S. Maryland Shortsale Foreclosure Training

Short Sales and Foreclosures: What Representatives Need to Know A program by the Real Estate Buyer’s Council of the National Association of REALTORS® About This Course 1. Differentiate between short sales and foreclosures. 2. Explain process of successful short-sale transaction. 3. Identify components of short- sale package. I-1

About This Course 4. Understand processes and procedures of foreclosure. 5. Guide clients who want to purchase short-sale or foreclosed properties. 6. Counsel buyers on how to prevent short sales and foreclosures. I-2 Modules and Objectives 1. Homeowners in Jeopardy • Understand why so many homeowners are in default. • Deﬁne homeowner’s options when facing default. • List concerns of professionals when working with homeowners in default. I-3

Modules and Objectives 1. Homeowners in Jeopardy (cont.) • Facilitate a counseling session for buyers who want to purchase a short-sale property. I-4 Modules and Objectives 2. The Short-Sale Package • List content of short-sale package. • Understand importance of a complete short-sale package. I-5

Modules and Objectives 3. Foreclosure Opportunities • Differentiate judicial foreclosure from nonjudicial foreclosure. • Describe foreclosure process. • Explain how to work with listing agent on REO property. • I-6 Modules and Objectives 3. Foreclosure Opportunities (cont.) • Facilitate counseling session for buyers who want to purchase foreclosed property. I-7

Modules and Objectives 4. How Consumers Can Prevent Foreclosure • Explain how foreclosures may be reduced by educating buyer public. • Recognize signs of mortgage fraud and predatory lending. I-8 Modules and Objectives 4. How Consumers Can Prevent Foreclosure (cont.) • Explain how mortgage fraud and predatory lending can impact home-buying decisions. I-9

1. Homeowners in Jeopardy In this module: • Homeowner counseling process • Homeowner options • Buyer counseling on short sales Page 1 1-1 Trend data • Where can you go to gather trend facts: – Maryland Association of Realtors – MRIS – Realtytrac (Free period, then membership) – Be careful of paying for data that is already available through your membership. – Research on your own, there is a lot of information on news sites as well as research driven governmental agencies. Let you fingers do the walking on the internet especially.

Providing Effective Service Effective service means: • *Understanding process and parties involved in transaction • Knowing what transpires from seller’s side of transaction 1-2 Case Study #1 • Missed one mortgage payment • Husband laid off • Living on credit cards • Other reasons why homeowners could be behind in mortgage payments? 1-3

Pre-Foreclosure • *Anytime sellers are behind in mortgage payments • Length of pre-foreclosure varies • During pre-foreclosure period, homeowners are notiﬁed of mortgage payment default Page 2 1-4 Options 1. *Reﬁnance 2. *Sell and bring $ to closing 3. *Lender workout 4. Deed in lieu of foreclosure 5. Short sale 6. Foreclosure 7. Do nothing or walk away 1-5

Reﬁnance • If homeowner’s credit allows for reﬁnance and if owner meets eligibility criteria: > One of best options is HOPE for Homeowners (H4H), a program through HUD > Program dates 10/1/08 – 9/30/11 1-6 www.995Hope.org

Refinance • Eligibility criteria: > Existing mortgage originated on or before 1-01-08 > Payment(s) as of 3-01-08 exceeds 31% of gross monthly income > No intentional default > No false information to get mortgage 1-7 Refinance • Features of FHA-insured loans under program: > 30- or 40-yr fixed-rate mortgage > Maximum 96.5% LTV ratio > No prepayment penalties > Extinguish subordinate liens > New home appraisals from 1-8 FHA-approved appraisers

Sell and Bring $ to Closing • Imperative to estimate seller’s net equity • Once listing in MLS and offer of compensation made to cooperating brokers, listing broker is responsible for paying compensation even if seller doesn’t pay listing broker 1-9 Page 3 • See Figures 2 and 3 for checklists. Lender Workout • Borrower awareness of available workout options is low • *Freddie Mac survey in 2008: More than half of borrowers did not know lenders had options to help avoid foreclosure 1-10

Lender Workout • Workout options include: > Forbearance > Reinstatement > Repayment plan > Loan modiﬁcation > Sign over property to lender in exchange for debt forgiveness 1-11 Deed in Lieu of Foreclosure • Occurs when borrower agrees to trade property to lender in exchange for cancellation of note • More likely to work in states where there is long foreclosure timeline • In declining markets, lenders less likely to consider deeds 4 Page in lieu 1-12

Short Sale • Occurs when (1) seller owes more money on loan than sale of property will likely produce and (2) seller is unable or unwilling to bring money to closing • Lender has not yet foreclosed on property 1-13 Short Sale • Elements of successful short sale: > Property is worth less than is owed > Seller has hardship and cannot keep property > Seller is cooperative and will work with broker to package short sale 1-14 > Lender is willing to consider

Short Sale > Property listed with caveats and protections for seller > Lender presented with contract, accepted, signed and dated by seller, along with completed short sale package and narrative > With lender approval in writing, offer and escrow 1-15 closes as usual Foreclosure • If homeowner is facing foreclosure, real estate professionals should instruct homeowner to contact lender immediately 1-16 Page 5

Do Nothing or Walk Away • Walking away from property eventually leads to lawsuit to foreclosure from lender • Homeowners who are ready to walk away should contact their attorney for advice • *Walking Away is the most detrimental option for most Borrowers Page 5 1-17 Rescue Scams • Homeowners should watch for foreclosure “rescue” offers in which owners sign quitclaim deed and then lease property • In such cases, former owners will still be liable for mortgage payments 1-18

If Short Sale Is Best Option • Estimate seller’s equity • Example Forms Page 7 and 8 • Determine if there are any liens • If seller has 1st and 2nd mortgage or a home equity line of credit, all lenders may need to approve short sale 1-19 If Short Sale Is Best Option • If mortgage has been securitized, approval may be required from the entity holding pool of loans • Check with primary lender on protocol • When you have determined that seller owes more than property is worth 1-20

If Short Sale Is Best Option • When you have determined that seller owes more than property is worth, advise seller in writing to obtain separate legal, credit, and tax advice 1-21 If Short Sale Is Best Option • Contact loss mitigation dept:  Finding decision maker often one of biggest challenges  Varying opinions on when to contact the lender  *Loss Mitigation Officer is the Final Decision Maker. 1-22 Page 9

If Short Sale Is Best Option • Obtain borrower’s authorization to release information in order to contact lender • See Figure 4 for sample form 1-23 If Short Sale Is Best Option • When listing potential short sales: > *No conﬁdential information should be disclosed without written permission of client > *All rules and regulations of MLS need to be followed, so long MLS regulations are not in conﬂict with state 1-24 regulations. Page 10

Counseling Buyers on Short Sales • *Can buyers wait for lender’s approval? • *Do they have to sell their home before purchasing short sale? • *Will they follow through on your counsel? Page 12 1-25 Counseling Buyers on Short Sales • Do they understand that lender makes ﬁnal call on price and terms? • Interested in “ﬂipping” the property? If yes, additional due diligence will need to be performed. 1-26

Buyer Considerations • Lender on Board? • When to Lock-in? • Due Diligence for Buyer’s Agent • Interviewing the Listing Agent • When to walk away • BPO versus Appraisal • Distressed Market Areas (95% LTV) Counseling Buyers on Short Sales • How willing are buyers to consult attorney? • Is buyer willing to enter into an exclusive buyer representation agreement and be responsible for compensation should it not be paid by seller’s side? 1-27

Tax relief act of 2007 • You’re not a CPA, and neither am I • Signed December 20, 2007 • Excludes income made from real property sale • *Applies on to primary residence • Forgives qualified debt for 2007-2012 • Only applies to properties under 2 million (1 million is married filing separately) Case Study #2 • Can you disclose conﬁdential information that you may know because of your prior meeting with them? Why or why not? • Sellers asking for $ at closing (not part of contract) for short-sale fee or to pay for personal property that will be 1-28 left behind. Okay?

Showing Short-Sale Listings • Short-sale listings under contract appear in MLSs in a variety of ways • Include these listings if buyer clients wants to see potential short-sale properties  When is Ratiﬁcation?  Can it be listed as “Active” 1-29 with consent? Page 13 Showing Short-Sale Listings • Remember: subsequent offers may have an equal chance of being approved by lender if lender has not provided listing agent/broker a written approval of contract 1-30

Buyer Issues • *There may be multiple lien holders • *Seller acceptance of short- sale offer does not guarantee bank approval • *Documentation requirements from each lender may vary • *You know of a “FIRM” contract when the lender 1-31 provides written approval. Page 14 Buyer Issues • Continuing investigation of the property—CMA updates while property is pending lender approval. • Time for lenders to review offers may not give most buyers enough time to order property inspection 1-32

Buyer Issues • Unless contract stipulates otherwise, earnest money deposit, mortgage application, home inspection and attorney review will take effect upon signature of seller 1-33 Buyer Issues • Unless there is way for buyer to cancel contract while lender approval is pending, buyer is committed to transaction • If buyer chooses to purchase another home during this time he or she will need to do it “subject to release of prior 1-34 contract”

Examples of Fraud • *Ignoring the Right of Recission • *Financing based on inﬂated Appraisals • *Use of Straw Buyers 1-34 Contract Considerations • NVAR Shortsale Addendum • Escrow Issues • Forced Disclosures • NVAR Buyer Counseling Documents 50

Force disclosure in the offer to purchase Recommendation to Paragraph 34: “As a condition of ratification, the seller obligates themselves to disclose to the purchaser if they are pursing a shortsale, or if they decide during the time period from ratification to closing, to pursue a shortsale. Notice of the Seller to the Purchaser shall be in a timely manner, and the Purchaser will have 3 days to decide to void the contract based on the decision to pursue a Shortsale.” *Recommendation ONLY: Consult your Broker and legal counsel… Discussion Questions • How would you counsel buyer client on these short-sales issues? > Home inspection > Earnest money > Property condition > Additional lien holders > Mortgage application 1-35

Don’t Practice Law • Ability for buyers to nullify original contract if they ﬁnd another property or realize value has decreased and choose to withdraw will be entirely based on how original contract was written 1-36 2. The Short-Sale Package In this module: • Components of effective short-sale package • Common results from short sale • Mortgage Forgiveness Debt Relief Act of 2007 2-1 Page 16

Seller benefits – Short Sale • Embarrassment of Foreclosure • They can stay in property till Sold • Credit Protection – 2-5 months behind = 30-60 deduction – Foreclosure = 200+ Deduction – Fannie Mae Guidelines • Cannot get a mortgage for 5 year post Short Sale • Cannot get a mortgage for 5-7 years post Foreclosure • It’s the “RIGHT” thing to do Lender Benefits – Short Sale • Cost of Filing and Foreclosing – Notice of Default = $1500 – Notice of Trustee Sale = $1800 – Cash for Keys Closing = $1500 – REO / Agent Commissions = (4-5% on Average) • Property Maintenance Costs • Utilities • Potential for Marketing Continuing to Decline • Reduce Bad Debt on the Books – Most lenders may keep no more than 3% of leveraged properties as inventory • 2008 Study shows $65,000 avg to REO property

Components of Short-Sale Package • Short-sale proposal • CMA letter • Marketing history, • Borrower’s signed showings, and short-sale payoff feedback application • Purchase contract • Seller’s hardship signed by buyer and letter seller • Seller’s financial • Written proof of information buyer’s ability to • Supporting financial purchase property information • Certified escrow • Supporting hardship instructions information • HUD-1 settlement • Repair estimate for statement Page 16 the property • Preliminary title 2-2 report Components of Short-Sale Package • Remember: > *There can be multiple loans and you will need to repeat this process for each lender  “It takes more documentation to get out of their mortgage than it took them to get it in the first place.”  Packets are responsibility of Seller and Listing Agent. 2-3

Proposal Letter • Should include: > Overview of homeowner’s situation > What they owe on property > What it is really worth > Amount of needed repairs > What offer to bank is > See Figure 6 Page 17 2-4 Short-Sale Payoff Application • Application provided by lender • *Real estate professional may have obtained this in advance of putting together short-sale submission package 2-5 Page 17

Seller’s Hardship Letter • Application provided by lender • Real estate professional may have obtained this in advance of putting together short-sale submission package Page 18 2-6 Seller’s Financial Information • Financial statement can be constructed list of assets and liabilities: Assets Liabilities > Real estate > Real estate loan(s) > Stocks, bonds, • Personal loans mutual funds • Credit card debt > Bank accounts • IRS liens > Personal property • Judgments > Retirement accounts • Lawsuits 2-7 Page 18

Supporting Financial Information • Typically the same information as for borrowers applying for a loan: > Pay stubs > W-2s and/or tax returns > Bank statements and credit reports Page 19 2-8 Supporting Hardship Information • The following are helpful to provide complete picture of borrower’s hardship: > HOA liens > Medical bills > Disability statements > Unemployment beneﬁts or status > Divorce decree Page 19 2-9

Comparative Market Analysis • Create CMA using most current comparable sales • Note: if CMA is too far below broker price opinions (BPOs), lender may view entire short- sale package in a negative light Page 20 2-10 Marketing History • Provide complete history of showings, feedback, and advertising • Highlight data such as: > Average time on market > # of short sale and REO listings > Price trends > Market absorption rate/months 2-11 of inventory Page 20 > Recent economic data

Repair Estimate for Property • Providing lender with detailed repair estimate from reputable (licensed) contractor will assist in getting short sale accepted • Most lenders prefer to sell “as is” and have buyer make needed repairs Page 21 2-12 Contract and HUD-1 • Provide lender with a copy of purchase contract • All supporting documents, including the HUD-1 settlement statement and buyer’s preapproval letter, should be attached 2-13 Page 21

Common Results from Short Sales • Lien is released and: 1. Seller is forced to carry remaining debt on payment plan 2. Seller is forced to liquidate other assets 3. Lender sues for deﬁciency 4. Lender reports loss as a “charge off” or “collection” to credit bureau Page 21 2-14 5. Lender forgives remaining indebtedness Common Results from Short Sales 6. Lender ignores contract 7. Lender refuses to approve contract as written and agreed to. Lender may indicate net proceeds they require for approval of short sale. 2-15

Recourse and Non-Recourse Loans • If seller has non-recourse loan the lien holder has no ability to seek compensation for amount forgiven in short sale • If seller has recourse loan, lien holder has ability to force seller to repay debt Page 22 2-16 Mortgage Forgiveness Debt Relief Act of 2007 • Prior to this law, forgiven debt was considered taxable income • Under this law, up to $2 million of debt forgiven on taxpayer’s principal residence in 2007, 2008 or 2009 will not be treated as income 2-17 Page 22

Homeowner’s Assistant Program – Military Aid Program http://hap.usace.army.mil/ First There has to be an announcement of a base closing or realignment action which affects your community. Second A determination must be made that real estate values have dropped as a direct result of the base closing or realignment announcement. Eligibility The applicant must be a military service member (including Coast Guard) or federal civilian employee assigned at or near the installation announced for closure or realignment. 3. Foreclosures In this module: • Judicial foreclosure vs. nonjudicial foreclosure • Buyer counseling on REOs www.foreclosurelaws.org 3-1 Page 23

*Broker Price Opinions (BPO) 1. Will doing a BPO take away from my marketing time 2. Does my E and O Insurance cover me for doing them? 3. If I were to take my projected income for the year, would the number of hours it takes to do a BPO be profitable 4. Am I adequately trained to perform the requirements of the BPO? Broker Price Opinion II 5. Do I have a resource to substantiate my suggested values of the property? 6. What is my Broker’s policy? 7. What is State Law? 8. What recent case law exists in my state regarding agents doing BPO’s? 9. Will doing the BPO for the Loss Mitigation Officer potentially yield a contract to do REO listings? 10. Will this relationship be profitable for more than just the cost of the BPO? 76

When All Alternatives Are Exhausted • When reﬁnancing, short sales, and/or loan modiﬁcations don’t work, only one option: > Foreclosure Page 23 3-2 Mortgage vs. Deed of Trust • The type of loan instrument (mortgage or deed of trust) can help determine: > How proceedings will take place > Length of time to complete proceedings > Outcome 3-3

Mortgage vs. Deed of Trust • If loan instrument is mortgage: > Judicial foreclosure or court-ordered action is typically used to execute foreclosure proceedings 3-4 Types of Deeds • General Warranty Deed – Best  I’m the owner, I warranty my ownership and everyone else’s back in the chain of title. • Special Warranty Deed – Acceptable  I’m the owner, I warrant my ownership only. • Quitclaim Deed – Never Acceptable  I may be the owner, and if I am, I transfer whatever I have to you, but will make no warranties of any kind. 80

Mortgage vs. Deed of Trust • If loan instrument is deed of trust: > Nonjudicial foreclosure is used > Nonjudicial foreclosure typically takes less time than judicial foreclosure For an overview of judicial and 3-5 nonjudicial processes, see Figure 8 – page24. Forced Sale of Property • Foreclosure requires forced sale of property either by: > Sheriff’s sale > Trustee sale 3-6 Page 25

Closer Look at Sheriff’s Sale • Listed among legal/judicial notices in local newspaper • Scheduled sale of property is published for speciﬁc number of weeks prior to sheriff’s auction/sale • *May have questionable clarity on the title Page 25 3-7 Buyer Considerations • Opportunity for property inspections can be negligible or extremely limited • Buyers may be responsible for evicting occupants • Buyers may be responsible for paying outstanding liens 3-8 Page 26

Maryland Foreclosure Summary - Judicial Foreclosure Available: Yes - Non-Judicial Foreclosure Available: Yes, with restrictions - Primary Security Instruments: Deed of Trust, Mortgage - Timeline: Typically 90 days - Right of Redemption: No - Deficiency Judgments Allowed: Yes In Maryland, lenders may foreclose on a mortgage or deed of trust in default using either the judicial, assent to decree, or non-judicial foreclosure process. Lenders must wait for 135 from date of default to foreclose. 85 Maryland Foreclosure Snippets 1. A notice of sale must be published in a newspaper of general circulation in the county where the property resides at least once a week for three (3) successive weeks, with the first publication to be not less than fifteen (15) days prior to sale and the last publication to be not more than one week prior to sale. The notice of sale must also be sent by certified and by registered mail, not more than thirty (30) days and not less than ten (10) days before the date of the sale, to the borrower at their last known address. 2. The sale must be conducted by the person authorized to make the sale (i.e. trustee, sheriff) and may take place immediately outside the courthouse entrance, on the property itself or the location advertised in the notice of sale, if different. The terms of the sale vary by process. 3. If the sale is postponed, notice of the new date of sale shall be published in the manner the original notice of sale was given. 4. Within thirty (30) days after the sale, the person authorized to make the sale must file a complete report of the sale with the court. The clerk of the court will then issue a notice containing a brief description to identify the property and stating that the sale will be ratified unless cause to the contrary is shown within 30 days after the date of the notice. A copy of the notice shall be published at least once a week in each of three successive weeks before the expiration of the 30-day period in one or more newspapers of general circulation in the county in which the report of sale was filed. 5. Lenders have a period of three (3) years to file for a deficiency judgment, but it is limited to the balance of the loan in default after the foreclosure sale proceeds have been applied. 86

Buyer Considerations • Buyers may not receive clear title • Buyers may be impacted in states that offer borrowers the right of redemption 3-9 Redemption • Redemption period: Right of borrower to recover a property after foreclosure • This period varies from state to state • Borrower may incur a deﬁciency judgment for the difference of sale in Virginia. 3-10 Page 26

Right of Redemption Maryland does not have a post-sale statutory right of redemption, which would allow a party whose property has been foreclosed to reclaim that property if the property is sold under power of sale. In certain judicial foreclosures a right to redemption is permitted. When Property Fails to Sell at Sheriff’s Auction • When foreclosed properties don’t attract bidders at sheriff’s auction, the property is considered real estate owned or REO • REO means the property or asset is owned by the lender 3-11 Page 27

Counseling Buyers on REOs • Buyers who are good candidates: > Are experienced investors > Understand that most REO properties are sold “as is” > Have resources to repair and rehab the property if necessary 3-12 Counseling Buyers on REOs • Buyers who are NOT good candidates: > “Wanna-be” investors  Those who have contingencies, such needing to sell another residence before they can buy  Licensee seeking to purchase an REO 3-13

Preparing Buyers on What to Expect • “Gutted” properties, missing appliances, cabinets, wiring, siding, plumbing • Electricity disconnected • Structural damage • Missing or broken 3-14 ﬁxtures Buying REOs • Lender’s internal cost to foreclose can be signiﬁcant • REO transactions are investment driven 3-15 Page 28

Showing REOs • Previewing REOs is an added beneﬁt you provide as buyer’s agent • But DON’T allow buyer client unsupervised access to REO properties Page 28 3-16 Writing Offers on REOs • Buyer’s chance of offer being accepted greater when: > Buyer makes offer based upon market value > Buyer has been pre- approved for ﬁnancing > *They ask for closing date that is sooner rather than 3-17 later Page 29

Writing Offers on REOs  They agree upfront to an “as-is” transaction  They do not have any home sale or home close contingencies 3-18 Writing Offers on REOs • Buyer’s agents should call listing agent for instructions on presentation of offer • Listing agent then submits offer to asset manager 3-19

Writing Offers on REOs • Counteroffer is handled through addendum, which is sent to listing agent from asset manager, who forwards it to buyer’s representative via fax or e-mail • When offer is accepted, listing agent contacts buyer’s representative 3-20 Recommendation to Paragraph 34: “As a condition of ratification, the seller obligates themselves to disclose to the purchaser if they are pursuing a shortsale, or if they decide during the time period from ratification to closing, to pursue a shortsale. Notice of the Seller to the Purchaser shall be in a timely manner, and the Purchaser will have 3 days to decide to void the contract based on the Seller’s need to pursue a Shortsale.” Recommendation ONLY: Consult your Broker and legal counsel…

Buyer’s Reps Should Note • Even though offer may have been accepted by asset manager, it is common for acceptance to be subject to senior management approval • Listen carefully to listing agents because they are an extension of asset manager 3-21 Limited Property Disclosures • With REOs, property disclosures may be limited • If buyer client refuses to schedule property inspection, buyer’s rep should ask client to sign an acknowledgment of waiver of inspection 3-22 Page 30

Managing the Funds • Earnest money deposits on REO transactions are handled in same way as any other transaction • In most states, earnest money is not deposited until there is signed contract Page 31 3-23 City POS Inspection • Some cities require a point of sale (POS) inspection to assess safety, soundness, and security of property • Customarily, buyer corrects violations unless seller ﬁxes them • Many cities require escrow fund to cover costs of repairs Page 31 3-24

Final Walkthrough • Addendum may state: “buyer to have walkthrough immediately before title transfer to ascertain property is in same condition as when purchase agreement was written.” Page 31 3-25 Closing Dates and Per Diems • *Asset managers prefer closings to take place at the end of the month • Most sellers charge a daily penalty for every day the buyer is late in meeting the contract closing 3-26 Page 32

Possible Beneﬁts and Disadvantages • What are possible beneﬁts and disadvantages of buyers purchasing property at each of the following? > Short sale > Sheriff’s sale > REO Page 33 Chart Page 33 3-27 4. How Consumers Can Prevent Foreclosures In this module: • Educating consumers • Choosing the right loan 4-1 Page 34

Becoming Educated • Education is a consumer’s best self-defense • Free pre-purchase counseling offered by agencies and/or organizations approved or certiﬁed by HUD and/or NeighborWorks® Center for Homeownership Education and Counseling (NCHEC) Page 34 4-2 Becoming Educated • Available at www.realtor.org: 4-3

Choosing the Right Loan • Know your credit score • Also important: > Knowing the terms of your loan > Having legal advisement when reviewing loan documents prior to signing Figure 9 – Page 36 4-4 Staying Aware of Predatory Lending • Predatory lending: lending practices that are harmful or abusive to borrowers • While deﬁnition varies from state to state, there are many common practices • For list of possible warning signs, see Figure 10 – page 37 4-5

Mortgage Fraud • Mortgage fraud: deliberate criminal activity • Practices include, but are not limited to, falsifying information, ignoring right of rescission, and ﬁnancing on inﬂated appraisals Page 38 4-6 Responding to the Crisis • Lawmakers introducing home loan protection acts as well as strengthening existing anti- predatory lending legislation 4-7

HVCC • Home Value Code of Conduct – Effective May 1, 2009 – Affects Fannie Mae / Freddie Mac – Lender to handle payment – Appraisal Management Company (Clearing House) – No Lender Contact – Agents, on behalf of clients, may contact – Property Condition Reports Questions? • Are there any questions we can answer before concluding today’s class? 4-8

Thank you! • On behalf of REBAC, thank you for participating in today’s class! 4-9

S. Maryland Shortsale Foreclosure Training

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