Sarasota Short Sale seminars QandA

Following on from previous posting…………….

Q: Should I stop paying my mortgage, if I haven’t already?
A: It is of utmost importance to contact your lender or lenders as soon as you know you are in trouble, either directly or via an attorney or a mediator such as Save our Homes from Foreclosure (SOHFF), LLC. Some lenders will discuss the situation before you miss a payment and some will not. Last Monday 12th Circuit Chief Judge Lee Haworth announced that he is introducing legislation to require lenders and homeowners to discuss possible ways of avoiding foreclosure before it actually happens. The new Homestead Foreclosure Conciliation Program will apply to foreclosure suits files on or after December 1st against homestead residential property in Manatee, Sarasota and Desoto counties. Unfortunately this new legislation does not help homeowners trying to avoid the suit in the first place. Nor does it help investors. For further information email me here and ask for a copy of “Local Judge says borrowers, lenders must see eye to eye”.


Q: How will my credit score be affected?
A: This will vary from case to case but Short Sales and Deeds in Lieu are kinder on credit scores than Foreclosures due to the lack of deficiency judgments. Fannie Mae guidelines introduced in June, ’08 indicate that creditworthiness can be restored 2 years after a Short Sale; 5-7 after a Foreclosure.

Q: How much does it cost to have a firm like SOHFF, LLC do the Short Sale negotiation?
A: This cost will usually be borne by the lender. If Prudential Palms Realty is handling the sale they will cover the cost even if the lender does not. As a point of interest, legislation came into effect on October 1st, ’08 protecting consumers from unscrupulous “foreclosure-rescue consultants” and equity purchasers. For further information email me here and ask for a copy of “House Bill #643 – Foreclosure Rescue Services”.

Q: What happens if I have second loan on my property?
A: This is a major stumbling block to the Short Sale process as the junior lien holder must sign-off on the deal for it to go ahead. Currently the junior lien holders are insisting on being repaid at least 10% of their loan. The principal lender, however, if they are also taking a substantial loss are usually only offering 3%. In some cases a pro-rata arrangement can be made but this is unusual and depends on the figures involved.

Q: When a Short Sale is proposed what happens to the loan arrears and any unpaid HOA dues or property tax?
A: All these costs must be met to allow the buyers to get clean title of the property. They are all included in the negotiations with the lender(s) along with any realtor commissions.

Perhaps the most important message of the seminars was that everyone’s situation is unique and that it is very important that the correct professional advice is sought on an individual basis. For those struggling (or soon-to-be struggling) Florida homeowners unable to afford legal help a statewide effort called Florida Attorneys Saving Homes (FLASH) will place homeowners with a pro bono attorney. For further information about FLASH and their toll-free hot line number please email me here .

Perhaps the most interesting quote of the seminars was from a developer who is sitting on several properties worth less than the amount owed on them. He said he was keeping up with payments so far but was worried that the banks were thinking, “let’s run this guy’s traps ‘till he’s out of pelts”. A concern many can relate to in these difficult times.

Sarasota Short Sale seminars a success!

The Short Sale seminars I hosted this week, on behalf of Prudential Palms Realty, went extremely well. The attendees were a diverse cross-section of the local community in deed.
We had people in trouble with their main and only residence, people who’d never heard the term “short sale”, others who are struggling with second properties, investors sitting on multiple assets, and even one gentleman who came to “buy up a couple of short sales”!
The main speaker was John Rigg of Save our Homes from Foreclosure, LLC. Also in attendance to answer questions were Matt Plummer of Blalock & Walters, Attorneys at Law, www.blalockwalters.com and Larry Geimer of Kerkering Barberio & Co., P.A., CPAs, www.kbgrp.com.

Several informative handouts were distributed including;
1. Florida Foreclosure Law – a description of the foreclosure process
2. Mortgage Forgiveness Debt Relief Act – from the IRS website
3. Fannie Mae Announcement 08-16, June 25th 2008 – Bankruptcy, Foreclosure, and Conversion of Principle Residence Policy Changes; and Revised Property. Value Representation and Warranty Requirements
4. Fannie warns homeowners who walk away

Email me here to receive a copy of any of the above.

John started by explaining the 4 main options possibly available to anyone who has a property on which they owe more than its current value when they find themselves unable, or unwilling, to continue making the loan repayments or make up the deficit from other sources. These options relate purely to the property in question; bankruptcy and other extreme measures are best discussed with an appropriate professional advisor and were not explored by the seminars.
These 4 options are;
a. Loan Modification. The HOPE NOW and Project Lifeline programs announced by the banking industry as part of the Federal bailout plan introduce the concept of loan modification. The programs allow for reductions in principal (to 80% of the property’s new market value) and/or interest rates and/or increases in loan term time in order to help homeowners. Of course this option is only available if the homeowner can afford the new terms. It is expected that Freddie Mac and Fannie Mae will be issuing guidelines in the next couple of weeks as to how much a borrower will be allowed to borrow in relation to their income. In reality lenders are happy to lower interest rates and increase term times but not so keen to reduce principal balances. This means that the homeowner will probably not make any saving in the long run and will still be “underwater” on their home.
b. Foreclosure; Deficiency judgments will be filed. They can be enforced for up to 4 years and, even then, they can be extended, all the while accumulating interest and penalties. Lenders do not like foreclosures; it costs them $50K – 70K per property and the value of an abandoned property plummets almost immediately, dragging down the neighborhood with it.
c. Deed in Lieu of Foreclosure; The homeowner voluntarily hands the keys back to the lender(s) who will normally write off the deficit in return for the saved legal expenses.
d. Short Sale; The homeowner finds a buyer for the property at current market value, or close to it. The lender(s) agree to write-off any deficit. Evidence of hardship is usually required but lenders have agreed to Short Sales even when the homeowner has substantial sums in accounts at the lenders own bank. No deficiency judgments are issued although, in some cases, the homeowner will be asked to sign a promissory note for a fraction of the deficit at a very favorable rate of interest – all of which are negotiable. Currently there are no official guidelines in place to calculate exactly what percentage of outstanding debt and/or fair market value the lender will accept as a short sale offer.

Many interesting discussion points came up during the seminars. I plan to spend some time doing some further research before posting the Q&A section of this write-up. Please check back in a couple of days.

Real Estate Broker Hosts Short Sale Seminars in Sarasota, Florida

Prudential Palms Realty, one of Sarasota’s foremost Real Estate Brokerages, is hosting two Short Sale seminars on the 18th and 19th November.

As Executive Vice President I head up the Real Estate Solutions Group, a new division of Prudential Palms Realty, set up to deal specifically with distressed properties both pre- and post-foreclosure. My team is encountering the short sale scenario more and more frequently and it is apparent that the homeowners are not fully informed of the implications of their situation or of any remedies which may be available to them.

With the passing of the Emergency Economic Stabilization Act, 2008, aka Federal bailout, a few weeks ago the U.S. Government announced its commitment to a policy of Homeownership Preservation. Lenders, particularly those participating in the Capital Purchase Program are under instructions to avoid unnecessary foreclosures and to use the bailout dollars to restructure distressed loans wherever possible.

John Rigg of Save Our Homes from Foreclosure, LLC, www.SOHFF.com, will be one of the seminar speakers. He says, “In these difficult and changing times it is important that the consumer is kept in the loop when the Treasury Department is making decisions which will ultimately affect all of us. Prudential Palms is attempting to do just that by offering these seminars. I would encourage any one with a home-secured loan to attend, whether they are considering a short sale or not”.

Other speakers will include representatives from the Sarasota legal and accounting firms of Blalock & Walters, Attorneys at Law, www.blalockwalters.com, and Kerkering Barberio & Co., P.A., CPAs, www.kbgrp.com.

The seminars are open to all and will be taking place on18th November, 2008 at 7pm, Hampton Inn, 5995 Cattleridge Blvd. (I-75 & Bee Ridge) and on19th November, 2008 at 4:30pm, Robb & Stucky, 7557 S. Tamiami Trial.

Bailout Backlash

The story so far; $250 billion of the EESA budget has been earmarked to fund the Capital Purchase Program. The Capital Purchase Program is to have voluntary and non-voluntary participants. The non-voluntary participants include our top nine banks which represent half the nation's deposit base and are sharing $125 billion of the bailout. A further 20ish regional banks have also been selected to receive non-voluntary cash injections.
This leaves the remainder of the program budget available to be voluntarily applied for by the rest of our qualifying U.S. controlled banks, savings associations, and bank and savings and loan holding companies. The Treasury has made it clear that they are hoping the weaker banks will be bought out by the stronger ones, hence only healthy institutions who will give their new shareholder a reasonable return need apply. The application deadline is November 14, 2008 and the Treasury plans to distribute the entire Capital Purchase Program fund by the end of the year.

This strategy has already had a devastating effect on the share price of some perfectly solid institutions simply because they, a) were not selected for the program and b) chose, for the sake of shareholder confidence, not to apply for a handout. This in turn has resulted in these same institutions falling prey to the big boys with taxpayer's billions to play with
.
National City's $5.2 billion sale to PNC, for example, was announced last Friday. National City was forced to close the deal at well below market price when it became apparent that it had missed out on selection for the Capital Purchase Program by falling just behind the top nine banks. PNC, on the other hand, has received $7.7 billion of taxpayer bailout money.

While it is true that National City was holding a large portfolio of souring mortgages and home equity loans, particularly in the Florida market, it was in fact the best capitalized large bank in the U.S. thanks to a $7 billion investment in April this year by New York's Corsair Capital. National City compared very favorably with other institutions, Marshall & Ilsley and Comerica, to name two, who have received bailout money, both on a tier one capital ratio and tangible common equity / assets basis. They were purchased for $2.23 per share while most analysts (with buy ratings on the stock) had targets of $7 to $8. See www.CNNMoney.co/magazines/fortune for more on the National City buyout.

Further speculation arose about the Treasury's Capital Purchase Program selection criteria when it was revealed that the Comptroller of the Currency, John C. Dugan, who makes these selections, was a PNC attorney before taking his current government job.
Perhaps the most important question though is, although many private investors are going to get hurt in the upcoming bank fire sales, will the U.S. taxpayer benefit in the long term?

A Shift in Strategy

While the initial focus of the Federal bailout was on purchasing mortgage-backed securities and whole loans, the Treasury’s emphasis has shifted.

Following similar moves by European authorities, the U.S. Government has announced that, before the end of the year, it will spend $250bn of the $700bn bailout fund to partially nationalize our banking system by buying up stocks in nine of the nation's largest banks. A joint statement by Treasury Secretary Hank Paulson, Federal Reserve ChairmanBen Bernanke and head of the Federal Deposit Insurance Corporation Shela Bair described the plan which, it is hoped, will stimulate business and consumer lending and prevent the economy from tipping into a deep recession. For each dollar "force fed" to a lending
institution its lending reserve increases by $10.

According to Interim Assistant Secretary Kashkari, the goal of the Federal bailout remains, "to restore capital flows to the consumer and business that form the core of the economy".

Apparently it was decided that the original plan to buy up bad loans from any bank that came forward would result in temporarily saving institutions which are, in fact, beyond saving, thereby wasting taxpayers' money. The new scheme will allow the biggest banks , rather than the government, to undertake the task of saving faltering, but viable, smaller banks who are losing many of their small business accounts due purely to confidence issues.

The FDIC will supplement the planned equity purchases by temporarily insuring loans between banking institutions and business bank deposits. Consumer deposit insurance limits will be temporarily increased to $250,000. It is not clear how long this additional insurance will stay in effect. President Bush has stated, "these measures are not intended to take over the free market but to preserve it".

My assessment is that the success of this strategy depends entirely on how quickly and on what scale the anticipated lending frenzy commences. There are currently no indications that legislation will be introduced to enforce lending levels so we are depending on moral suasion which makes the timing of an economic turnaround hard to predict.

The saga continues……………

The Effect of the Bailout on Real Estate

On October 3, 2008 President Bush signed the Emergency Economic Stabilization Act, a.k.a. the $700 billion Federal “bailout”. This Act gives the U.S. Treasury the authority to buy or insure troubled assets owned by struggling financial institutions. Another avenue available to the Treasury is to take equity stakes in these troubled financial institutions in the hope that the U.S. taxpayer may one day benefit from appreciation of the purchased assets. Although a Program Supervisor, Neel Kashkari, has already been appointed it is unclear exactly how the bailout will be implemented and what the resulting effect on the economy and, therefore, the real estate market is likely to be.
The assumption is that “troubled assets” may be mortgage-backed securities or whole loans, i.e. pre-foreclosure, as opposed to REO property. Some anticipate that the financial institutions will be invited to offer eligible assets for sale at auctions where the Treasury will guarantee a minimum purchase price as a percentage of the debt under the auction hammer. Others predict that the Treasury will be paying “hold to maturity” prices based on an estimate of what the assets will be worth once the current crisis has passed. What selection criteria, if any, will be applied to participating companies, what the guaranteed percentage or hold to maturity values will be are some of the issues requiring clarification.
Meanwhile, both John McCain and Barack Obama are claiming responsibility for a plan to use $300 billion of the bailout fund to help homeowners directly by buying unaffordable mortgages and restructuring the loans in order to keep the homeowners in their homes. This plan raises its own implementation issues; the fairness of selecting eligible homeowners to name one.
So what will the effect of the bailout be on our ailing economy and, more specifically, the local real estate market? The intention is to help the rescued institutions to stabilize their investment portfolios; provide them with an infusion of capital and restore investor confidence in the process. How long it will take for these measures to stimulate spending and kick start the real estate market is hard to say.
How many of the potential bailout candidates would be better advised to negotiate short sales with their mortgagees rather than pursue the Treasury process? It’s an unknown until we get the who, what, and how of the process sorted out.
The markets so far have not shown optimism. Most economists foresee a worldwide recession but if you look at the actual forecasts they see positive GDP growth returning in the second half of 2009. Given the severity of this crisis, that would not be a bad outcome.
We’ll keep our blog freshly updated as details emerge.