California Foreclosures Spike. Can You Guess In Which Direction?

     The end of the 2012 calendar year is now in sights.  Analysts and real estateprofessionals can’t help but eye the future and speculate on what 2013 might bring.  Many believe 2013 will be a continuation story of much of 2012 –

• supply shortages amidst a demand-heavy market will help drive up median home values
• cash investors will continue to gain an even bigger market presence by snatching up bargain deals afforded by pre-foreclosure and REO sales
• rental market demand will continue its upward climb, as tight lending practices are expected to remain constant and homeowner consumer confidence remains below traditional norms

     But with six weeks still to go in 2012, much can happen in a real estate market as fragile as it currently is, on both national and state levels.  The California real estate markets seem especially susceptible to statistical changes due to the political reforms enacted in our state legislature.  The California Homeowner Bill of Rights, for example, was passed earlier in the year, and is due to take effect January 1, 2013.  The impact of this government intervention is, however, already seeming to rear its head.

     ForeclosureRadar recently reported a 60 percent jump in foreclosure cancellations in California from September to October, the biggest spike since it began tracking cancellations in 2006.   “While this is not the first time cancellations have spiked, this is the largest one-month increase since we started tracking foreclosures in September 2006,” the company says in its report.  Many are attributing this trend to the Homeowner Bill of Rights; more specifically, the provision which restricts the loss mitigation practice of dual-tracking.

     Dual-tracking is a practice wherein a Mortgage Lender / Mortgage Servicer is simultaneously processing a loan through the foreclosure process while said loan is being considered for a home loan modification or short sale workout option.  According to the California Homeowner Bills of Rights legislation, Mortgage servicers will be required to render a decision on a loan modification or short sale application before advancing the foreclosure process.  Said differently, the foreclosure process must be paused until the review of a homeowner’s loss mitigation workout application is completed.  This provision will help many avoid foreclosure, as it will extend a homeowner additional time to seek resolution should any given workout attempt go unsuccessful.  However, analysts are contending these political reforms may have unintended side effects which may hinder market recovery. 

     A recent quote from founder and CEO of ForeclosureRadar, Sean O’Toole, says it all. “The California Homeowner Bill of Rights that takes effect in January 2013 is beginning to impact foreclosure trends.  This is another example of where changes in foreclosure trends are driven by government intervention, and not necessarily economic recovery. While the impacts are still unclear, the elimination of dual tracking may avoid some unnecessary foreclosures, but will lengthen the foreclosure process and delay ultimate recovery. Expect further impacts to foreclosure trends in the months ahead.”

Has the Real Estate Recovery Process Truly Started?

     The California real estate market has shown some signs of improvement over the past few months.  Home prices have received upward pressure from a demand-heavy marketplace amidst limited supply of available listings.  Highly competitive bidding wars are being commonly reported.  In fact, C.A.R. October press release shows 57 percent of home sales received multiple offers, representing the highest percentage in the last 12 years.  Moreover, on average, each home received 4.2 offers, up from 3.5 in 2011. 

     Another welcomed trend, as reported by DataQuick, shows the share of equity sales in California in September to have reached its highest level in 4 years, climbing to 63 percent, as compared to a mere 50.8 percent of all sales as recently as September 2011.  Let’s not get too excited, however.  The percentage shift being seen is a result of a more constrained REO-dominated market as opposed to an increase in equity sale numbers.  Regardless, this market shift is a welcomed discovery, as it does lend to an increase is median home values.

     Despite the above reports, I still find myself reluctant to label these recent developments as the start of a full-blown market Recovery.  I’m no pessimist, and I do regard the glass as being half full.  But simply categorizing home price appreciation as the start of the full-fledged Recovery may be a bit premature.  Instead, let’s call my sentiment regarding these real estate market improvement one of Cautious Optimism, and below I will explain why…

     For starters, Freddie Mac’s study of fixed mortgage rates continue to reveal mortgage rate indexes are hovering near record lows.  Frank Nothaft, chief economist for Freddie Mac, remarked “Mortgage rates remained relatively unchanged this week on signs of a growing economy and low inflation.”  The increased affordability of home loans should help fuel sales, but prolonged levels of low rates [as recent forecasts show] are good barometers of the overall economy condition, indicating the real estate market is not yet strong enough to support interest rate hikes.

     Additionally, C.A.R. Vice President and Chief Economist Leslie Appleton-Young, even amidst positive indicators of an improving market as noted above, still maintains the 2013 forecasts are inconclusive. “The wildcards for 2013 include federal, monetary and housing policies, state and local government finances, housing supply, and the actions of underwater homeowners – not to mention the strength of the overall economic recovery,” says Appleton-Young.

     All that being said, I am very pleased the market is finding ways to improve, and optimistic such trends will continue their upward climb, albeit more slowly than we would like.  My hesitance to label market improvement as an all-out Market Recovery is largely predicated on forecast studies like the below C.A.R. October press release…

     2013 California median home prices are expected to rise slightly, but not necessarily due to a strengthening of the marketplace, but more so due to supply shortages.  The most intensive bidding wars are still predominantly among cash investors, edging out first-time homebuyers and handicapping a more comprehensive market rebuilding process. Interest rates are expected to remain at historic lows, which is perhaps a leading indicator the market will not be strong enough to be labeled as being amidst full Recovery.  Instead, these forecasts do show the market will continue to be quite fragile, not yet strong enough to sustain higher mortgage rates nor healthy levels of available supply.  Any unanticipated changes in monetary and housing policies could derail these trends of improvement.  As a result, I will maintain my stance of Cautious Optimism when it comes to my analysis of the market recovery. 

Banks Slow to Extend Californians the Agreed-Upon Principal Reductions

     Reports as recent as  August 2012 indicate banks are still slow to extend principal reductions to California homeowners after the $25 Billion Mortgage Settlement was approved by the federal judge on April 5, 2012.  Even though the settlement provisions were effective immediately, the California Reinvestment Coalition (CRC) reported the banks have returned to “business as usual” by forgoing principal reductions to instead push their short sale efforts forward.  Kamala Harris, California Attorney General, had secured $12 billion in principal reductions to homeowners to be used by 2015, yet recent reports from the CRC show a mere 2.7%, or $335 million, as being used for such purposes.  Studies by Keeping Current Matters [aka The KCM Crew] echo these findings, with KCM portraying their research in the below pie chart which shows how the National Mortgage Settlement funds have been spent.

  

     As the chart above indicates, banks are certainly prioritizing their short sale efforts in California in the wake of the Mortgage Settlement, with an estimated 85% of the exercised settlement funds being used for such purposes.  As a realtor Los Angeles specializing in short sales, I’m a little torn by these statistics.  It’s encouraging to see the settlement funds stimulate the short sale arena; after all, these transactions still hold up as a less costly remedy than foreclosure.  At the same time I would also contend principal reductions would go a long way in revitalizing the housing market statewide by opening up more opportunities for refinancing, as well as eliminating more negative equity from the market equation.  Kevin Stein, associate director for CRC, contests “The California piece of the settlement emphasized principal reduction because that is what is needed to stabilize families and neighborhoods in California, and yet the banks’ initial performance shows that meeting Californians’ needs is not their priority.”

    Perhaps the participating lenders / servicers in the Mortgage Settlement can take a page out of life’s playbook and realize that balance is the key component to anything healthy.  Placing too much emphasis on short sales may prove to have less corrective impact than if the funds were more evenly dispersed over all types of assistance programs.  For those underwater homeowners in California interested in principal reduction, it is certainly possible that lenders will begin extending this type of workout more so than in the prior months, since the settlement months are still available for this specific use.  But until lenders begin exercising this workout program at a higher frequency, principal reductions should not be the expectation.  

Surviving the Short Sale Escrow Process

A residential short sale is not the simplest of transactions.  Unlike in a standard sale [i.e. equity sale], realtors in a short sale must first work with a homeowner’s lenders to acquire short saleapprovals before escrow closing can take place.  The realtor will not only have to successfully navigate the homeowner’s loss mitigation department to do so, but often times must operate in the face of a foreclosure looming in the background.  For many files, closing dates are established just days before a foreclosure auction.

In these situations, I commonly get this question thrown my way: “What happens if we need more time to close? The lender won’t foreclose, will they?”

As a short sale negotiator, I always have an eye and an ear on investor tendencies when it comes to foreclosure processing.  In days prior, it was not uncommon to see postponement after postponement being issued once the short sale was fully approved.  Investors were seemingly more reluctant to proceed with foreclosure and incur the associated costs for facilitating such an action.  As a result, realtors began relying on short sale approvals as a security blanket to help stave off foreclosure auction.   In more recent times, I’ve seen a growing trend for investors to choose foreclosure over short sale if the sale is looking like it ‘s floundering and won’t get done.  Requesting more time, and then more time, or requesting buyer change after buyer change, are red flags which eventually induce the investor to simply pull the plug instead of putting in more time, resources and money into processing the file.  After all, the short sale process is a form of Loss Mitigation.

As a general rule, I always encourage my files to close on or before the original closing date established in the lender’s short sale approval paperwork.  Predominantly this date is at least 30 days out from the date of approval issuance, which should give ample time to complete inspections and prepare escrow for closing.  With cash buyers, closing time can routinely be cut down to 30 days or less, so from a short sale perspective, Cash is most certainly King. 

Cases wherein buyer’s are requesting financing, today’s market does make it a bit difficult to manage a 30-day or less escrow close.  With everyone keen on taking advantage of the historically low interest rates, short sale buyers seeking loan financing are competing for limited lender attention.  To make sure my short sale buyer loan applications are processed in 30 days or less, I’m never more than a phone call or email away from the loan officer.  I constantly defer to the loan officer for status, and identify and implement corrective measures the moment I see underwriting fall off course.  Taking a proactive approach to all aspects of short sales is the key to my successes.

If I find the established closing date fast approaching and more time is absolutely necessary, I push the lender to at least show evidence of the following, placed in order from most ideal to least:

1. confirmation of funding

2. confirmation of all buyer’s closing funds wired into escrow

3. confirmation of signed loan docs

4. confirmation of loan docs

Without showcasing any of the above, a short sale lender will be more compelled to deny the short sale and proceed with foreclosure.  But if you can demonstrate to the short sale lender that your listing is on the cusp of closing, as these four statuses do, you are doing all that can be asked – maximizing the chances your short sale listing will get done successfully.  

Perfecting the Art of Short Sale ESCALATIONS

It is always frustrating to have file reviews fall behind schedule; the short sale process time line is long enough without such delays.  For short sale specialists, escalations are the primary tool at our disposal to correct review hold-ups.  All short-pay lenders implement procedures to correct any short sale negotiation process that has derailed from its expected review course.  Although each lender might use a different name for such a procedure, the end result is the same.  The most widespread identifier for this lender, corrective process is the ESCALATION, so for the sake of this article, we’ll use the same.  If used properly, the escalation will minimize your negotiation time and bolster your closing rate!

The escalation is a coined loss mitigation review term used by realtors and 3^rd party negotiators to red flag a short sale review.  For each and every bank task, an expected due date (or time frame) is provided.  As soon as the due date (or time frame) has elapsed, the file should become eligible for a red flag escalation.  The escalation message will usually be sent not only to the delinquent review party, usually the assigned file negotiator, but to the review party’s immediate manager / oversight team.  The escalation will then have an expected turnaround time for the delinquent party to bring the file back in good standing.  Should the escalation time period elapse with no file advancement or account note updates, the file will again be eligible for an additional, phase 2 Escalation.  This additional escalation will have a new response date, and will usually include even higher management than the initial escalation request.  As such, the escalation really has two benefits:

1.       Places a red flag tag on the file until the review process has been brought up to speed

2.       Includes upper management to make these parties aware of the file delays, establishing a way for agents and 3^rd party negotiators to walk up the bank’s chain of command

Keep in mind, that should an initial escalation go unanswered, not all is lost.  In fact, each and every escalation documented in the account notes will add strength to our short sale negotiation leverage.  A history of under-performance by a bank employee, as evidenced by an account record full of escalations, will eventually place the file under review of upper management with more immediate access to the overall decision team.

A Close Encounter of the Short Sale Kind

No doubt the short sale transaction still maintains its dominant footing in residential real estate.  As an active Realtor and short sale specialist, I still encounter the full gamut of short sale scenarios – small condos to luxury homes, single family to multi-units.  Property values range from sub $100,000 to well over $1,000,000, and the unpaid loan balances vary just the same.  Many short sale lenders have introduced a variety of short sale programs to target this diverse range of underwater situations still prevalent in their portfolios.  Lenders even continue to shell out attractive incentive packages for homeowners proactively seeking short sale assistance, seemingly to award these homeowners monetarily for taking the “high road” and helping each other cure these non-performing portfolio assets.

Bank of America, for example, continues to solicit and review their clients for their [relatively new] Cooperative Short Sale program.  A Bank of America Cooperative Short Sale can both streamline the review process and offer the homeowner financial assistance ranging from $2,500 to up to $30,000.  Many homeowners approach me with a kneejerk reaction to ask how they can quality for the maximum $30,000 award.  Although Bank of America weighs many variables to determine the offered incentives package, I’ve witnessed firsthand the homeowner’s default status as playing a major, determining factor.

All else being equal, Bank of America has offered my clients higher relocation awards when the homeowner approaches their lender earlier in default.  Homeowners who haven’t even missed a payment yet have qualified for high relocation awards.  I’ll give you two very recent examples which illustrate this point:

1. Homeowner A had an unpaid principle balance of $976,000, with an estimated home market value of $755,000.  Homeowner A approached Bank of America for their Cooperative Short Sale program 39 months into default, and was extended a relocation award of $8,700

2. Homeowner B had an unpaid principle balance of $301,000 with an estimated home market value of $219,000.   Homeowner A approached Bank of America for their Cooperative Short Sale program with 0 months of default, and was extended a relocation award incentive of nearly $13,100.

From the above, I can deduce that a borrower’s default status plays a big role in the relocation award calculation.  Homeowners who approach their lenders earlier in default seem to optimize their chances of getting the higher incentive award.  Curing a defaulted loan earlier in default saves the lender big bucks; it would seem lenders are incentivizing borrowers to take early action as opposed to waiting until the last possible minute before seeking resolution.   

The Hardship Letter – Create Your Voice & Your Bank May Just Listen

Any Loss Mitigation Professional will tell you that running an efficient short sale [or loan modification] campaign is no simple task to perfect.   It all starts with the assembling of the application, chalked full of homeowner hardship materials and real estate transaction documents.  When all said and done, the initial package submitted to open lien holder review averages out to 60 + pages of documentation, with enough stuff to keep any bank negotiator busy for weeks on end.  The sheer magnitude of each short sale application lends one reason why the short sale process tends to take 45 – 60 days to generate lender approvals for Equitable Reality & Services’ negotiators, a time frame which can grow significantly for lesser experienced, short sale agents or negotiators. 

For this present article, I want to hone in on just one item within the short sale package - The Hardship Letter.  The hardship letter can be regarded as the cover page for the entire application, and if well constructed, will establish a foundation upon which your loss mitigation case can be built.  It need not be a ten page biography, nor should it be a solitary, fragmented sentence without backbone.  A well-crafted hardship letter should fit on a single page, and concisely identify:

1. personal account info [account holder names, loan account numbers, property address]

2. the homeowner’s current financial difficulties

3. the homeowner’s intent to sell their property via shortsale [or, if applying for a loan modification, the homeowner’s request for modification consideration]

If done properly, your letter will give your bank negotiator perspective, a narrowed tunnel vision through which he or she can review your financial materials.  It’s not the letter itself that drives the decision process ; it’s the financial materials which speak up for themselves.  But it’s the hardship letter that gives this collection of pay stubs, bank statements, financial statements and tax returns a unified voice.  In an industry with so much competition, with bank departments inundated with applications, a finely-tuned voice will help you set yourself apart from the deafening crowds.

Please click on the link below for a hardship letter sample http://www.equitableres.com/samplehardshipletter.pdf

In total, six key features are identified in the sample:

1. date of letter

2. item appropriately labeled as ‘Hardship Letter’

3. personal account info identified

4. homeowner current financial difficulties identified clearly and concisely

5. request for short sale consideration clearly documented

6. signed and dated