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

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.

A Silver Lining in a Troubled Market

     

     When it comes to real estate, especially here in southern California, I commonly get asked the question, “When do you think the worst is behind us?”  Using new foreclosure filing figures as my guide, I am unfortunately here to report that recent studies show the real estate market may not be as well off as some analysts had forecasted in prior months.  According to RealtyTrac Inc., a leader of the online marketplace in collecting and aggregating foreclosure data worldwide since its inception in 1996, lenders commenced foreclosure proceedings against more homeowners nationwide last month.  In fact, over 109,000 new Notices of Default [NOD] were filed in May 2012, representing a 12% increase from the prior month and a 16% increase compared to May 2011.  Much like picking up an opponent’s tell in a competitive game of poker, these trends reflect how lenders are becoming more aggressive in their efforts to address delinquent mortgages.

     Unless a homeowner is able to reinstate [or make up missed payments in full] their loan, or unless a loan modification or refinance is obtained, NOD’s eventually lead to either foreclosure auctions, home repossessions, or short sales.  Since foreclosures, REO’s and short sales all tend to sell at a discount, such transactions would continue to negatively impact home values. 

     There is an upside, however, which we can all feel good about.  Although the rate of foreclosure initiations has increased of late, so too has the number of short sale closings as compared to foreclosures.  In fact, Realty Trac reports that the first quarter of 2012 shows not only a 25% increase in short sales as compared to the prior year, but REO sales decline of 15% this first quarter.   What does this tell us?  Lenders have increasingly embraced the short sale as a more lucrative loss mitigation tool as compared to repossession and the eventual real-estate owned [REO] sale to follow.  Since short sales tend to sell at a smaller discount than REO homes, such transactions have less of a negative impact on home prices.

     So although we will likely continue to see new foreclosure cases injected into the marketplace over the next several months, we can take solace in the fact that better loss mitigation systems are now in place to absorb the negative implications of such foreclosure activity.  If you want my quick retort the question, “When do you think the worst is behind us?”, I would respond as follows –

     I do not envision any further extreme losses in home values as we saw with the initial bubble burst in 2006 - 2007.  However, the dynamic between new foreclosure filings and more efficient loss mitigation approaches will likely continue to thwart drastic home value growth for the next few fiscal quarters.  

The Loss Mitigation Menu May Just Have a New Entrée Addition

    

     Recent studies indicate that one in three homes is presently underwater nationwide.  Many such households have either attempted in the recent past, or are currently amidst, loss mitigation resolution efforts to alleviate themselves from their distressed property situations.  For some time, the menu of mitigation entrées has been somewhat limited in scope to the following few choices – loan modification, refinance, short sale, or deed-in-lieu.  Bank of America’s pilot testing of their Mortgage to Lease program may soon mature into a permanent, new loss mitigation option for underwater households. 

     At present, Bank of America has solicited an estimated 2,500 households in Nevada, New York, Arizona and California.   Analysts are optimistic that the program will not only be received with open arms by the general public, but identified by investors as a solid loss mitigation tool as well.  Myself and my Equitable Realty & Services co-workers are all optimistic that we will soon see the Mortgage to Lease program added as a permanent loss mitigation menu item nationwide.  While said program is still in its testing phase, now is the perfect opportunity to identify the prequalification requirements so my California readers can be first line in the application process once the pilot tag is lifted.   

·          Have loans owned by Bank of America.

·          Are delinquent for more than 60 days.

·          Have exhausted modification solutions or have not responded to alternatives to foreclosure, including short sale and deed-in-lieu.

·          Have high loan balances in relation to their current property value.

·          Face considerable risk of ultimate foreclosure.

·          Have no junior liens.

·          Are still occupying the home.

·          Have adequate income to make an affordable rent payment.

    If you believe that you meet the above criteria, keep a watchful eye on new developments, because I believe the Mortgage to Lease program floodgates to open up very soon. 

    Keep in tune for a follow-up blog which will summarize the key benefits of the Mortgage to Lease program.

THE SHORT SALE TRANSACTION : BACK TO THE BASICS

As an everyday California Realtor and short sale negotiator, I sometimes take for granted all the situational learning I’ve accumulated over the past four grueling years.  What I now regard as second nature may truly be an exercise of the unknown to others when it comes to the short sale transaction.  If you look at statistical evidence, putting a proper file together, and efficiently walking said file from submission to short-pay approval, must be no simple task.  In fact, it is estimated that only 1 in 3 short sales get approved, and even fewer close successfully.  These numbers certainly demonstrate the inherent challenges Realtors face when taking on short sale listings from their clients.

I must have woken up on the altruistic side of the bed today… because I am calling upon myself to present a quick refresher course dissecting the short sale basics, which my audience of fellow agents, buyers and sellers will hopefully find useful for their own short sale endeavors.

A short sale is a real estate transaction in which the sale proceeds are less than the outstanding loan balance(s) owed on the current mortgage lien(s).  Due to the realized loss incurred by the owner of the loan, approval from the owner(s) [of the note] becomes a prerequisite prior to closing the transaction.  Although each lender has adopted its own unique short sale process, each share similar characteristics, and the outline below hits the key highlights.  Before engaging the short-pay lender, it is imperative that you work directly with your homeowner clientele to acquire the appropriate items the lender will be requesting.  It is likewise just as important to the take the next step and audit all documentation, so that no rock is left unturned and the file is evaluated from every angle.  Future blog postings will break down the underwriting process of your short sale package.  For this current article, let’s make a big assumption that such underwriting has been completed… What’s next?

1. SUBMIT 3^rd PARTY AUTHORIZATION à This form is predominantly faxed / submitted separately from the full short sale package.  To ensure your form is accepted by the lender, be sure that your authorization form includes:

                   * full property address, as it appears on the homeowner’s mortgage statement

                   * loan number(s)

                   * seller full printed name(s)

                   * seller signature(s) and date(s)

                   * last 4 digits of seller social security number(s)

                   * identify all intended, authorized parties

Usually this form is honored for the duration of the short sale review process, or until the homeowner instructs their bank to remove authorized parties.  Should you need immediate access to your client’s account, and do not have the luxury of waiting for your authorization form to clear, you can always call the lender with your client and acquire temporary verbal authorization.

3. FILE SUBMISSION à Once your short sale package is rendered complete, packed full of your seller’s financial data and your transaction documents, your file should be submitted to your lender to initiate the negotiation process.  It is important to transmit the entire package in one shot, and in chronological order.  It is this part of the review process which seems to give the short sale nation the most grief, yet it is ironically the portion that which we as real estate agents have most control over.  If information is missing, or documents cannot be located in a messy package, the short sale department will not advance your file’s review.  If submitted incorrectly, you can expect your short sale to be delayed significantly.  To avoid frustration, heart-ache and wasted time on the back-end, do yourself a favor and construct your short sale packages carefully on the front-end.   Always use a fax cover letter which identifies each item contained in the transmission.  In case you are wondering, below is the order chronology I find most effective for my short sale packages after much trial and error:

                   * fax cover sheet

SELLER HARDSHIP DOCUMENTS                   

                   * seller hardship letter

                   * short sale lender application, which will include a financial statement for the seller

                   * seller proof of income

                    * seller bank statements

                    * seller 4506-T form

                    * seller last 2 years tax returns

SHORT SALE TRANSACTION DOCUMENTS

                    * Listing Agreement

                    * Purchase Agreement

                    * HUD-1

                     * buyer financing information

4. FILE QUEUED FOR SHORT SALE REVIEW à Upon receipt of the initial short sale request, the short-pay lender will audit the package for completeness and accuracy.  Only when the file is deemed complete will the account be advanced from the set-up team to the negotiation team.  For some lenders / servicers, the transition from the processing phase to the negotiation phase is not completed until the next step [COLLECTING VALUES] is also completed.  For other lenders, a negotiator may be assigned to your file prior to the recording of the subject property valuation data, but negotiations will obviously be limited until the COLLECTING VALUES process is completed.    

5. COLLECTING VALUES  à The short-pay lender will contact the file’s designated listing office to schedule an appraisal or Broker’s Pricing Opinion [BPO] in order to generate Fair Market Value [FMV] assessment data.  Such value reports are predominantly generated by a contracted 3^rd party, who is responsible for reporting their findings back to the short-pay lender. 

6. COMPARATIVE ANALYSIS à The bank’s FMV figure will be reviewed by the bank negotiator in conjunction with the buyer’s standing offer to determine strength and acceptance eligibility of the original offer submitted.

•  If offer is within bank’s acceptance range, file will be submitted to the investor for FINAL REVIEW & APPROVAL RELEASE.
• If the buyer’s original offer is less than the bank’s acceptance range, the bank negotiator will respond with COUNTER REQUIREMENTS. 
• If there is a sizable discrepancy between the buyer’s best & final and the bank’s bottom-line payoff requirements, this will be the appropriate time to request a VALUE DISPUTE. 

7. CLOSING THE SHORT SALE  à  When your file is approved, you will usually be allotted 30 - 45 days for buyer to obtain financing, and for escrow procedures to fully run its course all the way through recording.  At the end of escrow, title will be transferred from seller to buyer, and the well-deserved commissions will be paid out.

I hope you all find the above information helpful.  Be on the lookout for a new posting very soon.  

Californians, are you ready for Mortgage to Lease?

     Californians, are you ready?  As of May 25, 2012, Bank of America decided to expand its pilot program testing of Mortgage-to-Lease into California.  Initially extended to 1,000 households within Nevada, New York, and Arizona, Bank of America appears to be looking to increase its sample size of testing data points by inviting solicited California residents who meet the pre-screening criteria.  Including those originally solicited, the total is now estimated to be 2,500.  Bank of America is hoping such expansion will generate enough conclusive evidence of the effectiveness of the Mortgage-to-Lease program to warrant its full-fledged implementation across the country.  Until then, however, this pilot program will be conducted strictly on a solicitation basis in these four states, so hold tight on your application inquiries. 

     All of us at Equitable Realty & Services eagerly await the Mortgage-to-Lease pilot study findings, because said program could truly be the shot in the arm the real estate market needed to get back on track.  Bank of America Executive Ron Sturzenegger likewise optimistically remarks that if this program is welcomed by the public as a new alternative to foreclosure, Bank of America anticipates Mortgage to Lease “to stabilize housing prices in the surrounding community and curtail neighborhood blight by keeping a portion of distressed properties off the market. “

-As a side note, a trusted source has alluded to Equitable Realty & Services that this program may come to California with an option to buy. Yes, rent now and regain ownership later... Stay tuned....

California Real Estate’s Spring Progress Report Shows Signs of Improvement

     It’s been too long since I have been able to report uplifting news as it pertains to the California real estate market.  So it is with great pleasure I present this article to you all, chalked full of statistical evidence documenting a real estate market slowly on the rise.  It almost makes me feel like I am back in elementary school showing my parents an encouraging Progress Report, unlike in months past where the lackluster California real estate statistics would equate to the times I exerted all efforts to conceal unsatisfactory teacher remarks.

      According to the trusted source ForeclosureRadar, for example, foreclosure numbers fell quite dramatically last month.  With the number of foreclosure sales making up a lower share of the market, home prices received the boost we were all looking for, as foreclosures and short sales are predisposed to sell at a markdown.  C.A.R. Newsline similarly reported that in California, “the total share of all distressed property types sold statewide decreased in April to 42.0 percent, down from March’s 45.5 percent and from 47.7 percent in April 2011.”  When it comes to the percentage of foreclosures as a share in the market, the old saying certainly olds true… less is more!

     It has also been reported that the number of homes currently on the market has dropped.  As a result, the homes left listed on the active market are becoming enveloped in more intensive bidding wars, now that competing buyers have less inventory to choose from. California Association of Realtors President LeFrancis Arnold remarked that “The tight inventory we’ve been experiencing in the distressed market over the past several months is now spreading to equity properties, essentially affecting the supply conditions of both the distressed and non-distressed markets.” The more rampant and the more intensive these bidding wars become, the better. 

     A quick glance to the future may similarly show further market improvements.  Mortgage Banker Association’s Vice President of Research and Economics Michael Fratantoni announced that “Newer delinquencies, loans one payment past due as of March 31, are down to the lowest level since the middle of 2007, indicating fewer new problems we will need to deal with in the future.” 

I’m not one to count my chickens before they hatch, but if I add up all of the above:

1. foreclosure sales making up a lower share of the market

2. tightened inventory creating more intensive bidding wars

3. new loan delinquency figures are at the lowest levels since 2007…

     It just may mean California and the national real estate market at large may have finally turned the corner.  No doubt there is still much room for improvement, and it still remains iffy whether home prices will ever climb back to the peaks seen in 2006 – early 2007, but at least statistical evidence has some bright spots.  So if these statistics find themselves on the Spring Progress Report, just maybe we can keep the momentum going and produce a solid Final Report Card heading into summer break.  Only then could we metaphorically characterize the real estate market as the student deserving summer vacation as a reward for a job well done, as opposed to the slacker needing summer school to wise up.