House sales here continued apace through last fall. Prices were holding. Unlike other parts of the country, few people were losing their homes to foreclosure.

But this winter brought record low numbers of house sales. Prices retreated to levels of four or five years ago. And Lane County foreclosure filings accelerated.

Now, Lane County is seeing the same kind of investor tours of foreclosed homes that marked the high water of misery in other parts of the country.

“We thought we were immune a year and a half ago,” said David Tatman, administrator of Oregon’s Division of Finance and Corporate Securities.

“We thought we were superior to the rest of the country because we weren’t seeing the reset shock on loans. Our housing prices had leveled off, but they looked like they were holding. Well, in the last nine months we’ve certainly played catch-up with a vengeance.”

Lane County is not immune because, in addition to homeowners who lost their jobs, there were residents here who also took out risky loans and told — or acquiesced to — little lies in order to close their real estate deals, the same as the rest of the country, mortgage brokers say. The lies got them into loans they couldn’t afford and now they’re heading into foreclosure.

About one out of five home loans that local brokers made in 2004 and 2005 were high interest rate loans, according to U.S. Housing and Urban Development Data. They were subprime or nonconforming loans made to people with lower credit scores, adjustable loans with low teaser payments that reset at a high rate after several years and loans that included 100 percent of the asking price plus closing costs.

The newly minted homeowners were happy but they had little skin in the game, at least at first.

Our very own market bubble

Lane County had its own housing appreciation bubble, beginning in early 2004. The average price jumped by $100,000, up from the $150,000 to $170,000 range of the 1990s and early 2000s. The real estate volume, as measured by dollars, went ballistic in those years. The normal Lane County volume was about $700 million a year. Suddenly, in 2005, it leapt to $1.2 billion, according to the Regional Multiple Listing Service.

Bidding wars were common. Buyers made offers sight unseen.

“It was almost to the point you’d ask a seller: What do you want for your house? And they’d almost get it,” real estate agent Deb Bean of ReMax Integrity said. “There was no rhyme or reason to it. It’s not like we were bringing in higher paying businesses with a ton of new jobs.”

At the height of the market, waiting to buy a house until you had a down payment didn’t make sense, Eugene mortgage broker Rick Richardson said. Homeowners couldn’t save fast enough to earn the kind of appreciation they’d see if they’d just buy.

Buyers could get into a house with no down payment because brokers offered new kinds of loans, such as 80/20, or piggyback, loans. Buyers took out a first mortgage to cover 80 percent of the cost of the house. Then, the same day, they took out a second mortgage at a higher interest rate to cover the remaining 20 percent.

Busy offices such as Allegiance Mortgage and Grandeur Financial brokered 100 percent mortgages almost exclusively in 2005, 2006 and into 2007, according to employees.

And when a monthly mortgage payment was out of reach for some buyers, local brokers turned to adjustable rate mortgages with low, interest-only payments for two, three or five years — before the loans required full interest and principal payments. After the introductory period, the interest rates would adjust once or twice a year every year for the life of the loan.

Many of these were “subprime” loans, meaning borrowers paid a higher interest rate because their credit histories were blemished.

Brokers reassured buyers that they could improve their credit while in the introductory period of these loans, before the payments reset to a high rate. Then the borrowers could refinance into a standard, 30-year fixed rate loan at lower interest rates, they were told.

“It was a Band-Aid,” said Susan Aldrich, owner of Grandeur Financial. “It was to get you into a house. You did A, B, C and D, and that cleaned up your credit, and you could refinance two years down the road (into a 30-year fixed loan) once you had seasoning — equity — in the property … That was the premise that everyone was schooled in when they came in here and filled in an application.”

Newfangled loans, Wall Street greed

While all this was going on, big investment banks and other lenders were coming out with loan programs to speed the mortgage-making process along. Borrowers with decent credit — at first, 740 or above on an 850-point scale — would no longer have to prove their earnings with W-2 forms or pay stubs. They could simply state their income.

As months went by, the credit score requirement for this “stated loan” or “no doc loan” or cynically “liar’s loan” slipped to 720, and then to 680 and then lower.

“At one point you could state your income and be at 580,” said Erick Harpole, a real estate agent with Keller Williams Realty, with offices in Eugene and Reno, who watched the loan frenzy from the sidelines.

If borrowers couldn’t qualify for one loan, there’d surely be another to place them in. A handful of standard loans splintered into hundreds of variations for every kind of credit, earnings and household situation, local brokers said.

“Can you fog a mirror? Great. What do you think your income is? To qualify, your income has to be ‘this.’ Do you make that amount of money? ‘Oh yeah absolutely.’ You laugh about it now, but it was stupid what people were able to qualify for,” Harpole said.

Many buyers were clueless, he said.

“(Brokers) said ‘Great. Here’s your loan. Sign these 170 pages that say you’ll make your payment or we’re going to take your house.’ Nobody reads that stuff because they’re so excited about buying a house. That’s the American Dream.”

The newfangled loans of the bubble years were made possible by investment banks — Bear Stearns and Lehman Brothers — which developed a hunger to buy and sell pools of mortgages because they saw them as a way to earn profits they couldn’t find anywhere else.

“There was a lot of greed on Wall Street’s part,” said Jack Hochman, a Lane County real estate investor. “The (stock) markets weren’t moving and the interest rates were at an all-time low back then. There wasn’t a place for these bankers to make fixed rates of return on their money.”

To these big investors, buying mortgages seemed like a lucrative bet, Harpole said. The default rate on home mortgages was 1 percent. In the rare case of default, the investor holding the mortgage could seize and sell the property. With prices rising, little would be lost. And offering subprime loans for people with sketchy credit was OK, from the investor’s standpoint, because these loans were paying 8 percent to 12 percent interest — more than just about any other investment at the time.

The investment bankers figured out how to package the loans into what are called mortgage-backed securities and market them to private equity firms, pension funds and hedge funds. As homeowners paid their mortgages, the proceeds would be distributed among the legions of investors who had bought parts of these packages.

Brokers, banks get in on the act

The home loan industry will never be the same.

“The requirement for your parents and my parents was you put 20 percent down and you can spend 25 percent of your income on housing. The bank was keeping that loan and, by God, they knew they didn’t want that property back, so they were going to make sure that you could afford it,” Tatman said. “The problem was the whole process got changed. The securitization really created a problem.”

In this frenzy of loan-making, Lane County mortgage brokers could make six-figure salaries, if they could close enough loans. They’d get a fee up front for originating the loan and then a share of the proceeds when they sold the loan to a wholesaler — adding up to as much as $4,000 to $12,000 per loan, local brokers said.

Becoming a broker didn’t take much sweat, said Hien Williams, a South Eugene High School graduate, who went to work at Allegiance Mortgage.

A prospective broker need only find a job at a brokerage, learn the trade from a senior loan officer in a six-month tryout and then take an online test, Williams said. “How easy is that? And then you get your license. I still really didn’t know what I was doing.”

As more and more private mortgage brokers hung out shingles, local banks and credit unions started to originate and sell mortgages for securitization. Oregon First Community Credit Union, Selco Community Credit Union and Umpqua Bank were among the institutions that got into the act.

“The market during that period of time gave more value to those loans than we could recognize if we retained them on our books,” said Ron Stroble, Umpqua’s mortgage division manager. “There was a year and three month period there that we actually sold. The market was so strong,”

The banks and credit unions say they didn’t go big into offering the exotic loans, but they also made one or more of these kinds of nontraditional loans: Pick-a-pay adjustable rate mortgages, piggy back 80/20 loans and/or no document loans.

A main difference from some independent brokers, however, is the credit unions sold mostly to customers with whom they’d keep a long-term relationship, said Scott Hirschhorn, senior loan officer with Selco Mortgage Co.

Credit union and community bank officials also said they didn’t reach down to the riskiest borrowers. They said they set a minimum credit score of 620 (on an 850-point scale) for their home loan customers. Umpqua said it only accepted lower scores a few times,

“We’re a pretty plain vanilla lender. We stick by the guidelines. There’s not a lot of excitement to that but it’s solid, good lending,” Stroble said.

Oregon Community Credit Union CEO Dal King said: “We didn’t play any of those crazy high risk games ever.”

Selling the loans was good business for the small banks and credit unions because they retained the servicing rights, meaning — for a continuing fee — they’d bill the borrowers, settle disputes and even start foreclosure proceedings on behalf of the mortgage-backed security holders.

In competition for mortgages

With bankers, investors and free-lance brokers in the act, mortgage making was a crowded field between 2004 and 2008.

“Everybody and their dog became a mortgage broker,” Alrich said. “Pizza salesmen were mortgage brokers for God sakes. Everybody knew a family member, co-worker or friend who was a mortgage broker.”

The mortgage brokers were fierce competitors. They formed relationships with real estate agents so the agents would steer homebuyers their way. They advertised on television and billboards. They worked their networks and their telephones, brokers said.

The impetus to sell came from the investment bankers who created the new types of loans and then set the loose guidelines that borrowers needed, the brokers said.

Loan wholesalers, who bought the loans, packaged them and resold them to investors, spread the word about each new program. They’d make regular stops at Lane County mortgage offices, take loan officers out for burgers and brews at Red Robin or the Steelhead, and then they’d conduct mini-seminars on the latest loan products.

Afterward, the wholesaler would meet privately in brokers’ offices, where they’d go over loan files, looking for mortgages to buy. Some wholesalers would actually fill out documents on behalf of the loan officers, the brokers said. Others showed the brokers how to win underwriter approval for stalled loan applications by bending the truth with regard to income and employment. A half dozen brokers interviewed for this story described the methods.

“Lenders sent their reps down to your office and they’d tell you how to do it,” Williams said. “They’re the ones who tell you, ‘OK, the person doesn’t make enough? Do a stated loan, as long as it isn’t overly exaggerated. You can’t say a janitor makes 60 grand. It has to be within reason.’ ”

The wholesalers would “tell you what the file had to have and how the loan worked,” Aldrich said. Sometimes that meant pencilling in the entire household income in the box asking for a single wage earner’s income, she said.

In other cases, when, for instance, a foreman at a sawmill might not qualify for a house he wanted because his income was a bit low, the loan officer might look up the salary range for sawmill foremen and write down the higher of the salaries as belonging to his customer, Richardson said.

“I thought that was crossing the line. I wouldn’t do that. But it was very much done,” he said.

Investigations into mortgage fraud

Traditionally, lenders required that monthly payments on a house could be no more than 25 percent to 33 percent of the borrower’s gross income. But in the boom mortgage years some brokers made loans with payments that took as much as 70 percent of the borrower’s monthly income. “What did the debt-to-income matter if they were making the numbers up anyway?” Richardson said.

Some brokers, however, said they were steadfast in their resistance to fudging the numbers. “I never went to the buyer and said, ‘Look, this is what you need to make to qualify. That’s wrong. I’ve been very careful in my 20 years in business not to do things like that,” said broker Fred Chamberlin of Alpine Mortgage.

Mortgage fraud increased markedly during the boom years, said FBI supervisor Joe Boyer, who oversees white collar crime in Oregon. “We’re investigating a lot of cases involving similar allegations of false loan applications, and they’re false for a number of reasons — overstated income, understated liabilities,” he said. “The extent of it that went on is a lot more than one would have expected.”

Practices at Countrywide Financial Corp., a top subprime lender, attracted the scrutiny of attorneys general in 33 states — including Oregon — who charged the company with enticing homeowners into loans they couldn’t afford, failing to fully explain the risks the homeowners faced and boosting the company’s share of the mortgage resale market by closing shaky home loans. As many as 4,600 Oregonians took out those subprime loans, according to Attorney General John Kroger.

Countrywide settled lawsuits with the attorneys general without admitting fault and has agreed to pay $8.68 billion to renegotiate as many as 400,000 home loans nationwide.

Many of the home loans made in Lane County from 2004 to mid-2007 are now coming back to haunt us. Of the first 100 home loan defaults filed in Lane County in 2009, 84 were made during that time period.

The inflated loans were made to match the then-inflating home prices. Now, as home prices drop, these homeowners owe more than the house is worth.

The desperate ones are selling houses for less than they owe. “And they set the price for everybody else,” Harpole said.

Some owners simply give up. “They financed 100 percent of their house and their house went down in value,” said John Helmick, CEO of Gorilla Capital, which specializes in buying foreclosed houses. “Now, it’s a rational economic choice for them to walk away from the house rather than continue to pay for the house when it’s not worth as much as they owe on it.”

Homeowners who’ve been paying low teaser rates are expected to default as the loans reset to higher levels in the coming years, leading to an even higher foreclosure rate. The bulk of them will reset in 2010 and 2011, Harpole said.

“There’s a lot of people who can’t afford their property. And you (recently) had 2,000 people get laid off from Monaco,” he said. “There’s no doubt we’re going to see more and more of those defaulting.”

Some spread the blame for creating the toxic home loans far and wide.

“Who’s to blame? Every one of us: The investor who created the loan, the banks that offered it, underwrote it and funded it, the mortgage broker who did it,” said Shelley Aldrich, owner of Eugene-based Grandeur Financial. “Everybody knew what was going on. There was not a person who wasn’t aware. We’re all guilty.”

Others insist some participants in the departed mortgage boom — among them investors, banks, brokers and borrowers — are a little guiltier than others.

Investors

Eugene real estate broker Erick Harpole said this “colossal mess” could not have developed without Wall Street investors deciding that mortgage lending was the ticket to a high rate of return.

“The top 1 or 2 percent of investors, their clear expectation is they are entitled to a 10, 12, 14 percent return on their money,” he said. “They’re entitled to that even though it’s way beyond inflation and it’s way beyond reality. … They pressured (investment) banks to come up with aggressive programs to get more and more loans, so that they could turn around and sell them based on the principle that real estate always goes up in value and the (mortgage) default rate is less than 1 percent.

“The greed was so rampant … common sense just went out the door.”

It was a fast-moving time, said David Tatman, administrator of the Oregon Division of Finance and Corporate Securities.

“People weren’t looking too close at the details. They thought the rising tide economically would take care of the details. They weren’t planning to hold the loan. They were a pass through. Financial services is where everyone gets a slice and moves it on down. Nobody stops and says, ‘I’m going to make sure this works right. That’s the problem, or it was.’ ”

Brokers

Mortgage brokers — working in stand-alone brokerages or at special desks within banks and credit unions — made loans as fast as they could sell them to wholesalers.

Brokers don’t have a fiduciary duty — a covenant to act in the client’s best interest — to a borrower the way a lawyer or a real estate agent does.

“Some lenders compensated brokers better than others so obviously brokers would push borrowers to those companies vs. the others,” Harpole said. “There was no accountability whatsoever for the broker. The wholesale lender was saying, ‘Here, package up what I need, I’ll take it to my underwriter and we’ll get an answer.’ The broker is out of the loop as soon as he gets paid.”

“There were people who could qualify for a loan, but if you had taken the time to really look at their net disposable income, the loan wasn’t in their best interest or would have a high likelihood of failure,” said Patrick Stevens, a Eugene attorney who represents banks in foreclosures.

Tatman said brokers accepted that making the poor loans was “the way the marketplace is currently operating.”

“ ‘We’re doing our part to promote the American Dream.’ That’s the positive spin to the way brokers did it,” Tatman said. “The negative spin is ‘The more loans I make the more money I make, and I don’t care about the outcome because I’m making money hand over fist.’ To be honest, the truth is somewhere in between.”

Some brokers suffered in the resulting downturn as much as anybody. About 60 percent of licensed brokers left the field in the past four years.

Some are suffering the same threat of foreclosure that’s befallen their customers.

“I’m a broker but I’m still a human being,” said mortgage broker Marcus Bodart, who recently renegotiated his home loan to avoid foreclosure. “I go out and earn a living and pay the mortgage and pay the bills. People run into problems and brokers are not immune. On the contrary, when people are on commission, in the good times they make a lot of money and in bad times it’s tough.”

Some people wonder where government regulators were through the period when brokers were closing ill-fitting home loans.

“We did not monitor this industry very well and we allowed them to take risks that weren’t reasonable. The government has some level of responsibility due to their failure to oversee this industry,” said John Helmick, the CEO of Gorilla Capital, which buys houses at weekly foreclosure auctions.

Borrowers

Borrowers have got to shoulder their share of the blame, said Fred Chamberlin, a broker at Alpine Mortgage in Eugene. “To be real honest, none of the people who bought these houses were forced into it. … If you couldn’t afford to buy it, why did you buy it?”

On the other hand, members of the general public buy a house about once every seven years and they don’t have the financial eduction to make good decisions about mortgages, Harpole said.They think: “If the bank says I can do this, it must be all right because the bank’s conservative. The bank wouldn’t gamble with my future,” he said.

“There’s a lot of people who were put in very bad situations because they did not truly understand what they were getting into, which is not an excuse. But they should never have had the option to get (the shaky loans),” he said.

Of course, borrowers are going to want the interest-only teaser payments, or the no down payment loan, Aldrich said. “When you offer those types of things, of course they’re going to take advantage of it. You can’t rent without first, last and security, and we were letting people buy homes without a dime. It was just ignorant.

“But I don’t make the mortgage programs out there. If they are available to us, and that’s what the lenders are telling (us) they have, that’s what you offer.”

Major lenders are cranking up their foreclosure operations this spring. A federal rescue program for homeowners has been slow to materialize. And foreclosure counselors say it’s next to impossible for homeowners who are trying to get relief by modifying their loan terms to get anybody with the authority to do this on the telephone.

“You can try talking to God, because he’s about the only person to listen,” said Beaverton real estate broker Todd Clark, who’s spearheading an effort to inform Congress of the difficulty of renegotiating home loans.

Oregon lawmakers are considering a bill that would require lenders to meet face-to-face with homeowners before pursuing foreclosure.

Eugene-based foreclosure counselor Stacey Howard testified in favor of Senate Bill 628 after she tried to reach Chase Home Lending on behalf of a homeowner and was transferred a dozen times and cut off twice. (A Chase official said the company has hired hundreds of additional employees this year to deal with the flood of troubled mortgages.)

“We can’t get through. We cannot get through and we’re doing it every day. How is the homeowner — with their lack of information — supposed to accomplish this?” Howard asked the senators.

Foreclosure filings soar

One in five Lane County homebuyers took out high-cost, subprime or nonconforming loans in 2004 and 2005, according to federal statistics. Roughly half of subprime borrowers can be expected to default, according to national statistics from the National Mortgage Bankers Association.

While foreclosure filings are leveling out nationally, locally they’re soaring. Lane County filings jumped from 600 a year to 1,200 a year within the past two years.

Those who are now dealing with loans they can’t afford have three choices:

Refinance into a 30-year, fixed-rate mortgage with an affordable monthly payment amount.

Persuade their lender to renegotiate their loan to accept a smaller amount of interest or principle in order to lower the monthly payments.

Walk away from their house and default on the loan, which may affect their ability to land a job, take out car insurance or buy another house for years to come.

These are individual choices but the stakes are collectively high. The increasing number of people who sell their homes at a loss and the trend toward banks dumping houses on the market in foreclosure sales is depressing home prices, said Erick Harpole, a real estate broker with Keller Williams Realty.

“If that person is your neighbor, your home value is going down too. That’s just the long and short of it.”

Refinancing a good way out

Refinancing is the best way out of an overly expensive mortgage payment. It lowers the interest rate, reducing the monthly payment without damaging the borrower’s credit rating.

But without a stellar credit rating, that isn’t easy. Lenders are exceptionally picky about whom they loan money to today, Harpole said. “If there were 10 people who could qualify for a loan based on programs available in (2005), there’s only 1 to 1½ of those 10 people who can qualify for a loan today.”

Eugene mortgage broker Marcos Bodart can testify to that. Bodart took out a high-priced loan with a low teaser payment on his own house several years ago. When the housing market slumped and his income dropped, he realized with alarm he couldn’t refinance. He owed more than the house was worth.

That’s common, said John Helmick, CEO of Gorilla Capital, which specializes in buying houses at foreclosure auctions.

“The homes that are in foreclosure primarily were financed or refinanced in 2006 and 2007,” Helmick said. “Those people financed 100 percent of the value of their house at that time. … Now, the house is worth less than when it was financed.”

Lenders won’t refinance a house for less than the appraised value, so unless the borrower can make up the difference in cash, he or she is out of luck.

Interest rate reduction

The next step for troubled borrowers is to see if their mortgage holder will either reduce the interest rate or the amount of principal that the borrower owes.

Failing that, they ask if the bank will accept less than the borrower owes if the borrower can find a buyer for the house — called a short sale.

Short sales are common in local real estate listings nowadays but they’re not easy to negotiate, say short sale specialists such as Harpole and investor Jack Hochman.

They describe a Kafkaesque world with dead-end phone systems, employees without the power to do anything and organizations without clear lines of authority.

And people wanting to modify their loan, or get out from under a mortgage through a short sale, are in a hurry — especially when they’ve received the first default notice. At that point, they have 120 days before their property can be sold on the courthouse steps.

“You’re really working against the clock,” Harpole said. “If you don’t follow the timeline and you don’t give them the documents when they need it you’re dead.”

Getting documents to the right place isn’t as easy as it sounds, foreclosure counselor Howard said. “We fax stuff again and again and again and they say they haven’t received it. It’s really frustrating. It’s really difficult for the homeowners.”

Often, the lenders have different departments taking contradictory actions, broker Clark said.

“You talk to the short sale department and the loss mitigation department and the foreclosure department, and they are completely separate. So, even if you have an offer on the property, the loss mitigation department won’t call the foreclosure department and say, ‘Hey we’ve got an offer on this property, take it off the auction block. I think we can work this out.’ So I have to call the foreclosure department and say, ‘Hey we’ve got an offer on this property so we need it removed from the auction block.’ It’s absolutely crazy.”

Competence on the other end of the phone also may be in short supply, Hochman said.

“The (lenders) were drafting people without any experience into these departments. There is no certification for being a loss mitigator. The training has to be weak at best. … And these people are carrying anywhere from 150 to 300 files on their desk.”

Tough times for finance firms

These are difficult times for finance or mortgage companies too, said Thomas Kelly, spokesman for the New Jersey-based Chase Home Finance. Each week, Chase gets 40,000 calls from distressed borrowers, he said.

Since January, the company has hired 650 new “loan counselors,” bringing the call-answering staff to 3,000, he said.

“We continue to hire people because the number of people who are delinquent on their mortgages is the highest level in 60 or 70 years — since the Great Depression,” he said.

Chase will do its best, Kelly said. “We understand a person’s home is a very emotional thing and we’re working very hard to connect with people and get them information as quickly as we can.”

Local short sale professionals said it takes 30 to 50 hours of work spread over a couple of months to arrange a single sale with a loan servicing company.

A number of the high-risk loans that are now in trouble were packaged with other loans and re-sold to other investors, so there may be private equity firms, retirement investment pools or hedge funds that hold an interest in any given property.

The borrower sends money to the company that services the loan, that company communicates with a trustee, and the trustee reports to the investors.

To further complicate the situation, the loan is probably registered on the Mortgage Electronic Registration System, a big database in Virginia. And MERS administrators also have the power to foreclose on loans. All of which makes mortgage relief negotiations difficult if not impossible, said Jeffrey Norton, a New York attorney who represents homeowners in housing-related lawsuits.

A borrower, for instance, may assume Countrywide holds their mortgage, because that’s who sends the monthly mortgage statement. It’s more likely, he said, that Countrywide sold the loan and is just handling the monthly payments for the unnamed investors behind the scenes.

“People don’t understand the process,” Norton said. “Countrywide is not in a position to do anything (to help the borrower). They make … money off of enforcement and foreclosure and the fees they’re getting on both sides of the deal.”

In fact, companies like Countrywide that are just servicing the loans have a disincentive to work with a borrower who is struggling. They can be sued by the investor if they start lowering interest or principal for struggling homeowners carrying too-costly loans. The borrowers’ relief is the investors’ loss, said David Tatman, administrator of the Oregon division of Finance and Corporate security.

Cutting deals that reduce their income has never been part of the business model, Harpole said. “They’ll take the house back in foreclosure and deal with it that way. At that point, they get cash back versus just postponing the write down of that asset value. It’s an ugly reality,” he said.

The trend is particularly disturbing because of its implications for foreclosures. As house prices continue to decline and more people find themselves paying mortgages above the value of their properties, the risk increases that they'll start walking away in droves. But "you have to be very careful in jumping to conclusions," says First American chief economist Mark Fleming. "Just because your house is worth less than your outstanding mortgage doesn't mean you're going to go into foreclosure or anything like that." Even for people awash in debt, homes are still places to live. If prices are given enough time to recover, they might still be a good investments, too. (Read: How to Fix the Housing Market)

A bigger problem is the tanking economy. Lose a job and paying the mortgage becomes more of an issue. Since the house is worth less than you owe on it, you can pretty much forget about refinancing or selling, the old get-out-of-jail-free cards when you could no longer make your payments. So maybe we should be most worried about the 50% of homes that are underwater in the Detroit area. Or — odd as it may sound — Rhode Island, where the unemployment rate, at 10%, is second only to Michigan, and where 15.7% of mortgage holders are underwater, up from 12.1% in September. (Read the four steps to ending the foreclosure crisis.)

According to the First American CoreLogic report, the states with the highest percentage of negative-equity borrowers are the usual suspects. After Nevada (55.1%) and Michigan (40.0%), Arizona (31.8%), Florida (30.3%) and California (29.5%) round out the top five. Those statewide averages, though, mask a lot of local variation. One pattern: exurbs, where homes are newer and loans more likely to have been signed during the bubble years, are harder hit. For instance, in the metro area that includes Los Angeles, 23% of homeowners are faced with negative equity. Fifty miles to the east, in the area that includes Riverside, 45% are. (Read: House of Cards: The Faces Behind Foreclosures)

Another trend: a creeping problem in the Midwest. It's true that property markets never went wild in Des Moines or Omaha like they did in Merced and Fort Myers, but this means even modest declines in home values can erase equity, especially for recent buyers who have less of a cushion against falling prices. In Iowa, 18.6% percent of homeowners have negative equity; in Nebraska the figure is 16.6% (both jumped more than three percentage points from September). (See pictures of struggling Cleveland.)

By some measures, such unlikely spots are in even more danger than California, which is suffering a brutal real estate slump after years of speculative excess. That's because midwesterners owe more on their properties than left-coasters. The average loan-to-value ratio in California is 70%, while Nebraska and Iowa clock in at 75% and 76%, respectively. As the recession deepens and home prices continue to slide, there are fewer and fewer places to hide.

Sure, it’s another story of home prices dropping in a sour real estate market, by about 39 percent in this case. But Kurtyan says there’s more to it. Short sales have become so mainstream in some markets, such as this region of central California, that during March he and the developer behind the complex began promoting these properties’ status as re-priced “short sale” homes — homes priced below what the seller owes on their mortgage — in order to lure skeptical, price-conscious buyers.

The Village at Green River has hung a banner advertising “short sale” prices, and the complex’s voicemail greeting discusses its status as “a short sale situation.”

“We had a significant response just from changing the sign so that it advertises prices starting at $299,000,” Kurtyan says. “It’s a negative situation for everyone involved, except for the buyer who gets a good deal.”

Indeed, while buyers will get townhouses each boasting a two-car garage, two bedrooms, and two and a half bathrooms, the developer behind the estimated $8 million project will walk away empty-handed at these prices, and the multiple lenders involved will either break even or lose money, Kurtyan says.

Short sales now widespread
Stories like the above have become increasingly common around the US in recent months. Last week Bethesda, Md.-based Inside Mortgage Finance, and Washington-based Campbell Communications released a real estate industry survey indicating that roughly 20 percent of all U.S. home sales in March were “short sales.”

“Our numbers suggest that 20 percent of completed home sales nationwide are short sales,” said Guy Cecala, publisher of Inside Mortgage Finance. “The number would be larger if it weren’t for the fact that one-third of all attempted short sale deals don’t go through.”

So why so many short sales? The combination of falling home prices and homes financed with low down payments means many homeowners owe more on their properties than they’re currently worth. Add to that the population of homeowners who face foreclosure due to resetting mortgages or who must sell for other life reasons (relocation, etc.) in the middle of a bad market, and it makes sense that lenders hoping to avoid more foreclosures on the books will take this alternative.

According to IFM/Campbell research, two-thirds of short sales are initiated by homeowners and one-third are launched by mortgage lenders (as a foreclosure alternative). IFM/Campbell data indicates the top reason for short sales initiated by homeowners is their inability to make mortgage payments, followed by other factors such as the value of the property declining.

In a typical home transaction the seller gets final say on which buyer gets the home, but in a short sale the lender weighs in on that decision, since it’s the lender who won’t recoup 100 percent of the seller’s mortgage balance as in a “normal” home transaction.

This means more complication for both buyer and seller, according to Tom Popik, a Campbell Communications research partner who worked on the study. Many buyers who consider putting a bid in on a short sale abandon the deal mid-way through because it takes so long for a lender — unlike a regular individual home seller — to respond to it.

“If you put in an offer on a short sale, you’ll have to wait on a response for anywhere from four to six weeks,” Popik says. “Our study indicates the average wait is 4.5 weeks.”

Buying a short sale: Time-consuming process
Knowing that the typical short sale is time-consuming for this very reason, Kurtyan said that he and the developer he represents began petitioning the lender for price drops before marketing the homes at their current prices, rather than marketing reduced prices and crossing their fingers that the lender would approve them — a common tactic among short sellers. The process started in December, he says, but it took until March for the new prices to get approved due to the lenders involved.

In the case of the Village at Green River, the developer got a loan for 80 percent of the project from a primary lender, and secured 20 percent more from individual investors, Kurtyan says. But the project, built over a 14-month period between 2006 and 2007, came on the market at the worst possible time. The 80 percent lender had to convince the 20 percent lender group to forgo some — and then all — of its investment.

Since the lender approved the new prices in late March, 11 of the 19 homes have sold, with the first closing next week.

“The landscape is in constant change here,” says Kurtyan.

“The amount of time a lender can take is one of the most important things the consumer needs to know,” said Popik. “Any buyer looking at a short sale property should find out where the seller is in terms of discussions with their lender.”

A short sale occurs when a lender agrees to allow a homeowner to sell the home for less than the mortgage owed on it. The lender either absorbs the difference or requires a borrower to pay it back in a lump sum judgment or payment plan.

This allows homeowners to walk away from their houses without going into foreclosure and seriously damaging their credit.

In 2007 there were 2.2 million new foreclosure filings in America, up nearly 80 percent compared with the previous year. The average foreclosure cost lenders $40,000, and the last thing banks and lenders want is more houses to sell.

For many, a short sale is now looking like the last best option. Though it still diminishes one's credit rating, the short sale is often vastly preferable to other options.

Real Estate Contributor and "Wall Street Journal" reporter Wendy Bounds shared the details on what you need to know about short selling your home on "Good Morning America" today.

 Prove inability to make payments

The first thing you need to do is prove to the lender that you can't make payments at the adjustable level. That will require some filing of paper work, some documentation showing that your income has gone down.

Find a willing buyer

The second thing is to find a buyer who is willing to buy the home at a discount rate. To do that you have to get a knowledgeable real estate agent or attorney involved, maybe someone who specializes in short sales. That's important because pricing is incredibly important in the search to find the right buyer.

Get lender to approve sale

Lastly, you need to get the lender to approve the sale once you do find a buyer. That's why it's important to work with the lender as much as possible. That's going to make it that much easier for you in the long run.

If you can't complete a short sale

If the homeowner isn't able to complete a short sale, the next option is either foreclosure or handing over the deed to the bank in lieu of foreclosure. Those options are worse for your credit than a short sale  that's why it's so important to get the pricing right. Work closely with an agent who specializes in this kind of thing and work closely with your lender so you'll know what to expect.

Your home is your most important asset

Your house is the most important asset that you will own. Be smart and get everything in line, realize when the situation is deteriorating, write a compelling letter to the lender. That way, you'll be able to get people to pay some attention to you. Pay attention to your home and don't be in denial about the reality of this market.

Audio - http://abcnews.go.com/Video/playerIndex?id=4263032 

About 7.63 million properties, or 18 percent, had negative equity in September, and another 2.1 million will follow if home prices fall another 5 percent, according to a report by First American CoreLogic.

The data, covering 43 states and Washington, D.C., includes borrowers nationwide, even those who took out mortgages before housing prices began to soar early this decade.

Seven hard-hit states -- Arizona, California, Florida, Georgia, Michigan, Nevada and Ohio -- had 64 percent of all "underwater" borrowers, but just 41 percent of U.S. mortgages.

"This is very much a regional problem, and people tend to forget that," said David Wyss, chief economist at Standard & Poor's, who expects home prices nationwide to fall another 10 percent before bottoming late next year.

"Most of the country is not in bad shape," he continued. "Things seem to be stabilizing in Michigan, but the big bubble states -- Florida, California, Arizona and Nevada -- are still very overpriced."

About 68 percent of U.S. adults own their own homes, and about two-thirds of them have mortgages.

JPMorgan Chase & Co, one of the biggest mortgage lenders, on Friday offered to modify $70 billion of mortgages to keep a potential 400,000 homeowners out of foreclosure. Bank of America Corp, which bought Countrywide Financial Corp in July, also has a large loan modification program.

HOME PRICES, ECONOMY UNDER PRESSURE

U.S. home prices fell a record 16.6 percent in August from a year earlier, with declines in all 20 major metropolitan areas measured by the S&P/Case-Shiller Home Price Indices.

Foreclosure filings rose 71 percent in the third quarter to a record 765,558, according to RealtyTrac.

Meanwhile, the Commerce Department said gross domestic product fell at a 0.3 percent rate in the third quarter. Some experts expect the worst U.S. recession since the early 1980s.

Yet despite a series of expensive government programs to spur lending, mortgage rates are rising, making it tougher to borrow or refinance. The rate on a 30-year fixed-rate mortgage jumped this week to 6.46 percent from 6.04 percent a week earlier, Freddie Mac said.

Meanwhile, borrowing costs on hundreds of thousands of adjustable-rate mortgages are expected to reset higher in the coming months. The problem may be particularly serious for borrowers with rates tied to the London Interbank Offered Rate, or Libor, which is abnormally high relative to benchmark U.S. rates.

Last week, Wachovia Corp said borrowers with its "Pick-a-Pay" ARMs and living in or near Stockton and Merced, California, owed at least 55 percent more on their mortgages, on average, than their homes were worth. Wells Fargo & Co is buying Wachovia.

NEVADA HARD HIT, NEW YORK AT RISK

First American CoreLogic, an affiliate of title insurance and real estate services company First American Corp, said states with large numbers of homes with negative equity either had rapid price appreciation, many homes bought with subprime mortgages or as speculative investments, steep manufacturing declines, or a combination.

Nevada was hardest hit, where mortgage borrowers on average owed 89 percent of what their homes were worth, and 48 percent had negative equity. Michigan was second, with an 85 percent loan-to-value ratio and 39 percent of borrowers underwater.

New York fared best, with an average 48 percent loan-to-value ratio and just 4.4 percent of mortgage borrowers with negative equity.

But Wyss said this could change as financial market upheaval transforms Wall Street. This month, New York City Comptroller William Thompson estimated that the city alone might lose 165,000 jobs over two years.

"We're going to see home prices coming down pretty significantly in New York," Wyss said. "A lot of people are losing jobs, and won't be getting their usual bonuses, and that leaves less money for housing."

January Residential Highlights

2008 Summary
Results from 2008 compared with 2007 show a 10.1% decline in new
listings. Closed sales and pending sales decreased 27.7% and 25.7%,
respectively.

12-Month Sale Price Percent Change
The average sale price dropped 7% ($246,800 v. $265,300) and the
median sale price declined 6.3% ($220,000 v. $234,900). Total sales volume
for Greater Lane County was $740 million in 2008, a decrease from $1.1
billion in 2007.

If you would like the total breakdown email us and we will get you the Lane County Real Estate Information- If you have any questions please feel free to call Erick & Jeannette with the Harpole Real Estate Group, Keller Williams Realty - Eugene/Springfield. 541.343.7653 or email erick@harpolehomes.com

A look at the numbers from November 2008 compared with those from
the year prior shows that new listings dropped 23.6%. Closed sales were
off by 21.6%, while pending sales dropped 26.3%. At the month’s rate of
sales, the 2,163 active residential listings would last approximately 11.4
months.

Year-to-Date

A comparison of January-November 2008 with the same period a year
ago shows the number of new listings was 9.6% less. Pending sales dropped
25.4%, while closed sales declined 27.6%. See table above.

12-Month Sale Price Percent Change

Comparing the rolling sale prices for the 12 months ending in November
2008 with those of the 12 months immediately prior, the average sale price
decreased 6.3% ($249,000 v. $265,700) and the median sale price dropped
4.9% ($223,000 v. $234,500).

If you would like the total breakdown email us and we will get you the Lane County Real Estate Information- If you have any questions please feel free to call Erick & Jeannette with the Harpole Real Estate Group, Keller Williams Realty - Eugene/Springfield. 541.343.7653 or email erick@harpolehomes.com

Erick Harpole has a real estate group with Keller Williams Realty in Eugene/Springfield Oregon. Having been in real estate for six years, Harpole has production in excess of $25 million a year. He has increased his market share and sales by 100% in the past 12 months even though the market has dropped over 50% in the past two years.

Diane Ivas is a member or the RE/MAX Circle of Legends, the Top 20 Teams Northern Illinois, the Chairman’s Club, the Hall of Fame, and has received the Life Time Achievement award. She is no stranger to success. With annual sales in excess of 80 homes in the exclusive western suburbs of Chicago, Ivas and her team understand the current market situation.

Mark Des Jardins is a Virginia native and 20-year Florida resident. He holds a Bachelor’s degree in Computer Information Systems and with over 20 years of technology business experience he is currently providing first-tier professional real estate service in unique, picturesque Ocala, Florida.

What are the three skills every agent must develop to be successful in today’s market?

Erick Harpole feels his top three skills are lead generation, solid presentation skill and market knowledge, and constant follow-up.

Lead generation: “As an agent our first job is lead generation-defined as the ability to generate buyer and seller leads consistently. If we have no potential customers we are dead in the water. Leads are the life blood of the real estate business.”

Solid Presentation Skills and Market Knowledge: “Once you have a client, you have to be able to clearly articulate why they should use you versus using another agent in your marketplace. Then you must the ability to explain market conditions and the benefits of buying or selling in our current market.”

Follow-up, Follow-up, Follow-up: “As agents we need to have systems in place to make sure that no one falls through the cracks. Consistent, long term follow-up insures that you don’t lose clients and potential referrals.”

For Diane Ivas, she, too agrees that follow-up is one of her musts, but she also feels that listening and empathy play a major role in her day to day success.

Excellent Listening Skills: “Because every buyer and seller has unique needs, a great sales agent is always “listening” for the indication of authentic needs.”

Immediate Follow up: “Successful agents are not careless and do not procrastinate. They understand that clients want answers ASAP. Future referrals come from contented clients and successful agents really strive to build their future by satisfying their present clients.”

Empathy: “Great agents display compassion and are sympathetic to their clients who are enduring a stressful market.”

When it comes to his chosen skillset, Mark Des Jardins feels the process starts with the prospect and isn’t completed until all objections are handled before closing day.

Prospecting Skills: “Regardless of the market, successful agents are always searching for business leads by phone or in person. This is the only way to determine real sellers and real buyers.”

Listing Presentation: “Now, more than ever, it is imperative to obtain listings. Even though many markets are flooded with them it is a fabulous time to take control of the inventory. To do so, a superior listing (marketing) presentation is essential to differentiate you from the rest.”

OHT - Objection Handling Techniques: “Especially in the overriding anxiety in today’s situation, learning the skill of overcoming stalls and objections is fundamental to success. It allows the seller/buyer to make informed decisions by relying on your professionalism. This skill should never be confused as some verbal wizardry or manipulation. Quite to the contrary for it causes the seller/buyer to become very clear on what the delay is really all about. Don’t forget that you can’t sell a home to a buyer, they buy it! Likewise, you can’t list a home for a seller they choose to sell it!”

What are the three most important things every seller needs to consider in today’s market?

For Harpole, he breaks it down to the basics of business, from the Law of Supply and Demand through educating the agent in market value, and ensuring the seller is really ready to sell.

The Law of Supply and Demand: “When inventory goes up and demand goes down, prices fall. It’s a law…no exceptions. Sellers need to understand that the market is not what it was in 2005. Unfortunately, they will not see those two-year-old values when there is currently over 12 months of housing inventory on the market.”

Market Value: “…is what a buyers is willing to pay you for your home and what you are consequently willing to sell it for. Buyers are comparison shopping. They are looking for the house that offers the most benefits and features for the best price.”

Sellers, who sell, Sell! “Are you really motivated? There are a lot of motivated sellers in our market place; 1) Bank-owned Property (REO), 2) Pre-Foreclosure (short-sales), 3) Builders, 4) Divorces, 5) Bankruptcies, 6) Relocation for jobs, then everybody else. When there are a limited amount of buyers and you don’t have to sell then you are better off not listing your house. Increased inventory on our market drives values down.”

For Ivas, however, it’s a mix between old-fashioned accurate pricing and new-age proactive thinking through staging and home inspections.

Accurate Pricing: “Historically, under any market conditions an overpriced home seldom sells. Successful agents know that they have to be “in line” or better than the competition.”

Staging the Home: “Because most markets are filled with inventory, a home needs to look as presentable and immaculate as possible. There are just too many homes available for buyers to have to look past the unkempt, untidy and cluttered conditions. They will move on very quickly.”

Pre-home Inspection: “Oftentimes it is a good idea to perform a pre-home inspection to show potential buyers and also as a pre-emptive strike to discover any defects that need to be corrected.”

Mark Des Jardins takes a traditional approach taking it back to the basics for agents. He offers his best advice with an accurate price, timing, and good terms.

An Accurate Price: “Definitive pricing provides a true perspective on current market variables. It is most difficult for sellers in the early shifting of a market to be come willing to set a more competitive price. A successful agent is prepared with the “facts”. It is so important not to be casual or cavalier but to demonstrate an abundance of market awareness while not being adversarial with the seller.”

Timing: “One of the confirming factual tolls successful agents use with power is the average length of time on the market statistic. It provides fair estimate on when the property will sell. It takes the “heat” off the agent. However, it is incumbent that the agent continue to stay in touch regularly.”

Terms: “Good terms are clearly significant influences for potential buyers and their selling agents to see and show the property. Terms are marketing tolls not merely facts about a listing.”

What are the three most important things every buyer needs to consider in today’s market?

According to Harpole, the best homes sell first. Buyers need to set their expectations by a little planning ahead, with the help of their agent.

The best homes sell first: “Regardless of the market the best always sell first. If a home is priced in the correct price range and is in outstanding condition it will sell first and for the best price.”

Length of stay: “How long do they plan on staying in their new house? With buyers concerns about the market continuing to decline in value and by understanding their goals and dreams you are able to overcome this objection. Real estate markets go up and they go down, buying a home is an emotional purchase, understand what they want.”

Buyers are looking for a deal: “Ask them what does a deal look like to them, price, incentives, concessions. Narrow down what they are looking for and why. Most buyers don’t even know what they are looking for.”

Ivas knows that in this market, buyers need to understand that it’s a great time to buy, underneath much of the national hype. Her other thoughts? Thinking of a home as a home, and location.

Excellent time to buy: “Since prices and interest rates remain low this continues to be a wonderful time to buy. There are no guarantees about the future but the present is opportunistic.”

A Home First not only an Investment: “Don’t just look at buying a home for investment. They need to love what they have chosen to purchase. This is where their family will enjoy living.”

Location: “It is important to study the home’s location to accommodate buyer’s needs such as schools, driving, shopping and other unique family circumstances. There are plenty of choices.”

Mark Des Jardins encourages his buyers that there’s no day, but today to buy a home. And while today’s real estate industry has a great presence on the Web and innovative technology, he also presses the value of hiring an agent to aid the personal process, when the time is right for them to decide on a home.

Cost Associated with Waiting: “Given that we cannot predict the bottom of the market an overly cautious may miss a golden opportunity. Prices may go up, inflation, taxes, political change and on and on.”

One cannot sell a property over the Internet/phone: “Properties sell themselves in person. Almost 100% of our home buyers visit properties to purchase. Dissuade them from being obsessive about making selective decisions through virtual touring. Yes, it is a phenomenal tool but we should never relinquish our responsibility to them to encourage the onsite viewing. This, of course, allows us to more adequately understand their wants and desires.”

Be Ready to Decide: “The best opportunities belong to those who can decide “now”. Get your buyers to have all their ‘ducks in a row’ …. current house on the market competitively priced, financing in order and able and willing to buy ‘today’ not tomorrow or three months from now.”

For more information, visit www.HarpoleHomes.com, www.hinsdale-homes.com, www.ocalahorsefarms.com.

There are 5 fundamental secrets that real estate investors like to keep close to their chest and they are the secrets that enable them to survive and even profit during a bear market.

This article blows the lid off the secret world of the professional real estate investor!

1)Aligning For Profit in a Bear Market

When professional property investors believe the market is entering a downward phase i.e., changing from Bull to Bear - they will change their investment strategies accordingly. One method that tough investors apply is to buy up property in the best areas that they can afford once a market is slumping already. Professional real estate investors know that the best areas for property always boom again very early on in the next property cycle.

By working in this way they can then leverage their investment by selling their property early on in the boom cycle and buying elsewhere and always remaining one step ahead of less professional investors or average home owners.

Up and coming areas will eventually peak as well of course as they are swept along on the tide of the boom, but they will not peak first and investors in these areas will have to wait longer to see their profits.

Professional investors will likely enter these areas just before they peak and sell up just before the heat goes out of the market enabling them to again buy up what they can afford in the best areas thus positioning themselves ready for the next upward trend. And so it continues!

2)Slow Down Your Speculating

You may already have decided that the time is no longer right to be over extending yourself and you may have cut back on your property purchases, but remember that making any home improvement or taking on any renovation projects during a downward period of the property market is also considered to be speculating. Don’t just assume that capital appreciation from your property will justify home related expenditure right now…in a bear market it won’t.

3)Never Forget The Supply and Demand Theory

Property prices don’t go up infinitely, if you examine the ebb and flow of the market in the US over the past decades for example, you will see that stand alone investment in real estate would’ve returned you gains of just over 1 percentage point above inflation! There comes a point in every market cycle when the market runs out of investors willing to buy up at the top prices and there comes a point when first time buyers are frozen out of the market. As demand dries up, over supply brings down prices and this stops the entire market in its tracks. If you remember this fundamental fact and examine the movement of the market closely and carefully you will be able to see when supply is about to outstrip demand, you will be able to watch first time buyers reigniting the market, you will understand when the time is right to sell and when the time is right to buy.

4)Balance Real Estate Exposure

You may assume that your only exposure to the property market is what you physically hold in the way of real estate assets – but don’t forget all your paper investments as well. Do you have money invested in REITs, do you have funds that invest in commercial property as part of the underlying portfolio, what about your retirement fund, which market sectors are the find managers investing in on your behalf right now? Don’t assume that fund managers will make the right decisions at the right time on your behalf, you might be able to see the heat going out of the market quicker than they can react. If this happens you have to be prepared to rebalance your entire portfolio and move your exposure away from real estate if you believe the market is about to dip.

5)Protect Your Equity

There is nothing more valuable than the equity you own in your own home. Do not put that at risk. It is very tempting in a boom market to re-mortgage yourself back up to the new greater value of your home, but in so doing you expose yourself, your family, your home and your future to unnecessary levels of risk. Secure the roof over your own head first and foremost, and only then proceed into the greater real estate market with care! Do not be tempted to secure any extra loans or mortgages on your family home. Professional and wise real estate investors worth their salt will always secure their own position first and foremost.

Negotiation through the loss mitigation department will be the key factor in getting your new home at a deep discount.

If opportunities emerge in which lenders can sell distressed properties without registering big losses, they will do it.

For example, consider that a homeowner with a $200,000 mortgage is late on his or her loan payments and is facing foreclosure. With the consent of the homeowner, you offer his or her lender $150,000 as full payment for the loan, which is accepted. That means you instantly save $50,000 on a real estate investment.

This is a short sale.

Getting started

Negotiating a short sale with a lender can be a complicated. But with careful research and patience, it is possible for you to earn big profits with short sale deals. Naturally, closing the first one will be the most challenging.

The first step in this process is to identify potential investment opportunities on Foreclosure.com, which offers more than 1.8 million listings across the nation.

Preforeclosure properties are ideal because you can make more money with them versus homes that are already bank-owned.

To be most successful, we recommend reaching out to homeowners who are more than three payments behind on their mortgages. At this point, each of these homeowners has received a Notice of Default (NOD) and is very close to losing their home. Time is running out and the chances of them curing the loans and making up the back payments are slim.

The homeowners understand this and may be grateful for your assistance. The lenders understand this, too, and are motivated to recoup their losses as soon as possible.

Calling lenders

It’s important to gather as much information as possible about the properties and the homeowners prior to getting on the telephone with lenders. Because when you do get a lender representative on the line, he or she will have questions.

Using the contact information contained within the listings you have targeted from Foreclosure.com, it’s time to call a lender and inquire about the possibility of a short sale agreement. Traditionally, the “Loss Mitigation Department” will handle these types of requests.

If you can’t get in touch with anyone, move onto the next listing. The negotiating can begin only when you get in touch with the right person.

Once you have reached a representative for the lender, inform him or her that you represent the homeowner. This is all you need to say — avoid revealing that you are an investor. The representative will usually want basic information about the property, the homeowner and the proposed deal. He or she will also want to know the value of the property and the financial situation of the homeowner (borrower).

Aside from making the initial introduction, the goal of this conversation should be to request a short sales or workout packet. This packet will provide you with everything you need — instructions, forms and procedures — to close a successful short sales deal.

Broker’s Price Opinion (BPO)

Lenders generally hire local real estate brokers or appraisers to evaluate properties in the foreclosure process prior to selling them at public auction. These are referred to as a Broker’s Price Opinion (BPO).

Essentially, a Realtor® — based on the condition of the home and current market conditions — provides the lender with an estimate for the value of the property. The BPO is the key piece of information that a lender will rely on to make a decision regarding a short sale.

The lower the estimate, the better it is for you.

Lenders want to get rid of distressed properties as soon as possible, but they aren’t going to sell them for ridiculously low prices Many short sales, in fact, fall through if the BPOs come in too high. When properties are in good condition, it is hard to convince lenders that they are worth much less than the appraised values.

Hardship letter

Most lenders will request a hardship letter that details the reasons a homeowner has not made his or her mortgage payments. This is a bit strange because the borrower who is in default must prove that he or she is broke and unable to afford the payments.

This is a fairly extensive request, which may require the homeowner to submit pay stubs, tax records and other personal financial records, along with the letter. It is essential that you submit everything that is requested.

Otherwise, your offer will not be accepted.

Creating an effective and compelling hardship letter requires creativity. Without lying, the letter should paint a very bleak picture of the situation. If neither you nor the homeowner possesses decent writing skills, it may be in your collective best interests to seek the assistance of a professional — it’s worth it.

HUD-1 settlement statement

A lender will generally require a written contract between you and the homeowner. A preliminary HUD-1 settlement statement will reassure the lender that the homeowner isn’t receiving any cash from the deal.

The HUD-1 form requires you to itemize all charges imposed upon you and the homeowner for the real estate transaction. Essentially, it is a complete list of the incoming and outgoing funds.

The contract should be written so that you pay all costs associated with the deal. And, that the “net cash” to the homeowner is the precise amount of the short pay to the lender.

If you have difficulty completing the form, a title or escrow company may help you prepare it in advance of the closing.

Supporting materials

A lender will often agree to a bigger discount if a property requires significant repairs. The more work that needs to be put into the property, the less it is worth and the harder it is to sell on the open market.

Hire a professional(s) to appraise the home and provide you with a bid for repair estimate (the higher the better). This is not a requirement because as mentioned above, the lender will get its own BPO. However, providing independent appraisals and comparable sales information that support your offer are critical.

There are other things you can also do if the home is not in ready-to-move-in condition.

Always remember, it is in your best interests to submit with your paperwork as much negative information about the property as possible. For example, newspaper clippings that discuss “bad news” nearby or in the neighborhood can help reduce the price of the property in negotiations.

Waiting for an answer

It usually takes about three to six weeks to receive an answer from the lender once you have submitted the HUD-1 settlement statement and all of the other supporting materials.

It’s always good to call the lender to ensure that he or she has received the information, as well as make it clear that you are always available to answer questions and provide additional information, especially if something is missing.

If the auction date for the property is approaching, ask the lender to extend it until he or she has had time to consider your offer. If your offer is legitimate, the lender will almost always grant your request.