Archive for the 'Short Sales/REO' Category
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 isn’t 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 wouldn’t finance those homes now if asked. Prices are even lower if the bank hasn’t 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 it’s 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.
read comments (1)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 Miller’s 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. Foreclosures…Your 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, I’m 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 borrower’s 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 borrower’s 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.
I get a lot of calls these days from real estate agents wondering what effect a short sale or deed in lieu of foreclosure (DLF from here forward) will have on borrowers’ credit. That is a really important and interesting question, since the last real estate downturn preceded the widespread use of Fico scores and automated underwriting (AU) systems.
Everyone now seems aware that debt cancellation creates taxable income. In a short sale, the amount of the lender’s loss is reported to the borrower as income, creating an income tax liability for the borrower. If the borrower is insolvent at the time, the tax liability can be avoided, but only to the extent that liabilities exceed assets.
But how will credit scores be affected? And if a loan is approved through LP or DU, Freddie Mac’s and Fannie Mae’s automated underwriting engines, will the underwriter overturn the approval when she sees the typical “settled” comment on the mortgage tradeline?
For answers to these questions, I turned to my credit reporting agencies and representatives from the capital markets to see what is boiling inside the pot.