Short Sale Blog

Here is the latest short sale news at Seattle Short Sales. We assist hundreds of Seattle area homeowners with short selling their home and avoiding foreclosure.

J.P. Morgan Chase Overcharged 4,500 Military Members, Wrongfully Foreclosed on 18

Seattle Short Sales - Monday, March 07, 2011

J.P. Morgan Chase has apologized for overcharging 4,500 active-service military members on their mortgages, and for wrongfully foreclosing on 18 of them. But for California Rep. Bob Filner, an apology is not enough. “Everything is impersonal. Nobody is ever responsible and yet these people’s lives were turned upside down.”

This story was reported last month by the Wall Street Journal. The report indicates that a spokesperson for the lender has acknowledged that they did not comply with the law, and that they are embarrassed about the incident.

The Servicemembers Civil Relief Act, or SCRA, is a federal law that protects soldiers, sailors, airmen and Marines from being sued - both when in active service, and for up to a year afterward. The origins of the act date back to the Civil War; the law was redrafted under its current title in the 1940s.

Two of the results of this act, for servicemembers who fall under its protection, are that interest rates are capped, and foreclosures cannot take place.

Chase’s error was discovered partly because a U.S. Marine Corps captain who felt that he had been overcharged on his mortgage filed a lawsuit against the lender. The lawmakers who participated in this hearing expressed their concerns that, although this problem was discovered with this one lender, it may also occur with many other lenders - and that other military personnel may also be being overcharged or threatened with having their homes taken away.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

Delinquent Loans Back on the Increase

Seattle Short Sales - Friday, February 25, 2011

There were more residential mortgages registered as either delinquent or in foreclosure in January than there were in December. This disturbing news comes from new data released last week by Lender Processing Services (LPS) and reported by DSnews.com.

The number of non-current home loans had declined month by month through the end of 2010. But the LPS data indicate that this trend has reversed: there more residential mortgages either delinquent of in foreclosure at the end of January than there had been for the month of December. A total of 6.92 million residential mortgages were classified as non-current in January, compared to 6.87 million in the previous month.

The LPS report indicates that the national delinquency rate - or the percentage of home loans that are more than 30 days past due - rose in January by 0.8%, to 8.90%.

Of the 6.92 million mortgages within the “non-current” category as of last month, 2.20 million of those are already in the process of foreclosure. Nearly that number again, 2.16 million, are in the 90+ day delinquent category, and so are hovering precariously upon the brink of foreclosure. Recent streamlining of the HAFA short sale process may provide alternatives to foreclosure for some homeowners, but many of these homes will end up in the growing REO inventory that is likely to keep home prices suppressed for years to come.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

New Moody’s Study Finds Nearly Half of Modified Loans Re-Default Within 12 Months

Seattle Short Sales - Thursday, February 10, 2011

A new study by Moody’s Investors Service, reported last week by DSNews.com, confirms the growing view that loan modifications programs such as HAMP are a failure.

The study authors looked at two million residential mortgage loans. They found that 47%, or nearly half, of loans that were classified as "current" after they had been modified re-defaulted within 12 months. As a comparison, only 16% of unmodified current loans defaulted within the same time period.

A relationship between payment reduction and likelihood of default was discovered: for every 20% that monthly payments were reduced, the borrowers were 10% less likely to redefault.

The most successful type of loan modification involved reducing the principal balance, which reduced monthly payments by an average of 34% and resulted in the lowest rate of re-default after 12 months. Lenders, however, are generally reluctant to reduce loan principal.

Other means of modifying loans, such as lowering interest rates, extending terms, and forbearance modification, reduced monthly payments by between 20-25%, and resulted in higher rates of borrowers re-defaulting.

The Moody’s authors also compared the re-default rate between different major loan servicers. For this comparison, they used the likelihood of borrowers redefaulting within 6 months of their loan modification, for loan modifications initiated between early 2009 and the middle of 2010. They found a range in default rates, with Bank of America having the poorest record:
• Bank of America – 33%
• Wells Fargo – 29%
• American Home Mortgage – 26%
• Ocwen – 24%
• GMAC Mortgage – 23%
• JPMorgan Chase – 22%
• CitiMortgage – 20%
• Litton Loan Servicing – 20%
Lenders are becoming more aggressive in making sure that loan modifications result in lowered monthly payments, and this does seem to be improving the long-term success rate of loan modifications.

High default rates of loan modifications mean that, for many struggling homeowners, their loan modification was only a temporary fix. Failure to keep a modified loan current (or for many, failure to ever have their trial modification approved as permanent even if they did keep it current) can delay foreclosure. But for many, by the time their modified loan has become seriously delinquent, it is too late for them to attempt other strategies such as a short sale, and foreclosure has become their only option.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

Shadow Inventory of Properties Could Take 41 Months to Clear

Seattle Short Sales - Sunday, January 16, 2011

According to a study released by credit ratings agency Standard & Poor’s, summarized in a report by DSNews.com, the shadow inventory could now take 41 months to clear. The report puts the value of these shadow inventory properties at a total of $460 billion.

Standard & Poor’s defines shadow inventory as:
- properties where the borrowers are, or recently were, 90 or more days delinquent on mortgage payments,
- properties that are currently, or were recently, in foreclosure, and
- REO properties - that is, real-estate owned properties (now owned by the lender).

The shadow inventory is growing. Less than one year ago, in February 2010 - the time to clear the shadow inventory was estimated at 33 months. That represents a 24% increase in the estimated time between February and September 2010.

A large or growing shadow inventory has many detrimental effects on the housing market. A large inventory works to continue to drop home prices. A growing shadow inventory, where homes move into part of the shadow inventory more quickly than they move out of it (by being sold) may create a backlog of houses to hit the market in the future - and signal even greater home price drops in the future. One study published late last year predicts that REO inventories will reach their peak in mid-2011.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

2.2 Million Mortgages Greater Than 90 Days Delinquent But Not in Foreclosure

Seattle Short Sales - Thursday, December 30, 2010

A report published this month indicates that nearly 2.2 million mortgages are greater than 90 days delinquent yet not in foreclosure.

Information provided by LPS Applied Analytics, in their December Mortgage Monitor Report, indicates that, nationwide, 13.1% of mortgages are noncurrent: either delinquent or in foreclosure. The delinquency rate is now 2.1 times higher than the historical average, and the foreclosure inventory is 7.7 times higher than the historical average and rising.

Washington state fares well compared to national averages, with only 7.1% of mortgages currently delinquent (compared to the national average of 9.0%) and a foreclosure inventory of 2.5% (compared to the national inventory rate of 4.1%) for a total of 9.6% of mortgages being non-current. Washington state therefore ranks relatively favorably, in 39th place nationwide, in terms of non-current loans.

However, Washington shows a relatively large increase in the number of non-current loans. While the nationwide percentage has dropped by 2.28% over the past six months, the percentage for Washington State has increased by 3.1% over the same period.

Foreclosure inventories continued to rise for all loan types, as a result of both an increased number of foreclosure starts and a decline in foreclosure sales. More than 20% of loans that are greater than 12 months delinquent, however, have not yet moved into foreclosure.

The number of loans classified as “seriously delinquent” (i.e. greater than 90 days without payment) continues to grow, as the number of loans moving into that category by far outpaces the number of loans moving from that category into foreclosure. Foreclosure inventories also continued to rise, both as a result of the increase in the number of loans moving into foreclosure and the decline in foreclosure property sales.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

Hold-ups to Short Sale Approval Process From Second Mortgages are in No One’s Interest

Seattle Short Sales - Tuesday, December 21, 2010

When a second mortgage is involved, getting lender approvals for a short sale may prove difficult - in some cases, tripping up the deal all together. However, lenders who allow a short sale deal to fall apart are not only working against the interest of distressed homeowners. They are working against their own best interests as well.

A recent article in the Wall Street Journal (quoting data from real-estate research firm CoreLogic) indicates that more than one third of properties undergoing foreclosure have at least one junior lien: a second mortgage, and in some cases even a third mortgage. Primary mortgages are serviced by banks, but actually held by GSEs such as Freddie Mac or Fannie Mae. However, most of the approximately $1 trillion in second mortgages is held by banks or credit unions, and nearly half of that by the nation’s four largest banks: Bank of America, Wells Fargo, Chase, and Citigroup.

Gaining approval for a short sale when there is a second mortgage is difficult because the interests of the first and second lender are opposed (even where both loans are serviced by the same lender). The first mortgage negotiator will try to minimize the amount of sales proceeds to be allocated to the second lender, while the second mortgage negotiator wants to maximize the proceeds they receive. In some cases, the negotiations between the parties carry on so long that the deal falls apart: either critical deadlines or expiry dates are missed, or the buyers give up on the purchase and walk away.

The WSJ article gives the example of a condo owner in La Jolla, California, who is trying to conduct a short sale of his home. He owes $260,000 on his first mortgage and $50,000 on his second. Freddie Mac, who holds the first mortgage, will only release $3000 to the second lender; but the second lender demands a minimum of $7000 in order to approve the deal.

If the two lenders cannot reach some sort of comprise agreement, the whole deal will fall apart - all for the sake of a few thousand dollars. The property will proceed to foreclosure, Freddie Mac will recover less than they would have through a short sale, and the second lender will receive nothing at all.

And the homeowner will have to live with the stain of foreclosure on his credit report.

In addition to this being a losing situation for all parties involved, the effect of homes moving into foreclosure rather than being sold on the market via short sales will serve only to slow any future housing market recovery.

In the example presented, if Freddie Mac would agree to give $4000 more to the second lender, they will still end up making more money than they stand to by letting the property move into foreclosure.

A strategy that can be undertaken by the parties to a short sale (i.e. buyer, seller and agents), where there is a second mortgage and these types of problems are anticipated, is to structure the written deal with a slightly lower purchase price, so there is some cash available from the buyer to pay the second lender.

Short sales have been on the increase since early 2008 - first because homeowners realized that a short sale was a far better alternative for them than awaiting foreclosure, but now also because lenders are becoming aware that their losses are minimized by choosing short sales over foreclosure.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

Short Sales Becoming a More Favorable Option for Servicers as Well

Seattle Short Sales - Saturday, December 18, 2010

A report published this week by HousingWire indicates that foreclosure will continue to become a less favorable option for loan servicers, and that they will increasingly turn to short sales to mitigate their losses.

Loss severities on residential mortgage-backed securities are predicted to continue to increase through 2011. A “loss severity” is the percentage of principal lost when a loan is foreclosed. Loss severities for prime mortgage loans are currently at 44%, but are predicted to increase to between 49% and 54% in 2011. For subprime mortgage loans, loss severities are predicted to increase from 75% to between 80% and 85%.

Loss severities had remained stable for over a year. Low mortgage rates, government-funded loan modification programs, and the homebuyer tax credit program all temporarily helped to keep home prices slightly higher, and therefore to raise the amount that lenders could recover when they foreclosed on loans. However, loss severities are now predicted to increase for many reasons, including the overall failure of the loan modification programs, expiry of the homebuyer tax credit program, and numerous factors expected to keep home prices low, ranging from current high inventory to predicted increases in shadow inventory.

The HousingWire report quotes Fitch Ratings Managing Director Diane Pendley as saying that servicers will look increasingly to short sales to minimize their losses, as recovery rates for lenders via a short sale are generally about 10% higher than through foreclosure.

Many homeowners have chosen to take charge of their financial situation by initiating a short sale. The advantages for them include being able to take action and make their own choices rather than waiting for a lender to initiate foreclosure proceedings, as well as ending up with a smaller impact on their credit report, clearing them to make a new start in the market sooner. With lenders now realizing the advantages of short sales over foreclosures, it can be expected that the short sale approval process will become streamlined and easier.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

Loan Servicers' Ties to Mortgage Insurers Might be Too Close for Comfort.

Seattle Short Sales - Wednesday, December 01, 2010

Mortgage insurance is meant to protect the investor: the borrower pays the insurance premium so that if they default on the loan, the investor is protected. The loan servicer (which, in most cases, is the bank) is only an intermediary in the process. However, a recent report in American Banker indicates that some loan servicers’ position in the insurance deal is a bit too close for comfort - and quite possibly, a conflict of interest with the parties the servicer is supposed to represent. In some instances, loan servicers have force-placed insurance on their borrowers that is up to ten times as expensive as regular insurance: disadvantaging both the borrowers and the investors.

Fo the most part, banks (as loan servicers) negotiate mortgage loans with borrowers, and then they sell those loans to third parties: the investors, such as Freddie Mac or Fannie Mae. The investors pool the loans into mortgage-backed securities (MS), which are usually sold as bonds. The purchasers of the bonds earn an interest payment which is tied to the interest payment made by the borrowers on their mortgages.

Borrowers are required to have mortgage insurance, which protects the investors should the borrowers default on their loans. The loan servicers, once they have sold off the mortgage, become minor players in the deal - just intermediaries. And once they have sold those mortgages, their earnings as intermediaries are low: typically about 0.25% of the value of the mortgage. On a $200,000 mortgage, this translates to about $500 per year.

The American Banker report has uncovered many examples of close business relationships between the loan servicers and the mortgage insurers; in some cases, the insurers themselves are actually owned by the banks. The report quotes Diane Thompson, counsel for the National Consumer Law Center, as saying “There’s no arm’s-length transaction here.” She notes that this situation actually creates incentives for servicers to force-place excessive insurance coverage.

This close relationship may include outright ownership, or it may include kick-backs from insurers: payments to loan servicers. In one example given in the article, loan servicer EverBank replaced its client’s $4,000 insurance policy with a $33,000 force-placed one. They paid specialty insurer Assurant for the policy, and Assurant returned a $7,100 “commission” to EverbBank subsidiary EverInsurance - a payment far greater than EverBank would ever have received from servicing the loan.

In other instances, cases were uncovered where the banks had deliberately let an insurance policy lapse so that they could force-place a more expensive policy - stopping the advance of a delinquent borrower’s escrowed private insurance until the policy lapsed, then purchasing a more expensive policy and advancing payments on it.

These policies do not only harm borrowers - who quickly see the equity of their property stripped away as the large part of any payments they are making (or, if they are not, a growing arrears calculation) as funds go towards unreasonably high insurance policies. (American Banker uncovered one example of a $120,000 property with a force-placed insurance policy costing $10,000 per year - a policy that would soon strip away any remaining equity in the property). These policies also harm the investors, who become increasingly unlikely to recover their investment when borrowers' payments are going to insurance policies, and investment equity is rapidly being stripped.

The issue here is conflict of interest. As the American Banker report notes “there ceases to be a clear difference between the entity purchasing insurance and the entity selling it.” This works out even better for the insurer, because it means that the servicer is less likely to pursue claims (to avoid any apparent conflict of interest, and also because payments on the claims could possibly come from its own profits)) - when in fact, the servicer as representative of the investors should actually aggressively pursue any insurance claims arising from its forcibly insured portfolio.

Many banks are still reeling from the discovery of sloppy documentation practices, a discovery which leads to questions about the legalities of many past foreclosure proceedings - including accusations of “robo-signing,” as well as documentation with signing dates or locations that suggest that they may not have been signed in the presence of a notary, as required by law. These further revelations, of potentially "too close for comfort" ties between loan servicers and mortgage insurers - their lack of arms-length distance, and how their association might be to the detriment of both borrowers and investors - will only add to the mass of paperwork (and possible litigation) related to foreclosure proceedings to be expected over the coming months.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

High Rate of Redefault on Freddie Mac Loan Modifications

Seattle Short Sales - Friday, November 26, 2010

A report published this month by the Housing Wire indicates that nearly half of the loan modifications initiated on Freddie Mac loans in the second quarter of last year defaulted within a year.

Of the 16,000 loan modifications done on Freddie Mac loans in the second quarter of 2009, 42% of them were delinquent within 12 months. There are some signs that the success rate is improving; for loans modifications initiated in the third quarter of 2009, the default rate was somewhat lower, at 29%.

The overall indications are strong, though, that loan modifications (e.g. through HAMP) are losing steam. Loan modifications may help people whose financial struggles are small or only temporary; as of July 1st this year, 121,000 HAMP loan modifications have been completed through Freddie Mac, but the average annual saving per borrower was only $8,700. For many homeowners, this level of saving is not sufficient to solve their financial problems. For them, loan modifications do not solve the problems; they only prolong them.

Trends in foreclosure-prevention moves indicate that an increasing number of distressed homeowners are choosing home forfeiture programs (e.g. short sales) rather than home retention programs (e.g. loan modifications) to rid themselves of financial troubles.

The Federal Housing and Finance Agency’s second-quarter report for 2010 indicates that, from the first to the second quarter of 2010, the number of homeowners in a HAMP trial loan-modifications had decreased by over 50%. While a small part of that decrease is due to homeowners moving into the permanent HAMP loan-modifications, in large part the decrease is due to homeowners moving out of the loan-modification program all together.

Meanwhile, over the same period, short sales by distressed homeowners increased by 26%.

Many analysts worry about what the failure of so many loan modification trials will mean. A failed loan modification delays foreclosure proceedings. Numerous failed loan modifications means that numerous homes temporarily avoid foreclosure, creating a backlog of foreclosures that will still take place at a later date. It was reported last month that foreclosures are on the rise in two thirds of American metropolitan areas - a possible early sign of failed loan modifications now working their way through to foreclosure.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

Well Fargo to Allow Postponement of Foreclosures for Short Sales in Some Situations

Seattle Short Sales - Wednesday, November 24, 2010

Wells Fargo has informed the National Association of Realtors that it will allow postponement of scheduled foreclosures in order that a short sale may go ahead, but only in specific circumstances.

This development follows their announcement in September, reported in The American Banker, that Wells Fargo was implementing a new policy to stop issuing extensions to foreclosure sale dates. According to Wells Fargo, they were implementing that new no-extension policy at the request of their investors.

This month’s announcement is a partial reversal of that policy. Postponement of a scheduled foreclosure in order to facilitate a short sale may be permitted, but only under the following circumstances:

  • Wells Fargo must have an approved short sale sales contract in hand (including approvals from junior lien-holders and mortgage insurers)
  • the buyer has financing approved or has proof of funds
  • the short sale can close within 30 days of the scheduled foreclosure sale

These guidelines apply to loans owned by Wells Fargo (including Wachovia) as well as loans serviced by Wells Fargo but owned by an investor provided that that investor approves, and in reference to one single postponement. Wells Fargo will consider postponements for situations that do not fit the criteria above on a case-by-case basis.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/


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