Is there REALLY a REO/Foreclosure Home Shortage?? According to Realtor Magazine real estate investors are starting to report indications that the housing recovery could be starting to gain some solid foundations. One indication in particular could not only be a positive sign for the market, but could actually spur more investing as would-be investors rush to get in on the bargains before they miss their chance. There may actually be a shortage of REO deals. According to a report in Bloomberg, recovering markets like Phoenix and Miami may have bottomed out, with the result that bulk-REO buyers are starting to have trouble finding the bargain-basement deals that they once snapped up and converted into money-making rentals in no time. In fact, the “shortage” could result in hedge funds and investing firms having some difficulty “get[ting] capital out in an efficient way” if the trend continues.
Of course, there are still plenty of foreclosure and REO properties out there for investors to purchase, but the key to successfully turning them into cash-flow properties quickly is to purchase them in areas that are already recovering. This way, the demand for properties is already present and there are many qualified, would-be renters at the ready. Furthermore, hedge funds prefer to buy in bulk, while many lenders are opting to do short sales or sell off properties via auction and the traditional real estate brokers. As a result, the much-hoped-for mass-auctions are not appearing, with the problem that some investing firms have literally billions of dollars that they cannot invest.
Paddy Deighan, J.D. Ph.D
Yesterday I wrote about some issues in the note buying segment of real estate. I wanted to expand on the topic because there is a lot of interest in it and it is a misunderstood issue.
The first and foremost issue is that buying the note itself does not impart a lot of benefit of the buyer. Most notes that are sold are in default or imminent default. Therefore, the note itself has little value. However, unless the buyer asks for the assignment of the note, it is not automatically assigned to the buyer. The assignment is not only critical; it is essential and the route of many of the standing problems that plague the foreclosure industry. For the same reasons that lenders and their servicers are plagued with difficulties, the note buyer now has to ensure that the assignment has been properly recorded and perfected. Otherwise, they may have the same difficulty as the lenders and servicers are having now when it is time to foreclose.
Distressed home owners are becoming very savvy. They know that they have some leverage in the foreclosure process and they are using it to get money from lenders or buyers. This is why I maintain that buying notes are not for the faint of heart. Conceivably, you just brought yourself a big headache in having to foreclose and pay the home wonder to leave.
Another “note buying” point that needs clarification: Many of the notes that are purchased are on homes that are listed for sale. The sale of the note by the lender does not affect the listing agreement signed by the home owner. The listing agent still has the listing. However, if the home owner tenders a Deed in Lieu (DIL) to the lender or servicer, the listing agreement is voided because the home owner no longer has standing (the legal right) to list the home and prudent agents will terminate the listing immediately. Of course, many home owners neglect to mention to their agent that they tendered a Deed in Lieu. But THAT is another story!! LOL
Paddy Deighan J.D. Ph.D
An important aspect of Note buying: Many aspects of real estate are cyclical and that makes things both interesting and challenging. It also requires all of us to stay abreast of latest trends and issues. Note buying is one such trend. It goes away for a while and then new programs get marketed and it returns again with some variation on the original theme.
I am going to write tomorrow more in-depth blog on some aspects of note buying. However, I wanted to address one specific area today.
I have been discussing note buying with several entities and I have been working with investors to purchase notes on a large scale. The first obstacle in any note buying strategy is to have a clearly defined strategy. This sounds easy but my experience indicates that most do not have a clear strategy.
One thing to consider: Many notes have been modified through the various loan modification programs. Such changes are not reflected on the original mortgage and such modifications are not recorded. They are not in the public domain.
I mention this because many note buyers recognize that they may have to negotiate with the home owner in order to achieve their goals. Many astute note buyers try and work out a deal with the home owner PRIOR to obtaining the note. This is prudent but any arrangements made in such a scenario are probably not legally enforceable. Additionally, the home owner may not mention that the loan has been modified already. This takes away one avenue to get the home owner to cooperate with the note buyer because typically a note buyer offers better terms than they thought the home owner already had. But alas, this may not be true due to loan modification. Accordingly, as part of any note buying strategy, it would be prudent to ask whether a loan has been modified.
Paddy Deighan J.D. Ph.D
Fast Short Sale Approval?? Ask if the Servicer is Delegated. When home owners pay their mortgage payments to Bank of America, Wells Fargo, or any of the other "lenders" these entities are actually servicers for the investor that owns the note. In most cases, even though they lent the money they have subsequently sold the loan to an Investor. At this point, all they do is collect the payment, take a fee for this and then transfer the remaining funds to the holder of the loan...the Investor. The investor could be Fannie Mae, Freddie Mac, Pension funds, Insurance companies etc...
When you are requesting a Short Sale the request is almost always made to the Servicer. If the Servicer is delegated then they have the authority to accept the Short sale without asking the investor for approval. Usually this delegation is based on certain parameters.
For example: The Investor may tell their Servicer that they can accept any short sale as long as the loss is less than 35%; the Borrower (Seller) is at least 30 days delinquent on their payments, live in the property and the current payment is more than 31% of their gross income.
If the Short Sale fits within these parameters then the Servicer can issue the approval. The parameters vary from investor to investor.
Here's why it is important to know whether the Servicer is delegated. If the Servicer is able to approve the Short Sale without going to the investor, it saves a lot of time. It can easily cut the Short Sale time for approval in half.
An example of why this knowledge is relevant: Recently it was discovered that a Servicer was delegated. There was a purchase price that netted the investor about $1,000 less than what would fit within this particular Servicer's delegation authority. At this point, there are two options: 1. the file could be submitted to the investor for approval, or 2. the purchase price could be raised $1,000 to get the approval quickly. The Buyer was perfectly happy to pay an additional $1000 (presumably in exchange for a faster approval). The Short Sale approval was received the next day.
Accordingly, always ask the Servicer if they are delegated for the file you are working. If they are try to see if the Short Sale you have submitted fits their parameters. They may not always tell you but it certainly is worth asking. Knowing the answer can save you a lot of time.
Paddy Deighan J.D. Ph.D
Call it What it Is…Quiet Title is Not as Advertised. Hardly a day goes by that someone mentions a “Quiet Title” action. From everything that is stated, it appears to be a dream come true for distressed home owners. First of all, what is being marketed as “Quiet Title” is not really an action to quiet title.
The term quiet tile refers to legal court matters in which the actual title to a property is disputed among several different claimants. This can happen in a variety of settings, but it is most common in inheritance battles or battles between business partners that each claim title to a property. This type of action does not apply to the vast majority of distressed home owners.
What my colleagues in law and I have been successfully been doing is to argue (successfully) in Court that the lender is not the real party n interest since they assigned their rights to the mortgage and/or note. This occurred because the lender (or servicing agent) does not properly “perfect” their interest in the property or they do not otherwise properly assign their interest. This creates a legal challenge to the foreclosure action. It also may be the basis for a separate cause of action to strip away the mortgage and thus make the remaining debt an unsecured obligation.
This can be a very valuable asset to distressed home owners, but let’s call it what it really is…it is a defense to a foreclosure action or an independent cause of action to strip away the mortgage from the note. It is not a “Quiet Title” action. To me, this dilutes the value of the various people that are marketing “Quiet Title” actions. If they do not even call it by its proper names, do they really know what they are doing??
Paddy Deighan J.D. Ph.D