Finding a New Way to Sell

From Arizona.

A growing number of homeowners behind on their mortgage and facing foreclosure are finding a way to sell despite the glut of Valley homes for sale.

They are turning to "short sales," which are similar to regular home sales except a deal is worked out in which the lender accepts what the house is appraised for or what it will currently sell for instead of what is owed on it.

So a homeowner would sell the house to a buyer willing to pay the current market value of the home, and the lender takes a loss on the rest.

Short sales are the latest trend for metro Phoenix's slowing real estate market, and housing advocates are advising struggling homeowners to contact their lender about a sale before falling into foreclosure.

As foreclosures rise, lenders are more motivated to do the sales because they at least get most of what they are owed.

Homeowners don't get any equity from the sale, but they also don't get a nasty foreclosure mark on their credit record. And although lenders lose out on money they're owed, a short sale lets them avoid a costly foreclosure on the home.

"Short sales are the buzz in the market now," said Tom Ruff of Information Market, a research data firm based in Glendale. "With foreclosures climbing and homes prices falling, short sales are bound to climb."

There is no way to track the exact number of short sales closing in the Valley because they show up on public records as a regular sale between a buyer and a seller. But real estate market watchers say they are seeing an uptick.

For the Valley's housing market, a short sale means one less foreclosure at a time when the number of people defaulting on their mortgages has tripled from a year ago.

It also is one fewer hit to Valley neighborhoods, where foreclosures are pulling down housing values.

Short sales lower an area's "comps," or comparable sales prices, too, but not as badly.

For some homeowners, they are the best option.

A brother and sister from California recently approached Phoenix real estate agent Brett Barry about their house here in the Valley. The pair paid $597,000 for the investment home in Tatum Ranch at the height of the housing market in 2005. Now, they can no longer afford to keep it. And with a record number of Valley homes for sale, their chances of selling the home for what they paid are slim.

"I ran the numbers, and the house won't sell for more than $495,000 now," said Barry, of Realty Executives. "They didn't put any money into it. They have an interest-only loan. They could only rent it for about $1,800 and month, but their payment is $3,500."

He told them they could do one of two things: Work out a short sale or call the lender and hand over their keys.

Lenders can benefit

Most lenders prefer short sales because foreclosures cost them time and anywhere from $30,000 to $50,000 per house in legal, appraisal, marketing and servings fees. A short sale gets a home off their books and typically costs a lender less than a foreclosure.

At a recent foreclosure-prevention town hall meeting in Phoenix, the director of National Initiatives for mortgage giant Freddie Mac encouraged housing advocacy groups and lenders to steer people toward short sales if their only other option is foreclosure.

"We have an investment to protect as well as a moral responsibility to help people avoid foreclosure," Christina Diaz-Malones said.

A few years ago, most Valley homes to go to the foreclosure auction block enticed multiple bids from investors. But now, lenders are taking back 80 percent of the homes they are foreclosing on. Investors have stopped bidding on many houses because they can't make money on a resale.

To be eligible for a short sale, homeowners must prove they can't pay their mortgage because of some type of hardship such as a job loss, medical expenses, death of a spouse or, sometimes, too much debt.

But homeowners should be careful about confusing a short-sale plan with a foreclosure rescue scheme.

Once a homeowner misses a payment or two, a lender files a notice with the Maricopa County Recorder's Office to start foreclosing.

Many groups track those filings to try to buy foreclosure properties. But recently, some groups have begun preying on people about to lose their homes.

Many of the offers of help are thinly veiled schemes to get homeowners to sign over their house to groups that strip away any equity. Often, the homeowners then are required to pay rent until they can refinance and get their house back. But the rent is usually more than their old mortgage payment, and they wind up getting evicted.

Joann Hauger of Community Housing Resources of Arizona said groups that really want to help homeowners don't typically solicit them. More housing advocates such as Hauger are advising people to seek a short sale now instead of losing their home to foreclosure.

"Almost everyone we are seeing now for default counseling owe more than their house is worth," she said.

The hit homeowners take on their credit score is much less on a short sale than on a foreclosure.

A homeowner involved in a short sale will see an 80- to 100-point drop on his or her credit score. A foreclosure is a 250- to 280-point hit, said Randy Kutz of Phoenix Heritage Real Estate Group, HomeSmart. About 70 percent of his business now is short sales.

"Banks don't advertise they are open to short sales, but banks don't want to take the homes back," he said.

People who are able to do short sales will have a tax hit.

The difference between what a homeowner owes and what the bank gets for the house is typically treated as income for the seller. That's taxable income for the homeowner that will show up on a 1099 form from the lender.

The lower sales price from a short sale won't please too many of the homeowner's neighbors. It will show up like any sale and often will be a considered a comp for the area that other buyers and sellers use as a benchmark for home prices.

But housing market watchers say a lower comp or short sale is much better for a neighborhood than a home repossessed by the bank at a foreclosure auction.

"Foreclosed homes can quickly turn into empty eyesores with green pools, yards full of weeds and debris when lenders take them over," Barry said. "A short sale means a new owner for the home and one less foreclosure black mark for the neighborhood."

Free Foreclosure Workshop

Debt Elimination For A Better Financial Tomorrow

Debt elimination is an important step for securing a better financial tomorrow.
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Banks and other lenders will be wary of lending to you. Even if the lenders give you loans, there will be a high collateral value or high interest rates. Thus you will be stuck in a debt trap. Where you will be borrowing just to repay the old debt. This is known as a debt trap, therefore its very essential that debt is eliminated, thus debt elimination gives you leeway to plan for your future. Debt elimination should be done continuously and with a conscious effort. Therefore don't take small debts as they add up to big debts. Try to make expenditures out of the available cash in hand, this means that you are not living on credit. Thus one should strive for debt elimination at the earliest.

Foreclosure Prevention Hotline aids troubled borrowers

When Emilio Gutierrez missed a third mortgage payment on his Thornton-area home late last year, he knew he was headed for serious financial trouble.

But after calling the Colorado Foreclosure Prevention Hotline and meeting with an Adams County housing counselor, Gutierrez worked out a repayment plan with Countrywide Home Loans, his mortgage provider.

"If you have the desire to save your home, call that hotline," Gutierrez said. "You have to be willing to make the sacrifices."

About 16,000 people have called the hotline since it started last October, according to the Colorado Division of Housing.

About half of callers take the next step of meeting with a housing counselor, said Ryan McMaken, a spokesman for the division.

Of that group, about four out of five are able to avoid foreclosure, McMaken said, although that doesn't mean they necessarily keep their homes.

About a third of those who meet with a housing counselor still lose their homes in short sales, in which the lender agrees to accept a sales price below what is owed on the mortgage.

Several factors help borrowers who go through the hotline to work out better terms with lenders.

Counselors screen out troubled borrowers who are too far behind to help or who aren't honest about their financial situation.

That helps loss-mitigation agents at the mortgage companies who are typically loaded down with 200 to 300 files each and are eager to prioritize, McMaken said.

"It shows the borrower is really engaged. That makes them move up the list," McMaken said.

Financial mismanagement, an unsuitable mortgage loan and unsteady work in the circuit-board manufacturing industry combined to put Gutierrez behind, said Mary Ellen De Los Santos, housing counseling coordinator with the Adams County Housing Authority.

Last October, Gutierrez got a better-paying job as a service technician for microfilm equipment. He was also motivated to make the necessary sacrifices to catch up, she said.

Gutierrez and his wife, Cecilia, share the mortgage on a duplex with their daughter. Their failure would have brought her down as well.

Gutierrez, 55, adds that he doesn't want to face the prospect of retirement as a renter, something he has been most of his life.

"We had too much of our lives and heart in that place," he said.

The couple bring home about $3,000 a month. They are meeting their share of monthly mortgage payments of $1,000 a month and paying another $700 a month to catch up on the missed payments.

They should be current by the end of August.

The Gutierrez family, however, won't be out of the woods even then. Their adjustable-rate mortgage resets sharply higher next March, from a 7.13 percent interest rate to above 10 percent, De Los Santos estimates.

Gutierrez hopes De Los Santos can help him refinance out of that situation as well, once a $10,000 prepayment penalty on his current loan expires.

"I still get up at night," Gutierrez said. "It is hard for me to sleep. I am dealing with it one day at a time."

How to get help

Call the state's Foreclosure Prevention Hotline. 877-601-4673

Coping With Foreclosures: Homeowners Need Help

The deepening sub-prime home mortgage crisis was underscored by the Mortgage Bankers Association’s yesterday when the MBA reported that the percentage of payments 30 or more days past due for sub-prime adjustable-rate home mortgages have risen 1.31-percent in the first quarter of 2007.

That’s an increase to 15.75-percent from the 14.44-percent delinquency rate of last quarter, a “sizable increase” according to Doug Duncan, the MBA’s chief economist.

Federal Reserve Chairman Ben Bernanke foresees further increases in delinquencies and foreclosures for at least a year into the future.

This striking jump in delinquencies is combined with equally high foreclosure numbers. The share of mortgages that are at some point in the foreclosure process increased by 1.28 percent—the highest rate since the first quarter of 2004, and the fourth quarter in a row with an increasing share of mortgages in foreclosure.

What’s more, the share of mortgages that started the foreclosure process increased to 0.58 percent in the first quarter of 2007. This is the largest share of mortgages entering foreclosures in a given quarter, the first time on record that this ratio has increased for four quarters in a row, and the largest four-quarter increase on record.

Clearly action is needed to help homeowners who have sub-prime mortgages find some financial relief. The Center for American Progress is proud to be part of that effort.

Following our March release of our report From Boom to Bust: Helping Families Prepare for the Rise in Subprime Mortgage Foreclosures, which predicted the present conditions of the failed housing market and prescribed federal policies to reduce the impact of negative consequences, members of the House and Senate turned to the report for policy guidance. Among our recommendations:

• Provide federal grants to expand and enhance current mortgage assistance and foreclosure prevention programs and low-interest mortgage assistance to eligible borrowers.
• Allot federal funds to target key cities and states facing the highest risk of mass foreclosure.
• Include provisions to ensure federal agencies assess the effectiveness of each program every three years.
• Strengthen programs that aid families while their mortgage contracts are renegotiated or the property is sold on the market so that the homeowners’ credit ratings are salvaged, allowing for the possibility of future homeownership.

A number of members of Congress see the merits in several of our proposals. Sen. Jack Reed (D-RI), for example, has introduced legislation that would provide better federal housing assistance to low and moderate income families. Similar legislation in the House is under consideration. Separately, Sen. Charles Schumer (D-NY) has proposed a $300 million emergency foreclosure workout plan.

The Center applauds these legislative moves and looks forward to our complete set of recommendations being adopted by the full Congress later this year.

Foreclosures often lock out renters

Foreclosure doesn't always hurt only the person whose name is on the mortgage. More renters are turning to support agencies for help.

Kimberly Edwards found out the duplex she was renting was in foreclosure only when a notice written in legalese was taped to her door. But its meaning was crystal clear: She and her two sons had to vacate the premises the next day or go to court.

As it happened, the property had been in foreclosure when she moved in and the six-month grace period was up. Edwards, a 29-year-old single mother in school with plans to become a paralegal, was paying her portion of her subsidized rent to a man who wasn't making mortgage payments.

Edwards is one of a growing number of renters being displaced because their landlords are losing their investment properties to foreclosure.

While there is no estimate of the number of renters being forced to move because their buildings are in foreclosure, workers on the front lines -- from foreclosure prevention counselors to tenants organizations -- say that starting last year, they began hearing from significantly more people caught in the foreclosure crossfire. The problem has been getting worse.

The number of investment properties entering foreclosure suggests the problem is widespread, although it is unclear how many of those were vacant. Hennepin County estimates that in the first quarter, about 45 percent of foreclosed properties could have been rentals, up from about 33 percent in 2006. Ramsey County estimates 43 percent in the first quarter.

Beth Kodluboy, executive director of the Minneapolis tenant advocacy group Home Line, has seen a steady increase in foreclosure-related calls. Through early June, the group took 77 calls -- as many as it did in all of 2006.

Cheryl Peterson, senior mortgage foreclosure prevention counselor for Twin Cities Habitat for Humanity, said she's been getting more and more calls from renters in the past year. "They don't know what to do," she said. Neither does Peterson, who is set up to work with homeowners, not tenants.

When displaced renters call, she explains the complicated and lengthy foreclosure process. She does what she can to refer renters to organizations that may be able to help with legal matters or with new housing, such as Legal Aid or tenant advocacy groups. Peterson also gets "a lot of calls from people who own several properties in north and south Minneapolis." she said. "Juggling the financing of multiple mortgages ... is beyond the foreclosure counseling programs's area of expertise because it's a business venture."

She blames the increase of investment property delinquencies on a mixture of subprime lending and small-time landlords who "couldn't afford the properties to begin with," and were dreaming of making it rich in real estate. But many took on more debt than they could afford, their adjustable mortgage rates spiked, or they couldn't find renters. They stopped making repairs. Then utilities got shut off.

Some landlords continue to pocket rent long after they stop paying the mortgage, allowing a tenant to learn of the foreclosure only when a deputy knocks on the door to hand them a foreclosure notice.

Telltale signs

Tenants advocates say that clues of foreclosure typically show up long before that.

For Edwards, the first sign that something wasn't right at the duplex at 36th Avenue and Washburn Avenue N. came in August, when the water was shut off for a couple of days. Her landlord, who lives in Colorado, also was slow to have a handyman come and fix the radiators, which were blazing hot in summer.

There were other signs. "He couldn't rent the other half of the duplex and the house was on the market, too, the entire time," Edwards said.

The court granted her 30 days to vacate, which gave her until just before Christmas to leave. "My kids didn't have a Christmas," she said.

Happy with the neighborhood, where she said "it was OK for my kids to ride bikes up and down the street," and lacking money to move, she tried to convince the bank holding the mortgage to let her pay rent directly to it and stay. But she recalls being told "absolutely not, because they didn't want to be a landlord."