Dumb Dumb II

By Ben Pargman | Published: February 25, 2010

Following yesterday’s post – I don’t call lenders dumb . . . but sometimes they’re good for solid laugh.  Check this one out.   These are actual emails from lenders.

From the lender in 1st position:

Being in first lien position, our investor gets to make the decision as to how much the 2nd can receive on a short sale – both from the net proceeds and as their total payoff. They require the 2nd’s Release letter upfront as part of our submission stating that they will agree to release their lien for the proposed amount. Basically, at this point, if the 2nd will not issue a Release letter upfront stating they will agree to this – then we will not be able to do a short sale on this loan.

From the lender in 2nd position:

I’ve been doing this for 4 years and have never submitted approval before the 1st issues their approval. Neither has anyone on my team. This may be this particular lenders policy, but not how we operate.  I cannot issue an approval until I have the approval from the 1st and can verify their offer to us, that is the way it always goes, the 1st is in superior position so they dictate the terms.  I’ll decline the file and let our legal dept pursue our note.

What are you in kindergarten!?    You go first . . . no you go first . . .no you go

We actually see this all the time and a skilled short sale negotiator can often get these two kindergartners  to play nicely and get along . . . so this deal isn’t dead yet.

I’m not going to call lenders dumb, but in a week where the big banks are on a publicity blitz to promote how seriously they are taking foreclosure avoidance and short sales – here’s what’s really going on behind the PR campaign.

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Dumb Dumb

By Ben Pargman | Published: February 24, 2010

I don’t engage in lender bashing.  Facebook and the blogosphere are full of people talking about how dumb lenders are.  You’ll never find me saying that.

My party line is “lenders are simply under intense pressure from many different places – investors, insurance companies, government regulators, and their own PR agenda – that often the end result just doesn’t make sense to us.”

I’ve always taught – don’t try to understand a bank – you’ll go nuts.

However, in a week when banks are bending over backwards to push a marketing agenda of how seriously they are taking short sales and how they are aggressively pursuing foreclosure alternatives – I just have to share:

Here is an actual email exchange between one of my short sale negotiators and a lender’s loss mitigation representative regarding a proposed short sale offer:

Lender: I will tell you that the minimum net to <BANK> needs to be $51,500.  This amount does not include jr liens, commission, closing costs etc.  Thank you,

Negotiator:  There is unit next door for sale for $49k.  It has had no offers. How can we get that number with this unit next door?

Lender:  Please be advised that this is NOT based off the value.  The value is only used as a reference.  The file will remain closed until an offer that meets this criteria is received.  Thank you,

Negotiator:  What is it based off if not the value?  The homes are not worth that much so how can we get you an offer for that amount?

Lender:  There are buyers that are willing to pay more than the current market value.

Oh, silly me. . . I get it!  First, the bank sets a demand NOT based on the value of the property but rather establishes criteria based on the assumption that there are people in this market who will pay more than what the property is currently worth?!

A skilled short sale negotiator’s job is to breakthrough this silliness which we see all the time.  I’m not going to call lenders dumb, but they are often good for a solid laugh.

I have another one to share tomorrow.

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Analysts Say: More Short Sales Please!

By Ben Pargman | Published: February 16, 2010

Regular readers of this Blog will recognize a theme:  government announces new rules or program . . . the blogosphere goes nuts with headlines and posts that the new policy is “bad for short sales” or “bad for real estate agents” . . .  I write something ultimately concludes . . . “the government program in the end will not stop the market from doing what it needs to do  . . . the market must correct itself . . . real estate investors are the agents of change . . . the market can’t correct itself without us . . . whatever government program will merely serve to delay the inevitable . . . there will still be more short sales than anyone could ever handle . . .stop whining and get to work” or something like that.
So today we get more evidence that . . . well, I’m right.

Moody’s Investors Service is forecasting another 8 percent decline in home prices during this year before the market reaches a bottom.  They blame the increase in the “underwhelming” success of the administration’s Home Affordable Modification Program (HAMP).

The report highlights that not only is the bottom deeper than originally thought, but also future away in time.  Previously, Moody’s predicted the floor to be reached in the third quarter of this year, but now they have extended that date until the end of the fourth quarter 2010.

Moody’s says the reason for the delay is the unimpressive number of houses successfully avoiding foreclosure through the HAMP program.

A decline in distress sales-including foreclosure, deed in lieu, and short sales-as a share of total home sales is a driving contributor to the gain in house prices.

The Moody’s report clearly suggests that a lack of successful short sales is part of the reason the market has not turned the corner towards recovery sooner.

While HAMP modifications have kept many houses from foreclosure temporarily, the report states that HAMP will “fail to convert to a permanent modification and will eventually end up on the market as heavily discounted distress sales,” Moody’s wrote. “It is looking likely that foreclosures will hit the market more slowly than we had anticipated, mitigating but prolonging the price decline.”

So . . . at the risk of saying “I told you so” . . .  to the extent that a HAMP modification can buy a homeowner some time –  good for the homeowner, but for someone in a house that is upside down that they can’t afford to keep making payments on – it’s short sale or foreclosure – one of the two.

And the best way for a seller to successfully sell their house through a short sale is to work with a team that includes an experienced real estate agent and an experienced real estate investor.  Anything else and you’re just delaying the inevitable, bringing on more foreclosures, and pushing back the date that this market starts to recover.

So . . . if you’re still worried about some program taking away all the good deals . . . get to work.  Apparently, according to some analysts we haven’t done enough yet!

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Foreclosures Get Worse, Increasing Demand for Smart Investors

By Ben Pargman | Published: February 9, 2010

A recently released study from LPS Applied Analytics shows the foreclosure crisis keeps getting worse.  Here are some quick statistics from the report:

  • Delinquency rates have surpassed the 10% level; factoring in foreclosures, the total non-current rate sits at 13.3%.
  • Industry extrapolations indicate that over 7.2 million loans are currently behind on payments with an estimated nearly 1 million properties in REO status.
  • Average number of days delinquent for loans in foreclosure has increased 63 percent from January 2008 to December 2009, rising from 249 to 406 days delinquent.
  • Prime loans have experienced a worse pace of deterioration on a relative basis than subprime, FHA and all loans as a whole. Within prime loans, those with current unpaid principal balances between $417,000 and $600,000 have performed the worst.
  • The percent of “new” serious delinquencies (from the population of loans that were current as of year-end 2008) sits at 4.64%, higher than any other year analyzed for the same period. Extrapolated counts result in approximately 2.3 million “new” 60-day delinquent loans from December 2008 to year-end 2009.*

I said a couple of years ago (check out old blog posts) that we were entering a huge market correction and all the government programs, bailouts, and subsidies to stop foreclosures would not and could not prevent the inevitable from happening.

When a borrower is in a house that is worth far less than what it is worth, one of three things will happen: (1) if the borrowers can afford to keep making payments they may wait the several years it will take for the market to recover, or the borrower will default (either voluntarily or involuntarily) and (2) the borrower will work out an alternative with the lender to avoid foreclosure, or (3) the property will go to foreclosure.

If the borrower attempts to work out an alternative to foreclosure, there are only two options: (a) stay in the house, or (b) leave the house.  Despite all the efforts of the administration and all the talk by lenders, a modification to keep someone in the house is not sustainable unless the loan balance is reduced to the fair market value of the property and the payments are affordable.  Because many loan modification programs do not offer principle balance reductions and many borrowers are in houses that no matter how the loan is modified, they cannot afford, the only viable option is to work out a deal with a lender that allows the seller to move and avoid a foreclosure – that’s a Short Sale.

Short Sales are critically important to the U.S. economy right now.  They are perhaps the most honest and sustainable remedy to the foreclosure crisis.

It is well trained professional real estate investors who understand how to get these complicated deals done successfully.  As the number of foreclosures continue to climb as illustrated by the latest LPS Applied Analytics data, the need for well trained short sale investors also continues to climb.

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New FTC Proposed Rules

By Ben Pargman | Published: February 8, 2010

The Federal Trade Commission proposed a new rule that would prohibit loan modification specialists and loss mitigation attorneys from collecting advanced payment for foreclosure prevention services until after they obtain results.

“Homeowners facing foreclosure or struggling to make mortgage payments shouldn’t have to contend with fraudulent ‘companies’ that don’t provide what they promise,” FTC Chairman Jon Leibowitz said. “The proposed rule would outlaw up-front fees so companies can’t take the money and run.”

The FTC has brought 28 cases against companies suspected of foreclosure rescue and mortgage modification scams in addition to those brought by state and other federal law enforcement agencies.

“Far too many homeowners have paid up-front fees to bad actors who promised loan modifications but never delivered,” Treasury Secretary Timothy Geithner said.

For about two years now, I have been approached by speakers and service providers asking me to promote various forms of loan modification services given the close connection between loan modification and short sales.  Believing that loan modification is NOT something real estate investors should be involved in for a profit, I have always declined.  Here’s what I have told them:

  • Real Estate investors provide an essential role in the economy by being a Buyer of distressed assets which are not well addressed by the retail market.
  • A Buyer is adverse to a Seller and sits on the opposite side of the transaction.  (That doesn’t mean we can’t operate with the dignity and interest of the seller in mind, but technically, we’re “on the other side”.)
  • That legitimate and important role should be kept distinct and not blurred with anything that resembles foreclosure prevention, advice giving, consulting services, or anything else that might confuse the seller such as loan modification services.
  • If a Seller can and wants to stay in the house, they should – it is in the market and the economy’s best interest that they keep their house if they can.
  • A buyer of investment real estate has no interest in working to keep a seller in their house because it is in conflict to our interest of buying the house.
  • Loan Modification work should be left for seller to do themselves or if help is needed, then to attorneys, non-profits, or legitimate services that charge fees only upon successful delivery of results.

The FTC’s proposed rule should not present problems for short sale real estate investors who understand what hats they wear and which ones they shouldn’t put on.  Hopefully, a new rule will remove the scam artists from the market, give sellers who have a shot at staying in their house a better chance of doing so, and if they can’t then Short Sale investors will be prepared to do what we do distinct from any confusion in the minds of a seller.

The proposed rule, however,  defines Short Sale as a “Mortgage Assistance Relief Service” together with loan modification and therefore the Rule would affect how real estate investors market and advertise.  More on that . . .

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Short Sale Success Workshop for January 2010: “$120,000 from a Shack”

By Ben Pargman | Published: January 21, 2010

I’ll show you the real deal . . . step-by-step how we created a $120,000.00 profit all the details . . . line-by-line.

It’s a 100% Content jammed packed training

Sunday, January 24, 2010
9 pm est / 8 pm central / 7pm mountain / 6 pm pacific
<<<<<CLICK HERE to RESERVE your free seat>>>>

From “Lead” to “Check” Ben illustrates each step of the deal including the marketing to find and sell, the paperwork, the agents, and the closing logistics.

When the training starts, you can come back here to ask any questions or leave a “Comment” below and we will get back to you.

See you on the training.
Here’s to your Success!

Ben

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HUD Recognizes “Good Flippers”, Waives 90 Day Seasoning!

By Ben Pargman | Published: January 18, 2010

Wow, I never thought my blog post on “Good Flippers” would have such an impact.  I posted it Friday morning and then that day FHA waives the 90 day flipping rule!  Ah, the power of the pen!

Okay, so maybe that’s just a coincidence, but the both the article and the FHA waiver make the same point – flipping real estate is an important part of the economic recovery!

Even HUD gets it:

In today’s market, FHA research finds that acquiring, rehabilitating and the reselling these properties to prospective homeowners often takes less than 90 days. Prohibiting the use of FHA mortgage insurance for a subsequent resale within 90 days of acquisition adversely impacts the willingness of sellers to allow contracts from potential FHA buyers because they must consider holding costs and the risk of vandalism associated with allowing a property to sit vacant over a 90-day period of time. HUD: Waiver of Requirements of 24 CFR 203.37a(b)(2)

Current HUD regulations provide that a mortgage for a property will not be eligible for FHA insurance if the contract of sale for the purchase of the property is executed within 90 days of the prior acquisition by the seller.   This 90 day period is often referred to as the “seasoning requirement”.

However, effective February 1, 2010 (for a period of one year), the 90 day seasoning requirement will be waived provided that:

  • the transaction is arms length; and
  • a flip spread of more than 20% must be justified by verification of repairs or an explanation of the increase in property if no work was done.

This is tremendously positive news for “Good Flippers” and recognizes the value that we bring to the economy as I discussed in Friday’s post.   The waiver explicitly recognizes that not all increase in value is due to physical repairs and provides room for increases in value (even above 20%) “in cases where no such work is performed”.

To help facilitate the return of repaired and habitable properties to the market in a timely fashion, additional exemptions to the 90-day resale restriction period must be granted for the purchase of the properties by investors.  This policy change will help to sell properties that may otherwise remain vacant for up to 90 days, while offering affordable hosing options to buyers wishing to use FHA-insured financing. HUD: Waiver of Requirements of 24 CFR 203.37a(b)(2)

The waiver specifically notes that all other guidance concerning property flipping remains unchanged, so you still have to understand how to be a Good Flipper.

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The Good Flippers

By Ben Pargman | Published: January 14, 2010

Finally!  In this week’s Time article, “Home Flippers Are Back in Florida. A Good Sign?”, Thomas Collins writes:

The current crop of investors, analysts say, are playing a crucial role in reviving the housing market . . . Somebody’s got to clean up those messes, and that’s what the good flippers do, observers say. They might try to sell right away or rent the houses for a while. Either way, it’s good for the whole neighborhood . . . “They’re vital,” [says a housing consulting firm] of the good flippers. “I can’t think of a conceivable way that we could turn the market around without them.”

What nice recognition of the important role investors – yes, flippers, play in the fixing of the economy!

The focus of the article admittedly is rehabbers who purchase properties, fix them up and then re-sell them.   I suggest that the “good flipper” label also extends to those investors who add value not just through fixing broken kitchen appliances and pipes, but also to those investors who fix the broken timing and logistics of transactions that keep properties out of foreclosure and off REO inventory by flipping short sales.

The problem that most sellers and real estate agents have with Short Sales is that they take a long time, are unpredictable, and when there are multiple liens on a property, can get very complicated and frustrating.  The frustration and complications cause many Short Sale attempts to fail and houses to go to foreclosure.

For example, I asked a real estate agent this morning, “so are you listing any short sales?”  Her response:

– no, I try not to mess with Short Sales, I tried it twice and here’s what happened.  I had good buyers who liked the houses, but it took months for the bank to respond and when they did they kept asking for more money.  My client agreed, and then we had a problem with the second mortgages…it went on and on and finally, my clients gave up and went and  found another house where they didn’t have to mess with the short sale.  Since then, I just don’t want to mess with short sales.

With short sales flipping, even if there are no physical repairs – no pipes or appliances that need fixing, the good short sale flipper brings value to the equation by fixing the inefficiency and impracticability of selling a short sale directly from a distressed seller to retail buyer.

The real estate investor – who understands short sales, is patient, does not need to “move in the house before school starts”, and who has funds ready to close the transaction whenever the bank decides to get around to approving the short sale – that investor can deal with the frustrating and long process with the bank that a retail buyer is not likely to put up with.

Then, when the good flipper has fixed that inefficiency in the market by riding out the process and cleaning up messes on title (call them non-physical repairs) the flipper can restore the property to the retail market and sell to a retail buyer.  The property now can command retail market price where it could not before.

It’s no different than everyone of us who has ever traded in a car to dealer.  You realize when we say “trade-in”, we are actually agreeing to sell our car at a wholesale – below retail price to a professional car flipper.  The dealer/car flipper may wash the car, do repairs or not.  He may not even touch the car – adding no “improvements” – then he flips it within hours of our selling to him.

The car flipper earns a profit on the difference between what he purchased it for wholesale and what he sells it retail because he understands the process and is willing to take the hassle and headache off the hands of the seller.  Is there anything wrong with this practice?  Of course not!  If a seller wants full market retail price, anyone of us can certainly take out an add in AutoTrader, put a sign in the car’s window and spend our evenings and weekends taking phone calls and showing the car.  If we chose to elect out of that hassle, we can chose to sell the car at a wholesale price to a professional car flipper who understands the business – so we don’t have to.

Banks and anyone else who would suggest that there is something inappropriate about flipping a short sale (without ‘doing anything’) fail to acknowledge the reality that you can’t get the benefits of a retail market without meeting the expectations of the retail market.

Expectations of the retail market include:

  • responding to a buyer’s offer within a reasonable time frame of a couple of days
  • being able to agree to a closing date 30 to 45 days after contract
  • being willing to undertake repairs and respond to or renegotiate after inspections
  • paying a listing agent and a selling agent their full commissions
  • delivering clear and marketable title and clearing up all liens and encumbrances
  • delivering the premises in broom-clean, move in condition

These are the very things that banks DO NOT or just CANNOT do in the Short Sale Approval process.

Until such time as lenders and sellers are can meet the expectations of the retail market, the market will demand and require the role of an intermediary flipper to bridge the gap between the short sale market and the retail market.  Any effort by lenders to circumvent or impede the role of the “Good Flipper” will keep more properties from ultimately reaching the retail market and will cause more properties into foreclosure further swelling the vacant REO inventory.

The short sale flipper bridges the gap created by the lender’s inability to meet the expectations of the retail market and by returning properties to the retail market faster than the REO process, short sale flipping is good for banks, neighborhoods, and the economy.

Hail the Good Flippers!

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“The banks were in denial”

By Ben Pargman | Published: January 13, 2010

For years I’ve been promoting the important role of that short sales  play for the betterment of the economy.  Reports over the past few weeks suggest that the rest of the country is starting to realize this important role of short sales.

According to the National Association of Realtors, ten percent of all sales last year were Short Sale – almost 500,000 transactions.

A Bloomberg.com article reports that short sales almost tripled to 40,000 in the first six months of 2009 compared to the same months in 2008.

With current estimates reporting approximately 2 million housing units in the US somewhere in the foreclosure process, the Administration continues to search for solution for homeowners facing foreclosure.  However, according to a recent CNN.com report, only about 4 percent of these at-risk homeowners receive long-term mortgage help – the vast majority of people facing foreclosure do not obtain relief that allow them to stay in the house in any sustainable manner.

Citigroup experts recently stated that the government’s current solutions have been ineffective at keeping people in their homes and it is predicted that another 8 million homes could fall to foreclosure.

Given these realities, Banks are finally seeing Short Sales as a necessary and important solution to take seriously.  According to Richard Green, the director of the Lusk Center for Real Estate at the University of Southern California in Los Angeles, “It’s really finally dawning on banks that they’re better off with a short sale . . . I think banks were in denial.”

However, the banks are still in denial about one major reality of Short Sales . . .

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Let’s talk first, Florida – Mandatory Mediation in the Sunshine State

By Ben Pargman | Published: January 6, 2010

With nearly half-a-million foreclosure proceedings underway in the Florida courts in the beginning of 2010, the Florida Supreme Court issued an administrative order instituting a statewide “managed mediation” program to facilitate communication between lenders and distressed borrowers and encourage foreclosure alternatives including Short Sales.

Florida is a Judicial Foreclosure state which means foreclosures actually go through the courts and involve a lawsuit.  The massive amount of foreclosures is putting a great burden on the court system in general which has an interest in finding alternatives to foreclosure.  Under the new program, all foreclosure cases in the state courts that involve residential homestead property will be referred to mediation, unless the plaintiff and borrower agree otherwise.”

The mediation program specifically anticipates Short Sales and qualification standards for mediators includes an understanding of Short Sales as an option.

Borrowers who participate in the program and have a Short Sale in the works should submit the standard Short Sale requirements through the mediation online system including:

  • Signed purchase contract for the homestead residence
  • Listing agreement for sale of the homestead residence
  • Preliminary HUD-1
  • Written authorizing to release information

Also, the borrower should be reminded that the sale MUST be an arm’s length transaction, and the property cannot be sold to anyone with close personal or business ties to the borrower.

A mediation must be scheduled within 120 days of a foreclosure filing, with the cost of the mediation being paid for by the lender and the Borrowers must meet with a HUD-approved foreclosure counselor prior to the mediation.

The Court noted that “Florida has the third highest mortgage delinquency rate, the worst foreclosure inventory, and the most foreclosure starts in the nation. The crisis continues unabated.”  The state has consistently been ranked as having one of the nation’s highest foreclosure rates since the onset of the housing crisis.

The Supreme Court acknowledged lack of communication between plaintiffs and borrowers as the most significant issue impeding early resolution of foreclosure cases, and concluded that effective case management and mediation techniques are the best methods the courts can employ to ensure that such communications occur early enough in the case.  “No action will be taken by the court to set a final hearing or enter a summary or default final judgment until the requirements of [the mediation program] have been met.”

While the referral to mediation is required, the parties are not forced to agree to anything in the mediation.  Also, the borrower cannot be compelled to particiate. If the borrower does not participate it just means the lender can go forward with the foreclore.

Also, it doesn’t mean that this is the only place a short sale could be considered.  Even if the parties do not agree to a settlement in the mediation, the opportunity to do a short sale still exists as always.

What does this mean for Short Sale investors?

First, any program that faciliates a borrower avoiding a foreclosure and working out a deal with their lender is a good thing for sellers, the enonomy, the housing market, and our country.  This is true regardless of whether the resolution is a short sale for an investor or not.  To the extent that a mediation program helps find (or pressures lenders into agreeing to) solutions that benenfit sellers – that can only be good for the larger economy and therefore you and me.

However, the more ‘proceedure’ that is added to the foreclosure ‘process’, the longer and more expensive it gets for the lender . . . and the math behind the added process and expense makes a short sale more attractive to the lender. Requiring mediation will add steps, time, and expense to the lender’s foreclosure process.

If you have been to one of our live trainings or have access to the RE$ource Vault, you’ve seen the Lender Short Sale Analysis spreadsheet which illustrates how a bank weighs a short sale offer against what they think they will get if they foreclose on the property and eventually sell it REO.  The longer and more expensive the foreclosure process is, the relatively more attractive the Short Sale offer looks.  To keep it simple . . . the further away the bird-in-the-bush (the bank’s REO proceeds) appears, the more attractive the bird-in-hand (short sale offer) is.

At the end of the day, the effectiveness of the program will depend on how it is administered.  The court asknoweldged that judicial resources for such an undertaking were “limited”.  I hope the program is successful in addressing the blazing hot foreclosure crisis in the state where I grew up and were most of my family still lives.   By adding more process, confusion and delay to the foreclosure pipeline, I predict one impact will be that a wholesale short sale offer from an investor will appear more attrative to lenders in the Sunshine State.

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