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FHA’s response to short sales

March 8th, 2010

Please see below for a new Mortgagee Letter from FHA stating that if a buyer short sold on a property or if the bank incurred any negative debt the buyer would not be eligible for an FHA mortgage for 3 years. Basically, FHA considers a short sale as a Foreclosure. FHA will make exceptions to this rule, if they borrower has paid on time and they are moving under extenuating circumstances, job loss, death, and relocation.

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, DC 20410-8000
ASSISTANT SECRETARY FOR HOUSINGFEDERAL
HOUSING COMMISSIONER
Date: December 16, 2009
To: All Approved Mortgagees
Mortgagee Letter 09-52
Subject
Short Sales and Short Pay Offs
Purpose
This mortgagee letter provides guidance to lenders and underwriters regarding borrower eligibility when
• a previously owned property was sold for less than what was owed (short sale), or
• there is principal write down of indebtedness that cannot be refinanced into a new mortgage (short pay off).
Effective Date
This guidance is effective immediately.
Affected Topics
The topics summarized below were revised or created as a result of these changes in guidance. This Mortgagee Letter also provides the entire content of each block affected, with changes underlined. The changes will be integrated into the FHA Single Family On-Line Handbooks shortly.
Continued on next page
22
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, DC 20410-8000
ASSISTANT SECRETARY FOR HOUSINGFEDERAL
HOUSING COMMISSIONER
2
Mortgagee Letter 09-52, Continued
Summary – FHA Guidance on Short Sales
Borrowers are not eligible for a new FHA mortgage if they pursued a short sale agreement on his or her principal residence simply to
• take advantage of declining market conditions, and
• purchase, at a reduced price, a similar or superior property within a reasonable commuting distance.
Reference: For detailed information on converting existing principal residences into rental properties, see 4155.1 4.E.4.g
Summary – Guidance on Borrowers current at the time of Short Sale
Borrowers are considered eligible for a new FHA-insured mortgage if
• they were current on their mortgage and other installment debts at the time of the short sale of their previously owned property, and
• the proceeds from the short sale serve as payment in full.
Reference: For detailed information, see “Short Sales” at 4155.1 4.C.2.l.
Summary – Guidance on Borrowers in default at the time of Short Sale
Borrowers in default on their mortgage at the time of the short sale (or pre-foreclosure sale) are not eligible for a new FHA-insured mortgage for three years from the date of the pre-foreclosure sale. Lenders may make exceptions to this rule under certain circumstances.
Reference: For detailed information, see “Short Sales”, at 4155.1 4.C.2.l.
Continued on next page
33
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, DC 20410-8000
ASSISTANT SECRETARY FOR HOUSINGFEDERAL
HOUSING COMMISSIONER
3
Mortgagee Letter 09-52, Continued
Summary – Refinancing with Short Pay Off
FHA will insure the first mortgage where the existing note holder(s) write off the amount of indebtedness that cannot be refinanced into the new mortgage due to a decline in property value and/or a reduction in income.
Reference: For detailed information, see “Short Pay Offs”, at 4155.1 3.B.1.f.
Questions
Please address any questions about the topics addressed in this Mortgagee Letter to the FHA Call Center at 1-800-CALLFHA.
Signature
David H. Stevens
Assistant Secretary for Housing-Federal Housing Commissioner
44
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, DC 20410-8000
ASSISTANT SECRETARY FOR HOUSINGFEDERAL
HOUSING COMMISSIONER
4
Mortgagee Letter 09-52, 4155.1 Chapter 4.C.2. New Topic (changes underlined)
l. Short Sales
4155.1 4.C.2.l
Short Sales
Borrowers are not eligible for a new FHA- insured mortgage if they pursued a short sale agreement on his or her principal residence simply to
•
•
take advantage of declining market conditions, and
purchase at a reduced price a similar or superior property within a reasonable commuting distance.
Reference: For detailed information on converting existing principal residences into rental properties, see 4155.1 4.E.4.g
Borrowers Current at the time of Short Sale
Borrowers are considered eligible for a new FHA-insured mortgage if, from the date of loan application for the new mortgage
•
•
All mortgage payments due on the prior mortgage were made within the month due for the 12 month period preceding the short sale, and
All installment debt payments for the same time period were also made within the month due.
Borrowers in default on their mortgage at the time of the short sale (or pre-foreclosure sale) are not eligible for a new FHA-insured mortgage for three years from the date of the pre-foreclosure sale.
Borrowers in Default at the time of Short Sale
Note: Borrowers who sold their property under FHA’s pre-foreclosure sale program are not eligible for a new FHA-insured mortgage from the date that FHA paid the claim associated with the pre-foreclosure sale.
Continued on next page
55
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, DC 20410-8000
ASSISTANT SECRETARY FOR HOUSINGFEDERAL
HOUSING COMMISSIONER
5
Mortgagee Letter 09-52, 4155.1, Chapter 4.C.2. New Topic (changes underlined)
l. Short Sales, Continued
Short Sales (continued)
Exceptions: Lenders may make exceptions to this rule for borrowers in default on their mortgage at the time of the short sale if
•
•
The default was due to circumstances beyond the borrower’s control (such as death of primary wage earner, long term un-insured illness, etc.), and
The review of the credit report indicates satisfactory credit prior to the circumstances beyond the borrower’s control that caused the default.
Reference: For information on Short Pay Offs, see 4155.1 3.B.1.f.
Mortgagee Letter 09-52, 4155.1, Chapter 3.B.1. New Topic (changes underlined)
f. Short Pay Offs
4155.1 3.B.1.f.
Short Pay Offs
To be eligible for refinancing with a short pay off, borrowers must be current on their mortgage.
Reference: For more information on mortgage payment history, see 4155.1 4.C.2.b.
Continued on next page
66
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, DC 20410-8000
ASSISTANT SECRETARY FOR HOUSINGFEDERAL
HOUSING COMMISSIONER
6
Mortgagee Letter 09-52, 4155.1, Chapter 3.B.1. New Topic (Changes underlined)
f. Short Pay Offs, Continued
Short Pay Offs (continued)
FHA will insure the first mortgage where the existing note holder(s) write off the amount of the indebtedness that cannot be refinanced into the new FHA-insured mortgage if
•
•
there is insufficient equity in the home based on its current appraised value, and/or
the borrower has experienced a reduction in income and does not have the capacity to repay the existing indebtedness against the property.
For instances where the existing note holders are reluctant to write down indebtedness, a new subordinate lien may be executed by the amount which the payoff is short. For more information on new subordinate financing see 4155.1 3.B.1.c.
If payments on subordinate financing are required, they must be included in the qualifying ratios unless payments have been deferred for no less than 36 months. This policy only applies to no cash-out (rate and term) refinances with short pay offs.
Reference: For information on Short Sales, see 4155.1 4.C.2.l

Northern CO foreclosures report

February 21st, 2010

This is an article from the Loveland Reporter-Herald, talking about foreclosure rates in this area. Definitely worth reading to get a feel for how many people are truly struggling with their homes being worth less than what they owe, not having enough money to cover their mortgages, etc.

http://reporterherald.com/news_story.asp?ID=26799

Ben Blonder, Broker/Owner, Kapital Real Estate LLC, 970 420 6166

Ironic story about bad mortgages on a huge scale!

February 9th, 2010

The Mortgage Bankers Association (MBA) has sold its 10-story headquarters for $41.3 million, below the $79 million the trade group says it paid for the property in 2007.

The MBA, which was underwater on its loan, refused to discuss its situation. A spokesperson for the MBA said the organization has reached “an agreement with all relevant parties.”

CoStar Inc., a commercial real estate information firm, which purchased the property, says it plans to move its headquarters into the building.
“It’s a little bit of irony that in the middle of the mortgage crisis brought on by the bad lending practices of many members of the Mortgage Bankers Association that they got caught up in the same problem,” Dean Baker, co-director of the Center for Economic and Policy Research, a liberal research group, told The Washington Post.

As the real estate market crashed, the association’s membership has continued to fall. Its membership fell to 2,500 from 3,000 in 2008, officials had said.

The company was “fortunate to be able to take advantage of what we see as a historic opportunity to secure an exceptional asset at a greatly reduced price,” Andrew Florance, CoStar’s CEO, said in a statement.

Source: The Wall Street Journal, James R. Hagerty (02/06/2010) and The Washington Post, V. Dion Haynes (02/05/10)

Copyright National Association of REALTORS®. Reprinted with permission.

Click the link above “submit a short sale” if you owe more than your home is worth and want to sell. This is what we do!

February 9th, 2010

Some Legal Pitfalls to Watch Out for When Doing a Short Sale

January 28th, 2010

This is a summary of an article in Realtor Magazine. It has some seriously important information for both sellers and real estate practitioners that want to pursue a short sale.

1) Do not misrepresent tax consequences of a short sale! While the US govt passed a law in 2007 that directs the IRS to not tax any debt forgiven on a short sale (i.e. man owes $300k, bank nets $250k, before 2007 he would have had to pay income tax on that difference), this only applies to purchase money, not cash out refis, and there is a limit, albeit generous ($1 million for an individual, $2 million for a couple). This law also may not apply to investment property. It is a limited law, and sellers should consult tax professionals to figure out their situation.

2) Misrepresenting how secondary debt is treated. Holders of 2nd liens generally will not forgive the debt via short sale. Many times, they will make the seller sign a promissory note. Sometimes these 2nds will sell the balance to collection agencies for a few thousand dollars, and then they can come after the seller for that. This only applies in recourse states.

3) Providing poor oversight of so-called “short sale companies”. These companies negotiate short sales so the Realtor has time to do other things. But many of these companies are fly-by-night operations and a lot of times they do not get the deal done, which could lead to the owner getting foreclosed on and then coming after the Realtor for not properly overseeing the deal.

Questions, comments, concerns? Leave a message and I will answer back, thanks!

Ben Blonder, Broker/Owner Kapital Real Estate LLC

See below for some good information, or click “Submit a Short Sale” above if you are owe more than your home is worth and still want to sell. That is what we do!

January 18th, 2010

If you list your property as a short sale with me, you DO NOT PAY COMMISSION! In almost all cases, especially if your home is a primary residence and not an investment property, you will not have to pay a penny at closing.

Let me give you an example. I sold a short sale for a guy in Loveland. He owed $444,000 on the property. He also had a judgement against him for $10,000. We ended up selling the home for $250,000, and the $10,000 judgement got rolled in there too. I got paid, the judgement got paid, and the lender (who had to agree to the short sale) netted about $220,000 total. My client showed up to the closing table with $0.00. The debt was reported as “settled for less than full amount owed”. He should be able to buy again after about 2 years.

The reason the lender agreed to this was because the value of this home had dropped to about $280,000. If the lender were to ignore the short sale and foreclose on the property, they could have MAYBE sold it for $250,000 and would still have to pay attorney fees, holding costs, utilities, insurance, etc. It just made more sense for them to do the short sale.

After a short sale, when can you buy again?

January 11th, 2010

First of all let me start by saying I AM NOT AN ATTORNEY OR TAX PROFESSIONAL, and do not mistake this article as legal and/or tax advice!

Ok, disclaimer done.

I sell a LOT of short sales. Approximately 70% of my business in the past 2 years was either short sales or foreclosure. Over these past few years, I have learned a lot about the ins and outs of short sales.

One question I get a lot is: “how will completing a short sale affect my credit?” I can answer confidently that a short sale is MUCH better on your credit than a deed in lieu of foreclosure (4-7 years before a borrower can be considered for another loan) or an actual foreclosure (at least 5-7 years, sometimes up to 10 years before a borrower can qualify for another loan). Now put those two options up against a short sale: borrowers who complete a short sale can be considered for any type of loan as soon as 2 years after a short sale!

Fannie Mae wants short sellers to buy again in the future. Short sales are encouraged by the government. Obama’s Making Home Affordable plan incentivizes lenders, servicers, and borrowers to complete a short sale rather than go deed in lieu or actual foreclosure. However, unfortunately, short sales have NOT been streamlined yet. Every bank seems to treat them differently. For instance, with Bank of America, I had a short sale under contract for over 12 months. It did eventually close somehow, but imagine the frusteration.

One thing I can say is: our industry is extremely dynamic, and constantly changing. This is even more true with the short sale industry. I feel like a lot of the banks are getting their acts together. I even had a short sale that was less than a month from contract to close!

What I hope to see is more “pre-negotiated” short sales. In other words, a lender knows that the borrower will not be able to continue making payments and will want to do a short sale. Well, that lender can get the valuation of the property and give the homeowner or their realtor a “strike-off” price to short sell the property at. This would really alleviate the main objection most buyers avoid short sales for: that is the sheer amount of time it takes to get these deals approved and accepted by the lender. I have been starting to see this happen more, and I am guessing that is a trend that will continue.

Ben Blonder, Broker/Owner Kapital Real Estate LLC
cell 970 420 6166

WOW lots of good info here

January 9th, 2010

Check out this VERY informative article–

http://www.realtor.org/realtors/basics_short_sales

Great links and great info here.

Call or email me with any questions!

Ben Blonder, 970 420 6166, ben_blonder@yahoo.com

Short Sale Defined

December 21st, 2009

Short Sale: A sale where the lender will agree to accept less than the full amount of the mortgage. This allows you to sell the house to an investor or other buyer for a good price, while the lender recovers the bulk of the amount due without having to pursue foreclosure proceedings.

That is the long and short of it.

A short sale may work for you if:

1) you are behind in your mortgage payments
2) your house is not worth as much as you owe
3) bank has started the foreclosure proceeding
4) you foresee yourself having a financial hardship in the near future that may cause you to miss payments.

All of these deals have to be looked at on a case-by-case basis to determine the likelihood of success. My success rate with short sales has been over 90% (over 90% of short sales I list end up closing and NOT being foreclosed on).

Call me to discuss your unique situation…it depends on how much you owe, how many loans, what lenders, etc.

Ben Blonder
Cell 970 420 6166
Email ben_blonder@yahoo.com

Tax Liability When Doing a Short Sale

December 21st, 2009

Tax Liability When Doing a Short Sale

You know what a short sale is, right? It is when your lender is willing to accept less than what is owed on the property to settle with you, instead of going through foreclosure. This is a very helpful technique to sell, especially when you owe more than your home is worth. Also, a short sale is a LOT less damaging to your credit than an actual foreclosure. That is why homeowners choose to do short sales.

The main gist of this article is to explain what happens when a lender allows a short sale, and forgives debt. Say you owe $200,000 on a property, and the lender accepts $150,000 to settle the debt. So they would be forgiving $50,000 worth of debt. Now, before the Mortgage Forgiveness Debt Relief Act of 2007 (http://www.irs.gov/individuals/article/0,,id=179414,00.html), this income would always be treated as taxable income, in other words you would pay taxes on it as if you made $50,000 more than you actually did. This used to discourage people from even attempting a short sale before 2007.

However, in 2007, the Act mentioned above was passed, which effectively says that you do NOT have to pay income tax on forgiven debt, as LONG AS the property being short sold is your PRIMARY RESIDENCE. That is the key. If the property is an investment property for you, you would still be liable to pay income tax on the forgiven debt.

This IRS provision applies to debt forgiven in calendar years 2007-2012, up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married and filing separately). Lenders are required to send Form 1099-C, Cancellation of Debt, when they cancel any debt of $600 or more. The amount cancelled will be in box 2 of the form. You still have to report the forgiven debt on your taxes, you just don’t have to pay taxes on it.

This makes it much more attractive to do a short sale on your property if it is your primary residence. There are many benefits to short sale vs foreclosure, but in this article we are really only talking about the tax benefits. For other benefits, please visit www.coloradoshortsaleexpert.com and browse through the many articles provided to educate people on this somewhat complicated issue. Also, you can contact me at ANY time and I will answer all of your questions!

Lastly, I am NOT an accountant or attorney, this article should NOT be construed as legal or tax advice. If you have questions regarding the legal/tax consequences of a short sale, please contact an attorney or CPA. I have referrals for both if needed.

Ben Blonder, Broker/Owner, Kapital Real Estate

ben_blonder@yahoo.com

Cell 970.420.6166