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Archive for June, 2010

How Far Underwater Do Borrowers Sink Before Walking Away?

Wednesday, June 30th, 2010

By Nick Timirao

At what point do borrowers who owe more than their homes are worth decide to stop paying the mortgage?

A new study from economists at the Federal Reserve Board aims to answer that question. The research found that the median borrower who “strategically” defaults doesn’t walk away from the mortgage until the amount owed exceeds the value of the home by 62%.

The study is bad news for the mortgage industry in that it backs up the idea that a growing share of borrowers are walking away from loans. Concerns are mounting among lenders and investors that some borrowers who owe far more than their homes are worth are now choosing not to pay mortgages that they can afford.

But the silver lining here is that it suggests a rather high threshold for borrowers to walk away.

“The fact that many borrowers continue paying a substantial premium over market rents to keep their homes challenges traditional models of hyper-informed borrowers” choosing to simply walk away, the authors write. The results suggest “that borrowers face high default and transaction costs” that make strategic defaults less widespread than they might otherwise be.

The study examined borrowers in Arizona, California, Florida and Nevada who bought homes in 2006 with no money down. Nearly 80% of those borrowers had defaulted by September 2009. The authors then attempt to estimate and separate out defaults caused by job loss and other income shocks from those that had been spurred simply by negative equity.

Nearly 80% of all defaults in the sample resulted from the traditional combination of income shocks and negative equity. But for borrowers that had a loan-to-value ratio of 150%, half of all defaults were strategic defaults, driven purely by negative equity.

Most defaults are typically driven by a combination of income shock and negative equity, or what’s known as the “double-trigger” hypothesis. While borrowers who lose their jobs but have equity in their homes can sell and avoid default, those without any equity are left with fewer options.

“Borrowers do not ruthlessly exercise the default option at relatively low levels of negative equity, broadly consistent with the ‘double-trigger’ hypothesis,” the authors write. “But by the time equity falls below -50%, [half] of defaults appear to be strategic.”

(Read about a separate study released on Monday that finds that around one in five mortgage defaults could be considered “strategic.”)

Empirical evidence suggests that more borrowers may be walking away from their primary residences, but this is a much bigger problem in housing markets that saw stunning home-price gains followed by a free fall. Look to the desert suburbs of Phoenix and Las Vegas, the southwestern coast of Florida, and the far-flung exurbs of California’s San Joaquin Valley and Inland Empire.

The Fed study finds, as have others before, that borrowers are more likely to walk away from homes in states where lenders can’t sue them for a deficiency judgment. The median borrower in a state where lenders have recourse to borrowers’ assets, such as Florida or Nevada, defaults when he or she is 20 to 30 percentage points further underwater than the same borrower in a non-recourse state, such as Arizona or California.

Borrowers with higher credit scores also find it more costly to default. The median borrower with a credit score between 620 and 680 walks away when their loan-to-value ratio hits 151%, while the median borrowers with a credit score above 720 walks away with a loan-to-value ratio of 168%.

Fannie Mae Intensifies Penalties for Strategic Defaulters

Thursday, June 24th, 2010

by Brittany Dunn

Despite being able to afford their monthly mortgage payments, some borrowers are walking away from their homes based on the sheer fact that the property is currently worth less than what is owed. This phenomenon, dubbed “strategic default,” isn’t looked upon kindly, as it unnecessarily adds to the growing number of foreclosures across the nation.

In an effort to sway homeowners away from this growing trend, Fannie Mae announced policy changes on Wednesday designed to encourage borrowers to work with their servicers and pursue alternatives to foreclosure.

Under these changes, defaulting borrowers who walk away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the day of foreclosure.

In addition, Fannie Mae said it will take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments. In an announcement next month, the company said it will be instructing its servicers to monitor delinquent loans facing foreclosure and put forth recommendations for cases that warrant the pursuit of deficiency judgments.

“We’re taking these steps to highlight the importance of working with your servicer,” said Terence Edwards, executive vice president for credit portfolio management. “Walking away from a mortgage is bad for borrowers and bad for communities, and our approach is meant to deter the disturbing trend toward strategic defaulting.”

On the flip side, Edwards said borrowers facing hardship who make a good faith effort to resolve their situation with their servicer will preserve the option to be considered for a future Fannie Mae loan in a shorter period of time.

According to Fannie Mae, troubled borrowers who work with their servicers and provide information to help the servicer assess their situation can be considered for foreclosure alternatives, such as a loan modification, a short sale, or a deed-in-lieu of foreclosure. Fannie Mae said borrowers with extenuating circumstances who work out one of these options with their servicer could be eligible for a new mortgage loan in three years and in as little as two years depending on the circumstances.

Market Summary for the Beginning of June

Thursday, June 24th, 2010

On March 21 we reported the steep decline in ARMLS rental inventory that occurred between summer 2009 and spring 2010.

Inventory levels remained low and reached a minimum of 5,765 on May 4, but then started to rise again. The rate of increase has accelerated since the beginning of June and the current level is 6,169, of which 3,375 are single family detached. There are now 10% more single family detached rentals available on ARMLS than one month ago. This is still low compared with historical levels – there were 5,136 single family detached rentals available on June 10, 2009. However it seems that landlords have responded to the shortage and are now adding some inventory to meet the demand.

Rental rates (averaged for all areas and types) are currently 69.4c per square foot, and at the same date last year they were 67.7c per square foot. That’s an annual increase of 2.4%, but all of the increase has occurred since March 7, 2010 when a low point of 65.4c was reached. These figures are based on leases signed, not on average asking prices which are much higher (92.6c at present) and still coming down.

Of course ARMLS represents only a small part of the total rental market, but we believe it is large enough to form a representative sample of the single family market. The multi-family market is quite different and is not one which we cover.

Arizona Bankruptcy: What debts or bills can be wiped out by filing bankruptcy?

Friday, June 18th, 2010
posted by Jeff Judge

Filing Bankruptcy in Arizona can discharge most but not all debts (see chapter 11 bankruptcy in Tuscon for more information).  Bankruptcy can discharge: 

1. Credit Card Debts or other unsecure debts
2. Medical Bills
3. Old Vehicle Repossession Debts
4. Previous House or Apartment Evictions or Home Foreclosure Debts
5. Payday Loans
6. Co-signed Debts – if you co-signed a car, house, credit card debt for another person, you can wipe out your debt but not your co-debtor’s obligation
7. Bank Loans (Credit Union Loans) – However, the bank or credit union may take and close any accounts you have with them.
8. Secured Debts if you are willing to return the property.  With vehicles, if you keep the property then you must agree to keep the debt.
9. Leases or unexpired contracts – For example, if you can’t afford your gym membership, expensive apartment lease, Direct TV contract, cell phone contract, or car lease, you can terminate the contract or lease.

Generally, Bankruptcy does not discharge:

1. Taxes
2. Student Loans
3. Child/Family Support
4. New Debts within 90 days of filing date
5. Court Fines, Fees, and Restitution
6. Drunk Driving Accident Claims
7. Fraudulent Debts or Fiduciary Obligations
8. Business Debts involving Wages and Employee Benefits (see Tucson business work out solutions)

These are considered priority debts.  Generally, a Bankruptcy filing won’t discharge them but you should talk to an experienced bankruptcy lawyer to discuss all your options.  One option is to file for Chapter 13 Bankruptcy protection which can help you avoid collection harassment by setting up a 3 to 5 year repayment plan.

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75% of modified home loans will redefault

Friday, June 18th, 2010

By Les Christie, staff writerJune 16, 2010: 3:02 PM ET


NEW YORK ( — Most borrowers who have had their mortgages modified through a government-sponsored program will redefault within 12 months, according to a report released Wednesday.

Between 65% and 75% of loans that are modified through the Home Affordable Modification Program but not backed by the federal government are likely to go bad, according to the report released by Fitch Ratings, a N.Y.-based credit-rating agency.

The main reason these borrowers continue to struggle is that HAMP does nothing to solve the rest of their debt problems, the report added.

“Many of these borrowers still have very heavy levels of other debt,” said Diane Pendley, a Fitch managing director, “auto loans, credit cards and other expenses. The HAMP modifications reduce housing expenses down to 31% of income but do not touch these other obligations.”

On average, HAMP-modified borrowers, according to Pendley, have 64% of their monthly pretax income spent before they even buy a quart of milk. If even a small emergency arises — an unexpected car repair, a medical bill or a loss of overtime income — they’re in trouble.

“We’re talking borrowers who don’t have cash reserves,” said Pendley. “If they did, they wouldn’t be in this position in the first place. It doesn’t take much for them to get in the same situation again”

Jay Brinkmann, the chief economist for the Mortgage Bankers Association, finds nothing at all surprising about the Fitch finding. “Over the course of studying this over several years,” he said, “we find re-default rates from 40% to 60% on modified mortgages. You have borrower behavior that keeps coming back.”

When that happens, lenders are much more likely now to recommend that borrowers opt for foreclosure alternatives instead of modifying loans a second time.

Currently, according to the Fitch report, about half of prime borrowers who lose their homes now do so through foreclosure.

The other 50% go through short sales, in which they sell their homes for less than what they owe the bank, or deed-in-lieu, a transaction where the bank takes back the property directly and forgives the outstanding balance.

Don’t foreclose! Do a short sale

Friday, June 18th, 2010

By Les Christie, staff writer

NEW YORK ( — Short sales are the hottest thing going in the distressed-property market, and the trend is expected to get even hotter in coming weeks, when the government starts handing out cash to encourage lenders to close these deals.

“Banks have ramped up short sale approvals,” said Duane Legate of House Buyer Network, which connects short sellers with buyers. “They’re hiring a lot of the people who once worked in the mortgage-lending industry and moved them over to short sales.”

These transactions, where lenders allow homeowners to sell their houses for less than they owe, accounted for 17% of all residential real estate sales in February, up from nearly 13% in November, according to a monthly real estate market survey by Campbell/Inside Mortgage Finance.

And Bank of America (BAC, Fortune 500), the country’s largest mortgage servicer, has more than doubled the number of short sales it processed in recent months.

Elizabeth Weintraub, a Sacramento, Calif.-area real estate agent who handles many short sales, was amazed at how quickly a recent deal went through. “Bank of America approved it in 24 days,” she said. “That flipped me out.”

This is a huge change from even just six months ago when the short-sale market was stalled and most people would describe the process has real estate hell. Because lenders stand to lose so much on these transactions, they have been reluctant to make short sales happen, often waiting months before getting back to potential buyers.

“In the past, many short sales would never come to fruition and the ones that did averaged over half a year to complete,” said Chris Saitta, CEO of Equator, which produces short sale software.

“Things would just fall into a black hole and not come out again,” added Weintraub.

And even when banks did agree to the sale, the process could be further complicated if the original owner had a second mortgage.

In most cases, the first lender is repaid in full before any money flows to a second-lein holder. And because most distressed borrowers are severely underwater, there’s usually nothing left to send on. As a result, second-lein holders are left holding the bag and have been killing many deals.

But that has been changing. For one thing, banks realize that they make out far better financially with a short sale than a foreclosure. “The lenders lose 50% on a foreclosure and only 30% on a short sale,” said Glenn Kelman, founder of the real estate Web site Redfin. “And short sales offer a way to get distressed properties off their books quickly.”

And on April 5, lenders and mortgage investors will have even more incentives to offer troubled borrowers short sales instead of foreclosing.

Under the new Home Affordable Foreclosure Alternatives program, borrowers will earn a $3,000 “relocation incentive” and servicers will get $1,500 for handling a short sale.

The investors who actually own the mortgage notes will get $2,000 in exchange for sharing proceeds of the short sales with any second-lien holders. And, finally, those second lien holders will receive up to $6,000 for releasing their claims.

Lenders participating in the program must also determine the market values of properties early on and inform the owners of just what price they’re willing to accept. Then, if owners come back to the lenders with bonafide offers, they have to be accepted within 10 days.

Equator’s Saiita anticipates a short sale explosion in response to the new program. “The challenge will be handling all the volume,” he said.

The company has already tweaked its software, which 58 servicers use, to handle the new HAFA rules. And that should help reduce the time it takes to execute a sale, which currently averages 88 days.

The boom in short sales may accelerate the end to the foreclosure crisis by cleaning out the overhang of borrowers in distress and replacing them with more stable homeowners.

Plus, these sales are better for distressed borrowers because their credit scores suffer less. Going through a foreclosure can knock 200 points off a FICO score, twice as much as the penalty for a short sale.

Arizona Anti-Deficiency Statute

Tuesday, June 8th, 2010

Arizona’s mortgage deficiency statutes located at A.R.S. §33-729, §33- 814 and §12-1566 and the case law interpreting them are complex. This article includes a checklist of items to be considered to determine whether a mortgage lender has the right to obtain a mortgage deficiency judgment against a borrower or guarantor of a loan secured by real property pursuant to…

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Mortgage Debt Relief Act

Thursday, June 3rd, 2010

If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.

The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value…

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Three Things Homeowners Need to Know About Short Sales in Arizona

Wednesday, June 2nd, 2010

Fannie defines ALL Preforeclosure events as any one of the following:

  • Deed-in-Lieu
  • Pre-foreclosure Sale
  • Short Sale

Full Foreclosure retains a 5 yr waiting period
Note: New Waiting Periods Effective July 1, 2010

Preforeclosure Event Current Waiting Period Requirements
New Waiting Period Requirements


  • Deed-in-Lieu of Foreclosure – 4 years
  • Additional requirements apply after 4 years up to 7 years
  • 2 years – 80% maximum LTV ratios
  • 4 years – 90% maximum LTV ratios
  • 7 years – Standard LTV ratios
  • Preforeclosure Sale 2 years
  • Short Sale No specific policy currently exists
  • For extenuating circumstances, for all 3 event scenarios, it’s a 2-year waiting time and 90% LTV.

FHA is Different

Many people have recently asked what is the FHA waiting period after bankruptcy, foreclosure or a short sale. In answer, here are the FHA guidelines related to bankruptcy, foreclosure and short sales.

Chapter 7 Bankruptcy

FHA requires that the minimum waiting time is typically no less than two years from the discharge date. In addition, the borrower must have reestablished good credit or chosen to not incur new credit obligations.

Chapter 13 Bankruptcy

FHA states that a Chapter 13 does not disqualify a borrower from obtaining FHA financing as long as the borrower can show that at least one year of the pay-out period has elapsed under the plan and that all of the required payments (and mortgage payments when applicable) have been made on time. Also, the borrower must receive permission from the court to enter into the mortgage transaction.


FHA states that the minimum waiting period is three years for a borrower whose house has been foreclosed or who has given a deed-in-lieu of foreclosure. It has been asked, How does FHA determine the date of the foreclosure? Sheriff’s sale? redemption? paid claim date (if past foreclosure was FHA)?

If the previous foreclosure was not a FHA-insured mortgage, the three year period will typically begin on the date of the sheriff / trustee sale. If the previous foreclosure was a FHA-insured mortgage, it will be reported on HUD’s Credit Alert Interactive Voice Response System (CAIVRS). CAIVRS is a Federal government-wide repository of information on those individuals with delinquent or defaulted Federal debt and on those for whom a payment of an insurance claim has occurred. In these cases, because the default is on federal debt most investors will not allow another FHA, VA, or USDA loan.

Preforeclosure Sale (Short Sale)

FHA does not currently have a policy regarding the time required to reestablish credit and obtain a new FHA loan after a short sale. However, the borrower must be able to qualify using standard FHA guidelines including the fact that they typically can not have any late payments on their mortgage for the previous 12 months. Although this is the official FHA policy, many lenders have heard that FHA currently will not insure a new loan application from a borrower with a short sale that is less than three years old.  Many of the individual banks and lenders have implemented their own policies regarding the waiting period after a short sale. I have seen a typical range between two and four years.  We anticipate that FHA will issue a written policy regarding short sales with more liberal guidelines in the near future.

If in a case of relocation and there was a short sale for the previous residence and there are not any lates on the credit report, FHA will allow a new loan without a waiting period. The key is relocation (although it has not been defined what the minimum distance might be. How the previous lender reports the short sale/mortgage to the credit bureau may determine the approval.

New Seasoning Requirements To Obtain Traditional Mortgage Financing Following a Short Sale or Deed-in-Lieu

Tuesday, June 1st, 2010

The Arizona Association of Realtors form of Short Sale Addendum to the Residential Resale Real Estate Purchase Contract contains the following disclaimer: “Seller acknowledges that Broker is not qualified to provide financial, legal, or tax advice regarding a short sale transaction. Therefore, the Seller is advised to obtain professional tax advice and consult with independent legal counsel immediately regarding the tax implications and the advisability of entering into a short sale agreement.”

Sellers should not dismiss this cautionary statement. Short sales involve potential consequences that sellers might not expect. Here are a few key reasons why sellers should seek tax and legal advice so they can enter a short sale armed with good information.

Your lender may be able to sue you after the short sale A short sale occurs when a lender permits a homeowner to voluntarily sell their home even though the lender receives less from the proceeds of the sale than the outstanding balance on the loan. Unless the lender gives the homeowner a written release of liability, the lender could sue the homeowner for the unpaid balance of the loan (also called the deficiency). Some lenders even include in their short sale approval agreement an express provision reserving the right to sue the homeowner or require the homeowner to sign a promissory note for the deficiency.

In contrast, the anti-deficiency provisions contained in Arizona’s foreclosure statutes protects many (but not all) homeowners from liability to the lender after a foreclosure or trustee’s sale. A desperate homeowner might be grateful to learn the bank approved a short sale and rush to sign the bank’s approval agreement only to later face a lawsuit from the lender for a substantial liability. If anyone wonders whether banks would really pursue borrowers for deficiencies, they should consider lenders’ recent and ongoing efforts at the Arizona legislature to severely reduce the scope of the anti-deficiency statutes.

You could owe taxes as a result of the short sale Even though the seller receives no cash at closing in a short sale, the seller might owe taxes on the short sale. There are two possible types of taxes from a short sale – taxable cancellation of debt income (or COD income) and a taxable gain from the sale of the house.
Generally, if a lender cancels a debt, the cancelled debt will be COD income unless the borrower qualifies for an exclusion. Exclusions include qualified principal residence indebtedness and insolvency. Cancellation of a non-recourse debt (meaning a loan for which the lender’s only remedy the borrower’s default is to foreclose) does not result in COD income, but there can still be a taxable gain.

As strange as it may sound, a seller can have a taxable gain on a short sale. The gain or loss on sale of a property equals the difference between the seller’s adjusted basis in the property and the amount realized. In the case of a non-recourse loan, the entire unpaid debt immediately before the sale constitutes the amount realized for tax purposes.

Attempting a short sale does not stop a foreclosure Short sales are an alternative to foreclosure, but pursuing a short sale does not prevent a foreclosure. The short sale is a voluntary agreement between the homeowner and the lender. The lender doesn’t have to cancel a foreclosure until it approves the short sale (which can take months). If the seller can continue to make payments, this won’t be an issue. Otherwise, the clock will be ticking.