LATimes – Nineteen months ago, the recession took Bob Walker’s job. Then, creditors lined up to take the three-bedroom hilltop home that the computer consultant shared with his wife, Stephanie, a playwright still looking for her first break.

Avoiding the stigma and financial fallout of foreclosure became an obsession for the Walkers. They talked to the banks, found multiple jobs, put their Silver Lake house on the market and tried to stitch together a plan to repay their debts. Finally, they turned to a short sale, chronicled in a popular blog: Love in the Time of Foreclosure.

“We really thought that, worst-case scenario, we will sell the house and break even,” Stephanie Walker said. “But it didn’t work. We went into great losses.”

In a short sale the lender lets a homeowner unload a house for less than what is owed on the mortgage. The transaction recognizes that the home isn’t worth what the owner paid for it after more than two years of falling real estate values.

Such deals are appealing to struggling homeowners because they escape weighty house debts — but they don’t get away unscathed. Their credit scores will be damaged, perhaps less severely than in foreclosure, but still badly enough to limit for years their ability to borrow money. There may be tax consequences. And any money invested through down payments and renovations will be lost.

Lenders, which can withhold approval of a short sale if they don’t like the price, have resisted such sales because they are difficult to execute, particularly when multiple creditors and other parties are involved. And short sales lock in losses that might be reduced if the sale is delayed until the market improves.

But that resistance is softening. With more Americans losing jobs and missing mortgage payments, banks and investors increasingly are agreeing to short sales as a less costly alternative to foreclosure.

Short sales approved by Fannie Mae and Freddie Mac, which own 57% of U.S. mortgages, nearly quadrupled in the first nine months of 2009 compared with the same period in 2008. At the nation’s largest mortgage servicers, short sales soared 165% to 74,513 in the first nine months of 2009 from the year-earlier period.

Short sales are still few compared with foreclosures, but policymakers are looking at such sales to shrink the number of bank-owned homes on the market.

Late last year, the Obama administration added incentives to get short sales done if a borrower is unable to qualify for a modified mortgage as part of the government’s $75-billion effort to help troubled homeowners. Starting in April, the government will pay incentives to lenders and borrowers when a sale is completed.

Many economists view short sales as a way to address a problem that mortgage relief hasn’t fixed: properties that are “under water,” carrying more debt than the home is worth.

“Making short sales easier would go a long way to freeing up the market,” said Richard Green, director of the Lusk Center for Real Estate. “Right now, if people are under water on their house, they are really stuck.”

Short sales remain difficult. Uncertainty over home prices makes properties hard to value, lenders are understaffed and multiple loans on a home can trip up negotiations among creditors.

The Walkers faced some of these challenges. The couple paid $799,000 for their home in 2006, taking out loans from Countrywide Financial Corp. and National City Corp.

They spent most of their savings and ran up big credit card balances to redo their kitchen and landscaping. Even with her husband’s $240,000 yearly salary, they were stretched thin making combined mortgage payments of $5,000 a month, Stephanie Walker said.

When Bob Walker’s consulting contract was canceled, the couple fell behind on their house payments. They found jobs but their income suffered.

They listed the home for $875,000 but found no buyers. A foreclosure notice arrived. They were offered a three-month payment reduction from Bank of America but couldn’t afford it. A short sale looked attractive.

One factor motivating banks to go along with short sales is that foreclosures typically cost more. Foreclosed properties often sit vacant, susceptible to damage from neglect or vandals. A study by Amherst Securities Group found that prime loans took an average loss of 45% in a foreclosure as opposed to 35% in a short sale.

“The bank or the investor is going to lose money on a short sale or a foreclosure,” said J.K. Huey, senior vice president of Wells Fargo Home Mortgage. “You don’t lose as much if you sell the property when it is occupied.”

Representatives of Wells Fargo & Co., JPMorgan Chase & Co. and Bank of America Corp. said their companies had assigned more employees to handle short sales. But the sheer volume of requests has made it difficult to keep up.

“I wouldn’t call it overwhelmed,” said Matt Vernon, the executive in charge of short sales and bank-owned properties for Bank of America Home Loans. “But the volume has certainly stressed our current process.”

Then there’s the problem of second mortgages, which have proved to be a thorny impediment to the housing recovery. The loans were widespread during the boom years as people tapped rising equity or financed a down payment.

Of the 1.2 million U.S. properties in foreclosure, about 34%, or 403,670, have a second loan, according to RealtyTrac. In California, with 280,023 properties in foreclosure, about 46%, or 128,800, have a second loan.

“Those junior liens make short sales much more difficult and they make modification much more difficult,” said Michael LaCour-Little, a finance professor at Cal State Fullerton who has studied the issue. The different banks “often have no incentive to cooperate.”

Sally Quinn’s second mortgage has complicated her short-sale attempts.

She is facing foreclosure on a Glendora town house that she bought as an investment property. Quinn said she has tried to arrange a short sale four times through her lenders, Bank of America and JPMorgan. Buyers, tired of waiting months for an answer from the banks, walked away on three occasions, and the banks rejected an offer from a fourth as too low, she said. She lined up a fifth buyer, she said, but BofA balked.

“It all came crashing down,” she said.

The Walkers also found the short-sale process to be emotionally wrenching. Weighed down with debt and fearful they would be pursued by the bank that held their second mortgage, they filed for bankruptcy protection last summer.

In her blog, Stephanie Walker wrote that the struggle helped them focus on what was important: their love for each other.

As the blog grew in popularity, Walker hosted online question-and-answer sessions and the couple were featured in media reports. The attention helped the Walkers secure a plan for the future. A reader hired them as caretakers of a home in Washington state’s San Juan Islands.

Last month, Walker retired the blog to focus on her next project, a baby due in July, posting: “I don’t want my life to be forever tied to our foreclosure story. It’s just time for me to move on.”

Hi Paul,

My soon to be Ex-Husband and I bought a home in December of 2008.  We are currently going through a divorce.  I chose to stay in the home with our children, after our seperation.  Now, several months later, I am unable to make the $2,200.00 Mortgage Payment on my own.  We have only owned the home for 1 year and our principal has only decreased by about $6,000 since we purchased it.  This leaves no room to pay a realator’s comission and the closing costs, even if we could get it to sell for the original purchase price.  To make matters worse, our neighborhood builder went bankrupt.  We now have a new builder.  The new homes that are being built are smaller, but also much cheaper.

I have almost maxed out my credit card, taken a loan out against my 401K and borrowed money from my parents, just to pay the mortgage by the end of each month.  I have not yet fallen behind by 30 days, but I am creaping much closer. 

My real estate agent suggested a short sale.  My credit is not super and I am very concerned that by doing a short sale, it will drop my score considerably.  I have three children to support and need to be able to find somewhere else to live.  I want to make sure that my decision is a sound one. 

My lender (Citi Mortgage)offered to lower my payments to $1,450 for twelve months and submit a loan modification request to FHA (I have a FHA Loan – 30 yrs fixed @ 6.25%).  However, Citi Mortgage would expect a baloon payment of $10,000 at the end of the 12 months.  I can’t afford to pay that kind of money.  If I was to request the Loan Modification, would I be allowed to put my home on the market? 

I am having a very hard time figuring out what to do.  I can’t afford to pay the Mortgage and am starting to drown in debt because of it.  Which of these options would you suggest, given my circumstances?  Loan Modification or a Short Sale?  Any advice that you can offer would be great!!

Thanks,
Renee (more…)

Has anyone ever hear of a collection Company coming after someone for a satisfied mortgage?

Last month I completed a short sale my house, the Bank, Chase Mortgage, received a fair price, they signed off on everything. At the time of sale and closing remaining balance, which was in writing, was $0.00, I owed nothing, I was free and clear.

Chase sent all the paperwork and the lien release to the title company and we closed, the new owner took possession, all was well. 3 weeks after the closing, I just received a notice from a company apparently representing Chase called LCS financial stating I owed just shy of $60,000.00!!!!

There was no paperwork or ANYTHING from Chase or the title company at closing that stated the loan was not satisfied. Is this a scam or has Chase sold the paper to some clown company who thinks they will receive a few bucks???

Any helpful info is appreciated.

Andrew (more…)

Hi Paul,

I’m just beginning the process of short sale, and have a buyer and contract, with verbal agreement of interest of both primary and secondary lenders to proceed. But now I’m looking into the whole “full release of liability” issue. I’m in Florida, which I understand is NOT a non-recourse state. So, I’m online searching for advise, and hopefully, some worded examples how to proceed.

I’ve learned a lot from what I’ve seen here (negotiation the “full release” and perhaps the credit agency “settled” language; but the concepts are still at a general level to me. Any (non-attorney) council for me? Or better yet, a resource where I can find the language for the “full release.”

My broker, who is a bit of specialist in short sales doesn’t seem to think this is necessary (which tells me he’s not the full specialist that I had hoped.) My deficiency amount will be $183k short of the $393k purchase price; and I don’t want this coming back on me.

Thanks for all your help

Don (more…)

Sorry I haven’t been posting with the vigor of days of yore.  I’ll try to improve on that.  But in the meantime, I thought this conversation I had with a Florida bankruptcy attorney one late night a few months ago was interesting.  The names have been changed to protect the innocent.  And now for the question: should I do a short sale if I’ve already filed for bankruptcy? (more…)

My husband and I are in the process of short-selling our home.  My husband and I are both real estate agents (but I just help out with office work) and the broker of our office is negotiating the short sale. 

My husband was in an accident about 18mths ago and spent many months in the hospital and in and outpatient therapy.  By God’s grace he has recovered and is now able to work.  However, the economy and market on top of his time off of work (I was not able to work either as we have small children and I had to be with him in the hospital and take him to therapy as well. 

After cashing out IRA,s and selling whatever personal items we could – and with very little income as he started back in real estate, we finally made the decision to do the short sale.  We now have a contract submitted to the bank and are awaiting approval.

I have these questions:

1) What can our broker do in negotiating to help ensure a better outcome for us – actually our 1st will not be a short sale – just the second.  Our loan is with Wells Fargo and we live in the state of GA (the 2nd is a home equity line, but it was used in initally purchasing the home – we have never refinanced since we lived here – bought in 2005).

2) What can we expect our repercussions to be from the short sale?

3)HOw long will it be before we can buy another home – we have heard conflicting answers from different lenders. We are currently 60+ days behind on our first and second.

4) any other info you can give that you think is necessary in negotiating short sales?  My husband is currently helping some others try and short sell their homes ans well and absolutely does not want to lead anyone astray.

 I appreciate any info you may be able to give.  It is very difficult to find definitive answers – especially applicable to our state regarding short sales.

THanks so much.

Christina (more…)

I have a Satisfaction of Mortgage recorded in Palm Beach Florida by MERS in conjunction with a short sale of my property. The language reads as follows:

Know all men by these presents: MERS is the owner of and holder of a certain mortgage deed executed by My_Name to MERS bearing Date 01/01/2005 recorded on 01/13/2005 in Official Records Book OR XXX234, Page 999, Instrument # XXX2228899 in the office of the Clerk of the Circuit Court of Palm Beach County State of Florida, securing a certain note in the principal sum of $300,000.00 Dollars, and certain promises and obligations set forth in said mortgage deed, upon the property situated in said State and County hereby acknowledge full payment and satisfaction of said note and mortgage deed, and surrenders the same as canceled, and hereby directs the Clerk of the said Circuit Court to cancel the same of record.

Witnessed sealed notarized etc. and recorded.

Is this a release of my note as well as the mortgage? I have no cancelled note, and have not yet received a 1099C from my “lender”. They reserved the right to pursue a deficiency judgement in their short sale letter. This sure looks like MERS recorded the note as paid in full and satisfied along with the mortgage.

Thanks
Jeff (more…)

DSNews – The Treasury Department announced this month that it is close to finalizing a widened incentive program to entice lenders and servicers to rely more on short sales as an alternative to foreclosure.

That prospect – and the high costs of the foreclosure process – are two reasons government regulators are pushing short sales, in which defaulting homes are sold for less than the outstanding mortgage balance. Because the homes are sold for what the market will bear, the new owner is less likely to get “underwater,” owing more than the mortgage is worth. That’s a key predictor of a borrower’s likelihood to default.

“What they are trying to do is move some of these foreclosures in the pipeline, and bring them to a resolution before (foreclosure) happens,” Lisa Marquis Jackson of the California-based John Burns Real Estate Consulting told Reuters this week. “Twelve percent of these being modified isn’t enough to clean these up.”

Even short sales come at a cost, however. Realtors complain that lenders are prickly in short sale negotiations, often taking half a year to close them. Longer administrative delays raise the likelihood of a prospective buyer losing interest in a deal.

Under the upcoming Treasury plan, as much as $10 billion of government funds dedicated for loan modifications will be used to give lenders catch-up payments, to assuage their fears that property values could continue to fall.

The payments still have to be worked out, but one Treasury proposal has been to offer lenders $1,000 for going along with a short sale, and the same amount for deed-in-lieu transactions with similar results.

Borrowers also would be in line for incentives – possibly $1,500 in closing fees – for agreeing to a short sale or deed-in-lieu. Second lien holders could receive nearly as much – $1,000 – for signing away any claims in those sales, the Treasury said.

“Presumably, the Treasury is trying to help facilitate a transaction that will result in less loss to the lender than in the case of a foreclosure,” the California-based John Burns Real Estate Consulting said in a recent research note that reacted to the news.

That program – part of an initiative unveiled in May – expands on the Obama administration’s Home Affordable Modification Program, which has had a mixed record in mitigating housing losses in the U.S. economic downturn. Of the scores of troubled homeowners eligible for loan modifications under the program, only 12 percent have received refinances, according to Treasury figures.

Scant modifications have contributed to an avalanche of foreclosure filings, unleashing a flow of repossessed housing in “shadow inventories” – a property glut that could drive home prices down and threaten the market’s recent modest gains. As DS News previously reported, some analysts estimate that shadow inventory could rise as high as 7 million units, foreshadowing a new housing crash.

Hi Paul. 

My ex-husband and I purchased a 2 acre lot and and new manufactured house about 6 years ago.  We are both on the mortgage.  We filed bankruptcy and got divorced a couple years ago. 

When we got divorced, he stayed in the home.  the mortgage was not reaffirmed in the bankruptcy.  Since then, I have gotten remarried. 

My ex is now 3 months behind on the mortgage and is in the process of moving out.  Since i am on the loan, wells-fargo is working with me and has offered a loan modification. 

My ex has decided that he doesnt want us to move in to the house and I suspect he is going to try to short sale it behind my back.  The property is in a very distressed condition (his doing) and now is worth way less than the loan amount.  Can he do that if I dont agree to it? 

If I am willing and able to make the payments (which I am), can he prevent me from doing so?  I really dont want to lose the house and we are willing to rehab the property.  We would like to live there long term. 

Any advice would be a blessing.  Thanks!!!

Patti (more…)

I am estimating I am upside down $30-40k in a 2004 RV with low miles. I have about $30k in CC debt. I own no home. I have good credit and have never been late on rv payment.

Will they consider a short sale if I have a bit of a nest egg in my SEP account? It is my only retirment.

Jen (more…)