Housing BUZZ

What Every Buyer Needs to Know Before Buying Short Sales and Foreclosures (REO's)

Buyers face many challenges in today's real estate market, from finding the right purchase financing to finding the right property. Buyers today shouldn't have to worry about possible "buyer traps" once they have found the right home. Due to the current economic climate, i.e. the housing bust, buyers may find that the majority of homes in the market they are looking at will include properties listed as both "short sales" and "REO" properties as well as the traditional sales that once dominated our market just 3 to 4 years ago.

Here is what you should know about the different types of property sales that you may encounter in today's real estate market and how each kind of sale can create their own risks and challenges.

 

Short Sales

For any of you that invest in the stock market, we're not talking about short selling a home the same way you would short sell a stock. A short sale on a home happens when the homeowner must sell their property for less than what they currently owe to their mortgage holders.

A short sale typically is executed to prevent the homeowner from having their property foreclosed or repossessed by their bank. Often a bank will choose to allow a short sale if they believe that it will result in a smaller financial loss than the foreclosure proceedings.

A short sale requires much paperwork and preparation on behalf of the borrower, and the lender agrees to discount the loan balance due to an economic or financial hardship on the part of the borrower. Typically, before applying for a short sale, the seller must have a ready buyer and all the paper work prepared to present to the lender.

Special Considerations for the Buyer:

Since a short sale transaction is never a guaranteed solution for the seller, i.e. the seller's bank is not obligated to accept a short payoff on their outstanding loan, buyers who decide to make offers on short sale properties should be aware of several important considerations:

• Short sales can take any where from a little as 2 months to as long as 6 months to complete successfully - since most lenders will not even consider a short sale until the seller has become delinquent on their mortgage, and not until the seller has been able to market the property for sale and produce and offer, there is usually no way to expedite a short sale transaction. Depending on how the buyer makes their offer they can find that their good faith deposit can be tied up for several months or longer. The acceptance of the short payoff by the seller's lender is only a contingency of the offer, so buyers can find themselves in a contractual obligation without a definitive time period to close escrow.
• Short sellers usually do not have the resources to pay for inspections or repairs - since a short seller is most likely facing foreclosure, they will usually not have the resources to pay for any inspections or repairs that might need to be made to the property. Even though the buyer will most likely front the cost of the inspections, the real estate agents may still be able to negotiate the repairs of the property with the seller's lender footing the bill.
• Short sellers may have more than one lender - some short sales require all of the seller's lenders' approvals before the transaction can be successfully closed. This can add additional complications depending on whether or not the seller's loans were purchase money or refinanced, as well as the way that different banks handle the short sale process.
• Short Sales may require extra monetary compensation to junior lien holders - when there is not enough equity in the property to cover both the second and the first mortgage, some junior lien holders (second mortgagor) will require more compensation that what the senior lien holders (first mortgagor) will allow to be paid from their proceeds. This can cause a complication in which the buyer must pay the junior lien holder extra monetary compensation over and above the actual purchase price of the home - increasing the buyer's down payment and closing costs significantly. 
• Buyers can find themselves ousted from a short sale if a higher offer is received prior to the short sale acceptance - Buyers may submit an offer and wait 2-3 months as the short sale approval process is worked out, but all the while the property may still be marketed for sale and the seller's lender may require that all offers made be presented to them. This may allow another offer to be made at the last minute and accepted in front of an earlier offer.

As you can see, there are many pitfalls to be aware of when a buyer considers making an offer on a short sale. Buyers should seek the assistance of a professional who has had experience and is knowledgeable in short sale transactions.

 

Real Estate Owned (REO's), a.k.a. Foreclosures

The other common sales transaction that a buyer will find available in today's market is an REO property. REO, which is an acronym which stands for Real Estate Owned by a bank, is exactly that, a property that has been foreclosed and repossessed by the bank that made the loan on the property.

From what you have probably heard about foreclosures you may expect to get the best deal by purchasing these kinds of properties, but BUYER BEWARE, especially when purchasing a foreclosure, a buyer can unknowingly inherit costly repairs, hazards, and more. Here are a few considerations that should be made when shopping for REO properties:

• REO's may not always be the best deal - Many times once a bank has repossessed a property, they will turn it over to a separate asset management department that specializes in mitigating the banks loss by marketing the property for sale a price that will cover as much of the loss as possible. Although REO’s are mainly sold by local realtors, sometimes these asset management companies, most being located out of state, can be unrealistic in their perception of pricing for the property meaning the home may be marketed at a higher price than what the true market value may be. Although the bank wants to get the best price possible they have no interest in "dumping" real estate cheaply.
• Limited disclosure when purchasing REO’s – Since the banks that repossess these properties have never lived in them, they are excused from providing certain disclosures regarding the condition of the property to the buyers. Buyer’s of REO’s are truly taking a risk and must be sure to order all possible reports and inspections that may be suggested by their agents and other advising professionals.    
• REO properties tend to be in run down condition – Buyers need to think twice about purchasing an REO property, especially if they are using FHA financing, as most REO properties need a considerable amount of work just to make the home livable and most FHA loans require the property to be an inhabitable condition. Well, a lot of REO properties for sale today may be distressed as a result of simple neglect, intentional vandalism, or both. If you think about it, if the previous homeowner knew they were defaulting then they either could not afford to or just plain refused to spend money on repairs needed to maintain the property. And as for intentional vandalism, when some homeowners lose their properties through foreclosure they have been known to take their anger and frustration out on the property. It’s not uncommon for them to strip a property of its fixtures, cabinets, appliances, and even copper plumbing, as well as damage the property by smashing out the walls, breaking window panes, pouring cement down the toilet, or flooding the property by leaving the faucets on.
• Financing can be restricted on an REO property – Due to their often neglected or vandalized condition most lenders will require the property to be inhabitable and free of all possible health and safety issues. This often means that the buyer has to front the bill to repair the property to an inhabitable condition. This can put the buyer at additional risk as they would be putting money into a property that they don’t own yet, and if there is a glitch in their financing or with the bank selling the REO, they may be out the money they spent on any such repairs if the sale does not close.

A bank owned property might not be a great bargain. Do your homework before making an offer. Make sure that the price you pay (if you’re successful) is comparable to other homes in the neighborhood. Consider the costs of renovation, including time to complete them. Don’t get caught up in a “bidding war” and pay over market value... It’s an old myth that “foreclosures” are always a bargain.

 

Final Considerations

It is also important realize, that for every horror story that you may hear about buying either a foreclosure or a short sale, there are multiple success stories in which buyers have found wonderful opportunities and were able to pick up these properties at great values in a successful manner. What buyers need to realize is that they should seek the assistance of a real estate professional that is knowledgeable and experienced in these types of transactions to help guide them through all the potential pitfalls of purchasing such a property.

How to Determine Who Owns Your Mortgage

When trying to contact your lender to work out a payment plan or some other deal, knowing who owns your mortgage can be very helpful. Unfortunately finding out is not as easy as it sounds.

In a perfect world you should be able to call the phone number on your last mortgage statement or the number in your payment coupon book and connect directly with your lender. But more often than not, this merely puts you in touch with the mortgage servicer - the business that collects and processes your payments. And in most cases, the servicer is either prohibited from divulging the true identity of your lender or the person you’re dealing with has no idea who your lender is or even what you may be asking.

During the height of the subprime lending, risky mortgages along with good mortgages were often sliced and diced and repackaged into mortgage backed securities (MBS’s) that were sold and traded on Wall Street, so the end investor owning a portion of your loan may be impossible to track down. And since the mortgage meltdown sank many banks and other lending institutions which were taken over by other banks or regulators, often the information regarding the original investors behind your loan may have been lost.

Creating another level of anonymity to the already confusing mortgage servicing process, many of these investors and banks subscribe to an automated system called MERS (Mortgage Electronic Registration System) that keeps track of who owns the mortgage and note as it changes hands among investors, as well as who services it for that investor. But customers who attempt to look up the investor behind their mortgage on the MERS registry will usually not find it. Rather, MERS makes the name and contact information of the servicer available, but not the name and contact of the investor. That information is for the servicer or investor to disclose, not MERS.

So, what should you do if you’re trying to track down your lender? Take the following approach:

Call the phone number on your most recent mortgage statement or your payment coupon book. This will put you in touch with the mortgage servicer who may also be the lender who owns your mortgage or at least be able to tell you the name of your lender. (Remember, the person may not know or may not be permitted to tell you so you may have to try several different representatives or even their managers).  

Chances are that if your original loan amount is below $417,000 and your loan is a fixed or a hybrid loan (short term fixed that turns adjustable) then you probably have an agency backed loan which has ended up at Fannie Mae or Freddie Mac, the investors behind conventional agency loans (see their contact information below). However, if your original loan amount is greater than $417,000, is a monthly adjustable rate mortgage (also called a Pay Option ARM), or a subprime mortgage, then your loan is probably on of the many loans that were sliced and iced and sold as a mortgage backed security on Wall Street. 

You can try to contact Fannie Mae (FNMA). If they own the note, they may provide the identity of the investor: 1-800-7FANNIE (1-800-732-6643).

You can fill out an inquiry on the website by Freddie Mac (FHMLC) by visiting them at https://ww3.freddiemac.com/corporate/. If they own the note, they may provide the identity of the investor.

If you have an FHA loan, contact FHA’s National Servicing Center to determine who owns your mortgage: (800) CALL- FHA / (800) 225- 5342 or send an email to hsg-lossmit@hud.gov

If the mortgage is listed as MOM or has a MIN (Mortgage Identification Number) assigned to it, you can search the MERS database by mortgage identification number (MIN), your name and social security number, or the property’s address. Dial the toll-free MERS Servicer Identification System at 888-679-6377 (an automated touch-tone system) or search online at MERS Servicer ID.

If you know the name of the bank or other lending institution that owns your mortgage but have no contact information for them, check out the HOPE NOW Mortgage Lender’s Directory.

*One of the most important steps to saving your home from foreclosure is to get in touch with your lender immediately. Better yet, hire a qualified attorney with experience in foreclosures and loan modifications to contact your lender on your behalf, so you have legal representation on your side. You can almost be certain that your lender will have a slew of attorneys reviewing the paperwork. You should have one to watch your back, too.

Why your Personal & Financial Information is Safer with a Mortgage Broker than with a Bank

Seldom is so much private financial information divulged as when you apply for a mortgage. Yet a recent survey suggests that not all providers of home loans may be handling such private material as carefully as they should be, and surprisingly the bigger the bank, the less control there is to keep your private information safe.

The survey, conducted late last year by Wolters Kluwer Financial Services of Minneapolis, asked executives from roughly 350 banks, credit unions and mortgage companies how they transmitted financial data. About 62 percent used the Internet, but nearly two-thirds of that group said they typically used traditional e-mail services rather than secure online delivery technologies, like e-mail stored at a password-protected Web site.

Art Tyszka, the director of document services at Wolters Kluwer, which sells secure document delivery software to financial institutions, said that the traditional transmission methods could leave borrowers at heightened risk for identity theft and other forms of financial fraud.

Although the survey was conducted by a company trying to sell enhanced security programs to such lenders, it is still valid enough data to point out the possible holes that currently exist in most major banks data systems. In fact, any good 5^th grade hacker can easily intercept financial information transmitted by email these days, either on the sending side or even the receiving side – which it turns out is exactly where most cyber criminals have been directing their attention these days.

E-mail messages typically travel over a network of Internet servers, and hackers can prey on the data at many different levels – at the most poorly protected of those servers or from the origin of the email, the residential internet customer’s own router which is usually provided directly by Comcast or AT&T and is extremely outdated and easily corrupted. Use of e-mail provides hackers easy access to scan messages for Social Security numbers, bank account numbers, passwords, loan terms or other commonly used mortgage information.

The more secure systems allow users to upload important personal information directly to secured servers in an encrypted form or direct a recipient to a Web site where information can be accessed only with a password. This way any hackers scanning for information over easily accessible servers will only find encrypted information and not your bank account or social security numbers.

But even these secure methods are not completely foolproof. As it can be difficult to control a staff of tens of thousands, so some communications can squeak outside the normal secure channels.

Though larger banks usually use the more secure e-mail method, while smaller community banks or credit unions may not want to pay for encryption systems, consumers may actually be safer using a broker than a big bank – since with banks, hackers know exactly where to go for the largest amounts of information.

Added, many smaller brokers are using cost efficient loan origination systems that help them transmit documents securely by encrypting the data before it is sent out over less protected servers.