Many lenders negotiate prices for short-sales, in which the seller is offering the home for less than is owed on the mortgage. But traditionally the only way you could find out was to submit a below-list offer and wait—often for many months—for a response. If the bank made a counter-offer, you knew you were in the ballpark; if they didn’t respond at all, you were too low. By then, you may have lost all interest in buying the property.

The good news is, on April 5, this frustrating system will change at least for some buyers and sellers. That’s when the federal government will begin to provide financial incentives to lenders to do more short sales. The rules also help standardize the process, so your chances of negotiating a distressed-property bargain will increase.

Under the old practices, when a financially-distressed seller brought a potential buyer who was offering less than the amount owed on the loan, the bank would order an appraisal or broker’s price opinion (BPO) and then decide whether the offer was acceptable. Under the new federal rules, banks will order a BPO before the property is listed for sale, and will share information on the minimum net proceeds they’re willing to accept with the sellers. If they then bring in a buyer whose offer is equal to or greater than this pre-approved amount, the lender must accept it within 10 days.

Not all sellers are eligible for this program, called Home Affordable Foreclosure Alternatives (HAFA) (for the requirements see Help for America’s Homeowner’s Supplemental Directive 09-09). But since the process is likely to go so much smoother for those who buy and sell under HAFA, you may want to wait a bit until the program goes into effect and concentrate on finding these “pre-approved” deals.

Of course, when you do find a property you like, you may not be the only person bidding on it. To improve your chances of winning, make sure your offer is “clean,” with as few contingencies as possible (though I would never forego a home inspection). Include tax and credit records, and a mortgage pre-approval letter. If you can afford to pay cash, that will put you in an even stronger bargaining position.

Still, in your eagerness to win the property, don’t forget that distressed properties often come with added financial burdens. Although under HAFA, the seller is supposed to provide clear title, to protect yourself your, your contract must make it clear that you will not be responsible for any of the seller’s unpaid property taxes, liens or second trusts. Also, cash-strapped homeowners often stop paying taxes and homeowners’ association fees during the time between when the house is listed and the deal is closed. To make sure that you’re not on the hook for these expenses, Leonard P. Baron, professor of finance at San Diego State University, recommends that you ask that the bank escrow at least six months worth of taxes and HOA fees, to cover any potential shortfall.

To put things in perspective, we learned that just a few years ago, BofA processed fewer than 10 short sale requests per month and that this department was managed by a single individual. In contrast, there were 59,000 short sale requests in the month of February, 2010, managed by approximately 1,000 individuals, which will double to 2,000 this year.

Matt laid out some of the challenges faced by BofA. For starters, BofA does not own most of the loans that are being defaulted on and has to go out to the investors (of which there are hundreds) that own the loans to get their approval on short sales. Further, there were as many as 17 disparate systems that negotiators needed to access in order to communicate with the various investors and different departments within the bank.

To bring some semblance of order, Matt has redefined the “customer” as 1. Distressed Homeowners; 2. Realtors; 3. Lenders, and; 4. Buyers of Homes. This is a cultural change within the organization, as past thinking was that the investor was the customer (buyer of their loans).

In all, the audience found Matt to be smart and attentive and very much appreciated him taking the time to articulate how he plans to address a very difficult and important challenge.

Question: I am a firsttime homebuyer but was not within the prior income limits at the time I entered into my contract to purchase on October 30, 2009. I will be covered, however, by the new income limits. If the new rules have been signed into law by the time I go to settlement, will I be eligible for a credit?
Answer: Yes. The new income limitations go into effect as soon as the President has signed the bill. The income limit and other eligibility rules will look to your status as of the date of purchase,
which is the settlement date. So if the new rules have been signed when you go to settlement, you should be eligible for the credit (or a portion of the credit if you’re within the phaseout range).
Question: I am an eligible existing homeowner. I have a fair amount of equity in my home. I
have found a home with a nonnegotiable
price of $825,000. Will I be able to use any
of the $6500 tax credit?
Answer: No. The $800,000 cap on the cost of the purchased home is firm at $800,000. Any amount
above $800,000 makes the home ineligible for any portion of the credit. The $800,000 is an
absolute ceiling.
Question: I owned my home for 10 years, but sold it two years ago year and have been renting
since. If I purchase a home, will I be eligible for the $6500 tax credit if I meet all the
other eligibility tests?
Answer: Yes. Because you lived in the home for more than 5 consecutive years of the previous 8, you
will qualify for the $6500 credit. For example, Say John and his wife bought a home in 2000
and lived there until 2008 when he got a divorce. Whether John has been renting or bought in
the interim, he WOULD INDEED be eligible for the credit because he owned a home and
occupied it as his principal residence for 5 consecutive years out of the last 8 years. The
keyword here is “consecutive.” As long as he lived in that house for 5 years straight what he
did since 3 years doesn’t impact eligibility.
Question: I am an eligible firsttime
homebuyer. I entered into a contract to purchase on
November 1, 2009. Do I have to go to closing before December 1? How does the
extension date affect me?
Answer: You do not have to close before December 1. Once the legislation has been signed, it will be as
if the Nov 30 date had never existed. Therefore, so long as the contract settles before April 30
(or July 1, worst case), the purchaser will be eligible for the credit.

Following are some excerpts from his speech:
- The first wave (a tsunami) of foreclosures hit in 2005 through 2008. These were directly attributed to the sub-prime market on loans given to people who could not afford the property;
- The second wave, what we are currently experiencing, is more the result of the economic downturn and job losses;
- RealtyTrac estimates that 45% of home sales in the recent past have been of distressed properties (either bank-owned or in some state of foreclosure);
- We are currently in the 45th straight month of increased foreclosure activity. The trend is not expected to subside until sometime in late 2011;
- California’s foreclosures spiked in 2007 and continued into 2008;
- California is responsible or roughly 523,000 of 2.3 million forecloures nationwide, or 23%;
- RealtyTrac forecasts that there will be one foreclosure for every six to 10 jobs lost;
- Anywhere from $60 billion to $100 billion of Alt-A and Option ARM loans are about to be recast, raising payments for homes that have these loans. This will generate the next huge wave of foreclosures;
- 60% of all foreclosures are in six states: California, Florida, Nevada, Arizona, Utah and Colorado;
- 10% of all mortgages today are delinquent, 4% are in the foreclosure process;
- Banks have slowed down the foreclosure process, not strategically, but because of the increased volume, workload and requirements imposed by the government’s “Making Homes Affordable” program;
- The “Shadow Inventory” many people refer to exists through the elongated process of foreclosing and in the pending foreclosures on delinquent mortgages:

Here are some forecasts being made by RealtyTrac:
- Foreclosures will peak in 2010. If so, this may prevent another massive crash;
- Unemployment will be the primary driver in foreclosure activity;
- Option ARMs resetting in Q2-Q3 2010 will set off another wave of defaults;
- “Strategic Defaults,” people who

can pay

, but don’t because they have negative equity in their home, will increase;
- Loan modifcations will be ineffective;
- Most likely scenario is a long, slow, flat recovery over the next three to four years;
- “Normal” markets will not return until late 2012 (although he pointed out that some economists consider him to be a “raging optimist”).

We were very grateful to have Mr. Sharga address our group and obtained a lot of useful information from his presentation. We encourage folks who are interested in knowing more about what is going on in the foreclosure space to subscribe to RealtyTrac at www.realtytrac.com.

Southern California markets also peaked at different times and are recovering at their own paces. Sales volume slid 44% from its peak in 2004 to its low in 2007.
• San Diego peaked in May 2006 with a median sales price of $622,380, and was down 39.6% to a median price of $375,710 in August 2009.
• Ventura didn’t peak until August 2006, at $710,910. It was down 34.4% at $466,200 in August 2009.
• Orange County peaked in April 2007 at $747,260, and was down 33.2% to a median price of $499,440 in August 2009.

C.A.R. anticipates that the median homeprice will be $271,000 by the end of 2009,down 21.8% from 2008, but that 2010 will see an annual increase of 3.3% to a median home price of $280,000. Explains Leslie Appleton-Young, chief economist and vice president of C.A.R., “With distressed properties accounting for nearly one-third of the sales in 2010, inventory will be relatively lean, under six months during the off-season months, and a roughly four month supply during the peak season. ”The caveat is the flow of foreclosures. “Although it appears at this time that lenders are closely monitoring the flow of distressed
properties onto the market, there could be an exertion of downward pressure on home prices should a heavier than expected wave of foreclosures come to market next year,” said Appleton-Young.

What will sell more houses is more jobs. In Southern California, non-farm payrolls fell 4.5% between August 2008 and August 2009, a loss of some 370,000 jobs. That’s 0.5% less job loss than the state as a whole.

California is predicted to end the year with an unemployment rate of 11.6%, and the figure is forecast to rise to 12.1% in 2010. However, the rate of non-farm job losses will slow from 4.3% in 2009 to 1.1% in 2010. Disposable income will rise 0.1% in 2010 from a loss of 0.4% in 2009. “The wild cards for 2010 include
foreclosures, loan resets, the labor market, and the California budget crisis, as well as the actions of the federal government,” Appleton-Young said. “We expect the median price to decrease slightly through the remainder of 2009 and into next year, then rise before leveling off next summer.”