Short Sales: The 800 Pound Gorilla that

is Affecting a Growing Number of People and

Eroding the Housing Market

Though some data provided also pertains to foreclosures, it is only included because credit companies commonly combine short sale

and foreclosure data together. This report will strictly address solutions for short sales and strategic defaults.

Solutions that Require Policy Change to Allow Short Sellers to Re-enter the Fledgling US Economy

Change the Credit Default Requirement of Servicers to Consider a Homeowner for a Short SaleEncourage Manual Mortgage Underwriting Exceptions for “Life Event” Mortgage Only (MO) Defaulters

Focusing on Short Sales

NationalFlorida exampleNot all Short Sellers are the Same: Owner Occupied and Investor

Why Buyers Aren’t Buying and Solutions that are Working

National Florida statewide: comparison of % of *Distressed Listings

compared to total Florida Listings Not all Short Sellers are the Same: Owner Occupied and

Investors

1. Definition of a short sale, Wikipedia: http://en.wikipedia.org/wiki/Short_sale_(real_estate)2. Definition of a mortgage servicer, Wikipedia: http://en.wikipedia.org/wiki/Mortgage_servicer

Focusing on Short Sales

*A short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property's loan. It often occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a moderate loss is better than pressing the borrower. *mortgage servicerA mortgage servicer is the company that borrowers pay their mortgage loan payments to.

*Data shows the national average percentage of “underwater” homeowners (residential properties with a mortgage in negative

equity) in the US was 22.7 at the end of March 2011.

• Nevada: 63%

• Arizona: 50%

• Florida: 46%

• Michigan: 36%

• California: 31%

States with Highest Negative Equity Percentage of Total Mortgages in Their State

Data: 22.7% Negative Equity Report/ CoreLogic, June 7, 2011 and 28.4% from Zillow Reuters/ on 5/9/11 msnbc.com

Here’s an example of numbers of homeowners affected in Florida alone…

Florida3rd highest in US with 46.1% of all mortgages underwater

*2,021,868 negative equity mortgages statewide**Total # of listings statewide: 232,167

**Total distressed listings: 63,262.

This number of homeowners/units will need to:

rent after listing sells

will not be able to purchase another home with a mortgage for minimum of 2-3 yrs after short sale and 3-7 years after foreclosure.

**These homeowners/units are 27.24% of the total listings in the state of Florida alone.

*New CoreLogic Data Shows Slight Decrease in Negative Equity CoreLogic June 7, 2011, Santa Ana, Calif. , pg. 3

** See next page for Distressed Listing through MLX Advantage: Combines Short Sale and Foreclosure selections (includes short sales and pre-foreclosures for 4/1-5/2/11. Did not include REO’s/bank owned. Some Fl. counties not reporting.)

** # of Homeowners eliminated in Florida alone:Compare Florida Total Listings to Short Sale/Pre-Foreclosure Listings

Not all Short Sellers are the Same: Owner Occupied and Investor

• Owner Occupied short sellers with a hardship: purchased an owner occupied home, wishing to stay until family circumstances changed. And circumstances, commonly loss of income, divorce, relocation for jobs, increase in household size, did change.

• Investor short sellers: purchased home(s) as investor speculators, hoping to flip and make a profit, widely popular in a booming housing market.

• Owner Occupied short sellers with no hardship: purchased an owner occupied home and have no apparent hardship (loss of job, divorce, increase in household#, etc.) This type of short seller is also known as a “strategic defaulter”. A *strategic default is the decision by a borrower to stop making payments (i.e. default) on a debt despite having the financial ability to make the payments.

– *These are the “stuck” short sellers, as they don’t have a defined hardship other than sever loss of equity. These short sellers are often turned down for a short sale, or the bank requires a partial note to be paid in order to complete the short sale.

*Wikipedia definition of Strategic Default: http://en.wikipedia.org/wiki/Strategic_default

How can short sellers… become buyers again?

When?

How will it happen?

Solutions that Require Policy Change to Allow Short Sellers to

Re-enter the Fledgling US Economy

Here’s press that realtors and public see in article meant to alert banks of fraud…

*Short Sale Scam cheats banks, sellers June 8, 2011, www.Floridarealtors.org

Banks and distressed home sellers stand to lose more than $375 million this year from a short sale scam that has sellers and banks agreeing to sell homes at very undervalued prices, according to a new study by CoreLogic.

Here’s how the scam often works: Borrowers who are underwater or in financial distress are approached, often by an investment group, and persuaded to sell the property in a short sale at a low price. Soon after the bank accepts the lowball offer, the investment group then resells the house to legitimate buyers at a higher price.

Sixty-five percent of short sales resold within six months that net profits of 40 percent or higher were flagged “suspicious,” which means there is a high likelihood that the lender accepted a low offer, according to the CoreLogic study. These transactions often go undetected by banks, too.

And…

*A short way to short-sale fraud June 03, 2011

by Kenneth R. Harney www.therealdeal.com

Here’s the frustrating reality occurring the majority of the time

More of these properties than realized are greatly distressed. Repairs CANNOT be done prior to a short sale or REO (bank owned) closing.

• To repair a home, buyer must:– obtain a rehab loan, agree to an *escrow closing,

or pay cash.• Mortgage guidelines require minimum property

standards, and if not present, cost must be: – added into a rehab mortgage or kept in escrow at

closing and released after repairs complete. • In both cases:

– Buyer completes repairs AFTER CLOSING ON HOME and pay inspections and bids for repairs.

• PROBLEM MOST OFTEN: – Home “After Improved Value” (with needed

repairs) STILL WON’T APPRAISE and value is not high enough to cover repair costs.

– Homebuyers prefer to buy from Investor/rehabber who does inspection, purchases home, rehabs, and hope that property appraises out high enough to cover repairs.

*Escrow closing: buyer gets mortgage for home, but escrows repair costs, usually 1.5%, at title co. until repairs are completed.

Frustrating Conflict: CoreLogic May 2011 Study Short Sale Research Study

Conflict of Policy:The growing number of short sellers are producing a glut of

soon to be ex-homeowners who are exempt from purchasing another home for a minimum of two to three years, and more.

• Servicers tell existing homeowner that in order to be considered for a short sale, the homeowner must be in default on their mortgage payment before being considered for a short sale.

Troubled homeowners figured out long ago that the only way to get any attention from their lender was to stop paying. And guess who they heard that from? The banks themselves.

Orlando Sentinel, May 17, 2011, Beth Kassab/Business Columnist/ Article: Bondi should embrace lower mortgage principals

• Even though mortgage underwriting guidelines offer reasonable timeframes and underwriting standards for homeowners that must short sale, being late on mortgage payments for the 12 months preceding a short sale is what exempts these short sale homeowners from repurchasing a home for a minimum number of years for all mortgage types.

• FHA Borrower in Default at the time of Short SaleA borrower in default on his/her mortgage at the time of the short sale (or pre-foreclosure sale) is not eligible for a new FHA-insured mortgage for three years from the date of the pre-foreclosure sale.

FHA outreach.gov/FHA Handbook 4155.1, 4.C.2.1

• Additional restrictions also imposed by lenders: Some major lender place additional restrictions on FHA, conventional and VA guidelines already in place, regarding short sales. Additional overlays may include greater timeframes before giving a mortgage. One major lender will not give a mortgage AT ALL to short sellers that had to sign a promissory note for a previous short sell, even if the debt is included in the DTI! NOTE: These short sellers no longer own the previous home, must pay a note, the debt is part of their DTI, and they ARE STILL DENIED A LOAN !

Wait Timeframes and Maximum LTV after a Short Sale for a New Mortgage

• *VA: 1 year at 100% LTV or lower• *FHA: 1 year if there were no lates in the preceding

12 months before the short sale closing• *Fannie Mae and FHLMC: 2yrs at 80% LTV• *FHA: 3 years if there were lates in the preceding 12

months before the short sale closing• *Fannie Mae and Freddie Mac: 4 years at 90% LTV

with private mortgage insurance (PMI). As of 6/4/11, there are no known PMI carriers who will insure at 90% LTV!

*See Resource page for where to retrieve information for loan programs.

Change the Credit Default Requirement of Servicers to Consider a Homeowner for a Short Sale

• In March of 2011, a 27 page term sheet prepared by attorneys general and led by Tom Miller of Iowa and used as a starting point for negotiating real reform with the banks included this proposed change: *“Servicer’s employees shall not instruct, advise or recommend that borrowers go into default in order to qualify for loss mitigation relief.”

• If servicers would not instruct current homeowners that they must be late on mortgage payment in order to be considered for short sale and allow these homeowners to continue paying the mortgage payment, it would prevent short sellers from automatically becoming exempt from re-purchasing a home for a longer period of time.

• Credit is still affected with a short sale closing and the wording “settled for less than full balance of loan” shows on credit report. Over time, however, credit scores increase. Late payments required for short sale consideration by servicers at present will exempt a short seller from getting a mortgage, even if the credit score has gone back up.

*Word for Word: The 27 Page Term sheet on Mortgage Servicing Practices Excerpt can be found on page 17, K.8

Trans Union Provides Positive Credit Proof for Mortgage Only Defaults…

In a PowerPoint presentation presented by *TransUnion on May 17-18, 2011 at the Financial Services Summit, credit risk differences were established for Mortgage Only delinquent consumers:– *MO: “Mortgage Only” A consumer who goes 120+ DPD on a mortgage but has no other delinquent existing

tradelines at the time the new tradeline is opened– *MD: “Multiple Delinquencies” A consumer who goes 120+ DPD on a mortgage but has at least one

delinquent existing tradeline at the time the new tradeline is opened

Trans Union test results proved… An MO (Mortgage Only) default during the recession indicates a better risk, regardless

of when the new account opens Scores for mortgage-only defaulters tend to “rebound” faster than for those w/multiple

delinquencies

Incorporating these results into strategy is not difficult after MO identification: Identify MOs—a relatively simple task at the credit file level Adjust score cut-offs for MOs in prescreen Adjust pricing for MOs in offer

*“Life After Foreclosure and Hidden Opportunities” presented May 17-18, 2011 at TransUnion Financial Services Summit.

…With Benefits and Knowledge Too Important and Valuable to Ignore!

(*cont’d.)

The benefits can be material “Buy deeper” without the accompanying loss rates Avoid the tough competition currently vying for the cleanest segments Target a segment that will not otherwise get attractive pricing Achieve higher risk-adjusted margin than is currently available in other segments Build loyalty at a time when consumer dissatisfaction is relatively high

Summary Behavior that was once considered high-risk may no longer be so An understanding of how external factors impact consumers can reveal acquisition

opportunities your competitors might miss The recent recession is a great example of exceptional behavior; mortgage-only

defaulters may not be as bad as you think Radical changes to the environment can limit the effectiveness of based on prior 26

intuition experience

*“Life After Foreclosure and Hidden Opportunities” presented May 17-18, 2011 at TransUnion Financial Services Summit.

Encourage Manual Mortgage Underwriting Exceptions for “Life Event” Mortgage Only (MO)

Defaulters

• Because of the credit proof shown on the *TransUnion report and further documentation from *FICO, a case for consideration of common sense manual underwriting exceptions could be made for short sellers who have not had any late pays on credit other than those incurred due to the short sale.

• Additional criteria that could be required:

Greater monies down

higher credit score

Higher interest rate

*“Life After Foreclosure and Hidden Opportunities” presented May 17-18, 2011 at TransUnion Financial Services Summit.

*FICO Reveals Score Impact of Mortgage Delinquencies: from 3/24/11/ Smart Credit

Why Buyers Aren’t Buying and Solutions That are Working!

Why buyers aren’t buying short sale inventory

1. Buyer bears the expense of appraisals, inspections, with all monies lost if appraised value not high enough.

2. This happens most often because In areas where negative equity is common, and minimum value to include repairs needed will not be realized in appraisal value. Therefore, a mortgage cannot be given for amount needed.

3. Rehabilitation and Renovation mortgages are typically at a slightly higher rate with higher costs.

4. Often these homes are partially destroyed or vandalized, and homebuyers are fearful of what they can’t see are wrong with these homes.

What buyers feel safe buying

• What IS selling: *FNMA Homepathhomes and *Neighborhood Stabilization Program (NSP) homes, where foreclosed (Homepath and NSP) and short sale (NSP only) homes are rehabbed and then put into the market.

• Homeowners perceive these properties as safe, as they have been inspected, and repaired to min. code standards.

• If banks/servicers repaired homes, they would realize a higher sales price, just like FNMA Homepath, NSP, and investors/rehabbers.

*FNMA Homepath website: http://www.homepath.com/*NSP Program Overview: http://www.hud.gov/offices/cpd/communitydevelopment/programs/neighborhoodspg/

Resources1. Definition of a short sale, Wikipedia: http://en.wikipedia.org/wiki/Short_sale_(real_estate)

2. Definition of a mortgage servicer, Wikipedia: http://en.wikipedia.org/wiki/Mortgage_servicer

3. Data: 22.7% Negative Equity Report/ CoreLogic, June 7, 2011 and 28.4% from Zillow Reuters/ on 5/9/11 msnbc.com

4. *New CoreLogic Data Shows Slight Decrease in Negative Equity CoreLogic June 7, 2011, Santa Ana, Calif. , pg. 3

5. *Wikipedia definition of Strategic Default: http://en.wikipedia.org/wiki/Strategic_default

6. Short Sale Scam cheats banks, sellers http://www.floridarealtors.org/NewsAndEvents/article.cfm?id=260867

7. A short way to short-sale fraud June 03, 2011 12:30PM By Kenneth R. Harney http://therealdeal.com/newyork/articles/a-short-way-to-short-sale-fraud-by-kenneth-harney

8. Orlando Sentinel, May 17, 2011, Beth Kassab/Business Columnist/ Article: Bondi should embrace lower mortgage principals

9. FHA outreach.gov/FHA Handbook 4155.1, 4.C.2.1: www.fhaoutreach.gov/FHAHandbook/prod/infomap.asp?address=4155-1.4.C.2.l

10. Fannie Mae Selling Guide/Originating through Closing/Underwriting Borrowers/Credit Assessment/Traditional Credit History

11. https://www.efanniemae.com/sf/guides/ssg/sg/pdf/sel052411.pdf

12. Freddie Mac Selling Guide/ First go here: http://www.allregs.com/tpl/Main.aspx. Then, find Single-Family Seller/Servicer Guide, Volume 1/Chs. 37-38: Credit Underwriting/Chapter 37: Underwriting the Borrower/37.7: Evaluating Borrower credit reputation (02/01/11)

13. VA Pamphlet 26-7, Revised/ Chapter 4: Credit Underwriting, pgs. 44-45 http://www.benefits.va.gov/WARMS/pam26_7.asp

14. Word for Word: The 27 Page Term sheet on Mortgage Servicing Practices http://www.americanbanker.com/issues/176_45/how-the-state-ags-want-to-revamp-mortgage-servicing-1034053-1.html. Excerpt can be found on page 17, K.8.

15. “Life After Foreclosure and Hidden Opportunities” presented May 17-18, 2011 at TransUnion Financial Services Summit. Full PDF located at http://www.transunion.com/docs/business/eMarketing/finSummit2011/Life-after-Foreclosure.pdf

16. FICO Reveals Score Impact of Mortgage Delinquencies: http://www.smartcredit.com/blog/2011/03/24/fico-reveals-score-impact-of-mortgage-delinquencies/ from 3/24/11

17. FNMA Homepath website: http://www.homepath.com/

18. NSP Program Overview: http://www.hud.gov/offices/cpd/communitydevelopment/programs/neighborhoodspg/