Anytime you pick up the newspaper or read anything on the websites, you are sure to read that the real estate market is upside down and that foreclosures are on the rise and that the market is not about to improve anytime soon. I have been to seminars and conventions on the mainland and the market is terrible in some areas and actually doing well in other areas on the mainland.
Oahu has been somewhat insulated from the huge downturn in the market but we have seen a drop of about 20-25% in the number of sales of real estate within the past year but the prices have not dropped. There is a fluctuation of the median price but the prices go up and down rather than showing a downward spiral. Sales activity has definitely slowed down but the prices have not shown a big drop.
What does that mean to the investor waiting on the sideline waiting for the bottom to fall out on Oahu? It may not happen unless we have a major world catastrophe or the interest rates go up to 9 or 10%. We are actually spoiled by the low interest rates and think that 10% is high. When I bought my first home, the interest rate was 9 or 10% and that was the norm. If you remember the prime interest rate was 18 to 20% in the late 1970s and early 1980s. I do not believe that the federal government will allow the interest rates to get that high. I am not an economist but I am a practitioner of real estate and do not think that the interest rates will run up as it did in the past.
How about those that are in trouble? The predictions are that the foreclosure rate will increase and that the bankruptcy filings will increase. Compared to the really bad times of the previous recession in the mid-1990s, we are at about 1400-1500 foreclosure filings whereas there were about 3500 to 4000 foreclosure filings in the mid-1990s. A good simple indicator to me is the number of foreclosure ads that you can see in the papers. In the last recession, we had 2 pages or more that were full of foreclosure notices. You will see about 1/4 of the page or less in foreclosure notices. Is the market difficult for some people? Yes. Is it as bad as the last recession? NO!!!!
The real estate owner must understand what is involved when a borrower falls behind in the mortgage payments and what steps need to be taken to resolve the problem. The owner must know the preliminary process that lenders go through in determining what course of action they will take when dealing with delinquent payments. Once the course of action has been determined, the lender will usually take one of the following steps:
- Payment forbearance - lender will allow the borrower to go for a short period of time without making payments so that the borrower can have some time to arrange his finances. The payments that are not paid will be added to the principal balance and the borrower will have to pay those amounts.
- Loan modification - Lender may be willing to modify the terms and conditions of the loan and the interest rate to help the borrower get back on his feet
- Deed in lieu of foreclosure - Lender may be willing to take the property back instead of foreclosing on the loan and the mortgage is forgiven with no deficiency
- Short sale - Lender/Investor is willing to let the property be sold at fair market value or slightly slower price which could be substantially below the original purchase amount and the outstanding loan amount. The question of how to deal with the deficiency must be discussed between borrower and lender. Lender does not want to increase their loss exposure any more than they absolutely have to.
- Judicial Foreclosure - Legal procedure to foreclose on the property where the courts and a foreclosure commissioner are involved
- Non-Judicial Foreclosure - Legal procedure to foreclose on the property where the bank does not go through the courts to foreclose on the property.
Judicial and Non-Judicial foreclosure process will be discussed in a future article.
Short Sales ProcedureWhen the borrower is unable to make the mortgage payments on a timely basis, the borrower should contact the lender right away and explain why payments cannot be made and tell the lender when the payments can be brought current. A short sale occurs when the current value of the property is less than the current loan amount and the borrowers are unable to make the monthly payments.
In order to prevent the property from going into foreclosure, the borrower has to go through certain steps. Contacting the lender is the first and most important step in this process.
In order to gain an acceptable workout solution, the borrower needs to accurately assess the cause of delinquency and be prepared to take corrective action before contacting the lender. The borrower can prepare a proposal package to submit to the lender requesting a workout solution. The real estate licensee can play a critical role in helping the borrower prepare the proposal package that is complete and accurate backed by market data.
The following are steps that should be taken by the borrower to prepare for the short sale:
- Get Organized
- Do a Self Analysis
- Prepare a Budget Analysis
- Compose a Hardship Letter
- Assemble the Documents
- Gather Income Statements (including pay stubs, tax returns)
- Do a Market Analysis by a Professional Realtor
Once the steps have been taken and all the documents are prepared for submittal to the lender, the borrower needs to select a potential solution that is realistic to the borrower and the lender. The borrower must also make sure that the lender is agreeable to a short sale. The debtor needs to list the property at a price that will sell the property in a short period of time and make the sale subject to lender approval. The short sale package must contain a bona fide purchase contract for the lender to consider. If there is no purchase contract, the bank will not look at the short sale proposal.
Lenders have guidelines that are set by the lender, investors, mortgage insurance companies that are written in the service guidelines. Guidelines vary for different types of loans, such as VA, FHA and conventional and determine what is an acceptable workout plan proposed by the borrower.
Some causes for default by the borrower are:
- The homeowner may be overextended in the monthly expenses. The borrower may have assumed too much debt
- The borrower may have debts from furnishing the house or making repairs.
- There may have been a death in the family and loss of income
- The borrow may have had a prolonged illness
- Loss of income, cut in pay, loss of second job, less hours
- Excessive obligations
- Poor money management
- Unexpected repairs
- Divorce/Separation
- Alcohol or substance abuse
Mortgage insurance companies need to approve short sales along with the primary lender. If you or someone you know is a prime candidate for a short sale, do not delay listing the property. If you let the non-payment drag on, the lender may start foreclosure proceedings and it may be too late to do a short sale. You must use a Realtor who is familiar with the short sale process. You must be willing to fill out the financial statement and provide documentation of income to qualify for a short sale. I teach a class on the foreclosure process. You are welcome to take the class at no charge if you agree to work with Abe Lee Realty on a real estate transaction in the very near future.
If you have any questions, please feel free to email me at
abelee@hawaii.rr.com or call me at 808-216-4999. There is no charge for the initial meeting to discuss your situation. All information you give me will be held in confidence. Don’t forget to take the pre-licensing class if you are thinking of buying or selling a home. The 60 hours of classes will help you to become a wiser consumer. You can also earn thousands of dollars by referring business to Abe Lee Realty without doing any work on the transaction. You must be licensed to receive a commission. Call me or email me and we can discuss the various programs that are available for you.
