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.

You may even have a potential buyer who has put down all the paperwork to make an offer, and they still won’t cave. On the plus side, this can go two ways- the bank may say you have to go into forclosure, but they may also try to convince you to stay in your house and refinance your mortgage.

You may even be able to settle it with a loan modification.

If that doesn’t work, though, and your bank is willing, a short sale may be completed. In order to comfort potential buyers, you may want to think about moving out of your house while going through the shortsale process- this will make it seem less likely that you may decide to simply refinance. And be sure to get official approval from your bank. “Bank Approved Short Sale” is much more likely to get takers than one that doesn’t yet have expresss permission. a

Many real estate agents have had to do with on-the-fly, on-the-job training through experience with these types of sales.  They all require more paperwork than a regular home sale and more patience, but they’re not impossible. Private companies often offer training programs and certification labels to show clients that an agent has ‘official’ skills in the ‘distressed’ property field.

Sellers forced into a foreclosure and/or a short sale are often panicky and more difficult to deal with, but they need to keep in mind that they can stary in their homes for quite some time. Receiving a notice from the bank does not necessarily mean you have to move out right away. The bank doesn’t own a home until it has been officially foreclosed, a long and difficult process.

In this window, a skilled real estate agent can intervene and get the ball rolling on a shortsale instead. The seller must prove financial hardship, but it is not impossible.

If a realistic offer is made, your real estate agent submits a big packet of paperwork to the lender/lenders for them to approve the deal. This is a crucial step that requires high precision- even one piece of paper out of place in that packet can result in a no-deal and big waste of time. Lenders have limited time to work through these packets with you- if there’s something wrong, they’re likely to just put your back at the bottom of the pile, so to speak.

On Tuesday, the National Association of Realtors reported that home prices in major metropolitan areas declined almost fourteen percent when compared to the same time last year. However, prices were up in the first part of the year, which suggests that the oscillations may even out.

An agent with J.T. Kirkland predicts that mortgage rates and the federal homebuyer’s tax credit will help to pull in new buyers into the market, keeping prices at least stable, if not rising, into the spring.
“It’s different town to town, city to city,” he says. “Areas with good schools are seeing increases, for example, and demand is rising again.”

He confirms that, on paper, prices at the high and low ends of range have indeed dropped, but that the middle prices have remained fairly stable, which means that most buyers and sellers will have more luck than they suspect. However, the markets flooded with foreclosed and shortsale properties, which create a downward pressure on prices. Real estate short sales have been very helpful in some areas, but when they become to common they tend to exacerbate the problems.

But the tax credit is doing its job- incentivizing first-time buyers to get into the market and snap up those foreclosures and short sale homes. And though overall prices are down, the actual number of sales is increasing thanks to the credit. Sales of single-family homes and condominiums actually rose more than eight percent this quarter, though they haven’t reached anywhere near the peaks of 2004-2005.

The main problem, say experts, is psychological. People feel frightened, insecure in the their jobs and wary of getting trapped into a payment deal they can’t handle. The key to overcoming these doubts is open communication with lending institutions, buying affordable homes that fit one’s income, and ignoring the melodramatic reporting on the housing market on TV. Television news exaggerates in order to get more viewers- obtaining news from free outlets can often be more reliable. The only thing to fear is fear itself.

Another thing for potential buyers to keep in mind is that they will never get an opportunity like this gain- home prices will soon begin rising again. It’s smart to get into the market while everything is cheap.

The plan is designed to help homeowners who don’t have the income or debt levels to qualify for a loan modification under the Obama administration’s $75 billion Making Home Affordable program. The plan establishes timelines, a standard process and documents, and cash incentives for participation.

Short sales, as these deals are known, reduce the damage to the borrowers’ credit record and save the lenders the cost of foreclosure. Short sales also help neighboring property values because the sales price is usually higher than what the house would fetch in a foreclosure auction.

About one in 10 home sales this year was a short sale, or an estimated 500,000 sales, according to the National Association of Realtors. In areas like Las Vegas, southern Florida and California, the ratio is far higher.

Before this, homeowners struggling to make their payments on an FHA-backed mortgage were not allowed to get a loan modification.

Now, at-risk mortgagors will be able to lower the principle they must pay on their loans by up to 30% in what is being called a ‘partial claim’. However much the principal is reduced will be combined into a second, no-interest mortgage that isn’t due until the first one is completed, or the property no longer belongs to the borrower.

Reducing the principal on the original mortgage in this way will allow homeowners to lower their monthly mortgage payments to an amount they can afford, preventing foreclosures and defaults. The old MHA loan modification program used to leave the principle alone, reducing only the interest rate.

The goal of either method, however, is to reduce monthly mortgage expenses for homeowners to 31% of their income.

An added bonus of the new MHA program is its ability to bring borrowers up-to-date on their payments: it includes all past due payment into the second, no-interest mortgage.

The program is called FHA Home Affordable Modification, and in order to qualify, a borrower must already be in default on their mortgage, (that is, at least one month past due on payments) but not more than one year past due.  This, hopefully, will prevent those who are irresponsible and completely unable to make payments from joining, and also preventing those who can make their payments just fine from taking advantage of the program.

In addition, any borrower wishing to take advantage of the program must be the owner and occupant of a single-family residence, and be able to prove that they have enough financial resources to maintain payments on the new mortgage. They must also not have purposefully defaulted on their mortgage payments even though they had enough money to pay. Also, applicants must not have more than 55% of their monthly income in total debt after modification.

The new program doesn’t only incentivize the mortgage owners, but lenders as well. It offers up to $1,200 for each loan to lenders. Homeowners who do not have an FHA mortgage should try to get a loan modification through the first Making Home Affordable loan modification programs which deal mainly with changes of interest rates.

For more information on the FHA-Home Affordable Refinance Program can be found on the HUD website.

However, I know, unlike many others, that the government has a free service for that, and that various non-governmental websites that purport to have free reports are trying to bait you into paying for SOMETHING.  But many people are fooled by this ploy and don’t use the Federal Trade Commission-sanctioned site and service, instead using freecreditreport and similar companies. The reports are used as an innocuous-seeming lure to hook customers into a fifteen dollar a month service that ‘alerts’ them to ‘important’ changes in their credit report. Government officials contend that such close surveillance is unnecessary and a waste of money.

Now, the Federal Trade Commission is asking the public to comment on possible amendments to the current free-report rule, possibly changing rules about deceptive marketing in the industry. During the next few weeks and months, anyone who is interested will be presented with the opportunity to weigh in on this matter- if you feel like you’ve been deceived by similar online services in the past, speak up!

The Federal Deposit Insurance Corporation protects the deposits of consumers in the event that a bank fails, and has been doing so for decades. In this day and age, there is no reason to fear that a bank will lose your money. The organization has recently said that banks and other lenders should try to give certain qualified borrowers a ‘temporary respite’ from their monthly mortgage payments. This is known as a forebearance, and can last up to six months, especially if the mortgage holders are trying to work out a loan modification.

The agency has released a plan to lower loan payments to lower levels for borrowers to have defaulted, but only those who can prove that they only defaulted because of job loss or involuntary salary reductions. The FDIC chairwoman has released statements saying that they’re making these announcements, not just to save money and mitigate losses, but because it’s the right thing to do. They’re trying to keep families in their houses and keep the economy going strong.