UTAH REAL ESTATE INVESTOR

The Making Home Affordable (MHA) program has the ability to help assist home owners who are struggling to make ends meet in our current economic crisis.  This program gives the home owner a temporary reduction in their interest rate to allow them to recover from the economic downturn and keep their home.

The essense of the program works like this…the lender will modify the home’s first (1st)  mortgage to 31% of the household’s gross income.  This reduction remains in effect for 5 years.  After the 5th year the interest rate will rise 1% per year until it reaches the original mortgage interest rate where it remains fixed for the life of the loan.

In order to accomplish this modified mortgage payment the lender has 3 options:

1. Reduce the interest rate down to (as low as) 2%
2. Ammortize the loan out to (a maximum of) 40 years
3. Forgive a portion of the loan principle.

To determine if your income would justify a MHA modification you need to determine if 31% of your gross income is equal to (or greater) than the lowest minimum payment allowed by the lender under this program.  The lowest minimum payment is figured by taking your loan balance plus all accrued late fee, charges and missed payments and ammortizing that amount over 40 years at 2% interest.  Then add in your property taxes, hazard insurance and mortgage insurance (if applicable).  This represents the lowest minimum payment under the MHA program.

Example:  John Homeowner has a $100,000 mortgage with payments of $845/month ($125/mo for taxes and insurance).  John has missed 5 payments and the lender has begun foreclosure proceedings (late fees of $400 and attorney’s fees of $3,000).  So John now owes the lender:

• $100,000 principle balance
• $4,225 in missed payments
• $400 in late fees
• $3,000 for attorney’s fees
• $107,625 Now owed to the lender

John’s lowest possible payment under the MHA program ammortizes $107,625 over 40 years at 2% which equals $325.92/mo PLUS $125 ) for taxes and insurance) which equals $450.92/mo.

Most people understand this lowest payment calculation but fail to understand the gross income calculation.  In order to qualify for the modification John’s income must support $450.92 at 31% of his income.  So John must have a gross income of $1,454.58/month and be able to show that he can support the balance of his monthly obligations at that income after the mortgage modification.  Keep in mind that the more money John makes the higher the modification amount will be to keep it at 31% of his gross monthly income.

Should you find yourself facing a potential mortgage default or foreclosure be sure to contact your lender or a HUD-approved housing counselor.  Both are very interested in keeping you in your home and helping you find a solution to your current economic struggles.  And both will usually provide these services for FREE.

For more information on Foreclosure Prevention visit www.hud.gov or www.CommunityActionUC.org. To find a FREE HUD-approved housing counselor to explore your options call 1-800-569-4287 (TDD 1-800-877-8339).

Q: What Should I Be Aware Of?

Beware of scams!  Solutions that sound too simple or too good to be true usually are.  If you’re selling your home without professional guidance, beware of buyers who try to rush you through the process.  Unfortunately, there are people who may try to take advantage of your financial difficutly.  Be especially alert to the following:

Equity skimming  In this type of scam, a “buyer” approaches you , offering to get you out of financial trouble by promising to pay off your mortgage or give you a sum of money when the property is sold.  The “buyer” may suggest that you move out quickly and deed the property to him or her.  The “buyer” then collects rent for a time, does not make any mortgage payments, and allows the lender to foreclose.  Remember, signing over your deed to someone else does not relieve you of your obligation to pay on your loan.

Hint: Do not sign over your deed or sell your property with a “proper” closing.  And always have payments made to a third party escrow company to insure that the payments are made as agreed.

Phony Counseling Agencies  Some groups calling themselves “counseling agencies” may approach you and offer to perform certain services for a fee.  These could well be services you could do for yourself for free, such as negotiating a new payment plan with your lender, or pursuing a pre-foreclosure sale.  If you have any doubt about paying for such services, call a HUD-approved housing counseling agency at 1-800-569-4287 or TDD 1-800-877-8339.  Do this before you pay anyone or sign anything.

For more information on Foreclosure Prevention visit www.hud.gov or www.CommunityActionUC.org. To find a FREE HUD-approved housing counselor to explore your options call 1-800-569-4287 (TDD 1-800-877-8339).

Q: How Do I Know If I Qualify For Any Of The Work-out Options

Your lender will determine if you qualify for any of the alternatives.  A housing counseling agency can also help you determine which, if any, of these options may meet your needs and also assist you in interacting with your lender.  Most services are provided FREE of charge.

For more information on Foreclosure Prevention visit www.hud.gov or www.CommunityActionUC.org. To find a FREE HUD-approved housing counselor to explore your options call 1-800-569-4287 (TDD 1-800-877-8339).

Q: What Are My Alternatives?

If you are facing the possibility of foreclosure you may be considered for the following:

• Special Forbearance  Your lender may be able to arrange a repayment plan based on your financial situation and may even provide for a temporary reduction or suspension of your payments.  You may qualify for this if you have recently experienced a reduction in income or an increase in living expenses.  You must furnish information to your lender to show that you would be able to meet the requirements of the new payment plan.
• Mortgage Modification  You may be able to refinance the debt and/or extend the term of your mortgage loan.  This may help you catch up by reducing the monthly payments to a more affordable level.  You may qualify if you have recovered from a financial problem and can afford the new payment amount.
• Partial Claim (FHA Loans)  Your lender may be able to work with you to obtain a one-time payment from the FHA-insurance fund to bring your mortgage current.  If you are between 4-12 months delinquent but can afford the regular monthly mortgage payment you may get a loan (a lien on your property with 0 payments, 0% interest) to bring your mortgage current.  This lien must be paid off when you refinance or sell your home.
• Pre-Foreclosure Sale (Short sale)  This will allow you to avoid foreclosure by selling your property for an amount less than is necessary to pay off your mortgage loan.
• Deed-in-Lieu-of Foreclosure  As a last resort, you may be able to voluntarily “give back” your property to the lender.  This won’t save your house, but it is not as damaging to your credit rating as a foreclosure.  In order to qualify for this option you must be delinquent on your mortgage, not qualify or be successful with any other work out option and only have one (1) mortgage on your home.

For more information on Foreclosure Prevention visit www.hud.gov or www.CommunityActionUC.org. To find a FREE HUD-approved housing counselor to explore your options call 1-800-569-4287 (TDD 1-800-877-8339).

Q: What Should I Do If I Have Missed A Mortgage Payment?

1. Do Not Ignore The Letters From Your Lender!  If you are having problems making your payments, call or write to your lender’s “Loss Mitigation Department” without delay.  Explain your situation.  Be prepared to provide them with financial information, such as your monthly income and expenses.  Without this information, they may not be able to help.
2. Stay in your home for now.  You may not qualify for assistance if you abandon your property.
3. Contact a HUD-approved housing counseling agency.  Call 1-800-569-4287 or TDD 1-800-877-8339 for the housing counseling agency nearest you.  These agencies are valuable resources.  They frequently have information on services and programs offered by Government agencies as well as private and community organizations that could help you.  The housing counseling agency may also offer credit counseling.  These services are usually free of charge.

For more information on Foreclosure Prevention visit www.hud.gov or www.CommunityActionUC.org. To find a FREE HUD-approved housing counselor to explore your options call 1-800-569-4287 (TDD 1-800-877-8339).

Q: What Happens When I Miss My Mortgage Payments?

Foreclosure may occur.  This is the legal means that your lender can use to reposses (take over) your home.  When this happens, you must move out of your house.  If your property is worth less than the total amount you owe on your mortgage loan, a deficiency judgment could be pursued.  If that happens, you not only lose your home, you also would owe your lender an additional amount.

Both foreclosures and deficiency judgments could seriously affect your ability to qualify for credit in the future.  So you should avoid foreclosure if possible.

For more information on Foreclosure Prevention visit www.hud.gov or www.CommunityActionUC.org.  To find a FREE HUD-approved housing counselor to explore your options call 1-800-569-4287 (TDD 1-800-877-8339).

“A Las Vegas bankruptcy judge has dealt a blow to an obscure but critical piece of the mortgage enforement machinery that could slow foreclosures.

“After a rare hearing in front of three judges last year that initially encompassed 27 cases, U.S. Bankruptcy Judge Linda Riegle has ruled that the Mortgage Electronic Registration System (MERS) could not represent lenders seeking to foreclose on delinquent homeowners already in bankruptcy unless it could produce the actual loan note. This goes to the heart of how home lending has evolved over the past two decades, with a loan rarely staying on the books of the originator but often being sold several times to other institutions or investment groups. As a result, producing a loan document is far more complex than opening a drawer in a filing cabinet.” (Tim O’Reiley)

Essentially the court ruling means that a lender must be able to produce the actual mortgage note in order to foreclose. While this case has been appealed, it awaits to be seen what the ultimate ramifications are for all the mortgage notes being serviced by someone other than the lender and what rights they maintain through the foreclosure process.

“How do I stop the foreclosure?” This is a question that I’m being asked more and more as the economic recession progresses. There are several options that are available to most people but it comes down to 2 basic actions: 1 – become current with the mortgage or 2 – settle and close the account. Those are the only 2 ways to stop a foreclosure. In all fairness, there are a few other options that will stall a foreclosure (such as bankruptcy or other legal proceedings) but these don’t actually stop the foreclosure process.

Most homeowners who contact me are looking for ways to keep their homes. This means they are looking for option #1, how can I become current with my mortgage even though I am currently (or will soon be) behind in my payments? The average homeowner has a few options available in this case.
1. Refinance the home…if the home owner’s credit has been to badly damaged they may be able to refinance their home. Consider an FHA loan which allows a much lower credit score but still has competitive loan rates (some loan limits may apply).
2. Loan modification…contact your lender and ask them about options for loan modification. This is only realistic if your payment is about 1/3 of your total monthly income. If the payment is greater than 1/3 then a loan modification is simply delaying the inevitable (future foreclosure). Be careful when modifying your loan. If the lender simply adds all your back-payments and fees into the mortgage then your mortgage payment will go up and you won’t have done yourself any favors. You need a reduction in monthly payment either through a lower interest rate or reduced principle balance owed (or both).
3. Loan rescission…if the loan is for your personal residence and the loan is less than 3 years old, you may qualify for an extended right of rescission. Through this legal process you can force the lender to modify your loan to much more favorable terms that will be affordable to you. Since this process can take up to 1 year, you may also qualify for free housing during that year (at the lender’s expense).

If you already know that keeping the house isn’t going to be a possibility there are several more options for selling the home, even in today’s market, with terms that are acceptable to your lenders.
1. Short sale…selling you home to a buyer for less than you owe the lender. Most lenders are very willing to consider a short sale because they actually will make more money than if they foreclose. You should only proceed with a short sale with someone who is knowledgeable and experienced with the short sale process. Most mistakes in the short sale process are made in the early stages of the process and once these mistakes are made they usually can’t be undone and you could end up with a foreclosure anyway.
2. Seller financing…a simple way of saying that someone else with take over your responsibility to make the payments to the lender. This is a great way to sell a home but you need to make sure that the buyer is able and willing to make those payments on your behalf. If they don’t make the payments it is your credit on the line.
3. Assumptive short sale…a combination of options #1 & #2, this process will usually settle the 2nd mortgage for a discount (usually under $3,000) and may modify or simply reinstate the 1st mortgage after which the buyer will service the 1st mortgage on your behalf.
4. Mortgage rescission…cancelling the mortgage and enforcing the rescission through legal options will force the lender to take the property back with no further negative credit reporting. Because the mortgage is cancelled there can be no foreclosure, no deficiency judgement and no 1099 tax reporting.

While this list certainly isn’t exhaustive, it represents the top 7 options that most homeowner are utilizing in today’s market. For a more extensive list you can read my short consumer report by visiting me at my website at http://khayyamjones.com.

I have a simple strategy that I use when I want to get a short sale sold. Here is the process:

1. List the Property
2. Get an Investor Offer on the Property
3. Collect current Financials & other Short Sale Documents
4. Submit entire short sale packet to lender(s)
5. Order BPO/Appraisal and lender’s BPO/Appraisal
6. Start a “Dutch Auction” list price weekly reduction
7. Negotiate lowest acceptable net price to lender
8. Compare Highest & Best offer with lender’s approved price/value
9. Close transaction

Here is a short summary of the reasoning behind each step:

1. List the Property
The lender wants to know that we are doing everything we can to facilitate a sale. If the lender knows that it is listed and marketed on the MLS then we have the best chance of finding a qualified end buyer. They also know that the offers from a listed property represent “market value” and are more willing to negotiate a good settlement value.

2. Get an Investor Offer on the Property
Investors will always offer a low price on any property in order to get the best deal available. At this stage of the game it doesn’t matter, we just need a legitimate offer that we can submit to the lender to get the short sale process started (we are always honest and never fabricate an offer). We also want that offer to be low so that we can find the lowest acceptable value that the lender will approve.

3. Collect current Financials & other Short Sale Documents
The financial information needs to be current so it is collected when we have an offer. I have a network of investors so I know I’ll have an offer within a couple days of listing the property so I begin to collect this information immediately. The short sale documents include all the financial information to “prove” to the lender that the seller can no longer afford to keep the property and that they need to sell it. These documents also show what happened to the seller because they could afford the property when they bought it and now they can’t they afford it. All information needs to be truthful and honest.

4. Submit entire short sale packet to lender(s)
All the information is submitted in one packet to the lender. This keeps information from becoming lost and allows the process to move forward more quickly. Since most lenders are backed up with other short sales and foreclosures, the first several calls to the lender will just be checking on information and making sure that all information then lender needs has been submitted. Any missing information can quickly be resubmitted.

5. Order BPO/Appraisal and lender’s BPO/Appraisal
While almost no one does this, we order our own BPO on each property. We want to have an independent opinion of value and price. The 1st mortgage lender will almost always order their own BPO (an appraisal if the loan is over FHA limits) to establish value. With our own BPO in hand we will meet the BPO agent and show them the property and give them a copy of the BPO as a second opinion. We will point out those things which are important to the value of the property but that may not be obvious to someone not already familiar with the property. Our main objective is to get an idea of where that agent feels the value of the property will be (although they never tell us their value). We also use our BPO to send to any junior lein-holders so they are also aware of value (which makes negotiations with them go more smoothly).

6. Start a “Dutch Auction” list price weekly reduction
To get the best price available we need to have competing offers. Once the BPO has been completed by the lender we start to lower the price each week until we start to get offers on the property. If we don’t see any offers during the week we lower the price. (I like to lower the price on Thursday so that anyone looking for homes to view over the weekend will see the price change and come to see the home.)

7. Negotiate lowest acceptable net price to lender
Once all of the paperwork has been received by the lender the case/file is assigned to a negotiator who then orders the BPO/appraisal. (Note: We hold any subsequent offers until the negotiation is concluded to establish the best possible pay-off/settlement the lender will allow for the seller.) Once the BPO has been received by the lender we begin the actual negotiations. We know that the lender’s BPO value represents the price that the lender believes they can sell the property for (should they take the property back through foreclosure). We know that the lender’s bottom line is below that number because the foreclosure process is very expensive (attorney’s fees, property insurance, loan interest to Fed, selling costs, commissions, concessions, and dropping property values…not to mention the problems the lenders are having with too much bad debt on their books). Those costs generally add up to 15-20% of the property value (they can be significantly higher in upper-end homes). The lender will negotiate a value that is as high as possible but at least higher than their bottom line through the foreclosure process. Once they agree to a net value it is logged into their system.

8. Compare Highest & Best offer with lender’s approved price/value
Once we have determined the lender’s bottom line we will compare that value with our highest & best offer on the property. If the H&B offer is significantly higher than the lender’s approved bottom line then the investor will buy the property and resell it to the buyer with the H&B offer. However, if the H&B offer is not significantly higher then the lender’s bottom line then the H&B offer is submitted to the lender for approval and that buyer will close a single transaction. (Significantly higher means about 12-15% of the property value. The investor will have costs associated with 2 closings: 1% 1st closing costs, 3% money costs, 1% 2nd closing costs, 3% commission to 2nd buyer’s agent and the investor’s profit. So if the investor finds their own buyer they can reduce the sales price by 3% and still be profitable.)

9. Close transaction
Finally we close the transaction, either with or without the investor. The seller should be done with this settlement and no further negative reporting from the lender (our agreement with the lender states something to the effect of “satisfaction in full to seller”). Because the lender is writing off the “bad debt” lost in the negotiations, the seller may see a 1099 tax form which shows the lender’s loss as income for the seller. If the property was the seller’s principle residence then that “income” may be excluded from their taxes (some restrictions apply so consult your tax advisor).

Conclusion
At the end of the day this process is not 100% successful. However, it is a process that gives the seller the best chance of getting an approved short sale from their lender that is sellable in today’s market.

The economy has hurt a lot of people and many families have been forced our of their homes through the foreclosure process. With all the economic problems already weighing you down, what do you do when your mortgage company sends you a tax form 1099-C showing their loss as your gain? Does that mean you have to pay taxes on that money the mortgage company lost when you already have no money (which is why you lost your home in the first place)?

Not necessarily! There may be help through the Mortgage Forgiveness Debt Relief Act of 2007 (enacted Dec. 20, 2006). According to this act, up to $1,000,000 of forgiven debt on your principle residence may be excluded from your taxes (up to $2,000,000 if filing jointly). This debt forgiveness does not apply to second homes, investment property, business property, credit cards or car loans. Also, the debt on the principle residence must have been used to purchase, build or substantially improve the property (so if the loan was to get cash to pay for a new car, kid’s college, investments, etc., then this debt is not exempt under this act).

For most Americans this is extremely good news! Because of our country’s economic struggles, this debt relief act has been extended through 2012. To take advantage of this legislation you will need to fill out IRS form 982 and submit it with your other tax documents.