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Short Sales may avert Foreclosure
September 3, 2009 | 
Author It is possible to sell your property in a short sale prior to completely ruining your credit with a foreclosure suit or running months and months delinquent.
While most lenders will not approve a short sale if the mortgage is current, selling a property by way of short may be accomplished between the period after missing that first payment and before the lender files a foreclosure suit.
Historically, a lender does not file a foreclosure suit until the borrower is 90 days delinquent. However, in this market, some lenders are waiting 120 days or more before filing and serving a foreclosure suit. Quite often, if a short sale is pending, the lender refrains from filing suit while awaiting a short sale.
It is during this period, from one month delinquent to four months delinquent that it is possible to short sell a property prior to the lender filing and serving the foreclosure suit.
The short sale process starts with (1) engaging a realtor and getting an offer to purchase, (2) a short sale application. However, there are important items to take care of prior to accomplishing these two seemingly simple tasks.
The real first step is meeting with attorney familiar with foreclosure defense and lending /banking.
A foreclosure defense attorney is necessary to look out for your interests when engaging a realtor to list and sell a property by short sale. Many real estate brokerage agreements contain provisions that may be adverse to you in your attempt to short sell a property.
Things you may want to consider,
include: (1) make the real estate broker commission contingent upon actual closing, (2) provide that the Seller has discretion concerning the type and nature of the documents to be provided to the Lender for the Lender to evaluate whether or not to approve the short sale, and (3) that the Seller is not obligated to sell/close unless the Seller is satisfied with the terms of the Lender’s approval letter, contract or settlement with the Lender.
A foreclosure defense attorney may also be necessary to advise the borrower on how best to fill out a short sale application. An attorney may help determine what things to include in the short sale application, and what things to omit and/or tell the lender that your attorney has advised you not to provide certain information because this matter may wind up in litigation.
After engaging a realtor, for a quick short sale, the goal is to list the property at a price that will get noticed.
A lender is often willing to accept an amount less than what the lender believes is the true value because the lender typically evaluates loan resolution scenarios based on the time value of money. In other words, a lender may be better off receiving $175,000 today as proceeds from a short sale, than $225,000 in 12 months after paying a foreclosure attorney thousands of dollars in fees and costs to conduct the foreclosure suit plus real estate broker commissions, carrying costs, property maintenance costs, and the costs of maintaining the lender’s loss reserve accounts.
After getting an offer and completing all or a portion of the short sale package, it is in the lender’s hands.
However, if an offer to purchase can be acquired and short sale package completed prior to the lender filing a foreclosure, chances are that the lender will not file the foreclosure suit while closing is pending.
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Mandatory Mediation in Florida
The August 17, 2009, Associated Press article in the OnlineWSJ.com indicates that the Florida foreclosure task force has recommended to the Florida Supreme Court that mediation be required prior to foreclosure of a primary residences in Florida. The task force also recommended that the lenders foot the bill for costs associated with mediation.
While the idea of state-wide mandatory mediation for primary residence foreclosures is good one, it may be impractical.
First, upon motion or request by a homeowner, judges often require mediation prior to a trial. Therefore, if there are true issues to be discussed, it is likely the judge will order mediation anyway.
Second, judges should have the discretion to handle each individual case as they see fit. For example, often the owners are nowhere to be found and cannot even be reached to schedule a mediation. In other cases, where the borrower has absolutely no income, no equity or does not care about trying to avoid a deficiency judgment, mediation is an exercise in futility.
Third, it is important to note the timing of when mandatory mediation would occur. As I understand the recommendation, mediation would occur after the foreclosure suit is filed, and after the parties are served, giving the court jurisdiction to order such a mediation.
Finally, and most importantly, by the time the foreclosure suit if filed, many homeowners have already given up and moved out. The vast majority of foreclosure suits [greater than 90%] are never defended. Often homeowners don’t truly understand that a foreclosure suit is a real lawsuit. Where the summons gives the homeowner 20-days to respond the complaint, the homeowner should talk to an attorney. I can’t tell you how many people Castle Law Group has turned away because they failed to respond to the foreclosure complaint within the time allotted and were subsequently defaulted.
What is needed, far more than mandatory mediation, is an educated public. Homeowners need to be informed of their rights. Avoiding a deficiency judgment, or getting the lender to modify a loan, are legitimate foreclosure defense litigation goals. Homeowners simply need to be advised to see an attorney when they are served with a foreclosure complaint, or any lawsuit for that matter.
Hiring a Realtor or Broker to Short Sell Your Property
What you need to know when hiring a Realtor or Real Estate Broker to do a short sale of your property:
Hiring the right realtor or real estate broker to conduct a short sale may be one of the largest challenges facing short sellers today. Messing this step up could devastate your chances of avoiding a deficiency judgment.
Your Realtor or real estate broker may not have your best interest in mind. Your goal is to avoid the potential for the lender to seek a deficiency judgment. The Realtor or real estate broker’s goal is to sell the property and collect a commission, regardless of whether the Lender agrees to refrain from pursuing a deficiency judgment. This is one of the most important reasons to be represented by an attorney. Be certain that your interests are being protected throughout the short sale process.
Many Realtors only look out for the commission and do not care whether or not the homeowner avoids a deficiency judgment, and their brokerage agreements read accordingly. In fact, it has become prevalent for real estate brokers to include a short sale addendum in the real estate brokerage agreement that could have a negative impact on your best interest. For example, many short sale addenda to real estate brokerage agreements require that the client provide “ALL” information the Lender may request to evaluate whether on not the Lender with “approve” the short sale. The problem is that the Lender’s request for financial information is a fishing expedition to determine whether or not the Lender will pursue a deficiency judgment. You don’t want your agreement with your real estate broker to have a negative impact on your end goal of avoiding a deficiency judgment.
Therefore, it is important to have an attorney review the agreement between you and your real estate agent or broker before you sign a real estate brokerage agreement.
Likewise, it is also important to have an attorney review the offer to purchase or real estate purchase and sale agreement prior to signing. Many real estate brokers include a short sale addendum that doesn’t include a provision that makes “closing” contingent upon the Lender’s agreement to refrain from pursuing a deficiency judgment and cancel the promissory note. This is important because without such a provision, the short sale buyer/purchaser could sue to force the short sale seller to “close” where the Lender approves the short sale, but will not agree to refrain from pursuing a deficiency judgment and canceling the promissory note, the ultimate goal of many of our clients.
Every short sale situation is different. Therefore, you need advice that is specifically tailored to your individual situation. Because real estate brokerage agreements come in as many shapes and sizes as there are brokers, a thorough review of the proposed brokerage agreement is mandatory to ensure a consistent strategy to avoid a deficiency judgment. Castle Law Group typically recommends the use of one of our addendums to the brokerage agreement, and one of our addendums to the purchase and sale contract.
The advantage in having Castle Law Represent ONLY YOUR BEST INTERESTS in a Short Sale:
Our addendums typically include the following: (1) make the real estate broker commission contingent upon actual closing, (2) provide that the Seller has discretion concerning the type and nature of the documents to be provided to the Lender for the Lender to evaluate whether or not to approve the short sale, and (3) that the Seller is not obligated to sell/close unless the Seller is satisfied with the terms of the Lender’s approval letter, contract or settlement with the Lender.
$4 Million Grant for Florida Foreclosure Defense
Today Florida’s Attorney General, Bill McCollum, announced that the State of Florida will have funds to help Floridians facing foreclosure.
Thanks to a settlement with Bank of America, resulting from their takeover of Countrywide Financial, the State of Florida will be releasing $4 million dollars to provide Foreclosure Defense services. The funds will be distributed to non-profit agencies beginning October 1, 2009 through September 30, 2011.
Read more about it here in a story posted by the Tampa Bay Business Journal.
634,000 Americans 50+ years old facing foreclosure
According to AARP Magazine (March/April 2009), there are 634,000 Americans aged 50+ who are 30-180 days past due on their first mortgages.
A study done in September, 2008 by AARP indicates that, at that time, Americans 50+ years old represented 28% of those who were delinquent, in foreclosure or who had been foreclosed. The study titled “A First Look at Older Americans and the Mortgage Crisis” is available by clicking HERE.
The assumption that they are in good shape during this crisis, based on equity and low fixed interest rates, has not proven true. Unlike younger homeowners, who may eventually be able to recover from such a loss, homeowners in this age group may never recover, and may suffer significant financial reprecussions into older age.
WHY THE BANK DOES NOT WANT YOUR PROPERTY
If you have been served with a foreclosure suit or foreclosure complaint, it is important to know that you have options, and that your lender doesn’t want your property.
The information below is for demonstrative purposes only and does not reflect the actual percentages, values or numbers concerning any particular bank.
Lending Guidelines & Regulation: What happens when you are 45 days late
While bank or lenders have different capital structures, banks that are regulated by the FDIC have certain guidelines they must adhere to. For example, XYZ Bank makes a $200,000 loan for an investor to purchase a residential property in 2005. In 2007, the borrower goes 45-days delinquent. The FDIC knocks on the bank’s door and says, “I see this loan is 45-days delinquent, please put $2,000 of your equity capital into a loss reserve account. This $2,000 of equity capital actually represents $20,000 of XYZ Bank’s lending power.
Leverage:
Most bank use LEVERAGE when making loans. When XYZ Bank makes a loan, it puts 10% of its equity capital into the loan, and uses other peoples money to fund the remaining 90% of the loan. The borrowed money could be your own deposits, certificates of deposit (“CDs”), or money borrowed from other banks.
Lending Guidelines & Regulation: What happens when you are 90 days late
When the loan goes 90-days delinquent, XYZ Bank puts the loan into foreclosure. The FDIC knocks on the door again and asks XYZ Bank if it has an appraisal or Brokers Price Opinion (“BPO”) more recent than 12-months. If the bank doesn’t have a recent BPO or appraisal, the FDIC says, “go get one”. If the BPO comes back at $180,000, the FDIC instructs XYZ Bank to put another $18,000 of its equity capital into the loss reserve account because the bank is likely facing a $20,000 loss.
Why/When the Bank takes action:
This doesn’t have to happen too often before the bank is out of equity capital.
Banks have historically put loans into foreclosure after the loan goes 90-days delinquent. However, in this market, many banks cannot afford the FDIC knock on the door and are therefore delaying putting loans into foreclosure.
Why a Deed-in-Lieu of Foreclosure is not a great option for the bank:
Historically, banks would also accept a deed-in-lieu of foreclosure. In other words, an investor could say to XYZ Bank, don’t file a foreclosure suit against me. I will simply deed the property to you, the bank, then the bank would sell the property to repay the loan. However, under such a scenario, if the property value doesn’t significantly exceed the loan amount, the FDIC also requires the bank to set aside reserves because it has an asset that is not generating a return, and more particularly, in case it experiences a loss.
Today, many banks cannot afford to maintain a large portfolio of Real Estate Owned by the bank (“REO”).
Why Banks prefer a “Short Sale”
Therefore, often the best solution is for the owner to list the sell the property, for a loss, with the permission and blessing of the bank … a “short sale”. This puts cash back into the hands of the bank.
Castle Law Group specializes in actively defending mortgage foreclosure lawsuits with the litigation goals of preventing deficiency judgments and 1099′s.