The focus of this article is settlement of a non-purchase money second mortgage (“NPM Second Mortgage”).

Under Arizona law borrowers of purchase money mortgages (loans used to buy a home, or refinancing of loans used to buy a home without taking any “cash out”) have no personal liability for the debt. However, borrowers who obtained a NPM Second Mortgage, usually a HELOC (“home equity line of credit”), after the purchase of the home can be sued. In such cases the borrower should consider aggressive settlement of the debt. Typically, the earlier a settlement is reached, the more favorable the terms achieved.

Best Setting

The best setting to negotiate a NPM Second Mortgage is at the time of a short sale. Most institutional lenders will usually accept the proceeds of the sale as full payment or require no more than a small cash contribution. For example, we have had clients settle large NPM Second Mortgages ($80,000 to $600,000) in a short sale by contributing zero to $25,000. The amount of the cash contribution largely depends on the available funds in the borrower’s account. It is also very important to review the short sale approval letter to ensure that the lender cannot sue the borrower after the short sale.

2nd Best Setting

If a short sale is unsuccessful, the next best setting to negotiate a NPM Second Mortgage is shortly after a foreclosure. At this time, a borrower can expect to pay 10%-25% of the debt owed. Often times, the settlement amount can be paid over several years with little or no interest.

Worst Setting

The worst setting to negotiate is after the lender has retained a lawyer and filed a lawsuit. Although some lenders will still settle the debt for 10%-25% of the debt, others will require an amount closer to 50%. In fact, the attorney for one lender, Wells Fargo, generally insists on full repayment with interest.

In conclusion, it is much more prudent to pro-actively pursue a settlement early rather than ignore the situation and hope that the lender will forget about the borrower. Lenders have up to six years to sue and all major lenders (Chase, Wells Fargo, Bank of America, Citi Mortgage) are pursuing lawsuits on a NPM Second Mortgage.

Guest Author

Aaron M. Green, Esq. of Combs Law Group, P. C.

As we soon head into the 2nd quarter of 2012, I was curious about foreclosure and REO trends for the new year as compared to 2011, especially for here in Arizona.

Down 19% from January 2011

According to RealtyTrac, default notices, scheduled auctions and bank repossessions were reported on 210,941 U.S. properties in January.  That was a 3 percent increase from the previous month but still down 19 percent from January 2011.  The report also shows one in every 624 U.S. housing units with a foreclosure filing during the month.

“Although overall foreclosure activity was down from a year ago for the 16th straight month in January, we continue to see signs on a local and regional level that the frozen-up foreclosure process is beginning to thaw,” said Brandon Moore, CEO of RealtyTrac.  Moore also indicates that foreclosures will likely increase in the coming months.  He references the finalized mortgage and foreclosure settlement reached in early February between 49 state attorneys general and five of the nation’s largest lenders and says that it will allow lenders and servicers to process some of the delayed foreclosures from last year.  He does point out however, that other obstacles to foreclosure are still in place at the state level, “including legislation altering the foreclosure process and lawsuits against lenders.”  With that, uneven trends are expected in local and regional foreclosure numbers while lenders work through additional legal challenges.

Notably, default notices were filed for the first time on over 58,000 U.S. properties in January, with no change from the previous month but down 22 percent from January 2011.  Default notices increased more than 20 percent on a year-over-year basis in several states, including Connecticut, Massachusetts, and Florida.

Foreclosure auctions were scheduled on 86,037 U.S. properties in January, up 1 percent from December, but still down 20 percent from January 2011.

Lenders repossessed (REO) a total of 66,542 U.S. properties in January, an 8 percent increase from December but still a 15 percent decrease from January 2011.  REO activity increased at least 30 percent on a year-over-year basis in several states such as New Hampshire, Wisconsin, and Massachusetts – Arizona was not on that list.

Nevada Still Leads the Pack

With one in every 198 housing units with a foreclosure filing in January, Nevada posted the nation’s highest foreclosure rate for the 61st straight month — despite an 8 percent decrease in foreclosure activity from December.  A total of 5,931 Nevada properties had a foreclosure filing in January, down 52 percent from January 2011 and a 52-month low.

California foreclosure activity dropped to a 50-month low in January, but the state still posted the nation’s second highest foreclosure rate: one in every 265 housing units with a foreclosure filing during the month.

Arizona Foreclosures

Arizona foreclosure activity increased 14 percent from the previous month, helping the state post the nation’s third highest foreclosure rate: one in every 325 housing units with a foreclosure filing during the month.  A total of 8,749 Arizona properties had a foreclosure filing in January, down 44 percent from January 2011.

The year-over-year drops in foreclosure activity in Nevada, California and Arizona were driven by low foreclosure starts in all three states.  In Nevada, default notices averaged fewer than 1,200 per month from October through January after averaging more than 4,000 per month in the first nine months of 2011.  In California, default notices averaged fewer than 18,000 per month in December and January after averaging more than 28,000 per month from August through November.  In Arizona, scheduled auctions (the first foreclosure notice in the state) averaged fewer than 4,300 per month in December and January after averaging more than 7,500 per month in the previous 12 months.  Other states with foreclosure rates ranking among the top 10 were Florida, Illinois, Delaware, Colorado and Indiana.

Only four cities in the top 20 metro foreclosure rates posted annual increases in foreclosure activity:  Lansing-East Lansing, Mich. (20 percent increase); Orlando (55 percent increase); Chicago (13 percent increase); and Miami (21 percent increase).

So overall, I get the sense that while foreclosures may have gone down in many areas when compared to last year, we are not nearly “out of the woods yet.”  According to many experts like Mr. Moore, changing regulation will help to push more foreclosures through and the numbers will only increase for a while.  Stay tuned…

On January 27, 2012 Tim Massad, the Assistant Secretary for Financial Stability, issued an announcement enhancing Making Home Affordable and expanding HAMP (Home Affordable Modification Program). This exciting announcement covers the following:

• Extends HAMP expiration date;
• Expands the eligibility for HAMP;
• Expands the liabilities used to determine eligibility;
• Expands the eligibility of homes to include rental properties; and
• Increases the incentives for principal reduction modifications.

December 31, 2013

The simplest but most crucial change is the extension of the HAMP program to December 31, 2013. This adds another year to the program which was scheduled to expire at the end of this year.

The most exiting of these expansions in the program is the increase of incentives for principal reduction in a HAMP modification. The Treasury Department has tripled the incentives to investors to reduce principal on loans. The Treasury will now pay from 18 to 63 cents on the dollar, depending on the degree of change in the loan to value ratio. The closer the reduction gets to the value the higher the payment. This is important since participating in Principal Reduction Alternative is voluntary for the investor. The much larger incentive should encourage more investors to participate.

Fannie Mae & Freddie Mac

When the Principal Reduction Alternative (PRA) was launched, the incentives were not available to Fannie and Freddie. Now, in a HAMP modification, Fannie and Freddie can get payments toward that negative equity in the loan. That is critical since Fannie and Freddie loans are the majority of loans.

The second most exciting news is the expansion of HAMP to rental properties. This program was initially only available to loans on principle residences of the borrower. Now loans on properties that are rented to tenants or vacant properties that are up for rent are eligible for modification.

A major problem with HAMP was that lenders did not look at how much borrowers really paid for their home on a monthly basis. They only look at the first loan; majority of homeowners actually have two loans. Many times, the first loan was less than 31% of their gross monthly income which made them ineligible for HAMP. When you take into consideration both loans on the property, their total payments would be greater than 31% which would make them eligible. This announcement requires banks to include the second loan in determining whether or not a homeowner is paying more than 31% of his or her gross monthly income in mortgage payments. They are expanding this even further to include other monthly liabilities such as medical bills.

Awaiting Further Guidelines

As we await the guidelines and the effective date of these changes, there are some logical deductions we can hope for once the guidelines are provided. The first is since a borrower must be eligible for HAMP to be eligible for HAFA (the Treasury Short Sale Program) and loans on rental properties will now be eligible for HAMP, we can hope that loans on rentals will become eligible for HAFA as well. The second is that borrowers who were previously denied modification under the previous guidelines will now be eligible to apply under the new guidelines. Stay tuned….

Guest Author

Brown & Memmott Law, PLLC

Most distressed zip codes are based off of the Cromford Report’s unique “Distress Index” for each zip code in the Greater Phoenix area. The Distress Index is from 0-100, with anything above 40 considered highly distressed. Contact us at 480-331-2832 for the full report.

West Valley

Includes cities such as Avondale, Buckeye, Glendale, Peoria, Surprise, and others.

• 85339 – Distress Index: 86.4 – (see homes)
• 85335 – Distress Index: 84.6 – (see homes)
• 85392 – Distress Index: 81.6 – (see homes)

Phoenix

Immediate Phoenix Metro area.

• 85040 – Distress Index: 82.1 – (see homes)
• 85037 – Distress Index: 82.0 – (see homes)
• 85035 – Distress Index: 81.7 – (see homes)

Southeast Valley

Includes cities such as Chandler, Gilbert, Mesa, Tempe, and others.

• 85224 – Distress Index: 77.3 – (see homes)
• 85225 – Distress Index: 74.6 – (see homes)
• 85204 – Distress Index: 74.5 – (see homes)

Northeast Valley

Includes cities such as Scottsdale, Paradise Valley, and Fountain Hills and others.

• 85257 – Distress Index: 54.7 – (see homes)
• 85254 – Distress Index: 51.0 – (see homes)
• 85250 – Distress Index: 48.2 – (see homes)

Legend Trail and McDowell Mountain Ranch are two gorgeous and affluent communities in the Northeast Valley city of Scottsdale. But as with much of the real estate market in the Phoenix Metro, distressed homes abound. Here are the latest numbers for both these communities and the zip codes they are located in.

McDowell Mountain Ranch Real Estate

Zip code 85255 distressed properties: 36
Zip code 85260 distressed properties: 30
McDowell Mountain Ranch Only: 19 (includes both short sales and bank owned foreclosures)
Click here to see homes

Legend Trail Real Estate

Zip code 85262 distressed properties: 17
Legend Trail Only: 3 (includes both short sales and bank owned foreclosures)
Click here to see homes

How does this compare with other zip codes in the Northeast Valley? If we use the Cromford Report’s “Market Distress Index” we see that both 85255 and 85262 are under the average MDI for the Northeast Valley. While 85260 is slightly over the average MDI.

85326 – See Homes (West Valley)

Trustee Sales: 69
Notice of Foreclosure: 95

85041 – See Homes (Phoenix)

Trustee Sales: 61
Notice of Foreclosure: 90

85379 – See Homes (West Valley)

Trustee Sales: 56
Notice of Foreclosure: 70

85037 – See Homes (Phoenix)

Trustee Sales: 49
Notice of Foreclosure: 93

85033 – See Homes (Phoenix)

Trustee Sales: 48
Notice of Foreclosure: 85

85339 – See Homes (West Valley)

Trustee Sales: 47
Notice of Foreclosure: 84

85338 – See Homes (West Valley)

Trustee Sales: 46
Notice of Foreclosure: 61

85345 – See Homes (West Valley)

Trustee Sales: 44
Notice of Foreclosure: 76

85225 – See Homes (Southeast Valley)

Trustee Sales: 43
Notice of Foreclosure: 63

85308 – See Homes (West Valley)

Trustee Sales: 38
Notice of Foreclosure: 55

85374 – See Homes (West Valley)

Trustee Sales: 37
Notice of Foreclosure: 49

85032 – See Homes (Phoenix)

Trustee Sales: 36
Notice of Foreclosure: 71

85392 – See Homes (West Valley)

Trustee Sales: 36
Notice of Foreclosure: 67

85335 – See Homes (West Valley)

Trustee Sales: 35
Notice of Foreclosure: 70

85353 – See Homes (West Valley)

Trustee Sales: 35
Notice of Foreclosure: 66

85249 – See Homes (Southeast Valley)

Trustee Sales: 35
Notice of Foreclosure: 46

85326 (see homes)

Trustee Sales: 81
Notice of Foreclosure: 81
Average Price per Square Foot (Sales): $44
Median Price: $75,000

85353 (see homes)

Trustee Sales: 62
Notice of Foreclosure: 76
Average Price per Square Foot (Sales): $44
Median Price: $84,000

85335 (see homes)

Trustee Sales: 60
Notice of Foreclosure: 62
Average Price per Square Foot (Sales): $42
Median Price: $65,000

All data is current as of the end of September 2011

Have questions, comments, or want to see more data like this? Call us at 480-331-2832.

85041 (see homes)

Trustee Sales: 73
Notice of Foreclosure: 93
Average Price per Square Foot (Sales): $44
Median Price: $73,000

85037 (see homes)

Trustee Sales: 63
Notice of Foreclosure: 126
Average Price per Square Foot (Sales): $41
Median Price: $65,000

85032 (see homes)

Trustee Sales: 55
Notice of Foreclosure: 85
Average Price per Square Foot (Sales): $79
Median Price: $109,000

All data is current as of the end of September 2011

Have questions, comments, or want to see more data like this? Call us at 480-331-2832.

85207 (see homes)

Trustee Sales: 45
Notice of Foreclosure: 45
Average Price per Square Foot (Sales): $103
Median Price: $115,000

85204 (see homes)

Trustee Sales: 45
Notice of Foreclosure: 41
Average Price per Square Foot (Sales): $58
Median Price: $78,000

85225 (see homes)

Trustee Sales: 43
Notice of Foreclosure: 68
Average Price per Square Foot (Sales): $75
Median Price: $118,000

All data is current as of the end of August 2011

Have questions, comments, or want to see more data like this? Call us at 480-331-2832.

85331 (see homes)

Trustee Sales: 33
Notice of Foreclosure: 31
Average Price per Square Foot (Sales): $124
Median Price: $292,500

85254 (see homes)

Trustee Sales: 29
Notice of Foreclosure: 43
Average Price per Square Foot (Sales): $131
Median Price: $275,000

85255 (see homes)

Trustee Sales: 17
Notice of Foreclosure: 34
Average Price per Square Foot (Sales): $187
Median Price: $544,000

All data is current as of the end of August 2011

Have questions, comments, or want to see more data like this? Call us at 480-331-2832.