The King’s Inn has a new interim owner – Washoe County! The county took title to the 4 parcels that make up the property on a 4 June 2009 tax deed for delinquent 2006 property taxes ($65K, though total taxes due are now closer to $175K). Within days, the base of the building was painted dark brown, wiping out the graffiti, signage stains, and old mural. Good work, Washoe!
The next step will be a tax auction, where the minimum bid is the amount of delinquent taxes, interest, penalties and fees. Correct if I’m wrong, but I believe it is illegal for the county to profit from a sale of this sort. Any excess proceeds go back to the "owner" AKA first mortgage holder. The 3 vacant parcels and tower parcel will be auctioned individually, and there is no guarantee that one buyer will end up with all the parcels.
The general process is the county files a notice of default for delinquent taxes. Then there is a 2 year "redemption" period where the owner can get the lien removed by paying up. Finally after 2 years, the county can take the property. There are very stringent noticing requirements throughout the process.
Normally, the properties at a tax auction are there because they are worthless – splinter parcels, mold infestation, falling down health hazards, parcels no one want to continue owning and paying taxes on. But in the list of tax deeds just filed (user ID: rrb, Password 877yodiane), there are a lot of interesting properties besides the King’s Inn. Incline, ArrowCreek, Fieldcreek Somersett (234 series) and a swath of riverfront property in Verdi (see the 038 series).
Generally, the bank will swoop in and pay off the delinquent taxes to prevent the tax deed. Maybe some occasionally fall through the cracks. But if you were a bank and you mortgagee was in tax default, might it not be cheaper for you to let the county do your dirty work instead of foreclosing yourself? The bank can always bid at the tax auction on their own property (just as they do at Trustee’s Sales on the courthouse steps), but without the costs involved in a foreclosure. Any thoughts on this as a strategy?
Hat Tip to LJK for the "simple question" that lead me to this information. Grand Wazoo, our post on the lofts got "discouraged", but I’ll write you up a private post with what I know. I’ll do a public post when the conflict of interest with this site gets resolved. Anyone else notice that "Ms. Pygmy Head" is no longer listed as a blog contributor at the bottom of the page? Thanks to the Dude for not suing me for using his photo as the thumbnail lead for this post.
big baby
“So I don’t see how Baby makes the observation -15% equity by year’s end unless he’s talking about the property dropping further in value. But then this is unrelated to the mortgage thereagainst.”
Already in denial and he hasn’t even moved in yet!
WOW!
CommercialLender
Smarten,
BTW, “Big Baby” is Derrick is Apple is yadda yadda. Best to ignore.
As for the I/O vs Amort, agree best to stick with amortizing. The question most germain here is what is your hold period? The 5/1 leaves you quite vulnerable if things don’t go your way at that future time, while paying a bit more for a 30 does not. True, its a bit of a gamble, and maybe the 5/1 would be best, but would only be known in retrospect.
Paying the point? Well, its tax deductible in the 1st year on a purchase (check with you tax person), so your assumption of 5 yrs (61 months to be exact) is too long. To pay a 1% to save 0.25% is on a straight line 4 yrs, before any effect of taxes. Now, this 0.25% gap is very small. Maybe IJJ or others can comment, but seems to me this is a sign of the times – that loan cannot be sold at a premium in today’s market, so they are not offering much of a rate discount at all. Tough quandry, one best answered by knowing your intended hold period. I further agree that long term rates are looking attractive on a historical perspective, so maybe there’s some ‘bird in hand’ analyses to do here?
I mentioned ‘1 yr’ because banks don’t generally (or did not in my experience) accept a valuation increase unless you’d owned for at least a year, besides, there’s so many costs to amortize if you will. By all means, refi later if you can save enough rate to do so.
Wow, your qualification story is sobering, and I don’t think it will get any better anytime soon. So, at the end of 5 yrs, you might be in a worse underwriting environment, too, notwithstanding your qualifiable income and values then. I’m telling my clients the same today: refi it sooner rather than later, despite rates, because underwriting is getting tighter by the day.
Thanks for sharing and letting us chime in.
smarten
RRB Fan –
Have you actually secured a mortgage from Penfed?
Penfed was one of the thirteen [that’s right, 13] sources we applied to for a mortgage. And we were denied.
Penfed may be great if you receive a paycheck and have 60 days to let them do whatever it is that they do before telling you that you don’t qualify. But for everyone else, IMO, they’re worthless.
So what do great looking rates/terms on paper accomplish if they’re illusory and IMO, that’s exactly what they are with Penfed.
If anyone out there is mortgage shopping and wants to give Penfed a chance, I say do it. But you’d better be prepared to apply with someone else who can actually deliver a pre-qualification letter within 15 days of contracting, and a formal loan commitment within 30 [which is what we were required to procure] – because Penfed is simply not capable of delivering.
big baby
* news from scottsdale *
!!Smarten makes financial train wreck decision to purchase a home!
-on a lighter note commercial lender finally got his star treck decoder ring out of a box of corn flakes!-
inclinejj
The only part of Real Estate I am don’t gamble on is always taking 15 and 30 year fixed rate loans..
Only the best of the best borrowers are getting jumbo financing right now..I congratulate you and you wife for having you credit and finances in order to qualify for a loan this size..
The King’s Inn needs to be torn down..
Anyone who comes on this blog and bashes Diane is a total 100% do*chebag
I wouldn’t want to wait around for a lender to underwrite my loan these days..My tax returns are about a foot thick for each year..Plus I am blessed on borrowing “family” money for 4%..No questions asked..
Will the Incline Village market continue to go down..yes..will foreclosures increase..yes..But I am in the same boat as Smarten..I want to buy a home in Incline Village for the long term, so what happens in year 1-3 to year 5 of my ownership matters nothing..
In fact I don’t even bother to worry about what values are right now..cause I tend to keep everything I buy for a long term hold..
RRB Fan
smarten asked:
Have you actually secured a mortgage from Penfed?
Yes, had a jumbo 5/1 ARM with them. It was a refi and it did take then ~60 days. Earlier this year I secured a HELOC (prime – 1%) against rental property — had to provide tax returns since I am self employed. Their turn around time on the HELOC was < 2 weeks.
I know they are very conservative and I guess SLOW. That’s nothing compared to the refi that I’m now doing, with another credit union, where we are at 95 days and counting. I would have gone with PenFed but didn’t want to 1) pay an origination fee and 2) pay a yield spread premium for being a jumbo loan.
smarten
RI and LandLawyer –
I wanted to address your points concerning a mortgagee being forced to pursue his/her/its security [first] to the exclusion of any other remedy [i.e., the one action rule], however, after A SHORT SALE. I say after a short sale because that was the point I was trying to make in my earlier post [“in a short sale situation, a lender may choose to reconvey/release its mortgage WITHOUT extinguishing (the) underlying obligation”].
You have a mortgagor, like Diane, who asks his/her/its mortgagee/lender to VOLUNTARILY release/reconvey the mortgage for less than what is owed [under the obligation secured thereby]. If the mortgagee agrees [because there’s insufficient equity in the property meaning formal foreclosure to recover the deficiency is a waste], the question I thought we were talking about was what happens to the remainder of the now former mortgagee’s indebtedness not satisfied? My point was that it does NOT go away [i.e., the obligation independently survives]; the mortgagee is NOT forced to foreclose on a mortgage he/she/it has already released/reconveyed [at the mortgagor’s request]; and, the mortgagee is NOT limited by an artificial six month statute of limitations in order to bring a deficiency judgment [because as RI rightly points out, there never was a formal foreclosure action].
In response to LandLawyer’s advice that mortgagees should “think 3 times, no 4 times, before bringing ANY sort of action against a borrower on a loan secured by a lien on real property before completing a foreclosure” because the consequence may be “that the entry of [a] judgment discharges the lien” and converts the mortgagee into an unsecured judgment holder, although sound advice, it really has little application in a short sale [again, which is what I thought we were talking about].
If there’s insufficient equity in a property secured by a mortgage; a short sale yields the mortgagee the same [or a greater] net return [than would be netted by a formal foreclosure]; why wouldn’t the mortgagee agree to a short sale; and if the mortgagee does, how is he/she/it harmed by agreeing to the short sale AS LONG AS THE BALANCE OF WHAT IS OWED is not extinguished? And then to take the question one step further, what type of agreement, if any, is required for the mortgagee to pursue his/her/its deficiency?
CommercialLender
But Smarten, why would a borrower agree to a short sale if the remaining debt due is not expunged thereafter? In that case, a borrower – whose credit will be shot anyway after either a short or foreclosure – would simply be motivated to walk away entirely. This would force the bank in a one-action state to either go after the house or go after the borrower. I suspect more often than not the lender will opt for the former, leaving the borrower with bad credit but no follow-on debt obligation.
I think it was BB who asked a few posts ago that if such a document were slipped in at closing by the shorted lender, what seller would agree to sign it (assuming they read/understand it)?
This points to a general comment of advice for anyone in this situation: GET LEGAL COUNSEL!
LandLawyer
I think all we have here is the lawyer usage of the word ‘deficiency’ and the lay usage of the word, which has caused some confusion.
Once the lender agrees to a short sale, and authorizes the trustee to reconvey as part of the short sale, it has effectively released its security interest in the property. As a condition of agreeing to the short sale, it may require the borrower to sign a note for some portion of what will still be owed. But at that point, the new note is not secured by an interest in real property, and the one action rule is irrelevant. Also, because there was no foreclosure, there could be no deficiency under the statute. This was I think RI’s point in his response to Mike. Mike’s post seemed to suggest that a lender would have 6 months to sue Diane for a deficiency after a short sale, which is clearly incorrect.
I think the confusion arises in the use of the word “deficiency”. That word, in common legal usage, and as contained in NRS 40.455, is reserved to mean what is still owed to a lender after a foreclosure. If there is no foreclosure, there is no deficiency as the word is used in NRS 40.455. So in a short sale, because there is no foreclosure, there is no deficiency.
So Smarten is correct when he says a lender can ask the borrwer to sign a note for some, or all, of the unpaid debt that will remain after the short sale, and the lender is free to pusue that note on an unsecured basis. But technically, and in strict legal usage, it is not a deficiency as the word is used in the statute. And as RI correctly points out, the lender would have 6 years, not 6 months, from the date of default to institute an action to collect on the unsecured note.
To answer Smarten’s final question, there need not be any other ‘agreement’ for the lender to pursue its rights under the new note, other than the note itself. The borrower is obligated to perform under the terms of the new note. If the borrower defaults, the lender can sue on the note. But the note is unsecured, and the best the lender can get is a judgment that may be very difficult to turn into dollars.
And to Smarten, I wish you the best in your new house.
LandLawyer
CL, I think there may still be some confusion regarding the one action rule. You say that “this would force the bank in a one action state to either go after the house or go after the borrower”.
It’s not an either or. If the loan is secured by an interest in real property, the lender MUST first go after the property by way of foreclosure. Then, if the foreclosure does pay off the debt, the lender can go after the borrower for a deficiency, but the deficiency action must be commenced within six months of the foreclosure.
But if the lender blunders and does not first foreclose, and instead brings an action against the borrower on the loan secured by the real property, then the kind of disastrous outcome could result that I described above.
Your point about why would a borrower agree to sign an unsecured note as part of a short sale is quite valid, and is a whole other issue for discussion. I have seen several borrowers decide to allow the foreclosure rather than agree to sign a new note in favor of the bank. They are taking the chance that the bank may sue for a deficiency after the foreclosure, but none of the lenders seem to be doing that. And once the six months period runs, the lender is forever barred from seeking a deficiency.
smarten
I don’t have an answer CL, but I do know that many, many short sellers ARE executing unsecured notes that reaffirm their former secured deficiency. My point was that sneaky mortgagees don’t need to raise the issue. As long as the mortgage reconveyances/releases they give do NOT recite that the underlying note obligations are not discharged in full [even though most pre-printed forms recite the exact opposite], I believe they can thereafter enforce whatever the deficiency in a direct action on the note. Since you “used to do this for a living” RI [and presumably LandLawyer still does], what do you think?
I think the more poignant question is why would a lender ever agree to a short sale if part of the transaction means it gives up its right to recover a deficiency? What’s in it for the lender? Why not simply foreclose, as cumbersome as it may be, and then preserve your rights to go after the borrower personally for any deficiency?
I point back to a short sale discussed here on this blog – 346 Winding Way in IV. WAMU held a first and second mortgages against the property totaling a combined $1.6M+. The lender eventually agreed to a $925K short sale [which was really less, because the lender agreed to a sales commission and the payment of delinquent property taxes/costs of sale being paid from the sales proceeds]. So you would expect WAMU to walk away from $700K or more of idebtedness just to accommodate the only in your dreams prayers of a dishonest borrower?
Hopefully Diane will eventually share with us the nuts and bolts of her hopeful short sale. But I predict that when all is said and done, her lender ISN’T going to walk away from the full deficiency and if she/her husband want “finality,” they’re going to have to negotiate paying [either via a note or otherwise] some additional amount to their lender[s]. But let’s just wait and see.
Hey, one more piece of data re: my proposed 5/1 ARM. I just learned there’s a 5% lifetime cap, and although there’s a yearly adjustment cap of 2%, there’s no cap whatsoever come the first adjustment. In other words, that 5.375% five year fixed interest rate ARM can turn into as much as a 10.375% interest rate after five years and a day. There’s no pre-payment penalty even during the first year of the mortgage. Given the amount of our down payment, we don’t have to worry about the home appraising for more than its current appraised value in order to evidence sufficient equity to support a refinance during the first year after origination. However, we do need to concern ourselves with today’s appraised value eroding further.
Reno Ignoramus
Hey Smarten and CL:
I don’t know why a borrower would agree to execute an unsecured note either. It seems to me that the whole point of short sale is to get out from under the loan and be DONE. Signing an unsecured note and agreeing to make payments thereon for years into the future is hardly being done, IMHO. I suppose if the lender only requires a relatively small part of the debt that will remain after the short sale to be paid back, then perhaps it would be worth it just to get the property sold and to move on. But if the lender is requiring all, or even most, of the remaining debt to be paid off by way of an unsecured note, what’s the point?
As far as bank psychology, I don’t know that either. But I am personally acquainted with a few people who have done a short sale, and their lender did not reuire them to sign a note for any part of the remaining debt. These were not cases where the amount remaining owing after the short sale was large, typically less than $100K. Maybe it is only in those cases where the unpaid amount is substantial that the banks are requiring unsecured notes?
BanteringBear
“I think the more poignant question is why would a lender ever agree to a short sale if part of the transaction means it gives up its right to recover a deficiency? What’s in it for the lender? Why not simply foreclose, as cumbersome as it may be, and then preserve your rights to go after the borrower personally for any deficiency?”
This is a fair question, but the short answer is probably that it’s generally MUCH cheaper for the bank in the long run. It’s expensive for them to foreclose, care for the house, then re-sell it. After a short sale, they’ve washed their hands of the entire situation. But, as far as agreeing to a short sale, I’d bet that they want to know a lot about the borrower and their assets, before agreeing to such. They’re not going to be left holding the bag on some wealthy persons flip gone bad, or if the person has a lot of assets. That’s why I don’t see how Allen “I don’t have to sell” Murray, could even qualify. He was quite proud of the fact that he had a few rental properties. If I were a bank, I’d want interest in those before I’d ever agree to a short sale on his house. I smell a foreclosure on Dant.
Reno Ignoramus
I asked that very question a couple of months ago. I know that in the past, before this recent tsunami of foreclosures, that it was very difficult to “qualify” for a short sale. It was like qualifying for a loan in reverse. A borrower basically had to prove he had no assets. Banks were not going to allow a borrower to walk away from an unpaid debt if the borrower had any other assets that could be liquidated to pay the debt. So when I look at the MLS and see houses listed for $700K and $800K and $900K and $1 million as short sales, I have to wonder. Do these people have NO other assets?
I can understand how a person with basically no assets could have got a NINJA loan on a bubble priced $300K house that is today worth $150K and really can make the case as being eligible for a short sale. But how does a person with an $750K house make the case? Were people buying $1 million houses with NINJA loans?
BanteringBear
RI posted:
“So when I look at the MLS and see houses listed for $700K and $800K and $900K and $1 million as short sales, I have to wonder. Do these people have NO other assets?”
Some do, some don’t. What’s clear in all cases, is that the borrowers want no part of the underwater asset, and want the bank to eat all of the losses. Many may recall the story DowntownMakeoverDude shared in which a female acquaintance found herself underwater in her “investment” and thought that, while she owned another home free and clear, the bank would agree to a short sale for the underwater property. They quickly declined, for obvious reasons. I’m sure there are many people attempting to short sell their house who could afford to bring cash to the table. Do you think they will? Hell no! They’ll send it into foreclosure and stick it to the bank if they have to. I’m just disappointed that the banks aren’t pursuing deficiency judgments in full recourse states.
“I can understand how a person with basically no assets could have got a NINJA loan on a bubble priced $300K house that is today worth $150K and really can make the case as being eligible for a short sale. But how does a person with an $750K house make the case? Were people buying $1 million houses with NINJA loans?”
Well, of course they were! Look at how many bubble era homes sold for more than $500k. I bet an argument could be made that more than 75% of those buyers could NOT afford the house, and that may be conservative. Remember the illegal alien strawberry picker in the San Joaquin valley who signed up for an exploding ARM on a $750k stucco sh!tbox with a salary of $14k? This whole bubble was disgusting. The greed, from all parties involved, is absolutely nauseating.
smarten
Why would a short sale seller agree to [formally] take on a deficiency [not in the formal NRS sense] after selling his/her/its home? I’m told because a short sale gets treated differently than a foreclosure for credit reporting purposes. In fact, a short sale where the seller directly/indirectly agrees to repay the deficiency shouldn’t even get reported [credit wise] derogatorily unless/until a formal default has occurred.
But I’m wondering if the fat lady hasn’t yet sung on this subject? Let’s say a short sale is consummated; the lender’s mortgage release/reconveyance says nothing whatsoever as to the underlying note being extinguished; the short seller just ASSUMES he’s/she’s out from further liability [is this what happened to the short sale sellers you know RI?]; in-truth-and-in fact these sellers aren’t out from further liability because as I’ve previously written, the note survives; and then somewhere down the road, the lender [or more likely its assignee] surfaces his/her/its ugly head and [surprise] sues on the note?
I don’t think this chapter of our novel in process has yet been written.
CommercialLender
OK, so next question: how many sellers who list their homes as short sales have pre-discussed or pre-agreed upon terms with their banks? All? Any? Most? A few? It occurs to me if they subsequently realize the bank wants a new note for any shortfall, they’d then just say ‘screw it’ and let it slip to foreclosure. If so, this might be another reason why so few short sales are happening, in reality.
smarten
CL asks how many short sale sellers even have a clue? I’d say very, very few.
But the more germane question to me is how many of their delusional agents have a clue so they can share it with their clients? Up until about six months ago I would have answered NONE. Now? I’d say very, very few [just the ones who advertise they’re “short sale experts” (ha, ha) or “certified”].
As to those agents who do have a clue, does the group here think they’re more interested in making a sale [any kind of sale] or protecting their clients from a future surprise? Or more likely, does the group think many of these agents merely gloss over “the [remote] potential for liability” [to cover their behinds] and then assure their clients [as they assured them before that real estate prices never go down in value] they shouldn’t worry because lenders never go after their short sale borrowers for deficiencies?
Like I said; I don’t think this chapter of our novel in process has yet been written.
Reno Ignoramus
Looks like the lenders are going to have ample opportunities to institute deficiency actions going forward. (But based upon their actions to date, there is absolutely no indication they have any intention of doing so). As of today, there have been 288 trustee’s deeds recorded. With 4 more business days left in the month, it looks certain that we will see over 300 TDs this month. That may be more than the number of REO properties that get sold this month.
Reno Ignoramus
Also, starting July 1, the fee to record a NOD will be $64. This increase in the fee is earmarked to help fund the foreclosure mediation program that becomes effective July 1.
Stand by, folks, as I believe this will prove to be an expirement with unintended consequences for lenders and borrowers alike.
inclinejj
point back to a short sale discussed here on this blog – 346 Winding Way in IV. WAMU held a first and second mortgages against the property totaling a combined $1.6M+. The lender eventually agreed to a $925K short sale [which was really less, because the lender agreed to a sales commission and the payment of delinquent property taxes/costs of sale being paid from the sales proceeds]. So you would expect WAMU to walk away from $700K or more of idebtedness just to accommodate the only in your dreams prayers of a dishonest borrower?
Also this borrower refinanced the property and took money out..I can be wrong on this so correct me..wasn’t purchase money trust deeds treated differently then refinance loans and cash out loans???
billddrummer
To Inclinejj,
You’re right about the difference in treatment on purchase money trust deeds vs. refinances. That bill that was passed in 2008 exempted the tax hit you normally get if you were sent a 1099 on a foreclosure, but there was a catch: The exemption only worked if the foreclosure and subsequent NOD was on a purchase money loan, or if on a refinance, only if the loan at the time of the NOD was less than or equal to the property value. Which conveniently excluded virtually everyone who refinanced even once.
Now I’m not sure about the legal treatment (smarten would know better), but it seems to me if someone was able to get $1.6 million in loans against the property, the borrower probably has some other assets somewhere that would bear looking into. In that case, pursuing a deficiency judgement might make some sense.
And oh by the way, if Michael Jackson and Farah Fawcett both died today, who’s the third?