David Dufresne's Blog

NO NEW 21-DAY TURNAROUND REQUIREMENT FOR SHORT SALE APPROVALS

Recently enacted Senate Bill 306 does not require lenders to review short sale requests from sellers and their agents within 21 days.  The new California law, which addresses certain escrow procedures, has been mischaracterized by some practitioners as landmark legislation calling for a 21-day turnaround for short sale approvals.

The new law inserts a short payoff amount request into the existing payoff demand law which generally requires a lender to respond to a request for a payoff demand statement within 21 days from when it is requested, typically by escrow.  The new law essentially requires, after a short sale has already been approved, for the lender to respond to a request for a short-pay demand statement within 21 days.  The lender’s response to escrow can be a short-pay demand statement or even, depending on the circumstances, a written statement electing not to proceed with the proposed transaction.

Another provision of SB 306 may also cause confusion.  In practice, a lender may approve a short sale subject to its review of a closing statement prepared by escrow, but the lender does not review that closing statement promptly.  Under the new law, if a lender fails to approve the closing statement within four days, the closing statement shall be deemed approved, but only if it is “not clearly contrary to the terms of the short-pay agreement or the short-pay demand statement provided to the escrowholder.”  The new law does not bind a lender to a short payoff amount in an offer that the lender has not approved.

Senate Bill 306 contains other technical changes in real estate related laws, such as, but not limited to, the following:

• Expanding the existing requirement for a lender to contact certain borrowers to explore options for avoiding foreclosure at least 30 days before filing a notice of default, to include not only owner-occupied residences, but also owner-occupied residential property with two-to-four dwelling units.
• Extending the existing requirement for a lender to record a notice of sale from 14 to 20 days before a trustee’s sale.  This provision does not change existing law requiring a lender to wait at least 20 days after mailing a notice of sale before conducting a trustee’s sale.

This new law comes into effect on January 1, 2010.  The full text of Senate Bill 306 is available

1. All Lenders or the Beneficiary of the Property must either Deny a Short Sale offer in 4 days from receiving the offer or it is assumed to be “accepted.”

2. All Lenders or the Beneficiary of the Property must, within 21 days of the receipt of a short-pay request, as defined, to prepare and deliver a short-pay demand statement,  which would be a written statement, conditioned on the existence of a short-pay agreement, that is prepared in response to a request from an entitled person or authorized agent, setting forth an amount less than the outstanding debt, together with any terms and conditions, under which the beneficiary would execute and deliver a reconveyance of the deed of trust securing the note that is the subject of the short-pay demand statement.

The new “Senate Bill SB 306,”  that will go into effect January 1st 2010. The effects of this Bill will either speed up the Short Sale process or increase the number of homes in California that are declined. Although the State of California to impose it’s will against the Banks… everyone should keep in mind that  banks may  decline a file that it is physically unable to review with the time constraints that will no be imposed upon them.

Thousands of Bay Area homes have a ticking time bomb embedded in their mortgage. The homes were purchased with loans known as option ARMs, short for adjustable rate mortgages.

Next year, many option ARM payments will begin to readjust, slamming borrowers with dramatically higher monthly mortgage bills. Analysts say that could unleash the next big wave of foreclosures – and home-loan data show that the risky loans were heavily used in the Bay Area.

From 2004 to 2008, “one in five people who took out a mortgage loan (for both purchases and refinancing) in the San Francisco metropolitan region (San Francisco, Alameda, Contra Costa, Marin and San Mateo counties) got an option ARM,” said Bob Visini, senior director of marketing in San Francisco at First American CoreLogic, a mortgage research firm. “That’s more than twice the national average.

“People think option ARMs (will be) a national crisis,” he said. “That’s not really true. It’s just in higher-cost areas like California where you see their prevalence.”

Of the 10 metro areas nationwide with the most option ARMs, three are in the Bay Area, according to Fitch Ratings, a New York research firm. They are the East Bay counties of Alameda and Contra Costa, the South Bay area of Santa Clara and San Benito counties, and the counties of San Francisco, Marin and San Mateo.

Together, these areas account for the second-most option ARMs in the country, although they are still far behind the greater Los Angeles area (including Los Angeles, Riverside, San Bernardino and Orange counties), according to Fitch data http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/09/20/MNOR19N2B1.DTL&type=business&tsp=1

U.S. Foreclosure Activity Decreases Less Than 1 Percent From Record High in July
Activity Up 18 Percent From August 2008 Despite Year-Over-Year Drop in REOs

IRVINE, Calif. — September 10, 2009 — RealtyTrac^® (www.realtytrac.com), the leading online marketplace for foreclosure properties, today released its August 2009 U.S. Foreclosure Market Report™, which shows foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 358,471 U.S. properties during the month, a decrease of less than 1 percent from the previous month but still an increase of nearly 18 percent from August 2008. The report also shows one in every 357 U.S. housing units received a foreclosure filing in August.

“The August report demonstrates that there is still an ample supply of properties filling the foreclosure pipeline even while the outflow of bank-owned REO properties onto the resale market is being more carefully regulated,” said James J. Saccacio, chief executive officer of RealtyTrac. “After hitting a high for the year in July, REOs dropped 13 percent in August, but we also saw a record high number of properties either entering default or being scheduled for a public foreclosure auction for the first time.”

Share your comments on this report.

Nevada, Florida, California post top state foreclosure rates

With one in every 62 housing units receiving a foreclosure filing in August, Nevada continued to document the nation’s highest state foreclosure rate despite an 8 percent decrease in foreclosure activity from the previous month. A total of 17,902 Nevada properties received a foreclosure filing during the month, still an increase of 53 percent from August 2008.

Florida documented the nation’s second highest state foreclosure rate, with one in every 140 housing units receiving a foreclosure filing, and California documented the nation’s third highest state foreclosure rate, with one in every 144 housing units receiving a foreclosure filing.

A 10 percent month-to-month decrease in foreclosure activity helped lower Arizona’s foreclosure rate from the nation’s third highest in July to fourth highest in August. One in every 150 Arizona housing units received a foreclosure filing in August — still more than twice the national average.

Other states with foreclosure rates ranking among the nation’s 10 highest were Michigan, Idaho, Utah, Colorado, Georgia and Illinois.

Six states account for more than 60 percent of national total

Six states accounted for 62 percent of the nation’s total foreclosure activity in August despite decreasing REOs in all six states. California REOs dropped 32 percent from the previous month, but the state continued to post the highest overall total of any state, with 92,326 properties receiving a foreclosure filing in August. California’s total was down 15 percent from the previous month and was also down 9 percent from August 2009 — the first year-over-year decrease in California foreclosure activity in RealtyTrac’s monthly reports.

A total of 62,401 Florida properties received foreclosure filings in August, the nation’s second highest state total and an increase of more than 10 percent from the previous month despite a 5 percent decrease in REO filings. Initial default notices in Florida increased 12 percent from the previous month, and scheduled auctions increased 13 percent from the previous month.

A new law in Michigan requiring lenders to file a separate public notice of default before scheduling a foreclosure auctionboosted overall foreclosure activity numbers in the state for August. A total of 9,789 of the new default notices were reported in August, bringing the total number of Michigan properties receiving foreclosure filings to 19,359 for the month — a 134 percent spike from the previous month and third highest among the states. Michigan’s foreclosure rate leapfrogged from 19th highest in July to fifth highest in August.

With 17,902 properties receiving foreclosure filings in August, Nevada posted the nation’s fourth highest total despite a 24 percent decrease in REO filings from the previous month, and with 17,807 properties receiving foreclosure filings in August, Arizona posted the nation’s fifth highest total despite an 11 percent decrease in REO filings from the previous month.

Illinois REO filings decreased 15 percent from the previous month, but the state’s total of 13,078 properties receiving foreclosure filings was still sixth highest among all the states in August.

Other states with totals among the 10 highest in the country were Georgia (11,947), Ohio (11,368), Texas (11,261) andNew Jersey (8,316).

Three states dominate top 10 metro foreclosure rates

Foreclosure filings were reported on 14,940 Las Vegas properties in August, one in every 53 housing units — more than 6.7 times the national average and the highest foreclosure rate among metro areas with a population of at least 200,000. The city’s foreclosure activity was down 11 percent from the previous month but still up 48 percent from August 2008.

With one in every 86 housing units receiving a foreclosure filing in August, the Reno-Sparks metro area joined Las Vegas in the top 10, posting the seventh highest metro foreclosure rate.

Six California metro areas documented foreclosure rates among the top 10 in August. Stockton posted the nation’s second highest metro foreclosure rate — one in every 74 housing units received a foreclosure filing — followed by Merced at No. 3 (one in 78), Riverside-San Bernardino-Ontario at No. 4 (one in 80), Vallejo-Fairfield at No. 5 (one in 82), Modesto at No. 6 (one in 84), and Bakersfield at No. 10 (one in 94).

Two Florida metro areas documented foreclosure rates among the top 10: Orlando-Kissimmee at No. 8 with one in every 87 housing units receiving a foreclosure filing, and Cape Coral-Fort Myers at No. 9 with one in every 88 housing units receiving a foreclosure filing.

Report methodology

The RealtyTrac U.S. Foreclosure Market Report provides a count of the total number of properties with at least one foreclosure filing reported during the month — broken out by type of filing at the state and national level. Data is also available at the individual county level. Data is collected from more than 2,200 counties RealtyTrac’s report incorporates documents filed in all three phases of foreclosure:

• Default — Notice of Default (NOD) and Lis Pendens (LIS)
• Auction — Notice of Trustee Sale and Notice of Foreclosure Sale (NTS and NFS)
• Real Estate Owned, or REO properties (that have been foreclosed on and repurchased by a bank).

If more than one foreclosure document is filed against a property during the month, only the most recent filing is counted in the report. The report also checks if the same type of document was filed against a property in a previous month. If so, and if that previous filing occurred within the estimated foreclosure timeframe for the state the property is in, the report does not count the property in the current month.

* Actual increase may not be as high due to data collection changes or improvements
† Collection of some records previously classified as NOD in this state was discontinued starting in January 2009
† Collection of some records previously classified as NOD in this state was discontinued starting in September 2008

About RealtyTrac Inc.

RealtyTrac^® (http://www.realtytrac.com/) is the leading online marketplace of foreclosure properties, with more than 1.5 million default, auction and bank-owned listings from over 2,200 U.S. counties, along with detailed property, loan and home sales data. Hosting more than 3 million unique monthly visitors, RealtyTrac provides innovative technology solutions and practical education resources to facilitate buying, selling and investing in real estate. RealtyTrac’s foreclosure data has also been used by the Federal Reserve, FBI, U.S. Senate Joint Economic Committee and Banking Committee, U.S. Treasury Department, and numerous state housing and banking departments to help evaluate foreclosure trends and address policy issues related to foreclosures.

I wanted to pass this along to those homeowners thinking of doing a short sale and why it is important to see a Tax Attorny or CPA before considering your action….

“By now most people realize short sales, deed-in-lieu of foreclosures and other “debt forgiveness” programs may generate federal tax if not properly structured; however, far fewer people consider the potential consequences related to state taxes.

While federal guidelines exempt homeowners from federal taxes through 2012, most states waived taxes for 2008 but are increasingly reluctant to implement the policy for 2009 and beyond. For example, California, one of the hardest hit areas of the nation in terms of real estate declines and foreclosures, has not yet signed a bill into effect for 2009 leaving homeowners uncertain of their financial future.

Because the state tax hit for debt forgiveness is potentially large, the question is more than merely academic despite the fact that most mortgage loans are non-recourse (ie, the lender cannot go after other assets) and therefore less likely to result in taxable income. However, even if the primary mortgage is a non-recourse loan, home equity lines of credit, refinancing and other debt is typically recourse debt subject to income taxation at both the state and (usually) federal level.

Furthermore, the temporary waiver does only applies to primary residential properties – not investment or vacation homes creating greater confusion for homeowners and short sale investors alike.  Note: many investors may avoid federal income taxes by declaring insolvency – see our prior blog posts about this topic.

Savvy short sale investors are probably wondering if all states are equally regressive in their reluctance to assist troubled homeowners; fortunately the response is a resounding “no”.  In fact, seven states (or nine depending on how you view it…more on that in a minute) have zero state income taxes which makes it quite simple to avoid potential tax ramification since the federal waiver remains in effect for several more years.

Wondering which states manage to escape personal income taxes?

Here’s the list…

•     Alaska

•     Florida

•     Nevada

•     South Dakota

•     Texas

•     Washington

•     Wyoming

•     New Hampshire and Tennessee only tax dividend and interest income which is unlikely to impact short sale investments owned by individuals.”

Tens of thousands of homeowners who were hoping for lower payments are discovering that lenders roll late fees, back taxes or other costs into the principal, sometimes turning a difficult payment into an impossible one.  That’s one reason many reworked mortgages are sliding back into default.  Monthly payments, on loans modified from Jan. 1, 2008, through March 31, 2009, increased on 27% and were left unchanged on an additional 27.5% according to a recent report by banking regulators.  Many modified mortgages fall delinquent — 25% to 40%, depending on the type of mortgage.  It’s too early to know if this pattern will continue under the Obama administration’s $75 billion initiative to get lenders to reduce monthly payments for homeowners struggling to make their mortgages.

A total of 360,165 mortgage modifications are now in a three-month trial period under the government’s plan announced in March.  But the initiative focuses on reducing interest rates rather than cutting principal.  “Payments have [either] gone up [or] the payment relief can last for the first few years and then go up (again),” says Alan White, assistant professor of law at the Valparaiso University School of Law in Valparaiso, Ind.

Local foreclosure activity since September 1st 2009

Number of  Homes with Notices of Defaults filed

Dublin  35

Pleasanton 33

Livermore 67

San Ramon 30

Danville 18

Alamo 5