Tag Archives: foreclosure

Distressed Home Sellers are 29% of Home Sale Market

According to the “Distressed Sales Activity” report from First American CoreLogic, First American Core Logicdistressed home sales are on the rise again, accounting for an amazing 29% of all home sales in the month of January.

Nearly 1 Million distressed sales occurred last year, which includes short sales and real estate owned (REO) property.

Distressed property sales are at their highest levels since April of 2009.

Expect to see this trend to continue – there is still a lot of pent-up housing inventory in the system, banks are finally starting to liquidate their REO portfolios faster, and there is a strong focus on completing short sales quicker.

Real estate agents and investors should keep their eyes on the distressed property numbers, this will be a very large part of the market for the next few years!

Short Sale Supervisor Talks to a Real Estate Agent – Recorded Conversation

The Short Sales and Bank Fraud story continues to gain traction. After CNBC aired the story we brought them, dozens of other media outlets, bloggers and authorities have contacted me to discuss this topic.

Here is the story of how this fraud initially came to our attention, along with the evidence to back it up.

Last year, I was contacted by an experienced real estate agent in our network who negotiates many short sales. She had recorded a conversation between her and a supervisor in the loss-mitigation department at a major national lender, who she felt was trying to get her to do something illegal.

Here is the audio of that recording, along with the transcript. The names have been removed at the request of the agent to prevent backlash from the bank.

Listen: Recorded Conversation with Bank Supervisor

AGENT: OK, so the only way to settle with *LENDER* then is to get money from somebody else and pay it prior to – that’s what *LENDER-EMPLOYEE* suggested – pay it prior to close of escrow, outside of…. <unintelligible> Pardon me?

LENDER: That is something you can do.

AGENT: Pay it outside of escrow, off the HUD, prior to close.

LENDER: Right, that’s something you could do.

AGENT: And is that something you guys do regularly or you see people doing?

LENDER: Yes, that happens – we have people that send us money outside if they need approval letters <unintelligible> from the first, and once we receive the additional funds, the approval letter can be sent for what the first actually offered – so it happens.

AGENT: OK and what about the fact that the first says that, no more than you know, a certain percent is to go to the second?

LENDER: OK, if the first… Here’s the thing, if you’re asking what this is about – the first is saying “well here’s what I’m going to allow” and the first is saying “this is what we’re willing to pay out.”  If there’s a contribution, if you don’t want to be able to come up with the additional that we’re asking for – the first has already gave their approval on what they’re doing – what someone just comes up with has nothing to do with the first.

AGENT: Even if on this letter it says that “the second is not to receive any more than a certain amount”?

LENDER: The first can not dictate what we receive. The first is saying what they are only going to allow. That’s the amount that they’re allowing to us. If someone out there – the buyer – or a family member puts more money and says here’s what I want to give for you because here’s the additionally requested funds – that has nothing to do with the first.
You’re not asking the first to come out of their pocket any extra than what they are willing to give. So that that’s not any information that might have to be required on the HUD.
Hold on one second please.  <long pause>

LENDER: So I need to have the information – you’ve had the opportunity to go over this with *LENDER-EMPLOYEE* – did he explain all this to you on how this takes place?

AGENT: Well he does but I’m having a tough time, ******, I’m licensed and everybody else…

LENDER: It’s not illegal; it’s not a hard thing, this thing that has happened. The information that you’ve actually received from us – we’re actually trying to help you get this deal closed. If you choose to go back and tell the first what’s going on – you’re going to kill the deal.
So what actually happens prior to closing has nothing to do with the first. What happens at closing – that is information you can provide to them. If you are able to come up with additional funds not to get this deal closed prior to closing, then that’s fine – that’s irrelevant for the first. If you go ahead and you want to let the first know “well, here’s all the information that I have – here’s what’s going on” you will be the one to actually kill this deal. I’m trying to actually give you a way to go about getting this resolved. If you take our suggestion – you take the information that *LENDER-EMPLOYEE* has given you – you can have this done.
If not, then you know, those guys are going to foreclose on it and it’s a done deal. But it’s not like we’re holding up this process.

AGENT: Well, what about the form that the buyer’s lender puts out that there are – that everybody has to sign that says there are no side deals?  <long pause>
I mean that… How do I get around that?

LENDER: What you need to take care of actually is not going to be a problem. What they submit to us – there is $****** they are giving us – the only thing you have to worry about – I mean it sounds like you’re scared that you’re going to be fined for something because you are doing something you are not supposed to. This is what we do all day.

AGENT: Well yes, I don’t want to lose my license, go to jail, I mean, I have to sign…

LENDER: You’re not going to lose your license – we have plenty of realtors who do this, who actually understand how this whole process goes – and they realize that OK, if I want to get this done, this will take place. Nobody’s losing their license and nobody’s going to jail, nobody’s receiving a fine…
So and here’s the thing too, I’ll be really honest with you, if you are uncomfortable about working it, you can probably assign it over to someone else, where they would be able to do this – if it makes you feel that uncomfortable – you should probably just assign it over to someone else. Someone who’s actually been able you know – who’s done this before, who’s more familiar with it.
Not to be disrespectful or rude to you or anything like that, but we deal with this every day all the time, this is not something out of the norm. But if you feel like you are doing something that’s against your morals, please assign it to someone else who’s been able to do deals like this so they can get it done, and you can have a happy buyer and a happy seller.

AGENT: Well, how do I get, I mean what’s the logic or if I could understand – when I’m signing a paper put out by FHA that says there are no side deals – this is a side deal.

LENDER: This is a contribution. <long pause> You guys are able to come up with money in order to get this deal closed.

AGENT: OK

LENDER: OK. So the offer that we have it still stands – you can call *LENDER-EMPLOYEE* back and let him know if, what you’re going to do, and if you guys foreclose, we understand. If you’re not comfortable with this – go ahead and assign it over to someone else.

AGENT: <sigh> OK, well thank you for your time.

LENDER: No Problem

CNBC – Big Banks, Short Sales, Kick Backs and Fraud

This morning CNBC aired the story we brought them regarding short sales, bank fraud and kick-backs to banks.

—————————–

Diana Olick  — CNBC Real Estate Reporter
Big Banks Accused of Short Sale Fraud

Just as regulators, lawmakers and all forms of financial oversight boards are talking about new regulations to guard against mortgage fraud and another mortgage meltdown, there appears to be yet a new mortgage fraud out there today, allegedly perpetuated by agents of, yes, the big banks.

I was first alerted to this by Jeremy Brandt, the CEO of several companies that bring short sale agents, investors and sellers together.

His companies include 1-800-CashOffer, HomeFlux.com and FastHomeOffer.com. Brandt has a huge network of short sale real estate agents, and over the past several months he’s been receiving all kinds of questions and complaints about trouble with second lien holders.

As we all know, during the housing boom, millions of Americans pulled cash out of their homes in the form of home equity loans and lines of credit. They also used “piggy back” loans in order to get even lower interest rates on their primary mortgages. Now, many of the borrowers in trouble, and many who are so far underwater on their loans that they don’t qualify for any refi or modification, are choosing short sales as a way out. (Short sales are when the lender allows the home to be sold for less than the value of the loan). About 12 percent of all home sales by the end of 2009 were short sales, according to the National Association of Realtors.

In order for a short sale with two loans to happen, the second lien holder has to drop the lien.

If they don’t, and there’s no short sale, the home goes to foreclosure and the first lien holder gets the house because second liens are subordinated debt to the primary loan.

In short, the second lien holder gets nothing. In order to get the second lien holder to drop the lien, the first lien holder generally negotiates some partial payment to the second lien holder. The second lien holder doesn’t have to agree, but more and more are doing so.

That’s all legal.

But here’s what’s not legal and what’s apparently happening quite often recently. Since many second lien holders are getting very little, they are now allegedly requesting money on the side from either real estate agents or the buyers in the short sale. When I say “on the side,” I mean in cash, off the HUD settlement statements, so the first lien holder doesn’t see it.

“They are pretty clear and pretty upfront about the fact that if the first lender knows they are getting paid, the first lender will kill the short sale,” says Brandt. “So these second lenders are asking for the payments off the closing documents, off the HUD statement, usually in a cashiers check prior to closing. Once they receive that payment, they will allow the short sale to go through, which according to RESPA laws and the lawyers that we have spoken to on the topic is not legal.”

(RESPA is the Real Estate Settlement Procedures Act, the 2008 law requiring that consumers receive disclosures at various times in the transaction. It outlaws kickbacks that increase the cost of settlement services. RESPA is a HUD consumer protection statute designed to help homebuyers be better shoppers in the home buying process, and is enforced by HUD. Read more about it here.).

I told RESPA specialist Brian Sullivan over at HUD about all this and he replied, “That’s a red flag!”

Clearly illegal.

Brandt told me he’s heard from at least 200 agents that they’ve had these requests made by representatives of Citi Mortgage, JP Morgan Chase, Bank of America and other large banks.

Most agents wouldn’t go on the record with me, for fear of retribution by the banks with whom they have to work every day. But one agent, Kayte Gentry, of Keller Williams Integrity First Realty, was brave enough to blow the whistle.

“I think it’s wrong, and I think somebody needs to hold them accountable, and every time I lose a house in foreclosure because of this, it hurts my client,” says Gentry matter-of-factly. “Aside from being illegal and a violation of RESPA, it’s immoral and truly it’s just sad for the client that it’s hurting.”

Gentry says she has had the requests made three times and claims she lost one sale because of it.

“The big banks that have recently made this request, specifically payments outside of the closing statement have been Citi Mortgage and JP Morgan Chase.”

JP Morgan Chase simply answered, “No Comment,” when I relayed the charge to their media representative.

Bank of America denied the practice to CNBC in a written statement:

“Bank of America enforces a policy that all disbursements are documented on the settlement statement for short sales. When we are servicing a first mortgage with a second lien held by another investor, if the second lien holder asks for off-HUD payments, we will not approve the transaction (if we have knowledge of it). It is also against Bank of America’s policy to accept off-HUD payments on its second liens.”

Citi ‘s reply was a bit more complicated:

“We work very hard to help distressed homeowners find solutions for their financial challenges. In our attempt to amicably resolve the debt, we will generally negotiate a reduced settlement with the homeowner in order to release a second lien. Unlike some lenders who refuse to reduce the payoffs on second liens, we choose to reduce the payoff amounts in some situations to assist the borrower. We do not provide instructions to settlement agents on how to fill out the settlement statement or any other closing documents, and we certainly do not require settlement agents or any other parties to violate applicable laws.”

“When we confront the lenders and tell them that this request is illegal and a violation of RESPA, they tell us it’s been cleared through legal and they don’t care. Do it anyway,” charges Gentry.

I personally heard a recording of a phone conversation between a short sale real estate agent and a second lien lender, during which the second lien lender clearly asked for cash outside of the settlement and threatened to kill the deal without it.

The real estate agent was rightly concerned and reluctant (the recording was given to me by Brandt who got it from the agent. The agent would provide no information on the lender, for fear of retribution):

AGENT: Well yes, I don’t want to lose my license, go to jail, I mean, I have to sign…

LENDER: You’re not going to lose your license – we have plenty of realtors who do this, who actually understand how this whole process goes – and they realize that OK, if I want to get this done, this will take place.”

I contacted the Treasury Department, HUD, FINCEN (Financial Crimes Enforcement Network) and the Federal Trade Commission, and none of their representatives could tell me of any active investigation into this. The folks at HUD said they’d be very interested to see my story.

What is a Short Sale?

A short sale is the sale of real estate in which the sale proceeds fall short of the balance owed on the property.

It generally occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a loss is better than foreclosure.

Both parties must consent to the short sale process, it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrower. It is becoming a common practice as so many home owners owe more than their house is worth.

In a short sale without recourse, the lender does NOT pursue the home owner (borrower) for the forgiven debt.  Otherwise the lender may sue the home seller for the difference between the sales price of the home and the remaining loan balance.

Example Short Sale:

Steve bought a house for $320,000 and financed the property with an 80/20 loan.  He got a loan for 80% ($256,000) from one lender, and a second loan for 20% ($64,000) from another lender in order to 100% finance the property.

A year later Steve has lost his job and can no longer afford his house payments.  He’s 3 payments behind and is headed towards foreclosure.

Steve decides to sell his house and downsize.  Unfortunately, property values have fallen in his area and the real estate market is slow. He receives an offer for $205,000 to buy his home.

Since Steve still owes $320,000 on his house, he must either come up with the difference ($115,000) in order to sell the home, or request his lenders accept a short sale.

Because he is behind in his payments and the lender does not want to foreclose, the first lender (the 80% lien holder) might agree to discount their loan to $202,000 (a $54,000 discount) and the second lender  (the 20% lien holder) might agree to discount their loan to $3,000 (a $61,000 discount).  The second lien holder typically gives a much larger discount because if the first lender forecloses on the property, the second lender gets nothing, while the first lender gets the property.

With both lenders agreeing to discount their loans, the house is sold for $205,000 and foreclosure is avoided.  The home sellers will not receive any funds from the sale, and typically must prove a hardship (lost job, divorce, etc) for the lenders to agree to a short sale.

In general the IRS does not tax forgiven debt from a short sale (contrary to many reports).  See the IRS Home Foreclosure & Debt Cancellation site.

As long as the short sale is without recourse, the lender does not pursue the borrower for the difference between the original loan amount and the discount and the debt is forgiven.

Extreme Home Makeover – For Sale

The Okvath family, recipients of an Extreme Home Makeover in 2005, have listed their mansion for $1.3 million. The 5,346 sq. ft. home is on a 1.07-acre lot, has 6 bedrooms, 5.5 baths, and a 3-car garage big enough for four cars and includes a home theater with seating for 12.

Unfortunately, it seems that it is growing more common for these Extreme Home Makeover houses to be foreclosed on, mortgaged to the hilt, or sold off to pay debts.  Many people, when presented with something for “free” don’t value it and tend to waste it.

Another problem for many of the recipients of Home Makeovers is the cost of upkeep.  Many of these new houses have high electricity bills, high taxes, and cost a lot to keep going.  Instead of building a $2m home that the new owners can’t afford to keep, perhaps ABC should focus on building smaller homes.

If they insist on building luxury homes (they do have to be Extreme don’t they?), they should be put them in a trust and provide for upkeep/taxes as part of the deal.

More info from AZ Republic, WSJ Blog, ABC15.

Real Estate News – Who can you trust?

Recently I did an interview with a magazine devoted to residential real estate investing on the topic “Who can you trust in real estate news?

I highlighted my appearance on Larry King Live, where a supposed “real estate expert” made incorrect comments regarding the taxation of forgiven debt during a short sale.  Unfortunately, my interview segment had completed and I was unable to correct the error before the end of the show.

Once the show was over, I called the producers but there wasn’t much they could do at that point.  Hundreds of thousands of home owners got bad information from a reputable source!

Another problem we’ve seen recently is the “pay-for-play” system that many magazines and web sites are using.  Most people expect a trade magazine or web site to provide industry information and trends based on expertise.  The issue arises with magazines force advertising in exchange for “news” coverage.  I’ve heard this many times in so many words: “We’ll do a cover story on your company if you buy $10,000 worth of ads from us”.

This creates a situation where the content is not driven by the industry, but by who is willing to buy advertising.  This isn’t illegal, but is disingenuous.  Most readers would put much less weight on the articles and stories in a publication if they knew they were simply bought with ad dollars.  In the music industry this is called “payola” and IS illegal.

The lesson is: Always question everything you hear or read in the media!

Extreme Makeover Foreclosures – Why a free house isn’t good

It’s basic human psychology that if something is free, we tend to value it much less.  Take for example the rash of foreclosures on homes from the show “Extreme Makeover, Home Edition“.

Most of the people who participate in the show receive a brand new, high-end home that is mortgage free.

The problem is, many of the people who should be grateful for the opportunity to get back on their feet and own their home free and clear – instead act as though they’ve won the lottery and immediately take out a home equity loan to get at the cash in the property.

Extreme-makeover

Just a few of the Extreme Home Makeover foreclosure cases are in Atlanta (’08), Atlanta (’09), Idaho, Michigan, and Oregon.

This is a prime example of why “Foreclosure Bailouts” don’t work.  When people get “bailed out” they rarely value the help they’ve been given and tend to make the same mistakes over and over.  Case in point are the statistics on the re-default rates for loan modifications.  In a study by the Office of Thrift Supervision, over 55% of modified loans were back in default after 6 months.

If the government artificially props up housing prices by repricing loans and allowing “cram downs” they will just prolong the problem and we’ll still be dealing with unstable home prices 3 years from now.

Larry King, Foreclosures and Short Sale Taxation

Wednesday I had the great opportunity to be interviewed by Larry King on his show about foreclosures, short sales and the housing mess.

A lot of people have contacted me regarding the final segment in the show.  Two supposed “real estate experts” both made a huge error.

They stated that after a short sale, the home seller will be required to pay taxes on any debt forgiveness.

This is totally false.

While a bank will 1099 a home seller for any debt forgiveness on the loan, there are provisions in the tax code so the home seller does not have to declare this as taxable income.

Unfortunately, I was not on the final segment to make the correction and it stood as fact.  Hopefully I will have the opportunity to go back on Larry’s show and correct the record!

USA Today Housing Roundtable – Just Walk Away?

I had the opportunity recently to participate in a USA Today roundtable on the housing market .  It was a great way to share some of my thoughts on investing, foreclosures and what home owners should do given the current housing market.  I was surrounded by some very smart people from various industries.

One of the questions posed by the reporter was “What if you can’t pay your mortgage, yet can’t sell your home for enough to pay off your mortgage? Should you mail in your keys and walk away?”

Unfortunately, one of the supposed “experts” actually suggested this is a perfectly rational choice for many people –

People should consider the risk to their credit rating vs. how much
they can save. In some cases, walking away might be a perfectly
rational choice. People may owe $500,000 on a home that is now worth $300,000. You (might be able to buy a much cheaper) home across the street and put $200,000 in your pocket. That might be worth the risk to your credit rating. Furthermore, since this is happening on a very large scale, my guess is that plenty of lenders will still be happy to issue loans in a couple of years to people who walked away.

I am amazed that this continues to be the opinion held by some in our community.  Home owners need to take personal responsibility and try to work things out with their lender. “Just walk away” is the head-in-the-sand type of attitude that got many home owners in the place they are in.

If you are a home owner facing foreclosure, the very first thing you need to do is call your lender, be up front about your situation, and try to work out a payment plan.  Most lenders are very willing to work with you.

If you can’t work something out with your lender and you have some time, list your home at a discount with a real estate agent.  Find someone who is very experienced with short sales, be sure they have closed successfully on at least 2 or 3 as the listing agent.

If time is short, call a reputable real estate investor in your local market.  Experienced investors can purchase your home quickly and prevent a foreclosure on your credit report.

lis pendens Defined

Definition: Lis Pendens

noun. Latin for “a suit pending”.

A notice of a pending lawsuit tied to real property recorded with the appropriate office to put the public and property owner on notice.

This alerts a potential purchaser or lender that the properties title may be in question, making it less attractive to either.  Further, anyone who purchases or lends against the property described in the lis pendens takes it subject to the ultimate outcome of the lawsuit.

In judicial foreclosure states a lis pendens will be filed before the home is foreclosed on.

Helpful Resources: