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Foreclosure:Prevention and Opportunities for Buyer-Clients

A program by the Real Estate Buyer’s Agent Council, Inc.

of the National Association of REALTORS®

Student Manual

Foreclosure: Prevention and Opportunities for Buyer-Clients

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Copyright © 2006, Real Estate Buyer’s Agent Council, Inc. (REBAC) Revised October 2007, December 2007 IMPORTANT NOTE: The Real Estate Buyer’s Agent Council, Inc. and National Association of REALTORS®, its faculty, agents and employees are not engaged in rendering legal, accounting, financial, tax, or other professional services through these course materials. If legal advice or other expert assistance is required, the student should seek competent professional advice. Real Estate Buyer’s Agent Council, Inc. 430 North Michigan Avenue Chicago, Illinois 60611 USA Phone: 800-648-6224 E-mail: [email protected] Web site: www.rebac.net

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Acknowledgments The Real Estate Buyer’s Agent Council (REBAC) expresses gratitude and appreciation to Edward A. Bugos, ABR®, without whose subject matter and industry expertise this course would not have been possible. Edward would like to thank his business partner, Jean Gesdorf, for her time, energy, and invaluable assistance in developing the content of this course.

About REBAC – The Real Estate Buyer’s Agent Council, Inc.

About the ABR® Designation

The Real Estate Buyer’s Agent Council, REBAC, of the National Association of REALTORS® promotes superior buyer representation skills and services. REBAC’s membership numbers more than 50,000 and is the world’s largest organization of real estate professionals concentrating on buyer representation. Members who meet all course and professional experiential requirements are awarded the ABR® (Accredited Buyer’s Representative) and/or ABRMSM (Accredited Buyer’s Representative Manager) designation(s). Both are the only designations of their type recognized by NAR. REBAC Membership Benefits listing in REBAC’s online membership directory at

www.rebac.net. Today’s Buyer’s Rep, REBAC’s award-winning monthly

newsletter. The Real Estate Professional, a bi-monthly trade magazine

covering the entire spectrum of the real estate industry. bi-annual CD-ROMs containing fresh, relevant topics. weekly HotSheet e-mail newsletter marketing tools such as REBAC logos for print media,

marketing brochures and REBAC’s Home Buyer’s Kit. REBAC Day, at the annual NAR National Conference and

Expo. national consumer awareness marketing campaign plus, new benefits and membership enhancements added

each year

The Accredited Buyer’s Representative (ABR®) designation is the “benchmark of excellence in buyer representation.” The Real Estate Buyer’s Agent Council, Inc. (REBAC) of the National Association of REALTORS® awards this coveted designation to REALTORS® who meet the specified educational and practical experience criteria. ABR Candidacy The first step in becoming an ABR® designee is to become candidate by successfully completing the ABR® designation course. Candidates must maintain membership in the National Association of REALTORS® and REBAC. A free one-year membership in REBAC is included with registration for the ABR® designation course. Thereafter, dues are $110 per year. Candidates have three years (from successful completion of this ABR® designation course) to fulfill the designation requirements. Candidates who do not complete the designation requirements within the three-year time frame must start over. REBAC Benefits All REBAC membership benefits

Consumer and industry respect and recognition

Tools to help you promote your business to consumers and other real estate professionals.

Discounts on products and services for your buyer representative business.

Information on the buyer representation trends and influences

New designees receive Welcome Packet that includes a: Letter of recognition

Designation lapel pin

Certificate

Press release for local media Note: ABR® candidates cannot use the ABR® logo or refer to themselves as an ABR®-designated buyer’s representative. Only REALTORS® who have met all requirements for the designation and are active members of NAR and REBAC are permitted to call themselves an ABR® designee and use the ABR® logo.

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Follow these steps to

Accredited Buyer’s Representative

Complete the ABR® Designation course, including an 80% passing grade on the written exam.

Complete one elective course

Submit documentation, verifying five completed buyer ‘s representative transactions

Maintain membership in the National Association of REALTORS® and REBAC

Who should earn the ABR®? Agents who want to enhance their buyer representation skills, and demonstrate proficiency in serving the special needs of buyers.

Accredited Buyer’s Representative Managersm designation is for owners, brokers, and managers who have or intend to incorporate buyer representation into their company’ service offerings. Offered in partnership with the Real Estate Managers Council of the National Association of REALTORS®. Requirements are completion of both the ABR® and ABRMsm courses plus verification oversight of 25 buyer’s representative transactions or two years of experience overseeing buyer’s representatives. Administrative Accredited Buyer’s Representative designation can be awarded to real estate professionals who do not actively represent buyers, list, or sell; candidates must submit a letter from the managing broker, written on company letterhead, attesting to such and the transaction verification requirement is waived. To change to an ABR® designation, transaction documentation is required.

Elective courses Go to www.CourseCalendar.com for course dates and locations

Successful Buyer Representation in New-Home

Sales Successful Relocation Representation e-Buyer Innovative Marketing for Buyer’s Reps Foreclosure: Prevention and Opportunities for

Buyer-Clients Harnessing The Power Seniors Real Estate Specialist (SRES®)

Designation Course

e-PRO Creating Wealth through Residential Real Estate

Investment (CRS) Effective Negotiating for Real Estate

Professionals (WCR) Land 101: Fundamentals of Land Brokerage (RLI)

Resort and Second-Home Markets CIPS I: Essentials of International Real Estate

= available as online course through REALTOR® University


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Table of Contents

Acknowledgments ..................................................................................................................... iii

Introduction .................................................................................................................................1 Modules and Objectives.........................................................................................................1

Module 1: Foreclosure: A Growing Trend ................................................................................3 What Is a Foreclosure?..........................................................................................................3 Foreclosures on the Increase ................................................................................................3 Reasons for Foreclosure........................................................................................................4

Module 2: The Process of Foreclosure...................................................................................10 Mortgage Theory and Ownership of Property......................................................................10 Types of Foreclosure ...........................................................................................................12 The Foreclosure Process.....................................................................................................13 Professionals Involved in Foreclosures ...............................................................................15

Module 3: How Buyer-Clients Can Prevent Foreclosure.......................................................18 Becoming Educated.............................................................................................................18 Choosing the Right Loan .....................................................................................................18 Staying Aware of Predatory Lending Practices....................................................................20 Understanding Nontraditional Loan Programs.....................................................................20 What to Do If Payments Fall Behind ....................................................................................25

Module 4: Getting Involved in the Foreclosure Market .........................................................32 Foreclosure as Opportunity..................................................................................................32 Who Should Buy a Foreclosed Property?............................................................................33 Preparing Buyer-Clients on What to Expect ........................................................................34 Buying Property Pre-Foreclosure.........................................................................................35 Foreclosure Business Niches ..............................................................................................39

Module 5: Working with REOs and REO Specialists.............................................................43 REOs Before and After Foreclosure ....................................................................................43 How REO Properties Are Different from Typical Listings.....................................................43 Working with a Listing Agent on an REO Property ..............................................................44 Writing the Offer...................................................................................................................45 Managing the Funds ............................................................................................................46 Working with Title Companies .............................................................................................46 Working with Home Inspections...........................................................................................46 City Point of Sale Inspection ................................................................................................46 Final Walk Through..............................................................................................................47 Closing Dates and Per Diems..............................................................................................47 Benefits for You and Your Clients........................................................................................47 Other Revenue Opportunities ..............................................................................................47 Getting Started.....................................................................................................................49

Resources..................................................................................................................................50 Finder Companies................................................................................................................51

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How to Avoid Foreclosure ...................................................................................................52 A General Guide for Short Payoffs ......................................................................................55 Judicial and Non-Judicial Process Summary.......................................................................56 Title Theory and Lien Theory States....................................................................................57 State Comparison Table ......................................................................................................58


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Discussion Questions Discussion Question 1: Reasons for foreclosure ..........................................................................8 Discussion Question 2: Preventing foreclosures ........................................................................25 Discussion Question 3: Loan workouts.......................................................................................27 Discussion Question 4: Deed-in-Lieu Case Study ......................................................................28 Discussion Question 5: The short sale .......................................................................................30 Discussion Question 6: Agency relationships .............................................................................36 Discussion Question 7: Agency responsibilities and unlisted properties ....................................37 Discussion Question 8: Agency responsibilities and listed properties ........................................38 Discussion Question 9: REOs.....................................................................................................44 Discussion Question 10: Getting started.....................................................................................49 List of Figures Figure 1: Anatomy of a Mortgage Scam .......................................................................................5 Figure 2: Possible Warning Signs of a Predatory Loan ................................................................6 Figure 3: Foreclosure Rates by Loan Type, 2007 Q1...................................................................8 Figure 4: Title Theory and Lien Theory States............................................................................11 Figure 5: Diagram of Foreclosure ...............................................................................................13 Figure 6: Six Common Mortgages and Who They Fit .................................................................19 Figure 7: Option ARM Payment Options.....................................................................................22 Skill Builder Tips Skill Builder Tip 1: Understanding the difference between predatory lending and creative lending

programs ................................................................................................................................7 Skill Builder Tip 2: Lien, title, or intermediate theory...................................................................12 Skill Builder Tip 3: FHASecure....................................................................................................23 Skill Builder Tip 4: The borrower could receive a 1099 on a short sale ......................................29 Skill Builder Tip 5: Provisions to Include in the Purchase/Sale Agreement ................................35 Skill Builder Tip 6: Getting started in the pre-foreclosure market................................................39 Skill Builder Tip 7: Exclusive buyer representation agreement...................................................40 Skill Builder Tip 8: Recommend a lien search ............................................................................40 Skill Builder Tip 9: Get to know the asset manager ....................................................................43 Skill Builder Tip 10: Do not let buyers “go it alone” .....................................................................45

Introduction

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Introduction The goal of this course is two-fold. The course enables students to: 1. Counsel home-buying clients on they can help prevent foreclosure. 2. Spot opportunities for buyer-clients in the foreclosure market

segment.

Course topics include: Understanding the process of foreclosure and how it occurs.

Counseling buyer-clients to help them avoid foreclosure proceedings.

Tapping into the foreclosure market for the benefit your business and buyer-clients.

Performing a needs assessment for a buyer-client considering a foreclosure property.

Integrating foreclosure property opportunities into your current business.

Working with bank-owned real estate (REO) in pre- and post-foreclosure.

Modules and Objectives

Module 1: Foreclosure: A Growing Trend Define foreclosure.

Describe the reasons for foreclosure.

Differentiate mortgage fraud from predatory lending.

Module 2: The Process of Foreclosure Understand the differences between lien, title, and intermediate theory.

Differentiate judicial foreclosure from non-judicial foreclosure.

Describe the foreclosure process and types of foreclosures.

Define the roles of professionals involved in a foreclosure.


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Module 3: How Buyer-Clients Can Prevent Foreclosure Explain how future foreclosures may be reduced by educating the

buyer public.

Describe nontraditional loan programs and the clients for whom these programs are best suited.

Understand mortgage loan workout options as means of preventing foreclosure.

Identify short sales and deed-in-lieu-of-foreclosure as additional ways to avoid foreclosure.

Module 4: Getting Involved in the Foreclosure Market Identify the clients who are best suited to purchase foreclosed property.

Explain how to prepare buyer-investors on what to expect before viewing properties.

Describe considerations in buying property pre-foreclosure

Describe other foreclosure business niches, including auctions, short sales, sheriff’s sales, and judgment liens.

Module 5: Working with REOs and REO Specialists Describe how the sales of REO properties are different from typical

transactions.

Communicate to REO departments the benefits for the bank and consumer of working with a real estate professional experienced in handling foreclosure properties.

Explain how to work with a listing agent on an REO property.

Define the term broker price opinions (BPOs).

Module 1: Foreclosure: A Growing Trend

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Module 1: Foreclosure: A Growing Trend In this module:

defining foreclosure

foreclosure statistics

reasons for foreclosure

What Is a Foreclosure? A foreclosure is the legal process by which a borrower in default under a mortgage is deprived of his or her interest in the mortgaged property. It usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt. A foreclosure may negatively affect the borrower’s ability to obtain credit in the future.

Foreclosures on the Increase Real estate foreclosures have been increasing and will continue to do so. According to a recent U.S. Foreclosure Market Report1, 925,986 foreclosures were filed in the first half of 2007. This represents a 55 percent increase from the first half of 2006. Based on these data, the national foreclosure rate for the first six months in 2007 is one foreclosure filing for every 134 U.S. households. Some states experience higher rates of foreclosures than others. From January to June 2007, for example, the 10 states with the highest rates of foreclosure filings included: Nevada Colorado California Michigan Florida Ohio Georgia Arizona Connecticut Indiana

Among the indicators that point to an increasing number of future foreclosures are:

Congressional reports and secondary mortgage market findings

negative impact of heavy refinancing

precarious debt load of the American consumer

general economy fears of inflation, higher interest rates, and flat incomes

1 Realty Trac. Foreclosure Activity Up Over 55 Percent in First Half of 2007. Available at: http://www.realtytrac.com.


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Foreclosure: Myth or Reality? Myth: Lending institutions are eager to initiate foreclosures when borrowers default on mortgages. Reality: Lending institutions do not want to maintain an inventory of foreclosed real estate. They are not in the property management business and the expense of maintaining these properties will likely not be recouped.

Reasons for Foreclosure The most common reasons for foreclosure and loss of property are: Non-payment of mortgage Failure to pay property taxes Bankruptcy2 Surety for other debts, i.e., the property is used as collateral or security

for the debt obligation Forfeiture for illegal activities, such as seizure by the federal Drug

Enforcement Agency (DEA) of property used in drug manufacturing or trafficking

The underlying causes for the sharp increase in foreclosures, however, may point to mortgage fraud and predatory lending.

Mortgage Fraud Mortgage fraud is deliberate criminal activity. The “lenders” who are involved in fraudulent practices may fabricate and falsify information such as income and employment verification or forge signatures on loan documents and property titles. Fraudulent practices involve ignoring the right of rescission time period for a deed filing, financing based on inflated appraisals, fake documents, sales to straw buyers who represent the original sellers, and phantom second loans. The Federal Bureau of Investigation (FBI) lists the following as additional indicators: Exclusive use of one appraiser

Increased commissions/bonuses to brokers and appraisers

Bonuses paid (outside or at settlement) for fee-based services

Higher than customary fees

Requests to sign blank application, employee or bank forms

Purchase of loans that are disguised as refinances

Investors-short term investments with guaranteed re-purchase

Investors used to flip property prices for fixed percentage

Multiple "holding companies" utilized to increase property values

2 Under new laws, the person declaring bankruptcy must first be pre-qualified for debt. The person must prove a worthiness of bankruptcy.


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Source: Federal Bureau of Investigation. Financial Crimes Report to the Public, Fiscal Year 2006. Available at: http://www.fbi.gov. In March 2007, an Atlanta jury found developer Phillip Hill guilty of 166 counts of fraud and money laundering, one of the largest mortgage-fraud cases in U.S. history. Hill bought homes and sold them to straw buyers at inflated prices. For an illustration of Hill’s mortgage scam, see Figure 1.

Figure 1: Anatomy of a Mortgage Scam

© 2007, The Washington Post. Reprinted with Permission.


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Predatory Lending While the definition of predatory lending varies from state to state, there are many common practices. For a list of possible warning signs, see Figure 2.

Figure 2: Possible Warning Signs of a Predatory Loan

Sounds too easy. “Guaranteed approval” or “no income verification”

regardless of borrower’s current employment, credit history, and assets. These claims indicate the lender doesn’t care about whether you can afford to make the payments over the long haul.

Excessive fees. Higher lender and/or mortgage broker fees than are typical in your market. Because these costs can be financed as part of the loan, they are easy to disguise or downplay. On competitive loans, fees are negotiable. It is common for home buyers to pay only one percent of the loan amount for prime loans. By contrast, a typical predatory loan may cost five percent or more.

Large future costs. High-risk adjustable rate mortgages where the payment rises a lot after a short introductory period are seldom appropriate for families who already have had problems repaying other loans. Home buyers also should avoid a large single “balloon” payment (a lump sum due at the end of the loan’s term).

Closing delays. The lender deliberately delays closing so the commitment on a reasonably-priced loan expires.

Over-valued property. Inflated appraisals that allow excessive fees to be included in the loan and result in the borrower owing more to the bank than the home is worth.

Barriers to refinancing. Prepayment penalties that make it hard for a borrower to refinance in order to pay off a high-cost loan by taking advantage of a low-cost loan.

No down payment loans. These loans may be split into two mortgages, with one having a much higher cost. Home buyers should be sure they can afford the payments.

Unethical document management. An ethical lender or broker will always require you to sign key loan papers, and they will never ask you to sign a document dated before the date you sign it.

Source: Reprinted with permission from the National Association of REALTORS® and the Center for Responsible Lending. Shopping for a Mortgage? Do Your Homework First: How to Avoid Predatory Lending. Available at: http://www.realtor.org.


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The Center for Responsible Lending estimates that predatory lending costs Americans $9.1 billion each year3.

Skill Builder Tip 1: Understanding the difference between predatory lending and creative lending programs It is important to draw a distinction between creative lending programs, such a specific loan products intended for “flipping” a property. These products have specific uses and should not be assumed to be predatory lending practices. It is the abusive and deceitful actions of the lender, including failure to fully explain the risks and imposing higher rates and fees than appropriate, considering the creditworthiness of the borrower, that characterize predatory lending. Predatory lenders target individuals whose credit histories are less than ideal. Often, these borrowers are uninformed, financially inexperienced, and cash poor. Subprime loans are appealing to borrowers for the following reasons: Lower monthly payments

Quick money

Cash for expenses such as college tuition, home improvements, vacations, medical treatment

Assumption of continued increases in property values

“Perceived” lower costs associated with ARMs and similar types of financing

However, the subprime mortgage market experiences much higher rates of delinquency and foreclosure. As shown in Figure 3, foreclosure rates for subprime adjustable-rate mortgages (ARMs) are substantially higher than for prime, VA, and FHA loans.

3 Center for Responsible Lending. Report to be Released to U.S. Senate: Predatory Lending Annual Toll is $9.1 Billion. Available at: http://www.responsiblelending.org.


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Figure 3: Foreclosure Rates by Loan Type, 2007 Q1

Source: Mortgage Bankers Association. National Delinquency Survey, 2007 1st Quarter. Washington, DC: Mortgage Bankers Association; 2007.

Foreclosure “Rescue” Scams Another type of scam on a sharp incline is the foreclosure “rescue” scam. In one form of this scam, companies tell desperate homeowners that they will renegotiate their mortgage terms and stop foreclosure proceedings for a fee. In another form, companies encourage homeowners to sign over title for a year or two, during which the homeowner can pay rent to the company. Once the homeowners are caught up financially, the company promises to sell it back. The results of either form of this scam? Lost money and loss of one’s home.

Discussion Question 1: Reasons for foreclosure

1. In your opinion, what causes the most foreclosures?

0.541.05

2.19

3.3

6.46

0.0

2.0

4.0

6.0

8.0

Prime VA FHA SubprimeFixed

SubprimeARM

Perc

ent


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2. Which cause do you think will increase most in the future?


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Module 2: The Process of Foreclosure In this module:

mortgage theory

types of foreclosure

professionals involved in foreclosure

Mortgage Theory and Ownership of Property Before mapping out the process of foreclosure, it is important to understand the type of mortgage theory—lien, title, and intermediate theory—used in your state. Why? Because it determines who owns the property prior to foreclosure, how the foreclosure will proceed, and the length of time it will likely take to conclude the proceedings. Although it may vary from state to state, foreclosure in title-theory states generally occurs through a non-judicial proceeding, while lien-theory state foreclosure proceedings are conducted via judicial actions. Currently, there are 30 lien states and 20 title theory states. Refer to Figure 4 on the next page to find out which theory prevails in your state.

Lien Theory In a lien-theory state, the deed is in the name of the borrower (mortgagor), and the lender (mortgagee) places a lien on the property by means of the mortgage instrument. Lien theory tends to favor the borrower because it “buys more time” in a foreclosure proceeding which must be a judicial action.

Title Theory In a title-theory state, the lending institution holds title to the property in the name of the borrower through a deed of trust. The title remains in the name of the lender until the loan is paid in full. Some states, like California, do not record mortgages; instead these states record a deed of trust. Title theory tends to benefit the lender because it is a non-judicial proceeding that is more expedient in comparison to lien theory.

Intermediate Theory Intermediate theory combines lien and title theory. In this form ownership is held between mortgagee and mortgagor. The borrower’s name appears on the title as owner, following the lien theory, but upon default ownership immediately transfers to the lender.

Module 2: The Process of Foreclosure

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Figure 4: Title Theory and Lien Theory States

T – Alabama T – Alaska T – Arizona T – Arkansas T – California T – Colorado L – Connecticut L – Delaware T – District of Columbia L – Florida T – Georgia T – Hawaii T – Idaho L – Illinois L – Indiana L – Iowa L – Kansas L – Kentucky

L – Louisiana L – Maine L – Maryland T – Massachusetts T – Michigan T – Minnesota T – Mississippi T – Missouri T – Montana T – Nebraska T – Nevada T – New Hampshire L – New Mexico L – New York L – New Jersey T – North Carolina L – North Dakota L – Ohio

T – Oklahoma T – Oregon L – Pennsylvania T – Puerto Rico L – Rhode Island L – South Carolina T – South Dakota T – Tennessee T – Texas T – Utah L – Vermont T – Virginia T – Washington T – West Virginia L – Wisconsin T – Wyoming


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Skill Builder Tip 2: Lien, title, or intermediate theory

It is important to know which theory is applicable in your state: Lien Theory: the title is in the borrower’s name, the lender files a lien.

Title Theory: the title is in the lender’s name, the borrower is granted a trust deed.

Intermediate Theory: the title is in the borrower’s name, ownership is transferred to the lender upon default.

Types of Foreclosure Foreclosure proceedings may be judicial or non-judicial in nature. As noted previously, judicial proceedings tend to favor the borrower because they take longer to accomplish and the outcome is dependent upon the decision of the court. On the other hand, non-judicial proceedings are more expedient because there is no need to involve court action and the outcome is predetermined.

Judicial Foreclosure A judicial foreclosure is a court-ordered action. The lender obtains the right to foreclose by filing and winning a lawsuit. The key is “winning” because a judicial foreclosure can turn into a nightmare for a lender when the mortgagor’s attorney plays on the heart strings of the court. For this reason, most states allow summary judgment, which is a brief overview of the facts followed by a decision in place of a full-blown courtroom trial.

Non-Judicial Foreclosure Non-judicial foreclosures typically take less time to complete than judicial foreclosures. This is because the borrower pre-authorizes the sales of the homes in the loan document which is usually in the form of a trust deed. The power-of-sale clause orders foreclosure upon default. This is similar to a power of attorney in that it grants the specified person, typically a trustee, the right to sell the borrower’s property if the lender notifies the trustee that the loan is in default. Twenty-seven states currently use non-judicial foreclosure. Why is it important to know whether your state uses judicial or non-judicial foreclosure before becoming involved in a pre-foreclosure or foreclosure property situation? Because it determines how the proceedings will take place, the length of time to completion, and the outcome. As previously noted, judicial foreclosures generally occur in lien-theory states and non-judicial in title-theory states. For a summary of steps in judicial and non-judicial foreclosures, refer page 56 in the Resources section.


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The Foreclosure Process The following diagram illustrates the general flow and timelines of a foreclosure process. Details and timelines vary based on state-specific foreclosure laws.

Figure 5: Diagram of Foreclosure

1. Pre-Lien 30 days

Your state:

2. Lien 30 days

Your state:

Pre-foreclosure

3. Notice of Default (NOD)

90 days

Your state:

4. Notice of Sale

21-25 days

Your state:

Auction

5 Trustee Sale

If Unsold

REO

REO


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Pre-foreclosure During the pre-foreclosure phase, the homeowner is initially notified, often by phone call, of a mortgage payment default. This contact typically occurs within 30 days following the default on a payment. Before placing a lien on the property, the lender may follow up with letters and phone calls. Remember, a lien is a legal claim against a property; when the property is sold the lien-holder is paid. After attempting to notify the borrower of the impending consequences, the lender will send a formal notice of default to the borrower with a specific redemption period within which the property can be reclaimed by paying the past-due amounts or loan balance. The redemption period will vary from state-to-state.

Auction Following the notice of sale, the property may be listed for sale at auction. An auction can occur through a sheriff’s sale or a private party; a private auction may be conducted during the pre-foreclosure phase. Auctions offer the greatest potential return on investment; however, they also hold the highest risk to the investor. This is because investors usually have limited means of investigating the property prior to the sale.

Real Estate Owned (REO) Property REOs are real properties owned by a lender as the result of default by borrower and subsequent foreclosure by the institution. REO foreclosures are perhaps the easiest method of purchasing a distressed property. The lending institutions do not want to carry inventory of real properties and therefore may be very motivated to sell. The risk for investors of buying REOs may be less than auctions but the potential return on investment is usually also less. On the other hand, expenses, such as taxes and liens, not covered in the sale of an auction property, may be covered by the lending institution in an REO sale.


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Redemption The right of the borrower to recover a property after foreclosure is known as a redemption period. This is a matter of state law and varies widely from state to state; some states allow no redemption period, others allow up to a year. If the borrower makes good on the past due payments during the redemption period, title to the property can be recovered. Some states allow the borrower to redeem the property by paying only the missed payments along with any accrued late charges and penalties; however, many states require the borrower to pay the entire loan balance. Refer to the table beginning on page 58 to check the redemption period in your state.

Lenders Seek to Minimize Loss After the REO has completed the formal foreclosure process, how does this affect the lender’s situation and incentives? The lender’s role changes from servicing the borrower to selling the property. The lender is motivated to recover the current balance and minimize the future loss.

Professionals Involved in Foreclosures Professionals commonly involved in foreclosures are:

asset manager

outsource asset management company

finder

REO representative

vendor management

eviction specialist

loss mitigation specialist

foreclosure attorney

auditor

Lender-Employee Asset Manager This is the person assigned to oversee the REO property from the listing to sale and close. They will work with the listing agent (seller’s agent) once the property has been assigned to an agent from one of the various sources, finder company, outsource asset management company (asset manager within) or the seller themselves. All communication about the listing will go through the asset manager who may handle 200 to 300 listings at a time and oversee a multi-state territory.


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Outsource Asset Management Company (OAMC) The OAMC essentially performs the same duties as an asset manager; the difference is that asset managers are employees of the lender and OAMCs are independent companies contracted by the lender. The OAMC handles all phases of the pre-foreclosure process from drive-by broker price opinions (BPO) to the post-foreclosure sale.

Finders Finders act as subcontractors for the REO representative or OAMC. Their primary function is to find others to carry out specific functions for which the OAMC lacks the facility. A distinction between a finder company and an OAMC is that the latter locates an agent, handles the negotiation of a sale, pays vendors’ invoices, and handles other clerical duties including the paperwork. Finders do not serve in any negotiation capacity. For more information on finders, refer to page 51 in the Resources section.

REO Representative The REO representative is considered the listing broker representing for the lender of a foreclosed property; often in a formal agency relationship.

Vendor Management Someone has to manage the upkeep of properties in pre-foreclosure or foreclosure; property preservation is the focus of the vendor manager. This person takes care of duties such as re-keying and “trashing out” of properties; although they may call upon an assigned agent of an REO property to actually handle these tasks. Often REO companies hire a preservation company to do these tasks plus others such as boarding-up windows and doors. Many REO companies have contracts with the preservation companies and pay a set schedule of fees for these services.

Eviction Specialist Just as it sounds. This is the person who is responsible for making sure REO properties are vacated. A real estate professional assigned this property might be tasked with checking the occupancy of that property – is someone still there? A report of findings would be sent to the eviction specialist. It cannot be assumed that the previous owner will be forced to vacate a foreclosed property. In some states the previous owner automatically becomes the tenant of the new owner.

Loss Mitigation Specialist The loss mitigation specialist, working with the property owner and sometimes the agent, tries to develop a workout plan in place of a foreclosure; for example, a short sale. In this instance, a real estate


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agent might list the property of the owner for a set period of time and proceeds from the sale would be used to pay off previous debt owed to the lender and others in the “chain”, i.e., lien holder #1, lien holder #2, and so on. Any sale must be bank approved. The loss mitigation specialist works closely with the foreclosure attorneys hired by the lender.

Auditors Local government agencies may be a resource in searching for foreclosed properties.

Foreclosure Attorneys The foreclosure attorney is responsible for performing the legal work. The attorney is hired by the lender and usually works with the lender’s loss mitigation specialist. Notes:


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Module 3: How Buyer-Clients Can Prevent Foreclosure In this module: educating consumers

choosing the right loan

understanding nontraditional loan programs

what to do if payments fall behind

Becoming Educated Education is a consumer’s best self-defense. Real estate professionals who work with buyers—especially first-time home buyers—should encourage them to take advantage of free pre-purchase counseling offered by agencies and/or organizations approved or certified by the U.S. Department of Housing and Urban Development (HUD) and/or NeighborWorks® Center for Homeownership Education and Counseling (NCHEC). Education topics include: When homeownership is the right decision Credit How to qualify for a loan Loans and financing options Finding the right house What to expect at the loan closing How to budget and make mortgage payments on time Home insurance Home maintenance and other post-purchase considerations

The NAR, in partnership with the Center for Responsible Lending and NeighborWorks® America, has developed two brochures for consumers: Shopping for a Mortgage? Do Your Homework First. Avoid Predatory

Lending.

Are You Having Problems Paying Your Mortgage? Learn How to Avoid Foreclosure and Keep Your Home

These brochures can be downloaded for free at www.realtor.org.

Choosing the Right Loan The best way for a buyer-client to prevent foreclosure? Choose the right mortgage loan. Borrowers should shop for and compare the rates, terms and conditions that best suit their needs. For a comparison of common mortgages, the borrowers for whom the mortgages are best suited, and pluses and minuses, see Figure 6.

Module 3: How Buyer-Clients Can Prevent Foreclosure

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Figure 6: Six Common Mortgages and Who They Fit Mortgage Pluses Minuses Conventional 30-year, fixed-rate mortgages

Good for buyers who want the security of a fixed principal and interest payment and plan to stay in a home long-term.

Higher overall interest than 15-year loans. May need to refinance if rates fall significantly.

Conventional 15-year, fixed rate mortgages

Appeals to buyers who can afford higher payments and want to build equity quickly and pay less interest across a loan’s life. Payments remain the same over the life of the loan.

Payments that are 25 percent to 30 percent higher can be a burden if income changes.

Bi-weekly mortgages

Good for buyers who want to reduce the time needed to pay off a loan. By paying half the monthly payments every two weeks, the approach produces 13 monthly payments, rather than 12, per year.

Little flexibility if income changes or emergencies arise.

Adjustable-rate mortgages

Low interest in the first year. Good for those who know their income will rise over the coming years or those who are moving in a couple years and aren’t concerned with a rate hike. Allows borrowers to qualify for a higher loan amount.

Monthly payments can increase significantly if rates rise, although most adjustables have some form of interest-rate cap.

Multi-year fixed, with balloon

Lower closing costs than fixed mortgages; low payments.

Need to refinance at end of fixed-rate period, no matter what interest rates are.

FHA and VA Lower down payment requirements than conventional loans. Often easier to qualify for those with low incomes.

Requires additional inspections and insurance. In case of VA loans, limited to veterans.

Source: Reprinted from REALTOR® Magazine Online by permission of the NATIONAL ASSOCIATION OF REALTORS®. Copyright 2007. All rights reserved.


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The primary determining factors are chiefly the length of time the borrower plans to stay in the house and the amount of monthly payment that is affordable. If the borrower plans to stay in the house for less than five to seven years, it may be reasonable to consider an adjustable rate, balloon, or two-step mortgage. For example, ARMs traditionally offer lower interest rates than fixed-rate loans during the early years of the loan, a two-step mortgage offers a lower interest rate than a 30-year mortgage for the first five to seven years, and a balloon mortgage offers lower interest rates for shorter term financing, usually five or seven years. Low interest rates make it is easier to qualify for these types of mortgages. However, borrowers should not accept an ARM unless they can afford the maximum possible monthly payment (or will be able to when the payment increases).

Staying Aware of Predatory Lending Practices It is also important to stay vigilant for illegal or abusive practices, such as bait-and-switch, stated-income loans and the consumer’s liability, subprime loans, and traps of second mortgages. For a description of predatory lending practices, see Module 1.

Understanding Nontraditional Loan Programs As the real estate industry fluctuates, the banking industry has created a number of new and exotic consumer loan products. Non-traditional loan programs should not be immediately associated with predatory lending practices. Non-traditional loan products are suitable for certain situations and fully informed borrowers. However, when financially inexperienced borrowers are pushed into these types of loans by high-pressure tactics, the line may be crossed into predatory lending. As a result, some of these loan products have contributed to the rising rate of property foreclosures. What is the appeal for buyers?

Payment flexibility

Maximize cash flow

Minimize effects of vacancy for rental properties

Leverage to pay off personal bills

Leverage to buy more property

The following section explains a variety of nontraditional programs, the borrowers for whom these programs are best suited, and possible concerns.

Interest-Only Loans With an interest-only loan, the borrower makes monthly payments of interest only for a fixed period of time, usually five to seven years. After the end of the term, the borrower must pay the balance in a lump sum or start paying off the principal, in which case the payments increase dramatically. An interest-only mortgage might be a good fit for borrowers who:


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have income in the form of infrequent commissions or bonuses

expect a significant increase in earnings in future years

plan to invest the monthly savings between an interest-only and an amortizing mortgage payment, and are reasonably confident that the investments will make money.

Option Adjustable-Rate Mortgages (Option ARMs) Until 2006, ARMs were extremely popular as homebuyers sought to take advantage of rapidly rising home prices. Adjustable-rate mortgages are usually capped in one of two different ways: Interest rate caps: caps are usually established on a monthly, six-

month, one-year, three-year or five-year basis. The rate will vary based on the index to which the interest rate is linked, such as the prime rate plus a margin. There may be a lifetime cap.

Payment caps: in contrast to an interest rate cap, these loans limit the required monthly payment based on a fixed amount. The downside for the borrower when the minimum payment option is selected is the unpaid monthly balance is added to the principal. This is called negative amortization.

How does a payment cap work to the detriment to the borrower? Consider the example of a loan with a capped-out rate of 7.5% but a required payment of only $1,075. The initial rate of the loan was 2%, allowing for a low payment of $1,000 per month. As interest rates rise, the new monthly payment might normally be $1,200. If the capped (required) payment is only $1,075, then $125 is added to the loan balance, to be paid off over time, unless the borrower decides to pay the additional amount. Option ARM loan programs are targeted to those with variable incomes, such as the self-employed and those who receive year-end bonuses, because they allow adjustment of monthly payments. Unfortunately, buyers also use option ARMs to buy “more house” than they could otherwise afford; in these circumstances, borrowers can default if interest rates rise. Fitch Ratings, which evaluates mortgage-backed securities, has found that on average about half of all option ARM borrowers tend to "negatively amortize" during the first five years, meaning they pay less than the interest-only amount and add to the mortgage balance. About 10% pay the interest-only amount and the remaining 40% of borrowers make a fully amortizing payment.


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Figure 7: Option ARM Payment Options 1. Minimum Payment

The monthly payment is set for 12 months at an initial interest rate. After the first year, the payment changes annually with a payment cap limiting the amount of yearly increase or decrease. If, after the initial 12-month interest rate period, only the minimum payment is made, it may be insufficient to cover all of the interest charged on the loan for the previous month. Unpaid interest is added to the principal balance owed, which is deferred.

2. Interest-Only Payment

This option enables the borrower to avoid deferred interest when the minimum payment is not enough to cover the monthly interest due. The interest-only payment option, however, is not available if the payment would be less than the pre-set minimum payment. This payment option does not result in principal reduction. The amount of payment may change monthly based on changes in the ARM index used to determine the fully indexed rate.

3. Fully Amortizing 30-Year Payment

With fully amortizing payments, both principal and interest are paid with the loan following a schedule. The payment is calculated each month based on the prior month's fully indexed rate, loan balance, and remaining loan term.

4. Fully Amortizing 15-Year Payment

The 15-year payment option enables repayment of the loan twice as fast as the 30-year rate and saves more than half the total interest costs.

Hybrid loans Hybrid loans are a combination of fixed and ARM loans and offer variations in time periods and payment options.

2/28 and 3/27 ARMs A 2/28 or 3/27 adjustable-rate mortgage gives the borrower a fixed payment for the initial two- or three-year period before adjusting the mortgage up as often as every six months. After the initial “teaser rate” period, mortgage payments typically adjust up every six months. 2/28 and 3/27 ARMs are often promoted as vehicles that allow borrowers to repair their credit until they can refinance to a mortgage with more favorable terms. Unfortunately, as the interest rates on these mortgages adjust upward, many borrowers cannot afford their mortgage payments. As explained in Module 1, record numbers of subprime ARM borrowers in 2006 and 2007 defaulted on their mortgages and fell into foreclosure. According to Moody's Economy.com, reset activity of ARMs sold in 2005 and 2006 is likely to peak in Q4 of 2007 and Q1 of 2008. In the wake of the


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subprime mortgage market crisis, lenders like Washington Mutual have stopped offering 2/28 and 3/27 ARMs.

Skill Builder Tip 3: FHASecure

On August 31, 2007, President Bush proposed a new Federal Housing Administration (FHA) program called FHASecure. This program will allow 80,000 ARM borrowers who are defaulting on their payments due to reset interest rates an option to refinance their existing mortgage. This program is estimated to help 240,000 families avoid foreclosure.

Who will be eligible?

Borrowers must have made their mortgage payments for the six months prior to their loan resetting

Borrowers must be delinquent on their mortgage as a result of the reset.

Borrowers will need at least 3 percent equity.

Borrowers who are interested in learning more about this program should visit the FHA Web site: http://www.fha.gov

Fixed-period ARMs With fixed-period ARMs, borrowers are provided three to ten years of fixed payments before the initial interest rate changes. At the end of the fixed period, the interest rate will adjust annually. Fixed-period ARMs, with terms of 3/1, 5/1, 7/1, and 10/1, are generally tied to the one-year Treasury Securities Index. ARMs with an initial fixed period and lifetime and adjustment caps usually also have a first adjustment cap. First adjustment caps limit the interest rate to be paid the first time the rate is adjusted. The advantage of this type of loan is that the interest rate is lower than a 30-year fixed-rate mortgage. Because the lender is not “locked in” for a long time period, the risk is lower, and consequently a lower rate can be charged. The borrower benefits from a fixed rate for a period of time.

Two-Step Mortgages Two-step mortgages offer a fixed rate for a certain time, usually five to seven years, after which the interest rate changes to a current market rate. After this one-time adjustment, the mortgage maintains the new fixed rate for the remaining life of the loan.

Convertible ARMs Some ARMs provide an option to convert to a fixed-rate mortgage at designated times, usually during the first five years on the adjustment date; an action the borrower can take if interest rates start rising. The new rate is established at the current market rate for fixed-rate mortgages. There is


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usually a nominal fee, but little paperwork is required. The disadvantage is that the conversion interest rate is typically somewhat higher than the market rate at that time. Another type of convertible mortgage is a fixed-rate loan with rate reduction option. If rates have dropped since the time of closing, it allows the borrower, under some prescribed conditions and for a small conversion fee, to adjust the mortgage to current market rates. However, the interest rate or discount points may be somewhat higher.

Graduated Payment Mortgages (GPMs) Graduated payment mortgages offer lower initial payments and gradually increase at predetermined times. Lower initial payments allow the borrower to qualify for a larger loan amount. The monthly payments will eventually be higher in order to “catch up” from the lower initial payments. In fact, there will be negative amortization during the early years of the loan; the principal is paid off at an accelerated pace during the later years of the loan. Lenders offer a variety of GPM payment plans, with variations in the rate of payment increases and the number of years over which the payments will increase. The greater the rate of increase or the longer the period of increase, the lower the mortgage payments in the early years. The following table compares the monthly payment schedule of a 30 year fixed rate loan with the most frequently used GPM plan. In this plan payments increase 7.5 percent each year for 5 years before leveling off. The example is based on a mortgage of $60,000 and an interest rate of 10 percent.

Monthly Payments Year 30 year fixed GPM loan 1 526.80 400.22 2 526.80 430.24 3 526.80 462.50 4 526.80 497.20 5 526.80 534.49 6 526.80 574.57 7 to 30 526.80 574.57

Buydown Mortgages A temporary buydown offers an initial discounted interest rate which gradually increases to an agreed-upon fixed rate, usually within one to three years. This initial discounted rate allows the borrower to qualify for “more house” with the same income. It provides the advantage of low initial monthly payments for the first years of the loan, when extra money may be needed for furnishings or home improvements. Monthly payments can be reduced during the first few years of a mortgage by making an initial lump sum payment. If the borrower does not have the cash to pay for the


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buydown, the lender may pay this fee if the borrower agrees to a somewhat higher interest rate. The 2-1 buydown is a very popular loan product. For example, if the interest rate on the note is 8% with a 2-1 buydown mortgage, the initial discounted rate is 6% with a 6% interest rate for the first year, 7% for the second year, and 8% afterwards. The difference must be prepaid in payments between the 6% and 8% rates the first year, and between the 7% and 8% rates the second year. Though less common, 3-2-1 and 1-0 buydowns are also available. Compressed buydowns work the same way, but with interest rate changes every six months instead of on a yearly basis. The lower rate may apply for the full duration of the loan or for just the first few years. A buydown may be used to qualify a borrower who would otherwise not qualify; a buydown results in lower payments which are easier to qualify for.

Discussion Question 2: Preventing foreclosures

What can you do in your local marketplace to help reduce the rate of foreclosures?

What to Do If Payments Fall Behind Few borrowers—if any—intentionally plan to default on their mortgage payments. Distressed borrowers may be unable to pay their mortgage for any number of reasons: job loss, divorce or separation, serious illness, and/or an unexpected emergency. If borrowers fall behind in payment, they should contact the lender immediately. If borrowers receive a notice of default (NOD), they should contact the lender to explore mortgage workout solutions, if available. A loan workout is the process by which a borrower comes to a mutually acceptable financial arrangement with a lender in order to avoid an impending foreclosure. The advantage for the lender is avoiding the expense and potential loss involved in a foreclosure. A workout can culminate with the owner staying in the property or the property being sold, under the terms of


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the workout, to a new buyer. For a list of options that borrowers should explore with their lender, see Figure 7.

The following items must be identified for a borrower who is investigating a workout as an option: servicing guidelines and primary intent

when the loan considered in default

borrower counseling for delinquencies

types of forbearance (solutions) available

the role of FHA insurance, VA guaranty, or private mortgage insurance (PMI)

alternatives if forbearance fails

Figure 7: Mortgage Loan Workout Options

• Forbearance. Lenders may let you make a partial payment, or skip payments, if you have a reasonable plan to catch up. Tell your lender if you expect a tax refund, a bonus, or a new job.

• Reinstatement. Reinstatement refers to making a payment that covers all your late payments, usually at the end of a forbearance period.

• Repayment Plan. If you can’t afford reinstatement, but can start making payments to catch up, the lender may let you pay an additional amount each month until you are caught up.

• Loan Modification. Your lender may agree to amend your mortgage to help you avoid foreclosure. The options include:

o Adding all the missed payments to the loan amount and increasing the monthly payment to cover the larger loan.

o Giving you more years to pay off the loan, lowering the interest rate, and/or forgiving part of the loan, to lower your monthly payment.

o Switching from an adjustable rate mortgage to a fixed rate mortgage, so you aren’t exposed to increases in your monthly payment.

o Requiring amounts for taxes and insurance to be included with your monthly mortgage payment so you avoid big bills in addition to your mortgage.

• Sign Over the Property to the Lender in Exchange for Debt Forgiveness. This can hurt your credit, but is better than having a foreclosure in your credit history.

Source: Reprinted with permission from the National Association of REALTORS® and the Center for Responsible Lending. Are You Having Problems Paying Your Mortgage? Learn How to Avoid Foreclosure and Keep Your Home. Available at: http://www.realtor.org.


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Discussion Question 3: Loan workouts

1. What are the benefits for a homeowner?

2. What are the benefits for a lender?

3. What are the opportunities for investors?

Deed-in-Lieu of Foreclosure Another workout option is the deed-in-lieu of foreclosure, which conveys title to the lender when the borrower is in default. The lender may or may not cease foreclosure activities if a borrower asks to provide a deed-in-lieu. A deed-in-lieu may prevent the foreclosure from being recorded and becoming public record. However, even if the lender accepts the deed-in-lieu, the avoidance and non-repayment of debt will likely show on a borrower’s credit history (but it won’t be as bad as a foreclosure in the history).

Advantages Disadvantages offers a solution when all

other alternatives are exhausted

saves expenses of foreclosure, including legal fees

saves time, money, energy

forces lender to hold the property in inventory, borrower loses property

presents a likely loss for the lender

still shows on borrower’s credit history


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Discussion Question 4: Deed-in-Lieu Case Study

Agent Mary Listsmore has a listing appointment with Mr. Indebt to talk about putting his house on the market. During the conversation, she asks why he is selling at this time. He responds that he has lost his job and can no longer afford the mortgage payments. He also states that he is 60 days late in payment. He believes that his house is worth $250,000 and if it can fetch that price, he will be able to clear up his debt and move on with his life. A market value analysis shows that the house is worth $215,000 in the current market. He says that he could not accept that price because he owes more. He asks Mary Listsmore what she knows about a deed-in-lieu. Mary has been through this before with other sellers.

1. If you were Mary, how would you respond?

2. What position should a seller representative take when counseling a seller on a deed-in-lieu of foreclosure?

3. How does the role change if the buyer’s representative is representing a buyer-client in a purchase of an unlisted property and the seller is considering a deed-in-lieu of foreclosure?

Short Sales A short sale occurs when the lender decides that it is in their best interests for the owner/borrower to sell the property for less than the mortgage balance owed on it.


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Skill Builder Tip 4: The borrower could receive a 1099 on a short sale

If the lender cancels a portion of the mortgage debt, the borrower of a foreclosure property sold in a short-sale transaction could receive a 1099-form from the lender. That means the borrower will have to pay tax on the “phantom income.” (The borrower should check with the lender’s policy on short sales.)

Short sales became common in the high interest-rate, high-foreclosure period of the 1980s. This trend has continued as a result of the highly-leveraged mortgages currently in vogue. Therefore, short sales are expected to be an ongoing part of the foreclosure market. A distinctive feature of short sales is that the agent is typically compensated by means of a fee negotiated with the lender, not by the consumer. Before accepting such a listing, confer with your principal broker to determine if perhaps another type of attorney-written agreement between the homeowner and the brokerage (other than a listing) might suffice. In this scenario, you not are actually “selling” the property to anyone, merely hoping to strike an agreement between the owner and the lender to allow the owner to sell the property for less than the remaining amount owed on the mortgage. Additionally, after the lender agrees to the deal, ask if you could find a buyer-client to purchase the property or, if you list properties, accept the listing on behalf of the lender.


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Discussion Question 5: The short sale

Shar Greenfield receives a call from Mr. and Mrs. Ragsdale; they ask her to view their home and possibly list it. In gathering facts about the home and the seller’s situation, Shar finds out that the Ragsdales have a first and second mortgage constituting more debt against the house than they have equity. Furthermore, they are two months behind on the first mortgage. They have only two thousand dollars in savings, which will be needed for moving costs. They must sell in the next 60 days in order for Mrs. Ragsdale to accept a job offer in another state.

1. Describe at least three options for the Ragsdale’s situation.

2. Which of the options involve the mortgage lender(s)?

3. Should Shar agree to list the property? Why, or why not? If so, what duration?


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Notes:


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Module 4: Getting Involved in the Foreclosure Market In this module:

foreclosure as opportunity

representing and preparing buyer-clients

conducing needs assessment

buying property pre-foreclosure

foreclosure business niches

Foreclosure as Opportunity While the impact of foreclosure on defaulted borrowers cannot be minimized, foreclosure does provide opportunity for many buyer-investors, as well as for buyer’s representatives. Before jumping headlong into this business, however, buyer’s representatives should formulate their business strategy. For a list of research questions, see Figure 8.

Module 4: Getting Involved in the Foreclosure Market

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Who Should Buy a Foreclosed Property? Buying a pre-foreclosure or foreclosed property is not for every buyer-client. As a general rule, buyers who make good candidates for this type of purchase share the following characteristics: Are experienced investors

Understand that many foreclosed properties are sold “as is”

Figure 8: Questions to Help Formulate Your Business Strategy

Demographics and Geographics

Questions to ask:

What are the demographics of the area?

Is it an aging community, baby boomers, or young couples looking for a first home?

Is the area predominately affluent, middle, or lower income?

How well does the inventory of available housing match the financial demographics?

Buyer’s or Seller’s Market Questions to ask:

Is this a buyer’s or seller’s market or both?

Are interest rates rising, falling, or stable?

Is inventory increasing or decreasing?

What is the current ‘months of inventory’ compared to six months or one year ago?

Has there been a steep increase or decrease in housing values?

New Businesses, Employment Opportunities, and Workforce Housing Questions to ask:

Has your market transitioned in-part to an investor’s market?

Are there new businesses moving to your area?

Are existing businesses growing or losing market share or are businesses maintaining at a stable level?

Is there sufficient housing to support a balanced workforce?


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Are patient and have the time to wait out the months of delay until completion of the sheriff’s deed

Have resources to repair and rehab the property

Buyer-clients who are not good candidates are “wanna-be” investors and those who have contingencies, such as those who need to sell another residence before they can buy the foreclosed property.

Preparing Buyer-Clients on What to Expect Buyers should be prepared as to what to expect before viewing properties. Properties are sold “as-is” and often need considerable repair. Some examples of property problems include:

“gutted” properties, missing appliances, cabinets, wiring, siding, plumbing

electricity disconnected

structural damage

missing or broken fixtures

Needs Assessment The buyer’s representative should perform an initial needs assessment for a buyer-client considering the purchase of a pre-foreclosure, foreclosure, or auction property. Needs assessment includes:

evaluating the buyer-client’s risk/reward threshold

determining the timing and financial preparedness of the client, such as the type of documentation needed and when

evaluating the eagerness and motivation of the buyer-client

weighing the buyer-client’s ability to follow through on your counsel and suggestions

contracting with the buyer-client: considerations, clauses, and compensation

communicating the importance of consensus building and paper-trailing for all parties involved in pre-foreclosure/foreclosure acquisitions

performing additional due-diligence if the buyer-client is interested in “flipping” the property

planning for the sheriff’s deed (timeline)

continuing investigation of the property

maintaining communication with title company

determining if time-is-of-the essence for the buyer

other?


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Skill Builder Tip 5: Provisions to Include in the Purchase/Sale Agreement What type of provisions should be included in a purchase/sale agreement in order to protect a buyer-client who plans to purchase a foreclosure property? There are factors and conditions involved in foreclosure properties that are not encountered with traditional home sales; for example: lien encumbrances

water sewer holds

walk through and inspection may be not possible or limited

Foreclosure: Myth or Reality? Myth: There is a lot of money to be made buying foreclosures on the courthouse steps. Reality: The biggest “wins” are likely found in pre-foreclosure, ideally before the lender files the foreclosure action.

Buying Property Pre-Foreclosure For many experienced investors, buying property pre-foreclosure offers the greatest bargains. However, these transactions can be difficult as they are dealing directly with the owner of the pre-foreclosure home. Whenever a homeowner is about to lose or surrender a home, emotions run high and the potential for litigation increases. Before becoming involved in situations like the scenarios that follow, seek the advice of your principal broker and an attorney. In addition, be mindful that pre-foreclosure and foreclosure property transactions do not make licensees exempt from agency laws. State agency laws must be strictly adhered to.


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Discussion Question 6: Agency relationships Do state agency relationship requirements apply in a foreclosure transaction?

Case study: A licensee found out about the availability of a foreclosed property during a conversation with a loss mitigation specialist. Based on information shared by the mitigation specialist, the licensee, a buyer’s representative, assumed that the seller was in financial distress and the lender did not want to maintain this property in inventory.

1. May a buyer’s representative use this assumption to maximize the buyer’s position by offering the seller a solution to the predicament?

2. What if the mitigation specialist asked the licensee to list the property?


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Discussion Question 7: Agency responsibilities and unlisted properties

Agency responsibilities in a pre-foreclosure transaction involving unlisted properties

The buyer’s representative has a buyer-client interested in finding a “good buy” in a pre-foreclosure property. Accessing a database, such as www.foreclosures.com, the broker finds three unlisted properties that fit the buyer’s criteria. He contacts all three of the sellers and secures an appointment to meet with one. Wanting to be up-front with the seller of the unlisted property, he states that he represents a buyer-client who is interested in the possible purchase of the property. He asks the seller to sign the state-required agency disclosure form, which affirms that the buyer’s representative is the agent of the buyer.

1. What information should the buyer’s representative gather for his buyer-client so that an informed decision can be made?

2. Could there be any possible impediments to full disclosure of personal and property information from the seller because the buyer’s representative is NOT representing the seller?

3. In the distress situation of a pre-foreclosure, will the seller fully understand the ramifications of agency? Will the seller realize that he is not being represented in the transaction?


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Discussion Question 8: Agency responsibilities and listed properties

Agency responsibilities in a pre-foreclosure transaction involving listed properties

John Smith, ABR® of ABC Realty, pulls the pre-foreclosure and foreclosure property listings out of the MLS each week and sends the list to prospective buyer-clients. In response to the mailing, Ann Jones calls and asks to view a pre-foreclosure property at 123 Oak listed by XYZ Realty. John gathers the preliminary property data, shows the property to Ms. Jones, and then carries out additional due-diligence actions regarding the property.

1. What type and extent of due diligence actions should John perform?

2. If Ann makes an offer, what special clauses or addenda, if any, should be included in the purchase agreement?

3. What could go wrong, for John and his client, when attempting to purchase a pre-foreclosure property? How could these problems be avoided?

4. What should the listing agent do to ensure that the seller and his situation are treated with the highest degree of ethics, empathy, tact, and fairness?


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The primary difference between scenarios one and two is the involvement of a listing agent who represents the seller and interfaces with the buyer’s representative.

Skill Builder Tip 6: Getting started in the pre-foreclosure market

When you first begin working with pre-foreclosure opportunities for buyer-clients, you may be more comfortable working on co-op listings instead of making direct contact with unlisted sellers. Additionally, consult your broker’s office policies and procedures. Focusing on the sale of pre-foreclosures is not mainstream in many markets; it may be necessary to expand current office policies in order to cover these transactions.

Foreclosure Business Niches There are several niches in the foreclosure market that represent business opportunities for the real estate professional, such as: auction

sheriff’s sale

short sale

judgment liens

REO

Auctions Auctions are a vibrant business niche and the experience of an auction is replete with emotional power and suspense. Real estate auctions of all types are the second fastest-growing type of auctions held today in the U.S. as cited by a 2005 survey conducted the National Auctioneers Association; only auctions of antique and collectible cars exceed that of real estate auctions. Foreclosure properties are often sold via the auction method because it is an expeditious way to dispose of the properties. The majority of real estate auctions today are conducted by auctioneers who do not specialize in real estate. Real estate auctioneers typically get started in the business by specializing in personal property auctions and then expand based on marketplace needs and opportunities. Few states require an auctioneer’s license to auction real estate; however, many states do require a real estate broker’s license to organize and supervise the sale of property at auction, although not necessarily for “calling” it.


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Skill Builder Tip 7: Exclusive buyer representation agreement

When assisting a buyer in the purchase of a home through an auction, it is important to protect yourself by asking the client to sign an exclusive buyer representation agreement.

Sheriff’s Sales A sheriff’s sale entails sale of a property by the sheriff under authority of a court judgment in order to satisfy an unpaid obligation. How can sheriff’s sales be found? They are usually listed among the legal notices in the local newspaper. The scheduled sale of a particular property is published for a specific number of weeks prior to the sheriff’s sale. The public notice usually includes the property address, mortgagee, mortgagor, appraised value, property description, and date of the actual sale. Other information sources are the local legal news, county recorder’s office, or county Web sites. Do not expect to schedule a property inspection before the sale. Potential buyers usually have limited or no access to properties offered at a sheriff’s sale because they are often still occupied by the owners or tenants. After completion of the sale, if may be necessary for the buyer to initiate a legal action to evict the occupants.

Skill Builder Tip 8: Recommend a lien search

Recommend that at minimum a buyer engage a title company to conduct a limited lien search on the property. A lien search will reveal any other outstanding encumbrances on the property and prevent later surprises.

Short Sales A short sale occurs when property is sold for less than the amount of money owed, including a commission to be deducted from seller’s proceeds. For example, a lender may decide that the institution’s interests are best served by accepting less than what is owed in mortgages on a property. An effective way to find short sales is to advertise for them. Another method is word of mouth. A short sale can be a high risk endeavor because of the unknown “baggage” that can come along. And, consider the potential problems involved in convincing the previous property owner to move out or paying off delinquent charges for water and utilities.

Judgment Liens A judgment lien is a legal encumbrance on a debtor’s property. It is granted to a creditor by court judgment and may be enforced by seizure and sale of the property by the sheriff; the sale proceeds are paid to the creditor in order to settle the lien. Judgment liens are often published in the local newspaper, under legal notices, or may be listed by the county or municipal auditor’s office or by the clerk of courts.


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The purchase of a judgment lien is initiated by contacting the creditor who holds the lien. The purchaser of a property tax lien receives an assignment of the lien which is filed with the clerk of courts. Most popular with those who purchase judgment liens are property tax liens, which are sold at public auction conducted by the auditor’s office. Consult with your local county or municipal tax auditor to learn how auctions are handled. Your local lien depositor can advise how lien assignments are handled in your state.

REO Properties As explained in Module 1, REO is an acronym for “real estate owned” and refers to property that is owned by a lending institution as a result of a borrower’s default and a subsequent foreclosure action. REOs may be listed in the local multiple-listing service (MLS), published in your local newspaper, or advertised on foreclosure Web sites. A good method for staying informed about the local REO market and future listings is to network with local REO specialists. Foreclosure: Myth or Reality? Myth: Lenders are so eager to dispose of real estate owned (REO) properties that revert back to the mortgage company after an unsuccessful foreclosure auction that they will make “killer deals” for buyers and pay generous fees to buyer’s representatives. Reality: For the most part, mortgage lenders use three national outsource asset management companies (OAMCs) to recycle foreclosure properties. If a lender controls REO properties on a local basis, they are first offered to the lender’s board of directors and then to preferred in-house clients. Although a few transaction fees may be waived for the buyer of an REO, most lenders do little to reduce the interest rate or offer any other long-term money-saving loan concessions. Real estate agents are seldom offered, and may have difficulty negotiating, a reasonable co-op fee.


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Notes:

Module 5: Working with REOs and REO Specialists

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Module 5: Working with REOs and REO Specialists In this module: working with a listing agent on an REO property

understanding the impact of inventory on your client base

following the foreclosure transaction revenue

understanding buyer’s representative compensation

REOs Before and After Foreclosure Remember, REOs are properties owned by a lending institution as a result of default by a borrower and subsequent foreclosure. The lender’s internal cost to foreclose can be significant considering items such as accrued interest, legal fees, condo fees/assessments, property taxes, water/sewer and the like. Liquidating the property prior to formal foreclosure makes the best economic sense for both the lender and buyer-client. Costs accumulate and as the lender continues to incur costs over time it improves the buyer-client’s negotiating position.

How REO Properties Are Different from Typical Listings The buyer’s representative should understand that REO properties are different from the typical listings they are accustomed to working with. REO transactions are typically investment driven; therefore, there are few emotional ties to the properties, other than asset managers achieving their monthly goals. The buyer’s representative must be able to counsel the buyer on procedures and keep the end result in mind. Is the buyer driven by profitability or is the buyer looking for a residence?

Skill Builder Tip 9: Get to know the asset manager

If the asset manager likes the way you work, it could be the start of a good portfolio of business.


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Discussion Question 9: REOs

What could you say to convince a lender that a buyer’s representative is the “best bet” for achieving a profitable liquidation of a property in pre-foreclosure?

1.

2.

3.

Working with a Listing Agent on an REO Property Working with a listing agent on an REO property starts with the initial call to arrange a showing of the property. A serious error made by many agents is to give a buyer-client the access code or lock combination to enter these properties without the licensee being present. In many states this would be considered a violation of license law and/or MLS rules. Given their busy schedules, some licensees may think that this practice offers a transaction shortcut and saves time. However, allowing clients unsupervised access to an REO property is dangerous and should be avoided.


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Skill Builder Tip 10: Do not let buyers “go it alone”

Do not give buyers unsupervised access to properties. Always accompany a buyer-client to a property viewing.

Limited Property Disclosures Keep in mind that there are limited property disclosures when it comes to REO properties. In some states sellers are indemnified from property disclosure. This means they have no duty to disclose defects. Even though REO properties are generally bought “as is” (meaning what you see is what you get), a home inspection offers some protection. If the client refuses to schedule a property inspection, the buyer’s representative should ask the client to sign an acknowledgment of the waiver of inspection. If a seller agrees to make concessions to the buyer for repairs, make sure it is included in the contract to make this a reality. As a good rule of thumb, ask the listing agent if this will be a possibility. Buyer’s representatives should listen carefully to listing agents because they are an extension of the asset manager who deals with the seller. Any information you can gather will help your buyer-client make an informed decision.

Writing the Offer Typically the initial offer is written on the contract form of the buyer’s representative’s company. The buyer’s representative calls the listing agent for instructions on presentation of an offer. The listing agent then submits the offer to the asset manager, which can be accomplished in a variety of ways. In some instances, a Web site may be provided to help negotiate the offer with communication exchanged through the Web site until an offer is accepted. When an offer has been accepted, the listing agent contacts the buyer’s representative and advises the acceptance of the offer. A counteroffer is handled through an addendum, which is sent to the listing agent from the seller, the asset manager, who forwards it to the buyer’s representative via fax or e-mail. Of course, it is extremely important that the buyer’s representative read all of the details of the counteroffer addendum so they can be fully explained to the buyer It is helpful to determine who the decision maker is when negotiating price or other considerations in a foreclosure transaction. Even though the offer may have been accepted by the asset manager, it is not uncommon for the acceptance to be subject to senior management approval. Also, if possible, try to determine the parameters that an asset manager has been given for a particular property. You may find that you are only a few dollars away from the asset manager being able to make a decision; this can avoid the necessity for taking the decision to a higher organizational level for an approval.


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Managing the Funds Earnest money procedures for REO property transactions may be different from those in a traditional transaction. For example, earnest money may be:

sent to and retained by a title company

retained by selling company

sent to and retained by the listing agent’s company

The REO seller will likely ask your buyer to provide a pre-approval letter or verification and proof of funds if it is a cash offer. Verification of funds can be accomplished by a letter from buyer’s bank or a copy of a bank statement.

Working with Title Companies Although the choice of a title company is a negotiable item in many areas of the country, it is still quite common for the seller of an REO property to make pre-arrangements with a specific title company. Some sellers use one title company throughout an entire state and handle local buyer sign-ups through satellite offices. Others may use several local title companies within an area. REO sellers typically do a large volume of transactions and their chosen title companies are familiar with their seller’s contracts and policies.

Working with Home Inspections The buyer is entitled to schedule a home inspection and many do. However, the purpose of the inspection is only to provide information on the condition of the property. The seller will not, in most cases, make any repairs nor give any credit for repairs. Furthermore, many states indemnify the seller from property disclosures. While there may be some exceptions, the property is sold and bought “as is.”

City Point of Sale Inspection Some cities require a city point of sale inspection (POS). The purpose of this inspection is to assess the safety, soundness, and security of the property. The POS inspection may include both internal and external aspects, such as landscaping, sewer, and the like. An occupancy permit will not be issued until POS criteria are met. Customarily, the buyer assumes responsibility for correcting violations unless the seller fixes the violations. Lenders interested in a quick sale may be willing to discuss concessions regarding the repair of violations. Many cities require an escrow fund to cover costs of such repairs; for example, the municipality may require an amount equivalent to 1.5 times the bid be placed in escrow to assure correction of violations.


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Final Walk Through It is not uncommon to see an addendum to the contract that reads “buyer to have walk through immediately before title transfer to ascertain property is in same condition as when purchase agreement was written.” Even though the buyer knows he is buying the property “as is”, the inspection assures the same “as is” condition as when the offer was presented. Keep in mind that the listing agent and seller usually have photos of the property condition at the time it was listed. It is a good idea for a buyer’s representative to also take photos for the buyer as a precaution in the event the property is not in the same condition at time of closing.

Closing Dates and Per Diems In order to meet monthly revenue goals, asset managers prefer closings to take place at the end of the month rather than the beginning of the next month. A buyer’s representative should explain to their buyer that the closing date must be adhered to because, if not, it could cost them extra dollars above and beyond the contract purchase price. Most sellers charge a daily penalty for every day the buyer is late in meeting the contract closing date. This fee is charged regardless of who caused the delay on the buyer’s side of the transaction, whether it is the buyer who is slow to deliver documents or the lender who has no sense of urgency or a combination of both.

Learn the Business Working alongside the REO listing agent is the best way to learn the business “inside out.” Ask questions and follow their lawful instructions. The end result could be a better outcome for your buyer-client and future business for you.

Benefits for You and Your Clients Helping your buyer-client purchase pre-foreclosure and foreclosure properties can result in a “client for life.” As described throughout the previous material, these transaction present special challenges and the real estate specialist who can lead a transaction to a successful outcome will earn a reputation as a trusted advisor. Furthermore, gaining a reputation in this specialty area provides the market distinction that attracts the clients who do multiple transactions yearly. It also expands your sphere of influence to include high-visibility contacts such as lenders, attorneys, and CPAs.

Other Revenue Opportunities In addition to handling the transaction, the real estate professional can take advantage of revenue opportunities by offering ancillary services such as broker price opinions (BPOs) or property preservation.


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BPOs and Drive-By BPOs Lenders have an ongoing need for BPOs in order to determine the best price for an REO property. Typically lenders will request two or three BPOs per property and will list with the highest BPO; although all BPOs will be considered in pricing a property. A BPO is not the same as a comparative market analysis (CMA). When conducting a CMA, improvements to the property take a high priority in determining the value. The BPO focuses on repair costs so that the lender, buyer, or investor can evaluate if the costs for refurbishment will provide a positive return on investment. BPOs are used to determine the value of a distressed property and, therefore, the value may need to be discounted in comparison to recently sold traditional properties. When several BPOs present too large of a discrepancy for the lending institution to determine a fair value, estimating the value of the property may require an internal or external reconciliation or recon. The lending institution accomplishes this through an additional BPO for the interior and/or the exterior of the property. An external BPO is often referred to as a “drive-by BPO.”

Preservation Services When a property is put into foreclosure, lending institutions need assistance in a number of areas in order to prepare the property for sale. As previously noted, often the residents are still occupying the property and must be evicted. The property may have to be cleaned up, sealed (boarded up), and re-keyed. Providing these preservation services may be a source of additional revenue as well as lead to making valuable future contacts with lenders.


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Getting Started How can a real estate professional get started in the foreclosure business? Some suggestions are: Research Web sites for listings, investors, and self-marketing

opportunities; for example www.REOTrans.com

Contact the REO departments of banks

Create foreclosure-specific marketing materials

Discussion Question 10: Getting started

What actions can a real estate professional take in order to get started in the foreclosure business?


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Resources

Resources

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Finder Companies Finder companies assist corporate REO departments in several ways including the following: Locate and assign qualified, experienced

real estate agents to list their REO properties

Instruct and assist the agent in the tasks of initial occupancy check through vacancy. Depending on the situation, this can include: determination of who is residing in the property, “cash for keys” presentation and negotiation, eviction coordination, interfacing with the client’s local and general lead counsel, evaluation of remaining personal property, re-key and proper lockbox installation.

Coordinate and open lines of communication between the agent and the corporate client’s vendors including: field service and/or trash-out companies, appraisers, surveyors, contractors, etc.

Instruct and assist the agent with preparation of the BPO/Listing package. This includes proofing and editing the various required forms and photos, making sure all of the corporate client’s guidelines and requirements are met. Of particular importance are the age, proximity and appropriateness of the comps used in the BPO as well as the list of repairs and, of course, suggested pricing on that form. The Finder also assures that all documents, photos and supporting data are complied in a cohesive package before submitting them to the client. The main objective is to make sure the agent has provided everything the corporate client will need to list the property when he or she first opens the package to do so.

Assist the agent with the operation of the corporate client’s web site. This is becoming increasingly important as REO departments develop their own websites and insist that agents submit all BPO/listing packages, offers, counter offers, status reports, and other reports online.

Obtain any needed second or updated BPOs for the client in order to clarify or adjust pricing.

Follow up to make sure the agent has provided the required monthly updates, sales reports, copies of advertising, MLS printouts, etc.

Replacement of agents should it become necessary to do so.

People often confuse the role of a finder company with that of an outsource/asset management company. The majority of the Finder’s involvement comes in a period of time between the property completing foreclosure and thus becoming an REO through the time it is vacated and listed for sale. Once listed, the corporate client’s REO Department typically handles all negotiations and closings directly with the real estate agent, thus keeping tight control of those aspects of the transaction. In contrast, an Outsource/Asset Management company typically takes the place of the corporate REO department, not only assigning the agents, but also approving all submitted paperwork, negotiating the terms of the sale, (within stated guidelines), and working all the way through closing. There is a major difference in how each type of company is compensated. The Outsource/Asset Management firm is paid a referral fee directly by the corporate client; the finder company receives a referral fee from the listing broker at time of closing.


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How to Avoid Foreclosure 4

The guidance below (and in the "How to Avoid Foreclosure" pamphlet) is

applicable to homeowners with FHA Insured loans. While a good deal of this information may apply to all homeowners in danger of losing their homes, not all of the foreclosure avoidance tools mentioned may be available to you if you have a VA or conventional loan. Additionally, HUD/FHA does not have any Loss Mitigation oversight over VA or conventional loans. Please contact your lender or a housing counseling agency. Q: What Happens When I Miss My Mortgage Payments? Foreclosure may occur. This is the legal means that your lender can use to repossess (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 HUD 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. Q: What Should I Do? 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.

4 U.S. Department of Housing and Urban Development', Homes and Communities Web, www.hud.gov/foreclosure

Stay in your home for now. You may not qualify for assistance if you abandon your property.

Contact a HUD-approved housing counseling agency. Call (800) 569-4287 or TDD (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.

Q: What Are My Alternatives? 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. 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. You may qualify if: your loan is at least 4 months delinquent but

no more than 12 months delinquent; you are able to begin making full mortgage

payments. When your lender files a Partial Claim, the U.S. Department of Housing and Urban Development will pay your lender the amount necessary to bring your mortgage current. You must execute a Promissory Note, and a

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Lien will be placed on your property until the Promissory Note is paid in full. The Promissory Note is interest-free and is due when you pay off the first mortgage or when you sell the property. Pre-foreclosure sale. This will allow you to avoid foreclosure by selling your property for an amount less than the amount necessary to pay off your mortgage loan. You may qualify if: the loan is at least 2 months delinquent; you are able to sell your house within 3 to 5

months; and a new appraisal (that your lender will obtain)

shows that the value of your home meets HUD program guidelines.

Deed-in-lieu of foreclosure. As a last resort, you may be able to voluntarily "give back" your property to the lender. This will not save your house, but it is not as damaging to your credit rating as a foreclosure. You may qualify if: you are in default and do not qualify for any

of the other options your attempts at selling the house before

foreclosure were unsuccessful; and you do not have another FHA mortgage in

default. Q: How Do I Know if I Qualify for Any of These Alternatives? 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. Call (800) 569-4287 or TDD (800) 877-8339. Q: Should I Be Aware of Anything Else? Yes. 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 difficulty. 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 necessarily relieve you of your obligation on your loan.

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 (800) 569-4287 or TDD (800) 877-8339. Do this before you pay anyone or sign anything. Q: Are There Any Precautions I Can Take? Here are several precautions that should help you avoid being "taken" by a scam artist: Do not sign any papers you do not fully

understand. Make sure you get all "promises" in writing. Beware of any contract of sale of loan

assumption where you are not formally released from liability for your mortgage debt.

Check with a lawyer or your mortgage company before entering into any deal involving your home.

If you're selling the house yourself to avoid foreclosure, check to see if there are any complaints against the prospective buyer. You can contact your state's Attorney General, the State Real Estate Commission, or the local District Attorney's Consumer Fraud Unit for this type of information.


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Q: What Are the Main Points I Should Remember? Do not lose your home and damage your

credit history. Call or write your mortgage lender

immediately and be honest about your financial situation.

Stay in your home to make sure you qualify for assistance.

Arrange an appointment with a HUD-approved housing counselor to explore your options at (800) 569-4287 or TDD (800) 877-8339.

Cooperate with the counselor or lender trying to help you.

Explore every alternative to keep your home. Beware of scams. Do not sign anything you do not understand.

And remember that signing over the deed to someone else does not necessarily relieve you of your loan obligation.

Act now. Delaying cannot help. If you do nothing, YOU WILL LOSE YOUR HOME and your good credit rating. Content updated April 28, 2006 U.S. Department of Housing and Urban Development 451 7th Street, S.W., Washington, DC 20410 Telephone: (202) 708-1112 Find the address of a HUD office near you

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A General Guide for Short Payoffs The following is an outline of the requirements many lending institutions will insist upon receiving in order to process a “short-pay.” Ideally all of the information should be available in order to expedite the process. 1. Lenders will need a written authority from the mortgager to release payoff funds. 2. A written explanation from the seller must be supplied to the lender explaining the reason for

the short payoff. 3. Lenders require copies of the most recent pay stubs. 4. A copy of the proposed contract and proposed closing statement. 5. The real estate commission may be negotiable with the lender. 6. Lenders will typically require a market value analysis.


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Judicial and Non-Judicial Process Summary

Mortgage Judicial Foreclosure

Borrower Defaults

File Complaint (Initiate Law Suit)

Record Lis Pendens

Court Hearing Date set for Sale

Advertise the Sale

Sell to highest bidder

Buyer pays cash at sale.

Buyer receives Certificate of Sale

Period of Statutory Redemption

(Right of Redemption)

Sheriff's Deed Conveyed to Buyer

Evict Mortgagor

Possible Deficiency Judgment

Trust Deed Non-Judicial Foreclosure

Borrower Defaults

Beneficiary authorizes Trustee to

proceed with Foreclosure

Record Notice of Default

Period of Equitable Redemption

Trustor can reinstate

Advertise the Sale

Sell to highest bidder

Buyer pays cash at sale.

Trustee conveys Trustee's Deed to

Buyer

Deficiency Judgment Unlikely

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Title Theory and Lien Theory States

T - ALABAMA T - ALASKA T - ARIZONA T - ARKANSAS T - CALIFORNIA T - COLORADO L – CONN. L - DELAWARE T - D.C. L - FLORIDA T - GEORGIA T - HAWAII T - IDAHO L - ILLINOIS L - INDIANA L - IOWA L - KANSAS L - KENTUCKY

L - LOUISIANA L - MAINE L - MARYLAND T – MASS. T - MICHIGAN T - MINNESOTA T - MISSISSIPPI T - MISSOURI T - MONTANA T - NEBRASKA T - NEVADA T - N. HAMPSHIRE L - NEW MEXICO L - NEW YORK L - NEW JERSEY T - NORTH CAROLINAL - NORTH DAKOTA L - OHIO

T - OKLAHOMA T - OREGON L – PENN. T - PUERTO RICO L - RHODE ISLAND L - SOUTH CAROLINA T - SOUTH DAKOTA T - TENNESSEE T - TEXAS T - UTAH L - VERMONT T - VIRGINIA T - WASHINGTON T - WEST VIRGINIA L - WISCONSIN T - WYOMING

In a title state, the lending institution holds title to the property in the name of the borrower through a deed of trust. In a lien state, the deed stays with the borrower (mortgagor), and the lender (mortgagee) places a lien on the property using the mortgage instrument. Generally, foreclosure in title states occurs through a non-judicial proceeding, while lien states are conducted via judicial methods; however, it varies with each state.


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State Comparison Table

Information obtained from www.realtytrac.com

State Process Period (Days)

Sale Publication (Days)

RedemptionPeriod (Days)

Sale/NTS Comments

Alabama

49-74 21 365 Trustee Judicial not common

Alaska

105 65 365* Trustee Judicial as last alternative

Arizona

90+ 41 30-180* Trustee Judicial not common

Arkansas

70 30 365* Trustee Both are used equally

California

117 21 365* Trustee Judicial not common

Colorado

91 14 75 Trustee Judicial not common

Connecticut

62 NA Court Decides

Court Judicial only

Delaware

170-210

60-90 None Sheriff Judicial only

Dist of Columbia

47 18 None Trustee Trustee Sale only

Florida

135 NA None Court Judicial only

Georgia

37 32 None Trustee Judicial not common

Hawaii

220 60 None Trustee Both used equally

Idaho

150 45 365 Trustee Trustee Sale more common

Illinois

300 NA 90 Court Judicial only

Indiana

261 120 None Sheriff Judicial only

Iowa

160 30 20 Sheriff Trustee Sale Voluntary

Kansas

130 21 365 Sheriff Judicial only

Kentucky

147 NA 365 Court Judicial only

Louisiana

180 NA None Sheriff Judicial only

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Sale Publication (Days)

Redemption Period (Days)

Sale/NTS Comments

Maine

240 30 90 Court Judicial only

Maryland

46 30 Court Decides Court Judicial only

Massachusetts

75 41 None Court Judicial only

Michigan

60 30 30-365 Sheriff Non-Judicial only

Minnesota

90-100 7 1825 Sheriff Non-Judicial more common

Mississippi

90 30 None Trustee Non-Judicial more common

Missouri

60 10 365 Trustee Non-Judicial more common

Montana

150 50 None Trustee Trustee Sale more common

Nebraska


Nevada 116 80 None Trustee Trustee Sale more common

New Hampshire

59 24 None Trustee Non-Judicial only

New Jersey

270 NA 10 Sheriff Judicial only

New Mexico

180 NA 30-270 Court Judicial only

New York


North Carolina

110 25 None Sheriff Non-Judicial more common

North Dakota

150 NA 180-365 Sheriff Judicial only

Ohio


Oklahoma

186 NA None Sheriff Judicial more common


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Sale Publication(Days)

Redemption Period (Days)

Sale/NTS Comments

Oregon

150 30 180 Trustee Trustee Sale more common

Penn. 270 NA None Sheriff Judicial only Rhode Island

62 21 None Trustee Non-Judicial more common

South Carolina


South Dakota

150 23 30-365 Sheriff Judicial more common

Tennessee

40-45 20-25 730 Trustee Non-Judicial only

Texas

27 NA None Trustee Non-Judicial more common

Utah

142 NA Court Decides Trustee Non-Judicial only

Vermont

95 NA 180-365 Court Judicial only

Virginia

45 14-28 None Trustee Trustee Sale more common

Washington

135 90 None Trustee Trustee Sale more common

West Virginia

60-90 30-60 None Trustee Trustee Sale only

Wisconsin

290 NA 365 Sheriff Judicial more common

Wyoming

60 25 90-365 Sheriff Non-Judicial more common

prevention and opportunities for buyer-clients - rebacrebac.net/teach/foreclosure/2007/foreclosure...

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