Short Sales 101 – Introduction

Regardless of the reasons used to explain the current mortgage crisis in the United States, the grim reality is that more homeowners are in financial distress than at any other time in the history of residential real estate, according to the Distressed Property Institute. 

Hence, real estate Short Sales.  If you’re not yet familiar with them, you soon will be.  They are reshaping the way lenders liquidate homes in default.  Historically, these homes would simply be foreclosed upon.  Today, the Short Sale offers a favorable alternative.

Nolo’s Plain-English Law Dictionary defines a Short Sale as, “a sale of a house in which the proceeds fall short of what the owner still owes on the mortgage.”  The lender decides that selling the house at a moderate loss results in less loss and expense for the bank than a foreclosure.  Both the lender and the borrower (homeowner) must consent to the Short Sale process.

You may think Short Sales were created in response to the housing market meltdown in 2007, but they have been around for years.  They have not been widely used in the past for two reasons:

– Until just recently, the lender could seek a deficiency judgment against the borrower for the amount of the loss.   Laws vary from State to State, but the lender was able to garnish wages, engage a collection agency to collect the debt, or seek other legal relief.

– The lender can elect to forgive all or a portion of the mortgage balance.  However, until 2007, the amount forgiven became taxable income.  The lender simply issued an IRS Form 1099 to the borrower.  The tax implications were dramatic.  If the lender forgave $100,000 and issued an IRS Form 1099 to the borrower for the same amount, the borrower potentially wound up owing the IRS tens of thousands of dollars depending on their tax rate.

The Mortgage Forgiveness Debt Relief Act was a major piece of legislation passed by Congress and signed into law by President George W. Bush.  The Act offered relief to homeowners, who, after a Short Sale, owed taxes on the forgiven mortgage debt.  This relief is great news!  Most homeowners no longer have to pay taxes on that forgiven debt.  The Act applied to debts forgiven between 2007 and 2009, but was extended through 2012 by the Economic Stabilization Act of 2008.

The Home Affordable Foreclosure Alternatives (HAFA) Program that went into effect April 5, 2010 is a huge step forward in improving the Short Sale process.  It requires borrowers to be fully released from future liability for their first mortgage debt, and, if a second lender receives an incentive under HAFA, that debt as well.  Lenders cannot ask for cash contributions or promissory notes from borrowers, and deficiency judgments are not allowed.  It also places timelines on the lenders to approve or deny Short Sale packages.

Why are these three pieces of legislation important?  They changed the Short Sale from a tool that was not widely used in the past to one we feel offers the best solution to distressed homeowners, lenders, purchasers, the neighborhoods where these homes are located, and the housing market in general.

With the economic downturn that began in 2008, many homeowners lost their jobs.  Others are going through a divorce or have had a spouse pass away.  Losing that income makes it very difficult, if not impossible, to keep up with mortgage payments. 

Most of the individuals or families we consult with would rather lose anything but their home.  They often stop paying credit card bills or even car notes in an effort to keep their home.  Eventually though, they just can’t keep up with the mortgage.  That’s where we can help with a Short Sale.  Sadly, 80% of Americans facing foreclosure have never picked up the phone and talked with their lender or a real estate professional.

Watch for Part 2 in the series where we will begin to explore The Anatomy of a Short Sale

Excerpt from The Field Guide to Short Sales. Copyright © 2010 by Tom & Gina Branch.

Another Federal Tax Credit for Homebuyers?

Federal Tax Credit - Round 3

Well, just when I thought it was not possible, Shaun Donovan, Secretary of Housing and Urban Development, said that the housing market’s July woes were “worse than expected” and that the administration may support a new homebuyer tax credit.

In an interview on CNN, Donovan said the administration is “concerned” about the direction the housing market has taken. He defended the Obama administration’s record on supporting the housing market, despite new signs that the market is still in a downward spiral. Donovan did not rule out a further homebuyer tax credit to support the market. Congress passed a homebuyer tax credit to support first-time buyers. The credit has now expired.

While the statistics show that the housing market was recovering late last year and into early spring, once the current tax credits expired in April, the market went back to its downward trend. I based that on the data put out by the National Association of REALTORS® (see below) showing a marked decrease in sales and a corresponding increase in home on the market. 

What I find interesting about the data is that the November 2009 tax credit had a greater impact than the April 2010 tax credit.  I suspect if the government does a third round of credits that the impact will be less than the earlier two credits.  I’m also waiting to see August’s data as one month does not make a trend.

While the Federal Tax Credits may have stalled the free-fall of the housing market, I’m not convinced that they brought that many new buyers into the market or that the sales of entry-level homes resulted in an increase in sales of move-up homes as many of the buyers cashing in on the tax credit purchased foreclosures and short sales. 

Further, many people who would like to purchase a home cannot do so because of the extremely tightened mortgage underwriting guidelines so until we loosen those standards just a little I don’t expect to see a rash of new homebuyers coming into the market.

It will be interesting to see which position the administration and NAR takes on this issue.

Side Job?

Have you ever wondered if the agent on the other end is a part timer?  While clearly a RE/MAX promotional, I had to laugh at the story line.



Note this is not designed to start a debate on part-time versus full-time agents. It’s humor!

Source:  RE/MAX YouTube Page


Housing Recovery on Hold?

Housing Recovery on Hold

Today was not a great day for news on the economy and its impact on the housing recovery.  

The Commerce Department downgraded the economic growth rate to an anemic 1.6 percent, down from an initial estimate of 2.4 percent last month, confirming the economy has lost significant momentum in recent months.  This is a sign that doesn’t bode well for employment and raises fears that the nation’s jobless rate could climb higher.

I maintain that housing will not lead the way out of this crisis.  Putting people back to work is critical to the recovery. Higher unemployment rates will lead to a greater number of defaults and foreclosures adding to the downward spiral in housing values and upward spiral in available inventory. 

2011 is also the year where the largest number of Adjustable Rate Mortgages (ARM) will adjust. Now, the good news is that interest rates are low so the adjustments may not have a huge impact.  The downside is many of these homeowners cannot refinance given the changes in lending guidelines and declining property values.

Why is this a factor?  Most ARMs adjust annually after the initial period so the bubble will slide into 2012 and later years. Many people would like to have the bubble behind us but until we can refinance some of these homeowners or the banks do something to stabilze their portfolios, the bubble will be with us. Eventually interest rates will climb and those ARMs may start defaulting.

We have to get people back to work if we want to stabilize the economy and our housing market.

Sneak Preview – The Branch Team SMART Car

Well, after a month of working with the graphics designers at SkinzWraps, we finalized a wrap for our SMART car.  We went through a number of designs trying to find something that worked for us.  We got some of the usual “real estate” agent designs but nothing that jumped out.

We have a custom RE/MAX License plate (SLDFST) issue by TXDOT, so the idea of putting a race car on the side of the car was discussed.  The SMART car lacks the real estate (pardon the pun) so we finally decided to make the SMART car look like a RE/MAX sponsored race car. SkinzWraps has experience wrapping race cars and they even added the “netting” to the side windows for a more authentic look!

Part of any NASCAR vehicle includes loads of sponsors.  If it works for NASCAR, it might work for us!  Many of our ancillary services vendors were happy to advertise with us.

The design was approved today and they will start production of the “skins” early next week.


Does HUD Owe You a Refund?

Does HUD Owe You a Refund

If you’ve ever had an FHA mortgage, you may be eligible for a refund of the up-front mortgage insurance premium that was paid at closing.

HUD has set up a website where you can search to see if you are due a refund. Click here to visit the HUD website.

Beware of scams! You do not need to pay another person or firm to assist you in collecting your refund or share payment.

Source:  HUD


The Finish Line – Another Short Sale Closing – Keller, TX

Short Sale Closing - Keller, TX

Another short sale closed! The sellers avoided foreclosure, the buyers purchased a nice home at a discount, and the lender did not have the losses involved with a foreclosure.

Many people feel that the nation’s economy rises and falls with the housing market. While this is often true, we believe the current housing crisis is a direct result of the economic downturn and massive job loss across the nation.

In the Short Sale community, the vast majority of homeowners did not get a bad loan or buy more house than they could afford; they’re just good, hardworking Americans who fell on bad times.

All indicators point to Short Sales being on the real estate horizon for the foreseeable future, at least through 2012, and maybe longer. Industry experts see another wave of distressed homeowners surfacing when the once popular Pay Option Adjustable Rate Mortgages (ARMs) begin to adjust in the coming months.

These mortgages allowed the borrower to essentially “pick a payment” that fit their budget in order to get into the house they wanted to purchase. These loans have the potential to negatively amortize and the rate will adjust upward – it’s just a matter of time. Pay Option ARMs were widely used in California and will begin adjusting soon.

We encourage homeowners across the United States to get educated on the options available should they become financially distressed. Short Sales are a great tool, providing relief to all parties.

Just remember to choose a REALTOR® with a proven Short Sale track record to negotiate on your behalf. Making the right choice can mean the world of difference to your financial future.