Short Sales, statistics in Florida, and why we need to pay attention current policy exempting short sellers from the home purchasing market.... and solutions to keep underwater homeowners in their homes.
Short Sales: The 800 Pound Gorilla that is Affecting a Growing Number of People and Eroding the Housing MarketThough some data provided also pertains to foreclosures, it is only included because credit companies commonly combine short saleand foreclosure data together. This report will strictly address solutions for short sales and strategic defaults.
Focusing on Short SalesNationalFlorida exampleNot all Short Sellers are the Same: Owner Occupied and InvestorSolutions that Require Policy Change to AllowShort Sellers to Re-enter the Fledgling USEconomyChange the Credit Default Requirement of Servicers to Consider a Homeownerfor a Short SaleEncourage Manual Mortgage Underwriting Exceptions for “Life Event” MortgageOnly (MO) DefaultersWhy Buyers Aren’t Buying and Solutions thatare Working
Focusing on Short Sales*A short sale is a sale of real estate in which the sale proceeds fall short of the balanceowed on the propertys loan. It often occurs when a borrower cannot pay themortgage loan on their property, but the lender decides that selling the property at amoderate loss is better than pressing the borrower.*mortgage servicerA mortgage servicer is the company that borrowers pay their mortgage loan paymentsto. National Florida statewide: comparison of % of *Distressed Listings compared to total Florida Listings Not all Short Sellers are the Same: Owner Occupied and Investors1. Definition of a short sale, Wikipedia: http://en.wikipedia.org/wiki/Short_sale_(real_estate)2. Definition of a mortgage servicer, Wikipedia: http://en.wikipedia.org/wiki/Mortgage_servicer
*Data shows the national average percentage of “underwater” homeowners (residential properties with a mortgage in negative equity) in the US was 22.7 at the end of March 2011.States with Highest Negative Equity Percentage of Total Mortgages in Their State • Nevada: 63% • Arizona: 50% • Florida: 46% • Michigan: 36% • California: 31%Data: 22.7% Negative Equity Report/ CoreLogic, June 7, 2011 and 28.4% from Zillow Reuters/ on 5/9/11 msnbc.com
Here’s an example of numbers of homeowners affected in Florida alone…Florida 3rd highest in US with 46.1% of all mortgages underwater *2,021,868 negative equity mortgages statewide **Total # of listings statewide: 232,167 **Total distressed listings: 63,262. This number of homeowners/units will need to: rent after listing sells will not be able to purchase another home with a mortgage for minimum of 2-3 yrs after short sale and 3-7 years after foreclosure. **These homeowners/units are 27.24% of the total listings in the state of Florida alone.*New CoreLogic Data Shows Slight Decrease in Negative Equity CoreLogic June 7, 2011, Santa Ana, Calif. , pg. 3** See next page for Distressed Listing through MLX Advantage: Combines Short Sale and Foreclosure selections (includes short sales and pre-foreclosures for 4/1-5/2/11. Did not include REO’s/bank owned. Some Fl. counties not reporting.)
** # of Homeowners eliminated in Florida alone:Compare Florida Total Listings to Short Sale/Pre-Foreclosure Listings
Not all Short Sellers are the Same: Owner Occupied and Investor• Owner Occupied short sellers with a hardship: purchased an owner occupied home, wishing to stay until family circumstances changed. And circumstances, commonly loss of income, divorce, relocation for jobs, increase in household size, did change.• Investor short sellers: purchased home(s) as investor speculators, hoping to flip and make a profit, widely popular in a booming housing market.• Owner Occupied short sellers with no hardship: purchased an owner occupied home and have no apparent hardship (loss of job, divorce, increase in household#, etc.) This type of short seller is also known as a “strategic defaulter”. A *strategic default is the decision by a borrower to stop making payments (i.e. default) on a debt despite having the financial ability to make the payments. – *These are the “stuck” short sellers, as they don’t have a defined hardship other than sever loss of equity. These short sellers are often turned down for a short sale, or the bank requires a partial note to be paid in order to complete the short sale. *Wikipedia definition of Strategic Default: http://en.wikipedia.org/wiki/Strategic_default
Solutions that Require Policy Change to Allow Short Sellers to Re-enter the Fledgling US Economy How can short sellers… become buyers again? When? How will it happen?
Frustrating Conflict: CoreLogic May 2011 Study Short Sale Research StudyHere’s press that realtors and public see in Here’s the frustrating reality occurring article meant to alert banks of fraud… the majority of the time*Short Sale Scam cheats banks, sellers June 8, 2011, More of these properties than realized are greatly www.Floridarealtors.org distressed. Repairs CANNOT be done prior to a short sale or REO (bank owned) closing.Banks and distressed home sellers stand to lose more than $375 • To repair a home, buyer must: million this year from a short sale scam that has sellers and – obtain a rehab loan, agree to an *escrow closing, banks agreeing to sell homes at very undervalued prices, or pay cash. according to a new study by CoreLogic. • Mortgage guidelines require minimum property standards, and if not present, cost must be: Here’s how the scam often works: Borrowers who are – added into a rehab mortgage or kept in escrow at underwater or in financial distress are approached, often by closing and released after repairs complete. an investment group, and persuaded to sell the property in a • In both cases: short sale at a low price. Soon after the bank accepts the – Buyer completes repairs AFTER CLOSING ON lowball offer, the investment group then resells the house to HOME and pay inspections and bids for repairs. legitimate buyers at a higher price. • PROBLEM MOST OFTEN: Sixty-five percent of short sales resold within six months that – Home “After Improved Value” (with needed net profits of 40 percent or higher were flagged “suspicious,” repairs) STILL WON’T APPRAISE and value is not which means there is a high likelihood that the lender high enough to cover repair costs. accepted a low offer, according to the CoreLogic study. These – Homebuyers prefer to buy from transactions often go undetected by banks, too. Investor/rehabber who does inspection, purchases home, rehabs, and hope that propertyAnd… appraises out high enough to cover repairs.*A short way to short-sale fraud June 03, 2011 *Escrow closing: buyer gets mortgage for home, but escrows repair by Kenneth R. Harney www.therealdeal.com costs, usually 1.5%, at title co. until repairs are completed.
Conflict of Policy: The growing number of short sellers are producing a glut of soon to be ex-homeowners who are exempt from purchasing another home for a minimum of two to three years, and more.• Servicers tell existing homeowner • Even though mortgage underwriting guidelines that in order to be considered for a offer reasonable timeframes and underwriting standards for homeowners that must short sale, short sale, the homeowner must be being late on mortgage payments for the 12 in default on their mortgage payment months preceding a short sale is what exempts before being considered for a short these short sale homeowners from repurchasing a home for a minimum number of sale. years for all mortgage types.Troubled homeowners figured out long ago that the only way • FHA Borrower in Default at the time of Short Sale to get any attention from their lender was to stop paying. And guess who they heard that from? The banks A borrower in default on his/her mortgage at the time of themselves. the short sale (or pre-foreclosure sale) is not eligible for Orlando Sentinel, May 17, 2011, Beth Kassab/Business a new FHA-insured mortgage for three years from the Columnist/ Article: Bondi should embrace lower mortgage date of the pre-foreclosure sale. principals FHA outreach.gov/FHA Handbook 4155.1, 4.C.2.1 • Additional restrictions also imposed by lenders: Some major lender place additional restrictions on FHA, conventional and VA guidelines already in place, regarding short sales. Additional overlays may include greater timeframes before giving a mortgage. One major lender will not give a mortgage AT ALL to short sellers that had to sign a promissory note for a previous short sell, even if the debt is included in the DTI! NOTE: These short sellers no longer own the previous home, must pay a note, the debt is part of their DTI, and they ARE STILL DENIED A LOAN !
Wait Timeframes and Maximum LTV after a Short Sale for a New Mortgage• *VA: 1 year at 100% LTV or lower• *FHA: 1 year if there were no lates in the preceding 12 months before the short sale closing• *Fannie Mae and FHLMC: 2yrs at 80% LTV• *FHA: 3 years if there were lates in the preceding 12 months before the short sale closing• *Fannie Mae and Freddie Mac: 4 years at 90% LTV with private mortgage insurance (PMI). As of 6/4/11, there are no known PMI carriers who will insure at 90% LTV!*See Resource page for where to retrieve information for loan programs.
Change the Credit Default Requirement of Servicers to Consider a Homeowner for a Short Sale• In March of 2011, a 27 page term sheet prepared by attorneys general and led by Tom Miller of Iowa and used as a starting point for negotiating real reform with the banks included this proposed change: *“Servicer’s employees shall not instruct, advise or recommend that borrowers go into default in order to qualify for loss mitigation relief.”• If servicers would not instruct current homeowners that they must be late on mortgage payment in order to be considered for short sale and allow these homeowners to continue paying the mortgage payment, it would prevent short sellers from automatically becoming exempt from re- purchasing a home for a longer period of time.• Credit is still affected with a short sale closing and the wording “settled for less than full balance of loan” shows on credit report. Over time, however, credit scores increase. Late payments required for short sale consideration by servicers at present will exempt a short seller from getting a mortgage, even if the credit score has gone back up. *Word for Word: The 27 Page Term sheet on Mortgage Servicing Practices Excerpt can be found on page 17, K.8
Trans Union Provides Positive Credit Proof for Mortgage Only Defaults…In a PowerPoint presentation presented by *TransUnion on May 17-18, 2011 at the Financial Services Summit, credit risk differences were established for Mortgage Only delinquent consumers: – *MO: “Mortgage Only” A consumer who goes 120+ DPD on a mortgage but has no other delinquent existing tradelines at the time the new tradeline is opened – *MD: “Multiple Delinquencies” A consumer who goes 120+ DPD on a mortgage but has at least one delinquent existing tradeline at the time the new tradeline is openedTrans Union test results proved… An MO (Mortgage Only) default during the recession indicates a better risk, regardless of when the new account opens Scores for mortgage-only defaulters tend to “rebound” faster than for those w/multiple delinquenciesIncorporating these results into strategy is not difficult after MO identification: Identify MOs—a relatively simple task at the credit file level Adjust score cut-offs for MOs in prescreen Adjust pricing for MOs in offer*“Life After Foreclosure and Hidden Opportunities” presented May 17-18, 2011 at TransUnion Financial Services Summit.
…With Benefits and Knowledge Too Important and Valuable to Ignore!(*cont’d.)The benefits can be material “Buy deeper” without the accompanying loss rates Avoid the tough competition currently vying for the cleanest segments Target a segment that will not otherwise get attractive pricing Achieve higher risk-adjusted margin than is currently available in other segments Build loyalty at a time when consumer dissatisfaction is relatively highSummary Behavior that was once considered high-risk may no longer be so An understanding of how external factors impact consumers can reveal acquisition opportunities your competitors might miss The recent recession is a great example of exceptional behavior; mortgage-only defaulters may not be as bad as you think Radical changes to the environment can limit the effectiveness of based on prior 26 intuition experience*“Life After Foreclosure and Hidden Opportunities” presented May 17-18, 2011 at TransUnion Financial Services Summit.
Encourage Manual Mortgage UnderwritingExceptions for “Life Event” Mortgage Only (MO) Defaulters• Because of the credit proof shown on the *TransUnion report and further documentation from *FICO, a case for consideration of common sense manual underwriting exceptions could be made for short sellers who have not had any late pays on credit other than those incurred due to the short sale.• Additional criteria that could be required: Greater monies down higher credit score Higher interest rate *“Life After Foreclosure and Hidden Opportunities” presented May 17-18, 2011 at TransUnion Financial Services Summit. *FICO Reveals Score Impact of Mortgage Delinquencies: from 3/24/11/ Smart Credit
Why Buyers Aren’t Buying and Solutions That are Working! Why buyers aren’t buying short sale What buyers feel safe buying inventory 1. Buyer bears the expense of appraisals, • What IS selling: *FNMA Homepath inspections, with all monies lost if homes and *Neighborhood appraised value not high enough. Stabilization Program (NSP) homes, 2. This happens most often because In where foreclosed (Homepath and areas where negative equity is NSP) and short sale (NSP only) common, and minimum value to homes are rehabbed and then put include repairs needed will not be into the market. realized in appraisal value. Therefore, a mortgage cannot be given for • Homeowners perceive these amount needed. properties as safe, as they have 3. Rehabilitation and Renovation been inspected, and repaired to mortgages are typically at a slightly min. code standards. higher rate with higher costs. • If banks/servicers repaired homes, 4. Often these homes are partially they would realize a higher sales destroyed or vandalized, and price, just like FNMA Homepath, homebuyers are fearful of what they NSP, and investors/rehabbers. can’t see are wrong with these homes.*FNMA Homepath website: http://www.homepath.com/*NSP Program Overview: http://www.hud.gov/offices/cpd/communitydevelopment/programs/neighborhoodspg/
Resources1. Definition of a short sale, Wikipedia: http://en.wikipedia.org/wiki/Short_sale_(real_estate)2. Definition of a mortgage servicer, Wikipedia: http://en.wikipedia.org/wiki/Mortgage_servicer3. Data: 22.7% Negative Equity Report/ CoreLogic, June 7, 2011 and 28.4% from Zillow Reuters/ on 5/9/11 msnbc.com4. *New CoreLogic Data Shows Slight Decrease in Negative Equity CoreLogic June 7, 2011, Santa Ana, Calif. , pg. 35. *Wikipedia definition of Strategic Default: http://en.wikipedia.org/wiki/Strategic_default6. Short Sale Scam cheats banks, sellers http://www.floridarealtors.org/NewsAndEvents/article.cfm?id=2608677. A short way to short-sale fraud June 03, 2011 12:30PM By Kenneth R. Harney http://therealdeal.com/newyork/articles/a-short-way- to-short-sale-fraud-by-kenneth-harney8. Orlando Sentinel, May 17, 2011, Beth Kassab/Business Columnist/ Article: Bondi should embrace lower mortgage principals9. FHA outreach.gov/FHA Handbook 4155.1, 4.C.2.1: www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.4.C.2.l10. Fannie Mae Selling Guide/Originating through Closing/Underwriting Borrowers/Credit Assessment/Traditional Credit History11. https://www.efanniemae.com/sf/guides/ssg/sg/pdf/sel052411.pdf12. Freddie Mac Selling Guide/ First go here: http://www.allregs.com/tpl/Main.aspx. Then, find Single-Family Seller/Servicer Guide, Volume 1/Chs. 37-38: Credit Underwriting/Chapter 37: Underwriting the Borrower/37.7: Evaluating Borrower credit reputation (02/01/11)13. VA Pamphlet 26-7, Revised/ Chapter 4: Credit Underwriting, pgs. 44-45 http://www.benefits.va.gov/WARMS/pam26_7.asp14. Word for Word: The 27 Page Term sheet on Mortgage Servicing Practices http://www.americanbanker.com/issues/176_45/how-the- state-ags-want-to-revamp-mortgage-servicing-1034053-1.html. Excerpt can be found on page 17, K.8.15. “Life After Foreclosure and Hidden Opportunities” presented May 17-18, 2011 at TransUnion Financial Services Summit. Full PDF located at http://www.transunion.com/docs/business/eMarketing/finSummit2011/Life-after-Foreclosure.pdf16. FICO Reveals Score Impact of Mortgage Delinquencies: http://www.smartcredit.com/blog/2011/03/24/fico-reveals-score-impact-of- mortgage-delinquencies/ from 3/24/1117. FNMA Homepath website: http://www.homepath.com/18. NSP Program Overview: http://www.hud.gov/offices/cpd/communitydevelopment/programs/neighborhoodspg/