1. Homeowners in Jeopardy
In this module:
• Homeowner options
• Buyer considerations in short sales
1-1
Providing Effective Service
Effective service means:
• Understanding process and parties
involved in transaction
• Knowing what transpires from
seller’s side of transaction
1-2
Case Study #1
• Missed one mortgage payment
• Husband laid off
• Living on credit cards
• Other reasons why homeowners
could be behind in mortgage
payments?
1-3
Pre-Foreclosure
• Anytime homeowners are behind
in mortgage payments
• Length of pre-foreclosure varies
• During pre-foreclosure period,
homeowners are notified of
mortgage payment default
1-4
Options
1. Refinance
2. Sell and bring $ to closing
3. Lender workout
4. Short sale
5. Deed in lieu of foreclosure
6. Foreclosure
7. Do nothing or walk away
1-5
Refinance
• Homeowners who are current with
mortgage may be able to refinance
to 30- or 15-year fixed-rate loan via
Home Affordable Refinance
1-6
Eligibility Criteria for Home
Affordable Refinance
1-7
Home
 Owner occupied
 Is one- to four-unit home
Existing
mortgage
 Owned or backed by Fannie
or Freddie
 LTV is above 80% but not
more than 105%
Borrower
 Current on existing mortgage
 Has income to support new
mortgage payments
Sell and Bring $ to Closing
• Although many homeowners may
not have cash to cure deficiencies
at closing, they may have liquid
assets:
> U.S. Treasury bonds
> Individual retirement accounts
(IRAs)
1-8
Lender Workout
• Workout options include:
> Forbearance
> Reinstatement
> Repayment plan
> Loan modification
> Sign over property to lender
1-9
Lender Workout
• 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
1-10
Lender Workout
• For many lenders, loan
modification is suitable option
1-11
Eligibility Criteria for Home
Affordable Modification
Home
 Owner occupied
 Is one- to four-unit property
Existing
 Unpaid principal balance ≤
mortgage
$729,750 for one-unit prop.
 Originated on/before 1-1-09
 Payments exceed 31% gross
monthly income
Borrower
1-12
 Experiences fin. hardship
 At risk of imminent default
or in default
Home Affordable Modification
• Borrowers put on 3-mo. trial period
w/modified interest level and
mortgage payment.
• If borrower is successful in making
payments, mortgage servicer
executes agreement with new
interest rate.
1-13
Short Sale
• 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
1-14
Short Sale
• 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
1-15
Short Sale
> 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
1-16
Foreclosure Alternatives
• For borrowers who meet eligibility
criteria for Home Affordable
Modification, but don’t qualify for
modification or complete process
• Documentation will be
standardized and incentives will be
offered to borrowers and servicers
to facilitate short sales
1-17
Foreclosure Alternatives
Incentives  $1,000 for servicers for
successful short sale or
deed-in-lieu-of-foreclosure
 $1,500 for
borrowers/homeowners to
help with relocation
expenses
 Up to $1,000 toward cost of
paying junior lien holders to
release liens
1-18
Foreclosure Alternatives
Features
1-19
 Depending on market, up to
one year to market and sell
the property
 No foreclosures may occur
during marketing period
 Servicers may not charge
fees to borrowers to
participate
 Servicers may not negotiate
lower commission after
offer has been received
Deed in Lieu of Foreclosure
• 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
1-20
Foreclosure
• If homeowner is facing foreclosure,
real estate professionals should
instruct homeowner to contact
lender immediately
1-21
Do Nothing or Walk Away
• 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
1-22
Rescue Scams
• 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
1-23
If Short Sale Is Best Option
• 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
1-24
If Short Sale Is Best Option
• 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
1-25
If Short Sale Is Best Option
• When you have determined that
seller owes more than property is
worth, advise seller in writing to
obtain separate legal, credit, and
tax advice
1-26
If Short Sale Is Best Option
• Contact loss mitigation dept:
> Finding decision maker often one
of biggest challenges
> Varying opinions on when to
contact the lender
1-27
If Short Sale Is Best Option
• Obtain borrower’s authorization to
release information in order to
contact lender
• See Figure 7 for sample form
1-28
If Short Sale Is Best Option
• 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
1-29
Counseling Buyers on Short Sales
• 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?
1-30
Counseling Buyers on Short Sales
• 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.
1-31
Counseling Buyers on Short Sales
• 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?
1-32
Case Study #2
• 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?
1-33
Showing Short-Sale Listings
• 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
1-34
Showing Short-Sale Listings
• 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
1-35
Buyer Issues
• There may be multiple lien holders
• Seller acceptance of short-sale
offer does not guarantee bank
approval
• Documentation requirements from
each lender may vary
1-36
Buyer Issues
• 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
1-37
Buyer Issues
• Unless contract stipulates
otherwise, earnest money deposit,
mortgage application, home
inspection and attorney review will
take effect upon signature of seller
1-38
Buyer Issues
• 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”
1-39
Discussion Questions
• How would you counsel buyer
client on these short-sales issues?
> Home inspection
> Earnest money
> Property condition
> Additional lien holders
> Mortgage application
1-40
Don’t Practice Law
• 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
1-41