Your Goal: Avoid Foreclosure!

You may know of someone who is struggling financially who may want to give up, or already has. I encourage you to check into a few options. My hope is to be able to provide any information for questions that you, or others you know, might have.

Very few understand what banks will provide as options to home owners facing financial difficulty and mortgage default on their home.  Foreclosure occurs when a bank takes a property back from a borrower.  After a borrower has defaulted on their loan for 90 days, a bank will post a Notice of Default (in judicial states) prior to another 90 days after which the bank will typically post a foreclosure date. A foreclosure may affect your credit by as much as 150-250 points and remain on your credit for up to 5 years.  In Utah, lending institutions (banks) may exercise their right to pursue a deficiency judgement for the remaining loan amount. Banks tend to be easier on the borrower if you do what you can to minimize their losses through a short sale.

A short sale is when a bank is willing to take less than is owed on the mortgage. This involves a home sale cooperating with a realtor and does not require the seller to pay any losses or closing costs. This is a much better option for your credit than a foreclosure affecting your credit 50-150 points depending on your payment status. In fact, a bank would rather do a short-sale than foreclose in order to mitigate further losses.

Often in foreclosure, the second mortgagor may come after the borrower to recover losses. There can be recourse from a bank should a home go into foreclosure.

My start in the residential real estate market 10 years ago began in working pre-foreclosure, short-sales. The process of negotiating with the bank is somewhat fulfilling to me while I have the chance to help those with whom I am working. The process is not easy, but the outcome is rewarding with a win-win resolve for the bank and home owner.

Please call or e-mail me if you have questions.

All the best,

Dallin

Dallin B. Nelson

Real Estate Short Sale Specialist

(801) 830-3930 direct

(801) 995-4717 fax

(888) 447-6254 toll free

dallinn@prudentialutah.com

Utah Economic Outlook

Utah Economic Outlook

Spring 2011

Written by Jeff Thredgold, President, Thredgold Economic Associates
Economic Consultant to Zions Bank

Expansion
Utah continues to build a foundation for stronger economic growth, a welcome departure from the painful recession of much of the past three years. The state’s economic rebound should maintain its current pace through the end of 2011, with stronger performance on tap during 2012 and especially during 2013.

The vast majority of states have now returned to minimal or modest levels of job creation. This follows all 50 states experiencing recession at some point since 2008. Utah’s current annualized pace of job creation would rank with the strongest in the West and also rank among the nation’s “top 10.”

Jobs Rebound
The Utah economy added an estimated 18,000 net new jobs during the most recent 12-month period, a 1.6% growth pace. By comparison, Utah lost more than 60,000 jobs during 2008 and 2009.

The state’s goods production sector added an estimated 3,100 net new jobs during the most recent 12-month period, a 1.7% growth rate. Gains of 3,500 jobs in manufacturing and 800 jobs in natural resources more than offset the loss of another 1,200 construction jobs.

Utah’s service providing sector added 14,900 net new jobs, a 1.5% growth pace. The addition of 9,300 jobs in professional & business services; 3,700 net new jobs in education & health services; 1,500 new jobs in both the trade, transportation & utilities and leisure & hospitality sectors offset a decline of 1,100 jobs in financial activities. Employment in information, other services, and government was flat.
The state’s unemployment rate has averaged 7.6% in recent months, after peaking at a revised 8.0% level in early 2010. The unemployment rate is expected to move noticeably lower in coming years as employment gains return to more traditional levels.

Export Surge
A key to Utah economic growth in coming years will be to expand export opportunities around the globe. Export growth was also an important factor in keeping Utah’s recession of recent years from having an even wider, and more painful, impact.
Utah was the only state in the nation to see exports double during the past five years, with export-related employment now accounting for 93,000 Utah jobs, twice the level during 2006 (U.S. International Trade Administration). More than 2,800 Utah companies exported nearly $14 billion worth of goods last year, a 31% rise from the prior year, according to the Governor’s Office of Economic Development. The Governor’s goal of doubling exports again during the next five years is similar to President Obama’s desired objective for American firms.
The top five Utah exports included primary metals manufacturing, electronics, transportation equipment, minerals & ore, and food & kindred products. The top five destinations included the United Kingdom, Canada, China (including Taiwan), India, and Switzerland.
Construction Pain
Utah has clearly not been immune from the new home construction weakness found across the nation. The state has lost roughly two of every five construction jobs that existed five years ago. Various forecasts suggest that new single-family housing starts will rise modestly this year, followed by solid gains in 2012 and 2013.

Exceptional "U"
The University of Utah recently ranked first of the nation’s 181 major research universities in regard to creating start-up companies based on university technology. The annual survey by the Association of University Technology Managers noted the

“U of U’s” creation of 19 companies in 2009. Such companies can create hundreds of high-quality jobs and substantial revenue to the University.

The “U of U” had tied with the Massachusetts Institute of Technology (MIT) the year before and was second to MIT in the two prior years. The University’s top ranking resulted despite the fact that MIT’s research budget is nearly four times larger.

Utah View
Recent issues of the Insight have noted the wide array of high rankings the state has garnered during the past year in such areas as business environment and opportunities, quality of life, effectiveness of government, and best places to live and find a job. Such accolades will pay dividends for years to come. Delta Air Lines’ Sky magazine’s March 2011 feature of more than 50 pages about Utah—seen by hundreds of thousands of people every day—will also pay dividends, especially for tourism.

Utah’s economic outlook is clearly favorable. The state is well-positioned to build on current growth and favorable news to re-establish its position among the top handful of economic performers in coming years.

PMI Appreciation Video (LINK)

Utah Economic Commentary from Jeff Thredgold with Zions Bank - Second Quarter

Better in '11


Modest growth has returned to the Utah economy, with overall performance expected to improve during 2011. Stronger performance seems on tap during 2012. Such welcome growth follows the most painful Utah recession since the Great Depression.

Stronger Utah economic performance has resulted in part from a return of U.S. and global economic growth. The U.S. economy officially returned to growth in June 2009, following 18 months of serious recession. The global economy returned to growth later in 2009.

The Utah economy added an estimated 16,500 net new jobs during the most recent 12-month period, an annual growth pace of 1.4%. Such growth ranks among the top 10 states and ranks first in the West.

By comparison, neighboring states of Colorado, Idaho, Montana, and Nevada rank among the 10 worst performing states in regard to job performance during the past year. Overall, three-fourths of the 50 states recorded minimal to modest additions to employment during the period.

Gains & Losses

Utah job gains were exclusively within the private sector, with total government employment falling by 300 jobs. The state’s professional & business services sector added 6,800 net new jobs, while education & health services added 5,000 jobs.

Job gains were also recorded in leisure & hospitality (1,800 jobs), financial activities (1,200 jobs), trade, transportation & utilities (700 jobs), natural resources (600 jobs), information (400 jobs), other services (900 jobs), and construction (100 jobs). The state’s manufacturing sector lost another 900 jobs during the past year.

The state’s unemployment rate averaged 7.5% in recent months, the highest level in nearly 30 years. The rate is expected to return to more traditional levels during the next 3-4 years.

Revenue Rise

Improving economic growth has led state tax revenues to improve, both in Utah and across the nation. The Beehive State’s tax revenues are now surprising on the upside, following declining revenues in 2008 and 2009 which led to painful spending reductions. State tax revenues nationwide rose during the July-September 2010 period for the third consecutive quarter. However, such revenues still trail those of two years earlier.

While massive budget deficits have been commonplace in recent years in California, Michigan, and New York, states of all sizes are dealing with a collective shortfall estimated at $41 billion in the next fiscal year, according to the Fiscal Survey of States, released by the National Governors Association and the National Association of State Budget Officers. Slow revenue growth, increased spending demands, and a drop in federal stimulus assistance next year will all contribute to the problem.

Let It Snow!

Utah’s winter sports industry is off to a solid start, with promising levels of snow as the season began. In addition, ski resort bookings have risen. A report from the Mountain Travel Research Program noted that bookings at 265 property management companies in Utah, California, Colorado, and Oregon were up more than 15% during 2010’s final quarter from a year earlier. Advance bookings for early 2011 also rose.

Deer Valley ski resort in Park City was named North America’s #1 ski resort for the fourth consecutive year by the readers of Ski magazine. Park City Mountain Resort ranked fifth, with The Canyons, Snowbird, Snowbasin, Alta, Brighton, and Solitude all ranking among the top 30 ski resorts.

More Accolades

The Summer 2010 issue of Insight noted six accolades recognizing the state’s attractive business climate. Two additional recognitions arose in recent weeks.

• Forbes magazine awarded Utah the top spot in its annual rankings of the “best states for business and careers.” Second-ranked Virginia topped the list in the four prior surveys. North Carolina, Colorado, and Washington rounded out the top five

• Newsweek magazine ranked Salt Lake City among the “Top 10 Places in America Poised for Recovery.” The magazine noted Salt Lake City among the three “New Silicon Valleys” along with Raleigh-Durham, NC and urban northern Virginia

Utah in 2011

The state’s recovery from its most painful downturn since the Great Depression continues to unfold, with stronger job gains expected in 2011 and especially in 2012. Rising national and international recognition of Utah as a great place to invest, work, and play will pay major dividends for years to come.


Found at: http://www.zionsbancorporation.com/zionsbank/ins/insUT2011winter.html

Use a Short Sale to Escape Foreclosure

If you owe more than your house is worth and can't afford your payments, you might be able to sell it for less than you owe -- without having to pay the lender the difference.

 

If you can no longer make your mortgage payments and your home is now worth less than you owe on it, foreclosure may not be your only option.

 

A short sale, in real-estate terms, is the sale of a house for less than what the owner still owes on the mortgage. If the lender agrees to a short sale, the rest of the homeowner's debt typically is forgiven. Lenders sometimes agree to the procedure in order to take a small loss and avoid the lengthy and costly foreclosure process.

 

While there are some significant negative consequences to a short sale, an ever-increasing number of properties are being advertised with that label.

Short sale: Win-win-win situation

The beauty of short sales is that they can be a win-win-win situation for seller, buyer and lender. Here's how:  

• The seller gets out of the mortgage liability without facing bankruptcy. 
• The buyer gets the home at a reduced price. 
• The lender agrees to a loss it considers minimal without going through a foreclosure and being saddled with an unsalable property. 

While it may seem surprising that lenders would agree to accept less than what they are owed, they benefit from the process, too.

 

"The lender benefits by not having to go through the protracted process of foreclosing on the borrower and then having to put the property on the market and go through the whole marketing process," says Stuart Wilson, a real-estate agent with Paragon Real Estate in San Francisco.

 

A market saturated with foreclosures can cost lenders billions -- and as much as $50,000 per foreclosure -- according to a study by the congressional Joint Economic Committee.

 

A buyer's dream

For a buyer, a short sale is a boon since he or she is getting a property at a reduced price. However, the process of waiting for a lender to decide whether to agree to a short sale can make a lengthy home-buying process longer and more arduous.

 

Wilson, who has represented both buyers and sellers in short-sale deals, advises working with an agent who's familiar with short sales.

 

He also suggests that buyers looking to negotiate a short-sale deal come armed with enough documentation to convince the lender that settling for the lower price is the best option.

 

"You'd better be armed with recent comparables that show unequivocally that the lender's price is out of line," says Wilson. "You can't do this with a cover letter or a conversation. It will need to be done with the kind of documentation that an appraiser would come up with.

 

"When you go into a short sale, you have an institutional lender, and it is an anonymous entity," Wilson continues. "You don't get a chance to talk to these people, you don't know what their guidelines are, you don't know what their time frames are, and you don't know if your contract will be approved in six weeks or six months. It's a real crapshoot."

 

Lenders are most concerned with the financial situations of the seller when they ultimately make their decisions. If a seller can handle the mortgage payment, there's no motivation for the lender to let the seller out of the mortgage at a lower price.

 

"A lot of lenders aren't even going to consider a short sale unless it seems like (the homeowner) is in financial distress," says Natalie Lohrenz, director of counseling for Consumer Credit Counseling Service of Orange County in Santa Ana, Calif.

 

Also, if the home has a second mortgage with another institution, a short sale is less likely to be approved, since that second institution would have to agree to forfeit all or part of the money it's owed.

Last gasp only

While getting a lender to agree to a short sale may seem like an answer to the prayers of a homeowner who wants to unload a house, it's not a good move if you're merely looking to find a new place. It's generally a last-ditch effort when the only other option is foreclosure.

 

Should you go for a short sale? It depends on how deep a financial hole you're in and how likely it is you'll be able to overcome those financial difficulties.

 

"If they're just having a short-term problem -- short-term disability or maternity leave or layoffs, but they have good prospects to find something soon and they can weather the storm and hold on to the profit through that -- obviously they wouldn't want to think about a short sale," says Lohrenz.

 

"But if the choice is foreclosure or short sale, generally a short sale is going to be a better idea."

Before you think about asking your lender to consider a short sale, it would be a good idea to get your paperwork lined up.

 

Be ready to show the lender you are serious about your situation. Get together a hardship letter (an honest explanation of your financial situation and how it occurred), pay stubs, bank statements, tax returns, an appraisal and documentation of your debts.

 

3 critical safeguards

If you're considering a short sale, experts advise you to take the following steps to meet potential negative consequences head-on.

 

1. Get it in writing. Make sure the lender agrees in writing that the short sale will absolve all debts.

"If they owe $300,000 on the house and the short sale is for $280,000, is there any possible way that the lender's going to come after them for the $20,000?" Lohrenz says. "Most lenders will put that in the agreement that they're not going to come after the deficiency."

 

2. Protect your credit rating. Ask the lender how it will report the short sale on your credit report.

"Most of the time, a short sale shows simply that a debt is satisfied," says Lohrenz. "But theoretically, a short sale could reflect on the credit report as 'settled for less than the full balance.'" Such a designation is a negative mark on your credit report, though it wouldn't hurt your credit as much as a foreclosure would.

 

3. Get professional tax advice. Short sales often have tax repercussions, since lenders can claim the forgiven debt as income that they provided you.

 

That means if you agreed to a short sale for $50,000 less than what you owed the lender, the lender could issue you a 1099 for $50,000, which you would have to pay taxes on.

 

But there are two "outs," says Lohrenz. "If you meet the IRS' definition of insolvency at the time the debt was forgiven, then you generally don't have to pay taxes on it."

 

Or, if your home loan is a nonrecourse loan, you're also likely to escape this tax. With a recourse loan, whoever signed the note is personally liable for the debt, and in a short sale, the debtor would have to pay tax on the difference. A nonrecourse debt is one secured by the loan collateral -- such as the house itself -- and the debtor would not have to pay tax on the sale shortfall.

 

The most common case is that mortgages secured by the property -- especially for buyers who made a 20% or more down payment -- is a nonrecourse loan. But it is absolutely critical you consult a tax attorney before you make such a move to ensure that you don't dig a deeper financial hole as a result of the tax situation.

 

This story was reported and written by Tamara E. Holmes for Bankrate.com.

Educating: The Crisis of Credit

The Crisis of Credit by Jonathon Jarvis:

New Guidelines Affect Loan Modifications and Credit Scores

By: Christine Hynes

New Guidelines Affect Loan Modifications and Credit Scores

Starting November 1, 2009, borrowers can have a little more assurance when it comes to loan modifications and how they impact credit scores negatively.

Previously, the effects of a loan modification on one’s credit score was something of a mystery. Some banks would not report late or partial payments to the credit bureaus during the trial modification process while others would. This led to confusion among borrowers, leaving many afraid of further damaging their credit with a loan modification.

Thanks to new guidelines set forth by the Consumer Data Industry Association, loan modifications under federal programs Making Homes Affordable and the Home Affordable Modification Program are to be listed on credit reports as, “loan modified under a federal plan”. This notification on the credit report will not have the same negative impact previous entries such as “partial payment” have had. In many instances, a report of a partial payment during the trial loan modification period could drop a borrower’s credit score as much as 100 points.

For the time being, FICO has agreed to take no action on these new entries… yet. Instead the credit reporting agency plans on studying the long term outcome of these loans and then making an appropriate score assessment based on the success rate of modified loans. As it stands now, banks are supposed to report the loan as current if the borrower is current on their normal mortgage payment and is current through their trial. However, if a homeowner is behind on their payments as they begin the trial process, their late entries on their credit report will not be expunged. When the permanent loan modification is approved and implemented that is when their loan will be brought current, but the late that are currently on the credit report will continue to report on the credit report.

It is important to note that these new guidelines only apply to loan modifications under the umbrellas of the federal loan modification programs MHA and HAMP. Individual bank loan modifications do not qualify and the banks will report to the credit agencies based on their specific policies. In addition, even if the borrower’s credit score is not affected by the “loan modified under a federal plan” entry will still be visible on a borrower’s credit report, which may affect a lender’s decision somewhere down the line.

Ultimately, the decision still rests with the homeowner on how to proceed with their specific situation. While a loan modification may or may not have an impact on credit reports, the impact of a foreclosure or short sale on credit scores will most likely be far more severe.

Finally, FICO will wait one year in order to gather data on this new ruling to see if they will retroactively decide to report negatively on the borrower’s credit report. This of course will be an across the board decision. And yes, they will retroactively ding your credit if they decide that is the appropriate course of action. However, any creditor that pulls your credit will still see some type of term listed on the credit referencing a loan modification. This means the new creditor will be aware of the modification, which may impact their decision.

* Provide help in most states.

(ArticlesBase SC #1495272)

Article Source: http://www.articlesbase.com/ - New Guidelines Affect Loan Modifications and Credit Scores

A Successful Bank Approval

Many clients have asked me to post an approval for a short sale. This is an example of an approval from Wells Fargo. The desired outcome is to have the bank provide in writing that they will "agree to settlement short of full payment" and "waive any deficiency rights if applicable!"


(used with permission of seller of the property that received agreed settlement short of full payment).

Credit Meltdown - Some (very helpful) Educational Videos

From PBS, this is the 6 part series on the meltdown of our economy.

Frontline: Inside the Meltdown part 1

Frontline: Inside the Meltdown part 2

Frontline: Inside the Meltdown part 3

Frontline: Inside the Meltdown part 4

Frontline: Inside the Meltdown part 5

Frontline: Inside the Meltdown part 6

KSL: Utah's worst recession in more than 50 years

The only positive thing we heard today is the economy may hit bottom this year and stabilize. For now, we're feeling the strongest economic headwinds most of us can remember.

Consumer spending fell for the sixth straight month in December. For the year, consumer spending rose by just 3.6 percent.

Robert Crawford, an economist at the BYU Business School, says people are actually hurting the economy by not spending.

"That behavior, while prudent in the long-run perspective, is in fact making things worse," he said.

But he says saving is a good thing, especially for people who have unstable employment.

He also says an increase in spending by itself wouldn't be enough to reverse the recession. It's going to take businesses willing to invest. Consumer spending accounts for about 70 percent of total economic activity.

Americans worried about the possibility of more job cuts boosted their savings rate to 3.6 percent of their after-tax incomes in December. That was the highest level since tax rebate checks temporarily pushed the rate up to 4.8 percent in May.

A year ago, Utah led the nation in job growth. Now we're losing jobs. Construction is at its worst level since World War II, and sales tax revenue is dropping at a record pace, undermining government budgets.

To get money moving again, Wood says more rescue and stimulus bills are needed. He says, "You just have to hold your nose at this point. This is a crisis. This is a Pearl Harbor for the global and the U.S. economy. You know some of this is battlefield surgery, right now. We're just trying to stop the bleeding."

This article is found on KSL from February 2, 2009.

Successful closing of a short-sale that has been 11 months in the making; 9 months negotiating and 3 months under contract...!

The closing of this property in west Lehi was an education I will have to benefit from in the future. The negotiations required contact with executive levels at two of the largest banks in the country (Wells Fargo and Chase).

We received offers in June, August and October but buyers were not taking on the offers due to confidence in their buying power, the lowering prices of neighboring properties (including better resale areas),and a custom/specific floor plan that they couldn't foresee as their own.

The second mortgage was a large one and they were unwilling to let go of so much money. However, after a great deal of effort and persuasion the first and second lowered the sale to a value comparable to about 70 cents on the dollar.

After final bank approval was given the buyer struggled to get financing due to competing refinances.

Needless to say, this was a nail-biter that we held our breath through to the end.

Thank you Adam and Kate for being great clients; I appreciate your conscientious and responsible attitude in helping me help you.

Successful Closing Today of Short Sale

I listed Frank Volpe's home October 9, 2008. Today we closed his home in Highland. Here is a testimonial from Frank on his satisfaction of my work on selling his home.
Meeting with Frank initially, there was great concern over the time remaining to get his home sold to avoid foreclosure. In checking with the bank we found that they would postpone foreclosure if an offer was received. I knew I would need to work fast. An offer was received within 3 weeks and persistence with the bank merited an acceptance of a short sale or a payoff short of full amount.
Frank was great to work with - I appreciate the opportunity to help him.

60 Minutes: Where's The Bottom

With the surge of sub-prime loans hitting the foreclosure market in 2008 there is another surge of loans that will affect our economy in a larger and more creative way in 2010.
This news story from 60 minutes provides staggering insight into the looming tidal wave that will hit soon.
Scott Pelley reports on the mortgage crisis that's far from over, with a second wave of expected defaults on the way that could deepen the bottom of the U.S. recession.

Successful Closing of Short Sale

Twice in the last 3 months I have seen banks move fast enough to get an offer completed and closed from contract to recording within 45 days.

In late August I began marketing Shawn's home at a price that obtained about 35+ buyers to preview the home within a 3 month time frame. An offer was received in early October which culminated in a close today. Few snags were presented in negotiation with Citi Mortgage.

Many thanks to Shawn Carter for his recommendation and a great transaction.

Differences Between Foreclosure and Short Sale

Having The Answers To Those Tough Questions
When a homeowner finds themselves upside down in their mortgage payments, they have no idea of which direction to turn, and It seems that it is almost impossible to get straight answers to their questions about what options they have, and how each option will affect their credit. Following is information to help you answers those questions. Remember, there are NO quick fixes when it comes to credit, so it is imperative that you don't wait until the last minute to get this information out to your clients. and your prospects, clients and referral partners.

FORECLOSURE
Foreclosure is the legal process in which a bank or other secured creditor either sells or repossesses a parcel of real property, home or land, after the owner has failed to comply with the mortgage or deed of trust agreement with the lender. Most frequently, the violation of the mortgage agreement is the default of payment. The completion of the foreclosure process allows the lender to sell the property, and keep the proceeds to pay off the mortgage as well as any legal costs. The length of the foreclosure process varies from state to state.

If the foreclosed property is sold for less than the remaining primary mortgage balance, and there is no insurance to cover the loss, the court overseeing the foreclosure process may enter a deficiency judgment against the borrower. Deficiency judgments can be used to place a lien on the borrower's other personal property, obligating the borrower to repay the difference or suffer the loss of their property. It gives the lender a legal right to collect the remainder of debt out of borrower's other existing assets.

However, there are exceptions to this rule. If the mortgage is classified as "non-recourse debt," then the borrower has no personal liability in the event of foreclosure. This is often the case with residential mortgages. If so, the lender may not go after borrower's personal assets to recoup additional loss.

The lender's ability to pursue a deficiency judgment can be restricted by state laws. In California and some other states, original mortgages (the ones taken out at the time of purchase) are typically non-recourse loans, however, refinanced loans and home equity lines of credit aren't.
If the lender chooses not to pursue deficiency judgment-or can't because the mortgage is non-recourse-and writes off the loss, the borrower may have to pay income taxes on the un-repaid amount if it can be considered "forgiven debt."

Any other loans taken out against the property being foreclosed (second mortgages, HELOCs) are "wiped out" by foreclosure (in the sense that they are no longer attached to the property), but the borrower is still obligated to pay them off if they are not paid out of the foreclosure auction's proceeds.

How Does a Foreclosure Affect Credit?
A foreclosure can be reported as a Foreclosure or Repossession and carries a derogatory payment status of 8 or 9 (M1, R1 and I1 being the best and R9, I9, etc. being the most negative) which is just under a Public Record. There is a misconception that foreclosures are considered Public Records to the scoring system, however, they are not. Although there is a Public Notice Record on file once a foreclosure is filed, but this record is completely different than a credit report public record.

A Foreclosure will remain on a credit report for 7 years from completion date. And the score will drop from 50-250 points. The difference in point loss depends on how many points your client has to lose in the payment history factor of their credit. So if someone has a 750 credit score, and they opt to foreclose, their score could drop up to 250 points. However, if someone has a 500 credit score, they may lose 50 points for the same derogatory.

If a Deficiency Judgment or Tax Lien is filed in connection with a Foreclosure, the credit score can drop an additional 100 points.

Fannie Mae Waiting Period
The current selling guideline from Fannie Mae has upped the previous 4 year period of how much time must elapse after a foreclosure to 5 years from the date the foreclosure proceeding is completed, not started.

The exception for extenuating circumstances has been increased from a 2 year to a 3 year waiting period.

WORD OF CAUTION: If you have a borrower going through a foreclosure due to circumstances of losing a job, a medical crisis, sub-prime mortgage crisis fall-out, I suggest that you advise them to fully document their experience now. Not to wait until later, because the details and emotional energy of what they are going through will be more difficult to document and prove down the road if they decide to apply for a loan in 2 years based on an extenuating circumstance claim.
In General: When it comes to foreclosure and how it affects the ability to obtain credit in the future, there are multiple points of extremely negative impact. Deficiency judgments for the amount not collected by the lender in the foreclosure sale can end up on the borrower's credit report as a derogatory mark. Additionally, there is a high risk that the borrower will be hit with a substantial tax penalty which can result in a tax lien, which also appears on the credit report. As a general rule, other than a bankruptcy, foreclosure is the least desirable of all of the options available when a borrower is upside down in a home mortgage.

Deed in Lieu Of Foreclosure
An alternative to foreclosure is a "deed in lieu of foreclosure." In this scenario, the borrower turns the house over to the lender and walks away without owing anything. A deed in lieu of foreclosure offers several advantages to both the borrower and the lender. The main advantage to the borrower is that it immediately releases him or her from most or all of the personal debt associated with the defaulted loan. The borrower also avoids a foreclosure proceeding and may receive more generous terms than he or she would in a formal foreclosure. Advantages to a lender include a reduction in the time and cost of repossessing the property.
However, the lender usually will not proceed with a deed in lieu of foreclosure if the outstanding debt on the property exceeds the current fair market value of the property. So in this market, this option probably won't be available to most homeowners who are upside down.

How Does a Deed in Lieu Of Foreclosure Affect the Borrower's Credit?
Most lenders report a deed in lieu of foreclosure as a foreclosure, so the credit scores will carry the same serious affect as if it were an actual foreclosure. However, what most borrowers don't know is that they can negotiate with the lender to report it differently in return for turning over the deed and avoiding foreclosure costs.

Many lenders will say that they cannot change the reporting status, but they can. Here are their options in preferred order:

• Paid As Agreed - Credit scores will have already dropped over 100 points due to default in payments, however, if reported as Paid As Agreed, the borrower will be able to purchase another home in a shorter time period.

• Paid Settlement - Credit scores could drop up to 150 points.
The item will remain on the credit report for 7 years from the completion date or the settlement date.

Fannie Mae Waiting Period
The selling guideline from Fannie Mae has not changed. It is a 4 year period of how much time must elapse after a deed in lieu of foreclosure proceeding is completed.
The exception for extenuating circumstances also remains the same at 2 years.

Short Sale (aka Pre-Foreclosure Sale)
In my opinion, the best option is a short sale, which occurs when a bank or mortgage lender agrees to discount a loan balance, due to an economic hardship on the part of the home owner. The home owner sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove a proposed sale.

A short sale is typically executed to prevent a home foreclosure. Lenders often choose to allow a short sale if they believe that it will result in a smaller financial loss than foreclosing. For the home owners, the advantages include avoidance of having foreclosures on their credit histories. Additionally, a short sale is typically faster and less expensive than a foreclosure.

Junior lien holders, such as holders of second mortgages, HELOC lenders, and homeowner associations (special assessment liens), may also need to approve the short sale. Frequent objectors to short sales include those who hold tax liens (income, estate or corporate franchise tax - as opposed to real property taxes, which have priority even unrecorded) and mechanic's lien holders. It is possible for junior lien holders to prevent the short sale.

While it is frequently common for a lender to forgive the balance of the loan in question, it is unlikely that a lien holder that is not a mortgagee will forgive any of their balance. Further, it is common for a lender to omit updating the zero balance and settlement option on the mortgagor's credit report, or even flat-out refuse to do so "due to their financial loss."

The Mortgage Forgiveness Debt Relief Act Of 2007
When the lender decides to forgive all or a portion of the debt and accept less, the forgiven amount is considered as income for the borrower, like with a foreclosure, leaving it open to be taxed. However, The Mortgage Forgiveness Debt Relief Act of 2007 contains amendments to remove such tax liability, allowing the borrower and lender to work together to find a solution beneficial to both parties.

How Does a Short Sale Affect the Borrower's Credit?
The few reported short sales that I have seen have appeared as "Paid Settlements" on a mortgage account. In the wake of the current mortgage crisis, short sales are becoming extremely common, but legislation has not caught up with the tidal wave and there is no law on the books relating to them to date. As a result, there is an opportunity for the borrower to negotiate credit reporting with the lender. I've seen several successful negotiations, so be sure to let your borrower know that it is possible.

My view - a short sale proves that the borrower is exhausting every effort to pay the loan. The borrower has willingly committed to taking on months of emotional and physical stress in a good-faith effort to sell the property to maintain a good relationship with that lender. Most likely, the reason they can't afford their current mortgage is because they were in an adjustable product and their mortgage payment has doubled. That doesn't mean that they can't afford a different loan program with a lower payment. Which leads me to wonder what the incentive is for lenders not to negotiate with the borrower on how the item is reported to the bureaus. All they would be doing is cutting off a pretty substantial future income stream if they put these types of borrowers out of the market for two years. In that light, negotiation for a non-report on short sales is well worth it. A short sale can ding a FICO score as little as 25 points to a maximum of 125. Depending upon how much (or how little) the FICO score was affected will determine how soon the borrower/seller can get back into the housing market.

Here are their options in preferred order:

• Paid As Agreed - Won't hurt the score at all as long as the borrower has kept payments current.
Unrated - May drop a few points.
• Paid Settlement - Credit score will drop 50-150 points.
• If reported, the item will remain on the credit report for 7 years from the completion date or the settlement date.

Fannie Mae Waiting Period
A few weeks ago, Fannie Mae was going to consider a short sale the same as a foreclosure, however, the current selling guideline from Fannie Mae has reduced the amount of time that must elapse after a short sale to 2 years from the date the short sale is completed, not started.
There is no exception for extenuating circumstances.

Bankruptcy Mortgage Relief
Currently, bankruptcy offers very limited protection to a homeowner who is upside down with their payments. The borrower can file a Chapter 7 which, depending on the state bankruptcy law, will most likely require him or her to surrender the property to the bankruptcy court, or file a Chapter 13 debt repayment plan to spread out prior delinquent payments over a number of months or years in the future. However, no bankruptcy proceeding can modify the terms of an existing home loan on a principal residence. Legislation is being proposed to Congress that would allow bankruptcy judges to modify the terms of an existing mortgage loan. I would not hold my breath. It could take years to make further substantial changes to the bankruptcy laws.

How Does a Bankruptcy Affect the Borrower's Credit?
My advice on this is to avoid Bankruptcy at all costs unless, your borrower is upside down on everything. Not only have the new bankruptcy filing requirements become more difficult and more costly, a public record will wreak havoc on credit scores and could stop someone from being hired or renting a place to live.
A Chapter 7 Bankruptcy will remain on the report for 10 years, and a Chapter 13 will remain for 7 years. The point loss could be from 100-350 points, depending on how many points the borrower has to lose in this factor.

Fannie Mae Waiting Period
The selling guideline from Fannie Mae has not changed. It is a 4 year period of how much time must elapse after a Chapter 7 Bankruptcy. The 4 year period can start on either the discharge or dismissal date.
The exception for extenuating circumstances is 2 years.
Again, the selling guideline from Fannie Mae has not changed. It is a 2 year period of how much time must elapse after a Chapter 13 Bankruptcy. The 2 year period can start on either the discharge or dismissal date.
In the case of multiple bankruptcies, the current selling guidelines that have just been added require a 5 year waiting period from the most recent discharge or dismissal date.
The exception for extenuating circumstances in the case of multiple bankruptcies is a 3 year waiting period from the most recent discharge or dismissal date.

What's the Good News?
Aging Out: In all instances above where I reference how many points will be lost in each scenario, it is important to make sure your clients understand that over time, all derogatory accounts age out. This means, the older the account becomes, the less it will hurt their credit scores.

7 Year Reporting Period: The law states that derogatory items "can be" reported for 7-10 years as outlined above. It doesn't state that they "MUST BE.' My experience proves over and over again that there is no need to wait out the 7 years. You don't have to. You can start seeking early removal of the item by disputing to the credit bureaus that are reporting it. In many instances, after 3-4 years, the item will be deleted.