Question: I am thinking about conducting a short sale on a condo I have in Palos Verdes. I have a home in Orange County that has some amount of equity, and I’m doing alright in my 401k. Doing a short sale with my mortgage lender will not risk my other assets, will it? If I am unable to do a short sale with the condo and end up having to lose it in foreclosure, what will happen? And will the tax liability be the same for either outcome?

Answer: If you bought the Palos Verdes condominium with a mortgage loan, a foreclosure will terminate the bank’s rights to any of your other assets. If the mortgage lender agrees to let you do a short sale, you should also end up with no liability to the lender, unless part of the agreement was reimbursing the lender the discrepancy of your loan and the sale.

Basically, you shouldn’t have any liability for the short-sale-difference unless that was originally part of the agreement.  Then of course you’ll be responsible to those payments in  whatever form you agreed to make them.

As for the tax issues, keep in mind that the IRS doesn’t recognize any tax liability whatsoever for forgiving non-recourse debt.

Just as recently as five years ago, real estate short sales were fairly uncommon, and before that, they were extremely rare. However, in the current economic climate of high unemployment and lots of mortgage default, many more homeowners are turning to short sales to compensate for the fact that home values are falling.

According to a recent study conducted in California, almost twelve percent of all sales in the real estate business were short sales in the past few months.

This sudden onslaught of popularity of the this maneuver has left bankers at a loss- short staffed and undertrained, they are trying to keep up their service people numbers to contend with all of the new loan modification requests and short sale dealings, each of which is very time consuming and labor-intensive to execute.

There is a very sharp learning curve for both mortgagers and mortgagees, as well as loss mitigation specialists and other intermediaries. Banks are striving to close the short-sale close gap, making sure that a higher percentage of houses that go on short sale actually get purchased. Though home sales are on the decline in general.

Banks in today’s market are made to deal with higher demand for mortgages and mortgage/loan services, including but not limited to refinancing and loan modifications, than ever before. The backlog at lending and banking companies is starting to effect everyone’s ability to access loss mitigation services.

In areas where unemployment is booming, mortgage delinquencies and foreclosures are also on the rise, and even those who manage to successfully secure loan modifications could be in trouble again in home balues continue to fall, or incomes continue to drop.

Lenders are doing their best to expand their loss mitigation services as requests skyrocket, but officials in the industry have commented that the delays are greatly hindering everyone’s efforts to revive the housing market. Loan modification programs are suffering, and short sales are taking way longer than they should. Banks were not prepared for this.

Senators have written to the Secretary of Housing and Urban Development, Shaun Donovan to help formulate a new strategy to help and coerce lenders to help homeowners quicker and more often. Even HUD-approved counselors are having a hard time getting homeowners access to loss mitigation departments.

It takes a very savvy counselor or professional to get banks’ attention and expedite the process. California loan modifications especially are on the rocks.

When a loan modification just doesn’t make sense, avoiding real estate foreclosure means getting pretty savvy and creative with different options: namely, the shortsale.

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A shortsale is the idea that a lender will be willing to accept all the proceeds from the sale of a house in exchange for forgiving all of the homeowners debt, even if the house is no longer worth enough to pay off the principle and interest. It definitely requires the cooperation of the bank or lender in question, but why would they agree to this if they are taking a loss?

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The entire transaction is anything but simple- these types of short sales can take months to negotiate, selling them at the market value of what they are worth today, instead of what they were originally purchased for. (The average time to complete such a transaction is anywhere from two to six months.) And in the end, it often makes financial sense for lenders to accept this, because on average real estate foreclosures result in about forty percent loss to the lenders, and short sales on average only lose about nineteen percent.

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However, one technique that lenders have begun to do to try to get more money is a ‘deficiency agreement’, in which the lender requires that they mortgagee needs to eventually pay back the difference, or the loss, in full. It is better to try to negotiate a situation in which the bank itself will ‘eat’ the discrepancy.

Although in the past investors would push servicers to foreclose on those who couldn’t make their payments on their mortgages, today investors are all about loss mitigation. Foreclosure, it turns out, is a costly hassle, leading to thousands and thousands of dollars of loss. Extrapolating these losses over entire portfolios, or even over the entire country, they add up to billions of wasted dollars.

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Obviously, investors and government agencies don’t like that, and they have begun convincing/enticing/forcing the servicing community to help discover new methods of loss mitigation, create special departments for their execution, and generally to pursue less wasteful alternatives to foreclosure. These new plans include tactics such as delicate loan modification negotiations, forbearance plans, deed-in-lieu of foreclosure, and real estate short sales. Now, every single operation features such programs, it is assumed. And even better, it works. The huge losses of sudden foreclosures and defaults are largely a thing of the past, replaced by the smaller losses of loan mods, the short sale, and other mitigating actions.

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Sadly, this improvement is not without its drawbacks. Loan servicers, especially the ones in residential situations, have become bogged down in layers of litigation that come with loss mitigation, because trying to reach a workout of loss mitigation while simultaneously, and often secretly, pursuing the channels of foreclosure created a lot of angry people claiming that they were engaging in deceptive practices.

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There is a court case that set a strong precedence in these matters. Richter v. Bank of America (1991) led to a court awarding Richter about three million in damages against a lender who had ‘breached it’s duty’ to deal in good faith towards the goal of restructuring a loan, and had engaged in negligent misrepresentation by going for foreclosure while ‘taunting’ the borrower with promises of a loan modification.  It was a landmark case, demonstrating the power of expectations for genuine loss mitigation efforts over the old foreclosure practices or unscrupulous fraud. It also made servicers nervous and hesitant to engage in loss mitigation efforts if foreclosure might be legally simpler.

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However, most lenders have come to the conclusion that the risk to their interest is worth the prevention of major loss during foreclosure or short sale.  And there are some pretty simple and effective steps lenders can take to protect themselves from potential risk, not the least of which is hiring a loss mitigation specialist.

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The most self-explanatory, but often hardest to execute plan is to simply “be a straight shooter”. Lenders who suggest that they plan to pursue loss mitigation avenues instead of foreclosure need to admit that, actually, they will be proceeding with foreclosure procedures until a document executed by both parties is produced that sets out specific, agreed-upon loss mitigation alternatives.  They need to straight out document the fact that they are in danger of foreclosure, and that they should not definitely rely on loss mitigation results, and be aware that they are in very real danger of losing their homes. Lenders cannot be in the business of giving out false hope, because it can lead to more loss, and sometimes lawsuits.

What exactly is loss mitigation, and what does it mean for Californians?  It’s the effortful goal of trying to stop foreclosure on a home, usually headed by a representative of the loan holder, or an impartial third party working in the best interests of the mortgage holder. (Third party loss mitigation consultants tend to be more impartial and reliable from the home-owner’s perspective, because they can deal with the lenders without personal stakes involved.)

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Loss mitigation was first created as a collaboration between the mortgage industry and the federal government to try to help homeowners avoid foreclosure and catch up on delinquent payments. The basic idea of loss mitigation is to mitigate the possible loss from the bank and the homeowner’s standpoint, to try to reach an agreement whereby an alternative to foreclosure can be found.

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Loss mitigation counselors generally first attempt to garner a loan modification plan or repayment plan that is doable for both the bank and the homeowner. And though the goal is to keep the mortgage holder in his or her home, if there is just no way to make up the payments, the loss mitigation consultant will then try to ‘mitigate’ those  losses, helping the homeowner get as much out of a short sale, deed-in-lieu, or a foreclosure as possible

The fundamental concept of a loan modification is to extend the term of amortization on the loan. What is amortization? It’s originally a French word meaning to kill or to retire, easily recognizable from the ‘mort’ that is so recognizable in other words.  The basic idea is that an amortization spreads out the debt over time, allowing you to retire it piece by piece.

The basic idea of finance is to allow you to pay back your lender over time with interest, so that you get the money you need to fund your home, project, or investment, and they get paid, essentially, for extending you the loan in the first place. So, to figure out how much you need to pay for this service, you calculate how much you’d have to pay per month to pay back the balance plus interest compounded monthly,  over a certain amount of time.
Loans vary. Some assets require longer amortizations than others. Cars, for example, generally take about five years, and house loan are maybe thirty. The longest amortizations that are readily available are forty-year loans, and even those are rare and only for large, expensive assets.
So, when people get in trouble on their payments, the fundamental technique is to extend the amortization on the note. Lengthening the time reduces the monthly payment, always. This is called a loan modification, or a loan mod, and with proper negotiation and professional help, they are not to difficult to obtain.
Another thing to do when you’re in trouble is to get a lower interest rate, which is another form of a loan modification. But that’s rare, because this move is risky, and generally lenders are reluctant to give you a lower interest rate.

A short sale means offering up your home for sale, generally listed through MLS, without going through a complete foreclosure.  They are two options to relinquish ownership of the property and to mostly forgive the debt, and there are advantages and disadvantages to each choice.  We will begin discourse about these differences here.
While in foreclosure (depending on specific state laws) a home-owner selling their property could potentially stay in their home for several months to up to a year before having to vacate the premises. But that does not necessarily mean foreclosure is better than a short sale.  During a foreclosure, the seller’s life is completely disrupted as they deal with potential buyers making low offers, touring the place, having open houses, and dealing with the legal aspects.
In addition, foreclosure, or deed-in-lieu, results in a huge loss of good credit, up to and sometimes more than 300 points lost.  A short sale, however, varies, and one might lose as little as 100 points on their credit when completing a short sale.

It used to be the case that most lenders would not even consider agreeing to a short sale, but that is changing. The process is becoming much more common, and much more accepted.

Loss mitigation consultants are people who are experts at loss mitigation techniques and who can help you stave off foreclosure or at least the negative impacts of foreclosure. Knowing how to prevent foreclosure also means knowing all the loss mitigation techniques and processes. There are two main efforts involved the help whatever loss mitigation technique you choose work. The first is timing, and the second is having an open and organized line of communication. For distressed homeowners, having a third party loss mitigation specialist help with the process can be very beneficial.

Loss mitigation specialists are advantageous to the homeowner because they are not emotionally involved in the home. They are professionals who have had a lot of experience in the field of loss mitigation and dealing with lenders and homeowners throughout the process. They are knowledgeable about how the lenders operate, and what techniques will work best in your situation.

Loss mitigation was introduced by the federal government and mortgage lenders as a way to help lessen foreclosure rates throughout the nation. Since the middle of 2007, foreclosures have been increasing at an alarming rate. Because the economy shows no signs of improvement, this rate will only increase.

Even if you have already been served with a “Notice of Sale” or a “Notice of Default”, you can still rescue your home from being foreclosed upon. What you must realize is that the lenders do not want to take the responsibility of owning and then selling your house. This process is time consuming and tedious, and they would much rather have money than a house. The risks of foreclosing upon are higher than just accepting less of the loan. They will most likely be willing to work with you to change the terms of your loan, a process called a loan modification, or loan mod for short.

Basically what it comes down to is that if you are able to convince your mortgage holder that you can offer less risk with working with them than with them foreclosing upon your house, the lender will be likely to rescind the foreclosure order. Visiting with a loss mitigation specialist such as Access Loss Mitigation can help work with you and your lender to develop a relationship and a plan of action. After the plan is formulated, the foreclosure consultant will work with your mortgage holder to negotiate a loss mitigation method for you. The lender will likely be willing to use at least one method of loss mitigation rather than foreclosure.

Due to the downfalls of our economy over the last few years, there are an unprecedented amount of real estate foreclosures. Experts think that this is just the tip of the iceberg and that there are more to come. People who are invested in real estates, whether by owning a house or investing in a homeowner (such as a mortgage company) are not getting a return on their investments.

Mortgage investors are willing to keep putting money into their investments, just at a lesser amount then they initially agreed to. By putting in lesser amounts, they are practicing loss mitigation, a way to minimize one’s losses. In real estate, there are several loss mitigations to help cope with problems such as foreclosure, loan modifications, shortsales and more.

Utilizing mortgage loss mitigation solutions such as loan modifications is a way to help mortgage lenders stem their losses. Usually, a mortgage lender (such as a bank) does not want to foreclose on a person’s house, as having a physical house is too much work. Instead, they would rather get money. Because homeowners sometimes cannot make their payments, whether for loss of job, illness, bankruptcy, or anything else, mortgage lenders want to be able to recoup whatever money they are able to using any means necessary.

The reason that loan lenders do not like to foreclose on a house is because the process can be expensive due to things like court and attorney fees, and also because the mortgage lender then has to take responsibility for the physical property and to secure a new buyer. This can be time consuming. Instead, it is sometimes in the mortgage holder’s best interests to work with their borrowers to find a reasonable solution such as a loan modification.

A loan modification is a change or modification to the current mortgage terms. If both the homeowner and lender agree to modify the loan, they can modify many things such as the length of the loan, the interest rate of the mortgage, the assets used to secure the mortgage, or any other terms that are able to be amended.

Loan modifications and other loss mitigations can benefit both the homeowner and the mortgage holder. It is a good way for a homeowner who is approaching foreclosure to stave off the process and keep their asset. To find out more about these processes, speak with a loss mitigation specialist such as Access Loss Mitigation.