Cheryl Bowers, Plainfield, Naperville, IL. Real Estate

What is a Short Sale?

A short sale is a negotiated settlement. This is when the lender agrees to accept less than the amount owed as a payoff on a loan.

Why would my Lender want to allow a Short Sale to help me?

The reason is simple; a short sale often has a better return on investment to the lender than a foreclosure. The average savings a lender sees from a short sale property compared with a foreclosure property is $14,000. Not only does the lender receive this savings, they are also paid on the loan 6 months earlier than in the foreclosure process. This allows them to collect and cash-out earlier than they would in a foreclosure. Plus, lenders spend a great deal of money with attorneys to complete the foreclosure process. Lenders created the short sale process as a foreclosure alternative for those reasons. The incentives to perform a short sale on your property are in place to motivate you to participate.

When should I start my Short Sale?

It is best to begin a short sale when you realize you can no longer afford the mortgage, so that your property can be marketed properly and you can receive a high offer. The earlier you start, the higher our likelihood of success. We have negotiated short sales that have already gone to foreclosure sale. Contact Us to see if you have enough time.

How long does it take for you to complete the case once we fill out the paperwork?

Typical cases are completed within three months. If you have a foreclosure sale date approaching we can complete it sooner. In the past we have found buyers quickly and have used our relationship with the banks to push back your foreclosure sale date.

What is a Deed in Lieu?

A Deed in Lieu is when the property is deeded back to the lender with the approval of the borrower prior to foreclosure. (This process may still leave a negative impact on the borrower's credit.)

Why should a lien holder accept less than the outstanding debt?

After the lender does an appraisal on the property and discovers that the value is less than the payoff, the lender will decide if it is worth further legal actions and cost. A business decision is made to either continue foreclosure action or accept the short sale offer.

What is a Closing Statement?

A form used at closing that gives an account of the funds received and paid at closing, including the escrow deposits for taxes, hazard insurance, and mortgage insurance.

What is a Deed?

The legal document conveying title to a real property.

What is a Deed of Trust?

A deed of trust is an instrument used in many states in place of a mortgage. Property is transferred to a trustee by the borrower (trustor), in favor of the lender (beneficiary) and reconveyed upon payment in full.

What is Depreciation?

A loss of value in a real property brought about by age, physical deterioration, functional or economic obsolescence.

What is Loss Mitigation?

Loss Mitigation is a process to avoid foreclosure; the lender tries to help a borrower who has been unable to make loan payments and is in danger of defaulting on his or her loan.

What is a Loan Modification?

A mortgage modification is a loss mitigation option that allows a borrower to refinance and/or extend the term of the mortgage loan and reduce the monthly payments.

What is a Forbearance Plan?

A forbearance plan is a loss mitigation option where the lender arranges a revised repayment plan for the borrower that may include a temporary reduction or suspension of monthly loan payments.

What is an Offer on a property?

An offer is an indication by a potential buyer of a willingness to purchase a home at a specific price; generally put forth in writing.

How long is a Short Sale process?

Depending on the mortgage company and the state in which the home is located, a short sale process can take between 1-4 months.

What is the difference between a Satisfaction of a Lien vs. a Release?

A satisfaction is a total release from the debt owed. A release is when the lender releases the lien from the property to allow the home to be sold. (The borrower may still be required to repay the balance of the debt.)

How does a foreclosure and a short sale show up on my credit?

Foreclosures show up as FORECLOSURE, and can stay on your record for seven years. Anytime you apply for a new loan or have your credit run, the foreclosure will show up and is usually a required disclosure you must make on most credit and job applications. A short sale is listed as SETTLED DEBT, and is much less harmful to your credit. Please consult a credit company for more information.

What liability do I have when doing a short sale?

In a short sale, it is possible the bank could 1099 you for the difference in what you sell your property for and what you owed. This means the IRS could consider the difference as income, and you could be taxed on that income. The bank might also ask you to pay a portion of the difference back in the form of an unsecured note, which is similar to an I.O.U. It is a negotiation, and we employ tactics to have the bank consider the debt settled.

In a foreclosure, your house is sold at an auction, which typically causes the difference of the total amount you owe and the foreclosure sale price to be much greater. This means you have a higher potential tax liability. Additionally, the bank may come after you for a Deficiency Judgment.

A successful short sale will eliminate a deficiency judgment, minimize your tax liability, and keep the foreclosure off your credit.

What is a Deficiency Judgment?

A Deficiency Judgment can arise when the bank sells the house at foreclosure auction. The bank can sell the house at auction for any amount less than the total amount owing of the debt plus fees. A deficiency judgment can arise if the bank sells the house for less than the mortgage debt. The lender then holds you responsible for the unpaid portion of the loan. For instance, if you owe $100,000 to the mortgage servicer and they see proceeds after the auction of $55,000, the remaining difference of $45,000 can be moved into a judgment against you. This will also appear on your credit report along with the foreclosure. The lender may be allowed to take further legal action such as garnishing wages to pursue payment based on the laws of your state. Some states have restrictions and regulations on deficiency judgments, but unfortunately the majority do not.

Some lenders will choose the deficiency judgment while others may pursue a path to write off the loan. If they choose to write off the loan, the lender may issue a 1099 form which you will have to pay taxes on for the calendar year. Recently, according to an MSNBC news article, President Bush announced plans to do away with this tax penalty. According to the same article, the Democrats said they support this plan. For more information on deficiency judgments and the tax liability you may face based on your current situation, submit your information to one of our analysts for a free consultation, and as always consult your attorney/tax advisor.

Do I need to give you power of attorney?

Has a sufficient amount of air been expelled from the deflating housing bubble to suggest that a bottom is in sight? No. But there may be a few nascent signs of recovery amid the housing rubble. Let's start with a remarkable chart that compares the Nasdaq bubble to the housing bubble (see "A Tale of Two Bubbles").

From peak to trough during the 2000-2002 bear market, the Nasdaq lost 78% of its value. From peak to trough during the recent housing bubble, homebuilding stocks lost ... yes, you guessed it ... 78%!

Assets down, liabilities up

Though housing's woes are at the root of most of today's economic evils, the stimuli underway-fiscal and monetary-can only go so far in healing the carnage the bursting housing bubble is inflicting on millions of homeowners. Housing's black hole is the epitome of asset price deflation; it is less a gross domestic product (GDP) phenomenon, other than in its ripple effects. A recession, if we're in one (as I suspect) or we enter one, isn't purely driven by housing, of course. And the data measured to define a recession, including GDP, sales, personal income, industrial production and employment (no, a recession is not defined simply as two quarters in a row of negative GDP), don't really reflect the carnage.

We're in the early stages of a process whereby the asset side of individual balance sheets is being marked down as the liability side is being marked up. This doesn't mean massive job losses or deteriorating incomes (typical of a recession). But the psychological impact can't be dismissed just because it doesn't hit traditional GDP measures.

Inventories too high for prices to fly

Let's start with the basics of supply and demand. When I first rang the alarm bells about pending doom for housing, it was based on growing inventories, unsustainable home price appreciation, ridiculous lending practices and accelerating securitizations. Have we worked off these excesses? Well, prices have certainly come down, as you can see in the chart below.

You'd think, with a plunge like that, inventory excess would have eased. It hasn't. Measured as months' supply, inventory remains just off an all-time high, while vacancy rates are in the stratosphere. Simple economics tells us that prices are unlikely to stabilize until inventories begin to get some downside traction.

Fed and Congress getting aggressive

Indeed, we are getting some marginal assistance via lower mortgage rates and rising affordability (thanks to lower rates and lower prices). And the stimulus package component that bumps up the conforming loan limits from $417,000 to about $730,000 means larger mortgages can now fetch lower rates and easier refinancing. On top of that, the Bush administration and lenders (including some of the nation's largest banks) unveiled a plan two weeks ago giving seriously delinquent borrowers a 30-day reprieve from foreclosure proceedings while they try to negotiate more affordable mortgage terms. Finally, the NAHB/Wells Fargo Housing Market Index just showed a five-year-high surge in traffic, aided by improving affordability. These are all good signs ... but possibly only at the margin.

There's likely still too much complacency about how bad things are, particularly in what had been highly speculative areas of the country. Those borrowers more severely impacted reside in areas where lending standards were the loosest and/or where the local economies were troubled. Tops on the list remain California and Nevada. For instance, about 60% of properties on the market in Las Vegas are in foreclosure. The same is true in parts of California: 46% of homes sold in Sacramento and 31% in San Diego were foreclosure sales in 2007, up dramatically from about 4% for each city a year earlier.²

Not just a subprime problem anymore

Delinquencies and foreclosures are not just a subprime problem. In fact, the statistics for prime mortgages are alarming. To date, over 36% of foreclosures started in this country are prime mortgages (about evenly divided between fixed- and adjustable-rate). That's certainly lower than the 55% that are subprime, but disquieting nonetheless. In fact, subprime "serious delinquencies" (loans 90 days or more past due plus loans in foreclosure) have not yet topped their 12% record set in 2001, but seriously delinquent loans overall are at a record of just under 3% of all mortgages outstanding. That's as a result of pressures up the spectrum to prime that are typically not so elevated during housing downturns.

There's also a record that needs to be set straight. Many assume that mortgage rate resets are driving the elevated readings among adjustable-rate mortgage (ARM) delinquencies and foreclosures, when in fact the majority remain at their teaser rates. In the meantime, the ARM reset story is only just now really kicking into gear. There was about $300 billion in ARM loans that reset in 2007, while that will jump to an estimated $500 billion in 2008. The heart of the problem here is solvency. The Federal Reserve can lower rates all it wants and Congress can drop dollar bills from the sky ... but the "cost" of money is one thing, while the "availability" of money is an entirely different thing. The latter is our bigger problem today.

Banks shutting their windows as real mortgage rates soar

Banks are becoming stingier with a loaned buck-and not just for subprime residential borrowers (for whom the lending window is effectively shut). Banks are tightening lending standards across the board for consumer, commercial and industrial borrowers.

Let's talk incentive now. When home prices were skyrocketing, there was all the incentive in the world to borrow money to buy a home. The "real" mortgage rate is calculated by subtracting the rate of home price appreciation from the nominal mortgage rate. At the peak in the housing cycle in 2005, real mortgage rates were deep in negative territory, meaning you were being paid to borrow money ... not a bad deal indeed.

Talk about a reversal since then! The difference between today's 6% mortgage rate and a -5% home price depreciation rate results in an 11% real mortgage rate! Ouch. Today there's not much of an incentive for a home buyer to borrow money to buy a depreciating asset. In turn, it makes equally little sense for a lender to provide financing to a borrower who wants to buy a depreciating asset.

Securitization run amok

Of course, there's a bigger problem that resulted from the housing bubble, and that's securitization and the opacity around the trillions of dollars in mortgage-related securities and derivatives. Behind the ballooning supply of home loans was ballooning securitization. The share of new mortgages repackaged and sold to investors rose from less than one-third to more than one-half between 2001 and 2005. The jump was concentrated in those geographies where initially it had been most difficult to obtain mortgages ... the same locales where the supply of credit had escalated the most, yet where economic prospects had improved the least.

For a time, it was a good story-the "democratization" of housing finance meant a record homeownership rate and risk that was ostensibly spread throughout the system. But good stories can have ugly endings. The increase in delinquencies is now highest in regions where a larger percentage of mortgage loans were repackaged and sold. We're now learning that loan portfolios fitting the criteria for securitization are far more likely to default than packages of loans with lower credit scores that are less likely to be securitized.

This too shall cleanse

If there's any silver lining, it rests with prospective buyers. Foreclosures can be a boon for well-financed buyers searching for bargains. They're also a natural step in the process of working off the remaining excesses and getting back to some semblance of pricing reality. So are recessions.

Home prices are forecast to fall more than 30% in some communities in 'the most severe housing recession' since 1945.

Housing markets from Orlando, Fla., to Stockton, Calif., will crash, and some will suffer price drops of more than 30% before the housing crisis is over, a report from Moody's Economy.com said today. I find this funny because once again the media is slow to find out. I've been telling people now for a year that we won't see the bottom until fall of 2009.

We are now in the spring here in Orlando and I've sold 4 homes this week and listed another. Does that mean we're turning the market? My opinion is NO. It's simply the seasonal shift that we always have. Buyers always come out around the end of February and buying subsides in August.

On a national level, the housing market recession will continue through early 2009, said the report, co-authored by Mark Zandi, chief economist of Moody's Economy.com, and Celia Chen, director of housing economics.

The report paints a worsening picture of the hard-hit housing sector, which is in the midst of its worst downturn since World War II. Again, I say we won't see an up-tick until 1^st quarter of 2010.

While activity will stabilize in 2009, it will be 2010 before a measurable improvement in sales, construction and pricing will emerge, the report said.

Overall, house prices are forecast to fall 13% from their peak through early 2009. After accounting for incentives home sellers are offering buyers, effective declines from peak to trough will total well over 15%, according to the report, which said the housing recession will ultimately be severe enough to be characterized as a housing crash.

Punta Gorda Fla. and Stockton are the hardest hit markets in the United States, with price declines from peak to trough forecast at 35.3% and 31.6%, respectively.

"This is the most severe housing recession since the post-World War II period," Zandi told Reuters.

These markets have been hard hit due to several reasons, namely the exiting of investors from the areas, a fair amount of subprime mortgage loans causing an increase in foreclosures and overbuilding by home builders, Zandi said.

As I personally look at the MLS and each subdivision - community I see that nearly 10% of the homes are in short sales or foreclosure. We're looking at another 12-18 months before all of those get washed out. However, that means there are some fantastic deals for buyers. The funny thing about is that when the media catches on and says that the market is turning, the great deals will be gone.

In summary, I say if you want a great deal on a house call me now and lets find you that great deal now, before they all disappear.