Straight Digs

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CNBC’s real estate blog, Realty Check, recently reported evidence of short sale fraud being perpetrated by banks.  If you are buying in this market you may be approached to commit fraud by a bank.  It pays to know what is and isn’t fraud in a short sale.

In a short sale, the homeowner is selling their home for less than the mortgage or mortgages on the home.  If the homeowner cannot pay the difference between what they owe and the purchase price, they are “short” and need the permission of their bank to complete the sale.

Often homeowners have a second mortgage or a home equity line of credit on their home.  In this case, they need the permission from both banks.  CNBC found evidence that in this scenario, the second mortgage lenders were sometimes asking for a payment on the side, not to be reported to the first mortgage lender.  This payment was sometimes asked of an agent, sometimes of the buyer.

Payments outside of the real estate contract or outside of “escrow” or not to be reported to the first lender in any way are probably violations of RESPA, the law governing lending fraud.  If you are asked to make hidden payments to anyone in a short sale transaction, you are probably doing something illegal.

You also may be throwing your money away.  As one of our clients put it, “If I’m being asked to put a lunch box full of money at the bus stop for someone to pick up, how can I be sure that they are going to hold up their part of the deal?”  Without a contract, there is no guarantee.

Finally, the banks aren’t the only ones asking for handouts on the side.  At a Bank of America talk given to Orange County Realtors, a number of Realtors reported that homeowners themselves are sometimes asking for payments on the side to choose a buyer’s offer to send to the bank.

As always, if you have any questions about the legality of a payment before, during or after escrow, seek legal advice.

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Is the media calling the Orange County housing bottom?  Here is a summary of recent news articles from the Orange County Register on the housing bottom over the last month:

October 7, 2009–The California Association of Realtors said home prices hit bottom early 2009 and forecasts that the median home price will rise 3.3% next year.

October 14, 2009–Prices and sales rose together, year-over-year, for the first time since September 2005.  15th consecutive month with year-over-year sales gains.

October 20, 2009–Aliso Viejo is the hottest housing market in Orange County with a market time of 1.2 months to sell all current inventory.  For all of Orange County, market time is down to 2.4 months from 4.76 months a year ago.

October 24, 2009–September national home sales had largest increase in 26 years and jumped 13% in the West.  Deutsche Bank chief economist calls the bottom.

October 28, 2009–Three Orange County cities, San Juan Capistrano, Lake Forest, and Tustin, are in state’s Top 10 price gainers in September.

October 29, 2009–UCLA economists project Orange County median price to rise next year by 15.9% to 16.6%.  Projected price increases to be smaller 2011-2015.

November 4, 2009–Expected market time for Orange County short sales is 56 days compared with 7 months a year ago.  Bank owned homes current inventory is just 21 days.

As with the housing peak, no one is going to perfectly call the housing bottom and no one can predict the future.  However, today the Orange County housing market is moving in the right direction, as reflect in the media reports.  If it continues, we will see price and sales increases in the future.

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We get an uneasy feeling when describing to a new client what the current market is like.  It is hard to convey that in this so-called “buyers market” they will probably compete in multiple offers on every home they offer on. That is, assuming they are buying in the starter range up to $500,000, which is where most of the buying activity is these days.

So it comes as no surprise to us, though it may to those new to the market, that a Garden Grove bank-owned home recently garnered 135 offers.  Don’t get us wrong, 135 is a big number.  Too big.  The bank/agent created a lot of work for themselves underpricing it that much.  Recent comparables sales in Garden Grove sold for between $450,000 and $525,000 so pricing it in the $300,000’s just created a lot of work for everyone.

But here is the thing: most of the offers we have written this year have been on properties with multiple offers.  The skeptic in us says, “maybe the listing agents are just saying they have multiple offers.  Maybe they’re bluffing.”  Problem is, that while we are closing some of them, some of them . . . too many . . . are closing without us.   It’s not a bluff.

Scary anecdote part II, increasingly “all cash” buyers are winning the multiple offer game.  There were 25 “all cash” buyers on the above-mentioned Garden Grove home.  With banks wanting a sure thing, they are often willing to accept less for an “all cash” buyer whether it is for a bank-owned home or for approval on a short sale.  We have represented some of those “all cash” buyers this year and have seen first-hand that in that position you are in the driver’s seat in this market.

If you or someone you know is in the market to buy now, hang on, because eventually you will win one of those multiple offers.  And if you find a home you like without multiple offers at a good price, run don’t walk to offer on it.

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Orange County housing inventory is relatively low right now.  Trendgraphix shows that as of May 2009, there were 11,694 homes for sale in Orange County.  That is the lowest that number has been in over three years (February 2006). 2006 is generally considered the peak of the Orange County market.

Some parts of Orange County are experiencing extremely low inventory.  Aliso Viejo, for example, had 263 homes for sale in May according to Trendgraphix, also the lowest since 2006 (January), but that number is just over the number for May 2005 when the market was booming.

Why is inventory so low?

Low prices are a key factor.  Prices declined dramatically in 2008, but have been stable all this year.  The median price has held steady from January through May.

Low interest rates.  Rates were as low as 4.75% for a while driving a lot of buyers on the fence into the market place.   Despite a recent rise in rates, they are still below 6% for conforming loans (up to $729K) and that has helped keep a lot of buyers buying.

Fewer short sale properties.  Short sales continue to pop up especially in the under $500,000 range.  However, many homeowners are electing to try loan modifications to save their homes rather than short sales or foreclosures.

Fewer bank-owned homes.  Rumor has it that banks that have foreclosed on homes are holding on to those homes and slowly releasing them on the market to keep demand up for their homes.  This is the so-called “shadow” inventory theory.  Makes sense to us, though carrying costs will catch up to the banks eventually.  We can’t remember a bank-owned home that did not get multiple offers recently.

Fewer equity sellers. Equity sellers are getting a premium over distressed sales these days, because they can be easier sales and because there are so few of them.  Homeowners who are selling these days have a need (growing family, job change, etc.) rather than just wanting to sell to get money out.

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It happens all the time.  Mortgage fraud, according to the L.A. Times, has run rampant in the industry and Congress has decided to do something about it.

The FBI, Justice Department, and other government agencies have been given $500 million in funding to investigate and prosecute those who participate in mortgage fraud.  According to a Mortgage Bankers Association report, most fraud occurs on the mortgage application.  In California, faked bank statements or deposits are particularly prevalent.

Because we don’t usually deal directly with our clients’ loans, we don’t often see the kinds of mortgage fraud detailed in the L.A. Times.  However, in this current short sale market, our buyers have been approached by the sellers of properties to pay them money outside of escrow to get their offer accepted.  This is a clear case of mortgage fraud as the seller’s lender would not allow such a payment if it knew about it.

Mortgage fraud has always been illegal.  Now it has teeth.  Consult your agent and lender before doing anything that you think might be fraudulent.

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The Federal Trade Commission released a “foreclosure rescue scams” publication this time last year that is as relevant today as it was then.  Many homeowners who are deciding between loan modification, short sale, or foreclosure are susceptible to the practices of scam artists looking to make money on others’ fears.  One of the best parts of the FTC publication is its “Red Flags” section, which we have reproduced below.  If you need help navigating this process we can help guide you to the right resources free of charge.

“RED FLAGS

If you’re looking for foreclosure prevention help, avoid any business that:
• guarantees to stop the foreclosure process – no matter what your circumstances
• instructs you not to contact your lender, lawyer, or credit or housing counselor
• collects a fee before providing you with any services
• accepts payment only by cashier’s check or wire transfer
• encourages you to lease your home so you can buy it back over time
• tells you to make your mortgage payments directly to it, rather than your lender
• tells you to transfer your property deed or title to it
• offers to buy your house for cash at a fixed price that is not set by the housing market at the time of sale
• offers to fill out paperwork for you
• pressures you to sign paperwork you haven’t had a chance to read thoroughly or that you don’t understand.”

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Kelli Hart at the Orange County Register reports that at least half the active inventory in Aliso Viejo as of February 19 was distressed properties.  A poll taken on that site shows that as of this writing about 60% of the readers felt that this was a bad sign and about 40% took it as a good sign.

There’s a third possibility: that statistic alone does not tell the story.  It has been the case for a while now that a significant portion of the Aliso Viejo home sales have been distressed properties.  As we posted in October of last year, the majority of homes selling in Aliso Viejo in October were distressed sales.  That continued in Q4 with 58% of the Aliso Viejo home sales being distressed sales.  So the statistic by itself says nothing new.

What is new is that Aliso Viejo homes sold in the fourth quarter of 2008 (176) were up by 59% compared to 2007 (111 sales).  That general trend has continued as sales in Aliso Viejo in the first two months of 2009 (87) are up 36% from the first two months of 2008 (64).

None of these statistics is the only one to consider.  Each one has to be considered the context of the others to be meaningful, but the sales trends are unexpected good signs in today’s market.

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A recent blog post by Newport Beach attorney Steven Vondran suggests that under California law, foreclosure consultants have duties to the homeowner that some of them are not aware of.

When a homeowner is having trouble with their mortgage payments, they sometimes turn to outside help.  California has a Foreclosure Consultant Act specifically aimed at covering how someone can help a homeowner in distress.

The Act provides for protections for homeowners, including:

• agreements must be in writing
• the homeowner can rescind the agreement within 3 business days
• the consultant cannot collect an advance fee unless he meets one of the exceptions

Exceptions to the consultants covered by the Act include attorneys, accountants and lenders trying to help a homeowner refinance.

The penalties for violating the Act are not limited to getting your money back.  Penalties can include punitive damages and jail time.

The bottom line is if you or someone you know is having trouble making their mortgage payments (that means everyone) be aware that you have rights.  Many salespeople who fell out of the real estate and mortgage industries are now in the loan modification/foreclosure consultant business and are not aware of their duties to you under the law.  Buyer beware.

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In our office meeting recently, agents griped about appraisal issues they are currently facing in Orange County.  While appraisals are generally going more smoothly than they were during the rapidly increasing market of say 2005, some appraisals are causing problems.

The buyer’s lender usually requires an appraisal of the value of a home to determine if it is worth at least the purchase price.  So, if a home is purchased for $500,000, it would need to appraise for $500,000 or more or the lender could refuse to lend on the home.

The most typical problem occurs when an appraisal comes in below the purchase price of a home.  So, in the above example, if the appraisal came in at $475,000, we would say that home “didn’t appraise.”  Depending on the lender’s policy, the lender could either decide not to lend on the property or the lender could lend up to the applicable percentage of $475,000.   So, if the above lender is willing to lend up to 80% of the value of the home, the lender would be willing to lend $380,000 ($475,000 x 80%) rather than $400,000 on the home. 

Even if the lender is willing to lend, however, oftentimes the buyer is unwilling or unable to go forward.  The buyer often decides the appraiser is “right” about the value and asks the seller to reduce the price or the buyer will “walk.”  Sometimes a negotiated, in-between amount is worked out. 

If the buyer wants to move forward, the buyer will have to make up for some of the cash difference in value.  In the above example, the buyer would need to bring to close of escrow an extra $20,000 to make up for the reduction in value ($500,000 purchase price less $380,000 loan amount is $120,000).

Usually, appraisals come in low when comparables are hard to find or are low due to foreclosure or REO activity.  When the last 3 sales in the area occurred 6+ months ago, the appraiser could be hard pressed to find comparables that make sense for the area.  If the last 3 sales were foreclosures or bank-owned homes, the prices could be low relative to the value of an “equity home” in the area.

Sometimes, lenders are rejecting appraisals because of the quality of the appraisal.  Recently, we sold a home where the appraised value came in $25,000 over the purchase price, but the lender did not approve of either the wording of the appraisal or the comparables used.  It took a second appraisal worded differently to impress the lender.

The key with any appraisal issue is to have experienced representation whether you are the buyer or seller.  If you are the seller, a good agent will prepare you for the possibility of an appraisal issue in advance and will present your best case to the appraiser.  If you are a buyer, a good agent will have thoroughly explained the comparables so you are comfortable about your offer relative to other homes selling.

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Half of Aliso Viejo’s housing inventory consists of short sales and bank-owned homes.  As of July 9, 2008, the MLS showed Aliso Viejo active inventory at 286 homes.  Aliso Viejo REO homes or bank-owned homes totaled 25 homes.  Finally, 118 Aliso Viejo homes were short sales or “subject to lender approval” sales.  Combined, 143 homes were either bank-owned or short sales, which is exactly half of the Aliso Viejo inventory.

As we pointed out in a previous blog post, short sales are not selling quickly.  In the last 3 months, 24 short sale homes closed escrow (sold) in Aliso Viejo.  At that pace, it would take about 15 months to sell all of the current short sales in Aliso Viejo. 

It would appear that short sales are an extreme buyer’s market and a great opportunity for buyers today.  However, it is still generally difficult to negotiate a short sale.  Banks are overloaded with them and don’t have the resources to handle them adequately.  Our recommendation is to only work with them if you have an abundance of time and patience and are keeping an eye out for deals in the other markets.

35 Aliso Viejo bank-owned homes sold in the last 3 months, which means it would take about 2 months to sell the active bank-owned inventory in Aliso Viejo.  Bank-owned homes continue to be an extreme seller’s market.  With our clients, we have seen multiple offers on many bank-owned homes.  Banks are pricing their homes aggressively attracting many buyers.  We don’t recommend you focus all of your attention on bank-owned homes, but often these are the best deals in town.

133 Aliso Viejo homes that were neither bank-owned nor short sales sold in the last 3 months.  We call these sales “equity” sales, because the homeowner has equity left after the sale.  At that pace, it would take just a little more than 3 months to sell all of the Aliso Viejo equity sales. 

Believe it or not, the equity market in Aliso Viejo is a balanced market.  If it only takes 3-4 months to sell your home in today’s market, you are a happy seller.  As a buyer, you can still find great prices relative to last year.  This is a balanced market, because sellers in this category have been much more aggressive with their pricing in the last few months as they have had to compete with the increasing numbers of short sales and bank-owned homes.