QueenCityHomeBuyers.com

Some of you may have heard that Citigroup made an announcement today. That announcement really comes as no surprise as the lending industry continues to dig it’s way out of the current crisis it is in. The announcement: Citi is launching a new “Foreclosure Alternative” program that allows homeowners in default to remain in their homes for an additional 6 months, provided that they hand over the deed to their property after the 6 month time frame is up. For some, this would seem like the answer to their prayers, at least a short-term answer. The homeowner is still required to maintain their utility bills, but Citi promises to pay at least $1,000 in relocation expenses and will keep an open mind about other expenses as well.

Citi will start the pilot for this program this week in the following state: Texas, Florida, Illinois, Michigan, New Jersey and Ohio. Says Citi’s top mortgage executive Sanjiv Das, “Why should we all go through the foreclosure process and evict people?” Das added that avoiding the costly foreclosure process is “less painful for our borrowers as well as for us.” Citi’s program is an effort to counter a growing trend in which many homeowners who owe more than their home is worth in today’s market opt to simply walk away. Many feel that market values will not come back, at least in the foreseeable future. This trend is reflected in data from Moody’s Economy.com, citing that almost a third of all homeowners owe more on their home than it is currently worth.

The announcement of this programs and it’s approach is similar to the program announced from Fannie Mae at the beginning of November, 2009. In the Fannie Mae program, homeowners transfer the title of their property back to Fannie Mae, then turn around and rent the property back at current market rates. The homeowners are allowed to rent on a month-to-month basis for up to one year. There has been a lot of speculation about how effective this program will be, citing that it will only prolong the inevitable and that the majority of homeowners problems are more than a temporary in nature. John V Back of Valley Accounting in Phoenix stated, “The Fannie Mae Deed for Lease Program has some merit in that it allows homeowners to stay in their homes as market-rate renters for up to one year after losing ownership of the homes. The merits of the program are curious to me because while the program does allow the homeowner to avoid the disruption of moving right away and it reduces their monthly payment down to a market rent amount; it is only putting off the inevitable move to more affordable living arrangements. I would think the more logical way to handle this is to simply consider this a loan modification and let the homeowner continue to occupy and own their home on more affordable terms.”

The current crisis in the lending industry is complicated, to say the least. It will take time, flexibility, and many different attempted strategies to get back to ground zero. As a last piece of advice to homeowners, Mr. Back says: “gather all of their loan documents and have your lawyer and your CPA evaluate insolvency, recourse debt provisions, gain or loss on the transaction for investment properties and tax planning before they enter into any transaction with the lender. It is often one of the biggest financial decisions, with the biggest income tax consequences that anyone will ever face.”

There have been many terms that have been tossed around in real estate industry in recent times.  One of these is the term “Short Sale”.  What is a mortgage short sale and how can it help you?

First of all, lets define what a short sale is.  Bankrate.com defines a short sale as: “A short sale, in real estate terms, is a sale of a house in which the sale price is less than what the owner still owes on the mortgage.  It is a procedure sometimes agreed to by lenders, who often would rather take a small loss then go through the lengthy and costly foreclosure process.”  Why would a lender do this?  There are several reasons why.  The first reason is pretty obvious.  A lender will not even entertain the idea of a short sale unless they have a solid reason to believe that you will not be able to continue making the payments on your loan.  Usually, the evidence to support this belief is in the fact that you are already 90 days late in your payments and that you have no idea how you are going to get back on track.  You may have had a job loss or some unexpected financial disaster.  Whatever the situation, there is little reason to believe that being able to catch up the payments, or “cure” the loan, is a possibility.  This situation is unfortunate, but it does happen…even to those who have said, “That will never happen to me!”

Another reason that the lender may consider a short sale is if property values in your area have fallen, you borrowed heavily against your equity, or otherwise the value of the house is significantly less than what is owed on the loan(s).  So, the lender must consider their options.  One of these options is to accept a short sale.  The reasoning behind accepting a short sale is that it is better to get most of the money they are owed than to lose out and get nothing at all.  They can also take your property back through a foreclosure proceeding, but that’s a completely different post.

Another reason for accepting a short sale is for a very simple reason.  The lender is in the business of lending.  They are not in the business of selling or renting real estate.  A lender is required to maintain a certain amount of cash in reserves for every property that they have taken back in foreclosure.  This means that for every property that a bank has in it’s inventory, that is even more money that they cannot lend out and therefore make a profit on.  Do you see why there are incentives for the lender to accept a short sale?

Is a short sale right for everyone?  Of course not.  Every homeowners situation is different, just like every fingerprint is different.  You must take a look at your own circumstances and resources, taking into account every detail and determining if selling your house through a short sale is the right strategy for you.  You must know that there are disadvantages to a short sale, one of those being a negative hit on your credit report.  How much of a hit will your credit score take?  That is hard to say as there is no set-in-stone formula you can use to determine how many points will be deducted from your credit score (this formula is proprietary).  There are many different factors that go into determining an individual credit score, so no two reports will be identical in the impact from a short sale.  However, a short sale will also reflect that you are proactive and that you did not just “give up” or “quit” on your obligation, as is likely the case when a foreclosure shows up on your credit report.

You must also be aware that the lender does not have to agree to a short sale.  The case must be made to the lender as to why it is in their best interest to accept a short sale.  One way to kill any chance of a short sale being accepted is for the end buyer to offer the homeowner money at closing.  Most lenders will not agree to the homeowner receiving any cash at closing.  The reason for this is simple in that if the lender is taking a loss, they feel that the homeowner should not be “rewarded” for selling their home for less than what is owed on the loan.  For a short sale to work as it is designed, it must be the best option for all parties involved: for the homeowner, for the lender, and for the end buyer.  I hope this helps in explaining the short sale process to you.  Feel free to leave any comments or questions below.