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For Buyers, Short Sales Are Loaded With Pitfalls

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | October 26th, 2012

As thousands of would-be buyers have discovered, short sales can be a long shot.

Though selling houses for less than the amount owed on the mortgage has become commonplace, accounting for the lion's share of transactions in many markets, such sales are fraught with complications that can short-circuit the deal. There are no, uh, shortcuts.

Here, courtesy of members of the National Association of Exclusive Buyer Agents (NAEBA), is a short summary of the ways in which a short-sale purchase can be derailed:

-- Often the house is not advertised as a short sale. That's like advertising a house that is not really for sale, because the seller does not have the authority to sell the house at the advertised price, says the Phoenix-based NAEBA, whose members work only on behalf of buyers.

-- The negotiating process is far different in that the seller may not care how much is being offered since he won't be taking any money from the sale. The seller may be so anxious to get away from his underwater mortgage that he'll accept just about any offer. But the bank has the final say-so.

-- Many lenders will not even discuss a short sale with a seller until a purchase contract is in place. That means the buyer who makes the first offer is a guinea pig, because nobody knows whether the lender will even accept a short-sale offer.

Short sales are sometimes listed at a "ridiculously low price" just to get the ball rolling, the NAEBA warns. Similarly, a seller may agree to any offer, no matter how low and no matter whether it has a snowball's chance of being accepted by the bank, just so he can begin negotiations with the lender.

-- A short sale is only one remedy lenders can pursue, and often others are taking place simultaneously. For example, a foreclosure can take place at any time and kill the transaction, even after the lender has approved it. According to NAEBA members, in the vast majority of cases, an approval from the lender is not fully binding on the lender.

"Usually things work out," the buyers' agents report. "But short-sale contract provisions also usually give the lender a path to back away from any transaction."

Likewise, the seller and his lender may come to terms on a loan modification that allows the seller to keep the house. In these cases, the buyer and his agent -- and sometimes even the seller's agent -- may not have any knowledge that the seller is negotiating with his lender until their deal is done.

-- Short sales can be long, drawn-out affairs. The timelines are shorter than they used to be, but it can still take months, especially if the seller doesn't have his paperwork in order. And at any time during the process, the lender is free to change the rules, forcing everyone to start over again.

-- Once lenders approve the short sale, they often require the sale to close within a short period. Consequently, there is not enough time for the buyer to have the house examined by an independent home inspector. The necessary inspections can always be performed prior to the lender's approval. But the buyer loses that money if the lender rejects the deal.

Similarly, if the deal falls through -- even if the buyer gets tired of waiting and wants to move on -- the buyer will lose the money he's forked over for an appraisal, credit report and application fees paid to the lender.

Buyers may not even get their earnest money back. According to NAEBA, sellers are sometimes "frustrated to the point" of refusing to release the buyer's deposit, which can be thousands of dollars.

"Our members have had situations where a seller's lender approves a short sale, then decides to foreclose, and the seller takes out his frustrations on the buyer by not releasing his claim to the earnest money deposit," the buyers' agents report. "The deposits usually end up being returned, but not without additional legal expense and frustration for the buyer."

-- Unpaid homeowner association fees can kill the deal, as can unpaid taxes and utility bills. These become liens on the property that have to be cleared before the deal will close. And guess who's NOT going to pay them? That's right -- the seller and his lender, putting another cost on the buyer's shoulders.

If the seller has a second mortgage, that lender also has to approve the deal. Because subordinate lienholders stand to lose everything if the primary lender forecloses, they often agree to a smaller payoff. But their approval is still needed, which can draw out the process even more. Ditto for mortgage insurance companies.

-- The seller's emotional state can have a big impact on the process. Since there is little benefit -- they rid themselves of a mortgage they can't pay, but their credit is usually already damaged, they get no cash from the deal and they could be dinged with a deficiency judgment requiring them to make up the difference between what they owe and the selling price -- some start a short sale but lose motivation and refuse to complete it.

In other cases, the seller may be listing the house as a short sale just to delay the inevitable foreclosure. And in other instances, the seller makes it difficult to show the property.

"We have witnessed numerous situations where a showing is scheduled, and when the buyers and their agent arrive, the seller is actually inside the home but will not come to the door to let them inside," the buyers' agents warn.

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Combating the Neighborhood Eyesore

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | October 19th, 2012

With millions of homes in foreclosure -- and millions more owners having difficulty paying their mortgages -- there's likely to be one in every neighborhood: the property that has gone to seed.

Maybe the green lawn next door that you once envied has turned an ugly brown because it hasn't been watered, or the flower beds have been overtaken by weeds that have grown up to the windows. Or perhaps the grass hasn't been cut in weeks, and the house is surrounded by what looks like a wheat field.

If the neighborhood eyesore has been abandoned, the house itself has probably deteriorated. The windows may be broken or boarded up, the gutters could be sagging, the garage door might be hanging off its frame, and the roof could be covered with debris.

Perhaps the place has been taken over by rodents. Or maybe the neighborhood kids are using it as a hangout. Worse, homeless squatters could be using it as shelter -- or drug pushers might be using it as their place of business.

It's not a pretty picture. Yet scenes like these are playing out everywhere. No neighborhood is immune, and the impact on local property values can be chilling, even when the distressed property is still occupied and well-maintained.

Research from the Federal Reserve Bank of Cleveland shows that neighboring property values sag by up to 3.9 percent when a nearby house is in the foreclosure process but still occupied. When the offending house is vacant and the taxes aren't being paid, the negative impact on neighboring property values can be twice that much.

"Vacant homes can be more than just an eyesore. They can have substantial negative impacts on the surrounding community, impacts that are felt most acutely by the neighbors and communities that must cope with the dangers and costs of vacant buildings," Federal Reserve Board governor Elizabeth Duke said in a recent speech in New York.

All of this raises the question: What can you do if you are trying to sell your house and a ramshackle property happens to be right next door -- or even down the street -- from your cream puff?

For starters, if the offending property is still occupied, try being neighborly by explaining your situation and offering whatever assistance you can. You might even enlist your real estate agent to help; after all, it's in his or her best interest, too. And sometimes agents can help organize a communitywide effort to help a distressed neighbor.

If you live in a community governed by a homeowners association, let the property manager or the association board know of your dilemma. Associations often will pay to cut the grass and correct visible exterior maintenance issues. The cost will become a lien on the offending property that will have to be discharged before it can be sold.

Homeowners are generally free to choose how their property looks. However, if your neighbor rejects your offer or otherwise refuses to bring the outside up to a reasonable standard, you may be able to prod the local authorities to force him to act. Many jurisdictions fine owners for not maintaining their properties. And with the foreclosure problem getting out of hand, some state and local governments have enacted ordinances that hold lenders' feet to the fire.

If the place is abandoned, you need to find the owner. That may or may not be your neighbor's lender, depending on where the property stands in the foreclosure process.

Several communities are enforcing vacant property registration ordinances that require lenders to secure and maintain the property and call for stiff fines and penalties if they don't, whether or not the foreclosure is completed. To force lenders to fix up houses that are in disrepair, for example, Chula Vista, Calif., requires holders of troubled mortgages to pay fees and post a bond for each such property. Springfield, Mass., and Albany, N.Y., also command that each foreclosed property be registered.

That's why Joseph Bada of default management company Five Brothers in Warren, Mich., says "lenders will do everything in their power" to help.

"The last thing (lenders) want is an unhappy neighbor," says Bada. "They are very concerned. They look for such calls. Then they notify us, and we go out and take care of it."

If you've still had no success, you might want to take matters into your own hands. Not by going onto the property or into the house without permission -- that could be considered trespassing, no matter how altruistic your intentions. Rather, by erecting an obvious border between your place and the rundown house next door.

That might be a fence or even tall shrubs to help block the view. Either one is a fairly fast fix that could be worth the investment, says Margaret Innis, who operates Decorate to Sell, a home staging company based in Andover, Mass.

"If you have a great neighborhood, you want your buyers to see it," Innis says. "But if the house next door is an ugly duckling, you really have to think on your feet."

One possibility is to try to make sure prospects use a route to your house that doesn't take them by the offending property. Another might be to put a water fountain on your patio table. Or install plantation blinds so that light can stream in but the view does not -- "anything," says Innis, "that you can do to minimize the distraction."

At the very least, laws in every state afford you the right to prune trees, shrubs and roots that cross the line and intrude on your property. But proceed cautiously. Don't just hack away. You can't wield an ax to everything you don't like.

Make sure you don't go over the property line, be careful not to prune so much that the plant dies, and clean up your mess. If the debris is on your side of the line, it becomes your responsibility, not your neighbor's.

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Credit Unions Push Five-Year Mortgages

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | October 12th, 2012

Mortgage makers have always been a creative lot. But these days, credit unions seem to have supplanted traditional lenders as the most inventive.

Banks and mortgage companies are pretty much operating with one hand tied behind their back while they wait for regulators to lay down the law under the latest -- and much more restrictive -- legislation. But not credit unions, says Ed Roberts of the trade publication Credit Union Journal.

These not-for-profit institutions, which are owned and controlled by their members, had "much lower deficiency ratios" than banks during the mortgage meltdown, says Roberts. So they are "much more willing to experiment."

One of the most intriguing new products is a five-year, fixed-rate mortgage being offered by the National Institutes of Health Federal Credit Union, which serves biomedical and health-care professionals in Maryland, Virginia, West Virginia and the District of Columbia.

"We call it our 'Goodbye Mortgage' because it's perfect for our baby boomer members who want to get out of debt before they retire," says NIHFCU President Juli Anne Callis.

Say you're nearing the point when you're ready to slow down and enjoy the fruits of your labor, but you have a 10- or 12-year "tail" left on your current home loan. The loan is not throwing off the interest write-offs it used to, but you don't have enough cash lying around to pay it off.

Consider refinancing into a five-year, "see-ya" loan like the one offered by the NIH credit union. At today's record low interest rates, you might be able to cut the remaining term in half while paying no more than you were under your original loan.

Even if the payment is somewhat higher, Callis says, her members are going for it. They are at the stage in their lives when they have the financial wherewithal to pay a little more each month in order to be out of debt sooner rather than later.

"'How can we get out of debt by the time we retire?' is a constant theme we hear from our members," Callis says.

But the Goodbye Mortgage doesn't appeal only to empty nesters. Parents who want to dump their mortgage debt by the time their children reach college age also see the value of refinancing into a five-year loan.

Younger buyers who don't want to load up on debt are giving the loan a hard look, Callis says. And there's interest, too, among folks who want to pay off their loan on their primary residence sooner so they can buy a vacation home.

Shorter-term loans have always been available in the mortgage supermarket. While most people know about 15-year loans, few realize that lenders will sometimes go as short as 10 or even eight years. But five-year loans? They're practically unheard of.

What makes a five-year loan work, of course, is today's rock-bottom rates. Say you are on the back end of a 30-year, fixed-rate loan you took out 20 years ago at 7 percent. If you borrowed $200,000, your payment is $1,330.60, and your current balance is $144,602.

Roll that into a five-year loan at 2.5 percent and your payment would jump $703, to $2,033.88. But now you have a lot more discretionary income than you did 20 years ago, and if you throw that against your mortgage, you'd be debt-free in half the time.

"As long as you are in a position where the higher monthly payment is not going to affect your lifestyle, the Goodbye Mortgage works really well," says Mark Lawson, a NIHFCU loan officer.

Other credit unions are offering five-year adjustable-rate mortgages -- but with a twist. Whereas the typical five-year ARM resets annually after the initial five-year fixed period, the 5-5 adjustables offered by Affinity Federal in New Jersey and Alliance Credit Union in San Jose, Calif., and Wilmington, N.C., are 30-year loans that adjust only after every fifth year.

"For the past four years or so, it's been all about the 30-year fixed-rate mortgage. Adjustables had fallen off the map," says Jim Delyea of Alliance, which serves as a credit union for about 200 companies. "So we thought it was time to reintroduce it. It's almost like a new concept, it's been off the table for so long."

Both institutions are targeting their 5-5 ARM toward buyers who know they won't be staying in their homes for long periods, whose jobs dictate that they be able to move every seven to 10 years. It's more secure than a typical 5-1 ARM, says Delyea.

"You'll enjoy five years of low, locked-in payments, then an adjustment only every five years after that," the Alliance vice president says. "It's the perfect mix."

ARMs don't have a particularly great reputation, largely because rates can fluctuate so widely that borrowers could be hit with unexpectedly higher payments. But with a 5-5 ARM, even borrowers with longer-term horizons can anticipate what is coming and budget for it, says Affinity's Elizabeth McLaughlin.

At Affinity, New Jersey's largest credit union serving more than 2,000 businesses and organizations, the 5-5 ARM comes with a 3 percentage point cap at the first adjustment and a 2-point cap on subsequent resets. Over the life of the loan, the rate can rise by no more than 6 points.

These built-in protections are even better with Alliance's loan, which has 2 percentage point caps on each adjustment and a 5-point maximum over the 30-year term.

And, of course, if market rates should fall sometime over the life of the 5-5 ARM, there's always the possibility your rate could slide right along with them.

The product "is a good example of the financial industry finding better ways to execute a worthwhile concept rather than simply tossing it out entirely because there were problems associated with it," Alliance says on its website.

"Consumers did have problems with ARMs, but it didn't make sense to lock everyone into fixed-rate mortgages when ARMs could benefit a lot of homebuyers if they were merely structured a little differently to protect against high risks and extremes."

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