Short Sale Blog

Good news on the national front regarding mortgage payment delinquencies - but, as usual, the Seattle area and Washington state seem to be lagging behind the national trends.

According to a new report by TransUnion, as published in the Silicon Valley Mercury News, the percentage of homeowners who are 60 or more days delinquent on their mortgage payments dropped in the first quarter of 2012. The nation-wide delinquency rate is now at its lowest level since 2009.

But that drop is small. The national delinquency rate was 5.78% for the first three months of this year - down from 6.19% a year ago. Before the housing crash, the delinquency rate was about 2%, and it peaked at nearly 7% in late 2009.

Throughout this housing crisis, though, Washington state seems to lag behind national trends. As the national delinquency rate declines, there are only eight states where the delinquency rate is still increasing: we in Washington are one of those eight.

The regions that were hit hardest and earliest by the financial crisis and high foreclosure rates are showing very strong signs of recovery. A report published this week by HousingWire, using figures published by Move Inc., lists the regions that show the “top turnarounds.” These are the towns showing the highest level of housing market recovery, as reflected by declining inventory and increasing house prices. Those top turnaround towns include Phoenix-Mesa in Arizona; Orlando, Florida; and Oakland and San Jose in California - all of which have already been hit hard by foreclosures.

We are confident that Washington state and the Seattle real estate market will also follow those same trends and see recovery in the housing market. We just seem to continue to be a year or two behind the national trend.

As delinquency rates are still on the rise here, homeowners who are struggling to make their mortgage payments will continue to look for solutions such as short sales, in order to avoid foreclosure and the negative affects that mortgage payment delinquency will have on their credit rating.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

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A revision of Senate Bill 6337 (companion to House Bill 2718) was passed last month. The aim of the bill is to protect homeowners who short-sale their homes from being pursued by their lender for the deficiency.

The deficiency is the shortfall owed to the lender after a home is sold short. For example, if a homeowner owes $200,000 on their mortgage but, following the short sale, can pay the lender back $120,000 on the loan, the difference - $80,000 - is the deficiency.

This bill sounds great in theory. But, for the majority of homeowners who process their short sale here through Seattle Short Sales, Inc., this bill will make no difference at all.

Why? Because the majority of our approvals - in fact 93% of all short sale approvals we negotiated last month - already come with a clear wording that waives the homeowner of ever having to pay back the deficiency. Our homeowners already have the protection that this bill would offer.

The new bill applies only to short sales for which the lender has issued a Form 1099 to the borrower: the homeowner to whom the debt was forgiven. Lenders are required to issue a 1099 any time that they forgive a debt of over $600. This means that the borrower must declare the forgiven debt, and they may have to pay tax on it as if it were income. It also means that the lender may write off the bad debt as a loss, which means that they may get a tax break on that loss.

So, really, what Bill 6337 does is prevent a lender from both writing off the bad debt as a loss, and also pursuing the borrower to pay back that debt. They must choose one option or the other. (Which - really - should be the case for whenever a 1099 is issued, not only in the case of short sale deficiencies).

And that seems only fair.

But, as we pointed out, 90% or more of our recent approval letters already specify that the lender will not pursue the deficiency. Here are some sample stats showing how our track record of obtaining deficiency waivers with short sale approvals has increased over the past two years:

(A quick point here, in case you were wondering why we’ve only shown stats for a few months over the past two years: We could not afford the time to go through all of the hundreds of short sale approvals we have negotiated over that time period. So we used the March 2010 and March 2011 stats, which we had already gone through for our blog post on deficiency waivers. And then, starting last July, we changed our file-naming system so that whether the deficiency was waived (“Debt Settled”) or not waived (“Lien Release” only) is in the file title, so we selected the two months at the beginning of that period as well as the last two months. You can review our complete short sale approval letter database here).

So two years ago, back when the majority of short sale approvals did not explicitly waive the deficiency, this bill might have made a difference. But now that lenders have realized that short sales are in their best interests, too, and are willing to write into their approval letters that they will waive the homeowner of ever having to repay the deficiency… well, Bill 6337 won’t do anything. They have already said they will not pursue the deficiency.

For the minority of our short sale approval letters where the lender does not explicitly waive the deficiency… well, even then, Bill 6337 will not change much. According to the wording of the bill, the lender is only prevented from pursuing the deficiency if they have issued a 1099. But if they don’t issue that 1099, again, the bill won’t prevent them from chasing borrowers up for that deficiency down the road - or to selling that loan on to debt collectors.

The take-away here is that the protection for homeowners who are considering a short sale is that Bill 6337 will not likely protect you. Your security lies in the wording of your original approval letter. Make sure that the negotiators who are working on your behalf work towards clear and unambiguous wording about waiving the deficiency balance - and then you will know that your future is safe, Bill 6337 or not.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

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This week, the Washington State legislature passed the new House Bill 1362, also known as the Foreclosure Fairness Act. The bill, sponsored by Democratic state Rep. Tina Orwall (Des Moines) is aimed at reducing the high rate of foreclosures in Washington State. The bill was passed by the Senate at the end of March, but with amendments, so it had to return to the House, where it was passed on Wednesday.

Recent data released by RealtyTrac indicate that Washington State had the 11th highest number of foreclosures in the country for February 2011. One third of these were in King County, with Snohomish and Pierce Counties together accounting for another third.

According to HB 1362, section 1a, "The rate of home foreclosures continues to rise to unprecedented levels, both for prime and subprime loans, and a new wave of foreclosures has occurred due to rising unemployment, job loss, and higher adjustable loan payments.”

This represents a significant rise in the foreclosure rate for the state; two years ago, Washington ranked only 25th nation-wide. Over 77,000 families state-wide have lost their homes in that time period, and 43,000 more families are expected to lose their homes in 2011.

The Foreclosure Fairness Act has been drafted with the intention of slowing the foreclosure rate in Washington State by providing homeowners with information and alternatives. There has been a growing recognition that the current American foreclosure system is “broken,” with many struggling homeowners stymied about their options due to problems communicating with their loan servicers: long telephone waits, lost paperwork, not getting to speak to right people. The new bill will bring homeowners and servicers face to face, in the company of a third party to facilitate negotiations.

Rep. Orwall told the Seattle Medium that “one of the keys to restore Washington’s economy is to stabilize the housing market through a proactive and effective strategy that helps families keep their homes. Mediation is an important new tool to ensure that all options have been explored before moving to foreclosure.”

The new bill will require that lenders provide homeowners with a notice of how much of a payment (including any fees) is required to reinstate a deed of trust before recording notice of foreclosure sale, and also that they explain that mediation is an option. It will allow for the provision of a professional housing counsellor (i.e. a disinterested third party) early in the process, to help with communication, in order to try to avoid issuance of a foreclosure notice in the first place.

If the homeowner and servicer cannot come to an agreement, the bill then provides for foreclosure mediation: help from the third party in looking at alternatives, such as short sales. Foreclosure mediation has already dropped the foreclosure rate in other states.

The bill also provides for a mechanism for funding the new housing counsellors. Financial institutions which issue more than 250 notices of default in the preceding year will be required to pay a $250 fee on each notice of default. The fee will also help to fund outreach campaigns as well as the costs of enforcement of the new regulations.

“Foreclosure may sound like someone else’s problem, but when it’s happening en masse, like it’s happening right now, it’s all of our problems,” commented Sen. Adam Kline to The State Column, noting that a high rate of foreclosure “tears the connecting threads out of our neighborhoods.”

Foreclosure mediation, aimed at finding alternatives to foreclosure, will not only help individual homeowners. Reducing the foreclosure rate statewide will also help the housing market as a whole, speeding the recovery of home prices and eliminating the problem of negative home equity that currently plagues one third of Seattle area homeowners.

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