Short Sale Service Stop Foreclosure

While some analysts are saying that rises in home prices and increased home sales are a harbinger of recovery, most experts are only cautiously optimistic. One of the reasons for their restraint is the extremely large number of option-ARMs and ARMs that are scheduled to “reset” in the next 24 months. If past experience is any indicator of what happens when ARMs reset, this could send another flood of short sale homes and foreclosed homes into an already heavily saturated real estate market.

Even though banks are no longer making “stated income” loans, the number of home loans whose interest rates can or will reset is staggering. The potential risk is exceptionally high (reaching into the millions) and consumer credit, especially for those homeowners who are underwater on their existing mortgages, is nowhere to be found. Without the ability to refinance into lower fixed-rate mortgages, experts fear that millions of consumers will join the pre-foreclosure crowd between now and 2012.

The impact could be huge. Nearly 100 banks have already failed in 2009. For those institutions that aren’t properly capitalized, 2010 and 2011 could be just as tough. That places additional burden on the FDIC and the Treasury Department to come up with workable solutions that can either keep people in their homes or get them out of otherwise valuable property with the property intact.

The Treasury promises new guidelines for homeowners who want to get out of home ownership in a semi-controlled way. Combined with the Hope for Homeowners program waiting in the wings, the administration is confident that these programs will help stem the tide of foreclosures. The real problem with these programs is that they address only the properties that are in distress today and may not be equipped to deal with the rising tide of home foreclosures that will occur in the absence of refinancing options, tight consumer credit, and high unemployment.

Treasury expects to release new short sale guidelines later this month. Whether the streamlined short sale procedures enable homeowners to exit their homes quickly remains essentially in the hands of private lenders, and therefore largely out of the government’s control.

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Homebuilders are excited by the prospect that the recent uptick in home sales supports the idea that a recovery is underway. Experts are divided on whether this is the case. Nationally, foreclosures dropped and home sales edged upward slightly in August, but a record number of foreclosures were filed in the months prior to August.

Foreclosures are still climbing in many key foreclosure states including Nevada and Michigan, and more states have enacted or are considering moratoria on foreclosures. Overall, the data seem to indicate that legislated delays inserted into the foreclosure process are not effective in the long term at preventing a large number of foreclosures. Many homeowners are not making payments on their homes due to unemployment and underemployment. Still others are walking away from residential, vacation and investment properties whose values have dropped substantially, are unsalable due to the size of the mortgage balance, and have few prospects of recovering their value in the near future.

While sales prices have edged upward, and there are many excellent deals to be found in real estate right now; the careful short sale investor will take advantage of deals as they arise. The fundamentals of property purchasing haven’t changed. Is the property in a good location? What are the property’s serious defects, if any? Will repairing the defects merely help the property retain value or will it lead to improvement in value? What are the near-term prospects for this property? What are the mid-term prospects? Does the property have long-term value potential? What kinds of buyers would be interested in purchasing this property?

Other considerations include financing. Can you finance the purchase of the property? Do you need to? Can you hold onto the property as long as is needed to comply with lending requirements? Will your lender allow you to lock in you rates for longer than their standard lock-in period? Can you afford to wait on this property, or are there several other properties you could purchase and get the same benefits?

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Short sales should be the preferred option over foreclosure and offer stiff competition to loan modification programs, according to new research conducted by Amherst Securities Group.

Short sales mitigate the lender’s loss and limit it to 20%-40%, where foreclosures often recover less than half of the loan’s remaining value. Amherst also says that Hope For Homeowners is a more promising solution for loan modification than the Home Affordable Modification Program (HAMP). The Hope For Homeowners (H4H) program is favored over HAMP because it allows the homeowner to regain equity in his or her home and allows the troubled mortgage to be re-written into a FHA insured mortgage.

Most loan modification provisions of the HAMP option are not useful for borrowers who need to reduce payments beyond their current levels, and offer no options for adjustable-rate mortgages that are already using 40-year terms. For homeowners in these circumstances, short sales and foreclosures are the only viable options.

Ultimately, loan modification programs assume that homeowners want to keep their homes. There are a growing number of homeowners who simply want to get out from under a mortgage. These homeowners include people who need to move to pursue job opportunities elsewhere, couples who are divorcing, and homeowners who can no longer take care of a home or who find homeownership undesirable for some other reason.

For these homeowners, despite the downsides of each option, short sales and foreclosures still represent the best options to get out from under their homes.

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For some homeowners, their primary concern when it comes to short sales is “How will this affect my credit score?” Very likely, there are few ways to avoid coming through a short sale with your credit intact. Most sellers who complete short sales are in financial trouble to begin with. After all, financial hardship is one of the criteria for a short sale approval by most lenders.

Some short sale “experts” will tell you that your credit will be fine. It won’t. Your credit score will take a hit when you close on a short sale. So if your credit score will take a hit whether you do a short sale or go through foreclosure, why bother with a short sale at all?

The simple answer is this: first, it’s better for you and second, it’s better for the bank. (And what’s better for the bank is better for you in the long run.) Foreclosure is the mortgage equivalent of bankruptcy. If you go through foreclosure, you won’t get another mortgage for five to seven years. Even longer if your credit problems persist after the foreclosure, as they often do. When you do become eligible for another mortgage, you may find that the only loans you can get have extremely high interest rates or require a co-signer. After all, you’re a bad risk.

With a short sale, you can be eligible for a new mortgage in as little as two to three years. Two to three years is enough time to repair or rebuilt your credit. According to VantageScore Solutions, a risk-assessment firm co-created by the three major credit-reporting bureaus, your credit will take a hit of 100 or more points. In comparison, a foreclosure will drop your credit score by 150 or more points and will follow you for 5-7 years, just like a bankruptcy does.

For homeowners considering a short sale or foreclosure, the short sale is the better exit strategy from a bad situation because it enables you to recover faster and get back into the game earlier.

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Last month, some analysts said that the rise in the number of home sales was proof of a budding recovery. A growing number of mortgage delinquencies has other experts concerned that the bottom of the housing market is nowhere in sight. Chilling statistics released by the Mortgage Bankers’ Association show that fewer than 7% of delinquent prime mortgages are recovered currently, down from 45% at the start of the housing crisis. The numbers for Alt-A and sub-prime mortgages are worse: 4.3% and 5.3% of delinquent mortgages respectively are recovered by homeowners who have fallen behind.

This is the most damning evidence to date for loan modifications, once looked upon as the surefire cure for the failing real estate market. The MBAA now says that once a homeowner falls behind on the mortgage, there is little hope that the homeowner will be able to rectify the situation.

The inability of homeowners to recover after a stumble doesn’t bode well, according to the organization, given that there are currently about 4 million US mortgages that are classified as delinquent. If the MBAA’s statistics hold up, expect to see about 3.75 million new foreclosures in the not-so-distant future. This is on top of the 1.9 million home loans that Moody’s predicts to foreclose in 2009.

At one time, prime mortgages and distressed properties rarely kept company, but the MBAA says it has seen a significant increase in the number of prime mortgage failures and short sales, conditions that the MBAA attributes to unemployment. The grim unemployment picture continues for more than half of all US states. A minor drop in the unemployment rate, such as the one seen in July, will not forestall the looming tsunami of foreclosures, which threatens to keep real estate values unstable for the foreseeable future.

Photo Credit: Stuart Pilbrow