An attorney offers the opinion that once the NOD is filed, the credit damage is done. He further opines that with hundreds of thousands of foreclosures, there has never been a better time to for a homeowner to walk away. The credit damage bogeyman is a scare tactic promulgated by the lending industry which, by the way, is mostly responsible for this mess. Foreclosures are happening to doctors, real estate brokers, and, yes, attorneys. These homeowners are not deadbeats or bums; they are reputable citizens in trouble. What? Says the attorney, is the lending industry going to refuse loans to these people when they show up in a couple of years with 20% down. The lending industry needs these people to saddle with more loans. The attorney further offers this accusation: the folks most benefiting from short sales are real estate agents and lenders. Homeowners receive no demonstrable benefit from a short sale vs. foreclosure.
Comments
That attorney is frankly nuts, and feel free to refer them to me to debate it. Let's start off with the very simple fact that if the 1st mortgage forecloses the borrower remains liable for the 2nd mortgage. Yes, the 2nd loses their security interest in the property, but they have not given up any rights to collect the debt from the borrower themselves.
And in states that allow deficiency judgements even on the foreclosed loan a shortsale can save the borrower from years of debt collectors and potentially even bankruptcy.
By negotiating a shortsale, the borrower can be confident that this is completely behind them aside from a lower credit rating.
That said I agree that there is a lot of fear mongering and misinformation out there and that some of it is an attempt to scare homeowners into making bad decisions - providing balance to that is one of the primary reasons for this site. I also don't think having a foreclosure is catastrophic -- but I firmly believe that keeping a seat at the table and trying to get a short sale done is in the borrowers best interest.
Counter arguments anyone???
Per MyFico.com's website: They state that a short sale, deed in lieu, or foreclosure all have the same effect on credit scores.
MyFico is owned by Fair Isaac, the inventors of credit scoring.
So many agents and owners believe that the short sale will go easier on their credit scores and make it easier to buy a house again sooner.
The fact is, they do not. A short sale or foreclosed owner will still need to wait the 5 year period after foreclosure to buy a home using a FNMA loan.
As for the 2nd trust deed holder coming back on you, I am not qualified to answer other than the fact that many who have lost their homes have done so because of a major illness. It is important to seek the advice of an attorney and CPA as a bankruptcy might be the very best thing for a person. The Fresh Start can make it possible for a person to provide for their own retirement.
Hi Mary - Thank you so much for contributing.
I think that saying a short-sale, foreclosure or deed-in-lieu all have the same affect is an over simplification, based on what I've gleaned from myfico.com. I think what the moderator was trying to say was that in all three cases it will show as seriously derogatory, and ultimately as settled for less the amount due. But note that if you are doing a short sale or deed-in-lieu this can be negotiated - it is the lenders choice as what to report to the credit bureau. Similarly the right for the lender to pursue a deficiency judgement can be negotiated (when the lender has the right to pursue one). Based on those two facts it is ALWAYS better for the homeowner to remain at the table and try to get a short sale done.
Second, the vast majority of foreclosures have nothing to do with illness at the moment. And in situations where negative equity and perhaps an ARM reset are the only reason for foreclosure folks really should do everything they can to avoid BK. A BK is ABSOLUTELY worse for your credit than a foreclosure, just by the simple fact it stays with you 10 years instead of 7.
Sean -
Here is another benefit of completing a Short Sale vs Foreclosure. In a memo from Fannie Mae - see the link below, dated, 6/25/2008 - it basically says that Fannie Mae will lend to someone who has had a short sale (pre-foreclosure) after 2 years versus 5 years if someone has had a foreclosure. This is really good news for homeowners who have a tough situation with their housing who choose a Short Sale vs Foreclosure.
https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0816.pdf
BOB
Great find Bob, thanks for posting it!!! Yet another reason for Realtors to help folks get a short sale done -- they'll have a repeat customer back in just 2 years (though hopefully in a property they can afford).
Sean, Are there updates after these guidelines you posted here in 2008?
Good find.. I read through it and now, for Bankruptcy:
what's the difference between a discharge date and a dismissal date? Going from the discharge date, it actually ends up competing with Pre-Foreclosures (also at 1 yr)
SEAN - I LIKE YOUR STYLE..
GREAT FIND.. ON THE FANNIE MAE PDF..
I SEE NOTHING ELSE FROM ATTY.. ??
KEEP IT COMING..
Sean,
You seem to know what you're talking about. I'm a Commercial Lender for a bank and a former Examiner in the consumer Bureau for the State of Idaho regulating mortgage lending and credit reporting, (amongst other areas). I'm suprised at how few people really know the effects different actions will take on their credit, but I guess banks and reporting agencies sort of like the fact that they don't, else everyone would take the shortre route. Both actions can (foreclosure and settled) may stay on the owners report up to 7 years. Notice, I said may..., there is no law that says it has to. It has been my experience that consumers have an easier time convincing creditors to remove settled from their bureau, than removing Foreclosure... after say 4 or 5 years. Also as a lender I would be more inclined to not rubber stamp a decline based on settled over foreclosed..., there is a story behind settled I might be able to work with..., foreclosed is foreclosed.
Thanks Richard! I really appreciate the additional insights on how a shortsale or settlement is better than a foreclosure.
Hi Richard,
Would you speak more about your experience in getting Settled for Less than Agreed off of a person's credit report after a few years? That would be a cool tool to have!
Thanks!
Wow.. No benefit to the homeowner huh..?? strong words of advice.. have you ever had a foreclosure on your record? FHA seems to like the responsiblity of a homeowner who hangs in to assist in the organization of the short transaction.. 2 year wait till a new loan is capable origination.. I guess you can help me understand the benefits of foreclosure..
Not all foreclosures and short sales are profitable. To pull a home out
of foreclosure, buyers need to make up back payments to the lender, pay
all imposed fees and either pay off the loan or make arrangements to
sell the property. Few lenders will let a buyer assume an existing
obligation.
The fact that is continually overlooked is that following a short sale, if you have a deficiency judgement, that debt is on your credit. Not only will your credit need to recover, you will have to pay that unsecured debt off. I'm not sure how many people will be able to pay of $50-60K (or more) over that two years they are waiting for their credit to heal. I suspect that many of these people will become the wave of people that file bankruptcy down the road.
Do not short sell your home unless you get a written release of all liability from your lenders. ALL OF THEM. Modify your loan instead. Keep your house. By the way, a loan modification has no negative effect on your credit. However, a successful modification does bring your loan current by nature of the process.
This is going to be true regardless of whether the homeowner does a short sale or not. At least if they pursue a short sale they get a shot at negotiating a release of liability. Even if they aren't able to negotiate the release, it will still be better than a foreclosure.
That said, you are correct that it may be preferable to explore a loan modification first. This assumes the person doesn't have to sell - due to job loss, or relocation for example. It also assumes the lender is willing to do a reasonable loan mod - which is still fairly rare.
Yes- Many homeowners are calling me to short--sale because they could not get a loan modification that made sense. Two of our sellers recently were told flat out that the lender would not modify- so to go for a short-sale and they told the homeowner they'd approve it. (We'll see... but most of them have been going through... Even one without documentation - without bank statements or income verification- Wachovia approved and closed within 60-days!)
Untrue about Loan Modifications. Your credit is affected! Ask a reputable lender about doing anything for at least 2 years after a loan modification.
Great advice Mike! As I write this, I have heard rumblings that the credit scoring systems may begin to rate loan modifications differently on a person's credit profile. I don't have anything more than rumblings, but it doesn't hurt to know that the credit might be affected. I would still go ahead with a loan mod rather than a foreclosure; big hit to credit scores or not.
Two years of good payment history after a loan mod would heal any hit that MIGHT happen due to any change in credit scoring to rate modifications in the scoring models.
Mary Supinger
Loan officer and credit analyst in San Diego, CA
New information as of January 2009: There is ONE major benefit by SOME FHA lenders! A short sale will not be counted against a borrower if they want to buy a new home right away. A foreclosure requires a waiting period of two years.
Mary,
What is the source of that statement? That would be great news. Where can I verify that?
Hi Patrick,
They are in the undewriting guidelines of a lender that I use for FHA loans. I regularly read lender guidelines.
Are you a loan officer or someone looking for an FHA loan?
No, I'm just a poor schmuck who's considering a short sale and wondering how bad it's going to affect my credit and ability to get another loan down the road.
Hi again,
I will be happy to let your loan officer know who the lender is when you get ready to buy again. If you are going to buy in California, I would be happy to help you.
Do you want to stay in your home? Loan modifications are happening now and we might be able to modify the loans so that you can stay in your home.
Call me to discuss your situation. I am a mortgage loan officer, credit analyst, and loan modifications professional. I would be happy to discuss your situation with you.
Best Regards,
Mary Supinger
619-701-4321
I am about to short sale my home. Are lenders only willing to approve the home owner to qualify for their short sale program only if they have deliquencies of at least 2-3 months late mortgage payments? I am still current on my payments b/c I want to cause the least damage to my credit report after the short sale is done.
Can anybody reply? Im in the same situation! Im current because i can afford it, not because im a loser!
Can anybody reply? Im in the same situation!
Yes, it is possible to complete a short sale while being on time on your payments. It just depends on your situation. I'm a Realtor and just helped a client through a short sale even though he was never late on a payment with either lender. He had a first and a second and was upside down on both loans.
a shortsale does not effect your credit like a foreclosure. this is the biggest benefit of a shortsale.
Please review a post to one of my blog sites. A short sale has the same effect as a foreclosure on credit SCORES.
http://realblogging.com/mary-supinger/short-sale-vs-foreclosure-the-impa...
Mary Supinger
Loan officer and credit analyst in San Diego, CA
From reading all this messages seems like not
everybody knows or understands the legal issue on short sale or foreclosures. Lets not get the consumers more confused. Don't go by heresay..get the actual source. We should just refer them to their Tax Preparer, CPA or Tax Lawyer.
See the following link for info directly from the government who is the actual source.
http://www.irs.gov/irs/article/0,,id=179073,00.html
Even though the consumer will or might recieve a 1099, it can be offset and Zero out by filling out Form 982.
As for Calif Lic Realtors check the following link for the CAR legal.
http://www.car.org/legal/2009-qa/credit-aft-forecl-bankrup-short/
As it states, a consumer can be eligible to obtain credit to purchase a home?
Five years from the date the foreclosure sale was completed. Unless "extenuating circumstances" that led to the foreclosure? It is Three years.
Four years from the date the deed-in-lieu was executed.
As for Short sale /Preforeclosure it is Two years from the completion date.
Thanks Art - I have to agree and I also take some issue with Mary's position that there is no benefit to a short sale. Perhaps not with regard to FICO scores - I don't know - but I was aware of the 2 year repurchase rule, and any way you slice it that is a big benefit given that prices are now far more reasonable than they have been in years, and that prices and rates won't stay this low forever.
Something no one has touched on is the fact that a if you work with a bank on a short sale they may ask you to pay some of the balance on a no interest loan over a 5 year period. For example, if your balance is $200,000 and the offer is $150,000 but the bank wants $155,000 they may ask you to pay the $5000 difference over a 5 year period.
Jade - you do not have to be behind on the mortgage to complete a short sale - I have 3 right now where the Sellers are not behind. However, you do need hardship - loss of job, health issue, divorce, mortgage increased, family size increased (and current home is no longer practical), depleted savings, pay cuts, etc. You should definately work with an experienced Realtor who in my opinion has completed at least 10+ short sales - Also, I am a Certified Distressed Property Expert (CDPE) and gain valuable information that is shared within the community. Ideally, someone in the Advance program - If you would like a referral, please contact me at bob@inspiragroup.com or call at 949-387-0500 x 101.... We can help!!!
Demian - we typically can get better terms then that - I have had clients where the banks have written off over $350,000 in loss and the clients did not have a note or any recourse. In fact, not one of my clients has taken back a note - In CA, if purchase money, then there is no recourse and the banks know that. Also, typically the homeowner do not have large assets and the banks have not wanted the last penny form a distressed homeowner.
I'd be glad to give someone a no obligation consultation, by simply e-mailing my your situation - please state which bank(s) are owed, what the hardship is, what city/state your home is located, how many months behind in the payments (if any) and whether purchase money or refinance loan(s).
BOB - MBA, CDPE
bob@inspiragroup.com
Glad to have found this informative site. I have just a few questions I'm hoping can be answered. We are currently renting. Our landlord can no longer keep up with the mortgage payments. He tried to re-negotiate the loan and the lender refused. He has now been advised to short sale. We are in a tough spot. He would like us to stay until he finds a buyer (so at least he will continue getting some $$$ for the mortgage). He has offered us a significantly reduced rent rate because he knows it will be a hassle for us to deal with inspectors, potential buyers etc.
My husband is military and we will only be in this area for another year. We have no idea how long this "short sale" process will take. However, we do know that it may be difficult to find another house to live in for a term shorter than a year (and maybe significantly shorter depending on how long the short sale takes). Our landlord is a very kind man and we would like to help him out if at all possible but we don't want to put our family in a really tough situation. It would not be ideal but I suppose we could stay in a apt. (although it would be very cramped) for a few months but I wouldn't want to do it longer than 3 months or so.
So, all of that background to ask - what is the short sale process? He says he is going to put the house on the market in Oct. and the Realtor wants to come and look at it next week. Does this mean he has actually already been approved for a short sale? Or does he find a buyer and then get approved? Are short sales typically approved? This house is obviously not his primary residence but is (rather, was supposed to be) an investment property. Will that play a role in whether or not he can do a short sale? I don't know what is "hardship" would be. I don't really think any of the aforementioned "hardships" fit his situation.
We just feel like we are walking on egg shells not having any idea at all when we might have to pick everything up and go. He says a short sale will take about 3-4 months but in all of my HGTV watching (lol!) I have never seen one go through that fast.
Ugh. This is all so confusing. Can anyone help at all?
Thanks so much!
One more quick question. In order to get approved for the short sale, will our landlord have to prove that he has already tried to sell it for what is owed and has been unsuccessful?
Short Sale can damage the ability to obtain new financing for 0-5, Foreclosure 2-5 years. Short Sale shows that you took responsibility in rectifying the problem instead of just walking for someone else to deal with your mess
You Can look at the difference here: http://www.shortsalesandiego.org/faq.html
We lost a 2 year long fight w/our lender yesterday.
I talked to a real estate attorney yesterday, and because of Litton's practices, we are even more upside down than we are than when we originally contacted them to modify our loan. We were advised to walk away. Mail the keys to Lendor and just be done with it. The comment about; "Leaving their mess for someone else to deal with" is so not the case in cases such as most of the posters I've read.
Most, have worked hard to do their best to work with the lenders so that monies could be paid so (most) everyone could at least stay where they are until housing picks up again. Why would lenders choose not to work with homeowners and adjust monthly payments to a practical, manageable payment, rather than pay the property tax and let it just sit? Especially with those homes that will need some upgrading in order to meet the demands of home buyers when it does pick up?
Denise -
Walking away and mailing the keys back is not sound advice! Typically, banks do not want the home back. The HAMP program, where this is way more promise of a modification, is flawed. A homeowner needs to make good money to support the home and even if a modifiacation is offered it does not take care of the negative equity.
So, if a homeowner can not get a modification and can not afford the home, then a short sale is better for the homeowner and the bank. It does take a skilled agent who has experience - Unfortunately, there are lots fo agents who say they can do short sales. There is an agent in San Diego who has completed over 200 short sales and just lost his first short sale where the cleint chose her uncle - after further research the agent found out the uncle never did a short sale and didnt have any listings.
The bottom line is an agent experienced with short sales and guide a homeowner thru the process and will know how to deal with the bank. With a property with defects we take pictures, get estimates to fix, maybe even an independent appraisal. It all depends on the bank and the homeowner circumstance.
Every short sale where I assisted the homeowner has come back with a genuine thank you. We resolved their situation with the best possible outcome. In the best examples we recieved a non-recourse settlement on a recourse situation. Imagine a homeowner settling up with a bank and owning nothing further. This can be done. Even if we cant get a full settlement, the homeowner still resolves their situation in the best manner for them and the bank.
If somone can stay in their home, great. If they need to leave, then leave with all the issues resolved.
You can e-mail me the details of your situation at bob@inspiragroup.com. Also, if anyone wants a recommendation to an experienced Distressed Property Expert, I'll get you in touch with a true professional.
BOB, MBA, CDPE, ePRO
bob@inspiragroup.com
There are short sales and walking away efforts where they make sense...sorry there is no one answer.
The one kinda most correct approach is a money maximization plan...never heard this before probably. Most Realtors just want a commission...most homeowners just want to keep their home or walk away...the homeowners I work get a blend of me making a sale and they living rent free for as long as possible. Not all short sales will go through, of course not. So why not play the game for the benefit of the homeowners.
Attempt a loan modification....until it falls off the path. Then work a short sale, semi - rigorously as in not too hard but just hard enough to get extension after extension after extension on the trustee sale. The homeowner saves money, pays down debt, plans for a move on their terms.
Myself as the Realtor have numerous opportunities for buyers and maybe a short sale commission down the road.
I take short sales at times with no hope of closing them....only to give the owner a fighting chance to move out with their head held high...6 months down the road saving thousand of dollars by not paying rent. Some deal I take, with no chance of closing...are some great commissions after they finally do close. I put the appropriate energy into them and it's a win all around.
Dan Rogers
drrogers@email.com
I just came across 2 very interesting options for homeowners in foreclosure and I wanted some feedback.
1) An investor pool is purchasing the property in a short-sale so once the paperwork is in you will know within about 72 hours if the bank accepts the offer or not. They do need about 3 weeks before the TS sale to give them enough time. There is zero cost to the homeowner whic is great - but the downside that I see is that there is not a huge commission to the Real Estate agent so they probably will not like this one.
2) This other program is also funded by an investor pool and seems really good if the homeowner wants to stay in the property, but please shoot holes in it as I would love to know.
What the investor pool does here is go in and purchase the note from the lender and then turns around and rewrites a new note to the homeowner at 7.5 fixed for 30 years (3 year prepayment penalty) at 90% of the CURRENT market value. The house needs to be at least 25% upside down. The homeowner's fico does not matter, the inverstor just wants to see proof that the payment can be made.
My first thought was that the 7.5 fixed was kinda high but... being the mathematician I am I ran some numbers.
ex. Lets say a property with a 360k loan is now worth 200k. 90% of that is 180k. A loan at 7.5% would yield a pmt of about $1260 per month. You would have to get that 360k loan modified to 1.59% to get the same pmt. And even then, you would be upside down by 160k as compared to being back in an equity position.
So what am I missing here? Anything? As the scientist and mathematician I am, I am always the consumate skeptic. Help me out there.
RonRock@kastlerock.net
Your skepticism is well founded, I think these are likely scams. Few lenders are selling notes at a discount, and if they are they aren't doing it on a one off basis that allows investors to pick and choose the ones they happen to have deals on. I would avoid these.
That said - if the investor has already purchased the note on the property, the second program could very well be legit, as I know several note investors that are buying up notes and then renegotiating the loans into terms that are affordable for the owner, and which provide solid returns for the investor.
Ron,
Both of these business models are legitimate. My company works similarly to what you describe in example 1.
We purchase the property with cash (private funds) after negotiating the seller's debt with the lender. There is no fee to the seller and their credit is saved from the damage a foreclosure will do (about 250 points vs. about 80 for a short sale) to their ability to obtain credit in the future.
FHA's recent guideline change on property flips really served to legitimize our business model.
http://tinyurl.com/4f3bjo
FNMA and Freddie Mac have recently put out statements saying the same thing. They realize that investors are the answer to the housing crisis and will serve to stabilize the market.
Keys to making sure that a property flip is legal according to Freddie Mac...
http://www.freddiemac.com/sell/guide/bulletins/pdf/bll0924xA.pdf
When our realtors introduce us to a homeowner who is in default, we make a cash offer on the property immediately and get the short sale negotiation process started right away.
Lenders seem to be more willing to deal with investors/third party negotiators because we are helping to get bad debt off their books and to get the property on the market and to the end buyer more quickly.
This was one of the main reasons FHA recently reversed their decision on the ban on property flips.
Example 2 is also legitimate and although I don't know anyone doing it currently, I do know that it is perfectly legal. The only bad thing I have heard is that some investors are buying the notes just to turn around and foreclose and kick out the previous owners so they can re-sell or rent the property.
http://www.getoutofforeclosurenow.com
What area do you purchase property?
I am a real estate agent and I am currently working with an investor group that makes cash offers to homeowners that are in a short sale situation. I represent the homeowner in the short sale transaction and the investor group is my seller's buyer and we then submit the offer to the corresponding lender(s). The investors pay for a short sale negotiation service to help expedite the sale. The investors then are looking to re-market the subject property and close the second escrow in the next one to 30 days. This investor group is very above board and has several extra documents for the homeowner to review to make sure everyone is clear about what is happening.
We are currently working with homeowners in Contra Costa and Alameda Counties.
This works out to be a very good way to help the homeowner successfully complete the short sale and have full representation.
I'm currently going through a divorce and my soon to be ex wants me to accept a Short Sale - Our home is already in foreclosure. The ship has saled on the loan modification alternate. When does foreclosure show on your credit report at the time of filing with the court or after your home is sold at a sheriff's sale? My current financial situation is bleek due to the outrageous fees paid to lawyers for my divorce. The attorney's office is handling the foreclosure says that the house would not go to the auction block for another year. Since my credit is already shot wouldn't it make more sense to ride it out to the end and save up money and possibly file either a chapter 7 bankruptcy or chapter 13 depending on my financial standing a year from now?
Rich:
You clearly have a lot of things on your plate and Michelle makes a great point about getting restarted. That should be the overall goal. How best to do that depends on the answers to several questions.
1. Why does the attorney believe the trustee sale wouldn't happen for about a year from now? Who is the lender? Are there junior lienholders? What other debts do you have?
2. What is your current employment and income situation?
3. Have you filed a BK in the past and if so when?
4. Who is living in the subject property now?
5. Are there support payments coming out of your divorce and who has to pay what and for how long?
6. Are you away of the tax consequences of a short sale or foreclosure? These can be very substantial.
7. There are other questions that need to be answered as well.
To answer some of your questions, the missed payments should already be on your credit. The actual reporting of the foreclosure would likely take one to two months, it is a matter of public record and would be both the NOD and the Trustee sale as they are recorded at the County Recorder's Office or however your county does it's real estate recordings.
The bankruptcy filing could be important for helping you wipe out debts that you will not be able to handle because you have had to switch to a one income household. If there are junior lienholders the foreclosure will not erase your obligation to pay them. The short sale will likely only give you a release of any junior liens and not a satisfaction in full, so you would also have liability to pay them off as well.
You have a lot of issues that do need to be timed together in order for you to have a good restart. Someone who has real estate experience with short sales and general knowledge of bankruptcy and real estate law would be very helpful for you to consult. Bankruptcy and short sales are good tools to get started over, but as in most things, timing is very important.
In the past I have represented many foreclosure clients in bankruptcy. I also practiced in the area of eviction law. I am currently with a real estate team that does specialize in distressed property situations including short sales. I have also personally been through an ugly divorce, bankruptcy, short sale, foreclosure and eviction. I know what it is like and what needs to be done to have the best chance to put yourself in the best possible position.
I highly suggest consulting with a bankruptcy attorney in advance so that you can make an informed decision. The bigger question is not only the best exit strategy but also making a decision that will allow you to restart, rebuild and recover as quickly as you can. This is why so many people consider short sales. This is a very subjective question that only you can answer once you have all of the facts. You will want to consult with a real estate agent that is experienced with short sales so that you can decide the best option for you. Remember that although home ownership is the American Dream we are also the Great Land of Second Chances. The bigger issue is that you get yourself to a good place so that you can restart the next chapter of your life.
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