In this module:

• Homeowner counseling process

• Homeowner options

• Buyer counseling on short sales

1. Homeowners in Jeopardy

1-1

Effective service means:

• Understanding process and parties involved in transaction

• Knowing what transpires from seller’s side of transaction

Providing Effective Service

1-2

• Missed one mortgage payment

• Husband laid off

• Living on credit cards

• Other reasons why homeowners could be behind in mortgage payments?

Case Study #1

1-3

• Anytime sellers are behind in mortgage payments

• Length of pre-foreclosure varies

• During pre-foreclosure period, homeowners are notified of mortgage payment default

Pre-Foreclosure

1-4

1. Refinance

2. Sell and bring $ to closing

3. Lender workout

4. Deed in lieu of foreclosure

5. Short sale

6. Foreclosure

7. Do nothing or walk away

Options

1-5

• If homeowner’s credit allows for refinance and if owner meets eligibility criteria:

> One of best options is HOPE for Homeowners (H4H), a program through HUD

> Program dates 10/1/08 – 9/30/11

Refinance

1-6

• Eligibility criteria: > Existing mortgage originated on or

before 1-01-08

> Payment(s) as of 3-01-08 exceeds 31% of gross monthly income

> No intentional default

> No false information to get mortgage

Refinance

1-7

• Features of FHA-insured loans under program:

> 30- or 40-yr fixed-rate mortgage

> Maximum 96.5% LTV ratio

> No prepayment penalties

> Extinguish subordinate liens

> New home appraisals from FHA-approved appraisers

Refinance

1-8

• Imperative to estimate seller’s net equity

• Once listing in MLS and offer of compensation made to cooperating brokers, listing broker is responsible for paying compensation even if seller doesn’t pay listing broker

• See Figures 2 and 3 for checklists.

Sell and Bring $ to Closing

1-9

Lender Workout

1-10

• Borrower awareness of available workout options is low

• Freddie Mac survey in 2008: More than half of borrowers did not know lenders had options to help avoid foreclosure

Lender Workout

1-11

• Workout options include: > Forbearance

> Reinstatement

> Repayment plan

> Loan modification

> Sign over property to lender in exchange for debt forgiveness

Deed in Lieu of Foreclosure

1-12

• Occurs when borrower agrees to trade property to lender in exchange for cancellation of note

• More likely to work in states where there is long foreclosure timeline

• In declining markets, lenders less likely to consider deeds in lieu

Short Sale

1-13

• Occurs when (1) seller owes more money on loan than sale of property will likely produce and (2) seller is unable or unwilling to bring money to closing

• Lender has not yet foreclosed on property

Short Sale

1-14

• Elements of successful short sale: > Property is worth less than is owed

> Seller has hardship and cannot keep property

> Seller is cooperative and will work with broker to package short sale

> Lender is willing to consider short sale

Short Sale

1-15

> Property listed with caveats and protections for seller

> Lender presented with contract, accepted, signed and dated by seller, along with completed short sale package and narrative

> With lender approval in writing, offer and escrow closes as usual

Foreclosure

1-16

• If homeowner is facing foreclosure, real estate professionals should instruct homeowner to contact lender immediately

Do Nothing or Walk Away

1-17

• Walking away from property eventually leads to lawsuit to foreclosure from lender

• Homeowners who are ready to walk away should contact their attorney for advice

Rescue Scams

1-18

• Homeowners should watch for foreclosure “rescue” offers in which owners sign quitclaim deed and then lease property

• In such cases, former owners will still be liable for mortgage payments

If Short Sale Is Best Option

1-19

• Estimate seller’s equity

• Determine if there are any liens

• If seller has 1st and 2nd mortgage or a home equity line of credit, all lenders may need to approve short sale

If Short Sale Is Best Option

1-20

• If mortgage has been securitized, approval may be required from the entity holding pool of loans

• Check with primary lender on protocol

• When you have determined that seller owes more than property is worth

If Short Sale Is Best Option

1-21

• When you have determined that seller owes more than property is worth, advise seller in writing to obtain separate legal, credit, and tax advice

If Short Sale Is Best Option

1-22

• Contact loss mitigation dept: > Finding decision maker often one of

biggest challenges

> Varying opinions on when to contact the lender

If Short Sale Is Best Option

1-23

• Obtain borrower’s authorization to release information in order to contact lender

• See Figure 4 for sample form

If Short Sale Is Best Option

1-24

• When listing potential short sales: > No confidential information should be

disclosed without written permission of client

> All rules and regulations of MLS need to be followed

Counseling Buyers on Short Sales

1-25

• Can buyers wait for lender’s approval?

• Do they have to sell their home before purchasing short sale?

• Will they follow through on your counsel?

Counseling Buyers on Short Sales

1-26

• Do they understand that lender makes final call on price and terms?

• Interested in “flipping” the property? If yes, additional due diligence will need to be performed.

Counseling Buyers on Short Sales

1-27

• How willing are buyers to consult attorney?

• Is buyer willing to enter into an exclusive buyer representation agreement and be responsible for compensation should it not be paid by seller’s side?

1-28

• Can you disclose confidential information that you may know because of your prior meeting with them? Why or why not?

• Sellers asking for $ at closing (not part of contract) for short-sale fee or to pay for personal property that will be left behind. Okay?

Case Study #2

1-29

• Short-sale listings under contract appear in MLSs in a variety of ways

• Include these listings if buyer clients wants to see potential short-sale properties

Showing Short-Sale Listings

1-30

• Remember: subsequent offers may have an equal chance of being approved by lender if lender has not provided listing agent/broker a written approval of contract

Showing Short-Sale Listings

Buyer Issues

1-31

• There may be multiple lien holders

• Seller acceptance of short-sale offer does not guarantee bank approval

• Documentation requirements from each lender may vary

Buyer Issues

1-32

• Continuing investigation of the property—CMA updates while property is pending lender approval.

• Time for lenders to review offers may not give most buyers enough time to order property inspection

Buyer Issues

1-33

• Unless contract stipulates otherwise, earnest money deposit, mortgage application, home inspection and attorney review will take effect upon signature of seller

Buyer Issues

1-34

• Unless there is way for buyer to cancel contract while lender approval is pending, buyer is committed to transaction

• If buyer chooses to purchase another home during this time he or she will need to do it “subject to release of prior contract”

Discussion Questions

1-35

• How would you counsel buyer client on these short-sales issues?

> Home inspection

> Earnest money

> Property condition

> Additional lien holders

> Mortgage application

Don’t Practice Law

1-36

• Ability for buyers to nullify original contract if they find another property or realize value has decreased and choose to withdraw will be entirely based on how original contract was written