Print

Email story

Comment

Letter to the editor

One lively market

Entrepreneurs target distressed homeowners who have no equity.

By PAUL SWIDER, Times Staff Writer
Published December 2, 2007

With the declining real estate market and the ravages of subprime mortgages, an increasing number of homeowners are unable to make payments on homes worth less than they owe.

But one man's problem is another's possibility.

A new market is forming for those who buy and sell homes about to be taken back by banks. Sometimes this can help indebted homeowners while it profits business and even bails out banks.

But those close to the market add notes of caution.

"In any disaster, there is always opportunity," said Askia Aquil, president and chief executive of St. Petersburg's nonprofit Neighborhood Housing Services. "The key is for the victim not to be doubly or triply victimized."

NHS recently hosted a conference for organizations like itself to learn about options for distressed homeowners.

Other programs, including some by lenders, teach about the business of default and foreclosure as entrepreneurs and investors step into the breach.

"Anybody who tells you they do this just to help people is not telling the truth," said Mitchell Herman, who is adding Emergency Property Solutions to his real estate and mortgage businesses. "But it is nice if you can make some money and help somebody."

Herman tracks the growing list of foreclosure filings and picks properties that combine a significant debt for the owner and a marketable rental opportunity for him.

People who have negative equity in their homes need a solution that Herman perhaps can provide by negotiating with the lender to accept less than the amount owed on the home. The borrower gets out of a painful situation, the bank gets rid of a nonperforming asset, and Herman purchases a discounted house.

That's if all goes well. But the process can be complicated. Banks are more interested in receiving payments than taking a home, but they won't discount a loan for nothing, so there has to be evidence of a problem. And after the fact, there can be tax implications for the homeowner.

"You have to have a hardship," said Ken Monduori, who works with Regions Bank and teaches real estate agents the finer points of "loss mitigation" with banks. "Typically the story should be 'the sadder the better' to persuade the lender to accept less than full payment."

But lenders will require documentation, not just a sob story. Some lenders create a checklist to complete, with detailed financial information, along with an offer sheet on the home and other paperwork. Herman describes this process as "dequalifying" for a loan.

"If you're financially insolvent, there's a hardship, but if not, get in line, pal," he said. "There are a lot of slick people. Banks aren't going to play that game."

Herman said he makes it easy for homeowners in default, but others say anyone can handle the deal.

"There are a lot of people in the business of making money off of people in distress," said Darryl Wilson, property law professor at Stetson University College of Law. "Of course, consumers aren't that good at agreeing they can't hold on to their home."

Herman said he would never advise anyone not to make mortgage payments but that banks have no incentive to talk unless the party is in default. After borrowers fall far enough behind, the bank will file a lis pendens, a legal procedure that starts the foreclosure process. Such filings have more than doubled in Pinellas County over the past year.

If there is equity in the home, a buyer may get a deal at the expense of the distraught homeowner. If no equity, someone like Herman will try to talk the bank down.

"I have no compunction about making money off of banks," said Herman, who added that his profit comes in the house, not fees from the borrower. "We're creating equity where there is none."

Such "short sales" are becoming big business. A Clearwater firm, Foreclosures Daily, has a subscription-based Web site that shows investors the latest lis pendens filings and correlates them with property records, bankruptcy data and other pertinent information investors use to cull the best deals for themselves. Foreclosures Daily has been growing rapidly of late.

"The foreclosure process is convoluted," said Foreclosures Daily CEO Mike Kane. "We've done all the up-front work and we know we can make investors successful."

Even a successful short sale is not a clean slate for the homeowner. A house with a $200,000 mortgage sold short for $100,000 represents $100,000 in taxable income. Then again, that foreclosed property sold at auction for $100,000 could mean an outstanding debt for the rest, which the lender could pursue.

Bankruptcy might save some people, Wilson said, but for most it just buys time. It's a coin toss as to which is worse on a credit report, foreclosure or bankruptcy, because the former never disappears while the latter is like a guilty plea of bad credit management.

Aquil said he pursued the short-sale seminar because he has seen a marked uptick in calls from people in trouble about their homes, including many from affluent areas. He said he may partner with people like Herman who can work the deal while NHS guards the homeowner.

Paul Swider can be reached at pswider@sptimes.com or 727 892-2271.

On the rise

Foreclosures in Pinellas County

346 foreclosure filings in November 2006

835 foreclosure filings in October 2007

Source: ForeclosuresDaily.com

[Last modified December 1, 2007, 22:01:21]