Ted Simons: There's been a slowing in the decline of Phoenix-area housing prices, and according to a new report from ASU's W.P. Carey School of Business, prices should level off this spring. Still, many people are upside down on their loans and can't afford their mortgage payments. One option is a short sale. Here to talk about that is Michelle Lind, general counsel for the Arizona association of Realtors, which along with the state real estate department, released a guide that explains some of the risks of short sales. Good to have you here. Thanks for joining us.
Michelle Lind: Thanks for having me.
Ted Simons: Before we get started, I think most folks knows what a short sale is. Define it.
Michelle Lind: It's a transaction in which the lender allows the homeowner to sell their property for less than the loan amount on the property. Bank short. The lender agrees to take less than the loan amount.
Ted Simons: If I bought a house for $200,000 and the loan is for $180,000, and the sale is for $130,000, it allows the loan to go through?
Michelle Lind: Exactly.
Ted Simons: What's this designed to do?
Michelle Lind: There's a lot of information out there. If you Googled short sales or Googled foreclosure, you're going to get millions of hits. What we wanted to do is the Arizona department of real estate short sale committee is to come up with a document, a one place where real estate professionals can send consumers to get good, reliable information about short sales and the foreclosure process and provide them with links to additional information, reliable information.
Ted Simons: Let's get started with the idea of what a homeowner should know before proceeding with a short sale. What needs to be considered?
Michelle Lind: Well, the first thing that the homeowner needs to know is, of course, they need to know who the lender's options are. What are the lender's options if they don't make their payments. The lender can foreclose. There's judicial foreclosure. Trust deed sale, and can sue in a promissory note. The second thing we put in a short sale advisory regarding what they should think about before they do a short sale is to be aware of predatory foreclosure rescue scams or short sale scams because unfortunately, there's an increasing amount of that in -- in our community. In fact, I attended a mortgage foreclosure summit today with Eric holder, the U.S. attorney general, Terry Goddard, the Department of Justice, FBI, all addressing that issue.
Ted Simons: And I want to get back to that in a little bit. The average homeowner is looking to maybe do a short sale. The type of loan has to be considered as well. I would think. Finding out even if you're eligible. All of those things have to be put into place.
Michelle Lind: Right, you need to look at the type of loan and a lot of people have more than one type of loan on their property. If it's a principle residence, you've got one loan that's most likely a purchase money loan. If the lender be forecloses under Arizona law, they can't proceed for a deficiency. But if the lender doesn't foreclose, there are questions, depending on the circumstances whether they might be able to pursue for deficiency.
Ted Simons: You mentioned scams, what red flags should a homeowner look for?
Michelle Lind: Large upfront fees. Anyone that absolutely guarantees they can stop their foreclosure. Because no one can 100% guarantee that. Where someone is asking you to sign over the deed to your house, saying you can lease it back. Something that transfers title, those are huge red flags that the homeowner needs to be aware of.
Ted Simons: The concept of legal advice and tax advice, I don't think people think about those things, but again, when talking about a short sale, that's a different beast and you have to incorporate those aspects, don't you?
Michelle Lind: Absolutely. And in drafting a short sale advisory, we repeat that message over and over because that's so incredibly important. A legal -- legal advice is important to find out, again, what the lender's remedies. Can they sue you after a short sale? The tax implications are important. Because generally speaking, release of debt is a taxable event and so in some circumstances, someone who is released from a debt can end up having to pay income on that -- income tax on that.
Ted Simons: Interesting. Options other than a short sale. Again, I know this is mentioned in here, but I want to discuss this. People say they've got to do a short sale, they've got to do a short sale. Not necessarily?
Michelle Lind: Someone wants to look at their options. One of the first options that we want to make sure that the homeowners look at is a loan modification. We've heard a lot in the media about the federal loan modification programs and unfortunately, they've not been as successful as we would have hoped.
Ted Simons: Why not? Even on this program, we're hearing loan modifications aren't happening as often as they should. What's going on there?
Michelle Lind: It's hard and a complex issue. The first thing, many homeowners don't even address a loan modification before they get a trust deed notice. The percentages are really high, how many people that enter into the foreclosure process get a note who have never contacted their lender or, for example, a HUD-approved housing counselor to look into a loan modification. Once you're in the process, you have a time period, in Arizona it's 90 days after they file a notice of trust deed sale, that they can foreclose on the home.
Ted Simons: Would that entire process -- showing signs of improving?
Michelle Lind: We see media reports that it is. I haven't seen any concrete -- you know, concrete statistics that say it is. One issue is issues of principal reduction. Most lenders in loan modification haven't done anything to reduce the principal. Most of the programs that require the homeowner to go into a temporary three-month trial period before they'll actually, you know, agree to finally modify the loan. And statistically, at least the statistics I've seen, indicate that even when loan modification goes through, many of the homeowners end up back in default. Next year.
Ted Simons: Something else people need to know about regarding short sale, how much is impacts your credit score and how long you can wait to buy another house.
Michelle Lind: That's a common question and one of the things we address in the short sale advisory. The impact on your credit score is really going to vary because it's going to vary on how many late pays you had, how many 30-day, 60-day late pays. And how it was reported to the credit bureau. So there's -- there's, you know, a large range that -- that I hear that it could impact. It is going to impact your credit. It's -- it is basically an agreement with your creditor that you didn't agree -- you didn't, you know, pay the loan as agreed. But I hear ranges anywhere from 125, 150, more or less, depending on the circumstances.
Ted Simons: And in this day and age, I imagine that's not going to help matters when it's already difficult enough to get these mortgages.
Michelle Lind: Absolutely, because the lending underwriting is so tight. That decreasing your credit score is certainly going to have long-term effects, not only in obtaining a loan for a new home, but in so many areas that your credit score is taken into consideration.
Ted Simons: Are we going to see a increasing number of short sales coming up here or have things bottomed up?
Michelle Lind: I think we're going to see an increasing number. Last month, I believe, at least in the Phoenix metropolitan area, we saw about -- short sales were about a little over 23% of the sales that were -- that were made. 40%, 40-plus percent were foreclosure lender owned. And the same time this year ago there were short sales so we're seeing an increase in the short sale and that's again because lenders are being more willing to enter into those agreements.
Ted Simons: We have a website on the screen. Our viewers can get a copy of the advisory. Get it and be informed. It's not some sort of special information going on.
Michelle Lind: This came from the Arizona department of real estate. Commissioner Judy Lowe formed this workgroup. John FOLTZ was the chair. We have it available. It's available on the department of real estate webpage and available on our website as well. And actually, we have it translated in Spanish as well. If someone has a client or a seller that's primarily Spanish speaking we have that available in that language as well.
Ted Simons: So if you’re looking at a short sale, there is no excuse to get informed and get this information. Michelle thanks for joining us.
Michelle Lind: Thanks for having me.