Conference Call Recap 2/18/09

Thanks to those who attended last night's conference call. We didn't have as many members as usual, but the information and discussion is always....priceless. Here are some of the key learnings:

Dwindling Loss Mitigation Fees
An increasing number of lenders seem to be discounting or eliminating loss mitigation fees from the HUD. They insist that loss mitigation is really the responsibility of the real estate agents and that loss mitigation companies need to hit up agents for part of their commission if they want to get paid. So what to do?

Several options were discussed including the following:

1) Most lenders will allow some type of seller concessions. Since you are the buyer and any money you make on the HUD goes to the same place (your pocket), why not increase your seller concessions on the HUD to make up for loss mitigation fees lost. You can also tell the loss mitigator that the seller has agreed to pay you out of the seller concessions so to go ahead and approve or add money in that area of the HUD.

2) You can put loss mitigation fees on the buyer's side of the HUD so the lender is not paying for them. This increases your purchase price which increase your gross offer. You can then simply reverse-engineer your gross offer price to meet the lender's delegated authority percentage based on who actually owns the loan (Freddie, Fannie, FHA, VA, Conventional).

3) You can add a loss mitigation fee disclosure letter to your short sale package that basically justifies your value in the transaction and establishes the fees you expect to be paid. This is particularly powerful because it lets you keep your loss mitigation company on the deal (and get paid when it closes) even if you don't purchase the property.

4) Most lenders will pay 5% real estate commissions if there are two agents involved in the transaction. If you are the investor, you can use this to your advantage in negotiating the loss mitigation fee. For example, if you have agreed to split the real estate commissions with the listing agent, you could agree with the lender to reduce the total agents' commissions to 4% and allocate the other 1% to loss mitigation fees. Now instead of getting 2.5% commissions (half of 5%) and no loss mitigation fees, you actually capture 2% commissions + 1% loss mitigation fees = 3% total fees. Because you are doing all the negotiations, it's only fair that you capture something for loss mitigation.

2nd Mortgage Lenders Going After Deficiency Judgments
How do you deal with (or try to prevent) second lenders who are adamant about pursuing deficiency judgments from the homeowner? Some second mortgage lenders don't just want the $3000 you've offered as a payoff, but also want a note signed by the homeowner for the outstanding balance - usually paid over 5 years at zero or little interest. While there is no property attached to this note and the likelihood of getting paid is very small, some lenders are stubborn or just want it for their books. Is this a veiled threat on their behalf or will they really go all the way to foreclosure if they don't get the note?

The truth is that some homeowners don't mind signing the note given that they have no funds or intention of paying the lender anything. But smarter homeowners don't want any other possible credit damage or just want the home completely behind them. One strategy discussed on the call was to tell the second lender that the homeowner was in the process of declaring BK and that any note would be wiped away. Another method was positioning yourself as the lender's ally in getting more money from the first lender. This would involve going back to the first lender to get an approval for $5000 (for example) paid to the second lender at closing. Now you have a bargaining chip with the second lender to say that you were able to get $5k for them if they agree to let the deficiency go.

Shielding Your Different Companies from Lenders
As a short sale investor, you quickly realize the benefits of having different companies that you own all working on the same deal. Different companies = additional revenue streams that the lender will pay you on the HUD. However, it gets a bit tricky when the investor's name is signed on all the docs (buyer, brokerage, loss mitigation, private lending). Just for reference, there is only place on the Option Contract and one place on the NOD Purchase Agreement where the buyer's name must be written underneath the signature line - but that one place is enough to trip you up.

For example, if the lender discovers that the loss mitigator he/she is talking to on the phone is also the buyer, they certainly won't pay any loss mitigation fees and may even close the file because they think it's a conflict of interest (just ask Karl). If the buyer and the buyer's agent/brokerage are the same person, they won't pay any of the buyer's brokerage commissions. And they certainly won't pay any loss mitigation fees if they discover that the realtor and the loss mitigator are the same person. So how do you shield this information from lenders?

One way is to create your buying company with both you and your wife as principals. One of you signs as the buyer and the other is the loss mitigator. Although you have the same last names, this usually won't trip you up because your relationship with the loss mitigator is typically on a first name basis. You can also simply hire someone to do the loss mitigation for you. To solve the buyer/agent same person dilemma, remember that brokerages are paid commissions - not realtors. You therefore do not have to indicate who the buyer's agent is, only the brokerage representing the buyer.

Much more, but that's all I could keep track of. I encourage more of you to join our calls - we all benefit greatly with each person that joins.