A LAWYER’S PERSPECTIVE ON SHORT SALES

A LAWYER’S PERSPECTIVE ON SHORT SALES
by Michael A. Starvaggi, Esq.

For better or worse, short sales will be a common part of the real estate transactional landscape for the foreseeable future. It makes sense, then, to understand why they exist and how, exactly, they work. A short sale occurs when the value of a property is less than outstanding balance on the mortgage or mortgages affecting it and the mortgage holder(s) agree to accept less than the amount owed to them in order to facilitate the sale of the property.

Why would a mortgage lender agree to take less than the outstanding balance? For one reason, very often the homeowner is in default or foreclosure when the short sale takes place. Therefore, the lender’s only choices are to pursue the foreclosure or strike a deal to allow the property to be sold. Foreclosure is costly and time consuming, and the auction sale price often does not cover the mortgage debt anyway. Furthermore, if the lender cannot sell the property at auction, it ends up as another REO (“real estate owned” by the bank) and the lender must incur the cost of maintaining the property which is not a profitable enterprise. So it makes sense that the mortgage holder would consider reducing its payoff so that the property can be sold privately.

Should you find yourself involved in a short sale transaction, there are several things you must keep a lookout for. Here are the main ones.
First, remember that there are other choices for a distressed homeowner who wishes to remain in their home. Mortgage modification programs abound these days. Many are backed by the government (such as the HAMP programs) and others are private. So if the homeowner is considering a short sale only because they cannot afford their payment, be sure all other avenues are explored first.

If the sort sale does proceed, it must be understood that listing a property, or even entering into a contract with a buyer for a short sale, does not prevent the lender from foreclosing on the premises. Often, the lender or its counsel will give the homeowner ample opportunity to sell the home if there is a contract in place, but they are generally not obligated to do so. Thus, even if the lender knows that that a private sale is pending, they can proceed to sell the property at auction. In some cases, federally insured lenders must forego foreclosure proceedings while a short sale is pending, but this is not a universal rule and should not be relied upon. Always insist upon written confirmation that the lender has temporarily stayed its foreclosure proceedings and be keep active communication with the lender’s attorneys.

In addition, it must be clear to all parties that it is strictly in the lender’s sole discretion whether or not to allow a short sale. Thus, any contract of sale must reflect the contingency that the sale is subject to the approval of the mortgage holder or holders. Buyers should be aware that the process may take much longer than a traditional transaction and should be guided accordingly when locking rates and making arrangements to sell any real estate of their own.

Even if the short sale is approved, the lender may pursue the homeowner for the difference between the amount they accept at closing and the balance owed to them. This difference is called a “deficiency” and a judgment can be entered against the homeowner for this amount. Thus it is crucial for the seller to negotiate this point with their lender in advance and to have a written agreement as to whether or not the lender will pursue a deficiency judgment.

And the pitfalls don’t end there. If the lender does not pursue the deficiency amount, that amount may be taxable income to the seller. Currently there are laws that relieve taxpayers from claiming such amounts as income, but these laws may expire or may not apply to a particular transaction short sale. It is important to discuss this potentiality with a tax professional.

There are also numerous rules about the structure of the short sale transaction that must be borne in mind.

First, the seller will not be entitled to keep any money from the short sale and there must be no “side deals” or other arrangements with the buyer that attempt to circumvent this rule. If you sense that there is something amiss, do not proceed.
Second, the short sale must be an “arms length transaction.” This means the buyer and seller may not be friends, family members or any other parties who have had a previous relationship.

Third, it is advisable to steer clear of sale and leaseback arrangements. Any transaction wherein the buyer is agreeing to rent the premises back to the seller and eventually reconvey the premises is suspect and should be avoided, as it may run afoul of New York’s Home Equity Theft Prevention Act. For more information, see my article at http://www.starlawpc.com/index.php?page=blog_detail&blog_id=2.

Fourth, the short sale must be an as-is transaction, as the lender will not allow repair credits or the like to be part of the deal.

Although there is no uniformity to the short sale process, there are guidelines being promulgated that will provide similar treatment of for the short sale of all Fannie Mae/Freddie Mac loans as well as for all FHA/HUD loans.

As always, it is essential to seek legal counsel if you are considering the sale or purchase of real estate. Be sure to discuss all of these points with your legal advisor.

Michael A. Starvaggi is an attorney admitted to practice in New York and New Jersey. To contact Mr. Starvaggi, please call (845) 589-9456, write to mstarvaggi@starlawpc.com or visit www.starlawpc.com.
This article is intended for informational purposes only. Please discuss your particular situation with an attorney of your choosing.

The article is written by a professional and is intedened for general use. Always contact your advisors before making a decision. The Smart Investor, or Ken Mahoney does not agree or disagree with the above article. The article is provided as a 'starting point' for your research.

Can You Retire With The Equity In Your Home?

Can You Retire With The Equity In Your Home?

By Ken Mahoney

The collapse of the housing market has provided a painful lesson for those who were counting on their homes as a source of retirement income. Falling home prices illustrate the potential difficulties of relying on the sale of a home to pay for retirement.

Since 1987, U.S. housing prices have risen 4.1% annually.1 During that same period, the Consumer Price Index rose 3% annually.2 Thus, when you subtract inflation, home prices produced a real return of only 1.1%. Additionally, you need to factor in property taxes, maintenance, and insurance, which can all serve to erode the long-term growth of a home’s value.

Movin’ on Out

The prospect of cashing in your home’s equity to pay for retirement may be enticing when home prices are rising. However, when prices are falling, it’s much easier to see why this is an unreliable strategy.

First, home values are subject to cyclical trends, so there’s no guarantee that your home will be worth what you were planning on when you are ready to retire. There is also the possibility that, depending on market conditions, you may have trouble selling it.

Next, you’ll still need somewhere to live. If you buy a smaller place, you will need to pay transaction and relocation costs, which could consume money you thought would help pay for retirement.

Throw It in Reverse

One way for older homeowners to capitalize on the equity in their homes is a reverse mortgage. But despite their recent surge in popularity (the government insured 11,660 reverse mortgages in April 2009, the highest monthly total since the program began in 1990), reverse mortgages may not be an appropriate strategy for some people.3

Homeowners aged 62 and older can use a reverse mortgage to borrow against the value of their homes, and there’s no need to pay back the loan as long as they continue to live there. The loan is paid off by the sale of the home after they move out or after both spouses pass away. The amount a homeowner might be able to receive from a reverse mortgage will depend on the loan’s interest rate, the owner’s age, and the home’s equity value. Reverse mortgage loan fees are typically high and can reach up to 10% of a home’s value over the life of the loan.4

The collapse of the housing market has caused many people to take a second look at the way they view their homes.


1) The Wall Street Journal, May 27, 2009
2) Thomson Reuters, 2009 (CPI for the period 12/31/1986 to 3/31/2009)
3–4) The Wall Street Journal, June 10, 2009



Mr. Mahoney is a registered broker with Aurora Capital, LLC, an SEC registered broker-dealer and member FINRA and SIPC.

Disclaimer: This communication and its contents is neither a solicitation nor an offer to buy/sell any insurance and/or financial product(s). Information about insurance and/or financial product(s) and/or investment products provided herein may not be suitable for all individuals and/or investors. Moreover, the information contained herein has been obtained from sources believed to be reliable; its accuracy and completeness cannot be guaranteed. Individuals and/or investors are advised to contact their appropriate professional for all personal planning, including but not limited to healthcare planning, retirement and estate planning, tax planning and/or corporate planning

The Dollar and Gold and Inflation
By Ken Mahoney

So, why is the dollar weaker? We hear and read about it all the time.

A simple answer is interest rates. Unlike the interest rates in other countries, interest rates in the U.S. are at historic lows. Lower interest rates can be a boon to the economy by easing the purchase of big ticket items like your home and lower interest rates allow institutions to borrow dollars which they can sell to invest in higher rate currencies. This practice called “currency carry trade” in which investors borrow low-yielding currencies and lend high-yielding currencies weakens the currency that is borrowed because investors sell the borrowed sum and convert it to other currencies. The downside to lower interest rates is the increased chance of higher inflation and the reduced value of the dollar which then results in reduced purchasing power for the consumer. The Federal Reserve, however, has stated several times that it will keep interest rates low for the foreseeable future.

And what about gold? I'm glad you asked. In the past several weeks gold has gone as high as $1,070 an ounce and may be trending higher. Some experts and investors see the increase in gold as a result of the struggling dollar and a concern over inflation. On the other hand, it is difficult to see inflation as an issue with near 10% unemployment and 70% capacity utilization (a full 10% below its long term average). Remember, a simple definition of inflation is “too much money chasing too few goods”. With 10% unemployment, you get the picture. But when the dollar falls, investors buy gold as a hedge against the depreciation of the paper currency. As interest rates are so low, it’s a low cost hedge.

Further, the bond market does not appear too concerned with inflation. Wouldn't we see rates much higher in the bond market if inflation were a real threat? TIPS (Treasury Inflation Protected Securities) are telling us that inflation will be under 2% for the next 10 years.

It has been clear for months now that Asia, particularly China, is leading the economic recovery around the world. The Chinese government has implemented massive government stimulus and the result may be near double digit growth rates. China insists on pegging its currency to the dollar to protect their export market. It might actually make sense for the U.S. and China to organize an 'informal' G-2 to see if there couldn’t be a common denominator that would work for both countries. Currently, there seems to be some friction between the two countries, as they both want to export their way back to property.

While The University of Michigan consumer sentiment index fell last week – it showed higher gas prices and unemployment continuing to weigh heavily on consumers’ minds – other economic data points show recent improvement. For example, the earnings we have seen have been better than expected mostly because companies have cut costs (unfortunately, most of the cost cutting has been in the form of layoffs).

And so, we continue to have this push/pull dynamic with the economy, investor and consumer confidence, and the dollar.

I welcome the opportunity to discuss this email with you in greater detail. Please feel free to call me at 845/371-0101 or email me at kmahoney@auroracapital.com

And don’t forget to visit my blog for additional articles and comments - http://kenmahoney.blogspot.com/

Mr. Mahoney is a registered broker with Aurora Capital, LLC, an SEC registered broker-dealer and member FINRA and SIPC. Aurora Capital Brokerage, trades cleared by Legent Clearing.

Disclaimer: This email and its contents is neither a solicitation nor an offer to buy/sell any insurance and/or financial product(s). Information about insurance and/or financial product(s) and/or investment products provided herein may not be suitable for all individuals and/or investors. Moreover, the information contained herein has been obtained from sources believed to be reliable; its accuracy and completeness cannot be guaranteed. Individuals and/or investors are advised to contact their appropriate professional for all personal planning, including but not limited to healthcare planning, retirement and estate planning, tax planning and/or corporate planning.

Get Ready for Earnings Season by Ken Mahoney

Get Ready for Earnings Season by Ken Mahoney

In the next couple of weeks, companies will be reporting earnings that ended Sept 30 We will find out from corporate America how revenues and profits were for the third quarter. The stock market has ‘run up’ and has had the best quarter in over 10 years. The question will be if companies will be able to show better profits to match the markets anticipation of better times ahead.

Why Companies Try to Shape Perceptions of Quarterly Results
Regardless of whether publicly traded corporations meet expectations, beat the street, or disappoint investors, the government requires them to report their quarterly earnings to shareholders and regulatory agencies.
Earnings season is the hectic period during which corporations release their quarterly earnings to the public. For most companies, this begins shortly after the last month of each quarter; as a result, these reports can profoundly influence the financial markets each October, January, April, and July.
In addition to their regulatory filings, many companies announce their earnings results through press releases, conference calls, and the Internet, rather than allowing stock analysts alone to share—and shape—the information. These quarterly reports typically include unaudited financial statements, a discussion of business conditions during the quarter, and some guidance about the company’s expectations for the near future.

Here is a look at how and why companies attempt to exert some influence over these announcements.

Control
Leaving analysts to search through quarterly financial statements and publish their findings and impressions might not result in a message the company is comfortable with. Although analysts typically have already weighed in with their forecasts of the company’s earnings, the company can help shape public and analyst perceptions by announcing its own earnings results, often emphasizing positive aspects of the report while downplaying the negatives.

Timing
Quarterly report due dates are usually set by the company’s fiscal calendar. A company can employ strategic timing by pre-announcing earnings results on a day of its choosing. When the news is good, the company may seek the maximum exposure. If it knows the earnings results are going to disappoint, the company may strive to bury the information by releasing the report when fewer people are watching for it or are distracted by other news. Otherwise, pre-announcement can help the firm put negative results in the past and move forward with corrective actions.

Publicity
There are thousands of publicly traded companies, so many of them will not capture the attention of the media or the general public. A surprising earnings announcement can help a company draw attention and gain valuable publicity.
Earnings can provide a key to understanding the performance of an individual company and the behavior of the stock market in general. However, it’s critical to be aware of some of the techniques companies use that could potentially influence public perceptions of their earnings results.

Is there a Disconnect between Wall Street and Main Street? by Ken Mahoney

Is there a Disconnect between Wall Street and Main Street?

By Ken Mahoney

October 2009

While most of us are concerned about the high unemployment rate – currently running around 9.7%, the poor housing market and reduced consumer spending the stock market has shown significant gains. Just since the spring of this year the market has rallied 30 percent or better. So why do we see these gains on Wall Street despite the concerns of Main Street?

Often with the market we see these extremes. We see it like a rubber band stretching and contracting. Earlier this year, we saw the rubber band being stretched on the downside - the fundamentals were poor and the market fell off sharply. Now, we're seeing the other side. Both trailing and forward P/E ratios are at some of the highest levels to date. During the past six months the market has performed well in large part because of a sense of optimism with regard to both national and global economies. The financial markets appear to be doing well, leading many, including Federal Reserve Bank chairman Ben Bernanke, to declare the recession is over.

Governments around the world have provided funding to help stabilize failing or potentially failing financial institutions and large corporations and as a result we are seeing the improved positions of these financial institutions and corporations. At the same time experts state the U.S. government is operating at a 10% deficit. Added to mix is the devaluation of the U.S. dollar – since the early 1970’s the value of the U.S. dollar has decreased 25%. But is the upswing in the market that we are seeing real and long term? What Wall Street is considering profit may in fact just be the bail out funds. Unfortunately, fixes are generally temporary and the failure of certain industries – the airline industry for example as well as small businesses – could be next.

And yet, despite the concerns of Main Street, we do see Wall Street performing well and we see small investors, not just the large institutional investors, with the opportunity to take advantage of these optimistic market conditions.

I welcome the opportunity to discuss Wall Street versus Main Street with you in greater detail. Please feel free to call me at 845/371-0101 or email me at kmahoney@auroracapital.com

And don’t forget to visit my blog for additional articles and comments - http://kenmahoney.blogspot.com/