So the lenders are catching on to the buy another home wave. This is probably the first condition they will have on their approvals.

The mortgage applicant can't get a break these days, huh?

It all part of the cycle.     Under-react, react, over-react....  Lather, rinse, repeat...

Do you know which banks these loans were with?

Wells, Countrywide, but appears to be some kind of industry wide underwriting directive.

I had a similar request this week from a lady who wanted to sell her townhome in Northern Virginia and buy a retirement home farther south in Northern Virignia. 

When I looked at the numbers, her home was worth abuot 2/3 of what she owed.  She wanted to Short Sell it and move south.  That's just not going to work.  Banks aren't going to take a hit so she can move. 

She's got five years to retirement.  That will be a better time to sell.  She agreed. 

Too many home owenrs believe that Short Sale is simple a solution to the falling market. 

Does anyone know what impact a short sale will have on someone's credit? I have not seen this on a credit report, but I continue to be asked this question.

Why does everyone just assume it is okay to BAIL? This is disturbing.

Janet, Banks  haven't started (I hope they don't start) but I believe as soon as a home becomes upside down, the borrower is technically in default and the loan can be called.  I have heard a number of my clients talk about doing this but none have tried yet.  AJ

AJ: How could they be in default just because the house decreased in value? Who determines the value?

Do you mean in default on paper and in conjunction with applying for a new loan?

You know, this actually seems like a sound strategy to me.  Lease it out, get into a lower payment, and STILL PAY THE BANK...

I think desperate times call for creative measures and this seems like a great option to not defaulting.  With so many defaults out there, you think lenders would be bending over backwards for good solid clients that MAKE THEIR PAYMENTS.

WOW! Now that is creative on the part of folks leasing primarys and upgrading through REO oppertunities!! How do the lenders determine they are upside down on their exsisiting homes? Can't their homes be worth exactly what they owe? As for being in default as a result of being upside down. Never heard of it. I don't think the note, you know the "PROMISSARY" note, makes any referance to value of collateral over the life of the loan. As far as short sales - BIG impact on credit, not to mention ones tax returns (the forgiven debt tax). The whole 'BAILING' thing is disturbing to me also. I just can't stop thinking about the PROMISSARY note. Nicely done!

The impact on the credit score depends on the final disposition of the mortgage.  Ideally, you want the account to be listed as either a Closed Account or Paid As Agreed.  This will have virtually no negative impact on the credit (with the exception of any missed mortgage payments).  However, if the account reflects that the account was Foreclosed, Settled, Closed For Less, etc. or any other negative connotation, you can expect a decrease in credit scores to the tune of 150 to 300 points.  I hope that helps!

Janet,  Seriously, how can these people expect the banks to make a loan under those conditions.  Yes, they would have a year ago, but...  Scott's right in regard to the short sale effecting someone's credit.  It obviously won't be as bad as a foreclosure, but it will surely have a negative affect and for a while.

James, thank you for coming in and explaining this. How will the bank determine if they place "settled" on the account?

In the car business a repo that was voluntarily returned said voluntary surrender. A repo that the bank sold and ended up "short" was settled for less than the amount owed and the shortfall was listed.

I NEVER saw a bank list a car that was "short sold" as simply closed.

So this eliminates one potential headache for me. I suspect a client of mine will be upsidedown on his existing home if we have it appraised. Otherwise, he wishes to rent it out until the maket improves and buy a cheaper home that is in default. How would the bank actually know his existing home is not worth what he owes?

Oh great. More bad news. This just confirms my concerns in my last post. I can't even help my clients the way I'd like to anymore.

Jennifer: Good question. They must be running a desktop appraisal. The other possibliity is because certain counties are flagged as distressed or declining, that may trigger the investigation into the value.

Or...maybe they have run across the owner occupied morphing into a rental so often that is what triggers it.

Anyway, they don't want these deals.

I've yet to see a credit report come back to me with "sold short" as well, but speaking with a lot of clients I've seen them mislabeled as Foreclosure SEVERAL times.  As a matter of fact, a client that I'm working on now has her short sale listed as foreclosure on her credit report.  When negotiating with the lender the house in question is with, be sure that they stipulate how they will diposition the loan after it is sold.  According to one of my Short Sale buddies, he makes sure that it says paid as agreed or account closed.  Nothing to notate a negative.

this all true, and as for the short sale question it reports as a foreclosure.   banks will treat it as the same thing.  

AJ is 100% wrong in his statement. Mortgages aren't callable and haven't been since the Great Depression. But for some reason the myth lives on. Lenders can prevent draws on HELOCs but that is as far it goes (they couldn't make the balance due in full on a whim for example).

As for the topic at hand, this is a perfectly reasonable guideline. What is happening is people would buy a cheaper house while their credit is good and walk away from the old one. It is highly unlikely (especially here in California) that they are renting cash flow positive but even if that miracle did come true the old loan wasn't underwritten as an investor property (which are much riskier) and so from the banks POV they have someone with an underwater investor property on their balance sheet, you would take an extremely conservative stance towards that person. You claim this is an overreaction but fail to justify why.

Random Guy: Thank you for giving all of us a reasonable explanation. I believe sometimes in the struggle to close loans we forget there is a method to the "madness" that does on in a bank's mind.

Thanks as well for clarifying AJ's statement.

The reason I view it as an over-reaction and connected to the current "make no loan" attitude: Since when did owning an underwater investment disqualify someone?

Shall we debit the assets of everyone who owns a car that has depreciated to less than they owe? That would be almost everyone who is financing a  car, of course.

If cash flow legitamately covers the debt at the conservative 75% occupancy required, help me understand what the bank is risking here? That the owner of the property would rather walk away than continue to rent?

Chadd and James: I think it should report as a settled foreclosure. The lender is still taking a loss, the borrower still defaulted.

I'd be shocked if a borrower can cover PITI and vacancy factor in an underwater house in California with rent. I think the underwriters would be a little shocked as well.

But from now on you have to think of the market as having one basic lender it is actually 2, Fannie/Freddie, but they adopt the same policies. If someone buys a new house and has an old house that is underwater their motivation to keep the old house is lessened. Fannie/Freddie are the mortgage market and they think they are adopting policies that will prevent defaults on their mortgages. It isn't about defaulting on the new mortgage but defaulting on the old one. So this policy says you have to deal with your current house before moving onto your next house.

Makes sense, thank you for this clarification, I will pass this on to others in the office. Your comments are always welcome on my blog random guy. Stop by again. Randomly, of course.

I must agree with your first statement. It would be rare for rent to cover this in Calif. Having said this, plenty of investors have properties that do not cash flow. I guess I should presume that these investors will not be able to qualify as easily as they have in the past either...assumption being houses will not be going up in value and could render the investor upside down in the future....do you agree?

"Having said this, plenty of investors have properties that do not cash flow."

There is just a huge difference between "I am a real estate investor" from the get go and "Oh! that house is cheap lets go buy it even though we are underwater on our home". The RE investors will mostly walk or not walk regardless, it is just a numbers game and if the loans they got were underwritten at all (considering the boom, not a safe bet) they should have more equity put into the home than your standard homeowner. The investor will have difficulty qualifying but they always had a higher hurdle to jump. The homeowner/wanna be investor has even more hurdles to jump, no history of rental payments, no history of being an investor, original loan not being underwritten as NOO and the mortgage companies not wanting to do anything to exacerbate the walk away problem.

As a mildly interested observer, if I may make an observation of what I see here versus someone in Florida (or Nevada, or Arizona) who has had to deal with the downturn for longer. Many in CA haven't got past the point of being mad at the lenders and confusing desire to purchase with ability to purchase. Focus energy on those with ability to purchase, the faster you qualify the candidate up front the faster you can move on or close the loan, it is just a numbers game at this point. These people in the post aren't real leads they are just time wasters.

Random guy: I am lucky enough in our office to have the office next to the top producer. However, I already know I wish you had the office on the other side of me. You really are a wealth of knowledge with a rare (for ActiveRain) California perspective, and a keen understanding of the JOB of being a mortgage broker.

I am trying now to decide if you ARE a mortgage broker or a lender, or an underwriter. Your grasp of the industry situation in my opinion is really remarkable. If you were not the Random Guy, I would need to suscribe to you right now, and be the relentless sponge that soaks up everything you write.

As it is, I feel you have given me material for another whole post, but can only credit you as Random Guy who inspired me. I hope this is okay?

Learning to separate the time wasters from the real loans has been difficult for me. I find it hard to ruthlessly discard those that do not have the ability to buy especially those among my old client base. And yet, this is a skill required in the new environment. I could not agree more with you on this, and have actually made this observation in the next door office.

At first, I thought it was just the ability to qualify people before loans were submitted that distinguished him as the top gun. Then I finally realized it was more...it was also the ability to discard the ones that wouldn't qualify quickly and move on to those that will.

Numbers game, that is correct. Plenty of leads with few that will actually qualify vs never enough leads when all would qualify. Great concept, You are quite the thinker.

"As it is, I feel you have given me material for another whole post, but can only credit you as Random Guy who inspired me. I hope this is okay?"

You can quote me but I retain all movie and book rights. ;)

RG: LOL, so be it and stay tuned. You will be quoted in my next post.