Monday, February 22, 2010

Are you underwater?


Please note that I gather information from a variety of sources and use the information with the permission of those sources.  I do not receive or give any compensation for the information.  While I feel the information I share is interesting and useful, I cannot personally vouch for its reliability.  While most of the topics contained in this newsletter are general in nature, some information is specific to Arizona.  If you live or own property outside of Arizona, be sure investigate what is applicable by law or common practice to your area.
 
Are you underwater?
Thanks to the folks at One Project Closer for the information below.  Please note that information from One Project Closer is intended for a wide audience and may not be applicable to the state where you live and to your individual circumstances.  It is essential that you get legal and tax advice for your personal situation. 

With all the turmoil in the housing market these days, the term underwater is being tossed about quite frequently, especially as it applies to home and mortgages.  So what exactly does it mean to be underwater?
Being underwater in a mortgage means that the total debt secured by a property (e.g., the total value of all mortgage loans), exceeds the appraised value of that property.  Being underwater indicates a negative equity position. For instance, if you have a first mortgage for $100,000; and a second mortgage for $20,000, but your house appraises for only $110,000, you are underwater by $10,000.
Being underwater was very uncommon for the six years preceding the last 18 months because home prices were constantly on the rise, by as much as 20% year over year.  Of course, universal 20% growth is simply not sustainable, and the correction the markets brought in 2007 and 2008 has put many honest, hardworking payers in a negative equity situation.

Problems Caused by Being Underwater

The most significant problem caused by being underwater in a mortgage is the inability to move without putting up a large amount of cash to make up the deficit in value.  Since selling the property will not net enough proceeds to pay off the loan, homeowners are essentially stuck in their current residences unless they have a large financial reserve.   In forced-move situations (for instance, due to lack of employment in the area), homeowners must be foreclosed, or come up with a creative solution, like renting their current property and moving into a rental in the new location.
Worse yet for many homeowners is the inability to refinance the loan(s) to a lower rate.  As Ethan wrote about in his recent article, when a property is underwater, mortgage lenders don’t want to take the risk.  The fact that a homeowner already has a loan is of no consequence to a new lender (since refinancing would essentially shift the risk from the current lender to the new lender).

The Impact of Closing Costs

While the standard definition of being underwater is cited above, its important to consider the selling a property costs money (usually as much as 7-8% for realtor fees, transfer taxes, etc).  So, a mortgage of $100,000 on a $100,000 may still be considered underwater since the proceeds from the sale would only generate about $92,000, $8000 short of covering the entire loan.

Relief for Borrowers

In recent conversations with a mortgage lender for Wells Fargo, she said there’s been some rumbling in the community that a future housing bill passed by congress will attempt to ensure people with negative equity situations can still refinance to a lower rate.  How this will be achieved practically in the market remains to be seen, but we’ll write about it if we see things materialize.

What Should I Do if I’m Underwater?

Basically the financial equivalent of holding your breath. Keep making payments on time for your loan.  This will preserve your credit report and score through the downturn.  Eventually, by sheer math, you’ll own more of the home.  If you have any difficulty keeping up your payments, contact your lender to determine options. In dire situations, lenders can make loan modifications to either suspend principal payments, reduce interest rates, or re-amortize the loan to a longer payback period. Remember, lenders don’t want to foreclose on your property, especially in the current housing market.  They’ll be willing to work with you if you are serious about your commitment to them.
As a last resort, a short sale is an option for those who must move.  In a short sale, the bank authorizes you to sell your house for less than the total mortgage value and they agree to take a reduced payment for the loan.  There may be an impact to your credit score in this case, so it’s still a lose-lose, but it’s better than the alternative of full foreclosure.

What is a Short Sale?

Thanks to Attorney Randy Nussbaum of Nussbaum & Gillis, P.C. in Scottsdale for the following information.

A short sale is a sales transaction in which one or more of real property secured creditors permit the conveyance of the property without being pain in full.  A short sale does not by its very nature address whether the underlying indebtedness is being released or satisfied.  Instead, a short sale is separate and apart from the enforcement of the promissory note.

Lenders acquiesce to short sales when they realize that a short sale is the best means to maximize their recovery on the subject property. In most situations involving short sales, the lenders understand that since the property is worth less than the indebtedness encumbering the property, a short sale allows lenders to realize the maximum amount from the sale of the property.  Insightful lenders accept that their other means of recovery on the indebtedness is through foreclosure and, invariably, the amount the lenders net through foreclosure is substantially less than from a short sale.  Therefore, from a lender's perspective, a short sale is a means of making the best of what is oftentimes a very bad state of affairs.

The short sale process:

Even though lenders are modifying their policies (even at the time this article was being drafted), the majority of lenders still follow the same practice.

  • First of all, they insist that the Seller present a bona fide offer to it, along with a written explanation from the borrower as to why the short sale should be approved.
  • Most lenders request financial information as well, based on the often mistaken belief that a lender should not cooperate if the Seller has the ability to either maintain the loan or cover any shortfall.
  • If the lender finds the offer acceptable, it will normally submit an addendum authorizing the short sale, whereas if it does not find the purchase price adequate, it may summarily reject it...  Many lenders are now responding with an amount that the lender would accept as a minimum selling price.
When a short sale is advantageous:
  • A short sale is usually better than a foreclosure because with a short sale, the number of months you are late with your mortgage payment is almost always less than if you endure a completed foreclosure... This in itself, is probably better for your credit.
  • A short sale is an appropriate vehicle to sell your house if you are not otherwise prejudicing yourself by completing the transaction.  For example, if you are avoiding a foreclosure on your record and are desirous of minimizing your HOA fees, which are a personal obligation separate and apart from the foreclosure, a short sale permits you to terminate future fees because, once you no longer own the property, your obligation on those fees ceases as a matter of law.  In many cases, this could save you hundreds, if not thousands of dollars.
  • If the subject loans are recourse obligations and a short sale will reduce your obligation on any shortfall, utilizing a short sale makes sense and could save you tens of thousands of dollars, if not more.
Problems with short sales:
  • Does a Short Sale Provide Anti-Deficiency Protection?
  • Acknowledgement of a Non-Recourse Debt
  • Triggering Tax Liability Where None Existed
  • The Seller Loses the Benefit of a Foreclosure
(Note:  I have not included the full explanation of the above and/or an explanation of the "Interplay of Bankruptcy and Short Sales" that were included in Randy Nussbaum's article.  If these topics are important to you, I would suggest that you procure additional information from legal and tax professionals.)


Without question, some short sales are preferable to foreclosures and should be pursued.  Nevertheless, clients who are contemplating short sales need to fully understand the potential risks and pitfalls of doing so.

New Arizona Short Sale Advisory

The Arizona Association of REALTORS® and the Arizona Department of Real Estate have just put out a new document entitled Short Sale Seller Advisory which provides valuable information for Arizona property owners. Below you will find an outline of what is in the document.  You can download the most current version of the entire document by going to this link: www.aaronline.com/documents/ssseller_advisory.pdf


The information in this Advisory is provided with the understanding that it is not intended as legal or other professional advice. These materials have been prepared for general informational purposes only. The information and links may not be updated or revised for accuracy.  If you have questions or need advice, please contact an attorney and your tax advisor.


Outline of the Short Sale Seller Advisory (View Actual Document for Details.)

Before Proceeding with a Short Sale
  • Be Aware of Predatory "Rescue" Scams & Short Sale Fraud
  • Contact a Free HUD-approved Housing Counselor or Contact Your Lender Directly.
  • Utilize Free Services Available to Arizona Residents
  • Obtain Legal Advice
  • Obtain Tax Advice
Options Other Than a Short Sale - Consider All Options (A short sale may not be your best course of action.)
  • Loan Workout
  • Loan Modification
  • Refinance
  • Deed-in-Lieu of Foreclosure
  • Work Out Sale
  • Bankruptcy
  • Foreclosure
Short Sale Considerations
  • Contact a Qualified Real Estate Professional
  • Investigate Documentation and Eligibility
  • Determine the Amount Owned on the Property
  • Determine the Estimated Fair Market Value of the Property
  • Consult Legal Counsel
  • Understand That a Short Sale May Not Discharge the Debt
  • Obtain Tax Advice
  • Be Aware of the Impact on Your Credit Score
  • Understand That There May Be a Waiting Period Before You Can Buy Another Home
  • Review the Arizona Association of REALTORS ® (AAR) Short Sale Forms (Contact me if you would like a copy.)
For More Information, Visit:


If you or someone you know is underwater and are considering doing a short sale, please contact me.  I would be happy to assist you in any way I can. 

Thursday, February 4, 2010

This continues to be a great time to buy!



Low Interest Rates 
Large Inventory of Great Homes 
Government Tax Incentives 
Low Prices
Tax credits are still available for qualified first-time buyers and current owners looking to buy.
You can find information on the tax credit at my 11/7/09 posting at my Pook's E-News blogsite.

Lender Checklist: What You Need for a Mortgage

Copyright National Association of REALTORS®. Reprinted with permission.
  • W-2 forms — or business tax return forms if you're self-employed — for the last two or three years for every person signing the loan.
  • Copies of at least one pay stub for each person signing the loan.
  • Account numbers of all your credit cards and the amounts for any outstanding balances.
  • Copies of two to four months of bank or credit union statements for both checking and savings accounts.
  • Lender, loan number, and amount owed on other installment loans, such as student loans and car loans.
  • Addresses where you've lived for the last five to seven years, with names of landlords, if appropriate.
  • Copies of brokerage account statements for two to four months, as well as a list of any other major assets of value, such as a boat, RV, or stocks or bonds not held in a brokerage account.
  • Copies of your most recent 401(k) or other retirement account statement.
  • Documentation to verify additional income, such as child support or pension.
  • Copies of personal tax forms for the last two to three years.

The Cromford Report 2/2/10

Thanks to Mike Orr for providing this update on the Phoenix Metro real estate market:

New active listings continue to pile in, and although there continues to be a large number of pending sales, their number is not growing anything like as fast as in 2009, so we see the first evidence of a weakness in demand for a very long time. This is reflected in the fact that the Cromford Market Index™ is now falling back towards the normal level of 100.
During January, $/SF sales pricing weakened sharply in lender owned properties, with far fewer expensive properties being sold by the banks. However, pricing strengthened among normal listings, short sales and pre-foreclosures. Overall pricing is just 52c per sq. ft. higher than last month but we see signs of a little price weakness ahead during February. We note that annual appreciation has improved to -1.9% from -16.7% in the last three months. By the end of February it is likely to have turned positive.
For Maricopa County, new notices of foreclosure jumped in the last week, but the count for the month of January was 6,762, the lowest total for any month since November 2008. 4,454 trustee deeds were recorded, about average compared with the recent few months. Overall, we saw a slight decline in foreclosure activity.
- Mike Orr


If you haven't visited pookbellini.com lately, please do! In addition to great real estate information, you'll find some helpful links there:

• Arizona Department of Education
• Arizona Golf
* Arizona Guide
* Arizona Hiking
* Cactus League Baseball
* Current Gasoline Prices
* Current Road Conditions