Short Sale After Foreclosure – Part 2

August 5th, 2011 by uteferdig

This is a follow up to a blog I had originally posted about 10 days ago http://uteferdig.metrolistpro.com/blog/2011/07/29/short-sale-after-foreclosure-closed-part-1/.

Problem with preliminary report:
Two days before our scheduled closing, I received the updated prelim.  Sadly, it did not show my sellers as the owners of the property.  Instead, it showed the servicer as the owner.  This is one of those moments when you just want to crawl in a hole and die.  How on earth can I straighten out this mess with less than 2 days before closing?  This was a new low on our roller coaster ride. I call my escrow officer and he tells me he is working with the title department.  Later that day, I am told that the prelim stands as is.  Now what?  Throw in the towel or keep fighting.  Well. giving up was not an option.  I send an e-mail to the rep at the trustee’s office who had helped us in getting the trustee sale set aside.  Her response to me seems to suggest that this was a case of faulty interpretation.  I forward the e-mail communication with her to the escrow officer.  The next day, the trustee’s office and title/escrow stick their heads together and work out the interpretation issue and a new updated prelim is issued now finally showing my sellers again as the owners of the property.  This gives new meaning to my motto “never give up, never surrender.”

Sloppily written funding conditions:
The updated/corrected prelim became available around noon the day before closing and of course we still need the buyer’s lender to approve the corrected prelim.  The buyer’s loan agent tells me he won’t know anything until the following the morning (the day of our scheduled closing).  Luckily, by then I had received extensions from both lenders, but the junior’s extension is only good for 2 extra days (i.e., final deadline is July 29th).  Mid morning, the loan agent responds to my update request with “nothing yet.”  I know then that we won’t close that day.

Missing HUD approval:
Then, early afternoon, I get a call from the escrow officer telling me that he still has not received the approved HUD from the first lender.  He asked me if I had heard anything.  Of course I had not because I am typically not involved in getting the final HUD approved by the short sale lenders.  Around 4 p.m., the escrow officer informs me that he still has not received the approved HUD.  Well, of course, by then it would not have done us any good to have a HUD approved that shows a 7/27 settlement date.  I asked the escrow officer to update the HUD to show a 7/29 settlement date and resubmit it for approval.  Since my short sale approval was based on a HUD with a July 29th closing date, closing 2 days later than expected was not going to affect the numbers.

The next day, I got up at 3 a.m. to write our closer at the first lender an e-mail asking for help in getting the HUD approved (they are 3 hours ahead of us Californians).  The closer replies just before 6 a.m. saying that the HUD has been approved, but he does not send me a copy of the approved HUD, which means I don’t know which HUD was approved (the one with the 7/27 settlement date or the one with the 7/29 date).  I sent an e-mail back asking for clarification and am advised that it was the 7/27 HUD that was approved and that we would of course need a new HUD reflecting the later closing.  I forward the 7/29 HUD that had already been submitted and ask for approval and that he send me a copy of the new approved HUD so that I could forward it to the escrow officer who could no longer access his secure e-mail account with this servicer because it had been locked (it only takes a couple of invalid password entries for it to lock and it’s a pain to get it unlocked, especially when the negotiator is on vacation).  Shortly thereafter, the closer sent me an approved HUD with 7/29 settlement date.

Authenticity of HUD approval questioned
Just before 8 a.m., I receive an e-mail from the buyer’s loan agent asking me how the lender knows that the HUD approval was indeed authorized by the servicer (The HUD just had a big “APPROVED” stamp at the top, but no signature).  Did they really think that I would forge a HUD approval?  Anyway, I did not have time to dwell on that.  I just forwarded the closer’s e-mail from that morning which clearly stated in the body of the e-mail that the HUD had been approved.  If he had just forwarded the approved HUD to me in an attachment without saying “HUD approved” they could have questioned that the attachment was the approved HUD.  I don’t think the loan agent really questioned my integrity.  He was trying to be proactive and anticipate any objections the underwriter might raise based on the experience that we had throughout this transaction.  They crossed every T and dotted every I more than once.  It was in many ways overkill and driven by fear that the investor would not buy the loan after the closing.  That’s part of the climate that we are in right now.  Lenders are as paranoid as we are.  Apparently, the e-mail from the closer satisfied the lender as I did not hear any more about the approved HUD.  I even had the sellers sign the updated HUD just in case the lender should ask for it (although the escrow officer did not require it).  Although nobody had asked for a signed updated HUD from the junior lien holder, we requested it just to be safe and the negotiator e-mailed it to me promptly.  The buyer’s agent and I also had the parties sign an addendum extending close of escrow until July 29th (again nobody had asked for it up until then, but we both felt that this was not the time to cut corners, which turned out to be a good thing – keep reading).

Closing:
At last, the wire was ordered shortly before 11 a.m. and we closed this escrow in the afternoon.  Once I received confirmation of closing around 2 p.m., I drove to the house to install the lockbox so that the buyer’s agent could retrieve the key.  I entered the house and just about suffered a heart attack as the sellers still had quite a bit of personal belongings there and nobody was home.   After the initial shock, I composed myself quickly and I reminded myself how wonderful my sellers had been throughout the transaction and I had not reason to believe that we would not be able to solve this last little problem.  I called my clients and found out that they thought they had till the morning to get out.  The husband called his brother and a friend and the house was vacant in record time (I called the buyer’s agent at 4:50 p.m. to inform her that she could pick up the key).  The little last minute excitement was just the icing on the cake.

Post Closing
The day after the closing, I received an e-mail from the closer asking me what I needed (it was in response to my e-mail asking for an approved HUD showing an authorized servicer signature – I had asked for it just in case the underwriter was not going to accept the closer’s e-mail).  I informed the closer that I needed nothing and that the escrow had indeed closed.  I receive an e-mail back saying that he had the funds, but none of the required post closing documents and low and behold, he asks me for a contract addendum extending the close of escrow.  The escrow officer informed me that all the required documents had been faxed to the servicer the day before (except for the addendum because the addendum was not on the list of the required documents) and they resend the documents that morning.

It was just very glad that we had prepared the addendum and had the parties sign it the day before the closing (the buyers were out of town about 2 hours away in an area with no cell reception and the buyer’s agent was able to get it signed – I could not have asked for a better buyer’s agent and better buyers). This confirms that we can never drop our guard and must make sure that our contracts reflect what’s going on.  Unfortunately, I see the opposite happening all too often in real life and I get strange reactions when I submit addenda that address the changes that occur throughout a transaction.

Finally, around 11 a.m., the closer confirms that he had everything and that the file had been closed.

Sleeping Beauty Wakes Up:
On Monday, August 1, 2011, I received an e-mail from the servicer’s rep who had dropped the ball when we needed help in getting the trustee sale rescinded (see previous blog), which made it necessary to escalate the file to her manager.  Her message informed me that the short sale had closed and that she had forwarded the information to the investor to make sure the trustee sale was going to be rescinded.  I can’t help but wonder where she has been while we were frantically working on setting aside the trustee sale so that we could close.  I had made it very clear to her that we needed it set aside before we could close and for her to tell me now that the short sale had closed 3 days earlier that she is making sure the investor will set aside the trustee sale is proof that she was asleep at the wheel and that escalating the file was the only way to get it done.  I guess I should be thankful that she stopped responding to our e-mails and phone calls as it was a clue to me that we had a problem.  Everything happens for a reason;  we just don’t always know what the reason is when it happens.

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Short Sale After Foreclosure Closed – Part 1

July 29th, 2011 by uteferdig

Never Give Up – Never Surrender

I am working on the final stages of a post foreclosure short sale. Let me say up front, the purpose of this post is not to provide a step-by-step guide on how to complete a short sale after the bank has foreclosed on the home. This is a story of hope, faith, dedication persistence, diligence and good fortune. Never give up, never surrender.

Background
Two failed loan modifications: I took this listing in December of 2010. My clients had already gone through 2 failed loan modification attempts (first application was denied because borrower was still current with payments and the second was rejected because the lender claimed that the borrower submitted a document a day late – never a decision on the merits). I was not part of the loan modification process. We were dealing with a first refinanced loan and a HELOC. I knew it was going to be challenging, but I had no idea how challenging it was going to be, which was probably a blessing.

Not eligible for HAFA:
We submitted an application for determination of HAFA eligibility. The servicer decided that they were not eligible for a HAFA short sale because the income to house payment ratio was just under the required 31%. The servicer counted an obscure health benefit as income although it did not mean more real gross income to the borrower. Lesson learned. The trustee sale which was by then looming was postponed for 60 days (new date was April 4, 2011).

The only good thing that came out of having tried the HAFA route was that the negotiator told me what the investor’s minimum net would have been and he also shared the BPO value. That was nice as it provided us with some guidance.

We received an offer soon after we had put the property on the market, but the buyer canceled just a few days later. Then we received a couple of other offers, but we had to counter because of the minimum net requirement. The buyers decided not to agree to the higher price. We were back to square 1. Then, when we were only 4 weeks away from the trustee sale date, we received another offer. It was lower than what we needed to meet our minimum net, but we decided to accept and I submitted the short sale package with a detailed CMA substantiating that the offer price represented fair market value. Prices had dropped substantially since the BPO in December, but we all know that servicers think the BPO value is sacred. About 3 weeks after I had submitted the short sale package, we received a counter. They wanted $20,000 more (difference between contract price and BPO value). Buyer counters back offering $5,000 over contract price. The second wanted $9,000 ($6,000 more than we had offered). The first was only willing to pay $6,000. Negotiator for the second agrees to submit to investor at $6,000.

The sinking feeling:
On Wednesday before the April 4 trustee sale, the negotiator informed me that the investor (one of the big ones) rejected the request for postponement of the trustee sale. Not the kind of news I wanted to share with my seller and the buyer’s agent. I told everybody, but then I went into a mad research frenzy and I e-mailed everybody that I thought would listen or have any kind of helpful info. I also sent e-mails to the investor. I don’t remember how I got the e-mail addresses. Like I said, I just went on a research marathon and was going wild. I was not ready to throw in the towel. I wish I could say I knew exactly what I was doing. I just put all the skills that I had learned in my past life as a research attorney to work. I was in the zone.

The day of the trustee sale: In the morning of the day of the trustee sale, I found an e-mail from the investor in my inbox. It confirmed that the investor had rejected the application to postpone the trustee sale. It suggested that the buyer could purchase at the trustee sale, but it also stated that if nobody bought the property at the trustee sale and the property reverts back to the investor, that we could petition the servicer to reopen the short sale and the investor would rescind the trustee sale if the short sale was ultimately approved. I checked with the buyer’s agent to see if the buyer was still interested and was told that they were. My seller was willing to hang in there as well. We had nothing to lose by trying. I asked a few major short sale players in the industry if they had ever done one of those petitions, but I was told that the trustee sales they got set aside were trustee sales that occurred because someone had dropped the ball and forgot to ask for postponement. My case was not a result of an oversight. The investor unambiguously rejected the request for postponement. Everybody told me that the odds were against us.

Needless to say, there is no “petition to reopen” form that I could download somewhere. So, I just had to design my own. No big deal. I have drafted complaints for court actions before. Writing a petition was not going to be a problem. As a matter of fact is was right up my alley. I confirmed that nobody purchased the property at the trustee sale and submitted the petition to reopen the day after the trustee sale. I knew that we had to act quickly because investors assign these properties to REO agents quickly. Indeed, my seller found a note from the soon-to-be REO agent posted to the front door only 3 days after the trustee sale. I called the agent and found that she could not have been nicer and more supportive of what we were trying to do. She was a class act. The seller worked out cash for key schedule and we kept the agent informed of our progress with the petition to reopen the short sale.

Black hole #1:
After I submitted the petition to reopen the short sale to the servicer, I dutifully called in for updates a couple of times a week. For about three weeks, I was told that they had not update and nobody could tell me if someone was even looking at the petition. They only confirmed that they had received it, but nobody knew what the process of review was going to be. Finally, 4 weeks later, a ray of hope. The servicer informs me that a processor has been assigned to the file and our escrow officer received an e-mail from the processor a day later letting him know what documents she needed to proceed. Not sure why she contacted the escrow officer instead of me, but I was not complaining. I was just glad there was movement and I immediately contacted the processor and provided her with everything she needed. The only thing I could not provide to her yet was the approval from the junior lien holder. The negotiator had sent the file back to the processor claiming that the buyer had walked. Luckily. the processor called me and I was able to set things straight. but of course we had to wait to get reassigned to a new negotiator.

Both lenders ordered new BPOs, which was excellent news as values had declined since the December BPO. Both BPOs were completed within days of finding out that our petition to reopen was successful. The good thing about working post trustee sale was that we no longer had the trustee sale hanging over our head, but my seller had to deal with the cash for keys timelines and the threat of eviction if cash for keys failed.

Approval Letters:
The servicer for the first was not going to submit the file to the negotiator until we had approval from the junior lien holder, which we were able to supply about 3 weeks after the first had assigned a processor to the file (May 26, 2011). Getting that junior lien holder approval was a big milestone. The approval expired July 7th. The clock was ticking. While we were waiting for the approval from the junior, the seller’s first deadline for cash for keys came and went. He decided to forgo the $3,500 the investor had offered him. Taking the cash for keys would have been the end of the short sale. The investor gave the seller a second deadline and offered $2,500. The second deadline was about 3 or 4 weeks later.

About a week after we had submitted the junior lien holder approval to the servicer for the first lender, our escrow officer received a call from the servicer for the first informing him that the investor would not entertain the offer from another buyer. Our escrow officer tells the servicer rep that he was not aware of a new buyer and he asked whether she had spoken to the listing agent. He immediately called me (it was early in the morning) and told me what had happened. I called the servicer rep back and was lucky she answered the phone. I explained that we were still dealing with the same buyer who had submitted the offer a month before the trustee sale and that we had not switched buyers. I also told her that I would have never submitted the petition to reopen if we no longer had the buyer. She asked me if I could submit proof that we still had the same buyer. I sent her the original contract and a recently updated lender pre-approval letter that we would not have been able to get if the original buyer had walked. The investor was satisfied with the proof and we received short sale approval from the first on June 3rd and the first gave us until July 27th to close escrow. The second deadline for cash for keys came and went while we were waiting for the approval from the first and the seller was facing the possibility of an eviction action. Once we received the approval letter, the investor told the eviction department to not file the unlawful detainer, but it was a close call.

Pending at last:
After the trustee sale, I changed the MLS status for the listing to “temporarily of the market” while we were awaiting the fate of the petition to reopen. Obviously, the status “contingent” was no longer accurate and there is no status that fit our situation. I had a couple of agents call while we were temporarily off the market and I had to explain that we could not accept backup offers because my seller was technically speaking no longer the owner of the property and could therefore no longer enter into a purchase agreement. Aside from this legal impediment, I also knew that the investor would not allow us to substitute at this juncture (I knew that even before the servicer rep asked me to prove we were still dealing with the same buyer). It felt very good to finally be able to change the status to pending.

Escrow phase:
The buyer conducted inspections, the appraisal came in at purchase price, no conditions and then the underwriter boom lowered. The updated preliminary title report showed the investor as the owner of the property. Not good. but not surprising. The underwriter insisted on getting the trustee sale set aside before loan docs could be drawn. Making it just a funding condition was not good enough. Back we go to the servicer. The loan condition surfaced on June 24th. but it’s clear that we would most likely not be able to be able to close escrow by July 7th (the expiration date of the junior approval letter). I submitted a request for an extension and the junior gave us till July 27th. Now both approval letters expired the same day.

Black hole # 2:
I notified the servicer of the loan condition and was told that the investor was working on setting aside the trustee sale. We were not dealing with the negotiator. We were dealing with a special liaison person who initially responded promptly to update requests. Then suddenly, dead silence. No response to phone calls and no reply to e-mails (mine or the escrow officer’s). 2 weeks go by and I decide it’s time to escalate. I manage to get an e-mail address for a manager of our liaison person and he responds promptly and assigns someone else who e-mails me and calls me telling me what the action plan is. Someone from the trustee’s office calls me and tells me that she is on it and a few days later we have copies of the rescission documents that were submitted for a rush recording. The owner of the mortgage company reluctantly agrees to authorize loan doc drawing. Buyers signed loan documents on July 22nd and while we were at the signing the escrow officer received confirmation that the rescission was recorded on July 21st. Now we are waiting for the preliminary title report to become available which should happen tomorrow, July 25th. I am praying that the underwriter will sign off on the updated preliminary report and fund the loan in time for a July 27 closing. I did ask for an extension from both lenders just in case, but have not yet received extension and hope very much that I won’t need them.

Regardless of whether this escrow will close, it was worth all the hard work and agony as my seller’s future employment could hinge on whether he has a foreclosure on his record (a foreclosure could jeopardize his security clearance).

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Short Sales – Uncertain Tax Consequences

July 19th, 2011 by uteferdig

By now, just about everybody in the real estate industry has heard about the mortgage debt relief act and insolvency. The short sale advisory that we use in short sales in California does a pretty good job at summarizing some of the issues sellers may face after a short sale, but the advisory is not intended as a substitute for legal advice. In reality, there are many situations in which even attorneys cannot predict with certainty what will happen after a short sale or a foreclosure because they don’t know what a lender will do. Will they pursue the former home owner for a deficiency or forgive the balance of the loan?

There is a 4-year statute of limitations, which means that the lender has 4 years to decide what to do after the borrower stopped making payments. Let’s say, a home owner stopped paying in June of 2010 and the home either sold as a short sale or foreclosed in February 2011. The lender, a junior non-purchase money lender, has until June 2014 to either pursue the former home owner for a deficiency or forgive the remainder of the loan balance. Not only is there no finality for the borrowers who lost their home, but there is also the possibility that the lender will issue a 1099C after the expiration of the mortgage debt forgiveness act on December 31, 2012. If that happens, the borrower will only be able to avoid the debt forgiveness tax consequence if another exception, such as insolvency, applies. Thus, if the lender does not issue the 1099 until the end of the 4-year statute of limitations period, the borrower’s tax liability is uncertain for years after the sale or foreclosure on the house and it makes it very difficult for borrowers to get ahead. It seems to me that those who would like to have certainty will have to discharge the unpaid loan balance in bankruptcy as a discharged debt is not taxable and they would opt to do so soon after the short sale or foreclosure so that they can move on with their lives. Since a home owner does not know at the time of signing a listing agreement whether the recourse lender will agree to forgive the remainder of the loan, there is no way of knowing whether going through a short sale really makes sense.
For real estate agents, it means that they need to choose their short sale listings very carefully or run the risk of wasting lots of time. Unless a borrower is willing to proceed with the short sale even if the junior lien holder will not forgive the remainder of the loan, it does not make sense to try to negotiate a short sale that involves a recourse junior lien. While I understand that a listing agent can’t force a seller to close a short sale, I think it is important to address the issue at the time of the short sale listing appointment. Listing a home with sellers who make it clear from the start that they will not agree to a deficiency agreement is like playing Russian roulette. While I understand why a seller would not want to agree to a deficiency agreement and the possibility of facing years of uncertainty, taking a listing with a low chance at closing does not appear very good business practice.

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Ute Ferdig (DRE #01326917)
Ferdig Real Estate Solutions
Newcastle, CA 95658
916-751-1267