on and on.  Don’t get me wrong, I’m not a bank advocate, but I also don’t believe they are the big monsters most paint them out to be.  I believe it is a rare case the bank makes any profit on the resale, especially since the properties are generally over financed, which is the bank’s fault in the first place.  But, they do get the write-off!!!

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