kcaa-network-20090423

Radio Show #8: Short Sales: How to eliminate Tax Consequences

kcaa-network-20090423

Section One:

Welcome to the Foreclosure Freedom Network Show.  I’ve been in the mortgage industry for 20 years and am a Licensed California Realtor and Certified Loss Mitigation Consultant, which means I’ve learned the ropes of mediating between the homeowner and lender and hope to help every homeowner understand this crisis better and what the remedies may be for you, if in trouble.

This is a half hour show and will be broken into three sections, first one is titled: Mortgage Crisis History and proposed or needed remedies.  The second is ‘Homeowner Affordability and Stability Plan (HASP)’.  The third is titled “Do it Yourself Loan Modification”.  Please call in if you have questions and I’ll answer them at the tail end of that section. If you’re too shy to call, you can go to the chat room and type in your question and the moderator will forward it to me so that I can respond to this on the air.  I cannot guarantee I’ll get all these topics fully covered in this show today, but where one is left incomplete I’ll come back and cover it in the next show, which again is every Thursday afternoon at 2PM, KCAAradio.com. If you miss any portion of this or would just like to listen to it 15 times, no problem, there is a podcast on the KCAARadio website and can be easily navigated to for this show and all future ones.

I’m very happy to be here today with a show filled with news, both good and bad on the current Mortgage Crisis.  Good news is that the new Homeowner Affordability and Stability Plan won’t help everyone, but will assist 3-4 Million with their mortgages (for those with Fannie/Freddie investor loans) and should serve as an example to other investors not using this plan helping to forge the way to Crisis Relief and a better day for many.

Most of the listeners are residents of San Bernardino, Riverside and Los Angeles Counties.  You need to know that according to the News Release last week on Home Price Declines in the Fourth Quarter of ‘08 and the Annual ‘08 Overview, it showed San Bernardino and Riverside to have lost 34.32% of home values in ‘08 alone!  There are only five cities with a more declining picture in the Country, with Fairfield, Vallejo, Modesto, Stockton and Merced (the worst) all in California!

Further, when looking at the entire nation in the last Quarter of ‘08 through to present, CA, NV, AZ, MI, VA, DC, MD, GA and FL are deemed to be the worst and of these CA beats the cake.  So an end is not in sight at this point.  This is not good news.

To look at the more immediate history on Real Estate, the market has been appreciating steadily since 1998 at an accelerating rate from 5 - 9.4% in 05.  Then, in ‘06, few people noticed the appreciation fell from 9.4% to 3.8% (lower than any appreciation level in many years).  That was the signal to escape from the game, but many were too hopeful that it was a false alarm.  ‘07 averaged -0.7% depreciation of assets; weighted far more heavily in the last quarter.  At this point in time there was the beginnings of hysteria amongst lenders who were quite concerned and convinced that Sub Prime products were going to become a catastrophe yet most lenders at this point were barely giving lip service to approving loan modifications or short sales though some were quick to handle.  Those were mostly non Federal Reserve Member Banks but were big enough lenders to send their delegates to become educated in how to best avoid the pitfalls of a market run (i.e. get out quickly with a depreciating market & if there’s a buyer, approve the short sale).  And more importantly, if you have a homeowner who can pay 300K and wants to stay in their home, isn’t that better than selling to a buyer who will only pay 200K and wants to get a renter in there?  (How to avoid a future slum 101)

It’s been obvious to me (since the middle of ‘07 at a National Mortgage Bankers Convention I attended featuring the Founder of Hope Now who was very explicit in both lender problems and desperately needed solutions) that Lenders have been fully aware of the Crisis and histories solutions. If you flood any market with more supply than demand, what do prices do?  If you have 50% of all current loans with Sub Prime borrowers on oddball mortgage products (such as two years interest only at 2% and the remaining 28 years at 3-4 points above Libor Index or Reverse Mortgages), what do you think is going to happen once the Adjustable Rate Mortgage Resets? If you misroute or hang up on owners who are calling in for help or have ‘collections’ harass them and threaten them with foreclosure should they not submit a payment in three days, two or three times in a row, can you expect them to keep trying?   I don’t exaggerate to say this still happens with most lenders today - and I mean by that - today.

We work with lenders every day on these issues.  Few negotiators or even managers of the Home Retention Departments or Pre Foreclosure Sale Departments do the math or logically detail the pro’s and con’s of keeping many thousands of non performing loans on the books, continuing to lose money on these loans while the paperwork gets misplaced (lost, thrown out, who knows) for the tenth time or workouts get denied for the third time with no diligent effort to contact the homeowners agent and merely ‘not enough data’ or ‘price too low’coming to the homeowner in a letter written the same date the modification application was denied, giving them no chance to counter with needed data or correct a misunderstanding.  There has traditionally been little guidance through this maze for lender or homeowner.  I really don’t believe all these lenders are so clueless.  Could there be some intention here to allow this market to depress?  (Was the intention to force Government increase in bribe, I mean stimulus money to pay the servicers for their time in performing their job in this?  Was it to depress the market and buy up tons of properties for pennies on the dollar?  Who knows?)

I’ve seen the worst of scenarios; where Fraudulent Scoundrels joined with Senior Loan Officers of a Federal Reserve Member Bank (who had been sending out memo’s to their junior loan officers detailing how to cheat their internal underwriting system and get the loan through even when the buyer is not qualified), These schemes were not your corner broker, they Scammed many thousands of Ma and Pa wannabe investors in ‘06 out of hundreds of thousands promising dank hotel rooms would be converted into the Taj Mahal type of thing and running off with the funds before any conversion was even begun.  At the root of this evil there is and was dishonest developers who had engineered the scheme to begin with, and who happen to still be there today, refusing to sell their failing project to new blood but rather hanging onto it, continuing to crush it into the ground; why?  Could it be to depress the market so that the 200K units could be acquired back at a penny on the dollar and once again they would hold all the cards?

Let’s face it, historically speaking when there is a market collapse like this it’s both preceded and added to by fraud, deceit, carpetbaggers, ponsi schemers and all manner of assorted scoundrels and don’t think for a minute that these are only lowly creatures at the bottom of the barrel.  By now you all know the scope of deception at all levels of the playing field.

Now what?

Section Two:

Just yesterday the President’s Homeowner Affordability and Stability Plan was released along with Lender guidelines.  Let’s take a look at what this means for the average Joe.

Loans must· be originated on or before January 1, 2009.
First-lien loans on owner-occupied properties with unpaid principal· balance up to 729,750 or higher if owner occupied property has 2-4 units on it.
All borrowers must fully document income, including most recent pay stubs, tax return, signed affidavit of financial hardship.·
Property owner occupancy must be verified through credit report and other documentation.·
Incentives are now offered to lenders and servicers to modify ‘at· risk’ borrowers who haven’t missed payments but risk of default is imminent.
Modifications can start from 3/4/2009 through 12/31/2012 and can only be modified once under the program.·

Terms and Procedures:
NPV (Net Present Value) test must be required to be used on each loan· that is at risk of imminent default or 60 days delinquent.  This will compare NPV of cash flows with modification and without modification.  If the test is positive, meaning that the NPV of expected cash flow is greater in the modification scenario the servicer must modify unless fraud was or is a factor on the part of the home owner or a servicer contract prohibits this.
Parameters of the NPV test are spelled out in the guidelines,· including acceptable discount rates (The Discount Rate is the interest rate the Federal Reserve Banks charge depository institutions on overnight loans.), property valuation methodologies (homes will not be appraised but many lenders use ‘BPOdirect.net’ to determine rough home value and/or have a Realtor who will do a Current Market Analysis for a small fee, home price appreciation assumptions - taking a look at the overall trend of housing.  (Currently in San Bernardino and Riverside remember it’s a negative 34 percent), foreclosure costs and timelines (5 months in California for the timeline and costs average $40,000) and borrower cure and re-default rate assumptions (last year 54% of all loan modifications failed because they weren’t sustainable - it’s stated in this act to be mandatory that lenders evaluate the sustainability of the modifications they propose and approve on behalf of Fannie and Freddie now and all is based on conservative estimates) and Implied future rates based on futures prices which are:
[February 2009: 0.16%
March 2009: 0.18%
April 2009: 0.19%
May 2009: 0.21%
June 2009: 0.24%
July 2009: 0.29%
August 2009: 0.35%
September 2009: 0.40%
October 2009: 0.46%
November 2009: 0.52%
December 2009: 0.57%]
From this you can see that sooner is better than later on getting your Loan Modification Application in.
Servicers will follow a specified sequence of steps in order to· reduce the monthly payment to no more than 31% of gross monthly income (DTI). [The front end ratio is calculated by taking the sum of your mortgage payment, property taxes, and homeowners insurance, and dividing that total by your gross monthly income and must end up no more than 31% of loan amount.]
The sequence of modifying is to first reduce the interest rate (to a· floor rate of 2%) then if necessary extend the term or amortization of the loan up to a maximum of 40 years, then forbear principal (as needed have principal either forgiven or paid on a gradient or in a tail end balloon note) or Hope for Homeowners is acceptable.
The monthly payment includes principal, interest, taxes and· insurance, including flood and homeowners and HOA or COA fees.  Monthly income includes wages, salary, overtime, fees, commissions, tips, social security, pensions and all other forms of income.
Servicers must enter into the program agreement with Treasury’s financial agent on or before December 31, 2009.·

Payments to Servicers, Lenders and Responsible Borrowers:
The program will share with lender cost of reducing monthly payments from 38% to 31% DTI.·
Servicers that modify loans according to the guidelines will receive· an up-front fee of 1K plus “pay for success” fees on still-performing loand of $1,000 per year.
If Homeowners make their payments on time they are eligible for up to· 1K principal reduction payments each year for up to 5 years.
The program will provide one-time bonus incentive payments of $1,500· to lender/investors and $500 to servicers for modifications made while borrower is still current on mortgage payments.
The program will include incentives for extinguishing second liens on loans modified under this program.·
No payments will be made under the program to the lender/investor,· servicer or borrower unless and until the servicer has first entered into the program agreements with Treasury’s financial agent.
Similar incentives will be paid for Hope for Homeowner refinances.·

Transparency and Accountability
Measures to prevent and detect fraud, such as documentation and audit requirements.·
Servicers will be required to collect, maintain and transmit records· for verification and compliance review, including borrower eligibility, underwriting, incentive payments, property verification and other documentation.
Freddie will audit compliance.·

Section Three:
DO IT YOURSELF LOAN MODIFICATION
Anyone who can read and follow instructions, has nothing to hide and has the time and follow through to persist, get the lender on the phone and gather up all the support documents needed, can do their own Loan Modification.  We encourage those who want to save money to do it their self.  We also offer custom loan modifications and do very well at this. Our rates are very reasonable and need only be paid once the loan modification is obtained.  Here are 13 lucky steps you can do to obtain a loan modification for your first mortgage:
1. Educate yourself.  Download this Podcast and study it.  If you go to our blog site, www.foreclosurefreedomnetwork.com, you can also get a written version of it and can follow along or print it out.
2. Analyze the current market value of your home.  If you’re not a Realtor you can still use the website www.zillow.com to see a fair average estimate of the value of your home.  It isn’t exactly what the lender is looking at but is close.
3. Fill out the financial form.  We have enclosed this on the blog.  It’s very important to BE HONEST.  The lender is going to find out any credit or banking information anyway, just be sure you do before you fill out the form.  To go back later and change all of the figures looks at best irresponsible.
4. Review your financial form and analyze it to see if any of the fees can be reduced.  You can call your Credit Card companies and generally get a reduction of interest even if doing this for yourself, although true pros will get better results and will likely be worth the fee.  Look at each field, don’t skip over things like Medical because you don’t have insurance.  Put down an average monthly expense based on a reasonable estimate of the last few years and breakdown by month and adjust for inflation.  Try to be realistic on this. Part of your analysis is for Front End Debt to Income Ratio or PITI/Income.  (PITI = Principal, Interest, Taxes and Insurance connected to the home in question.)  Ideally your proposed workout will equal 31% and no lower.  Higher is acceptable, if you can afford it.
5. After you deduct all your expenses listed from Income you have ‘discretionary funds.’  Try not to put discretionary funds into the other fields above this or it could throw off the calculations and delay the process as it will lead to challenges.
6. If your balance is too low do a work out to bring it up or down.  This will be the ‘proposed workout’ you will give to the lender, the desired result.  If the balance is too high you don’t qualify for a loan modification, however double check your figures first and remember be honest with this, it won’t pay to try to slip one over here and will disqualify you if discovered and will likely be discovered, so just forget about trying.  The ‘sweet’ range for getting a proposed modification to be approved after all frivolous expenses are deleted or if apparently frivolous but not, are explained, is between $200 and $500 left over each month to take care of emergencies.  This of course is relative but certainly this is a good range.
7. Take a look at your Total Back End Debt to Income ratio.  Here you must include all Debt, Credit Cards, Auto if over 10 payments, personal loans, second mortgages or Equity Line of Credits and any other debt including your first mortgage principal, interest, taxes and insurance.
8. Write a Hardship Letter.  Don’t forget to include your Hardship, i.e. why can’t you pay this?  What happened?  If nothing happened and you just want a better rate, how difficult is it for you to come up with your monthly payments and is yours a fixed or adjustable mortgage or reverse mortgage.  Be complete.  Please don’t skimp on this, it’s very important.
9. Look on your lenders website where they should have detailed what they specifically need from you for Loan Modification Package.  If you can’t find this you can go to our Blog site.  We put most of the Lender Workout Package needs on it.
10. Call or write your lender requesting help with your loan and include all the needed documents.  Ask for ‘Home Retention Department’.  Even if it’s named differently, saying Home Retention will communicate your intention is to Retain your Home, not sell it or foreclose.  If you’re calling, document the entire conversation and note the employee number and name of who you talked to and what was said, date and time and number you called and put on these notes the next step, so you don’t forget.
11. Prepare for this call by reviewing this Podcast and written form on the blog site.  Don’t skimp here, you may lose the day just because you got all turned around and gave out incorrect or incomplete data.
12. If you ‘blow it’ don’t fear, just call back and correct the data.  Sometimes talking to a new person can calm your nerves and give you more confidence.
13. Call back once a week until the modification is approved.  Provide any further documents requested.  Don’t hesitate to resend the package if it appears to be lost, but if you have to do this also send it certified mail return receipt, so that next time you can state to the Counselor who signed for it and the date and time, so that this can be hunted up on their end; then make sure they do.
14. Be sure that if in default you are saving up minimally 31% of your monthly income to put towards the workout once approved.  There may be some room for leeway here, but minimally one month at 31% will be needed to set the new loan modification into action.

Connie Saunders
Foreclosure Freedom Network
(877) 333-4506