Richard Zaretsky, Florida Real Estate Attorney

It is only 3 weeks since the new bailout programs "started" but don't ask for any testimonials from any homeowner whose home has been saved.

The programs were described in my recent article BAILOUT FOR HOMEOWNERS - WITHOUT WALL STREET, and the follow up article BAILOUT MISREPRESENTATIONS AND MISCONCEPTIONS.

One program called Hope for Homeowners, a $300 billion program, has yet to get off the ground. Despite being passed by Congress in July and supposing to be effective October 1st, thousands of desperate homeowners who have sought help are being told that details haven't been worked out yet.

As reported by CNBC.COM, "This program-just like everything else the government has tried so far-is too little, too late," says Kathleen Day, a spokesperson for Center of Responsible Lending, a nonpartisan research and policy organization, which projects there will be 2.2 million foreclosures from now to the end of 2009. "It will just not have the impact that is needed."

According to CNBC, Chris Rines, executive vice president of Citizens Home Loans, a mortgage bank and brokerage in Dayton, Ohio, says banks and private investors-who put up the money for mortgages-will balk at underwriting new mortgages for borrowers with credit scores under 580. Lenders even under the plan are looking for scores in the 600's.

Additionally, investors are reluctant to "voluntarily" write down the existing mortgages, if payments are still current for these prospective borrowers. For example, if the home was originally appraised at $200,000 and the loan balance is $170,000, but the new appraisal is $100,000, then the new loan would be $90,000 and require the existing lender to write down the loan $70,000.

Rines says this Catch-22 is the result of inadequate consultation between government and private investors, who will likely have to wait months longer to get importantl program details before they can figure out if they can make money under the program.

"It's frustrating for us that we got to tell these people that unfortunately at this moment there just isn't enough information," he says. "And it is kind of hard for them to understand, especially when they have sheriff's notice on their door and they have kids. You know, it's tough."

FHASecure, launched a year ago, has produced slim to no results for homeowners, and it took 6 months for that program to get off the ground - and at that it may just be hovering a millimeter above ground.

The key is whether the programs are voluntary or mandatory for the lenders. Mandatory mass loan modification such as Sheila Bair, head of the Federal Deposit Insurance Corporation (FDIC) has recently suggested, are going to be necessary and both presidential candidates are now picking up on that obvious program deficit. The key is what lever does the government have - and that may be to condition participation in any buyout of loans by the government to be tied to active and mandatory participation in these programs.

Keep tuned!

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com

Here is more proof that the loss mitigators used by some banks just don't quite "get it".

In an article this morning in the Palm Beach Post, by staff writer Eve Samples, Wells Fargo is targeted for its botched handling of a short sale opportunity, resulting in a loss to the bank of at least $40,000 more than it would have experienced in the short sale opportunity. The article goes on to say,

Behind on their mortgage and forced to move to Miami-Dade County for work, Reggie and Noelvis Capiro this summer petitioned their lender, Wells Fargo Home Mortgage, and its servicing company to allow a short sale on their three-bedroom, three-bath house. They found a buyer who was willing to pay $400,000, about $40,000 less than they owed on the mortgage.

The bank countered at $520,000, and the deal fell apart, according to the Capiros' agent, Dave Derrenbacker, owner of Water Pointe Realty Group in Stuart.

The Capiros lost the home to foreclosure in June, and the bank this month sold the house to a new buyer. The sale price this time: $360,000, according to Multiple Listing Service data.

The writer does not realize that the loss to the bank is even greater, since the costs of taking the property into the REO department of the bank needs to be added to the simple math loss in the selling price. My guess is the loss is more like over $50,000.

This example goes to the heart of the issues that the Federal Government is facing if they want to get into the loss mitigation business, and confirms that this situation is not isolated and that the real number in aggregate losses is enormous. See Banks Create Billions More In Losses.

To understand how and why lenders should do short sales in a declining housing market, a review of the short sale philosophy is in order. I wrote about this about six months ago in BACK TO BASICS - A REVIEW OF SHORT SALES and an excerpt seems appropriate:

Who Qualifies - And Why A Lender Would Want The Loan Paid Off -

You can read discussions on who qualifies for a short sale in a previous article (see this link Some Sellers Think They are Entitled to a Short Sale and Economics 101). Technically, everyone can qualify for a short sale. To understand this we need to become more, well, "technical".

Logically, a lender is not going to want to keep a secured loan on its books where it has evidence that the security has decreased in value dramatically and the loan to value ratio under which the loan was originally made is now "upside down", meaning the value is less than the amount of the loan. The portion of the loan that is not in compliance with the original loan to value ratio is, for bank auditing purposes (or investment valuation purposes if the loan is not a portion of a mortgage backed collateralized security) and therefore is not considered secured. That is bad since it makes the lender set aside reserves of cash for the lack of value in the loan. The lender needs to do something to change that situation.

Depending on the language in your mortgage or your promissory note, the valuations being upside down could be reason to put your loan into breach and call the promissory note. I have not seen this done as of yet by any residential lender. But technically, if a property is in this upside down situation, the loan could already be technically in default.

Often, the desire to unload the upside down property is made based on economic calculations made by the owner of the property. Those calculations usually show that it is better to take a loss now of a known amount of money rather than continue to pay interest, insurance and taxes in excess of the income from the property for an unknown period of time until rental or property values increase so the economic cash drain is reversed.

In any event, the lender would prefer to have the loan right side up or off its books. In some cases the property owner has excess cash laying around and can just sell the property (if that is their plan) and pay the amount to the bank that they are "short" at the closing so the loan is paid off in full.

In other cases, usually where the borrower has become financially distressed but also where the borrower is asset rich but presently is lacking liquidity (I call it financial indigestion), other arrangements satisfactory to the lender can be accomplished.

These other arrangements usually come in two flavors: (1) providing alternative secured collateral to the lender, such as a first or second mortgage on another borrower owned property that has equity value, or (2) having the borrower sign a new or modified promissory note that is unsecured and payable over a fixed period of time, usually 3 to 10 years from the date of the short sale.

Where the borrower is experiencing extreme financial hardship, a third alternative can occur, which is actual forgiveness of the unpaid amount to the lender.

This leads us to the issue of the unpaid portion of the short sale. Many lenders will not provide a release of the balance due. This causes some good and some bad issues for the borrower. The good part is that without a final disposition of the unpaid portion, the borrower has not received any phantom income (i.e.: that 1099 stuff). This good news does not last forever. Once the statute of limitations on enforcement of the promissory note expires, then the borrower has that income to report to the IRS. The bad news is that the lender very well may sell the unpaid promissory note to some investor for 5 or 10 cents on the dollar and then that investor will definitely come after the borrower for as much as they can get above that 5 or 10 cents on the dollar. The small element of good news here is that as long as they are trying to collect on the unpaid portion, that unpaid portion is not income that the borrower has to report to the IRS.

Why mistakes are made by lenders in the short sale process.

I am going to be conservative and say that Wells Fargo in this case had incorrect information on the market when undertaking their valuation and "potential" for the property. At my firm we have come across this situation several times - often when there are two lenders and one approves the short sale price while the other says they need it "much higher". The reason for the mis-valuations can be several, but some common ones are size of the property (one lender used the property appraiser size calculations, which were overstated by 30%), condition of the property (most lenders do not do an inside inspection and none do an inspection of the mechanicals of the home), liens or other property associated obligations being assumed by the buyer (thereby lowering the stated price, but raising the value price), rapidly declining values for the neighborhood (and determining where in the cycle this sale might occur - ie how much further to bottom for this neighborhood), and certainly others.

Short Sale consultants and attorneys should make it their business to be aware of the valuations for similar homes in that neighborhood so they can counter erroneous arguements for a higher price - when none is justified.

How will the additional loss affect a foreclosure deficiency judgment?

When a foreclosure occurs, the lender may be entitled to the dreaded foreclosure deficiency judgment. How does the court determine the amount the lender is entitled to if the lender screwed up an opportunity for mitigation of that loss to the ultimate detriment for the borrower? I know of no reported case law on the subject, but surely if one makes it to the appellate courts, equity will have the judge decrease the deficiency judgment by the amount of the additional loss created by the mistake or stubbornness of the lender. I say here that equity will cause that to occur because as a matter of law, the lender had no obligation to entertain a short sale at all. For a more detailed discussion on the deficiency process see my article Foreclosure Deficiency Judgment Compared to Deed In Lieu and Short Sale Scenarios.

In the past I have often stated that the short sale process is like living in the Wild West - this is still true, but slowly we are spiraling into some focal point (like a tornado drawing into its core all it touches or gets near) where some common means of accomplishing loss mitigation will be standardized. That time probably will be accelerated if the Federal Government steps in to be the loss mitigator.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com

The government bail out of the housing crisis has created wonderfully conceived programs to keep homeowners in their homes with re-negotiated mortgages or refinanced mortgages. The specific programs for the home saving legislation are the HOPE for Homeowners (H4H) and FHASecure programs.

I spoke about these programs in my recent blog articles NUTSHELL VERSION - EMERGENCY ECONOMIC STABILIZATION ACT and YOUR Ticket to Normalcy? THE BAILOUT BILL.

The H4H program is a voluntary program for lenders. Essentially for the lender with a non-performing loan (ie: a mortgage about to go into or already in foreclosure) the effect is potentially better than a short sale solution to avoiding foreclosure expenses. In a short sale, the lender gets all of the net sale proceeds and has the option to seek the difference (the shortage) from the borrower. In a H4H program refinance, instead of selling the home, the owner is refinanced with an FHASecure mortgage. The advantage to the foreclosing lender is that it will get about 85% of the current appraised value of the house, but that amount is all it will get and it cannot later seek the shortage against the borrower. As a sweetener, the foreclosing lender will participate with the government (FHASecure) if there is any "appreciation" realized upon the later sale or refinance of the borrower's home.

Great deal you may think - but there is a Catch-22. The whole concept hinges on the participation of lenders to fund the FHASecure program of FHA insured mortgages to these borrowers - and not a single lender in the nation has stepped up to the plate to make the first loan. The FHA website merely says, "List of Participating Lenders Coming Soon".

One would think that since this program was announced over two months ago to be effective October 1^st, that the participating lenders would already be there to start taking applications - but no, homeowners who are to be served by this program have found that so far it is an empty shell of well meaning and promising regulations.

For the homeowner then, the short sale is the primary vehicle available to personally mitigate the loan liability situation, which adds inventory to the available housing list and thus drives prices down as supply further exceeds demand.

Loss mitigation through the borrower lender allowing the borrower to stay in the home and writing down the loan as would be the case under the H4H program, is a event that we seldom see in our daily lender discussions and negotiations. This is not to say it does not exist, but it is an exceptional event unless there are factors involved that go to lender misconduct or other technical issues regarding the origination or servicing of the loan.

So until the lenders begin participation in the H4H program and FHASecure, the hype and glory emanating from our governmental finance gurus is just an empty bag.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com

Sometimes you get a frank speaking knowledgable person that sums up the day's thought succintly and in one sentence. Speaking on the Financial Crisis, legenday investor Jim Rogers, in an interview reported on CNBC this morning said the irresponsible people need to go bankrupt if necessary. Here is the quote - you'll love it since it is So True!

"I thought it outrageous that anybody has to step in to bail out a bunch of 29 year olds driving Maseratis," he said

The whole interview is on CNBC with a video clip too.

I have some articles on the bail out that may be helpful to you at these links.

EMERGENCY ECONOMIC STABILIZATION ACT -WHAT IT MEANS FOR YOU

BAILOUT FOR HOMEOWNERS - WITHOUT WALL STREET

A word of caution - to make the homeowner bailout work you need to have lenders participating in the HOPE program and FHASecure program -- to date I have not heard of a single one! So much for voluntary programs.

It appears the politicians think the only ones that vote are people losing their homes?

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@FLORIDA-COUNSEL.COM - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com Website www.florida-counsel.com

The stock market is at equivalent lows to times dating back to the Great Depression (which for those of you needed date measurements is almost 75 years ago).

In 1987 there was a stock crash but not like now. Now there are other more compelling issues regarding the financial trust between banks and their customers and between banks that have money and banks that need money.

Typically there is a daily operation by your bank where at the end of the day they take their extra money and invest it in overnight depositories which go to distribute money to other banks that need money to fund new loans or to cover short term contraction of deposits. The money loaned out overnight is always back the next day - well that's the problem apparently, since now it is not always back the next day.

With this uncertainty, banks with money want to hoard it, leaving banks needing money to beg for it from the public by offering higher than normal short term interest teasers. That's why you see those advertisements popping up in the newspapers. Ever wonder why two banks on the same street offer short term interest rates varying as much as 25%?

So here is the housing problem -

1. Buyers qualifying for a mortgage have a Herculean task in this market. If banks don't want to lend to each other, imagine them giving a loan to a complete stranger to buy a new home! Home loan applications were up last week as rates begin to dip (below 6%) but will the loan applications end up as successfully closed loans?

2. Even cash rich buyers are reluctant to buy - investor buyers don't buy when the market is dropping and don't buy until the market begins to recover. Why? Investors want liquidity. There is no liquidity on the way down to a market bottom and little liquidity at the bottom. It is on the way up, no matter how slow that is, where a sale of an asset can occur, even if it is at the same price at which the asset was purchased. But at least it is not lower.

There is hope -

Fortunately, there is always someone out there that needs a roof over their head and has the ability to find the cash or mortgage to purchase the home. And there is always the investor that sees opportunity when others see gloom.

Our government is trying to address the tight fisted mindset with cash injections and even offering to make loans directly to large borrowers and homebuyers and offering refinancing opportunties. But consumer confidence is falling to depths unknown, and with continued employment on most peoples' minds there is not going to be a lot of spending going on (except at neighborhood bars).

The end result - we are in right now probably one of the worst quarters for home sales and even commercial transactions in the past 20 years. So sit tight, plan your strategy for survival and use the time wisely to re-invent yourself to grow with what will eventually be a new day.