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If We Believe Foreclosure Is In Our Clients Best Interest, Should We Propose This As An Option?

Mortgage and Lending with Reasy Financial LLC NMLS 2446155

If we believe foreclosure is in our clients best interest, should we propose this as an option and recommend they seek legal counsel?

Negative EquityThis morning I was thinking about the many clients I have who are underwater 50-70% in negative equity.  The more I thought about the reality of those clients getting back to the break-even point, where their home is worth what they paid for it, the more I questioned what my advice to them should be.  In Arizona, our foreclosure laws are extremely favored toward homeowners.  I'm not going to pretend to be an expert and give you all the scenarios but, often times, the borrower can walk away without any recourse, or deficiency.    

This brought me to think about the letters behind my name, CMPS.  I am a Certified Mortgage Planning Specialist, and have been since January 2007.  What is CMPS you ask?  CMPS is a training, certification and ongoing membership program for financial professionals who provide mortgage and real estate equity advice. The CMPS Institute was formed as a joint effort by leaders in the mortgage and financial planning industries to raise professional standards among mortgage professionals and integrate sound financial planning advice into the mortgage process.   Note the last sentence, sound financial planning advice.  This leads me to my question.Top 10 States by Negative Equity Share

What would your advice be to a borrower owes $220,000 on a home that's worth $70,000?  Should they continue to pay their mortgage if they have suffered income loss but still have assets?  What if they were advised by legal counsel there is no recourse if they walk away versus do a short sale, where there may be recourse?  One could argue that bad economic advice would be to continue paying on an asset that could take more than 20 years to see the original purchase value versus fixing your credit after foreclosure, which could only take 3-5 years.  The average appreciation rate for Arizona is 5.73025% for a 30 year period.  The 5 and 10 year averages are the same, depending on the years you start and stop. 

Lenders have loss-mitigation departments, which are staffed and have legal counsel.  Why shouldn't a borrower mitigate their own losses too?  Sometimes it's really just a business decision that one faces.  Many business contracts have been broken by the politicians, the people who run these banks and the banks themselves.  Is it immoral?  Is it unethical?  Are we outraged to hear about it??  What do you think?  

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About the Author

My name is David Krushinsky and I am a Phoenix mortgage specialist that is truly passionate about my profession and the result is that nearly 100% of my business is by referral from satisfied clients, trusted financial advisors and the most experienced REALTOR®'s in the Phoenix area.
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Comments (12)

Brian Brumpton
Keller Williams Boise - Boise, ID
Boise Idaho Real Estate


There may be not legal recourse but don't you think it's also a good idea to shed some light on the difference in credit ramifications?  

A favorable short sale approval could keep clients from both legal recourse and help to preserve their credit.

Dec 03, 2009 11:21 AM
Tiffany Torgan
Harcourts Prestige Properties of La Jolla - La Jolla, CA
Featured on HGTV's New Show! How Close Can I Beach

I think if suggesting foreclosure is the better way to go then do it. Their credit probably is already shot and it doesn't seem like the short sale process is much less damaging to their credit. At the NAR convention one of the speakers said that the only difference on how either one effects one's credit is one more year in being able to purchase a home once they get their credit established again.

Dec 03, 2009 11:24 AM
Tiffany Torgan
Harcourts Prestige Properties of La Jolla - La Jolla, CA
Featured on HGTV's New Show! How Close Can I Beach

Ya'll might want to check out the preserving their credit part, the CAR attorney a couple of weeks ago had begged to differ. I would have them consult an attorney to keep you out of the hot seat. The attorney said that Agents shouldn't say that doing a short sale will preserve credit. Maybe suggest also them consulting a CPA for tax ramifications as well.

Dec 03, 2009 11:27 AM
David Krushinsky
Reasy Financial LLC - Peoria, AZ
AZ MB-1044208 MLO NMLS #202115

Brian - You MUST ensure that you get a full waiver on the promissory note in a short sale to release deficiency.  The lender would also have to agree to do a short sale with little to no late payments.  Is that really reality??

Tiffany - You're right.  The effects of a short sale and foreclosure are often the same for credit.  If the borrower has many lates, often times they must to do the short sale, it basically drops the score as low as a foreclosure.  With an FHA loan, a buyer can purchase in 3 years with a foreclosure just like they could with a short sale.  Here's the current rules for lending. I'm not certain of the tax implications but you bring up very valid points.

Dec 03, 2009 11:34 AM
Tiffany Torgan
Harcourts Prestige Properties of La Jolla - La Jolla, CA
Featured on HGTV's New Show! How Close Can I Beach

Thanks David. I'm a Broker so I have to be extra careful, but I did take very good notes when this subject came up. As you can imagine there were a lot of questions from all over the room. I will check out your link you sent.

Dec 03, 2009 11:54 AM
Nick Johnson
West USA Realty Revelation - Phoenix, AZ

David, I enjoyed our conversation about this when you brought it up to me. I'm glad you're seeking out this avenue as a possibility.

Since our conversation prior to this post have you found a way to package up and create a loan product for this?

Of course, keep me posted as you know I come across a ridiculous amount of short sales and could easily over load you with business if this gets any speed.

Dec 04, 2009 12:07 PM
John Cannata
214-728-0449 http://TexasLoanGuy.com - Frisco, TX
Texas Home Mortgage - Purchase or Refinance

I don't see it EVER being an option to suggest a foreclosure. Perhaps I am not seeing the full picture. Are these customers unable to make the payments as originally agreed upon because one lost a job or was injured? If so, then the lender can usually work something out. There have been modifications made due to the home values depreciating. I short sale is the more dignified way of completing this transaction. Now, if they tried a short sale, no offers have been made, and the homeowner can not continue to make payments... then FCL is the last option. But until all avenues are attempted, I do not see offering a foreclosure.  Again, that is only if the customer can not afford the payments as originally agreed upon or a job relocation.

Dec 05, 2009 11:54 AM
Wayne Johnson
Coldwell Banker D'Ann Harper REALTORS® - San Antonio, TX
San Antonio REALTOR, San Antonio Homes For Sale

David, That's an intruiging question. Lucky for me in a way, as a Realtor, this is outside the scope of any recommendation I would make. I see my role as helping the homeowner in understanding the market value of the house, and what needs to be done to make it most saleable. I would then suggest the homeowner get counseling from their attrney, financial advisor, tax advisor, accountant, and lender. I know everybody does not have a crew of advisors to help them with this sort of decision, but as a Realtor, I do not have the expertise to determine the best course of action, or the unintended consequences of taking foreclosure.

Dec 06, 2009 12:35 PM
Kate Kate
San Diego, CA

I saw the news last night about homeowners banding together to go after Great-Big-Bank who is sitting on our bailout money but won't take calls from homeowners who are trying to SAVE their homes.

That sure outrages me! I had to turn the news off or I would not be able to sleep. Homeowners need representation in this mess, that's for sure!

Dec 09, 2009 02:55 AM
Jessica Steele
Welcome Home Realty - Surprise, AZ

I have to say that I agree with John in this instance. Is that really an option? To me it seems more like a last resort. I also, however, agree with Wayne. This is truly outside of the realm we, as Realtors, are able to comment on. I cannot recommend anything, other than to consult an attorney, a tax advisor, a lender, etc. What I can do, however, is present them options. A foreclosure, however, would always be at the bottom of that list.

As an underwater homeowner, I feel the pain of the borrower, but unless I am under extreme financial distress, I feel that I have an obligation to fulfill.  (I am sure my neighbors appreciate that too).

Dec 12, 2009 10:36 AM
David Krushinsky
Reasy Financial LLC - Peoria, AZ
AZ MB-1044208 MLO NMLS #202115

John, I respect everything you said and I would have agreed with you a few months ago.  You might never see my point and that's OK.  I am going to really put myself out there on this one, but think about it this way.  Homeowner buys his house because he's always seen real estate increase in value.  Over the last +70 years, real estate has never declined in value.  Every month the homeowner pays on his mortgage he feels good because he is paying down his debt and increasing his equity toward the "American Dream", owning a home free and clear.  Along comes 2007, 2008 and 2009; his equity is wiped out.  IF his property appreciates at 5.70% per year from 2009 his house will once again be worth what he paid for it in 2028.  If he strategically foreclosed now, in three years he could probably (highly probable) purchase a new home for much lower than he owed on this home.

My point is this... Yes, you are breaking an obligation you agreed to.  Is it in your best interest?  Yes.  Are you breaking a promise to a friend?  No, you are only a number to the owner of this loan i.e. Wall Street firm. 

The people that created the loans that enabled borrowers to access credit have protection against defaults.  They are called Credit Default Swaps (CDS).  A CDS is similar to a life insurance policy, in that, it allows a purchaser a guaranteed payment in the event the loan defaults.  So the creators of these loans are allowed to buy CDS on their own loans.  It's similar to you being able to buy a life insurance policy on someone whom you are going to hire a hit man to murder.  The Wall Street firms began buying CDS when they saw the writing on the wall in 2006, before the equity was gone.  Where is the downside protection for the homeowners.  There isn't.  There are no derivatives one can buy to protect their home from negative equity.

It's not fair to the lenders for homeowners to default right?? Wrong, they actually prefer it in some cases.  They are making more money on the default than the lousy 2-3% per month in interest.  Why wasn't AIG allowed to fail?  They had the largest exposure to CDS, which would have had massive repurcussions throughout the globe.  This is one of the reasons we read so many posts about Realtors stating, "It's like the bank wanted to foreclose. They kept losing one piece of paper or we had to fax 5 times and it still didn't close".  The loan owner probably has a CDS on that loan.   

These institutions have no sympathy for my clients and likewise I have no sympathy for them.  They make business decsisions.  I say homeowners should view it the same way.  It's only my perspective.  You are allowed to have your own.  Thanks for the comment buddy.   

Dec 12, 2009 11:09 AM
Renée Donohue~Home Photography
Savvy Home Pix - Allegan, MI
Western Michigan Real Estate Photographer

I do not suggest anything ever.  My license is on the line and I send them to a lawyer to get all that advice to make that decision.  I am supportive of any decision they make, as long as legal counsel has guided them and they made up their own minds!

Dec 18, 2009 12:07 AM