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

The Fair Housing Federal Agency [FHFA] Back in the Spotlight

     The Fair Housing Finance Administration [FHFA] seems to be in the spotlight an awful lot of late.  Riding the highs generated from their August 21 press release with several welcomed short sale changes, the FHFA, seemingly in the same breathe, announced it will move forward as-planned with what is being regarded as a locally harmful initiative - their REO bulk sales plan.  The proposal calls for the immediate selling of 500 Fannie-Mae owned foreclosed [REO] homes in both Los Angeles and Inland Empire areas.  What’s not sitting well with the public is the lack of transparency with which the FHFA plans to carry out this bulk sales plan.  As C.A.R. President C.A.R. President LeFrancis Arnold noted in her August 24 newsletter, the FHFA aims to act out this plan “in a secretive manner by not disclosing any details, such as property locations, final property count, sales price, or names of winning bidders.” 

     LeFrancis’s and the C.A.R.’s disappointment with the FHFA is no secret.  In fact, the C.A.R. responded on August 22 by filing a request under the pretense of Freedom of Information Act to get specifics on the transaction details. 

     Analysts feel this plan will harm an already-delicate and uncertain recovery process.  For starters, bulk-selling REO’s will restrict an already-low inventory index.  The long-run average for unsold inventory in the Inland area is a 5- to 6-month supply, but currently stands at 3.1 months in Riverside County and 3.8 months in San Bernardino. Additionally, the FHFA’s plan will pump less than market prices into the equation at an accelerated rate.  Historically REO unloading negatively impacts market price levels, so this move is perceived to hinder the price gaining trends we’ve been experiencing of late.   

     Not to throw the FHFA entirely under the proverbial bus, as it is still only a few days out since it took strides in their attempt to provide better framework for Fannie and Free short sales.  The proposed changes are to go into effect November 1, 2012, which at least on paper are designed to better streamline the review process to enhance overall efficiency and market productivity. With regard to the most current announcements for the REO bulk sales plan, I don’t dispute that the high Fannie REO count may make it very difficult for the FHFA to know exactly what to do with them.  What gives the C.A.R. a legitimate gripe against the FHFA is the secrecy with which it plans to operate.  In an industry that dismissed the phrase caveat emptor (or buyer beware) many years ago, to instead preach “Disclose! Disclose! Disclose!”, their intentional disregard for transparency is tough to figure. 

Are We Finally Ready to Streamline the Short Sale Process?

     Realtors, investors and those in the know have long advocated a streamlined approach to short sales, but this movement is only now gaining momentum.  Perhaps the industry just wasn’t ready for such innovations before now; perhaps it took time and repetition for the industry to become seasoned and suited to streamline the process. 

     Not too long ago it was Governor Brown’s passing of the Homeowner Bill of Rights which hit the news; presently it is the recent announcements from the Federal Housing Finance Agency [FHFA], with specific changes going into effect as soon as November 1, 2012.  Regardless how you slice it, it is clear that key market players are making applaud-worthy efforts to improve existing Loss Mitigation processes aimed to support the rebuilding process on both local and national levels.   

     The FHFA is the governing body of the government-sponsored entities of Fannie Mae and Freddie Mac, and announced on August 21 new short sale guidelines for Fannie and Freddie.  Fannie and Freddie existing shortsale programs will merge into one standard program.  Consolidating processes into a single, uniform program should certainly help [the industry] execute short sales more effectively and efficiently.  Additionally, Servicers will now be able to process and approve eligible short sales without having to first submit to Fannie and Freddie.  Fewer document requirements are being implemented as well for qualifying homeowners.  These innovations are hoped to have the combined effect of shortening the qualification process.

 ther highlights of this announcement include:

·         second lien holder contributions of up to $6,000 by Fannie and Freddie

·         Opportunities to short sell for current borrowers demonstrating hardship

·         Special treatment for military personnel

    Analysts believe that such innovations will make it easier for banks to quickly qualify eligible borrowers for a short sale.  As the FHFA Acting Director Edward J. DeMarco remarked, “These new guidelines demonstrate FHFA’s and Fannie Mae’s and Freddie Mac’s commitment to enhancing and streamlining processes to avoid foreclosure and stabilize communities.”

An Analysis of the Low Unsold Housing Index

     The most recent real estate reports for California markets continue to identify low inventory as the stand-out characteristic.  Historically the turnover from spring to summer brings a seasonal surge of listing and sales activity.  Yet in 2012…. Not so much.  The California Association of Realtors recently reported that single family home sales [SFR] were up 8.5 % across the state from last year but down 8.6% from May levels.  C.A.R. Vice President and Chief Economist Leslie Appleton-Young attributes much of this downward month to month sales activity to the tightening of distressed and foreclosure units available for sale.  Most analysts share the view that this low seasonal inventory, coupled with high demand sustained by low interest rates and a strengthened job market, has concocted a seller’s market dominated by multiple offer situations and bidding wars which drive up home prices.  June median home prices substantiate this reasoning, as the reported figures for the third consecutive month were above the $300,000 mark, ending June at $320,540, its highest mark since December 2010.

    But just how low is inventory?  One of the best measurements of inventory and overall health of the housing market lies in the Unsold Housing Index, calculated by determining how many months it would take to sell homes currently on the market at the current rate of home sales.  The Unsold Index is simply calculated by dividing the available homes by the number of homes sold. A three month Inventory in the Unsold Index indicates that at the current rate of sales it will take three months to completely deplete the inventory, assuming that no new listings are generated.  A reported index of 7 is commonly regarded as a healthy market.  And with the current California Unsold Index at 3.5 months, there is no debate that we are currently experiencing a tightened housing market, especially when seasonal adjustments are factored into the equation.

     If we take the above study a step further, perhaps we can diagnose what type of sale is contributing most to this downward inventory trend?  As the below chart will indicate, pulled from the C.A.R. website, equity sales continue their year-to-year and month-to-month climb, while distressed sales, more specifically REOs, continue on a downward pace. 

Type of Sale	June 2011	May 2012	June 2012
Equity Sales	50.5%	56.0%	58.0%
Total Distressed Sales	49.5%	44.0%	42.0%
REOs	29.2%	22.6%	20.2%
Short Sales	20.0%	21.1%	21.4%
Other Distressed Sales (Not Specified)	0.2%	0.3%	0.4%
All Sales	100.0%	100.0%	100.0%

     With the average distressed sale fetching lesser purchase prices than equity sales, such a trend helps partly explain the current price increases.  With inventory levels so low, the next big question to ask ourselves, why this continued percentage drop in REOs share in the marketplace?  Are distressed homeowners finding solutions to keep their homes without having to put their properties up for sale to avoid foreclosure?  Are beneficiaries taking more time to both process foreclosures and to resell foreclosed homes?    

     Well, as statisticians love to say, “the numbers don’t lie”.  As the graph below illustrates, pulled from Foreclosureradar.com :

… both the average time to foreclose and the time it takes beneficiaries to resell their REOs have increased since the start of 2012.  Both trends can help explain why there has been a recent decline in REO sales and overall sales.   It’s certainly possible that lenders are extending these foreclosure-related processes to add fuel to the existing price increase trend.  But it could also be the extreme back-log of delinquent accounts and the limited resources lenders have to process all the homeowner inquires that is causing these lender delays.  My hunch… it’s a combination of both.  Regardless how you slice it, C.A.R. President LeFrancis Arnold explains that the decline in REO housing supply is “putting upward pressure on bank-owned home prices, with the median price of REO properties showing a double-digit year-over-year gain of 11 percent in June.”

A Close Look at Studio City Foreclosure Trends

As the summer wheels continue to churn forward, my focus intensifies on foreclosure trends in my local market here in Studio City, CA, home base for my real estate firm, Equitable Realty & Services.    Through the scope of my Economics Degree, I’m always looking for signs of growth and increased productivity, as the market continues to search for ways to heal itself.  Political innovations, like the recent passing of the California Homeowner Bill of Rights, or the Mortgage Forgiveness Debt Relief Act of 2007 [which I bring up now only because it is currently set to expire December 31, 2012], are also given their due attention for their immediate impact on the local and national recovery process.

For such real estate data research, I can always rely on the published works of RealtyTrac Inc., a leader of the online marketplace in collecting and aggregating foreclosure data worldwide since its inception in 1996.  I encourage anyone who shares my similar interests on these issues to visit RealtyTrac at www.realtytrac.com .  There you will find helpful statistics, even graph analytics like the caption below. 

Foreclosure Activity and 30-Year Interest Rate - Studio City, CA

As you can see, this graph shows a steady decline in foreclosure activity in Studio City Real Estate since September of last year, providing a much needed confidence boost to eager realtors, investors, and homeowners looking on.  Studies on both state and national levels show similar trends.  But does this contained study provide enough statistical evidence to show the prolonged real estate and economic downturn is behind us.  Asked differently, is the market trajectory truly on the path of recovery?   The answer may be right here on this very same graph. 

If you look at a historical graph of interest rates and recessions, you will nearly always observe recessions correspond with low rates.  Interest rates, as you know, can be regarded as the price of borrowing money.  Behaving similarly to normal commodities, pricing levels have direct correlation to a commodity’s demand.  Increased demand puts upward pressure on price, with the latter increasing until a new equilibrium is reached, and at a higher price.  This is Economics 101 people. 

The Federal Reserve continues to dive into their monetary policy arsenal, doing their part to keep both short-term and long-term rates low to encourage business, spending, and investment.  Fed Chairman Ben Bernake uphold the policy committee’s aim to maintain such measures until the end of 2014, at least for the time being.  From a housing perspective, the historically low rates will help awaken business and fight the foreclosure crisis head on. With the price of borrowing cheaper, target areas of first-time home buying, new construction, refinance and real estate investment will all receive a shot in the arm.  When normalcy in the market is restored, it will be strong enough to support interest rate increases. 

So, not until I see both the foreclosure trend downward and interest rates upward can I truly maintain that the economy has pulled through the worst of it.    

The California Governor Makes the Homeowner Bill of Rights Official

     In a bold yet calculated move, California Governor Jerry Brown pulled the trigger on the long-discussed California Homeowner Bill of Rights, officially signing the bill into law last Wednesday, July the 11^th.  Designed to reinforce the existing infrastructure for loss mitigation review processes, the California Homeowner Bill of Rights is hoped to help families and homeowners better avoid foreclosure whenever possible so that the negative consequences of such foreclosures can be subdued.  As a short sale specialist for the past 4 years, it is far too common a story to hear of pre-qualified homeowners being unsuccessful in their loss mitigation efforts.  Even with their packages falling in line with the program criteria, homeowners are coming up empty-handed on their modification and / or short sale campaigns, only to have their lender foreclose and repossess the property.  Much like applying pressure to an open wound to stop the bleeding, the Homeowner Bill of Rights is being called into action to push down these foreclosure horror stories one at a time so the market and overall economy can heal at a faster rate.

     Set to come into effect on January 1, 2013, the law will only pertain to first trust deeds secured by owner-occupied properties.  Below itemizes the primary components of the law.  For full text, I encourage all my California readers to visit www.leginfo.ca.gov  In my next blog to follow this week, I will share my own analyses and forecast the effectiveness of the law’s various components in reducing foreclosure rates across California. 

     The California Homeowner Bill of Rights, A.K.A. Assembly Bill 278 and Senate Bill 900, consists of the following primary components:

1.  Imposes Limitations on Dual Tracking à Dual Tracking is a practice in which a mortgage servicer / lender continues to advance a property through the foreclosure filing process concurrently to reviewing a defaulted borrower for a workout program.  Under this provision, while a homeowner is currently requesting modification or short sale consideration from their bank, the borrower’s bank will no longer be able to freely push the property further into foreclosure, whether it be recording a new notice of default or notice of sale, or even conduct a trustee’s sale. Depending on workout review status, certain foreclosure filing restrictions will now apply.  As Governor Brown stated, “Californians should not have to suffer the abusive tactics of those who would push foreclosure behind the back of an unsuspecting homeowner.  These new rules make the foreclosure process more transparent so that loan servicers cannot promise one thing while doing the exact opposite.”

2. Requires Provision of Single Point of Contact à For a borrower requesting a foreclosure prevention 

alternative, the mortgage servicer [or bank] will be required to promptly establish and provide a direct means of communication with a single point of contact.  This provision is aimed to make it a bit easier for homeowners to acquire workout and foreclosure status updates, which theoretically will create more efficiency in review timelines.

3. Additional Written Notice Requirements à Mortgage Servicers/ lenders will be required to provide borrowers written correspondences pertaining to both workout and foreclosure status changes.  The element of surprise may be suitable for a birthday party, but certainly does not have much of a place in loss mitigation. 

4. Mortgage Servicers / Lenders are Subject to Penalties for Violations of this Law à In an effort to prevent reckless behavior, mortgage servicers / lenders are now more susceptible to penalties for violating any of the above parameters of the law.  Borrowers will now have an opportunity to bring action against their banks for violations of this provision.  Monetary awards and suspension of foreclosure activity are both available for homeowners found to be victims of lender misconduct.