Archive for the 'Short Sales/REO' Category
For some time now consumers and industry professionals alike have been pondering an unknown: how much credit damage will result from a short sale or foreclosure? Opinions vary widely and we’ve yet to see a large enough sample to draw any conclusions. In what amounts to a stronger sentence imposed on those who have lost a home, Fannie Mae recently increased the amount of time required after a foreclosure before one can obtain a new conventional loan. That change signaled that lenders might be cracking down harder on foreclosures.
However, my Spidey sense has been tingling, and I believe that we’re going to have to do exactly the opposite in order to help speed the recovery along. Sidelining foreclosed homeowners for five years will just prolong the agony. My theory is that at some point, the industry must recognize that foreclosures today tell a different story than they did previously, and we need to find a way to bring worthy consumers back into the market sooner to help kick real estate back into gear.
When I spotted this article today, it gave me hope.
How Will Foreclosure Effect Credit Scores?
The amount of damage to a credit score caused by foreclosure, deed in lieu or a short sale during 2008 and 2009 may be mitigated by the slower economic times, say some credit and legal experts.
FICO may have to adjust its credit scores to lessen the impact of a foreclosure in the last two years, says Todd J. Zywicki, a professor of law at George Mason University.
”It just seems obvious that a foreclosure in 2008 or 2009 doesn’t have as much information value as a foreclosure five years ago,” he says. ”To the extent that foreclosure doesn’t predict future behavior as much as it did in the past, you’d expect that the FICO algorithm would change to adjust for that.”
One of the country’s largest credit unions Golden 1 has already figured out a way to lend to people with a foreclosure on their record by offering a mortgage repair loan specifically for those who have lost a home to foreclosure and who want to buy a new one.
BECU, another large credit union based in Washington State, is about to present a program to fellow lenders, ”How to Lend to the Newly Credit Impaired.”
Source: The New York Times, Ron Lieber (03/14/2009)
read comments (0)Real estate buying activity in Sacramento is highly concentrated in the foreclosure sector. Makes sense. Buyers want the best deal they can get, and bank-owned properties appear to offer the best chance for that. But financing those REOs isnt always easy, especially as shrinking bank liquidity pulls the lending noose tighter.
The Problem with As Is Sales
Many bank owned properties have been abused or poorly maintained. The banks who now own them would prefer to sell as is to avoid throwing good money after bad. But you can bet those same banks wouldnt finance those homes now if asked. Prices are even lower if the bank hasnt had to spend money on fix-up, but securing a loan on a roughed-up property is a growing challenge
Traditionally, lenders are concerned with two categories of repairs: habitability and health & safety issues. Conditions that impair habitability include kitchens lacking appliances or cabinets, non-functional sink or toilet fixtures, damaged or removed flooring, or a leaky roof. Health & safety issues are self explanatory but can include even minor items like missing electrical outlet covers. Banks have always required that these items be repaired prior to close. But its getting tougher as banks balance sheets dry up, leaving them extremely vulnerable if they originate a loan that cannot be sold off immediately in the secondary market.
A Few Possible Solutions
Here are a few ways to deal with this challenge.
For those contemplating the choice between doing a short sale or a regular foreclosure, the potential tax liability that may result associated with debt relief on a short sale is definite negative. At least one piece of helpful legislation appears to be making its way through the congressional maze.
This yesterday from Peter Millers FHA Mortgage Guide:
FHA Mortgages Senate Passes Bill To End Tax on Mortgage Forgiveness
Posted: 17 Dec 2007 10:43 AM CST
The Senate has passed the Mortgage Cancellation Relief Act of 2007, a measure which would end the income tax borrowers face when lenders forgive up to $2 million in outstanding mortgage debt.Sponsored by Sen. Debbie Stabenow (D-MI), the measure would also extend the deductibility of mortgage insurance for three more years. The current legislation making mortgage insurance deductible applies only to loans made between January 1st and December 31st of this year.Under Section 108 of the Internal Revenue Code, forgiven mortgage debt is seen as imputed and taxable income. Many of those who negotiate a short sale with a lender wind up owing thousands of dollars to Uncle Sam because the forgiven debt is considered to be income under the tax rules.
Previously, the House had passed a similar bill, HR. 3648.
The bills are likely to zoom through the conference process and to be signed by the President. Why? Just how much money can the government collect from distressed, foreclosed and bankrupt borrowers?
This is encouraging news for sellers and agents who wish to pursue this option but were worried about have a big tax bill. Now, I still maintain that a short may be no better for your credit and Fico score than a foreclosure, but we now reasonably expect to see relief from the tax consequence.
Got a question or concern? Contact me here. Or apply for a loan. I do loans in most of the western U.S. and I’ve been doing FHA and VA loans for nearly two decades.
As real estate values continue to sag, pushing many home owners toward foreclosure, one question surfaces more than any other. Will a short-sale damage your credit less than a foreclosure?
REWIND
I wrote a couple of articles awhile back entitled, Short Sales vs. ForeclosuresYour Credit Will Suck Either Way and Short Sales and Loan Prospector: A Response From Freddie Mac. At the time–nearly a year ago–my preliminary investigation suggested that short sales and foreclosures would have exactly the same effect on credit. But back then, this issue was just reclaiming the spotlight, and no one had really given it much thought. You see, it has been 10 years since we’ve really seen this problem.
Those articles are still garnering comments, and I’ve been getting daily phone calls and emails from all over the country from people facing foreclosure. So recently I reopened the investigation. And although the issue is far from clear, my conviction is the same. As far as your next mortgage is concerned, a short sale won’t leave your credit in better shape than a foreclosure. And it could leave you worse off from a tax standpoint.
NOT EVERYONE AGREES
Now I need to acknowledge the disagreement out there. Speculation is rampant, but a lot of it is groundless. There are people predicting the number of points each type of foreclosure will move your scores, a claim my credit reporting agency called “asinine.” Real estate agents seem more prone to recommending short sales, though most of the agents I know are very cautious about this. One Realtor/lender wrote,
Purchasing Sacramento Short Sales–A Waste of Time?
I am frequently asked these days about buying short-sales. It sure seems like a good buying opportunity. But after what happened this week, Im not so sure anymore.
Nearly everyone knows what a short-sale is by now. But just in case, a short-sale is a home listed for sale that, when sold, will not yield enough to pay all the costs of the sale and pay off the existing mortgage(s) completely. So the lender is asked to accept less than the amount owed. If they agree, a short sale results. Sacramento area homes have fallen enough in value that short-sales are becoming commonplace.
Now, there are several reasons why a short-sale seems like is a great opportunity to buy a home cheap.
Sacramento Short Sales: A Response from Freddie Mac
What effect will short sales have on a borrowers credit and ability to secure another home loan? Without the public Notice of Default that precedes a foreclosure and notifies the credit bureaus, will short sales slip under the radar? Are they less onerous than a completed foreclosure as many people suggest?
Yesterday, I received this answer from Freddie Mac about the way Loan Prospector, its automated underwriting system, will react to the typical short sale comments found on a borrowers credit report. The answer was obtained for me by Scott St. John, an officer of American Pacific Mortgage who serves on the advisory board for Freddie Mac.
Nice to see a lender take such pro-active measures to help borrowers avoid going into default. I’ve been waiting to see how various lenders would respond to this market. You would have to call this the most enlightened response yet. From the Sacramento Bee this morning:
Lender counsels those in trouble
NovaStar Financial helps its borrowers find jobs, avoid mortgage foreclosure.
By Mark Davis - McClatchy Newspapers
Last Updated 7:01 am PST Monday, January 22, 2007
The payoff comes when customers find work and keep their homes. Bissett said she got a lot of thanks-filled e-mails this Christmas.
When customers accept help, the coaches try just about everything.
Lewis-Coates approved paying one borrower’s electric bill because the power was about to be shut off. LaunchPoint bought a cell phone with prepaid minutes for an unemployed customer who was losing phone service. Prospective employers needed to be able call back.
One borrower was walking to work because public buses didn’t run during the shift he had been switched to. Lewis-Coates said she mentioned it at a meeting and a NovaStar employee donated a bicycle, which worked until the borrower found transportation.