Question:

When your house goes into foreclosure, do they inspect it and decide if it is a tear down or do they just sell it as is?

 Answer:

If it is a straight foreclosure:  homeowner doesn’t make payments, lender goes through the legal process and ends up with the house, what happens next looks something like this.

 Lender tries to determine value by having several real estate agents do BPOs (broker price opinions) or having an appraisal. 

Lender contacts a real estate agent to assess the condition of the property and make recommendations.  Usually this is an agent with whom they work regularly, so s/he knows how the lender prefers to approach a foreclosure.  Sometimes a professional inspection will be done.

 Lender determines how much more money they are willing to invest.  If the home is newer and can be cosmetically improved, they may do so.  If the home is in terrible condition, they may sell it as is.  If the home is liveable except for some minor issues, they may have those done.  At a minimum, they usually have the property cleaned up if needed.  

Different lenders have different procedures – there is no one size fits all answer.  In our area, I don’t believe I have ever seen a lender tear down a structure, but I understand this does happen elsewhere

A Response to Comments on an Earlier Post

On October 27, 2008, I did a post regarding Bellingham real estate short sales, distressed properties & foreclosures.  In it, I defined these terms and others related to the process, and I also discussed the impacts on the Bellingham and Whatcom County real estate market.

Recently we received a comment on that post, raising some questions and making me realize we needed an update.  The discussion below consists of the comments and a response.

Comment: “ I am not sure this article answered the sentence preceding the link…’Bellingham and Whatcom County Real Estate is being increasingly affected by short sales and foreclosures…’  In what way is it being affected?”

Response:  The short answer is price.  Particularly when the market first started to see a number of short sales, they were often priced substantially below list prices for “normal” sales.  Some of these prices were “real” – that is, the home actually sold close to the listed price – but many were designed to create bidding and sold for considerably more than the list price. This is not seen as often now due to changes in MLS rules attempting to bring more credibility to pricing.  Whether the prices were real or not, they created a very strong impression that prices had dropped substantially.  Even if the list prices were

realistic, short sales and bank owned properties typically sold for less money than “normal” properties.  As more distressed properties entered the market, “normal” sellers realized they needed to compete, and all prices have drifted lower.  

            As of November 30, 2011, 13% of the homes for sale in Bellingham were distressed, 55.6% of the pending sales were distressed, and 25.4% of the sales in November 2011 were distressed.  It’s pretty obvious that buyers are looking for a good deal, and the “normal” sales have to compete.

Comment: “Real Estate prices are still too high in Whatcom.  More specifically, too high for this economy.  The cost of buying a home is out of balance with incomes, so either incomes need to rise or housing needs to fall.  I own a home and … what my home is “worth” greatly exceeds what I paid for it only a few years ago even after the bubble burst…”

Response:  Let’s begin by defining “worth or value”.  Unless a home has recently been sold, no one knows what it is “worth”, because that is determined by the price to which a ready, willing and able buyer and a ready, willing and able seller will agree.  A variety of methods are used to estimate value, but they do not establish it.  A current example from our practice:  a home was appraised at $235,000 in August.  The list price has gradually been reduced until it is now listed at $185,000.  The seller just accepted an offer of $175,000, and that could go down after the inspection is completed.  I can virtually guarantee that any home sold in 2005 or thereafter is worth less than the sale price at that time, unless very significant upgrades have been made.

            Affordability is a mixed bag.  According to the Washington Center for Real Estate Research at Washington State University, during the 2^nd quarter of 2011 (the most recent stats available), the Homeowner Affordability Index in Whatcom County was 128 (5^th lowest in the State of Washington).  The first-time buyer Homeowner Affordability Index was 63.7 (also the 5^th lowest in the State of Washington).  The higher the index number, the more affordable housing is relative to income.

Comment:  “Bank or mortgage companies are part of the problem.  They make statements that they can’t sell a house for less than XXX or refuse to sell a home at a loss…  Until banks “let go” and clear the market of these properties (by selling at reasonable prices even if at a loss to the bank to eager first time buyers) this market will continue to struggle.”

Response:  Lenders have been part of the problem, although not necessarily because they aren’t willing to take the losses.  Some of them, particularly the surviving very large lenders, still don’t have efficient systems in place to process these

properties…particularly the short sales…which leads to incredibly long waiting times for approval, properties being sold at foreclosure while they are in negotiation for a short sale, loan modifications being denied that could work for both parties, homeowners remaining in homes after skipping payments for months without notice of default, etc. 

            The flip side, however, is that in areas with massive numbers of properties in default, the delays have helped to feed homes into the market gradually rather than in one big batch.  This may have been a godsend to “normal” sellers by helping to keep prices somewhat more stable. 

            In the State of Washington, a new law took effect last July with requirements that may help distressed sellers negotiate more effectively and in a more timely manner with their lender.

An Observation:  It is worth repeating the numbers regarding distressed and “normal” sales from above: As of November 30, 2011, 13% of the homes for sale in Bellingham were distressed, 55.6% of the pending sales were distressed, and 25.4% of the sales in November 2011 were distressed.  Note the disparity between the percentage of active listings which are distressed, (the lowest percentage of the 3), the percentage pending sales which are distressed (the highest percentage of the 3) and the percentage of homes sold in November which were distressed.  A “normal” sale typically closes in about 30 days.  Most bank-owned properties close in 30 to 45 days.  A short sale may never close, and the default period of time to hear back from the lender according to our contract forms is 60 days…and it typically takes an additional 30 days to close.  Buyers and agents are learning about the frustrations, delays and risks of a short sale, which means the price for one has to be really good to tempt a buyer to go through the process.  This may actually lessen their impact on prices as fewer buyers want to mess with them.

On July 22^nd, the Mortgage Foreclosure Fairness Act went into effect in the Washington State, and it could have a profound impact on the experience of distressed homeowners who are trying to find a solution. 

First, let’s look at who it impacts:

• Homeowners currently or going into default.  Default is when a borrower is 30 days or more behind in their loan payments.
• Owner-occupied residences only.
• Lenders who foreclosed at least 250 owner-occupied loans in the past 12 months.

Now let’s look at what it requires:

• Affected lenders must notify owners defaulting after July 22nd of their rights under this law by mail (twice) and telephone (3 times).  Owners who defaulted prior to July 22 can still contact the lender to claim these rights, but the lender is not required to notify them.
• If an owner responds, the lender cannot file a notice of default or proceed with a foreclosure currently in process for 90 days from the date of the first notice.  If the owner does not respond, the foreclosure will proceed.
• The 90 days is a period during which the owner and lender can negotiate regarding the loan.  All possibilities are on the table – loan modification, short sale, deed in lieu of foreclosure, deficiency requirements, credit reporting, etc.
• The owner may demand a face to face meeting with the lender and may have a housing counselor (paid by the state) or an attorney present.  There are significant advantages to the owner to have such a representative, because they can demand mediation with the lender.  The owner alone cannot make such a demand. 

Advantages and process of mediation:

• Housing counselor or attorney notifies the WA State Dept of Commerce, which will appoint a mediator and notify the lender that mediation will be scheduled and conducted within 45 days.  They will also notify the lender of the 90 day restriction on the foreclosure process.
• Owner and lender split the cost of the mediation:  $400 for 3 hours, paid in advance.
• Lender representative who has the power to make a decision must be present or available during the mediation.  No waiting for months while it moves from desk to desk.  This is huge!
• Options that will allow owner to keep the house or disposal plans other than foreclosure must be discussed.  Failure of the lender to meet certain standards can result in a determination of “bad faith”, potentially stopping a foreclosure and allowing a Consumer Protection Act claim by the owner.

Funding:

            Lenders subject to this program pay $250 into the fund every time they file a default notice in the State of Washington.

What You Most Need to Know 

If you miss a payment and receive a call or letter from your lender, RESPOND!

If you missed a payment prior to July 22^nd, call 1-800-894-HOME (4663). 

This law finally gives distressed homeowners an opportunity to have a meaningful interaction with their lender that can lead to a timely, negotiated solution to a problem they share.  It’s about time, so spread the word!

For those not familiar, a short sale is a property sale in which the proceeds from the transaction are insufficient to pay all the liens and seller closing costs. Since a lender has a lien on the property in the amount of the loan, if a sale will not generate enough money to pay the loan amount and the closing costs, a seller cannot transfer title to a buyer unless the lender agrees to accept less than the amount owed.  The process of such a sale is that the seller picks a list price, the seller and buyer reach agreement and that agreement is submitted to the lender for approval.  Since it is the seller who has established the list price, rather than the lender, no one knows what the lender will actually accept.  The lender, of course, would like to get as much of the loan back as possible, so that approval may take months, or may never be given.  In the meantime, the seller and buyer must simply wait. 

Recently, the Washington State Department of Licenseing  issued at Short Sale Advisory intended to provide information to home owners and home sellers who might find themselves in a foreclosure or short sale circumstance. Many home owners are not sure where to turn when they find themselves owing more money on their home than it is worth this advisory serves to help guide home owners with the process and inform them that other options might be available. If you would like to view the Short Sale Advisory you may do so here.  While reading the advisory you will learn the things you need to do before proceeding with a short sale, short sale considerations, and options that maybe available to you other than short sales.

To view a complete list of Short Sales and Foreclosures in Bellingham and throughout Whatcom County visit www.JohnsonTeamRealEstate.com to search for properties currently for sale. You just might find that real estate deal you have been looking for.

Ask your lender or loan servicer about options for avoiding foreclosure. “Inquire about your eligibility for the government program and the possibility of lowering your monthly payment by reducing the interest rate, extending the length of the loan or forgiving some of the principal,” suggested Sam Frumkin, an FDIC Senior Policy Analyst.

If you think you need help working with your lender, contact a housing counselor approved by the U.S. Department of Housing and Urban Development (HUD). A trained, reputable, non-profit counseling agency will provide free or low-cost services. For a referral to a HUD-approved counselor, see Foreclosure Prevention Resources.

Beware of foreclosure rescue and loan modification scams. These frauds typically involve criminals who charge large upfront fees and falsely “guarantee” to rescue a home from foreclosure. Homeowners should avoid any company or individual who requires a fee in advance, “guarantees” to stop a foreclosure or modify a loan, or recommends to stop paying or speaking with the lender. In some cases, homeowners have lost their homes while waiting for results from con artists who had promised to help them. A new Federal Trade Commission rule prohibits these practices by nonbank providers of mortgage relief services. The use of a HUD-approved housing counselor also can help you avoid foreclosure rescue scams.

Learn more about the government’s programs. Go to the Web site http://www.makinghomeaffordable.gov/ for detailed information. You can also learn more by speaking with your lender, loan servicer or housing counselor. The Web site can help you determine if you may be eligible, but only the servicer of your loan can tell you if you qualify. Here’s a snapshot of the main programs:

• The Home Affordable Modification Program is designed to help as many as three to four million homeowners at risk of losing their homes by reducing the monthly payments on their mortgages.
• The Second Lien Modification Program enables homeowners to reduce the cost of their second mortgage if their first mortgage has already been modified under the Home Affordable Modification Program. Examples of second mortgages include some home equity loans and loans that homeowners may have taken to help with the down payment on their home.
• The Home Affordable Refinance Program is intended to help people who have been unable to refinance into mortgages with a lower interest rate because their homes have decreased in value.
• The Home Affordable Foreclosure Alternatives Program is designed for homeowners who can no longer afford to stay in their homes but want to avoid the stigma of foreclosure. This program is for people who agree to leave their property for more affordable housing after either selling the home for less than what they owe on their first mortgage or voluntarily transferring ownership to the loan servicer.

Source:  FDIC.gov

If you have real estate questions or are wondering what the value of your home maybe feel free to call (360) 303-2734 or visit www.JohnsonTeamRealEstate.com to view the latest real estate deals and information.  On the website you will also be able to search for the latest Short Sales and Foreclosures that are currently listed in Bellingham and around Whatcom County.

We had a local bankruptcy attorney speak at our sales meeting this past week and were given a whole new perspective on short sales.  We all know that many people are in trouble with their home loans and other debt, and we hear a great deal about short sales and foreclosures, but this is the first time I have heard bankruptcy discussed as an alternative.  If spoken of at all, it is usually as a last resort, to be avoided if at all possible – perhaps because the perception is that the bankrupt person is left with nothing and can get no credit for 7 to 10 years.  It seems that isn’t the reality. 

Before continuing, let me emphasize that I am not an expert in this area and strongly advise you to talk with an attorney before taking any action.  The purpose of this article is to get you thinking enough to thoroughly explore your options.

There seem to be 2 kinds of bankruptcy that are most commonly used by individuals:  Chapter 7 and Chapter 13.  They are quite different, but in neither case is the individual stripped of everything (s)he owns.  Chapter 7 takes about 4 months to complete.  Assets are sold and creditors are paid according to the type of security they have (a mortgage would be a strong security interest).  The person filing can keep up to $125,000 of their home equity (if they have no equity, they can keep up to $11,000 per individual or $22,000 per couple from other assets).  They can keep all retirement accounts.  They can keep up to $3200 value in a vehicle and a variety of household goods, clothing, etc.

If someone wants to keep their house, they would look at Chapter 13.  This puts a foreclosure on hold and provides for a financial reorganization of the filer’s assets and liabilities.  A plan is submitted to the court to bring the filer current with the debt over a period of 3 to 5 years, and portions of the debt may be shed (sounds like 2nd mortgages and credit cards are particularly vulnerable).  Part of the plan may be a mortgage modification under the federal HAMP program that can lower interest rates or principal.  The attorney calls Chapter 13 bankruptcy “a debt reorganization plan that works,” unlike scams advertised on late night TV or  phone calls from telemarketers who promise, but can’t deliver. 

Banks servicing loans held by Fannie Mae or Freddie Mac are required by law to participate in the HAMP (Making Home Affordable) program although some large lenders seem to make it so difficult that it simply never happens.    A person does not have to be in bankruptcy to use the program, but it sounds as though a letter from a bankruptcy attorney moves it along much more quickly. 

So why does the attorney advise against short sales and in favor of bankruptcy?  In a short sale, the homeowner may very well end the process without their house but still owing money to the lender (it is called “the deficiency) because the lender may not otherwise give permission for the sale.  Neither form of bankruptcy leaves debt hanging over the filer, and with Chapter 13, they may also keep their house.

This is a very simple overview of a complex process.  If you are behind on your mortgage, underwater in your home value or struggling to pay your bills, check out all your options.  The impact on your life and your family is too big to make an uninformed decision.