Fairness in Housing Forced Real Estate Loans

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					Short Sale Real Estate
Wednesday February 24, 2010 - 16:00 PM EST

Source: Wall Street Greek

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Short Sale Lemonade

A housing short-sale provides a win-win opportunity for both lender and borrower, and offers the parties
involved in distressed property dealings to make real estate lemons into lemonade.

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Short Sale Real Estate

                The reality of the Real Estate Bubble of 2005 through 2007 places most homeowners who
purchased in that unfortunate time frame "underwater," or owing the lender more than the property is worth.
Market forces have whipsawed the values of home prices. At the peak, appreciation soared as high as 50% or
more, though more recent plummeting has led to the shedding of as much as 60% or more value, driving
American ingenuity to employ the real estate short sale.

Some areas never participated or participated to a milder degree, and are now nearer to recovery, though still a
long way from recovered. The committed parties: homeowner, lender, and lender's investor are all involved in
a bad way. It's an unfortunate situation, where the only choices are choices that will result in loss. The
situation requires that ideas of fairness and recrimination be removed from the issue, letting only economics
weigh decision-making. There is a loss to be taken; the loss can be limited, the damage realized, and the
process of re-building started. Life and investing is a process, not a destination. We need to move on.

The news media and our own local industry gossip groups are full of stories of cheaters and morally bankrupt
property owners defrauding lenders with misstated income to acquire "liar loans"; and Investors who were
"non-owner occupants" posing as homeowners to qualify for easier loans, with the intention of leasing the
home as an investment or "flipping" the property shortly after closing. Most will agree there is very little room
for compassion or understanding when these borrowers find themselves in trouble and ask for help.

However, there is an enormous population of upright citizens that need to sell their residences for a variety of
legitimate reasons. They need to move on with their lives, but their lives have stalled due to declining home
prices. It is easy to forget that the use of leverage is a two-sided sword until market forces move against an
encumbered property. The result has typically been a costly and devastating foreclosure. As a result, the use of
a "Short Sale," a relatively new method to liquidate properties, is on the rise.

Many residential borrowers have found themselves in the kind of financial trouble that in the past would have
only been remedied by the foreclosure of the lender. The process itself is extremely lengthy and expensive.
Not only does the income stream from the mortgage stop, but huge legal expenses start. The borrowers view
the lender as an antagonist and villain, sweeping away their property and jeopardizing their future. The
borrower attempts every legal obstacle in their effort to remain in the home, but in the inevitable conclusion of
a foreclosure, they are forced out.

Often an angry and despondent occupant expresses their frustration and anger by physically damaging the
property. The lender not only incurs huge legal fees, but it is not uncommon for repair bills to run up to
$30,000 to $40,000 or more. The properties are often stripped of appliances, copper wire, air conditioning
units, cabinets, plumbing fixtures, and lighting fixtures. The property can become an unsightly blight to the
neighborhood, with unkempt lawns and ruined landscaping. The entire area is affected, and property values
are further impacted, exacerbating the situation.

"A foreclosure makes a bad situation worse; in attempting to protect the asset, it loses even more value,
causing greater losses."

A foreclosure makes a bad situation worse; in attempting to protect the asset, it loses even more value, causing
greater losses. The lender, often an entity that has never had any face-to-face contact with the borrower, as its
sole role was lending the funds in the secondary financing markets, takes enormous losses.

The borrower is also of course extremely damaged by a foreclosure as well. The repercussions of foreclosure
extend beyond the obvious loss of the home. Any down payment, often a precious commodity, particularly
among first-time buyers who may have tapped family credit lines, is irrevocably lost. There is also the
inevitable stress and embarrassment of the process, causing family and personal pressures.

As an American matures, credit scores become very important, affecting not only the ability to borrow money,
but to borrow at what rate. Insurance rates for autos, rentals, and homes can be levied based on credit scores.
The ability to lease a home is decided in large part by the prospective tenant's credit score, and the higher the
risk to a Landlord, the more the rent and the greater the security deposit required within the legal limits of the
law. Further, the ability to rent a car while traveling is impacted by your capability to produce a credit card.
Credit scores often affect employment applications, security clearance, and job promotions with a present

Many economists agree the new business cycle has started, and within 12-18 months the economy will be
much, much better. Troubled borrowers will have a chance to heal their finances, and will once again desire to
have a home of their own. A homeowner who has lost a property through foreclosure is barred from a Fannie
Mae (NYSE: FNM) loan for a period of 5 years though, and an investor is barred for 7 years. These former
homeowners represent future home sales, and are essential to the recovery.

Both the lenders and the borrowers are severely impacted by the foreclosure process. Once the realization hits
that a borrower is going to default on a home loan, it is in the interest of both parties to sell the property as

quickly as possible. The use of the "Short Sale," whereby the lender accepts a payoff for less than the full
amount of the loan, is gaining more and more acceptance. Although the lender still registers a loss, the loss is
far less than the alternative method of foreclosure. The legal and title fees are greatly reduced; utilities
normally remain in the borrowers name; upkeep responsibilities remain with the homeowner; the property
stays occupied; and the loss from vandalism and theft is mitigated. The sales process is quicker, and the
savings are significant to the lender. The owner remains in the property limiting the disruption, and the
property never receives the stigma associated with a foreclosure. The stress is greatly reduced and the
surrounding neighborhood benefits from a normal sale with a slight twist. The lender still takes a loss, but
significantly less of a loss. In many cases, the lender can reduce the loss by 20-30%, a very substantial figure.

The borrower also benefits: The credit score of the borrower is still affected adversely in a "Short Sale," but a
typical foreclosure can easily lower a credit score 250-350 points. However, typically in a "Short Sale," only
the late payments on the mortgage will show on the credit report; and it will be reported as paid or negotiated
when the home is sold. Further, typically a "Short Sale" is not reported on a credit report, and should have no
impact on employment should an employer use credit scores as a hiring or promoting criteria. Also, the
waiting time to become eligible for a new Fannie Mae loan is greatly reduced to possibly 24 months,
providing a huge benefit to both the homeowner and the general economy. Investors also become eligible for
a Fannie Mae backed loan sooner than with a foreclosure.

Although the process for a "Short Sale" needs to be streamlined and standardized, the transactions are
becoming more and more prevalent. A home being sold as a "Short Sale" does not blight the neighborhood,
seems to be sold closer to market value, and is as close to a win-win situation as possible under the present

This process will further speed the return to market normalcy. It will unfreeze thousands of homes that need to
be sold due to a variety of circumstances. It will permit more and more transactions, eventually allowing
economic forces to heal and recuperate the Housing Market. The affected borrowers represented a large part
of the buying pool, and represent a significant segment of the population. The sooner the problems are
recognized and dealt with, the sooner this segment can again take its place in homeownership, benefiting more
Americans and the economy in general. This segment of the market could begin to impact housing demand as
soon as 2011. Thus, I believe the realities of today and American ingenuity have taken lemons and made them
into lemonade.

Editor's Note: Article should interest investors in Bank of America (NYSE: BAC), Freddie Mac (NYSE:
FRE), Fannie Mae (NYSE: FNM), Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), Wells Fargo
(NYSE: WFC), Toronto Dominion (NYSE: TD), UltraShort Real Estate ProShares (NYSE: SRS), Ultra Real
Estate ProShares (NYSE: URE), ING Clarion Global Real Estate Income Fund (NYSE: IGR), Xinyuan Real
Estate Co. (NYSE: XIN), Rydex Real Estate Fund H (Nasdaq: RYHRX), T. Rowe Price Real Estate Fund
(Nasdaq: TRREX), Toll Brothers (NYSE: TOL), Hovnanian (NYSE: HOV), D.R. Horton (NYSE: DHI),
Beazer Homes (NYSE: BZH), Lennar (NYSE: LEN), K.B. Homes (NYSE: KBH), Pulte Homes (NYSE:
PHM), NVR Inc. (NYSE: NVR), Gafisa SA (NYSE: GFA), MDC Holdings (NYSE: MDC), Ryland Group
(NYSE: RYL), Meritage Homes (NYSE: MTH), Brookfield Homes (NYSE: BHS), Standard Pacific (NYSE:
SPF), M/I Homes (NYSE: MHO), Orleans Homebuilders (AMEX: OHB), Vanguard REIT Index ETF
(NYSE: VNQ) and Avatar Holdings (Nasdaq: AVTR).

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and
website in no way offers or represents financial or investment advice. Information is provided for
entertainment purposes only.

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