Welcome to my blog. Here you find current information about new topics in real estate law. Should you have a suggestion for a topic you would like me to cover, please e-mail me and I will try to cover it at some point in time. I look forward to receiving your feedback!
The so-called "short sale" is a much talked about solution to a financially distressed seller's woes. This occurs when a buyer enters into a purchase contract with the seller at a price which is less than the existing balance of the mortgage. In a period of plummeting property values, this is often the only way to get a property sold, particularly where it has been purchased or refinanced in recent years when appraised values and, therefore, mortgages, were at an all-time high. In order for such a deal to close, however, the lender's approval must be obtained because the essence of the transaction is that it is being asked to accept less than it is owed to retire the debt and also to waive its right to sue the borrower (seller) for the loss.
Why would a lender accept such an arrangement? There are a number of reasons, especially in hard economic times like those we are currently experiencing. For one, the lender is usually being relieved of the burden of a non-performing loan (typically, the borrower has previously stopped making payments) which is secured by an asset which is worth substantially less than it was when the loan was originated. For another, to reject such an offer and, instead, march through the foreclosure process is time-consuming and expensive. Finally, just because the law allows a lender to sue a borrower for the amount it is short (the "deficiency"), that doesn't mean that the lender will ever see the money or see it soon.
So, if lenders have all these good reasons to approve short sales and to do so more expeditiously, why is it that an estimated two thirds of the contracts submitted to lenders for approval fail to close? There are actually a number of possibilities. The lender deems the offer to be too low. Or the purchaser not qualified for replacement financing. Or the seller/borrower not sufficiently financially distressed. Maybe there's a home equity loan on the property which the short sale will wipe out and that lender won't co-operate. There is also, many observers suspect, a problem with the compensation system under which the loan servicers who are much more often dealt with than the actual lender are paid. The allegation is that it provides more incentive to the servicers to take the property to foreclosure than to negotiate a short sale solution.
But probably the most frequently encountered problem of all is simply the slow pace at which lending institutions and/or loan servicers process requests for short sale approval. It can take 1-2 months to get a response and 3-4 months to close when approved, sometimes longer. By then, the buyer is likely long gone and the deal has fallen through.
So, what's the lesson here? Two things. First, contact your lender or loan servicer's loss mitigation department when you decide to sell your property and request information about it's short sale policy. That way you will be ready to move forward immediately when you find an acceptable buyer since the process starts with submission of a package of documents required by the lender, including a hardship letter from the seller/borrower, income and asset information and you can have collected those ahead of time. Second, tell your buyer up front what to expect and keep him or her informed. The more realistic a buyer's expectations, the more likely he or she will be there at the closing.
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This week the Obama administration announced the details of its plan to help resolve the foreclosure crisis in which the country is engulfed. As I mentioned in an earlier posting, in Illinois alone, foreclosures were up 85% in 2008 over 2007 and there were 14,000 new filing in January of this year. Realtrak estimates that there have been well over 1,000,000 properties in foreclosure already nationwide and none of the experts think that the problem has peaked yet. Nationwide, approximately 20% of the properties with a mortgage are "underwater," i.e., they are worth less than the amount of the mortgage! How long will it be before people start walking way from such properties? Clearly, the Obama plan won't solve this problem, nor is it intended to do so. In fact, it doesn't offer any help at all for the million or so households that are already enmeshed in the foreclosure process. These folks are left to their own devices which do, however, include such realistic prospects as short sales and loan modifications of various sorts. Who does the plan intend to help?
Basically, two classes of homeowners - and that's the first thing to notice. Investor owners are out of luck. One group of owners that the government intends to help is comprised of folks whose home is slighlty underwater (it's value is now no more that 105% of the amount of its mortgage), and who are doing their best to make their payments and have either been successfully doing so or, perhaps, have slipped a couple of payments behind (for foreclosure purposes, lenders typically tend not to take notice of a borrower until he or she is a couple of payments behind). To these borrowers, the program offers the prospect of a refinance of an existing mortgage on market terms, one resulting in a monthly payment low enough to enable them to continue living in the home (because current rates are lower than they were in the past). One should note, however, that the property may still be worth less than the amount of the debt.
The other class of homeowners who are intended beneficiaries of the Obama plan are those who are in default or in danger of imminent default because of loss of employment or of the imminent likelihood of an increased interest rate on the existing mortgage. The point is to keep these people out of foreclosure and in their homes and the remedy offered is modification of their existing mortgages based on a monthly payment to income ration that doesn't exceed 31%.
As you might assume, there are a lot of fine points as to who qualifies and what they qualify for. More detailed information is available online at www.fanniemae.com/homeaffordable, www.freddiemac.com/avoidforeclosure and www.financialstability.gov.
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About two weeks ago, President Obama announced some of the details of his mortgage relief plan, known as the Homeowner Stability Initiative (HSI). The regulations governing its implementation will be released on March 4.
What we know so far is that 75 billion dollars of the bailout money that was authorized by congress last year has been allocated to the Homeowner Stability Initiative. Two categories of homeowners have been specifically targeted: 1) those who are on the verge of foreclosure and 2) those whose homes are presently underwater, that is, worth less than the amount of the mortgage. The program is intended to help up to 9 million homeowners stay in their homes by lowering their mortgage payment so that it doesn't exceed 31% of monthly income.
Those who are nearing foreclosure need not have actually missed any payments to participate in the program although having missed payments will not count against you. Who will be eligible and how the payment reduction will be achieved will presumably be made clear when the regulations are published on March 4. Homeowners whose properties are underwater (that is, where the property is worth less than the debt) will be similarly assisted. The number of homes which have become worth less than the amount owed on them is hugh and growing. Moodyseconomy.com recently reported that 27% of all homes with mortgages, that is, 13.8 million out of 52 million, are underwater!
These numbers are truly staggering. How long will it be before people start walking away from properties with negative equity? Many experts believe that this problem will not be solved until existing mortgage balances are written down to a level which realistically reflects the property's current market value. Don't hold your breath.
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I am a real estate attorney and broker ijust north of Chicago. In the coming months, I will be blogging about a variety of real estate-related topics, some of which I hope you will suggest. For starters, though, it's hard to think of a more compelling topic than the foreclosure crisis that is engulfing us. Spawned by the reckless, sometimes fraudulent, lending practices and massive job layoffs of recent years, residential foreclosures have reached astonishing levels. In Illinois last year, foreclosures were up 85% over the previous year! This year, in January alone there were over 14,000 new filings. At the same time, the home sales market has tanked and market values dropped to below the amount owed on many homes.
What advice can a lawyer give a homeowner in such a market? First, realize that, in Illinois, foreclosure is not a quick process. It is a lawsuit that will take close to a year from beginning to end and the beginning isn't usually until about three months after you stop making your payments. So there's no need to panic. There's time to consult an attorney and develop a plan of action.
Second, remember that your lender does NOT want to own your property. It is in the money lending business, not the property ownership and management business. For one thing, it has to contend with the real possibility that your property is worth less than the amount of it's loan (that's called being underwater). Even if it isn't, if you lender has to go all the way to a foreclosure sale it will typically have lost 30-40% of the amount of the loan in expenses and unpaid interest. It has a lot of incentive to work with you, not against you. So, just because a foreclosure action is filed against you, don't assume that the battle is over.
How will your lender work with you? Traditionally, the alternatives ranged from postponing payments for a while to accepting a "short sale," which is when a buyer is found at a price which is lower than the amount owed. Just last week, President Obama introduced some new possibilities aimed at keeping qualified homeowners in their homes.
I will be posting a new blog entry weekly. In the coming weeks, I will work my way through the topics touched on above. Next week, the Obama plan, after that "short sales," then other possible arrangements with your lender. At some point, I'll post a more detailed overview of the foreclosure process itself so you will have a better idea of the time frames involved.
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