Short Sales - Facts and Fiction

Short sales are increasingly popular in Minnesota and can offer a significant bargain for buyers that understand the process. Before you jump in, there are important considerations, pitfalls and drawbacks to keep in mind.

The Minnesota Home Ownership Center has created a new Fact Sheet for home buyers titled “Purchasing a Short Sale Home” that explains the Short Sale process and explains how purchasing a Short Sale differs from traditional home purchases and outlines the advantages and disadvantages of purchasing a Short Sale.

The Center's goal is to help YOU be a successful homeowner.  We have other Fact Sheets for home buyers, here.

Not sure if purchasing a Short Sale is right for you? Not sure what your next steps to home ownership should be? Speak with a non-profit housing counselor! For more information about housing counseling and other assistance available in Minnesota... click here.

HAMP, HARP and Now HAFA too?

Last week we mentioned that HAMP and HARP were members of the duet known as Making Home Affordable... well... the group has added a third band member and is now a trio.

The U.S. Treasury has announced the "Home Affordable Foreclosure Alternatives" (HAFA) Program which is designed to help struggling homeowners who are unable to qualify for a mortgage modification under the Home Affordable Modification Program (HAMP).

HAFA sings backup for HAMP, and provides incentives to servicers/lenders as well as borrowers to move forward with a short sale or deed-in-lieu of foreclosure.

Just as an FYI, in a short sale situation, the mortgage holder allows the homeowner to sell the property for a price short of the balance owed on the property’s loan.

The Center will be working on a more in-depth fact sheet over the coming weeks, but the basics of the program are as follows:

• Should speed up the Short Sale process, as it uses borrower financial and hardship information that was collected when they applied for a HAMP modification.
• Allows borrowers to receive PRE-APPROVED short sales terms (including minimum price accepted, proceeds to owner and real estate agents, etc.) BEFORE listing the property.
• KEY: While in Minnesota, as a non-recourse state, first mortgage debt is fully released from future liability, under HAFA, subordinate lien holders that receive an incentive under HAFA must also FULLY RELEASE that debt as well.  This means that homeowners will not have to sign a promissory note or worry about a future deficiency judgment.  (NOTE: This is ONLY if the junior, or subordinate, lien holder receives money under HAFA.
• Unifies documents, timeframes and deadlines to speed up the process.
• Provides financial incentives for all parties.  $1,500 to the borrower for relocation assistance and $1,000 for servicers to cover admin costs, and up to $3,000 in short sale proceeds to be shared among subordinate lien holders.  In most cases subordinate lien holders see nothing from a short sale... and have been the reason that many short sales have fallen through.  It will be interesting to see if this incentive changes their attitude.  It will be especially interesting to see if junior lien holders will be willing to trade possible FUTURE JUDGMENTS for a rather small ($3,000) incentive today.
• Requires ALL SERVICERS participating in HAMP to implement HAFA.
• Goes into effect on April 5th, but lenders and servicers may begin sooner if they choose.  The program is scheduled to end on December 31, 2012.
• Homeowners that are denied for a HAMP modification MUST receive a notification from their lender/servicer, in writing, of the HAFA option and give the borrower 14 days to respond orally or in writing.

Who qualifies for HAFA?

The homeowner must meet the basic eligibility criteria for HAMP

• the loan must be on their Primary Residence (no investors or second homes);  
• 1 to 4 units, as long as one of the units is the owner's primary residence;
• First lien originated before 2009 Mortgage either delinquent or in imminent danger of default,
• Unpaid principal balance no more than $729,750;
• Borrower’s total monthly PITIA payment exceeds 31% of gross income.

BIG QUESTIONS still remain about the program:

• Will homeowners that won't be able to hold on to their properties go through the extra effort to sell... or simply walk away.  "Post-HAMP-Denial-Strategic-Default"
• What effect will this new program have on already-pressured sales prices?  Short Sales already put a downward pressure on local "comps".  What will happen when there is a FLOOD of HAFA-generated short sales?
• What procedures are in place to prevent fraud?  Real Estate Agents are being called upon to help the bank determine the price they'll accept, and once the price is set, any offer over the minimum amount MUST be accepted by the bank.  This could be a magnet attracting fraud at all kinds of levels.

Feel free to respond in the comments!

Sued - After A Foreclosure

The Minnesota Home Ownership Center's network of Housing Counselors (Foreclosure Counselors) has begun to see an uptick in lenders seeking deficiency judgments AFTER a foreclosure... and, without getting too technical in this blog post, we felt it was important to warn struggling homeowners and our partners about this new trend:

A deficiency judgment is “a judgment lien against a debtor, defendant or borrower whose foreclosure sale did not produce sufficient funds to pay the mortgage in full.”

In plain English: a homeowner can be sued for the difference between the amount the bank received when they auctioned off the house at the Sheriff’s sale, and the amount of the outstanding mortgages.

Minnesota is a ‘Non-Recourse’ state. This means that FIRST lien holders CANNOT seek judgment (cannot sue) former homeowners for outstanding funds. HOWEVER... any “Junior” lien-holders CAN. If there is more than one mortgage on the property – or if there is a line of credit or HELOC taken out against the property – THOSE lenders CAN sue the former property owner for payment of any outstanding debt!

Here’s a realistic scenario:

• If a homeowner purchased a $200,000 home in 2005 and financed the purchase 100% using an 80/20 loan (80%, or $160,000 financed with one lender who holds first lien position, 20%, or $40,000 financed with a second lender who holds second lien position).
• Now, given current market circumstances in Minnesota, the home may only sell for $150,000 at the Sheriff’s Sale.
• The first lien holder (who was owed $160,000) is wiped out. The homeowner does not owe this first lien holder any additional funds, and the first lien holder CANNOT sue the former homeowner for the ‘deficiency’ of $10,000. ($160,000 - $150,000).
• HOWEVER… the second lien holder CAN sue the homeowner for their ‘deficiency’. In this scenario… they can sue for the ENTIRE outstanding amount of $40,000. (To keep the math simple, we’re assuming that no principal was paid down in the last 5 years).

If the lender seeks a deficiency judgment, the former homeowner may find themselves having their wages garnished, tax returns withheld or garnished and other consequences.

Here’s the kicker - - - lenders can take up to THREE YEARS SIX YEARS after the Sheriff’s Sale to decide whether or not to seek judgment! THREE.YEARS. SIX.YEARS. (!)

Former homeowners may find themselves being sued for outstanding mortgage debt YEARS after a foreclosure... just as they begin to rebuild their financial lives.

Jennifer Lancour, a Housing Counselor at PRG, Inc., one of the organizations that work with the Minnesota Home Ownership Center to offer Foreclosure Prevention Counseling, stated recently:

We’ve always counseled clients about the possibility of Deficiency Judgments in situations where there is more than one lien on a property. But in the past it was unlikely that a lender would seek judgment. Since the middle of last year, we’ve started seeing more and more clients coming back to us after a foreclosure looking for assistance because they’ve been served court papers.

In addition, Homeowners also need to be EXTREMELY careful when negotiating a SHORT SALE on their property as well. If the negotiations aren’t done properly, even the FIRST lien holder can seek judgment for any deficiencies.

The MN Home Ownership Center has a helpful fact sheet on its website about deficiency judgments (with MANY thanks to the Housing Preservation Project for their work!). You can download the fact sheet here.

Deficiency Judgments are just ONE of the MANY considerations struggling homeowners need to think about when facing a possible foreclosure. If you, or someone you know is struggling with mortgage payments... don't wait until it's too late. To find your local non-profit, FREE Foreclosure Counselor, click here. For additional information about preventing foreclosure in Minnesota, click here.