Crescent City Real Estate News

Strategic Default Vs. Strategic Short Sale And "Verifiable Hardships"

The new "buzz phrase" in our industry is "Strategic Default".  

Recently,  University of Arizona professor Brent White wrote an article dealing with the issue "Strategic Defaults".  In the article, he basically justified the idea of "walking away" from your mortgage, based on the fact that it was a "business decision" on the borrower's part, just as the bank made a "business decision" when they decided to loan the money for the residence. 

60 Minutes even decided to run a story on "Strategic Defaults".

As much as it pains me to say this (I'm an ASU Grad), I agree with much of what the UA Professor is saying.  Let's face it, when the borrower decided to borrow money, they were asked to not only use the lender's appraiser, but were also asked to pay for the appraisal.  The lender, in turn, decided that, based on the opinion of their own hand-picked appraiser, it was a good business decision to provide a loan to the borrower.  In addition, we were all privy to the age-old question from the appraiser of "Where do we need to be on the price?"

What I don't agree with is the premise of "walking away" vs. "making an attempt" to work with the lender.  In most cases, a borrower's credit would be less affected by conducting a "strategic short sale" vs. a "strategic default".  Don't believe me?  See my recent blog that details how FNMA looks at a foreclosure vs. a short sale, in terms of waiting periods to get their next loan.  

Now, some of you may ask, "What is a Strategic Short Sale"?

I'll do my best to explain...As agents, when it comes to short sales, we are always faced with Rule Number One...  Does the Seller have a verifiable hardship?

Six months ago, I wouldn't take a short sale listing unless the Seller had a "verifiable hardship"...  Things have changed...  We've recently closed several short sales for clients who did not have "verifiable hardships", as defined by most lenders.

So, what does this mean?  My opinion is that lenders are now beginning to look at their "bottom line" profit of a short sale vs. a foreclosure.  In other words, most lenders have finally realized that their "breaking point" in terms of bank-owned properties has been reached (i.e., they finally understand that it makes more sense to short sell a home than foreclose and take it back and sell it as an REO).  

My inclination is that they are now more willing to sell a home at market value, and they are realizing that current market value (as evidenced by their BPO or Appraisal) is much better than what they would expect to get if they decided to take the home back into their inventory (less the $50-$60k they will spend on a foreclosure).  More important, they are willing to "look the other way" when it comes to a "verifiable hardship" in order to make more $$.

Many of us subscribe to the rules of "No Hardship, No Short Sale".  I'm here to challenge you to "think outside the box".  We've had several short sales approved in recent months where there was no "verifiable hardship" present.  

While all lenders still require a hardship letter, we're finding that this requirement holds little, if any value.  The bottom line is if the lender feels that they can come out ahead (financially) in a short sale vs. foreclosure, they will more-often-than-not go for the short sale (if it makes financial sense, which it almost always does).  The beauty of a short sale is that your only competition is the BPO that the lender requires.  If your contract price is within 5-8%% of the BPO price, chances are, your deal will  go through.  

It's been repeated Ad-Nauseum, but I'll say it again here...  LENDERS DO NOT CARE ABOUT THE FINANCIAL HEALTH OF YOUR CLIENTS.  THEY ONLY CARE ABOUT THEIR OWN BOTTOM LINE.  In other words, if it makes more sense for them to short sell a home (which it always does, unless there is PMI, but that's another story) they will approve it.

A group that I happen to subscribe to (they will go un-named) preaches that if your client doesn't  have a "verifiable hardship", you shouldn't take their short sale listing.  I'm here to debunk this myth.  Banks could care less about hardships.  They only care about their bottom line.  Don't believe me?  

We recently closed two short sales for a retired orthopedic surgeon with two rental/investment homes with Chase.  He couldn't even write a hardship letter, based on his current financial position (i.e. no hardship).  Chase simply made a good investment decision.  

If you have a client who you feel doesn't meet this "hardship letter" requirement, and you don't want to take the listing, have them contact me.  I'll take it.

Let's quit talking about "strategic defaults", and start talking about "strategic short sales".  If the bank agrees to do it, what is the harm?  Let's face it, a short sale is a MUCH better alternative for a Seller's credit vs. a strategic foreclosure, and it's almost always a better alternative to the lender.

Now, before some of you jump in and slam this blog with your comments, please realize that what I'm writing about is reality.  We are not trying to "scheme the system" (please, get over the whole "victim thing").  The bottom line is that lenders are not stupid.  They (most of them, anyway) are finally realizing that approving a short sale is a better alternative than foreclosure.  In most cases, they are FINALLY coming to the reality that they own enough homes (through foreclosure) and they need to start making rational business decisions.  

In other words, it matters not what/how you feel about "strategic short sales", but how the lenders feel about them (at least in my recent experience), and how you can best advise your clients.

This blog is only intended to share what I'm seeing in my short sale transactions.  Your opinions are welcomed.

 

 

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Bob Hertzog
Designated Broker-Summit Home Consultants 2009:
95% Success Rate Closing Short Sales
www.phxshortsalehelp.com

 

 

Contemplating A Strategic Default?  FNMA Says You Must Now Wait 7 YEARS To Buy Again!

On Wednesday, FNMA announced a change in the timeframe to purchase after a foreclosure.  Beginning July 1st, 2010, homeowners will be forced to wait 7 YEARS before purchasing another home backed by FNMA (previously, there was a 5-year wait).  

This new announcement will dovetail into the announcement that they made on April 30th regarding waiting periods for those homeowners that choose to short-sell their homes.  Basically, homeowners who choose to work with their lenders will be forced to wait anywhere from 2-7 years, depending on whether there are "extenuating circumstances", and the amount of down payment that a homeowner chooses to put down (i.e. with no "extenuating circumstances", a homeowner who chooses to put down 20% will only have to wait 2 years, while a homeowner who chooses to put the minimum required down will have to wait 7 years).  Both of these changes will go into effect on July 1, 2010.

Regardless of where you stand on the issue of "strategic defaults", FNMA is making it very clear that they would much rather see a homeowner work with their lender, rather than simply "walking away" and handing their home back to the bank.

The bottom line is this:  By simply "giving up" and handing your home back to the bank, you will not be able to purchase a home through FNMA for 7 YEARS (unless you have "extenuating circumstances" that led to the foreclosure).  If you short sell your home, you will be back in the game in as little as 2 YEARS.  To make things easier to digest, please see the following FNMA announcements that go into effect on July 1, 2010:

New Foreclosure Waiting Periods

New Short Sale Waiting Periods

What Are Extenuating Circumstances?- Download the Seller Handbook (updated 5/27/10) and go to page 427

Please take a moment to familiarize yourselves with the links provided.  They are very informative, and will help you to better understand these substantial changes. 

 

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Bob Hertzog
Designated Broker-Summit Home Consultants 2009:
95% Success Rate Closing Short Sales
www.phxshortsalehelp.com

 

 

One of our daughters went to a coupon class about a month ago. She and her sister do not want to be in debt for anything other than a modest home, even their cars are almost paid off. They only have credit cards to use as ID and for online purchases which they then try to pay in full each month. 

They did not want to go alone the first time so I told them I would show them how to save money using coupons and the sales, especially the buy one get one free sales each week. Since we go to the store anyways, I thought I might as well take them with me. We can have some girl time together. 

If you are struggling paying your bills- you need to pay attention to this post. 

If you are in debt and want to get that debt paid down and eliminated- you need to pay attention to this post. 

If you make money but love to save and have more money at the end of your paycheck- then you need to pay attention to this post. 

This is serious saving! 

This is not about saving a dollar here and a dollar there. This is about actually making a difference in your family's budget. 

I will share some other case studies later on. 

I know families who are using this coupon system to cut their food bill in half and nearly eliminate their budget for household goods, cleaners, personal care products and beauty products. 

This system is being used by middle class families to extend their budget. The savings each month from their food budget and personal care budget are being used to pay down their debt. I will write a post about the fastest and easiest way to pay down your debt at another time. 

In fact, this is such a savings to most families; studies have shown that a mom or dad that uses these saving strategies is worth $80 per hour! This is nothing to make light of! 

As I was showing them I got hooked!  Since I go to the store anyways I figured that it was time we started saving some money and use that money we save towards paying for the college bills we are paying and for paying down debt. We spend a lot of money on food, good food, healthy food. But those savings we'll talk about later on. For now, just see how FAT these savings are. 

This is nothing to sneeze at!!! I don't care how much money you are making in real estate you can learn some frugal ways to save. Since we live in Florida and we are now approaching hurricane season, stocking up is a 'must do item' on your list. As soon as the storm warning hits- the stores' shelves empty within hours. 

In just one month we have enough shampoo and conditioner for a year, enough razors for a year, enough body wash for a year and enough feminine products for a year.  In this photo here between Walgreens, CVS and Publix and this is all non food items-

 I bought $980 of products for $64.00 - that includes the 6.5% sales tax. 

We still have lots of items to donate to the Military care packages, send our kids in college and give to homeless shelters. 

If you are so rich that you don't need to save any money- you and your friends can do this for fun and then donate all your items to charity. 

The video I posted below is ten minutes long so fair warning about that but it is well worth watching. I go through the items and explain how you can use them, etc. For instance, Nestor and I do not use any deodorants that contain the aluminum because we believe it may cause breast cancer. So we donate the free products that we don't use to our kids who refuse to listen to us about deodorants or we send it off in care packages or drop it off at the homeless shelters. 

 

 

 

 

 

 

        

 

 

Copyright © 2010 By Katerina Gasset, All Rights Reserved.*If You Are Struggling To Pay Your Bills- You Need To Read This Post*