Real estate deals in which lenders agree to take less for a property than the balance on the mortgage have tripled since 2008, a report says.

By Tiffany Hsu, Los Angeles Times

August 11, 2010

Copyright © 2010, Los Angeles Times

However, 28% of those elite scorers' defaults were calculated and strategic, compared with 18% for the overall population in the statistical sample. This pattern is forcing lenders and the credit industry to seek new ways to evaluate risk beyond traditional credit scores.

The June study, which follows up on earlier research involving credit files where consumers' personal identifiers had been removed, tracked strategic defaulters in 2009. By examining payment patterns in individual credit files, Experian and Oliver Wyman estimate that about 19% of all mortgage defaults last year involved strategic walkaways.

Though there was some evidence that total defaults may have peaked at the end of 2008, the walkaway issue remains a costly and controversial one for the mortgage industry. Fannie Mae announced in late June that strategic defaults have become such a problem that it was toughening its policy and would pursue walkaways for unpaid balances and penalties where permitted by state law.

The Experian-Oliver Wyman study confirmed that geography played a significant role in the strategic default phenomenon. Homeowners in volatile boom-and-bust states such as California and Florida have been especially prone to walk away from deeply negative equity situations.

A separate study by three researchers at the Federal Reserve found that not only is geography crucial, but state law treatment of unpaid mortgage debt balances after a walkaway may play a major role as well. The Fed study examined 133,281 loan histories from Arizona, California, Florida and Nevada where borrowers were underwater on their loans.

According to the researchers, in California and Arizona, where state law limits lenders' ability to collect post-foreclosure deficiencies on principal residence mortgages, borrowers were more likely to walk away from their houses at lower levels of negative equity compared with borrowers in states such as Florida and Nevada, where lenders face fewer restrictions.

"This result suggests," the Fed study said, "that borrowers may factor into the costs of default the potential legal liabilities resulting from a foreclosure."

The Fed researchers concluded that the depth of borrowers' negative equity positions is an important tripwire to their decision to send back the keys. Borrowers whose negative equity is relatively modest appear to be much less willing to strategically default, probably because they hold out hope that market conditions will improve enough to restore them to positive equity one day.

But as negative equity approaches 50% — and borrowers see no prospects for higher real estate values — roughly half of all mortgage defaults are strategic.

The Fed researchers cited a hypothetical case from Palmdale to illustrate the economic logic of strategic defaulters: Purchasers there in 2006 paid $375,000 for a median-priced single-family home. By 2009, the same house was worth less than $200,000. Meanwhile, a three- to four-bedroom house in Palmdale rented for $1,300 a month at the end of 2009 — far less than what the deeply underwater borrowers were paying for their homes.

Why stay in a seemingly hopeless situation, bleeding money indefinitely? Both studies document that many borrowers asked themselves that very question — and decided to just stop paying.

kenharney@earthlink.net

Distributed by Washington Post Writers Group.

Copyright © 2010, The Los Angeles Times

This chart was just published in the LA Times, Los Angeles Edition today. 

This article was posted in 2008, but the rules are still basically the same.  Every day I receive calls from potential home buyers that want to buy a foreclosure. Today, compared to 2008 there are even more home buyer opportunites to explore.  Short sales, foreclosures and also motivated sellers are all opportunites for todays home buyers.  

Choose your agent carefully as experience matters even more in the current real estate market.  I, Teri Pacitto, am a Broker Associate with over 23 years of full time experience in the Ventura County and Los Angeles County real estate market.   I represent short sales, bank owned properties and equity properties in the local market.  Make sure to follow my Blog as well as view my web site to keep current with the local real estate market statistics. 

Teri Pacitto, Broker Associate, SFR, CDPE, CHS

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By Tara-Nicholle Nelson, Esq., FrontDoor.com | Published: 2/01/2008

Many buyers associate buying a foreclosure with getting a steal of a deal. This can be true, but there are also potential pitfalls. The pros and cons of buying a home involved in foreclosure vary with the phase of foreclosure the property is in when purchased. Use this handy guide to figure out what sort of property is best for you! Also see The Stages and Phases of the Foreclosure Process.

Missed Payments/Motivated Seller

Advantages:

• Seller will be motivated to achieve a fast sale, may create opportunity for below market purchase price.
• Seller may be more likely to do repairs.
• Seller might be amenable to providing major closing cost credits and other concessions.
• Buyer can use regular mortgage financing.
• Buyer can obtain desired inspections within standard due diligence/contingency period.
• Seller must legally provide complete history of property's condition, problems, repairs, etc.

Disadvantages:

• Seller may not be able to negotiate price below outstanding balance of seller's mortgage(s).
• Sellers still have to move out.

Pre-Foreclosure/Notice of Default (NOD) or Lis Pendens Filed by Lender/Short Sale

Advantages:

• Seller will be motivated for fast sale, increasing buyer's bargaining power.
• Buyer can do all standard inspections, including researching title during due diligence/contingency period.

Disadvantages:

• Unless purchase price will pay mortgage(s) and closing costs in full, lender's approval of price and terms of sale will be required (i.e. short sale).
• Lender may not approve price, seller concessions or closing cost credits.
• Short sale may take 45-90 days to close.
• Sellers still have to move out.

Foreclosure Auction

Advantages:

• Property will be sold for outstanding mortgage balance owed to foreclosing mortgage holder -- this can be a low price for the property.
• Cash payment requirements reduce competition.

Disadvantages:

• Auction purchase price must be paid in cash on the same day as the auction -- no mortgage is usually allowed.
• No inspections allowed; as-is sale.
• Buyer may take property and owe other liens, back taxes and mortgages. Buyer must research state of title prior to auction.
• Bank cannot provide disclosures as to property history/condition issues.
• If bank believes auction will not recover a good price, bank may buy the property at auction.
• Property condition might be suspect due to damage done by upset homeowners.
• No commissions or attorney's fees will be paid; buyer must pay for their own representation.

Post-Foreclosure Bank-Owned Property REO (Real Estate Owned by Lender)

Advantages:

• Bank is motivated to get property sold and will negotiate price, down payment, closing costs, escrow length, etc.
• Title will be clear; buyer will not take on any liens, mortgage or back taxes of prior owners.
• Inspections and mortgage financing are allowed within normal due diligence/contingency period.
• House will be vacant.
• Property will usually be listed on MLS; bank will pay real estate agent's commission.
• REO sales close within a normal escrow period of time.

Disadvantages:

• Bank will not agree to do any repairs; as-is sale.
• Bank will usually require additional paperwork.
• Bank cannot provide disclosures as to property history/condition issues.

When foreclosure looms, many homeowners try to sell their homes. For them, the goal is not just to get the home sold, but to do it quickly. Foreclosure rates are the highest in buyer's markets, when homes take a longer than average time to sell. What's a homeowner to do? Get aggressive, and get your home sold fast!

As a seller, you control the only three factors that influence whether your home sells quickly: pricing, marketing and condition. Here are some easy steps and insider secrets to make your home fly off the market in record time!

Pricing Your House

1. Don't try to salvage equity that does not exist. The fact that you bought your home for thousands more than homes are currently selling for in your neighborhood is irrelevant to the current fair market value of your home. You have to get clear on your goal: Are you trying to eke dollars out of your home by holding out for the highest price, or are you trying to avoid the seven-year black mark that a foreclosure will leave on your credit report?

    

2. Don't overprice your home. Get clear about what you want. If you'd like to get your home sold, make sure you price it aggressively and that means low. If your home is overpriced, some buyers won't even see it because it will appear to be out of their price range. Other buyers will focus on seeing properties whose sellers seem more realistic about pricing. Your house will sit on the market longer than it should and then the lowballers will crawl out of the woodwork.

    

3. Get real about what your home is worth. Have your real estate agent prepare a Comparative Market Analysis (CMA) that shows recently sold, similar homes in your neighborhood. If you're serious about getting it sold fast, take the sales prices (not the list prices) from the most recently sold homes in your area, and then go down 10 percent or so from there to get your list price. When a home is slightly underpriced, it seems like a bargain. More buyers will come out to see it, and chances of getting a qualified offer skyrocket.

    

4. Make sure you have an accurate understanding of how low you can go. A buyer is not going to pay a premium price for your home just because that's what you owe. If you owe more than your home is worth, give your lender a ring, complete a short sale application (see How to Get Your Lender to Agree to a Short Sale) and ask your lender to give you some indication of how low a sale price they will accept. Conform your list price to that (don't forget to take closing costs into account); a short sale blemishes your credit but not as badly as a foreclosure does!

Bank of America Revises Short Sale Policy
Bank of America, one of the country’s largest mortgage lenders, says it is loosening its policies on short sales in response to the U.S. Treasury Department’s announcement last week that it would increase incentives for lenders to work out short sale deals.

The government’s plan is a boon to banks, says David Sunline, BofA’s real estate management executive, because it provides guidance when there are multiple liens, a potentially litigious issue for lenders.

In the past, the bank followed Fannie Mae’s policy of giving second lien holders about 10 percent of the second mortgage balance in a short sale. Now when it holds the second lien, BofA will accept 5 percent of the net proceeds of the short sale, Sunline says. When it is the first lien holder, it will offer 5 percent to the holder of the second lien.

Sunline says home owners considering short sales should contact the bank within five days of getting an offer on the home and expect its cooperation as long as the offer is within the range of other sales in the area and the borrower can demonstrate financial hardship.

Source: The New York Times, Bob Tedeschi (05/15/2009)