DROdio Real Estate

You have to admit, the current economic landscape makes it difficult for everyone, even the banks although you may not see it that way.  So what do you do if you've come upon hard times and you're no longer able to make your mortgage payment?  Do you sell your home?  But what if you owe more than the home is worth?This is the case for most people who bought within the last few years.  Housing values are falling, payments are rising along with the cost of living in almost every imaginable area.So what's a desperate homeowner to do?  Well, don't look to the bank to give straight forward answers, as they would in a perfect world rather you cough up the money and pay as agreed, even if current situations are less than perfect.Here are 4 tips you can look into with your lender in order to avert a foreclosure:Short SaleWhat Is A Short Sale?If a homeowner cannot keep up with their loan payments, they ask the lender to forgive a portion of the loan and allow the homeowner to sell the home for less than what is owed.  This is actually a good deal for the bank as they tend to lose on average 19% in a short sale and upwards of 40% if they go into foreclosure.The current climate in the market is as such that the bank would rather get their money however they can, but they want you to do it as you originally agreed.  Quite simply, make the payments.  But lenders are taking their time in evaluating short sale requests which waste more time and  money for them and heartache for the borrower.  The following details a typical situation experienced by homeowners waiting on decision to be made on a short sale offer:

John Fitzmorris, a short-sale expediter in East Stroudsburg, Pa., was working with Robson and Laura Pereira, who were behind on their mortgage."She worked, but he had a construction business that went defunct," said Fitzmorris. "That put them in trouble."Falling home prices in the area made a normal sale impossible; the couple was upside-down in their mortgage, owing more on the property than it was worth on the current market.After they fell behind on their payments, Laura Pereira said, her bank, HSBC (HBC), sent her a letter asking her to call for help. "I called them four or five times and they never got back to me," she said. "We had three [short sale] offers on the house at the time." Later, the loan was sold to First American.Fitzmorris, who has been doing short sales for more than 20 years, contacted First American (FAF, Fortune 500) about a short sale well before the foreclosure date.But after three months, the bank still hadn't approved the short sale, and the Pereira's property went to sheriff's sale. (First American declined to comment on specific cases.)"The offer we sent to the bank was $129,500," said Fitzmorris. "But another investor, TM Builders, bought the property at the sheriff's sale for $100,265."In the end, the bank lost $60,000 on the loan, when it could have lost $30,000 by doing a short sale.Ironically, TM Builders flipped the home to Fitzmorris's buyer for the $129,500 short-sale price, money the bank would have gotten had it acted more quickly."The sellers did what they could to mitigate the problem but the bank didn't respond, which hurt both the sellers - with an unnecessary foreclosure permanently impacting their credit - and the bank," said Fitzmorris.

Call your lender and ask about a short sale package which details the process of the short sale, what it would entail and their requirements.  Believe it or not, lenders are more amenable to short sales given the current climate, even though they are slow to approve such a deal.In California, homeowners are giving up and walking away from their homes and often times the bank has no recourse due to the laws around mortgage debt there.  So envision this as doing the bank a favor, as you're being upfront about what you need to remedy the situation and in this way the bank avoids having to take over the property, pay taxes, Realtor fees and maintenance which further cuts into their profit, if any.Keep in mind that the following reasons prevent the bank from acting quickly on approving a request for a short sale:

•  Mortgages are pooled and securitized making it difficult to get approval to change the terms  on a loan as it is often difficult to determine who owns the note
• Given the volume  of foreclosures and owners falling behind on their loans, this makes it difficult for servicers to keep up with the requests  for short sales

By all means, remain vigilant and persistent in your efforts to settle the debt.Loan ModificationA loan modification involves changes made to the loan which allow it to be reinstated under terms which allow the borrower to afford the mortgage payment.  In many cases this involves changing the interest rate and/or the term of the loan.  This works in cases where the borrower signed on for an exploding ARM which increases every 3, 6, 12 months or as specified on their agreement.If your lender doesn't readily offer such options housing organizations such as ACORN and NACA have programs in place to negotiate on behalf of the borrower with the lender.  Be prepared to find and list your financial information as this needed to make your case to the lender.Loan ExtensionA Loan Extension involves the bank suspending your mortgage payments for a certain period of time, typically three months of every 12 month cycle.  The amount that is unpaid during this time is  put at the end of the loan and is due at the end of the loan term.This may be helpful to those borrowers going through hard financial times and expect it to only last for a short time while they reorganize their finances.Principal Write DownA Principal Write Down means the bank will refinance the loan down to the current market value.  For example, if you owe $500,000 on a home that is worth $400,000 the bank may be willing to write down the balance owed on the mortgage to an amount closes to the  current market value of the home.This lowers the amount the borrower owes while also decreasing their monthly payment as the payment will now be based on the adjusted amount owed.  This is a rather popular option since many homes were overpriced in the market upswing a few years ago and the current situation is part of a market a correction.  Still, with elements known to most as the "perfect financial storm"->(rising gas prices, cost of living increases, high unemployment rate, companies going out of business), a principal write down is a welcomed solution as most want to keep their home even with the current economic downturn.Keep in mind none of these options are guaranteed.  You will need to be vigilant around understanding what options are available to you through your lender, nonprofit organizations and new laws being passed to remedy the current housing situation.  An informed homeowner is a smart homeowner, which one are you?

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What is a Tax Lien and How Do They Work?A tax lien is a lien placed upon a property due to nonpayment of property and/or personal taxes.   They move with the property and not with the owner.  Therefore, if you purchase a home with an tax lien, that lien now becomes your responsibility.  Keep in mind that depending on your state, the tax lien can also become the owner's personal responsibility.How Does It Work? When a property owner becomes delinquent on their property taxes a lien is placed on the home by the state or local county government .  The tax debt is then sold to another party who then holds the lien until the debt is paid.  The homeowner has a certain amount of time as determined by their county to pay the property taxes.In DC, this is usually up to the time of a court-ordered foreclosure to pay the debts and redeem the property.  If the owner forks up the cash for the property then they will be able to redeem the property and the third party will be reimbursed plus interest and any other costs associated with the lien.  If the homeowner fail to pay the delinquent tax lien, then they lose the property to the party who holds the tax lien.Smart Move or Risk?This depends on your perspective and personal situation, as with most deals involving money there's a certain level of risk associated depending on the variables involved.Risks

• Your investment will be tied up until the homeowner decides to pay the delinquent debt.  In other words the sale is final until the house goes into foreclosure.  Therefore it is to your advantage not to use money that you will need for emergencies or that you cannot afford to do without for a period of time.
• If the property owner goes bankrupt then it will take you that much longer to see a return on your investment.  And, eventhough you may hold the tax lien, you run the risk of the IRS and other creditors being satisfied first.
• More than likely if the owner cannotpay their back taxes, they can'tafford to maintain the upkeep of the home.  Some tex lien investors find that once they get in o n a property, it will be costly to get the property up to par in order to be sold.  Research is key.
• Attending a tax lien certificate requires time and money on travel, lodging food etc.  The biggest risk is spending money to attend auctions and come away with not buying a tax lien certificate at all.  In order to determine your real return on investment on must include the time and money spent acquiring the tax liens.

Benefits

• Foreclosure.  If you go into foreclosure with the property, and you hold the first lien, you're in first place to be paid upon sale of the property but perhaps at a loss of market value.  Still you come out on top with your investment plus interest.
• It is possible that a homeowner will let the property lapse due to current economic conditions.  That is, they do not pay taxes needed to redeem the property and they abandon the property altogether.

Tips

• As mentioned above, stay close to home when beginning your search as travel expenses can get high and cut into your ROI
• Research, Research Research!  Make sure that you get all needed information before making a bid so that you will be making an informed decision.  We know that the possibility of netting a high ROI is exciting but go into the process knowing as much as you can about a particular property.
• Get comparables in the property you intend to buy
• Be sure to conduct a thorough inspection of the property noting the construction, condition, age and landscape.  Is this a property that will need work if the home lapses and goes into foreclosure?  Are you prepard to just buy the deed or will you be investing more of your own capital?  These are all questions to anwer or consider prior to bidding on a home.
• Begin your search in your home state to minimize the expenses acquired in the pursuit of tax lien certificates.  If you state does not sell tax lien certificates then start with the states closest to you and then move outward.  Money spent in this area should be minimal in order to maximize the return on your investment.

Impact  on the DC MarketOn July 1, 2008, the  Office of Tax and Revenue (OTR) mailed 6,500 notices of property tax delinquency  to property owners informing them of outstanding real property taxes to be paid before July 31, 2008 or else their properties will be sold at the September 17, 2008 Tax Lien sale.  For you this means more opportunities to purchase a tax lien that may become yours if the home owner doesn't pay the delinquent debt.Still take into the consideration the risks and benefits, then decide if investing in tax liens align with your investment goals.

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Some of you may be wondering what happened to the PMI companies with the recent market downturn. After all, aren't some buyers paying PMI to insure the lender in the event of a default? Where are they now? Why are so many lenders going out of business if homeowners have already paid for a policy covering such events.Let's explain why:PMI (Private Mortgage Insurance) only covers up to 20% of the purchase price of the home. This means that if a home was purchased for $500,000, then the PMI policy value is $100,000. Once the homeowner defaults and goes into foreclosure, the bank files a claim for the policy value and is left with the remaining debt to sell in a short sale or REO.With recent foreclosures due to millions of homeowners defaulting on loans, PMI companies have black balled the following states:  California, Nevada Arizona Florida, Ohio and Michigan. This would make sense since they are among the worst hit foreclosure states. As a result, many PMI companies are pulling out of the market as in some states, more foreclosures were filed than homes sold, which isn't a good indicator with regards to market profitability.This has made it difficult to finance a home where the contract does not include a 20% downpayment by the borrower.  Again, this is due to so many PMI companies pulling isntout of the market and/or charging higher PMI premiums.  However, an option is to obtain a FHA loan where only 3% down is required.  This way you can still put down a lower downpayment and have the backing of a FHA loan.In the event of a foreclosure, the loan is backed by the government.  However, with the recent wave of foreclosures, Fannie Mae and Freddie Mac are rumored to be in trouble themselves.  But never fear, Uncle Sam will save the day.  This means for consumers, market stabilization due to increased consumer confidence in the backbone of the mortgage industry.

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By now you've heard about the Fannie, Freddie and IndyMac crisis and probably wondering what this means for you?  After all, if you're in the market to buy a home, own a home, or have money in the bank you're at the very least concerned.  The viability of Fannie Mae and Freddie Mae, the nations largest holder of mortgage backed securities was at risk due to the US mortgage crisis prompting the federal government to step in.  IndyMac falling along the same lines also prompting government involvement led to IndyMac's closure and subsequent receivership by the FDIC.  Significant news, we know.By now you've got questions, well we've got some answers.I Own A Home, What Does This mean For My Home Value?Given that Fannie and Freddie Mac hold about 5.3 trillion of the mortgage debt, the efforts put forth by the government to shore up these two entities is a positive move in the long run.  By giving them a level of stability needed in today's economy, housing prices may stabilize as a result of this move.  Why?  They hold almost half of the mortgage debt held in the United States and therefore they are critical to keeping the mortgage industry on its feet.But I'm In The Market To Buy A Home, What Does This Mean For Me? If you're in the market to buy a home you can rest easy.  By the federal government stepping in, this eases fears around any collapses as it relates to Fannie Mae or Freddie Mac.  These two companies back almost half of the mortgage debt and keeping them afloat only serves to help current and potential homeowners in the long run.  This gives consumers the needed confidence to stay in the market which gives the economy a needed boost.Is My Money Safe?Is it under $100,000?  If so, then yes.   However, if you have more than $100,000 in an account then you should make sure that it is insured as the FDIC only insures accounts up to the $100,000 mark, $250,000 for IRA accounts.  The market here in the DC Metro area makes it such that down payments over $100,000 on homes wouldn't be at all uncommon.With the current IndyMac situation, it's been stated in various news media sources that the FDIC will cover up to 50% of uninsured balances but account holders shouldn't hold their breath waiting for their money.  The lesson here is that maintaining accounts over the $100,000 mark without insurance is akin to driving without a seat belt.  Catastrophe ahead.For those of you with uninsured accounts over the FDIC's insured limits may wish to check this website for more information.  Keep in mind you will need to check with the institutions for current rates and information.

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We asked to Blake, VAR's associate counsel, a question about mold remediation work we had done for a bank-owned listing of ours:

We are listing a bank foreclosure property on which mold remediation work was completed.  We have disclosed our knowledge of mold and the remediation steps which were taken to all agents who inquired about the property.  We now have a ratified contract and the selling agent is requesting our mold remediation report which we had declined, citing the bank protocol which is that we are not to send out any inspection reports or work invoices/estimates to external agents outside of our firm and outside of the bank.  How far reaching is our responsibility of disclosure - are we required to provide the report to the selling agent or is our current level of disclosure enough?  Also, since this is a bank foreclosure are they exempt from disclosure.  Also, the buyers have signed a water damage, toxic mold and environmental indemnification agreement.   

And he wrote back:

You indicated below that the mold remediation is complete.  If it was done satisfactorily you don't have to disclose it.  The law doesn't require listing agents to dislcose repair history, only current material adverse facts pertaining to the physcial condition of the property.    

FYI, if you do have a disclosure obligation you don't have to provide reports - reports are proprietary and there is no requirement that you provide them. 

Lenders who take property back in foreclosure are exempt from the obligation to give a disclosure statement.  Section 55-518(2) exempts “transfers by a beneficiary under a deed of trust who has acquired the real property at a sale conducted pursuant to a foreclosure sale under a deed of trust or has acquired the real property by a deed in lieu of foreclosure.”  This makes sense.  The lender would have no better knowledge of the property than the trustee in foreclosure would, but even if it did, buyers of REO typically understand they’re buying what the lender has.  

FYI, no seller in Virginia is obligated to make disclosures about property condition, except as to lead paint and as required by the Residential Property Disclosure Act (in this case, you are exempt). 

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